<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
ELECTRONIC ARTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7372 94-2838567
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
1450 FASHION ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(415) 571-7171
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
RUTH A. KENNEDY
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
1450 FASHION ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(415) 571-7171
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
GORDON K. DAVIDSON, ESQ. BARRY E. TAYLOR, ESQ.
MARK C. STEVENS, ESQ. MARK E. BONHAM, ESQ.
RICHARD L. DICKSON, ESQ. DANIEL R. MITZ, ESQ.
JAY S. KOMAS, ESQ. CRAIG D. NORRIS, ESQ.
JEFFREY L. DONOVAN, ESQ. ANNA ITOI, ESQ.
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
TWO PALO ALTO SQUARE 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94306 PALO ALTO, CALIFORNIA 94304
(415) 494-0600 (415) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this
Registration Statement. The issuance of securities shall occur at the
effective time of the proposed merger of Village Acquisition Corporation with
and into Maxis, Inc. as described in the Agreement and Plan of Reorganization,
dated as of June 4, 1997 (the "Reorganization Agreement"), attached as
Appendix A to the Proxy Statement/Prospectus forming a part of this
Registration Statement.
---------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE AGGREGATE OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE (2) PRICE (2) FEE (3)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value................. 4,152,335 $33.27 $138,164,278 $41,867.96
</TABLE>
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- -------------------------------------------------------------------------------
(1) Represents the number of shares of Common Stock, par value $0.01 per share
(the "Electronic Arts Common Stock"), of Electronic Arts Inc. ("Electronic
Arts") which may be issued to stockholders of Maxis, Inc. ("Maxis")
pursuant to the terms of the Reorganization Agreement upon the conversion
of up to 11,394,992 shares of common stock of Maxis, par value $0.0001 per
share (the "Maxis Common Stock").
(2) Estimated solely for the purpose of computing the registration fee
pursuant to Rule 457(f)(1) of the Securities Act of 1933, as amended (the
"Securities Act"). Pursuant to Rule 457(f)(1), the maximum aggregate
offering price is the product of (i) $12.125, representing the average of
the high and low sales price of Maxis Common Stock as reported on the
Nasdaq National Market ("Nasdaq") on June 23, 1997, and (ii) up to
11,394,992 shares of Maxis Common Stock to be converted into Electronic
Arts Common Stock pursuant to the Reorganization Agreement.
(3) Calculated in accordance with Section 6(b) of the Securities Act and Rule
457(f)(1) promulgated thereunder. The amount of the registration fee
includes $28,117.87 previously paid pursuant to Section 14(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
connection with the filing by Maxis of preliminary proxy materials
pursuant to Rule 14a-6(a) promulgated under the Exchange Act.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
[MAXIS LOGO]
2121 N. CALIFORNIA BOULEVARD, SUITE 600
WALNUT CREEK, CALIFORNIA 94596-3572
July 2, 1997
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders (the
"Special Meeting") of Maxis, Inc. ("Maxis"), to be held on Friday, July 25,
1997 at 8:00 a.m., local time, at Maxis' headquarters located at 2121 N.
California Boulevard, Suite 600, Walnut Creek, California 94596. At the
Special Meeting you will be asked to consider and vote upon (i) the approval
and adoption of the Agreement and Plan of Reorganization, dated as of June 4,
1997 (the "Reorganization Agreement"), among Maxis, Electronic Arts Inc.
("Electronic Arts") and Village Acquisition Corporation, a wholly owned
subsidiary of Electronic Arts ("Merger Sub"), and (ii) the approval of the
Merger (as defined below). A copy of the Reorganization Agreement appears as
Appendix A to the enclosed Proxy Statement/Prospectus.
Pursuant to the Reorganization Agreement, Merger Sub will be merged with and
into Maxis (the "Merger"), whereupon Maxis will become a wholly owned
subsidiary of Electronic Arts. At that time, each share of common stock of
Maxis, par value $0.0001 per share ("Maxis Common Stock"), issued and
outstanding immediately prior to the effective time of the Merger will be
converted into the right to receive 0.3644 (the "Exchange Ratio") of a share
of common stock of Electronic Arts, par value $0.01 per share ("Electronic
Arts Common Stock"). Holders of Maxis Common Stock will receive cash in lieu
of any fractional shares of Electronic Arts Common Stock to which such Maxis
stockholders would have been entitled. Each outstanding option to purchase
Maxis Common Stock (each a "Maxis Option") will be assumed by Electronic Arts
and converted into an option to purchase that number of shares of Electronic
Arts Common Stock determined by multiplying the number of shares of Maxis
Common Stock subject to such Maxis Option immediately prior to the effective
time of the Merger by the Exchange Ratio, rounded down to the nearest whole
number of shares, at an exercise price equal to the exercise price of such
Maxis Option at the time of the Merger divided by the Exchange Ratio, rounded
up to the nearest whole cent.
Consummation of the Merger is subject to, among other things, approval by
the holders of the majority of the outstanding shares of Maxis Common Stock
and expiration or termination of the waiting period applicable to the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"). The Merger will be consummated shortly after such stockholder
approval is obtained, such waiting period expires or is terminated and the
other conditions to the Merger are satisfied or waived. If the requisite
approval of the stockholders of Maxis is received and the waiting period
applicable to the Merger under the HSR Act expires or is terminated, the
Merger is expected to be consummated on or about July 25, 1997.
A detailed description of Maxis, Electronic Arts, the Reorganization
Agreement and the Merger is set forth in the accompanying Proxy
Statement/Prospectus, which you should read carefully. If the Merger is
approved and consummated, you will receive detailed information on how to
transmit your Maxis share certificates to obtain your shares of Electronic
Arts Common Stock.
Maxis' Board of Directors has received an opinion of Alex. Brown & Sons
Incorporated, Maxis' financial advisor, that, as of the date of the
Reorganization Agreement, the Exchange Ratio is fair, from a financial point
of view, to Maxis stockholders. A copy of this opinion is included as Appendix
B to the accompanying Proxy Statement/Prospectus.
AFTER CAREFUL CONSIDERATION, THE MAXIS BOARD OF DIRECTORS HAS UNANIMOUSLY
DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST INTERESTS OF MAXIS AND ITS
STOCKHOLDERS AND HAS APPROVED AND ADOPTED THE REORGANIZATION AGREEMENT AND
APPROVED THE MERGER. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF MAXIS VOTE FOR THE APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND FOR THE APPROVAL OF THE MERGER.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE. If you attend the Special Meeting in person, you may, if
you wish, vote your shares personally on all matters whether or not you have
previously returned a proxy card. Your prompt cooperation will be greatly
appreciated.
Very truly yours,
/s/ Samuel L. Poole
Samuel L. Poole,
President and Chief Executive
Officer
<PAGE>
[MAXIS LOGO]
2121 N. CALIFORNIA BOULEVARD, SUITE 600
WALNUT CREEK, CALIFORNIA 94596-3572
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
----------------
To the Stockholders of Maxis, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Maxis, Inc., a Delaware corporation ("Maxis"), will be held on
Friday, July 25, 1997 at 8:00 a.m., local time, at Maxis' headquarters located
at 2121 N. California Boulevard, Suite 600, Walnut Creek, California 94596,
for the following purposes:
1. To consider and vote upon a proposal to (i) approve and adopt an
Agreement and Plan of Reorganization, dated as of June 4, 1997 (the
"Reorganization Agreement"), by and among Maxis, Electronic Arts Inc., a
Delaware corporation ("Electronic Arts"), and Village Acquisition
Corporation, a wholly owned subsidiary of Electronic Arts and a Delaware
corporation ("Merger Sub"), and (ii) approve the merger of Merger Sub with
and into Maxis (the "Merger"). Upon completion of the Merger, Maxis will
become a wholly owned subsidiary of Electronic Arts. The Reorganization
Agreement contemplates, among other things, that each outstanding share of
common stock of Maxis, par value $0.0001 per share will be converted into
0.3644 of a share of common stock of Electronic Arts, par value $0.01 per
share; and
2. To transact such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The foregoing items of business are more fully described in the Proxy
Statement/Prospectus accompanying this Notice.
Only stockholders of record at the close of business on June 27, 1997 are
entitled to notice of and to vote at the Special Meeting or any adjournment or
postponement thereof.
All stockholders are cordially invited to attend the Special Meeting in
person. However, to assure that your vote will be counted, please complete,
date and sign the enclosed proxy card and return it promptly in the enclosed
postage-paid envelope, whether or not you plan to attend the Meeting. Any
stockholder attending the Meeting may vote in person even if he or she has
returned a proxy.
By Order of the Board of Directors,
/s/ Samuel L. Poole
Samuel L. Poole
President and Chief Executive
Officer
Walnut Creek, California
July 2, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE, SIGN AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-
PAID ENVELOPE SO THAT YOUR SHARES MAY BE REPRESENTED AT THE MEETING.
DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD
1
<PAGE>
[MAXIS LOGO] [ELECTRONICS ARTS LOGO]
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PROXY STATEMENT PROSPECTUS
--------------- ---------------
This Proxy Statement/Prospectus is being furnished to the holders of common
stock, par value $0.0001 per share ("Maxis Common Stock"), of Maxis, Inc., a
Delaware corporation ("Maxis"), in connection with the solicitation of proxies
by the Maxis Board of Directors for use at the Special Meeting of Maxis
stockholders to be held on Friday, July 25, 1997 at 8:00 a.m., local time, at
Maxis' headquarters located at 2121 N. California Boulevard, Suite 600, Walnut
Creek, California 94596, and at any adjournments or postponements thereof (the
"Special Meeting").
The Special Meeting has been called to consider and vote upon a proposal to
(i) approve and adopt an Agreement and Plan of Reorganization, dated as of
June 4, 1997 (the "Reorganization Agreement"), by and among Maxis, Electronic
Arts Inc., a Delaware corporation ("Electronic Arts"), and Village Acquisition
Corporation, a wholly owned subsidiary of Electronic Arts and a Delaware
corporation ("Merger Sub"), and (ii) approve the merger of Merger Sub with and
into Maxis (the "Merger").
Upon consummation of the proposed Merger, Maxis will become a wholly owned
subsidiary of Electronic Arts and each issued and outstanding share of Maxis
Common Stock will be converted into the right to receive 0.3644 (the "Exchange
Ratio") of a share of common stock of Electronic Arts, par value $0.01 per
share ("Electronic Arts Common Stock"). Holders of Maxis Common Stock will
receive cash in lieu of any fractional shares of Electronic Arts Common Stock
to which such Maxis stockholders would have been entitled. At such time, each
outstanding option to purchase Maxis Common Stock (each a "Maxis Option") will
be assumed by Electronic Arts and converted into an option to purchase that
number of shares of Electronic Arts Common Stock determined by multiplying the
number of shares of Maxis Common Stock subject to such Maxis Option
immediately prior to the effective time of the Merger by the Exchange Ratio,
rounded down to the nearest whole number of shares, at an exercise price equal
to the exercise price of such Maxis Option at the time of the Merger divided
by the Exchange Ratio, rounded up to the nearest whole cent. Based on the
number of shares of Maxis Common Stock outstanding as of June 23, 1997, an
aggregate of approximately 4,098,460 shares of Electronic Arts Common Stock
are expected to be issued by Electronic Arts in connection with the Merger,
representing approximately 7.0% of the total number of shares of Electronic
Arts Common Stock to be outstanding immediately after consummation of the
Merger. On June 23, 1997, the closing sales prices on the Nasdaq National
Market of Electronic Arts Common Stock and Maxis Common Stock were $33.88 per
share and $11.88 per share, respectively.
Consummation of the Merger is subject to, among other things, approval by
the holders of the majority of the outstanding shares of Maxis Common Stock
and expiration or early termination of the waiting period applicable to the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). The proposed Merger will be consummated shortly after
such stockholder approval is obtained, such waiting period expires or is
terminated and the other conditions to the Merger are satisfied or waived. If
the requisite approval of the stockholders of Maxis is received and the
waiting period applicable to the Merger under the HSR Act expires or is
terminated, the Merger is expected to be consummated on or about July 25,
1997.
This Proxy Statement/Prospectus also constitutes the prospectus of
Electronic Arts for use in connection with the offer and issuance of shares of
Electronic Arts Common Stock to be issued in the Merger in exchange for the
Maxis Common Stock. This Proxy Statement/Prospectus and the accompanying form
of proxy are first being mailed to stockholders of Maxis on or about July 2,
1997.
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION.
STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS
PROXY STATEMENT/ PROSPECTUS IN ITS ENTIRETY, PARTICULARLY THE
MATTERS REFERRED TO UNDER "RISK FACTORS" COMMENCING ON PAGE
17.
---------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Proxy Statement/Prospectus is July 2, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION..................................................... 1
FORWARD LOOKING STATEMENTS................................................ 2
TRADEMARKS................................................................ 2
SUMMARY................................................................... 3
The Companies........................................................... 3
The Special Meeting..................................................... 3
Risk Factors............................................................ 4
Maxis Reasons for the Merger............................................ 5
Electronic Arts Reasons for the Merger.................................. 5
Opinion of Financial Advisor............................................ 6
Federal Income Tax Treatment............................................ 6
Regulatory Matters...................................................... 6
Accounting Treatment.................................................... 6
Interests of Certain Persons in the Merger.............................. 6
Terms of the Merger..................................................... 7
Comparative Per Share Market Data....................................... 11
Selected Historical and Selected Unaudited Pro Forma Financial
Information............................................................ 13
Comparative Per Share Data.............................................. 16
RISK FACTORS.............................................................. 17
THE SPECIAL MEETING....................................................... 23
Date, Time, Place and Purpose of Special Meeting........................ 23
Record Date and Outstanding Shares...................................... 23
Voting of Proxies....................................................... 23
Vote Required........................................................... 23
Quorum; Abstentions; Broker Non-Votes................................... 24
Solicitation of Proxies and Expenses.................................... 24
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS........................... 25
Background of the Merger................................................ 25
Maxis Reasons for the Merger............................................ 26
Electronic Arts Reasons for the Merger.................................. 28
Opinion of Alex. Brown & Sons Incorporated.............................. 28
Certain Federal Income Tax Considerations............................... 33
Regulatory Matters...................................................... 34
Accounting Treatment.................................................... 35
Appraisal Rights........................................................ 35
TERMS OF THE MERGER....................................................... 36
General................................................................. 36
Effective Time; Closing Date............................................ 36
Corporate Matters....................................................... 36
Merger Consideration.................................................... 36
Conversion of Shares; Procedures for Exchange of Certificates........... 37
Termination of Maxis Employee Stock Purchase Plan....................... 37
Representations and Warranties.......................................... 37
Non-Solicitation........................................................ 38
Additional Covenants.................................................... 39
Indemnification and Insurance........................................... 41
Conditions to the Merger................................................ 42
Termination; Termination Fee............................................ 44
Expenses................................................................ 45
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Voting Agreement....................................................... 45
Affiliate Agreements................................................... 46
Employment and Noncompetition Agreements............................... 46
Interests of Certain Persons........................................... 46
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............. 48
ELECTRONIC ARTS BUSINESS................................................. 54
ELECTRONIC ARTS SELECTED SUPPLEMENTAL FINANCIAL DATA..................... 63
ELECTRONIC ARTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................... 65
ELECTRONIC ARTS MANAGEMENT AND EXECUTIVE COMPENSATION.................... 72
ELECTRONIC ARTS PRINCIPAL STOCKHOLDERS................................... 78
ELECTRONIC ARTS CERTAIN TRANSACTIONS..................................... 80
MAXIS BUSINESS........................................................... 81
MAXIS SELECTED SUPPLEMENTAL FINANCIAL DATA............................... 87
MAXIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 88
MAXIS MANAGEMENT AND EXECUTIVE COMPENSATION.............................. 94
MAXIS PRINCIPAL STOCKHOLDERS............................................. 98
MAXIS CERTAIN TRANSACTIONS............................................... 100
COMPARISON OF CAPITAL STOCK.............................................. 101
COMPARISON OF RIGHTS OF HOLDERS OF ELECTRONIC ARTS COMMON STOCK AND
HOLDERS OF MAXIS COMMON STOCK........................................... 103
EXPERTS.................................................................. 103
LEGAL MATTERS............................................................ 103
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
APPENDICES
A--Agreement and Plan of Reorganization
B--Opinion of Alex. Brown & Sons Incorporated
C--Voting Agreement
ii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY ELECTRONIC
ARTS, MERGER SUB OR MAXIS. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED
BY THIS PROXY STATEMENT/PROSPECTUS OR A SOLICITATION OF A PROXY IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATES SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE INFORMATION CONTAINED HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
Electronic Arts and Maxis are each subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). These
materials can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices at Northwest Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, New York, New York 10048. Copies of these materials can
also be obtained from the Commission at prescribed rates by writing to the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the World Wide Web site is http://www.sec.gov. The Electronic Arts
Common Stock and the Maxis Common Stock are listed on the Nasdaq National
Market and reports and other information concerning Electronic Arts and Maxis
may be inspected at the offices of the National Association of Securities
Dealers, Inc. located at 9513 Key West Avenue, Rockville, Maryland 20850.
After the consummation of the Merger, Maxis will no longer file reports, proxy
statements, or other information with the Commission or Nasdaq. Instead such
information will be provided, to the extent required, in filings made by
Electronic Arts.
Under the rules and regulations of the Commission, the solicitation of
proxies from stockholders of Maxis to approve and adopt the Reorganization
Agreement and to approve the Merger constitutes an offering of the Electronic
Arts Common Stock to be issued in connection with the Merger. Accordingly,
Electronic Arts has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to such offering (together with all amendments and exhibits thereto,
the "Registration Statement"). This Proxy Statement/Prospectus constitutes the
prospectus of Electronic Arts that is filed as part of the Registration
Statement. Other parts of the Registration Statement are omitted from this
Proxy Statement/Prospectus in accordance with the rules and regulations of the
Commission. Copies of the Registration Statement, including the exhibits to
the Registration Statement and other material that is not included herein, may
be inspected, without charge, at the regional offices of the Commission
referred to above, obtained at the Commission's World Wide Web site set forth
above or obtained at prescribed rates from the Public Reference Section of the
Commission at the address set forth above.
Statements made in this Proxy Statement/Prospectus concerning the contents
of any contract or other document are not necessarily complete. With respect
to each contract or other document filed as an exhibit to the
1
<PAGE>
Registration Statement, reference is hereby made to that exhibit for a more
complete description of the matter involved, and each such statement is hereby
qualified in its entirety by such reference.
All information contained in this Proxy Statement/Prospectus relating to
Electronic Arts has been supplied by Electronic Arts, and all information
relating to Maxis has been supplied by Maxis.
FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify these forward-looking statements. In
particular, statements regarding expected synergies, advantages and other
effects of the Merger described in "Approval of the Merger and Related
Transactions--Electronic Arts Reasons for the Merger," "--Maxis Reasons for
the Merger" and elsewhere in this Proxy Statement/Prospectus are forward-
looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of many factors,
including those described in the risk factors set forth under "Risk Factors,"
"Electronic Arts Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Maxis Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Proxy
Statement/Prospectus.
Neither Electronic Arts nor Maxis makes any express or implied
representation or warranty as to the attainability of the projected or
estimated financial information referenced or set forth herein under "Approval
of the Merger and Related Transactions--Opinion of Alex. Brown and Sons
Incorporated" or elsewhere herein or as to the accuracy or completeness of the
assumptions from which that projected or estimated information is derived.
Projections or estimations of Electronic Arts' future performance are
necessarily subject to a high degree of uncertainty and may vary materially
from actual results. Reference is made to the particular discussions set forth
under "Risk Factors," "Electronic Arts Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Maxis Management's
Discussion and Analysis of Financial Condition and Results of Operations." In
connection with forward-looking statements which appear in these and other
disclosures, stockholders of Maxis should carefully review the factors set
forth in this Proxy Statement/Prospectus under "Risk Factors" beginning on
page 17 hereof.
Readers are cautioned not to place undue reliance on forward-looking
statements contained herein, which reflect the analysis of the management of
Electronic Arts and Maxis, as appropriate, only as of the date hereof. Neither
Electronic Arts nor Maxis undertakes any obligation to release publicly the
results of any revision to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
TRADEMARKS
Electronic Arts, EA SPORTS, Need For Speed, Dungeon Keeper, Soviet Strike,
Privateer, Bullfrog Productions Ltd., and Origin Systems are trademarks or
registered trademarks of Electronic Arts or its wholly owned subsidiaries in
the U.S. and/or other countries. All rights reserved. The National Hockey
League and NHL are registered trademarks of the National Hockey League and are
used under license by Electronic Arts. PGA TOUR is a trademark owned by PGA
TOUR, Inc. and is used by permission. NBA is a trademark of NBA Properties,
Inc. ROAD & TRACK is a registered trademark of Hachette Filipacchi Magazines,
Inc., used under license by Electronic Arts. Sega Saturn, Sega and Genesis are
trademarks of Sega Enterprises, Ltd. Nintendo, Super Nintendo Entertainment
System, and Super NES are registered trademarks and Nintendo 64 is a trademark
of Nintendo of America Inc. The PlayStation is a trademark of Sony Computer
Entertainment Inc. 3DO is a trademark and/or registered trademark of The 3DO
Company. Apple and Macintosh are registered trademarks of Apple Computer, Inc.
Maxis, the Sim and Maxis logos and the names of products offered by Maxis are
trademarks or registered trademarks of Maxis. This Proxy Statement/Prospectus
also includes product names, trade names and trademarks of other companies.
All of such other trademarks are the property of their respective owners.
2
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement/Prospectus. The summary does not contain, and is not
intended to contain, a complete description of the terms of the Reorganization
Agreement or the Merger and is qualified in its entirety by reference to the
full text of this Proxy Statement/Prospectus and the Appendices hereto.
Stockholders of Maxis are urged to read this Proxy Statement/Prospectus and the
Appendices hereto in their entirety.
This Summary contains forward-looking statements regarding future events or
the future financial performance of Electronic Arts and Maxis. Actual events
and the actual results of Electronic Arts and Maxis may differ materially from
those anticipated in or by any forward-looking statement due to certain risks
and uncertainties including the risks described under "Risk Factors" and
elsewhere in this Proxy Statement/Prospectus. See "Forward Looking Statements."
THE COMPANIES
Electronic Arts Inc.
Electronic Arts creates, markets and distributes interactive entertainment
software for a variety of hardware platforms. As of March 31, 1997, Electronic
Arts marketed approximately 117 titles developed and/or published under one of
its brand names, and distributed approximately 51 additional titles developed
by other software publishers in North America and over 1,000 of such additional
titles in the rest of the world.
Electronic Arts was incorporated in California in 1982 and was reincorporated
in Delaware in September 1991. The principal executive offices of Electronic
Arts are located at 1450 Fashion Island Boulevard, San Mateo, California 94404.
Electronic Arts' telephone number is (415) 571-7171.
Maxis, Inc.
Maxis is a leading provider of entertainment and learning software products
for personal computers and is widely recognized for its successful Sim family
of entertainment products, which have sold over seven million copies on all
platforms combined since the introduction of SimCity in 1989. Titles in the Sim
franchise include, among others, SimCity 2000, SimCity, SimAnt, SimTower,
SimCopter and SimIsle.
Maxis was incorporated in California in 1990 as Sim-Business and was
reincorporated in Delaware in April 1995 as Maxis, Inc. The principal executive
offices of Maxis are located at 2121 N. California Boulevard, Walnut Creek,
California 94596-3572. Maxis' telephone number is (510) 933-5630.
Village Acquisition Corporation
Merger Sub is a wholly owned subsidiary of Electronic Arts recently
incorporated in Delaware for the purpose of effecting the Merger. Merger Sub
has no material assets and has not engaged in any activities except in
connection with the Merger.
The principal executive offices of Merger Sub are located at 1450 Fashion
Island Boulevard, San Mateo, California 94404. Merger Sub's telephone number is
(415) 571-7171.
THE SPECIAL MEETING
Date, Time, Place and Purpose
The Special Meeting will be held at 8:00 a.m., local time, on Friday, July
25, 1997 at Maxis' headquarters located at 2121 N. California Boulevard, Suite
600, Walnut Creek, California 94596. At the Special Meeting, stockholders
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<PAGE>
of Maxis at the close of business on June 27, 1997 (the "Record Date") will be
asked to approve and adopt the Reorganization Agreement and approve the
proposed Merger. See "The Special Meeting--Date, Time, Place and Purpose of
Special Meeting."
Record Date and Vote Required
Only holders of record of Maxis Common Stock at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting. Each
Maxis stockholder is entitled to one vote for each share of Maxis Common Stock
held as of the Record Date. Pursuant to the Delaware General Corporation Law
("DGCL"), approval of the Merger requires the affirmative vote of at least a
majority of the outstanding shares of Maxis Common Stock entitled to vote at
the Special Meeting. Maxis officers and directors and their affiliates hold
approximately 59.0% of the outstanding Maxis Common Stock. See "The Special
Meeting--Record Date and Outstanding Shares" and "--Vote Required."
A stockholder of Maxis beneficially owning approximately 28.5% of the issued
and outstanding Maxis Common Stock has executed a Voting Agreement with
Electronic Arts, pursuant to which he has agreed to vote all such shares in
favor of the Merger. See "Terms of the Merger--Voting Agreement."
Recommendation of Maxis Board of Directors
AFTER CAREFUL CONSIDERATION, THE MAXIS BOARD OF DIRECTORS HAS UNANIMOUSLY
DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST INTERESTS OF MAXIS AND ITS
STOCKHOLDERS AND HAS APPROVED AND ADOPTED THE REORGANIZATION AGREEMENT AND
APPROVED THE MERGER. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF MAXIS VOTE FOR THE APPROVAL AND ADOPTION OF THE REORGANIZATION
AGREEMENT AND FOR THE APPROVAL OF THE MERGER. MAXIS STOCKHOLDERS SHOULD READ
THIS PROXY STATEMENT/PROSPECTUS CAREFULLY PRIOR TO VOTING. See "Approval of the
Merger and Related Transactions--Maxis Reasons for the Merger," "--Background
of the Merger."
Appraisal Rights
Holders of Maxis Common Stock are not entitled to dissenters' rights or
appraisal rights with respect to the Merger.
RISK FACTORS
Maxis stockholders should carefully consider a variety of risks in evaluating
the matters to be voted on at the Special Meeting and the acquisition of the
securities offered hereby, including the following: (i) that the interactive
software industry is volatile, highly dynamic and intensely competitive; (ii)
that the rapidly changing market for interactive entertainment software demands
the development, introduction and distribution of new competitive products on a
timely basis, constantly adapted to new hardware platforms and designed to meet
emerging industry standards; (iii) risks associated with product development
schedules; (iv) that Electronic Arts' success depends upon continued market
acceptance of the videogame hardware systems of its licensors, and further upon
its ability to accurately predict the market's future demand for each hardware
system for purposes of product-development; (v) that provisions in Electronic
Arts' contracts with hardware licensors may result in manufacturing and
shipping delays and cause Electronic Arts to assume various other financial
risks and expenses; (vi) that Electronic Arts' quarterly results of operations
are difficult to predict, due to the fact that expenses associated with
overhead and product-development remain relatively constant, while revenues are
generated by quarterly sales which may vary significantly; (vii) that the use
of film and videotape in certain Electronic Arts products requires higher-
volume sales of such products to recoup the significant costs of video
production; (viii) risks associated with the limitations of the companies'
abilities to protect their intellectual property; (ix) that gross margins for
Electronic Arts may not continue to increase due to rising or stable costs
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<PAGE>
associated with royalties, distribution and other expenses, with significant
price protection often required by retailers; (x) that success in the video
game and personal computer ("PC") businesses increasingly requires the
production of "hit" products, and that there can be no assurance that
Electronic Arts will continue to develop or successfully market any future
"hit" titles; (xi) that there can be no assurance that Electronic Arts will
continue to be successful in attracting and retaining enough qualified
personnel; (xii) that significant revenues of Electronic Arts obtained from
foreign sales are potentially subject to unexpected changes in regulatory
requirements, tariffs, or currency fluctuations; (xiii) that Electronic Arts
holds equity investments in several small affiliates which are generally small
and without significant financial resources; (xiv) a variety of risks related
to the effects of announcement or consummation of the Merger on the business of
Maxis; (xv) risks associated with the development and release of SimCity 3000;
(xvi) that the market price of the Electronic Arts Common Stock has
historically been subject to significant fluctuations over a short period of
time, and that as a result of the fixed Exchange Ratio, if the price of
Electronic Arts Common Stock were to fluctuate significantly before the
Effective Time then the value received by Maxis stockholders would
correspondingly increase or decrease; (xvii) that the operations of Electronic
Arts and Maxis may not be integrated in an efficient and effective manner,
thereby reducing or eliminating the anticipated benefits of the Merger; (xviii)
that the market price of the Electronic Arts Common Stock could be
significantly and adversely affected by any potential failure to achieve
expected business synergies or if the Merger has a dilutive effect; (xix) that
Electronic Arts will incur significant transactional costs with respect to the
Merger, and could incur further unanticipated costs related to the process of
integration; (xx) that former stockholders of Maxis will each have a
significantly smaller voting influence over the affairs of Electronic Arts than
they currently enjoy over the affairs of Maxis; (xxi) risks associated with the
Merger failing to qualify as a pooling of interests for accounting purposes;
and (xxii) that certain affiliates of Maxis have certain interests that are
different from or in addition to shareholders of Maxis. See "Risk Factors."
MAXIS REASONS FOR THE MERGER
The Maxis Board of Directors (the "Maxis Board") has unanimously adopted and
approved the Reorganization Agreement and believes that the Merger is fair to,
and in the best interests of, Maxis and its stockholders. The Maxis Board's
decision to approve the Reorganization Agreement and the Merger was based, in
part, upon its belief that the combined company's experience, financial
resources, and size and breadth of product offerings will allow it to respond
more quickly to technological change, increased competition and market demands
in a rapidly changing industry. The Merger should also provide Maxis access to
Electronic Arts' greater resources, including its national and international
sales, marketing, and distribution capabilities, to support Maxis' efforts to
develop products, expand its customer base and enhance relationships with
existing customers. Maxis also expects to benefit from (i) enhanced
efficiencies resulting from the combination of the two companies' customer
service and technical support systems and (ii) increased management breadth and
strengthened organizational infrastructure from the addition of senior
Electronic Arts executives. The Maxis Board also considered other potential
benefits and synergies that may result from the Merger. See "Approval of the
Merger and Related Transactions--Maxis Reasons for the Merger."
ELECTRONIC ARTS REASONS FOR THE MERGER
The Electronic Arts Board of Directors (the "Electronic Arts Board") believes
that several benefits will accrue to Electronic Arts by virtue of the proposed
Merger. First, the acquisition of Maxis' Sim products is consistent with
Electronic Arts' long term strategy for growth through obtaining and exploiting
key franchise properties and brands. The addition of the Maxis PC software
titles to Electronic Arts' product line is expected to enhance Electronic Arts
strong distribution business, and, in particular, to enhance Electronic Arts'
PC market share and contribute to its effort to achieve its PC market
objectives. Finally, the Sim product line will increase the number of titles
and key brands Electronic Arts can offer into emerging on-line medium. See
"Approval of the Merger and Related Transactions--Electronic Arts Reasons for
the Merger."
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OPINION OF FINANCIAL ADVISOR
Alex. Brown & Sons Incorporated ("Alex. Brown") has delivered to the Maxis
Board its written opinion, dated June 4, 1997, to the effect that as of such
date, the Exchange Ratio was fair, from a financial point of view, to Maxis.
The full text of the opinion of Alex. Brown which sets forth, among other
things, assumptions made and matters considered, is attached as Appendix B to
this Proxy Statement/Prospectus and is incorporated herein by reference.
HOLDERS OF MAXIS COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH OPINION IN
ITS ENTIRETY. See "Approval of the Merger and Related Transactions--Opinion of
Alex. Brown & Sons Incorporated" and Appendix B hereto.
FEDERAL INCOME TAX TREATMENT
The Merger is intended to constitute a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
in which case no gain or loss will generally be recognized by holders of Maxis
Common Stock solely upon their receipt of Electronic Arts Common Stock in the
Merger (except to the extent of cash received in lieu of a fractional share
thereof) in exchange therefor. As a condition to Electronic Arts' and Maxis'
obligations to consummate the Merger, Electronic Arts and Maxis must obtain an
opinion from their respective legal counsel that, for federal income tax
purposes, the Merger will constitute a "reorganization" within the meaning of
Section 368(a) of the Code. HOWEVER, MAXIS STOCKHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO
THEM OF THE MERGEr. See "Approval of the Merger and Related Transactions--
Certain Federal Income Tax Considerations."
REGULATORY MATTERS
Under the provisions of the HSR Act, the Merger may not be consummated until
such time as certain information has been furnished to the Department of
Justice and the Federal Trade Commission (the "FTC") and the specified waiting
period requirements of the HSR Act have been satisfied. Based on information
available to them, Electronic Arts and Maxis believe that the Merger will not
violate federal or state antitrust laws. However, there can be no assurance
that a challenge to the Merger on antitrust grounds will not be made or, if
such a challenge is made, that Electronic Arts would prevail or would not be
required to terminate the Reorganization Agreement or would not be required to
accept certain conditions in order to consummate the Merger. See "Approval of
the Merger and Related Transactions--Regulatory Matters" and "Terms of the
Merger--Conditions to the Merger."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon (i) receipt by Maxis of a letter
from its independent auditors regarding concurrence with Maxis management's
conclusion that Maxis qualifies as an entity that may be a party to a business
combination for which the pooling-of-interests method of accounting would be
available and (ii) receipt by Electronic Arts of a letter from its independent
auditors regarding concurrence with Electronic Arts management's conclusion as
to the appropriateness of pooling-of-interests accounting treatment for the
Merger under APB No. 16, if consummated in accordance with the Reorganization
Agreement. See "Approval of the Merger and Related Transactions--Accounting
Treatment" and "Terms of the Merger--Conditions to the Merger."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of the Maxis Board and the management of Maxis have certain
interests in the Merger that are different from, or in addition to, the
interests of Maxis stockholders in the Merger generally. These
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<PAGE>
certain interests include: (i) all executive officers of Maxis have severance
and option acceleration agreements that may be triggered in connection with the
Merger, and (ii) Jeffrey B. Braun and William R. Wright, founders and directors
of Maxis, have entered into employment agreements with Electronic Arts. See
"Terms of the Merger--Interests of Certain Persons" and "--Employment and
Noncompetition Agreements."
TERMS OF THE MERGER
General
The Reorganization Agreement provides for the merger of Merger Sub with and
into Maxis with Maxis to continue as the surviving corporation of the Merger
(the "Surviving Corporation") and to become a wholly owned subsidiary of
Electronic Arts. See "Terms of the Merger--General."
Effective Time of the Merger
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware or at such later time as
may be agreed in writing by Electronic Arts, Maxis and Merger Sub and specified
in the Certificate of Merger (the "Effective Time"). Assuming all conditions to
the Merger are satisfied or waived prior thereto, it is currently anticipated
that the Closing Date and Effective Time will be on or about July 25, 1997. See
"Terms of the Merger--Effective Time; Closing Date."
Conversion of Common Stock; Assumption of Options
At the Effective Time, each share of Maxis Common Stock issued and
outstanding immediately prior to the Effective Time (other than any shares of
Maxis Common Stock held by Maxis or owned by Merger Sub, Electronic Arts or any
direct or indirect wholly owned subsidiary of Maxis or of Electronic Arts
immediately prior to the Effective Time) will be canceled and extinguished and
automatically converted into the Exchange Rate of 0.3644 of a share of
Electronic Arts Common Stock. No fractional shares will be issued by virtue of
the Merger. Holders of shares of Maxis Common Stock will receive cash in lieu
of fractional shares of Electronic Arts Common Stock. At the Effective Time,
each outstanding Maxis Option will be assumed by Electronic Arts and will
become an option for shares of Electronic Arts Common Stock with appropriate
adjustments to be made to the number of shares issuable thereunder and the per
share exercise price thereof based on the Exchange Ratio. No later than five
business days after the Closing Date, Electronic Arts will file a registration
statement on Form S-8 for the shares of Electronic Arts Common Stock issuable
with respect to assumed Maxis Options. See "Terms of the Merger--Merger
Consideration."
For a summary of the principal differences between the rights of holders of
Electronic Arts Common Stock, and the holders of Maxis Common Stock, see
"Comparison of Rights of Holders of Electronic Arts Common Stock and Holders of
Maxis Common Stock."
Exchange of Certificates
Promptly after the Effective Time, Electronic Arts shall cause an exchange
agent to mail to each holder of record (as of the Effective Time) of
outstanding shares of Maxis Common Stock a letter of transmittal and
instructions for use in effecting the surrender of certificates which, prior to
the Merger, represented shares of Maxis Common Stock. CERTIFICATES SHOULD NOT
BE SURRENDERED BY THE HOLDERS OF MAXIS COMMON STOCK UNTIL SUCH HOLDERS RECEIVE
THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. See "Terms of the Merger--
Conversion of Shares; Procedures for Exchange of Certificates."
Non-Solicitation
Pursuant to the Reorganization Agreement, Maxis has agreed not to, directly
or indirectly, solicit, initiate, encourage or participate in any discussions
or negotiations with, or disclose any non-public information
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<PAGE>
concerning Maxis to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, in connection with any proposed
acquisition with respect to Maxis (other than the Merger), except that, to the
extent that the Maxis Board determines, in good faith, after consultation with
outside legal counsel, that the Maxis Board's fiduciary duties require it to do
so, Maxis may participate in discussions or negotiations with, and furnish non-
public information to any person after such person has delivered to Maxis, in
writing, an unsolicited bona fide acquisition proposal which the Maxis Board in
its good faith reasonable judgment determines, after consultation with its
independent financial advisors, would reasonably be likely to result in a
transaction more favorable than the Merger to the stockholders of Maxis. See
"Terms of the Merger--Non-Solicitation."
Conduct of Business of Maxis
Pursuant to the Reorganization Agreement, Maxis has made certain covenants
regarding the conduct of its business during the period from the date of
execution of the Reorganization Agreement until the earlier of the termination
of the Reorganization Agreement or the Effective Time, including, without
limitation, covenants to carry on, and use reasonable best efforts to preserve,
its business, in all material respects, in the usual, regular and ordinary
course, and in compliance with all applicable laws and regulations, and use its
reasonable best efforts consistent with past practices and policies to: (a)
preserve intact its present business organization; (b) keep available the
services of its present officers and employees; and (c) preserve its
relationships with customers, suppliers, distributors, licensors, licensees,
and others with which it has business dealings. In addition, Maxis has agreed
not to take, or to agree to take, certain actions relating to: (a) contractual
rights with respect to stock options, and stock plans; (b) severance or
termination pay; (c) the intellectual property of Maxis; (d) dividends or
distributions; (e) repurchases or acquisitions of capital stock and stock
splits or combinations; (f) issuance or sales of capital stock or other
securities; (g) amendments to charter documents or Bylaws; (h) acquisitions of,
or investments in, other businesses or assets of other businesses; (i)
dispositions of properties or assets which are material to the business of
Maxis; (j) indebtedness or guarantees of indebtedness; (k) employee benefit
plans, employment contracts, and employee compensation and other benefits; (l)
settlement of disputes and waiver or releases of claims; (m) Electronic Arts'
ability to account for the Merger as a pooling of interests; (n) changes in
accounting methods; (o) material contracts; (p) lending; (q) tax audit
assessments; and (r) insurance coverage. See "Terms of the Merger--Additional
Covenants."
Conditions to the Merger
The respective obligations of Electronic Arts, Maxis and Merger Sub to effect
the Merger are subject to the satisfaction, at or prior to the Effective Time,
of certain conditions relating to, among other things: (i) the approval and
adoption of the Reorganization Agreement, and the approval of the Merger, by
the stockholders of Maxis; (ii) the effectiveness of the Registration
Statement; (iii) the absence of legal impediments to consummation of the
Merger; (iv) the expiration or early termination of applicable waiting periods
under the HSR Act; (v) receipt of legal opinions relating to tax matters; (vi)
the listing on the Nasdaq National Market of the shares of Electronic Arts
Common Stock issuable to stockholders of Maxis in the Merger; and (vii) the
receipt of letters from the independent auditors for Electronic Arts and Maxis
to the effect that no conditions exist that would preclude Electronic Arts from
accounting for the Merger as a pooling of interests. The obligation of Maxis to
consummate and effect the Merger is also subject to the satisfaction, at or
prior to the Effective Time, of certain additional conditions relating to,
among other things: (i) subject to materiality thresholds, the accuracy of the
representations and warranties of Electronic Arts and Merger Sub in the
Reorganization Agreement; (ii) subject to materiality thresholds, the
performance and compliance of Electronic Arts and Merger Sub with agreements
and covenants in the Reorganization Agreement; (iii) the receipt by Maxis of
certain customary closing documents; and (iv) the absence of any material
adverse change with respect to Electronic Arts' business since the date of the
Reorganization Agreement. The obligations of Electronic Arts and Merger Sub to
consummate and effect the Merger are also subject to the satisfaction, at or
prior to the Effective Time, of certain additional conditions relating to,
among other things: (i) subject to materiality thresholds, the accuracy of
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the representations and warranties of Maxis contained in the Reorganization
Agreement; (ii) subject to materiality thresholds, the performance and
compliance of Maxis with agreements and covenants in the Reorganization
Agreement; (iii) the receipt by Electronic Arts of certain customary closing
documents; (iv) the absence of any material adverse change with respect to
Maxis' business since the date of the Reorganization Agreement; and (v) the
absence of legal, contractual or regulatory restraints and certain
administrative actions or proceedings. See "Terms of the Merger--Conditions to
the Merger."
Termination; Termination Fee
The Reorganization Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger by
the stockholders of Maxis: (i) by mutual written consent of Electronic Arts and
Maxis; (ii) subject to certain exceptions, by either Electronic Arts or Maxis,
if the Merger shall not have been consummated by October 31, 1997; (iii) by
either Electronic Arts or Maxis, in case of certain governmental actions having
the effect of permanently restraining, enjoining or otherwise prohibiting the
Merger; (iv) by either Electronic Arts or Maxis, in the event of a failure to
obtain the required approval of the stockholders of Maxis at the Special
Meeting; (v) by Electronic Arts, in certain circumstances where the Maxis Board
fails to provide its unanimous recommendation in favor of the Merger and
approval and adoption of the Reorganization Agreement; (vi) by Electronic Arts,
if the Maxis Board shall have approved, publicly endorsed, recommended or
executed a letter of intent or similar document with respect to any acquisition
proposal other than the Merger; (vii) by Electronic Arts, in certain
circumstances where Maxis fails to recommend rejection of a tender or exchange
offer relating to securities of Maxis or fails to announce its opposition to an
acquisition proposal other than the Merger; (viii) in certain circumstances and
subject to certain limitations, by Maxis, upon a breach of any representation,
warranty, covenant or agreement on the part of Electronic Arts set forth in the
Reorganization Agreement, or if any such representation or warranty of
Electronic Arts shall have become inaccurate; (ix) in certain circumstances and
subject to certain limitations, by Electronic Arts, upon a breach of any
representation, warranty, covenant or agreement on the part of Maxis set forth
in the Reorganization Agreement, or if any such representation or warranty of
Maxis shall have become inaccurate; (x) by Maxis, if the average closing price
of Electronic Arts Common Stock, as quoted in the Nasdaq National Market and
reported in The Wall Street Journal, over the ten (10) trading days ending the
third business day prior to the date originally established in this Proxy
Statement/Prospectus for the Special Meeting is less than $20.00; or (xi) by
either Electronic Arts or Maxis, in the event of a tender or an exchange offer
relating to the securities of Maxis which is accepted by more than fifty
percent (50%) of the outstanding shares of Maxis Common Stock (excluding for
such calculation the shares of Maxis Common Stock held beneficially or of
record by Jeffrey B. Braun).
If the Reorganization Agreement is terminated by Electronic Arts or Maxis
pursuant to the provisions described in clauses (iv) or (xi) above, or by
Electronic Arts pursuant to the provisions described in clauses (v), (vi) or
(vii) above, then Maxis, in certain circumstances and subject to certain
limitations, is required to pay to Electronic Arts, in cash, a non-refundable
fee in the amount of $5,000,000. See "Terms of the Merger--Termination;
Termination Fee."
Expenses
All fees and expenses incurred in connection with the Reorganization
Agreement and the transactions contemplated thereby will be paid by the party
incurring such expenses whether or not the Merger is consummated; provided,
however, that Electronic Arts and Maxis shall share equally all fees and
expenses, other than attorneys' and accountants' fees and expenses, incurred in
relation to the printing and filing of this Proxy Statement/Prospectus and the
Registration Statement. See "Terms of the Merger--Expenses."
Voting Agreement
Jeffrey B. Braun (who beneficially owns approximately 28.5% of the Maxis
Common Stock and is Chairman of the Board of Directors of Maxis) has entered
into a Voting Agreement with Electronic Arts,
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agreeing that he will vote his shares in favor of the adoption of the
Reorganization Agreement and approval of the Merger, and that he will not
solicit, initiate or engage in discussions, or take any other action likely to
facilitate the efforts of any person, other than Electronic Arts, relating to
an acquisition proposal with respect to Maxis. See "Terms of the Merger--Voting
Agreement."
Affiliate Agreements
Each person determined by Maxis to be an "affiliate" of Maxis within the
meaning of Rule 145 promulgated under the Securities Act, has executed an
agreement that, among other things, restricts sales, transfers and other
dispositions of both securities of Maxis held by such person and the Electronic
Arts Common Stock received by such person in connection with the Merger in
order to comply with the requirements of certain federal securities laws and to
help ensure that the Merger will be treated as a pooling of interests for
accounting purposes. See "Terms of the Merger--Affiliate Agreements."
Employment and Noncompetition Agreements
Each of Jeffrey B. Braun (the Chairman of the Board of Directors of Maxis)
and William R. Wright (the Chief Technical Designer and a director of Maxis)
have entered into agreements, in connection with the Merger, amending their
current Employment Agreements with Maxis whereby, as of the Effective Date,
such persons will become employees of Electronic Arts. Mr. Braun and Mr. Wright
have also entered into Noncompetition and Nonsolicitation Agreements with
Electronic Arts, restricting them for a period of two years from the Effective
Date from carrying on or engaging in certain business activities. See "Terms of
the Merger--Employment and Noncompetition Agreements."
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COMPARATIVE PER SHARE MARKET DATA
Electronic Arts Common Stock is traded on the Nasdaq National Market under
the symbol "ERTS." The following table sets forth the range of high and low
sale prices reported on the Nasdaq National Market for Electronic Arts Common
Stock for the periods indicated:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDING MARCH 31, 1998
First Quarter (through June 23, 1997)............................ $35.56 $20.13
FISCAL YEAR ENDED MARCH 31, 1997
Fourth Quarter................................................... $36.13 $26.25
Third Quarter.................................................... 37.63 27.88
Second Quarter................................................... 39.13 24.75
First Quarter.................................................... 34.50 25.25
FISCAL YEAR ENDED MARCH 31, 1996
Fourth Quarter................................................... $28.50 $22.13
Third Quarter.................................................... 38.75 23.13
Second Quarter................................................... 41.75 27.13
First Quarter.................................................... 30.00 20.13
Maxis Common Stock is traded on the Nasdaq National Market under the symbol
"MXIS." The following table sets forth the range of high and low sale prices
reported on the Nasdaq National Market for Maxis Common Stock for the periods
indicated:
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDING MARCH 31, 1998
First Quarter (through June 23, 1997)............................ $12.50 $ 6.75
FISCAL YEAR ENDED MARCH 31, 1997
Fourth Quarter................................................... $13.63 $ 7.38
Third Quarter.................................................... 15.75 12.25
Second Quarter................................................... 20.50 11.00
First Quarter.................................................... 27.13 19.75
FISCAL YEAR ENDED MARCH 31, 1996
Fourth Quarter................................................... $37.50 $20.25
Third Quarter.................................................... 44.50 29.25
Second Quarter................................................... 49.50 23.00
First Quarter (from May 25, 1995)................................ 30.50 19.50
</TABLE>
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The following table sets forth the closing sale prices per share of
Electronic Arts Common Stock and Maxis Common Stock on the Nasdaq National
Market on June 4, 1997, which closing prices were quoted prior to the
announcement on such date of the proposed Merger, and on June 23, 1997, the
latest practicable trading day before the filing of this Prospectus/Proxy
Statement for which information was obtainable, and the equivalent per share
price for Maxis Common Stock. The "equivalent per share price" for Maxis Common
Stock as of such dates equals the closing sale price per share of Electronic
Arts Common Stock on such dates multiplied by the Exchange Ratio of 0.3644. See
"Terms of the Merger--Merger Consideration."
<TABLE>
<CAPTION>
ELECTRONIC ARTS MAXIS EQUIVALENT
COMMON STOCK COMMON STOCK PER SHARE PRICE
--------------- ------------ ---------------
<S> <C> <C> <C>
June 4, 1997....................... $30.38 $10.88 $11.07
June 23, 1997...................... $33.88 $11.88 $12.35
</TABLE>
Electronic Arts and Maxis believe that Maxis Common Stock presently trades on
the basis of the value of the Electronic Arts Common Stock expected to be
issued in exchange for such Maxis Common Stock in the Merger, discounted
primarily for the uncertainties associated with the Merger. Apart from the
publicly disclosed information concerning Electronic Arts which is included in
this Proxy Statement/Prospectus, Electronic Arts cannot state with certainty
what factors account for changes in the market price of the Electronic Arts
Common Stock.
Maxis stockholders are advised to obtain current market quotations for
Electronic Arts Common Stock and Maxis Common Stock. No assurance can be given
as to the market prices of Electronic Arts Common Stock or Maxis Common Stock
at any time before the Effective Time or as to the market price of Electronic
Arts Common Stock at any time thereafter. Because the Exchange Ratio is fixed,
the Exchange Ratio will not be adjusted to compensate Maxis stockholders for
decreases in the market price of Electronic Arts Common Stock which could occur
before the Merger becomes effective. In the event the market price of
Electronic Arts Common Stock decreases or increases prior to the Effective
Time, the value at the Effective Time of the Electronic Arts Common Stock to be
received in the Merger in exchange for Maxis Common Stock would correspondingly
decrease or increase, provided however, that Maxis has retained the right to
terminate the Reorganization Agreement if the average closing price of
Electronic Arts Common Stock, as quoted in the Nasdaq National Market and
reported in The Wall Street Journal, over the ten (10) trading days ending the
third business day prior to the date originally established in this Proxy
Statement/Prospectus for the Special Meeting is less than $20.00. See "Risk
Factors--Fluctuations in Stock Price," "--Risks Associated with Fixed Exchange
Ratio" and "Terms of the Merger--Termination; Termination Fee."
Following the Merger, all Maxis Common Stock will be owned by Electronic Arts
and, as a result, Maxis Common Stock will no longer be listed on the Nasdaq
National Market.
Electronic Arts and Maxis have never paid cash dividends on their respective
shares of Common Stock. Pursuant to the Reorganization Agreement, Maxis has
agreed not to pay cash dividends pending the consummation of the Merger without
the written consent of Electronic Arts. Neither the Maxis Board nor the
Electronic Arts Board currently anticipates paying cash dividends in the
foreseeable future.
12
<PAGE>
SELECTED HISTORICAL AND SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following selected historical financial information of Electronic Arts
and Maxis has been derived from their respective historical consolidated
financial statements and should be read in conjunction with such consolidated
financial statements and the notes thereto, certain of which are included in
this Proxy Statement/Prospectus. The selected unaudited pro forma combined
financial information of Electronic Arts and Maxis is derived from the
unaudited pro forma condensed combined financial statements included in this
Proxy Statement/Prospectus, which give effect to the Merger as a pooling of
interests, and should be read in conjunction with such unaudited pro forma
statements and the notes thereto.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the operating results or
financial position that would have occurred if the Merger had been consummated
nor is it necessarily indicative of future operating results or financial
position.
ELECTRONIC ARTS SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Net revenues................... $624,766 $531,887 $493,346 $418,289 $298,386
Cost of goods sold............. 312,044 273,594 263,357 224,606 160,578
-------- -------- -------- -------- --------
Gross profit................... 312,722 258,293 229,989 193,683 137,808
Operating expenses:
Marketing and sales........... 85,555 72,928 61,951 46,847 38,465
General and administrative.... 41,742 32,207 29,308 23,767 20,713
Research and development...... 118,103 99,627 73,902 62,570 37,451
-------- -------- -------- -------- --------
Total operating expenses....... 245,400 204,762 165,161 133,184 96,629
-------- -------- -------- -------- --------
Operating income............... 67,322 53,531 64,828 60,499 41,179
Interest and other income,
net........................... 11,639 6,021 13,250 3,782 2,537
-------- -------- -------- -------- --------
Income before provision for
income taxes and minority
interest...................... 78,961 59,552 78,078 64,281 43,716
Provision for income taxes..... 27,241 18,759 24,980 19,450 13,421
-------- -------- -------- -------- --------
Income before minority
interest...................... 51,720 40,793 53,098 44,831 30,295
Minority interest in
consolidated joint venture.... 1,282 (304) 2,620 (94) 563
-------- -------- -------- -------- --------
Net income..................... $ 53,002 $ 40,489 $ 55,718 $ 44,737 $ 30,858
======== ======== ======== ======== ========
Net income per share........... $ 0.96 $ 0.75 $ 1.07 $ 0.86 $ 0.62
======== ======== ======== ======== ========
Number of shares used in
computation................... 55,483 54,163 52,297 52,286 49,992
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and short-term
investments.................... $230,096 $147,983 $174,121 $ 130,318 $ 98,029
Marketable securities........... 5,548 37,869 10,725 11,931 --
Working capital................. 241,613 199,713 168,742 135,741 85,094
Long-term investments........... 24,200 24,200 14,200 -- --
Total assets.................... 516,703 424,219 341,239 273,651 181,257
Total liabilities............... 127,430 100,625 103,018 97,988 67,687
Minority interest............... 28 1,277 1,148 3,485 2,999
Total stockholders' equity...... 389,245 322,317 237,073 172,178 110,571
</TABLE>
13
<PAGE>
MAXIS SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues........................ $48,262 $55,412 $38,147 $23,332 $13,864
Cost of revenues.................... 16,899 17,897 14,186 8,367 5,323
------- ------- ------- ------- -------
Gross profit........................ 31,363 37,515 23,961 14,965 8,541
------- ------- ------- ------- -------
Operating expenses:
Research and development........... 12,652 8,416 6,008 3,299 2,440
Acquisition-related charge......... -- 2,232 -- -- --
Sales and marketing................ 16,517 12,843 8,813 5,407 2,591
General and administrative......... 6,747 5,504 4,184 3,225 2,669
------- ------- ------- ------- -------
Total operating expenses............ 35,916 28,995 19,005 11,931 7,700
------- ------- ------- ------- -------
Income (loss) from operations....... (4,553) 8,520 4,956 3,034 841
Interest income..................... 1,640 1,493 226 114 197
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes..... (2,913) 10,013 5,182 3,148 1,038
Provision (benefit) for income
taxes.............................. (1,238) 3,825 1,879 1,021 368
------- ------- ------- ------- -------
Income (loss) from continuing
operations......................... (1,675) 6,188 3,303 2,127 670
Discontinued operations:
Loss from discontinued operations
(net of income tax benefit of $251
in fiscal 1994 and $203 in fiscal
1993)............................. -- -- -- (376) (600)
Gain on disposal of discontinued
operations (net of income tax
expense of $173 in fiscal 1995)... -- -- 303 -- --
------- ------- ------- ------- -------
Net income (loss)................... $(1,675) $ 6,188 $ 3,606 $ 1,751 $ 70
======= ======= ======= ======= =======
Per share amounts:
Income (loss) from continuing
operations........................ $ (0.15) $ 0.56 $ 0.37 $ 0.25 $ 0.08
======= ======= ======= ======= =======
Net income (loss).................. $ (0.15) $ 0.56 $ 0.40 $ 0.20 $ 0.01
======= ======= ======= ======= =======
Shares used in per share
calculations....................... 11,180 11,051 8,915 8,621 8,061
======= ======= ======= ======= =======
<CAPTION>
MARCH 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-
term marketable securities......... $38,045 $42,890 $ 8,655 $ 4,932 $ 6,932
Working capital..................... 41,259 45,265 11,457 8,208 6,913
Total assets........................ 69,329 67,300 19,142 14,427 10,168
Redeemable preferred stock.......... -- -- 11,363 10,849 10,335
Stockholders' equity (deficit)...... 58,531 57,234 2,388 (1,239) (2,480)
</TABLE>
14
<PAGE>
ELECTRONIC ARTS AND MAXIS
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
DATA:
Net revenues....................................... 673,028 587,299 531,493
Cost of goods sold................................. 328,943 291,491 277,543
--------- ------- -------
Gross profit....................................... 344,085 295,808 253,950
Operating expenses:
Marketing and sales.............................. 102,072 85,771 70,764
General and administrative....................... 48,489 37,711 33,492
Research and development......................... 130,755 110,275 79,910
--------- ------- -------
Total operating expenses........................... 281,316 233,757 184,166
Operating income................................... 62,769 62,051 69,784
Interest and other income, net..................... 13,279 7,514 13,476
--------- ------- -------
Income before provision for income taxes and
minority interest................................. 76,048 69,565 83,260
Provision for income taxes......................... 26,003 22,584 26,859
--------- ------- -------
Income before minority interest.................... 50,045 46,981 56,401
Minority interest in consolidated joint venture.... 1,282 (304) 2,620
--------- ------- -------
Net income......................................... 51,327 46,677 59,021
========= ======= =======
Net income per share............................... $ 0.86 $ 0.80 $ 1.06
========= ======= =======
Number of shares used in computation............... 59,557 58,190 55,546
========= ======= =======
<CAPTION>
MARCH 31,
1997
---------
<S> <C> <C> <C>
PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash and short-term investments.................... $ 268,141
Marketable securities.............................. 5,548
Working capital.................................... 278,392
Long-term investments.............................. 34,478
Total assets....................................... 586,032
Total liabilities.................................. 142,708
Minority interest.................................. 28
Total stockholders' equity(1)...................... 443,296
</TABLE>
- --------
(1) Total pro forma stockholders' equity at March 31, 1997 reflects $5.5
million in estimated charges to operations expected to be incurred in
connection with the Merger, including $2.5 million in direct transaction
costs and $3.0 million in additional anticipated costs associated with
integrating the two companies. See "Risk Factors--Costs of Integration;
Transaction Expenses."
15
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
Electronic Arts and Maxis and unaudited pro forma combined per share data after
giving effect to the Merger on a pooling-of-interests basis assuming that
0.3644 of one newly issued share of Electronic Arts Common Stock is issued in
exchange for each outstanding share of Maxis Common Stock in the Merger. This
data should be read in conjunction with the selected financial information and
the separate historical financial statements of Electronic Arts and Maxis and
notes thereto included elsewhere in this Proxy Statement/Prospectus. The
unaudited pro forma combined financial data is presented for illustrative
purposes only and is not necessarily indicative of the operating results that
would have been achieved had the Merger been consummated as of the beginning of
the periods presented and should not be construed as representative of future
operating results or financial condition.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
HISTORICAL--ELECTRONIC ARTS
Net income per share.................................. $ 0.96 $ 0.75 $ 1.07
Book value per share(1)............................... $ 7.19
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
HISTORICAL--MAXIS
Net income (loss) from continuing operations per
share................................................ $ (0.15) $ 0.56 $ 0.37
Book value per share(1)............................... $ 5.20
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
PRO FORMA COMBINED--ELECTRONIC ARTS
Pro forma net income per Electronic Arts share........ $ 0.86 $ 0.80 $ 1.06
Pro forma book value per Electronic Arts share(1)(2).. $ 7.61
EQUIVALENT PRO FORMA COMBINED--MAXIS(3)
Pro forma net income per Maxis share.................. $ 0.31 $ 0.29 $ 0.39
Pro forma book value per Maxis share(1)(2)............ $ 2.77
</TABLE>
- --------
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of shares of common stock outstanding at the end of
each period. Electronic Arts pro forma combined book value per share is
computed by dividing pro forma stockholders' equity by the pro forma
number of shares of Electronic Arts Common Stock which would have been
outstanding had the Merger been consummated as of the balance sheet date.
(2) Pro forma book value reflects $5.5 million in estimated charges to
operations expected to be incurred in connection with the Merger,
including $2.5 million in direct transaction costs and $3.0 million in
additional anticipated costs associated with integrating the two
companies.
(3) Maxis equivalent pro forma combined amounts are calculated by multiplying
the Electronic Arts pro forma combined per share amounts by the Exchange
Ratio of 0.3644.
16
<PAGE>
RISK FACTORS
Future operating results of Electronic Arts depend upon many factors and are
subject to various risks and uncertainties. Prior to voting on the proposed
Merger, each Maxis stockholder should carefully consider and evaluate the
following factors, among others, which may cause Electronic Arts' operating
results to vary or which may materially and adversely affect Electronic Arts'
operating results.
The Industry and Competition. The interactive software business has
historically been a volatile and highly dynamic industry affected by changing
technology, limited hardware platform life cycles, hit products, competition,
component supplies, seasonality, consumer spending and other economic trends.
The business is also intensely competitive. A variety of companies offer
products that compete directly with one or more of Electronic Arts' products.
These direct competitors vary in size from very small companies to companies
with financial, managerial and technical resources comparable to or greater
than those of Electronic Arts. Typically, Electronic Arts' chief competitor on
dedicated game platforms is the hardware manufacturer/licensor itself, to
which Electronic Arts must pay royalties and, in the case of Sony and Nintendo
Co., Ltd. ("Nintendo"), manufacturing charges. For example, Sony has
aggressively launched sports product lines that directly compete with
Electronic Arts' sports products on the PlayStation ("PlayStation"). In
addition, competition for creative talent has intensified, and the attraction
and retention of key personnel by Electronic Arts is increasingly difficult.
Products. Interactive entertainment software products typically have life
spans of only 3 to 12 months. In addition, the market is crowded with a large
number of titles competing for limited shelf space at retail. Electronic Arts'
future success will depend in large part on its ability to develop and
introduce new competitive products on a timely basis and to get those products
distributed widely at retail. To compete successfully, new products must adapt
to new hardware platforms and emerging industry standards, provide additional
functionality and be successfully distributed in numerous changing worldwide
markets. If Electronic Arts were unable, due to resource constraints or
technological or other reasons, to successfully develop and distribute such
products in a timely manner, this inability would have a material adverse
effect on its operating results and financial condition.
Development. Product development schedules, particularly for new hardware
platforms and high-end multimedia PCs, are difficult to predict because they
involve creative processes, use of new development tools for new platforms and
the learning process, research and experimentation associated with development
for new technologies. Compact Disc-Read Only Memory ("CD-ROM") products
frequently include more content and are more complex, time-consuming and
costly to develop than 16-bit cartridge products and, accordingly, cause
additional development and scheduling risk. For example, in fiscal year 1996,
Madden Football 96 and NHL Hockey 96 for the PlayStation did not ship at all
due to significant delays in development that made the delayed completion date
untimely for these products. Likewise, Need for Speed II for PC-CD, a high
margin product scheduled for shipment in March of 1997, did not ship until
April of 1997 due to last minute development delays. Dungeon Keeper,
originally scheduled to ship in the quarter ended June 1996, is now expected
to ship during the summer of 1997. In addition, development risks for CD-ROM
products can cause particular difficulties in predicting quarterly results
because brief manufacturing lead times allow finalizing products and projected
release dates late in a quarter. Manufacturing lead times during the year for
CD-based products have been as brief as one to three weeks; cartridge products
more typically have had a six- to twelve-week lead time for manufacture.
Platform Changes. A large portion of Electronic Arts' revenues are derived
from the sale of products designed to be played on proprietary video game
platforms such as the PlayStation, Sega Saturn ("Saturn"), the 16-bit Super
Nintendo Entertainment System (the "SNES"), the 16-bit Sega Genesis video game
system (the "Genesis") and the Nintendo 64 (the "N64"). The interdependent
nature of Electronic Arts' business and that of its hardware licensors brings
significant risks to Electronic Arts' business. The success of Electronic
Arts' products is significantly affected by market acceptance of the new
videogame hardware systems and the life span of older hardware platforms, and
Electronic Arts' ability to accurately predict these factors with respect to
each platform. In many cases, Electronic Arts will have expended a large
amount of development and marketing resources on products designed for new
video game systems (such as the new 32-bit systems) that have not yet achieved
large installed bases, or will have continued product development for older
hardware platforms that may have shorter life cycles than Electronic Arts
expected. Conversely, if Electronic Arts does not choose to
17
<PAGE>
develop for a platform that achieves significant market acceptance, or
discontinues development for a platform that has a longer life cycle than
expected, Electronic Arts' revenue growth may be adversely affected. For
example, Electronic Arts signed an agreement with Nintendo to develop and
publish a line of EA SPORTS products for the N64 in March of 1997, nearly
seven months after introduction of that platform in North America. Due to long
development times associated with this platform, Electronic Arts will not ship
N64 products in significant quantities until calendar year 1998.
Electronic Arts believes that investment in products for the 32-bit market,
including both Compact Disc personal computer ("PC-CD") and CD-dedicated video
game ("CD-video game") platforms (particularly the Sony PlayStation) has been
strategically important in positioning Electronic Arts for the now completed
transition to 32-bit machines. Electronic Arts continues to believe that such
investment is important and will continue its aggressive development
activities for 32-bit platforms. Although the PlayStation has achieved
significant market acceptance in all geographic territories, there can be no
assurance that its growth will continue at the present rates, particularly
with the introduction of the N64 by Nintendo. The introduction and market
acceptance of the N64, particularly in North America, may adversely affect the
growth rate of the 32-bit CD-platforms. While Electronic Arts has a broad
range of products available and under development for the PlayStation and for
PC-CD, Electronic Arts will not ship products for the N64 in any significant
quantities until calendar year 1998.
Hardware Companies. Electronic Arts' contracts with hardware licensors,
which are also some of Electronic Arts' chief competitors, often grant
significant control to the licensor over the manufacturing of Electronic Arts'
products. This fact could, in certain circumstances, leave Electronic Arts
unable to get its products manufactured and shipped to customers. In most
events, control of the manufacturing process by hardware companies increases
both the manufacturing lead times and the expense to Electronic Arts as
compared to the lead times and costs that Electronic Arts can achieve
independently. In both fiscal 1996 and fiscal 1997, for example, Electronic
Arts experienced delays in the manufacturing of PlayStation products which
caused delays in shipping those products. The results of future periods may be
affected by similar delays. Finally, Electronic Arts' contracts with its
hardware licensors often require Electronic Arts to take significant risks in
holding or prepaying for its inventory of products. In particular, Electronic
Arts' agreement with Nintendo for N64 products requires prepayment of costly
cartridge-based inventory, minimum orders and no rights of return.
Revenue and Expenses. A substantial majority of the revenue of Electronic
Arts in any quarter typically results from orders received in that quarter and
products introduced in that quarter. Electronic Arts' expenses are based, in
part, on development of products to be released in the future. Certain
overhead and product development expenses do not vary directly in relation to
revenues. This trend is increasing as Electronic Arts increases the proportion
of products developed internally. As a result, Electronic Arts' quarterly
results of operations are difficult to predict, and small delays in product
deliveries may cause quarterly revenues, operating results and net income to
fall significantly below anticipated levels. Electronic Arts typically
receives orders shortly before shipments, making backlog an unreliable
indicator of quarterly results. A shortfall in shipments at the end of any
particular quarter may cause the results of that quarter to fall significantly
short of anticipated levels.
Film and Videotape. Electronic Arts produces film and videotape to include
in certain products pursuant to agreements between certain of Electronic Arts'
subsidiaries with the Screen Actor's Guild ("SAG"), the American Federation of
Television and Radio Artists ("AFTRA") and the British Actors Equity
Association ("Equity"). However, the costs of video production are
significantly higher than for software production, and for products which
include a substantial amount of video such as certain interactive movies, the
costs of producing the video component is significantly higher than the cost
of developing the software component. Accordingly, more units of such products
must be sold to recoup the development and production costs. There can be no
assurance that these products which include significant film or videotape
components will be commercially successful enough to recoup development costs.
In addition, Electronic Arts' agreements with SAG and AFTRA expire during the
current calendar year, and there can be no assurance that Electronic Arts will
be able to renegotiate favorable terms.
18
<PAGE>
Limited Protection of Proprietary Technology. Generally, neither Electronic
Arts nor Maxis has signed license agreements with the end users of its
products and neither company fully copy-protects its products. Rather, both
companies rely on copyright laws to prevent unauthorized distribution of their
software. The companies also both rely on a combination of trade secret,
patent and trademark laws to protect their proprietary rights. Existing
copyright laws provide only limited protections. It is possible for
unauthorized third parties to copy the companies' products or to otherwise
obtain and use information that Electronic Arts or Maxis regard as
proprietary. Policing unauthorized use of products is difficult and expensive.
Policing unauthorized copying and distribution of the companies' products has
become increasingly difficult to combat as the Internet and other widely
available electronic transmission capabilities have emerged. Further, the laws
of certain countries in which Electronic Arts and Maxis distribute their
products provide less protection for the companies' intellectual property
rights and products than do the laws of the United States.
Gross Margins. Although gross margins for Electronic Arts' products as a
whole have increased over the last three fiscal years, there are no assurances
that this trend will continue in the future for several reasons. Professional
and celebrity royalties continue to increase. Also, while the costs of
development of new products for 32- and 64-bit systems have increased, overall
costs of goods are not declining. For products on platforms for which
Electronic Arts is required to purchase its goods from the hardware companies,
Electronic Arts is unable to achieve cost reductions through manufacturing
efficiencies, and royalties to hardware companies remain fixed or are
increasing. As Electronic Arts begins to ship N64 products in significant
quantities, margins may further decline due to the higher cost of goods
associated with this cartridge-based platform. Similarly, higher distribution
expenses for operations in Europe and North America and growth of the lower
margin distribution business continue to put pressure on margins. In addition,
retailers continue to require significant price protection for products, and
with an increasing number of titles available for advanced platforms, such
requirements for price protection may increase.
Marketing and Distribution. Both the video game and PC businesses have
become increasingly "hits" driven. Additional marketing and advertising funds
are required to drive and support "hit" products, particularly television
advertising. There can be no assurance that Electronic Arts will continue to
produce "hit" titles, or that advertising for any product will increase sales
sufficiently to recoup those advertising expenses.
Employees. Competition for employees in the interactive software business is
intense and increasing as competition in the industry increases. In the last
fiscal year, recruiting of Electronic Arts' employees generally, and its
executive officers in particular, has been intense. Large software and media
companies frequently offer significantly larger cash compensation than does
Electronic Arts, placing pressure on Electronic Arts' base salary and cash
bonus compensation. Small start-up companies such as those proliferating in
the online business areas offer significant potential equity gains which are
difficult for more mature companies like Electronic Arts to match without
significant stockholder dilution. While executive turnover has decreased in
fiscal 1997 as compared to fiscal 1996, virtually all of the executives
continue to experience intense recruiting pressure. There can be no assurance
that Electronic Arts will be able to continue to attract and retain enough
qualified employees in the future.
Foreign Sales and Currency Fluctuations. For the 1997 fiscal year,
international net revenues comprised 46% of total consolidated net revenues.
Electronic Arts expects foreign sales to continue to account for a significant
and growing portion of Electronic Arts' revenues. Such sales are subject to
unexpected regulatory requirements, tariffs and other barriers. Additionally,
foreign sales are primarily made in local currencies which may fluctuate.
Investments in Affiliates. Electronic Arts has a number of equity
investments in affiliates, including small developers, such as Firaxis and
Visual Concepts, other publishers, such as NovaLogic, Inc. and Accolade, Inc.,
and new ventures such as Mpath Interactive. These companies are generally
small and without significant financial resources. Financial difficulties for
any of these companies could cause a reduction in the value of Electronic
Arts' investment. For example, in fiscal 1996 Electronic Arts wrote off its
investment in SportsLab in its entirety.
19
<PAGE>
Merger Related Risks to the Business of Maxis. The announcement or the
consummation of the Merger may increase the likelihood of a number of changes
to Maxis' business, any of which could have a material adverse effect. Such
changes include but are not limited to: loss of key management, development or
other personnel of Maxis; deterioration of Maxis' customer relationships,
returns of Maxis' products in excess of normal returns, reduction or cessation
of orders for Maxis' products, or cancellation of agreements by distributors
of the Maxis product line, certain of which have already communicated their
intention to take all or some of such actions; confusion of potential buyers
of Maxis products; and delays in product development or delivery and
diminution of the Sim brand. If the Merger were not completed for any reason,
Maxis could be materially adversely affected by such changes and restoring
Maxis' business to its pre-announcement value could require a substantial
period of time, require significant expenditures or prove impossible. As a
result of the factors described above, the failure to consummate the Merger
for any reason could have a material adverse effect on Maxis' business
operating results, financial condition and stock trading price. For a
discussion of other risks regarding the business of Maxis, see "Maxis
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors."
Risks Related to SimCity 3000. SimCity, its successor SimCity 2000 and
related add-on products represented 46% of net revenues of Maxis for fiscal
1997 and 52% of net revenues for fiscal 1996. Maxis originally planned to
release, the follow on product to SimCity 2000, in March 1997, but has
deferred the introduction until fiscal 1998. Failure to ship SimCity 3000 for
the calendar 1997 holiday season would have a material adverse effect on the
operating results of Maxis, and could have a material adverse effect on the
operating results of the combined company, during the current fiscal year and,
in particular, the third fiscal quarter.
Fluctuations in Stock Price. Due to analysts' expectations of continued
growth and other factors, any shortfall in earnings could have an immediate
and significant adverse effect on the trading price of the Electronic Arts
Common Stock in any given period. As a result of the factors discussed in this
Proxy Statement/Prospectus and other factors that may arise in the future, the
market price of the Electronic Arts Common Stock historically has been, and
may continue to be subject to significant fluctuations over a short period of
time. These fluctuations may be due to factors specific to Electronic Arts, to
changes in analysts' earnings estimates, or to factors affecting the computer,
software, entertainment, media or electronics industries or the securities
markets in general. For example, during the fiscal years 1997 and 1996 the
price per share of the Electronic Arts Common Stock ranged from $24.75 to
$39.13 and from $20.13 to $41.75, respectively. See "Comparative Per Share
Market Data."
Risks Associated with Fixed Exchange Ratio. Under the terms of the
Reorganization Agreement, each outstanding share of Maxis Common Stock will be
converted into the right to receive the Exchange Ratio of 0.3644 of a share of
Electronic Arts Common Stock at the Effective Time of the Merger. The
Reorganization Agreement does not provide for adjustment of the Exchange Ratio
based on fluctuations in the price of either Electronic Arts Common Stock or
Maxis Common Stock. As discussed above, the price of Electronic Arts Common
Stock may vary significantly between the date hereof and the date on which
stockholders vote with respect to the Reorganization Agreement. To the extent
that the market price for Electronic Arts Common Stock increases or decreases
before the Effective Time, the market value at the Effective Time of the
Electronic Arts Common Stock to be received by Maxis stockholders in the
Merger would correspondingly increase or decrease. Maxis stockholders will not
be compensated for decreases in the market price of Electronic Arts Common
Stock which could occur prior to the Effective Time. Stockholders voting on
the Merger are urged to obtain recent market quotations for Electronic Arts
Common Stock and Maxis Common Stock. No assurance can be given as to the
market prices of Electronic Arts Common Stock or Maxis Common Stock at any
time before the Effective Time or as to the market price of Electronic Arts
Common Stock at any time thereafter.
General Risks Associated with Integration of Operations. Electronic Arts and
Maxis have entered into the Reorganization Agreement with the expectation that
the proposed Merger will result in long-term benefits. These anticipated
benefits will depend in part on whether the companies' operations can be
integrated in an efficient and effective manner. There can be no assurance
that this will occur. The successful integration of Maxis with Electronic Arts
will require, among other things, integration of the companies' respective
product offerings and
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coordination of the companies' sales and marketing efforts and research and
development efforts. It is possible that this integration will not be
accomplished smoothly or successfully. The diversion of the attention of
management and any difficulties encountered in the process of combining the
operations of the two organizations could cause the interruption of, or a loss
of momentum in, the activities of either or both of the companies' businesses,
which could have an adverse effect on their combined operations. Furthermore,
the process of combining the companies could have a material adverse effect on
employee morale and on the ability of Maxis and Electronic Arts to retain the
key technical and sales and marketing personnel who are critical to the
combined companies' future operations. There can be no assurance that
employees of Maxis will continue to work for Electronic Arts. In addition, the
announcement and consummation of the Merger could cause customers or potential
customers to delay or cancel orders for products as a result of uncertainty
over the integration and continued support of Maxis' products. Failure to
accomplish the integration of the two companies' operations efficiently and
effectively could have a material adverse effect on Electronic Arts' business,
operating results and financial condition.
Financial Impact of Failure to Achieve Synergies. If the integration of
Electronic Arts' and Maxis' operations is not successful, if the combined
company does not experience business synergies as quickly as may be expected
by financial analysts, if such synergies are not achieved or are at levels
below those expected by financial analysts, or if the accretive/dilutive
effect of the Merger is not in line with the expectations of financial
analysts, the market price of the Electronic Arts Common Stock may be
significantly and adversely affected.
Costs of Integration; Transaction Expenses. Electronic Arts and Maxis
estimate that they will incur aggregate direct transaction costs of
approximately $2.5 million associated with the Merger, which will result in a
non-recurring charge to operations upon consummation of the Merger. Electronic
Arts expects to incur a non-recurring charge to operations of approximately
$3.0 million primarily in the quarter ending September 30, 1997, the quarter
in which the Merger is expected to be consummated, to reflect costs associated
with integrating the two companies. Actual costs may substantially exceed such
estimates, unanticipated expenses associated with the integration of the two
companies may arise, or Electronic Arts may incur additional material charges
in subsequent quarters to reflect additional costs associated with the
integration of the two companies.
Percentage of Voting Stock; Influence over Affairs. Following the Merger,
and based upon the companies' respective capitalizations as of June 16, 1997,
the current stockholders of Electronic Arts and Maxis will own approximately
93.0% and 7.0%, respectively, of the outstanding shares of Electronic Arts
Common Stock. Accordingly, the percentage ownership of Electronic Arts by each
former stockholder of Maxis will be substantially less than such stockholders'
current percentage ownership of Maxis. Accordingly, former Maxis stockholders
will have a significantly smaller voting influence over the affairs of
Electronic Arts than they currently enjoy over the affairs of Maxis.
Pooling of Interests. In order to qualify the Merger as a pooling of
interests for accounting and financial reporting purposes, affiliates of
Electronic Arts and Maxis have agreed not to sell, or otherwise reduce their
risk with respect to, any shares of stock, except for a de minimus number as
defined by certain rules and regulations of the Commission, of either
Electronic Arts or Maxis during the period beginning 30 days preceding the
Effective Time and continuing until Electronic Arts publicly announces
financial results covering at least 30 days of combined operations of
Electronic Arts and Maxis. Assuming that the Merger is completed and the
Effective Time occurs on or before August 29, 1997, it is not expected that
such combined financial results would be published until the latter part of
October 1997. If affiliates of Electronic Arts or Maxis sell their Electronic
Arts Common Stock or Maxis Common Stock despite their contractual obligation
not to do so, the Merger may not qualify for accounting as a pooling of
interests for financial reporting purposes in accordance with generally
accepted accounting principles, which would in turn materially and adversely
affect Electronic Arts' reported earnings and, potentially, its stock price.
See "Approval of the Merger and Related Transactions--Accounting Treatment."
Interests of Certain Persons in the Merger. Certain members of the Maxis
Board of Directors and the management of Maxis have certain interests in the
Merger that are different from, or in addition to, the interests
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of Maxis stockholders in the Merger generally. These certain interests
include: (i) all executive officers of Maxis have entered into severance and
have pre-existing option acceleration agreements that may be triggered in
connection with the Merger and (ii) Jeffrey B. Braun and William R. Wright,
founders and directors of Maxis, have entered into employment agreements with
Electronic Arts. See "Terms of the Merger--Interests of Certain Persons."
Because of the foregoing factors, as well as other factors affecting
Electronic Arts' operating results and financial condition, past financial
performance should not be considered a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
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THE SPECIAL MEETING
DATE, TIME, PLACE AND PURPOSE OF SPECIAL MEETING
The Special Meeting will be held at 8:00 a.m., local time, on Friday, July
25, 1997 at Maxis' headquarters located at 2121 N. California Boulevard, Suite
600, Walnut Creek, CA 94596. At the Special Meeting, stockholders of Maxis at
the close of business on the Record Date will be asked to approve and adopt
the Reorganization Agreement and approve the Merger. The Reorganization
Agreement is attached hereto as Appendix A. See "Approval of the Merger and
Related Transactions" and "Terms of the Merger."
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of Maxis Common Stock at the close of business on the
Record Date are entitled to notice of and to vote at the Special Meeting. As
of June 23, 1997, there were 11,247,147 shares of Maxis Common Stock
outstanding and entitled to vote held of record by approximately 141
stockholders (although Maxis has been informed that there are in excess of 800
beneficial owners of Maxis Common Stock). Each Maxis stockholder is entitled
to one vote for each share of Maxis Common Stock held as of the Record Date.
VOTING OF PROXIES
The proxy accompanying this Proxy Statement/Prospectus is solicited on
behalf of the Maxis Board for use at the Special Meeting. Maxis stockholders
are requested to complete, date and sign the accompanying proxy and promptly
return it in the enclosed envelope or otherwise mail it to Maxis. All properly
executed proxies received by Maxis prior to the vote at the Special Meeting
that are not revoked will be voted at the Special Meeting in accordance with
the instructions indicated on the proxies or, if no direction is indicated, to
approve and adopt the Reorganization Agreement and to approve the Merger. A
Maxis stockholder who has given a proxy may revoke it at any time before it is
exercised at the Special Meeting, by (i) delivering to the Secretary of Maxis
(by any means, including facsimile) a written notice, bearing a date later
than the date of the proxy, stating that the proxy is revoked, (ii) signing
and so delivering a proxy relating to the same shares and bearing a later date
prior to the vote at the Special Meeting, or (iii) attending the Special
Meeting and voting in person (although attendance at the Special Meeting will
not, by itself, revoke a proxy). Please note, however, that if a stockholder's
shares are held of record by a broker, bank or other nominee and that
stockholder wishes to vote at the Special Meeting, the stockholder must bring
to the Special Meeting a letter from the broker, bank or other nominee
confirming such stockholder's beneficial ownership of the shares.
It is not anticipated that any matter not referred to herein will be
presented for action at the Special Meeting. If any other matters are properly
brought before the Special Meeting, the persons named in the proxies will have
discretion to vote on such matters in accordance with their best judgment.
VOTE REQUIRED
Pursuant to DGCL, approval of the Merger requires the affirmative vote of at
least a majority of the outstanding shares of Maxis Common Stock entitled to
vote at the Special Meeting. Maxis officers and directors and their affiliates
hold approximately 59.0% of the outstanding Maxis Common Stock.
Since the required vote of the Maxis stockholders is based upon the number
of outstanding shares of Maxis Common Stock rather than upon the shares
actually voted in person or by proxy at the Special Meeting, the failure by
the holder of any such shares to submit a proxy or to vote in person at the
Special Meeting (including abstentions and "broker non-votes") will have the
same effect as a vote against approval of the Merger.
Jeffrey B. Braun, who beneficially owns approximately 28.5% of the issued
and outstanding Maxis Common Stock, has executed a Voting Agreement with
Electronic Arts, pursuant to which he has agreed to vote all such shares in
favor of the Merger. See "Terms of the Merger--Voting Agreement."
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QUORUM; ABSTENTIONS; BROKER NON-VOTES
The required quorum for the transaction of business at the Special Meeting
is a majority of the shares of Maxis Common Stock outstanding on the Record
Date, either present in person or represented by proxy. Abstentions will be
included in determining the number of shares present and voting at the Special
Meeting and will have the same effect as votes against the proposals. If an
executed Maxis proxy is returned and the stockholder has specifically
abstained from voting on any matter, the shares represented by such proxy will
be considered present at the Special Meeting for purposes of determining a
quorum. If an executed proxy is returned by a broker holding shares in street
name which indicates that the broker does not have discretionary authority as
to certain shares to vote on one or more matters, such shares will be
considered present at the meeting for purposes of quorum. Since the required
vote of the Maxis stockholders is based upon the number of outstanding shares
of Maxis Common Stock, abstentions and broker non-votes will have the same
effect as a vote against approval of the Merger.
SOLICITATION OF PROXIES AND EXPENSES
Maxis will bear the cost of the solicitation of proxies in the enclosed form
from its stockholders. In addition to solicitation by mail, the directors,
officers and employees of Maxis may solicit proxies from stockholders by
telephone, telegram, letter or in person. Following the original mailing of
the proxies and other soliciting materials, Maxis will request brokers,
custodians, nominees and other record holders to forward copies of the proxy
and other soliciting materials to persons for whom they hold shares of Maxis
Common Stock and to request authority for the exercise of proxies. In such
cases, Maxis, upon the request of the record holders, will reimburse such
holders for their reasonable expenses.
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APPROVAL OF THE MERGER AND RELATED TRANSACTIONS
This section contains forward-looking statements regarding future events or
the future financial performance of Electronic Arts and Maxis. Actual events
and actual results could differ materially from those anticipated in or by any
forward-looking statements due to certain risks and uncertainties, including
the risks described under "Risk Factors" and elsewhere in this Proxy
Statement/Prospectus. See "Forward-Looking Statements."
BACKGROUND OF THE MERGER
Electronic Arts and Maxis have been familiar with each other's products for
many years. At various times, most recently in May and June 1996, Electronic
Arts and Maxis discussed the possibility of entering into a business
combination transaction but did not pursue the opportunity at that time.
In November 1996, the Maxis Board decided to explore possible strategic
transactions and alternatives with third parties. At this time representatives
of Maxis requested that Alex. Brown, Maxis' financial advisors, work with
Maxis to determine various options. Alex. Brown approached several companies
regarding a potential transaction.
On December 17, 1996, Larry Probst, Chief Executive Officer of Electronic
Arts, E. Stanton McKee, Jr., Executive Vice President and Chief Financial and
Administrative Officer of Electronic Arts, Samuel Poole, President and Chief
Executive Officer of Maxis, Fred Gerson, Vice President and Chief Financial
Officer of Maxis, and a representative of Alex. Brown, Maxis' financial
advisor, met to explore a possible strategic combination of the two companies.
At this meeting, Maxis also reviewed its preliminary product plans and
forecasts for fiscal 1998 with Electronic Arts.
Several times throughout the first quarter of 1997, various representatives
of the companies met to become familiar with the each other's company. On
January 16, 1997, Messrs. Probst, McKee, Gerson, Poole and representatives of
Alex. Brown met to review Maxis' preliminary fiscal 1998 financial forecast.
On February 1, 1997, Luc Barthelet, Keith McCurdy and Rob Martyn, members of
Electronic Arts' product development team, Paul Zuzelo, Maxis' Vice President
of Product Development, Mr. Gerson and other product development personnel met
to perform a fundamental assessment of Maxis' products and their development
status. On February 19, 1997, Don Mattrick, Electronic Arts' Executive Vice
President, North American Studios, and Mr. McKee met with Messrs. Poole,
Gerson and Zuzelo and representatives of Alex. Brown to review Maxis' product
development process and key products, their development status and their
projected shipping dates.
In March 1997, Maxis formally retained Alex. Brown to pursue strategic
alternatives and transactions with third parties. During this time, Alex.
Brown contacted several additional companies regarding a potential strategic
transaction. In addition to Electronic Arts, Maxis, through Alex. Brown,
entered into discussions with two other parties during April and May regarding
a possible strategic transaction.
During a March 12, 1997 follow up to the February 19, 1997 meeting, Messrs.
Barthelet, McKee, Zuzelo, Steffen Bartschat, a Maxis Executive Producer, and
Greg Kearney, a Maxis Programming Director, met at Electronic Arts' San Mateo
office to review Maxis' development progress relating to certain products
discussed at the previous meeting. On March 19, 1997, Norman Basch, Electronic
Arts' Director of Business Development, met and on or about such time had
several phone conversations with Mr. Gerson and Ken Owyang, Maxis' Controller,
to discuss the potential synergies of a merger between the two companies. On
March 27, 1997, the Electronic Arts Board held a regularly scheduled meeting
at which the advantages and disadvantages of a merger with Maxis were
discussed, and management was authorized to continue discussions with Maxis.
During the month of April 1997, Maxis and Electronic Arts continued to
review their alternatives in meetings or telephone conversations from time to
time in light of recent discussions and meetings between representatives of
each company. During this period and continuing through May and early June,
Mr. McKee
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and a representative of Alex. Brown had numerous discussions and negotiations
regarding the terms of a potential merger. By May of 1997, discussions between
Electronic Arts and Maxis had intensified and the parties became focused on
the specific terms that would allow a combination. On May 14, 1997, May 21,
1997, May 23, 1997, May 29, 1997 and June 2, 1997, the Maxis Board held
special meetings to discuss the status of negotiations between the two
companies. Financial and legal advisors participated in these meetings. On May
22, 1997, Messrs. Probst, Mattrick, McKee and Jeff Braun, Chairman of the
Maxis Board and a significant stockholder in Maxis, discussed by telephone the
possible benefits of a merger transaction. On May 23, 1997, Messrs. McKee and
Gerson had a telephone call to arrange product due diligence by Electronic
Arts at Maxis' offices on May 27, 1997. On May 27, 1997, Messrs. Barthelet,
Martyn and McCurdy performed product due diligence at Maxis' offices. The same
day, Mr. Mattrick visited Mr. Wright in San Mateo to discuss the development
of certain products. Immediately following this meeting, Messrs. Braun,
Mattrick, Probst, and William Wright, a founder and a director of Maxis, met
to further discuss the possibility of a combination. On May 28, 1997, Messrs.
McKee, Gerson and Alex. Brown met to discuss the terms of the merger
transaction. On May 29, 1997, Messrs. McKee and Alex. Brown met shortly before
a meeting of the Maxis Board that same day to finalize the terms to be
presented at that meeting to the Maxis Board. These terms were then presented
to the Maxis Board. At this time the Maxis Board determined that the
Electronic Arts proposal was the most beneficial to Maxis and determined to
proceed with such proposal.
Negotiations between management and legal counsel for each company and
review by Maxis' financial advisors continued from May 30, 1997 to June 4,
1997 on the terms of the Merger and the definitive Reorganization Agreement,
and Electronic Arts performed further due diligence with respect to Maxis. On
June 3, 1997, the Electronic Arts Board met telephonically to discuss
remaining issues relating to the merger of the companies, and approved the
Merger.
On June 4, 1997, the Maxis Board met and approved the terms of the Merger
and authorized its legal counsel to complete the definitive Reorganization
Agreement. At the Maxis meeting, the Maxis Board received a report from Alex.
Brown that stated they would deliver a fairness opinion with respect to the
proposed Merger. On June 4, 1997, each company executed and delivered the
Reorganization Agreement which was announced immediately thereafter by the
issuance of a joint press release.
MAXIS REASONS FOR THE MERGER
The Maxis Board believes that the Merger is fair to and in the best
interests of Maxis and its stockholders, and the Maxis Board has unanimously
adopted and approved the Reorganization Agreement and approved the Merger. The
following are among the reasons the Maxis Board believes the Merger will be
beneficial to Maxis and its stockholders:
. The combined experience, financial resources, and size and breadth of
product offerings of the combined company will allow the combined
company to respond more quickly and effectively to technological change,
increased competition and market demands in an industry experiencing
rapid innovation and change.
. The Merger should provide Maxis with greater resources to support its
marketing, distribution and product development efforts.
. Electronic Arts' substantial domestic and international sales, marketing
and distribution capabilities should provide an expanded opportunity for
distribution of Maxis' products both within the United States and in
international markets, thereby allowing Maxis to expand its customer
base.
. The combination of the customer service and technical support system may
permit the combined company to provide more efficient support coverage
to its customers.
. The Maxis stockholders would have the opportunity to participate in the
potential growth of the combined company after the Merger.
. The addition of senior Electronic Arts executives will increase
management breadth and strengthen organizational infrastructure.
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. Based solely on historical trading prices of the Electronic Arts Common
Stock and the Maxis Common Stock, the Merger could provide Maxis'
stockholders with securities that may have less price volatility than
the Maxis Common Stock.
In the course of its deliberations, the Maxis Board reviewed with Maxis
management a number of additional factors relevant to the Merger, including
the strategic overview and prospects for Maxis, its products and its finances.
The Maxis Board also considered, among other matters: (i) historical
information concerning Maxis' and Electronic Arts' respective businesses,
prospects, financial performance and condition, operations, technology,
management and competitive position, including public reports concerning
results of operations during the most recent fiscal year and fiscal quarter
for each company filed with the Commission; (ii) the financial condition,
results of operations and businesses of Maxis and Electronic Arts before and
after giving effect to the Merger; (iii) current financial market conditions
and historical market prices, volatility and trading information with respect
to the Maxis Common Stock and the Electronic Arts Common Stock; (iv) the
consideration to be received by Maxis stockholders in the Merger and the
relationship between the market value of the Electronic Arts Common Stock to
be issued in exchange for each share of Maxis Common Stock and a comparison of
comparable merger transactions; (v) the belief that the terms of the Merger
and the Reorganization Agreement, including the parties' representations,
warranties and covenants, and the conditions to their respective obligations,
are reasonable; (vi) the prospects of Maxis as an independent company; (vii)
the potential for other third parties to enter into strategic relationships
with or to acquire Maxis; (viii) the impact of the Merger on Maxis' customers
and employees; and (ix) reports from management, legal and financial advisors
as to the results of their due diligence investigation of Electronic Arts. The
Maxis Board also considered the terms of the proposed Reorganization Agreement
regarding Maxis' rights to consider and negotiate other acquisition proposals
in certain circumstances, as well as the possible effects of the provisions
regarding termination fees. See "Terms of the Merger--Non-Solicitation," "--
Termination; Termination Fees." In addition, the Maxis Board noted that the
Merger is expected to be accounted for as a pooling of interests and that no
goodwill is expected to be created on the books of Electronic Arts as a result
thereof. The Maxis Board considered financial presentations of Alex. Brown,
including the oral opinion of Alex. Brown delivered at the June 4, 1997
meeting of the Maxis Board, which concluded, subject to the assumptions made,
matters considered and limitations set forth in such opinion, that the
Exchange Ratio provided in the Reorganization Agreement was fair, from a
financial point of view, to Maxis stockholders on such date (a copy of the
Alex. Brown Opinion is attached as Appendix B hereto, and Maxis stockholders
are urged to carefully review the Alex. Brown Opinion). See "Approval of the
Merger and Related Transactions--Opinion of Alex. Brown & Sons Incorporated."
The Maxis Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to: (i) the risk that the potential benefits sought in the Merger
might not be fully realized; (ii) the possibility that the Merger might not be
consummated and the effect of the public announcement of the Merger on (a)
Maxis' sales and operating results, (b) Maxis' ability to attract and retain
key technical, management and marketing personnel and (c) the progress of
certain development projects; (iii) the potential dilutive effect of the
issuance of the Electronic Arts Common Stock to be issued in the Merger; (iv)
the substantial charges to be incurred, primarily in the quarter in which the
Merger is completed, in connection with the Merger, including costs of
integrating the businesses and transaction expenses arising from the Merger;
(v) the risk that despite the efforts of the combined company, key technical,
management and marketing personnel may not remain employed by the combined
company; and (vi) the other risks described under "Risk Factors" herein. The
Maxis Board believed that these risks were outweighed by the potential
benefits of the Merger.
The foregoing discussion of the information and factors considered by the
Maxis Board in connection with its evaluation of the Merger is not intended to
be exhaustive but is intended to include all of the material factors
considered by the directors. In view of the wide variety of factors, both
positive and negative, considered by the Maxis Board, the Maxis Board did not
find it practical to, and did not, quantify or otherwise assign relative
weights to the specific factors considered. After careful reconsideration of
all of the foregoing factors, the Maxis Board continues to believe that the
Merger is in the best interests of Maxis stockholders and continues to
unanimously recommend approval and adoption of the Reorganization Agreement
and approval of the Merger by the Maxis stockholders.
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ELECTRONIC ARTS REASONS FOR THE MERGER
The Electronic Arts Board has adopted and approved the Reorganization
Agreement. The following are among the reasons the Electronic Arts Board
believes the Merger will be beneficial to Electronic Arts:
. Electronic Arts' long-term strategy for growth includes obtaining and
exploiting through internal development, licensing or acquisition, key
franchise properties and brands. Electronic Arts believes that Maxis'
Sim products represent one of the premier franchise properties and
brands in the industry.
. Electronic Arts has strong domestic and international marketing and
distribution capabilities. Acquisition of Maxis' products would enhance
Electronic Arts' distribution business, particularly in the PC software
market, and permit Electronic Arts to better exploit the key properties
and brands of Maxis.
. One of Electronic Arts' objectives is to become the leading publisher in
the PC interactive entertainment market. While Electronic Arts has
achieved significant success in the video game software market, to date
its market share for PC products has been less than ten percent (10%) in
North America. Combining the Maxis product line with the Electronic
Arts' product line would enhance Electronic Arts' PC market share and
contribute to its effort to achieve its PC market objectives.
. Maxis' products may be particularly suited to on-line distribution and
gameplay. By obtaining access to the Sim product line, Electronic Arts
will increase the number of titles and key brands it can offer in the
emerging on-line medium.
In the course of its deliberations, the Electronic Arts Board, with
Electronic Arts management, reviewed and considered a number of other factors
relevant to the Merger. In particular, the Electronic Arts Board considered,
among other things, (i) information concerning Electronic Arts' and Maxis'
respective businesses, prospects, financial performance and conditions,
operations and product development schedules; (ii) the comparative stock
prices of Electronic Arts and Maxis at various points in time prior to
execution of the Reorganization Agreement: (iii) the charges expected to be
incurred in connection with the Merger, primarily in the quarter ended
September 30, 1997, including the transaction costs and the costs of
integrating the companies' businesses; (iv) alternatives for growth in the PC
market; and (v) the results of management's due diligence investigation and
analysis of Maxis.
The Electronic Arts Board also considered a variety of potentially negative
factors in its deliberations concerning the Merger, including: (i) the slower
growth rate of Maxis compared to the historical growth rate of Electronic
Arts; (ii) the possible dilutive effect of the issuance of Electronic Arts
stock in the Merger; (iii) the dependence of Maxis' near term financial
expectations on timely delivery of SimCity 3000; (iv) the risk that despite
the best efforts of the combined company the key technical and creative
personnel of Maxis may not be retained; and (v) the risks that the benefits
sought to be obtained through the Merger may not be obtained.
OPINION OF ALEX. BROWN & SONS INCORPORATED
Maxis retained Alex. Brown on March 1, 1997 to act as Maxis' financial
advisor in connection with the Merger, including rendering its opinion to the
Board of Directors of Maxis as to the fairness, from a financial point of
view, of the Exchange Ratio to Maxis' stockholders.
At the June 4, 1997 meeting of the Maxis Board, representatives of Alex.
Brown made a presentation with respect to the Merger and rendered to the Board
its oral opinion, subsequently confirmed in writing as of the same date, that,
as of such date, and subject to the assumptions made, matters considered and
limitations set forth in such opinion and summarized below, the Exchange Ratio
was fair, from a financial point of view, to Maxis' stockholders. No
limitations were imposed by the Board upon Alex. Brown with respect to the
investigations made or procedures followed by it in rendering its opinion.
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THE FULL TEXT OF ALEX. BROWN'S WRITTEN OPINION DATED JUNE 4, 1997 (THE
"ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
HERETO AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. MAXIS
STOCKHOLDERS ARE URGED TO READ THE ALEX. BROWN OPINION IN ITS ENTIRETY. THE
ALEX. BROWN OPINION IS DIRECTED TO THE BOARD, ADDRESSES ONLY THE FAIRNESS OF
THE EXCHANGE RATIO TO MAXIS' STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY MAXIS STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THE ALEX. BROWN OPINION WAS
GIVEN TO THE MAXIS BOARD FOR ITS CONSIDERATION IN DETERMINING WHETHER TO
APPROVE THE REORGANIZATION AGREEMENT. THE DISCUSSION OF THE ALEX. BROWN
OPINION IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE ALEX. BROWN OPINION ATTACHED HERETO AS
APPENDIX B.
In connection with the Alex. Brown Opinion, Alex. Brown reviewed certain
publicly available financial information and other information concerning
Maxis and Electronic Arts and certain internal analyses and other information
furnished to it by Maxis and Electronic Arts. Alex. Brown also held
discussions with the members of the senior managements of Maxis and Electronic
Arts regarding the businesses and prospects of their respective companies and
the joint prospects of a combined company. In addition, Alex. Brown (i)
reviewed the historical reported prices and trading activity for both the
Maxis Common Stock and the Electronic Arts Common Stock, (ii) compared certain
financial information for both Maxis and Electronic Arts with similar
information for selected companies whose securities are publicly traded, (iii)
compared certain stock market information and valuations for both Maxis and
Electronic Arts with similar information for certain companies whose
securities are publicly traded, (iv) reviewed the financial terms of certain
recent business combinations which it deemed comparable in whole or in part,
(v) reviewed the terms of the Reorganization Agreement and certain related
documents and (vi) performed such other studies and analyses and considered
such other factors as it deemed appropriate.
In conducting its review and arriving at its opinion, Alex. Brown assumed
and relied upon, without independent verification, the accuracy, completeness
and fairness of the information furnished to or otherwise reviewed by or
discussed with it for purposes of rendering its opinion. Pursuant to a
nondisclosure agreement between Alex. Brown and Electronic Arts, Alex. Brown
performed financial due diligence with respect to Electronic Arts, and Alex.
Brown relied upon Wall Street estimates regarding Electronic Arts (such
estimates being the "Electronic Arts Estimates"). In connection with the
analysis performed by Alex. Brown, Maxis provided to Alex. Brown its financial
projections (the "Maxis Estimates") and Alex. Brown utilized and relied upon
the Maxis Estimates in the Analysis of Certain Other Publicly Traded
Companies, Contribution Analysis, and the Pro Forma Earnings Analysis
summarized below. With respect to the information relating to the prospects of
Maxis and Electronic Arts provided to Alex. Brown by each company, Alex. Brown
assumed that such information was reasonably prepared and reflected the
currently available judgments and estimates of the respective managements of
Maxis and Electronic Arts as to the likely future financial performances of
their respective companies and of the combined entity. Alex. Brown assumed,
with the consent of Maxis, that the Merger would qualify for pooling of
interests accounting treatment and as a tax-free transaction for the
stockholders of Maxis for federal income tax purposes. Alex. Brown did not
make and it was not provided with an independent evaluation or appraisal of
the assets of Maxis or Electronic Arts nor was Alex. Brown furnished with any
such evaluations or appraisals. The Alex. Brown Opinion is based on market,
economic and other conditions as they existed and could be evaluated as of the
date of the opinion letter. It should be noted that the Maxis Estimates were
not prepared for public disclosure, that they are subject to change and that
there can be no assurance that such estimates can be achieved.
The following is a summary of the analyses performed and factors considered
by Alex. Brown in connection with the rendering of the Alex. Brown Opinion.
Historical Financial Position. In rendering its opinion, Alex. Brown
reviewed and analyzed the historical and current financial condition of Maxis
which included (i) an assessment of each of Maxis' and Electronic Arts' recent
financial statements; (ii) an analysis of each of Maxis' and Electronic Arts'
revenue, growth and operating performance trends; and (iii) an assessment of
Maxis' margin changes, leverage and market share.
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Historical Stock Price Performance. Alex. Brown reviewed and analyzed the
daily closing per share market prices and trading volume for Maxis Common
Stock and Electronic Arts Common Stock, from June 4, 1996 to June 4, 1997.
Although Alex. Brown reviewed the trading volume of Maxis Common Stock and
Electronic Arts Common Stock, it primarily focused on the relative stock price
movements of the two companies. Alex. Brown also reviewed the daily closing
per share market prices of the Maxis Common Stock and Electronic Arts Common
Stock and compared the movement of such daily closing prices with the movement
of the Nasdaq composite average over the period from June 5, 1995 to June 4,
1997. Alex. Brown noted that, on a relative basis, both Maxis and Electronic
Arts underperformed the Nasdaq composite average and that Electronic Arts
outperformed Maxis over the two-year period from June 5, 1995 to June 4, 1997.
Alex. Brown further noted that over the two-year period from June 5, 1995
through June 4, 1997 the relative stock price performance of the Maxis Common
Stock and Electronic Arts Common Stock was not similar. Alex. Brown also
reviewed the daily closing per share market prices of Maxis Common Stock and
Electronic Arts Common Stock and compared the movement of such closing prices
with the movement of a recreational software composite average (consisting of
Activision, Inc., Broderbund Software, G.T. Interactive, Midway Games, Inc.,
7th Level, Inc., Spectrum HoloByte, Inc. and The 3DO Company (collectively,
the "Selected Companies")) over the period from June 5, 1995 through June 4,
1997. On a relative basis the Maxis Common Stock price underperformed the
composite average. This information was presented to give the Board background
information regarding the respective stock prices of Maxis and Electronic Arts
over the periods indicated.
Analysis of Selected Publicly Traded Companies. This analysis examines a
company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. Alex. Brown
compared certain financial information (based on the commonly used valuation
measurements described below) relating to Maxis and Electronic Arts to certain
corresponding information from the Selected Companies including Electronic
Arts (together, the "Selected Publicly Traded Companies"). Such financial
information included, among other things, (i) common equity market valuation;
(ii) capitalization ratios, (iii) operating performance; (iv) ratios of common
equity market value as adjusted for debt and cash ("Enterprise Value") to
trailing 12-month revenues and revenues for calendar years 1997 and 1998; (v)
ratios of common equity value implied by the Exchange Ratio as adjusted for
debt and cash ("Merger Enterprise Value") to trailing 12-month revenues and to
revenues for calendar years 1997 and 1998; (vi) ratios of common equity market
prices per share ("Equity Value") to earnings per share ("EPS"); and (vii)
ratios of common equity prices per share implied by the Exchange Ratio
("Merger Equity Value") to trailing 12-month EPS, calendar year 1997 EPS and
calendar year 1998 EPS. The financial information used in connection with the
multiples provided below with respect to Maxis and Electronic Arts was based
on the latest reported 12-month period as derived from publicly available
information, the Maxis Estimates and the Electronic Arts Estimates. In the
case of the Selected Companies, the financial information used in connection
with the multiples provided below was based on (i) estimates of EPS obtained
from reports published by First Call and (ii) estimates from other operating
measures obtained from selected Wall Street research. Alex. Brown noted that,
on a trailing 12-month basis, the multiple of Enterprise Value to revenues was
1.5x for both Maxis Estimates and Maxis First Call estimates and 2.2x for
Electronic Arts, compared to a range of 1.0x to 2.4x, with a mean of 1.7x, for
the Selected Publicly Traded Companies; the multiple of Enterprise Value to
calendar year 1997 revenues was 1.2x for both Maxis Estimates and Maxis First
Call estimates and 1.9x for Electronic Arts, compared to a range of 1.3x to
2.2x, with a mean of 1.7x for the Selected Publicly Traded Companies; and the
multiple of Enterprise Value to calendar year 1998 revenues was not applicable
for Maxis Estimates, 1.0x for Maxis First Call estimates and 1.5x for
Electronic Arts, compared to a range of 1.0x to 2.1x, with a mean of 1.5x for
the Selected Publicly Traded Companies. Alex Brown noted that, on a trailing
12-month basis, the multiple of Merger Enterprise Value to revenues was 1.6x
for both Maxis Estimates and Maxis First Call estimates; the multiple of
Merger Enterprise Value to calendar year 1997 revenues was 1.3x for both Maxis
Estimates and Maxis First Call estimates; and the multiple of Merger
Enterprise calendar year 1998 revenues was not applicable for Maxis Estimates
and 1.0x for Maxis First Call estimates. Alex. Brown further noted that the
multiple of Equity Value to trailing 12-month EPS was not measurable for both
Maxis Estimates and Maxis First Call estimates and 32.6x for Electronic Arts,
compared to a range of 8.6x to 38.7x, with a mean of 26.4x, for the Selected
Publicly Traded Companies; the multiple of Equity Value to calendar year 1997
EPS was 41.8x for Maxis Estimates, 38.8x for Maxis First Call
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estimates and 25.7x for Electronic Arts, compared to a range of 10.8x to
31.5x, with a mean of 21.7x for the Selected Publicly Traded Companies; the
multiple of Equity Value to calendar year 1998 EPS was not applicable for
Maxis Estimates, 20.9x for Maxis First Call estimates and 20.1x for Electronic
Arts, compared to a range of 13.2x to 21.2x, with a mean of 17.6x, for the
Selected Publicly Traded Companies. Alex Brown further noted that the multiple
of Merger Equity Value to trailing 12-month EPS was not measurable for both
Maxis Estimates and Maxis First Call estimates; the multiple of Merger Equity
Value to calendar year 1997 EPS was 42.1x for Maxis Estimates and 39.5x for
Maxis First Call estimates; and the multiple of Merger Equity Value to
calendar year 1998 EPS was not applicable for Maxis Estimates and 21.3x for
Maxis First Call estimates. As a result of the foregoing procedures, Alex.
Brown noted that the multiples for Maxis and Electronic Arts were generally
within the range of the multiples for the Selected Publicly Traded Companies.
EPS projections for Maxis were based on Maxis Estimates and First Call
estimates, and EPS projections for the Selected Companies and Electronic Arts
were based on First Call estimates. The Maxis Estimates EPS, as of May 5,
1997, for the trailing 12-month period, calendar year 1997 and calendar year
1998 were ($0.15), $0.26 and not applicable, respectively, and the First Call
EPS estimates, as of May 5, 1997, for the same periods were ($0.15), $0.28 and
$0.52. The First Call EPS estimates for Electronic Arts, as of May 6, 1997,
for the trailing 12-month period, calendar year 1997 and calendar year 1998
were $0.93, $1.18 and $1.51, respectively.
Analysis of Selected Mergers and Acquisitions. Alex. Brown reviewed the
financial terms, to the extent publicly available, of twenty-five proposed,
pending or completed mergers and acquisitions since April 1992 in the software
industry (the "Selected Transactions"). Alex. Brown calculated various
financial multiples and the premiums over market value based on certain
publicly available information for each of the Selected Transactions and
compared them to corresponding financial multiples and the premiums over
market for the Merger, based on the Exchange Ratio of 0.3644. The twenty-five
software transactions reviewed, in chronological order of public announcement,
were: Jostens, Inc. / Wicat Systems, Inc.--April 4, 1992; Electronic Arts Inc.
/ Origin Systems, Inc.--September 3, 1992; Symantec Corporation / Contact
Software International, Inc.--May 3, 1993; MicroProse, Inc. / Spectrum
HoloByte, Inc.--June 17, 1993; Tribune Company / Compton's Multimedia
Publishing Group--July 6, 1993; Intuit Inc. / ChipSoft, Inc.--September 2,
1993; H&R Block, Inc. / MECA Software, Inc.--October 12, 1993; Electronic Arts
Inc. / Broderbund Software, Inc.--February 9, 1994 (terminated transaction);
Adobe Systems, Inc. / Aldus Corporation--March 16, 1994; Novell, Inc. /
WordPerfect Corporation--March 22, 1994; Novell, Inc. / Borland International
(Quattro Pro)--March 22, 1994; Pearson Inc. / The Software Toolworks, Inc.--
March 31, 1994; Spelling Entertainment Group / Virgin Interactive
Entertainment--June 29, 1994; Adobe Systems, Inc. / Frame Technology
Corporation--June 22, 1995; Symantec Corporation / Delrina Corporation--July
5, 1995; SoftKey International Inc. / Minnesota Educational Computing Corp.--
October 30, 1995; SoftKey International Inc. / The Learning Company--October
30, 1995; SoftKey International Inc. / Compton's--November 30, 1995; Sierra
On-Line, Inc. / Papyrus Design Group, Inc.--November 30, 1995; CUC
International Inc. / Sierra On-Line, Inc.--February 20, 1996; CUC
International Inc. / Davidson & Associates, Inc.--February 20, 1996; GT
Interactive Software Corporation / WizardWorks Group, Inc.--June 25, 1996;
International Business Machines Corporation / Edmark Corporation--November 13,
1996; CUC International Inc. / Berkeley Systems Inc.--April 10, 1997
(unannounced deal, date obtained from news article); Broderbund Software, Inc.
/ Parsons Technology--May 29, 1997. These transactions involved the
acquisition of software companies that primarily sold their products into the
consumer market. Alex. Brown noted that (i) the multiple of the equity
purchase price, as adjusted for debt and cash (the "Adjusted Purchase Price"),
to trailing 12-month revenues was 1.6x for the Merger versus a range of 1.0x
to 9.8x with a mean of 3.6x and a median of 2.7x for the Selected
Transactions; (ii) the multiple of Adjusted Purchase Price to operating income
was not measurable for the Merger versus a range of 11.3x to 99.5x with a mean
of 38.1x and a median of 40.1x for the Selected Transactions; (iii) the
multiple of Adjusted Purchase Price to net income was not measurable for the
Merger versus a range of 12.3x to 94.6x with a mean of 52.1x and a median of
57.5x for the Selected Transactions; and (iv) the multiple of the Adjusted
Purchase Price to book value was 2.1x for the Merger versus a range of 2.6x to
18.7x with a mean of 8.1x and a median of 8.6x for the Selected Transactions.
Alex. Brown also noted that the Selected Transactions were effected at a range
of premiums to the target's per share market price one month prior to
announcement and to the target's per share market price one day prior to
announcement of 8.1% to 105.3%, with a mean of 52.4%, and -1.1% to 88.2%, with
a mean of 44.4%,
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respectively, versus transaction premiums of 38.4% and 1.8%, respectively, for
the Merger (based on the per share market price four weeks prior to June 4,
1997 and as of June 4, 1997). All multiples for the Selected Transactions were
based on public information available at the time of announcement of such
transaction, without taking into account differing market and other conditions
during the five-year period during which the Selected Transactions occurred.
Historical Exchange Ratio Analysis. Alex. Brown reviewed and analyzed the
historical ratio of the daily per share market closing prices of Maxis Common
Stock and Electronic Arts Common Stock over the 3-month, 4-week and 7-day
periods prior to June 4, 1997 (the date of the meeting of the Maxis Board
approving the Merger). Such average exchange ratios for the aforementioned
time periods were .3269, .3352, and .3467, respectively.
Contribution Analysis. Alex. Brown analyzed the relative contributions of
Maxis and Electronic Arts, as compared to Maxis' relative ownership of
approximately 6.8% of the outstanding common stock (calculated on a treasury
basis) of the combined company, to the pro forma income statement of the
combined company, based on managements' projections for their respective
companies. This analysis showed that on a pro forma combined basis (excluding
(i) the effect of any synergies that may be realized as a result of the
Merger, and (ii) non-recurring expenses relating to the Merger), based on the
12-month period ending March 31, 1997 for Maxis and Electronic Arts, Maxis and
Electronic Arts would account for approximately 7.2% and 92.8%, respectively,
of the combined company's pro forma revenue; approximately -3.3% and 103.3%,
respectively, of the combined company's pro forma net income. This analysis
also showed that for the fiscal year ending March 31, 1998, Maxis and
Electronic Arts would account for approximately 8.1% and 91.9%, respectively,
of the combined company's pro forma revenue; approximately 7.0% and 93.0%,
respectively, of the combined company's pro forma net income.
Pro Forma Combined Earnings Analysis. Alex. Brown analyzed certain pro forma
effects of the Merger. Based on such analysis, Alex. Brown computed the
resulting dilution/accretion to the combined company's EPS estimate for the
fiscal year ending March 31, 1998, pursuant to the Merger after taking into
account any potential cost savings and other synergies that Maxis and
Electronic Arts could achieve if the Merger were consummated and before
nonrecurring costs relating to the Merger. Alex. Brown noted that after
assuming potential pre-tax cost savings and other synergies of (in thousands)
$2,000, $4,000, $6,000, $8,000, $10,000 and $12,000 for the fiscal year ending
March 31, 1998 and before non-recurring costs relating to the Merger, the
Merger would be approximately 1.3%, 2.2%, 3.1%, 4.0%, 4.9% and 5.8% accretive,
respectively, to the combined company's EPS for such fiscal year. There can be
no assurance that the combined company will be able to realize savings and
synergies in the amounts identified, or at all, following the Merger.
Relevant Market and Economic Factors. In rendering its opinion, Alex. Brown
considered, among other factors, the condition of the U.S. stock markets,
particularly in the recreational software sector, and the current level of
economic activity. Alex. Brown also considered general market and industry
trends in the recreational software sector.
No company used in the analysis of selected publicly traded companies nor
any transaction used in the analysis of selected precedent transactions
summarized above is identical to Maxis, Electronic Arts or the Merger.
Accordingly, such analyses must take into account differences in the financial
and operating characteristics of the Selected Companies and the Selected
Transactions and other factors that would affect the public trading value and
acquisition value of the Selected Companies and the Selected Transactions,
respectively.
While the foregoing summary describes all analyses and factors that Alex.
Brown deemed material in its presentation to the Maxis Board, it is not a
comprehensive description of all analyses and factors considered by Alex.
Brown. The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the applications of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Alex.
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Brown believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it,
without considering all analyses and factors, would create an incomplete view
of the evaluation process underlying the Alex. Brown Opinion. In performing
its analyses, Alex. Brown considered general economic, market and financial
conditions and other matters, many of which are beyond the control of Maxis
and Electronic Arts. The analyses performed by Alex. Brown are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by such analyses. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty.
Additionally, analyses relating to the value of a business do not purport to
be appraisals or to reflect the prices at which the business actually may be
sold. Furthermore, no opinion is being expressed as to the prices at which
shares of Electronic Arts Common Stock may trade at any future time.
Pursuant to a letter agreement dated March 1, 1997 between Maxis and Alex.
Brown, the fees to date payable to Alex. Brown for rendering the Alex. Brown
Opinion have been $250,000, which amount will be credited against an aggregate
fee based on the closing price of the Electronic Arts Common Stock at the
Effective Time of the Merger, payable upon consummation of the Merger. Based
on the closing price of the Electronic Arts Common Stock on June 16, 1997,
such aggregate fee is expected to equal approximately $1.7 million. In
addition, Maxis has agreed to reimburse Alex. Brown for its reasonable out-of-
pocket expenses incurred in connection with rendering financial advisory
services, including fees and disbursements of its legal counsel. Maxis has
agreed to indemnify Alex. Brown and its directors, officers, agents, employees
and controlling persons, for certain costs, expenses, losses, claims, damages
and liabilities related to or arising out of its rendering of services under
its engagement as financial advisor. The terms of the fee arrangement with
Alex. Brown, which Maxis and Alex. Brown believe are customary in transactions
of this nature, were negotiated at arm's length between Maxis and Alex. Brown,
and the Maxis Board was aware of such arrangements.
The Maxis Board retained Alex. Brown to act as its advisor based upon its
role as co-managing underwriter of a public offering of Maxis' stock and based
upon Alex. Brown's qualifications, reputation, experience and expertise. Alex.
Brown, as a customary part of its investment banking business, is engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwriting, private placements and valuations
for estate, corporate and other purposes. Alex. Brown maintains a market in
the Common Stock of Maxis and Electronic Arts and regularly publishes research
reports regarding the recreational software industry and the businesses and
securities of Maxis and Electronic Arts and other publicly traded companies in
the recreational software industry. Alex. Brown may actively trade the
securities of both Maxis and Electronic Arts for its own account and for the
account of its customers and, accordingly, may at any time hold a long or
short position in such securities.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of Maxis
Common Stock. This discussion does not deal with all income tax considerations
that may be relevant to particular Maxis stockholders in light of their
particular circumstances, such as stockholders who are dealers in securities,
foreign persons, stockholders who acquired their shares in connection with
previous mergers involving Maxis or an affiliate, or stockholders who acquired
their shares in connection with stock option or stock purchase plans or in
other compensatory transactions. In addition, the following discussion does
not address the tax consequences of transactions effectuated prior to or after
the Merger (whether or not such transactions are in connection with the
Merger), including without limitation transactions in which shares of Maxis
Common Stock were or are acquired or shares of Electronic Arts Common Stock
were or are disposed of. Furthermore, no foreign, state or local tax
considerations are addressed herein. ACCORDINGLY, MAXIS STOCKHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES TO THEM OF THE MERGER.
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The Merger is intended to constitute a "reorganization" within the meaning
of Section 368(a) of the Code, with each of Electronic Arts, Merger Sub and
Maxis intended to qualify as a "party to the reorganization" under Section
368(b) of the Code, in which case the following federal income tax
consequences will result (subject to the limitations and qualifications
referred to herein):
(a) No gain or loss will be recognized by holders of Maxis Common Stock
solely upon their receipt of Electronic Arts Common Stock in the Merger
(except to the extent of cash received in lieu of a fractional share
thereof) in exchange therefor;
(b) The aggregate tax basis of the Electronic Arts Common Stock received
in the Merger by a Maxis stockholder will be the same as the aggregate tax
basis of Maxis Common Stock surrendered in exchange therefor;
(c) The holding period of the Electronic Arts Common Stock received in
the Merger by a Maxis stockholder will include the period during which the
stockholder held the Maxis Common Stock surrendered in exchange therefor,
provided that the Maxis Common Stock is held as a capital asset at the time
of the Merger;
(d) Cash payments received by holders of Maxis Common Stock in lieu of a
fractional share will be treated as if such fractional share of Electronic
Arts Common Stock had been issued in the Merger and then redeemed by
Electronic Arts. A Maxis stockholder receiving such cash generally will
recognize gain or loss, upon such payment, measured by the difference (if
any) between the amount of cash received and the basis in such fractional
share; and
(e) None of Electronic Arts, Merger Sub or Maxis will recognize material
amounts of gain or loss solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. As a condition to Electronic Arts' and
Maxis' obligations to consummate the Merger, Electronic Arts and Maxis must
obtain an opinion from their respective legal counsel, Fenwick & West LLP and
Wilson Sonsini Goodrich & Rosati, P.C., respectively, that, for federal income
tax purposes, the Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code. These opinions, which are collectively referred
to herein as the "Tax Opinions," neither bind the IRS nor preclude the IRS
from adopting a contrary position. In addition, the Tax Opinions are subject
to certain assumptions and qualifications and are based on the truth and
accuracy of certain representations made by Electronic Arts, Merger Sub and
Maxis in certificates delivered to counsel by the respective managements of
Electronic Arts, Merger Sub and Maxis.
A successful IRS challenge to the "reorganization" status of the Merger
would result in a Maxis stockholder recognizing gain or loss with respect to
each share of Maxis Common Stock surrendered equal to the difference between
the stockholder's basis in such share and the fair market value, as of the
Effective Time of the Merger, of the Electronic Arts Common Stock received in
exchange therefor. In such event, a stockholder's aggregate basis in the
Electronic Arts Common Stock so received would equal its fair market value and
such stockholder's holding period would begin the day after the Merger.
REGULATORY MATTERS
Transactions such as the Merger are reviewed by the Department of Justice
and the FTC to determine whether they comply with applicable antitrust laws.
Under the provisions of the HSR Act, the Merger may not be consummated until
such time as certain information has been furnished to the Department of
Justice and the FTC and the specified waiting period requirements of the HSR
Act have been satisfied. The notification and waiting period imposed upon
Electronic Arts and Maxis under the HSR Act is currently expected to expire on
July 24, 1997.
At any time before or after the Effective Time, the Department of Justice,
the FTC, state attorneys general, foreign regulatory agencies or a private
person or entity could challenge the Merger under the antitrust laws and seek,
among other things, to enjoin the Merger, to cause Electronic Arts to divest
itself, in whole or in part, of
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significant assets of Electronic Arts and Maxis, or to impose conditions on
Electronic Arts with respect to the business operations of the combined
companies. Based on information available to them, Electronic Arts and Maxis
believe that the Merger will not violate federal or state antitrust laws.
However, there can be no assurance that a challenge to the Merger on antitrust
grounds will not be made or, if such a challenge is made, that Electronic Arts
would prevail or would not be required to terminate the Reorganization
Agreement or would not be required to accept certain conditions in order to
consummate the Merger. Electronic Arts does not have any obligation under the
Reorganization Agreement to dispose of any assets, discontinue or make any
changes to its operations or proposed operations, or make any commitment (to
any governmental body or otherwise) regarding its future operations or the
future operations of Maxis, even if such actions would facilitate the
consummation of the Merger.
Electronic Arts and Maxis each conduct operations in a number of foreign
countries where regulatory filings may be required as a result of the Merger.
Electronic Arts and Maxis will make such filings as they determine are
necessary or appropriate.
Electronic Arts and Maxis are aware of no other material governmental or
regulatory approvals required for consummation of the Merger, other than
compliance with the federal securities laws and applicable securities and
"blue sky" laws of the various states.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon (i) receipt by
Maxis of a letter from its independent auditors regarding concurrence with
Maxis management's conclusion that Maxis qualifies as an entity that may be a
party to a business combination for which the pooling-of-interests method of
accounting would be available and (ii) receipt by Electronic Arts of a letter
from its independent auditors regarding concurrence with Electronic Arts
management's conclusion as to the appropriateness of pooling-of-interests
accounting treatment for the Merger under APB No. 16, if consummated in
accordance with the Reorganization Agreement.
APPRAISAL RIGHTS
Pursuant to Section 262 of the DGCL, holders of Maxis Common Stock are not
entitled to appraisal rights in connection with the Merger because the
Electronic Arts Common Stock and the Maxis Common Stock are both traded on the
Nasdaq National Market and holders of Maxis Common Stock will receive in the
Merger only shares of Electronic Arts Common Stock and cash in lieu of
fractional shares thereof.
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TERMS OF THE MERGER
The following discussion summarizes the definitive terms of the
Reorganization Agreement, including the other agreements and transactions
contemplated thereby. The following is not, however, a complete statement of
all provisions of the Reorganization Agreement and related agreements.
Detailed terms of and conditions to the Merger and certain related
transactions are contained in the Reorganization Agreement, a copy of which is
attached to this Proxy Statement/Prospectus as Appendix A and is incorporated
herein by reference. Statements made in this Proxy Statement/Prospectus with
respect to the terms of the Merger and such related transactions are qualified
by reference to the more detailed information set forth in the Appendices
hereto.
GENERAL
The Reorganization Agreement provides for the merger of Merger Sub with and
into Maxis. As a result of the Merger, Merger Sub shall cease to exist, Maxis
will continue as the surviving corporation of the Merger (the "Surviving
Corporation") and will become a wholly owned subsidiary of Electronic Arts,
and the former stockholders of Maxis will become stockholders of Electronic
Arts. At the Effective Time all the property, rights, privileges, powers and
franchises of Maxis and Merger Sub shall vest in the Surviving Corporation,
and all debts, liabilities and duties of Maxis and Merger Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
EFFECTIVE TIME; CLOSING DATE
The Merger will become effective upon the filing of a Certificate of Merger
with the Secretary of State of the State of Delaware or at such later time as
may be agreed in writing by Electronic Arts, Maxis and Merger Sub and
specified in the Certificate of Merger (the "Effective Time"). The Closing
Date will occur at a time and date to be specified by Electronic Arts, Maxis
and Merger Sub after the satisfaction or waiver of the conditions to the
Merger, or at such other time as Electronic Arts, Maxis and Merger Sub agree
in writing. Assuming all conditions to the Merger are satisfied or waived
prior thereto, it is currently anticipated that the Closing Date and Effective
Time will be on or about July 25, 1997.
CORPORATE MATTERS
At the Effective Time, (i) the Certificate of Incorporation and Bylaws of
Merger Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation and Bylaws of the Surviving Corporation, (ii) the
Certificate of Incorporation of the Surviving Corporation shall be amended so
that the name of the Surviving Corporation shall be Maxis, Inc., (iii) the
initial directors of the Surviving Corporation shall be the directors of
Merger Sub immediately prior to the Effective Time, and (iv) the initial
officers of the Surviving Corporation shall be the officers of Maxis
immediately prior to the Effective Time.
MERGER CONSIDERATION
Conversion of Common Stock. At the Effective Time, each share of Maxis
Common Stock issued and outstanding immediately prior to the Effective Time
(other than any shares of Maxis Common Stock held by Maxis or owned by Merger
Sub, Electronic Arts or any direct or indirect wholly owned subsidiary of
Maxis or of Electronic Arts immediately prior to the Effective Time) will be
canceled and extinguished and automatically converted into 0.3644 of a share
of Electronic Arts Common Stock. Any shares of Maxis Common Stock held by
Maxis or owned by Merger Sub, Electronic Arts or any direct or indirect wholly
owned subsidiary of Maxis or of Electronic Arts immediately prior to the
Effective Time will be canceled and extinguished without any conversion
thereof.
Assumption of Options. At the Effective Time, each outstanding option to
purchase shares of Maxis Common Stock (each a "Maxis Option") under the Maxis
1993 Stock Option Plan or the Maxis 1995 Stock Plan (each a "Maxis Option
Plan"), whether or not exercisable, will be assumed by Electronic Arts and
will continue to have, and be subject to, the same terms and conditions set
forth in the applicable Maxis Option Plan
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immediately prior to the Effective Time and the Stock Option Agreement by
which it is evidenced, except that (i) each Maxis Option will be exercisable
(or will become exercisable in accordance with its terms) for that number of
whole shares (and no fractional shares) of Electronic Arts Common Stock equal
to the product of the number of shares of Maxis Common Stock that were
issuable upon exercise of such Maxis Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, rounded down to the nearest whole
number of shares of Electronic Arts Common Stock, and (ii) the per share
exercise price for the shares of Electronic Arts Common Stock issuable upon
exercise of such assumed Maxis Option will be equal to the quotient determined
by dividing the exercise price per share of Maxis Common Stock at which such
Maxis Option was exercisable immediately prior to the Effective Time by the
Exchange Ratio, rounded up to the nearest whole cent. No later than five
business days after the Closing Date, Electronic Arts will file a registration
statement on Form S-8 for the shares of Electronic Arts Common Stock issuable
with respect to assumed Maxis Options.
No Fractional Shares. No fractional shares will be issued by virtue of the
Merger, but in lieu thereof each holder of shares of Maxis Common Stock who
would otherwise be entitled to a fraction of a share of Electronic Arts Common
Stock (after aggregating all fractional shares to be received by such holder)
shall receive from Electronic Arts an amount of cash (rounded to the nearest
whole cent) equal to the product of (i) such fraction, multiplied by (ii) the
average closing price of one share of Electronic Arts Common Stock for the
five most recent days that Electronic Arts Common Stock has traded ending on
the trading day immediately prior to the Effective Time, as reported on the
Nasdaq National Market.
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
Promptly after the Effective Time, Electronic Arts shall cause an exchange
agent to mail to each holder of record (as of the Effective Time) of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Maxis Common Stock a letter of transmittal
in customary form and instructions for use in effecting the surrender of such
certificates for cancellation and in exchange for certificates representing
shares of Electronic Arts Common Stock, cash in lieu of any fractional shares
and any dividends or other distributions with a record date after the
Effective Time payable with respect to such whole shares of Electronic Arts
Common Stock. No dividends or other distributions declared with respect to
Electronic Arts Common Stock with a record date after the Effective Time will
be paid to the holders of any unsurrendered certificates until the holders of
record of such certificates shall surrender such certificates, and no cash
payment in lieu of fractional shares shall be paid to such holder until the
holder of record of such certificates shall surrender such certificates.
CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF MAXIS COMMON STOCK
UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
In the event a certificate representing Maxis Common Stock has been lost,
stolen or destroyed, the owner of such certificate will be required to provide
an affidavit of such fact, and Electronic Arts may, in its discretion and as a
condition precedent to the issuance of such certificates representing shares
of Electronic Arts Common Stock, require the owner of such lost, stolen or
destroyed certificate to deliver a bond in such sum as it may reasonably
direct as indemnity against any claim that may be made against Electronic
Arts, the Surviving Corporation or the Exchange Agent with respect to the
certificate alleged to have been lost, stolen or destroyed.
TERMINATION OF MAXIS EMPLOYEE STOCK PURCHASE PLAN
At the Effective Time, in accordance with the terms of Maxis' 1995 Employee
Stock Purchase Plan (the "Stock Purchase Plan"), all offering periods then in
progress shall terminate on the last trading date prior to the Effective Time
(the "New Exercise Date") and all options to purchase shares of Maxis Common
Stock under the Stock Purchase Plan shall be exercised automatically on the
New Exercise Date.
REPRESENTATIONS AND WARRANTIES
The Reorganization Agreement contains certain representations and
warranties, including, without limitation, representations and warranties of
Maxis as to: (i) due organization, good standing and subsidiaries;
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(ii) charter documents and bylaws; (iii) capital structure and obligations
with respect to capital stock; (iv) corporate power and authority; (v) no
conflicts with charter documents and certain agreements; (vi) governmental
consents and approvals; (vii) inapplicability of certain laws; (viii) filings
with the Commission and financial statements; (ix) absence of certain changes;
(x) taxes; (xi) intellectual property; (xii) compliance with laws; (xiii)
restrictions on business; (xiv) insurance; (xv) litigation; (xvi) fees,
payments and expenses relating to the Merger; (xvii) employee benefit plans;
(xviii) ownership of, and liens on, properties; (xix) environmental matters;
(xx) employees and labor matters; (xxi) certain contracts and agreements;
(xxii) accounting for the Merger as a pooling of interests; (xxiii) the
accuracy of information supplied for this Proxy Statement/Prospectus; (xxiv)
unanimous approval by the Maxis Board of the Reorganization Agreement and the
Merger; (xxv) the fairness opinion of Maxis' financial advisor; (xxvi)
products and distribution; (xxvii) development tools; and (xxviii) interested
party transactions.
The Reorganization Agreement contains further representations and warranties
of Electronic Arts and Merger Sub as to: (i) due organization and good
standing; (ii) charter documents and bylaws; (iii) capital structure; (iv)
corporate power and authority; (v) no conflicts with charter documents and
certain agreements; (vi) governmental consents and approvals; (vii)
inapplicability of certain laws; (viii) filings with the Commission and
financial statements; (ix) absence of certain changes; (x) accounting for the
Merger as a pooling of interests; (xi) the accuracy of information supplied
for this Proxy Statement/Prospectus; and (xii) the approval of the Merger by
the Electronic Arts Board.
The representations and warranties of Electronic Arts, Maxis and Merger Sub
contained in the Reorganization Agreement shall terminate at the Effective
Time.
NON-SOLICITATION
Pursuant to the Reorganization Agreement, Maxis has agreed, until the
earlier of the Effective Time or the termination of the Reorganization
Agreement pursuant to its terms, not to, directly or indirectly, (i) solicit,
initiate or encourage the making, submission or announcement of, any
Acquisition Proposal (as defined below) by any person, entity or group (other
than Electronic Arts and its affiliates, agents and representatives), or (ii)
participate in any discussions or negotiations with, or disclose any non-
public information concerning Maxis or any of its subsidiaries to, or afford
any access to the properties, books or records of Maxis or any of its
subsidiaries to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, entity or group (other than
Electronic Arts and its affiliates, agents and representatives), in connection
with any Acquisition Proposal with respect to Maxis. An "Acquisition Proposal"
with respect to an entity means any proposal or offer relating to (i) any
merger, consolidation, sale of substantial assets or similar transactions
involving the entity or any subsidiaries of the entity (other than sales or
licenses of assets or inventory in the ordinary course of business or as
permitted under the terms of this Agreement), (ii) sale of 15% or more of the
outstanding shares of capital stock of the entity (including without
limitation by way of a tender offer or an exchange offer), (iii) the
acquisition by any person of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
which beneficially owns, or has the right to acquire beneficial ownership of,
15% or more of the then outstanding shares of capital stock of the entity
(except for acquisitions for passive investment purposes only in circumstances
where the person or group qualifies for and files a Schedule 13G with respect
thereto); or (iv) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
Maxis has further agreed to cease any and all existing activities, discussions
or negotiations with any parties conducted prior to entering into the
Reorganization Agreement with respect to any Acquisition Proposal and to (i)
notify Electronic Arts as promptly as practicable if it receives any proposal
or written inquiry or written request for Maxis in connection with an
Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly as
practicable notify Electronic Arts of the significant terms and conditions of
any such Acquisition Proposal, as well as the identity of the third party
submitting such Acquisition Proposal. In addition, Maxis has agreed that Maxis
and its subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal made
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by any person, entity or group (other than Electronic Arts); provided,
however, that the Maxis' Board of Directors may disclose to Maxis'
stockholders a position with respect to a tender offer pursuant to Rules 14d-9
and 14e-2 promulgated under the Exchange Act.
Notwithstanding the foregoing, to the extent that the Maxis Board, in each
case determines, in good faith, after consultation with outside legal counsel,
that the Board's fiduciary duties require it to do so, (i) Maxis may
participate in discussions or negotiations with, and furnish non-public
information, and afford access to the properties, books or records of Maxis to
any person, entity or group (provided that Maxis provides such non-public
information pursuant to a nondisclosure agreement and such non-public
information has been previously delivered to Electronic Arts) after such
person, entity or group has delivered to Maxis in writing, an unsolicited bona
fide Acquisition Proposal (which has not been withdrawn) which the Maxis Board
in its good faith reasonable judgment determines, after consultation with its
independent financial advisors, would be reasonably likely to result in a
transaction more favorable than the Merger to the stockholders of Maxis (a
"Superior Proposal"); (ii) in the event Maxis receives a Superior Proposal,
the Maxis Board may (subject to certain conditions) recommend such Superior
Proposal to Maxis' stockholders and, in such case, withdraw, modify or refrain
from making its recommendation in favor of the Merger, and to the extent it
does so, Maxis may refrain from soliciting proxies and taking such other
action necessary to secure the affirmative vote of its stockholders as may be
required by the Reorganization Agreement; provided that (to the extent
permissable under applicable law) Maxis shall remain obligated to convene the
Maxis Stockholder Meeting and shall have the vote on the Merger considered by
the stockholders of Maxis prior to the vote (if any) on the Superior Proposal;
and provided, further, that Maxis shall not recommend to its stockholders a
Superior Proposal for a period of not less than 48 hours after Electronic
Arts' receipt of a copy of such Superior Proposal (or a description of the
significant terms and conditions thereof, if not in writing) and the identity
of the third party; and (iii) Maxis may enter into an agreement or
understanding relating to a Superior Proposal; provided, that such agreement
or understanding provides that the Merger shall be considered by the
stockholders of Maxis prior to the Superior Proposal and that if the Merger is
approved by the stockholders of Maxis, neither Maxis nor Electronic Arts shall
be required to pay a fee or otherwise incur any material liability arising out
of the agreement or understanding relating to the Superior Proposal,
including, without limitation, as a result of the Superior Proposal not being
approved. The performance of such agreement or understanding relating to the
Superior Proposal to the extent necessary to facilitate the due consideration
of such Superior Proposal at the meeting of the stockholders of Maxis after
the Merger shall not constitute a breach of the Reorganization Agreement.
ADDITIONAL COVENANTS
Covenants Regarding the Conduct of Business of Maxis. The Reorganization
Agreement requires (subject to certain exceptions described therein) that from
the date of execution of the Reorganization Agreement until the earlier of the
termination of the Reorganization Agreement or the Effective Time:
(i) Maxis and each of its subsidiaries shall carry on and use reasonable
best efforts to preserve its business, in all material respects, in the
usual, regular and ordinary course, and in compliance with all applicable
laws and regulations, pay its debts and taxes when due subject to good
faith disputes over such debts or taxes, pay or perform other material
obligations when due, and use its reasonable best efforts consistent with
past practices and policies to (a) preserve intact its present business
organization, (b) keep available the services of its present officers and
employees and (c) preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings; and
(ii) Maxis shall not do any of the following and shall not permit its
subsidiaries to do any of the following without the prior written consent
of Electronic Arts: (a) waive any stock repurchase rights, accelerate,
amend or change the period of exercisability of options or restricted
stock, or reprice options granted under any employee, consultant or
director stock plans or authorize cash payments in exchange for any options
granted under any of such plans; (b) grant any severance or termination pay
to any officer or employee except payments in amounts consistent with
policies and past practices or pursuant to written agreements outstanding,
or policies existing, on the date of execution of the Reorganization
Agreement and as previously disclosed in writing or made available to
Electronic Arts, or adopt any new severance plan; (c) transfer or license
to any person or entity or otherwise extend the term of any agreement with
respect to,
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amend or modify in any material respect any rights (including without
limitation distribution rights) to the intellectual property of Maxis or
enter into assignments of future patent rights, other than licenses and
distribution rights in the ordinary course of business; (d) declare, set
aside or pay any dividends on or make any other distributions in respect of
any capital stock or split, combine or reclassify any capital stock or
issue or authorize the issuance of any other securities in respect of, in
lieu of or in substitution for any capital stock; (e) repurchase or
otherwise acquire, directly or indirectly, any shares of capital stock of
Maxis, except repurchases of unvested shares at cost in connection with the
termination of the employment, consulting or director relationship with any
employee, officer, consultant or director pursuant to agreements in effect
as of the date of execution of the Reorganization Agreement; (f) issue,
deliver, sell, authorize or propose the issuance, delivery or sale of, any
shares of capital stock or any securities convertible into shares of
capital stock, or subscriptions, rights, warrants or options to acquire any
shares of capital stock or any securities convertible into shares of
capital stock, or enter into other agreements or commitments of any
character obligating it to issue any such shares or convertible securities,
or, except pursuant to agreements existing on the date hereof, accelerate
the vesting of any outstanding option or other security, other than the
issuance, delivery and/or sale of (i) shares of Maxis Common Stock pursuant
to the exercise of outstanding stock options, (ii) shares of Maxis Common
Stock issuable to participants in the Maxis ESPP consistent with the terms
thereof and (iii) options to purchase Maxis Common Stock granted at fair
market value, consistent with past practice and in accordance with Maxis
Stock Option Plans; (g) cause, permit or propose any amendments to any
charter document or Bylaw (or similar governing instruments of any
subsidiaries); (h) acquire or agree to acquire by merging or consolidating
with, or by purchasing any equity interest in or a material portion of the
assets of, or by any other manner, any business or any corporation,
partnership interest, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any assets which
are material, individually or in the aggregate, to the business of Maxis or
enter into any material joint ventures, strategic partnerships or
alliances; (i) sell, lease, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Maxis, except in the ordinary course of business consistent
with past practice; (j) incur any indebtedness for borrowed money in excess
of $2,500,000, or guarantee any indebtedness of any person for borrowed
money, or issue or sell any debt securities or warrants or rights to
acquire debt securities of Maxis or guarantee any debt securities of
others; (k) adopt or amend any employee benefit plan or employee stock
purchase or employee stock option plan, enter into any employment contract,
pay any special bonus or special remuneration to any director or employee
other than in the ordinary course of business, consistent with past
practice, or increase the salaries or wage rates of its officers or
employees other than in the ordinary course of business, consistent with
past practice; (l) make any payments outside of the ordinary course of
business in excess of $1 million for purposes of settling any dispute; (m)
take any action, or permit any of its affiliates to take any action, that
would be reasonably likely to interfere with Electronic Arts' ability to
account for the Merger as a pooling of interests; (n) pay (or make any oral
or written commitments or representations to pay) any bonus, increased
salary or special remuneration to any officer, employee or consultant
(except (i) for normal salary increases consistent with past practices not
to exceed 10% per year, (ii) pursuant to existing arrangements previously
disclosed to Electronic Arts and (iii) for reasonable bonuses to encourage
retention of employees after the announcement of a Superior Proposal) or
enter into or vary the terms of any employment, consulting or severance
agreement with any such person, pay any severance or termination pay (other
than payments made in accordance with plans or agreements existing on the
date of execution of the Reorganization Agreement), grant any stock option
(except for normal grants to newly hired employees or newly promoted
employees consistent with past practices) or issue any restricted stock, or
enter into or modify, in any material respect, any agreement or plan or
increase, in any material respect, employee benefits; (o) materially change
its accounting methods, principles or practices, except as required by
concurrent changes in GAAP; (p) amend in a manner adverse to Maxis or
terminate any material contract, agreement or license to which it is a
party except those amended or terminated in the ordinary course of its
business, consistent with past practice; (q) lend any amount to any person
or entity, other than (i) advances for travel and expenses which are
incurred in the ordinary course of business or (ii) any loans pursuant to
any Maxis Section 401(k) Plan; (r) waive or release any right or claim
except for the waiver or release of non-material claims in the ordinary
course of business, consistent with past practice; (s) split or combine
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the outstanding shares of its capital stock of any class or enter into any
recapitalization or agreement affecting the number or rights of outstanding
shares of its capital stock of any class or affecting any other of its
securities; (t) agree to any audit assessment by any tax authority in
excess of $500,000; (u) change any insurance coverage in any material
respects; or (v) agree in writing or otherwise to take any of the foregoing
actions.
Notification of Certain Matters. The parties to the Reorganization Agreement
have agreed to give prompt notice to the other parties after obtaining
knowledge of the occurrence, or failure to occur, of any event, which
occurrence or failure to occur would be reasonably likely to cause (i) any
representation or warranty contained in the Reorganization Agreement and made
by it to be untrue or inaccurate in any material respect at any time from the
date of the Reorganization Agreement to the Effective Time such that the
condition to closing of the Merger regarding the accuracy of representations
and warranties would not be satisfied as a result thereof, (ii) any Material
Adverse Effect (as defined below) on Maxis or Electronic Arts or (iii) any
failure to comply with or satisfy, in any material respect, any covenant,
condition or agreement to be complied with or satisfied by it under the
Reorganization Agreement such that the condition to closing of the Merger
regarding performance and compliance with agreements and covenants would not
be satisfied as a result thereof.
For purposes of the Reorganization Agreement, when used in connection with
an entity, the term "Material Adverse Effect" means any change, event or
effect that is materially adverse to the business, assets (including
intangible assets), financial condition or results of operations of such
entity and its subsidiaries taken as a whole; provided, however, that (i) any
adverse change, event or effect that is demonstrated to be primarily caused by
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, (ii) any adverse change, event or effect that is demonstrated to be
primarily caused by conditions generally affecting the interactive
entertainment software industry 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 (iii) any adverse change, event or effect that is
demonstrated to be primarily caused by the announcement or pendency of the
Merger 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.
Reasonable Best Efforts to Effectuate the Merger. The parties to the
Reorganization Agreement have agreed to use their respective reasonable best
efforts to effectuate the Merger and other transactions contemplated by the
Reorganization Agreement, to fulfill and cause to be fulfilled the conditions
to closing of the Merger and to effect the closing of the Merger as soon as
practicable; provided that no party will be required to agree to (i) any
divestiture of shares of capital stock or of any business, assets or property,
or (ii) the imposition of any material limitation on the ability of any party
to conduct their businesses or to own or exercise control of such assets,
properties and stock.
Certain Other Covenants of the Parties. The Reorganization Agreement also
contains certain additional covenants of the parties including covenants
relating to: (i) the preparation of this Proxy Statement/Prospectus and the
Registration Statement; (ii) Maxis' obligations with respect to the Special
Meeting; (iii) confidentiality of, and access to, the parties' business
information; (iv) public statements with respect to the Merger; (v) compliance
with legal requirements; (vi) obtaining required consents of third parties;
(vii) Maxis stock options and employee benefit plans; (viii) listing of the
Electronic Arts Common Stock on the Nasdaq National Market; (ix) affiliate
agreements; (x) regulatory filings; (xi) treatment of the Merger as a tax-free
reorganization; and (xii) accounting for the Merger as a pooling of interests.
INDEMNIFICATION AND INSURANCE
Electronic Arts has agreed that, from and after the Effective Time, (i) it
will cause the Surviving Corporation to fulfill and honor in all respects the
obligations of Maxis pursuant to each indemnification agreement currently in
effect between Maxis and each person who is or was a director or officer of
Maxis or any of its subsidiaries at or prior to the Effective Time (the
"Indemnified Parties") and any indemnification provisions under Maxis'
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Certificate of Incorporation or Bylaws as in effect on the date of the
Reorganization Agreement, and (ii) it will cause the Surviving Corporation, to
the fullest extent permitted under applicable law or under the Surviving
Corporation's Certificate of Incorporation or Bylaws, to indemnify and hold
harmless each Indemnified Party against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, to the extent arising out of or pertaining to
any action or omission in his or her capacity as a director or officer of
Maxis or any of its subsidiaries arising out of or pertaining to the
transactions contemplated by the Reorganization Agreement for a period of six
years after the Effective Time; provided, however, that if, at any time prior
to the sixth anniversary of the Effective Time, any Indemnified Party delivers
to Electronic Arts a written notice asserting a claim for indemnification,
then the claim asserted in such notice shall survive the sixth anniversary of
the Effective Time until such time as such claim is fully and finally
resolved.
In the event of any such claim, action, suit, proceeding or investigation
(i) any counsel retained by the Indemnified Parties for any period after the
Effective Time must be reasonably satisfactory to Electronic Arts, (ii) after
the Effective Time, Electronic Arts will cause the Surviving Corporation to
pay the reasonable fees and expenses of such counsel, promptly after
statements therefor are received and (iii) Electronic Arts will cause the
Surviving Corporation to cooperate in the defense of any such matter;
provided, however, that neither Electronic Arts nor the Surviving Corporation
will be liable for any settlement effected without its written consent (which
consent will not be unreasonably withheld).
Electronic Arts has also agreed to cause the Surviving Corporation to
maintain in effect, during the six-year period commencing as of the Effective
Time, a policy of directors' and officers' liability insurance for the benefit
of each of the Indemnified Parties providing coverage and containing terms no
less advantageous to the Indemnified Parties than the coverage and terms of
Maxis' existing policy of directors' and officers' liability insurance.
CONDITIONS TO THE MERGER
Conditions to Obligations of Each Party to Effect the Merger. The respective
obligations of each party to the Reorganization Agreement to effect the Merger
are subject to the satisfaction at or prior to the Effective Time of the
following conditions: (i) the Reorganization Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under applicable law, by the stockholders of Maxis; (ii) the
Commission shall have declared the Registration Statement effective and no
stop order suspending the effectiveness of the Registration Statement or any
part thereof shall have been issued and no proceeding for that purpose, and no
similar proceeding in respect of this Proxy Statement/Prospectus, shall have
been initiated or threatened in writing by the Commission; (iii) no
governmental entity shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, injunction or
other order (whether temporary, preliminary or permanent) which is in effect
and which has the effect of making the Merger illegal or otherwise prohibiting
consummation of the Merger; (iv) all waiting periods under the HSR Act
relating to the transactions contemplated hereby will have expired or
terminated early; (v) Maxis and Electronic Arts shall each have received
written opinions from their respective counsel, Wilson Sonsini Goodrich &
Rosati, P.C., and Fenwick & West LLP, in form and substance reasonably
satisfactory to them, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and such
opinions shall not have been withdrawn; provided, however, that if the counsel
to either Maxis or Electronic Arts does not render such opinion, this
condition shall nonetheless be deemed to be satisfied with respect to such
party if counsel to the other party renders such opinion to such party; (vi)
the shares of Electronic Arts Common Stock issuable to stockholders of Maxis
in the Merger and such other shares required to be reserved for issuance in
connection with the Merger shall have been authorized for listing on the
Nasdaq National Market upon official notice of issuance; and (vii) Maxis shall
have received from Ernst & Young LLP, independent auditors for Maxis, a letter
dated within two business days prior to the Effective Time (which may contain
customary qualifications and assumptions), to the effect that Ernst & Young
LLP concurs with Maxis' management conclusion that no conditions exist related
to Maxis that would preclude Electronic Arts from accounting for the Merger as
a pooling
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of interests; and Maxis shall have received from KPMG Peat Marwick LLP, the
independent auditors for Electronic Arts, a copy of a letter addressed to
Electronic Arts dated the Closing Date, in substance reasonably satisfactory
to Maxis (and which may contain customary qualifications and assumptions and
which may be based in part on the letter referred to above from Ernst & Young
LLP to Maxis) to the effect that KPMG Peat Marwick LLP concurs with Electronic
Arts' management conclusions that, as of that date, no conditions exist that
would preclude Electronic Arts from accounting for the Merger as a pooling of
interests.
Additional Conditions to Obligations of Maxis to Effect the Merger. The
obligation of Maxis to consummate and effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by Maxis: (i)
the representations and warranties of Electronic Arts and Merger Sub contained
in the Reorganization Agreement shall be true and correct in all material
respects (a) as of the date of the Reorganization Agreement, except where the
failure to be so true and correct would not have a Material Adverse Effect on
Electronic Arts and (b) on and as of the Effective Time except for changes
contemplated by the Reorganization Agreement and except for those
representations and warranties which address matters only as of a particular
date, which shall remain true and correct in all material respects as of such
particular date (it being understood that, for the purposes of determining
whether such representations and warranties made as of a particular date have
been true and correct, any inaccuracies therein that shall have been cured in
all material respects shall be disregarded), with the same force and effect as
if made on and as of the Effective Time, except in such cases (other than
certain representations regarding capital structure, corporate power and
authority, no conflicts with charter documents and certain agreements, and
governmental consents and approvals) where the failure to be so true and
correct would not have a Material Adverse Effect on Electronic Arts; (ii)
Electronic Arts and Merger Sub shall have performed or complied in all
material respects with all agreements and covenants required by the
Reorganization Agreement to be performed or complied with by them on or prior
to the Effective Time; (iii) Maxis shall have received a certificate with
respect to the two foregoing conditions signed on behalf of Electronic Arts by
the Chief Executive Officer and the Chief Financial Officer of Electronic
Arts; (iv) no Material Adverse Effect with respect to Electronic Arts shall
have occurred since the date of the Reorganization Agreement; and (v) Maxis
shall have received a legal opinion from Fenwick & West LLP.
Additional Conditions to Obligations of Electronic Arts and Merger Sub to
Effect the Merger. The obligations of Electronic Arts and Merger Sub to
consummate and effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Electronic Arts: (i) the
representations and warranties of Maxis contained in the Reorganization
Agreement shall be true and correct in all material respects (a) as of the
date of the Reorganization Agreement, except where the failure to be so true
and correct would not have a Material Adverse Effect on Maxis, and (b) on and
as of the Effective Time except for changes contemplated by the Reorganization
Agreement and except for those representations and warranties which address
matters only as of a particular date, which shall remain true and correct in
all material respects as of such particular date (it being understood that,
for the purposes of determining whether such representations and warranties
made as of a particular date have been true and correct, any inaccuracies
therein that shall have been cured in all material respects shall be
disregarded), with the same force and effect as if made on and as of the
Effective Time, except in such cases (other than certain representations
regarding capital structure and obligations with respect to capital stock,
corporate power and authority, no conflicts with charter documents and certain
agreements, governmental consents and approvals, and the fairness opinion of
Maxis' financial advisor) where the failure to be so true and correct would
not have a Material Adverse Effect on Maxis; (ii) Maxis shall have performed
or complied in all material respects with all agreements and covenants
required by the Reorganization Agreement to be performed or complied with by
it on or prior to the Effective Time; (iii) Electronic Arts shall have
received a certificate with respect to the two foregoing conditions signed on
behalf of Maxis by the President and the Chief Financial Officer of Maxis;
(iv) no Material Adverse Effect with respect to Maxis shall have occurred
since the date of the Reorganization Agreement; (v) Electronic Arts shall have
received a legal opinion from Wilson Sonsini Goodrich & Rosati, P. C.; and
(vi) no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or any legal,
contractual or regulatory restraint limiting or restricting Electronic Arts'
conduct or operation of its business or the business of Maxis and its
subsidiaries,
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following the Merger, shall be in effect, nor shall any proceeding brought by
an administrative agency or commission or other governmental entity, domestic
or foreign, seeking the foregoing be pending, except where the existence of
any of the foregoing items would not have a Material Adverse Effect on Maxis.
TERMINATION; TERMINATION FEE
The Reorganization Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger
by the stockholders of Maxis: (i) by mutual written consent duly authorized by
the Boards of Directors of Electronic Arts and Maxis; (ii) by either
Electronic Arts or Maxis, if the Merger shall not have been consummated by
October 31, 1997 for any reason; provided, however, that the right to
terminate this Agreement for such reason shall not be available to any party
whose action or failure to act has been a principal cause of or resulted in
the failure of the Merger to occur on or before such date and such action or
failure to act constitutes a breach of this Agreement; (iii) by either
Electronic Arts or Maxis, if a governmental entity shall have issued an order,
decree or ruling or taken any other action, in any case having the effect of
permanently restraining, enjoining or otherwise prohibiting the Merger, which
order, decree or ruling is final and nonappealable; (iv) by either Electronic
Arts or Maxis, if the required approval of the stockholders of Maxis shall not
have been obtained by reason of the failure to obtain the required vote upon a
vote taken at a meeting of stockholders duly convened therefor or at any
adjournment thereof; (v) by Electronic Arts, if at any time prior to the
approval of the Merger by the stockholders of Maxis, the Maxis Board accepts,
publicly endorses, recommends or executes a letter of intent or similar
document with respect to a Superior Proposal or resolves to do any of the
foregoing; (vi) by Electronic Arts, if Maxis shall have failed to include in
this Proxy Statement/Prospectus the unanimous recommendation of the Maxis
Board in favor of approval and adoption of the Reorganization Agreement and
the Merger, or the Maxis Board shall have amended or modified in a manner
adverse to Electronic Arts such Board of Directors' unanimous recommendation
in favor of the Merger or approval or adoption of the Reorganization
Agreement; (vii) by Electronic Arts, if the Maxis Board shall have approved,
publicly endorsed, recommended or executed a letter of intent or similar
document with respect to any Acquisition Proposal other than the Merger;
(viii) by Electronic Arts, if a tender or exchange offer relating to
securities of Maxis shall have been commenced and Maxis shall not have sent to
its security holders, within ten business days after the commencement of such
tender or exchange offer, a statement that Maxis recommends rejection of such
tender or exchange offer; (ix) by Electronic Arts, if an Acquisition Proposal
(other than a tender or exchange offer relating to the securities of Maxis) is
publicly announced, and, upon Electronic Arts' request, Maxis fails to issue a
press release announcing its opposition to such Acquisition Proposal within
five business days after such request; (x) by Maxis, upon a breach of any
representation, warranty, covenant or agreement on the part of Electronic Arts
set forth in the Reorganization Agreement, or if any such representation or
warranty of Electronic Arts shall have become inaccurate, in either case such
that the closing conditions regarding the accuracy of representations and
warranties or regarding performance and compliance with agreements and
covenants, as the case may be, would not be satisfied as of the time of such
breach or as of the time such representation or warranty shall have become
inaccurate; provided, however, that if such inaccuracy in Electronic Arts'
representations and warranties or breach by Electronic Arts is curable by
Electronic Arts through the exercise of its commercially reasonable efforts,
then Maxis may not terminate the Reorganization Agreement due to such
inaccuracy or breach if Electronic Arts is exercising commercially reasonable
efforts to cure such inaccuracy or breach; and, provided, further, that Maxis
may not terminate this Agreement due to any such inaccuracy or breach if it
shall have materially breached the Reorganization Agreement; (xi) by
Electronic Arts, upon a breach of any representation, warranty, covenant or
agreement on the part of Maxis set forth in the Reorganization Agreement, or
if any such representation or warranty of Maxis shall have become inaccurate,
in either case such that the closing conditions regarding the accuracy of
representations and warranties or regarding performance and compliance with
agreements and covenants, as the case may be, would not be satisfied as of the
time of such breach or as of the time such representation or warranty shall
have become inaccurate; provided, however, that if such inaccuracy in Maxis'
representations and warranties or breach by Maxis is curable by Maxis through
the exercise of its commercially reasonable efforts, then Electronic Arts may
not terminate this Agreement due to such inaccuracy or breach if Maxis is
exercising commercially reasonable efforts to cure such inaccuracy or breach;
and, provided, further, that Electronic Arts may not terminate this Agreement
due to any
44
<PAGE>
such inaccuracy or breach if it shall have materially breached the
Reorganization Agreement; (xii) by Maxis, if the average closing price of
Electronic Arts Common Stock, as presently constituted, as quoted in the
Nasdaq National Market and reported in the Wall Street Journal, over the ten
(10) trading days ending the third business day prior to the date originally
established in this Proxy Statement/Prospectus for the Special Meeting is less
than $20.00 (as adjusted for stock splits, recapitalizations, stock dividends
and the like); or (xiii) by either Electronic Arts or Maxis, in the event of a
tender or an exchange offer relating to the securities of Maxis which is
accepted by more than fifty percent (50%) of the outstanding shares of Maxis
Common Stock (excluding for such calculation the shares of Maxis Common Stock
held beneficially or of record by Jeffrey B. Braun, who is currently the Chief
Executive Officer of Maxis).
If the Reorganization Agreement is terminated by Electronic Arts or Maxis
pursuant to the provisions described in clauses (iv) or (xiii) above, or by
Electronic Arts pursuant to the provisions described in clauses (v), (vi),
(vii), (viii) or (ix) above, then Maxis shall pay to Electronic Arts, in cash,
a non-refundable fee in the amount of $5,000,000 (the "Termination Fee");
provided that such amount will not be payable if, prior to the termination
triggering the obligation to make such payment, either (i) a Material Adverse
Effect on Electronic Arts had occurred and Maxis had provided written notice
to Electronic Arts of such event; or (ii) Maxis shall have become entitled
pursuant to the provision described in clause (x) above to terminate the
Reorganization Agreement, shall have given written notice to Electronic Arts
to that effect, and Electronic Arts shall be unable or unwilling to effect a
cure to such breach. In the case of termination of the Reorganization
Agreement by Maxis pursuant to the provisions described in clauses (iv) or
(xiii) above, the Termination Fee shall be paid by Maxis prior to or
contemporaneous with notice of such termination being provided to Electronic
Arts and as a condition to Maxis' right to terminate under such provisions,
and in the case of termination of the Reorganization Agreement by Electronic
Arts pursuant to the provisions described in clauses (iv), (v), (vi), (vii),
(viii), (ix) or (xiii) above, the Termination Fee shall be paid by Maxis
within three (3) business days after such notice of such termination.
EXPENSES
Pursuant to the Reorganization Agreement, all fees and expenses incurred in
connection with the Reorganization Agreement and the transactions contemplated
thereby will be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that Electronic Arts and Maxis shall
share equally all fees and expenses, other than attorneys' and accountants'
fees and expenses, incurred in relation to the printing and filing of this
Proxy Statement/Prospectus and the Registration Statement and any amendments
or supplements thereto.
VOTING AGREEMENT
As an inducement to Electronic Arts to enter into the Reorganization
Agreement, Jeffrey B. Braun (who beneficially owns approximately 28.5% of the
Maxis Common Stock and is Chairman of the Board of Directors of Maxis) has
entered into a Voting Agreement with Electronic Arts that he will vote his
shares in favor of the approval and adoption of the Reorganization Agreement
and approval of the Merger, and that he will not (i) solicit, initiate
discussions or take any other action likely to facilitate the efforts of any
person, other than Electronic Arts, relating to an Acquisition Proposal; (ii)
furnish any nonpublic information regarding Maxis to any person in connection
with or in response to an actual or potential Acquisition Proposal; (iii)
engage in discussions with any person with respect to any Acquisition
Proposal; (iv) approve or recommend any Acquisition Proposal; or (v) enter
into any letter of intent or other similar document or any contract
contemplating or otherwise relating to any Acquisition Proposal. Nothing in
such Voting Agreement shall limit or restrict Mr. Braun in acting in his
capacity as a director or officer, as the case may be, of Maxis and in the
exercise of his fiduciary duties and responsibilities in such capacity. The
Voting Agreement only applies to Mr. Braun solely in his capacity as a
stockholder and shall not apply to his actions, judgments or decisions as a
director or officer of Maxis. This Voting Agreement terminates upon the
earlier to occur of the Effective Date or the termination of the
Reorganization Agreement in accordance with its terms.
45
<PAGE>
Pursuant to this Voting Agreement, Mr. Braun has also delivered to
Electronic Arts an irrevocable proxy with respect to matters covered by the
Voting Agreement, empowering Electronic Arts and certain officers of
Electronic Arts to vote his shares on any matter, but only those matters,
relating to the approval of the Merger and the adoption of the Reorganization
Agreement. Neither Electronic Arts nor Maxis paid any additional consideration
to Mr. Braun in connection with the execution and delivery of the Voting
Agreement.
AFFILIATE AGREEMENTS
Each person determined by Maxis to be an "affiliate" of Maxis within the
meaning of Rule 145 promulgated under the Securities Act, has executed an
agreement that prohibits: (i) the sale, transfer or other disposition of
Electronic Arts Common Stock received by such person in connection with the
Merger unless (a) such transaction is permitted pursuant to Rule 145(d) under
the Securities Act; or (b) legal counsel, representing Stockholder and
reasonably satisfactory to Electronic Arts, shall have advised Electronic Arts
in a written opinion letter (satisfactory in form and content to Electronic
Arts and Electronic Arts' legal counsel), and upon which Electronic Arts and
its legal counsel may rely, that such sale, transfer or other disposition will
be exempt from registration under the Securities Act; or (c) a registration
statement under the Securities Act covering the Merger Securities proposed to
be sold, transferred or otherwise disposed of, shall have been filed with, and
declared effective by, the Commission; or (d) an authorized representative of
the Commission shall have rendered written advice to Stockholder to the effect
that the Commission would take no action, or that the staff of the Commission
would not recommend that the Commission take action, with respect to the
proposed disposition of such Electronic Arts Common Stock if consummated; and
(ii) the sale, transfer or other disposition of, or any other similar
transaction intended to reduce its risk relative to any securities of
Electronic Arts or Maxis, during the period beginning thirty (30) days
preceding the Effective Time of the Merger through the date on which financial
results covering at least 30 days' combined operations of Electronic Arts and
Maxis are published by Electronic Arts unless (a) the sale or disposition is
in accordance with the "de minimis" test set forth in SEC Staff Accounting
Bulletin No. 76 and (b) Stockholder has obtained Electronic Arts' prior
written approval of such sale or disposition. Such persons have also made
certain representations pertaining to the "continuity of interest"
requirements for the Merger to constitute a "reorganization" within the
meaning of Section 368(a) of the Code. See "Approval of the Merger and Related
Transactions--Certain Federal Income Tax Considerations."
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
Each of Jeffrey B. Braun (the Chairman of the Board of Directors of Maxis)
and William R. Wright (the Chief Technical Designer and a Director of Maxis)
have entered into agreements, in connection with the Merger, amending their
current employment agreements with Maxis. These agreements with Electronic
Arts, dated as of June 4, 1997, state that (i) as of the Effective Date such
persons will become employees of Electronic Arts; (ii) their titles, duties
and compensation will be mutually determined in good faith by such persons and
Electronic Arts; and (iii) one year from the Effective Date, the Employment
Agreement will terminate (except for certain provisions relating to
severance), and thereafter the employees will be "at will" employees of
Electronic Arts, subject to Electronic Arts' standard employment policies and
practices.
Mr. Braun and Mr. Wright have also entered into Noncompetition and
Nonsolicitation Agreements with Electronic Arts, dated as of June 4, 1997,
restricting them for a period of two years from the Effective Date, from (i)
carrying on or engaging in any business in the interactive entertainment
software industry in any geographic area where Maxis is actually engaged in or
currently contemplates either doing such business or selling products
developed by Maxis (the "Competing Area"); (ii) soliciting from, or attempting
to sell or provide the same or similar products or services to, any actual or
potential clients or customers of Electronic Arts in the Competing Area; or
(iii) inducing or attempting to induce any employee or contractor of
Electronic Arts to discontinue his or her employment relationship with
Electronic Arts.
INTERESTS OF CERTAIN PERSONS
Samuel L. Poole, Maxis' President and Chief Executive Officer, and Fred M.
Gerson, its Vice President and Chief Financial Officer, have entered into
retention arrangements that provide for a payment of cash in an
46
<PAGE>
amount equal to one year's annual total cash compensation on the six-month
anniversary of the Effective Time, if the employee is still employed by Maxis
or Electronic Arts prior to those times (and such payments will accelerate if
the employee is terminated by Maxis or Electronic Arts prior to such times for
any reason other than cause). The early payment will not be made if such
employee voluntarily terminates his employment for any reason other than a
"constructive termination" by Maxis or Electronic Arts.
All other executive officers of Maxis have entered into retention
arrangements that provide for a payment of cash equal to either three, four
and one-half or six month's salary in the event that they remain with the
Company until three months, four and one-half months or six months,
respectively, after the Merger. If such employee is terminated by Electronic
Arts or Maxis other than for cause, such employee shall also be entitled to
severance payments upon such employee's termination with Maxis or Electronic
Arts for the period equal to three, four and one-half or six months, as the
case may be, after such termination. Neither the one time cash payment nor the
severance payments will be made if such employee voluntarily terminates his
employment for any reason other than a "constructive termination" by Maxis or
Electronic Arts.
Each executive officer of Maxis has an agreement with Maxis providing for
the acceleration of unvested stock options and restricted stock (i)
immediately preceding a change of control, if such options or restricted stock
are not assumed, (ii) immediately preceding a change of control in the event
an officer does not or will not receive upon exercise of the officer's stock
purchase rights under any stock option agreement the same identical securities
and/or other consideration as is received by all other stockholders in any
merger, consolidation, sale, exchange or similar transaction occurring upon or
after such change of control, (iii) immediately preceding any involuntary
termination following a change of control or (iv) six months following a
change of control, provided the officer has remained an employee of Maxis or
Electronic Arts. An affirmative vote by the Maxis stockholders in favor of the
Merger is considered a change of control for purposes of these agreements;
however, consummation of the Merger, in and of itself, will not cause
acceleration of unvested stock options or restricted stock.
Each of Jeffrey B. Braun and William R. Wright have entered into agreements,
in connection with the Merger, amending their current employment agreements
with Maxis. See "Approval of the Merger and Related Transactions--Employment
and Noncompetition Agreements."
Pursuant to the Reorganization Agreement, Electronic Arts has agreed to
indemnify each person who was an officer, director or employee of Maxis
against certain liabilities. In addition, Electronic Arts has agreed to
maintain policies of directors' and officers' liability insurance comparable
to those currently maintained by Maxis. See "Terms of the Merger--
Indemnification and Insurance."
As a result of the foregoing transactions and agreements, the directors and
executive officers of Maxis may have personal interests in the Merger which
are not identical to the interests of other Maxis stockholders.
47
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
assume a business combination between Electronic Arts and Maxis accounted for
on a "pooling of interests" basis. The unaudited pro forma condensed combined
financial statements are based upon the respective historical financial
statements of Electronic Arts and Maxis and should be read in conjunction with
such historical financial statements and the notes thereto, which are included
elsewhere in this Proxy Statement/Prospectus. The unaudited pro forma
condensed combined balance sheet combines Electronic Arts' March 31, 1997
audited condensed consolidated balance sheet with Maxis' March 31, 1997
audited condensed consolidated balance sheet.
The pro forma information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger had been consummated as presented in the
accompanying unaudited pro forma condensed combined financial information, nor
is it necessarily indicative of future operating results or financial
position.
The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
related notes thereto of Electronic Arts and of Maxis included elsewhere
herein.
48
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
REFLECTING ELECTRONIC ARTS INC.
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------------------------------
COMBINED
PRO FORMA PRO FORMA
ELECTRONIC ARTS MAXIS ADJUSTMENTS BALANCE
--------------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term invest-
ments...................... $230,096 $ 16,387 $ 21,658 $268,141
Marketable securities....... 5,548 21,658 (21,658) 5,548
Receivables, net............ 95,356 7,888 103,244
Inventories................. 15,847 2,026 17,873
Prepaid royalties........... 10,311 -- 10,311
Deferred income taxes....... 3,010 2,249 5,259
Other current assets........ 8,875 1,849 10,724
-------- -------- -------- --------
Total current assets...... 369,043 52,057 421,100
Property and equipment, net... 85,132 4,630 89,762
Prepaid royalties............. 9,351 -- 9,351
Long-term investments......... 24,200 10,278 34,478
Deferred income taxes......... -- 1,991 1,991
Investment in affiliates...... 25,657 -- 25,657
Other assets.................. 3,320 373 3,693
-------- -------- -------- --------
$516,703 $ 69,329 $ 0 $586,032
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable............ $ 41,560 $ 1,890 $ 43,450
Accrued liabilities......... 85,870 8,908 4,480 99,258
-------- -------- -------- --------
Total current liabili-
ties..................... 127,430 10,798 4,480 142,708
Minority interest in consoli-
dated joint venture.......... 28 -- 28
Stockholders' equity:
Common stock................ 542 53,271 (53,230) 583
Paid-in capital............. 135,510 -- 53,230 188,740
Notes receivable from stock-
holders.................... -- (161) (161)
Retained earnings........... 252,525 5,453 (4,480) 253,498
Deferred compensation....... -- (32) (32)
Unrealized appreciation of
investments................ 2,593 -- 2,593
Translation adjustment...... (1,925) -- (1,925)
-------- -------- -------- --------
Total stockholders' equi-
ty....................... 389,245 58,531 (4,480) 443,296
-------- -------- -------- --------
$516,703 $ 69,329 $ 0 $586,032
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
49
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME FOR THE YEAR ENDED
MARCH 31, 1997
REFLECTING ELECTRONIC ARTS INC.
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELECTRONIC ARTS/
MAXIS
COMBINED
ELECTRONIC ARTS MAXIS PRO FORMA
--------------- ------- ----------------
<S> <C> <C> <C>
Net revenues........................ $624,766 $48,262 $673,028
Cost of goods sold.................. 312,044 16,899 328,943
-------- ------- --------
Gross profit...................... 312,722 31,363 344,085
Operating expenses:
Marketing and sales............... 85,555 16,517 102,072
General and administrative........ 41,742 6,747 48,489
Research and development.......... 118,103 12,652 130,755
-------- ------- --------
Total operating expenses........ 245,400 35,916 281,316
-------- ------- --------
Operating income (loss)......... 67,322 (4,553) 62,769
Interest and other income, net...... 11,639 1,640 13,279
-------- ------- --------
Income (loss) before provision for
income taxes and minority
interest........................... 78,961 (2,913) 76,048
Provision (benefit) for income
taxes.............................. 27,241 (1,238) 26,003
-------- ------- --------
Income (loss) before minority
interest........................... 51,720 (1,675) 50,045
Minority interest in consolidated
joint venture...................... 1,282 -- 1,282
-------- ------- --------
Net income (loss)............... $ 53,002 $(1,675) $ 51,327
======== ======= ========
Net income (loss) per share......... $ 0.96 $ (0.15) $ 0.86
======== ======= ========
Number of shares used in
computation........................ 55,483 11,180 59,557
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
50
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1996 AND 1995
REFLECTING ELECTRONIC ARTS INC.
AFTER GIVING EFFECT TO THE MERGER
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net revenues........................................... $ 587,299 $ 531,493
Cost of goods sold..................................... 291,491 277,543
---------- ----------
Gross profit......................................... 295,808 253,950
Operating expenses:
Marketing and sales.................................. 85,771 70,764
General and administrative........................... 37,711 33,492
Research and development............................. 110,275 79,910
---------- ----------
Total operating expenses........................... 233,757 184,166
---------- ----------
Operating income................................... 62,051 69,784
Interest and other income, net......................... 7,514 13,476
---------- ----------
Income before provision for income taxes and minority
interest.............................................. 69,565 83,260
Provision for income taxes............................. 22,584 26,859
---------- ----------
Income before minority interest........................ 46,981 56,401
Minority interest in consolidated joint venture........ (304) 2,620
---------- ----------
Net income......................................... $ 46,677 59,021
========== ==========
Net income per share................................... $ 0.80 $ 1.06
========== ==========
Number of shares used in computation................... 58,190 55,546
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
51
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE (A):
The Electronic Arts and Maxis statements of income have been combined for
each of the three years in the period ended March 31, 1997.
This method of combining the two companies is for the presentation of
Unaudited Pro Forma Condensed Combined financial statements only. The
Unaudited Pro Forma Condensed Combined financial statements, including notes
thereto, should be read in conjunction with the historical consolidated
financial statements of Electronic Arts and Maxis and notes thereto included
elsewhere in this Proxy Statement/Prospectus.
NOTE (B):
The unaudited pro forma condensed combining statements of income for
Electronic Arts and Maxis have been prepared as if the Merger was completed at
the beginning of the periods presented. The unaudited pro forma combined net
income per share is based on the combined weighted average number of common
and common equivalent shares of Electronic Arts Common Stock and Maxis Common
Stock for each period, based on the Exchange Ratio of 0.3644 of a share of
Electronic Arts Common Stock for each share of Maxis Common Stock.
NOTE (C):
1. Pro Forma Basis of Presentation
These unaudited pro forma condensed combined financial statements reflect
the issuance of 4,099,660 shares of Electronic Arts Common Stock in exchange
for an aggregate of 11,250,438 shares of Maxis Common Stock (outstanding as of
March 31, 1997) in connection with the Merger based on the Exchange Ratio of
0.3644 of a share of Electronic Arts Common Stock for every 1.0 share of Maxis
Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON SHARES EXCHANGE ELECTRONIC ARTS
OUTSTANDING RATIO COMMON STOCK
------------- ------------ ---------------
<S> <C> <C> <C>
Maxis.............................. 11,250,438
Electronic Arts.................... 0.3644 : 1.0 4,099,660
Number of Shares of Electronic Arts
Common Stock Outstanding at March
31, 1997.......................... 54,163,398
----------
Total Number of Shares of
Electronic Arts Common Stock
Outstanding After Completion of
the Merger........................ 58,263,058
----------
</TABLE>
The actual number of shares of Electronic Arts Common Stock to be issued
will be determined at the Effective Time of the Merger based on the number of
shares of Maxis Common Stock outstanding at such time.
2. Transaction Costs and Merger-Related Expenses
(a) Electronic Arts and Maxis estimate they will incur direct transaction
costs of approximately $2.5 million associated with the Merger consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing and other related charges. At March 31, 1997, no transaction-related
costs had been incurred. These nonrecurring transaction costs will be charged
to operations during the quarter ending September 30, 1997.
(b) In addition, it is expected that as a result of the Merger, the combined
entity will incur merger-related expenses currently estimated to be $3.0
million. The Unaudited Pro Forma Condensed Combined Balance Sheet gives effect
to estimated direct transaction costs and merger related expenses as if such
costs and expenses had been incurred as of March 31, 1997. These costs and
expenses are not reflected in the Unaudited Pro Forma
52
<PAGE>
Condensed Combined Statements of Income. The merger-related expenses consist
primarily of the following (i) the elimination of duplicate management
information systems and equipment; (ii) incremental operations, consulting and
other costs associated with anticipated internal and customer-related
integration activities; (iii) customer and employee notifications and
programs; and (iv) cancellation and continuation of certain contractual
obligations.
NOTE (D):
There have been no adjustments required to conform the accounting policies
of the combined companies. Certain amounts for Maxis have been reclassified to
conform with the financial statements classification followed by Electronic
Arts.
53
<PAGE>
ELECTRONIC ARTS BUSINESS
This section contains forward-looking statements regarding future events or
the future financial performance of Electronic Arts. Actual events and the
actual future results of Electronic Arts may differ materially from those
anticipated in or by any forward-looking statement due to certain risks and
uncertainties including the risks described under "Risk Factors" and elsewhere
in this Proxy Statement/Prospectus. See "Forward-Looking Statements."
OVERVIEW
Electronic Arts' predecessor was incorporated in California in 1982. In
September 1991, Electronic Arts was reincorporated under the laws of Delaware.
Unless otherwise indicated, "Electronic Arts," when used in this "Electronic
Arts Business" section, refers to Electronic Arts Inc., a Delaware
corporation, its California predecessor and its wholly-owned and majority-
owned subsidiaries. Electronic Arts' principal executive offices are located
at 1450 Fashion Island Boulevard, San Mateo, California 94404. Its telephone
number is (415) 571-7171.
Electronic Arts creates, markets and distributes interactive entertainment
software for a variety of hardware platforms. As of March 31, 1997, Electronic
Arts marketed approximately 117 titles developed and/or published under one of
its brand names, including older titles marketed as "Classics" or "Publisher's
Choice." Electronic Arts also distributed approximately 51 additional titles
developed by other software publishers ("Affiliated Labels") in North America
and over 1,000 Affiliated Label titles in the rest of the world. As of March
31, 1997, Electronic Arts had developed 53 titles that had each generated
life-to-date net revenues in excess of $10,000,000. Since its inception,
Electronic Arts has developed products for 36 different computer hardware
platforms, including the following: IBM PC-CD and compatibles, Amiga, 8-bit
Nintendo Entertainment System (the "NES"), the Genesis, the SNES, Sega CD-ROM
peripheral device, Macintosh CD, 3DO Interactive Multiplayer, the PlayStation,
the Saturn and the N64. Electronic Arts' fiscal 1997 product releases were
primarily for PC-CD and 32-bit video game platforms and to a lesser degree 16-
bit and N64 cartridge products. As of March 31, 1997, Electronic Arts was
developing products for 5 different hardware platforms.
Electronic Arts' product development methods and organization are modeled on
those used in the entertainment industry, and Electronic Arts markets its
products with techniques borrowed from other entertainment companies such as
record producers, magazine publishers and video distributors. Electronic Arts
employees called "producers," who are each responsible for the development of
one or more products, oversee product development and direct teams comprised
of both Electronic Arts employees and outside contractors. Electronic Arts'
designers regularly work with celebrities and organizations in sports,
entertainment and other areas to develop products that provide gaming
experiences that are as realistic and interactive as possible. Celebrities and
organizations with whom Electronic Arts has had contracts include: FIFA, ROAD
& TRACK, John Madden, Shaquille O'Neal, the National Basketball Association,
the PGA TOUR, the Pebble Beach Company and the National Hockey League.
Electronic Arts maintains development studios in California, Canada, United
Kingdom, Texas, Japan, Washington and Maryland.
Electronic Arts invests in the creation of state-of-the-art software tools
and utilities that are then used in product development. These tools allow for
more cost-effective product development and the ability to more efficiently
convert products from one hardware platform to another. Electronic Arts has
also made investments in new facilities and equipment to facilitate the
creation and editing of digital forms of video and audio recordings and
product development efforts for new hardware platforms.
Additionally, Electronic Arts produces film, videotape and audio recordings
to include in its products. Two of Electronic Arts' subsidiaries, Electronic
Arts Productions Inc. (d/b/a Crocodile Productions) and Electronic Arts
Productions Ltd., have signed agreements with SAG and AFTRA in the United
States and with Equity in the UK, giving Electronic Arts access to a wide
range of talent for use in Electronic Arts-produced film and video for
inclusion in Electronic Arts' products. See "Risk Factors--Film and
Videotape."
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<PAGE>
Electronic Arts distributes its products and those of its Affiliated Labels
primarily by direct sales to retail chains and outlets in the United States
and Europe. In Japan and the South Asia Pacific region, Electronic Arts
distributes products both directly to retailers and through third party
distributors. Electronic Arts' products are available in over 52,000 retail
locations worldwide. In fiscal 1997, approximately 46% of Electronic Arts' net
revenues were generated by international operations, compared to 42% and 32%
in fiscal 1996 and fiscal 1995, respectively.
INVESTMENTS AND JOINT VENTURES
Investments
Electronic Arts has made investments as part of its overall strategy and
currently holds minority equity interests in several companies, including
NovaLogic, Inc., Tiburon Entertainment, Firaxis Software, Inc., Stormfront
Studios, Mpath Interactive, Accolade, Inc. and The 3DO Company. See "Risk
Factors--Investment In Affiliates."
Joint Ventures
Electronic Arts has a majority interest in a joint venture corporation,
Electronic Arts Victor Inc., for the development and distribution of
entertainment software products in Japan as well as certain Asian countries.
See Note 10 of the Electronic Arts Notes to Consolidated Financial Statements.
Electronic Arts and Capital Cities/ABC, Inc. formed a joint venture company
in December 1994, Creative Wonders, LLC (formerly ABC/EA Home Software, LLC),
to develop and publish children's edutainment and interactive entertainment
titles as well as reference products. Electronic Arts currently distributes
Creative Wonders' products as one of Electronic Arts' Affiliated Labels. See
Note 10 of the Electronic Arts Notes to Consolidated Financial Statements.
MARKET
Historically, no hardware platform or system has achieved long-term
dominance in the interactive entertainment market. This phenomenon has
resulted in Electronic Arts developing products at one time or another for 36
different hardware platforms. Today, the competition in the market for
hardware platforms has intensified. In fiscal 1997, the hardware market
completed the transition from 16-bit video game platforms to next generation
Sony and Sega 32-bit systems and saw the introduction of the Nintendo 64-bit
video game system. In addition, the installed base of multimedia-enabled home
computers has continued to grow as prices have declined and the quality and
choices of software have increased dramatically. Electronic Arts develops and
publishes products for multiple platforms, and this diversification continues
to be a cornerstone of Electronic Arts' strategy.
Early generation computer systems for which interactive software products
were published such as the Apple II and the Commodore 64 were 8-bit floppy-
disk-based personal computers. Several years ago these systems were eclipsed
by more powerful personal computer systems based on 16-bit microprocessors,
such as the IBM PC and compatibles, the Commodore Amiga and the Apple
Macintosh. Current computer systems utilize 32-bit microprocessor technology
and typically run CD-ROM based products.
Video game systems have likewise changed significantly over time. In 1986
and 1987, Nintendo and Sega Enterprises, Ltd. ("Sega"), respectively,
introduced 8-bit video game systems that, compared to existing general-purpose
computer systems available at the time, were low in price, easy to use and had
more sophisticated audio-video capabilities. In late 1989, Sega began shipping
its Genesis system, a more powerful 16-bit video game system. In August 1991,
Nintendo introduced its 16-bit SNES video game system. In late 1992, Sega
introduced the Sega CD-ROM drive as an add-on peripheral to its Genesis
system.
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The interactive software industry has recently undergone another significant
change due in part to the introduction of new hardware platforms, as well as
remote and electronic delivery systems. The new generation of systems are
based on 32-bit and 64-bit microprocessors that incorporate dedicated graphics
chipsets. Many of these systems utilize CD-ROM drives. Electronic Arts began
development of 32-bit software products over five years ago by creating the
original software development system for the first of these advanced products,
the 3DO Interactive Multiplayer ("3DO"), which was introduced in calendar year
1993. Sega and Sony each began distribution of their next generation hardware
systems (named the "Saturn" and "PlayStation," respectively) in Japan during
the quarter ended December 1994. Sega began limited shipment of the Saturn in
North America in May 1995 and Sony began shipping the PlayStation in North
America in September 1995.
In June 1996, Nintendo shipped the N64 in Japan and subsequently introduced
the system in North America in September 1996. The N64 is a cartridge-based
video game platform which uses a 64-bit microprocessor. Additionally,
Matsushita is developing a next generation hardware system based on the 64-bit
M2 technology licensed from The 3DO Company.
New entrants in the interactive entertainment and multimedia industries,
such as cable television, telephone and diversified media and entertainment
companies, and a proliferation of new technologies, such as on-line networks
and the Internet may increase the competition in the markets in which
Electronic Arts competes. Electronic Arts' new product releases in its 1998
fiscal year will be primarily for the IBM PC-CD and compatibles and 32-bit
video game platforms, including the Sony PlayStation and the Sega Saturn.
Electronic Arts is also scheduled to release one N64 product and two on-line
network gaming products during fiscal 1998. See "Risk Factors--The Industry
and Competition."
The early investment in products for the 32-bit market, including both PC-CD
and CD-video game platforms, has been strategically important in positioning
Electronic Arts for the current generation of 32-bit machines. Electronic Arts
believes that such investment continues to be important and will continue
aggressive development activities for 32-bit and 64-bit platforms. Although
the PlayStation has achieved significant market acceptance in all geographical
territories, there can be no assurance that its growth will continue at the
present rates, particularly with the introduction of N64 by Nintendo. The
introduction and market acceptance of the N64, particularly in North America,
may adversely impact the growth rate of the 32-bit CD-video game platforms.
While Electronic Arts has a broad range of products available, Electronic Arts
will not ship products for the N64 in any significant quantities until
calendar year 1998. In addition, Electronic Arts' revenues and earnings are
dependent on its ability to meet its product release schedule and its failure
to meet those schedules could result in revenues and earnings which fall short
of analysts' expectations for the fiscal year, and in particular the first
quarter of fiscal 1998. See "Risk Factors--Development" and "--Platform
Changes."
COMPETITION
See "Risk Factors--The Industry and Competition."
RELATIONSHIPS WITH SIGNIFICANT HARDWARE PLATFORM COMPANIES
Sony
In fiscal 1997, approximately 30% of Electronic Arts' net revenues were
derived from sales of software for the PlayStation compared to 9% in fiscal
1996. PlayStation products were first released during the second quarter of
fiscal 1996. During fiscal 1997, Electronic Arts released fourteen PlayStation
games compared to thirteen in fiscal 1996. Among these releases were Madden
Football '97, Soviet Strike, NBA Live '97, FIFA Soccer '97 and NHL '97. The
volume of sales of PlayStation products significantly increased in fiscal 1997
due to the increase in the installed base of PlayStation consoles worldwide
and the quality and timely release of Electronic Arts' key franchise titles.
Although revenues from the sales of PlayStation products in fiscal 1998 are
expected to continue to grow, Electronic Arts does not expect to maintain
these growth rates. See "Risk Factors--Development."
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Under the terms of a licensing agreement entered into with Sony Computer
Entertainment of America in July 1994 (the "Sony Agreement"), as amended,
Electronic Arts is authorized to develop and distribute CD-based software
products compatible with the PlayStation. Pursuant to the Sony Agreement,
Electronic Arts engages Sony to supply its PlayStation CDs for distribution by
Electronic Arts. Accordingly, Electronic Arts has limited ability to control
its supply of PlayStation CD products or the timing of their delivery. See
"Risk Factors--Hardware Companies."
In connection with Electronic Arts' purchases of Sony products to be
distributed in Japan, Sony of Japan requires cash deposits totaling one-third
of the purchase orders. At March 31, 1997, Electronic Arts Victor ("EAV") had
no outstanding deposits to Sony. EAV utilizes a line of credit to fund these
deposits and other operating needs. At March 31, 1997, EAV had an outstanding
balance on this line of approximately $4,024,000.
Nintendo
During the fourth quarter of fiscal 1997, Electronic Arts released one
product for the N64, FIFA Soccer 64. In fiscal 1997, approximately 3% of
Electronic Arts' net revenues were derived from the sale of N64 products. In
March 1997, Electronic Arts signed a licensing agreement with Nintendo (the
"N64 Agreement") to develop, publish and market certain sports products for
the N64. Due to the development time necessary for these products, Electronic
Arts does not anticipate shipping products for the N64 in any significant
quantities until calendar year 1998.
Under the terms of the N64 Agreement, Electronic Arts engages Nintendo to
manufacture its N64 cartridges for distribution by Electronic Arts.
Accordingly, Electronic Arts has limited ability to control its supply of N64
cartridges or the timing of their delivery. A shortage of microchips or other
factors outside the control of Electronic Arts could impair Electronic Arts'
ability to obtain an adequate supply of cartridges.
In fiscal 1997, approximately 4% of Electronic Arts' net revenues were
derived from sales of software for the SNES platform compared to 12% in fiscal
1996. The volume of sales of SNES products declined in fiscal 1997 as the
market made the transition from 16-bit cartridge based video game platforms to
next generation 32-bit systems. Electronic Arts released three SNES games in
fiscal 1997 compared to five games in fiscal 1996. These releases were Madden
Football '97, NBA Live '97 and FIFA Soccer '97. Electronic Arts does not
expect to release any new SNES titles in fiscal 1998.
Under the terms of its licensing agreement with Nintendo for SNES products,
Electronic Arts is authorized to develop, publish and market cartridge
products for the SNES. SNES cartridges distributed in North America and Europe
are manufactured by Electronic Arts in Puerto Rico. Electronic Arts is
required to purchase from Nintendo certain key components for production of
these cartridges. A shortage of these components or other factors outside the
control of Electronic Arts could impair Electronic Arts' ability to
manufacture an adequate supply of cartridges. Electronic Arts' SNES cartridges
distributed in the rest of the world are manufactured by Nintendo.
In connection with Electronic Arts' purchases of N64 and SNES cartridges for
distribution in North America, Nintendo requires Electronic Arts to provide
irrevocable letters of credit prior to Nintendo's acceptance of purchase
orders from Electronic Arts for purchases of these cartridges. For purchases
of N64 cartridges for distribution in Japan and Europe, and for SNES
cartridges distributed outside of North America and Europe, Nintendo requires
Electronic Arts to make cash deposits. Furthermore, Nintendo maintains a
policy of not accepting returns of either N64 or SNES cartridges. Because of
these and other factors, the carrying of an inventory of cartridges entails
significant capital and risk. See "Risk Factors--Hardware Companies."
Sega
In the fiscal year ended March 31, 1997, approximately 10% of Electronic
Arts' net revenue came from sales of Sega Genesis products compared to 26% in
fiscal 1996. During fiscal 1997, Electronic Arts released six
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Genesis games compared to ten in fiscal 1996. The volume of sales of Sega
Genesis products declined significantly in fiscal 1997 as the market made the
transition from 16-bit cartridge based video game platforms to next generation
32-bit systems. Electronic Arts currently has planned only limited releases of
Sega Genesis products in fiscal 1998 and, accordingly, the volume of Genesis
sales is expected to continue to significantly decline in fiscal 1998.
Under the terms of a licensing agreement entered into with Sega in July
1992, as amended (the "16-bit Sega Agreement"), Electronic Arts is authorized
to develop and manufacture ROM-cartridge software products compatible with the
Sega Genesis system through December 1997 and to distribute those cartridges
through June 1998. Genesis cartridges are manufactured by Electronic Arts in
Puerto Rico under the 16-bit Sega Agreement. A shortage of components, or
other factors outside the control of Electronic Arts could impair Electronic
Arts' ability to obtain an adequate supply of cartridges.
In the fiscal year ended March 31, 1997, approximately 6% of Electronic
Arts' net revenue came from sales of Saturn products compared to 2% in fiscal
1996. During fiscal 1997, Electronic Arts released twelve Saturn products
compared with four in fiscal 1996. Among these releases were Madden Football
'97, Need for Speed and NHL '97. During the third quarter of fiscal 1996,
Electronic Arts had its initial release of products for the Saturn.
Under the terms of a licensing agreement entered into with Sega in January
1995 (the "Sega Saturn Agreement"), Electronic Arts is authorized to develop
and distribute CD-based software products compatible with the Sega Saturn.
Pursuant to the Sega Saturn Agreement, Electronic Arts engages various third
party manufacturers approved by Sega to supply its Saturn CDs for
distribution. Accordingly, Electronic Arts has limited ability to control its
supply of Saturn CD products or the timing of their delivery.
PRODUCTS AND PRODUCT DEVELOPMENT
In fiscal 1997, Electronic Arts generated approximately three quarters of
its revenues from products released during the year. See "Risk Factors--
Products." As of March 31, 1997, Electronic Arts was actively marketing
approximately 117 titles, comprising approximately 264 stock keeping units
("sku's"), that were published by Electronic Arts' development divisions and
subsidiaries ("EA Studios"). During fiscal 1997, Electronic Arts introduced
over 31 EA Studios titles, representing over 63 sku's, compared to 22 EA
Studio titles, comprising over 64 sku's, in fiscal 1996. From the inception of
Electronic Arts through March 31, 1997, the EA Studios organization had
created and published 53 titles that have each generated more than $10,000,000
in life-to-date net revenues for Electronic Arts.
The products published by EA Studios are designed and created by its in-
house designers and artists and by independent software developers
("independent artists"). Electronic Arts typically pays the independent
artists royalties based on the sales of the specific products, as defined in
the related independent artist agreements.
For fiscal 1997, one title, Madden Football '97, published on five
platforms, represented 11% of the total 1997 net revenues. For fiscal 1996,
Electronic Arts had one title, FIFA Soccer '96, published on six platforms,
which represented 11% of the total 1996 net revenues. No one title accounted
for more than 10% of Electronic Arts' net revenues for fiscal 1995.
Electronic Arts publishes products in a number of categories such as sports,
action and interactive movies, strategy, simulations, role playing and
adventure, each of which is becoming increasingly competitive. Electronic
Arts' sports-related products, marketed under the EA Sports brand name,
accounted for a significant percentage of net revenues in fiscal years 1997
and 1996. There can be no assurance that Electronic Arts will be able to
maintain its market share in the sports category. See "Risk Factors--The
Industry and Competition."
The front line retail selling prices in North America of Electronic Arts'
products, excluding older titles (marketed as "Classics" and "Publisher's
Choice"), typically range from $40.00 to $70.00. "Classics" and "Publisher's
Choice" titles have retail selling prices that range from $10.00 to $15.00.
The retail selling prices of Electronic Arts titles outside of North America
vary based on local market conditions.
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Electronic Arts currently develops or publishes products for 5 different
hardware platforms and has from time to time developed and marketed products
on 36 different and incompatible platforms in the past. In fiscal 1997,
Electronic Arts product introductions were predominantly for PC-CD, 32-bit
video game platforms and to a lesser degree 16-bit video game systems.
Electronic Arts' planned product introductions for fiscal 1998 are
predominantly for PC-CD and 32-bit video game systems. Electronic Arts will
also release a limited number of products for the N64 and for on-line network
play in fiscal 1998. See "Risk Factors--Development" and "Platform Changes."
As compact discs have emerged as the preferred medium for interactive
entertainment, education, and information software, Electronic Arts continued
its investment in the development of CD-ROM tools and technologies in fiscal
1997 and currently has more than 37 products in development for new CD-ROM
platforms, including the IBM PC and compatibles, the PlayStation and the
Saturn. Most of these products will be convertible for use on multiple
advanced hardware systems. During the fiscal years 1997, 1996 and 1995,
Electronic Arts had research and development expenditures of $118.1 million,
$99.6 million, and $73.9 million, respectively. See "Risk Factors--
Development."
Additionally, Electronic Arts produces film and videotape to include in
certain products pursuant to agreements between certain of Electronic Arts'
subsidiaries with SAG, AFTRA and Equity. With extensive use of video in some
of Electronic Arts' products, particularly its products in the interactive
movie category, there can be no assurance that the significantly higher sales
levels required to make these products profitable will be achieved. During
fiscal 1997, Electronic Arts released one product with significant video
content and expects to release one product with significant video content in
fiscal 1998. In addition, Electronic Arts' agreements with SAG and AFTRA
expire in June 1997 and there can be no assurances that Electronic Arts will
be able to renegotiate favorable terms. See "Risk Factors--Film and
Videotape."
MARKETING AND DISTRIBUTION
Electronic Arts distributes both EA Studio products and products developed
and published by other software publishers known as "Affiliated Labels."
In most cases, Affiliated Label products are delivered to Electronic Arts as
completed products. As of March 31, 1997, Electronic Arts distributed 51
Affiliated Label titles in North America and over 1,000 Affiliated Label
titles in the rest of the world. No single Affiliated Label has accounted for
more than 10% of Electronic Arts' net revenue in any of the last three fiscal
years.
During fiscal 1997, Electronic Arts entered into a one year agreement with
Twentieth Century Fox Home Entertainment outside of North America and multi-
year agreements with Accolade, Inc. and DreamWorks Interactive in North
America for distribution of their products. Additionally, a significant
affiliate was acquired and discontinued distribution through Electronic Arts
in the second quarter of fiscal 1997.
Electronic Arts generated approximately 87% of its North American net
revenues from direct sales through a field sales organization of professionals
and a group of telephone sales representatives. The remaining 13% of its North
American sales were made through a limited number of specialized and regional
distributors and rack jobbers in markets where Electronic Arts believes direct
sales would not be economical. Electronic Arts had no customers accounting for
more than 10% of total net revenues for the years ended March 31, 1997, 1996
and 1995.
As discussed in "--Market" above, the video game business has become
increasingly "hits" driven, requiring significantly greater expenditures for
advertising, particularly for television advertising. There can be no
assurance that Electronic Arts will continue to produce "hit" products or that
advertising expenditures will increase sales sufficiently to recoup the
advertising expenditures.
Electronic Arts has stock-balancing programs for its PC products that, under
certain circumstances and up to a specified amount, allow for the exchange of
PC products by resellers. Electronic Arts also typically provides
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for price protection for its PC and video game system products that, under
certain conditions, allows the reseller a price reduction from Electronic Arts
for unsold products. Electronic Arts maintains a policy of exchanging products
or giving credits, but does not give cash refunds. Moreover, the risk of
product returns may increase as new hardware platforms become more popular or
market factors force Electronic Arts to make changes in its distribution
system. Electronic Arts monitors and manages the volume of its sales to
retailers and distributors and their inventories as substantial overstocking
in the distribution channel can result in high returns or the requirement for
substantial price protection in subsequent periods. Electronic Arts believes
that it provides adequate reserves for returns and price protection which are
based on estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and retailer
inventories of Electronic Arts' products and other factors, and that its
current reserves will be sufficient to meet return and price protection
requirements for current in-channel inventory. However, there can be no
assurance that actual returns or price protection will not exceed Electronic
Arts' reserves. See "Risk Factors--Revenues and Expenses."
Electronic Arts also has a fulfillment group that sells product directly to
consumers through a toll-free number listed in advertising by Electronic Arts
and its Affiliated Labels. This group is also responsible for targeted direct
mail marketing and sells product upgrades, backups and accessories to
registered customers.
The distribution channels through which consumer software products are sold
have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The development of remote and
electronic delivery systems will create further changes. The bankruptcy or
other business difficulties of a distributor or retailer could render
Electronic Arts' accounts receivable from such entity uncollectible, which
could have an adverse effect on the operating results and financial condition
of Electronic Arts. In the quarter ended September 1996, Electronic Arts
recorded $2,300,000 in bad debt expenses related to potentially uncollectible
receivables from a customer who filed for bankruptcy. In addition, an
increasing number of companies are competing for access to these channels.
Electronic Arts' arrangements with its distributors and retailers may be
terminated by either party at any time without cause. Distributors and
retailers often carry products that compete with those of Electronic Arts.
Retailers of Electronic Arts' products typically have a limited amount of
shelf space and promotional resources for which there is intense competition.
There can be no assurance that distributors and retailers will continue to
purchase Electronic Arts' products or provide Electronic Arts' products with
adequate levels of shelf space and promotional support.
INTERNATIONAL OPERATIONS
Electronic Arts has wholly owned subsidiaries in the United Kingdom, France,
Spain, Germany, Australia, Canada, South Africa, Singapore, Sweden and Puerto
Rico as well as a majority owned subsidiary in Japan. The amounts of net
revenues, operating profit and identifiable assets attributable to each of
Electronic Arts' geographic regions for each of the last three fiscal years
are set forth in Note 15 of the Electronic Arts Notes to the Consolidated
Financial Statements. International net revenues increased by 28% to
$289,239,000, or 46% of consolidated 1997 net revenues, compared to
$225,658,000, or 42% of the 1996 total. The increase in international revenues
was due to higher worldwide sales of 32-bit CD-video game products and
increased sales of PC-CD and Affiliated Label products in Europe and South
Asia Pacific. This was partially offset by a decrease in 16-bit video game
cartridge products. In fiscal 1997, Electronic Arts continued its strategy to
expand into emerging world markets by opening offices in Malaysia, Beijing,
Shanghai, Taiwan and Holland as well as expanding its European distribution.
In fiscal 1997, net revenues from Europe increased by 42% to $223,930,000
compared to $157,999,000 in fiscal 1996. The increase in Europe was mainly
attributable to the expansion of distribution in the United Kingdom as well as
higher revenues generated by Kingsoft GmbH, EA France and the full year of
operations of EA Nordic and EA South Africa. The increase was due mainly to an
increase in net revenues derived from higher volume of PlayStation and PC-CD
products and Affiliated Label products offset by a decrease in 16-bit
products. The increase in European Affiliated Label revenues was, in part, due
to a new distribution agreement with Twentieth Century Fox Home Entertainment.
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In fiscal 1997, Japan net revenues decreased by 19% to $37,237,000 compared
to $45,865,000 in fiscal 1996. The decrease in sales in Japan is attributable
to the soft demand for PC products and the delay in the introduction of
products relevant to the Japanese market. The decrease was partially offset by
increased sales of 32-bit products and a title for the N64. In fiscal 1997,
net revenues from South Asia Pacific increased by 29% to $28,072,000 compared
to $21,794,000 in fiscal 1996. The increase in net revenues was due mainly to
sales in new markets, including China, Taiwan and New Zealand.
Though international revenues are expected to grow in fiscal 1998,
international revenues may not grow at as high a rate as in prior years.
MANUFACTURING
Electronic Arts' Genesis and SNES cartridge products are manufactured by
Electronic Arts in Puerto Rico under the terms of a manufacturing license
agreement with Sega and Nintendo, respectively. A portion of Electronic Arts'
personal computer CD-ROM products are also manufactured in Puerto Rico. The
assembly of the final packaged product is performed by outside organizations
under the supervision of Electronic Arts' operations organization. The
manufacturing process for all software involves the duplication of software
code onto ROM chips, or CD, printing of packaging and documentation, and
assembly of the final packaged product. Quality control tests are performed on
all products by Electronic Arts employees, and the products are then
warehoused and shipped to customers by Electronic Arts.
In many instances, Electronic Arts is able to acquire materials on a volume-
discount basis. Electronic Arts has multiple potential sources of supply for
most materials. Except with respect to its PlayStation and N64 products,
Electronic Arts also has alternate sources for the manufacture and assembly of
most of its products. To date, Electronic Arts has not experienced any
material difficulties or delays in production of its software and related
documentation and packaging. However, a shortage of components or other
factors beyond the control of Electronic Arts could impair Electronic Arts'
ability to manufacture, or have manufactured, its products. See "Risk
Factors--Hardware Companies."
BACKLOG
Electronic Arts normally ships product within a few days after receipt of an
order. However, a backlog may occur for EA Studios and Affiliated Label
products that have been announced for release but not yet shipped. Electronic
Arts does not consider backlog to be an indicator of future performance.
SEASONALITY
Electronic Arts' business is highly seasonal. Electronic Arts typically
experiences its highest revenues and profits in the calendar year-end holiday
season and a seasonal low in revenues and profits in the quarter ending in
June. In its 1998 fiscal year, and particularly in the June and September
quarters, Electronic Arts expects these seasonal trends to be magnified by
general economic and industry factors.
EMPLOYEES
As of March 31, 1997, Electronic Arts employed approximately 1,700 people,
of whom over 900 were outside the United States. Electronic Arts believes that
its ability to attract and retain qualified employees is an important factor
in its growth and development and that its future success will depend, in
large measure, on its ability to continue to attract and retain qualified
employees. To date, Electronic Arts has been successful in recruiting and
retaining sufficient numbers of qualified personnel to conduct its business
successfully. See "Risk Factors--Employees."
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PROPERTIES
Electronic Arts' principal administrative, sales and marketing, research and
development, and support facility is located in four modern buildings in San
Mateo, California, 15 miles south of San Francisco. Electronic Arts presently
occupies approximately 196,000 sq. ft. in these buildings, under leases that
expire at various times between August 1998 and April 1999.
In addition, Electronic Arts leases and occupies a 54,000 sq. ft. facility
used as an office and warehouse in Hayward, California, and a 84,000 sq. ft.
warehouse facility in Louisville, Kentucky. Electronic Arts also occupies
sales offices in the metropolitan areas of Toronto, Chicago, Dallas and New
York. Electronic Arts also has a manufacturing facility in San Juan, Puerto
Rico.
Electronic Arts' North American research and development activities are
supported by a 86,000 sq. ft. development facility in Burnaby, British
Columbia, Canada and a 29,000 sq. ft. facility in Seattle, Washington.
Electronic Arts also owns a 180,000 sq. ft. development facility in Austin,
Texas and leases a 5,000 sq. ft. development facility in Baltimore, Maryland.
Electronic Arts' United Kingdom subsidiary occupies administrative, sales,
and distribution facilities in Langley, England, under a long-term lease for a
total of 66,000 sq. ft. and a 22,000 sq. ft. development facility in Surrey,
England. In Europe, Electronic Arts also leases two administrative, sales and
distribution facilities in Germany, as well as sales and distribution
facilities in Madrid, Spain, Lyon, France, Stockholm, Sweden and Johannesberg,
South Africa.
In Asia and the South Pacific, Electronic Arts maintains a 5,500 sq. ft.
sales and distribution facility in Brisbane, Australia. Electronic Arts also
has sales and distribution facilities in Singapore, Malaysia, Taiwan and New
Zealand, and representative offices in Beijing and Shanghai, China. Electronic
Arts also maintains a 27,000 sq. ft. sales and development office in Tokyo,
Japan. See Notes 3 and 8 to Electronic Arts Notes to Consolidated Financial
Statements.
In February 1995, Electronic Arts entered into a master operating lease for
land and buildings to be constructed in Redwood City, California. The facility
in San Mateo, California is to be used as a corporate headquarters for
Electronic Arts. The above mentioned rental space Electronic Arts currently
occupies is expected to be vacated upon the completion of the new corporate
headquarters. The square footage of the new facilities is expected to be
approximately 375,000. Electronic Arts expects completion of these facilities
in fiscal 1999.
Electronic Arts believes that these facilities are adequate for its current
needs. Electronic Arts believes that suitable additional or substitute space
will be available as needed to accommodate Electronic Arts' future needs.
LEGAL PROCEEDINGS
Electronic Arts is subject to a number of routine pending litigation
matters. Management, after review and consultation with counsel, considers
that any liability from the disposition of such matters would not have a
material adverse effect upon the financial condition or results of operations
of Electronic Arts.
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ELECTRONIC ARTS SELECTED SUPPLEMENTAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF IN-
COME DATA:
Net revenues................... $624,766 $531,887 $493,346 $418,289 $298,386
Cost of goods sold............. 312,044 273,594 263,357 224,606 160,578
-------- -------- -------- -------- --------
Gross profit................... 312,722 258,293 229,989 193,683 137,808
Operating expenses:
Marketing and sales........... 85,555 72,928 61,951 46,847 38,465
General and administrative.... 41,742 32,207 29,308 23,767 20,713
Research and development...... 118,103 99,627 73,902 62,570 37,451
-------- -------- -------- -------- --------
Total operating expenses....... 245,400 204,762 165,161 133,184 96,629
Operating income............... 67,322 53,531 64,828 60,499 41,179
Interest and other income,
net........................... 11,639 6,021 13,250 3,782 2,537
-------- -------- -------- -------- --------
Income before provision for in-
come taxes and minority inter-
est........................... 78,961 59,552 78,078 64,281 43,716
Provision for income taxes..... 27,241 18,759 24,980 19,450 13,421
-------- -------- -------- -------- --------
Income before minority inter-
est........................... 51,720 40,793 53,098 44,831 30,295
Minority interest in consoli-
dated joint venture........... 1,282 (304) 2,620 (94) 563
-------- -------- -------- -------- --------
Net income..................... $ 53,002 $ 40,489 $ 55,718 $ 44,737 $ 30,858
======== ======== ======== ======== ========
Net income per share........... $ 0.96 $ 0.75 $ 1.07 $ 0.86 $ 0.62
======== ======== ======== ======== ========
Number of shares used in compu-
tation........................ 55,483 54,163 52,297 52,286 49,992
======== ======== ======== ======== ========
<CAPTION>
MARCH 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DA-
TA:
Cash and short-term invest-
ments......................... $230,096 $147,983 $174,121 $130,318 $ 98,029
Marketable securities.......... 5,548 37,869 10,725 11,931 --
Working capital................ 241,613 199,713 168,742 135,741 85,094
Long-term investments.......... 24,200 24,200 14,200 -- --
Total assets................... 516,703 424,219 341,239 273,651 181,257
Total liabilities.............. 127,430 100,625 103,018 97,988 67,687
Minority interest.............. 28 1,277 1,148 3,485 2,999
Total stockholders' equity..... 389,245 322,317 237,073 172,178 110,571
</TABLE>
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QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------- YEAR
JUNE 30 SEPT. 30 DEC. 31 MARCH 31 ENDED
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Net revenues...................... $80,627 $129,267 $271,081 $143,791 $624,766
Operating income (loss)........... (6,300) 5,160 55,783 12,679 67,322
Net income........................ 35 5,884 36,678 10,405 53,002
Net income per share.............. $ 0.00 $ 0.11 $ 0.66 $ 0.19 $ 0.96
FISCAL 1996
Net revenues...................... $80,523 $ 94,035 $240,075 $117,254 $531,887
Operating income (loss)........... (32) 2,795 41,069 9,699 53,531
Net income........................ 800 2,993 29,266 7,430 40,489
Net income per share.............. $ 0.02 $ 0.06 $ 0.54 $ 0.14 $ 0.75
FISCAL 1995
Net revenues...................... $77,951 $ 88,845 $218,452 $108,098 $493,346
Operating income.................. 7,748 6,529 34,306 16,245 64,828
Net income........................ 11,933 6,710 24,518 12,557 55,718
Net income per share.............. $ 0.23 $ 0.13 $ 0.47 $ 0.24 $ 1.07
</TABLE>
64
<PAGE>
ELECTRONIC ARTS MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section contains forward-looking statements regarding future events or
the future financial performance of Electronic Arts. Actual events and the
actual future results of Electronic Arts may differ materially from those
anticipated in or by any forward-looking statements due to certain risks and
uncertainties, including the risks described under "Risk Factors" and
elsewhere in this Proxy Statement/Prospectus. See "Forward-Looking
Statements." Readers are cautioned not to place undue reliance on forward-
looking statements contained herein, which reflect the analysis of the
management of Electronic Arts only as of the date hereof.
RESULTS OF OPERATIONS
Comparison of Fiscal 1997 to 1996
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Net revenues.......................... $624,766,000 $531,887,000 17.5
</TABLE>
Electronic Arts derives revenues from shipments of EA Studio Compact Disk
("CD") products for dedicated entertainment systems ("CD-video game"), EA
Studio PC-CD products (primarily entertainment software), EA Studio cartridge
products, licensing of EA Studio products, distribution of EA Studio products
through hardware companies ("OEMs") and shipments of Affiliated Label CD
products that are created by third parties.
Total net revenues increased compared to the prior year due to an increase
in net revenues derived from a higher volume of CD-based products (CD-video
games and PC-CD), Affiliated Label products and a 64-bit video game cartridge
product. This was partially offset by a decrease in sales of 16-bit video game
cartridges.
Net revenues from 32-bit CD-video game products, including the PlayStation
and Saturn were $223,693,000 in fiscal 1997, representing 36% of the total net
revenues compared to $76,523,000, or 14% of total net revenues in fiscal 1996.
The increase in sales of PlayStation and Saturn products was attributable to
the greater installed base of these 32-bit CD-video game consoles and more
titles published for these consoles by Electronic Arts.
Sales of PlayStation products in fiscal 1997 increased to $185,349,000, or
30% of total revenue, compared to $50,491,000, or 9% of total revenue in
fiscal 1996. Electronic Arts released 14 new PlayStation titles in fiscal 1997
compared to 13 in fiscal 1996.
Net revenues derived from the sales of other 32-bit products were
$38,344,000 primarily from Saturn products in fiscal 1997 compared to
$26,032,000, including 3DO and Saturn products, in fiscal 1996. Electronic
Arts released 12 new Saturn titles in fiscal 1997 compared to eight 3DO titles
and four Saturn titles in fiscal 1996. Electronic Arts produced no new games
for 3DO in fiscal 1997 and does not expect to release any new titles in fiscal
1998.
Electronic Arts expects revenues from 32-bit CD-video game products to
continue to grow in fiscal 1998, but as revenues for these products increase,
Electronic Arts does not expect to maintain these growth rates.
Net revenues from PC-CD products increased to $178,310,000 in fiscal 1997,
representing 29% of total net revenues, from $140,594,000, or 26% of total net
revenues in fiscal 1996. Electronic Arts released 25 PC-CD titles and two
supplemental data disks in fiscal 1997 compared to 22 titles in fiscal 1996.
The increase in sales of PC-CD products was attributable to the growth in the
PC market worldwide, growth in the sports category, the expansion of
Electronic Arts' direct distribution worldwide and more PC-CD titles published
by Electronic Arts.
65
<PAGE>
Net revenues generated by 16-bit video game cartridge-based products were
$89,160,000, or 14% of total revenues in fiscal 1997, compared to
$202,599,000, or 38% of net revenues in fiscal 1996. New generation 32-bit and
64-bit video game consoles are replacing 16-bit video game systems.
Accordingly, sales of 16-bit video game hardware and related software have
significantly declined and are expected to continue to do so in fiscal 1998.
During fiscal 1997, Electronic Arts released fewer titles for these platforms
and does not expect to release any new titles in fiscal 1998.
Sales of EA Studio Genesis cartridge products in fiscal 1997 declined to
$62,005,000, or 10% of total revenue, compared to $138,643,000, or 26% of
total revenue in fiscal 1996. Electronic Arts released six new Genesis titles
in fiscal 1997 compared to 10 in fiscal 1996.
Net revenues derived from cartridge products for the Super Nintendo
Entertainment System ("Super NES") were $27,155,000, or 4% of total revenue,
in fiscal 1997 compared to $63,956,000, or 12% of total revenue in fiscal
1996. Electronic Arts released three new titles for the Super NES in fiscal
1997 compared to five in fiscal 1996.
Licensing of EA Studio products generated $22,095,000 in fiscal 1997,
compared to $27,018,000 in fiscal 1996. The decrease primarily resulted from
lower volume of distribution of Electronic Arts' products through OEMs in
North America and Japan.
Net revenues derived from N64 cartridge products were $17,804,000.
Electronic Arts released its first N64 title during the fourth quarter of
fiscal 1997.
Net revenues from shipments of Affiliated Label products in fiscal 1997
increased to $93,298,000 from $76,302,000 in fiscal 1996. The increase was due
to higher sales of Affiliated Label products in Europe and South Asia Pacific
related to an exclusive international distribution agreement with Twentieth
Century Fox Home Entertainment and other affiliates. This was partially offset
by a decrease in Affiliated Label net revenues in North America and Japan. The
decrease in North America was attributable to lower volume of revenue from two
exclusive distribution arrangements for certain PC entertainment and 3DO
products to key accounts on behalf of other third party publishers which began
in fiscal 1996 and the loss of a significant affiliate at the end of the
second quarter of fiscal 1997. The decrease in Japan was due to lower volume
of sales from existing affiliates.
Electronic Arts' revenues from floppy disk products, hand-held cartridge
products and products from the Sega 32X platform decreased to $406,000 in
fiscal 1997 from $8,851,000 in fiscal 1996. Results reflect the now completed
market shift away from these products to CD-based products. Electronic Arts
produced no new games for these platforms in fiscal 1997 and does not expect
to release any new titles in fiscal 1998.
North American net revenues increased by 10% to $335,527,000 in fiscal 1997
as compared to $306,229,000 in fiscal 1996. The increase was mainly
attributable to strong growth in 32-bit CD-video game and PC-CD systems
partially offset by the decline in 16-bit sales. Net revenues from sales of
CD-video game and PC-CD products increased $113,070,000 while sales of 16-bit
cartridge products decreased $82,493,000 in comparison to the prior year.
International net revenues increased by 28% to $289,239,000, or 46% of
consolidated 1997 net revenues, compared to $225,658,000, or 42% of the 1996
total. The increase in international revenues was due to higher worldwide
sales of 32-bit CD-video game products and increased sales of PC-CD and
Affiliated Label products in Europe and South Asia Pacific. This was partially
offset by a decrease in 16-bit video game cartridge products.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Cost of goods sold........ $312,044,000 $273,594,000 14.1
As a percentage of net
revenues............... 49.9% 51.4%
</TABLE>
66
<PAGE>
Cost of goods sold as a percentage of revenues in fiscal 1997 reflects lower
product costs associated with CD-based products offset by higher professional,
celebrity and manufacturing royalties, higher distribution and manufacturing
expenses for the operations in Europe and North America and growth in the
lower margin distribution business.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
OPERATING EXPENSES ------------ ----------- --------
<S> <C> <C> <C>
Marketing and sales................. $ 85,555,000 $72,928,000 17.3
As a percentage of net revenues... 13.7% 13.7%
General and administrative.......... $ 41,742,000 $32,207,000 29.6
As a percentage of net revenues... 6.7% 6.1%
Research and development............ $118,103,000 $99,627,000 18.5
As a percentage of net revenues... 18.9% 18.7%
</TABLE>
The increase in marketing and sales expense was due to higher television
advertising expenses and higher co-op advertising expenses associated with
higher revenues. Additionally, marketing and sales expenses, along with
general and administrative expenses, increased due to additional headcount and
higher facility expenses related to the opening of new sales offices in
international markets. Increases in general and administrative expenses were
also due to implementation related costs for new management information
systems in North America and Europe. The increase in research and development
expenses was primarily due to higher average development costs for CD-based
products than for cartridge products and higher depreciation expense.
Electronic Arts released a total of 63 new products in fiscal 1997 compared to
64 in fiscal 1996. Total CD-based new products released for fiscal 1997 were
53 compared to 47 in fiscal 1996.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ----------- --------
<S> <C> <C> <C>
Operating income.................... $ 67,322,000 $53,531,000 25.8
As a percentage of net revenues... 10.8% 10.1%
</TABLE>
The increase in operating income was primarily due to higher net revenues
and increased gross profit margins, partially offset by higher operating
expenses.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ----------- --------
<S> <C> <C> <C>
Interest and other income, net...... $ 11,639,000 $ 6,021,000 93.3
As a percentage of net revenues... 1.9% 1.1%
</TABLE>
The increase in other income was due to gains on sales of marketable
securities and higher interest income related to higher average cash balances.
The fiscal 1996 balance also included write-offs of certain investments in
affiliates.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ----------- --------
<S> <C> <C> <C>
Income taxes........................ $ 27,241,000 $18,759,000 45.2
Effective tax rate................ 34.5% 31.5%
</TABLE>
67
<PAGE>
The effective tax rate for fiscal 1997 increased over the prior year
primarily as a result of reported losses in Japan for which no tax benefit
could be currently realized.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Minority interest in consolidated
joint venture................... $ 1,282,000 $ (304,000) N/M
As a percentage of net
revenues...................... 0.2% (0.1%)
</TABLE>
EAV is sixty-five percent owned by Electronic Arts and thirty-five percent
owned by Victor Entertainment Industries, Inc. ("VEI"), a wholly-owned
subsidiary of Victor Company of Japan, Limited. The fiscal 1997 minority
interest represents VEI's pro rata share of EAV's net loss for that period.
Conversely, minority interest for fiscal 1996 represents VEI's pro rata share
of net income from EAV's operations.
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Net income....................... $ 53,002,000 $ 40,489,000 30.9
As a percentage of net
revenues...................... 8.5% 7.6%
</TABLE>
The increase in net income was due to higher revenue and gross profit
margins, higher other income, partially offset by higher operating expenses.
Comparison of Fiscal 1996 to 1995
<TABLE>
<CAPTION>
1996 1995 % CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Net revenues..................... $531,887,000 $493,346,000 7.8
</TABLE>
Total fiscal 1996 net revenues increased compared to fiscal 1995 primarily
due to increased net revenues derived from a higher volume of CD-based
products (PC-CD and CD-video games), and Affiliated Label products. This was
partially offset by decreased sales of Genesis video game cartridges and
Electronic Arts floppy-disk products.
Net revenues generated by 16-bit video game cartridge-based products were
$202,599,000, or 38% of consolidated net revenues in fiscal 1996, compared to
$281,933,000, or 57% of net revenues in fiscal 1995. The mix of net revenue in
fiscal 1996 reflected the continued impact of the transition from the mature
16-bit cartridge- based market to the emerging CD-based market. As the 16-bit
market matured, sales of hardware and software declined. During fiscal 1996,
Electronic Arts released fewer titles for these platforms as compared to
fiscal 1995.
Sales of EA Studio Genesis cartridge products in fiscal 1996 declined to
$138,643,000, or 26% of total revenue, compared to $213,471,000, or 43% of
total revenue in fiscal 1995. Electronic Arts released 10 new Genesis titles
in fiscal 1996 compared to 17 in fiscal 1995.
Net revenues derived from cartridge products for the Super Nintendo
Entertainment System were $63,956,000, or 12% of total revenue, in fiscal 1996
compared to $68,462,000, or 14% of total revenue in fiscal 1995. Electronic
Arts released five new titles for the Super NES in fiscal 1996 compared to six
in fiscal 1995.
Net revenues from PC-CD products increased to $140,594,000 in fiscal 1996,
representing 26% of total net revenues, from $72,227,000, or 15% of total net
revenues in fiscal 1995. Electronic Arts released 22 PC-CD titles in fiscal
1996 compared to 30 in fiscal 1995.
68
<PAGE>
CD-video game products, primarily the PlayStation in fiscal 1996 and the 3DO
Interactive Multiplayer in fiscal 1995, generated net revenues of $76,523,000
in fiscal 1996, representing 14% of the total net revenues, compared to
$27,230,000, or 6% of total net revenues in fiscal 1995. Electronic Arts
released 25 CD-video game titles in fiscal 1996 compared to eight in fiscal
1995.
Licensing of EA Studio products generated $27,018,000 in fiscal 1996,
compared to $21,001,000 in fiscal 1995. The increase primarily resulted from
increased distribution of Electronic Arts' products through OEMs.
Net revenues from shipments of Affiliated Label products in fiscal 1996
increased to $76,302,000 from $48,480,000 in fiscal 1995. The increase was
primarily attributable to revenues from the exclusive distribution of certain
PC entertainment and 3DO products to key accounts on behalf of other third
party publishers which began in fiscal 1996. Additionally, Electronic Arts had
increased Affiliated Label net revenues in Japan and Europe due to higher
sales from several new and existing affiliates. Affiliated Label CD-based
products represented 96% of total Affiliated Label net revenues in fiscal
1996, compared to 59% in fiscal 1995.
Electronic Arts' revenues from floppy disk products, hand-held cartridge
products and products from the Sega 32X platform decreased to $8,851,000, or
2% of the total in 1996, from $42,475,000, or 9% in fiscal 1995. Results
continued to reflect the rapid market shift away from these products to CD-
based products. Electronic Arts produced no new games for these platforms in
fiscal 1996 compared to 14 floppy disk titles in fiscal 1995.
International net revenues increased by 43% to $225,658,000, or 42% of
consolidated 1996 net revenues, compared to $158,043,000, or 32% of the 1995
total. The increase in international revenues was attributable to higher
worldwide sales of CD-based products, primarily PC-CD and PlayStation together
with an increase in sales of SNES products in Europe, which were licensed in
1995. This was partially offset by a decrease in floppy disk and Genesis
products.
North American net revenues totaled $306,229,000 in fiscal 1996,
representing a decrease of 9% over the $335,303,000 generated in fiscal 1995.
The decrease was attributable to the decline in 16-bit cartridge revenues
partially offset by the increase in shipments of PC-CD products and CD-video
games.
<TABLE>
<CAPTION>
1996 1995 % CHANGE
------------ ------------ --------
<S> <C> <C> <C>
Cost of goods sold........ $273,594,000 $263,357,000 3.9
As a percentage of net
revenues............... 51.4% 53.4%
</TABLE>
Cost of goods sold as a percentage of revenues in fiscal 1996 reflected
lower product costs associated with CD-based products offset by higher
production costs for multimedia releases, higher professional and celebrity
royalties, higher distribution and manufacturing expenses for the operations
in Europe and growth in the lower margin distribution business.
<TABLE>
<CAPTION>
OPERATING EXPENSES 1996 1995 % CHANGE
------------------ ------------ ------------ --------
<S> <C> <C> <C>
Marketing and sales....... $ 72,928,000 $ 61,951,000 17.7
As a percentage of net
revenues............... 13.7% 12.6%
General and
administrative........... $ 32,207,000 $ 29,308,000 9.9
As a percentage of net
revenues............... 6.1% 5.9%
Research and development.. $ 99,627,000 $ 73,902,000 34.8
As a percentage of net
revenues............... 18.7% 15.0%
</TABLE>
69
<PAGE>
The increase in marketing and sales expenses was affected by higher trade
show expenses and higher co-op advertising expenses associated with higher
revenues. Additionally, marketing and sales expenses, along with general and
administrative expenses, increased due to additional headcount and higher
facility expenses related to the prior year acquisitions and the opening of
new sales offices in international markets. The increase in general and
administrative expenses was partially offset by a decrease in bad debt
expenses in Japan as compared to fiscal 1995.
The increase in research and development expenses was primarily due to
additional headcount relating to increased in-house development capacity,
higher average development costs for CD-based products than for cartridge
products, increased reserves against artist advances due to product delays,
primarily on CD-video game platforms, and the acquisition of Manley &
Associates, a Seattle-based development company in 1996. Electronic Arts
released a total of 64 new products in fiscal 1996 compared to 86 in fiscal
1995.
<TABLE>
<CAPTION>
1996 1995 % CHANGE
----------- ----------- --------
<S> <C> <C> <C>
Operating income................... $53,531,000 $64,828,000 (17.4)
As a percentage of net revenues.. 10.1% 13.1%
</TABLE>
The decrease in operating income was primarily due to higher operating
expenses partially offset by an increase in net revenues.
<TABLE>
<CAPTION>
1996 1995 % CHANGE
----------- ----------- --------
<S> <C> <C> <C>
Interest and other income, net..... $ 6,021,000 $13,250,000 (54.6)
As a percentage of net revenues.. 1.1% 2.7%
</TABLE>
The decrease in other income was primarily due to a one-time payment of
$10,000,000 from Broderbund Software, Inc. ("Broderbund"), offset by costs of
$1,400,000 incurred by Electronic Arts, associated with the termination of the
merger agreement between Electronic Arts and Broderbund in fiscal 1995.
In fiscal 1996, Electronic Arts also had higher interest income related to
higher average cash balances and interest rates worldwide together with gains
on the sales of marketable securities and fixed assets. These gains were
substantially offset by losses and write-offs of certain investments in
affiliates.
<TABLE>
<CAPTION>
1996 1995 % CHANGE
----------- ----------- --------
<S> <C> <C> <C>
Income taxes....................... $18,759,000 $24,980,000 (24.9)
Effective tax rate............... 31.5% 32.0%
</TABLE>
The effective tax rate for fiscal 1996 decreased over the prior year
primarily as a result of the fiscal 1995 impact of the operating loss reported
by EAV and the use of those losses to offset EAV's profits in 1996. Tax
benefits from Electronic Arts' Puerto Rico operations were lower in the
current year as a result of lower sales of cartridge products.
<TABLE>
<CAPTION>
1996 1995 % CHANGE
----------- ----------- --------
<S> <C> <C> <C>
Minority interest in consolidated
joint venture..................... $ (304,000) $ 2,620,000 N/M
As a percentage of net revenues.. (0.1)% 0.5%
</TABLE>
70
<PAGE>
Minority interest for fiscal 1996 represents VEI's pro rata share of net
income from EAV's operations. Conversely, the fiscal 1995 minority interest
represents VEI's pro rata share of EAV's net loss for that period.
<TABLE>
<CAPTION>
1996 1995 % CHANGE
----------- ----------- --------
<S> <C> <C> <C>
Net income........................... $40,489,000 $55,718,000 (27.3)
As a percentage of net revenues.... 7.6% 11.3%
</TABLE>
The decrease in net income was due to higher operating expenses partially
reduced by higher revenue combined with the prior year impact of the after-tax
net gain of approximately $5,800,000 from the one-time payment of a merger
termination fee.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1997, Electronic Arts' working capital was $241,613,000
compared to $199,713,000 at March 31, 1996. Cash and short-term investments
increased by approximately $82,113,000 in fiscal 1997. Electronic Arts
generated $80,641,000 of cash from operations in fiscal 1997. In addition,
$20,205,000 was provided through the sale of equity securities under
Electronic Arts' employee stock plans.
Reserves for bad debts and sales returns increased from $27,569,000 at March
31, 1996 to $35,486,000 at March 31, 1997. Reserves have been charged for
returns of product and price protection credits issued for products sold in
prior periods. Management believes these reserves are adequate based on
historical experience and its current estimate of potential returns and
allowances.
During fiscal 1997 Electronic Arts invested approximately $36,000,000
primarily in computer hardware and software purchases required to support
Electronic Arts' development efforts and new management information systems
worldwide.
In connection with Electronic Arts' purchases of Sony products to be
distributed in Japan, Sony of Japan requires cash deposits totaling one-third
of purchase orders. Additionally, Nintendo of Japan requires cash deposits on
all orders of N64 cartridge products. EAV utilizes lines of credit to fund
these deposits for purchases of Sony and Nintendo products and for other
operating requirements. At March 31, 1997, EAV had approximately $4,024,000
outstanding on this line.
Electronic Arts' principal source of liquidity is $230,096,000 in cash and
short-term investments. Management believes the existing cash, cash
equivalents, short-term investments, marketable securities and cash generated
from operations will be sufficient to meet cash and investment requirements
for the foreseeable future.
71
<PAGE>
ELECTRONIC ARTS MANAGEMENT AND EXECUTIVE COMPENSATION
DIRECTORS
The names of the directors of Electronic Arts, and certain information about
them (including their terms of service), are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
---- --- ------------------------- --------
<S> <C> <C> <C>
M. Richard Asher(1)(2)(3)............ 65 Consultant 1984
William J. Byron(2).................. 64 Self-employed 1989
Daniel H. Case III(2)................ 40 President and Chief 1993
Executive Officer,
Hambrecht & Quist Group
and Hambrecht & Quist
LLC
Gary M. Kusin........................ 46 Chairman, Kusin Gurwitch 1995
Cosmetics, LLC
Timothy Mott(1)(3)................... 48 Partner, Ironwood Capital 1990
Lawrence F. Probst III(3)............ 47 Chairman and Chief 1991
Executive Officer of
Electronic Arts
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
MR. ASHER has been a Director of Electronic Arts since September 1984. He is
presently a consultant. Mr. Asher served as President and Chief Executive
Officer of Polygram Records, Inc., a publisher and distributor of recorded
music, from October 1985 through December 1989. Mr. Asher is a Director of
several private companies.
MR. BYRON has been a Director of Electronic Arts since January 1989. In
addition, from 1971 to 1981 he was Senior Vice President of Sanyo Electric
Consumer Products Division, from July 1985 through July 1988 its President and
from January 1987 through July 1988 Vice Chairman of the Sanyo Fisher
Corporation. Mr. Byron is currently self-employed.
MR. CASE has been a Director of Electronic Arts since November 1993. He is
currently President and Chief Executive Officer of Hambrecht & Quist Group and
Hambrecht & Quist LLC, an investment banking and venture capital firm. Mr.
Case serves on the Board of Directors of Rational Software Corporation and
Hambrecht & Quist, Inc. and is on the audit committee of Rational Software
Corporation. Mr. Case joined Hambrecht & Quist in 1981 and has held positions
in management, corporate finance, mergers and acquisitions and venture
capital.
MR. KUSIN has been a Director of Electronic Arts since August, 1995. He has
been the Chairman of Kusin Gurwitch Cosmetics, LLC, since March 1995. From
1983 through February of 1995, Mr. Kusin was the President of Babbages, Inc.
Mr. Kusin currently serves on the Board of Directors of County Seat Stores,
Inc.
MR. MOTT has been a Director of Electronic Arts since September 1990. He is
currently a partner of Ironwood Capital. Mr. Mott was a co-founder of
Electronic Arts and was employed by Electronic Arts from 1982 to 1990 in a
variety of capacities, including Senior Vice President of Business Development
and Managing Director of Electronic Arts (UK) Limited.
MR. PROBST has been a Director of Electronic Arts since January 1991. See
"--Executive Officers" below for additional information regarding Mr. Probst.
72
<PAGE>
EXECUTIVE OFFICERS
The names of the executive officers of Electronic Arts, who are chosen by
and serve at the discretion of the Electronic Arts Board, and certain
information about such executive officers, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lawrence F. Probst III................ 47 Chairman of the Board of
Directors and Chief Executive
Officer
William Bingham Gordon................ 47 Executive Vice President,
Marketing
Mark S. Lewis......................... 47 Executive Vice President,
International
E. Stanton McKee, Jr.................. 52 Executive Vice President, Chief
Financial and Administrative
Officer
Don A. Mattrick....................... 33 Executive Vice President, North
American Studios
Nancy L. Smith........................ 44 Executive Vice President, North
American Sales and Distribution
Monty Finefrock....................... 48 Senior Vice President, San Mateo
Studios
Ruth A. Kennedy....................... 42 Senior Vice President, General
Counsel and Secretary
David L. Carbone...................... 46 Vice President, Finance
</TABLE>
MR. PROBST has been a director of Electronic Arts since January 1991 and
currently serves as Chairman of the Board of Directors and Chief Executive
Officer. He was elected as Chairman in July 1994. Mr. Probst served as
President of Electronic Arts from December 1990, as Senior Vice President of
EA Distribution, Electronic Arts' distribution division, from January 1987 to
January 1991, and from September 1984, when he joined Electronic Arts, until
December 1986, as Vice President of Sales. Mr. Probst holds a B.S. degree from
the University of Delaware.
MR. GORDON has served as Executive Vice President, Marketing since October
1995. From August 1993 to October 1995, he served as Executive Vice President
of EA Studios. Prior to this, he served as Senior Vice President of
Entertainment Production since February 1992. From December 1989 to January
1992, he served as the Senior Vice President of Marketing. He also served as
General Manager of EA Studios, as Vice President of Marketing, Director of
Advertising and Vice President of Electronic Arts' former entertainment
division while employed by Electronic Arts. Mr. Gordon holds a B.A. degree
from Yale University and an M.B.A. degree from Stanford University.
MR. LEWIS has served as Executive Vice President, International since
October 1996 and previously as Senior Vice President, International from July
1993 to October 1996. From August 1991 to July 1993, he served as President of
Electronic Arts, Ltd., a wholly owned subsidiary of Electronic Arts which
serves the European market from its base in Langley, England. He has also
served as Managing Director of Electronic Arts, Ltd., Director of European
Publishing, and as a Producer and Manager of Product Support and Acquisitions
during his tenure with Electronic Arts. He has been employed by Electronic
Arts since 1984. Mr. Lewis is a graduate of Yale University.
MR. MCKEE joined Electronic Arts in March 1989 and is currently Executive
Vice President and Chief Financial and Administrative Officer. Prior to
October 1996, he served as Senior Vice President and Chief Financial and
Administrative Officer. Mr. McKee holds B.A. and M.B.A. degrees from Stanford
University and is also a Certified Public Accountant.
73
<PAGE>
MR. MATTRICK has served as Executive Vice President, North American Studios,
since October 1996. From July 1991 to October 1996, he served as Senior Vice
President, North American Studios, Vice President of Electronic Arts and
Executive Vice President/General Manager for EA Canada. Mr. Mattrick was
founder and former chairman of Distinctive Software Inc. from 1982 until it
was acquired by Electronic Arts in 1991.
MS. SMITH has served as Executive Vice President, North American Sales since
October 1996. She previously held the position of Senior Vice President of
North American Sales and Distribution from July 1993 to October 1996 and as
Vice President of Sales from 1988 to 1993. Ms. Smith has also served as
Western Regional Sales Manager and National Sales Manager since she joined
Electronic Arts in 1984. Ms. Smith holds a B.S. degree in management and
organizational behavior from the University of San Francisco.
MR. FINEFROCK has served as Senior Vice President, San Mateo Studios since
October 1995. Prior to this he served as Senior Vice President and General
Manager of the EA Entertainment division since March 1994. From February 1992
to March 1994, he served as Vice President of EA Studio Operations and
Development. From July 1989 to February 1992, Mr. Finefrock served as Vice
President of Studio Operations. Mr. Finefrock joined Electronic Arts in April
1983. He holds a B.S. degree in Business Administration from the University of
Redlands.
MS. KENNEDY has been employed by Electronic Arts since February 1990. She
served as Corporate Counsel until March 1991 and is currently Senior Vice
President, General Counsel and Secretary. Prior to October 1996, she served as
Vice President, General Counsel and Secretary. Ms. Kennedy was elected
Secretary in September 1994. Ms. Kennedy is a member of the State Bars of
California and New York and received her B.A. degree from William Smith
College and her Juris Doctor from the State University of New York.
MR. CARBONE has been with Electronic Arts since February 1991 as Vice
President, Finance. He was elected Assistant Secretary of Electronic Arts in
March 1991. Prior to joining Electronic Arts, Mr. Carbone served as Controller
for Magnetic Pulse, Inc., a privately held designer of tools for hydrocarbon
exploration, and was previously employed as Vice President of Finance for
Vicom Systems Inc., a supplier of high-end graphics and imaging systems, from
August 1989 to February 1990. Mr. Carbone holds a B.S. degree in accounting
from King's College and is a Certified Public Accountant.
COMPENSATION OF DIRECTORS
Currently, non-employee Directors of Electronic Arts receive an annual
retainer of $10,000, and a fee of $1,000 and $750 per meeting and telephone
meeting attended, respectively. Committee members receive a fee of $750 and
$500 per Committee meeting and telephone meeting attended, respectively. In
addition, the sum of $1,000 per day may also be paid with the approval of the
Board of Directors to individual Directors for special assignments. In
addition, each non-employee Director also participates in the Directors' Stock
Option Plan. Under the Directors' Stock Option Plan (i) upon initial election
or appointment to the Board of Directors, each non-employee Director is
granted an option to purchase 40,000 shares, or such lesser number of shares
as is determined by dividing $800,000 by the closing price of Electronic Arts'
Common Stock on the date of election or appointment, rounded to the nearest
1,000 shares and (ii) upon re-election to the Board of Directors, each non-
employee Director receives an option to purchase 10,000 shares, or such lesser
number as determined by dividing $200,000 by the closing price of Electronic
Arts' common stock on the date of re-election rounded to the nearest 100
shares; however, any director who received his initial grant after the last
annual meeting of stockholders receives a prorated annual grant to purchase a
number of shares determined as described above, prorated for the portion of
the year during which he was a director. Directors' compensation has not been
increased since the 1993 annual meeting and is based on a survey of 25
technology companies with annual revenues between $200 million and $500
million.
At the last annual meeting, Messrs. Asher, Byron, Case, Kusin and Mott, each
a non-employee director, received 6,700 options at an exercise price of
$30.00. These options were granted in connection with the Directors' re-
election to the Board. Such options vest in equal monthly installments over
fifty months from the grant date.
74
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and noncash compensation for each of
the last three fiscal years awarded to or earned by the five highest paid
executive officers of Electronic Arts whose salary and bonus in fiscal 1997
exceeded $100,000 and includes the Chief Executive Officer. This information
includes the dollar values of base salaries, bonus awards, the number of stock
options granted and certain other compensation, if any, whether paid or
deferred. Electronic Arts does not grant SARs to executive officers and has no
long term compensation benefits other than stock options.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ----------------------------------------
OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) COMPENSATION($) OPTIONS(#) COMPENSATION($)(3)
- --------------------------- ---- ------------ ----------- --------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence F. Probst III.. 1997 $500,186 $322,013 -- 60,000 $ 594
Chairman and Chief 1996 466,321 14,250 -- 180,000(4) 594
Executive Officer 1995 424,123 168,191 -- 100,000 621
Don A. Mattrick......... 1997 286,431 209,808 -- 0 110,146(5)
Executive Vice Presi-
dent, 1996 227,572 152,894 -- 500,000(4) --
North American Studios 1995 167,415 126,104 -- 30,000 --
E. Stanton McKee, Jr.... 1997 300,585 186,704 -- 30,000 594
Executive Vice Presi-
dent, 1996 271,335 59,100 -- 60,000(4) 594
Chief Financial and 1995 258,077 96,465 -- 60,000 621
Administrative Officer
William B. Gordon....... 1997 302,782 163,538 -- 30,000 594
Executive Vice Presi-
dent, 1996 285,936 7,296 -- 60,000(4) 594
Marketing 1995 272,115 95,525 -- 60,000 621
Mark Lewis.............. 1997 281,929 143,418 17,681(6) 35,000 340
Executive Vice Presi-
dent, 1996 243,701 58,100 -- 30,000 297
International 1995 232,207 76,124 75,130(7) 50,000 329
</TABLE>
- --------
(1) Includes deferrals for Section 125 Plan and Section 401(k) Plan.
(2) Represents bonuses earned during the fiscal year.
(3) Represents term life insurance premiums paid by Electronic Arts for the
benefit of executive officers.
(4) Includes 3/8/96 repriced grants: Probst: 90,000; Mattrick: 250,000; McKee:
30,000; Gordon: 30,000; and 9/27/95 grants that were canceled: Probst:
90,000; Mattrick: 250,000; McKee: 30,000; Gordon: 30,000.
(5) Represents $109,849 relocation expenses and $297 Electronic Arts paid term
life insurance premiums.
(6) Represents car allowance.
(7) Represents tax equalization payment from Electronic Arts (UK) Ltd.
75
<PAGE>
STOCK OPTIONS
The following table sets forth information regarding individual grants of
options to purchase Electronic Arts Common Stock during Electronic Arts' 1997
fiscal year to each of the executive officers named in the Summary
Compensation Table above. All such grants were made pursuant to Electronic
Arts' 1991 Stock Option Plan. In accordance with the rules of the Commission,
the table sets forth the hypothetical gains or "option spreads" that would
exist for the options at the end of their respective ten year terms based on
assumed annualized rates of compound stock price appreciation of 5% and 10%
from the dates the options were granted to the end of the respective ten year
option terms. Actual gains, if any, on option exercises are dependent on the
future performance of Electronic Arts Common Stock. The hypothetical gains
shown in this table are not intended to forecast possible future appreciation,
if any, of the stock price.
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION
SECURITIES GRANTED TO EXERCISE FOR OPTION TERM(3)
UNDERLYING EMPLOYEES PRICE PER EXPIRATION -------------------------
OPTIONS GRANTED IN FY1997(1) SHARE DATE 5% 10%
--------------- ------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence F. Probst III.. 60,000 2.75% $29.875(2) 9/03/06 $ 1,127,294 $ 2,856,783
Don A. Mattrick......... 0 -- -- -- -- --
E. Stanton McKee, Jr.... 30,000 1.375 29.875(2) 9/03/06 563,647 1,428,392
William B. Gordon....... 30,000 1.375 29.875(2) 9/03/06 563,647 1,428,392
Mark Lewis.............. 35,000 1.605 29.875(2) 9/03/06 657,587 1,666,457
</TABLE>
- --------
(1) Electronic Arts granted 2,180,589 options to employees in fiscal 1997.
(2) Stock options were granted at an exercise price equal to the closing bid
price of Electronic Arts' common stock on September 3, 1996 on the Nasdaq
National Market. The options became exercisable as to 6% on September 1,
1996 and thereafter at a rate of 2% per month for the next 47 months.
(3) Based on 53,312,232 shares of Electronic Arts' common stock outstanding as
of September 3, 1996 and a closing bid price of common stock that day of
$29.875, the following gains for all stockholders, assuming a ten year
term, would be:
<TABLE>
<CAPTION>
5% STOCK PRICE APPRECIATION 10% STOCK PRICE APPRECIATION
--------------------------- ----------------------------
<S> <C>
1,001,642,315 2,538,358,287
</TABLE>
76
<PAGE>
The following table sets forth certain information concerning the exercise
of stock options during fiscal 1997 by each of the executive officers named in
the Summary Compensation Table above and the number and value at Fiscal Year
end March 27, 1997 of unexercised options held by said individuals.
1997 AGGREGATED OPTION EXERCISES AND MARCH 27, 1997 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN THE MONEY
OPTIONS AT OPTIONS AT
MARCH 27, 1997 MARCH 27, 1997(2)
NUMBER OF --------------- --------------------
SHARES ACQUIRED VALUE(1) EXERCISABLE/ EXERCISABLE/
ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
--------------- ---------- --------------- --------------------
<S> <C> <C> <C> <C>
Lawrence F. Probst III.. 0 $ 0 601,300/178,700 $11,195,500/$759,500
Don A. Mattrick......... 20,000 520,625 137,966/206,034 1,829,898/ 720,102
E. Stanton McKee, Jr.... 0 0 199,500/ 80,500 2,344,050/ 428,450
William B. Gordon....... 155,000 4,340,000 177,300/ 84,700 2,506,675/ 415,200
Mark Lewis.............. 0 0 173,100/ 73,900 2,661,000/ 274,000
</TABLE>
- --------
(1) Market value on the date of exercise, less option exercise price.
(2) Based on the fair market value of Electronic Arts Common Stock at the
close of business on March 27, 1997 ($26.50) less the exercise price of
the options.
EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL AGREEMENTS
Electronic Arts presently has no employment contracts in effect for any
executive officer, and no severance arrangements exist with respect to their
resignation or termination of employment, whether or not in connection with a
change in control or ownership of Electronic Arts excepting that Mr. Mattrick
has a purchase option for property which is affected by a termination of his
employment by Electronic Arts. See "Electronic Arts Certain Transactions"
below. However, outstanding options under the 1991 Stock Option Plan,
including those held by executive officers, may immediately vest in connection
with certain changes in control or ownership of Electronic Arts, unless the
successor company assumes or replaces those options.
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<PAGE>
ELECTRONIC ARTS PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of May 23, 1997, with
respect to the beneficial ownership of Electronic Arts Common Stock by: (i)
each stockholder known by Electronic Arts to be the beneficial owner of more
than 5% of Electronic Arts Common Stock; (ii) each Director of Electronic
Arts; (iii) each executive officer named in the Summary Compensation Table
below; and (iv) all executive officers and directors as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OF CLASS
------------------------------------ ------------------------ --------
<S> <C> <C>
Putnam Investment Management
Company(2)
One Post Office Square
Boston, Massachusetts 02109......... 6,134,175 11.3%
Montag & Caldwell, Inc. (3)
3343 Peachtree Road
1100 Atlanta Financial Center
Atlanta, GA 30326-1450.............. 5,142,196 9.5%
Lawrence F. Probst III (4)........... 638,981 1.2%
E. Stanton McKee, Jr. (5)............ 380,389 *
William B. Gordon (6)................ 244,913 *
Mark Lewis (7)....................... 221,379 *
Don A. Mattrick (8).................. 164,148 *
Timothy Mott (9)........................ 149,490 *
M. Richard Asher (10)................ 131,280 *
William J. Byron (11)................ 67,888 *
Daniel H. Case III (12).............. 28,724 *
Gary M. Kusin(13).................... 13,262 *
All executive officers and directors
as a group (14 persons)(14)......... 2,261,863 4.0%
</TABLE>
- --------
*Less than 1%
(1) Unless otherwise indicated below, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
(2) Certain Putnam Investment managers (together with their parent
corporations, Putnam Investments, Inc. and Marsh & McLennan Companies,
Inc.), are considered "beneficial owners" in the aggregate of the number
of shares, which shares were acquired for investment purposes by such
investment managers for certain of their advisory clients, and the number
of shares shown is as of April 30, 1997 and has been confirmed by Putnam
on May 23, 1997.
(3) The number of shares shown is as of May 7, 1997 and has been confirmed by
Montag & Caldwell, Inc. on May 23, 1997.
(4) Represents 3,981 shares held by Mr. Probst, and 635,000 shares subject to
options exercisable within 60 days of May 23, 1997.
(5) Represents 159,389 shares held by Mr. McKee, and 221,000 shares subject to
options exercisable within 60 days of May 23, 1997.
(6) Represents 49,413 shares held by Mr. Gordon, and 195,500 shares subject to
options exercisable within 60 days of May 23, 1997.
(7) Represents 32,479 shares held by Mr. Lewis, and 188,900 shares subject to
options exercisable within 60 days of May 23, 1997.
78
<PAGE>
(8) Represents 4,115 shares held by Mr. Mattrick, and 160,033 shares subject
to options exercisable within 60 days of May 23, 1997.
(9) Represents 120,164 shares held by Mr. Mott, and 29,326 shares subject to
options exercisable within 60 days of May 23, 1997.
(10) Represents 86,204 shares held by Mr. Asher, and 45,076 shares subject to
options exercisable within 60 days of May 23, 1997.
(11) Represents 25,695 shares held by Mr. Byron, and 42,193 shares subject to
options exercisable within 60 days of May 23, 1997.
(12) Represents 28,724 shares subject to options exercisable within 60 days of
May 23, 1997 granted to Mr. Case.
(13) Represents 13,262 shares subject to options exercisable within 60 days of
May 23, 1997 granted to Mr. Kusin.
(14) Includes 1,752,746 shares subject to options exercisable within 60 days
of May 23, 1997 (including the options described in notes (4) through
(13) above).
79
<PAGE>
ELECTRONIC ARTS CERTAIN TRANSACTIONS
From April 1, 1996 to the present, there have been no transactions involving
more than $60,000 between Electronic Arts and any executive officer, any
director, any security holder known to Electronic Arts to be a 5% beneficial
owner of Electronic Arts Common Stock or any member of the immediate family of
any of the foregoing persons, in which any of the foregoing individuals or
entities had a material interest, except as indicated in "Electronic Arts
Management and Executive Compensation" above and pursuant to Electronic Arts'
Employee Stock Purchase Plan in which all full time employees of Electronic
Arts are eligible to participate, and except as follows:
By Lease Agreement between Electronic Arts and Don A. Mattrick, Executive
Vice President of Electronic Arts ("Mr. Mattrick") dated October 16, 1996 (the
"Lease") in connection with Mr. Mattrick's relocation to California from
Canada, Electronic Arts leased a residence (the "Property") to Mr. Mattrick in
Woodside, California. The Lease is for a three year term (the "Term") and
provides for monthly payments of $7,500 by Mr. Mattrick to Electronic Arts.
Mr. Mattrick is responsible for all maintenance, and Electronic Arts is
responsible for taxes and insurance for the Property. Mr. Mattrick has an
option to purchase the Property (i) at Electronic Arts' acquisition cost plus
the costs of improvements made by Electronic Arts ("Cost") if Mr. Mattrick is
terminated without cause during the Term, or (ii) at the greater of the
average of three independent appraisals or Cost if Mr. Mattrick resigns or is
terminated for cause during the Term.
80
<PAGE>
MAXIS BUSINESS
Maxis is a leading provider of entertainment and learning software products
for personal computers. Maxis seeks to develop innovative products that are
engaging and entertaining while encouraging exploration, learning and
creativity. Maxis is widely recognized for its successful Sim family of
entertainment products, which have sold over seven million copies on all
platforms combined since the introduction of SimCity in 1989. Titles in the
Sim franchise include, among others, SimCity 2000, SimCity, SimAnt, SimTower,
SimCopter and SimIsle.
Maxis believes that its products have been successful in large part due to
the use of innovative product concepts and advanced technologies to create
simulated environments. For example, Maxis' Sim titles allow users to create
and explore their own simulated environments, such as cities, farms, ant
colonies and buildings. Maxis' products are available for multiple PC
platforms including Windows 95, Windows, DOS and Macintosh, as well as for
game consoles. Maxis currently sells its software products in North America
through software distributors, major computer and software retailing
organizations, consumer electronics stores, discount warehouse stores and mail
order companies. Internationally, Maxis sells its products through a
combination of distribution, direct retail and licensing arrangements.
INDUSTRY BACKGROUND
Sales of PCs to home users have increased dramatically in recent years as a
result of declining prices, enhanced functionality and broader software
availability. According to Odyssey Homefront, January 1997, approximately 37%
of United States households have at least one PC. Today's PCs are increasingly
sophisticated, incorporating high-speed processors, high-capacity hard disks,
high-resolution monitors, sound boards, graphics boards and CD-ROM drives,
which together provide significantly enhanced processing, storage, sound and
graphics capabilities. The continued increase in penetration of PCs into the
home creates a large and growing mass market for consumer software and
provides an expanded opportunity for developers and publishers of
sophisticated software to offer a richer, more exciting user experience.
A large market also has developed for entertainment products on game
consoles. The new generation of 32/64-bit game consoles features advanced
technical capabilities that were previously available only on PCs.
Representative game consoles include the PlayStation, Saturn and the N64.
Distribution channels for consumer software products are increasingly
competitive. During the 1980's, consumer software typically was sold through
specialty software stores. Today these products are sold through additional
distribution channels such as consumer electronics stores and mass merchants.
Although the number of distribution channels has increased, competition for
shelf space has intensified because these channels, especially mass merchants,
generally carry only those relatively few products that are expected to sell
in high volumes. In addition, the abundance of new software titles forces
retailers to be highly selective when allocating shelf space.
The proliferation of powerful PCs and game consoles, increased interest in
consumer software and broader, more competitive distribution channels has
changed the environment in which consumer software companies compete. To
succeed in today's market, consumer software companies must offer innovative
products with broad consumer appeal, keep pace with advances in computing
technologies, market their products effectively through traditional and new
distribution channels, and achieve brand name recognition.
PRODUCTS
Maxis promotes products that encourage exploration and creativity, providing
a challenging and enriching experience that appeals to a broad range of
customers. Many Maxis products offer open-ended experiences outside a
traditional "win or lose" game format. Maxis' products are available for
multiple PC platforms, including Windows 95, Windows, DOS and Macintosh, as
well as for game consoles. All newly released products and product versions
are released on CD-ROM.
81
<PAGE>
Maxis' most successful products to date have been the Sim family products,
which take advantage of the simulation technologies that Maxis has developed.
Maxis' new entertainment product releases typically sell at street prices
ranging from $29 to $49. Maxis offers "add-on" products such as SimCity 2000
Urban Renewal Kit to enhance related products. Maxis has also created a
Classic line for some of its earlier releases, such as SimCity, SimEarth,
SimAnt and SimLife, that are sold at street prices ranging from $15 to $19.
During fiscal 1997 and 1996, approximately 46% and 52% respectively, of Maxis'
net revenues were derived from shipments of SimCity/SimCity 2000 and related
add-on products.
SimCity 2000, SimEarth and SimTower are representative of Maxis' products.
In SimCity 2000, the player acts as the mayor of an evolving city. The
player's challenge is to manage the creation of neighborhoods, choose zoning
laws and build infrastructure while confronting disasters, traffic gridlock
and urban decay. The player can design a new city, choose from pre-designed
cities or choose a specific disaster scenario based in various cities. In
SimEarth, the player manages a planet from its birth until its death ten
billion years later and guides the development of life forms from inception as
single-celled microbes to their evolution into a complex civilization. In
SimTower, the player acts as owner and manager of a skyscraper under
development. The player's objective is to construct a balanced and profitable
commercial property by leasing space for many uses, including apartments,
offices, restaurants, shops and theaters.
Maxis desires to leverage its product franchise, product development and
marketing capabilities to offer innovative, open-ended products for younger
audiences. One of the first Maxis-published products for children is SimTown,
which was introduced near the end of calendar year 1994. A more recent
children's product is SimPark, which was released in October 1996. These
products generally sell at street prices around $29. SimTown enables children
to design, build and manage their own neighborhoods, complete with individual
houses, streets, parks, stores, public buildings, pizza parlors and video
arcades. Players can click on buildings and see surprise animations or use the
"cut away" feature to see what is happening inside. SimPark lets nature-loving
youngsters create and run their own nature parks. With over 130 plant and
animal species to choose from, kids learn which flora and fauna fit best in
each ecosystem. For hints, the Identa-Species interface teaches each species'
unique features.
PLATFORMS
Maxis is committed to offering products for the most popular PC hardware
platforms. Maxis was one of the first software developers to introduce
entertainment products for Windows 95, Windows and PowerPC-based computers and
believes this strategy was important in establishing Maxis as one of the
leading publishers of entertainment software for these platforms. Maxis
currently is focusing its product development efforts on CD-ROM products for
Windows 95, but has also provided greater retail flexibility by offering two
or more formats on a single hybrid CD-ROM. Maxis has also introduced titles
for both the Sega and Sony 32-bit game consoles and intends to offer future
products for the PlayStation and N64 platforms.
The following table sets forth the percentage of Maxis' net revenues by
platform and media:
<TABLE>
<CAPTION>
PLATFORM FISCAL 1997 FISCAL 1996 FISCAL 1995
-------- ----------- ----------- -----------
<S> <C> <C> <C>
Windows & Windows 95................... 40% 55% 44%
DOS.................................... -- 18 33
Macintosh.............................. 6 13 22
Hybrid................................. 41 11 --
Game Console/Other..................... 13 3 1
<CAPTION>
MEDIA FISCAL 1997 FISCAL 1996 FISCAL 1995
----- ----------- ----------- -----------
<S> <C> <C> <C>
CD-ROM................................. 81% 75% 30%
Floppy Disk............................ 6 22 69
Game Console/Other..................... 13 3 1
</TABLE>
82
<PAGE>
DISTRIBUTION
Maxis believes its distribution capability is a key competitive factor.
Maxis currently sells its software products through software distributors,
major computer and software retailing organizations, consumer electronics
stores, discount warehouse stores, office supply stores and mail order
companies. In addition, Maxis is seeking to expand its sales through mass
merchants, toy retail chains, book resellers and educational dealers and
directly to end users. Maxis maintains relationships with distributors such as
TechData, Ingram Micro, and Merisel. Maxis also maintains direct relationships
with major retailers, including Best Buy, Babbages, Etc. and Electronics
Boutique. For fiscal 1997, Best Buy accounted for 10% of net revenues. For
fiscal 1996, Ingram Micro, Best Buy and Tech Data accounted for approximately
12%, 11% and 10% of net revenues, respectively. For fiscal 1995, Ingram Micro
accounted for approximately 19% of Maxis' net revenues.
Maxis also distributes products for its affiliate partners. Affiliate
partner products are generally distributed by Maxis under the name of the
affiliate partner who is responsible for the manufacturing, marketing and
customer support of its products. Sales of affiliate partner products during
fiscal 1997 and 1996 accounted for approximately 7% and 10% of Maxis' net
revenues, respectively. In fiscal 1998, Maxis evaluated the market for
affiliate products and recognized that many affiliates do not have the
necessary resources to support their product lines in light of the increasing
competition for retail space. Maxis consequently terminated all but one of its
affiliate partners. While Maxis is contractually obligated to distribute
products for terminated affiliates until December 31, 1997, certain affiliates
may elect to discontinue their business with Maxis sooner. Because of this
change in its affiliate program, Maxis expects a substantially reduced amount
of net revenues from affiliate products in fiscal 1998.
International sales represented approximately 33%, 20% and 15% of Maxis' net
revenues during fiscal 1997, 1996 and 1995, respectively. See Note 11 of the
Maxis Notes to Consolidated Financial Statements. Maxis sells its products
internationally through a combination of distribution, direct retail and
licensing arrangements. Maxis' London office supports direct sales to certain
retailers in the United Kingdom, and sells through distributors in the
United Kingdom, Germany, France and certain other European countries. Maxis'
Tokyo office sells products into Japan through certain distributors. Maxis
licenses its products through foreign distributors in other European countries
and certain countries in Asia. Generally, the licensee is responsible for
product localization and provides all sales, marketing and customer support.
Maxis receives a royalty on its licensed sales. The major localized versions
of Maxis' products include German, Japanese, French, Spanish, Chinese, Korean
and Italian.
Retailers of Maxis' products typically have limited shelf space and
promotional resources. There is intense competition among consumer software
producers for high quality and adequate levels of shelf space and promotional
support from retailers. To the extent that the number of consumer software
products and computer platforms continues to increase, this competition for
shelf space may intensify even further. Maxis' products constitute a
relatively small percentage of a retailer's sales volume, and there can be no
assurance that retailers will continue to purchase Maxis' products or provide
Maxis' products with adequate levels of shelf space and promotional support to
allow Maxis to meet its revenue target.
MARKETING AND SALES
As of March 31, 1997, Maxis' marketing and sales staff included 78 full-time
employees in ten offices located in California, Colorado, Texas,
Massachusetts, New Hampshire, North Carolina, Illinois, Maryland, New Jersey,
London, England and Tokyo, Japan. Maxis expects to increase its marketing and
sales spending in fiscal 1998 to provide greater penetration into the retail
market and increased marketing support for its products.
Maxis believes that marketing both to its distribution channels and to the
end user is critically important to the success of its products and franchise
as a whole. Maxis employs a wide range of sophisticated consumer marketing
techniques including in-store promotions, direct mailings of catalogs and
brochures, advertising in computer and general consumer publications,
distribution of newsletters to target audiences and on-line marketing to
promote sales of its products. Maxis has also utilized high impact and
consistent packaging across
83
<PAGE>
its Sim and other product lines in order to facilitate consumer recognition
and build a brand name. Maxis also maintains a 600,000-name database for use
in communicating product information and promoting product sales. Maxis
monitors and measures the effectiveness of its marketing strategies throughout
the product lifecycle.
PRODUCT DEVELOPMENT AND TECHNOLOGY
As of March 31, 1997, Maxis' research and development staff consisted of 108
full-time employees in California, Texas and Tokyo. Maxis believes that the
extensive experience of its product development team has been an important
competitive factor. Maxis intends to maintain and enhance its technological
capabilities in order to continue to develop innovative products and to
exercise substantial control over its product offerings. To date, the majority
of Maxis' revenues have come from internally developed products. Maxis has
established a library of internally developed proprietary techniques and
continually investigates leading edge technologies from academia and private
industry to create innovative and distinctive products.
Maxis' library of proprietary tools and techniques falls into two major
categories, simulation and display/animation. Maxis' simulation tools model
realistic environments by combining complex mathematical calculations with
large behavioral databases in a real-time fashion. These techniques include
databases that are manipulated by complex matrix math techniques, such as
cellular automata and artificial life/genetic algorithms. Maxis' display and
animation tools present simulated environments in a simple and intuitive
manner. Maxis is currently developing products that are expected to utilize
new 3-D polygon manipulation and texture mapping algorithms to achieve a first
person "3-D Point of View" environment.
Maxis is also developing techniques that will expand the user's ability to
interact with Maxis' products. These technologies will allow users to further
explore the environments they create, link environments from different Maxis
products and enable its products to be used by one or more players on local
and wide area networks.
Maxis believes that its development efforts for the 32-bit PC environment
will facilitate the development of products for the 32/64-bit game console
market. These consoles are being developed by leading hardware companies such
as Sony, Sega and Nintendo. Maxis believes that the operation of its
sophisticated and complex software on game consoles will be enhanced by the
significant improvements over the previous 16-bit game consoles in CPU speeds,
hardware-specific graphic accelerators and sound and memory capabilities.
Maxis uses a combination of in-house and third party designers, artists and
programmers to develop its products. Maxis' primary strategy is to develop its
core products internally and to utilize third party developers to create
conversions of these products for other platforms. However, in certain cases,
Maxis also uses third party developers to expand its ability to introduce
creative and innovative products. When working with third parties, Maxis seeks
to obtain full ownership of marketing and product development rights to all of
the materials produced. All products must undergo extensive editing, testing
and, if necessary, further development prior to release in order to reduce the
likelihood of product defects.
Entertainment products generally experience declining sales after market
introduction. Maxis' continued success depends on the timely introduction of
successful new products to replace declining revenues from older products. The
process of developing software products such as those offered by Maxis is
extremely complex and is expected to become more complex and expensive in the
future as new platforms and technologies are addressed. In the past, Maxis has
experienced significant delays in the introduction of certain new products and
Maxis anticipates that there will be similar delays in developing and
introducing new products in the future.
Maxis must continually anticipate the emergence of, and adapt its products
to, popular platforms for consumer software. When Maxis chooses a platform for
its products, it must make a substantial development investment one to two
years in advance of shipments of products on that platform. If Maxis invests
in a platform that does not achieve significant market penetration, Maxis'
planned revenues from those products will be adversely affected and Maxis may
not recover its development and marketing investment. If Maxis does not
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choose to develop for a platform that achieves significant market success,
Maxis' revenue growth may also be adversely affected. For example, there are
multiple, competing and incompatible formats being introduced in the market
for 32/64-bit game consoles, including the Atari Jaguar, Saturn, PlayStation
and N64. Maxis has developed game console products only for the Saturn and
PlayStation and intends to focus its future development efforts on the
PlayStation and N64 platforms. There can be no assurance that Maxis has
chosen, or in the future will choose, to support the platforms that will
ultimately be successful.
In fiscal 1997, 1996 and 1995, Maxis' research and development expenses were
approximately $12.7 million, $8.4 million and $6.0 million, or 26.2%, 15.2%
and 15.7% of net revenues, respectively (excluding a one-time charge related
to the Cinematronics acquisition in fiscal 1996). During fiscal 1998, Maxis
intends to continue its investment in research and development and therefore
expects these expenses to increase in absolute dollars.
COMPETITION
The market for Maxis' consumer software products is intensely and
increasingly competitive. Maxis believes that the principal competitive
factors in the consumer software industry include quality and originality of
products, price, brand name recognition, marketing capabilities, access to
distribution channels, ease of use and quality of support services. Maxis
believes that it competes favorably with respect to each of these factors.
Maxis competes primarily against other companies offering consumer software
in the entertainment category. Existing consumer software companies may
broaden their product lines or increase their focus to compete more directly
with Maxis' products, and potential new competitors, including computer
hardware or software manufacturers, diversified media companies and book
publishing companies, may enter the consumer software market. The competition
for retail shelf space is also likely to increase due to the proliferation of
consumer software products. Many of Maxis' competitors have greater financial,
technical, marketing, sales and customer support resources, as well as greater
name recognition and better access to consumers, than Maxis. There can be no
assurance that Maxis will respond effectively to market or technological
changes or compete successfully in the future. In addition, increasing
competition in the consumer software market may cause prices to fall, which
may adversely affect Maxis' business, operating results and financial
condition.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Maxis holds copyrights on many of its products, manuals, advertising and
other materials and maintains trademark rights in the Maxis name, the Maxis
and Sim logos, and the names of products published by Maxis. Maxis does not
hold any patents currently, but has three patent applications pending. Maxis
has licensed products to other entities for certain geographic areas or
particular computer platforms and receives royalties on such licenses. Maxis
also pays royalties on certain licensed products which it publishes but which
were created by third parties.
Maxis regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. The Sim prefix featured in Maxis' principal product franchise is not a
registered trademark although Maxis intends to protect its goodwill in the
name vigorously. Maxis does not include in its products any mechanism to
prevent or inhibit unauthorized copying. Unauthorized copying is common within
the software industry, and if a significant amount of unauthorized copying of
Maxis' products were to occur, Maxis' business, operating results and
financial condition could be 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 Maxis in the future with
respect to current or future products. As is common in the industry, from time
to time Maxis receives notices from third parties claiming infringement of
intellectual property rights of such parties. Maxis investigates these claims
and responds as it deems appropriate.
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Although Maxis is not currently the subject of any intellectual property
litigation, there has been substantial litigation regarding copyright, patent,
trademark and other intellectual property rights involving computer software
companies and Maxis has in the past made payments to settle litigation.
Policing unauthorized use of Maxis' products is difficult, and while Maxis is
unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In selling
its products, Maxis relies primarily on "shrink wrap" licenses that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. Further, Maxis enters into transactions in countries
where intellectual property laws are not well developed or are poorly
enforced. Legal protections of Maxis' rights may be ineffective in such
countries, and software developed in such countries may not be protectable in
jurisdictions where protection is ordinarily available. Any claims or
litigation, with or without merit, could be costly and could result in a
diversion of management's attention, which could have a material adverse
effect on Maxis' business, operating results and financial condition. Adverse
determinations in such claims or litigation could also have a material adverse
effect on Maxis' business, operating results and financial condition.
PRODUCTION
For each published product, Maxis prepares master software disks, camera-
ready and electronic user manuals and collateral materials. Maxis' disk
duplication, packaging, printing of manuals, manufacture of related materials,
warehousing, assembly and shipping are performed by outside vendors.
EMPLOYEES
As of March 31, 1997, Maxis employed 236 people on a full-time basis,
including 108 in research and development, 78 in sales and marketing, 12 in
manufacturing and shipping and 38 in finance and administration. 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 Maxis will be successful in attracting and retaining such
personnel. The employees and Maxis are not parties to any collective
bargaining agreements, and Maxis believes that its relations with employees
are good.
PROPERTIES
Maxis' principal office is located in approximately 42,400 square feet of
space in Walnut Creek, California. This facility is leased through November
2002. Maxis also leases small development facilities in San Mateo, California,
Austin, Texas and Tokyo, Japan and marketing and sales offices in London,
England and Tokyo, Japan. Maxis believes that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
LEGAL PROCEEDINGS
From time to time, Maxis is party to various legal proceedings or claims,
either asserted or unasserted, which arise in the ordinary course of business.
Management has reviewed pending legal matters and believes that the resolution
of such matters will not have a significant adverse effect on Maxis' financial
condition or results of operations.
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MAXIS SELECTED SUPPLEMENTAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net revenues........................ $48,262 $55,412 $38,147 $23,332 $13,864
Cost of revenues.................... 16,899 17,897 14,186 8,367 5,323
------- ------- ------- ------- -------
Gross profit........................ 31,363 37,515 23,961 14,965 8,541
------- ------- ------- ------- -------
Operating expenses:
Research and development.......... 12,652 8,416 6,008 3,299 2,440
Acquisition-related charge........ -- 2,232 -- -- --
Sales and marketing............... 16,517 12,843 8,813 5,407 2,591
General and administrative........ 6,747 5,504 4,184 3,225 2,669
------- ------- ------- ------- -------
Total operating expenses............ 35,916 28,995 19,005 11,931 7,700
------- ------- ------- ------- -------
Income (loss) from operations....... (4,553) 8,520 4,956 3,034 841
Interest income..................... 1,640 1,493 226 114 197
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes..... (2,913) 10,013 5,182 3,148 1,038
Provision (benefit) for income
taxes.............................. (1,238) 3,825 1,879 1,021 368
------- ------- ------- ------- -------
Income (loss) from continuing
operations......................... (1,675) 6,188 3,303 2,127 670
Discontinued operations:
Loss from discontinued operations
(net of income tax benefit of
$251 in fiscal 1994 and $203 in
fiscal 1993): ................... -- -- -- (376) (600)
Gain on disposal of discontinued
operations (net of income tax
expense of $173 in fiscal
1995): .......................... -- -- 303 -- --
------- ------- ------- ------- -------
Net income (loss)................... $(1,675) $ 6,188 $ 3,606 $ 1,751 $ 70
======= ======= ======= ======= =======
Per share amounts:
Income (loss) from continuing
operations....................... $ (0.15) $ 0.56 $ 0.37 $ 0.25 $ 0.08
======= ======= ======= ======= =======
Net income (loss)................. $ (0.15) $ 0.56 $ 0.40 $ 0.20 $ 0.01
======= ======= ======= ======= =======
Shares used in per share
calculations....................... 11,180 11,051 8,915 8,621 8,061
======= ======= ======= ======= =======
<CAPTION>
MARCH 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-
term marketable securities......... $38,045 $42,890 $ 8,655 $ 4,932 $ 6,932
Working capital..................... 41,259 45,265 11,457 8,208 6,913
Total assets........................ 69,329 67,300 19,142 14,427 10,168
Redeemable preferred stock.......... -- -- 11,363 10,849 10,335
Stockholders' equity (deficit)...... 58,531 57,234 2,388 (1,239) (2,480)
</TABLE>
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MAXIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net revenues
<TABLE>
<CAPTION>
1997 DECREASE 1996 INCREASE 1995
------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.......................... $48,262 12.9% $55,412 45.3% $38,147
</TABLE>
Net revenues include revenues from sales of software products, less
allowances for returns and promotional discounts. Net revenues also include
licensing revenues and royalty advances, provided Maxis has completed all
significant performance obligations under the terms of the license agreement
and any amounts paid are nonrefundable. Licensing revenues are derived from
licenses to third parties to develop Maxis' products for use on particular
hardware platforms or for certain geographical territories, and from OEM
arrangements.
Although SimCity 2000 remained Maxis' best-selling group of products, Maxis
experienced decreased revenues from these products from fiscal 1996 to fiscal
1997. SimCity 2000 was initially released for the DOS format in October 1993.
SimCity, SimCity 2000 and related add-on products accounted for 46% of net
revenues in fiscal 1997, as compared to 52% in fiscal 1996. During fiscal
1997, Maxis diversified its product offering with titles such as SimCopter,
SimGolf, SimPark and Full Tilt II. However, Maxis' two most significant
releases, SimCopter and SimGolf were shipped in mid-November--relatively late
in the holiday buying season. In addition, Maxis originally had planned to
release the follow-on product to SimCity 2000 in March 1997, but subsequently
deferred the introduction until fiscal 1998. The delayed release of these
products, as well as others, coupled with a difficult retail environment and
intense competition for retail shelf space resulted in a significant shortfall
in anticipated revenues for fiscal 1997.
The increase in net revenues from fiscal 1995 to fiscal 1996 was due
primarily to demand for Maxis' products, especially the Sim family of
products. Maxis' top three selling products for fiscal 1996 were SimCity 2000,
SimTower and SimIsle. SimCity, SimCity 2000 and related add-on products
accounted for 52% of fiscal 1996 net revenues. During fiscal 1995, the same
family of products accounted for 59% of net revenues. SimTown was Maxis' best-
selling product in its learning line, a segment that grew to 18% of net
revenues in fiscal 1996, from 11% in fiscal 1995. During fiscal 1996, Maxis'
product releases included SimCity 2000 Special Edition, SimIsle, SimTower for
Windows, SimTown for Windows and Full Tilt! Pinball, as well as several
affiliate partner products.
International revenues, including foreign licensing, comprised 33% of total
net revenues in fiscal 1997, as compared to 20% in fiscal 1996. The increase
was driven primarily by the March 1997 release of Kick Off '97 in Europe.
During fiscal 1996, international expansion also contributed to overall
revenue growth with international sales reaching 20% of net revenues in fiscal
1996, an increase from 15% of net revenues in fiscal 1995. Major territories
contributing to Maxis' international growth were Japan and Europe. During
fiscal 1998, Maxis expects that international revenues will increase in
absolute dollars. A portion of Maxis' international sales are denominated in
foreign currencies and, accordingly, Maxis is subject to foreign currency
exchange risk.
Affiliate partner sales were 7%, 10%, and 11% of net revenues in fiscal
1997, 1996 and 1995, respectively. Maxis recently evaluated the market for its
affiliate products and recognized that many affiliates do not have the
necessary resources to support their product lines in light of the increasing
competition for retail space. Consequently, Maxis decided to significantly
scale down its affiliate label program, and therefore expects a significantly
reduced revenue contribution from affiliate products in fiscal 1998.
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Cost of revenues
<TABLE>
<CAPTION>
1997 DECREASE 1996 INCREASE 1995
------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cost of revenues................... $16,899 5.6% $17,897 26.2% $14,186
Gross profit....................... 65.0% 67.7% 62.8%
</TABLE>
Maxis' cost of revenues includes all costs of media, manuals, duplication,
packaging materials, assembly and freight. In addition, royalties are included
in cost of revenues. Maxis' gross profit is affected by the mix of sales among
products that are developed or licensed by Maxis and affiliate partner
products that are developed by third parties and distributed by Maxis. Gross
profit and operating expenses are significantly lower for affiliate partner
products because Maxis' services are generally limited to sales, distribution
and related functions.
The decrease in gross profit percentage from fiscal 1996 to fiscal 1997 was
due to several factors. During fiscal 1997, Maxis derived a higher percentage
of net revenues from game console products, due primarily to sales of SimCity
2000 for the PlayStation. The percentage of revenues from game consoles was
13% in fiscal 1997, as compared to 3% in fiscal 1996. Cost of goods sold
generally is higher for game console products than for PC-based Maxis
products. Also, during the third quarter of fiscal 1997, Maxis commenced
shipments in Germany under a new distribution arrangement. The arrangement
requires payment of fixed selling/distribution fees and customer discounts,
generally resulting in lower gross margins. In addition, Maxis experienced
lower average selling prices because of an increase in the percentage of
revenues from sales of Maxis' lower-priced Collector's Series products and
lower average selling prices for some of its older products. Finally, Maxis
included sales premiums in its initial shipments of four Sim-branded titles
released in the third quarter of 1997, thereby increasing the cost of goods
sold for these products.
The increase in gross profit percentage from fiscal 1995 to fiscal 1996 was
primarily due to a greater mix of products with lower royalty rates.
Maxis' gross profit percentage has fluctuated significantly on a quarterly
basis. During fiscal 1997, the gross profit percentage ranged from 55.5% in
the second fiscal quarter to 73.9% in the fourth fiscal quarter. Quarterly
gross profit is affected by the mix of sales among products that are developed
or licensed by Maxis and affiliate partner products that are developed by
third parties and distributed by Maxis, as well as other factors. During
fiscal 1998, Maxis expects gross profit to continue to fluctuate on a
quarterly basis and further expects significantly lower gross profit in the
first and second fiscal quarters relative to the third and fourth fiscal
quarters, due primarily to the expected timing of certain Maxis-published
product releases.
Operating expenses
<TABLE>
<CAPTION>
1997 INCREASE 1996 INCREASE 1995
------- -------- ------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Research and development............ $12,652 50.3% $ 8,416 40.1% $6,008
Percentage of net revenues.......... 26.2% 15.2% 15.7%
Acquisition-related charge.......... -- n/a $ 2,232 100% --
Percentage of net revenues.......... -- 4.0% --
Sales and marketing................. $16,517 28.6% $12,843 45.7% $8,813
Percentage of net revenues.......... 34.2% 23.2% 23.1%
General and administrative.......... $ 6,747 22.6% $ 5,504 31.5% $4,184
Percentage of net revenues.......... 14.0% 9.9% 11.0%
</TABLE>
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel and
equipment costs required to conduct Maxis' development efforts and to fund
third party software development costs. Third party software development costs
include advanced product development payments, which are expensed as paid.
Maxis believes
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that significant investments in research and development are required to
remain competitive and has therefore consistently increased the absolute
amount of spending for research and development. Research and development
expense as a percentage of net revenue increased from fiscal 1996 to fiscal
1997 due primarily to added expenses incurred for the development of new
products and additional personnel and related costs, as well as relatively
lower net revenues in fiscal 1997. Also, operating costs related to
Cinematronics LLC were included in Maxis' results of operations for all of
fiscal 1997. There were no such costs prior to fiscal 1997 because Maxis
acquired Cinematronics LLC in March 1996. Research and development expenses as
a percentage of net revenues for fiscal 1996 as compared to fiscal 1995
remained relatively unchanged. During fiscal 1998, Maxis intends to continue
its investment in research and development and therefore expects these
expenses to increase in absolute dollars.
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on Maxis' product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by Maxis between completion of the working
model and the point at which the product is ready for general release have
been insignificant.
ACQUISITION OF CINEMATRONICS LLC
In March 1996 Maxis acquired for cash Cinematronics LLC, an independent
developer of entertainment software based in Austin, Texas. The business
combination was recorded as a purchase for accounting purposes. In connection
therewith, Maxis recorded a nonrecurring acquisition related charge of
approximately $2.2 million for acquired in-process technology.
SALES AND MARKETING
Sales and marketing expenses, which include customer support services,
increased significantly in absolute dollars primarily due to expansion of
Maxis' domestic and European sales and marketing organizations. Also, during
the first quarter of fiscal 1997, Maxis opened a sales, marketing and
development office in Tokyo, Japan. There were no comparable costs prior to
fiscal 1997. In addition, Maxis increased expenditures for product
advertising, trade shows and marketing programs with customers. Sales and
marketing expenses as a percentage of net revenue increased from fiscal 1996
to fiscal 1997 due to relatively lower net revenues in fiscal 1997. From
fiscal 1995 to fiscal 1996, sales and marketing expenses as a percentage of
revenues remained relatively unchanged.
Competition for retail shelf space is extremely competitive, as well as
increasingly costly. Therefore, in order to continue to distinguish Maxis and
its products in the marketplace, Maxis expects to continue aggressive
marketing and sales programs. Consequently, Maxis expects marketing and sales
expenses to continue to increase in absolute dollars.
GENERAL AND ADMINISTRATIVE
General and administrative expenses have increased in absolute dollars each
year primarily due to increased staffing and related costs necessary to
support Maxis' operations. General and administrative expenses as a percentage
of net revenues increased from fiscal 1996 to fiscal 1997 due to relatively
lower net revenues in fiscal 1997. In addition, Maxis incurred bad debt
expenses related to the bankruptcies of two of its large customers in fiscal
1997. Excluding the bankruptcy-related charges, Maxis expects the level of
general and administrative expenses to increase slightly in absolute dollars
in fiscal 1998, as compared to fiscal 1997.
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Interest income
<TABLE>
<CAPTION>
1997 INCREASE 1996 INCREASE 1995
------ -------- ------ -------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest Income......................... $1,640 9.8% $1,493 560.6% $226
Percentage of Net Revenues.............. 3.4% 2.7% 0.6%
</TABLE>
Interest income increased in absolute dollars and as a percentage of net
revenues due to higher average invested cash balances and relatively lower net
revenues in fiscal 1997. The significant increase in interest income from
fiscal 1995 to fiscal 1996 was due to cash received in Maxis' June 1995
initial public offering.
Provision (benefit) for income taxes
<TABLE>
<CAPTION>
1997 CHANGE 1996 INCREASE 1995
------- ------ ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Provision (Benefit) for Income
Taxes.............................. $(1,238) N/M $3,825 103.6% $1,879
Effective Income Tax Rate........... (42)% 38% 36%
</TABLE>
The year-to-year fluctuations in the provision for income taxes and the
effective income tax rate reflect Maxis' income growth in 1996 and adjustments
to the valuation allowance for deferred tax assets in 1995. The effective
annual income tax benefit rate of 42% in fiscal 1997 is due to the high level
of tax-exempt interest income relative to pretax income. In fiscal year 1998,
Maxis expects its effective annual income tax rate to be approximately 38%.
See Note 5 to Maxis Consolidated Financial Statements.
DISCONTINUED OPERATIONS
During fiscal 1994, Maxis discontinued certain unprofitable operations
related to the development of software for commercial purposes that had been
initiated in fiscal 1993. In connection with the discontinuance of these
activities, Maxis incurred net losses of $600,000 and $376,000 for fiscal 1993
and fiscal 1994, respectively, and a net gain on disposal of the related
assets of $303,000 in fiscal 1995. See Note 9 to Maxis Consolidated Financial
Statements.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (SFAS No. 128), which is required to be adopted on
December 31, 1997. At that time, Maxis will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per share, the
dilutive effect of common stock equivalents will be excluded. The impact is
expected to result in an increase in primary earnings per share of $0.03 for
the fiscal year ended March 31, 1996. There is no impact expected for the
fiscal years ended March 31, 1997 and 1995. The impact of SFAS No. 128 on the
calculation of fully diluted earnings per share for these years is not
expected to be material.
LIQUIDITY AND CAPITAL RESOURCES
On June 1, 1995, Maxis consummated an initial public offering of 3,450,000
shares of common stock, of which 2,450,000 were sold by Maxis. Maxis raised
approximately $35,500,000 net of expenses. As of March 31, 1997, Maxis'
principal sources of liquidity included cash and short-term investments of
$38.0 million and longer-term investments totaling approximately $10.3
million, generally maturing one to two years from purchase. Maxis' cash and
investments are available to meet seasonal working capital requirements.
Seasonally higher revenues during the year-end holiday buying season generally
result in increased accounts receivable and working capital during the fourth
calendar quarter.
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Maxis uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment.
Maxis' operating activities used cash of $0.6 million in fiscal 1997 and
provided cash of $8.1 million and $5.2 million in fiscal 1996 and 1995,
respectively.
In June 1995, Maxis entered into a seven-year lease, commencing in September
1995, for new office space to house its corporate headquarters. The lease
agreement and related amendments provide for monthly payments beginning at
$75,000 and escalating to $96,000 during the term of the lease. Maxis may
shorten the term of the lease to five years and six months in exchange for a
one-time payment equal to three months' rent. During fiscal 1998, Maxis
expects to incur approximately $1.3 million in capital expenditures. From time
to time, Maxis evaluates acquisitions of businesses, products or technologies
that complement the business of Maxis, such as the acquisition of
Cinematronics LLC. Maxis has no present understandings, commitments or
agreements with respect to any material acquisitions of other businesses,
products or technologies. Any such transactions, if consummated, may use a
portion of Maxis' working capital or require the issuance of equity.
Maxis believes that existing working capital and cash from operations will
satisfy its liquidity and capital requirements for at least the next year.
RISK FACTORS
In addition to the Risk Factors related to the Merger and the Electronic
Arts Common Stock to be issued in connection with the Merger set forth above
beginning on page 17, the following are additional Risk Factors related to the
business and operations of Maxis.
Preceding sections of this "Maxis Management's Discussion and Analysis of
Financial Condition and Results of Operations," contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including, but not limited
to, statements regarding Maxis' potential for future success, the revenue
potential of international markets and game consoles, gross profit and net
income on a quarterly basis, the level of affiliated product revenues,
research and development expenses, sales and marketing expenses, general and
administrative expenses, the anticipated effective income tax rate, future
capital expenditures and Maxis' ability to satisfy its liquidity and working
capital requirements of the next year. Actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth below and elsewhere in this Proxy Statement/Prospectus.
Maxis has experienced, and expects to continue to experience, significant
fluctuations in operating results due to a variety of factors, including the
size and rate of growth of the consumer software market, market acceptance of
Maxis' products and those of its competitors, development and promotional
expenses relating to the introduction of new products or new versions of
existing products, seasonality, projected and actual changes in computing
platforms, the timing and success of product introductions, product returns,
changes in pricing policies by Maxis or its competitors, the accuracy of
retailers' forecasts of consumer demand, the timing of orders from major
customers and order cancellations.
Maxis' operating results also may fluctuate significantly due to changes in
product plans or delays in completing and shipping products. For example, in
July 1996 Maxis discontinued the development of The Mindwarp, an action game
scheduled to ship during fiscal 1997. In connection with this decision, Maxis
closed its Utah development office. In mid-November 1996, Maxis released
SimCopter approximately one month later than originally planned. Due to the
importance of the holiday buying season, the delay in shipping SimCopter
resulted in a significant shortfall in Maxis' anticipated revenues for the
quarter and fiscal year. Such risks apply to all of Maxis' products under
development.
SimCity, its successor Sim City 2000 and related add-on products represented
46% of net revenues of Maxis for fiscal 1997 and 52% of net revenues for
fiscal 1996. Maxis originally planned to release the follow on product to
SimCity 2000 in March 1997, but has deferred the introduction until fiscal
1998. Failure to ship SimCity 3000 for the calendar 1997 holiday season would
have a material adverse effect on the operating results of Maxis during the
current fiscal year and, in particular, the third fiscal quarter.
Sales to a limited number of distributors and retailers have constituted and
are anticipated to continue to constitute a substantial majority of Maxis' net
revenues. The loss of, or significant reduction in, sales attributable to any
of Maxis' principal distributors or retailers could materially adversely
affect Maxis' business, operating
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results and financial condition. Distribution and retailing businesses in the
computer industry from time to time have experienced significant fluctuations
in their businesses and there have been a number of business failures among
such entities. For example, NeoStar, a retailer with over 650 retail stores,
filed for Chapter 11 bankruptcy in September 1996. In connection with this
event, Maxis incurred expenses for bad debt of $1,031,000 in fiscal 1997.
Although Maxis performs periodic credit evaluations of its customers, the
insolvency or business failure of any significant distributor or retailer of
Maxis' products could have a material adverse effect on Maxis' business,
operating results and financial condition.
The consumer software business is highly seasonal. Net revenues typically
are significantly higher during the third fiscal quarter, due primarily to the
increased demand for consumer software during the calendar year-end holiday
buying season. Net revenues in other quarters generally are lower and vary
significantly as a result of new product introductions and other factors. The
Company expects its net revenues and operating results to continue to reflect
significant seasonality. There can be no assurance that Maxis will achieve
consistent profitability on a quarterly or annual basis.
Maxis' success depends on the timely introduction of successful new products
to replace declining revenues from older products. In response to competitive
pressures Maxis may take certain pricing and/or marketing actions. Maxis has
in the past, and will likely in the future, reduce the price of older products
and offer promotions to extend the life cycle of its products. Such actions
could materially adversely affect Maxis' business, operating results and
financial condition. Maxis may be required to pay fees in advance or to
guarantee royalties, which may be substantial, to obtain licenses to
intellectual properties from third parties before products incorporating such
properties have been introduced or have achieved market acceptance.
Products generally are shipped as orders are received, and accordingly Maxis
operates with little backlog. Maxis' expense levels are based, in part, on its
expectations regarding future sales and, as a result, operating results would
be disproportionately adversely affected by a decrease in sales or a failure
to meet Maxis' sales expectations. Defective products may result in higher
customer support costs and product returns.
Maxis' gross profit is affected by the mix of sales among products that are
developed or licensed by Maxis and products that are developed by third party
affiliate partners and distributed by Maxis. Gross profit and operating
expenses are significantly lower on affiliate partner products because Maxis'
services with respect to such products generally are limited to sales,
distribution and related functions. Maxis evaluated the market for affiliate
products and, effective in fiscal 1998, decided to scale down its affiliate
program. Maxis consequently terminated all but one of its affiliate partners.
While Maxis is contractually obligated to distribute products for terminated
affiliates until December 31, 1997, certain affiliates may elect to
discontinue their business with Maxis sooner. Because of this change in its
affiliate program, Maxis expects a substantially reduced amount of net
revenues from affiliate products in fiscal 1998.
The market price of Maxis' Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results as well
as other factors, such as announcements of new products by Maxis or its
competitors and changes in financial estimates by securities analysts or other
events. The extreme volatility of the stock market has particularly affected
the market prices of equity securities of many high technology companies and
prices have often been disproportionate to the operating performance of such
companies. Broad market fluctuations, as well as economic conditions in
general and in the software industry in particular, may adversely affect the
market price of Maxis' Common Stock.
The announcement of the Merger may increase the likelihood of a number of
changes to Maxis' business, any of which could have a material adverse effect.
Such changes include, but are not limited to: loss of key management,
development or other personnel; deterioration of customer relationships;
returns of product in excess of normal returns; reductions or cessation of
orders for products, or cancellation of agreements by distributors of the
Maxis product line, certain of which have already communicated their intention
to take all or some of such actions; confusion of potential buyers of Maxis
products; delays in product development and diminution of the Sim brand. If
the Merger were not completed for any reason, Maxis could be materially
adversely affected by such changes, and restoring the Maxis business to its
pre-announcement value could require a substantial period of time, require
significant expenditures or prove impossible. As a result of the factors
described above, the failure to consummate the Merger for any reason could
have a material adverse effect on Maxis' business, operating results,
financial condition and stock trading price.
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MAXIS MANAGEMENT AND EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by Maxis during each of
the last three fiscal years ended March 31, 1997, to the Chief Executive
Officer, the former Chief Executive Officer and the four other most highly
compensated executive officers of Maxis during fiscal 1997 (the "Maxis Named
Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
AWARDS
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION(2)
- --------------------------- ------ -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey B. Braun........ 1997 $225,000 -- -- -- 8,834
Former CEO 1996 225,000 75,600 -- -- 7,733
1995 225,000 36,017 -- -- 11,758
Samuel L. Poole......... 1997 $190,800 $22,896 5,405(3) 80,000 10,486
CEO/President 1996 183,905 50,400 3,906(3) -- 10,414
1995 150,000 24,011 5,019(3) -- 12,871
Fred M. Gerson.......... 1997 159,000 14,310 -- 16,000 10,602
Vice President, Chief 1996 150,000 47,925 -- -- 10,621
Financial Officer 1995 59,135(4) 7,789(4) -- 120,000 3,233
Robin D. Harper......... 1997 130,000 10,998 -- 14,000 4,118
Vice President, 1996 115,560 37,753 -- -- 9,355
Marketing 1995 108,000 17,288 -- 40,000 10,699
Douglas B. Litke........ 1997 121,000 8,712 -- 14,000 10,427
Vice President, 1996 111,300 49,195 -- -- 10,442
Business Development 1995 105,000 29,408 26,672(5) 80,000 5,519
M. Ileana Seander(6).... 1997 124,960 -- -- 14,000 7,532
Former Vice President, 1996 110,000 39,545 -- -- 5,081
Sales 1995 88,573 28,528 -- 80,000 3,507
</TABLE>
- --------
(1) Represents bonus paid in fiscal year 1998 for fiscal 1997 achievements.
(2) Represents matching contributions under Maxis' 401(k) Plan and the full
dollar value of life, medical, dental, vision, and long-term disability
insurance premiums paid by Maxis.
(3) Represents automobile reimbursement.
(4) Fred M. Gerson joined Maxis in November 1994, five months prior to the
beginning of the 1996 fiscal year.
(5) Represents relocation reimbursement.
(6) Ms. Seander left Maxis after Fiscal Year End.
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OPTION/SAR GRANTS IN FISCAL 1997
The following table sets forth further information regarding the individual
grants of stock options pursuant to Maxis' stock option plans during fiscal
1997 to each of the Maxis Named Executive Officers.
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANTS VALUE
------------------------------- ---------------------
NUMBER
OF
SECURITIES % OF TOTAL
UNDER- OPTIONS/
LYING SARS
OPTIONS/ GRANTED TO EXERCISE GRANT
SARS EMPLOYEES OR BASE DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT
NAME (#)(1) YEAR(1) ($/SH)(2) DATE(3) VALUE $(4)
- ---- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Jeffrey B. Braun.......... -- -- -- -- --
Samuel L. Poole........... 80,000 10.4% $11.25 9/13/06 $522,560
Fred M. Gerson............ 16,000 2.1% 11.25 9/13/06 104,512
Robin D. Harper........... 14,000 1.8% 11.25 9/13/06 91,448
Douglas B. Litke.......... 14,000 1.8% 11.25 9/13/06 91,448
M. Ileana Seander......... 14,000 1.8% 11.25 9/13/06 91,448
</TABLE>
- --------
(1) Maxis granted options to purchase 789,606 shares of Maxis Common Stock
during fiscal 1997, of which 769,606 were granted to employees.
(2) The exercise price may be paid in cash, check, promissory note or shares
of the Maxis Common Stock, through a cashless exercise procedure involving
same-day sale of the purchased shares or by any combination of such
methods.
(3) Options may terminate before their expiration date if the optionee's
status as an employee or consultant is terminated or upon optionee's
death.
(4) The Black-Scholes option pricing model was used assuming a dividend yield
of 0, a risk-free interest rate of 6.60%, an expected stock price
volatility factor based upon historical experience of 61%, and an expected
option life based upon an average of seven months of Maxis actual history
and five years historical experience of two other software companies
similar to Maxis. The attribution of values with the Black-Scholes model
to stock option grants requires adoption of certain assumptions, as
described above. While the assumptions are believed to be reasonable, the
reader is cautioned not to infer a forecast of earnings or dividends
either from the model's use or from the values adopted for the model's
assumptions. Any future values realized will ultimately depend upon the
excess of the stock price over the exercise price on the date the option
is exercised.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option holdings for
the fiscal year ended March 31, 1997 with respect to each of the Maxis Named
Executive Officers. None of such options were "in-the-money" at fiscal year
end. No options were exercised by any Maxis Named Executive Officer during
fiscal 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
--------------------------- ---------------------------
EXERCISABLE NON-EXERCISABLE EXERCISABLE NON-EXERCISABLE
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Jeffrey B. Braun........ -- -- -- --
Samuel L. Poole......... -- 80,000 -- $0.00
Fred M. Gerson.......... -- 16,000 -- 0.00
Douglas B. Litke........ -- 14,000 -- 0.00
Robin D. Harper......... -- 14,000 -- 0.00
M. Ileana Seander....... -- 14,000 -- 0.00
</TABLE>
95
<PAGE>
COMPENSATION OF DIRECTORS
Other than reimbursement for certain expenses incurred in connection with
attendance at board and committee meetings, the directors of Maxis did not
receive any cash compensation for services provided as directors during fiscal
1997. Effective April 1, 1997, the Company began compensating outside
directors at a rate of $2,000 per Board meeting attended and $1,000 per Board
conference call attended, with the total compensation not to exceed $20,000.
Outside directors may be granted nonstatutory stock options from time to time
at the discretion of the Board of Directors. Currently, there are three
outside directors of Maxis.
EMPLOYMENT CONTRACTS, TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
Messrs. Braun and Wright have employment agreements with Maxis. The
agreements fix their base compensation, provide for their participation in
such employee benefit plans as Maxis may adopt from time to time for its
management and supervisory personnel generally, and, in certain circumstances,
allow for severance payments of up to six months' salary. The agreements are
automatically renewed annually unless terminated by either party on 90 days'
notice. The agreements also contain confidentiality, proprietary rights and
dispute resolution provisions. In connection with the Merger, each of the
employment agreements have been amended, effective upon the Effective Time of
the Merger. The amendments to the employment agreements to provide that
Messrs. Braun and Wright's titles, duties, base compensation and bonus
compensation will be determined in good faith by Electronic Arts and Mr. Braun
or Mr. Wright, as the case may be, and to provide that the employment
agreements will terminate upon the first anniversary of the Effective Time,
except for the provisions relating to severance payments.
The 1995 Stock Plan and the 1993 Stock Option Plan (collectively, the
"Option Plans") provide that in the event of a merger of Maxis with or into
another corporation, the Board of Directors (or a Committee appointed by the
Board of Directors) may provide for accelerated vesting of all options or
stock purchase rights issued pursuant to the Option Plans. Except as set forth
below, the Maxis Board of Directors has not provided for accelerated vesting
of any options or stock purchase rights in connection with the Merger.
The 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan") provides
that in the event of a merger of Maxis with or into another corporation, the
Board of Directors may shorten the Offering Periods then in progress by
setting a new Exercise Date (as those terms are defined in the Stock Purchase
Plan) and can, after prior notification, automatically exercise all options
held by the participants in the Stock Purchase Plan who fail to withdraw from
an Offering Period. In connection with the Merger, Maxis will set the last
trading date prior to the Effective Time as a new Exercise Date and
automatically exercise all options held by the participants in the Stock
Purchase Plan who fail to withdraw from any Offering Period.
In October 1995, agreements with its executive officers providing for the
acceleration of unvested stock options (i) immediately preceding a change of
control, if such options are not assumed, (ii) immediately preceding a change
of control in the event an officer does not or will not receive upon exercise
of the officer's stock purchase rights under any stock option agreement the
same identical securities and/or other consideration as is received by all
other stockholders in any merger, consolidation, sale, exchange or similar
transaction occurring upon or after such change of control, (iii) immediately
preceding any involuntary termination following a change of control or (iv)
six months following a change of control, provided the officer has remained an
employee of Maxis. An affirmative vote by the Maxis stockholders in favor of
the Merger is considered a change of control for purposes of these agreements,
however, neither such vote nor consummation of the Merger, in and of
themselves, will cause any such acceleration.
In August 1996, Maxis entered into agreements with its non-employee
directors providing for the acceleration of options and restricted stock upon
any change of control transaction occurring after August 12, 1998.
Samuel L. Poole, Maxis' President and Chief Executive Officer, and Fred M.
Gerson, its Chief Financial Officer, have entered into retention arrangements
that provide for a payment of cash in an amount equal to one
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<PAGE>
year's annual total cash compensation on the six-month anniversary of the
Effective Time, if the employee is still employed by Maxis or Electronic Arts
prior to those times (and such payments will accelerate if the employee is
terminated by Maxis or Electronic Arts prior to such times for any reason
other than cause). The early payment will not be made if such employee
voluntarily terminates his employment for any reason other than a
"constructive termination" by Maxis or Electronic Arts.
Certain executive officers of Maxis have entered into retention arrangements
that provide for a payment of cash equal to either three, four and one-half or
six month's salary in the event that they remain with the Company until three
months, four and one-half months or six months, respectively, after the
Merger. If such employee is terminated by Electronic Arts or Maxis, other than
for cause, such employee shall also be entitled to a severance payment upon
such employee's termination with Maxis or Electronic Arts for the period equal
to three, four and one-half or six months, as the case may be, after such
termination. Neither the one time cash payment nor the severance payments will
be made if such employee voluntarily terminates his employment for any reason
other than a "constructive termination" by Maxis or Electronic Arts.
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<PAGE>
MAXIS PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of the Maxis Common
Stock as of May 31, 1997, with respect to (i) each person who is known by
Maxis to own beneficially more than 5% of the outstanding shares of the Maxis
Common Stock, (ii) each director of Maxis, (iii) each of the Maxis Named
Executive Officers and (iv) all directors and executive officers of Maxis as a
group.
<TABLE>
<CAPTION>
SHARES APPROXIMATE
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED
- ------------------------------------ ------------ -----------
<S> <C> <C>
Jeffrey B. Braun (1).................................. 3,209,600 28.5%
2121 N. California Blvd., Suite 600
Walnut Creek, CA 94596
Warburg, Pincus Investors, L.P. (2)................... 1,593,750 14.2
466 Lexington Avenue
New York, NY 10017
William H. Janeway (3)................................ 1,593,750 14.2
Dr. Henry Kressel (3)................................. 1,593,750 14.2
William R. Wright (4)................................. 1,293,400 11.5
2121 N. California Blvd., Suite 600
Walnut Creek, CA 94596
FMR Corp. (5)......................................... 840,000 7.5
82 Devonshire Street
Boston, MA 02109
Samuel L. Poole (6)................................... 228,668 2.0
Avram C. Miller (7)................................... 24,000 *
Charles H. Gaylord Jr. (8)............................ 20,000 *
Eric C.W. Dunn (9).................................... 5,000 *
OTHER OFFICERS
Fred M. Gerson (10) .................................. 122,348 1.1
Robin D. Harper (11).................................. 45,582 *
Douglas B. Litke (12)................................. 58,431 *
M. Ileana Seander..................................... 24,375 *
All Directors and Executive Officers as a Group (16 6,707,013 59.3
Persons) (13)........................................
</TABLE>
- --------
* Less than one percent.
(1) Shares held of record by a trust for the benefit of Mr. Braun.
(2) The sole general partner of Warburg, Pincus, Investors, L.P.
("Investors") is Warburg, Pincus & Co., a New York general partnership
("WP"). E.M. Warburg, Pincus & Co., LLC, a New York limited liability
company ("EMW LLC"), manages Investors. The members of EMW LLC are
substantially the same as the partners of WP. Lionel I. Pincus is the
managing partner of WP and the managing member of EMW LLC and may be
deemed to control both WP and EMW LLC. WP, as the sole general partner of
Investors, has a 20% interest in the profits of Investors. William H.
Janeway and Henry Kressel, directors of Maxis, are Managing Directors and
members of EMW LLC and general partners of WP. As such, Messrs. Janeway
and Kressel may be deemed to have an indirect pecuniary interest (within
the meaning of Rule 16a-1 under the Exchange Act) in an indeterminate
portion of the shares beneficially owned by Investors and WP. All of the
shares indicated as owned by Messrs. Janeway and Kressel are owned
directly by Investors and are included because of Messrs. Janeway and
Kressel's affiliation with Investors. Messrs. Janeway and Kressel
disclaim "beneficial ownership" of these shares within the meaning of
Rule 13d-3 under the Exchange Act.
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<PAGE>
(3) All of the shares indicated as owned by Mr. Janeway and Dr. Kressel are
owned directly by Warburg and are included because of their affiliation
with Warburg. Mr. Janeway and Dr. Kressel disclaim "beneficial
ownership" of these shares within the meaning of Rule 13d-3 under the
Exchange Act.
(4) Includes 1,193,400 shares held of record by a trust for the benefit of
Mr. Wright and his family. Also includes 100,000 shares held by a trust
for the benefit of a child of Mr. Wright, as to which trust Mr. Wright
is not a trustee, and as to which shares Mr. Wright disclaims beneficial
ownership.
(5) Based on a Schedule 13G dated February 14, 1997 and a Report on Form 13F
filed by FMR Corp. ("FMR") with the Commission. FMR, a parent holding
company, has sole voting power with respect to 23,400 shares and sole
dispositive power with respect to all shares indicated.
(6) Includes 1,400 shares held by the children and grandchildren of Mr.
Poole, as to which shares Mr. Poole disclaims beneficial ownership.
(7) Includes 20,000 shares subject to stock option exercisable within 60
days of May 31, 1997.
(8) Shares held of record by a trust for the benefit of Mr. Gaylord.
(9) Represents shares subject to stock option exercisable within 60 days of
May 31, 1997.
(10) Includes 664 shares held by the children of Mr. Gerson, as to which
shares Mr. Gerson disclaims beneficial ownership.
(11) Includes 45,000 shares held of record by a trust for the benefit of Ms.
Harper and her family.
(12) Includes 57,500 shares held of record by a trust for the benefit of Mr.
Litke and his spouse.
(13) Includes 69,500 shares subject to a stock option exercisable within 60
days of May 31, 1997.
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<PAGE>
MAXIS CERTAIN TRANSACTIONS
In November 1994, Maxis loaned $87,000 to Fred M. Gerson, an executive
officer of Maxis, in connection with the exercise of a nonqualified stock
option to purchase 120,000 shares of Maxis Common Stock at $.725 per share,
with interest payable at a rate of 6.24%, compounded annually, and for a term
of three (3) years. The foregoing loan is secured by the Common Stock
purchased by Mr. Gerson. As of March 31, 1996, the total outstanding balance
on Mr. Gerson's note was $89,262. As of March 31, 1997, the total outstanding
balance was $89,246. The loan is currently in good standing with Maxis.
Maxis and William R. Wright, a Director and Co-founder of Maxis, are parties
to three Software Development License Agreements dated November 25, 1991
relating to the development of SimAnt, SimEarth, SimCity and SimCity Terrain
Editor. Mr. Wright has received royalties from Maxis in the aggregate amount
of $213,575 from March 31, 1996 through March 31, 1997, for fiscal year 1997,
pursuant to these agreements.
Maxis believes that the transactions set forth above were made on terms no
less favorable to Maxis than could have been obtained from unaffiliated third
parties. These transactions were, and all future transactions, between Maxis
and its officers, directors, principal stockholders and their affiliates will
be, approved by a majority of the Board of Directors, including a majority of
the independent and disinterested outside directors on the Board of Directors,
and will continue to be on terms no less favorable to Maxis than could be
obtained from unaffiliated third parties.
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<PAGE>
COMPARISON OF CAPITAL STOCK
DESCRIPTION OF ELECTRONIC ARTS CAPITAL STOCK
The authorized capital stock of Electronic Arts consists of 70,000,000
shares of Common Stock, $0.01 par value ("Electronic Arts Common Stock"), and
1,000,000 shares of Preferred Stock, $0.01 par value. The Electronic Arts
Board has unanimously determined that it would be in the best interests of
Electronic Arts and its stockholders to amend Electronic Arts' Certificate of
Incorporation to increase the number of authorized shares of Electronic Arts
Common Stock by 34,000,000 shares to a total of 104,000,000 shares and
currently intends to solicit the approval of such amendment and increase by
the stockholders of Electronic Arts at Electronic Arts' Annual Meeting of
Stockholders to be held on July 31, 1997. Such action is not being taken in
connection with the Merger and is neither necessary for, nor a condition to,
consummation of the Merger.
Electronic Arts Common Stock. As of May 31, 1997, there were approximately
54,243,240 shares of Electronic Arts Common Stock outstanding held of record
by approximately 1,955 stockholders. Electronic Arts Common Stock is listed on
the Nasdaq National Market under the symbol "ERTS." Holders of Electronic Arts
Common Stock are entitled to one vote per share on all matters to be voted
upon by the stockholders. The stockholders do not have the right to cumulate
votes in connection with the election of Directors. The holders of Electronic
Arts Common Stock are entitled to receive ratably such dividends, if any, as
may be declared from time to time by the Electronic Arts Board out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Electronic Arts, the holders of Electronic Arts Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities. The Electronic Arts Common Stock has no preemptive, conversion
rights or other subscription rights and there are no redemption or sinking
fund provisions applicable to the Electronic Arts Common Stock. All
outstanding shares of Electronic Arts Common Stock are fully paid and non-
assessable, and the shares of Electronic Arts Common Stock to be outstanding
upon completion of the Merger will be fully paid and non-assessable.
Electronic Arts Preferred Stock. Electronic Arts has 1,000,000 shares of
Preferred Stock authorized, and no shares are outstanding. The Electronic Arts
Board has the authority to provide for the issuance of Preferred Stock in one
or more series, to establish from time to time the number of shares to be
included in each such series, to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications, limitations
or restrictions thereof, and to increase or decrease the shares of any such
series. Although it presently has no intention to do so, the Electronic Arts
Board, without stockholder approval, can issue Preferred Stock with voting and
conversion rights which could adversely affect the voting power or other
rights of the holders of Electronic Arts Common Stock, potentially delaying,
deferring or preventing a change in control of Electronic Arts.
Electronic Arts Transfer Agent and Registrar. The Transfer Agent and
Registrar for the Electronic Arts Common Stock is Norwest Bank Minnesota,
N.A., 161 North Concord Exchange, P.O. Box 738, So. St. Paul, MN. 55075. Its
phone number is (800) 767-3330.
DESCRIPTION OF MAXIS CAPITAL STOCK
The authorized capital stock of Maxis consists of 40,000,000 shares of
Common Stock, $0.0001 par value ("Maxis Common Stock"), and 5,000,000 shares
of Preferred Stock, $0.0001 par value.
Maxis Common Stock. As of May 31, 1997, there were approximately 11,245,883
shares of Maxis Common Stock outstanding held of record by approximately 142
stockholders. Maxis Common Stock is listed on the Nasdaq National Market under
the symbol "MXIS." Holders of Maxis Common Stock are entitled to one vote per
share on all matters to be voted upon by the stockholders except that, in the
election of Directors, stockholders are entitled to cumulate their votes. See
"Comparison of Rights of Holders of Electronic Arts Common Stock and Holders
of Maxis Common Stock--Election of Directors." The holders of Maxis Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Maxis Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of Maxis,
the holders of Maxis Common Stock are entitled to share ratably in all assets
remaining after payment of
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<PAGE>
liabilities. The Maxis Common Stock has no preemptive, conversion rights or
other subscription rights and there are no redemption or sinking fund
provisions applicable to the Maxis Common Stock. All outstanding shares of
Maxis Common Stock are fully paid and non-assessable.
Maxis Preferred Stock. Maxis has 5,000,000 shares of Preferred Stock
authorized, and no shares are outstanding. The Maxis Board has the authority
to provide for the issuance of Preferred Stock in one or more series, to
determine or alter the powers, preferences and rights and the qualifications,
limitations or restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock, and to increase or decrease the number of shares of
any such series subsequent to the issuance of shares of that series, to
determine the designation of any series and to fix the number of shares of any
series.
Maxis Transfer Agent and Registrar. The Transfer Agent and Registrar for the
Maxis Common Stock is Harris Trust Company of California, 601 South Figueroa,
Suite 4900, Los Angeles, CA 90017. Its phone number is (213) 239-0671.
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COMPARISON OF RIGHTS OF HOLDERS OF ELECTRONIC ARTS COMMON STOCK AND HOLDERS OF
MAXIS COMMON STOCK
After consummation of the Merger, the holders of Maxis Common Stock who
receive Electronic Arts Common Stock under the terms of the Reorganization
Agreement will become stockholders of Electronic Arts. Because Maxis and
Electronic Arts are both Delaware corporations, Maxis stockholders' rights
will continue to be governed by the DGCL. Additionally, as stockholders of
Maxis, their rights are presently governed by the Maxis Certificate of
Incorporation, as amended (the "Maxis Charter") and the Maxis Bylaws. As
stockholders of Electronic Arts, their rights following the consummation of
the Merger will instead be governed by the Electronic Arts Certificate of
Incorporation (the "Electronic Arts Charter") and the Electronic Arts Bylaws.
The following discussion summarizes only the material differences between the
rights of holders of Electronic Arts Common Stock and holders of Maxis Common
Stock under the charters and bylaws of Electronic Arts and Maxis. This summary
does not purport to be complete and is qualified in its entirety by reference
to the Electronic Arts Charter and Bylaws, the Maxis Charter and Bylaws and
the relevant provisions of the DGCL.
Election of Directors. In electing Directors, holders of Maxis Common Stock
are permitted to cumulate their votes such that each share of stock normally
having one vote is entitled to a number of votes equal to the number of
directors to be elected. A shareholder may then cast all such votes for a
single candidate or may allocate them among as many candidates as the
shareholder may choose. Unlike the holders of Maxis Common Stock, the holders
of Electronic Arts Common Stock are not permitted to cumulate votes in
electing directors. Without cumulative voting, the holders of a majority of
the shares present at an annual meeting or any special meeting held to elect
directors have the power to elect all the directors to be elected at that
meeting, and no person can be elected without the support of holders of a
majority of the shares voting at such meeting.
Percentage of Voting Stock; Influence Over Affairs. Upon completion of the
Merger, the percentage ownership of Electronic Arts by each former Maxis
stockholder will be substantially less than such stockholder's current
percentage ownership of Maxis. Accordingly, former Maxis stockholders will
have a significantly smaller voting influence over the affairs of Electronic
Arts than they currently enjoy over the affairs of Maxis.
EXPERTS
The consolidated financial statements of Electronic Arts for the fiscal
years ending March 31, 1997, 1996 and 1995, have been audited by KPMG Peat
Marwick LLP, independent auditors, as set forth in their report included
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The consolidated financial statements of Maxis Inc., at March 31, 1997 and
1996 and for each of the three years in the period ended March 31, 1997,
appearing in this Proxy Statement/Prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report included herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the Electronic Arts Common Stock issuable pursuant to the
Merger will be passed on by Fenwick & West LLP, Palo Alto, California. Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California, is acting as counsel
for Maxis in connection with certain legal matters relating to the Merger.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Electronic Arts Inc.
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996............... F-3
Consolidated Statements of Income for the Years Ended March 31, 1997,
1996 and 1995.......................................................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 1997, 1996 and 1995.......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended March 31,
1997, 1996 and 1995.................................................... F-6
Notes to Consolidated Financial Statements for the Years Ended March 31,
1997, 1996 and 1995.................................................... F-7
Maxis, Inc.
Independent Auditors' Report............................................ F-20
Consolidated Balance Sheets as of March 31, 1997 and 1996............... F-21
Consolidated Statements of Operations for the Years Ended March 31,
1997, 1996 and 1995.................................................... F-22
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended March 31, 1997, 1996 and 1995.................................... F-23
Consolidated Statements of Cash Flows for the Years Ended March 31,
1997, 1996 and 1995.................................................... F-24
Notes to Consolidated Financial Statements for the Years Ended March 31,
1997, 1996 and 1995.................................................... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Electronic Arts Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Electronic
Arts Inc. and subsidiaries as of March 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 1997. These
consolidated financial statements are the responsibility of Electronic Arts
Inc. management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Electronic
Arts Inc. and subsidiaries at March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Palo Alto, California
May 1, 1997, except as to Note
14, which is as of June 4,
1997
F-2
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments.......................... $230,096 $147,983
Marketable securities.................................... 5,548 37,869
Receivables, less allowances of $35,486 and $27,569,
respectively............................................ 95,356 73,075
Inventories.............................................. 15,847 14,704
Prepaid royalties........................................ 10,311 14,519
Deferred income taxes.................................... 3,010 --
Other current assets..................................... 8,875 12,188
-------- --------
Total current assets................................... 369,043 300,338
Property and equipment, net................................ 85,132 70,062
Prepaid royalties.......................................... 9,351 11,030
Long-term investments...................................... 24,200 24,200
Investment in affiliates................................... 25,657 15,952
Other assets............................................... 3,320 2,637
-------- --------
$516,703 $424,219
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 41,560 $ 37,019
Accrued liabilities...................................... 85,870 63,606
-------- --------
Total current liabilities.............................. 127,430 100,625
Minority interest in consolidated joint venture............ 28 1,277
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 1,000,000
shares.................................................. -- --
Common stock $0.01 par value. Authorized 70,000,000
shares; issued and outstanding 54,163,398 and
52,741,572, respectively................................ 542 527
Paid-in capital.......................................... 135,510 108,078
Retained earnings........................................ 252,525 199,523
Unrealized appreciation of investments................... 2,593 16,266
Translation adjustment................................... (1,925) (2,077)
-------- --------
Total stockholders' equity............................. 389,245 322,317
-------- --------
$516,703 $424,219
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net revenues....................................... $624,766 $531,887 $493,346
Cost of goods sold................................. 312,044 273,594 263,357
-------- -------- --------
Gross profit..................................... 312,722 258,293 229,989
Operating expenses:
Marketing and sales.............................. 85,555 72,928 61,951
General and administrative....................... 41,742 32,207 29,308
Research and development......................... 118,103 99,627 73,902
-------- -------- --------
Total operating expenses....................... 245,400 204,762 165,161
-------- -------- --------
Operating income............................... 67,322 53,531 64,828
Interest and other income, net..................... 11,639 6,021 13,250
-------- -------- --------
Income before provision for income taxes and
minority interest............................... 78,961 59,552 78,078
Provision for income taxes......................... 27,241 18,759 24,980
-------- -------- --------
Income before minority interest.................. 51,720 40,793 53,098
Minority interest in consolidated joint venture.... 1,282 (304) 2,620
-------- -------- --------
Net income..................................... $ 53,002 $ 40,489 $ 55,718
======== ======== ========
Net income per share............................... $ 0.96 $ 0.75 $ 1.07
======== ======== ========
Number of shares used in computation............... 55,483 54,163 52,297
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
------------- PAID-IN RETAINED APPRECIATION TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS OF INVESTMENTS ADJUSTMENT TOTAL
------ ------ -------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1994................... 49,974 $477 $ 65,677 $108,878 $ 0 $(2,854) $172,178
Proceeds from sales of
shares through
employee stock plans
and other plans....... 954 10 7,210 7,220
Tax benefit related to
stock options......... 4,242 4,242
Adjustment effect of
poolings on prior
periods............... 22 15 (1,698) (1,661)
Adjustment for change
in Kingsoft, GmbH
fiscal year end....... (1,386) (1,386)
Unrealized (loss) on
investments........... (1,206) (1,206)
Translation adjust-
ment.................. 1,968 1,968
Net income............. 55,718 55,718
------ ---- -------- -------- -------- ------- --------
Balances at March 31,
1995................... 50,928 509 77,144 161,512 (1,206) (886) 237,073
Proceeds from sales of
shares through
employee stock plans
and other plans....... 1,814 17 21,661 21,678
Tax benefit related to
stock options......... 9,170 9,170
Adjustment effect of
immaterial pooling.... 1 103 (177) (73)
Adjustment for change
in Manley & Associates
fiscal year end....... (2,301) (2,301)
Unrealized gain on in-
vestments............. 17,472 17,472
Translation adjust-
ment.................. (1,191) (1,191)
Net income............. 40,489 40,489
------ ---- -------- -------- -------- ------- --------
Balances at March 31,
1996................... 52,742 527 108,078 199,523 16,266 (2,077) 322,317
Proceeds from sales of
shares through
employee stock plans
and other plans....... 1,421 15 20,190 20,205
Tax benefit related to
stock options......... 7,242 7,242
Unrealized (loss) on
investments........... (13,673) (13,673)
Translation adjust-
ment.................. 152 152
Net income............. 53,002 53,002
------ ---- -------- -------- -------- ------- --------
Balances at March 31,
1997................... 54,163 $542 $135,510 $252,525 $ 2,593 $(1,925) $389,245
====== ==== ======== ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 53,002 $ 40,489 $ 55,718
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest in consolidated joint ven-
ture......................................... (1,282) 304 (2,620)
Depreciation and amortization................. 21,461 15,859 10,763
Loss (gain) on sale of fixed assets........... 164 (2,044) 76
Equity in net loss of affiliates.............. 1,566 1,746 --
Gain on sale of marketable securities......... (8,393) (4,879) --
Adjustment for change in fiscal year end for
pooled subsidiaries.......................... -- (2,301) (1,386)
Change in assets and liabilities:
Receivables................................. (22,281) (16,686) 8,726
Inventories................................. (1,143) (2,346) (2,887)
Prepaid royalties........................... 5,887 (10,598) (5,120)
Other assets................................ 1,780 (4,214) (11,306)
Accounts payable............................ 4,541 2,772 (1,605)
Accrued liabilities......................... 24,765 (12,645) 6,635
Deferred income taxes....................... 574 3,219 6,803
-------- -------- --------
Net cash provided by operating activi-
ties..................................... 80,641 8,676 63,797
-------- -------- --------
INVESTING ACTIVITIES
Proceeds from sale of property and equipment.. 171 4,221 527
Proceeds from sale of marketable securities... 21,152 5,273 --
Capital expenditures.......................... (36,212) (56,830) (16,503)
Investment in affiliates...................... (11,271) (6,387) (472)
Short-term investments........................ (62,132) (11,655) 5,700
Long-term investments......................... -- (10,000) (14,200)
Acquisition of DROsoft........................ -- -- (1,397)
Acquisition of Vision Software................ -- (500) --
Adjustment for effect of poolings on prior
periods...................................... -- (73) (1,661)
-------- -------- --------
Net cash used in investing activities..... (88,292) (75,951) (28,006)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from sales of shares through employee
stock plans and other plans.................... 20,205 21,678 7,220
Tax benefit from stock option exercises......... 7,242 9,170 4,242
-------- -------- --------
Net cash provided by financing activi-
ties..................................... 27,447 30,848 11,462
-------- -------- --------
Translation adjustment.......................... 152 (1,191) 1,968
Minority interest on translation adjustment..... 33 (175) 282
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.................................... 19,981 (37,793) 49,503
Beginning cash and cash equivalents............. 105,628 143,421 93,918
-------- -------- --------
Ending cash and cash equivalents................ 125,609 105,628 143,421
Short-term investments.......................... 104,487 42,355 30,700
-------- -------- --------
Ending cash and short-term investments.......... $230,096 $147,983 $174,121
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for income taxes.... $ 14,889 $ 9,570 $ 6,390
======== ======== ========
NON-CASH INVESTING ACTIVITIES:
Increase (decline) unrealized appreciation of
investments.................................. $(19,562) $ 24,952 $ (1,206)
Transfer of assets at net book value to affil-
iated company................................ -- -- 6,003
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Electronic Arts Inc. and its wholly-owned subsidiaries (the "Company") and its
majority owned subsidiary Electronic Arts Victor Inc. All significant
intercompany balances and transactions have been eliminated in consolidation.
A summary of the significant accounting policies applied in the preparation
of the accompanying consolidated financial statements of the Company follows:
(a) Fiscal Year
The Company's fiscal year is reported on a 52/53-week period that ends on
the Saturday nearest to March 31 in each year. The results of operations for
fiscal 1997 and 1996 contain 52 and 53 weeks, respectively. Since the results
of an additional week are not material, and for clarity of presentation
herein, all fiscal periods are treated as ending on a calendar month end.
(b) Revenue Recognition
Product Sales: Revenue is recognized when the product is shipped. Subject to
certain limitations, the Company permits customers to obtain exchanges within
certain specified periods and provides price protection on certain unsold
merchandise. Revenue is reflected net of an allowance for returns and price
protection.
Software Licenses: For those agreements which provide the customers the
right to multiple copies in exchange for guaranteed amounts, revenue is
recognized at delivery of the product master or the first copy. Per copy
royalties on sales that exceed the guarantee are recognized as earned.
Revenue from the licensing of software was $22,095,000, $27,018,000, and
$21,001,000 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
(c) Cash and Investments
Cash equivalents consist of highly liquid investments with insignificant
rate risk and with maturities of three months or less at the date of purchase.
Short-term investments include securities with maturities greater than three
months and less than one year, except for certain investments with stated
maturities greater than one year. Long-term investments consist of securities
with maturities greater than one year.
The Company accounts for investments under Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, ("SFAS 115"). The Company's policy is to protect the value of its
investment portfolio and to minimize principal risk by earning returns based
on current interest rates. The Company has classified short-term investments
as "available-for-sale" and applicable investments are stated at fair value
which approximates cost. The cost of securities sold is based upon the
specific identification method.
(d) Prepaid Royalties
Prepaid royalties represent prepayments made to independent software
developers under development agreements. Prepaid royalties are expensed at the
contractual royalty rate as cost of goods sold based on actual net product
sales. Management evaluates the future realization of prepaid royalties
quarterly, and charges to
F-7
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
research and development expense any amounts that management deems unlikely to
be amortized at the contract royalty rate through product sales. Royalty
advances are classified as current and noncurrent assets based upon estimated
net product sales within the next year.
(e) Software Development Costs
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater. No
software development costs have been capitalized to date as the impact on the
financial statements for all periods presented is immaterial.
(f) Inventories
Inventories are stated at the lower of cost or market. Inventories at March
31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and work in process....................... $ 3,706 $ 2,160
Finished goods.......................................... 12,141 12,544
------- -------
$15,847 $14,704
======= =======
</TABLE>
(g) Outside Production Costs
The Company defers the outside production costs of the film content of its
products. Such costs are expensed as cost of goods sold based on actual net
product sales. Film costs deferred as of March 31, 1997 and 1996 were $926,000
and $5,500,000, respectively.
(h) Advertising costs
The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns which are deferred and
charged to expense at the first run of the ad. Cooperative advertising with
distributors and retailers is accrued when revenue is recognized. Cooperative
advertising credits are reimbursed when qualifying claims are submitted. For
the fiscal years ended March 31, 1997, 1996 and 1995, advertising expenses
totaled approximately $34,263,000, $28,437,000 and $28,065,000, respectively.
(i) Property and Equipment
Property and equipment are stated at cost. Depreciation of furniture and
equipment is computed using the declining balance method over the estimated
useful lives of the respective assets, which range from three to seven years.
Depreciation on new management information systems is computed using the
straight-line method over the estimated useful lives of the respective assets,
which range from four to seven years. Buildings are being depreciated using
the straight line method over 20 years. Amortization of leasehold improvements
is computed using the declining balance method over the lesser of the lease
terms or the estimated useful lives of the improvements.
F-8
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
(j) Intangible Assets
Intangible assets net of amortization at March 31, 1997 and 1996 of
$1,115,000, and $1,752,000, respectively, are included in other current and
noncurrent assets and include costs of obtaining product technology and
noncompete covenants which are amortized using the straight-line method over
the lesser of their estimated useful lives or the agreement terms, typically
no more than five years. Intangibles also include goodwill resulting from the
purchase of DROSoft (now known as EA Spain) in November 1994 and Vision
Software in March 1996. Amortization expense for fiscal years ended March 31,
1997, 1996 and 1995 was $654,000, $740,000, and $337,000, respectively.
(k) Income Taxes
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the impact of temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes.
(l) Foreign Currency Translation
For each of the Company's foreign subsidiaries the functional currency is
its local currency. Assets and liabilities of foreign operations are
translated into U.S. dollars using current exchange rates, and revenues and
expenses are translated into U.S. dollars using average exchange rates. The
effects of foreign currency translation adjustments are deferred and included
as a component of stockholders' equity.
Foreign currency transaction gains and losses are a result of the effect of
exchange rate changes on transactions denominated in currencies other than the
functional currency. Included in interest and other income in the statements
of income are foreign currency transaction gains (losses) of ($1,024,000),
$433,000, and $785,000, for the fiscal years ended March 31, 1997, 1996 and
1995, respectively.
(m) Net Income Per Share
Net income per share is based on the weighted average number of common stock
and common stock equivalents from stock options outstanding during the period.
There is no significant difference between primary and fully diluted earnings
per share.
(n) Employee Benefits
The Company has a 401(k) Plan covering substantially all of its U.S.
employees. The 401(k) Plan permits the Company to make discretionary
contributions to employees' accounts based on the Company's financial
performance. The Company contributed $405,000 and $279,000 to the Plan in
fiscal 1997 and fiscal 1996, respectively. No such contributions were made
during fiscal year 1995.
(o) Stock-based Compensation
The Company accounts for stock-based awards to employees using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
(p) Impact of Recently Issued Accounting Standards
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121") effective
F-9
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
for the fiscal year ended March 31, 1997. SFAS 121 requires that impairment
losses be recorded on long-lived assets and certain identifiable intangibles
when indicators of impairment are present and the undiscounted cash flows
estimated by those assets are less than the assets' carrying amounts. Adoption
of this standard did not have a material impact on the Company's consolidated
financial statements.
The Company adopted SFAS No.123, "Accounting for Stock-Based Compensation"
("SFAS 123") effective for the fiscal year ended March 31, 1997. SFAS 123
establishes a fair value method of accounting for stock-based employee
compensation plans. As allowed under provisions of SFAS 123, the Company has
chosen to continue the intrinsic value based method for stock-based employee
compensation plans and provide pro forma disclosures of net income and
earnings per share as if the accounting provisions of SFAS 123 had been
adopted. As the Company has elected to adopt only disclosure requirements of
SFAS 123, such adoption had no effect on the Company's consolidated net income
or cash flows.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 requires dual presentation of basic
earnings per share ("EPS") and diluted EPS on the face of all statements of
earnings issued after December 15, 1997, for all entities with complex capital
structures.
Basic EPS is computed as net earnings 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 including stock options, restricted stock awards, warrants,
and other convertible securities using the treasury stock method. The Company
does not anticipate the effect of the provisions of this new standard on
earnings per share to be material.
(q) 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. Such estimates include provisions for doubtful accounts,
sales returns and allowances, warranty provisions, and estimates regarding the
recoverability of prepaid royalty advances and inventory. Actual results could
differ from those estimates.
(r) Reclassifications
Certain amounts have been reclassified to conform to fiscal 1997
presentation.
2. FINANCIAL INSTRUMENTS
(a) Cash and Investments
<TABLE>
<CAPTION>
MARCH 31,
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash and equivalents:
Cash..................................................... $58,564 $28,078
Municipal securities..................................... 31,940 13,885
Money market funds....................................... 35,105 37,843
Commercial paper......................................... -- 25,822
------- -------
Cash and equivalents..................................... 125,609 105,628
------- -------
</TABLE>
F-10
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
MARCH 31,
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments:
Commercial paper............................. 17,315 2,805
Municipal securities......................... 9,163 5,600
Money market preferreds...................... 78,009 33,950
-------- --------
Short-term investments....................... 104,487 42,355
-------- --------
Cash and short-term investments................ $230,096 $147,983
======== ========
Long-term investments.......................... $ 24,200 $ 24,200
======== ========
</TABLE>
Long-term investments are in the form of commercial notes with maturities of
five to eight years secured by U.S. Treasury Notes. Such investments enable
the Company to take advantage of certain tax incentives in its Puerto Rico
operation and are treated as held to maturity for financial reporting
purposes.
(b) Marketable Securities
Marketable securities are comprised of equity securities. The Company has
accounted for investments in equity securities as "available-for-sale" and has
stated applicable investments at fair value, with net unrealized appreciation
reported as a separate component of stockholders' equity. Marketable
securities had an aggregate cost of $1,559,000 and $14,123,000 at March 31,
1997 and 1996, respectively. At March 31, 1997, marketable securities included
gross unrealized gains of $4,174,000 and gross unrealized losses of $185,000.
At March 31, 1996 marketable securities included gross unrealized gains of
$27,334,000 and gross unrealized losses of $3,588,000.
At March 31, 1997, marketable securities included the Company's approximate
7% ownership interest in The 3DO Company ("3DO"). During fiscal 1997, the
Company sold 1,220,000 shares of 3DO reducing its ownership interest to
2,013,668 shares. At March 31, 1996, the Company's ownership interest was
approximately 12% of the outstanding shares of 3DO.
For the fiscal years ended March 31, 1997 and 1996, the fair value of 3DO
stock and other securities sold was $21,152,000 and $9,783,000, respectively.
The gross realized gains from these sales totaled $8,393,000 and $9,112,000
for fiscal 1997 and 1996, respectively. There were no gains or losses from
sales of marketable securities during 1995. The gain on sale of investments is
based on the specific identification method.
(c) Foreign Currency Forward Exchange Contracts
The Company utilizes foreign currency forward exchange contracts to hedge
foreign currency market exposures of underlying assets, liabilities and other
obligations. The Company does not use forward exchange contracts for
speculative or trading purposes. The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions. The criteria the Company uses for designating an
instrument as a hedge include the instrument's effectiveness in risk reduction
and one-to-one matching of forward exchange contracts to underlying
transactions. Gains and losses on currency forward contracts that are
designated and effective as hedges of anticipated transactions, for which a
firm commitment has been attained, are deferred and recognized in income in
the same period that the underlying transactions are settled. Gains and losses
on currency forward contracts that are designated and effective as hedges of
existing
F-11
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
transactions are recognized in income in the same period as losses and gains
on the underlying transactions are recognized and generally offset. Gains and
losses on any instruments not meeting the above criteria would be recognized
in income in the current period. The Company transacts business in various
foreign currencies, including European currencies. During fiscal 1997, the
Company established hedging programs to protect against exposure on certain
intercompany receivables that are denominated in foreign currencies through
the use of foreign currency forward exchange contracts. At March 31, 1997, the
Company had foreign exchange contracts, all having maturities of 90 days or
less, to purchase and sell approximately $27,549,000 in foreign currencies,
primarily German Deutschmarks and British Pounds.
The difference between the face value and market value of these contracts is
not significant. The counterparties to these contracts are substantial and
credit worthy multinational commercial banks. The risks of counterparty
nonperformance associated with these contracts are not considered to be
material.
3. COMMITMENTS
LEASE OBLIGATIONS
The Company leases its current facilities and certain equipment under non-
cancelable operating lease agreements. The Company is required to pay property
taxes, insurance and normal maintenance costs for certain of its facilities
and will be required to pay any increases over the base year of these expenses
on the remainder of the Company's facilities.
In February 1995, the Company entered into a master operating lease for land
and a building to be constructed in Redwood City, California. The initial term
of the lease is for a period of three years from the earlier of the date of
completion of construction or December 1998. Monthly lease payments are based
upon the London Interbank Offered Rate. The Company has the option to purchase
the property for the unamortized financed balance at any time after the non-
cancelable lease term, or it may terminate the lease at any time after the
non-cancelable term by arranging a third party sale or by making a termination
payment. Should the Company elect to terminate the lease, it will guarantee a
residual value of up to 85% of the unamortized value of the property. As part
of the agreement, the Company must also comply with certain financial
covenants.
Total future minimum lease commitments as of March 31, 1997 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year Ending:
1998...................................................... $11,110
1999...................................................... 7,647
2000...................................................... 2,593
2001...................................................... 1,570
2002...................................................... 1,132
Thereafter................................................ 9,509
-------
$33,561
=======
</TABLE>
Total rent expense for all operating leases was $10,158,000, $7,631,000, and
$6,451,000, for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
F-12
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
The current portion of deferred rent of $599,000 and $823,000 at March 31,
1997 and 1996, respectively, represents the obligation accrued for rent,
calculated on the straight-line method over the lease term and is included in
accrued liabilities.
4. CONCENTRATION OF CREDIT RISK
The Company extends credit to various companies in the retail and mass
merchandising industry. Collection of trade receivables 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 credit losses are maintained.
The Company had no sales to any one customer in excess of 10% of total net
revenues for the fiscal years ended March 31, 1997, 1996 and 1995.
Short-term investments are placed with high credit-quality financial
institutions or in short-duration high quality securities. The Company limits
the amount of credit exposure in any one institution or type of investment
instrument.
5. LITIGATION
The Company is subject to pending claims and litigation. Management, after
review and consultation with counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon the
consolidated financial condition of the Company.
6. PREFERRED STOCK
At March 31, 1997 and 1996, the Company had 1,000,000 shares of Preferred
Stock authorized but unissued. The rights, preferences, and restrictions of
the Preferred Stock may be designated by the Board of Directors without
further action by the Company's stockholders.
7. STOCK PLANS
(a) Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan whereby eligible employees
may authorize payroll deductions of up to 10% of their compensation to
purchase shares at 85% of the lower of the fair market value of the Common
Stock on the date of commencement of the offering or on the last day of the
six-month purchase period. The Plan commenced in September 1991. In fiscal
1997, 184,596 shares were purchased by the Company and distributed to
employees at prices ranging from $21.25 to $25.18. In fiscal 1996, 154,516
shares were purchased by the Company and distributed to employees at prices
ranging from $15.09 to $21.57. In fiscal 1995, 169,187 shares were purchased
by the Company and distributed to employees at prices ranging from $15.09 to
$15.51 per share. The weighted average fair value of the fiscal 1997 and
fiscal 1996 awards was $10.413 and $8.813, respectively. At March 1997, the
Company had 228,638 shares of its Common Stock reserved for future issuance
under the Plan.
(b) Stock Option Plans
The Company's 1991 Stock Option Plan and Directors' Plan ("Option Plans")
provide stock options for employees, officers and independent contractors, and
for directors, respectively. Pursuant to these Option Plans,
F-13
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
the Board of Directors may grant non-qualified and incentive stock options to
employees and officers and non-qualified options to independent contractors,
and directors, at not less than the fair market value on the date of grant.
The options generally expire ten years from the date of grant and are
generally exercisable in monthly increments over 50 months.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share had the Company adopted the fair value method as of the beginning of
fiscal 1996. Under SFAS 123, the fair value of stock-based awards to employees
is calculated through the use of options pricing models. These models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which characteristics significantly
differ from those of the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted-average
assumptions used for grants made in 1997 and 1996 under the stock plans: risk-
free interest rates of 5.48% to 6.36% in 1997 and 5.12% to 6.25% in 1996;
expected volatility of 58% for both years; expected lives in both years of
2.42 years under the Option Plans and one year for the Employee Stock Purchase
Plan. No dividends are assumed in the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized when they occur. Had compensation cost for the Company's stock-
based plans been determined on the fair value at the grant date for awards
consistent with the method of SFAS 123, the Company's pro forma net income and
net income per share for fiscal 1997 and 1996 would have been $39,805,000
($0.73 per share) and $33,959,000 ($0.63 per share) in fiscal 1997 and 1996,
respectively.
Because SFAS 123 is applicable only to options granted subsequent to March
31, 1995, the impact of non-vested stock options granted prior to this date
has been excluded from the pro forma calculation. Accordingly, the fiscal 1997
and 1996 pro forma adjustments are not indicative of future period pro forma
adjustments as the pro forma effect will not be fully reflected until
subsequent years.
Additional information regarding options outstanding as of March 31, 1997 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE PRICES SHARES LIFE PRICE SHARES PRICE
- ------------------------ --------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.720 - $ 4.469......... 841,483 3.94 $ 3.30 841,282 $ 3.30
6.250 - 13.500......... 1,084,505 6.50 13.18 775,466 13.07
13.625 - 18.000......... 1,182,384 6.20 16.06 948,389 15.71
18.125 - 23.000......... 528,172 7.81 19.77 228,314 19.81
23.500 - 23.500......... 1,422,608 8.94 23.50 301,440 23.50
23.750 - 29.750......... 719,361 8.28 26.13 270,558 26.56
29.875 - 29.875......... 1,263,984 9.43 29.88 149,983 29.88
30.000 - 38.625......... 900,637 8.83 32.99 173,306 32.68
--------- ---- ------ ----------- --------
$ 0.720 - $38.625......... 7,943,134 7.60 $20.92 3,688,738 $ 15.38
========= ==== ====== =========== ========
</TABLE>
F-14
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
The following summarizes the activity under the Company's stock option plans
during the fiscal years ended March 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at March 31, 1994...................... 6,580,797 $13.63
Granted...................................... 3,173,931 16.88
Canceled..................................... (1,595,618) 25.36
Exercised.................................... (810,673) 6.15
---------- ------
Balance at March 31, 1995 (3,497,818 shares
were exercisable at a weighted average price
of $10.00).................................... 7,348,437 13.31
Granted...................................... 4,312,249 28.25
Canceled..................................... (2,321,172) 30.18
Exercised.................................... (1,658,953) 11.30
---------- ------
Balance at March 31, 1996 (3,301,613 shares
were exercisable at a weighted average price
of $11.84).................................... 7,680,561 17.03
Granted...................................... 2,214,089 30.55
Canceled..................................... (714,286) 22.77
Exercised.................................... (1,237,230) 12.85
---------- ------
Balance at March 31, 1997...................... 7,943,134 $20.92
========== ======
</TABLE>
8. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Computer equipment....................................... $87,077 $62,858
Buildings................................................ 21,590 18,921
Office equipment, furniture and fixtures................. 15,389 11,765
Leasehold improvements................................... 8,931 7,732
Land..................................................... 6,475 4,766
Warehouse equipment and other............................ 3,127 2,770
------- -------
142,589 108,812
Less accumulated depreciation and amortization........... (57,457) (38,750)
======= =======
$85,132 $70,062
======= =======
</TABLE>
Depreciation and amortization expenses associated with property and
equipment amounted to $20,807,000, $15,119,000, and $9,339,000, for the fiscal
years ended March 31, 1997, 1996 and 1995, respectively.
F-15
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
9. ACCRUED LIABILITIES
Accrued liabilities at March 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued expenses.......................................... $19,105 $18,203
Accrued royalties......................................... 31,841 16,889
Accrued compensation and benefits......................... 18,279 11,480
Accrued income taxes...................................... 12,611 10,477
Deferred income taxes..................................... 3,377 5,878
Deferred revenue.......................................... 657 679
------- -------
$85,870 $63,606
======= =======
</TABLE>
10. JOINT VENTURES
(a) Electronic Arts Victor Inc.
The Company has a majority interest in a joint venture corporation,
Electronic Arts Victor Inc. ("EAV"), for the development and distribution of
entertainment software products in Japan as well as certain Asian countries.
EAV is sixty-five percent owned by the Company and thirty-five percent owned
by Victor Entertainment Industries, Inc. ("VEI"), (formerly Victor Musical
Industries, Inc.) a wholly owned subsidiary of Victor Company of Japan,
Limited. The Company has consolidated 100% of the assets, liabilities and
results of operations for EAV. VEI's 35% interest in EAV and the profits or
losses therefrom has been reflected as "Minority interest in consolidated
joint venture" on the Company's Consolidated Financial Statements.
(b) Creative Wonders, Inc.
In December 1994, the Company and Capital Cities/ABC, Inc. formed Creative
Wonders, Inc. (formerly ABC/EA Home Software, Inc.), a joint venture company,
to publish children's edutainment and interactive entertainment multimedia
titles as well as reference products for personal computers and new generation
entertainment machines. Each company has a 50% ownership interest in the joint
venture company. The investment is accounted for under the equity method. The
Company distributes interactive titles sold by the joint venture into the
retail channel.
11. INCOME TAXES
The Company's pretax income from operations for the fiscal years ended March
31, 1997, 1996 and 1995 consisted of the following components:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic........................................... $30,527 $14,722 $41,330
Foreign............................................ 48,434 44,830 36,748
------- ------- -------
Total pretax income............................ $78,961 $59,552 $78,078
======= ======= =======
</TABLE>
F-16
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
Income tax expense (benefit) for the fiscal years ended March 31, 1997, 1996
and 1995 consisted of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
1997:
Federal...................................... $ 7,253 $(4,439) $ 2,814
State........................................ 848 (298) 550
Foreign...................................... 16,188 447 16,635
Charge in lieu of taxes from employee stock
plans....................................... 7,242 -- 7,242
------- ------- -------
$31,531 $(4,290) $27,241
======= ======= =======
1996:
Federal...................................... $(6,075) $ 2,094 $(3,981)
State........................................ (523) 395 (128)
Foreign...................................... 13,980 (282) 13,698
Charge in lieu of taxes from employee stock
plans....................................... 9,170 -- 9,170
------- ------- -------
$16,552 $ 2,207 $18,759
======= ======= =======
1995:
Federal...................................... $ 3,676 $ 5,955 $ 9,631
State........................................ 353 2,688 3,041
Foreign...................................... 8,066 -- 8,066
Charge in lieu of taxes from employee stock
plans....................................... 4,242 -- 4,242
------- ------- -------
$16,337 $ 8,643 $24,980
======= ======= =======
</TABLE>
The components of the net deferred tax assets as of March 31, 1997 and 1996
consist of:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals, reserves and other expenses............... $ 28,495 $ 23,415
Federal and State loss carryforwards................ -- 1,553
Foreign loss and credit carryforwards............... 11,766 8,321
Total gross deferred tax assets................... 40,261 33,289
Less: valuation allowance (11,766) (8,321)
Net deferred tax assets........................... 28,495 24,968
Deferred tax liabilities:
Undistributed earnings of DISC...................... (2,081) (2,378)
Prepaid royalty expenses............................ (25,385) (20,988)
Unrealized gains on marketable securities (1,396) (7,480)
-------- --------
Total gross deferred tax liabilities.............. (28,862) (30,846)
-------- --------
Net deferred tax asset (liability)................ $ (367) $ (5,878)
======== ========
</TABLE>
The valuation allowance relates solely to the foreign loss and foreign
credit carryforwards, for which the utilization is uncertain in future
periods.
F-17
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
At March 31, 1997, the Company had no net operating loss carryforwards for
Federal or State income tax purposes.
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for the years ended March 31, 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal tax rate.......................... 35.0% 35.0% 35.0%
State taxes, net of Federal benefit................. 0.9 0.5 2.9
Differences between statutory rate and foreign
effective tax rate................................. (1.4) (3.0) (1.8)
Foreign loss without tax benefit.................... 1.6 -- 3.4
Research and development credits.................... -- -- (1.2)
Tax exemptions on Puerto Rico operation............. (0.8) (0.7) (5.0)
Other............................................... (0.8) (0.3) (1.3)
---- ---- ----
34.5% 31.5% 32.0%
==== ==== ====
</TABLE>
The Company does not provide for U.S. taxes on undistributed earnings of its
foreign subsidiaries. At March 31, 1997, the undistributed foreign earnings of
the foreign subsidiaries amounted to approximately $76,000,000. If these
earnings were distributed to the parent company, foreign tax credits available
under current law would substantially eliminate the resulting Federal tax
liability.
The Company's manufacturing subsidiary in Puerto Rico operates under a
Puerto Rican tax incentive program which grants the Company certain percentage
exemptions from Puerto Rican income, property and municipal taxes for a period
of 20 years from the date of the commencement of operations. The U.S. tax
benefit derived for the years-ended March 31, 1997, 1996 and 1995 was
approximately $600,000, $411,000, and $3,886,000, respectively. Long-term
reinvestment in Puerto Rico of the undistributed earnings of the Puerto Rico
subsidiary enables the Company to take advantage of certain tax incentives. In
addition, the Company has been granted an amendment to expand its exemption
for certain additional operations.
12. INTEREST AND OTHER INCOME, NET
Interest and other income, net for the years ended March 31, 1997, 1996 and
1995 consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income......... $ 8,059 $ 6,444 $ 4,748
Interest expense........ (66) (141) (51)
Merger-related fee...... -- -- 8,600
Gain on sale of
marketable securities.. 8,393 4,879 --
Gain (loss) on sale of
property and
equipment.............. (164) 2,044 (76)
Impairment of investment
in affiliates.......... -- (4,700) --
Foreign currency gains
(losses)............... (1,024) 433 785
Equity in net loss of
affiliates............. (1,566) (1,746) --
Other expense, net...... (1,993) (1,192) (756)
------- ------- -------
$11,639 $ 6,021 $13,250
======= ======= =======
</TABLE>
F-18
<PAGE>
ELECTRONIC ARTS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997, 1996 AND 1995
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH, SHORT-TERM INVESTMENTS, RECEIVABLES, ACCOUNTS PAYABLE AND ACCRUED
LIABILITIES. The carrying amount approximates fair value because of the short
maturity of these instruments.
MARKETABLE SECURITIES. Fair value is based on quoted market prices.
14. SUBSEQUENT EVENT
On June 4, 1997 the Company entered into an agreement to merge with Maxis,
Inc. ("Maxis"), a California-based interactive software developer. Under the
proposed transaction, approximately 4.1 million shares of Electronic Arts'
stock will be exchanged for the outstanding Maxis common stock. The
transaction, which is anticipated to be completed in the quarter ended
September 30, 1997, will be accounted for as a pooling of interests.
15. OPERATIONS BY GEOGRAPHIC AREAS
The Company operates in one industry segment. Information about the
Company's operations in the North America and foreign areas for the fiscal
years ended March 31, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
NORTH SOUTH ASIA
AMERICA EUROPE PACIFIC JAPAN ELIMINATIONS TOTAL
-------- -------- ---------- -------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FISCAL 1997:
Net revenues from
unaffiliated
customers.............. $335,527 $223,930 $28,072 $ 37,237 $ -- $624,766
Intersegment sales...... 54,530 6,938 603 122 (62,193) --
-------- -------- ------- -------- -------- --------
Total net revenues.... $390,057 $230,868 $28,675 $ 37,359 $(62,193) $624,766
======== ======== ======= ======== ======== ========
Operating income
(loss)................. $ 23,437 $ 41,468 $ 5,652 $ (3,235) $ -- $ 67,322
Identifiable assets..... $368,878 $116,405 $12,820 $ 18,600 $ -- $516,703
FISCAL 1996:
Net revenues from
unaffiliated
customers.............. $306,229 $157,999 $21,794 $ 45,865 $ -- $531,887
Intersegment sales...... 49,975 9,801 54 100 (59,930) --
-------- -------- ------- -------- -------- --------
Total net revenues.... $356,204 $167,800 $21,848 $ 45,965 $(59,930) $531,887
======== ======== ======= ======== ======== ========
Operating income........ $ 14,409 $ 33,126 $ 5,114 $ 882 $ -- $ 53,531
Identifiable assets..... $309,308 $ 88,446 $ 8,469 $ 17,996 $ -- $424,219
FISCAL 1995:
Net revenues from
unaffiliated
customers.............. $335,303 $112,907 $13,139 $ 31,997 $ -- $493,346
Intersegment sales...... 55,444 3,850 101 34 (59,429) --
-------- -------- ------- -------- -------- --------
Total net revenues.... $390,747 $116,757 $13,240 $ 32,031 $(59,429) $493,346
======== ======== ======= ======== ======== ========
Operating income
(loss)................. $ 44,276 $ 25,997 $ 2,123 $ (7,568) $ -- $ 64,828
Identifiable assets..... $272,577 $ 50,910 $ 6,268 $ 11,484 $ -- $341,239
</TABLE>
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Maxis, Inc.
We have audited the accompanying consolidated balance sheets of Maxis, Inc.
at March 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended March 31, 1997. 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 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 included 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Maxis, Inc. at March 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Walnut Creek, California
May 5, 1997, except for Note
14 as to which the date is
June 4, 1997
F-20
<PAGE>
MAXIS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
----------------
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $16,387 $20,102
Marketable securities...................................... 21,658 22,788
Accounts receivable, less allowances for returns and
doubtful accounts of $7,782 in 1997 and $5,607 in 1996.... 7,888 6,991
Inventories................................................ 2,026 1,543
Income taxes refundable.................................... 1,134 227
Deferred income taxes...................................... 2,249 2,808
Other current assets....................................... 715 872
------- -------
Total current assets......................................... 52,057 55,331
Long-term marketable securities.............................. 10,278 6,119
Furniture and equipment, net................................. 4,630 3,243
Deferred income taxes........................................ 1,991 2,023
Other assets................................................. 373 584
------- -------
Total assets................................................. $69,329 $67,300
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,890 $ 1,607
Payable to affiliate partners.............................. 537 631
Royalties payable.......................................... 1,214 1,373
Accrued compensation....................................... 1,471 1,685
Accrued advertising........................................ 1,480 1,538
Other accrued liabilities.................................. 3,692 2,585
Accrued rent............................................... 514 647
------- -------
Total current liabilities.................................... 10,798 10,066
------- -------
Commitments
Stockholders' equity:
Common stock, $.0001 par value; authorized shares,
40,000,000; issued and outstanding, 11,250,438 in 1997 and
10,989,906 in 1996........................................ 53,271 50,514
Notes receivable from stockholders......................... (161) (269)
Deferred compensation...................................... (32) (139)
Retained earnings.......................................... 5,453 7,128
------- -------
Total stockholders' equity................................... 58,531 57,234
------- -------
Total liabilities and stockholders' equity................... $69,329 $67,300
======= =======
</TABLE>
See accompanying notes.
F-21
<PAGE>
MAXIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net revenues.......................................... $48,262 $55,412 $38,147
Cost of revenues...................................... 16,899 17,897 14,186
------- ------- -------
Gross profit.......................................... 31,363 37,515 23,961
------- ------- -------
Operating expenses:
Research and development............................ 12,652 8,416 6,008
Acquisition-related charge.......................... -- 2,232 --
Sales and marketing................................. 16,517 12,843 8,813
General and administrative.......................... 6,747 5,504 4,184
------- ------- -------
Total operating expenses.............................. 35,916 28,995 19,005
------- ------- -------
Income (loss) from operations......................... (4,553) 8,520 4,956
Interest income....................................... 1,640 1,493 226
------- ------- -------
Income (loss) from continuing operations before income
taxes................................................ (2,913) 10,013 5,182
Provision (benefit) for income taxes.................. (1,238) 3,825 1,879
------- ------- -------
Income (loss) from continuing operations.............. (1,675) 6,188 3,303
Discontinued operations:
Gain on disposal of discontinued operations (net of
income tax expense of $173)........................ -- -- 303
------- ------- -------
Net income (loss)..................................... $(1,675) $ 6,188 $ 3,606
======= ======= =======
Per share amounts:
Income (loss) from continuing operations............ $ (.15) $ .56 $ .37
======= ======= =======
Net income (loss) per share......................... $ (.15) $ .56 $ .40
======= ======= =======
Shares used in per share calculations................. 11,180 11,051 8,915
======= ======= =======
</TABLE>
See accompanying notes.
F-22
<PAGE>
MAXIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE RETAINED TOTAL
--------------- FROM EARNINGS DEFERRED STOCKHOLDERS'
SHARES AMOUNT STOCKHOLDERS (DEFICIT) COMPENSATION EQUITY
------ ------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at March 31,
1994................... 5,806 $ 944 $(118) $(2,065) $ -- $(1,239)
Common stock options
exercised............. 115 89 -- -- -- 89
Issuance of common
stock for notes
receivable............ 410 303 (303) -- -- --
Repurchase of common
stock................. (21) (10) 6 -- -- (4)
Deferred compensation
resulting from grant
of options............ -- 940 -- -- (940) --
Amortization of
deferred
compensation.......... -- -- -- -- 450 450
Net income............. -- -- -- 3,606 -- 3,606
Accretion of preferred
stock................. -- -- -- (514) -- (514)
------ ------- ----- ------- ----- -------
Balances at March 31,
1995................... 6,310 2,266 (415) 1,027 (490) 2,388
Accretion of preferred
stock................. -- -- -- (87) -- (87)
Conversion of preferred
stock into common
stock................. 2,094 11,449 -- -- -- 11,449
Issuance of common
stock in initial
public offering, net
of issuance costs..... 2,450 35,508 -- -- -- 35,508
Common stock issued
under stock option and
stock purchase plans.. 153 406 -- -- -- 406
Tax benefits resulting
from employee stock
transactions.......... -- 897 -- -- -- 897
Repurchases of common
stock................. (17) (12) -- -- -- (12)
Repayment of notes
receivable............ -- -- 146 -- -- 146
Net income............. -- -- -- 6,188 -- 6,188
Amortization of
deferred
compensation.......... -- -- -- -- 351 351
------ ------- ----- ------- ----- -------
Balances at March 31,
1996................... 10,990 50,514 (269) 7,128 (139) 57,234
Common stock issued
under stock option and
stock purchase plans.. 280 807 -- -- -- 807
Tax benefits resulting
from employee stock
transactions.......... -- 1,968 -- -- -- 1,968
Repurchases of common
stock................. (20) (11) -- -- -- (11)
Repayment of notes
receivable............ -- (7) 108 -- -- 101
Net loss............... -- -- -- (1,675) -- (1,675)
Amortization of
deferred
compensation.......... -- -- -- -- 107 107
------ ------- ----- ------- ----- -------
Balances at March 31,
1997................... 11,250 $53,271 $(161) $ 5,453 $ (32) $58,531
====== ======= ===== ======= ===== =======
</TABLE>
See accompanying notes.
F-23
<PAGE>
MAXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss)................................. $(1,675) $ 6,188 $ 3,606
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for returns and doubtful accounts..... 2,175 2,696 930
Depreciation.................................... 1,525 991 572
Acquisition-related charge...................... -- 2,232 --
Deferred income taxes........................... 591 (1,950) (1,765)
Gain on disposal of discontinued operations..... -- -- (303)
Amortization of deferred compensation........... 107 351 450
Changes in operating assets and liabilities:
Accounts receivable............................. (3,072) (5,914) 1,558
Inventories..................................... (483) 148 (582)
Income taxes refundable......................... (907) (354) (908)
Other current assets............................ 157 (509) (275)
Other assets.................................... 211 (576) 244
Accounts payable................................ 283 189 905
Payable to affiliate partners................... (94) 445 (311)
Royalties payable............................... (159) 162 92
Accrued compensation............................ (214) 514 551
Accrued advertising............................. (58) 839 327
Other accrued liabilities....................... 974 2,653 107
------- -------- -------
Net cash provided by (used in) operating
activities....................................... (639) 8,105 5,198
INVESTING ACTIVITIES
Purchases of held-to-maturity securities.......... (23,627) (24,989) (7,280)
Maturities of held-to-maturity securities......... 20,598 5,183 7,162
Purchases of available-for-sale securities........ -- (9,000) (3,424)
Maturities of available-for-sale securities....... -- 5,944 1,481
Additions to furniture and equipment.............. (2,912) (2,354) (1,560)
Net cash paid for acquisition..................... -- (2,342) --
------- -------- -------
Net cash used in investing activities............. (5,941) (27,558) (3,621)
FINANCING ACTIVITIES
Repayment of notes receivable from shareholders... 101 146 --
Proceeds from issuance of common stock............ -- 35,508 --
Proceeds from issuance of ESPP stock.............. 599 302 --
Repurchase of common stock........................ (11) (12) (4)
Proceeds from exercise of options................. 208 104 89
Tax benefit from exercise of stock options........ 1,968 897 --
------- -------- -------
Net cash provided by financing activities......... 2,865 36,945 85
Net increase (decrease) in cash and cash
equivalents...................................... (3,715) 17,492 1,662
Cash and cash equivalents at beginning of year.... 20,102 2,610 948
------- -------- -------
Cash and cash equivalents at end of year.......... $16,387 $ 20,102 $ 2,610
======= ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Accretion of preferred stock.................... $ -- $ 87 $ 514
Conversion of preferred stock to common stock... $ -- $ 11,449 $ --
Issuance of common stock for notes receivable... $ -- $ -- $ 303
Repurchase of common stock in exchange for
reduction of notes receivable.................. $ -- $ -- $ (6)
Forgiveness of note receivable from
stockholder.................................... $ (8) $ -- $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income tax payments............................. $ 434 $ 5,232 $ 4,809
</TABLE>
See accompanying notes.
F-24
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MAXIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY
Maxis, Inc., a Delaware corporation, develops, publishes and markets
entertainment software for personal computers and 32-bit game consoles. Maxis
currently sells its software products, including affiliate partner products,
in North America through software distributors, major computer and software
retailing organizations, consumer electronics stores, discount warehouse
stores and mail order companies. Internationally, Maxis sells its products
through a combination of distribution, direct retail and licensing
arrangements.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Maxis and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
The Company translates the accounts of its foreign subsidiaries using the
local foreign currency as the functional currency. The assets and liabilities
of foreign subsidiaries are translated into U.S. dollars using current
exchange rates. Gains and losses from this translation have not been material.
Foreign currency transaction gains and losses, which have not been material,
are included in the consolidated statements of operations.
REVENUE RECOGNITION
Product sales
Revenue from product sales is recognized upon shipment of product to the
customer, net of appropriate allowances for returns, provided that no
significant vendor obligations remain and collection is deemed probable. Costs
associated with certain post-sales customer obligations are accrued.
Software licenses
Software license revenue and royalty advances are recognized as revenue at
the time Maxis has completed all significant performance obligations under the
terms of the license agreement and any amounts paid are nonrefundable. Amounts
received prior to revenue recognition are recorded as deferred revenue.
Continuing royalties received under the terms of licensing agreements are
recognized as revenue when the amount of royalties is determinable. Revenue
from software license agreements totaled $4,569,000, $5,479,000 and $2,643,000
for the fiscal years ended March 31, 1997, 1996 and 1995, respectively.
MAJOR CUSTOMERS
Net revenues from sales to one customer accounted for 10% of net revenues
for the fiscal year ended March 31, 1997. Net revenues from sales to three
major customers accounted for 12%, 11%, and 10% of net revenues for the fiscal
year ended March 31, 1996. Net revenues from sales to one customer accounted
for 19% of net revenues for the fiscal year ended March 31, 1995.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid short-term cash
investments with original maturities of three months or less.
F-25
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARKETABLE SECURITIES
Effective April 1, 1994, Maxis adopted Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in
Debt and Equity Securities." Management determines the appropriate
classification of its debt and equity securities at the time of purchase and
reevaluates such designation as of each balance sheet date. Debt securities
are classified as held-to-maturity when Maxis has the positive intent and
ability to hold the securities to maturity. Debt securities classified as
held-to-maturity are carried at amortized cost, which is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Debt securities, not classified
as held-to-maturity, are classified as available-for-sale and are carried at
amounts which approximate fair value. Realized gains and losses during fiscal
1997 and 1996 on available-for-sale securities were not material.
ACCOUNTS RECEIVABLE
Maxis' accounts receivable are principally from distributors and retailers
of Maxis' products. Accounts receivable are recorded net of allowances for
potential credit losses ($1,794,000 and $564,000 at March 31, 1997 and 1996,
respectively), and sales returns ($5,988,000 and $5,043,000 at March 31, 1997
and 1996, respectively). Maxis performs periodic credit evaluations of its
customers and generally does not require collateral. Actual credit losses and
sales returns may differ from Maxis' estimates, and such differences could be
material to the financial statements.
INVENTORIES
Inventories are valued at the lower of standard cost, which approximates
cost, determined using the first-in, first-out method, or market. Maxis
evaluates the quantities on hand relative to current selling prices and
historical and forecasted sales volume. Based on these evaluations, provisions
are made to write inventories down to net realizable value.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets which
range from three to seven years.
CAPITALIZED SOFTWARE COSTS
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
established. No such costs have been capitalized because the impact on the
financial statements would be immaterial.
ROYALTIES EXPENSE
Royalties are recognized as cost of revenues based on actual net product
sales or software license revenue. Royalty costs, which are included in cost
of revenues, were $2,058,000, $3,291,000 and $2,304,000 in fiscal 1997, 1996
and 1995, respectively. Royalties paid to a director and stockholder of Maxis,
who is the developer of some of Maxis' software products, totaled $214,000,
$243,000 and $323,000 in fiscal 1997, 1996 and 1995, respectively.
INCOME TAXES
Maxis accounts for income taxes using the liability method required by
statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
F-26
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PER SHARE DATA
Per share data is based on the weighted average number of common shares and
dilutive common stock equivalents outstanding for the period. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 83,
options to purchase common stock (using the treasury stock method) granted by
Maxis during the 12 months immediately preceding the initial public offering
date have been included in the calculation of weighted average number of
common shares outstanding as if the underlying shares were outstanding for the
year ended March 31, 1995.
STOCK-BASED COMPENSATION
Maxis accounts for employee stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
and in the year ended March 31, 1997, has adopted the "disclosure only"
alternative described in Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123).
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (SFAS No. 128), which is required to be adopted
for Maxis' fiscal year ended March 31, 1998. At that time, Maxis will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of common stock equivalents
will be excluded. The impact is expected to result in an increase in primary
earnings per share of $0.03 for the fiscal year ended March 31, 1996. There is
no impact expected for the fiscal years ended March 31, 1997 and 1995. The
impact of SFAS No. 128 on the calculation of fully diluted earnings per share
for these years is not expected to be material.
2. MARKETABLE SECURITIES
At March 31, 1997, Maxis' held-to-maturity and available-for-sale debt
securities consist of the following (in thousands):
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Municipal Bonds.................. $28,436 $184 -- $28,620
Municipal Notes.................. 1,000 22 -- 1,022
------- ---- --- -------
Total held-to-maturity
securities...................... $29,436 $206 -- $29,642
======= ==== === =======
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Market Auction Preferreds........ $ 8,600 $ 20 -- $ 8,620
Money Market Funds............... 1,137 -- -- 1,137
------- ---- --- -------
Total available-for-sale
securities.................... 9,737 20 -- 9,757
------- ---- --- -------
Total marketable securities.... $39,173 $226 -- $39,399
======= ==== === =======
</TABLE>
F-27
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Such debt securities have been recorded as cash and cash equivalents
($7,237,000), short-term marketable securities ($21,658,000) and long-term
marketable securities ($10,278,000). The contractual maturities of held-to-
maturity and available-for-sale debt securities at March 31, 1997, are all two
years or less. For all periods presented, realized gains and losses on
available-for-sale securities were not material.
3. INVENTORIES
Inventories consist primarily of software media, manuals and related
packaging materials as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Raw materials and work-in process............................. $1,008 $ 356
Finished goods................................................ 1,018 1,187
------ ------
$2,026 $1,543
====== ======
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Computer equipment and software............................... $5,149 $3,099
Furniture..................................................... 1,141 955
Office equipment.............................................. 1,180 892
Leasehold improvements........................................ 969 581
------ ------
8,439 5,527
Less accumulated depreciation................................. 3,809 2,284
------ ------
$4,630 $3,243
====== ======
</TABLE>
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal........................................ $(2,373) $ 4,006 $ 2,753
State.......................................... 189 1,347 876
Foreign........................................ 355 422 188
------- ------- -------
Total current.................................... (1,829) 5,775 3,817
Deferred:
Federal........................................ 967 (1,540) (964)
State.......................................... (376) (410) (296)
Effect of valuation allowance adjustment....... -- -- (505)
------- ------- -------
Total deferred................................... 591 (1,950) (1,765)
------- ------- -------
Total current and deferred provision (benefit)... $(1,238) $ 3,825 $ 2,052
======= ======= =======
</TABLE>
F-28
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of income taxes attributable to income (loss) from
continuing operations computed at the U.S. federal statutory tax rates to the
effective tax rate of the provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory rates................... (35)% 35% 34%
State income taxes............................ (4) 6 7
Tax exempt interest........................... (17) (4) --
Foreign taxes................................. 13 -- --
Other......................................... 1 1 4
Effect of valuation allowance adjustment...... -- -- (9)
------- ------- -------
(42)% 38% 36%
======= ======= =======
</TABLE>
Significant components of Maxis' deferred tax assets are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Reserve for returns and doubtful accounts.................... $2,307 $2,386
Expenses not currently deductible for income tax purposes.... 740 981
Depreciation................................................. 748 1,022
Other........................................................ (41) 442
Net operating loss carryforward.............................. 486 --
------ ------
Total deferred tax assets.................................... $4,240 $4,831
====== ======
</TABLE>
Maxis has state net operating loss carryforward of $5,225,000 which expire
in the year 2002.
6. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In April 1995, Maxis was reincorporated in the State of Delaware. As part of
this reincorporation, each outstanding share of the former California
corporation no par common stock was converted to one share of Delaware
corporation $.0001 par value common stock and each share of the former
California corporation no par preferred stock was converted to two shares of
the Delaware corporation $.0001 par value preferred stock. All preferred
shares and per share information has been restated to reflect the effect of
the conversion.
On June 1, 1995, Maxis consummated an initial public offering of 3,450,000
shares of common stock that raised approximately $35.5 million, net of
expenses. Of the 3,450,000 shares of common stock, 2,450,000 shares were sold
by Maxis and 1,000,000 shares were sold by selling stockholders.
1993 STOCK OPTION PLAN
In June 1993, Maxis established a stock option plan ("1993 Plan") under
which incentive and nonqualified stock options may be granted to employees,
directors and consultants of Maxis to purchase up to 1,854,000 shares of
common stock. The options may be granted at an exercise price not less than
85% of the fair market value of the common stock at the date of grant. The
fair market value of the common stock was determined by the Board of
Directors. All options currently outstanding are immediately exercisable upon
grant and generally vest over various periods as determined by the Board of
Directors at the time of grant. Maxis retains the right to
F-29
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
repurchase (at the original purchase price) nonvested shares held at the time
of termination of employment. At March 31, 1997, 97,000 shares were subject to
Maxis' right of repurchase. In June 1995, the 1993 Plan was superseded by the
1995 stock option plan. At that time, the remaining 354,000 options available
for grant under the 1993 Plan were canceled.
1995 STOCK OPTION PLAN
In May of 1995, Maxis established a stock option plan ("1995 Plan") which
provides for grants of options to employees and consultants of Maxis and its
subsidiaries to purchase up to 1,775,000 shares of common stock. With respect
to incentive stock options granted under the 1995 Plan, the exercise price
must be at least equal to the fair market value per share of common stock at
the grant date. Options under the 1995 Plan generally vest and become
exercisable at a rate of 25% of the shares subject to option on the first
anniversary of the commencement of vesting and 25% of the shares each year
thereafter.
Changes in options outstanding during fiscal 1995, 1996 and 1997 for the
combined plans were as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at March 31, 1994............................ 12,000 $ 0.64
Options granted........................................ 1,072,000 1.00
Options exercised...................................... (525,000) 0.75
Options canceled....................................... (11,000) 0.70
---------
Outstanding at March 31, 1995............................ 548,000 1.21
Options granted........................................ 272,000 26.80
Options exercised...................................... (131,000) 0.80
Options canceled....................................... (26,000) 11.10
---------
Outstanding at March 31, 1996............................ 663,000 11.31
Options granted........................................ 790,000 14.57
Options exercised...................................... (230,000) 0.90
Options canceled....................................... (179,000) 11.80
Outstanding at March 31, 1997............................ 1,044,000 15.99
=========
Options vested and exercisable at March 31, 1997......... 165,000
=========
Options available for grant at March 31, 1997............ 852,000
=========
</TABLE>
The weighted average fair value of options granted during fiscal 1997 and
1996 is $8.44 and $15.32 per share, respectively.
The following table summarizes information with regard to stock options
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS VESTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE AND EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$0.725- 119,000 7.55 $ 4.47 112,000 $4.27
11.00..
$11.25- 344,000 9.36 $11.25 -- --
11.25..
</TABLE>
F-30
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ------------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS VESTED AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE AND EXERCISABLE EXERCISE PRICE
--------------- ----------- ----------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$12.00-21.50.. 266,000 9.45 $14.41 8,000 $12.00
$23.00-48.00.. 315,000 8.85 $26.82 45,000 $29.25
--------- -------
$0.725-48.00.. 1,044,000 165,000
========= =======
</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 from grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Expected volatility.......................................... .6068 .6068
Risk-free interest rate...................................... 6.41% 5.93%
Expected life of options in years............................ 5 5
Expected dividend yield...................................... -- --
</TABLE>
If Maxis had elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123, net income
(loss) and earnings (loss) per share would have been reduced (increased) to
the pro forma amounts indicated in the table below (in thousands except per
share amounts):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31.
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Net income (loss)--as reported.................... $ (1,675) $ 6,188
Net income (loss)--pro forma...................... $ (2,848) $ 5,747
Net income (loss) per share--as reported.......... $ (0.15) $ 0.56
Net income (loss) per share--pro forma............ $ (0.25) $ 0.52
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to March
31, 1995, the resulting pro forma compensation cost may not be representative
of that expected in future years.
During fiscal 1995, included in options granted and exercised are options
granted to Maxis' senior management team to purchase 410,000 shares of common
stock at prices from $0.73 to $0.80 per share. These options were exercised
and common stock was issued in exchange for notes receivable. The notes
receivable are for terms from two to nine years, bearing interest at rates
ranging from 6.24% to 8.01% with interest payable semiannually and principal
due at maturity.
During fiscal 1995, Maxis issued options to purchase 1,072,000 shares of
common stock. Maxis recorded deferred compensation of $940,000 for financial
reporting purposes with respect to such option grants to reflect the
difference between the exercise price and deemed fair value, for financial
statement presentation purposes, of Maxis' common shares. Amortization of
deferred compensation for the fiscal years ended March 31, 1997 and 1996,
totaled $107,000 and $351,000, respectively.
F-31
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. 1995 EMPLOYEE STOCK PURCHASE PLAN
In May 1995 Maxis established an employee stock purchase plan ("ESPP") and
has reserved an aggregate of 200,000 shares of common stock. The ESPP is
intended to qualify under Section 423 of the Code and permits eligible
employees of Maxis to purchase common stock through payroll deductions of up
to 10% of their compensation provided that no employee may purchase more than
$25,000 worth of stock in any calendar year. The ESPP is implemented with six-
month purchase periods as components of 24-month offering periods, the first
such purchase period commenced upon the date of the offering and ended on the
last market trading day on December 29, 1995. The price of common stock
purchased under the ESPP is 85% of the lower of the fair market value of the
common stock on the first day of each offering period or last day of each
purchase period. The ESPP will expire in the year 2005. In fiscal 1997, a
total of 50,000 shares were issued under the plan at prices ranging from
$10.41 to $16.79 per share. At March 31, 1997, a total of 128,000 shares were
available for issuance under the plan.
8. EMPLOYEE RETIREMENT AND BENEFIT PLAN
Maxis has a defined contribution retirement plan covering substantially all
employees which operates under Section 401(k) of the Internal Revenue Code.
Eligible employees may contribute amounts to the plan subject to certain
limitations. Maxis matches contributions by plan participants up to 5% of the
participant's pretax compensation. Retirement plan expense for fiscal 1997,
1996 and 1995 was $520,000, $321,000 and $209,000, respectively.
9. DISCONTINUED OPERATIONS
In September 1994, Maxis received full payment of the note receivable from
the management of the Division at which date the divestiture was accounted for
as discontinued operations. The results of operations of the Division for the
fiscal year ended March 31, 1995, were accounted for as discontinued
operations in the accompanying consolidated statements of income. The sale
resulted in a gain, net of applicable income taxes, of $303,000.
10. COMMITMENTS
In June 1995 Maxis entered into a seven-year lease for new office space to
house its principal corporate headquarters. The lease agreement and related
amendments provide for monthly payments beginning at $75,000, escalating to
$96,000 during the term of the lease. The lease is noncancelable for the first
five years and six months with the option, at Maxis' election, to shorten the
term of the lease for a one-time payment equal to three months rent.
Future minimum lease payments under Maxis' operating leases for the periods
ending March 31, pursuant to leases outstanding as of March 31, 1997, are due
as follows (in thousands):
<TABLE>
<S> <C>
1998.............................................................. $1,438
1999.............................................................. 1,170
2000.............................................................. 1,133
2001.............................................................. 837
2002.............................................................. --
------
$4,578
======
</TABLE>
Rent expense under all leases was $ 1,272,000, $1,021,000 and $486,000 for
fiscal 1997, 1996 and 1995, respectively.
F-32
<PAGE>
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. INFORMATION BY GEOGRAPHIC AREA
Information regarding Maxis' operations, including its foreign subsidiaries
and export sales, by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net revenues:
North America..................................... $32,705 $43,564 $32,614
Europe............................................ 9,972 7,197 4,135
Asia / Pacific and other.......................... 5,585 4,651 1,398
------- ------- -------
$48,262 $55,412 $38,147
======= ======= =======
</TABLE>
12. BUSINESS COMBINATION
In March 1996, Maxis acquired for cash Cinematronics LLC, an independent
developer of entertainment software, with headquarters in Austin, Texas. The
acquisition was accounted for under the purchase method. This purchase
resulted in a nonrecurring acquisition related charge of $2,232,000 for
acquired in-process technology. During fiscal 1996, the operations of
Cinematronics LLC were not material to Maxis.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
30 30 31 31 YEAR
------- --------- -------- ------- -------
(IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Fiscal year 1997:
Net revenues.................... $ 8,108 $ 8,004 $19,768 $12,382 $48,262
Gross profit.................... 5,128 4,441 12,642 9,152 31,363
Net income (loss)............... (1,416) (2,496) 2,025 212 (1,675)
Net income (loss) per share..... (0.13) (0.22) 0.18 0.02 (0.15)
Fiscal year 1996:
Net revenues.................... $11,332 $11,779 $20,111 $12,190 $55,412
Gross profit.................... 7,742 8,536 12,912 8,325 37,515
Net income (loss)............... 1,132 1,722 3,541 (207) 6,188
Net income (loss) per share..... 0.12 0.15 0.31 (0.02) 0.56
</TABLE>
14. SUBSEQUENT EVENT
On June 4, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Electronic Arts Inc., a Delaware
corporation ("Electronic Arts"), a publicly-held company that creates, markets
and distributes interactive entertainment software for a variety of hardware
platforms, pursuant to which Maxis will become a wholly-owned subsidiary of
Electronic Arts (the "Merger"). Under the terms of the Agreement, each share
of the Company's Common Stock will be converted into the right to receive
0.3644 of a share of Electronic Arts Common Stock. Each outstanding option to
purchase the Company's Common Stock will be converted into an option to
purchase Electronic Arts Common Stock at an adjusted exercise price.
Consummation of the Merger is conditioned upon the affirmative vote of the
Company's stockholders, among other conditions. The Board of Directors of the
Company has unanimously approved the Agreement and transactions contemplated
thereby. A special meeting of the Company's stockholders will be held to
consider and vote upon the proposed Agreement and other related matters.
F-33
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
ELECTRONIC ARTS INC.
VILLAGE ACQUISITION CORPORATION
AND
MAXIS, INC.
Dated as of June 4, 1997
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE I THE MERGER.................................................... A-4
1.1 The Merger..................................................... A-4
1.2 Effective Time; Closing........................................ A-4
1.3 Effect of the Merger........................................... A-4
1.4 Certificate of Incorporation; Bylaws........................... A-5
1.5 Directors and Officers......................................... A-5
1.6 Effect on Capital Stock........................................ A-5
1.7 Dissenting Shares.............................................. A-6
1.8 Surrender of Certificates...................................... A-6
1.9 No Further Ownership Rights in Maxis Common Stock.............. A-7
1.10 Lost, Stolen or Destroyed Certificates......................... A-7
1.11 Tax and Accounting Consequences................................ A-7
1.12 Taking of Necessary Action; Further Action..................... A-7
ARTICLE II REPRESENTATIONS AND WARRANTIES OF MAXIS...................... A-8
2.1 Organization of Maxis.......................................... A-8
2.2 Maxis Capital Structure........................................ A-8
2.3 Obligations With Respect to Capital Stock...................... A-9
2.4 Authority...................................................... A-9
2.5 Certain Statutory Provisions Not Applicable.................... A-10
2.6 SEC Filings; Maxis Financial Statements........................ A-10
2.7 Absence of Certain Changes or Events........................... A-11
2.8 Taxes.......................................................... A-11
2.9 Intellectual Property.......................................... A-12
2.10 Compliance; Permits; Restrictions; Insurance................... A-13
2.11 Litigation..................................................... A-13
2.12 Brokers' and Finders' Fees..................................... A-13
2.13 Employee Benefit Plans......................................... A-13
2.14 Title to Properties; Absence of Liens and Encumbrances......... A-14
2.15 Environmental Matters.......................................... A-14
2.16 Employees; Labor Matters....................................... A-15
2.17 Agreements, Contracts and Commitments.......................... A-15
2.18 Pooling of Interests........................................... A-17
2.19 Change of Control Payments..................................... A-17
2.20 Proxy Statement/Prospectus..................................... A-17
2.21 Board Approval................................................. A-17
2.22 Fairness Opinion............................................... A-17
2.23 Products and Distribution...................................... A-17
2.24 Development Tools.............................................. A-18
2.25 Interested Party Transactions.................................. A-18
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ELECTRONIC ARTS AND MERGER
SUB..................................................................... A-18
3.1 Organization of Electronic Arts and Merger Sub................. A-18
3.2 Electronic Arts and Merger Sub Capital Structure............... A-19
3.3 Authority...................................................... A-19
Section 203 of the Delaware General Corporation Law Not
3.4 Applicable..................................................... A-20
3.5 SEC Filings; Electronic Arts Financial Statements.............. A-20
3.6 Absence of Certain Changes or Events........................... A-21
3.7 Pooling of Interests........................................... A-21
3.8 Proxy Statement/Prospectus..................................... A-21
3.9 Board Approval................................................. A-21
</TABLE>
A-2
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TABLE OF CONTENTS (CONTINUED)
<TABLE>
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<C> <S> <C>
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... A-21
4.1 Conduct of Business............................................ A-21
ARTICLE V ADDITIONAL AGREEMENTS......................................... A-23
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations................................. A-23
5.2 Meetings of Stockholders....................................... A-24
5.3 Confidentiality................................................ A-24
5.4 No Solicitation................................................ A-24
5.5 Public Disclosure.............................................. A-26
5.6 Legal Requirements............................................. A-26
5.7 Third Party Consents........................................... A-26
5.8 Notification of Certain Matters................................ A-27
5.9 Reasonable Best Efforts and Further Assurances................. A-27
5.10 Stock Options and Employee Benefits............................ A-27
5.11 Forms S-8...................................................... A-28
5.12 Indemnification and Insurance.................................. A-28
5.13 NMS Listing.................................................... A-29
5.14 Maxis Affiliate Agreement...................................... A-29
5.15 Regulatory Filings; Reasonable Efforts......................... A-29
5.16 Tax-Free Reorganization........................................ A-29
5.17 Pooling Covenant............................................... A-29
5.18 Employee Matters............................................... A-30
ARTICLE VI CONDITIONS TO THE MERGER..................................... A-30
6.1 Conditions to Obligations of Each Party to Effect the Merger... A-30
6.2 Additional Conditions to Obligations of Maxis.................. A-31
Additional Conditions to the Obligations of Electronic Arts and
6.3 Merger Sub..................................................... A-31
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER........................... A-32
7.1 Termination.................................................... A-32
7.2 Notice of Termination; Effect of Termination................... A-33
7.3 Fees and Expenses.............................................. A-34
ARTICLE VIII GENERAL PROVISIONS......................................... A-34
8.1 Non-Survival of Representations and Warranties................. A-34
8.2 Notices........................................................ A-34
8.3 Interpretation; Knowledge...................................... A-35
8.4 Counterparts................................................... A-35
8.5 Entire Agreement; Third Party Beneficiaries.................... A-35
8.6 Severability................................................... A-35
8.7 Other Remedies; Specific Performance........................... A-36
8.8 Governing Law.................................................. A-36
8.9 Rules of Construction.......................................... A-36
8.10 Assignment..................................................... A-36
8.11 WAIVER OF JURY TRIAL........................................... A-36
</TABLE>
INDEX OF EXHIBITS
Exhibit A Form of Maxis Voting Agreement
Exhibit B Form of Maxis Affiliate Agreement
Exhibit C Form of Fenwick & West LLP Legal Opinion
Exhibit D Form of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Legal Opinion
A-3
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of June 4, 1997, among Electronic Arts Inc., a Delaware
corporation ("Electronic Arts"), Village Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Electronic Arts ("Merger Sub"),
and Maxis, Inc., a Delaware corporation ("Maxis").
Recitals
A. Upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware General Corporation Law ("Delaware Law"),
Electronic Arts and Maxis intend to enter into a business combination
transaction.
B. Concurrently with the execution of this Agreement, and as a condition and
inducement to Electronic Arts' willingness to enter into this Agreement, a
stockholder of Maxis is entering into a Voting Agreement (the "Voting
Agreement") in substantially the form attached hereto as Exhibit A.
C. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
D. It is also intended by the parties hereto that the Merger (as defined
below) shall qualify for accounting treatment as a pooling of interests.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
The Merger
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of Delaware Law, Merger Sub shall be merged with and
into Maxis (the "Merger"), the separate corporate existence of Merger Sub
shall cease and Maxis shall continue as the surviving corporation. Maxis as
the surviving corporation after the Merger is hereinafter sometimes referred
to as the "Surviving Corporation."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware Law (the "Certificate of
Merger") (the time of such filing (or such later time as may be agreed in
writing by the parties and specified in the Certificate of Merger) being the
"Effective Time") as soon as practicable on or after the Closing Date (as
herein defined). The closing of the Merger (the "Closing") shall take place at
the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California
94306, at a time and date to be specified by the parties, which shall be no
later than the second business day after the satisfaction or waiver of the
conditions set forth in Article VI, or at such other time, date and location
as the parties hereto agree in writing (the "Closing Date"). The parties
acknowledge that it is their express current intent that, to the extent
practicable, the Closing Date shall occur on or before August 31, 1997.
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
Delaware Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of Maxis and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Maxis and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
At the Effective Time, the separate existence of Merger Sub will cease and
Merger Sub will be merged with and into Maxis.
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<PAGE>
1.4 Certificate of Incorporation; Bylaws.
(a) At the Effective Time, the Certificate of Incorporation of Merger
Sub, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation of the
Surviving Corporation (subject, however, to Section 5.12); provided,
however, that at the Effective Time, the Certificate of Incorporation of
the Surviving Corporation shall be amended so that the name of the
Surviving Corporation shall be Maxis, Inc.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the
Surviving Corporation until thereafter amended, subject, however, to
Section 5.12 hereof.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or
appointed and qualified. The initial officers of the Surviving Corporation
shall be the officers of Maxis immediately prior to the Effective Time, until
their respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Maxis or the holders of any
of the following securities:
(a) Conversion of Maxis Common Stock. Each share of Common Stock, $.0001
par value per share, of Maxis (the "Maxis Common Stock") issued and
outstanding immediately prior to the Effective Time, (other than any shares
of Maxis Common Stock to be canceled pursuant to Section 1.6(b)) will be
canceled and extinguished and automatically converted (subject to Sections
1.6(e) and (f)) into 0.3644 (the "ExchangeRatio") shares of Common Stock of
Electronic Arts (the "Electronic Arts Common Stock").
(b) Cancellation of Electronic Arts-Owned Stock. Each share of Maxis
Common Stock held by Maxis or owned by Merger Sub, Electronic Arts or any
direct or indirect wholly owned subsidiary of Maxis or of Electronic Arts
immediately prior to the Effective Time shall be canceled and extinguished
without any conversion thereof.
(c) Stock Options; Employee Stock Purchase Plans. At the Effective Time,
all options to purchase Maxis Common Stock then outstanding under Maxis'
1993 Stock Option Plan (the "1993 Option Plan") and Maxis' 1995 Stock Plan
(the "1995 Option Plan" and, collectively, the "Maxis Stock Option Plans")
shall be assumed by Electronic Arts; and Section 5.10(c) hereof shall
govern Maxis' 1995 Employee Stock Purchase Plan (the "ESPP").
(d) Capital Stock of Merger Sub. Each share of Common Stock, $.01 par
value per share, of Merger Sub (the "Merger Sub Common Stock") issued and
outstanding immediately prior to the Effective Time shall be converted into
one validly issued, fully paid and nonassessable share of Common Stock,
$.01 par value per share, of the Surviving Corporation. Each certificate
evidencing ownership of shares of Merger Sub Common Stock shall evidence
ownership of such shares of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock
split, stock dividend (including any dividend or distribution of securities
convertible into Electronic Arts Common Stock or Maxis Common Stock),
reorganization, recapitalization, reclassification or other like change
with respect to Electronic Arts Common Stock or Maxis Common Stock
occurring or having a record date on or after the date hereof and prior to
the Effective Time.
(f) Fractional Shares. No fraction of a share of Electronic Arts Common
Stock will be issued by virtue of the Merger, but in lieu thereof each
holder of shares of Maxis Common Stock who would otherwise be entitled to a
fraction of a share of Electronic Arts Common Stock (after aggregating all
fractional shares of Electronic Arts Common Stock that otherwise would be
received by such holder) shall receive from Electronic Arts an amount of
cash (rounded to the nearest whole cent) equal to the product of (i) such
A-5
<PAGE>
fraction, multiplied by (ii) the average closing price of one share of
Electronic Arts Common Stock for the five (5) most recent days that
Electronic Arts Common Stock has traded ending on the trading day
immediately prior to the Effective Time, as reported on the Nasdaq National
Market.
1.7 Dissenting Shares. No appraisal rights will be available under Delaware
Law for shares of Maxis Common Stock in connection with the Merger.
1.8 Surrender of Certificates.
(a) Exchange Agent. Norwest Bank Minnesota, N.A. shall act as the
exchange agent (the "Exchange Agent") in the Merger.
(b) Electronic Arts to Provide Common Stock. Promptly after the Effective
Time, Electronic Arts shall make available to the Exchange Agent for
exchange in accordance with this Article I, the shares of Electronic Arts
Common Stock issuable pursuant to Section 1.6 in exchange for outstanding
shares of Maxis Common Stock, and cash in an amount sufficient for payment
in lieu of fractional shares pursuant to Section 1.6(f) and any dividends
or distributions to which holders of shares of Maxis Common Stock may be
entitled pursuant to Section 1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, Electronic
Arts shall cause the Exchange Agent to mail to each holder of record (as of
the Effective Time) of a certificate or certificates (the "Certificates"),
which immediately prior to the Effective Time represented outstanding
shares of Maxis Common Stock whose shares were converted into shares of
Electronic Arts Common Stock pursuant to Section 1.6, cash in lieu of any
fractional shares pursuant to Section 1.6(f) and any dividends or other
distributions pursuant to Section 1.8(d), (i) a letter of transmittal in
customary form (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon delivery
of the Certificates to the Exchange Agent and shall contain such other
provisions as Electronic Arts may reasonably specify) and (ii) instructions
for use in effecting the surrender of the Certificates in exchange for
certificates representing shares of Electronic Arts Common Stock, cash in
lieu of any fractional shares pursuant to Section 1.6(f) and any dividends
or other distributions pursuant to Section 1.8(d). Upon surrender of
Certificates for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Electronic Arts, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holders of such Certificates shall be entitled to
receive in exchange therefor certificates representing the number of whole
shares of Electronic Arts Common Stock into which their shares of Maxis
Common Stock were converted at the Effective Time, payment in lieu of
fractional shares which such holders have the right to receive pursuant to
Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d), and the Certificates so surrendered shall forthwith be
canceled. Until so surrendered, outstanding Certificates will be deemed
from and after the Effective Time, for all corporate purposes, subject to
Section 1.8(d) as to the payment of dividends, to evidence the ownership of
the number of full shares of Electronic Arts Common Stock into which such
shares of Maxis Common Stock shall have been so converted and the right to
receive an amount in cash in lieu of the issuance of any fractional shares
in accordance with Section 1.6(f) and any dividends or distributions
payable pursuant to Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the date of this Agreement with
respect to Electronic Arts Common Stock with a record date after the
Effective Time will be paid to the holders of any unsurrendered
Certificates with respect to the shares of Electronic Arts Common Stock
represented thereby until the holders of record of such Certificates shall
surrender such Certificates, and no cash payment in lieu of fractional
shares shall be paid to such holder until the holder of record of such
Certificates shall surrender such Certificates. Subject to applicable law,
following surrender of any such Certificates, the Exchange Agent shall
deliver to the record holders thereof, without interest, certificates
representing whole shares of Electronic Arts Common Stock issued in
exchange therefor along with payment in lieu of fractional shares pursuant
to Section 1.6(f) hereof and the amount of any such dividends or other
distributions with a record date after the Effective Time payable with
respect to such whole shares of Electronic Arts Common Stock.
A-6
<PAGE>
(e) Transfers of Ownership. If certificates representing shares of
Electronic Arts Common Stock are to be issued in a name other than that in
which the Certificates surrendered in exchange therefor are registered, it
will be a condition of the issuance thereof that the Certificates so
surrendered will be properly endorsed and otherwise in proper form for
transfer and that the persons requesting such exchange will have paid to
Electronic Arts or any agent designated by it any transfer or other taxes
required by reason of the issuance of certificates representing shares of
Electronic Arts Common Stock in any name other than that of the registered
holder of the Certificates surrendered, or established to the satisfaction
of Electronic Arts or any agent designated by it that such tax has been
paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, Electronic Arts, the Surviving
Corporation or any party hereto shall be liable to a holder of shares of
Electronic Arts Common Stock or Maxis Common Stock for any amount properly
paid to a public official pursuant to any applicable abandoned property,
escheat or similar law.
(g) Termination of Exchange Agent Provisions. On the demand of Electronic
Arts, any Electronic Arts Common Stock issuable or cash payable in
accordance with this Agreement that is made available to the Exchange
Agent, if not distributed to the stockholders of Maxis for one year after
the Effective Time, shall no longer be made available to the Exchange
Agent, and any former stockholders of Maxis who have not theretofore
complied with this Section 1.8 shall thereafter look only to Electronic
Arts for payment of their claim for Electronic Arts Common Stock, any cash
in lieu of fractional shares of Electronic Arts Common Stock and any
dividends or distributions with respect to Electronic Arts Common Stock.
1.9 No Further Ownership Rights in Maxis Common Stock. All shares of
Electronic Arts Common Stock issued in accordance with the terms hereof
(including any cash paid in respect thereof pursuant to Section 1.6(f) and
1.8(d)) shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Maxis Common Stock, and there shall be no further
registration of transfers on the records of the Surviving Corporation of
shares of Maxis Common Stock which were outstanding immediately prior to the
Effective Time. If after the Effective Time, Certificates are presented to the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, certificates representing the
shares of Electronic Arts Common Stock into which the shares of Maxis Common
Stock represented by such Certificates were converted pursuant to Section 1.6,
cash for fractional shares, if any, as may be required pursuant to Section
1.6(f) and any dividends or distributions payable pursuant to Section 1.8(d);
provided, however, that Electronic Arts may, in its discretion and as a
condition precedent to the issuance of such certificates representing shares
of Electronic Arts Common Stock, require the owner of such lost, stolen or
destroyed Certificates to deliver a bond in such sum as it may reasonably
direct as indemnity against any claim that may be made against Electronic
Arts, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
1.11 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute
a reorganization within the meaning of Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code"). The parties hereto adopt this
Agreement as a "plan of reorganization" within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Income Tax Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of Maxis and Merger Sub, the officers and directors of
Maxis and Merger Sub will take all such lawful and necessary action.
Electronic Arts shall cause Merger Sub to perform all of its obligations
relating to this Agreement and the transactions contemplated hereby.
A-7
<PAGE>
ARTICLE II
Representations And Warranties Of Maxis
Maxis represents and warrants to Electronic Arts and Merger Sub, subject to
the exceptions disclosed in writing in the disclosure letter supplied by Maxis
to Electronic Arts dated as of the date hereof and certified by a duly
authorized officer of Maxis (the "Maxis Schedules"), as follows:
2.1 Organization of Maxis.
(a) Maxis and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or
licensed to do business and is in good standing in each jurisdiction where
the character of the properties owned, leased or operated by it or the
nature of its activities makes such qualification or licensing necessary,
except where the failure to be so qualified would not have a Material
Adverse Effect (as defined below) on Maxis.
(b) Maxis has delivered to Electronic Arts a true and complete list of
all of Maxis' direct and indirect subsidiaries (whether wholly or partially
owned by Maxis), indicating the jurisdiction of incorporation of each
subsidiary, Maxis' equity interest therein and a list of any other equity
holders of such subsidiary.
(c) Maxis has delivered or made available to Electronic Arts a true and
correct copy of the Certificate of Incorporation and Bylaws of Maxis and
similar governing instruments of each of its subsidiaries, each as amended
to date, and each such instrument is in full force and effect. Neither
Maxis nor any of its subsidiaries is in violation of any of the provisions
of its Certificate of Incorporation or Bylaws or equivalent governing
instruments.
(d) When used in connection with an entity, the term "Material Adverse
Effect" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of such entity and
its subsidiaries taken as a whole; provided, however, that (i) any adverse
change, event or effect that is demonstrated to be primarily caused by
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, (ii) any adverse change, event or effect
that is demonstrated to be primarily caused by conditions generally
affecting the interactive entertainment software industry 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 (iii) any
adverse change, event or effect that is demonstrated to be primarily caused
by the announcement or pendency of the Merger 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.
2.2 Maxis Capital Structure. The authorized capital stock of Maxis consists
of 40,000,000 shares of Common Stock, $.0001 par value per share, of which
there were 11,255,934 shares issued and outstanding as of March 31, 1997 and
5,000,000 shares of Preferred Stock, $.0001 par value per share, of which no
shares are issued or outstanding. All outstanding shares of Maxis Common Stock
are duly authorized, validly issued, fully paid and nonassessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of Maxis or any agreement or document to which Maxis
is a party or by which it is bound. As of March 31, 1997, Maxis had reserved
an aggregate of 1,854,000 and 1,775,000 shares, respectively, of Maxis Common
Stock, net of exercises, for issuance to employees, consultants and non-
employee directors pursuant to the 1993 Option Plan and the 1995 Option Plan,
under which options are outstanding for an aggregate of 120,438 shares and
923,308 shares, respectively, and under which no shares and 851,692 shares,
respectively, are available for grant as of March 31, 1997. All shares of
Maxis Common Stock subject to issuance as aforesaid, upon issuance on the
terms and conditions specified in the instruments pursuant to which they are
issuable, would
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<PAGE>
be duly authorized, validly issued, fully paid and nonassessable. The Maxis
Schedules list for each person who held options to acquire shares of Maxis
Common Stock at March 31, 1997, the name of the holder of such option, the
exercise price of such option, the number of shares as to which such option
will have vested at such date, the vesting schedule for such option and
whether the exercisability of such option will be accelerated in any way by
the transactions contemplated by this Agreement, and indicate the extent of
acceleration, if any. As of March 31, 1997, an aggregate of 200,000 shares of
Maxis Common Stock were reserved for issuance pursuant to the ESPP.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Maxis, or any securities exchangeable or
convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities Maxis owns, directly or indirectly through
one or more subsidiaries, there are no equity securities, partnership
interests or similar ownership interests of any class of any subsidiary of
Maxis, or any security exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except as set forth in Section
2.2, there are no options, warrants, equity securities, partnership interests
or similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which Maxis or any of its
subsidiaries is a party or by which it is bound obligating Maxis or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition, of any shares of capital stock, partnership
interests or similar ownership interests of Maxis or any of its subsidiaries
or obligating Maxis or any of its subsidiaries to grant, extend, accelerate
the vesting of or enter into any such option, warrant, equity security, call,
right, commitment or agreement. Except as set forth in Section 2.2 and the
Voting Agreement, there are no registration rights and, to the knowledge of
Maxis, as of the date of this Agreement, there are no voting trusts, proxies
or other agreements or understandings with respect to any equity security of
any class of Maxis or with respect to any equity security, partnership
interest or similar ownership interest of any class of any of its
subsidiaries.
2.4 Authority.
(a) Maxis has all requisite corporate power and authority to enter into
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 authorized by all necessary
corporate action on the part of Maxis, subject only to the approval and
adoption of this Agreement and the approval of the Merger by Maxis'
stockholders and the filing and recordation of the Agreement of Merger
pursuant to Delaware Law. A vote of the holders of at least a majority of
the outstanding shares of the Maxis Common Stock is required for Maxis'
stockholders to approve and adopt this Agreement and approve the Merger.
This Agreement has been duly executed and delivered by Maxis and, assuming
the due authorization, execution and delivery by Electronic Arts and, if
applicable, Merger Sub, constitutes a valid and binding obligation of
Maxis, enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy and other similar laws and general principles
of equity. The execution and delivery of this Agreement by Maxis does not,
and the performance of this Agreement by Maxis will not, (i) conflict with
or violate the Certificate of Incorporation or Bylaws of Maxis or the
equivalent organizational documents of any of its subsidiaries, (ii)
subject to obtaining the approval and adoption of this Agreement and the
approval of the Merger by Maxis' stockholders as contemplated in Section
5.2 and compliance with the requirements set forth in Section 2.4(b) below,
conflict with or violate, in any material respect, any law, rule,
regulation, order, judgment or decree applicable to Maxis or any of its
subsidiaries or by which its or any of their respective properties is bound
or affected, or (iii) conflict with, result in any breach of or constitute
a default (or an event that with notice or lapse of time or both would
become a default) under, or impair Maxis' rights or alter the rights or
obligations of any third party under, or give rise to any rights of in, or
result in the creation of a lien or encumbrance on, any of the properties
termination, amendment, acceleration or cancellation of any obligation
contained in, or result in the creation of a lien or encumbrance on, any of
the properties or assets of Maxis or any of its subsidiaries pursuant to
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which
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Maxis or any of its subsidiaries is a party or by which Maxis or any of its
subsidiaries or its or any of their respective properties or assets are
bound or affected, except with respect to clause (iii) for any such
conflicts, violations, defaults, rights, liens, encumbrances or other
occurrences that would, individually or in the aggregate, not have a
Material Adverse Effect on Maxis. The Maxis Schedules list all consents,
waivers and approvals under any of Maxis' or any of its subsidiaries'
agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby,
which, if individually or in the aggregate not obtained, would result in a
Material Adverse Effect on Maxis.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any court, administrative agency or commission
or other governmental authority or instrumentality, foreign or domestic
("Governmental Entity"), is required to be obtained by Maxis or any of its
subsidiaries in connection with the execution and delivery of this
Agreement or the Agreement of Merger or the consummation of the
transactions contemplated hereby or thereby, except for (i) the filing of
the Agreement of Merger with the Secretary of State of the State of
Delaware, (ii) the filing of the Proxy Statement (as defined in Section
2.20) with the Securities and Exchange Commission ("SEC") in accordance
with the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
(iii) such consents, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and
state securities laws (including a Form S-4 registration statement to
register the shares of Electronic Arts Common Stock issued in the Merger)
and the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the securities or antitrust laws of any foreign
country and (iv) such other consents, authorizations, filings, approvals
and registrations which if not obtained or made would not have a Material
Adverse Effect on Village or a material adverse effect on the ability of
the parties to consummate the Merger.
2.5 Certain Statutory Provisions Not Applicable. The Board of Directors of
Maxis has taken all actions so that the restrictions contained in Section 203
of the Delaware Law applicable to a "business combination" (as defined in such
Section 203) will not apply to the execution, delivery or performance of this
Agreement or to the consummation of the Merger or the other transactions
contemplated by this Agreement. Maxis is not a foreign corporation subject to
Section 2115 of the California Corporations Code as of the date hereof.
2.6 SEC Filings; Maxis Financial Statements.
(a) Maxis has filed all forms, reports and documents, together with all
exhibits, required to be filed with the SEC since January 1, 1996, and has
made available to Electronic Arts such forms, reports and documents in the
form filed with the SEC. All such required forms, reports and documents
(including those that Maxis may file subsequent to the date hereof) are
referred to herein as the "Maxis SEC Reports." The Maxis SEC Reports (i) as
of their respective dates were prepared in accordance with the requirements
of the Securities Act or the Exchange Act, as the case may be, and the
rules and regulations of the SEC thereunder applicable to such Maxis SEC
Reports, and (ii) did not at the time they were filed (or if amended or
superseded by a filing prior to the date of this Agreement, then on the
date of such filing) or, in the case of Maxis SEC Reports filed under the
Securities Act, when such filing became effective, contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
None of Maxis' subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Maxis SEC Reports (the "Maxis
Financials"), including any Maxis SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with
the published rules and regulations of the SEC with respect thereto, (y)
was prepared in accordance with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved
(except as may be indicated in the notes thereto or, in the case of
unaudited interim financial statements, as may be permitted by the SEC on
Form 10-Q under the Exchange Act) and (z) fairly presented the consolidated
financial position of Maxis and its subsidiaries as at the respective dates
thereof and the consolidated results
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of Maxis' operations and cash flows for the periods indicated, except that
the unaudited interim financial statements were or are subject to normal
and recurring year- end adjustments. The balance sheet of Maxis as of March
31, 1997 is hereinafter referred to as the "Maxis Balance Sheet." Except as
disclosed in the Maxis Financials, since the date of the Maxis Balance
Sheet through the date of this Agreement, neither Maxis nor any of its
subsidiaries has any liabilities (absolute, accrued, contingent or
otherwise) of a nature required to be disclosed on a balance sheet or in
the related notes to the consolidated financial statements prepared in
accordance with GAAP which are, individually or in the aggregate, material
to the business, results of operations or financial condition of Maxis and
its subsidiaries taken as a whole, except (i) liabilities provided for in
the Maxis Balance Sheet or (ii) net liabilities incurred since the date of
the Maxis Balance Sheet in the ordinary course of business consistent with
past practices, which do not create an aggregate net increase in
liabilities (after taking into account any net increase in assets) in
excess of $4,000,000.
(c) Maxis has heretofore furnished to Electronic Arts a complete and
correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to agreements,
documents or other instruments which previously had been filed by Maxis
with the SEC pursuant to the Securities Act or the Exchange Act.
2.7 Absence of Certain Changes or Events. Since the date of the Maxis
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Maxis or any event that would reasonably be likely
to have a Material Adverse Effect on Maxis; (ii) any material change by Maxis
in its accounting methods, principles or practices, except as required by
concurrent changes in GAAP; (iii) any material revaluation by Maxis of any of
its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business; (iv) any declaration, setting aside,
payment of a dividend or other distribution with respect to the shares of
Maxis, or any direct or indirect redemption, purchase or other acquisition by
Maxis of any of its shares of capital stock, except for the repurchase at cost
of unvested shares held by Maxis employees on the termination of their
employment; (v) any material increase in or modification of the compensation
or benefits payable or to become payable by Maxis to any of its directors,
officers or employees, except in the ordinary course of business consistent
with past practice; (vi) any acquisition or sale of a material amount of
property or assets of Maxis, other than in the ordinary course of business
consistent with past practice; (vii) any alteration in the term of any
outstanding security of Maxis; (viii) any (A) incurrence, assumption or
guarantee by Maxis of any debt for borrowed money, (B) issuance or sale of any
securities convertible into or exchangeable for debt securities of Maxis or
(C) except for grants of options under Maxis' 1995 Stock Plan, issuance or
sale of options or other rights to acquire from Maxis, directly or indirectly,
debt securities of Maxis or any securities convertible into or exchangeable
for such debt securities; (ix) other than in the ordinary course of business,
any creation or assumption by Maxis of any mortgage, pledge, security interest
or lien or other encumbrance on any asset; (x) any making of any loan, advance
or capital contribution to or investment in any person other than (A) travel
loans or advances made in the ordinary course of business of Maxis, (B) other
loans and advances in an aggregate amount which does not exceed $100,000
outstanding at any time and (C) purchases on the open market of liquid,
publicly traded securities; (xi) any entering into, amendment of,
relinquishment, termination or non-renewal of, or any material breach under,
any material contract, lease transaction, commitment or other right or
obligation other than in the ordinary course of business; or (xii) any
transfer or grant of a right under the Maxis IP Rights (as defined in Section
2.9 below), other than those transferred or granted in the ordinary course of
business.
2.8 Taxes. Maxis and each of its subsidiaries, and any consolidated,
combined, unitary or aggregate group for Tax (as defined below) purposes of
which Maxis or any of its subsidiaries is or has been a member, has timely
filed all Returns (as defined below) required to be filed by it (other than
those that are not, individually or in the aggregate, material), has paid all
Taxes shown thereon to be due and has provided adequate accruals in all
material respects in accordance with GAAP in its financial statements for any
Taxes that have not been paid, whether or not shown as being due on any
returns. In addition, (i) no material claim for unpaid Taxes has become a lien
against the property of Maxis or any of its subsidiaries or is being asserted
against Maxis or any of its subsidiaries, (ii) no material audit of any Tax
Return of Maxis or any of its subsidiaries is being conducted by a
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Tax authority as of the date of this Agreement, (iii) no extension of the
statute of limitations on the assessment of any material Taxes has been
granted by Maxis or any of its subsidiaries and is currently in effect as of
the date of this Agreement and (iv ) there is no agreement, contract or
arrangement to which Maxis or any of its subsidiaries is a party that may
result in the payment of any amount that would not be deductible pursuant to
Sections 280G, 162 or 404 of the Code. As used herein, "Taxes" shall mean all
taxes of any kind, including, without limitation, those on or measured by or
referred to as income, gross receipts, sales, use, ad valorem, franchise,
profits, license, withholding, payroll, employment, excise, severance, stamp,
occupation, premium, value added, property or windfall profits taxes, customs,
duties or similar fees, assessments or charges of any kind whatsoever,
together with any interest and any penalties, additions to tax or additional
amounts imposed by any governmental authority, domestic or foreign. As used
herein, "Return" shall mean any return, report or statement required to be
filed with any governmental authority with respect to taxes.
2.9 Intellectual Property.
(a) Maxis (including, for all purposes under this Section 2.9, all of
Maxis' subsidiaries) owns, or has a valid and perpetual license under, all
patents, trademarks, trade names, service marks, copyrights, any
applications for all of the foregoing, trade secrets and know-how that are
required for the conduct of business of Maxis (including, without
limitation, the development, production and marketing of Maxis' products)
as currently conducted (the "Maxis IP Rights"), with sufficient rights for
the conduct of Maxis' business as currently conducted.
(b) Schedule 2.9(b) of the Maxis Schedules sets forth a complete and
service marks and any applications for all of the foregoing, included in
Maxis IP Rights, and specifies, where applicable, the jurisdictions in
which each such Maxis IP Right has been issued or registered or in which an
application for such issuance and registration has been filed, including
the respective registration or application numbers and the names of all
registered owners. Schedule 2.9(b) of Maxis Schedules sets forth the list
of all material licenses, sublicenses and other agreements to which Maxis
is a party (with subsidiaries clearly identified) and pursuant to which
Maxis or any other person is licensed or otherwise has rights under any
Maxis IP Right (excluding licenses granted by Maxis in the ordinary course
of business that permit use of software products without a right to modify,
distribute or sublicense the same and excluding standard licenses granted
to Maxis by software vendors covering software which is broadly distributed
by such licensors). The execution and delivery of this Agreement by Maxis,
and the consummation of the transactions contemplated hereby, will neither
cause Maxis to be in violation or default under any such license,
sublicense or other agreement, nor entitle any other party to any such
license, sublicense or agreement to terminate or modify such license,
sublicense or agreement, except for such violations, defaults, terminations
or modifications which, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect on Maxis.
(c) Neither the manufacture, marketing, license, sale or intended use of
any product or technology currently licensed or sold or under development
by Maxis violates in any material respect any license or agreement between
Maxis and any third party or, to the knowledge of Maxis, infringes in any
material respect any intellectual property right of any other party; and
there is no pending or, to the knowledge of Maxis, threatened claim or
litigation contesting the validity, ownership or right to use, sell,
license or dispose of any Maxis IP Rights, nor, to the knowledge of Maxis,
is there any basis for any such claim that is likely to be successful, nor
has Maxis received any notice asserting that any Maxis IP Rights or the
proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party, nor, to the knowledge of
Maxis, is there any basis for any such assertion that is likely to be
successful. To Maxis' knowledge, there is no material unauthorized use,
infringement or misappropriation under any Maxis IP Rights by any third
party, including any employee or former employee of Maxis. To the knowledge
of Maxis, no Maxis IP Right or product of Maxis is subject to any
outstanding decree, order, judgment, or stipulation restricting in any
manner the licensing thereof by or to Maxis. It is Maxis' policy to have
each employee, consultant or contractor of Maxis execute a proprietary
information and confidentiality agreement substantially in the form of
Maxis' standard forms of such agreement, and all of Maxis' employees,
consultants and contractors have executed such an agreement.
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(d) Maxis has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all Maxis IP Rights and the intellectual property rights of third parties
entrusted to them.
2.10 Compliance; Permits; Restrictions; Insurance.
(a) Neither Maxis nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of any law, rule,
regulation, ordinance, order, judgment or decree applicable to Maxis or any
of its subsidiaries or by which Maxis or any of its subsidiaries or any of
their respective properties is bound or affected. To the knowledge of
Maxis, no investigation or review by any Governmental Entity is pending,
threatened or contemplated against Maxis or any of its subsidiaries. There
is no material agreement, judgment, injunction, order or decree binding
upon Maxis or any of its subsidiaries which has or could reasonably be
expected to have the effect of prohibiting or materially impairing any
business practice of Maxis or any of its subsidiaries, any acquisition of
material property by Maxis or any of its subsidiaries or the conduct of
business by Maxis as currently conducted.
(b) Maxis and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of Maxis or any of its
subsidiaries (collectively, the "Maxis Permits"). Maxis and its
subsidiaries are in compliance in all material respects with the terms of
the Maxis Permits.
(c) Maxis and its subsidiaries maintain and at all times since January 1,
1994 have maintained fire and casualty and general liability insurance that
Maxis believes to be reasonably prudent for its business. The Maxis
Schedules lists all such insurance policies presently in effect, and copies
of all such policies have been provided or made available to Electronic
Arts or its counsel.
2.11 Litigation. Except as disclosed in the Maxis SEC Reports, there is no
action, suit, proceeding, claim, demand, arbitration or investigation pending,
or as to which Maxis or any of its subsidiaries has received any notice of
assertion nor, to Maxis' knowledge, is there a threatened action, suit,
proceeding, claim, arbitration or investigation against Maxis or any of its
subsidiaries which is reasonably likely to have a Material Adverse Effect on
Maxis. Maxis has no knowledge of any unasserted claim, the assertion of which
is likely, and which, if asserted, will seek damages, an injunction or other
legal, equitable, monetary or nonmonetary relief, which claim individually or
collectively with other such unasserted claims if granted would have a
Material Adverse Effect on Maxis. No Governmental Entity has at any time
challenged or questioned in writing the legal right of Maxis to develop, offer
or sell any of its products in the present manner or style thereof. Maxis has
delivered or made available to Electronic Arts or its counsel complete and
correct copies of all correspondence prepared by its counsel for Maxis'
auditors in connection with the last two completed audits of Maxis' financial
statements and any such correspondence since the date of the last such audit.
2.12 Brokers' and Finders' Fees. Except for fees payable to Alex. Brown &
Sons Incorporated pursuant to an engagement letter dated March 1, 1997, a copy
of which has been provided to Electronic Arts, none of Maxis or any of its
subsidiaries has incurred, nor will it incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement or any transaction contemplated
hereby.
2.13 Employee Benefit Plans.
(a) With respect to each material employee benefit plan, program,
arrangement and contract (including, without limitation, any "employee
benefit plan" as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) maintained or contributed to by
Maxis or any trade or business (a "Maxis Affiliate") which is under common
control with Maxis within the meaning of Section 414 of the Code (the
"Maxis Employee Plans"), Maxis has made available to Electronic Arts a true
and complete copy of, to the extent applicable, (i) such Maxis Employee
Plan, (ii) the most recent annual report (Form 5500), (iii) each trust
agreement related to such Maxis Employee Plan, (iv) the most recent summary
plan description for each Maxis Employee Plan for which such a description
is required, (v) the most recent
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actuarial report relating to any Maxis Employee Plan subject to Title IV of
ERISA and (vi) the most recent United States Internal Revenue Service
("IRS") determination letter issued with respect to any Maxis Employee
Plan.
(b) Each Maxis Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the
IRS covering the provisions of the Tax Reform Act of 1986 stating that such
Maxis Employee Plan is so qualified and nothing has occurred since the date
of such letter that could reasonably be expected to affect the qualified
status of such plan. Each Maxis Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither Maxis nor any Maxis Affiliate has incurred or is
reasonably expected to incur any material liability under Title IV of ERISA
in connection with any Maxis Employee Plan. All contributions due from
Maxis or any Maxis Affiliate with respect to any Maxis Employee Plan have
been made or accrued on Maxis' financial statements, and no further
contributions will be due or will have accrued thereunder as of the
Effective Date, except contributions that are consistent with the Employee
Plans and past practices of Maxis. The group health plans, as defined in
Section 4980B(g) of the Code, that benefit employees of Maxis and Maxis
Affiliates are in material compliance with the continuation coverage
requirements of subsection 4980B of the Code. There are no outstanding
violations of Section 4980B of the Code with respect to any Maxis Employee
Plan, covered employees or qualified beneficiaries which would have a
Material Adverse Effect on Maxis.
(c) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment
compensation, golden parachute, bonus or otherwise) becoming due to any
director or employee of Maxis or any of its subsidiaries from Maxis or any
of its subsidiaries, under any Maxis Employee Plan or otherwise, (ii)
materially increase any benefits otherwise payable under any Maxis Employee
Plan or otherwise or (iii) result in the acceleration of the time of
payment or vesting of any such benefits.
(d) Maxis has made available to Electronic Arts a list of all employees
of Maxis and of any of its subsidiaries and their salaries as of the date
of this Agreement.
2.14 Title to Properties; Absence of Liens and Encumbrances.
(a) The Maxis Schedules list the real property owned by Maxis. The Maxis
Schedules list each real or personal property lease (excluding software
leases) with annual lease payments of $100,000 or more to which Maxis is a
party and each amendment thereto. To Maxis' knowledge, all such current
leases are in full force and effect, are valid and effective in accordance
with their respective terms, and there is not, to Maxis' knowledge, under
any of such leases, any existing material default or material event of
default (or event which with notice or lapse of time, or both, would
constitute a default).
(b) Maxis has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in
its business, free and clear of any liens, pledges, charges, claims,
security interests or other encumbrances of any sort ("Liens"), except as
reflected in the Maxis Financials, the Maxis SEC Reports or in the Maxis
Schedules and except for liens for taxes not yet due and payable or liens
imposed by law and incurred in the ordinary course of business for
obligations not yet due to carriers, warehousemen, laborers, materials men
and the like and such imperfections of title and encumbrances, if any,
which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby. Neither Maxis nor
any of its subsidiaries is in 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 (the violation of which
would have a Material Adverse Effect on Maxis), or has received any notice
of violation with which it has not complied, except where such violation
would not have a Material Adverse Effect on Maxis.
2.15 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to
result in a material liability to Maxis, no underground storage tanks and
no amount of any substance that has been designated by any
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Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the United States Resource Conservation and Recovery Act of 1976, as
amended, and the regulations promulgated pursuant to said laws, (a
"Hazardous Material"), but excluding office and janitorial supplies, are
present, as a result of the actions of Maxis or any of its subsidiaries or
any affiliate of Maxis, or, to Maxis' knowledge, as a result of any actions
of any third party or otherwise, in, on or under any property, including
the land and the improvements, ground water and surface water thereof, that
Maxis or any of its subsidiaries has at any time owned, operated, occupied
or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be
likely to result in a material liability to Maxis, neither Maxis nor any of
its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has Maxis
or any of its subsidiaries disposed of, transported, sold, used, released,
exposed its employees or others to or manufactured any product containing a
Hazardous Material (collectively "Hazardous Materials Activities") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. Maxis and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "Maxis
Environmental Permits") which are material for the conduct of Maxis' and
its subsidiaries' Hazardous Material Activities and other businesses of
Maxis and its subsidiaries as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending or,
to Maxis' knowledge, threatened concerning any Maxis Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of Maxis or any of
its subsidiaries. Maxis is not aware of any fact or circumstance which
could involve Maxis or any of its subsidiaries in any material
environmental litigation or impose upon Maxis any material environmental
liability.
2.16 Employees; Labor Matters. Between January 1, 1996 and the date of this
Agreement, to Maxis' knowledge, no employee of Maxis or any of its
subsidiaries has violated, in any material respect, any employment contract,
patent disclosure agreement or noncompetition agreement between such employee
and any former employer of such employee due to such employee being employed
by Maxis or any of its subsidiaries and disclosing to Maxis or any of its
subsidiaries trade secrets or proprietary information of such employer.
Between April 1, 1997 and the date of this Agreement, to Maxis' knowledge, no
employee of Maxis or any of its subsidiaries has given notice to Maxis or any
of its subsidiaries that such employee intends to terminate his or her
employment with Maxis or any of its subsidiaries except for terminations of a
nature and number that are consistent with Maxis' prior experience. There are
no activities or proceedings of any labor union to organize any employees of
Maxis or any of its subsidiaries and there are no strikes, or material
slowdowns, work stoppages or lockouts, or threats thereof by or with respect
to any employees of Maxis or any of its subsidiaries. Maxis is not, and has
never been, a party to any collective bargaining agreement. Maxis and its
subsidiaries are, and since January 1, 1996, Maxis and its subsidiaries have
been in compliance in all material respects with all applicable laws regarding
employment practices, terms and conditions of employment, and wages and hours
(including, without limitation, ERISA, WARN or any similar state or local
law).
2.17 Agreements, Contracts and Commitments. Except as set forth in the Maxis
Schedules, as of the date hereof, neither Maxis nor any of its subsidiaries is
a party to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer, employee, consultant or member of Maxis' Board of Directors,
other than those that are terminable by Maxis or any of its subsidiaries on
no more than thirty days notice without liability or financial obligation,
except to the extent general principles of wrongful termination law may
limit Maxis' or any of its subsidiaries' ability to terminate employees at
will;
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(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
Maxis or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of Maxis or any of its subsidiaries to engage in any
line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise;
(f) any material joint marketing or development agreement currently in
force;
(g) any agreement, contract or commitment currently in force to provide
source code to any third party for any product or technology that is
material to Maxis and its subsidiaries taken as a whole, except for (i) any
agreement, contract or commitment pursuant to which source code is provided
for maintenance of the source code or for development of modifications
thereto only, and not for distribution of source or object code to third
parties, and (ii) any source code escrow agreement entered into in the
ordinary course of business that contains provisions relating to the
release of source code if Maxis and/or any of its subsidiaries ceases to do
business or fails to provide appropriate maintenance;
(h) any agreement, contract or commitment currently in force to license
any third party to manufacture or reproduce any Maxis product, except as a
distributor or OEM bundler in the ordinary course of business;
(i) any continuing contract for the future purchase, sale or manufacture
of products, material, supplies, equipment or services requiring payment to
or from Maxis or any of its subsidiaries in an amount in excess of $100,000
per annum which is not terminable on 90 days' or less notice without cost
or other liability at or at any time after the Effective Time or in which
Maxis or any of its subsidiaries has granted or received manufacturing
rights, most favored nation pricing provisions relating to any product,
group of products or territory;
(j) any material contract providing for the development of software
(other than contracts with consultants) for, or license of software to,
Maxis, which software is used or incorporated in any Maxis Product (as
defined in Section 2.23);
(k) any indenture, mortgage, promissory note, loan agreement, guarantee
or other agreement or commitment for the borrowing of money, for a line of
credit or for a leasing transaction of a type required to be capitalized in
accordance with Statement of Financial Accounting Standards No. 13 of the
Financial Accounting Standards Board; or
(l) any written agreement between or among Maxis or any of its
subsidiaries regarding intercompany loans, revenue or cost sharing,
ownership or license of Maxis IP Rights, intercompany royalties or
dividends or similar matters.
Any agreement, contract or commitment described in clauses (a) through (l)
above shall be referred to as a "Maxis Contract." Neither Maxis nor any of its
subsidiaries, nor to Maxis' knowledge any other party to a Maxis Contract (as
defined below), is in material breach, violation or default under, and neither
Maxis nor any of its subsidiaries has since January 1, 1997 received written
notice that it has materially breached, violated or defaulted under, and there
exists no event, condition or occurrence which, after notice or lapse of time,
or both, would constitute such a material default by Maxis or any of its
subsidiaries under, any of the Maxis Contracts that are material to Maxis or
would be reasonably likely to cause a Material Adverse Effect on Maxis.
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2.18 Pooling of Interests. To the knowledge of Maxis, based on consultation
with its independent accountants, neither Maxis nor any of its directors,
officers, affiliates or stockholders has taken any action which would preclude
Electronic Arts' ability to account for the Merger as a pooling of interests.
2.19 Change of Control Payments. The Maxis Schedules set forth each plan or
agreement pursuant to which any material amounts may become payable (whether
currently or in the future) to current or former employees, consultants,
officers and directors of Maxis as a result of or in connection with the
Merger.
2.20 Proxy Statement/Prospectus. The information supplied by Maxis for
inclusion in the Form S-4 registration statement relating to the issuance of
Electronic Arts Common Stock in the Merger (the "Registration Statement")
shall not at the time the Registration Statement is filed with the SEC and at
the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. The information supplied by Maxis for inclusion in the proxy
statement/prospectus to be sent to the stockholders of Maxis in connection
with the meeting of Maxis' stockholders to consider the approval and adoption
of this Agreement and the approval of the Merger (the "Maxis Stockholders'
Meeting") (such proxy statement/prospectus as amended or supplemented is
referred to herein as the "Proxy Statement") shall not, on the date the Proxy
Statement is first mailed to Maxis' stockholders, at the time of the Maxis
Stockholders' Meeting and at the Effective Time, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not false or misleading; or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the Maxis
Stockholders' Meeting which has become false or misleading. The Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations thereunder. If at any time
prior to the Effective Time, any event relating to Maxis or any of its
affiliates, officers or directors should be discovered by Maxis which should
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement, Maxis shall promptly inform Electronic Arts.
Notwithstanding the foregoing, Maxis makes no representation or warranty with
respect to any information supplied by Electronic Arts or Merger Sub which is
contained in any of the foregoing documents.
2.21 Board Approval. The Board of Directors of Maxis has, as of the date of
this Agreement, unanimously (i) approved this Agreement and the Merger, (ii)
determined that the Merger is fair to, and in the best interests of, Maxis and
its stockholders and (iii) determined to recommend that the stockholders of
Maxis approve and adopt this Agreement and approve the Merger.
2.22 Fairness Opinion. Maxis has received a written opinion from Alex. Brown
& Sons Incorporated, dated as of the date hereof, to the effect that as of the
date hereof, the Exchange Ratio is fair to Maxis' stockholders from a
financial point of view and has delivered to Electronic Arts a copy of such
opinion.
2.23 Products and Distribution. The Maxis Schedules contain a complete list
of the top five (5) software products (by title, determined by aggregate net
sales by Maxis or any of its subsidiaries in fiscal 1997 from such title)
published and/or distributed by Maxis or any of its subsidiaries (the "Maxis
Published Products") and the expected top five (5) products (by title,
determined by the projected net sales for such title in its first year after
introduction) under development or consideration by Maxis or its subsidiaries
with a scheduled ship date on or prior to December 31, 1997 (the "Maxis
Products Under Development," collectively with the Maxis Published Products
referred to as the "Maxis Products") (which list is correct in all material
respects).
(a) The Maxis Schedules set forth, for each Maxis Product, the following
(to the extent not already listed on another Schedule to this Agreement):
(i) a list of all material contracts and agreements (including without
limitation all material development, trademark license, technology license,
distribution or other agreements) relating to the Maxis Products; (ii)
whether the Maxis Product has been developed internally (i.e.,
substantially entirely by employees of Maxis or any of its subsidiaries) or
externally (i.e., including substantive contributions by one or more
independent contractors to Maxis) and, if externally, such
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Schedule sets forth the identity of the significant independent contractors
and a list of the material agreements with such independent contractors;
(iii) the material advances paid or payable, and the material royalties
payable, to any third parties with respect to such Maxis Product; and (iv)
a list of the third parties with significant distribution or publication
rights to such Maxis Product together with a description of: (A) the
territory in which the third party has distribution rights; and (B) whether
such distribution rights are exclusive or nonexclusive (all of which
information disclosed pursuant to clauses (i)-(iv) of this paragraph is
correct in all material respects).
(b) The Maxis Schedules set forth, for each Maxis Product Under
Development, the following (as of the date of this Agreement): (i) the
currently scheduled public availability date without regard to the Merger
(which dates Maxis believes to be reasonable); (ii) a schedule of
development milestone events and any material related payments, including
both milestones already achieved in the past six (6) months and those
scheduled for the future; and (iii) whether any significant development
milestone for such Maxis Product has been missed in the past six (6) months
by more than thirty (30) days (all of which information disclosed pursuant
to clauses (i)-(iii) of this paragraph is correct in all material
respects).
2.24 Development Tools. The Maxis Schedules contain a complete list of all
material software development tools used or currently intended to be used by
Maxis or any of its subsidiaries in the development of any of the Maxis
Published Products, except for any such tools that are generally available and
are used in their generally available form (such as standard compilers) (the
"Maxis Development Tools"). The Maxis Schedules also set forth, for each Maxis
Development Tool: (a) for any Maxis Development Tool not entirely developed
internally by the employees of Maxis or any of its subsidiaries, the identity
of the independent contractors and consultants involved in a material way in
such development and a list of the material agreements with such independent
contractors and consultants with respect to the Maxis Published Products; (b)
a list of any third parties with any rights to receive material royalties or
other payments with respect to such Maxis Development Tools, and a schedule of
all such royalties payable; (c) a list of any material restrictions on Maxis'
or any of its subsidiaries' unrestricted right to use and distribute such
Maxis Development Tool; and (d) a list of all agreements with third parties
for the use by such third party of such Maxis Development Tools (all of which
information disclosed pursuant to clauses (a)-(d) of this paragraph is correct
in all material respects).
2.25 Interested Party Transactions. Except as disclosed in the Maxis SEC
Reports filed prior to the date of this Agreement, since the date of Maxis'
last proxy statement to its stockholders, no event has occurred that would be
required to be reported by Maxis as a Certain Relationship or Related
Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC.
ARTICLE III
Representations and Warranties of Electronic Arts and Merger Sub
Electronic Arts and Merger Sub represent and warrant to Maxis, subject to
the exceptions disclosed in writing in the disclosure letter supplied by
Electronic Arts to Maxis dated as of the date hereof and certified by a duly
authorized officer of Electronic Arts (the "Electronic Arts Schedules"), as
follows:
3.1 Organization of Electronic Arts and Merger Sub.
(a) Each of Electronic Arts and Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is organized; has the corporate power and
authority to own, lease and operate its assets and property and to carry on
its business as now being conducted; and is duly qualified or licensed to
do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature
of its activities makes such qualification or licensing necessary, except
where the failure to be so qualified would not have a Material Adverse
Effect on Electronic Arts.
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(b) Electronic Arts has delivered or made available to Maxis a true and
correct copy of the charter and Bylaws of Electronic Arts and Merger Sub,
each as amended to date, and each such instrument is in full force and
effect. Neither Electronic Arts nor Merger Sub is in violation of any of
the provisions of its charter or Bylaws.
3.2 Electronic Arts and Merger Sub Capital Structure. The authorized capital
stock of Electronic Arts consists of 70,000,000 shares of Common Stock, par
value $0.01 per share, of which there were 54,165,716 shares issued and
outstanding as of March 29, 1997, and 1,000,000 shares of Preferred Stock, par
value $0.01 per share, of which no shares are issued or outstanding. The
authorized capital stock of Merger Sub consists of 1,000 shares of Common
Stock, par value $0.01 per share, all of which, as of the date hereof, are
issued and outstanding and are held by Electronic Arts. Merger Sub was formed
on June 2, 1997 for the purpose of consummating the Merger and has no material
assets or liabilities except as necessary for such purpose. All outstanding
shares of Electronic Arts Common Stock are duly authorized, validly issued,
fully paid and nonassessable and are not subject to preemptive rights created
by statute, the Certificate of Incorporation or Bylaws of Electronic Arts or
any agreement or document to which Electronic Arts is a party or by which it
is bound. Electronic Arts has reserved a sufficient number of shares of Common
Stock for the issuance of shares to the stockholders of Maxis in the Merger.
3.3 Authority.
(a) Each of Electronic Arts and Merger Sub has all requisite corporate
power and authority to enter into 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 authorized by all necessary corporate action on the part of
Electronic Arts and, in the case of this Agreement, Merger Sub, subject
only to the filing and recordation of the Agreement of Merger pursuant to
Delaware Law. This Agreement has been duly executed and delivered by each
of Electronic Arts and Merger Sub and, assuming the due authorization,
execution and delivery by Maxis, constitutes the valid and binding
obligation of Electronic Arts, enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy and other similar
laws and general principles of equity. The execution and delivery of this
Agreement by each of Electronic Arts and Merger Sub does not, and the
performance of this Agreement by each of Electronic Arts and Merger Sub
will not (i) conflict with or violate the Certificate of Incorporation or
Bylaws of Electronic Arts or the Certificate of Incorporation or Bylaws of
Merger Sub or the equivalent organizational documents of any of Electronic
Arts' other subsidiaries, (ii) subject to compliance with the requirements
set forth in Section 3.3(b) below, conflict with or violate in any material
respect any law, rule, regulation, order, judgment or decree applicable to
Electronic Arts or any of its subsidiaries (including Merger Sub) or by
which its or any of their respective properties is bound or affected, or
(iii) conflict with, result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default)
under, or impair Electronic Arts' rights or alter the rights or obligations
of any third party under, or give rise to any rights of termination,
amendment, acceleration or cancellation of any obligation contained in, or
result in the creation of a lien or encumbrance on any of the properties or
assets of Electronic Arts or any of its subsidiaries (including Merger Sub)
pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to
which Electronic Arts or any of its subsidiaries (including Merger Sub) is
a party or by which Electronic Arts or any of its subsidiaries or its or
any of their respective properties or assets are bound or affected, except
with respect to clause (iii) for any such conflicts, violations, defaults,
rights, liens, encumbrances or other occurrences that would, individually
or in the aggregate, not have a Material Adverse Effect on Electronic Arts.
The Electronic Arts Schedules list all material consents, waivers and
approvals under any of Electronic Arts' or any of its subsidiaries'
agreements, contracts, licenses or leases required to be obtained in
connection with the consummation of the transactions contemplated hereby,
which, if individually or in the aggregate not obtained, would result in a
Material Adverse Effect on Electronic Arts.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required to be
obtained by Electronic Arts or Merger Sub in connection with the execution
and delivery of this Agreement or the consummation of the Merger, except
for (i) the filing of the
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Registration Statement relating to the issuance of Electronic Arts Common
Stock in the Merger with the SEC in accordance with the Securities Act,
(ii) the filing of the Agreement of Merger with the Secretary of State of
the State of Delaware, (iii) such consents, approvals, orders,
authorizations, registrations, declarations and filings as may be required
under applicable federal and state securities laws and the HSR Act and the
securities or antitrust laws of any foreign country, and (iv) such other
consents, authorizations, filings, approvals and registrations which if not
obtained or made would not have a Material Adverse Effect on Electronic
Arts or a material adverse effect on the ability of the parties to
consummate the Merger.
3.4 Section 203 of the Delaware General Corporation Law Not Applicable. The
Board of Directors of Electronic Arts has taken all actions so that the
restrictions contained in Section 203 of the Delaware General Corporation Law
applicable to a "business combination" (as defined in such Section 203) will
not apply to the execution, delivery or performance of this Agreement or to
the consummation of the Merger or the other transactions contemplated by this
Agreement.
3.5 SEC Filings; Electronic Arts Financial Statements.
(a) Electronic Arts has filed all forms, reports and documents, together
with all exhibits, required to be filed with the SEC since January 1, 1996,
and has made available to Maxis such forms, reports and documents in the
form filed with the SEC. All such required forms, reports and documents
(including those that Electronic Arts may file subsequent to the date
hereof) are referred to herein as the "Electronic Arts SEC Reports." The
Electronic Arts SEC Reports (i) as of their respective dates were prepared
in accordance with the requirements of the Securities Act or the Exchange
Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such Electronic Arts SEC Reports, and (ii) did not
at the time they were filed (or if amended or superseded by a filing prior
to the date of this Agreement, then on the date of such filing) or, in the
case of Electronic Arts SEC Reports filed under the Securities Act, when
such filing became effective, contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. None of
Electronic Arts' subsidiaries is required to file any forms, reports or
other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in Electronic Arts SEC Reports
(the "Electronic Arts Financials"), including any Electronic Arts SEC
Reports filed after the date hereof until the Closing, (x) complied as to
form in all material respects with the published rules and regulations of
the SEC with respect thereto, (y) was prepared in accordance with GAAP
applied on a consistent basis throughout the periods involved (except as
may be indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and (z) fairly presented the consolidated financial position
of Electronic Arts and its subsidiaries as at the respective dates thereof
and the consolidated results of Electronic Arts' operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end
adjustments. The balance sheet of Electronic Arts contained in Electronic
Arts SEC Reports as of March 31, 1997 is hereinafter referred to as the
"Electronic Arts Balance Sheet." Except as disclosed in the Electronic Arts
Financials, since the date of the Electronic Arts Balance Sheet through the
date of this Agreement neither Electronic Arts nor any of its subsidiaries
has any liabilities (absolute, accrued, contingent or otherwise) of a
nature required to be disclosed on a balance sheet or in the related notes
to the consolidated financial statements prepared in accordance with GAAP
which are, individually or in the aggregate, material to the business,
results of operations or financial condition of Electronic Arts and its
subsidiaries taken as a whole, except liabilities (i) provided for in the
Electronic Arts Balance Sheet, or (ii) incurred since the date of the
Electronic Arts Balance Sheet in the ordinary course of business consistent
with past practices that would not have a Material Adverse Effect on
Electronic Arts.
(c) Electronic Arts has heretofore furnished to Maxis a complete and
correct copy of any amendments or modifications, which have not yet been
filed with the SEC but which are required to be filed, to agreements,
documents or other instruments which previously had been filed by
Electronic Arts with the SEC pursuant to the Securities Act or the Exchange
Act.
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3.6 Absence of Certain Changes or Events. Since the date of the Electronic
Arts Balance Sheet through the date of this Agreement, there has not been any
Material Adverse Effect on Electronic Arts or any event that would reasonably
be likely to have a Material Adverse Effect on Electronic Arts.
3.7 Pooling of Interests. To the knowledge of Electronic Arts, based on
consultation with its independent accountants, neither Electronic Arts nor any
of its directors, officers, affiliates or stockholders has taken any action
which would preclude Electronic Arts' ability to account for the Merger as a
pooling of interests.
3.8 Proxy Statement/Prospectus. The information supplied by Electronic Arts
for inclusion in the Registration Statement shall not at the time the
Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by Electronic Arts for inclusion in the Proxy Statement
shall not, on the date the Proxy Statement is first mailed to Maxis'
stockholders, at the time of the Maxis Stockholders' Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
are made, not false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the Maxis Stockholders' Meeting which has
become false or misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. If at any time prior to the Effective Time, any event
relating to Electronic Arts or any of its affiliates, officers or directors
should be discovered by Electronic Arts which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy
Statement, Electronic Arts shall promptly inform Maxis. Notwithstanding the
foregoing, Electronic Arts makes no representation or warranty with respect to
any information supplied by Maxis which is contained in any of the foregoing
documents.
3.9 Board Approval. The Board of Directors of Electronic Arts has (i)
determined that the Merger is fair to, and in the best interests of,
Electronic Arts and its stockholders and (ii) approved the Merger.
ARTICLE IV
Conduct Prior to the Effective Time
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Maxis and each of its subsidiaries shall,
except as permitted by the terms of this Agreement or to the extent that
Electronic Arts shall otherwise consent in writing, which consent shall not be
unreasonably withheld, or as provided in Section 4 of the Maxis Schedules,
carry on and use reasonable best efforts to preserve its business, in all
material respects, in the usual, regular and ordinary course, and in
compliance with all applicable laws and regulations, pay its debts and taxes
when due subject to good faith disputes over such debts or taxes, pay or
perform other material obligations when due, and use its reasonable best
efforts consistent with past practices and policies to (i) preserve intact its
present business organization, (ii) keep available the services of its present
officers and employees and (iii) preserve its relationships with customers,
suppliers, distributors, licensors, licensees, and others with which it has
business dealings.
In addition, except as permitted by the terms of this Agreement, and except
as provided in Section 4 of the Maxis Schedules, without the prior written
consent of Electronic Arts (which consent shall not be unreasonably withheld)
during the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement pursuant to its terms and the
Effective Time, Maxis shall not do any of the following and shall not permit
its subsidiaries to do any of the following (except as required by applicable
law):
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
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(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing or made available to
Electronic Arts, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend the
term of any agreement with respect to, amend or modify in any material
respect any rights (including without limitation distribution rights) to
the Maxis IP Rights or enter into assignments of future patent rights,
other than licenses and distribution rights in the ordinary course of
business;
(d) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock, equity securities or property) in
respect of any capital stock or split, combine or reclassify any capital
stock or issue or authorize the issuance of any other securities in respect
of, in lieu of or in substitution for any capital stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares
of capital stock of Maxis, except repurchases of unvested shares at cost in
connection with the termination of the employment, consulting or director
relationship with any employee, officer, consultant or director pursuant to
agreements in effect as of the date hereof;
(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into
shares of capital stock, or subscriptions, rights, warrants or options to
acquire any shares of capital stock or any securities convertible into
shares of capital stock, or enter into other agreements or commitments of
any character obligating it to issue any such shares or convertible
securities, or, except pursuant to agreements existing on the date hereof,
accelerate the vesting of any outstanding option or other security, other
than the issuance, delivery and/or sale of (i) shares of Maxis Common Stock
pursuant to the exercise of outstanding stock options, (ii) shares of Maxis
Common Stock issuable to participants in the Maxis ESPP consistent with the
terms thereof and (iii) options to purchase Maxis Common Stock granted at
fair market value, consistent with past practice and in accordance with
Maxis Stock Option Plans;
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Maxis or enter into
any material joint ventures, strategic partnerships or alliances;
(i) Sell, lease, encumber or otherwise dispose of any properties or
assets which are material, individually or in the aggregate, to the
business of Maxis, except in the ordinary course of business consistent
with past practice;
(j) Incur any indebtedness for borrowed money in excess of $2,500,000, or
guarantee any indebtedness of any person for borrowed money (except that
Maxis may guarantee any indebtedness of any subsidiary of Maxis, and any
subsidiary of Maxis may guarantee any indebtedness of Maxis or of any other
subsidiary of Maxis; provided that the total guaranteed indebtedness in the
foregoing cases, together with any incurred indebtedness by Maxis, does not
exceed $2,500,000), or issue or sell any debt securities or warrants or
rights to acquire debt securities of Maxis or guarantee any debt securities
of others;
(k) Adopt or amend any employee benefit plan or employee stock purchase
or employee stock option plan, enter into any employment contract (other
than: (x) offer letters and letter agreements with employees who are
terminable "at will," or (y) as required by law), pay any special bonus or
special remuneration to any director or employee other than in the ordinary
course of business, consistent with past practice, or increase the salaries
or wage rates of its officers or employees other than in the ordinary
course of business, consistent with past practice;
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(l) Make any payments outside of the ordinary course of business in
excess of $1 million for purposes of settling any dispute;
(m) Take any action, or permit any of its affiliates to take any action,
that would be reasonably likely to interfere with Electronic Arts' ability
to account for the Merger as a pooling of interests whether or not
otherwise permitted by the provisions of this Section 4.1;
(n) Pay (or make any oral or written commitments or representations to
pay) any bonus, increased salary or special remuneration to any officer,
employee or consultant (except (i) for normal salary increases consistent
with past practices not to exceed 10% per year, (ii) pursuant to existing
arrangements previously disclosed to Electronic Arts and (iii) for
reasonable bonuses to encourage retention of employees after the
announcement of a Superior Proposal (as defined below)) or enter into or
vary the terms of any employment, consulting or severance agreement with
any such person, pay any severance or termination pay (other than payments
made in accordance with plans or agreements existing on the date hereof),
grant any stock option (except for normal grants to newly hired employees
or newly promoted employees consistent with past practices) or issue any
restricted stock, or enter into or modify, in any material respect, any
agreement or plan or increase, in any material respect, benefits of the
type described in Section 2.13;
(o) Materially change its accounting methods, principles or practices,
except as required by concurrent changes in GAAP;
(p) Amend in a manner adverse to the Company or terminate any material
contract, agreement or license to which it is a party except those amended
or terminated in the ordinary course of its business, consistent with past
practice;
(q) Lend any amount to any person or entity, other than (i) advances for
travel and expenses which are incurred in the ordinary course of business
or (ii) any loans pursuant to any Maxis Section 401(k) Plan;
(r) Waive or release any right or claim except for the waiver or release
of non-material claims in the ordinary course of business, consistent with
past practice or the waiver or release of rights or claims set forth in the
Maxis Schedules;
(s) Split or combine the outstanding shares of its capital stock of any
class or enter into any recapitalization or agreement affecting the number
or rights of outstanding shares of its capital stock of any class or
affecting any other of its securities;
(t) Agree to any audit assessment by any Tax authority in excess of
$500,000;
(u) Change any insurance coverage in any material respects; or
(v) Agree in writing or otherwise to take any of the actions described in
Section 4.1 (a) through (u) above.
ARTICLE V
Additional Agreements
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Maxis and Electronic Arts will prepare, and file with the SEC, the Proxy
Statement, and Electronic Arts will prepare and file with the SEC the
Registration Statement in which the Proxy Statement will be included as a
prospectus. Each of Maxis and Electronic Arts will respond to any comments
of the SEC, will use its respective reasonable best efforts to have the
Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing and, to the extent that
presenting this Agreement and the Merger to Maxis' stockholders for their
approval and adoption would not violate applicable law, Maxis will cause
the Proxy Statement to be mailed to the Maxis stockholders at the earliest
practicable time after the Registration Statement is declared effective by
the SEC. As promptly as practicable after the date of this Agreement, each
of Maxis and Electronic Arts will prepare and file any other filings
required to be filed by it under the Exchange Act, the
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Securities Act or any other Federal, foreign or Blue Sky or related laws
relating to the Merger and the transactions contemplated by this Agreement
(the "Other Filings"). Each of Maxis and Electronic Arts will notify the
other promptly upon the receipt of any comments from the SEC or its staff
or any other government officials and of any request by the SEC or its
staff or any other government officials for amendments or supplements to
the Registration Statement, the Proxy Statement or any Other Filing or for
additional information and will supply the other with copies of all
correspondence between such party or any of its representatives, on the one
hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy
Statement, the Merger or any Other Filing. Each of Maxis and Electronic
Arts will cause all documents that it is responsible for filing with the
SEC or other regulatory authorities under this Section 5.1(a) to comply in
all material respects with all applicable requirements of law and the rules
and regulations promulgated thereunder. Whenever Maxis or Electronic Arts
obtains knowledge of the occurrence of any event which is required to be
set forth in an amendment or supplement to the Proxy Statement, the
Registration Statement or any Other Filing, Maxis or Electronic Arts, as
the case may be, will promptly inform the other of such occurrence and
cooperate in filing with the SEC or its staff or any other government
officials, and/or mailing to stockholders of Maxis, such amendment or
supplement.
(b) Subject to the provisions of Section 5.4(b), the Proxy Statement will
include the recommendation of the Board of Directors of Maxis in favor of
adoption and approval of this Agreement and approval of the Merger (except
that notwithstanding anything to the contrary contained in this Agreement,
the Board of Directors of Maxis may withdraw, modify or refrain from making
such recommendation to the extent that the Board determines, in good faith,
after consultation with outside legal counsel, that compliance with the
Board's fiduciary duties would require it to do so).
5.2 Meeting of Stockholders. Promptly after the date hereof, Maxis will take
all action necessary in accordance with Delaware Law and its Certificate of
Incorporation and Bylaws to convene the Maxis Stockholders' Meeting to be held
as promptly as practicable, and in any event (to the extent permissible under
applicable law) within 45 days after the declaration of effectiveness of the
Registration Statement, for the purpose of voting upon this Agreement. For so
long as the Board of Directors of Maxis continues to make the recommendation
set forth in Section 5.1, Maxis will use its reasonable best efforts to
solicit from its stockholders proxies in favor of the adoption and approval of
this Agreement and the approval of the Merger and will take all other action
necessary or advisable to secure the vote or consent of its stockholders
required by the rules of the National Association of Securities Dealers, Inc.
or Delaware Law to obtain such approvals.
5.3 Confidentiality.
(a) The parties acknowledge that Electronic Arts and Maxis have
previously executed a Confidentiality Agreement, dated May 24, 1996 (the
"Confidentiality Agreement"), which Confidentiality Agreement will continue
in full force and effect in accordance with its terms.
(b) Access to Information. Each of Electronic Arts and Maxis will afford
the other party and its accountants, counsel and other representatives
reasonable access during normal business hours to the properties, books,
records and personnel of such party during the period prior to the
Effective Time to obtain all information concerning the business, including
the status of product development efforts, properties, results of
operations and personnel of such party, as the other party may reasonably
request. No information or knowledge obtained in any investigation pursuant
to this Section 5.3 will affect or be deemed to modify any representation
or warranty contained herein or the conditions to the obligations of the
parties to consummate the Merger.
5.4 No Solicitation.
(a) Subject to Section 5.4(b), from and after the date of this Agreement
until the earlier of the Effective Time or termination of this Agreement
pursuant to its terms, Maxis and its subsidiaries shall not, and will instruct
their respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, (i) solicit,
initiate or encourage the making, submission or announcement of, any
Acquisition Proposal (as defined below) by any person, entity or group (other
than Electronic Arts and its
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affiliates, agents and representatives), or (ii) participate in any
discussions or negotiations with, or disclose any non-public information
concerning Maxis or any of its subsidiaries to, or afford any access to the
properties, books or records of Maxis or any of its subsidiaries to, or
otherwise assist or facilitate, or enter into any agreement or
understanding with, any person, entity or group (other than Electronic Arts
and its affiliates, agents and representatives), in connection with any
Acquisition Proposal with respect to Maxis. Without limiting the generality
of the foregoing, Maxis acknowledges and agrees that any violation of any
of the restrictions set forth in the preceding sentence by any director,
officer, employee, representative, investment banker, agent or affiliate of
Maxis shall be deemed to constitute a breach of this Section 5.4 by Maxis.
For the purposes of this Agreement, an "Acquisition Proposal" with respect
to an entity means any proposal or offer relating to (i) any merger,
consolidation, sale of substantial assets or similar transactions involving
the entity or any subsidiaries of the entity (other than sales or licenses
of assets or inventory in the ordinary course of business or as permitted
under the terms of this Agreement), (ii) sale of 15% or more of the
outstanding shares of capital stock of the entity (including without
limitation by way of a tender offer or an exchange offer), (iii) the
acquisition by any person of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
which beneficially owns, or has the right to acquire beneficial ownership
of, 15% or more of the then outstanding shares of capital stock of the
entity (except for acquisitions for passive investment purposes only in
circumstances where the person or group qualifies for and files a Schedule
13G with respect thereto); or (iv) any public announcement of a proposal,
plan or intention to do any of the foregoing or any agreement to engage in
any of the foregoing. Maxis will immediately cease any and all existing
activities, discussions or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal. Maxis will (i) notify
Electronic Arts as promptly as practicable if it receives any proposal or
written inquiry or written request for Maxis in connection with an
Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly
as practicable notify Electronic Arts of the significant terms and
conditions of any such Acquisition Proposal, as well as the identity of the
third party submitting such Acquisition Proposal. In addition, subject to
the other provisions of this Section 5.4(a), from and after the date of
this Agreement until the earlier of the Effective Time and termination of
this Agreement pursuant to its terms, Maxis and its subsidiaries will not,
and will instruct their respective directors, officers, employees,
representatives, investment bankers, agents and affiliates not to, directly
or indirectly, make or authorize any public statement, recommendation or
solicitation in support of any Acquisition Proposal made by any person,
entity or group (other than Electronic Arts); provided, however, that
nothing herein shall prohibit Maxis' Board of Directors from taking and
disclosing to Maxis' stockholders a position with respect to a tender offer
pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange Act.
(b) Notwithstanding anything contrary contained in Section 5.4(a) or
elsewhere in this Agreement, prior to the Effective Time, Maxis may, to the
extent the Board of Directors of Maxis determines, in good faith, after
consultation with outside legal counsel, that the Board's fiduciary duties
require it to do so, participate in discussions or negotiations with, and,
subject to the requirements of paragraph (c) below, furnish non-public
information, and afford access to the properties, books or records of Maxis
to any person, entity or group after such person, entity or group has
delivered to Maxis in writing, an unsolicited bona fide Acquisition
Proposal (which has not been withdrawn) which the Board of Directors of
Maxis in its good faith reasonable judgment determines, after consultation
with its independent financial advisors, would reasonably likely to result
in a transaction more favorable than the Merger to the stockholders of
Maxis (a "Superior Proposal"). In addition, notwithstanding the provisions
of paragraph (a) above or any other provision of this Agreement, in
connection with a submitted, written bona fide Acquisition Proposal, Maxis
may refer the proposing third party to this Section 5.4 or make a copy of
this Section 5.4 available to such third party. In the event Maxis receives
a Superior Proposal, nothing contained in this Agreement (but subject to
the terms of this paragraph (b)) will prevent the Board of Directors of
Maxis from recommending such Superior Proposal to Maxis' stockholders, if
the Board determines, in good faith, after consultation with outside legal
counsel, that such action is required by its fiduciary duties; in such
case, the Board of Directors of Maxis may withdraw, modify or refrain from
making its recommendations set forth in Section
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5.1(b), and, to the extent it does so, Maxis may refrain from soliciting
proxies and taking such other action necessary to secure the affirmative
vote of its stockholders as may be required by Section 5.2; provided that
(to the extent permissible under applicable law) Maxis shall remain
obligated under Section 5.2 to convene the Maxis Stockholder Meeting and
shall have the vote on the Merger considered by the stockholders of Maxis
prior to the vote (if any) on the Superior Proposal; and provided, further,
that Maxis shall not recommend to its stockholders a Superior Proposal for
a period of not less than 48 hours after Electronic Arts' receipt of a copy
of such Superior Proposal (or a description of the significant terms and
conditions thereof, if not in writing) and the identity of the third party.
Notwithstanding anything elsewhere contained in Section 5.4(a) or elsewhere
in this Agreement, Maxis may, if its Board of Directors determines, in good
faith, after consultation with outside legal counsel that the Board's
fiduciary duties require it to do so, enter into an agreement or
understanding relating to a Superior Proposal; provided, that (i) such
agreement or understanding provides that the Merger shall be considered by
the stockholders of Maxis prior to the Superior Proposal and (ii) if the
Merger is approved by the stockholders of Maxis, neither Maxis nor
Electronic Arts shall be required to pay a fee or otherwise incur any
material liability arising out of the agreement or understanding relating
to the Superior Proposal, including, without limitation, as a result of the
Superior Proposal not being approved. The performance of such agreement or
understanding relating to the Superior Proposal to the extent necessary to
facilitate the due consideration of such Superior Proposal at the meeting
of the stockholders of Maxis after the Merger shall not constitute a breach
of this Agreement.
(c) Notwithstanding anything to the contrary herein, Maxis will not provide
any non-public information to a third party unless: (x) Maxis provides such
non-public information pursuant to a nondisclosure agreement with terms
regarding the protection of oral or written confidential information at least
as restrictive as such terms in the Confidentiality Agreement; and (y) such
non-public information has been previously delivered to Electronic Arts.
(d) As of the date of this Agreement, Maxis shall immediately cease and
cause to be terminated any existing discussions with any Person that relate to
any Acquisition Proposal.
5.5 Public Disclosure. Maxis and Electronic Arts will consult with each
other before issuing any press release or otherwise making any public
statement with respect to the Merger, this Agreement or an Acquisition
Proposal and will not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or any
listing agreement with a national securities exchange or the Nasdaq Stock
Market.
5.6 Legal Requirements. Each of Maxis, Merger Sub and Electronic Arts will
take all reasonable actions necessary or desirable to comply promptly with all
legal requirements which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement (including
furnishing all information required in connection with approvals by or filings
with any Governmental Entity, and prompt resolution of any litigation prompted
hereby) and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such filings with or investigations by
any Governmental Entity, and any other such requirements imposed upon any of
them or their respective subsidiaries in connection with the consummation of
the transactions contemplated by this Agreement. Electronic Arts will use its
commercially reasonable efforts to take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of Electronic Arts Common Stock pursuant hereto.
Maxis will use its commercially reasonable efforts to assist Electronic Arts
as may be necessary to comply with the securities and blue sky laws of all
jurisdictions which are applicable in connection with the issuance of
Electronic Arts Common Stock pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date hereof,
Maxis and Electronic Arts will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of its or its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
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5.8 Notification of Certain Matters. Maxis and Merger Sub will give prompt
notice to Electronic Arts, and Electronic Arts will give prompt notice to
Maxis, after obtaining knowledge of the occurrence, or failure to occur, of
any event, which occurrence or failure to occur would be reasonably likely to
cause (a) any representation or warranty contained in this Agreement and made
by it to be untrue or inaccurate in any material respect at any time from the
date of this Agreement to the Effective Time such that the conditions set
forth in Section 6.2(a) or 6.3(a), as the case may be, would not be satisfied
as a result thereof, (b) any Material Adverse Effect on Maxis or Electronic
Arts or (c) any failure of Maxis and Merger Sub or Electronic Arts, as the
case may be, to comply with or satisfy, in any material respect, any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement such that the condition set forth in Section 6.2(b) or 6.3(b), as
the case may be, would not be satisfied as a result thereof. To ensure
compliance with this Section 5.8, Maxis shall deliver to Electronic Arts as
soon as practicable but in any event within thirty days after the end of each
monthly accounting period beginning with the month ended May 31, 1997 and
ending with the monthly accounting period occurring before the earlier of the
Closing Date or the termination of this Agreement in accordance with its
terms, an unaudited consolidated balance sheet, statement of operations and
statement of cash flows for Maxis, which financial statements shall be
prepared in the ordinary course of business, in accordance with Maxis' books
and records and generally accepted accounting principles and shall fairly
present the consolidated financial position of Maxis as of their respective
dates and the results of Maxis' operations for the periods then ended.
Notwithstanding the above, the delivery of any notice pursuant to this Section
5.8 will not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
5.9 Reasonable Best Efforts and Further Assurances. Subject to the
respective rights and obligations of Maxis and Electronic Arts under this
Agreement (including the rights of Maxis under 5.1(b) and 5.4(b)), each of the
parties to this Agreement will use its reasonable best efforts to effectuate
the Merger and other transactions contemplated hereby, to fulfill and cause to
be fulfilled the conditions to closing under this Agreement and to effect the
Closing as soon as practicable; provided that neither Maxis nor Electronic
Arts nor any subsidiary or affiliate thereof will be required to agree to any
divestiture by itself or any of its affiliates of shares of capital stock or
of any business, assets or property, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock. Subject to the first
sentence of this Section 5.9, each party hereto, at the reasonable request of
another party hereto, will execute and deliver such other instruments and do
and perform such other acts and things as may be necessary or desirable for
effecting completely the consummation of the transactions contemplated hereby.
5.10 Stock Options and Employee Benefits.
(a) At the Effective Time, each outstanding option to purchase shares of
Maxis Common Stock (each a "Maxis Stock Option") under the Maxis Stock
Option Plans, whether or not exercisable, will be assumed by Electronic
Arts. Each Maxis Stock Option so assumed by Electronic Arts under this
Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable Maxis Stock Option Plan immediately
prior to the Effective Time and the Stock Option Agreement by which it is
evidenced, except that (i) each Maxis Stock Option will be exercisable (or
will become exercisable in accordance with its terms) for that number of
whole shares (and no fractional shares) of Electronic Arts Common Stock
equal to the product of the number of shares of Maxis Common Stock that
were issuable upon exercise of such Maxis Stock Option immediately prior to
the Effective Time multiplied by the Exchange Ratio, rounded down to the
nearest whole number of shares of Electronic Arts Common Stock, and (ii)
the per share exercise price for the shares of Electronic Arts Common Stock
issuable upon exercise of such assumed Maxis Stock Option will be equal to
the quotient determined by dividing the exercise price per share of Maxis
Common Stock at which such Maxis Stock Option was exercisable immediately
prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent. As soon as reasonably practicable after the Effective
Time, Electronic Arts will issue to each holder of an outstanding Maxis
Stock Option a notice describing the foregoing assumption of such Maxis
Stock Option by Electronic Arts.
(b) The parties intend that Maxis Stock Options assumed by Electronic
Arts shall qualify following the Effective Time as incentive stock options
as defined in Section 422 of the Code to the extent Maxis Stock Options
qualified as incentive stock options immediately prior to the Effective
Time.
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(c) Prior to the Effective Time, Maxis shall take such actions as are
necessary to establish a "new exercise date" (as such term is used in the
ESPP) in accordance with the terms of the ESPP (the "New Exercise Date")
for the then current offering periods (as such term is used in the ESPP).
The New Exercise Date shall be the last trading day on which shares of
Maxis' Common Stock are traded on the Nasdaq National Market immediately
prior to the Effective Time; provided, however, that the New Exercise Date
shall be conditioned upon consummation of the Merger. On the New Exercise
Date, Maxis shall apply the funds credited as of such date under the ESPP
within each participant's payroll withholdings account to the purchase of
whole shares of Maxis Common Stock in accordance with the ESPP.
(d) Electronic Arts will reserve sufficient shares of Electronic Arts
Common Stock for issuance under Section 5.10(a) and under Section 1.6(c)
hereof.
5.11 Form S-8. Electronic Arts agrees to file a registration statement on
Form S-8 for the shares of Electronic Arts Common Stock issuable with respect
to assumed Maxis Stock Options no later than five (5) business days after the
Closing Date.
5.12 Indemnification and Insurance.
(a) From and after the Effective Time, Electronic Arts will cause the
Surviving Corporation to fulfill and honor in all respects the obligations
of Maxis pursuant to each indemnification agreement currently in effect
between Maxis and each person who is or was a director or officer of Maxis
or any of its subsidiaries at or prior to the Effective Time (the
"Indemnified Parties") and any indemnification provisions under Maxis'
Certificate of Incorporation or Bylaws as in effect on the date hereof. The
Certificate of Incorporation and By-laws of the Surviving Corporation will
contain provisions with respect to exculpation and indemnification that are
at least as favorable to the Indemnified Parties as those contained in the
Certificate of Incorporation and Bylaws of Maxis as in effect on the date
hereof, which provisions will not be amended, repealed or otherwise
modified from the Effective Time in any manner that would adversely affect
the rights thereunder of any Indemnified Party, unless such modification is
required by law.
(b) Without limiting the provisions of paragraph (a), after the Effective
Time Electronic Arts will cause the Surviving Corporation, to the fullest
extent permitted under applicable law or under the Surviving Corporation's
Certificate of Incorporation or By-laws, to indemnify and hold harmless
each Indemnified Party against any costs or expenses (including reasonable
attorneys' fees), judgments, fines, losses, claims, damages, liabilities
and amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation, whether civil, criminal, administrative or
investigative, to the extent arising out of or pertaining to any action or
omission in his or her capacity as a director or officer of Maxis or any of
its subsidiaries arising out of or pertaining to the transactions
contemplated by this Agreement for a period of six years after the
Effective Time; provided, however, that if, at any time prior to the sixth
anniversary of the Effective Time, any Indemnified Party delivers to
Electronic Arts a written notice asserting a claim for indemnification
under this Section 5.12(b), then the claim asserted in such notice shall
survive the sixth anniversary of the Effective Time until such time as such
claim is fully and finally resolved. In the event of any such claim,
action, suit, proceeding or investigation (i) any counsel retained by the
Indemnified Parties for any period after the Effective Time must be
reasonably satisfactory to Electronic Arts, (ii) after the Effective Time,
Electronic Arts will cause the Surviving Corporation to pay the reasonable
fees and expenses of such counsel, promptly after statements therefor are
received and (iii) Electronic Arts will cause Surviving Corporation to
cooperate in the defense of any such matter; provided, however, that
neither Electronic Arts nor the Surviving Corporation will be liable for
any settlement effected without its written consent (which consent will not
be unreasonably withheld). The Indemnified Parties as a group may retain
only one law firm (in addition to local counsel) to represent them with
respect to any single action unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the
positions of any two or more Indemnified Parties. In the event Electronic
Arts or the Surviving Corporation or any of their respective successors or
assigns (i) consolidates with or merges into any other person and shall not
be the continuing or surviving corporation or entity of such consolidation
or merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each
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such case, to the extent necessary to effectuate the purposes of this
Section 5.12, proper provision shall be made so that the successors and
assigns of Electronic Arts and Maxis assume the obligations set forth in
this Section 5.12 and none of the actions described in clause (i) or (ii)
shall be taken until such provision is made.
(c) Without limiting any of the obligations of Electronic Arts or the
Surviving Corporation set forth elsewhere in this Section 5.12, Electronic
Arts shall cause the Surviving Corporation to maintain in effect, during
the six-year period commencing as of the Effective Time, a policy of
directors' and officers' liability insurance for the benefit of each of the
Indemnified Parties providing coverage and containing terms no less
advantageous to the Indemnified Parties than the coverage and terms of
Maxis' existing policy of directors' and officers' liability insurance.
(d) This Section 5.12 will survive any termination of this Agreement and
the consummation of the Merger at the Effective Time, is intended to
benefit Maxis, the Surviving Corporation and each of the Indemnified
Parties, and will be binding on all successors and assigns of the Surviving
Corporation and Electronic Arts.
5.13 NMS Listing. Electronic Arts agrees to authorize for listing on the
Nasdaq National Market the shares of Electronic Arts Common Stock issuable,
and those required to be reserved for issuance, in connection with the Merger,
upon official notice of issuance.
5.14 Maxis Affiliate Agreement. Set forth on the Maxis Schedules is a list
of those persons who may be deemed to be, in Maxis' reasonable judgment,
affiliates of Maxis within the meaning of Rule 145 promulgated under the
Securities Act (each a "Maxis Affiliate"). Maxis will provide Electronic Arts
with such information and documents as Electronic Arts reasonably requests for
purposes of reviewing such list. Maxis will use its reasonable best efforts to
deliver or cause to be delivered to Electronic Arts, as promptly as
practicable on or following the date hereof (and in any event no later than
the date 30 days prior to the Effective Time), from each Maxis Affiliate an
executed affiliate agreement in substantially the form attached hereto as
Exhibit B (the "Maxis Affiliate Agreement"), each of which will be in full
force and effect as of the Effective Time. Electronic Arts will be entitled to
place appropriate legends on the certificates evidencing any Electronic Arts
Common Stock to be received by a Maxis Affiliate pursuant to the terms of this
Agreement, and to issue appropriate stop transfer instructions to the transfer
agent for the Electronic Arts Common Stock, consistent with the terms of the
Maxis Affiliate Agreement.
5.15 Regulatory Filings; Reasonable Efforts. As soon as may be reasonably
practicable, Electronic Arts and Maxis and certain Maxis Affiliates (if
necessary) each shall file with the United States Federal Trade Commission
(the "FTC") and the Antitrust Division of the United States Department of
Justice ("DOJ") Notification and Report Forms relating to the transactions
contemplated herein as required by the HSR Act, as well as comparable pre-
merger notification forms required by the merger notification or control laws
and regulations of any applicable jurisdiction, as agreed to by the parties.
Electronic Arts and Maxis each shall promptly (a) supply the other with any
information which may be required in order to effectuate such filings and (b)
supply any additional information which reasonably may be required by the FTC,
the DOJ or the competition or merger control authorities of any other
jurisdiction and which the parties may reasonably deem appropriate.
5.16 Tax-Free Reorganization. No party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
Merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code.
5.17 Pooling Covenant. Prior to the earlier of termination of this Agreement
and the Effective Time, Electronic Arts will not take any action, and
Electronic Arts will not permit any of its affiliates to take any action, that
would be reasonably likely to interfere with Electronic Arts' ability to
account for the Merger as a pooling of interests. In addition, Electronic Arts
will use its reasonable best efforts to deliver or cause to be delivered to
Maxis, on or as promptly as practicable following the date hereof (and in any
event no later than the date 30 days prior to the Effective Time), from each
person who may be deemed to be an "affiliate" of Electronic Arts
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within the meaning of Rule 145 promulgated under the Securities Act, an
agreement (which will be in full force and effect as of the Effective Time)
requiring such person to refrain from taking any action that would be
reasonably likely to interfere with Electronic Arts' ability to account for
the Merger as a pooling of interests.
5.18 Employee Matters. Promptly following the Merger, employees of Maxis
will become subject to Electronic Arts standard employee benefit plans on an
equivalent basis with other similarly situated employees of Electronic Arts
and will receive full credit pursuant to such plans for years of service at
Maxis.
ARTICLE VI
Conditions of the Merger
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder Approval. This Agreement shall have been approved and
adopted, and the Merger shall have been duly approved, by the requisite
vote under applicable law, by the stockholders of Maxis.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
in writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods under the HSR Act relating to the transactions contemplated hereby
will have expired or terminated early.
(d) Tax Opinions. Maxis and Electronic Arts shall each have received
written opinions from their respective counsel, Wilson Sonsini Goodrich &
Rosati, A Professional Corporation, and Fenwick & West LLP, in form and
substance reasonably satisfactory to them, to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of
the Code and such opinions shall not have been withdrawn; provided,
however, that if the counsel to either Maxis or Electronic Arts does not
render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(e) Nasdaq Listing. The shares of Electronic Arts Common Stock issuable
to stockholders of Maxis pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(f) Opinion of Accountants. Maxis shall have received from Ernst & Young
LLP, independent auditors for Maxis, a letter dated within two (2) business
days prior to the Effective Time (which may contain customary
qualifications and assumptions), to the effect that Ernst & Young LLP
concurs with Maxis' management conclusion that no conditions exist related
to Maxis that would preclude Electronic Arts from accounting for the Merger
as a pooling of interests; and Maxis shall have received from KPMG Peat
Marwick LLP, the independent auditors for Electronic Arts, a copy of a
letter addressed to Electronic Arts dated the Closing Date, in substance
reasonably satisfactory to Maxis (and which may contain customary
qualifications and assumptions and which may be based in part on the letter
referred to above from Ernst & Young LLP to Maxis) to the effect that KPMG
Peat Marwick LLP concurs with Electronic Arts' management conclusions that
as of that date, no conditions exist that would preclude Electronic Arts
from accounting for the Merger as a pooling of interests.
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6.2 Additional Conditions to Obligations of Maxis. The obligation of Maxis
to consummate and effect the Merger shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Maxis:
(a) Representations and Warranties. The representations and warranties of
Electronic Arts and Merger Sub contained in this Agreement shall be true
and correct in all material respects as of the date of this Agreement,
except where the failure to be so true and correct would not have a
Material Adverse Effect on Electronic Arts. In addition, the
representations and warranties of Electronic Arts and Merger Sub contained
in this Agreement shall be true and correct in all material respects on and
as of the Effective Time except for changes contemplated by this Agreement
and except for those representations and warranties which address matters
only as of a particular date, which shall remain true and correct in all
material respects as of such particular date, (it being understood that,
for the purposes of determining whether such representations and warranties
made as of a particular date have been true and correct, any inaccuracies
therein that shall have been cured in all material respect shall be
disregarded), with the same force and effect as if made on and as of the
Effective Time, except in such cases (other than the representations in
Sections 3.2 and 3.3) where the failure to be so true and correct would not
have a Material Adverse Effect on Electronic Arts. Maxis shall have
received a certificate with respect to the foregoing signed on behalf of
Electronic Arts by the Chief Executive Officer and the Chief Financial
Officer of Electronic Arts;
(b) Agreements and Covenants. Electronic Arts and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and Maxis shall have received a
certificate to such effect signed on behalf of Electronic Arts by the Chief
Executive Officer and the Chief Financial Officer of Electronic Arts; and
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Electronic Arts shall have occurred since the date of this Agreement.
(d) Legal Opinion. Maxis shall have received a legal opinion from Fenwick
& West LLP in the form attached hereto as Exhibit C.
6.3 Additional Conditions to the Obligations of Electronic Arts and Merger
Sub. The obligations of Electronic Arts and Merger Sub to consummate and
effect the Merger shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be
waived, in writing, exclusively by Electronic Arts:
(a) Representations and Warranties. The representations and warranties of
Maxis contained in this Agreement shall be true and correct in all material
respects as of the date of this Agreement, except where the failure to be
so true and correct would not have a Material Adverse Effect on Maxis. In
addition, the representations and warranties of Maxis contained in this
Agreement shall be true and correct in all material respects on and as of
the Effective Time except for changes contemplated by this Agreement and
except for those representations and warranties which address matters only
as of a particular date, which shall remain true and correct in all
material respects as of such particular date (it being understood that, for
the purposes of determining whether such representations and warranties
made as of a particular date have been true and correct, any inaccuracies
therein that shall have been cured in all material respect shall be
disregarded), with the same force and effect as if made on and as of the
Effective Time, except in such cases (other than the representations in
Sections 2.2, 2.3, 2.4 and 2.22) where the failure to be so true and
correct would not have a Material Adverse Effect on Maxis. Electronic Arts
shall have received a certificate with respect to the foregoing signed on
behalf of Maxis by the President and the Chief Financial Officer of Maxis;
(b) Agreements and Covenants. Maxis shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time, and Electronic Arts shall have received a certificate to
such effect signed on behalf of Maxis by the President and the Chief
Financial Officer of Maxis; and
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(c) Material Adverse Effect. No Material Adverse Effect with respect to
Maxis shall have occurred since the date of this Agreement.
(d) Legal Opinion. Electronic Arts shall have received a legal opinion
from Wilson Sonsini Goodrich & Rosati, A Profession Corporation, in the
form attached hereto as Exhibit D.
(e) Injunctions or Restraints on Conduct of Business. No temporary
restraining order, preliminary or permanent injunction or other order
issued by any court of competent jurisdiction or the legal, contractual or
regulatory restraint limiting or restricting Electronic Arts conduct or
operation of its business or the business or Maxis and its subsidiaries,
following the Merger, shall be in effect, nor shall any proceeding brought
by an administrative agency or commission or other Governmental Entity,
domestic or foreign, seeking the foregoing be pending, except where the
existence of any of the forgoing items would not have a Material Adverse
Effect on Maxis.
(f) Dissenters' Rights. To the extent that Section 2115 of the California
Corporations Code applies to Maxis, fewer than 5% of the stockholders of
Maxis shall have exercised or perfected their dissenters' rights under the
California Corporations Code.
ARTICLE VII
Termination, Amendment and Waiver
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger
by the stockholders of Maxis:
(a) by mutual written consent duly authorized by the Boards of Directors
of Electronic Arts and Maxis;
(b) by either Electronic Arts or Maxis, if the Merger shall not have been
consummated by October 31, 1997 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement;
(c) by either Electronic Arts or Maxis, if a Governmental Entity shall
have issued an order, decree or ruling or taken any other action (an
"Order"), in any case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, which order, decree or
ruling is final and nonappealable;
(d) by either Electronic Arts or Maxis, if the required approval of the
stockholders of Maxis contemplated by this Agreement shall not have been
obtained by reason of the failure to obtain the required vote upon a vote
taken at a meeting of stockholders duly convened therefor or at any
adjournment thereof;
(e) by Electronic Arts, if at any time prior to the approval of the
Merger by the stockholders of Maxis, the Board of Directors of Maxis
accepts, publicly endorses, recommends or executes a letter of intent or
similar document with respect to a Superior Proposal or resolves to do any
of the foregoing;
(f) by Electronic Arts, if any of the following shall occur:
(i) Maxis shall have failed to include in the Proxy Statement the
unanimous recommendation of the Board of Directors of Maxis in favor of
approval and adoption of this Agreement and the Merger, or the Board of
Directors of Maxis shall have amended or modified in a manner adverse
to Electronic Arts such Board of Directors' unanimous recommendation in
favor of the Merger or approval or adoption of this Agreement;
(ii) the Board of Directors of Maxis shall have approved, publicly
endorsed, recommended or executed a letter of intent or similar
document with respect to any Acquisition Proposal other than the
Merger;
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(iii) a tender or exchange offer relating to securities of Maxis
shall have been commenced and Maxis shall not have sent to its security
holders, within ten (10) business days after the commencement of such
tender or exchange offer, a statement that Maxis recommends rejection
of such tender or exchange offer;
(iv) an Acquisition Proposal (other than a tender or exchange offer
relating to the securities of Maxis) is publicly announced, and, upon
Electronic Arts request, Maxis fails to issue a press release
announcing its opposition to such Acquisition Proposal within five (5)
business days after such request; or
(v) Section 2115 of the California Corporations Code applies to
Maxis, and pooling for the Merger is not available because one or more
of the stockholders of Maxis who own at least ten percent (10%) of the
outstanding Maxis Common Stock as of the date of this Agreement
exercise or perfect their dissenters' rights.
(g) by Maxis, upon a breach of any representation, warranty, covenant or
agreement on the part of Electronic Arts set forth in this Agreement, or if
any such representation or warranty of Electronic Arts shall have become
inaccurate, in either case such that the conditions set forth in Section
6.2(a) or Section 6.2(b), as the case may be, would not be satisfied as of
the time of such breach or as of the time such representation or warranty
shall have become inaccurate; provided, however, that if such inaccuracy in
Electronic Arts' representations and warranties or breach by Electronic
Arts is curable by Electronic Arts through the exercise of its commercially
reasonable efforts, then Maxis may not terminate this Agreement under this
Section 7.1(g) if Electronic Arts is exercising commercially reasonable
efforts to cure such inaccuracy or breach; and, provided, further, that
Maxis may not terminate this Agreement pursuant to this Section 7.1(g) if
it shall have materially breached this Agreement;
(h) by Electronic Arts, upon a breach of any representation, warranty,
covenant or agreement on the part of Maxis set forth in this Agreement, or
if any such representation or warranty of Maxis shall have become
inaccurate, in either case such that the conditions set forth in Section
6.3(a) or Section 6.3(b), as the case may be, would not be satisfied as of
the time of such breach or as of the time such representation or warranty
shall have become inaccurate; provided, however, that if such inaccuracy in
Maxis' representations and warranties or breach by Maxis is curable by
Maxis through the exercise of its commercially reasonable efforts, then
Electronic Arts may not terminate this Agreement under this Section 7.1(h)
if Maxis is exercising commercially reasonable efforts to cure such
inaccuracy or breach; and, provided, further, that Electronic Arts may not
terminate this Agreement pursuant to this Section 7.1(h) if it shall have
materially breached this Agreement;
(i) by Maxis, if the average closing price of Electronic Arts Common
Stock, as presently constituted, as quoted in the Nasdaq National Market
and reported in the Wall Street Journal, over the ten (10) trading days
ending the third business day prior to the date originally established in
the Proxy Statement for the Maxis Stockholder Meeting is less than $20.00
(as adjusted for stock splits, recapitalizations, stock dividends and the
like); or
(j) by either Electronic Arts or Maxis, in the event of a tender or an
exchange offer relating to the securities of Maxis which is accepted by
more than fifty percent (50%) of the outstanding shares of Maxis Common
Stock (excluding for such calculation the shares of Maxis Common Stock held
beneficially or of record by Jeffrey B. Braun).
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other parties
hereto. In the event of the termination of this Agreement as provided in
Section 7.1, this Agreement shall be of no further force or effect, except (i)
as set forth in this Section 7.2, Section 7.3 and Article 8 (miscellaneous),
each of which shall survive the termination of this Agreement, and (ii)
nothing herein shall relieve any party from liability for any willful breach
of this Agreement. No termination of this Agreement shall affect the
obligations of the parties contained in the Confidentiality Agreement, all of
which obligations shall survive termination of this Agreement in accordance
with their terms.
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7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses
whether or not the Merger is consummated; provided, however, that
Electronic Arts and Maxis shall share equally all fees and expenses, other
than attorneys' and accountants fees and expenses, incurred in relation to
the printing and filing of the Proxy Statement (including any preliminary
materials related thereto) and the Registration Statement (including
financial statements and exhibits) and any amendments or supplements
thereto.
(b) Maxis Payments. If this Agreement is terminated by Electronic Arts or
Maxis pursuant to Section 7.1(d) or 7.1(j), or by Electronic Arts pursuant
to Section 7.1(e) or 7.1(f), then: Maxis shall pay to Electronic Arts, in
cash, a non-refundable fee in the amount of $5,000,000 (the "Termination
Fee"); provided that such amount will not be payable if, prior to the
termination triggering the obligation to make such payment, either: (i) a
Material Adverse Effect on Electronic Arts had occurred and Maxis had
provided written notice to Electronic Arts of such event; or (ii) Maxis
shall have become entitled pursuant to Section 7.1(g) to terminate this
Agreement, shall have given written notice to Electronic Arts to that
effect, and Electronic Arts shall be unable or unwilling to effect a cure
to such breach. In the case of termination of this Agreement by Maxis
pursuant to Section 7.1(d) or 7.1(j), the Termination Fee shall be paid by
Maxis prior to or contemporaneous with notice of such termination being
provided to Electronic Arts and as a condition to Maxis' right to terminate
under such provisions, and in the case of termination of this Agreement by
Electronic Arts pursuant to Section 7.1(d), 7.1(e), 7.1(f) or 7.1(j), the
Termination Fee shall be paid by Maxis within three (3) business days after
such notice of such termination.
ARTICLE VIII
General Provisions
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Electronic Arts, Maxis and Merger Sub contained in this
Agreement shall terminate at the Effective Time, and only the covenants that
by their terms survive the Effective Time shall survive the Effective Time.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a) if to Electronic Arts or Merger Sub, to:
1450 Fashion Island Blvd.
San Mateo, CA 94404
Telephone: (415) 571-7171
Facsimile: (415) 571-7132
Attention: Ruth Kennedy, SVP & General Counsel
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94306
Attention: Mark C. Stevens, Esq.
Telephone No.: (415) 494-0600
Telecopy No.: (415) 494-1417
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(b) if to Maxis, to:
2121 N. California Street
Suite 600
Walnut Creek, CA 94596
Attention: Sam Poole
Telephone No.: (510) 933-5630
Telecopy No.: (510) 927-3796
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Barry E. Taylor, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such
reference shall be to an Exhibit to this Agreement unless otherwise
indicated. When a reference is made in this Agreement to Sections, such
reference shall be to a Section of this Agreement unless otherwise
indicated. The words "include," "includes" and "including" when used herein
shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
(b) For purposes of this Agreement (a) as it relates to Electronic Arts,
the term "knowledge" means, with respect to any matter in question, that
any of the Chief Executive Officer, Chief Financial Officer or General
Counsel of Electronic Arts, has actual knowledge of such matter and (b) as
it relates to Maxis, the term "knowledge" means, with respect to any matter
in question, that any of the Chief Executive Officer, Chief Financial
Officer, General Counsel, Vice President--Product Development or Vice
President--Business Development of Maxis has actual knowledge of such
matter.
8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including Maxis Schedules (a)
constitute the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
it being understood that the Confidentiality Agreement shall continue in full
force and effect until the Closing and shall survive any termination of this
Agreement; and (b) are not intended to confer upon any other person any rights
or remedies hereunder, except as specifically provided in Sections 5.12 and
5.18.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
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8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to seek an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any court of the United States or any state having
jurisdiction, this being in addition to any other remedy to which they are
entitled at law or in equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law
thereof.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other parties. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
8.11 WAIVER OF JURY TRIAL. EACH OF ELECTRONIC ARTS, MAXIS AND MERGER SUB
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF
OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ELECTRONIC ARTS, MAXIS OR
MERGER SUB IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT
HEREOF.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
Electronic Arts Inc.
/s/ E. Stanton McKee
By___________________________________
E. Stanton McKee
Exec. VP--CFAO
Village Acquisition Corporation
/s/ E. Stanton McKee
By___________________________________
E. Stanton McKee
President
Maxis, Inc
/s/ Samuel L. Poole
By___________________________________
Samuel L. Poole
President and CEO
**** REORGANIZATION AGREEMENT ****
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APPENDIX B
[ALEX.BROWN LETTERHEAD]
June 4, 1997
Board of Directors
Maxis, Inc.
2121 N. California St.
Suite 600
Walnut Creek, CA 94596
Dear Sirs:
We understand that Maxis, Inc. ("Maxis") and Electronic Arts Inc.
("Electronic Arts") propose to enter into an Agreement and Plan of
Reorganization dated as of the date hereof (the "Agreement"). Pursuant to the
Agreement, a wholly owned subsidiary of Electronic Arts ("Newco") will be
merged with and into Maxis (the "Merger"), which shall be the surviving
corporation, and the separate existence of Newco shall cease. The Agreement
provides, among other things, that each share of Maxis common stock issued and
outstanding immediately prior to the effective time of the Merger will be
converted into .3644 shares (the "Exchange Ratio") of common stock of
Electronic Arts. We have assumed, with your consent, that the Merger will
qualify for pooling-of-interests accounting treatment and as a tax free
transaction for federal income tax purposes. The terms and conditions of the
Merger are more fully set forth in the Agreement. You have requested our
opinion as to whether the Exchange Ratio is fair, from a financial point of
view, to Maxis' stockholders.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors
of Maxis in connection with the transaction described above and will receive a
fee for our services, a portion of which is contingent upon the consummation
of the Merger and a portion of which becomes payable upon the delivery of this
opinion. We have also acted as the co-managing underwriter of a public
offering of the common stock of Maxis. Alex. Brown maintains a market in the
common stock of Maxis and Electronic Arts and regularly publishes research
reports regarding the consumer software and new media industries and the
businesses and securities of Maxis, Electronic Arts and other publicly owned
companies in the consumer software and new media industries. In the ordinary
course of business, Alex. Brown may actively trade the securities of both
Maxis and Electronic Arts for our own account and the account of our customers
and, accordingly, may at any time hold a long or short position in such
securities. In addition, we have acted as the lead-managing underwriter of a
public offering of the common stock of Electronic Arts and have in the past
provided other financial advisory services to Electronic Arts.
In connection with this opinion, we have reviewed certain publicly available
financial information concerning Maxis and Electronic Arts and certain
internal analyses and other information furnished to us by Maxis and
Electronic Arts. We have held discussions with the members of the senior
managements of Maxis and Electronic Arts regarding the businesses and
prospects of those companies. In addition, we have (i) reviewed the historical
reported prices and trading activity for the common stock of both Maxis and
Electronic Arts, (ii) compared certain financial information for both Maxis
and Electronic Arts with similar information for certain companies whose
securities are publicly traded, (iii) compared certain stock market
information and valuations for both Maxis and Electronic Arts with similar
information for certain companies whose securities are publicly
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[LOGO OF ALEX.BROWN]
traded, (iv) reviewed the financial terms of certain recent business
combinations which we deemed comparable in whole or in part, (v) reviewed the
terms of the Agreement and certain related documents, and (vi) performed such
other studies and analyses and considered such other factors as we deemed
appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof including information furnished to us orally or otherwise discussed
with us by management of Maxis and Electronic Arts. With respect to the
information relating to the prospects of Maxis and Electronic Arts, we have
assumed that such information reflects the currently available judgments and
estimates of the managements of Maxis and Electronic Arts as to the likely
future financial performances of their respective companies and of the
combined entity. In addition, we have not made nor been provided with an
independent evaluation or appraisal of the assets of Maxis and Electronic
Arts, nor have we been furnished with any such evaluations or appraisals. We
are not expressing our opinion as to the value of Electronic Arts' common
stock when issued pursuant to the Merger or the prices at which Electronic
Arts' common stock will trade subsequent to such issuance. Our opinion is
based on market, economic and other conditions as they exist and can be
evaluated as of the date of this letter.
Our advisory services and the opinion expressed herein were prepared for the
use of the Board of Directors of Maxis and do not constitute a recommendation
to any stockholder as to how such stockholder should vote. We hereby consent
to the inclusion of this opinion in its entirety to any proxy or registration
statement distributed in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of
view, to Maxis' stockholders.
Very truly yours,
/s/ Alex. Brown & Sons Incorporated
ALEX. BROWN & SONS INCORPORATED
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APPENDIX C
VOTING AGREEMENT
This Voting Agreement (this "Voting Agreement") is made and entered into as
of June 4 1997 (the "Effective Date") among Electronic Arts Inc., a Delaware
corporation ("Electronic Arts"), and Jeffrey B. Braun, trustee of the Jon
Himmel Trust dated 9/18/92 ("Stockholder").
RECITALS
A. This Voting Agreement is entered into pursuant to that certain Agreement
and Plan of Reorganization dated of even date herewith, as such may be amended
(the "Plan of Reorganization"), entered into by and among Electronic Arts,
Village Acquisition Corporation, a Delaware corporation ("Merger Sub"), a
wholly owned subsidiary of Electronic Arts, and Maxis, Inc., a Delaware
corporation ("Maxis"). The Plan of Reorganization provides for the merger of
Merger Sub with and into Maxis (the "Merger"), all pursuant to the terms and
conditions of the Plan of Reorganization and the Agreement of Merger to be
entered into between Merger Sub and Maxis in the form attached to the Plan of
Reorganization (the "Agreement of Merger"). The Plan of Reorganization and the
Agreement of Merger are collectively referred to herein as the "Merger
Agreements." Capitalized terms used herein and not defined herein shall have
the meanings that such terms have in the Plan of Reorganization.
B. The Merger Agreements provide for the conversion of all of the issued and
outstanding stock of Maxis at the Effective Time of the Merger into shares of
Electronic Arts' Common Stock, all as more particularly set forth in the Plan
of Reorganization.
C. As a condition to the willingness of Electronic Arts to enter into the
Plan of Reorganization, Electronic Arts has required that Stockholder agree,
and in order to induce Electronic Arts to enter into the Plan of
Reorganization Stockholder has agreed, to enter into this Voting Agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. VOTING OF MAXIS SECURITIES
1.1. Maxis Securities. Attachment 1 hereto sets forth all shares of Maxis
capital stock and any other securities of Maxis owned by Stockholder,
including all securities of Maxis as to which Stockholder has sole or shared
voting or investment power, and all rights, options and warrants to acquire
shares of capital stock or other securities of Maxis granted to or held by
Stockholder (such shares of Maxis capital stock, other securities of Maxis and
rights, options and warrants to acquire shares of Maxis capital stock and
other securities of Maxis are hereinafter collectively referred to as "Maxis
Stock"). As used herein, the term "New Maxis Securities" means, collectively,
any and all shares of Maxis capital stock, other securities of Maxis and
rights, options and warrants to acquire shares of Maxis capital stock and
other securities of Maxis that Stockholder may purchase or otherwise acquire
any interest in (whether of record or beneficially), on and after the
Effective Date of this Voting Agreement and prior to the Expiration Date (as
defined below). All New Maxis Securities will be subject to the terms of this
Voting Agreement to the same extent and in the same manner as if they were
Maxis Securities. The Maxis Stock and the New Maxis Securities shall be
collectively referred to herein as the "Maxis Securities." As used herein, the
term "Expiration Date" means the earliest to occur of (i) the closing,
consummation and effectiveness of the Merger, or (ii) such time as the Plan of
Reorganization is terminated in accordance with its terms.
1.2. Voting Agreement. Stockholder hereby agrees with Electronic Arts that,
prior to the Expiration Date, at any meeting of the stockholders of Maxis,
however called, and at any adjournment thereof, and in any written action by
consent of stockholders of Maxis, unless otherwise directed in writing by
Electronic Arts, Stockholder
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shall vote the Maxis Securities in favor of the Merger, the execution and
delivery by Maxis of the Plan of Reorganization and the adoption and approval
of the terms thereof and in favor of each of the other actions contemplated by
the Plan of Reorganization and shall otherwise vote the Maxis Securities with
respect to any action required in furtherance hereof and thereof. Prior to the
Expiration Date, Stockholder shall not enter into any agreement or
understanding with any person to vote or give instructions in any manner
inconsistent with the preceding sentence.
1.3. Proxy; Further Assurances.
(i) Contemporaneously with the execution of this Voting Agreement,
Stockholder shall deliver to Electronic Arts a proxy in the form attached
hereto as Attachment 2, which shall be irrevocable to the fullest extent
permitted by law, with respect to the Maxis Securities (the "Proxy").
(ii) Stockholder shall perform such further acts and execute such further
documents and instruments as may reasonably be required to support and help
consummate the Merger and to vest in Electronic Arts the power to carry out
and give effect to the provisions of this Voting Agreement.
SECTION 2. WAIVER OF APPRAISAL RIGHTS
Stockholder hereby waives any rights of appraisal and any dissenters' rights
that Stockholder may have in connection with the Merger.
SECTION 3. NO SOLICITATION
Stockholder covenants and agrees with Electronic Arts that, during the
period commencing on the date of this Voting Agreement and ending on the
Expiration Date, he will comply in all respects with the provisions of Section
5.4 of the Plan of Reorganization and further that Stockholder shall not,
directly or indirectly, (i) solicit or initiate discussions or engage in
negotiations with any person other than Electronic Arts or take any action
intended, designed or reasonably likely to facilitate the efforts of any
person, other than Electronic Arts, relating to an Acquisition Proposal of
Maxis, (ii) furnish any nonpublic information regarding Maxis to any person in
connection with or in response to an Acquisition Proposal or potential
Acquisition Proposal; (iii) engage in discussions with any person with respect
to any Acquisition Proposal; (iv) approve, endorse or recommend any
Acquisition Proposal; or (v) enter into any letter of intent or other similar
document or any contract contemplating or otherwise relating to any
Acquisition Proposal. Stockholder shall immediately cease any existing
discussions with any persons other than Electronic Arts that relate to any
Acquisition Proposal.
SECTION 4. OBLIGATIONS AS A DIRECTOR AND/OR OFFICER OF MAXIS
If at any time prior to the Expiration Date, Stockholder or a representative
of Stockholder is a member of the Board of Directors of Maxis ("Director") or
an officer of Maxis, nothing in this Agreement shall limit or restrict the
Director or officer in acting in his capacity as a Director or officer, as the
case may be, of Maxis and in the exercise of his fiduciary duties and
responsibilities in such capacity, it being agreed and understood that this
Agreement shall apply to the Stockholder solely in his or its capacity as a
stockholder and shall not apply to the Director's or officer's actions,
judgments or decisions as a Director of officer of Maxis.
SECTION 5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF STOCKHOLDER
5.1. Representations, Warranties and Covenants of Stockholder. Stockholder
represents, warrants and covenants as follows:
(a) Authority. Stockholder has full power and authority to enter into,
execute, deliver and perform Stockholder's obligations under this Voting
Agreement and to make the representations, warranties and covenants herein
contained.
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<PAGE>
(b) Maxis Securities Owned. Except as otherwise disclosed in the Maxis
Disclosure Letter and as provided herein: (i) at the date hereof, all the
Maxis Stock is, and at all times until and through the Expiration Date all
the Maxis Securities will be, owned by Stockholder free and clear of any
rights of first refusal, co-sale rights, security interests, liens,
pledges, claims, options, charges or other encumbrances; and (ii) the
Stockholder has the sole and exclusive right and power to exercise all
voting rights and other rights with respect to the Maxis Stock and will
have the sole and exclusive right and power to exercise all voting rights
and other rights with respect to the Maxis Securities, and the Maxis Stock
and the Maxis Securities are and will remain free and clear of any and all
voting trusts, proxies or other arrangements or understandings, whether
written or oral.
(c) Further Assurances. Stockholder agrees to execute and deliver any
additional documents reasonably necessary or desirable, in the opinion of
Maxis or Electronic Arts, to carry out the purposes and intent of this
Voting Agreement.
SECTION 6. MISCELLANEOUS
6.1. Notices. Any notice or other communication required or permitted to be
given under this Voting Agreement will be in writing, will be delivered
personally, by telecopier (with a hard copy also mailed), or by registered or
certified mail, postage prepaid and will be deemed given upon delivery, if
delivered personally, one business day after transmission by telecopier with
confirmation of receipt, or three (3) days after deposit in the mails, if
mailed, to the following addresses:
(i) If to Electronic Arts:
1450 Fashion Island Blvd.
San Mateo, CA 94404
Facsimile: (415) 571-7132
Attention: Ruth Kennedy, SVP & General Counsel
WITH A COPY TO:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, California 94036
Attention: Mark C. Stevens, Esq.
(ii) If to Stockholder:
To the address for notice for such Stockholder set forth on Attachment 1
hereto
WITH A COPY TO:
Barry Taylor, Esq.
Wilson Sonsini Goodrich & Rosati P.C.
650 Page Mill Road
Palo Alto, California 94304
or to such other address as a party may have furnished to the other parties
in writing pursuant to this Section 6.1.
6.2. Termination. This Voting Agreement shall be terminated and shall be of
no further force and effect upon the termination of the Plan of Reorganization
pursuant to its terms.
6.3. Counterparts. This Voting Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and
the same instrument. This Voting Agreement will become binding when one or
more counterparts hereof, individually or taken together, will bear the
signatures of all parties reflected hereon as signatories.
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<PAGE>
6.4. Assignment; Binding Upon Successors and Assigns. Neither party hereto
may assign any of its rights or obligations hereunder without the prior
written consent of the other party hereto. This Voting Agreement will be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
6.5. Waiver and Amendment. The waiver by a party of any breach hereof or
default in the performance hereof will not be deemed to constitute a waiver of
any other default or any succeeding breach or default. This Voting Agreement
may be amended by the parties hereto upon the execution and delivery of a
written agreement executed by the parties hereto.
6.6. Governing Law. The internal laws of the State of Delaware (irrespective
of its choice of law principles) will govern the validity of this Voting
Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto. Any litigation or
other dispute resolution proceeding among the parties relating to this Voting
Agreement will take place in San Mateo, Santa Clara or San Francisco County,
California. The parties consent to the personal jurisdiction of and the venue
in the state and federal courts within such counties.
6.7. Severability. If any term, provision, covenant or restriction of this
Voting Agreement (or of the Plan of Reorganization) is held by a court of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Voting Agreement (or
of the Plan of Reorganization, as the case may be) will remain in full force
and effect and will in no way be affected, impaired or invalidated. The
parties further agree to replace such invalid or unenforceable term with a
valid and enforceable provision that will achieve, to the greatest extent
possible, the economic, business and other purposes of the invalid or
unenforceable provision.
6.8. Construction of Agreement. This Voting Agreement has been negotiated by
the respective parties hereto and their attorneys and the language hereof will
not be construed for or against either party. A reference to a Section will
mean a Section in this Voting Agreement unless otherwise explicitly set forth.
The titles and headings herein are for reference purposes only and will not in
any manner limit the construction of this Voting Agreement which will be
considered as a whole.
6.9. Attorneys' Fees. Should suit be brought to enforce or interpret any
part of this Voting Agreement, the prevailing party will be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party will be entitled to
recover its costs of suit, regardless of whether such suit proceeds to final
judgment.
6.10. Specific Performance; Injunctive Relief. The parties hereto
acknowledge that Electronic Arts will be irreparably harmed and that there
will be no adequate remedy at law for a violation of any of the covenants or
agreements of Stockholder set forth herein. Therefore it is agreed that, in
addition to any other remedies that may be available to Electronic Arts upon
any such violation, Electronic Arts shall have the right to enforce such
covenants and agreements by specific performance, injunctive relief or by any
other means available to Electronic Arts or Electronic Arts at law or in
equity.
6.11. Partnership. Electronic Arts agrees that if Stockholder is a limited
partnership, Stockholder's general and limited partners shall in no event be
liable for any obligations or liabilities of Stockholder under this Agreement.
6.12. Construction. No provision of this Agreement shall be construed to
cause the Merger to be accounted for otherwise than as a "pooling of
interests."
C-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Voting Agreement as
of the date first set forth above.
ELECTRONIC ARTS INC.,
a Delaware corporation
By: /s/ Ruth Kennedy
----------------------------------
Name: Ruth Kennedy Title: Senior
Vice President, General Counsel
STOCKHOLDER:
/s/ Jeffrey B. Braun
-------------------------------------
Jeffrey B. Braun, trustee of the Jon
Himmel Trust dated 9/18/92
[SIGNATURE PAGE TO VOTING AGREEMENT]
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<PAGE>
ATTACHMENT 1
MAXIS STOCK
<TABLE>
<S> <C>
Stockholder's Address for Notice: 2121 N. California Blvd, Suite 600
Walnut Creek, CA 94596
Number of shares of Maxis capital
stock
beneficially owned by the undersigned: 3,209,600
Number of options, warrants or other
convertible
securities convertible into Maxis
capital stock
beneficially owned by the undersigned: 0
</TABLE>
C-6
<PAGE>
ATTACHMENT 2
FORM OF PROXY
IRREVOCABLE PROXY
The undersigned stockholder of Maxis, Inc., a Delaware corporation (the
"Company"), hereby irrevocably (to the fullest extent permitted by law)
appoints and constitutes Ruth Kennedy, E. Stanton McKee, Jr. and Electronic
Arts Inc., a Delaware corporation ("Parent"), and each of them, the attorneys
and proxies of the undersigned with full power of substitution and
resubstitution, to the full extent of the undersigned's rights with respect to
(i) the shares of capital stock of the Company owned by the undersigned as of
the date of this proxy, which shares are specified on the final page of this
proxy, and (ii) any and all other shares of capital stock of the Company which
the undersigned may acquire after the date hereof until such time as this
Proxy terminates in accordance with its terms. (The shares of the capital
stock of the Company referred to in clauses (i) and (ii) of the immediately
preceding sentence are collectively referred to as the "Shares.") Upon the
execution hereof, all prior proxies given by the undersigned with respect to
any of the Shares are hereby revoked, and no subsequent proxies will be given
with respect to any of the Shares.
This proxy is irrevocable, is coupled with an interest and is granted in
connection with the Voting Agreement, dated as of the date hereof, among
Parent and the undersigned (the "Voting Agreement"), and is granted in
consideration of Parent entering into the Agreement and Plan of Merger and
Reorganization, dated as of the date hereof, among Parent, Village Acquisition
Corporation, a wholly owned subsidiary of Parent, and the Company (the
"Reorganization Agreement"). Capitalized terms used but no otherwise defined
in this proxy have the meanings ascribed to such terms in the Reorganization
Agreement.
The attorneys and proxies named above will be empowered, and may exercise
this proxy, to vote the Shares at any time until the Expiration Date (as
defined in the Voting Agreement, such term is used herein with the same
definition) at any meeting of the stockholders of the Company, however called,
and at any adjournment thereof, or in any written action by consent of
stockholders of the Company, in favor of the Merger, the execution and
delivery by Maxis of the Plan of Reorganization and the adoption and approval
of the terms thereof and in favor of each of the other actions contemplated by
the Plan of Reorganization and shall otherwise vote the Maxis Securities with
respect to any action required in furtherance hereof and thereof.
The undersigned stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the heirs,
successors and assigns of the undersigned (including any transferee of any of
the Shares).
C-7
<PAGE>
This proxy shall terminate upon the Expiration Date.
Dated: June 4, 1997
-------------------------------------
Name: Jeffrey B. Braun, trustee of
the Jon Himmel Trust dated 9/18/92
Number of Shares of Company
Common Stock:
-------------------------
C-8
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify a director, officer, employee or agent made a party
to an action by reason of that fact that he or she was a director, officer,
employee or agent of the corporation or was serving at the request of the
corporation against expenses actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and in a manner
he or she reasonably believed to be in, or not opposed to, the best interests
of the corporation and with respect to any criminal action, had no reasonable
cause to believe his or her conduct was unlawful.
As permitted by Section 145, the Registrant's Certificate of Incorporation
(Exhibits 3.01 and 3.02 hereto) includes a provision that limits, to the
maximum extent permitted by Delaware law, the personal liability of directors
for monetary damages for breach of their fiduciary duties as a director. In
addition, as permitted by Section 145, the Bylaws of the Registrant (Exhibit
3.03 hereto) provide that: (i) the Registrant is required to indemnify and
hold harmless its directors and officers to the fullest extent permitted by
law in any action, suit or preceeding (a "proceeding"); provided that the
Registrant shall indemnify any such person seeking indemnity in connection
with a proceeding initiated by such person only if such proceeding was
authorized by its Board of Directors; (ii) the Registratant is required to pay
all expenses incurred by a director or officer in defending a proceeding in
advance of its final disposition; provided that if the Delaware General
Corporation Law so requires, such advance payments shall only be made if such
director or officer delivers an undertaking to the Registrant to repay all
amounts so advanced if it should ultimately be determined that such director
or officer is not entitled to be indemnified; provided further, that the
Registrant shall not be required to advance any expenses to a person against
whom the Registrant directly brings a claim, in a proceeding, alleging that
such person has breached his or her duty of loyalty to the Registrant,
committed an act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law, or derived an improper personal
benefit from a transaction; (iii) the rights conferred in the Bylaws are not
exclusive and the Registrant is free at its discretion to indemnify or advance
expenses to persons whom the Registrant is not obligated to indemnify or
advance expenses to under the Bylaws; and (iv) the Board of Directors is
authorized to cause the Registrant to enter into indemnification agreements
with any director, officer, employee or agent of the Registrant; and (v) the
Registrant may not retroactively amend, repeal or modify the Bylaw provisions
relating to indemnity.
The Registrant has entered into Indemnity Agreements (in the form of Exhibit
10.09 hereto) with each of its current directors to give such directors
additional contractual assurances regarding the scope of the indemnification
and liability limitation set forth in the Registrant's Articles and Bylaws.
The Registrant has also obtained director and officer liability insurance (see
Exhibits 10.04 and 10.19 hereto).
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and officers, may be
sufficiently broad to permit indemnification of the Registrant's directors and
officers for liabilities arising under the Securities Act.
The Reorganization Agreement contains covenants on the part of the
Registrant to maintain certain indemnification provisions and director and
officer insurance policies of Maxis in existence prior to the Merger. See
"Terms of the Merger--Indemnification and Insurance" in the Proxy
Statement/Prospectus and the Reorganization Agreement attached as Appendix A
thereto.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
The following exhibits are filed herewith or incorporated by reference
herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2.01+ Agreement and Plan of Reorganization dated as of June 4, 1997 by and
among the Registrant, Village Acquisition Corporation, and Maxis, Inc.
(see Appendix A to the Proxy Statement/Prospectus)
2.02+ Form of Certificate of Merger of Village Acquisition Corporation into
Maxis, Inc.
3.01 Registrant's Certificate of Incorporation, as amended to December 1,
1992. (1)
3.02 Registrant's Certificate of Amendment of Certificate of Incorporation.
(2)
3.03 Registrant's By-Laws, as amended to date. (3)
4.01 Specimen Certificate of Registrant's Common Stock. (4)
5.01+ Legal Opinion of Fenwick & West LLP.
8.01+ Tax Opinion of Fenwick & West LLP.
8.02+ Tax Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
9.01+ Voting Agreement dated as of June 4, 1997 by and between the
Registrant and Jeffrey B. Braun, trustee of the Jon Himmel Trust dated
9/18/92. (see Appendix C to the Proxy Statement/Prospectus)
9.02+ Form of Irrevocable Proxy dated as of June 4, 1997 granted to
Registrant by Jeffrey B. Braun, trustee of the Jon Himmel Trust dated
9/18/92. (see Appendix C to the Proxy Statement/Prospectus)
10.01 Registrant's 1982 Stock Option Plan, as amended to date, and related
documents. (5)(6)
10.02 Registrant's Directors Stock Option Plan and related documents. (6) (7)
10.03 Description of Registrant's FY 1998 Executive Bonus Plan. (6)(30)
10.04 Directors and Officers and Company Reimbursement Indemnity Policy by
and between Registrant and certain underwriters at Lloyd's, London and
Continental Insurance Company, dated June 20, 1992. (8)
10.05 Lease by and between Registrant, Electronic Arts Limited and Allied
Dunbar Assurance PLC, dated June 24, 1987, for the Registrant's U.K.
facilities. (9)
10.06 Lease by and between Registrant and H.G.C. Associates, dated June 24,
1992, for the Registrant's warehouse and production facilities. (10)
10.07 Lease Agreement by and between Registrant and 1450 Fashion Island
Boulevard Associates, L.P., dated March 22, 1991. (11)
10.08 Registrants' 1991 Stock Option Plan and related documents as amended.
(6) (12)
10.09 Form of Indemnity Agreement with Directors. (13)
10.10 Registrants' Employee Stock Purchase Plan and related documents as
amended. (6) (14)
10.11 Lease Agreement by and between Registrant and The Canada Life
Assurance Company, dated December 20, 1991, for the Registrant's
Canadian facilities. (15)
10.13 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated March 22, 1991. (17)
10.14 Agreement between Registrant and Sega Enterprises, Ltd., dated July
14, 1992. (18) (19)
10.15 Lease Agreement by and between Registrant and Century Centre II
Associates, dated July 27, 1992. (19)
10.16 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated October 1, 1992. (19)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
10.17 Amendment to Lease Agreement by and between Registrant and Century
Centre II Associates, dated February 2, 1993. (19)
10.18 Amendment to Lease Agreement by and between Registrant and Century
Centre II Associates, dated February 22, 1993. (19)
10.19 Directors and Officers and Company Reimbursement Indemnity Policy by
and between Registrant and certain underwriters at Lloyd's, London and
Continental Insurance Company, dated June 20, 1993. (19)
10.20 Lease by and between Registrant and 1450 Fashion Island Boulevard
Associates, L.P., dated August 27, 1992 for additional space at
corporate headquarters. (10)
10.22 Lease by and between Registrant, Electronic Arts Limited and Heron
Slough Limited, dated June 12, 1992, for the Registrant's U.K.
facilities. (20)
10.23 Lease by and between Registrant and the Travelers Insurance Company,
dated April 14, 1993, for the Registrant's production facilities. (21)
10.24 Amendment to Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated June 1, 1993. (22)
10.25 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.26 Amendment to Lease Agreement by and between Registrant and the
Travelers Insurance Company, dated November 30, 1993. (23)
10.27 Lease Agreement by and between Registrant and Arthur J. Rogers & Co.,
dated January 14, 1994. (24)
10.28 Lease Agreement by and between Registrant and the Prudential Insurance
Company of America, dated January 10, 1994. (24)
10.29 Agreement for Lease between Flatirons Funding, LP and Electronic Arts
Redwood, Inc. dated February 14, 1995. (25)
10.30 Guarantee from Electronic Arts Inc. to Flatirons Funding, LP dated
February 14, 1995. (25)
10.31 Lease Agreement by and between Registrant and Dixie Warehouse &
Cartage Co., dated April 10, 1995. (25)
10.32 Commercial Earnest Money Contract between Novell, Inc. and ORIGIN
Systems, Inc. dated April 13, 1995. (26)
10.33 First Amendment to Commercial Earnest Money Contract between Novell,
Inc. and ORIGIN Systems, Inc. dated June 1, 1995. (27)
10.34 Amendment No. 1 to Agreement between Registrant and Sega Enterprises,
Inc. effective December 31, 1995. (28)
10.35 Lease Agreement by and between Registrant and Don Mattrick dated
October 16, 1996. (29)
10.36 Amended and Restated Guaranty from Electronic Arts Inc. to Flatirons
Funding, LP dated March 7, 1997. (30)
10.37 Amended and Restated Agreement for Lease between Flatirons Funding, LP
and Electronic Arts Redwood, Inc. dated March 7, 1997. (30)
10.38 Amendment No. 1 to Lease Agreement between Electronic Arts Redwood
Inc. and Flatirons Funding, LP dated March 7, 1997. (30)
10.39+ Maxis, Inc. 1993 Stock Option Plan and related agreements.
10.40+ Maxis, Inc. 1995 Stock Plan and related agreements.
11.01 Computation of Per Share Earnings of Registrant. (30)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
11.02+ Computation of Per Share Earnings of Maxis, Inc.
21.01 Subsidiaries of the Registrant. (30)
21.02+ Subsidiaries of Maxis, Inc.
23.01+ Report on Financial Statement Schedule and consent of KPMG Peat
Marwick LLP with respect to Electronic Arts financial statements.
23.02+ Consent of Ernst & Young LLP with respect to Maxis financial
statements.
23.03+ Consent of Counsel (included in Exhibits 5.01, 8.01 and 8.02).
25.01+ Power of Attorney (see page II-7).
99.01+ Maxis Employment Agreement Amendment dated June 4, 1997 by and between
Registrant and Jeffrey B. Braun.
99.02+ Maxis Employment Agreement Amendment dated June 4, 1997 by and between
Registrant and William R. Wright.
99.03+ Noncompetition and Nonsolicitation Agreement dated June 4, 1997 by and
between Registrant and Jeffrey B. Braun.
99.04+ Noncompetition and Nonsolicitation Agreement dated June 4, 1997 by and
between Registrant and William R. Wright.
99.05+ Form of Proxy for Maxis stockholders.
</TABLE>
- --------
+Filed herewith.
(1) Incorporated by reference to Exhibit 3.01 to Registrant's Current Report
on Form 8-K filed on October 16, 1991.
(2) Incorporated by reference to Exhibit 4.01 to Registrant's Registration
Statement on Form S-8 filed on December 1, 1992 (File No. 33-55212) (the
"1992 Form S-8").
(3) Incorporated by reference to Exhibit 3.02 to Registrant's Current Report
on Form 8-K filed on October 16, 1991.
(4) Incorporated by reference to Exhibit 4.01 to Registrant's Registration
Statement on Form S-4 filed on March 3, 1994 (File No. 33-75892).
(5) Incorporated by reference to Exhibit 4.03 to Post-Effective Amendment No.
2 to Registrant's Registration Statement on Form S-8 filed on November 6,
1991 (File No. 33-32616) ("S-8 Amendment No. 2").
(6) Management contract or compensatory plan or arrangement.
(7) Incorporated by reference to Exhibit 4.04 to S-8 Amendment No. 2.
(8) Incorporated by reference to Exhibit 10.08 to Registrant's Annual Report
on Form 10-K for the year ended March 31, 1992 (the "1992 Form 10-K").
(9) Incorporated by reference to Exhibit 10.07 to the Registrant's
Registration Statement on Form S-1 filed on September 20, 1989, and all
amendments thereto (File No. 33-30346) (the "Form S-1").
(10) Incorporated by reference to similarly numbered exhibits to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
(11) Incorporated by reference to Exhibit 10.11 to Registrant's Annual Report
on Form 10-K for the year ended March 31, 1991.
(12) Incorporated by reference to Exhibit 4.01 to the Registrant's
Registration Statement on Form S-8 filed on July 29, 1993 (File No. 33-
66836) (the "1993 Form S-8").
(13) Incorporated by reference to Exhibit 10.09 to the Form S-1.
(14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8.
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form 10-K.
(16) Not Used.
II-4
<PAGE>
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form 10-K.
(18) Confidential treatment has been granted with respect to certain portions
of this document.
(19) Incorporated by reference to similarly numbered exhibits to Registrants
Annual Report on Form 10-K for the year ended March 31, 1993.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
(21) Incorporated by reference to Exhibit 10.23 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993.
(22) Incorporated by reference to Exhibit 10.24 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
(23) Incorporated by reference to similarly numbered exhibits to Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1993.
(24) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1994 (the "1994
Form 10-K").
(25) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1995 (the "1995
Form 10-K").
(26) Incorporated by reference to Exhibit 10.01 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(27) Incorporated by reference to Exhibit 10.02 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(28) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1996 (the "1996
Form 10-K").
(29) Incorporated by reference to Exhibit 10.35 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996.
(30) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1997 (the "1997
Form 10-K").
(b) Financial Statement Schedules.
Schedule II--Electronic Arts Valuation and Qualifying Accounts
Schedule II--Maxis Valuation and Qualifying Accounts
All other Schedules are omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
(c) Opinion of Financial Advisor.
Opinion of Alex. Brown & Sons Incorporated (see Appendix B to the Proxy
Statement/Prospectus).
II-5
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to the Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to
reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement; (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effecitve amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(4) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form;
(5) that every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the Registration Statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(6) to respond to requests for information that is incorporated by
reference into the Proxy Statement/Prospectus pursuant to Items 4, 10(b),
11 or 13 of this Form S-4, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the Registration
Statement through the date of responding to the request;
(7) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the Registration Statement when
it became effective; and
(8) insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item
20 above, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in a
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the question has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
ELECTRONIC ARTS INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-4
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN
THE CITY OF SAN MATEO, STATE OF CALIFORNIA, ON THE 23RD DAY OF JUNE, 1997.
Electronic Arts Inc.
/s/ Lawrence F. Probst III
By: _________________________________
LAWRENCE F. PROBST III
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ruth A. Kennedy and David L. Carbone, and each
or any one of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his or her name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462 promulgated under the Securities Act, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or
their or his or her substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
PRINCIPAL EXECUTIVE OFFICER:
/s/ Lawrence F. Probst III Chairman of the June 23, 1997
- ------------------------------------- Board, Chief
LAWRENCE F. PROBST III Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ E. Stanton McKee, Jr. Executive Vice June 23, 1997
- ------------------------------------- President, Chief
E. STANTON MCKEE, JR. Financial and
Administrative
Officer
PRINCIPAL ACCOUNTING OFFICER:
/s/ David L. Carbone Vice President, June 23, 1997
- ------------------------------------- Finance
DAVID L. CARBONE
ADDITIONAL DIRECTORS:
/s/ M. Richard Asher Director June 23, 1997
- -------------------------------------
M. RICHARD ASHER
/s/ William J. Byron Director June 23, 1997
- -------------------------------------
WILLIAM J. BYRON
/s/ Daniel H. Case III Director June 24, 1997
- -------------------------------------
DANIEL H. CASE III
/s/ Gary M. Kusin Director June 23, 1997
- -------------------------------------
GARY M. KUSIN
/s/ Timothy Mott Director June 25, 1997
- -------------------------------------
TIMOTHY MOTT
II-7
<PAGE>
SCHEDULE II
ELECTRONICS ARTS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS OF PERIOD
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended March 31,
1997
Allowance for doubtful
accounts and
returns.............. $27,569 $53,563 $2,240 $47,886 $35,486
======= ======= ====== ======= =======
Year Ended March 31,
1996
Allowance for doubtful
accounts and
returns.............. $33,567 $45,346 $ (461) $50,883 $27,569
======= ======= ====== ======= =======
Year Ended March 31,
1995
Allowance for doubtful
accounts and
returns.............. $29,113 $56,371 $2,540 $54,457 $33,567
======= ======= ====== ======= =======
</TABLE>
- --------
(1) Primarily the translation effect of using the average exchange rate for
expense items and the year-ended exchange rate for the balance sheet item
(allowance account).
<PAGE>
SCHEDULE II
MAXIS, INC.
VALUATION OF QUALIFYING ACCOUNTS
DESCRIPTION
Allowance for product returns:
<TABLE>
<CAPTION>
ADDITIONS-
PROVISION
BEGINNING FOR DEDUCTIONS- ENDING
YEAR ENDED BALANCE RETURNS RETURNS BALANCE
---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
March 31, 1995................. 1,718,000 6,047,000 (5,293,000) 2,472,000
March 31, 1996................. 2,472,000 7,615,000 (5,044,000) 5,043,000
March 31, 1997................. 5,043,000 7,843,000 (6,898,000) 5,988,000
</TABLE>
Allowance for doubtful accounts:
<TABLE>
<CAPTION>
ADDITIONS-
PROVISION DEDUCTIONS-
BEGINNING FOR DOUBTFUL RETURNS ENDING
YEAR ENDED BALANCE ACCOUNTS WRITTEN OFF BALANCE
---------- --------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
March 31, 1995............... 284,000 295,000 (140,000) 439,000
March 31, 1996............... 439,000 379,000 (254,000) 564,000
March 31, 1997............... 564,000 1,708,000 (478,000) 1,794,000
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER NUMBERED PAGE
------- -------------
<C> <S> <C>
2.01+ Agreement and Plan of Reorganization dated as of June
4, 1997 by and among the Registrant, Village
Acquisition Corporation, and Maxis, Inc. (see Appendix
A to the Proxy Statement/Prospectus)
2.02+ Form of Certificate of Merger of Village Acquisition
Corporation into Maxis, Inc.
3.01 Registrant's Certificate of Incorporation, as amended
to December 1, 1992. (1)
3.02 Registrant's Certificate of Amendment of Certificate
of Incorporation. (2)
3.03 Registrant's By-Laws, as amended to date. (3)
4.01 Specimen Certificate of Registrant's Common Stock. (4)
5.01+ Legal Opinion of Fenwick & West, LLP.
8.01+ Tax Opinion of Fenwick & West, LLP.
8.02+ Tax Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
9.01+ Voting Agreement dated as of June 4, 1997 by and
between the Registrant and Jeffrey B. Braun, trustee
of the Jon Himmel Trust dated 9/18/92. (see Appendix C
to the Proxy Statement/Prospectus)
9.02+ Form of Irrevocable Proxy dated as of June 4, 1997
granted to Registrant by Jeffrey B. Braun, trustee of
the Jon Himmel Trust dated 9/18/92. (see Appendix C to
the Proxy Statement/Prospectus)
10.01 Registrant's 1982 Stock Option Plan, as amended to
date, and related documents. (5)(6)
10.02 Registrant's Directors Stock Option Plan and related
documents. (6) (7)
10.03 Description of Registrant's FY 1998 Executive Bonus
Plan. (6) (30)
10.04 Directors and Officers and Company Reimbursement
Indemnity Policy by and between Registrant and certain
underwriters at Lloyd's, London and Continental
Insurance Company, dated June 20, 1992. (8)
10.05 Lease by and between Registrant, Electronic Arts
Limited and Allied Dunbar Assurance PLC, dated June
24, 1987, for the Registrant's U.K. facilities. (9)
10.06 Lease by and between Registrant and H.G.C. Associates,
dated June 24, 1992, for the Registrant's warehouse
and production facilities. (10)
10.07 Lease Agreement by and between Registrant and 1450
Fashion Island Boulevard Associates, L.P., dated March
22, 1991. (11)
10.08 Registrants' 1991 Stock Option Plan and related
documents as amended. (6) (12)
10.09 Form of Indemnity Agreement with Directors. (13)
10.10 Registrants' Employee Stock Purchase Plan and related
documents as amended. (6) (14)
10.11 Lease Agreement by and between Registrant and The
Canada Life Assurance Company, dated December 20,
1991, for the Registrant's Canadian facilities. (15)
10.13 Amendment to Lease Agreement by and between Registrant
and 1450 Fashion Island Boulevard Associates, L.P.,
dated March 22, 1991. (17)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER NUMBERED PAGE
------- -------------
<C> <S> <C>
10.14 Agreement between Registrant and Sega Enterprises,
Ltd., dated July 14, 1992. (18) (19)
10.15 Lease Agreement by and between Registrant and Century
Centre II Associates, dated July 27, 1992. (19)
10.16 Amendment to Lease Agreement by and between Registrant
and 1450 Fashion Island Boulevard Associates, L.P.,
dated October 1, 1992. (19)
10.17 Amendment to Lease Agreement by and between Registrant
and Century Centre II Associates, dated February 2,
1993. (19)
10.18 Amendment to Lease Agreement by and between Registrant
and Century Centre II Associates, dated February 22,
1993. (19)
10.19 Directors and Officers and Company Reimbursement
Indemnity Policy by and between Registrant and certain
underwriters at Lloyd's, London and Continental
Insurance Company, dated June 20, 1993. (19)
10.20 Lease by and between Registrant and 1450 Fashion
Island Boulevard Associates, L.P., dated August 27,
1992 for additional space at corporate headquarters.
(10)
10.22 Lease by and between Registrant, Electronic Arts
Limited and Heron Slough Limited, dated June 12, 1992,
for the Registrant's U.K. facilities. (20)
10.23 Lease by and between Registrant and the Travelers
Insurance Company, dated April 14, 1993, for the
Registrant's production facilities. (21)
10.24 Amendment to Lease Agreement by and between Registrant
and 1450 Fashion Island Boulevard Associates, L.P.,
dated June 1, 1993. (22)
10.25 Amendment to Lease Agreement by and between Registrant
and the Travelers Insurance Company, dated November
30, 1993. (23)
10.26 Amendment to Lease Agreement by and between Registrant
and the Travelers Insurance Company, dated November
30, 1993. (23)
10.27 Lease Agreement by and between Registrant and Arthur
J. Rogers & Co., dated January 14, 1994. (24)
10.28 Lease Agreement by and between Registrant and the
Prudential Insurance Company of America, dated January
10, 1994. (24)
10.29 Agreement for Lease between Flatirons Funding, LP and
Electronic Arts Redwood, Inc. dated February 14, 1995.
(25)
10.30 Guarantee from Electronic Arts Inc. to Flatirons
Funding, LP dated February 14, 1995. (25)
10.31 Lease Agreement by and between Registrant and Dixie
Warehouse & Cartage Co., dated April 10, 1995. (25)
10.32 Commercial Earnest Money Contract between Novell, Inc.
and ORIGIN Systems, Inc. dated April 13, 1995. (26)
10.33 First Amendment to Commercial Earnest Money Contract
between Novell, Inc. and ORIGIN Systems, Inc. dated
June 1, 1995. (27)
10.34 Amendment No. 1 to Agreement between Registrant and
Sega Enterprises, Inc. effective December 31, 1995.
(28)
10.35 Lease Agreement by and between Registrant and Don
Mattrick dated October 16, 1996. (29)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER NUMBERED PAGE
------- -------------
<C> <S> <C>
10.36 Amended and Restated Guaranty from Electronic Arts
Inc. to Flatirons Funding, LP dated March 7, 1997. (30)
10.37 Amended and Restated Agreement for Lease between
Flatirons Funding, LP and Electronic Arts Redwood,
Inc. dated March 7, 1997. (30)
10.38 Amendment No. 1 to Lease Agreement between Electronic
Arts Redwood Inc. and Flatirons Funding, LP dated
March 7, 1997. (30)
10.39+ Maxis, Inc. 1993 Stock Option Plan and related
agreements.
10.40+ Maxis, Inc. 1995 Stock Plan and related agreements.
11.01 Computation of Per Share Earnings of Registrant. (30)
11.02+ Computation of Per Share Earnings of Maxis, Inc.
21.01 Subsidiaries of the Registrant. (30)
21.02+ Subsidiaries of Maxis, Inc.
23.01+ Report on Financial Statement Schedule and consent of
KPMG Peat Marwick LLP with respect to Electronic Arts
financial statements.
23.02+ Consent of Ernst & Young LLP with respect to Maxis
financial statements.
23.03+ Consent of Counsel (included in Exhibits 5.01, 8.01
and 8.02).
25.01+ Power of Attorney (see page II-7).
99.01+ Maxis Employment Agreement Amendment dated June 4,
1997 by and between Registrant and Jeffrey B. Braun.
99.02+ Maxis Employment Agreement Amendment dated June 4,
1997 by and between Registrant and William R. Wright.
99.03+ Noncompetition and Nonsolicitation Agreement dated
June 4, 1997 by and between Registrant and Jeffrey B.
Braun.
99.04+ Noncompetition and Nonsolicitation Agreement dated
June 4, 1997 by and between Registrant and William R.
Wright.
99.05+ Form of Proxy for Maxis stockholders.
</TABLE>
- --------
+Filed herewith.
(1) Incorporated by reference to Exhibit 3.01 to Registrant's Current Report
on Form 8-K filed on October 16, 1991.
(2) Incorporated by reference to Exhibit 4.01 to Registrant's Registration
Statement on Form S-8 filed on December 1, 1992 (File No. 33-55212) (the
"1992 Form S-8").
(3) Incorporated by reference to Exhibit 3.02 to Registrant's Current Report
on Form 8-K filed on October 16, 1991.
(4) Incorporated by reference to Exhibit 4.01 to Registrant's Registration
Statement on Form S-4 filed on March 3, 1994 (File No. 33-75892).
(5) Incorporated by reference to Exhibit 4.03 to Post-Effective Amendment No.
2 to Registrant's Registration Statement on Form S-8 filed on November 6,
1991 (File No. 33-32616) ("S-8 Amendment No. 2").
(6) Management contract or compensatory plan or arrangement.
(7) Incorporated by reference to Exhibit 4.04 to S-8 Amendment No. 2.
(8) Incorporated by reference to Exhibit 10.08 to Registrant's Annual Report
on Form 10-K for the year ended March 31, 1992 (the "1992 Form 10-K").
(9) Incorporated by reference to Exhibit 10.07 to the Registrant's
Registration Statement on Form S-1 filed on September 20, 1989, and all
amendments thereto (File No. 33-30346) (the "Form S-1").
<PAGE>
(10) Incorporated by reference to similarly numbered exhibits to Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1992.
(11) Incorporated by reference to Exhibit 10.11 to Registrant's Annual Report
on Form 10-K for the year ended March 31, 1991.
(12) Incorporated by reference to Exhibit 4.01 to the Registrant's
Registration Statement on Form S-8 filed on July 29, 1993 (File No. 33-
66836) (the "1993 Form S-8").
(13) Incorporated by reference to Exhibit 10.09 to the Form S-1.
(14) Incorporated by reference to Exhibit 4.02 to 1993 Form S-8.
(15) Incorporated by reference to Exhibit 10.16 to the 1992 Form 10-K.
(16) Not Used.
(17) Incorporated by reference to Exhibit 10.18 to the 1992 Form 10-K.
(18) Confidential treatment has been granted with respect to certain portions
of this document.
(19) Incorporated by reference to similarly numbered exhibits to Registrants
Annual Report on Form 10-K for the year ended March 31, 1993.
(20) Incorporated by reference to Exhibit 19.01 of Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1992.
(21) Incorporated by reference to Exhibit 10.23 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993.
(22) Incorporated by reference to Exhibit 10.24 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993.
(23) Incorporated by reference to similarly numbered exhibits to Registrant's
Quarterly Report on Form 10-Q for the quarter ended December 31, 1993.
(24) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1994 (the "1994
Form 10-K").
(25) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1995 (the "1995
Form 10-K").
(26) Incorporated by reference to Exhibit 10.01 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(27) Incorporated by reference to Exhibit 10.02 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995.
(28) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1996 (the "1996
Form 10-K").
(29) Incorporated by reference to Exhibit 10.35 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended December 31, 1996.
(30) Incorporated by reference to similarly numbered exhibits to Registrant's
Annual Report on Form 10-K for the year ended March 31, 1997 (the "1997
Form 10-K").
<PAGE>
EXHIBIT 2.02
CERTIFICATE OF MERGER OF
VILLAGE ACQUISITION CORPORATION INTO MAXIS, INC.
Maxis, Inc. does hereby certify as follows:
1. The constituent corporations (the "Constituent Corporations")
------------------------
to the merger are Village Acquisition Corporation ("Merger Sub") and Maxis, Inc.
----------
("Maxis"), each of which is a corporation organized and existing under the
-----
General Corporation Law of the State of Delaware.
2. An Agreement and Plan of Reorganization dated as of June 4, 1997
among Electronic Arts Inc., Merger Sub and Maxis (the "Reorganization
--------------
Agreement") providing for the merger of Merger Sub with and into Maxis has been
- ---------
approved, adopted, certified, executed and acknowledged by each of the
Constituent Corporations in accordance with Section 251 of the General
Corporation Law of the State of Delaware.
3. The name of the surviving corporation is Maxis, Inc. (the
"Surviving Corporation").
---------------------
4. The certificate of incorporation of Merger Sub shall be the
certificate of incorporation of the Surviving Corporation, provided that: (a)
Article I of the certificate of incorporation of the Surviving Corporation shall
be amended to read "The name of the corporation is Maxis, Inc."; and (b) Article
VII of the certificate of incorporation of the Surviving Corporation shall be
amended to add the following sentence at the end of Article VII: "The
corporation shall indemnify to the fullest extent permitted by law any person
made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he
or she or his or her testator or intestate is or was a director, officer or
employee of the corporation or any predecessor of the corporation or serves or
served any other enterprise as a director, officer or employee at the request of
the corporation or any predecessor to the corporation."
5. The executed Reorganization Agreement is on file at the
principal place of business of the Surviving Corporation, which is located at
2121 N. California Street, Suite 600, Walnut Creek, California 94596.
6. The Surviving Corporation will furnish a copy of the
Reorganization Agreement, on request and without cost, to any stockholder of
either of the Constituent Corporations.
IN WITNESS WHEREOF, Maxis, Inc. has caused this Certificate to be
signed by its authorized officer on __________, 1997.
MAXIS, INC.
------------------------------------
Sam Poole, Chief Executive Officer
<PAGE>
EXHIBIT 5.01
------------
[LETTERHEAD OF FENWICK & WEST LLP]
June 25, 1997
-------------
Electronic Arts Inc.
1450 Fashion Island Boulevard
San Mateo, California 94404
Gentlemen/Ladies:
At your request, we have examined the Registration Statement on Form S-4
(the "Registration Statement"), to be filed by you with the Securities and
Exchange Commission (the "Commission") on or about June 25, 1997 in connection
with the registration under the Securities Act of 1933, as amended, of an
aggregate of 4,152,335 shares of your Common Stock, par value $0.01 (the
"Stock"), pursuant to the terms of an Agreement and Plan of Reorganization dated
as of June 4, 1997 (the "Reorganization Agreement") by and among Electronic Arts
Inc., a Delaware corporation ("Electronic Arts"), Village Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of Electronic
Arts ("Merger Sub") and Maxis, Inc., a Delaware corporation ("Maxis"). In
rendering this opinion, we have examined the following:
(1) the Reorganization Agreement and all Exhibits thereto;
(2) the Registration Statement, together with the Exhibits filed as a part
thereof;
(3) the Proxy Statement/Prospectus prepared in connection with the
Registration Statement, together with the Appendices thereto;
(4) the minutes of meetings and actions by written consent of the
stockholders and Board of Directors that are contained in your minute
books in our possession;
(5) the stock records for Maxis that you have provided to us (consisting
of a list of stockholders issued by Maxis' transfer agent, Harris
Trust Company, and a list of option holders respecting Maxis' capital
stock that was prepared by Maxis and provided to us by you, dated as
of June 4, 1997); and
<PAGE>
Electronic Arts Inc.
June 25, 1997
Page 2
(6) a Management Certificate addressed to us of even date herewith,
executed by Electronic Arts.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents, the authenticity of all documents submitted to us as
originals, the conformity to originals of all documents submitted to us as
copies, the lack of any undisclosed terminations, modifications, waivers or
amendments to any documents reviewed by us and the due execution and delivery of
all documents where due execution and delivery are prerequisites to the
effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon
our examination of the documents referred to above and have assumed the current
accuracy and completeness of the information obtained from public officials and
records included in the documents referred to above. We have made no
independent investigations or other attempts to verify the accuracy of any of
such information or to determine the existence or non-existence of any other
factual matters; however, we are not aware of any facts that would lead us to
-------
believe that the opinion expressed herein is not accurate.
Based upon the foregoing, it is our opinion that the up to 4,152,335 shares
of Stock to be issued by you to holders of Maxis Common Stock, when issued in
the manner referred to in the Reorganization Agreement and the Registration
Statement, will be legally issued, fully paid and nonassessable. We consent to
the use of this opinion as an exhibit to the Registration Statement and further
consent to all references to us in the Registration Statement and any amendments
thereto.
This opinion speaks only as of its date and is intended solely for your use
as an exhibit to the Registration Statement for the purpose of the above
issuance of the Stock and is not to be relied upon for any other purpose.
Very truly yours,
FENWICK & WEST LLP
By: /s/ Mark Stevens
-----------------------------
Mark Stevens, Partner
<PAGE>
EXHIBIT 8.01
[LETTERHEAD OF FENWICK & WEST LLP]
June 25, 1997
ELECTRONIC ARTS INC.
1450 Fashion Island Boulevard
San Mateo, California 94404
Attention: Board of Directors
Re: Exhibit Tax Opinion for the S-4 Registration
--------------------------------------------
Statement Filed in Connection with the Merger Transaction
---------------------------------------------------------
Involving Electronic Arts Inc. and Maxis, Inc.
----------------------------------------------------------
Ladies and Gentlemen:
We have been requested to render this opinion concerning
certain matters of U.S. federal income tax law in connection with the proposed
merger (the "MERGER") involving Maxis, Inc., a corporation organized and
existing under the laws of the State of Delaware ("MAXIS"), Electronic Arts
Inc., a corporation organized and existing under the laws of the State of
Delaware ("ELECTRONIC ARTS"), and Village Acquisition Corporation, a wholly
owned subsidiary of Electronic Arts, organized and existing under the laws of
the State of Delaware ("MERGER SUB"). The Merger is further described in and is
in accordance with the Securities and Exchange Commission Form S-4 Registration
Statement filed on June 25, 1997, and Exhibits thereto, as thereafter amended at
any time including the date hereof (the "S-4 REGISTRATION STATEMENT"). Our
opinion has been requested solely in connection with the filing of the S-4
Registration Statement with the Securities and Exchange Commission with respect
to the Merger.
The Merger is structured as a statutory merger of MERGER SUB
with and into MAXIS, with MAXIS surviving the merger and becoming a wholly owned
subsidiary of ELECTRONIC ARTS, all pursuant to the applicable corporate laws of
the State of Delaware and in accordance with the Agreement and Plan of
Reorganization by and among MAXIS, ELECTRONIC ARTS and MERGER SUB, dated as of
June 4, 1997, and exhibits thereto (collectively, the "AGREEMENT") . Except as
otherwise indicated, capitalized terms used herein have the meanings set forth
in the Agreement. All section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "CODE").
We have acted as legal counsel to ELECTRONIC ARTS in
connection with the Merger. As such, and for the purpose of rendering this
opinion, we have examined and are relying upon (without any independent
investigation or review thereof) the truth and accuracy,
<PAGE>
at all relevant times, of the statements, covenants, representations and
warranties contained in the following documents (including all schedules and
exhibits thereto), among others:
1. The S-4 Registration Statement;
2. The Agreement;
3. A Certificate of Officers of ELECTRONIC ARTS and MERGER
SUB dated June 25, 1997, signed by an authorized officer of each of
ELECTRONIC ARTS and MERGER SUB and delivered to us from ELECTRONIC ARTS and
MERGER SUB and incorporated herein by reference, and attached hereto as Exhibit
A; and
4. A Certificate of Officer of MAXIS dated June 25, 1997,
signed by an authorized officer of MAXIS and delivered to us from MAXIS and
incorporated herein by reference and attached hereto as Exhibit B.
In addition, we have reviewed such other instruments and
documents related to the formation, organization and operation of MAXIS,
ELECTRONIC ARTS and MERGER SUB or the consummation of the Merger and the
transactions contemplated thereby as we have deemed necessary or appropriate.
In connection with rendering this opinion, we have assumed or
obtained representations and are relying thereon (without any independent
investigation or review thereof) that:
(1) Original documents (including signature) are authentic,
documents submitted to us as copies conform to the original documents, and there
has been (or will be by the Effective Time of the Merger) due execution and
delivery of all documents where due execution and delivery are prerequisites to
the effectiveness thereof;
(2) Any representation or statement referred to above
made "to the best of knowledge" or otherwise similarly qualified is correct
without such qualification;
(3) The Merger will be consummated pursuant to the
Agreement and will be effective under applicable state law;
(4) There is no plan or intention on the part of the MAXIS
stockholders to engage in a sale, exchange, transfer, distribution, pledge,
disposition or any other transaction which would result in a direct or indirect
disposition of (a) shares of ELECTRONIC ARTS common stock to be issued to MAXIS
stockholders in the Merger, which shares would have an aggregate fair market
value, as of the Effective Date of the Merger, in excess of fifty percent (50%)
of the aggregate fair market value, immediately prior to the Merger, of all
outstanding shares of MAXIS stock, or (b) more than fifty percent (50%) of the
shares of ELECTRONIC ARTS common stock to be received in exchange for MAXIS
common stock in the Merger;
2
<PAGE>
(5) Following the Merger, MAXIS will continue its
historic business or use a significant portion of its historic business assets
in a business;
(6) To the extent any expenses relating to the Merger
(or the "plan of reorganization" within the meaning of Treas. Reg.
ss. 1.368-1(c) with respect to the Merger) are funded directly or indirectly by
a party other than the incurring party, such expenses will be within the
guidelines established in Revenue Ruling 73-54, 1973-1 C.B. 187;
(7) No outstanding indebtedness of MAXIS, ELECTRONIC ARTS, or
MERGER SUB has or will represent equity for tax purposes; no outstanding equity
of MAXIS, ELECTRONIC ARTS, or MERGER SUB has represented or will represent
indebtedness for tax purposes; no outstanding security, instrument, agreement or
arrangement that provides for, contains, or represents either a right to acquire
ELECTRONIC ARTS capital stock (or to share in the appreciation thereof)
constitutes or will constitute "stock" for purposes of Section 368(c) of the
Code; and
(8) None of MAXIS, ELECTRONIC ARTS, or MERGER SUB is,
or will be at the time of the Merger, an investment company as defined in
ss. 368(a)(2)(F) of the Code.
Based on the foregoing documents, materials, assumptions and
information, and subject to the qualifications and assumptions set forth herein,
we are of the opinion that, if the Merger is consummated in accordance with the
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the statements set forth in the Officers' Tax Certificates are true
and correct as of the Effective Time, then for federal income tax purposes, the
Merger will qualify as a reorganization within the meaning of Section 368(a) of
the Code.
Our opinion set forth above is based on the existing
provisions of the Code, Treasury Regulations (including Temporary and Proposed
Treasury Regulations) promulgated under the Code, published Revenue Rulings,
Revenue Procedures and other announcements of the Internal Revenue Service (the
"Service") and existing court decisions, any of which could be changed at any
time. Any such changes might be retroactive with respect to transactions entered
into prior to the date of such changes and could significantly modify the
opinion set forth above. Nevertheless, we undertake no responsibility to advise
you of any subsequent developments in the application, operation or
interpretation of the U.S. federal income tax laws.
Our opinion concerning certain of the U.S. federal tax
consequences of the Merger is limited to the specific U.S. federal tax
consequence presented above. No opinion is expressed as to any transaction other
than the Merger, including any transaction undertaken in connection with the
Merger. In addition, this opinion does not address any estate, gift, state,
local or foreign tax consequences that may result from the Merger. In
particular, we express
3
<PAGE>
no opinion regarding: (i) the amount, existence, or availability after the
Merger, of any of the U.S. federal income tax attributes of MAXIS, ELECTRONIC
ARTS or MERGER SUB; (ii) any transaction in which MAXIS common stock is acquired
or ELECTRONIC ARTS common stock is disposed other than pursuant to the Merger;
(iii) the potential application of the "disqualifying disposition" rules of
Section 421 of the Code to dispositions of MAXIS common stock; (iv) the effects
of the Merger and ELECTRONIC ARTS' assumption of outstanding options to acquire
MAXIS stock on the holders of such options under any MAXIS employee stock option
or stock purchase plan, respectively; (v) the effects of the Merger on any MAXIS
stock acquired by the holder subject to the provision of Section 83(a) of the
Code; (vi) the effects of the Merger on any payment which is or may be subject
to the provisions of ss. 280G of the Code; and (vii) the application of the
collapsible corporation provisions of ss. 341 of the Code to MAXIS, ELECTRONIC
ARTS or MERGER SUB as a result of the Merger.
In addition to the request for our opinion on this specific
matter of federal income tax law, we have been asked to review the discussion of
federal income tax issues contained in the Registration Statement. We have
reviewed the discussion entitled "Certain Federal Income Tax Considerations")
contained in the Registration Statement and believe that such information fairly
presents the current federal income tax law applicable to the Merger, and the
material tax consequences to MAXIS and MAXIS' shareholders as a result of the
Merger.
No ruling has been or will be requested from the Service
concerning the U.S. federal income tax consequences of the Merger. In reviewing
this opinion, you should be aware that the opinion set forth above represents
our conclusions regarding the application of existing U.S. federal income tax
law to the instant transaction. If the facts vary from those relied upon
(including if any representations, covenant, warranty or assumption upon which
we have relied is inaccurate, incomplete, breached or ineffective), our opinion
contained herein could be inapplicable. You should be aware that an opinion of
counsel represents only counsel's best legal judgment, and has no binding effect
or official status of any kind, and that no assurance can be given that contrary
positions may not be taken by the Service or that a court considering the issues
would not hold otherwise.
This opinion is being delivered solely for the purpose of
being included as an exhibit to the Registration Statement; it may not be relied
upon or utilized for any other purpose (including, without limitation,
satisfying any conditions in the Agreement) or by any other person or entity,
and may not be made available to any other person or entity, without our prior
written consent. We do, however, consent to the use of this opinion as an
exhibit to the Registration Statement and to the use of our name in the
Registration Statement wherever it appears.
Very truly yours,
FENWICK & WEST LLP
A LAW PARTNERSHIP INCLUDING
PROFESSIONAL CORPORATIONS
4
<PAGE>
Exhibits:
Exhibit A -- Certificate of Officers of Electronic Arts Inc. and
Village Acquisition Corporation, dated June 25, 1997, and signed by
authorized officers of Electronic Arts Inc. and Village Acquisition
Corporation.
Exhibit B -- Certificate of Officer of Maxis, Inc., dated June 25,
1997, and signed by an authorized officer of Maxis, Inc.
<PAGE>
EXHIBIT A
June 25, 1997
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
Two Palo Alto Square, Suite 700 650 Page Mill Road
3000 El Camino Real Palo Alto, California 94304
Palo Alto, California 94304
CERTIFICATE OF OFFICERS OF
ELECTRONIC ARTS INC. AND
VILLAGE ACQUISITION CORPORATION
The undersigned officers of Electronic Arts Inc. ("ELECTRONIC ARTS"), a
corporation organized and existing under the laws of the State of Delaware, and
its wholly owned subsidiary, Village Acquisition Corporation, a corporation
organized and existing under the laws of the State of Delaware ("MERGER SUB"),
on behalf of ELECTRONIC ARTS and MERGER SUB, respectively, after consulting with
legal counsel and financial auditors regarding the meaning of and the factual
support for the following representations, hereby represent, in connection with
the proposed merger of MERGER SUB with and into Maxis, Inc., a corporation
organized and existing under the laws of the State of Delaware ("MAXIS"), with
MAXIS surviving the merger (the "MERGER"), all pursuant to the Agreement and
Plan of Reorganization by and among MAXIS, ELECTRONIC ARTS and MERGER SUB, dated
as of June 4, 1997, and exhibits thereto (collectively, the "AGREEMENT"), that
to the best of their knowledge and belief the following facts are now true, and
will continue to be true as of the Effective Time for the Merger, and thereafter
as relevant:
1. MERGER SUB is a newly-formed corporation that was created for the
sole purpose of facilitating ELECTRONIC ARTS' acquisition of MAXIS. It has not
conducted and is not conducting any business activities.
2. Following the transaction, MAXIS will hold at least ninety percent
(90%) of the fair market value of its net assets, at least seventy percent (70%)
of the fair market value of its gross assets, at least ninety percent (90%) of
the fair market value of MERGER SUB's net assets,
<PAGE>
and at least seventy percent (70%) of the fair market value of MERGER SUB's
gross assets held immediately prior to the transaction. For purposes of this
representation, amounts paid by MAXIS or MERGER SUB to dissenters, amounts paid
by MAXIS or MERGER SUB to shareholders who receive cash or other property,
amounts used by MAXIS or MERGER SUB to pay reorganization expenses, all
redemptions and distributions (except for regular, normal dividends) made by
MAXIS, and MAXIS or MERGER SUB assets disposed of by MAXIS or MERGER SUB prior
to the Merger and in contemplation thereof (including without limitation any
asset disposed of by MAXIS or MERGER SUB, other than in the ordinary course of
business, during the period ending on the Effective Time and beginning with the
commencement of negotiations (whether formal or informal) between MAXIS and
ELECTRONIC ARTS regarding the Merger (the "PRE-MERGER PERIOD")), will be
included as assets of MAXIS or MERGER SUB, respectively, immediately prior to
the transaction.
3. Prior to the Merger, ELECTRONIC ARTS will be in Control of MERGER
SUB. As used herein, "Control" shall mean ownership of stock possessing at least
eighty percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of shares
of all other classes of stock of the corporation. For purposes of determining
Control, a person shall not be considered to own voting stock if rights to vote
such stock (or to restrict or otherwise control the voting of such stock) are
held by a third party (including a voting trust) other than an agent of such
person.
4. ELECTRONIC ARTS will acquire Control of MAXIS in the Merger
solely in exchange for ELECTRONIC ARTS voting common stock.
5. ELECTRONIC ARTS has no plan or intention to cause MAXIS to issue,
after the Merger, additional shares of stock (or rights to acquire shares of
MAXIS stock) that would result in ELECTRONIC ARTS losing Control of MAXIS.
6. ELECTRONIC ARTS has no plan or intention to reacquire any of its
voting common stock issued in the Merger. For purposes of this representation,
it should be noted that ELECTRONIC ARTS may from time to time repurchase some of
its issued and outstanding common stock in open market repurchase transactions.
7. ELECTRONIC ARTS has no plan or intention to: (i) cause MAXIS to
sell, transfer or otherwise dispose of any of its assets or of any of the assets
acquired from MERGER SUB except for dispositions made in the ordinary course of
business or for the payment of expenses incurred by MAXIS in the Merger; (ii)
liquidate MAXIS; (iii) merge MAXIS with or into another corporation including
ELECTRONIC ARTS or its affiliates; or (iv) to sell, distribute or otherwise
dispose of the stock of MAXIS.
8. In the Merger, MERGER SUB will have no liabilities assumed by
MAXIS and will not transfer to MAXIS any assets subject to liabilities.
9. ELECTRONIC ARTS intends that, following the Merger, MAXIS will
continue its historic business or use a significant portion of its historic
business assets in a business.
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<PAGE>
10. Neither ELECTRONIC ARTS nor any ELECTRONIC ARTS subsidiary owns,
or has owned during the past five (5) years, directly or indirectly, any shares
of MAXIS stock, or the right to acquire or vote any such stock.
11. No shareholder of MAXIS is acting as agent for ELECTRONIC ARTS
in connection with the Merger or approval thereof.
12. The transfer of cash to MAXIS shareholders in lieu of fractional
ELECTRONIC ARTS voting common stock shares, if any, is solely for the purpose of
avoiding the expense and inconvenience to ELECTRONIC ARTS of accounting for
fractional shares and does not represent separately bargained-for consideration.
13. Except with respect to payments of cash in lieu of fractional
shares of ELECTRONIC ARTS voting common stock, one hundred percent (100%) of the
MAXIS stock outstanding immediately prior to the Merger will be exchanged solely
for ELECTRONIC ARTS voting common stock. Thus, except as set forth in the
preceding sentence, MERGER SUB and ELECTRONIC ARTS intend that no consideration
other than ELECTRONIC ARTS voting common stock be paid or received (directly or
indirectly, actually or constructively) for MAXIS stock.
14. The total fair market value of all consideration other than
ELECTRONIC ARTS voting common stock received by MAXIS shareholders in exchange
for their MAXIS stock in the Merger (including, without limitation, cash paid to
MAXIS shareholders in lieu of fractional shares of ELECTRONIC ARTS voting common
stock) will be less than twenty percent (20%) of the aggregate fair market value
of MAXIS stock outstanding immediately prior to the Merger.
15. No shares of MERGER SUB have been or will be used as
consideration or issued to shareholders of MAXIS in the Merger.
16. Except as otherwise provided in the Agreement, ELECTRONIC ARTS,
MERGER SUB, MAXIS and the shareholders of MAXIS will each pay separately its or
their own expenses in connection with the Merger as contemplated by the
Agreement; provided, however, that to the extent any expenses relating to the
Merger (or the "plan of reorganization" within the meaning of Treas. Reg. ss.
1.368-1(c) with respect to the Merger) are funded directly or indirectly by a
party other than the incurring party, such expenses will be within the
guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
17. There is no inter-corporate indebtedness existing between
ELECTRONIC ARTS and MAXIS or between MERGER SUB and MAXIS that was issued,
acquired, or will be settled at a discount, and ELECTRONIC ARTS will assume no
liabilities of MAXIS or any MAXIS shareholder in connection with the Merger.
18. None of the payments to be received by any shareholder of MAXIS
which are designated as compensation are actually separate consideration for, or
allocable to, any of their shares of MAXIS stock; and the compensation to be
paid to any shareholder of MAXIS will be
3
<PAGE>
for services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
19. Neither ELECTRONIC ARTS nor MERGER SUB are investments companies
as defined in ss. 368(a)(2)(F) of the Internal Revenue Code of 1986, as amended.
20. ELECTRONIC ARTS and MERGER SUB are authorized to make all of the
representations set forth herein, and the undersigned are authorized to execute
this certificate on behalf of ELECTRONIC ARTS and MERGER SUB.
The undersigned recognize that counsel to and auditors for ELECTRONIC
ARTS and MERGER SUB and counsel to and auditors for MAXIS will rely upon the
foregoing representations in evaluating the U.S. federal income tax consequences
of the Merger.
<TABLE>
<S> <C>
ELECTRONIC ARTS INC. VILLAGE ACQUISITION CORPORATION
a Delaware corporation a Delaware corporation
By: /s/ Ruth A. Kennedy By: /s/ Ruth A. Kennedy
--------------------------------------- ---------------------------------------
Name: Ruth A. Kennedy Name: Ruth A. Kennedy
--------------------------------------- ---------------------------------------
Title: SVP, General Counsel and Secretary Title: Secretary
--------------------------------------- ---------------------------------------
Date: June 25, 1997 Date: June 25, 1997
--------------------------------------- ---------------------------------------
</TABLE>
4
<PAGE>
EXHIBIT B
June 25, 1997
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
Two Palo Alto Square, Suite 700 650 Page Mill Road
3000 El Camino Real Palo Alto, California 94304
Palo Alto, California 94304
CERTIFICATE OF OFFICER OF
MAXIS, INC.
The undersigned officer of Maxis, Inc., a corporation organized and
existing under the laws of the State of Delaware ("MAXIS"), on behalf of the
management of Maxis, after consulting with legal counsel and financial auditors
regarding the meaning of and the factual support for the following
representations, hereby represent, in connection with the proposed merger of
Village Acquisition Corporation ("MERGER SUB"), a Delaware corporation and
wholly owned subsidiary of Electronic Arts Inc., a corporation organized and
existing under the laws of the state of Delaware ("ELECTRONIC ARTS"), with and
into MAXIS, with MAXIS surviving the merger (the "MERGER"), all pursuant to the
Agreement and Plan of Reorganization by and among MAXIS, ELECTRONIC ARTS and
MERGER SUB, dated as of June 4, 1997, and exhibits thereto (collectively, the
"AGREEMENT"), that to the best of their knowledge and belief the following facts
are now true, and will continue to be true as of the Effective Time for the
Merger, and thereafter as relevant:
1. Following the Merger, MAXIS will hold at least ninety percent
(90%) of the fair market value of the net assets and at least seventy percent
(70%) of the fair market value of the gross assets held by MAXIS immediately
prior to the Merger. For the purpose of determining the percentage of the net
and gross assets held by MAXIS immediately before the Merger for purposes of
this representation, the following assets will be treated as property held by
MAXIS immediately prior but not subsequent to the Merger: (i) assets disposed of
by MAXIS prior to the Merger and in contemplation thereof (including without
limitation any asset disposed of by MAXIS, other than in the ordinary course of
business, during the period ending on the Effective Time of the Merger and
beginning with the commencement of negotiations (whether formal or
<PAGE>
informal) between MAXIS and ELECTRONIC ARTS regarding the Merger (the "PRE-
MERGER PERIOD")), (ii) assets used by MAXIS to pay expenses or liabilities
incurred in connection with the Merger, and (iii) assets used to make
distributions (except for regular and normal dividends), redemption or other
payments in respect of MAXIS stock or rights to acquire such stock (including
payments treated as such for tax purposes) that are made in contemplation of the
Merger or related thereto.
2. MAXIS has made no transfer of any of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the Pre-Merger Period other than (i) in
the ordinary course of business, and (ii) payments for expenses incurred in
connection with the Merger.
3. In the Merger, shares of MAXIS stock representing Control of MAXIS
will be exchanged solely for voting common stock of ELECTRONIC ARTS; at the time
of the Merger, there will exist no rights of any kind (including without
limitation warrants, options, convertible securities, contingent rights,
informal or unwritten rights) to acquire MAXIS stock or to vote (or restrict or
otherwise control the vote of) MAXIS stock which, if exercised, could affect
ELECTRONIC ARTS' acquisition and retention of Control of MAXIS. For purposes of
this representation, shares of MAXIS stock exchanged in the Merger for cash and
other property will be treated as MAXIS stock outstanding on the date of the
Merger but not exchanged for voting common stock of ELECTRONIC ARTS. As used
herein, the term "CONTROL" shall mean ownership of stock possessing at least
eighty percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of shares
of all other classes of stock of the corporation. For purposes of determining
Control, a person shall not be considered to own voting stock if rights to vote
such stock (or to restrict or otherwise control the voting of such stock) are
held by a third party (including a voting trust) other than an agent of such
person.
4. At the Effective Time of the Merger, there will be no accrued but
unpaid dividends on shares of MAXIS stock.
5. The total fair market value of all consideration other than
ELECTRONIC ARTS voting common stock received by MAXIS shareholders in exchange
for their MAXIS stock in the Merger (including, without limitation, cash paid to
MAXIS shareholders in lieu of fractional shares of ELECTRONIC ARTS voting common
stock will be less than twenty percent (20%) of the aggregate fair market value
of MAXIS stock outstanding immediately prior to the Merger.
6. MAXIS has no obligation, understanding, agreement or intention to
issue additional shares of stock after the Merger that would result in
ELECTRONIC ARTS losing Control of MAXIS.
7. MAXIS has no plan or intention, and is under no obligation, to
discontinue its business, to sell or otherwise dispose of any of its assets or
of any of the assets acquired from MERGER SUB in the Merger except for
dispositions made in the ordinary course of business or the payment of expenses
incurred by MAXIS pursuant to the Merger.
2
<PAGE>
8. There is no plan or intention on the part of any MAXIS shareholder
who owns five percent or more of MAXIS stock or is an officer or director of
MAXIS, and to the best knowledge of the management of MAXIS, there is no plan or
intention on the part of the remaining MAXIS shareholders to engage in a sale,
exchange, transfer, distribution, pledge, disposition or any other transaction
which would result in a direct or indirect disposition (a "SALE") of (a) shares
of ELECTRONIC ARTS voting common stock to be issued to MAXIS shareholders in the
Merger, which shares would have an aggregate fair market value, as of the
Effective Date of the Merger, in excess of fifty-percent (50%) of the aggregate
fair market value, immediately prior to the Merger, of all outstanding shares of
MAXIS stock. For purposes of this representation, shares of MAXIS stock (or the
portion thereof) (i) with respect to which a MAXIS shareholder receives
consideration in the Merger other than ELECTRONIC ARTS voting common stock
and/or (ii) with respect to which a Sale by a MAXIS shareholder who owns five
percent or more of MAXIS stock or is an officer or director of MAXIS occurs
during the Pre-Merger Period shall be considered shares of outstanding MAXIS
stock exchanged for ELECTRONIC ARTS voting common stock in the Merger and then
disposed of pursuant to a prearranged plan.
9. The transfer of cash to MAXIS shareholders in lieu of fractional
ELECTRONIC ARTS voting common stock shares, if any, is solely for the purpose of
avoiding the expense and inconvenience to ELECTRONIC ARTS of accounting for
fractional shares and does not represent separately bargained-for consideration.
10. Except with respect to payments of cash to MAXIS shareholders in
lieu of fractional shares of ELECTRONIC ARTS voting common stock, one hundred
percent (100%) of the MAXIS stock outstanding immediately prior to the Merger
will be exchanged solely for ELECTRONIC ARTS voting common stock. Thus, except
as set forth in the preceding sentence, MAXIS intends that no consideration
other than ELECTRONIC ARTS voting common stock be paid or received (directly or
indirectly, actually or constructively) for MAXIS stock.
11. Except as otherwise provided in the Agreement, MAXIS and the
shareholders of MAXIS will each pay separately its or their own expenses in
connection with the Merger as contemplated by the Agreement; provided,
however, that to the extent any expenses relating to the Merger (or the "plan
of reorganization" within the meaning of Treas. Reg. ss. 1.368-1(c) with respect
to the Merger) are funded directly or indirectly by a party other than the
incurring party, such expenses will be within the guidelines established in
Rev. Rul. 73-54, 1973-1 C.B. 187.
12. There is no inter-corporate indebtedness existing between
ELECTRONIC ARTS and MAXIS or between MERGER SUB and MAXIS that was issued,
acquired, or will be settled at a discount, and to the best knowledge of the
management of MAXIS, ELECTRONIC ARTS will assume no liabilities of MAXIS or any
MAXIS shareholder in connection with the Merger.
13. There is no indebtedness existing between MAXIS and any MAXIS
shareholder which will be repaid in connection with or as part of the Merger, or
will be specifically funded with amounts ELECTRONIC ARTS would contribute to
MAXIS subsequent to the Merger.
3
<PAGE>
14. None of the payments received by any shareholder of MAXIS which
have been designated as compensation are actually separate consideration for, or
allocable to, any of their shares of MAXIS stock; and the compensation paid to
any shareholder of MAXIS will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length for
similar services.
15. MAXIS is not an investment company as defined in ss. 368(a)(2)(F)
of the Internal Revenue Code of 1986, as amended (the "CODE").
16. MAXIS is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of section 368(a)(3)(A) of the Code.
17. On the Effective Date, the fair market value of the assets of
MAXIS will exceed the sum of its liabilities, plus the amount of liabilities, if
any, to which the assets are subject.
18. The fair market value of the ELECTRONIC ARTS stock and other
consideration received by each MAXIS shareholder will be approximately equal to
the fair market value of the MAXIS stock surrendered in the exchange.
19. MAXIS is authorized to make all of the representations set
forth herein, and the undersigned are authorized to execute this certificate
on behalf of MAXIS.
The undersigned recognize that counsel to and auditors for MAXIS and
counsel to and auditors for ELECTRONIC ARTS and MERGER SUB will rely upon the
foregoing representations in evaluating the federal income tax consequences of
the Merger.
MAXIS CORPORATION,
a Delaware corporation:
By: /s/ Fred M. Gerson
_____________________________
Name: Fred M. Gerson
___________________________
Title: VP/CFO
__________________________
Date: 6-24-97
______________________________
4
<PAGE>
EXHIBIT 8.02
[WSGR Letterhead]
June 25, 1997
Maxis, Inc.
2121 N. California Boulevard, Suite 500
Walnut Creek, California 94596
Ladies and Gentlemen:
We have acted as counsel for Maxis, Inc., a Delaware corporation ("Maxis")
in connection with the preparation and execution of the Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of June 4, 1997, among
Maxis, Electronics Arts, Inc., a Delaware corporation ("EA") and Village
Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of
EA ("Sub"). This opinion is being delivered to you pursuant to Section 6.1(d) of
the Reorganization Agreement. Pursuant to the Reorganization Agreement, Sub will
merge with and into Maxis and Maxis will survive as a wholly-owned subsidiary of
EA (the "Merger"). Unless otherwise defined, capitalized terms referred to
herein have the meanings set forth in the Reorganization Agreement. All section
references, unless otherwise indicated, are to the Internal Revenue Code of
1986, as amended (the "Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon the facts, statements, descriptions and representations
set forth in the registration statement on Form S-4 filed with the Securities
and Exchange Commission (the "Registration Statement"), the Reorganization
Agreement (including Schedules and Exhibits), and such other documents
pertaining to the Reorganization as we have deemed necessary or appropriate. We
have also reviewed and relied upon representations of officers of Maxis and EA,
in officers' certificates attached hereto as Exhibits A and B, respectively (the
"Officers' Certificates").
In connection with rendering this opinion, we have assumed or obtained
representations (without any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time)
<PAGE>
Maxis, Inc.
June 25, 1997
Page 2
due execution and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any statement made in any of the documents referred to herein, "to the
best of the knowledge" of any person or party is correct without such
qualification;
3. All statements, descriptions and representations contained in any of
the documents referred to herein or otherwise made to us are true and correct in
all material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Merger will be reported by Maxis, and EA on their respective
federal income tax returns in a manner consistent with the opinion set forth
below; and
5. The stockholders of Maxis will not, at the Effective Time, have an
existing plan or intent to dispose of an amount of EA Common Stock to be
received in the Merger (or to dispose of Maxis Common Stock in anticipation of
the Merger) such that the stockholders of Maxis will not receive and retain a
meaningful continuing equity ownership in EA that is sufficient to satisfy the
continuity of interest requirement as specified in Treasury Regulations Section
1.368-1(b) and as interpreted in certain Internal Revenue Service rulings and
judicial decisions.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the Merger
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and the facts set forth in the Officers' Certificates are true and
correct at the Effective Time, then for federal income tax purposes the Merger
will qualify as a "reorganization" within the meaning of Section 368(a) of the
Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the application or interpretation of the Federal income
tax laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences
<PAGE>
Maxis, Inc.
June 25, 1997
Page 3
that may result from the Merger or any other transaction (including any
transaction undertaken in connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material provision
thereof or if all of the representations, warranties, statements and assumptions
upon which we relied are not true and accurate at all relevant times. In the
event any one of the statements, representations, warranties or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
This opinion has been delivered to you only for the purposes stated. It
may not be relied upon for any other purpose or by any other person or entity
and may not be made available to any other person or entity without our prior
written consent. We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and further consent to the use of our name in the
Registration Statement in connection with references to this opinion and the tax
consequences of the Merger. In giving this consent, however, we do not hereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT A
June 25, 1997
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
Two Palo Alto Square, Suite 700 650 Page Mill Road
3000 El Camino Real Palo Alto, California 94304
Palo Alto, California 94304
CERTIFICATE OF OFFICER OF
MAXIS, INC.
The undersigned officer of Maxis, Inc., a corporation organized and
existing under the laws of the State of Delaware ("MAXIS"), on behalf of the
management of Maxis, after consulting with legal counsel and financial auditors
regarding the meaning of and the factual support for the following
representations, hereby represent, in connection with the proposed merger of
Village Acquisition Corporation ("MERGER SUB"), a Delaware corporation and
wholly owned subsidiary of Electronic Arts Inc., a corporation organized and
existing under the laws of the state of Delaware ("ELECTRONIC ARTS"), with and
into MAXIS, with MAXIS surviving the merger (the "MERGER"), all pursuant to the
Agreement and Plan of Reorganization by and among MAXIS, ELECTRONIC ARTS and
MERGER SUB, dated as of June 4, 1997, and exhibits thereto (collectively, the
"AGREEMENT"), that to the best of their knowledge and belief the following facts
are now true, and will continue to be true as of the Effective Time for the
Merger, and thereafter as relevant:
1. Following the Merger, MAXIS will hold at least ninety percent
(90%) of the fair market value of the net assets and at least seventy percent
(70%) of the fair market value of the gross assets held by MAXIS immediately
prior to the Merger. For the purpose of determining the percentage of the net
and gross assets held by MAXIS immediately before the Merger for purposes of
this representation, the following assets will be treated as property held by
MAXIS immediately prior but not subsequent to the Merger: (i) assets disposed of
by MAXIS prior to the Merger and in contemplation thereof (including without
limitation any asset disposed of by MAXIS, other than in the ordinary course of
business, during the period ending on the Effective Time of the Merger and
beginning with the commencement of negotiations (whether formal or
<PAGE>
informal) between MAXIS and ELECTRONIC ARTS regarding the Merger (the "PRE-
MERGER PERIOD")), (ii) assets used by MAXIS to pay expenses or liabilities
incurred in connection with the Merger, and (iii) assets used to make
distributions (except for regular and normal dividends), redemption or other
payments in respect of MAXIS stock or rights to acquire such stock (including
payments treated as such for tax purposes) that are made in contemplation of the
Merger or related thereto.
2. MAXIS has made no transfer of any of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the Pre-Merger Period other than (i) in
the ordinary course of business, and (ii) payments for expenses incurred in
connection with the Merger.
3. In the Merger, shares of MAXIS stock representing Control of MAXIS
will be exchanged solely for voting common stock of ELECTRONIC ARTS; at the time
of the Merger, there will exist no rights of any kind (including without
limitation warrants, options, convertible securities, contingent rights,
informal or unwritten rights) to acquire MAXIS stock or to vote (or restrict or
otherwise control the vote of) MAXIS stock which, if exercised, could affect
ELECTRONIC ARTS' acquisition and retention of Control of MAXIS. For purposes of
this representation, shares of MAXIS stock exchanged in the Merger for cash and
other property will be treated as MAXIS stock outstanding on the date of the
Merger but not exchanged for voting common stock of ELECTRONIC ARTS. As used
herein, the term "CONTROL" shall mean ownership of stock possessing at least
eighty percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of shares
of all other classes of stock of the corporation. For purposes of determining
Control, a person shall not be considered to own voting stock if rights to vote
such stock (or to restrict or otherwise control the voting of such stock) are
held by a third party (including a voting trust) other than an agent of such
person.
4. At the Effective Time of the Merger, there will be no accrued but
unpaid dividends on shares of MAXIS stock.
5. The total fair market value of all consideration other than
ELECTRONIC ARTS voting common stock received by MAXIS shareholders in exchange
for their MAXIS stock in the Merger (including, without limitation, cash paid to
MAXIS shareholders in lieu of fractional shares of ELECTRONIC ARTS voting common
stock will be less than twenty percent (20%) of the aggregate fair market value
of MAXIS stock outstanding immediately prior to the Merger.
6. MAXIS has no obligation, understanding, agreement or intention to
issue additional shares of stock after the Merger that would result in
ELECTRONIC ARTS losing Control of MAXIS.
7. MAXIS has no plan or intention, and is under no obligation, to
discontinue its business, to sell or otherwise dispose of any of its assets or
of any of the assets acquired from MERGER SUB in the Merger except for
dispositions made in the ordinary course of business or the payment of expenses
incurred by MAXIS pursuant to the Merger.
2
<PAGE>
8. There is no plan or intention on the part of any MAXIS shareholder
who owns five percent or more of MAXIS stock or is an officer or director of
MAXIS, and to the best knowledge of the management of MAXIS, there is no plan or
intention on the part of the remaining MAXIS shareholders to engage in a sale,
exchange, transfer, distribution, pledge, disposition or any other transaction
which would result in a direct or indirect disposition (a "SALE") of (a) shares
of ELECTRONIC ARTS voting common stock to be issued to MAXIS shareholders in the
Merger, which shares would have an aggregate fair market value, as of the
Effective Date of the Merger, in excess of fifty-percent (50%) of the aggregate
fair market value, immediately prior to the Merger, of all outstanding shares of
MAXIS stock. For purposes of this representation, shares of MAXIS stock (or the
portion thereof) (i) with respect to which a MAXIS shareholder receives
consideration in the Merger other than ELECTRONIC ARTS voting common stock
and/or (ii) with respect to which a Sale by a MAXIS shareholder who owns five
percent or more of MAXIS stock or is an officer or director of MAXIS occurs
during the Pre-Merger Period shall be considered shares of outstanding MAXIS
stock exchanged for ELECTRONIC ARTS voting common stock in the Merger and then
disposed of pursuant to a prearranged plan.
9. The transfer of cash to MAXIS shareholders in lieu of fractional
ELECTRONIC ARTS voting common stock shares, if any, is solely for the purpose of
avoiding the expense and inconvenience to ELECTRONIC ARTS of accounting for
fractional shares and does not represent separately bargained-for consideration.
10. Except with respect to payments of cash to MAXIS shareholders in
lieu of fractional shares of ELECTRONIC ARTS voting common stock, one hundred
percent (100%) of the MAXIS stock outstanding immediately prior to the Merger
will be exchanged solely for ELECTRONIC ARTS voting common stock. Thus, except
as set forth in the preceding sentence, MAXIS intends that no consideration
other than ELECTRONIC ARTS voting common stock be paid or received (directly or
indirectly, actually or constructively) for MAXIS stock.
11. Except as otherwise provided in the Agreement, MAXIS and the
shareholders of MAXIS will each pay separately its or their own expenses in
connection with the Merger as contemplated by the Agreement; provided,
however, that to the extent any expenses relating to the Merger (or the "plan
of reorganization" within the meaning of Treas. Reg. ss. 1.368-1(c) with respect
to the Merger) are funded directly or indirectly by a party other than the
incurring party, such expenses will be within the guidelines established in
Rev. Rul. 73-54, 1973-1 C.B. 187.
12. There is no inter-corporate indebtedness existing between
ELECTRONIC ARTS and MAXIS or between MERGER SUB and MAXIS that was issued,
acquired, or will be settled at a discount, and to the best knowledge of the
management of MAXIS, ELECTRONIC ARTS will assume no liabilities of MAXIS or any
MAXIS shareholder in connection with the Merger.
13. There is no indebtedness existing between MAXIS and any MAXIS
shareholder which will be repaid in connection with or as part of the Merger, or
will be specifically funded with amounts ELECTRONIC ARTS would contribute to
MAXIS subsequent to the Merger.
3
<PAGE>
14. None of the payments received by any shareholder of MAXIS which
have been designated as compensation are actually separate consideration for, or
allocable to, any of their shares of MAXIS stock; and the compensation paid to
any shareholder of MAXIS will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's length for
similar services.
15. MAXIS is not an investment company as defined in ss. 368(a)(2)(F)
of the Internal Revenue Code of 1986, as amended (the "CODE").
16. MAXIS is not under the jurisdiction of a court in a Title 11
or similar case within the meaning of section 368(a)(3)(A) of the Code.
17. On the Effective Date, the fair market value of the assets of
MAXIS will exceed the sum of its liabilities, plus the amount of liabilities, if
any, to which the assets are subject.
18. The fair market value of the ELECTRONIC ARTS stock and other
consideration received by each MAXIS shareholder will be approximately equal to
the fair market value of the MAXIS stock surrendered in the exchange.
19. MAXIS is authorized to make all of the representations set
forth herein, and the undersigned are authorized to execute this certificate
on behalf of MAXIS.
The undersigned recognize that counsel to and auditors for MAXIS and
counsel to and auditors for ELECTRONIC ARTS and MERGER SUB will rely upon the
foregoing representations in evaluating the federal income tax consequences of
the Merger.
MAXIS CORPORATION,
a Delaware corporation:
By: /s/ Fred M. Gerson
_____________________________
Name: Fred M. Gerson
___________________________
Title: VP/CFO
__________________________
Date: 6-24-97
___________________________
4
<PAGE>
EXHIBIT B
June 25, 1997
FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI, P.C.
Two Palo Alto Square, Suite 700 650 Page Mill Road
3000 El Camino Real Palo Alto, California 94304
Palo Alto, California 94304
CERTIFICATE OF OFFICERS OF
ELECTRONIC ARTS INC. AND
VILLAGE ACQUISITION CORPORATION
The undersigned officers of Electronic Arts Inc. ("ELECTRONIC ARTS"), a
corporation organized and existing under the laws of the State of Delaware, and
its wholly owned subsidiary, Village Acquisition Corporation, a corporation
organized and existing under the laws of the State of Delaware ("MERGER SUB"),
on behalf of ELECTRONIC ARTS and MERGER SUB, respectively, after consulting with
legal counsel and financial auditors regarding the meaning of and the factual
support for the following representations, hereby represent, in connection with
the proposed merger of MERGER SUB with and into Maxis, Inc., a corporation
organized and existing under the laws of the State of Delaware ("MAXIS"), with
MAXIS surviving the merger (the "MERGER"), all pursuant to the Agreement and
Plan of Reorganization by and among MAXIS, ELECTRONIC ARTS and MERGER SUB, dated
as of June 4, 1997, and exhibits thereto (collectively, the "AGREEMENT"), that
to the best of their knowledge and belief the following facts are now true, and
will continue to be true as of the Effective Time for the Merger, and thereafter
as relevant:
1. MERGER SUB is a newly-formed corporation that was created for the
sole purpose of facilitating ELECTRONIC ARTS' acquisition of MAXIS. It has not
conducted and is not conducting any business activities.
2. Following the transaction, MAXIS will hold at least ninety percent
(90%) of the fair market value of its net assets, at least seventy percent (70%)
of the fair market value of its gross assets, at least ninety percent (90%) of
the fair market value of MERGER SUB's net assets,
<PAGE>
and at least seventy percent (70%) of the fair market value of MERGER SUB's
gross assets held immediately prior to the transaction. For purposes of this
representation, amounts paid by MAXIS or MERGER SUB to dissenters, amounts paid
by MAXIS or MERGER SUB to shareholders who receive cash or other property,
amounts used by MAXIS or MERGER SUB to pay reorganization expenses, all
redemptions and distributions (except for regular, normal dividends) made by
MAXIS, and MAXIS or MERGER SUB assets disposed of by MAXIS or MERGER SUB prior
to the Merger and in contemplation thereof (including without limitation any
asset disposed of by MAXIS or MERGER SUB, other than in the ordinary course of
business, during the period ending on the Effective Time and beginning with the
commencement of negotiations (whether formal or informal) between MAXIS and
ELECTRONIC ARTS regarding the Merger (the "PRE-MERGER PERIOD")), will be
included as assets of MAXIS or MERGER SUB, respectively, immediately prior to
the transaction.
3. Prior to the Merger, ELECTRONIC ARTS will be in Control of MERGER
SUB. As used herein, "Control" shall mean ownership of stock possessing at least
eighty percent (80%) of the total combined voting power of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of shares
of all other classes of stock of the corporation. For purposes of determining
Control, a person shall not be considered to own voting stock if rights to vote
such stock (or to restrict or otherwise control the voting of such stock) are
held by a third party (including a voting trust) other than an agent of such
person.
4. ELECTRONIC ARTS will acquire Control of MAXIS in the Merger
solely in exchange for ELECTRONIC ARTS voting common stock.
5. ELECTRONIC ARTS has no plan or intention to cause MAXIS to issue,
after the Merger, additional shares of stock (or rights to acquire shares of
MAXIS stock) that would result in ELECTRONIC ARTS losing Control of MAXIS.
6. ELECTRONIC ARTS has no plan or intention to reacquire any of its
voting common stock issued in the Merger. For purposes of this representation,
it should be noted that ELECTRONIC ARTS may from time to time repurchase some of
its issued and outstanding common stock in open market repurchase transactions.
7. ELECTRONIC ARTS has no plan or intention to: (i) cause MAXIS to
sell, transfer or otherwise dispose of any of its assets or of any of the assets
acquired from MERGER SUB except for dispositions made in the ordinary course of
business or for the payment of expenses incurred by MAXIS in the Merger; (ii)
liquidate MAXIS; (iii) merge MAXIS with or into another corporation including
ELECTRONIC ARTS or its affiliates; or (iv) to sell, distribute or otherwise
dispose of the stock of MAXIS.
8. In the Merger, MERGER SUB will have no liabilities assumed by
MAXIS and will not transfer to MAXIS any assets subject to liabilities.
9. ELECTRONIC ARTS intends that, following the Merger, MAXIS will
continue its historic business or use a significant portion of its historic
business assets in a business.
2
<PAGE>
10. Neither ELECTRONIC ARTS nor any ELECTRONIC ARTS subsidiary owns,
or has owned during the past five (5) years, directly or indirectly, any shares
of MAXIS stock, or the right to acquire or vote any such stock.
11. No shareholder of MAXIS is acting as agent for ELECTRONIC ARTS
in connection with the Merger or approval thereof.
12. The transfer of cash to MAXIS shareholders in lieu of fractional
ELECTRONIC ARTS voting common stock shares, if any, is solely for the purpose of
avoiding the expense and inconvenience to ELECTRONIC ARTS of accounting for
fractional shares and does not represent separately bargained-for consideration.
13. Except with respect to payments of cash in lieu of fractional
shares of ELECTRONIC ARTS voting common stock, one hundred percent (100%) of the
MAXIS stock outstanding immediately prior to the Merger will be exchanged solely
for ELECTRONIC ARTS voting common stock. Thus, except as set forth in the
preceding sentence, MERGER SUB and ELECTRONIC ARTS intend that no consideration
other than ELECTRONIC ARTS voting common stock be paid or received (directly or
indirectly, actually or constructively) for MAXIS stock.
14. The total fair market value of all consideration other than
ELECTRONIC ARTS voting common stock received by MAXIS shareholders in exchange
for their MAXIS stock in the Merger (including, without limitation, cash paid to
MAXIS shareholders in lieu of fractional shares of ELECTRONIC ARTS voting common
stock) will be less than twenty percent (20%) of the aggregate fair market value
of MAXIS stock outstanding immediately prior to the Merger.
15. No shares of MERGER SUB have been or will be used as
consideration or issued to shareholders of MAXIS in the Merger.
16. Except as otherwise provided in the Agreement, ELECTRONIC ARTS,
MERGER SUB, MAXIS and the shareholders of MAXIS will each pay separately its or
their own expenses in connection with the Merger as contemplated by the
Agreement; provided, however, that to the extent any expenses relating to the
Merger (or the "plan of reorganization" within the meaning of Treas. Reg. ss.
1.368-1(c) with respect to the Merger) are funded directly or indirectly by a
party other than the incurring party, such expenses will be within the
guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187.
17. There is no inter-corporate indebtedness existing between
ELECTRONIC ARTS and MAXIS or between MERGER SUB and MAXIS that was issued,
acquired, or will be settled at a discount, and ELECTRONIC ARTS will assume no
liabilities of MAXIS or any MAXIS shareholder in connection with the Merger.
18. None of the payments to be received by any shareholder of MAXIS
which are designated as compensation are actually separate consideration for, or
allocable to, any of their shares of MAXIS stock; and the compensation to be
paid to any shareholder of MAXIS will be
3
<PAGE>
for services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
19. Neither ELECTRONIC ARTS nor MERGER SUB are investments companies
as defined in ss. 368(a)(2)(F) of the Internal Revenue Code of 1986, as amended.
20. ELECTRONIC ARTS and MERGER SUB are authorized to make all of the
representations set forth herein, and the undersigned are authorized to execute
this certificate on behalf of ELECTRONIC ARTS and MERGER SUB.
The undersigned recognize that counsel to and auditors for ELECTRONIC
ARTS and MERGER SUB and counsel to and auditors for MAXIS will rely upon the
foregoing representations in evaluating the U.S. federal income tax consequences
of the Merger.
<TABLE>
<S> <C>
ELECTRONIC ARTS INC. VILLAGE ACQUISITION CORPORATION
a Delaware corporation a Delaware corporation
By: /s/ Ruth A. Kennedy By: /s/ Ruth A. Kennedy
-------------------------------------- -----------------------------------
Name: Ruth A. Kennedy Name: Ruth A. Kennedy
------------------------------------ ---------------------------------
Title: SVP, General Counsel and Secretary Title: Secretary
----------------------------------- --------------------------------
Date: June 25, 1997 Date: June 25, 1997
------------------------------------ ---------------------------------
</TABLE>
4
<PAGE>
EXHIBIT 10.39
MAXIS 1993 STOCK OPTION PLAN
1. Name.
----
This Plan shall be known as the "Maxis 1993 Stock Option Plan", and is
sometimes herein called the "Plan".
2. Purpose.
-------
The purpose of the Plan is to provide a means for SimBusiness, a
California corporation (the "Company"), through the grant of either Incentive
Stock Options or Non-Statutory Stock Options to Key Employees (as defined
below), to attract and retain persons of ability as employees and motivate such
employees to exert their best efforts on behalf of the Company.
3. Definitions.
-----------
(a) The term "Board" means the Board of Directors of the Company.
(b) The term "Code" means the Internal Revenue Code of 1986, as
amended from time to time and any successor statute.
(c) The term "Committee" means, at the Board's election, a
Compensation Committee of the Board consisting of not fewer than three members
and serving at the Board's pleasure. If there is no such committee, the term
"Committee" shall mean the Board unless the context requires otherwise.
(d) The term "Consultant" shall mean any person who is engaged by the
Company or any Parent or Subsidiary of the Company to render consulting
services, and any director of the Company whether compensated for such services
or not; provided that if and in the event the Company registers any class of any
security pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended, the term Consultant shall thereafter not include directors who are not
compensated for their services or are paid only a director's fee by the Company.
(e) The term "Incentive Stock Options" means Options to purchase
Stock which at the time such Options are granted under the Plan are intended to
qualify as incentive stock options within the meaning of Section 422 of the
Code.
(f) The term "Key Employees" means those employees or, in the case of
Non-Statutory Stock Options, those employees and Consultants (including officers
and directors who are also employees or Consultants) of the
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 1
<PAGE>
Company whose services, in the judgment of the Committee, are considered
especially important to the future of the Company.
(g) The term "Non-Statutory Stock Options" means Options to purchase
Stock which at the time such Options are granted under the Plan do not qualify
as incentive stock options within the meaning of Section 422 of the Code.
(h) The term "Note" means a promissory note of an optionee in favor
of the Company meeting the criteria set forth in paragraph 7(k).
(i) The term "Option" or "Options" means Options to purchase Stock
whether or not at the time such Options are granted under the Plan the Options
qualify as incentive stock options within the meaning of Section 422 of the
Code.
(j) The term "Parent" means a "parent corporation" with respect to
the Company, whether not or hereafter existing, as defined in Section 425(e) of
the Code.
(k) The term "Stock" means common stock of the Company.
(l) The term "Subsidiary" means a "subsidiary corporation" with
respect to the Company, whether not or hereafter existing, as defined in Section
425(f) of the Code.
4. Shares Subject to the Plan.
--------------------------
Options may be granted by the Company from time to time to Key
Employees to purchase an aggregate of 300,000 shares of Stock, and that number
of shares shall be reserved for Options granted under the Plan (subject to
adjustment as provided in paragraph 7(h)). If any Option granted under the Plan
terminates, expires or, with the consent of the optionee, is canceled, new
Options may thereafter be granted covering such shares.
5. Administration of the Plan.
--------------------------
The Plan shall be administered by the Committee. Any vacancy
occurring in the membership of the Committee shall be filled by appointment by
the Board. If there is no Committee or the Board does not elect to delegate
such functions to the Committee, then all of the powers and duties given to the
Committee hereunder shall be exercised or performed by the Board. If at any
time the Company shall have a class of securities registered under Section 12(b)
or 12(g) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 2
<PAGE>
the members of any Committee appointed by the Board shall not be eligible to
receive any Options under the Plan and shall be "disinterested persons" within
the meaning of Rule 16b-3 under the 1934 Act so long as they serve as such
members.
The Committee may interpret the Plan, prescribe, amend and rescind any
rules and regulations necessary or appropriate for the administration of the
Plan and make such other determinations and take such other action as it deems
necessary or advisable, except as otherwise expressly reserved to the Board in
the Plan. Without limiting the generality of the preceding sentence, the
Committee may, in its discretion, treat all or any portion of any period during
which an optionee is on military or approved leave from the Company as a period
of employment of such optionee by the Company for purposes of accrual of his or
her rights under his or her Options. Any interpretation, determination or other
action by the Committee is final, binding and conclusive.
6. Grant of Options.
----------------
Subject to the Plan, the Committee shall: (a) determine from time to
time those Key Employees to whom Options are to be granted and the number of
shares of Stock to be subject to Options granted to them; (b) authorize the
granting of Options; (c) determine the number of shares subject to each Option;
(d) determine the time and the manner in which each Option is exercisable and
the duration of the exercise period; and (e) make such other determination as
it may be authorized to make in the Plan and as it may deem necessary and
desirable for the purposes of the Plan. All decisions, determinations and
interpretations of the Board concerning the Plan, or any grant thereunder, shall
be final and binding on all Key Employees and/or their heirs or assigns.
Each Option shall be designated in the written option agreement as either an
Incentive Stock Option or a Non-Statutory Stock Option. However notwithstanding
such designations, to the extent that the aggregate fair market value of the
Shares with respect to which Options designated as Incentive Stock Options are
exercisable for the first time by any optionee during any calendar year (under
all plans of the Company) exceeds $100,000, such Options shall be treated as
Non-Statutory Stock Options.
7. Terms and Conditions of Options.
-------------------------------
Each Option shall be evidenced by an agreement, in a form attached
hereto as Annex A or such other form as is approved by the Committee. Such
agreement is subject to the following terms and conditions and to such other
terms and conditions as the Committee may deem appropriate:
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 3
<PAGE>
(a) Option Period. Each Option agreement shall specify the period
-------------
for which the Option thereunder is granted and shall provide that such Option
shall expire at the end of such period or at the end of any extension of such
period authorized in writing by the Committee. The term of each Option shall
not exceed ten (10) years from the date of grant thereof provided, however,
where the option holder is a holder of more than 10% of the outstanding shares
of the Corporation, the term of each Incentive Stock Option shall not exceed
five (5) years from the date of grant.
(b) Option Price. The Option price per share shall be determined by
------------
the Committee at the time any Option is granted.
In the case of a Incentive Stock Option
(1) granted to a Key Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the fair market value per Share on
the date of grant.
(2) granted to any other Key Employee, the per Share exercise price
shall be no less than 100% of the fair market value per Share on
the date of grant.
In the case of all other Options
(1) granted to an Key Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the per Share exercise price
shall be no less than 110% of the fair market value per Share on
the date of grant.
(2) granted to any other Key Employee, the per Share exercise price
shall be no less than 85% of the fair market value per Share on
the date of grant.
(c) Exercise of Option. No part of any Option may be exercised until
------------------
the Optionee shall have remained in the employ of the Company for such period,
if any, after the date on which the Option is granted as the Committee may
specify in the Option agreement, and the Option agreement may provide for
exercisability in installments. An Option may not be exercised for a fraction
of a Share. In all events, however, no option shall be exercisable later than
120 months from the date of the grant of the Option, and the right to exercise
the
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 4
<PAGE>
same shall occur at the rate of at least 20% of the options granted per year
over five years from the date the option is granted.
(d) Payment of Purchase Price upon Exercise. Each Option shall
---------------------------------------
provide that the purchase price of the shares as to which such Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total fair market value, as
determined by the Committee, equal to the purchase price, or a combination of
cash, and Stock having a total fair market value, as so determined, equal to the
purchase price, or in such other consideration as the Committee deems
appropriate, including the Optionee's personal Note in the discretion of the
Committee. In all events, however, the consideration for purchase of the
Shares shall be in subject to the requirements of Section 408 and 409 of the
California General Corporation Law and the Board shall consider if the
acceptance of such consideration, other than cash, may be reasonably expected to
benefit the Company (Section 315(b) of the California General Corporation Law).
If the exercise results in the recognition of income by the Optionee for Federal
or State tax purposes, and the Company may or must provide for withholding taxes
with respect to such income, Optionee shall in addition to the purchase price
pay to the Company such additional amount as is estimated by the Company for
withholding purposes. The Company shall hold such additional amount in trust
and shall remit the same to the Federal or State tax authorities, as
appropriate, to be credited to the account of, or for the benefit of, Optionee.
(e) Exercise in the Event of Death or Termination of Employment or
--------------------------------------------------------------
Engagement. Subject to any right of the Company to repurchase the Stock
- ----------
received on exercise of an Option pursuant to a provision in an Option Agreement
included under paragraph 7(l),
(1) If an optionee shall die (i) while a Key Employee of the company
or (ii) within three months after termination of his or her employment with
the Company because of his or her disability or retirement, his or her
Options may be exercised, to the extent that the optionee shall have been
entitled to do so on the date of death or such termination of employment, by
the person or persons to whom the optionee's rights under the Option pass by
will or applicable law, or if no such person has such right, by his or her
executors or administrators (so long as, in each case, such person is an
Eligible Shareholder), at any time, or from time to time, but not later than
the earlier of 1) the expiration date specified in or pursuant to paragraph
7(a) or six months after the optionee's termination of employment.
(2) If an optionee's employment by the Company terminates, he or she
may exercise his or her Options, to the extent that he or she shall have been
entitled to do so at the date of the termination of his or her
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 5
<PAGE>
employment, at any time, or from time to time, but not later than the
expiration date specified in or pursuant to paragraph 7(a) or three months
after termination of employment, whichever date is earlier.
(f) Nontransferability. No Option granted under the Plan shall be
------------------
transferable other than by will or by the laws of descent and distribution, and
then only to a person who is an Eligible Shareholder. During the lifetime of
the optionee, an Option shall be exercisable only by such optionee.
(g) Investment Representation. Each Option agreement shall contain such
-------------------------
investment representations as the Committee may consider necessary and
appropriate to comply with applicable securities laws and shall provide that the
Committee may, in the exercise of its absolute discretion, require similar
representations to be made by any person exercising an Option hereunder at the
time of and as a condition of any such Option exercise.
(h) Adjustments in Event of Change in Stock. In the event of any change
---------------------------------------
in the Stock by reason of any stock dividend, recapitalization, reorganization,
merger or consolidation, split-up, combination or exchange of shares, any direct
or indirect offering of Stock at a price substantially below fair market value,
or any similar change affecting the Stock, either the vesting of all outstanding
Options may be accelerated or the number and kind of shares which thereafter may
be subject to Options and sold under the Plan and the number and kind of shares
subject to outstanding Option agreements and the purchase price per share
thereof shall be appropriately adjusted consistent with such change, as the
Committee may deem equitable and in the interests of the Company.
(i) No Rights as Shareholder. No optionee, as such, shall have any rights
------------------------
as a shareholder of the Company by virtue of the holding of any Option, or by
virtue of the exercise of any Option, until the issuance (as evidenced by the
appropriate entry on the books of the Company) of the stock certificate
evidencing such Shares, and until such time shall have no rights to vote or
receive dividends with respect to the optioned Shares. The Company shall issue
(or cause to be issued) such stock certificate promptly upon exercise of the
Option. In the event that the exercise of an Option is treated in part as the
exercise of an Incentive Stock Option and in part as the exercise of a Non-
Statutory Stock Option, the Company shall issue a separate stock certificate
evidencing the Shares treated as acquired upon the exercise of an Incentive
Stock Option and a separate stock certificate evidencing the Shares treated as
acquired upon exercise of a Non-Statutory Stock Option and shall identify each
such certificate accordingly in its stock transfer records. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as otherwise provided for herein.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 6
<PAGE>
Notwithstanding the above, any holder of an Option shall receive financial
statements of the Company at least annually to the extent the same is required
under 10 California Administrative Code section 260.140.46. All such financial
statements and financial information provided to any holder of an Option shall
be confidential and the holder of an Option shall not share the same with any
other firm or individual without the prior written consent of the Company, said
consent not to be unreasonably withheld, other than 1) the Option holder's tax
accountants, 2) the Option holder's financial and legal advisors and 3) any
agency of the United States or any State agency or political subdivision
thereof. Any disclosure, whether or not prior consent was necessary or obtained,
shall be immediately disclosed, in writing, by the holder of the Option to the
Company, and the individual or firm to whom disclosure is made shall execute a
written nondisclosure agreement consistent with the terms of this paragraph.
(j) No Rights to Continued Employment or Engagement. The Plan and any
-----------------------------------------------
Option granted under the Plan shall not confer upon any optionee any right with
respect to continuation of employment by the Company, nor shall they interfere
in any way with the right of the Company to terminate his or her employment at
any time, with or without cause.
(k) Terms of Note. At the discretion of the Company an optionee may pay
-------------
all or a portion of the consideration for Stock on the exercise of the Option by
delivery of a promissory note meeting the following criteria and containing such
other terms and conditions as the Committee shall elect and as are applicable to
all optionees: (i) the Note shall bear interest at the minimum rate necessary
to avoid imputation of interest under the Code; (ii) interest on the Note shall
be payable semi-annually; (iii) principal on the Note shall be payable in a lump
sum on the tenth anniversary of the date the Note is delivered to the Company in
payment of Stock, provided that the Note shall be prepayable in whole or in part
by the Maker at any time without penalty; and (iv) the Note shall be full
recourse to the maker.
(l) Stock Repurchase. In addition to or in lieu of any restrictions on
----------------
exercise of Options imposed pursuant to paragraph 7(c), the Committee may cause
the Option agreement evidencing any Options to provide that until the optionee
shall have remained in the employ of the Company for such period after the date
on which the Option is granted as the Committee may specify in the Option
agreement, any or all Shares of Stock received on exercise of the Option prior
to the expiration of such period may, at the Option of the Company, be
repurchased by the Company at the Option price originally paid. In all events,
however, the repurchase right shall lapse at the rate of at least 20% of the
Options subject to the repurchase right, or stock issued in accordance with the
same, per year over five years from the date of grant of the Option.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 7
<PAGE>
(m) Market Standoff Provisions. All Options which are issued subject to
--------------------------
this Plan, and any stock acquired by the exercise of an Option, shall not, to
the extent requested by the Company, be sold or otherwise transferred or
disposed of (other than to heirs or donees) for up to 180 days following the
effective date of a registration statement of the Company filed under the
Securities Exchange Act of 1934 or the Securities Act of 1933. Such agreement
shall be applicable only to the first such registration statement of the Company
which covers securities to be sold on its behalf to the public in an
underwritten offering. In order to enforce the foregoing covenant, the Company
shall have the right to place restrictive legends on the certificates
representing the Options or shares issued upon the exercise of the Options
subject to this section, and to impose a stop-transfer instruction with respect
to the Options or shares until the end of such period.
8. Compliance With Laws and Regulations.
------------------------------------
The Plan, the grant and exercise of Options thereunder and the obligation
of the Company to sell and deliver shares on exercise of such Options shall be
subject to all applicable federal and state laws, rules and regulations and to
such approvals by any government or regulatory agency as may, in the opinion of
the Committee, be required. The Company shall not be required to issue or
deliver any certificates for shares of Stock prior to (a) the listing of such
shares on any stock exchange on which the Stock may then be listed or (b) the
completion of any registration or qualification of such shares under any federal
or state law, or any ruling or regulation of any government body which the
Company shall, in its sole discretion, determine to be necessary or advisable.
9. Disposition of Shares.
---------------------
Shares acquired on the exercise of an Option may, pursuant to the terms of
the Option agreement, be subject to certain restrictions or to the provisions of
a stockholders' agreement. In such case, the shares shall bear a legend to that
effect.
10. Amendment and Discontinuation.
-----------------------------
The Board may from time to time amend, suspend, discontinue or terminate
the Plan; provided, however, that, subject to paragraph 7(h), without the
written consent of an optionee, no amendment, suspension, discontinuation or
termination of the Plan shall alter or impair any Option therefore granted to
him or her under the Plan. In addition, any amendment which (i) increases the
number of Shares subject to the Plan, other than in connection with an
adjustment as provided for herein, (ii) changes the designation of the class of
persons eligible to be granted Options or (iii) is made at the time the Company
has a class of equity securities registered under Section 12(b) or 12(g) of the
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 8
<PAGE>
1934 Act, and which materially increases in the benefits accruing to Key
Employees under the Plan, shall be subject to approval of the shareholders of
the Company.
11. Effective Date and Term of the Plan.
-----------------------------------
The effective date of the Plan shall be the date of its adoption by the Board
of Directors of the Company, subject to approval by the shareholders of the
Company as provided for in Section 12. Notwithstanding the foregoing, if the
Plan shall have been approved by the Board prior to such shareholder approval,
Options may be granted by the Committee as provided herein subject to such
subsequent shareholder approval.
This plan shall continue for a term of ten (10) years unless earlier
terminated pursuant to Section 10.
12. Additional ISO Restriction & Legend.
-------------------------------------
Notwithstanding any other provisions of this Plan, no shares acquired on any
exercise of an Incentive Stock Option granted under the plan shall be
transferable other than by will or by the laws of descent and distribution
within two years of the date such Incentive Stock Option is granted or within
one year after the issuance of such shares on such exercise. Each certificate
representing shares acquired on exercise of an Incentive Stock Option shall bear
a legend to this effect.
13. Shareholder Approval.
--------------------
(a) Continuance of the Plan is subject to approval by the shareholders
of the Company within twelve (12) months after the date the Plan is adopted. If
such shareholder approval is obtained at a duly held shareholders' meeting, it
must be obtained by the affirmative vote of the holders of a majority of all
classes of the outstanding shares of the Company, or if such approval is
obtained by written consent, it must be obtained in writing from the holders of
all of the outstanding shares of all classes of the Company's stock entitled to
vote.
(b) If and in the event that the Company registers any class of equity
securities pursuant to Section 12(b) or 12(g) of the 1934 Act, any required
approval of the shareholders of the Company obtained after such registration
shall be solicited substantially in accordance with Section 14(a) of the 1934
Act and the rules and regulations promulgated thereunder.
(c) If any shareholder approval of the Plan itself or of any amendment
thereto is solicited at any time other than as described in Section 12(b), the
Company shall, at or prior to the first annual meeting of shareholders
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 9
<PAGE>
held subsequent to the later of (1) the first date any class of equity
securities of the Company is registered under Section 12(b) or 12(g) of the 1934
Act or (2) the granting of an Option hereunder to an officer or director of the
Company after such registration, must (i) furnish in writing to the holders
entitled to vote for the Plan substantially the same information which would be
required (if proxies to be voted with respect to approval or disapproval of the
Plan or amendment were then being solicited) by the rules and regulations in
effect under Section 14(a) of the Exchange Act at the time such information is
furnished; and (ii) file with, or mail for filing to, the Securities and
Exchange Commission four copies of the written information referred to in
subsection (i) hereof not later than the date such information is provided to
shareholders.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 10
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE BY OPTIONEE OF
NONQUALIFIED STOCK OPTION
GRANTED UNDER THE MAXIS
1993 STOCK OPTION PLAN
Attention: Secretary
Ladies and Gentlemen:
Pursuant to the Nonqualified Stock Option Agreement, dated _______, 19__,
between you and me, granting to me an option to purchase up to an aggregate of
_________ shares of your Common Stock on the terms and conditions set forth
therein and at a price of $_________ per share (the "Purchase Price") of such
Common Stock, subject to the next paragraph, I hereby exercise such option with
respect to ______ shares of such Common Stock and enclose my check for
$__________ (or other consideration in accordance with such Agreement as
indicated below*) in payment in full of the aggregate Purchase Price of all of
the shares with respect to which such option is being exercised. Such aggregate
Purchase Price was calculated by multiplying such Purchase Price per share times
the number of shares with respect to which such option is being exercised
hereby.
I have carefully reviewed and hereby reaffirm all my representations,
warranties and agreements contained in such Agreement as if made on and as of
the date hereof and I hereby further represent and warrant to you that I
understand that I should rely solely on the advice of my personal tax,
accounting
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 11
<PAGE>
and other advisers with regard to this option exercise. Please advise me whether
any registration or qualification of the shares being purchased pursuant to this
exercise under any federal or state law and the rules and regulations of
governmental authorities thereunder will be required. I agree to cooperate with
you and take such actions as you may advise are necessary to facilitate and
effect such registration or qualification, if required.
When any such registration or qualification which may be required has been
completed, please forward to me a certificate representing the shares being
purchased pursuant to this option exercise registered in my name and deliver
such certificate to my address as follows:
---------------------------------
---------------------------------
---------------------------------
Very truly yours,
DATED: _________________, 19___ --------------------------
Typed or Printed Name:
--------------------------
Social Security Number:
--------------------------
*Consideration being delivered if other than cash (subject to your approval):
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 12
<PAGE>
EXHIBIT B
---------
NOTICE OF EXERCISE BY
DECEASED OPTIONEE'S LEGAL
REPRESENTATIVE OF
NONQUALIFIED STOCK OPTION
GRANTED UNDER THE MAXIS
1993 STOCK OPTION PLAN
Attention: Secretary
Ladies and Gentlemen:
Pursuant to the Nonqualified Stock Option Agreement, dated _______, 19__,
between you and ____________________ ("Optionee"), granting to Optionee an
option to purchase up to an aggregate of _________ shares of your Common Stock
on the terms and conditions and at the times set forth therein and at a price of
$_________ per share (the "Purchase Price") of such Common Stock, please be
advised that Optionee died on __________________, 19___, and that the
undersigned is a person empowered to exercise such option under the Optionee's
will or under the applicable laws of descent and distribution. Attached hereto
is (are) the following document(s) showing that the undersigned has been so
empowered: ___________________________________________________________________
_______________________________________________________________________. The
undersigned agrees to furnish to you such additional proof of the power of the
undersigned to exercise such option as you or your counsel may reasonably
require to be satisfied that the undersigned has the legal power and authority
to exercise such option.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 13
<PAGE>
Subject to the foregoing and to the next paragraph, the undersigned hereby
exercises such option with respect to _______ shares of such Common Stock and
encloses a check for $___________ (or other consideration in accordance with
such Agreement as indicated below*) in payment in full of the aggregate Purchase
Price of all of the shares with respect to which such option is being exercised.
Such Purchase Price was calculated by multiplying such Purchase Price per share
times the number of shares with respect to which such option is being exercised
hereby.
The undersigned has carefully reviewed and hereby reaffirms all of the
Optionee's representations, warranties and agreements contained in such
Agreement as if made by the undersigned on and as of the date hereof and the
undersigned hereby further represents and warrants to you that the undersigned
understands that the undersigned should rely solely on the advice of the tax,
accounting and other advisers of the undersigned with regard to this option
exercise. The undersigned represents that he is an Eligible Shareholder as
defined in the Plan. Please advise the undersigned whether any registration or
qualification of the shares being purchased pursuant to this exercise under any
federal or state law and the rules and regulations of governmental authorities
thereunder will be required. The undersigned agrees to cooperate with you and
take such actions as you may advise are necessary to facilitate and effect such
registration or qualification, if required.
When any such registration or qualification which may be required has been
completed, please issue a certificate representing the shares being purchased
pursuant to this option exercise registered in the following name or names:
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 14
<PAGE>
___________________________________________
___________________________________________
and deliver such certificates to the following address:
___________________________________________
___________________________________________
___________________________________________
Very truly yours,
DATED: _________________, 19___
Typed or Printed Name(s) and Title(s):
____________________________________
____________________________________
Social Security or Taxpayer
Identification Number(s):
_____________________________________
_____________________________________
*Consideration being delivered if other than cash (subject to your approval):
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 15
<PAGE>
ANNEX A
-------
STOCK OPTION AGREEMENT
----------------------
These Options are: ______ Qualified _______ Not Qualified
(NOTE: QUALIFIED OPTIONS ARE INTENDED TO BE "INCENTIVE STOCK OPTIONS"
AS DEFINED IN 28 U.S.C. (S) 422)
Number of shares subject to option: ____________
Option No.: _____
These options are issued to you in your capacity as:
________ Employee _________Director ________ Consultant.
Your capacity for which this Option is issued is important for certain
provisions of this Agreement. You may, however, have a relationship with
the Company in multiple positions. For example, you may be an employee and
director of the Company. Where your capacity, and continuation in this
capacity, is material to this Agreement (such as for purposes of vesting),
the capacity indicated above is the only capacity which will be considered
and will be relevant to this Agreement. Accordingly, if you were a
director and an employee of the Company, and you were issued options in
your capacity of director, the vesting of the options would require that
you remain a director of the Company over the stated term. If, during this
term you do not remain as director, your options will not vest even though
you continued as an employee of the Company.
This Agreement is made this ________, 19__, by and between Sim Business, a
California corporation (the "Company"), and ____________________ (the
"Optionee").
1. Grant of Option. Pursuant to the Maxis 1993 Stock Option Plan (the
---------------
"Plan"), the Company hereby grants to the Optionee, subject to the Plan and the
terms and conditions herein set forth, the option (the "Option") to purchase
from the Company all or any of __________ shares (the "Shares") of Common Stock
(the "Stock") of the Company at the purchase price of $______ (the "Purchase
Price") per Share. Capitalized terms used and not otherwise defined herein
shall have the meanings ascribed to them in the Plan.
2. Expiration Date. The Option shall expire on the ___ anniversary of the
---------------
date hereof.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 16
<PAGE>
3. Time of Exercise. The Option may be exercised in accordance with the
----------------
following schedule:
The Option Shall be
Exercisable With Respect
On or After the to the Following Cumulative
Following Date Number of Shares
--------------- ---------------------------
_______________ ___________________________
_______________ ___________________________
_______________ ___________________________
_______________ ___________________________
The Option shall be exercisable as provided in the foregoing schedule without
regard to the date when any other option may have been or may be granted by the
Company to the Optionee.
4. Notice of Exercise. The Option may be exercised by notice to the
------------------
Company, in the form attached hereto as Exhibit A or B, as appropriate, or
otherwise specified by the Company, specifying the number of Shares as to which
the Option is being exercised and accompanied by surrender of this Option
Agreement and payment in full of the Purchase Price in accordance with Sections
1 and 5. Notation of any partial exercise shall be made by the Company on
Schedule I hereto, and the Company shall thereupon return this Option Agreement
to the Optionee.
5. Payment of Purchase Price. On exercise of the Option, the Optionee
-------------------------
shall pay to the Company the Purchase Price of the Shares as to which the Option
is exercised. The Purchase Price shall be paid in cash, in previously acquired
Stock, by a combination of cash and previously acquired Stock, or in such other
consideration as the Committee deems appropriate, including the Optionee's
personal Note in the discretion of the Committee.
If the exercise results in the recognition of income by the Optionee for Federal
or State tax purposes, and the Company may or must provide for withholding taxes
with respect to such income, Optionee shall in addition to the purchase price
pay to the Company upon exercise of the Option such additional amount as is
estimated by the Company for withholding purposes. The Company shall hold such
additional amount in trust and shall remit the same to the Federal or State tax
authorities, as appropriate, to be credited to the account of, or for the
benefit of, Optionee.
6. Exercise upon Death or Termination of Employment. Subject to Section
------------------------------------------------
7,
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 17
<PAGE>
(a) In the event of the death of the Optionee (i) while an employee,
consultant or director of the Company, or (ii) within three months after
termination of your employment or your position as a consultant or director with
the Company, as appropriate, because of disability or retirement, the Option may
be exercised, to the extent that the Optionee shall have been entitled to do so
at the date of termination of employment or engagement, by the person or persons
to whom the Optionee's rights under the Option pass by will or applicable law
or, if no such person has such rights, by the Optionee's executors or
administrators, at any time or from time to time within 180 days after the date
of the Optionee's death, but in no event later than the expiration date
specified in Section 2.
(b) If the Optionee's employment with, or as appropriate, Optionee's
status as a consultant or director of the Company terminates, the Optionee may
exercise the Option to the extent that the Optionee is entitled to do so at the
date of the termination of employment or engagement at any time or from time to
time within three months of the date of termination of employment or engagement,
but in no event later than the expiration date specified in section 2.
7. Repurchase of Shares on Termination of Employment. In the event the
-------------------------------------------------
Optionee's employment with, or as the case may be, Optionee's status as a
consultant or director of the Company shall terminate for any reason, the
Company shall have the option, exercisable for a period of 180 days following
such termination by written notice to the Optionee (the "Exercise Notice") to
repurchase all of the Shares issued on exercise of this Option prior to such
termination or thereafter if exercised pursuant to Section 6, at the same per
Share Purchase Price. The Exercise Notice shall specify a time and date, which
shall be not more than 30 days after the date of the Exercise Notice, at which a
closing of the repurchase hereunder shall occur. At such Closing, the Optionee
or his representative shall deliver a certificate or certificates for the Shares
being repurchased and the Company shall deliver the purchase price thereof. The
Company's option with respect to the Shares shall lapse and be of no further
force or effect with respect to the cumulative number of Shares set forth below
on or after the respective dates set forth below:
The Foregoing Option Shall
Lapse With Respect to the
On or After the Following Cumulative Number
Following Date of Shares
-------------- ---------------------------
______________ ________________
______________ ________________
______________ ________________
______________ ________________
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 18
<PAGE>
8. Nontransferability. The Option shall not be assignable or
------------------
transferable, voluntarily or involuntarily, by operation of law, or otherwise,
and any such assignment or transfer which may be attempted shall be null and
void and of no effect; provided, however, that this section 8 shall not prevent
transfers by will or by the laws of descent and distribution. During the
lifetime of the Optionee, the Option shall be exercisable only by the Optionee.
9. Adjustments. In the event of any change in the Stock by reason of any
-----------
stock dividend, recapitalization, reorganization, merger or consolidation,
split-up, combination or exchange of shares, any direct or indirect offering of
Stock at a price substantially below fair market value, or any similar change
affecting the Stock, then in any such event the number and kind of Shares and
the Purchase Price per Share shall be appropriately adjusted consistent with
such change in such manner as the Committee may deem equitable to prevent
substantial dilution or enlargement of the rights granted hereunder. Any
adjustment so made shall be final and binding upon the Optionee.
10. No Rights as Shareholder. The Optionee, as such, shall have no rights
------------------------
as a shareholder of the Company.
11. No Right to Continued Employment. The Option shall not confer upon
--------------------------------
the Optionee any right with respect to continuation of employment with the
Company or Optionee's status as a consultant or director of the Company, nor
shall it interfere in any way with the Company's right to terminate the
Optionee's employment or engagement at any time, with or without cause.
12. Compliance With Law and Regulations. The Option and the obligation of
-----------------------------------
the Company to sell and deliver Shares hereunder, shall be subject to all
applicable federal and state laws, rules and regulations and to such approvals
by any government or regulatory agency as may, in the opinion of the Committee,
be required. The Company shall not be required to issue or deliver any
certificates for Shares prior to (a) the listing of such Shares on any stock
exchange on which the Stock may then be listed or (b) the completion of any
registration or qualification of such Shares under any federal or state law, or
any rule or regulation of any governmental body which the Company shall, in its
sole discretion, determine to be necessary or advisable. The Option may not be
exercised if its exercise, or the receipt of Shares pursuant thereto, would be
contrary to applicable law.
13. Investment Representations. The Optionee hereby represents and
--------------------------
warrants to and agrees with the Company as follows:
(a) Review of Documents. The Optionee acknowledges that the Optionee
-------------------
has been granted access to and has reviewed carefully the Plan and such records
of the Company as may be necessary to permit the Optionee to
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 19
<PAGE>
evaluate the Option and, before any exercise of the Option, the Optionee will
review such records of the Company as may be necessary to permit the Optionee to
evaluate the merits and risks of an investment in Stock. The Optionee is
entering into this Agreement and the transactions contemplated hereby solely in
reliance on the Optionee's own investigation and such review. The Optionee has
had an opportunity to meet with the officers of the Company subsequent to review
of such information to discuss with them the Optionee's questions concerning the
Company and the terms and conditions of the acquisitions hereunder.
(b) Acquisition of Shares for Own Account. The Optionee will acquire
-------------------------------------
the Shares, if at all, pursuant to this Agreement with the Optionee's own funds,
and not with the funds of anyone else. The Shares will be acquired, if at all,
for the Optionee's own account, not as a nominee or agent and not for the
account of any other person or firm. No one else has or will have on any
exercise of the Option any interest, beneficial or otherwise, in any of the
Shares to be acquired on such exercise. The Optionee is not, and prior to any
exercise of the Option will not be, obligated to transfer any of the Shares or
any interest therein to anyone else and the Optionee does not and will not have
any agreement or understandings to do so. The Optionee will acquire the Shares,
if at all, for investment for an indefinite period and not with a view to the
sale or distribution of any part or all thereof, by public or private sale or
other disposition, and has no intention of selling, granting any participation
in or otherwise distributing or disposing of any or all of the Shares or any
interest therein. The Optionee does not, and on any exercise of the Option will
not, intend to subdivide the Optionee's acquisition of any Shares with anyone.
(c) Restricted Nature of Shares. The Optionee is (or will be at the
---------------------------
time of any acquisition of Shares) able to bear the economic risk of the
investment in Shares and is aware that the Optionee must be prepared to hold any
Shares received for an indefinite period and that such Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), on the
ground that no distribution or public offering of any Shares is to be effected
and the Shares will be issued, if at all, by the Company in connection with
transactions not involving any public offering within the meaning of section
4(2) of the Act. The Optionee understands that the Company is relying in part
on the Optionee's representations as set forth herein for purposes of claiming
the exemption from registration under the Act provided by section 4(2) thereof
and that the basis for such exemption may not be present if, notwithstanding the
Optionee's representations herein, the Optionee has in mind merely acquiring
Shares for resale on the occurrence or nonoccurrence of some predetermined
event. The Optionee has no such intention.
(d) Sophistication of Optionee. The Optionee has such knowledge and
--------------------------
experience in financial and business matters that the Optionee is capable of
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 20
<PAGE>
evaluating the merits and risks of the prospective investment by the Optionee
contemplated by this Agreement and the Optionee has carefully reviewed and will
carefully review all the information regarding the Company access to which has
been and will be accorded to the Optionee hereunder, is thoroughly familiar with
the business, operations and properties of the Company by virtue of such review
and of the Optionee's relationship with the Company as a key employee thereof
and has discussed with the officers of the Company any questions the Optionee
may have had with respect to the Company.
(e) Agreement to Refrain from Resales. Without in any way limiting
---------------------------------
the Optionee's representations as set forth herein, the Optionee further agrees
that the Optionee shall in no event make any disposition of all or any part of
or interest in the Shares and that the Shares shall not be encumbered, pledged,
hypothecated, sold or transferred by the Optionee nor shall the Optionee receive
any consideration for the Shares or for any interest therein from any person,
unless and until prior to any proposed transfer, encumbrance, disposition,
pledge, hypothecation or sale of any of the Shares, either (1) a registration
statement on form S-1 (or any other form replacing such form or appropriate for
the purpose under the Act) with respect to the Shares proposed to be transferred
or otherwise disposed of shall be then effective or (2) (i) the Optionee shall
have notified the Company of the proposed disposition and shall have furnished
the Company with a detailed statement of the circumstances surrounding the
proposed disposition, (ii) the Optionee shall have furnished the Company with an
opinion of counsel in form and substance satisfactory to the Company to the
effect that such disposition will not require registration of any Shares under
the Act or qualification of Shares under any other securities law and (iii) such
opinion of counsel shall have been concurred in by counsel for the Company and
the Company shall have advised the Optionee of such concurrence.
In addition to the above, any Shares acquired shall not be sold or otherwise
transferred during the one year period following the effective date of the first
registration of the securities of the Company with the United States Securities
Exchange Commission unless agreed to and approved by the Company. The Company
may further impose stop-transfer instructions with respect to securities subject
to the foregoing restrictions until the end of such one year period.
(f) Shares Will Be "Restricted Securities". The Shares, if and when
--------------------------------------
issued, will be "restricted securities", as that term is defined in Rule 144
under the Act, and, accordingly, the Shares must be held indefinitely unless
they are subsequently registered under the Act or an exemption from such
registration is available. The Optionee understands and agrees that the Company
is not under any obligation to register the Shares under the Act or to comply
with Regulation A or any other exemption.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 21
<PAGE>
(g) Company May Refuse to Transfer. Notwithstanding the foregoing,
------------------------------
in the event that the Optionee has, in the opinion of counsel for the Company,
acted in any manner not consistent with the representations and agreements of
the Optionee in this Agreement, the Company may refuse to transfer the
Optionee's Shares until such time as counsel for the Company is of the opinion
that such transfer will not require registration of any Shares under the Act or
qualification of any Shares under any other securities law.
(h) Indemnification. The Optionee hereby agrees to indemnify the
---------------
Company and hold it harmless from and against any and all liability, damage,
cost or expense incurred on account of or arising out of (1) any inaccuracy in
any of the representations, warranties or agreements set forth in this Section
13, (2) the disposition of any Shares which the Optionee may receive, contrary
to the Optionee's representations, warranties and agreements set forth in this
Section 13 or (3) any action, suit or proceeding based on a claim that said
representations, warranties or agreements were inaccurate or misleading or
otherwise cause for obtaining damages or redress from the Company under the Act.
(i) Certificates Representing Shares to Be Legended. The Optionee
-----------------------------------------------
understands and agrees that certificates representing any Shares received on
exercise of the Option will bear a legend on the face thereof (or on the reverse
thereof with a reference to such legend on the face thereof) substantially in
the form set forth below, which legend restricts the sale, transfer or
disposition of the Shares otherwise than in accordance with this Agreement:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE
ENCUMBERED, PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT OR
AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION AND CONCURRED IN BY
THE CORPORATION'S COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR SUCH TRANSACTION COMPLIES WITH RULES PROMULGATED BY THE SECURITIES
AND EXCHANGE COMMISSION UNDER SAID ACT. IN ADDITION, SALE, TRANSFER,
ENCUMBRANCE, HYPOTHECATION, GIFT OR OTHER DISPOSITION OR ALIENATION OF SUCH
SHARES OR ANY INTEREST THEREIN IS RESTRICTED BY AND SUBJECT TO A
NONQUALIFIED STOCK OPTION AGREEMENT DATED ____________, 19__ A COPY OF
WHICH MAY BE INSPECTED AT THE PRINCIPAL OFFICE OF THE CORPORATION AND ALL
OF THE PROVISIONS OF WHICH ARE INCORPORATED BY REFERENCE IN THIS
CERTIFICATE.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 22
<PAGE>
(j) Stockholders' Agreement. The Committee may require the Optionee
-----------------------
to furnish to the Company, prior and as a condition to the issuance of any
Shares on any exercise of the Option, an agreement (in such form as the
Committee may specify) in which the Optionee confirms the foregoing
representations, warranties and agreements or makes similar or additional
representations, warranties and agreements with respect to such Shares.
14. Optionee Bound by Plan. The Optionee hereby acknowledges receipt of a
----------------------
copy of the Plan and agrees to be bound by all the terms and conditions thereof.
15. Notices. Any notice or other communication hereunder shall be in
-------
writing and shall be deemed duly given when delivered personally or deposited
with the United States Postal Service, all charges and first class postage
prepaid, properly addressed, if to the Company at Two Theater Square, Suite 230,
Orinda, California, 94563, Attention: Secretary, or, if to the
----------
Optionee at _____________. Either party may change such party's
- ------------------
address by notice hereunder to the other party.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
interpreted in accordance with the laws of the State of California.
17. Headings. The headings of sections and subsections herein are
--------
included solely for convenience of reference and are not part of this Agreement.
18. Severability of Provisions. If any provision of this Agreement is
--------------------------
held by a court of competent jurisdiction to be invalid or unenforceable, the
remaining provisions hereof shall continue to be fully effective.
19. Entire Agreement. This Agreement constitutes the entire agreement of
----------------
the parties, and supersedes any prior written or oral agreements between them,
concerning the subject matter hereof. There are no representations, agreements,
arrangements or understandings, oral or written, between the parties, relating
to the subject matter contained in this Agreement, which are not fully expressed
herein.
20. Successors. The Option shall not be transferred except as
----------
specifically provided herein. The Company's rights and obligations hereunder
may be assigned or transferred by it to and shall be binding upon and inure to
the benefit of any successor of the Company, but such assignment or transfer
shall not relieve the Company of any of its obligations hereunder. The term
"successor" means only any corporation which by merger, consolidation, purchase
of assets or otherwise succeeds to or otherwise acquires all or substantially
all of the assets of the Company.
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 23
<PAGE>
21. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be complete in itself and shall be deemed an
original, and all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed by or on behalf
of the parties hereto as of the date first above written.
Sim-Business, a California Corporation, by
________________________
Jeff Braun, President
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 24
<PAGE>
SCHEDULE I
NOTATIONS AS TO PARTIAL EXERCISE
- --------------------------------
Number of Balance of
Date of Shares Shares Subject Authorized Notation
Exercise Purchased to Option Signature Date
- -------- --------- ----------------- ----------- ----------
_______________________________________________________________________________
MAXIS 1993 STOCK OPTION PLAN Page 25
<PAGE>
EXHIBIT 10.40
MAXIS, INC.
1995 STOCK PLAN
(as amended in August 1996)
1. PURPOSES OF THE PLAN. The purposes of this Stock Plan are:
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees and Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or Nonstatutory
Stock Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
administration of stock option plans under state corporate and securities laws
and the Code.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Maxis, Inc., a Delaware corporation.
(h) "Consultant" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services and who is compensated
for such services. The term "Consultant" shall also include Directors.
(i) "Continuous Status as an Employee or Consultant" means that the
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered
<PAGE>
interrupted in the case of (i) any leave of absence approved by the Company or
(ii) transfers between locations of the Company or between the Company, its
Parent, any Subsidiary, or any successor. A leave of absence approved by the
Company shall include sick leave, military leave, or any other personal leave
approved by an authorized representative of the Company. For purposes of
Incentive Stock Options, no such leave may exceed 90 days, unless reemployment
upon expiration of such leave is guaranteed by statute or contract. If
reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the 91st day of such leave any Incentive Stock Option held
by the Optionee shall cease to be treated as an Incentive Stock Option and shall
be treated for tax purposes as a Nonstatutory Stock Option.
(j) "Director" means a member of the Board.
(k) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(n) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of
Common Stock shall be the closing sales price for such stock (or the closing
bid, if no sales were reported) as quoted on such system or exchange (or the
exchange with the greatest volume of trading in Common Stock) on the last market
trading day prior to the day of determination, as reported in The Wall Street
---------------
Journal or such other source as the Administrator deems reliable;
- -------
(ii) If the Common Stock is quoted on the NASDAQ System
(but not on the Nasdaq National Market thereof) or is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
-----------------------
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
-2-
<PAGE>
(o) "Incentive Stock Option" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(p) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(q) "Notice of Grant" means a written notice evidencing certain
terms and conditions of an individual Option or Stock Purchase Right grant. The
Notice of Grant is part of the Option Agreement.
(r) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(u) "Option Exchange Program" means a program whereby outstanding
options are surrendered in exchange for options with a lower exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option or
Stock Purchase Right.
(w) "Optionee" means an Employee or Consultant who holds an
outstanding Option or Stock Purchase Right.
(x) "Parent" means a "parent corporation", whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this 1995 Stock Plan.
(z) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 below.
(aa) "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
-3-
<PAGE>
(cc) "Section 16(b)" means Section 16(b) of the Securities Exchange
Act of 1934, as amended.
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,475,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) Procedure.
(i) Multiple Administrative Bodies. If permitted by Rule 16b-3,
the Plan may be administered by different bodies with respect to Directors,
Officers who are not Directors, and Employees who are neither Directors nor
Officers.
(ii) Administration With Respect to Directors and Officers
Subject to Section 16(b). With respect to Option or Stock Purchase Right grants
made to Employees who are also Officers or Directors subject to Section 16(b) of
the Exchange Act, the Plan shall be administered by (A) the Board, if the Board
may administer the Plan in a manner complying with the rules under Rule 16b-3
relating to the disinterested administration of employee benefit plans under
which Section 16(b) exempt discretionary grants and awards of equity securities
are to be made, or (B) a committee designated by the Board to administer the
Plan, which committee shall be constituted to comply with the rules under Rule
16b-3 relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of equity
securities are to be made. Once appointed, such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of the
-4-
<PAGE>
Committee and appoint additional members, remove members (with or without cause)
and substitute new members, fill vacancies (however caused), and remove all
members of the Committee and thereafter directly administer the Plan, all to the
extent permitted by the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section 16(b) exempt
discretionary grants and awards of equity securities are to be made.
(iii) Administration With Respect to Other Persons. With respect
to Option or Stock Purchase Right grants made to Employees or Consultants who
are neither Directors nor Officers of the Company, the Plan shall be
administered by (A) the Board or (B) a committee designated by the Board, which
committee shall be constituted to satisfy Applicable Laws. Once appointed, such
Committee shall serve in its designated capacity until otherwise directed by the
Board. The Board may increase the size of the Committee and appoint additional
members, remove members (with or without cause) and substitute new members, fill
vacancies (however caused), and remove all members of the Committee and
thereafter directly administer the Plan, all to the extent permitted by
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common Stock,
in accordance with Section 2(n) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights may be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options or Stock Purchase Rights may be exercised (which may be based
on performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or Stock
Purchase Right or the shares of Common Stock relating thereto, based in each
case on such factors as the Administrator, in its sole discretion, shall
determine;
-5-
<PAGE>
(vii) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xii) to institute an Option Exchange Program;
(xiii) to determine the terms and restrictions applicable to
Options and Stock Purchase Rights and any Restricted Stock; and
(xiv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. If otherwise eligible, an Employee or Consultant who has
been granted an Option or Stock Purchase Right may be granted additional Options
or Stock Purchase Rights.
6. LIMITATIONS.
(a) Each Option shall be designated in the Notice of Grant as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designations, to the extent that the aggregate Fair Market
Value:
-6-
<PAGE>
(i) of Shares subject to an Optionee's Incentive Stock
Options granted by the Company, any Parent or Subsidiary, which
(ii) become exercisable for the first time during any
calendar year (under all plans of the Company or any Parent or Subsidiary)
exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 6(a), Incentive Stock Options shall be
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the time of grant.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
employment or consulting relationship with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options and
Stock Purchase Rights to Employees:
(i) No Employee shall be granted, in any fiscal year of the
Company, Options and Stock Purchase Rights to purchase more than 500,000 Shares.
(ii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iii) If an Option or Stock Purchase Right is canceled in the
same fiscal year of the Company in which it was granted (other than in
connection with a transaction described in Section 13), the canceled Option or
Stock Purchase Right will be counted against the limit set forth in Section
6(c)(i). For this purpose, if the exercise price of an Option or Stock Purchase
Right is reduced, the transaction will be treated as a cancellation of the
Option or Stock Purchase Right and the grant of a new Option or Stock Purchase
Right.
7. TERM OF PLAN. Subject to Section 19 of the Plan, the Plan shall
become effective upon the earlier to occur of its adoption by the Board or its
approval by the stockholders of the Company as described in Section 19 of the
Plan. It shall continue in effect for a term of ten (10) years unless
terminated earlier under Section 15 of the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the
Notice of Grant; provided, however, that in the case of an Incentive Stock
Option, the term shall be ten (10) years from the date of grant or such shorter
term as may be provided in the Notice of Grant. Moreover, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Incentive Stock Option shall be five (5) years from
the date of grant or such shorter term as may be provided in the Notice of
Grant.
-7-
<PAGE>
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) Exercise Price. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised. In so doing, the Administrator may specify that an
Option may not be exercised until the completion of a service period.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
-8-
<PAGE>
(v) delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives:
(i) written notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the stock
certificate evidencing such Shares is issued (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 13 of the
Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise
-9-
<PAGE>
it at the date of termination (but in no event later than the expiration of the
term of such Option as set forth in the Notice of Grant). In the absence of a
specified time in the Notice of Grant, the Option shall remain exercisable for
three months following the Optionee's termination of Continuous Status as an
Employee or Consultant. In the case of an Incentive Stock Option, such period of
time shall not exceed three months from the date of termination. If, at the date
of termination, the Optionee is not entitled to exercise his or her entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his or
her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. In the event that an Optionee's
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option at any time
within twelve (12) months from the date of such termination, but only to the
extent that the Optionee was entitled to exercise it at the date of such
termination (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant). If, at the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee,
the Option may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent that the Optionee was entitled to exercise the Option at
the date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to individuals subject to Section
16 of the Exchange Act ("INSIDERS") must comply with the applicable provisions
of Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption from Section 16
of the Exchange Act with respect to Plan transactions.
11. STOCK PURCHASE RIGHTS.
(a) Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing, by means of a Notice of Grant, of the terms, conditions and
restrictions related to the offer, including the number of Shares that the
offeree shall be entitled to purchase, the price to be paid, and the time within
which the offeree must accept such offer, which
-10-
<PAGE>
shall in no event exceed six (6) months from the date upon which the
Administrator made the determination to grant the Stock Purchase Right. The
offer shall be accepted by execution of a Restricted Stock Purchase Agreement in
the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Rule 16b-3. Stock Purchase Rights granted to Insiders, and
Shares purchased by Insiders in connection with Stock Purchase Rights, shall be
subject to any restrictions applicable thereto in compliance with Rule 16b-3.
An Insider may only purchase Shares pursuant to the grant of a Stock Purchase
Right, and may only sell Shares purchased pursuant to the grant of a Stock
Purchase Right, during such time or times as are permitted by Rule 16b-3.
(d) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(e) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. An Option
or Stock Purchase Right may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock
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<PAGE>
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company; provided, however, that
conversion of any convertible securities of the Company shall not be deemed to
have been "effected without receipt of consideration." Such adjustment shall be
made by the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock subject to an
Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option or Stock
Purchase Right has not been previously exercised, it will terminate immediately
prior to the consummation of such proposed action. The Board may, in the
exercise of its sole discretion in such instances, declare that any Option or
Stock Purchase Right shall terminate as of a date fixed by the Board and give
each Optionee the right to exercise his or her Option or Stock Purchase Right as
to all or any part of the Optioned Stock, including Shares as to which the
Option or Stock Purchase Right would not otherwise be exercisable.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right may be assumed
or an equivalent option or right may be substituted by the successor corporation
or a Parent or Subsidiary of the successor corporation. The Administrator may,
in lieu of such assumption or substitution, provide for the Optionee to have the
right to exercise the Option or Stock Purchase Right as to all or a portion of
the Optioned Stock, including Shares as to which it would not otherwise be
exercisable. If the Administrator makes an Option or Stock Purchase Right
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee that the Option or
Stock Purchase Right shall be fully exercisable for a period of fifteen (15)
days from the date of such notice, and the Option or Stock Purchase Right will
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option or Stock Purchase Right shall be considered assumed if,
following the merger or sale of assets, the option or right confers the right to
purchase, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property) received in
the merger or sale of assets by holders of Common Stock for each Share held on
the effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets was not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
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<PAGE>
14. DATE OF GRANT. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule or regulation, including the requirements
of any exchange or quotation system on which the Common Stock is listed or
quoted). Such stockholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the applicable law, rule or
regulation.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
16. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, Applicable Laws, and the requirements of any stock
exchange or quotation system upon which the Shares may then be listed or quoted,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. LIABILITY OF COMPANY.
(a) Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of
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<PAGE>
any liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered
by an Option or Stock Purchase Right exceeds, as of the date of grant, the
number of Shares which may be issued under the Plan without additional
stockholder approval, such Option or Stock Purchase Right shall be void with
respect to such excess Optioned Stock, unless stockholder approval of an
amendment sufficiently increasing the number of Shares subject to the Plan is
timely obtained in accordance with Section 15(b) of the Plan.
18. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the manner and to the degree required under applicable federal and state law.
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<PAGE>
MAXIS, INC.
1995 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number _________________________
Date of Grant _________________________
Vesting Commencement Date _________________________
Exercise Price per Share $________________________
Total Number of Shares Granted _________________________
Total Exercise Price $_________________________
Type of Option: ___ Incentive Stock Option
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________
VESTING SCHEDULE:
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest one year after the
Vesting Commencement Date, and 25% of the Shares subject to the Option shall
vest each year thereafter.
<PAGE>
TERMINATION PERIOD:
This Option may be exercised for thirty days after termination of the
Optionee's employment or consulting relationship with the Company. Upon the
death or Disability of the Optionee, this Option may be exercised for such
longer period as provided in the Plan. In the event of the Optionee's change in
status from Employee to Consultant or Consultant to Employee, this Option
Agreement shall remain in effect. In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.
II. AGREEMENT
1. GRANT OF OPTION. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "OPTIONEE"), an option (the "OPTION") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share set
forth in the Notice of Grant (the "EXERCISE PRICE"), subject to the terms and
conditions of the Plan, which is incorporated herein by reference. Subject to
Section 15(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. EXERCISE OF OPTION.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, Disability or other termination of Optionee's employment or
consulting relationship, the exercisability of the Option is governed by the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as EXHIBIT A (the "EXERCISE NOTICE"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "EXERCISED SHARES"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment of
the aggregate Exercise Price as to all Exercised Shares. This Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
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<PAGE>
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. METHOD OF PAYMENT. Payment of the aggregate Exercise Price shall be
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) check; or
(c) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, AND (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
4. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. TAX CONSEQUENCES. Some of the federal and California tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
(i) Nonstatutory Stock Option. The Optionee may incur
regular federal income tax and California income tax liability upon exercise of
a NSO. The Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Exercised Shares on the date of exercise over their
aggregate
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<PAGE>
Exercise Price. If the Optionee is an Employee or a former Employee,
the Company will be required to withhold from his or her compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an
ISO, the Optionee will have no regular federal income tax or California income
tax liability upon its exercise, although the excess, if any, of the Fair Market
Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price will be treated as an adjustment to alternative minimum taxable
income for federal tax purposes and may subject the Optionee to alternative
minimum tax in the year of exercise. In the event that the Optionee undergoes a
change of status from Employee to Consultant, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive Stock
Option and will be treated for tax purposes as a Nonstatutory Stock Option on
the ninety-first (91st) day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as long-
term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
year after exercise AND two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the LESSER OF (A) the difference
between the FAIR MARKET VALUE OF THE SHARES ACQUIRED ON THE DATE OF EXERCISE and
the aggregate Exercise Price, or (B) the difference between the SALE PRICE of
such Shares and the aggregate Exercise Price.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
-4-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: MAXIS, INC.
___________________________________ _____________________________________
Signature Signature
___________________________________ _____________________________________
Print Name Name and Title of Signatory
____________________________________
Residence Address
____________________________________
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<PAGE>
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of the
Company's granting his or her spouse the right to purchase Shares as set forth
in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_______________________________________
Spouse of Optionee
<PAGE>
EXHIBIT A
MAXIS, INC.
1995 STOCK PLAN
EXERCISE NOTICE
Maxis, Inc.
Two Theatre Square
Suite 230
Orinda, CA 94563
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of ________________, the undersigned
("PURCHASER") hereby elects to purchase ______________ shares (the "SHARES") of
the Common Stock of Maxis, Inc. (the "COMPANY") under and pursuant to the 1995
Stock Plan (the "PLAN") and the Stock Option Agreement dated _____________,
19___ (the "OPTION AGREEMENT"). The purchase price for the Shares shall be
$_____________, as required by the Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. RIGHTS AS STOCKHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section 13 of
the Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
<PAGE>
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser. This agreement is
governed by California law except for that body of law pertaining to conflict of
laws.
Submitted by: Accepted by:
PURCHASER: MAXIS, INC.
____________________________ ________________________________________
Signature Signature
____________________________ ________________________________________
Print Name Name and Title of Signatory
Address: Address:
___________________________ Two Theatre Square, Suite 230
___________________________ Orinda, CA 94563
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<PAGE>
MAXIS, INC.
1995 STOCK PLAN
NOTICE OF GRANT OF STOCK PURCHASE RIGHT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Notice of Grant.
[Grantee's Name and Address]
You have been granted the right to purchase Common Stock of the Company,
subject to the Company's repurchase option and your ongoing Continuous Status as
an Employee or Consultant (as described in the Plan and the attached Restricted
Stock Purchase Agreement), as follows:
Grant Number _________________________
Date of Grant _________________________
Price Per Share $________________________
Total Number of Shares Subject _________________________
to This Stock Purchase Right
Expiration Date: _________________________
YOU MUST EXERCISE THIS STOCK PURCHASE RIGHT BEFORE THE EXPIRATION DATE OR
IT WILL TERMINATE AND YOU WILL HAVE NO FURTHER RIGHT TO PURCHASE THE SHARES. By
your signature and the signature of the Company's representative below, you and
the Company agree that this Stock Purchase Right is granted under and governed
by the terms and conditions of the 1995 Stock Plan and the Restricted Stock
Purchase Agreement, all of which are attached and made a part of this document.
You further agree to execute the attached Restricted Stock Purchase Agreement as
a condition to purchasing any shares under this Stock Purchase Right.
GRANTEE: MAXIS, INC.
___________________________ _______________________________
Signature Signature
___________________________ _______________________________
Print Name Name and Title of Signatory
<PAGE>
EXHIBIT A-1
MAXIS, INC.
1995 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Restricted Stock Purchase Agreement.
WHEREAS the Purchaser named in the Notice of Grant, (the "PURCHASER") is an
employee or consultant of the Company, and the Purchaser's continued
participation is considered by the Company to be important for the Company's
continued growth; and
WHEREAS in order to give the Purchaser an opportunity to acquire an equity
interest in the Company as an incentive for the Purchaser to participate in the
affairs of the Company, the Administrator has granted to the Purchaser stock
purchase rights subject to the terms and conditions of the Plan and the Notice
of Grant, which are incorporated herein by reference, and pursuant to this
restricted stock purchase agreement (the "AGREEMENT").
THEREFORE, the parties agree as follows:
1. SALE OF STOCK. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase shares of the Company's Common Stock
(the "SHARES"), at the per share purchase price and as otherwise described in
the Notice of Grant.
2. PAYMENT OF PURCHASE PRICE. The purchase price for the Shares may be
paid by delivery to the Company at the time of execution of this Agreement of
cash, a check, or some combination thereof.
3. REPURCHASE OPTION.
a. In the event the Purchaser's Continuous Status as an Employee or
Consultant terminates for any or no reason (including death or disability)
before all of the Shares are released from the Company's repurchase option (see
Section 4), the Company shall, upon the date of such termination (as reasonably
fixed and determined by the Company) have an irrevocable, exclusive option for a
period of sixty (60) days from such date to repurchase up to that number of
shares which constitute the Unreleased Shares (as defined in Section 4) at the
original purchase price per share (the "REPURCHASE PRICE"). Said option shall
be exercised by the Company by delivering written notice to the Purchaser or the
Purchaser's executor (with a copy to the Escrow Holder) AND, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's executor a check
in the amount of the aggregate Repurchase Price, or (ii) by the Company
canceling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals such
<PAGE>
aggregate Repurchase Price. Upon delivery of such notice and the payment of the
aggregate Repurchase Price in any of the ways described above, the Company shall
become the legal and beneficial owner of the Shares being repurchased and all
rights and interests therein or relating thereto, and the Company shall have the
right to retain and transfer to its own name the number of Shares being
repurchased by the Company.
b. Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or stockholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares; provided that if the Fair Market Value of
the Shares to be repurchased on the date of such designation or assignment (the
"REPURCHASE FMV") exceeds the aggregate Repurchase Price of such Shares, then
each such designee or assignee shall pay the Company cash equal to the
difference between the Repurchase FMV and the aggregate Repurchase Price of such
Shares.
4. RELEASE OF SHARES FROM REPURCHASE OPTION.
a. ___________________ (_______) of the Shares shall be released
from the Company's repurchase option
__________________________________________________________, provided in each
case that the Purchaser's Continuous Status as an Employee or Consultant has not
terminated prior to the date of any such release.
b. Any of the Shares which have not yet been released from the
Company's repurchase option are referred to herein as "Unreleased Shares."
c. The Shares which have been released from the Company's repurchase
option shall be delivered to the Purchaser at the Purchaser's request (see
Section 6).
5. Restriction on Transfer. Except for the escrow described in Section 6
-----------------------
or transfer of the Shares to the Company or its assignees contemplated by this
Agreement, none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until the release of
such Shares from the Company's repurchase option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
6. ESCROW OF SHARES.
a. To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Company's
repurchase option under Section 3 above, the Purchaser shall, upon execution of
this Agreement, deliver and deposit with an escrow holder designated by the
Company (the "ESCROW HOLDER") the share certificates representing the Unreleased
Shares, together with the stock assignment duly endorsed in blank, attached
hereto as EXHIBIT A-2. The Unreleased Shares and stock assignment shall be held
by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company
and Purchaser attached as EXHIBIT A-3 hereto, until such time as the Company's
repurchase option expires. As a further condition to the
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<PAGE>
Company's obligations under this Agreement, the spouse of Purchaser, if any,
shall execute and deliver to the Company the Consent of Spouse attached hereto
as EXHIBIT A-4.
b. The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow and while
acting in good faith and in the exercise of its judgment.
c. If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
d. When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Company or the Purchaser, as the case may be.
e. Subject to the terms hereof, the Purchaser shall have all the
rights of a stockholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
7. LEGENDS. The share certificate evidencing the Shares issued hereunder
shall be endorsed with the following legend (in addition to any legend required
under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
8. ADJUSTMENT FOR STOCK SPLIT. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
9. TAX CONSEQUENCES. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that
-3-
<PAGE>
the Purchaser (and not the Company) shall be responsible for the Purchaser's own
tax liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of the
Internal Revenue Code of 1986, as amended (the "CODE"), taxes as ordinary income
the difference between the purchase price for the Shares and the Fair Market
Value of the Shares as of the date any restrictions on the Shares lapse. In this
context, "restriction" includes the right of the Company to buy back the Shares
pursuant to its repurchase option. The Purchaser understands that the Purchaser
may elect to be taxed at the time the Shares are purchased rather than when and
as the Company's repurchase option expires by filing an election under Section
83(b) of the Code with the I.R.S. within 30 days from the date of purchase. The
form for making this election is attached as EXHIBIT A-5 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
10. GENERAL PROVISIONS.
a. This Agreement shall be governed by the laws of the State of
California. This Agreement, subject to the terms and conditions of the Plan and
the Notice of Grant, represents the entire agreement between the parties with
respect to the purchase of Common Stock by the Purchaser. Subject to Section
15(c) of the Plan, in the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Agreement, the terms and
conditions of the Plan shall prevail. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings in this
Agreement.
b. Any notice, demand or request required or permitted to be given
by either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or
deposited in the U.S. mail, First Class with postage prepaid, and addressed to
the parties at the addresses of the parties set forth at the end of this
Agreement or such other address as a party may request by notifying the other in
writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
c. The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
d. Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party from thereafter enforcing each
and every other provision of this Agreement. The rights granted
-4-
<PAGE>
both parties herein are cumulative and shall not constitute a waiver of either
party's right to assert all other legal remedies available to it under the
circumstances.
e. The Purchaser agrees upon request to execute any further
documents or instruments necessary or desirable to carry out the purposes or
intent of this Agreement.
f. PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY BY CONTINUING SERVICE AS AN EMPLOYEE
OR CONSULTANT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED OR
PURCHASING SHARES HEREUNDER). PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT
THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE
SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED
ENGAGEMENT AS AN EMPLOYEE OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD,
OR AT ALL, AND SHALL NOT INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT
TO TERMINATE PURCHASER'S EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH
OR WITHOUT CAUSE.
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of the Plan, and hereby accepts this
Agreement subject to all of the terms and provisions thereof. Purchaser has
reviewed the Plan and this Agreement in their entirety, has had an opportunity
to obtain the advice of counsel prior to executing this Agreement and fully
understands all provisions of this Agreement. Purchaser agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Agreement.
Purchaser further agrees to notify the Company upon any change in the residence
indicated in the Notice of Grant.
PURCHASER: MAXIS, INC.
_________________________ _____________________________________
Signature Signature
_________________________ _____________________________________
Print Name Name and Title of Signatory
-5-
<PAGE>
EXHIBIT A-2
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto
________________________________________________________________________________
________________ (__________) shares of the Common Stock of Maxis, Inc. standing
in my name of the books of said corporation represented by Certificate No. _____
herewith and do hereby irrevocably constitute and appoint
_____________________________________________ to transfer the said stock on the
books of the within named corporation with full power of substitution in the
premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between________________________ and the undersigned
dated ______________, 19__.
Dated: _______________, 19__
______________________________
Signature
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
<PAGE>
EXHIBIT A-3
JOINT ESCROW INSTRUCTIONS
Corporate Secretary _____________, 19__
Maxis, Inc.
Two Theatre Square
Suite 230
Orinda, CA 94563
Dear _________________:
As Escrow Agent for both Maxis, Inc., a Delaware corporation (the
"COMPANY"), and the undersigned purchaser of stock of the Company (the
"PURCHASER"), you are hereby authorized and directed to hold the documents
delivered to you pursuant to the terms of that certain Restricted Stock Purchase
Agreement ("AGREEMENT") between the Company and the undersigned, in accordance
with the following instructions:
1. In the event the Company and/or any assignee of the Company (referred
to collectively for convenience herein as the "COMPANY") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, or some combination thereof) for the number of shares of stock
being purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
<PAGE>
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 90 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
-2-
<PAGE>
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
disputes shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses or at such other addresses as a party may designate by ten
days' advance written notice to each of the other parties hereto.
COMPANY: Maxis, Inc.
Two Theatre Square
Suite 230
Orinda, CA 94563
PURCHASER: _____________________
_____________________
_____________________
ESCROW AGENT: Corporate Secretary
Maxis, Inc.
Two Theatre Square
Suite 230
Orinda, CA 94563
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
-3-
<PAGE>
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
MAXIS, INC.
_________________________________________
Signature
_________________________________________
Name and Title of Signatory
PURCHASER:
____________________________________________
Signature
____________________________________________
Typed or Printed Name
ESCROW AGENT:
_____________________________________
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-4
CONSENT OF SPOUSE
I, ____________________, spouse of ___________________, have read and
approve the foregoing Agreement. In consideration of granting of the right to
my spouse to purchase shares of Maxis, Inc., as set forth in the Agreement, I
hereby appoint my spouse as my attorney-in-fact in respect to the exercise of
any rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.
Dated: _______________, 19____
_____________________________________________
<PAGE>
EXHIBIT A-5
ELECTION UNDER SECTION 83(B)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: : TAXPAYER: SPOUSE:
ADDRESS: :
IDENTIFICATION NO. : TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: __________ shares (the "SHARES") of the Common Stock of Maxis,
Inc. (the "COMPANY").
3. The date on which the property was transferred is: ______________, 19__.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares based on
the continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$_______________.
6. The amount (if any) paid for such property is:
$_______________.
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
THE UNDERSIGNED UNDERSTANDS THAT THE FOREGOING ELECTION MAY NOT BE REVOKED
EXCEPT WITH THE CONSENT OF THE COMMISSIONER.
Dated: ___________________, 19__ ____________________________________________
______________________________________, Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 19__ _____________________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT 11.02
MAXIS, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
MARCH 31,
-----------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Net income (loss)...................................... $(1,675) $ 6,188 $3,606
======= ======= ======
Computations of weighted average common and common
equivalent shares outstanding:
Weighted average common shares outstanding........... 11,180 8,390 5,804
Common equivalent shares from stock options issued
during the twelve-month period prior to the
Company's initial public offering................... -- -- 993
Common equivalent shares attributable to:
Redeemable preferred stock (if-converted method)..... -- 2,094 2,109
Stock options (treasury stock method)................ -- 567 9
------- ------- ------
Shares used in computing net income (loss) per share... 11,180 11,051 8,915
======= ======= ======
Net income (loss) per share............................ $ (0.15) $ 0.56 $ 0.40
======= ======= ======
</TABLE>
<PAGE>
EXHIBIT 21.02
MAXIS, INC.
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY NAME INCORPORATION
- --------------- --------------
<S> <C>
Maxis Limited United Kingdom
Maxis K.K. Japan
Maxis South LLC (formerly Cinematronics LLC) Texas
</TABLE>
<PAGE>
EXHIBIT 23.01
REPORT ON FINANCIAL STATEMENT SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Electronic Arts Inc.:
The audits referred to in our report dated May 1, 1997, except as to Note 14
which is as of June 4, 1997, include the related financial statement schedule
for each of the years in the three-year period ended March 31, 1997, included
herein. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. 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.
We consent to the use of our reports included herein and to the reference to
our Firm under the heading "Experts" in the proxy statement/prospectus filed
on Form S-4.
KPMG Peat Marwick LLP
Palo Alto, California
June 24, 1997
<PAGE>
EXHIBIT 23.02
CONSENT OF ERNST & YOUNG LLP. INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 5, 1997, except for Note 14 as to which the
date is June 4, 1997, in the Registration Statement (Form S-4) and related
Prospectus of Electronic Arts Inc., filed with the Securities and Exchange
Commission.
Our audits also included the financial statement schedule of Maxis, Inc.
listed in Item 21(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule
referred to above, 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.
Ernst & Young LLP
Walnut Creek, California
June 23, 1997
<PAGE>
EXHIBIT 99.01
MAXIS EMPLOYMENT AGREEMENT AMENDMENT
------------------------------------
This Maxis Employment Agreement Amendment (this "Agreement") is
---------
entered into as of June 4, 1997 by and between Electronic Arts Inc., a Delaware
corporation, ("Electronic Arts"), and Jeffrey B. Braun a resident of California
---------------
("Employee") to amend that certain Maxis Employment Agreement originally dated
--------
June 1, 1992, as amended (the "Employment Agreement"). Any references to
--------------------
Electronic Arts in this Agreement shall be deemed to include subsidiaries of
Electronic Arts, including without limitation, Maxis, Inc. a Delaware
corporation ("Maxis").
-----
RECITALS
A. This Agreement is entered into concurrently with the merger of
Maxis Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of Electronic Arts, with and into Maxis (the "Merger"), pursuant to
------
that certain Agreement and Plan of Reorganization among Electronic Arts, Village
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Electronic Arts, and Maxis, dated of even date herewith (the "Reorganization
--------------
Agreement").
- ---------
B. Pursuant to the Merger, Maxis will become a wholly owned
subsidiary of Electronic Arts.
C. Employee has been responsible for the growth and success of
Maxis, and Employee's entering into and agreeing to be bound by this Agreement
is a material inducement for Electronic Arts and Maxis to consummate the Merger.
D. In connection with the Merger, Employee shall become an employee
of Electronic Arts pursuant to the terms of the Employment Agreement, as such
terms are amended herein.
THEREFORE, in consideration of the promises and the terms and
conditions set forth in this Agreement, the parties agree as follows:
On the Effective Date (as defined in the Reorganization Agreement),
the parties agree that Employee shall become an employee of Electronic Arts
under the terms of the Employment Agreement, with the following amendments
thereto, which supersede any contrary terms in the Employment Agreement:
1. Employee's title, duties, base compensation and bonus
compensation will be mutually determined in good faith by Employee and
Electronic Arts.
2. Upon the first anniversary of the Effective Date, the Employment
Agreement will terminate (except for Section 20 Severance Compensation, which
will survive),
<PAGE>
and thereafter, Employee will be an "at-will" employee of Electronic Arts,
subject to Electronic Arts' standard employment policies and practices.
3. Except as provided above, the Employment Agreement will remain in
full force and effect.
IN WITNESS WHEREOF, Electronic Arts and Employee have executed this Agreement as
of the date first above written.
EMPLOYEE
/s/ Jeffrey B. Braun
- -------------------------------------------
Jeffrey B. Braun
ELECTRONIC ARTS INC.
By: /s/ Ruth Kennedy
----------------------------------------
Name: Ruth Kennedy
Its: Senior Vice President, General Counsel
2
<PAGE>
EXHIBIT 99.02
MAXIS EMPLOYMENT AGREEMENT AMENDMENT
------------------------------------
This Maxis Employment Agreement Amendment (this "Agreement") is
---------
entered into as of June 4, 1997 by and between Electronic Arts Inc., a Delaware
corporation, ("Electronic Arts"), and William R. Wright a resident of California
---------------
("Employee") to amend that certain Maxis Employment Agreement originally dated
--------
June 1, 1992, as amended (the "Employment Agreement"). Any references to
--------------------
Electronic Arts in this Agreement shall be deemed to include subsidiaries of
Electronic Arts, including without limitation, Maxis, Inc. a Delaware
corporation ("Maxis").
-----
RECITALS
A. This Agreement is entered into concurrently with the merger of
Maxis Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of Electronic Arts, with and into Maxis (the "Merger"), pursuant to
------
that certain Agreement and Plan of Reorganization among Electronic Arts, Village
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Electronic Arts, and Maxis, dated of even date herewith (the "Reorganization
--------------
Agreement").
- ---------
B. Pursuant to the Merger, Maxis will become a wholly owned
subsidiary of Electronic Arts.
C. Employee has been responsible for the growth and success of
Maxis, and Employee's entering into and agreeing to be bound by this Agreement
is a material inducement for Electronic Arts and Maxis to consummate the Merger.
D. In connection with the Merger, Employee shall become an employee
of Electronic Arts pursuant to the terms of the Employment Agreement, as such
terms are amended herein.
THEREFORE, in consideration of the promises and the terms and
conditions set forth in this Agreement, the parties agree as follows:
On the Effective Date (as defined in the Reorganization Agreement),
the parties agree that Employee shall become an employee of Electronic Arts
under the terms of the Employment Agreement, with the following amendments
thereto, which supersede any contrary terms in the Employment Agreement:
1. Employee's title, duties, base compensation and bonus
compensation will be mutually determined in good faith by Employee and
Electronic Arts.
2. Upon the first anniversary of the Effective Date, the Employment
Agreement will terminate (except for Section 21 Severance Compensation, which
will survive),
<PAGE>
and thereafter, Employee will be an "at-will" employee of Electronic Arts,
subject to Electronic Arts' standard employment policies and practices.
3. Except as provided above, the Employment Agreement will remain in
full force and effect.
IN WITNESS WHEREOF, Electronic Arts and Employee have executed this Agreement as
of the date first above written.
EMPLOYEE
/s/ William R. Wright
- --------------------------------------------
William R. Wright
ELECTRONIC ARTS INC.
By: /s/ Ruth Kennedy
-----------------------------------------
Name: Ruth Kennedy
Its: Senior Vice President, General Counsel
2
<PAGE>
EXHIBIT 99.03
NONCOMPETITION AND NONSOLICITATION AGREEMENT
--------------------------------------------
This Noncompetition and Nonsolicitation Agreement (the "Agreement") is
---------
entered into as of June 4, 1997 by and between Electronic Arts Inc., a Delaware
corporation, ("Electronic Arts"), and Jeffrey B. Braun, a resident of California
---------------
("Braun"). Any references to Electronic Arts in this Agreement shall be deemed
-----
to include subsidiaries of Electronic Arts, including without limitation, Maxis,
Inc. a Delaware corporation ("Maxis").
-----
RECITALS
A. This Agreement is entered into concurrently with the merger of
Maxis Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of Electronic Arts, with and into Maxis (the "Merger"), pursuant to
------
that certain Agreement and Plan of Reorganization among Electronic Arts, Village
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Electronic Arts, and Maxis, dated of even date herewith (the "Reorganization
--------------
Agreement").
- ---------
B. Pursuant to the Merger, Maxis will become a wholly owned
subsidiary of Electronic Arts.
C. Braun has been responsible for the growth and success of Maxis,
and Braun's entering into and agreeing to be bound by this Agreement is a
material inducement for Electronic Arts and Maxis to consummate the Merger.
THEREFORE, in consideration of the promises and the terms and
conditions set forth in this Agreement, the parties agree as follows:
1. TERM OF AGREEMENT. This Agreement will commence on the Effective
-----------------
Date (as defined in the Reorganization Agreement) and will continue until two
years after the Effective Date.
2. COVENANTS AGAINST COMPETITION. Braun acknowledges that the
-----------------------------
services Braun has rendered to Maxis and may render to Electronic Arts are of a
special, unusual character which have a unique value to Electronic Arts, the
loss of which cannot adequately be compensated by damages in an action at law.
In view of the unique value to Electronic Arts of Braun's services and the facts
set forth in the recitals to this Agreement, and as a material inducement to
Electronic Arts to consummate the Merger, Braun hereby covenants and agrees with
Electronic Arts as follows:
2.1 ENGAGE IN BUSINESS. For a period of two (2) years after the
------------------
date hereof (such period hereinafter referred to as the "Noncompete Period"),
-----------------
Braun shall not, either for himself or for any other person or entity, directly
or indirectly, carry on or engage in any business in the interactive
entertainment software industry (the "Competing Area"), in any county of the
--------------
State of California, State of the United States, province of Canada or country
of the
<PAGE>
world in which, or in any geographic area where, Maxis carries on, is actually
engaged in or currently contemplates doing such business, or maintains or
currently contemplates maintaining sales or service representatives or employees
for the purpose of carrying on or engaging in such business, or sells or
currently contemplates selling, directly or indirectly, products developed by
Maxis. "Carry on or engage in any business" within the meaning of this Section 2
----------------------------------
shall include, without limitation, each of the following activities: to actually
engage in, work with, have a financial interest in, advise, lend money to,
guarantee the debts or obligations of, or permit one's name or any part thereof
to be used in connection with, an enterprise or endeavor, either individually,
in partnership or in conjunction with any person or persons, firms,
associations, companies or corporations, whether as a principal, agent,
shareholder, employee, officer, director, partner, consultant or in any other
manner whatsoever; provided, however, that Braun shall retain the right to
invest in or have an interest in entities traded on any public market or offered
by any national brokerage house, provided that such interest does not exceed two
percent (2%) of the voting control of such entity. In addition, Braun may (a)
make passive investments in privately held entities that are determined by the
Board of Directors of Electronic Arts not to be competitors of the Maxis
business (not to be unreasonably withheld) and (b) maintain an ownership
interest in Neighborhood or any of its successors in any amount.
2.2 CUSTOMER SOLICITATION. During the Noncompete Period, Braun
---------------------
shall not, either for himself or for any other person or entity, directly or
indirectly, solicit business in the Competing Area from, or attempt to sell or
provide the same or similar products or services in the Competing Area to, any
clients or customers or potential clients or customers of Electronic Arts except
in connection with his employment with Electronic Arts.
2.3 BRAUN SOLICITATION. During the Noncompete Period, Braun
------------------
shall not, either for himself or for any other person or entity, directly or
indirectly, solicit, induce or attempt to induce any employee or contractor of
Electronic Arts to discontinue his or her employment or provision of contracted
services for Electronic Arts.
2.4 ENFORCEABILITY. If any court of competent jurisdiction
--------------
shall determine that any provision of Sections 2.1, 2.2 or 2.3 of this Agreement
is unenforceable with respect to the term thereof or with respect to the scope
of subject matter or territory covered thereby, then such provision shall
nevertheless be enforceable by any such court upon such shorter term or within
such lesser scope as may be determined by such court to be reasonable and
enforceable.
3. MISCELLANEOUS.
-------------
3.1 DISPUTE RESOLUTION. Braun and Electronic Arts shall submit
------------------
to mandatory binding arbitration in any controversy or claim arising out of, or
relating to, this Agreement or any breach hereof in Santa Clara County,
California, in accordance with the commercial arbitration rules of the American
Arbitration Association then in effect, provided, however, that each of Braun
-------- -------
and Electronic Arts retains its rights to, and shall not be prohibited, limited
or in any other way restricted from, seeking or obtaining equitable relief from
a court having jurisdiction over the parties.
2
<PAGE>
3.2 SEVERABILITY. If any provision of this Agreement shall be
------------
found by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, then the parties hereby waive such provision to the extent that
it is found to be invalid or unenforceable and to the extent that to do so would
not deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect.
3.3 REMEDIES. Electronic Arts and Braun acknowledge that
--------
Electronic Arts would not have consummated the Merger unless Braun had, among
other things, entered into this Agreement. Any breach of this Agreement will
result in irreparable damage to Electronic Arts for which Electronic Arts will
not have an adequate remedy at law. Accordingly, Braun hereby consents and
agrees that for any breach or violation by Braun of any of the provisions of
this Agreement (including, without limitation, Section 2), a restraining order
and/or injunction may be issued against Braun, in addition to any other rights
and remedies Electronic Arts may have, at law or equity, including, without
limitation, the recovery of money damages.
3.4 NO WAIVER. The failure by either party at any time to
---------
require performance or compliance by the other of any of its obligations or
agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of
any provision hereof shall not be taken or held to be a waiver of any preceding
or succeeding breach of such provision or as a waiver of the provision itself.
No waiver of any kind shall be effective or binding, unless it is in writing and
is signed by the party against whom such waiver is sought to be enforced.
3.5 ASSIGNMENT. This Agreement and all rights hereunder are
----------
personal to Braun and may not be transferred or assigned by Braun at any time.
Any attempt by Braun to do so will be void and of no effect. Electronic Arts
may assign its rights, together with its obligations hereunder, to any parent,
subsidiary, affiliate or successor, or in connection with any sale, transfer or
other disposition of all or substantially all of the business and assets of
Village, provided, however, that any such assignee assumes Electronic Arts'
-------- -------
obligations hereunder.
3.6 ENTIRE AGREEMENT. This Agreement constitutes the entire
----------------
and only agreement between the parties relating to the noncompetition and
nonsolicitation obligations of Braun, and this Agreement supersedes and cancels
any and all previous contracts, arrangements or understandings with respect
thereto.
3.7 AMENDMENT. This Agreement may be amended, modified,
---------
superseded, canceled, renewed or extended only by an agreement in writing
executed by all parties hereto.
3.8 NOTICES. All notices and other communications required or
-------
permitted under this Agreement shall be in writing and hand delivered, sent by
facsimile, sent by registered mail, postage pre-paid, or sent by nationally
recognized express courier service. Such
3
<PAGE>
notices and other communications shall be effective upon receipt if hand
delivered or sent by facsimile, five (5) days after mailing if sent by mail, and
one (l) day after dispatch if sent by express courier, to the following
addresses, or such other addresses as any party shall notify the other parties:
If to Electronic Arts: Electronic Arts Inc.
1450 Fashion Island Blvd.
San Mateo, CA 94404
Facsimile: (415) 571-7132
Attention: Ruth Kennedy, SVP & General Counsel
If to Braun: P.O. Box 818
Orinda, CA 94563
Facsimile: (510) 253-1146
3.9 BINDING NATURE. This Agreement shall be binding upon, and
--------------
inure to the benefit of, the successors and personal representatives of the
respective parties hereto.
3.10 HEADINGS. The headings contained in this Agreement are for
--------
reference purposes only and shall in no way affect the meaning or interpretation
of this Agreement. In this Agreement, the word "or" is used in the inclusive
sense.
3.11 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement.
3.12 GOVERNING LAW. This Agreement and the rights and
-------------
obligations of the parties hereto shall be construed in accordance with the laws
of California, without giving effect to the principles of conflict of laws.
3.13 ADVICE OF COUNSEL. Braun acknowledges that he has received
-----------------
the advice of counsel in connection with entering into this Agreement and is
fully aware of his rights and obligations under this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, Electronic Arts and Braun have executed this Agreement as of
the date first above written.
/s/ Jeffrey B. Braun
- --------------------------------------------
JEFFREY B. BRAUN
ELECTRONIC ARTS INC.
By: /s/ Ruth Kennedy
-----------------------------------------
Name: Ruth Kennedy
Its: Senior Vice President, General Counsel
[SIGNATURE PAGE TO NONCOMPETITION AND NONSOLICITATION
AGREEMENT]
5
<PAGE>
EXHIBIT 99.04
NONCOMPETITION AND NONSOLICITATION AGREEMENT
--------------------------------------------
This Noncompetition and Nonsolicitation Agreement (the "Agreement") is
---------
entered into as of June 4, 1997 by and between Electronic Arts Inc., a Delaware
corporation, ("Electronic Arts"), and William R. Wright, a resident of
---------------
California ("Wright"). Any references to Electronic Arts in this Agreement shall
------
be deemed to include subsidiaries of Electronic Arts, including without
limitation, Maxis, Inc. a Delaware corporation ("Maxis").
-----
RECITALS
A. This Agreement is entered into concurrently with the merger of Maxis
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Electronic Arts, with and into Maxis (the "Merger"), pursuant to that certain
------
Agreement and Plan of Reorganization among Electronic Arts, Village Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of Electronic
Arts, and Maxis, dated of even date herewith (the "Reorganization Agreement").
------------------------
B. Pursuant to the Merger, Maxis will become a wholly owned subsidiary of
Electronic Arts.
C. Wright has been responsible for the growth and success of Maxis, and
Wright's entering into and agreeing to be bound by this Agreement is a material
inducement for Electronic Arts and Maxis to consummate the Merger.
THEREFORE, in consideration of the promises and the terms and conditions
set forth in this Agreement, the parties agree as follows:
1. TERM OF AGREEMENT. This Agreement will commence on the Effective Date
-----------------
(as defined in the Reorganization Agreement) and will continue until two years
after the Effective Date.
2. COVENANTS AGAINST COMPETITION. Wright acknowledges that the services
-----------------------------
Wright has rendered to Maxis and may render to Electronic Arts are of a
special, unusual character which have a unique value to Electronic Arts, the
loss of which cannot adequately be compensated by damages in an action at law.
In view of the unique value to Electronic Arts of Wright's services and the
facts set forth in the recitals to this Agreement, and as a material inducement
to Electronic Arts to consummate the Merger, Wright hereby covenants and agrees
with Electronic Arts as follows:
2.1 ENGAGE IN BUSINESS. For a period of two (2) years after the date
------------------
hereof (such period hereinafter referred to as the "Noncompete Period"), Wright
-----------------
shall not, either for himself or for any other person or entity, directly or
indirectly, carry on or engage in any business in the interactive entertainment
software industry (the "Competing Area"), in any county of the State of
--------------
California, State of the United States, province of Canada or country of the
<PAGE>
world in which, or in any geographic area where, Maxis carries on, is actually
engaged in or currently contemplates doing such business, or maintains or
currently contemplates maintaining sales or service representatives or employees
for the purpose of carrying on or engaging in such business, or sells or
currently contemplates selling, directly or indirectly, products developed by
Maxis. "Carry on or engage in any business" within the meaning of this Section 2
----------------------------------
shall include, without limitation, each of the following activities: to actually
engage in, work with, have a financial interest in, advise, lend money to,
guarantee the debts or obligations of, or permit one's name or any part thereof
to be used in connection with, an enterprise or endeavor, either individually,
in partnership or in conjunction with any person or persons, firms,
associations, companies or corporations, whether as a principal, agent,
shareholder, employee, officer, director, partner, consultant or in any other
manner whatsoever; provided, however, that Wright shall retain the right to
-----------------
invest in or have an interest in entities traded on any public market or offered
by any national brokerage house, provided that such interest does not exceed two
percent (2%) of the voting control of such entity. In addition, Wright may (a)
make passive investments in privately held entities that are determined by the
Board of Directors of Electronic Arts not to be competitors of the Maxis
business (not to be unreasonably withheld) and (b) maintain an ownership
interest in Neighborhood or any of its successors in any amount.
2.2 CUSTOMER SOLICITATION. During the Noncompete Period, Wright
---------------------
shall not, either for himself or for any other person or entity, directly or
indirectly, solicit business in the Competing Area from, or attempt to sell or
provide the same or similar products or services in the Competing Area to, any
clients or customers or potential clients or customers of Electronic Arts except
in connection with his employment with Electronic Arts.
2.3 WRIGHT SOLICITATION. During the Noncompete Period, Wright shall
-------------------
not, either for himself or for any other person or entity, directly or
indirectly, solicit, induce or attempt to induce any employee or contractor of
Electronic Arts to discontinue his or her employment or provision of contracted
services for Electronic Arts.
2.4 ENFORCEABILITY. If any court of competent jurisdiction shall
--------------
determine that any provision of Sections 2.1, 2.2 or 2.3 of this Agreement is
unenforceable with respect to the term thereof or with respect to the scope of
subject matter or territory covered thereby, then such provision shall
nevertheless be enforceable by any such court upon such shorter term or within
such lesser scope as may be determined by such court to be reasonable and
enforceable.
3. MISCELLANEOUS.
3.1 DISPUTE RESOLUTION. Wright and Electronic Arts shall submit to
------------------
mandatory binding arbitration in any controversy or claim arising out of, or
relating to, this Agreement or any breach hereof in Santa Clara County,
California, in accordance with the commercial arbitration rules of the American
Arbitration Association then in effect, provided, however, that each of Wright
-------- -------
and Electronic Arts retains its rights to, and shall not be prohibited, limited
or in any other way restricted from, seeking or obtaining equitable relief from
a court having jurisdiction over the parties.
2
<PAGE>
3.2 SEVERABILITY. If any provision of this Agreement shall be found
------------
by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, then the parties hereby waive such provision to the extent that
it is found to be invalid or unenforceable and to the extent that to do so would
not deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect.
3.3 REMEDIES. Electronic Arts and Wright acknowledge that Electronic
--------
Arts would not have consummated the Merger unless Wright had, among other
things, entered into this Agreement. Any breach of this Agreement will result in
irreparable damage to Electronic Arts for which Electronic Arts will not have an
adequate remedy at law. Accordingly, Wright hereby consents and agrees that for
any breach or violation by Wright of any of the provisions of this Agreement
(including, without limitation, Section 2), a restraining order and/or
injunction may be issued against Wright, in addition to any other rights and
remedies Electronic Arts may have, at law or equity, including, without
limitation, the recovery of money damages.
3.4 NO WAIVER. The failure by either party at any time to require
---------
performance or compliance by the other of any of its obligations or agreements
shall in no way affect the right to require such performance or compliance at
any time thereafter. The waiver by either party of a breach of any provision
hereof shall not be taken or held to be a waiver of any preceding or succeeding
breach of such provision or as a waiver of the provision itself. No waiver of
any kind shall be effective or binding, unless it is in writing and is signed by
the party against whom such waiver is sought to be enforced.
3.5 ASSIGNMENT. This Agreement and all rights hereunder are personal
----------
to Wright and may not be transferred or assigned by Wright at any time. Any
attempt by Wright to do so will be void and of no effect. Electronic Arts may
assign its rights, together with its obligations hereunder, to any parent,
subsidiary, affiliate or successor, or in connection with any sale, transfer or
other disposition of all or substantially all of the business and assets of
Village, provided, however, that any such assignee assumes Electronic Arts'
-------- -------
obligations hereunder.
3.6 ENTIRE AGREEMENT. This Agreement constitutes the entire and only
----------------
agreement between the parties relating to the noncompetition and nonsolicitation
obligations of Wright, and this Agreement supersedes and cancels any and all
previous contracts, arrangements or understandings with respect thereto.
3.7 AMENDMENT. This Agreement may be amended, modified, superseded,
---------
canceled, renewed or extended only by an agreement in writing executed by all
parties hereto.
3.8 NOTICES. All notices and other communications required or
-------
permitted under this Agreement shall be in writing and hand delivered, sent by
facsimile, sent by registered mail, postage pre-paid, or sent by nationally
recognized express courier service. Such
3
<PAGE>
notices and other communications shall be effective upon receipt if hand
delivered or sent by facsimile, five (5) days after mailing if sent by mail, and
one (l) day after dispatch if sent by express courier, to the following
addresses, or such other addresses as any party shall notify the other parties:
If to Electronic Arts: Electronic Arts Inc.
1450 Fashion Island Blvd.
San Mateo, CA 94404
Facsimile: (415) 571-7132
Attention: Ruth Kennedy, SVP & General Counsel
If to Wright: 2121 N. California Boulevard, Suite 600
Walnut Creek, CA 94596
Fax: (510) 253-1146
3.9 BINDING NATURE. This Agreement shall be binding upon, and inure
--------------
to the benefit of, the successors and personal representatives of the respective
parties hereto.
3.10 HEADINGS. The headings contained in this Agreement are for
--------
reference purposes only and shall in no way affect the meaning or interpretation
of this Agreement. In this Agreement, the word "or" is used in the inclusive
sense.
3.11 COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement.
3.12 GOVERNING LAW. This Agreement and the rights and obligations of
-------------
the parties hereto shall be construed in accordance with the laws of California,
without giving effect to the principles of conflict of laws.
3.13 ADVICE OF COUNSEL. Wright acknowledges that he has received the
-----------------
advice of counsel in connection with entering into this Agreement and is fully
aware of his rights and obligations under this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, Electronic Arts and Wright have executed this Agreement as
of the date first above written.
/s/ William R. Wright
- --------------------------------------------
William R. Wright
ELECTRONIC ARTS INC.
By: /s/ Ruth Kennedy
-----------------------------------------
Name: Ruth Kennedy
Its: Senior Vice President, General Counsel
[SIGNATURE PAGE TO NONCOMPETITION AND NONSOLICITATION AGREEMENT]
5
<PAGE>
EXHIBIT 99.05
PROXY PROXY
MAXIS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS
The undersigned stockholder of Maxis, Inc., a Delaware corporation, hereby
acknowledges receipt of the Notice of Special Meeting of Stockholders and Proxy
Statement/Prospectus, each dated July 2, 1997, and hereby appoints Samuel L.
Poole and Fred M. Gerson, and each of them, proxies and attorneys-in-fact, with
full power to each of substitution, on behalf and in the name of the
undersigned, to represent the undersigned at the Special Meeting of
Stockholders of Maxis, Inc., to be held on July 25, 1997, at 8:00 a.m. at
Maxis' corporate headquarters at 2121 N. California Blvd., Suite 600, Walnut
Creek, California 94596 and at any adjournments thereof, and to vote all shares
of Common Stock which the undersigned would be entitled to vote if then and
there personally present, on the matters set forth on the reverse side hereof:
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS INDICATED, WILL BE
VOTED "FOR" THE PROPOSAL LISTED, AND AS SAID PROXIES DEEM ADVISABLE ON SUCH
OTHER MATTERS AS MAY COME BEFORE THE MEETING, INCLUDING, AMONG OTHER THINGS,
CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT OF THE MEETING (INCLUDING
WITHOUT LIMITATION FOR PURPOSES OF SOLICITING ADDITIONAL VOTES TO APPROVE THE
REORGANIZATION AGREEMENT AND THE MERGER).
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE PROVIDED.
(Continued and to be signed on reverse side.)
<PAGE>
MAXIS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]
1. PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND PLAN OF REORGANIZATION AND
APPROVE THE MERGER, WHICH TRANSACTION PROVIDES FOR, AMONG OTHER THINGS, THE
MERGER OF VILLAGE ACQUISITION CORPORATION, A WHOLLY OWNED SUBSIDIARY OF
ELECTRONIC ARTS INC. AND A DELAWARE CORPORATION, WITH AND INTO MAXIS, INC.,
WITH THE RESULT THAT MAXIS, INC. WILL BECOME A WHOLLY OWNED SUBSIDIARY OF
ELECTRONIC ARTS INC.; THE CONVERSION OF EACH OUTSTANDING SHARE OF MAXIS,
INC. COMMON STOCK, PAR VALUE $0.0001 PER SHARE, INTO 0.3644 OF A SHARE OF
ELECTRONIC ARTS INC. COMMON STOCK; AND THE ASSUMPTION BY ELECTRONIC ARTS
INC. OF ALL OUTSTANDING OPTIONS TO PURCHASE MAXIS, INC. COMMON STOCK, ALL AS
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS.
For Against Abstain
[_] [_] [_]
Please sign exactly as name appears on Proxy
Dated: _____________________________________________________________ , 1997
- --------------------------------------------------------------------------------
Signature
- --------------------------------------------------------------------------------
(Signatures if held jointly)
- --------------------------------------------------------------------------------
(Title)
NOTE: WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS
ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE, GUARDIAN OR CORPORATE OFFICER OR
PARTNER, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN COR-
PORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE
SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON.
