<PAGE> 1
As filed with the Securities and Exchange Commission on December 23, 1996
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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T.HQ, INC.
(Exact name of Registrant as Specified in its Charter)
New York
(State or Other Jurisdiction of Incorporation or Organization)
13-3541686
(I.R.S. Employer Identification No.)
5016 North Parkway Calabasas, Calabasas, California 91302
(818) 591-1310
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
BRIAN J. FARRELL
President and Chief Executive Officer
T.HQ, INC.
5016 North Parkway Calabasas
Calabasas, California 91302
(818) 591-1310
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
Copies to:
KENNETH H. LEVIN, ESQ. ANTHONY J. BISHOP, ESQ.
Sidley & Austin Sheppard, Mullin, Richter & Hampton LLP
555 West Fifth Street, Suite 4000 333 South Hope Street, 48th Floor
Los Angeles, California 90013 Los Angeles, California 90071
(213) 896-6000 (213) 617-1780
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE
If any of the securities being registered on this form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1993, please check the following box. [ ]
If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
<PAGE> 2
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
Proposed Maximum Maximum
Title of Amount Offering Price Aggregate Amount of
Each Class of Securities to to be Per Offering Registration
Be Registered Registered(1) Share(2) Price(2) Fee
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Common Stock, $.0001 par value 1,725,000 shares $9.69 $16,715,250 $5065
================================================================================================================
</TABLE>
(1) Includes 225,000 shares which the Underwriter has the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c).
---------------
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
AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 3
T.HQ, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
<TABLE>
<CAPTION>
Form S-2 Item Number and Caption Location or Caption in Prospectus
- -------------------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus . . . . . . . . . . . . . . . Facing Page of Registration Statement and
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and
Ratio of Earning to Fixed Charges . . . . Prospectus Summary; Risk Factors; Capitalization
4. Use of Proceeds . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds
5. Determination of Offering Price . . . . . Outside Front Cover Page; Risk Factors; Market Price of
Common Stock; Underwriting
6. Dilution . . . . . . . . . . . . . . . . Not Applicable
7. Selling Security Holders . . . . . . . . Not Applicable
8. Plan of Distribution . . . . . . . . . . Outside Front Cover Page; Underwriting
9. Description of Securities to be
Registered . . . . . . . . . . . . . . . Prospectus Summary; Market Price of Common Stock;
Dividend Policy; Description of Securities
10. Interests of Named Experts and Counsel . Legal Matters; Experts
11. Information with Respect to the
Registrant . . . . . . . . . . . . . . . Outside Front and Inside Front Cover Pages; Prospectus
Summary; Risk Factors; Market Price of Common Stock;
Dividend Policy; Use of Proceeds; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Description of
Securities; Shares Eligible for Future Sale;
Consolidated Financial Statements
12. Incorporation of Certain Information by
Reference . . . . . . . . . . . . . . . . Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities . . . . . . . . . . . . . . . Not Applicable
</TABLE>
-iii-
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1996
PROSPECTUS
1,500,000 SHARES
T.HQ, INC.
[LOGO]
COMMON STOCK
--------------------------
All of the 1,500,000 shares of Common Stock, par value $0.0001 per
share (the "Common Stock"), offered hereby are being issued and sold by T.HQ,
Inc. ("T.HQ" or the "Company"). The Common Stock is quoted on the Nasdaq
SmallCap Market under the symbol "TOYH." The Company has applied for listing
on the Nasdaq National Market under the symbol "THQI". On December 20, 1996,
the last reported sale price of the Common Stock on the Nasdaq SmallCap Market
was $9.875 per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES 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 PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS
PRICE TO PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share . . . $ $ $
- -------------------------------------------------------------------------------------------------
Total (3) . . . $ $ $
=================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at
$400,000.
(3) The Company has granted to the Underwriters' a 30-day option to
purchase up to 225,000 additional shares of Common Stock on the same
terms and conditions as set forth above solely to cover
over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $__________, $__________ and $__________,
respectively. See "Underwriting."
THE SHARES OF COMMON STOCK ARE BEING OFFERED BY THE SEVERAL
UNDERWRITERS NAMED HEREIN, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THEM AND SUBJECT TO CERTAIN CONDITIONS. THE UNDERWRITERS RESERVE THE RIGHT TO
WITHDRAW, CANCEL OR MODIFY SUCH OFFER AND TO REJECT ORDERS IN WHOLE OR IN PART.
IT IS EXPECTED THAT THE CERTIFICATES FOR THE SHARES OF COMMON STOCK WILL BE
AVAILABLE FOR DELIVERY IN NEW YORK, NEW YORK, ON OR ABOUT ___________, 1997.
WEDBUSH MORGAN SECURITIES
THE DATE OF THIS PROSPECTUS IS __________, 1997
<PAGE> 5
[PICTURES OF PRODUCTS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING
GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and consolidated financial statements and notes
thereto appearing elsewhere in this Prospectus. Unless the context otherwise
requires, references in this Prospectus to "T.HQ" or the "Company" are to T.HQ,
Inc., a New York corporation, and its subsidiaries. The term "Title" is used
in this Prospectus to mean an interactive software title that is released by
the Company for use on a particular hardware platform. Unless otherwise stated
in this Prospectus, information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. See "Underwriting." All
references to shares of Common Stock, including shares subject to warrants and
options and warrant and option exercise prices, have been adjusted to reflect
the one-for-fifteen reverse stock split effective February 15, 1995.
This Prospectus includes statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
The Company's actual results may differ materially from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed in "Risk Factors" and
elsewhere in this Prospectus.
THE COMPANY
T.HQ develops, publishes and distributes interactive entertainment
software for the various hardware platforms that collectively dominate the home
video game market. The Company currently publishes Titles for all major
dedicated platforms manufactured by Sony, Sega and Nintendo, and in 1997
intends to release Titles for the recently introduced Nintendo 64 platform and
multi-media personal computers. The Company currently publishes products in
most interactive software genres, including action, adventure, arcade,
fighting, driving, strategy, simulation and sports. The Company's principal
customers include Toys "R" Us, Wal-Mart, Target and Best Buy, other national
and regional retailers, discount store chains and specialty retailers.
The Company achieved a turnaround in 1995, reversing two years of
significant losses. Under new leadership, the Company focused its product
strategy, improved inventory management and reduced fixed costs. As a result,
T.HQ's revenues increased from $13.3 million in 1994 to $33.3 million in 1995.
For the nine months ended September 30, 1996, revenues were $29.8 million,
compared to $18.9 million for the same period in 1995.
The Company's objective is to become a leading provider of exciting,
high-quality interactive entertainment software that appeals to a broad range
of consumers for use on a variety of platforms. The Company's business
strategy is based on the following:
- Developing a portfolio of games, primarily for use on advanced
platforms, based on properties that are proprietary or are
exclusively licensed to the Company ("franchise" properties).
Franchise properties allow the Company to release Titles based
on such properties on a variety of hardware platforms, to
create sequels to such Titles and to re-release such Titles at
secondary and tertiary price points in the future. The
Company's exclusively licensed properties currently consist of
BASS Masters Classic, Turner's World Championship Wrestling
and Brunswick's Tournament of Champions. Currently, the
Company's sole proprietary product is Pax Imperia II.
- Identifying and licensing titles originally developed in
foreign territories with proven or anticipated consumer
acceptance and publishing localized versions for advanced
platforms for distribution in the United States and other
countries. This strategy enables the Company to participate
in the market for advanced platform games while limiting risk.
In 1996, the Company commenced publishing and distributing
Sony PlayStation and Sega Saturn Titles under license from
foreign independent software developers, primarily from Japan.
In 1997, the Company expects to publish approximately 14
additional Titles acquired in such manner, including K1: The
Arena Fighters, Ghost in the Shell and Destruction Derby XL.
-3-
<PAGE> 7
- Publishing high quality software for the large installed base
of 16-bit and Game Boy platforms for so long as the Company
believes there is a significant market for such Titles. The
Company believes that the relatively low cost of development
of Titles for such platforms and reduced competition in these
markets creates an opportunity to generate continuing sales
and profits from these segments of the video game market.
Examples of such Titles published by the Company include
Disney's Toy Story and Pocahontas and LucasArts' Super Empire
Strikes Back and Super Return of the Jedi. Licenses acquired
for Titles currently under development include Disney's
Hunchback of Notre Dame and Hercules (an animated feature film
to be released in 1997). The Company has also entered into
agreements with Electronic Arts Inc., a competing independent
software company, pursuant to which the Company develops,
publishes and distributes Titles based on existing Electronic
Arts titles, primarily for SNES and Game Boy. Representative
Electronic Arts titles include Madden Football, FIFA
International Soccer, NBA Live, NHL Hockey and PGA Tour Golf.
The Company intends to continue to seek licenses of such
high-recognition properties to publish Titles for older
platforms.
- Expanding its presence in foreign markets that demonstrate
(through an increasing installed base of platforms) the
potential for commercial success of the Company's Titles. To
accomplish this strategy, the Company has established an
office in the United Kingdom to oversee its operations in
Europe and has developed strategic relationships with Japanese
publishers, resulting in foreign sales constituting the 25% of
the Company's revenues in 1995 and for the first nine months
of 1996.
- Managing the development and marketing of its Titles in a
manner that minimizes financial risk. The Company has
experienced and expects to continue to experience fluctuations
in its revenues, both on a quarterly basis and otherwise, as a
result of numerous factors. The Company attempts to minimize
its fixed expenses by such means as adjusting the relative use
of employees and independent contractors who perform software
development, adopting warehouse and shipping systems that
closely link product fulfillment costs to sales volume, and
compensating sales representatives based on sales volume. In
addition, by implementing strict product ordering and
inventory controls, the Company attempts to reduce the risks
associated with excessive or obsolete inventory.
As of December 16, 1996, the Company had approximately 36 new
Titles under license or in various stages of development that are currently
scheduled for release in 1997, including seven Titles for PlayStation, seven
Titles for Saturn, one Title for Nintendo 64 and two Titles for use on
multimedia personal computers.
The Company was incorporated in 1989, and its principal
executive offices are located at 5016 North Parkway Calabasas, Calabasas,
California 91302. Its telephone number at that location is (818) 591-1310.
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<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company . . . . . . . . . 1,500,000 shares
Common Stock outstanding after this offering (1) . . 6,238,685 shares
Use of proceeds . . . . . . . . . . . . . . . . . . . General corporate purposes, including obtaining
licenses for and development expenditures related to
new titles, repayment of borrowings under the
Company's revolving credit facility, and making
acquisitions of related businesses. See "Use of
Proceeds."
Nasdaq SmallCap symbol . . . . . . . . . . . . . . . TOYH
Proposed Nasdaq National Market symbol . . . . . . . THQI
</TABLE>
________________________________
(1) Based on shares outstanding as of December 16, 1996. Excludes 509,999
shares of Common Stock issuable upon exercise of options issued
pursuant to the Company's Amended and Restated 1990 Stock Option Plan
(the "Stock Option Plan") at a weighted-average exercise price of
$3.41 per share, 481,010 shares of Common Stock issuable upon exercise
of other options at a weighted-average exercise price of $4.09 per
share, and 704,091 shares of Common Stock issuable upon exercise of
other warrants at a weighted average exercise price of $16.79 per
share. See "Description of Securities," "Shares Eligible for Future
Sale" and "Underwriting."
T.HQ is a registered trademark and trade name of the Company.
Nintendo(R), Super Nintendo Entertainment System(R) ("SNES"), Game Boy(R) and
Nintendo 64(R) are registered trademarks of Nintendo of America, Inc.
("Nintendo"). Sega(R), Genesis(R), Game Gear(R) and Saturn(R) are registered
trademarks of Sega of America, Inc. ("Sega"). Sony PlayStation(R) is a
registered trademark of Sony Computer Entertainment Inc. ("Sony"). Nintendo,
Sega and Sony are referred to herein collectively as the "Manufacturers." This
Prospectus includes trademarks other than those identified in this paragraph.
-5-
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
---------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . $32,940 $56,478 $ 37,478 $ 13,289 $33,250 $18,935 $29,772
Operating income (loss) . . . . . . . 6,114 6,762 (19,233) (17,367) 757 246 1,106
Income (loss) before income taxes . . 6,224 6,686 (19,653) (17,479) 623 154 891
Net income (loss) . . . . . . . . . . 4,088 4,046 (16,240) (17,490) 601 154 887
Net income (loss) per share . . . . . $ 4.94 $ 2.79 $ (10.80) $ (8.75) $ .17 $ .05 $ .19
Weighted-average number of common
and common equivalent shares
outstanding . . . . . . . . . . . . 828 1,448 1,504 1,998 3,482 3,007 4,684
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
--------------------------
Actual As Adjusted(1)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,203
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,193
Revolving Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,478
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,613
</TABLE>
(1) Adjusted to give effect to the anticipated application of the
estimated net proceeds to the Company of this offering based on the
assumed public offering price of $____ per share. See "Use of
Proceeds" and "Capitalization."
-6-
<PAGE> 10
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should
consider carefully, in addition to the other information contained in this
Prospectus, the risk factors set forth below before making a decision to
purchase the shares of Common Stock offered hereby. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Prospectus. In each
instance in which a risk factor identifies an event that would or could
adversely affect the Company, such risk should be viewed as potentially
adversely affecting the Company's business, results of operations and financial
condition.
ACQUISITION OF PROPERTIES AND DEVELOPMENT OF NEW TITLES
The Company's continuing profitability is a direct result of its
ability to timely develop and sell new Titles to replace declining revenues
from older Titles. Consumer preferences for interactive entertainment software
("Software") are difficult to predict, and few Software titles achieve
sustained market acceptance. If revenues from new Titles fail to replace
declining revenues from existing Titles, the Company would be materially and
adversely affected.
The development of new Titles is dependant in substantial part upon
the Company's identification and exploitation in a timely manner of titles
based upon entertainment projects (such as movies, television programs and
arcade games), sports and entertainment personalities, or popular sports,
trends or concepts ("Properties") that have high public visibility or
recognition or that reflect the trends of popular culture. The determination
of which Titles the Company should develop is highly subjective and there can
be no assurances that any new Title will be successful. In addition, the
Company is in competition with numerous other Software companies for licenses
to develop Software based on such Properties. To the extent competition
intensifies for licenses to highly desirable Properties, the Company may
encounter increased difficulty in obtaining these licenses. See "Business -
Competition." The failure of the Company to accurately identify and secure the
rights to Properties that are or will become popular would have a material
adverse effect on the Company.
Properties generate significant public interest for periods that are
unpredictable and short. Consequently, the Company's commercially successful
Titles may be marketable in material quantities for only a limited time, often
for less than six months. As is typical of Software, the life cycle of a Title
generally consists of a relatively high level of sales during the first few
months after introduction, followed by market saturation and a decline in
sales. Accordingly, substantially all of the Company's net sales for a
particular year are generated by Titles released in that year. In some
instances, a sales decline may also be accompanied by decreasing sales prices,
which may result in credits or allowances to the Company's customers. See " --
Discounts, Allowances and Returns; Inventory Management." In addition, the
development cycle for new Titles, including the development of the necessary
game software, approval by the Manufacturer and production of the initial
cartridges or CD-ROMs, typically has ranged from nine to 18 months. During
such period, the market appeal of a Title may decline. To the extent the
Company experiences delays in the development or shipment of new Titles, or if
new Titles are not successful in the market, the Company would be materially
and adversely affected. See "Business -- Software Design and Development" and
"Business - Manufacturing."
As of December 16, 1996, the Company had approximately 36 new Titles
under license or in various stages of development that are currently scheduled
for release in 1997. For the reasons set forth above, there can be no
assurance that the Company will be able to release each of these Titles within
such time or at all, or that the Company will be able to secure the rights to
new Titles at a rate that will maintain the Company's current development and
release schedule.
DISCOUNTS, ALLOWANCES AND RETURNS; INVENTORY MANAGEMENT
Although the Company's arrangements with its distributors and
retailers generally do not give such customers the right to return manufactured
products embodying the Titles (the "Products") to the Company (other than
defective Products) or to cancel firm orders, the Company often negotiates
accommodations to retailers (and, less often, to distributors) when demand for
specific items falls below expectations for the purpose of maintaining its
relationships with its customers. Such accommodations consist of acquiescing
to the customer's request that not all booked orders be filled or that not all
shipped orders be accepted, negotiated price discounts, credits against future
orders and, less often, the return of Products to the Company. It is the
Company's practice to accept all returns of defective or damaged Products.
-7-
<PAGE> 11
At the time of Product shipment, the Company establishes provisions
against the gross revenues generated by such shipment based on estimates of
future returns of, and other customer accommodations that may be granted with
respect to, such Products, based on the Company's historical experience,
retailer inventories of the Titles and other factors. For the year ended
December 31, 1995 and the nine months ended September 30, 1996, provisions of
approximately $3.6 million and $3.3 million, respectively, were taken against
gross sales made during such periods, and as of September 30, 1996 the
Company's aggregate reserve against accounts receivable for returns and
customer accommodations was approximately $3.3 million.
The Company cannot predict the amount or nature of accommodations that
will be provided to its customers in future periods. Although the Company
believes its reserves are adequate with respect to such matters, there can be
no assurance that actual returns and other customer accommodations will not
exceed the reserves established. To the extent such accommodations were to
exceed the Company's reserves, the Company would be adversely affected.
The identification by the Company of slow-moving or obsolete
inventory, whether as a result of requests from customers for accommodations or
otherwise, would require the Company to establish reserves against such
inventory or to write-down the value of such inventory to its estimated net
realizable value. In 1993 and 1994 the Company incurred material charges to
income as a result of such write-downs, but has not experienced such problems
subsequent to those periods. While the Company believes that substantially all
of its current inventory is saleable in the ordinary course, there can be no
assurance that in the future the Company will not be required to incur charges
related to slow-moving or obsolete inventory.
REVENUE FLUCTUATIONS AND SEASONALITY
The Company has experienced and may continue to experience significant
quarterly fluctuations in net sales and operating results due to a variety of
factors, including the timing of releases of new Titles by the Company, the
popularity of both new Titles and Titles released in prior periods,
fluctuations in the mix of Titles with varying profit margins, the timing of
customer orders, the timing of shipments by the Manufacturers, fluctuations in
the size and rate of growth of consumer demand for Software for various
hardware platforms ("Platforms"), the timing of the introduction of new
Platforms and the accuracy of retailer's forecasts of consumer demand. The
Company's expenses are based, in part, on its expectations of future revenues
and, as a result, operating results would be disproportionately and adversely
affected by a decrease in sales or a failure by the Company to meet its sales
expectations. In addition, the Software market is highly seasonal, with sales
typically significantly higher during the fourth quarter (due primarily to the
increased demand for interactive games during the year-end holiday buying
season). See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview." There can be no assurance that the Company
can maintain consistent profitability on a quarterly or annual basis.
CUSTOMER CONCENTRATION AND CREDIT RISK
Sales to the Company's ten largest customers collectively accounted
for approximately 52% of the Company's gross sales in 1995 and 54% for the nine
months ended September 30, 1996. Toys "R" Us, Wal-Mart and Kay Bee accounted
for approximately 12%, 10% and 7%, respectively, of the Company's gross sales
in 1995. For the nine months ended September 30, 1996, Toys "R" Us, Wal-Mart
and Target accounted for 12%, 9% and 7% of the Company's gross sales,
respectively. The Company has no written agreement or other understanding with
any of its customers that relate to future purchases by such customers, and
thus such purchases could be terminated at any time. A termination of or other
adverse change in the Company's relationship with any of its largest customers
would have a material adverse effect on the Company.
The Company's sales of Products are typically made on credit, with
terms that vary depending upon the customer and demand for such Products. The
Company does not hold any collateral to secure payment by its customers, and
currently does not factor any of its receivables. Thus, the Company bears the
risk of its customers' and distributors' inability to pay such receivables or
the effect of any delay in such payment. Retailers and distributors compete in
a volatile industry and are subject to the risk of business failure. A
business failure by any of the Company's largest customers would have, and a
business failure by any of the Company's distributors or other retailers could
have, a material adverse effect on the Company.
RISKS ASSOCIATED WITH TITLES FOR MULTI-MEDIA PERSONAL COMPUTERS AND PROPRIETARY
TITLES
In 1996, the Company acquired Heliotrope Studios, Inc. ("Heliotrope")
in order to expand its offerings of interactive games and to enable the Company
to develop Titles for the multimedia personal computer ("PC") market. See
"Business - Business Strategy" and
-8-
<PAGE> 12
"Business - Software Design and Development." While the principals of
Heliotrope have certain experience developing and marketing CD-ROM games for
PCs, prior to this acquisition the Company had no experience in this segment of
the Software market. The development and marketing of such Titles can be
expected to subject the Company to risks in addition to those encountered in
the operation of the Company's historical business, some of which may not be
anticipated by the Company. Such risks include the ability to accurately
predict which Titles have appeal to the purchasers of interactive games for
PCs, greater reliance on distributors in order to obtain retail distribution,
and the greater retailer returns experienced for CD-ROMs for PCs. There can be
no assurance that the Company will be able to successfully develop and market
Titles for the PC market.
In 1997, the Company expects to release its first proprietary Title,
Pax Imperia II, an intergalactic strategy game. The Company's strategy
includes acquiring or developing other Properties that are proprietary to the
Company. The developing and marketing of such Titles can also be expected to
subject the Company to additional risks, including the risk that Titles that do
not have high public visibility or recognition will have more limited market
appeal.
GROWTH STRATEGY
From time to time the Company evaluates potential acquisitions of, or
investments in, other Software publishers or developers that the Company
believes will complement or enhance its business. In connection with any such
acquisitions, the Company may incur debt or issue debt or additional equity
securities, depending on market conditions and other factors. There can be no
assurance that the Company will consummate any such acquisitions or investments
or, if consummated, that such acquisitions or investments will prove to be
beneficial to the Company. The Company is not currently negotiating, nor does
it have any commitments or understandings with respect to, any future
acquisitions or investments.
DEPENDENCE ON THE PLATFORM MANUFACTURERS
The Company is wholly dependent on the Manufacturers and its licenses
with the Manufacturers (the "Platform Licenses") for the right to publish Titles
for the Manufacturers' Platforms and for the manufacture of its Titles. For the
year ended December 31, 1995, 79% of the Company's net sales consisted of
Nintendo Titles and 21% consisted of Sega Titles, and for the nine months ended
September 30, 1996, 74% of net sales consisted of Nintendo Titles, 15% consisted
of Sega Titles and 11% consisted of Sony Titles. The Company's current Platform
License with Sega limits the Company to introducing three titles for the Sega
Genesis per year of the licence. In addition, the Company's Platform License
with Sony, and with Nintendo for Nintendo 64 currently under negotiation,
require that the Company obtain approval for the publication of new Titles on a
title-by-title basis. As a result, the number of Titles the Company is able to
publish for these Platforms, and thus the Company's revenues from Titles for
these Platforms, may be limited.
In the event that, at the end of the term of the current Platform
License with a Manufacturer, such Manufacturer chooses not to renew or extend
such agreement, or if a Manufacturer were to terminate such license for any
reason, the Company would be unable to publish additional Titles for such
Manufacturer's Platform, which would materially and adversely affect the
Company.
Each of the Manufacturers is the sole manufacturer of the Products
published by the Company under license from such Manufacturer. The Platform
Licenses provide that such Manufacturer may raise prices for the Titles at any
time and include other provisions giving the Manufacturer substantial control
over the Company's release of new Titles. Furthermore, the relatively long
manufacturing cycle for cartridge- based Products (from 30 to 75 days) requires
the Company to accurately forecast retailer and consumer demand for its Titles.
Since each of the Manufacturers is also a publisher of Software for its own
Platforms, and also manufactures products for all of their other licensees, the
Manufacturers may give priority to their own products or those of other
publishers in the event of insufficient manufacturing capacity. If the Company
experiences unanticipated delays in the delivery of Products for these or any
other reasons, the Company would be materially and adversely affected. See
"Business - Manufacturing."
RECOVERY OF PREPAID ROYALTIES, GUARANTEES AND CAPITALIZED DEVELOPMENT COSTS
The Company typically enters into agreements with licensors of
Properties and developers of Titles that require advance payments of royalties
and/or guaranteed minimum royalty payments. There can be no assurance that the
sales of Products for which such royalties are paid will be sufficient to cover
the amount of these required royalty payments. The Company capitalizes its
prepaid royalties, and capitalizes software development costs upon the
establishment of technological feasibility of the Title under development.
Amortization of these payments and costs is determined on a title-by-title
basis based on the greater of (i) the ratio of current gross revenues for a
Title to
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<PAGE> 13
the sum of its current and anticipated gross revenues, or (ii) the
straight-line method over the estimated remaining economic life of the Title.
The Company analyzes such capitalized costs quarterly and writes off as project
abandonment losses these capitalized payments and costs (and expenses any
unpaid guaranteed minimum royalties) when, based on the Company's estimate,
future revenues will not be sufficient to recover such costs. As of September
30, 1996, the Company had prepaid royalties and capitalized development costs
of approximately $5.2 million. If the Company were required to write off a
material portion of its prepaid royalties or capitalized development costs, the
Company's results of operations could be adversely affected.
CHANGES IN CONSUMER DEMAND AND TECHNOLOGY
During the approximately 20-year history of the interactive
entertainment industry, there have been periods of significant growth in
consumer interest, followed by periods in which growth has substantially
declined. The Company's sales are dependent, among other factors, on the
popularity and unit sales of Platforms generally, as well as the relative
popularity and unit sales of the Platforms of the various Manufacturers. The
relative popularity of Platforms has experienced wide fluctuations in recent
years. Unexpected declines in the popularity of a particular Platform can be
expected to have a material adverse effect on consumer demand for Titles
released or scheduled for release for such Platform.
The interactive game industry is characterized by rapid technological
change. As a result, the Company must continually anticipate and adapt its
offerings to emerging Platforms and evolving consumer preferences. The
development of Software for new Platforms requires substantial investment.
Generally, such development efforts must occur well in advance of the release
of new Platforms in order to introduce Titles on a timely basis following the
release of such Platforms. The development and marketing of Titles for new
Platforms may require greater financial and technical resources than are
currently available to the Company. In addition, there can be no assurance
that the new Platforms for which the Company develops Titles will achieve
market acceptance and, as a result, there can be no assurance that the
Company's development efforts with respect to such new Platforms will lead to
marketable Titles or Titles that generate sufficient revenues to recover their
development and marketing costs. This risk can be expected to increase in the
future, as continuing increases in development costs require corresponding
increases in net sales in order for the Company to maintain profitability. In
addition, as the Company introduces CD-ROM Titles for PCs, the Company's game
software must maintain compatibility with such computers, their operating
software and their hardware accessories. The failure of the Company to timely
develop Titles for new Platforms that achieve significant market acceptance, to
maintain net sales that are commensurate with product development costs, or to
maintain such compatibility would have a material adverse effect on the
Company.
The introduction of new Platforms and technologies can render existing
Software obsolete and unmarketable. More commonly, as Platforms age and are
superseded by more advanced Platforms, consumer demand for Software for older
Platforms diminishes. While the Company's experience indicates that
competition for licenses to develop new Titles for older Platforms is
significantly less intense than for newer Platforms, there can be no assurance
that, as a result of such reduced consumer demand for such Titles, the
Company's Titles for such Platforms will generate sufficient sales to make such
Titles profitable. Despite this diminishing demand, the Company intends to
continue to publish new Titles for these older Platforms for so long as the
Company believes there is a significant market for such Titles.
A number of Software publishers who compete with the Company are
currently developing Software for use by consumers over the Internet. While
the Company believes that the market for such Software is currently
insignificant, future increase in the availability of such Software or
technological advances in such Software could result in a decline in
Platform-based Software and thus have a material adverse effect on the Company.
COMPETITION
The interactive entertainment industry is intensely competitive. The
Company competes, for both licenses to Properties and the sale of Software,
with the Manufacturers, each of whom is the largest developer and marketer of
Software for its Platforms. There can be no assurance that these companies
will not increase their own Software development efforts. As a result of their
commanding positions in the industry as the manufacturers of Platforms and
publishers of Software for their Platforms, the Manufacturers generally have
better bargaining positions with respect to retail pricing, shelf space and
purchases than do any of their licensees, including the Company. In addition,
each of the Manufacturers has dozens of active licensees, each of which is also
a competitor of the Company. Each of the Manufacturers and many of these other
competitors (such as Acclaim Entertainment, Inc., Disney Interactive, Inc.,
Electronic Arts Inc., GT Interactive Software Corp., Midway Games Inc. and
Microsoft Corporation) have broader Software lines and greater financial,
marketing and other resources than the Company; these competitive advantages
enable such competitors to market their Software more aggressively and make
higher offers or guarantees in connection with the acquisition of licensed
Properties. In addition, as competition for retail shelf
-10-
<PAGE> 14
space becomes more intense, the Company may need to increase marketing
expenditures to maintain sales of its Titles; and as competition for popular
Properties increases, the cost of acquiring licenses for such Properties is
likely to increase, resulting in reduced margins. Prolonged price competition,
increased licensing costs or reduced profit margins would have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to compete successfully with the Manufacturers and their other
licensees in the future.
In addition, the market for the Company's products is characterized by
significant price competition, and the Company expects that it will face
increasing pricing pressures from its current and future competitors.
Accordingly, there can be no assurance that the Company will be able to provide
products that compare favorably with the products of the Company's competitors
or that competitive pressures will not require the Company to reduce its
prices. Any material reduction in the price of the Company's products would
negatively affect operating income as a percentage of net revenue and would
require the Company to increase unit sales in order to maintain net revenue.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment market, which will
result in greater competition for the Company. In particular, many of the
Company's competitors are developing on-line interactive games and interactive
networks that will be competitive with the Company's interactive products.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by
the Company will not materially and adversely affect its business, operating
results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company relies to a substantial extent on the management,
marketing, sales, technical and software development skills of a limited number
of employees to formulate and implement its business plan, including the
development of its Titles. The Company's success depends upon, to a
significant extent, its ability to attract and retain key management and
software development personnel. Competition for such employees is acute and
the process of locating key personnel with the combination of skills and
attributes required to execute the Company's strategy is often lengthy. The
loss of services of key personnel could have a material adverse effect on the
Company. The only officer with whom the Company has an employment agreement is
Brian J. Farrell, its President and Chief Executive Officer. See "Management."
PROPRIETARY RIGHTS OF THE MANUFACTURERS
The Company depends on the Manufacturers for the protection of
intellectual property rights to their respective Platforms, cartridges and
CD-ROMs, their ability to control the proliferation of new titles by licensees
and others, and their ability to discourage unauthorized persons from producing
Software for their Platforms. There can be no assurance that the Manufacturers
will be able to continue to (i) protect their rights so that the proprietary
information and technology licensed by the Company from the Manufacturers will
not become generally available, (ii) control the proliferation of Software,
(iii) discourage unauthorized persons from producing Software, or (iv) believe
that it is in their best interests to continue any of the foregoing policies.
A change in any of these policies could have a material adverse effect on the
Company.
PROPRIETARY RIGHTS OF THE COMPANY
As a result of the Company's acquisition of Heliotrope, the Company
owns the rights to certain intellectual property with respect to Pax Imperia and
its sequel. See "Business - Strategy." However, other than such rights, its
licenses from the Manufacturers to produce Titles and its licenses to develop
and/or publish Titles based on Properties owned or controlled by others, the
Company does not have any material proprietary rights, technology or
intellectual property.
As a result of the proprietary rights of the Manufacturers and the
efforts taken by the Manufacturers to protect such rights, the Company does not
believe that there is a material amount of unauthorized copying of the
Company's Titles. However, unauthorized production occurs in the computer
software industry generally, and were a significant amount of unauthorized
production of the Company's CD-ROM Products for PCs to occur, the Company could
be materially and adversely affected.
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<PAGE> 15
FOREIGN SALES AND CURRENCY FLUCTUATIONS
For fiscal year 1995 and the first nine months of 1996, foreign sales
represented approximately 25% of the Company's net sales, and the Company
expects that foreign sales will continue to account for a significant portion
of its net sales in future periods. Foreign sales are subject to inherent
risks, including unexpected changes in regulatory requirements, tariffs and
other barriers, difficulties in staffing and managing foreign operations and
the possibility of difficulty in accounts receivable collection. There can be
no assurance that these or other factors will not have an adverse effect on the
Company's future foreign sales.
Because the majority of foreign sales are made in U.S. dollars, the
Company does not believe that foreign currency fluctuations have had a material
effect on its results of operations. To the extent the Company's foreign sales
increase and such sales are not denominated in U.S. dollars, the Company's
reported sales and results of operations could be adversely affected by foreign
currency fluctuations. The Company has not engaged in any foreign exchange
hedging activities and does not have any current plans to engage in any such
activities.
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, for federal income tax purposes the Company had
reported approximately $17.5 million of net operating loss ("NOL")
carryforwards incurred since 1993. The sale of the shares of Common Stock
offered by the Company hereby will result in an "ownership change" of the
Company for purposes of Sections 382 and 383 of the Internal Revenue Code of
1986, as amended. As a result, the amount of the NOL carryforward available to
reduce the Company's federal income tax liability in future years in which the
Company has taxable income will be limited to an annual amount equal to (i) the
fair market value of the Company's capital stock immediately prior to the
consummation of the offering made hereby, multiplied by (ii) the "long-term tax
exempt rate" published by the Internal Revenue Service for the month in which
this offering is consummated. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview."
VOLATILITY OF SHARE PRICE
The market price of the Common Stock has been, and is likely to
continue to be, highly volatile. Such price has fluctuated substantially in
recent periods. See "Market Price of Common Stock and Dividend Policy." In
addition, there has been a history of significant volatility in the market
prices for shares of other companies engaged in the Software industry. Factors
such as the timing and market acceptance of new Titles, the introduction of new
Software by the Company's competitors, loss of key personnel of the Company,
variations in quarterly operating results or changes in market conditions in
the Software industry generally could have a significant impact on the market
price of the Common Stock. Thus, there can be no assurance that the market
price of the Common Stock will not decline below the public offering price or
experience extreme volatility.
NO DIVIDENDS
The Company has not paid any cash or other dividends on its Common
Stock and does not expect to declare or pay any cash dividends in the
foreseeable future. In addition, the Company's revolving credit agreement
restricts the payment of any cash dividends. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock. Upon completion
of this offering, the 1,500,000 shares of Common Stock offered hereby
(1,725,000 million if the Underwriters' over-allotment option is exercised in
full) will be eligible for sale in the open market. Upon the expiration of
"lock-up agreements" with the Underwriters, 180 days after the consummation of
this offering (or earlier if the Underwriters decide to release shares from
these lock-up agreements) the shares subject to these agreements will be
eligible for sale subject to the limitations of Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Securities Act") with respect to
shares held by "affiliates" of the Company (as that term is defined under the
Securities Act). In addition, the Company has reserved for issuance sufficient
shares to fulfill its obligations to issue shares upon the exercise of certain
options and warrants to purchase shares of Common Stock. See "Description of
Securities -- Warrants and Options" and "Shares Eligible for Future Sale."
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares
of Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated offering expenses, are estimated to be
approximately $13,375,625 (approximately $15,441,969 if the Underwriters'
over-allotment option is exercised in full), assuming the shares offered hereby
are sold at the public offering price of $9.875 per share. The Company intends
to use such proceeds for general corporate purposes including obtaining
licenses for, and development expenditures related to, new Titles and the
repayment of amounts outstanding under the Company's revolving credit facility
with a bank (the "Revolving Credit Facility"). A portion of such proceeds may
also be used to fund acquisitions related to the Company's business. The
Company is not currently negotiating, nor does it have any commitments or
understandings with respect to, any acquisitions of or investments in other
companies. Following the repayment of indebtedness under the Revolving Credit
Facility, and pending the use of the balance of such proceeds for such other
purposes, the Company will invest such proceeds principally in United States
government securities, short-term certificates of deposit, money market funds
or other short-term, interest-bearing investments.
All borrowings under the Revolving Credit Facility are due in full on
June 30, 1997, at which time the Revolving Credit Facility will terminate if
not extended. The interest rate under the Revolving Credit Facility is the
bank's prime lending rate plus 1.25% per annum. At December 16, 1996, the
Company had $4,903,000 of borrowings outstanding under the Revolving Credit
Facility, all of which the Company used for general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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<PAGE> 17
MARKET PRICE OF COMMON STOCK
Through approximately February 17, 1995, the Common Stock traded on
the Nasdaq National Market under the symbol "TOYH." Since February 20, 1995,
the Common Stock has been quoted on the Nasdaq SmallCap Market under the same
symbol. The following table sets forth for the periods indicated the high and
low closing sales prices of the Common Stock as reported on the Nasdaq National
Market or the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
Closing Sales Prices
High Low
<S> <C> <C>
1994
First Quarter . . . . . . . . . . $22-1/2 $11-23/32
Second Quarter . . . . . . . . . 14-1/16 11-23/32
Third Quarter . . . . . . . . . . 16-7/8 11-1/4
Fourth Quarter . . . . . . . . . 21-9/16 8-7/16
1995
First Quarter . . . . . . . . . . 9-3/8 2-3/4
Second Quarter . . . . . . . . . 3-1/8 1-35/64
Third Quarter . . . . . . . . . . 4-3/4 1-15/16
Fourth Quarter . . . . . . . . . 6 2-3/4
1996
First Quarter . . . . . . . . . . 5-3/16 3-1/2
Second Quarter . . . . . . . . . 6-1/4 3-3/16
Third Quarter . . . . . . . . . . 7-9/16 4-1/8
Fourth Quarter (through
December 20, 1996) . . . . . . 10-3/8 6-15/16
</TABLE>
The closing sale price of the Common Stock on December 20, 1996, as
reported on the Nasdaq SmallCap Market was $9.875 per share. As of December
16, 1996, there were approximately 416 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any dividends on the Common
Stock and does not intend to pay any cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain its earnings, if any, for
the future operation and expansion of its business. The Revolving Credit
Facility prohibits the Company from declaring or paying any dividend on, or
making any distribution in respect of, the Company's capital stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
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<PAGE> 18
CAPITALIZATION
The following sets forth (i) the actual capitalization of the Company
at September 30, 1996, (ii) such capitalization as adjusted to give effect to
the receipt of the net proceeds from the sale of 1,500,000 shares of Common
Stock offered by the Company hereby at the assumed public offering price of
$____ per share (less underwriting discounts and commissions and estimated
offering expenses). This information is qualified in its entirety by, and
should be read in conjunction with, the consolidated financial statements and
the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
(in thousands)
Actual As Adjusted
------ -----------
<S> <C>
Revolving Credit Facility (1) . . . . . . . . . . . . . . . . . . . . . . . . $ 1,478
--------
Stockholders' equity:
Common stock, par value $0.0001;
100,000,000 shares authorized; 4,701,420 shares issued and outstanding;
6,201,420 shares issued and outstanding as adjusted (2) . . . . . . . . . 4
Cumulative foreign currency translation adjustment . . . . . . . . . . . . (367)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 34,452
--------
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,476)
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 9,613
--------
TOTAL CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . $ 11,091
- -------------------- ========
</TABLE>
(1) As of December 16, 1996, the actual amount outstanding under the
Revolving Credit Facility was $4,903,000. In addition, as of such
date the Company's lenders had issued and outstanding an aggregate of
$5,144,000 of letters of credit. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources."
(2) Excludes (i) 509,999 shares of Common Stock issuable upon exercise of
options issued pursuant to the Stock Option Plan at a weighted-
average exercise price of $3.41 per share; (ii) 481,010 shares of
Common Stock issuable upon exercise of other options at a weighted-
average exercise price of $4.09 per share and; (iii) 704,091 shares of
Common Stock issuable upon exercise of other warrants at a weighted
average exercise price of $16.79 per share. See "Description of
Securities."
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<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of the Company for
each of the years ended December 31, 1993, 1994 and 1995 have been derived from
and are qualified by reference to the audited consolidated financial statements
of the Company included elsewhere in this Prospectus which have been audited by
Deloitte & Touche LLP, independent auditors. The following selected
consolidated financial data as of and for the periods ended December 31, 1991
and 1992 were derived from audited financial statements not included in this
Prospectus. The selected financial data as of and for the nine months ended
September 30, 1995 and 1996 are derived from unaudited financial statements but
have been prepared on a basis substantially consistent with the audited
consolidated financial statements and, in the opinion of the Company, contain
all adjustments (which consist only of normal recurring adjustments) necessary
to present fairly the financial position and results of operations of the
Company as of such dates and for such periods. The results of operations for
interim periods are not necessarily indicative of a full year's operations.
This selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
---------------------------------------------------- -------------------
STATEMENT OF OPERATIONS DATA: 1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . $32,940 $56,478 $37,478 $13,289 $33,250 $18,935 $29,772
------- ------- ------- ------- ------- ------- -------
Cost and expenses:
Cost of sales . . . . . . . . . . . . 16,933 31,521 31,415 12,651 19,501 10,798 16,783
Royalties . . . . . . . . . . . . . . 4,427 7,179 6,028 2,327 3,641 2,103 5,084
Product development . . . . . . . . . 284 831 1,186 713 761 527 767
Project abandonment . . . . . . . . . --- --- 5,489 3,754 1,025 375 375
Selling . . . . . . . . . . . . . . . 1,466 4,237 4,843 5,909 2,393 1,689 2,304
General and administrative . . . . . 3,716 5,948 7,221 4,806 3,988 2,475 2,764
Operating interest . . . . . . . . . --- --- 529 496 1,184 722 589
------- ------- -------- -------- ------- ------- -------
Total costs and expenses . . . . . 26,826 49,716 56,711 30,656 32,493 18,689 28,666
------- ------- -------- -------- ------- ------- -------
Income (loss) from operations . . . . 6,114 6,762 (19,233) (17,367) 757 246 1,106
Interest income (expense) - net . . . 110 (76) (420) (112) (134) (92) (215)
------- ------- -------- -------- ------- ------- -------
Income (loss) before income taxes . . 6,224 6,686 (19,653) (17,479) 623 154 891
Provision (benefit) for
income taxes . . . . . . . . . . . 2,136 2,640 (3,413) 11 22 --- 4
------- ------- -------- -------- ------- ------- -------
Net income (loss) . . . . . . . . . . $ 4,088 $ 4,046 $(16,240) $(17,490) $ 601 $ 154 $ 887
======= ======= ======== ======== ======= ======= =======
Net income (loss) per share . . . . . $ 4.94 $ 2.79 $ (10.80) $ (8.75) $ .17 $ .05 $ .19
Weighted average number of
common and common equivalent
shares outstanding . . . . . . . . 828 1,448 1,504 1,998 3,482 3,007 4,684
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------------------------- -------------
BALANCE SHEET DATA: 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Working capital . . . . . . . . . . . . $17,036 $25,036 $ 11,046 $ 3,736 $ 7,082 $ 8,203
Total assets . . . . . . . . . . . . . 30,776 53,394 22,305 15,531 16,916 20,193
Revolving Credit Facility . . . . . . . 2,021 14,868 --- --- --- 1,478
Long-term debt . . . . . . . . . . . . --- --- --- --- --- ---
Stockholders' equity . . . . . . . . . 17,408 26,064 11,627 4,254 7,598 9,613
</TABLE>
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, publishes and distributes Software for the major
Platforms sold by the Manufacturers. For the nine months ended September 30,
1996, sales of Nintendo Software constituted 74% of the Company's sales, Sega
Software sales were 15%, and the remaining 11% were derived from sales of Sony
PlayStation Titles.
The Company achieved a turnaround in 1995, reversing two years of
significant losses. Under new leadership, the Company focused its product
strategy, improved inventory management and reduced fixed costs. As a result,
the Company's revenues increased from $13.3 million in 1994 to $33.3 million in
1995. For the nine months ended September 30, 1996, revenues were $29.8
million, as compared to $18.9 million for the same period of 1995.
While there remains a large installed base of 16-bit Platforms, the
Company believes that growth in the Software market will be derived principally
from games developed for the more advanced Platforms. Accordingly, the Company
intends to devote an increasing portion of its resources on the development of
Titles for 32-bit and 64-bit Platforms and PCs.
The Company's business cycle generally commences with the securing of
a license to publish one or more Titles based on a Property. Such licenses
typically require an advance payment to the licensor and a guarantee of minimum
future royalties. See "- Recovery of Prepaid Royalties, Guarantees and
Capitalized Development Costs." After securing the Property, the Company
commences software development for the Title. Upon completion of development
and approval of the Title by the Manufacturer, the Company orders Products and
generally causes a letter of credit to be opened in favor of the Manufacturer.
Products are shipped at the Company's expense to a public warehouse in
California for domestic distribution or in the United Kingdom for foreign
distribution.
The Company has unfilled sales orders the amount of which fluctuates
from time to time, commonly referred to as "backlog." However, substantially
all of the Company's Product orders are fulfilled shortly after they are
received. Accordingly, the Company does not believe that the amount of its
unfilled sales orders as of the end of a period is a meaningful indicator of
sales in future periods.
Revenue Fluctuations and Seasonality. The Company has experienced and
may continue to experience significant quarterly fluctuations in net sales and
operating results due to a variety of factors, including the timing of releases
of new Titles by the Company, the popularity of both new Titles and Titles
released in prior periods, fluctuations in the mix of Titles with varying
profit margins, the timing of customer orders, the timing of shipments by the
Manufacturers, fluctuations in the size and rate of growth of consumer demand
for Software for various Platforms, the timing of the introduction of new
Platforms and the accuracy of retailer's forecasts of consumer demand. The
Company's expenses are based, in part, on its expectations of future revenues
and, as a result, operating results would be disproportionately and adversely
affected by a decrease in sales or a failure by the Company to meet its sales
expectations. In addition, the Software market is highly seasonal, with sales
typically significantly higher during the fourth quarter (due primarily to the
increased demand for interactive games during the year-end holiday buying
season). There can be no assurance that the Company can maintain consistent
profitability on a quarterly or annual basis.
Profit margins may vary over time as a result of a variety of other
factors. Profit margins for cartridge Products can vary based on the cost of
the memory chip used for a particular Title. As Software has grown more
complex, the trend in the Software industry has been to utilize chips with
greater capacity and thus greater cost. CD-ROMs have significantly lower per
unit manufacturing costs than cartridge-based Products. However, such savings
may be offset by typically higher development costs for Titles published on
CD-ROMs; such higher costs result from the creation of increased and enhanced
content to take advantage of the greater storage capacity available on CD-ROMs.
-17-
<PAGE> 21
Recovery of Prepaid Royalties, Guarantees and Capitalized Development
Costs. The Company typically enters into agreements with licensors of
Properties and developers of Titles that require advance payments of royalties
and/or guaranteed minimum royalty payments. There can be no assurance that the
sales of Products for which such royalties are paid will be sufficient to cover
the amount of these required royalty payments. The Company capitalizes its
prepaid royalties, and capitalizes software development costs upon the
establishment of technological feasibility of the Title under development.
Amortization of these payments and costs is determined on a title-by-title
basis based on the greater of (i) the ratio of current gross revenues for a
Title to the sum of its current and anticipated gross revenues, or (ii) the
straight-line method over the estimated remaining economic life of the Title.
The Company analyzes such capitalized costs quarterly and writes off as project
abandonment losses these capitalized payments and costs (and expenses any
unpaid guaranteed minimum royalties) when, based on the Company's estimate,
future revenues will not be sufficient to recover such costs. As of September
30, 1996, the Company had prepaid royalties and capitalized development costs
of approximately $5.2 million. If the Company were required to write off a
material portion of its prepaid royalties or capitalized development costs, the
Company's results of operations could be adversely affected.
Discounts, Allowances and Returns; Inventory Management. Although the
Company's arrangements with its customers generally do not give such customers
the right to return Products to the Company (other than defective Products) or
to cancel firm orders, the Company often negotiates accommodations to retailers
(and, less often, to distributors) when demand for specific items falls below
expectations for the purpose of maintaining its relationships with its
customers. Such accommodations consist of acquiescing to the customer's
request that not all booked orders be filled or that not all shipped orders be
accepted, negotiated price discounts, credits against future orders and, less
often, the return of Products to the Company. It is the Company's practice to
accept all returns of defective or damaged Products.
At the time of Product shipment, the Company establishes provisions
against the gross revenues generated by such shipment based on estimates of
future returns of, and other customer accommodations that may be granted with
respect to, such Products, based on the Company's historical experience,
retailer inventories of the Titles and other factors. For the year ended
December 31, 1995 and the nine months ended September 30, 1996, provisions of
approximately $3.6 million and $3.3 million, respectively, were taken against
gross sales made during such periods, and as of September 30, 1996 the
Company's aggregate reserve against accounts receivable for returns and
customer accommodations was approximately $3.3 million.
The identification by the Company of slow-moving or obsolete
inventory, whether as a result of requests from customers for accommodations or
otherwise, would require the Company to establish reserves against such
inventory or to write-down the value of such inventory to its estimated net
realizable value. In 1993 and 1994 the Company incurred material charges to
income as a result of such write- downs, but has not experienced such problems
subsequent to those periods.
XBAND Modem. Pursuant to an agreement between the Company and
Catapult Entertainment, Inc. ("Catapult") entered into in April 1994, the
Company was granted exclusive distribution rights for Catapult's modems (the
"XBAND Modem") for use in connection with the Genesis and SNES systems in North
America. The XBAND Modem enables video game players to compete against each
other in real time from different locations through a communications network
created and maintained by Catapult.
The Company spent approximately $5.8 million through December 31, 1994
in connection with inventory purchases and the marketing and promotion of the
XBAND Modem. In May 1995, the Company sold to Catapult the Company's XBAND
Modem inventory and related accounts receivable for $3.2 million, of which $1.3
million was paid at such time and the balance was payable over a specified
period (less the amount collected by the Company with respect to such
receivables). Subsequently, Catapult filed for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code. Under Catapult's plan of reorganization, the Company
received approximately 15% of its remaining claim against Catapult, or
approximately $200,000. Because the Company determined in May 1995 that
receipt of any additional payment by Catapult was highly uncertain, at such
time the Company established a reserve in the amount of such remaining
payments. As a result, substantially all of the amount received pursuant to
the plan of reorganization will be reflected in the Company's statement of
operations for the year ended December 31, 1996.
-18-
<PAGE> 22
Traditional Toy Sales. Through May 1994, the Company developed and
marketed non-Software traditional toys. Toy sales accounted for approximately
16% of the Company's net sales in 1993 and approximately 2% of net sales in
1994. The Company made the determination in 1993 to phase out its toy division
based on its lack of profitability and the Company's belief that growth
prospects for the division appeared limited. Remaining toy inventory was sold
in the ordinary course of business and costs associated with the closure of the
toy division were charged to income in 1993.
Net Operating Loss Carryforwards. At December 31, 1995, for federal
income tax purposes the Company had reported approximately $17.5 million of NOL
carryforwards incurred since 1993. The sale of the shares of Common Stock
offered by the Company hereby will result in an "ownership change" of the
Company for purposes of Sections 382 and 383 of the Internal Revenue Code of
1986, as amended. As a result, the amount of the NOL carryforwards available
to reduce the Company's federal income tax liability in future years in which
the Company has taxable income will be limited to an annual amount equal to (i)
the fair market value of the Company's capital stock immediately prior to the
consummation of the offering made hereby, multiplied by (ii) the "long-term tax
exempt rate" published by the Internal Revenue Service for the month in which
this offering is consummated. Based upon a long-term tax exempt rate for
December 1996 of 5.64% and an assumed market price of the Common Stock
immediately prior to consummation of this offering of $___ per share, such
amount is estimated to be approximately $_________ per year.
-19-
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of the Company's net sales and its consolidated operating data as a
percentage of net sales:
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended September 30,
------------------------------------ --------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Domestic sales . . . . . . . . . . 79.4% 83.6% 74.9% 82.0% 74.8%
Foreign sales . . . . . . . . . . . 20.6 16.4 25.1 18.0 25.2
----- ----- ----- ----- -----
Net sales . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales . . . . . . . . . . 83.8% 95.2% 58.6% 57.0% 56.4%
Royalties . . . . . . . . . . . . 16.1 17.5 10.9 11.1 17.1
Product development . . . . . . . 3.2 5.4 2.3 2.8 2.6
Project abandonment . . . . . . . 14.6 28.2 3.1 2.0 1.3
Selling . . . . . . . . . . . . . 12.9 44.5 7.2 8.9 7.7
General and administrative . . . 19.3 36.2 11.9 13.1 9.2
Operating interest . . . . . . . 1.4 3.7 3.6 3.8 2.0
----- ----- ----- ----- -----
Total costs and expenses . . . . . 151.3 230.7 97.6 98.7 96.3
----- ----- ----- ----- -----
Income (loss) from operations . . . (51.3) (130.7) 2.4 1.3 3.7
Interest expense -- net . . . . . . (1.1) (0.8) (0.5) (0.5) (0.7)
------ ------ ------ ------ ------
Income (loss) before income taxes . (52.4) (131.5) 1.9 0.8 3.0
------ ------- ----- ------ -----
Net income (loss) . . . . . . . . . (43.3)% (131.6)% 1.8% 0.8% 3.0%
===== ====== ===== ===== =====
</TABLE>
-20-
<PAGE> 24
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995
The following table sets forth, for the first nine months of 1995 and
1996, the Titles released during such periods for the Platforms indicated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1995 1996
---- ----
<S> <C> <C>
PlayStation -- 3
Saturn -- 3
SNES 4 6
Genesis 2 2
Game Boy 7 7
Game Gear 1 --
-- --
Total 14 21
== ==
</TABLE>
The Company's net sales increased to $29,772,000 in the nine months
ended September 30, 1996, from $18,935,000 in the same period of 1995, as a
result of the increase in the number of new Titles released in 1996. For the
nine months ended September 30, 1996, net sales of the Company's Olympic Summer
Games, Disney's Toy Story and BASS Masters Classic Titles were $6,350,000 (21%
of net sales), $4,064,000 (14% of net sales) and $2,951,000 (10% of net sales),
respectively. Foreign net sales grew to $7,508,000 for the nine months ended
September 30, 1996, from $3,417,000, for the same period of 1995, as a result
of an increase in the number of Titles shipped and an increase in unit sales
per Title. The results for the first nine months of fiscal 1995 included sales
of $1,200,000 and cost of sales of $600,000 resulting from the sale of the
XBAND inventory to Catapult. See "- Overview - XBAND Modem."
Cost of sales decreased slightly as a percentage of net sales to 56.4%
for the nine months ended September 30, 1996 from 57.0% of net sales for the
corresponding period of 1995, as a result of the commencement in 1996 of the
sale of higher-margin CD-ROM Titles. This improvement was mitigated by
increased foreign sales (for which margins are generally lower) and a greater
percentage of sales of SNES Titles (for which margins are slightly lower).
Royalty expense as a percentage of net sales increased to 17.1% for
the nine months ended September 30, 1996 from 11.1% for the same period of
1995. License agreements for Titles released in 1996 provided for royalties at
higher rates, particularly the Company's licenses for Disney's Pocahontas and
Toy Story and its Titles for advanced Platforms.
For the nine months ended September 30, 1996, selling expenses
increased by $615,000 compared to the nine months ended September 30, 1995, as
a result of increased marketing efforts for new Titles (primarily print and
retail cooperative advertising).
Operating interest (which consists of interest and fees paid to the
Company's bank and fees paid to other issuers of letters of credit) decreased
to $589,000 for the nine months ended September 30, 1996, from $722,000 for the
same period of 1995. The decline is the result of the Company's entering into
more favorable agreements with the Company's domestic and European letter of
credit providers. See "- Liquidity and Capital Resources."
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER 31,
1994
The Company's net sales increased to $33,250,000 in the year ended
December 31, 1995, from $13,289,000 in the year ended December 31, 1994,
primarily as a result of an increase in the number of new Titles released in
1995. The Company introduced 24 new Software Titles in 1995 as compared to ten
new Titles in 1994. Net sales of the Company's BASS Masters Classic Titles
constituted $7,054,000, (21.2%) of sales in the year ended
-21-
<PAGE> 25
December 31, 1995. Approximately $2,941,000 (22%) of net sales in 1994
consisted of the Company's Ren & Stimpy Titles.
Foreign net sales grew to $8,356,000, or 25.1% of net sales in 1995,
from $2,175,000, or 16.4% of net sales in 1994, as a result of the increase in
the number of new Titles released and increased emphasis on sales to foreign
customers.
The results for fiscal 1995 included sales of $1,200,000 and cost of
sales of $600,000 resulting from the sale of the XBAND inventory to Catapult.
See "- Overview - XBAND Modem."
Cost of sales declined dramatically, as a percentage of net sales,
from 1994 to 1995. In 1995, 92% of sales were generated by new Titles, which
traditionally have higher profit margins, as compared to 56% in 1994. Close-out
sales (defined as sales at substantially reduced margins or at a loss) were not
material in 1995; however, close-out sales represented approximately 44% of net
sales in 1994. The Company attributes the decline in close-out sales to a
substantial improvement in the management of its inventory ordering. Costs of
sales as a percentage of net sales in 1994 was also adversely affected by a
reserve for discounts and allowances for the XBAND Modem in the amount of
approximately $2,000,000 established in that year.
Royalty expense was higher in 1994 than in 1995 because (i) license
agreements for Titles released in 1994 provided for royalties at higher rates,
and (ii) many of the Company's royalty agreements for Titles sold in 1994
provided for royalties on a per-unit basis, or provided for royalties payable
by the Company on gross sales prices before markdowns and allowances (which, as
a consequence of the substantial close-out sales in 1994, resulted in a higher
royalty rate).
Selling expense as a percent of net sales decreased to 7.2% in 1995,
from 44.5% in 1994, as a result of the higher sales volume in 1995 and the
Company's decision to discontinue marketing the XBAND Modem. Selling expense
in 1994 included $2,679,000 for the XBAND Modem.
The decrease in general and administrative expenses in 1995 compared
to 1994 resulted from continuation of cost reductions, which was offset in part
by a charge of $483,000 in 1995 resulting from the bankruptcy of one of the
Company's European customers. See "- Comparison of the Year Ended December 31,
1994 to the Year Ended December 31, 1993."
The lower project abandonment changes in 1995 are the result of the
Company bringing a greater portion of its Titles in development to market
successfully than in 1994.
The increase in operating interest in 1995 resulted from an increase
in the number of letters of credit opened in 1995 (which is directly related to
the increase in sales volume), and increased costs of opening letters of credit
with lenders other than the Company's bank.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER 31,
1993
The Company's net sales declined to $13,289,000 in 1994 from
$37,478,000 in 1993, as a result of a decrease in new Titles in 1994, a
decrease in average units sold per Title for releases in 1994 and close-out
sales of inventory (which accounted for 44% of net sales). The Company
cancelled several Titles that were under development in 1994 and five other
Titles scheduled for release in 1994 and instead released in 1995.
Toy sales in 1994 decreased to $278,000 from $5,996,000 in 1993 as a
result of the closure in 1994 of the Company's toy division. See "- Overview -
Traditional Toy Sales." The Company's revenues in 1994 were also adversely
affected by a reserve for discounts and returns for the XBAND Modem of
approximately $2,000,000.
Net sales of The Ren & Stimpy Show Titles constituted $2,941,000 (or
22%) of net sales in 1994 and $8,999,000 (or 24%) of net sales in 1993. Net
sales in 1994 included $2,789,000 (21% of net sales) generated by Sports
Illustrated and $1,636,000 (or 12% of net sales) generated by Madden Football
'95.
-22-
<PAGE> 26
The decrease in cost of goods sold in 1994 was a result of the
decrease in net sales for that year. Close-out sales in both 1994 and 1993
increased costs of goods sold both in dollar terms and as a percentage of net
sales.
Royalty expense decreased in 1994 due to the decline in net sales, but
increased as a percentage of sales because of the reasons set forth above. See
"- Comparison of the Year Ended December 31, 1995 to the Year ended December
31, 1994." In addition, the Company incurred generally higher royalty rates on
license and development agreements that were in effect in 1994 as compared to
1993.
Selling expense increased in 1994, both in absolute amount and as a
percentage of net sales, as a result of (i) $2,679,000 in marketing expenses
incurred in that year related to the XBAND Modem and (ii) the write-off
$914,000, consisting of the Company's remaining trade credit balance available
for the purchase of radio and television time; such amount was written off
because of the Company's termination of its television advertising campaigns.
General and administrative expenses in 1994 decreased approximately
$2,415,000 from 1993 primarily as a result of general cost reductions,
including reduced employee staffing levels and related costs, warehousing costs
and travel expenditures.
Project abandonment charges in the year ended December 31, 1994
include $918,000 related to Akira, $494,000 related to The Ren & Stimpy Show,
$525,000 related to seaQuest DSV, $446,000 related to Sports Illustrated,
$306,000 related to Time Trax and $582,000 related to The Mask.
In 1993, the Company recognized a tax benefit of $3,413,000, which
reflects the carryback to 1991 and 1992 of a portion of the loss incurred in
1993. For information concerning the Company's current NOL, see "-Overview-Net
Operating Loss Carryforwards."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are Product purchases, guaranteed
payments to licensors, advance payments to developers and the costs of internal
Software development. In order to purchase Products from the Manufacturers,
the Company must open letters of credit in their favor. As of September 30,
1996, the Company had obligations with respect to future guaranteed minimum
royalties of $4,710,000 (substantially all of which was payable within the
subsequent twelve months). As of December 16, 1996, the Company had
obligations with respect to open letters of credit of $5,144,000.
The amount of the Company's accounts receivable is subject to
significant seasonal variations due to the seasonality of sales, and is
typically highest at the end of the year. As a result, the Company's working
capital requirements are greatest during its third and fourth quarters. The
Company believes that the proceeds from this offering, together with funds
provided by operations and funds available under the Revolving Credit Facility,
will be adequate to meet the Company's anticipated requirements for operating
expenses, Product purchases, guaranteed payments to licensors and Software
development through 1997. However, to the extent accounts receivable,
inventories and guarantees and advance payments increase as a result of growth
of the Company's business, the Company could require additional working capital
to fund its operations. The Company does not anticipate making material
capital expenditures in 1997.
For the nine months ended September 30, 1996, the Company's net cash
used in operating activities was $1,144,000, compared to $3,160,000 for the
same period in 1995. During 1995 and 1994, the Company's net cash used in
operating activities was $3,395,000 and $9,986,000, respectively.
For the nine months ended September 30, 1996, the Company's net cash
used in investing activities was $768,000 (primarily as a result of the
Heliotrope Acquisition and the Company's purchase of 25% of Inland Productions,
Inc. ("Inland"), compared to $108,000 for the same period in 1995. For
additional information concerning the Company's acquisition and investment, see
Note 9 of Notes to Consolidated Financial Statements included elsewhere herein.
For 1995 and 1994, the Company's net cash used in investing activities was
$239,000 and $188,000, respectively.
-23-
<PAGE> 27
For the nine months ended September 30, 1996, the Company's net cash
provided by financing activities was $2,084,000, compared to $2,728,000 for the
same period in 1995. For 1995 and 1994, the Company's net cash provided by
financing activities was $2,661,000 and $9,833,000, respectively. Financing
activities were primarily the receipt of the proceeds from the exercise of
warrants and options and bank borrowings in 1996, the issuance of convertible
preferred stock in 1995 and the issuance of Common Stock in 1994. See
"Description of Securities - Warrants and Options."
Credit Facilities. In July 1996, the Company terminated its factoring
and credit agreement and entered into the Revolving Credit Facility. As of
December 11, 1996, under the Revolving Credit Facility, the Company may draw
down working capital advances and open letters of credit in an aggregate amount
not to exceed the lesser of $9,000,000, or an amount equal to the sum of 70% of
eligible accounts receivable, 50% of eligible inventory and 50% of the amount of
letters of credit opened by the Company in favor of the Manufacturers. The
portion of the borrowing base that consists of eligible inventory may not exceed
$1,500,000. Advances under the Revolving Credit Facility bear interest at the
bank's prime lending rate plus 1.25%. The Company has granted the bank a
security interest in its domestic accounts receivable and inventories. The
Revolving Credit Facility matures on June 30, 1997, subject to earlier
termination. As of December 16, 1996, the Company had advances under the
Revolving Credit Facility of $4,903,000 and open letters of credit from its
revolving credit lender of $2,690,000.
The Revolving Credit Facility contains customary covenants including,
among others, restrictions on the incurrence of debt, encumbrances on or sales
of assets, mergers and acquisitions, payments of dividends and capital
expenditures. Financial covenants as of December 11, 1996 include the
maintenance of (i) a current ratio of not less than 1.4 to 1, (ii) profitable
operations on a fiscal year basis, (iii) minimum tangible net worth of
$7,000,000, (iv) a ratio of debt to tangible net worth of not greater than 1.75
to 1, and (v) minimum working capital of $5,000,000.
The Company has also entered into agreements with two additional
lenders (the "North American Lender" and the "European Lender") pursuant to
which such lenders have agreed to issue letters of credit ("L/Cs") on the
Company's behalf to the Manufacturers for the purchase of Products for the
Company's North American operations (up to a maximum of $2,500,000) and the
Company's European operations (up to a maximum of $5,000,000), respectively.
Each of these lenders receives a fee for the issuance of such L/Cs, and each
lender retains title to the Products financed by such lender until such time as
such Products are sold to the Company's customers. The North American Lender
has a security interest in the domestic assets of the Company subordinate to
the security interest of the Company's bank. The term of the agreement with
the North American Lender expires on March 13, 1997, subject to automatic
renewals on such date and every nine months thereafter, unless terminated by
either party. The European Lender has a first priority security interest in
all of the Company's European subsidiary's receivables, inventory and other
assets. The agreement with the European Lender may be terminated at any time
by such lender. As of December 16, 1996, there were no open letters of credit
issued by the North American Lender and open letters of credit in the amount of
$2,454,000 issued by the European lender.
-24-
<PAGE> 28
BUSINESS
OVERVIEW
T.HQ develops, publishes and distributes interactive entertainment
software for the various hardware platforms that collectively dominate the home
video game market. The Company currently publishes Titles for all major
dedicated platforms manufactured by Sony, Sega and Nintendo, and in 1997
intends to release Titles for the recently introduced Nintendo 64 platform and
multi-media personal computers. The Company currently publishes products in
most interactive software genres, including action, adventure, arcade,
fighting, driving, strategy, simulation and sports. The Company's principal
customers include Toys "R" Us, Wal-Mart, Target and Best Buy, other national
and regional retailers, discount store chains and specialty retailers.
The Company's Titles are developed both internally and under contract
with independent developers, and are typically based on Properties licensed
from third parties. Other than Titles that the Company may release on CD-ROM
for use on PCs, all of the Company's Products consist of cartridges and CD-ROMs
manufactured for the Company by the Manufacturers.
The Company achieved a turnaround in 1995, reversing two years of
significant losses. Under new leadership, the Company focused its product
strategy, improved inventory management and reduced fixed costs. As a result,
T.HQ's revenues increased from $13.3 million in 1994 to $33.3 million in 1995.
For the nine months ended September 30, 1996, revenues were $29.8 million,
compared to $18.9 million for the same period in 1995.
THE INTERACTIVE ENTERTAINMENT INDUSTRY AND TECHNOLOGY
The home video game software market consists both of (i)
cartridge-based and CD-ROM-based Software for use solely on dedicated hardware
systems manufactured by the Manufacturers, and to a significantly lesser
extent, other vendors, and (ii) Software distributed on CD-ROMs for use on PCs.
Most Software for dedicated Platforms is currently sold in cartridge form.
However, CD-ROMs have become increasingly popular because they have
substantially greater data storage capacity and lower manufacturing costs than
cartridges.
The first modern Platform was introduced by Nintendo in 1985 using
"8-bit" technology. "8-bit" means that the central processing unit, or "chip,"
on which the Software operates is capable of processing data in 8-bit units.
Subsequent advances in technology have resulted in continuous increases in the
processing power of the chips that power both the Platforms and PCs. As the
technology of the hardware has advanced, the Software designed for the
Platforms has similarly advanced, with faster and more complex images, more
lifelike animation and sound effects and more intricate scenarios. The larger
data storage capacity of CD-ROMs enable them to provide richer content and
longer play. Portable Platforms manufactured by the Manufacturers are less
sophisticated technologically and do not require television monitors.
Currently, the non-portable Platforms being marketed are based primarily on
16-bit and 32-bit technology, and the 64-bit Nintendo 64 Platform was released
in the United States in September 1996.
The following table sets forth the year of release in the United
States of each of the Manufacturers' Platforms for which the Company publishes
Titles and the technology on which such Platforms are based:
<TABLE>
<CAPTION> Date of U.S.
Manufacturer Product Name Introduction Technology
------------ ------------ ------------ ----------
<S> <C> <C> <C>
Nintendo Game Boy 1989 8-bit (portable)
Sega Game Gear 1991 8-bit (portable)
Sega Genesis 1989 16-bit
Nintendo SNES 1991 16-bit
Sega Saturn 1995 32-bit
Sony PlayStation 1995 32-bit
Nintendo Nintendo 64 1996 64-bit
</TABLE>
The Company believes that the success of Software is dependent on the
graphic look and feel of the Software, the depth and variation of game play and
the popularity of the Property on which the Software is based. As new
Platforms are introduced, software for such Platforms requires new standards of
design and technology to
-25-
<PAGE> 29
fully exploit such Platforms' capabilities and requires that Software
developers devote substantial resources to product design and development.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of exciting,
high-quality interactive entertainment software that appeals to a broad range
of consumers for use on a variety of Platforms. The Company's business
strategy is based on the following:
o Developing a portfolio of games, primarily for use on advanced
Platforms, based on Properties that are proprietary or are exclusively
licensed to the Company ("franchise" Properties). Franchise
Properties allow the Company to release Titles based on such
Properties on a variety of hardware Platforms, to create sequels to
such Titles and to re-release such Titles at secondary and tertiary
price points in the future. The Company's exclusively licensed
Properties currently consist of BASS Masters Classic, Turner's World
Championship Wrestling and Brunswick's Tournament of Champions.
Currently, the Company's sole proprietary product is Pax Imperia II.
o Identifying and licensing titles originally developed in foreign
territories with proven or anticipated consumer acceptance and
publishing localized versions for advanced Platforms for distribution
in the United States and other countries. This strategy enables the
Company to participate in the market for advanced Platform games while
limiting risk. In 1996, the Company commenced publishing and
distributing Sony PlayStation and Sega Saturn Titles under license
from foreign independent software developers, primarily from Japan.
In 1997, the Company expects to publish approximately 14 additional
Titles acquired in such manner, including K1: The Arena Fighters,
Ghost in the Shell and Destruction Derby XL.
o Publishing high quality software for the large installed base of
16-bit and Game Boy Platforms for so long as the Company believes
there is a significant market for such Titles. The Company believes
that the relatively low cost of development of Titles for such
Platforms and reduced competition in these markets creates an
opportunity to generate continuing sales and profits from these
segments of the video game market. Examples of such Titles published
by the Company include Disney's Toy Story and Pocahontas and
LucasArts' Super Empire Strikes Back and Super Return of the Jedi.
Licenses acquired for Titles currently under development include
Disney's Hunchback of Notre Dame and Hercules (an animated feature
film to be released in 1997). The Company has also entered into
agreements with Electronic Arts Inc., a competing independent software
company, pursuant to which the Company develops, publishes and
distributes Titles based on existing Electronic Arts titles, primarily
for SNES and Game Boy. Representative Electronic Arts titles include
Madden Football, FIFA International Soccer, NBA Live, NHL Hockey and
PGA Tour Golf. The Company intends to continue to seek licenses of
such high-recognition Properties to publish Titles for older
Platforms.
o Expanding its presence in foreign markets that demonstrate (through an
increasing installed base of Platforms) the potential for commercial
success of the Company's Titles. To accomplish this strategy, the
Company has established an office in the United Kingdom to oversee its
operations in Europe and has developed strategic relationships with
Japanese publishers, resulting in foreign sales constituting the 25%
of the Company's revenues in 1995 and for the first nine months of
1996.
o Managing the development and marketing of its Titles in a manner that
minimizes financial risk. The Company has experienced and expects to
continue to experience fluctuations in its revenues, both on a
quarterly basis and otherwise, as a result of numerous factors. See
"Risk Factors - Revenue Fluctuations and Seasonality." The Company
attempts to minimize its fixed expenses by such means as adjusting the
relative use of employees and independent contractors who perform
software development, adopting warehouse and shipping systems that
closely link product fulfillment costs to sales volume, and
compensating sales representatives based on sales volume. In
addition, by implementing strict product ordering and inventory
controls, the Company attempts to reduce the risks associated with
excessive or obsolete inventory.
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<PAGE> 30
As of December 16, 1996, the Company had approximately 36 new Titles
under license or in various stages of development that are currently scheduled
for release in 1997, including seven Titles for PlayStation, seven Titles for
Saturn, one Title for Nintendo 64 and two Titles for use on multimedia personal
computers.
To further its strategy of obtaining or creating franchise Properties,
the Company has enhanced its development abilities by making certain strategic
acquisitions. In 1993, the Company acquired Black Pearl Software, Inc. ("Black
Pearl"), an independent Software developer. In August 1996, the Company
consummated the acquisition of Heliotrope and retained the services of that
company's principals (the "Heliotrope Acquisition") in order to develop and
publish Pax Imperia II for release in 1997 and to develop other strategy games
for the PC market. See "- Software Design and Development."
The Company may also rely upon strategic investments to facilitate
access to proprietary Software and skilled developers outside the Company. In
July 1996, the Company acquired a 25% interest in Inland, a recently formed
Software developer. Inland is currently developing the Company's PlayStation
and Nintendo 64 versions of WCW Wrestling and PC and PlayStation version of
BASS Masters Classic.
The Company seeks to acquire or invest in other Software development
companies to further its development of proprietary titles. However, as of the
date of this Prospectus, the Company was not negotiating, nor did it have any
commitments or understandings with respect to, any additional acquisitions or
investments.
TITLES
Since its inception, the Company has developed and released an
aggregate of 99 Titles, consisting of 31 SNES Titles, 36 Game Boy Titles, 13
Nintendo Entertainment Systems Titles, seven Genesis Titles, six Game Gear
Titles, three Saturn Titles and three PlayStation Titles. The Company
continually seeks to acquire licenses to publish and distribute additional
Titles.
The following tables set forth, for each Platform, the Titles (i)
released by the Company in 1996, and (ii) under development, and the date of
release (or anticipated release) of each Title. There can be no assurance that
each of the Titles under development will be released when scheduled or at all.
<TABLE>
<CAPTION>
TITLES RELEASED IN 1996 CATEGORY PLATFORM RELEASE DATE
----------------------- -------- -------- ------------
<S> <C> <C> <C>
Disney's Pocahontas . . . . . . . . . . . . . . . . Adventure Game Boy 03/96
In the Hunt . . . . . . . . . . . . . . . . . . . . Arcade PlayStation 03/96
Saturn 05/96
NHL Hockey '96 . . . . . . . . . . . . . . . . . . Sports Game Boy 04/96
NBA Live '96 . . . . . . . . . . . . . . . . . . . Sports Game Boy 03/96
Olympic Summer Games . . . . . . . . . . . . . . . Sports SNES 05/96
Genesis 05/96
Game Boy 06/96
Disney's Toy Story . . . . . . . . . . . . . . . . Adventure Game Boy 05/96
SNES (U.K. only) 06/96
</TABLE>
<TABLE>
<CAPTION>
TITLES RELEASED IN 1996 CATEGORY PLATFORM RELEASE DATE
----------------------- -------- -------- ------------
<S> <C> <C> <C>
BASS Masters Classics: Pro Edition . . . . . . . . Simulation SNES 05/96
Genesis 12/96
Mohawk & Headphone Jack . . . . . . . . . . . . . . Adventure SNES 08/96
Battlezone/Super Breakout . . . . . . . . . . . . . Arcade Game Boy 08/96
Time Killers . . . . . . . . . . . . . . . . . . . Arcade Genesis 07/96
Robopit . . . . . . . . . . . . . . . . . . . . . . Action PlayStation 08/96
Saturn 09/96
Alone in the Dark: One-Eyed Jack's Revenge . . . . Adventure Saturn 08/96
PlayStation 08/96
</TABLE>
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<PAGE> 31
<TABLE>
<S> <C> <C> <C>
Disney's Pinocchio . . . . . . . . . . . . . . . . Adventure Game Boy 09/96
Genesis 11/96
SNES (U.K. only) 11/96
PGA European Tour . . . . . . . . . . . . . . . . . Sports SNES 09/96
Mr. Do! . . . . . . . . . . . . . . . . . . . . . . Arcade SNES 09/96
Urban Strike . . . . . . . . . . . . . . . . . . . Action Game Boy 10/96
Game Gear 10/96
Floating Runner . . . . . . . . . . . . . . . . . . Action PlayStation 10/96
Madden '97 Football . . . . . . . . . . . . . . . . Sports Game Boy 11/96
FIFA International Soccer '97 . . . . . . . . . . . Sports Game Boy 11/96
NHL Hockey '97 . . . . . . . . . . . . . . . . . . Sports SNES 11/96
Sim City 2000 . . . . . . . . . . . . . . . . . . Simulation SNES 11/96
College Football USA '97 . . . . . . . . . . . . . Sports SNES 12/96
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
ANTICIPATED
TITLES UNDER DEVELOPMENT* CATEGORY PLATFORM RELEASE DATE
------------------------ -------- -------- ------------
<S> <C> <C> <C>
K-1: The Arena Fighters . . . . . . . . . . . . . . Fighting PlayStation Spring '97
WCW vs. The World . . . . . . . . . . . . . . . . . Fighting PlayStation Spring '97
Disney's Hunchback of Notre Dame . . . . . . . . . Adventure Game Boy Spring '97
Tasmania . . . . . . . . . . . . . . . . . . . . . Adventure Saturn Spring '97
Demolition Derby XL . . . . . . . . . . . . . . . . Driving Saturn Spring '97
Krazy Ivan . . . . . . . . . . . . . . . . . . . . Action Saturn Spring '97
Brunswick's Tournament of Champions . . . . . . . . Simulation SNES Summer '97
Disney's Timon & Pumbaa . . . . . . . . . . . . . . Action SNES Summer '97
Disney's Hercules . . . . . . . . . . . . . . . . . Adventure Game Boy Summer '97
Ghost in the Shell . . . . . . . . . . . . . . . . Action PlayStation Summer '97
Pax Imperia II . . . . . . . . . . . . . . . . . . Strategy PC Summer '97
Assault Rigs . . . . . . . . . . . . . . . . . . . Action Saturn Summer '97
Sentient . . . . . . . . . . . . . . . . . . . . . Action Saturn Summer '97
Madden Football '98 . . . . . . . . . . . . . . . . Sports Genesis Fall '97
SNES Fall '97
NHL Hockey '98 . . . . . . . . . . . . . . . . . . Sports Genesis Fall '97
SNES Fall '97
NBA Live '98 . . . . . . . . . . . . . . . . . . . Sports SNES Fall '97
Genesis Fall '97
BASS Masters Classic: Pro Edition . . . . . . . . . Simulation PlayStation Fall '97
PC Fall '97
World Championship Wrestling . . . . . . . . . . . Fighting Playstation Fall '97
Nintendo 64 Fall '97
Tenka . . . . . . . . . . . . . . . . . . . . . . . Action Saturn Fall '97
G Police . . . . . . . . . . . . . . . . . . . . . Action Saturn Fall '97
</TABLE>
* Excludes Titles which the Company expects to release in 1997 but have not
yet been publicly announced.
INTELLECTUAL PROPERTY LICENSES
The Company's strategy includes the creation of exciting games based
on licensed Properties that have attained a high level of consumer recognition
or acceptance. The Company believes it enjoys excellent relationships with a
number of licensors, including Disney, Electronic Arts and LucasArts.
The Company pays royalties to its Property licensors that generally
range from 2% to 22% of the Company's net sales of the Title. The Company must
typically pay minimum guaranteed royalties over the license term and advance
payments against such guarantees. License fees tend to be higher for
Properties with proven popularity and less perceived risk of commercial
failure. To the extent competition intensifies for licenses of highly
desirable Properties, the Company may encounter difficulty in obtaining these
licenses. See "- Competition." Licenses typically extend for two to three
years, may be exclusive for a specific Title or line of Titles, and may be
renewable upon payment of certain minimum royalties or the attainment of
specified sales levels.
The Company's Property licenses generally grant to the Company
exclusive use of the Property for the specified Titles, on specified Platforms,
within the defined territory and during the license term. However, licensors
typically retain the right to exploit the Property for all other purposes,
including the right to license the Property for use with other Platforms,
Software published by third parties for use with other Platforms based on such
Property may compete with Titles offered by the Company.
PLATFORM LICENSES
The Company's business is dependent on its license agreements with the
Manufacturers. All of such licenses are for fixed terms and are not exclusive.
Each license grants to the Company the right to develop, publish
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<PAGE> 33
and distribute Titles for use on such Manufacturers' Platforms, and requires
that such Titles be embodied in Products that are manufactured solely by such
Manufacturer.
The following table sets forth information with respect to the
Company's Platform Licenses. In some instances, the Company has more than one
Platform License for a particular Platform.
<TABLE>
<CAPTION>
Manufacturer Platform Number of Titles Territory Expiration Date(s)
- ------------ -------- ---------------- --------- ------------------
<S> <C> <C> <C> <C>
Nintendo SNES 12/contract yr. N. America and September and October 1997
Latin America
Nintendo SNES 20/contract yr. Europe, certain March and July 1997
Asian countries
Nintendo Game Boy 15/contract yr. N. America and April and September 1997
Latin America and January 1998
Nintendo Game Boy 10/contract yr. Europe, certain March 1997 and
Asian countries January 1998
Sega Genesis 3/contract yr. U.S., Canada October 1996(1)
Sega Game Gear 2/contract yr. U.S., Canada March 1998(2)
Sega Saturn 3/contract yr. U.S., Canada February 1998(2)
Sony PlayStation title-by-title(3) U.S., Canada June 1998
Sony PlayStation title-by-title(3) Europe December 2005(2)
</TABLE>
- -------------------------------
1 The Company has applied for, and consistent with past practice expects
to receive, a one- or two-year renewal of such license.
2 Agreement continues year-to-year after such date unless terminated by
either party.
3 This Platform License does not set a maximum number of Titles that the
Company may publish in the designated territory; however, each Title must be
approved by the Manufacturer prior to development of the Software.
The Company has applied for, and expects to receive, a license to
publish Titles for use on Nintendo's Nintendo 64 Platform, on a title-by-title
basis.
Sega and Nintendo charge the Company a fixed amount for each
cartridge, which amount varies based, in part, on memory capacity and processor
power. Sega and Sony similarly charge a per unit amount for each CD-ROM.
These charges include a manufacturing, printing and packaging fee as well as a
royalty for the use of the Manufacturer's name, proprietary information and
technology, and are subject to adjustment by the Manufacturers at their
discretion. The Manufacturers have the right to review, evaluate and approve a
prototype of each Title and all packaging used by the Company in connection
with the Products.
In addition, the Company must indemnify the Manufacturers with respect
to all loss, liability and expense resulting from any claim against the
Manufacturer involving the development, marketing, sale or use of the Company's
Titles, including any claims for copyright or trademark infringement brought
against the Manufacturer. As a result, the Company bears a risk not only that
the Properties upon which the Titles are based, but also the
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<PAGE> 34
information and technology licensed from the Manufacturer and incorporated in
the Products, may infringe the rights of third parties. While the Company's
agreements with its independent Software developers and Property licensors
typically provide for indemnification of the Company with respect to certain
matters, there can be no assurance that, if any claim is brought by a
Manufacturer against the Company for indemnification, such developers or
licensors would have sufficient resources to in turn indemnify the Company, or
that such indemnification would cover the matter that gave rise to the
Manufacturer's claim against the Company.
Each Platform License may be terminated by the Manufacturer if a
breach or default by the Company is not cured by the Company after receipt of
written notice thereof from the Manufacturer, or if the Company becomes
insolvent. Upon termination of a Platform License for any reason other than a
breach or default by the Company, the Manufacturer has the right to purchase
from the Company, at the price paid by the Company, any Product inventory
manufactured by such Manufacturer for the Company that remains unsold for a
specified period after such termination. Any such inventory not purchased by
the Manufacturer must be destroyed. Upon termination as a result of a breach
or default by the Company, any remaining inventory at such time must be
destroyed, subject to the right of any institutional lender to the Company to
sell such inventory for a specified period.
SOFTWARE DESIGN AND DEVELOPMENT
Once the Company identifies and acquires a Property from a licensor,
the Company designs and develops a game with features intended to exploit the
characteristics of the Property and to appeal to the target consumers for such
game. The Company's Software development process generally takes one of two
forms.
Internal Software Development. Prior to the Company's acquisition in
1993 of Black Pearl, an independent Software developer (the "Black Pearl
Acquisition"), all of the Company's Software was developed by independent
developers. The Black Pearl Acquisition resulted from the Company's
determination that the internal development of certain Software permits better
control over its quality and timeliness, and this acquisition provided the
Company with Software development facilities, personnel and equipment
permitting the Company to commence internal software development. The
Company's in-house development team is supervised by the Company's Vice
President -Software Development and is staffed by producers, programmers,
Software engineers, artists, animators and game testers. The Heliotrope
Acquisition enhanced the Company's internal development capabilities by adding
a Software development team and related facilities in Connecticut. The
Heliotrope team is currently working with the Company's other development staff
to produce Pax Imperia II for publication on CD-ROM for PCs. The Company uses
a variety of advanced hardware and software development tools, proprietary
hardware emulator systems, and various graphics, animation, sound and
compression applications. As of December 16, 1996, the Company had 25
development employees.
External Software Development. The Company also contracts with
independent software developers to conceptualize and develop Titles under the
Company's supervision. As of November 30, 1996, the Company had contracted
development efforts to 11 such developers. The Company generally pays
independent developers certain advances against royalties based on specified
development completion milestones. Royalties in excess of the advances are
based on a fixed amount per unit sold and range from $.25 to $7.00 per unit.
The Company generally obtains ownership of the Software code and related
documentation. The Company's agreements with its independent Software
developers are usually entered into on a title-by-title basis.
Although the predominant portion of the Company's Titles continue to
be developed by independent developers, approximately 30% of the Company's net
sales in 1995 and 10% of the Company's net sales for the nine months ended
September 30, 1996 were derived from Titles developed by the Company
internally.
The Company may make strategic investments in independent developers
for the purpose of securing access to proprietary Software and talented
developers. In June 1996, the Company acquired a 25% interest in Inland, the
developer of WCW Wrestling.
Upon completion of development, each title is extensively
"play-tested" by the Company and sent to the Manufacturer for its review and
approval. Related artwork, user instructions, warranty information, brochures
and packaging designs are also developed under the Company's supervision. The
development cycle for new Titles, including the development of the necessary
Software, approval by the Manufacturer and production of the initial
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<PAGE> 35
Products, typically has ranged from nine to 18 months. This relatively long
development cycle requires the Company to determine whether there will be
adequate retailer and consumer demand for a Title well in advance of its
release. See "Risk Factors - Acquisition of Properties and Development of New
Titles."
MANUFACTURING
Except for certain 16-bit Genesis cartridges, the Manufacturers are
the sole manufacturers of the Products sold for use on their respective
Platforms.
After placing a purchase order with a Manufacturer and opening a
letter of credit, the Company sends to the Manufacturer the Title's software
code and a prototype, together with related artwork, user instructions,
warranty information, brochures and packaging designs, for approval, defect
testing and manufacture. The Manufacturers currently deliver cartridges to the
Company within 30 to 75 days, and CD-Roms within 15 to 30 days, after their
receipt of an order and a corresponding letter of credit, if required.
MARKETING, SALES AND DISTRIBUTION
The Company depends in large part on the high name recognition of the
Properties on which its Titles are based to attract customers and to obtain
shelf space in stores. The Company's marketing activities are directed by a
sales team, led by the Company's Senior Vice President - Sales, which maintains
contact with major retail accounts and manages the activities of the Company's
independent regional sales representatives.
The Company is required by the Platform Licenses to provide a standard
defective product warranty on all of the Products sold. Generally, the Company
is responsible for resolving, at its own expense, any warranty or repair
claims. The Company has not experienced any material warranty claims.
United States and Canadian Sales. The Company's Titles are promoted
to retailers by display at trade shows, such as the annual Electronic
Entertainment Expo (E3). The Company also conducts print and cooperative
retail advertising campaigns for most Titles and prepares promotional
materials, including product videos, to increase awareness among retailers and
consumers.
During 1995, the Company's marketing efforts included nationwide
promotions for many of its Titles. Mail-in rebate offers for The Mask and
seaQuest were included with boxes of Nabisco(R) cookies and crackers, and for
Super Return of the Jedi and Jungle Strike with boxes of Post(R) cereals. The
Company's Game Boy Titles licensed from Electronic Arts, such as Madden '96,
FIFA Soccer '96, PGA Tour '96 and NHL '96, were included in Electronic Arts'
print, television and point-of-purchase advertising. National newspaper and
radio promotions included editorial and advertising support in key children's
consumer and electronic gaming publications, such as Disney Adventures,
Nintendo Power, GamePro, Game Players and Electronic Gaming Monthly. In 1996,
the Company's marketing efforts for Olympic Summer Games included a mail-in
rebate program with Reebok Shoes.
Most of the Company's gross sales consist of direct sales to
retailers. The Company distributes its Titles primarily to mass merchandisers
and national retail chain stores, including Toys "R" Us, Inc., Wal-Mart, Best
Buy, Blockbuster Video, Inc., Kay Bee Toys, Electronics Boutique and Sears.
Sales to the Company's ten largest customers collectively accounted for
approximately 52% of the Company's gross sales in 1995 and 54% of the Company's
gross sales for the nine months ended September 30, 1996. The Company has no
written agreement or other understanding with any of its customers that relate
for future purchases by such customers, and thus, purchases by such customers
may terminate at any time.
The Company utilizes electronic data interchange with most of its
major domestic customers in order to (i) efficiently receive, process and ship
customer Product orders, and (ii) accurately track and forecast sell-through of
Products to consumers in order to determine whether to order additional
Products from the Manufacturers. The Company ships its Products to its
domestic customers from a public bonded warehouse in Southern California.
The Company's agreements with its independent regional sales
representatives set forth the representatives' exclusive territory, types of
customers to be solicited, commission rate and payment terms. Such
representatives
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<PAGE> 36
do not have contractual authority to obligate the Company. The Company's
principal independent sales representatives are Vaughn Associates, Watt & Co.
and Original Marketing Concepts.
The domestic retail price for the Company's Software generally ranges
between $20 and $70 for SNES, between $15 and $35 for Game Boy, between $20 and
$55 for Genesis and between $39 and $59 for PlayStation and Saturn.
Foreign Sales. In 1992, the Company commenced the sale of its Titles
in the United Kingdom, Europe and Australia. The Company sells its Titles
directly to retailers in the United Kingdom and to distributors for
distribution in Europe and in Australia. The Company is the exclusive
distributor for Disney's SNES and Game Boy products in the United Kingdom for
such Titles as Toy Story, Pocahontas and Pinocchio. The Company ships its
Products to its foreign customers from a public bonded warehouse in the United
Kingdom. The Company is currently negotiating with distributors for other
countries, including Japan.
INTELLECTUAL PROPERTY RIGHTS
Each Product and Title typically embody a number of separately
protected intellectual property rights of the Manufacturer, the Property
licensors and, to a lesser extent, the Company. The licensors of the
Properties own the trademarks, trade names, copyrights and other intellectual
property rights relating to the Property on which the Titles are based. The
Manufacturer owns the patents and substantially all of the other intellectual
property embodied in the Products. While the Company owns the game software
embodied in the Products, the Company believes that such software has little
independent economic value. Accordingly, the Company must rely on the
Manufacturers and the Property licensors with respect to protection from
infringement of these property rights by third parties.
Each of the Manufacturers incorporates security devices in their
respective Platforms and Products to prevent unlicensed use of its Platforms.
In addition, Nintendo requires its licensees to display the "Nintendo Seal of
Approval" to notify the public that the Title has been approved by Nintendo for
use with a Nintendo Platform.
COMPETITION
The interactive entertainment industry is intensely competitive. The
ability of the Company to compete successfully is based on its ability to
identify and obtain licenses to commercially marketable Properties, to develop
appealing Titles, to adapt its development capabilities with new technologies
and to secure retail distribution. The Company competes, for both licenses to
Properties and the sale of its Titles, with the Manufacturers, each of which is
the largest developer and marketer of Software for its Platforms. There can be
no assurance that these companies will not increase their own development
efforts. As a result of their commanding positions in the industry as primary
manufacturers of dedicated interactive entertainment hardware and publishers of
software, the Manufacturers generally have better bargaining positions with
respect to retail pricing, shelf space and purchases than do any of their
licensees, including the Company. The Manufacturers often have lower suggested
retail prices for their Software than do their licensees.
Each of the Manufacturers has dozens of active licensees, each of
which is also a competitor of the Company. Each of the Manufacturers and many
of these other competitors (such as Acclaim Entertainment, Inc., Disney
Interactive, Inc., Electronic Arts Inc., GT Interactive Software Corp.,
Microsoft Corporation and Midway Games Inc.) have broader Software lines and
greater financial, marketing and other resources than the Company; these
competitive advantages enable such competitors to market their Software more
aggressively and make higher offers or guarantees in connection with the
acquisition of licensed Properties. In addition, as competition for retail
shelf space becomes more intense, the Company may need to increase marketing
expenditures to maintain sales of its Titles; and as competition for popular
Properties increases, the cost of acquiring licenses for such Properties is
likely to increase, resulting in reduced margins.
In addition, the market for the Company's Products is characterized by
significant price competition, and the Company expects that it will face
increasing pricing pressures from its current competitors. Accordingly, there
can be no assurance that the Company will be able to provide products that
compare favorably with the products of the Company's competitors or that
competitive pressures will not require the Company to reduce its prices. Any
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<PAGE> 37
material reduction in the price of the Company's products would negatively
affect operating income as a percentage of net revenue and would require the
Company to increase unit sales in order to maintain net revenue.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment market, which will
result in greater competition for the Company. In particular, many of the
Company's competitors are developing on-line interactive games and interactive
networks that will be competitive with the Company's interactive Products.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by
the Company will not materially and adversely affect its business, operating
results and financial condition.
XBAND MODEM
Prior to March 1996, the Company marketed the XBAND Modem. For
information with respect to the XBAND Modem, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -Overview."
EMPLOYEES
As of November 30, 1996, the Company had 50 full-time employees. All
but five of such persons are located in the United States. None of the
Company's employees is represented by a labor union or covered by a collective
bargaining agreement. The Company believes that its relations with its
employees are good.
PROPERTIES
The Company's executive offices occupy approximately 7,000 square feet
of office space at 5016 North Parkway Calabasas, Calabasas, California,
pursuant to a lease expiring in July 1998. The Company also leases office
space for marketing personnel in Cupertino, California and Epsom, England, and
for development personnel in Guilford, Connecticut. The Company believes that
its office facilities are adequate.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings material to its
financial condition or results of operations.
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- -
<PAGE> 38
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information as of December 16,
1996, concerning the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Brian J. Farrell 42 Director, President and Chief Executive Officer
Lawrence Burstein 54 Director
L. Michael Haller 52 Director, Senior Vice President
Bruce Jagid 56 Director
Jeffrey C. Lapin 40 Director
Murray L. Skala 49 Director
Deborah A. Lake 29 Vice President-Finance and Administration, Secretary and Treasurer
</TABLE>
The following table sets forth certain information as of December 16,
1996, concerning certain key employees of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Germaine Gioia 35 Vice President-Marketing
Alison Locke 41 Senior Vice President - Software Sales
Steve Ryno 30 Vice President - Product Development
Karen Shillcock 40 Managing Director, T.HQ International Ltd.
</TABLE>
Brian J. Farrell has been the Company's President and Chief
Executive Officer since January 1995. Between October 1992 and January 1995,
Mr. Farrell was the Executive Vice President and Chief Operating Officer of the
Company. From July 1991 to October 1992, Mr. Farrell served as the Vice
President, Chief Financial Officer and Treasurer of the Company. Mr. Farrell
has been a director of the Company since March 1993. Prior to joining the
Company, Mr. Farrell was Vice President and Chief Financial Officer of Starwood
Lodging Trust, a real estate investment trust ("Starwood"). Mr. Farrell was
employed by Deloitte Haskins & Sells, a predecessor of Deloitte & Touche LLP,
an international accounting firm and the Company's current auditors
("Deloitte"), from 1978 to 1984 and is a certified public accountant.
Lawrence Burstein has been a director of the Company since
July 1991. Since October 1982, Mr. Burstein has been Chairman of the Board and
a principal stockholder of Trinity Capital Corporation, a private investment
company. Mr. Burstein is a director of U.S. Communications, Inc., Brazil Fast
Food Corp. and CAS Medical Systems, Inc.
L. Michael Haller has been a director of the Company and the
Company's Senior Vice President since December 1995. Mr. Haller's
responsibilities include obtaining new licenses from foreign markets. Between
January and December 1995, Mr. Haller was a consultant to the Company. For
more than five years prior to 1995,
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Mr. Haller was an agent of and consultant to companies in the interactive
entertainment business, principally representing Kodansha Ltd., Japan's leading
publisher of literature, magazines and comics. Mr. Haller is also a director
of Pacific Advisors Fund, Inc.
Bruce Jagid has been a director of the Company since April
1995. Mr. Jagid has served as the Chairman (since March 1991) and Chief
Executive Officer (since January 1992) of Ultralife Batteries, Inc., a
manufacturer of lithium batteries.
Jeffrey C. Lapin has been a director of the Company since April
1995. Mr. Lapin has been the President and Chief Executive Officer of House of
Blues, Inc. Hospitality and Executive Vice President of House of Blues, Inc.
Entertainment since July 1996. From May 1991 to June 1996, Mr. Lapin was the
President and Chief Operating Officer of Starwood. Mr. Lapin was a Vice
President of Starwood from January 1988 to May 1991, Secretary from September
1986 to May 1991, and served as Trustee of Starwood from September 1992 to June
1996. Prior to his employment by Starwood, Mr. Lapin was an attorney at
Mitchell, Silberberg & Knupp in Los Angeles.
Murray L. Skala has been a director of the Company since July
1991. Mr. Skala is a partner of Feder, Kaszovitz, Isaacson, Weber, Skala &
Bass, LLP in New York City, a law firm that provides legal services to the
Company. Mr. Skala is also a director of Quintel Entertainment, Inc., Jakks
Pacific, Inc. and Katz Digital Technologies, Inc.
Deborah A. Lake has been the Vice President-Finance and
Administration, Treasurer and Secretary of the Company, since September 1996.
Ms. Lake is responsible for information systems, financial reporting and
internal controls. From August 1995 to August 1996, Ms. Lake was Chief
Financial Officer of MCL Distributing, Inc., a company engaged in produce sales
and distribution. Between June 1991 and August 1995, Ms. Lake rendered
services to the Company in a number of capacities, including serving as Vice
President-Finance and Administration from January 1995 until August 1995.
Previously, Ms. Lake was employed by Deloitte as a management consultant.
Germaine Gioia has been Vice President-Marketing since
December 1995 and has been employed by the Company since November 1993. Ms.
Gioia served as Director of Corporate Communications at CIC, a software
company, from 1991 to 1993. From 1989 to 1991, Ms. Gioia was employed by
LucasArts Entertainment Company in corporate marketing.
Alison Locke, the Company's Senior Vice President-Software
Sales, is responsible for sales in North America. Ms. Locke has been employed
by the Company since February 1991. Previously, Ms. Locke served as Vice
President of Computer Product and Nintendo Game Sales of Data East USA
Incorporated, an interactive entertainment company and in various sales
capacities with Activision Inc. and Broderbund Software Inc.
Steve Ryno has been Vice President-Product Development of the
Company since December 1995. From June 1993 to December 1995, Mr. Ryno was the
Company's Director of Product Development. Mr. Ryno was also the Director of
Product Development of Black Pearl Software from 1993 until its acquisition by
the Company. From 1988 to 1993, Mr. Ryno was employed as an executive producer
at Atari Corporation. Mr. Ryno also previously served as an editor of
Electronic Gaming Monthly.
Karen Shillcock has been a Managing Director of T.HQ
International Ltd. (a subsidiary of T.HQ) and responsible for the Company's
European operations since October 1995. From March 1993 to September 1995, Ms.
Shillcock was the Advertising and Public Relations Director of Columns Ltd., an
advertising agency. From October 1991 to February 1993, Ms. Shillcock was an
Associate Director at KPR Public Relations. Previously, Ms. Shillcock was the
Head of Business Development at TMD Carat Advertising, Ltd.
EMPLOYMENT AGREEMENT WITH MR. FARRELL
Upon Mr. Farrell's appointment as the Company's President and
Chief Executive Officer in January 1995, the Company entered into a new
employment agreement (the "Employment Agreement") with Mr. Farrell. The term
of the Employment Agreement expires on December 31, 1997.
-36-
<PAGE> 40
The Employment Agreement provides for an annual base salary of
$200,000 in 1995, $225,000 in 1996 and $300,000 in 1997. Mr. Farrell is also
entitled to a bonus equal to 4.5% of the Company's net income before taxes for
each of 1996 and 1997.
The Employment Agreement provides that if Mr. Farrell's
employment is terminated by him voluntarily or by the Company for cause, he
will be precluded from engaging, directly or indirectly, in any business
activity that competes with the Company's business and from detrimentally
affecting any relationship between the Company and, or soliciting away from the
Company, any customer, supplier or employee of the Company for one year. If
the Employment Agreement is not renewed by either the Company or Mr. Farrell
prior to its scheduled expiration date, the noncompetition restriction will
expire on March 31, 1998.
The Employment Agreement also provides that in the event any
person or group of persons (i) acquires or makes a tender offer to acquire 30%
or more of the Common Stock, or (ii) (a) acquires at least 10% of the Common
Stock or (b) files a Schedule 13D or 13G with the Commission, and the Board of
Directors believes that the ownership of Common Stock by such person or group
of persons would adversely affect the Company's business (a "Change of
Control"):
1. If within 180 days after a Change of Control Mr.
Farrell's employment is terminated other than for cause or if he
voluntary terminates his employment, he would be entitled to receive a
lump sum payment equal to 2.99 times the average annual compensation
paid to him for the five years immediately preceding such termination;
and
2. All options held by Mr. Farrell to purchase Common
Stock would immediately vest, or he would be entitled to surrender all
of such options and receive an amount in cash per share equal to the
difference between the option prices of the options surrendered and
the greater of (i) the average price per share paid by the person
acquiring control of the Company, (ii) the average price paid in
connection with a tender offer for the Common Stock, or (iii) the
average trading price of the Common Stock on the date of termination
of Mr. Farrell's employment.
At the time of his appointment as the Company's President and
Chief Executive Officer, and in consideration for his previous service to the
Company, Mr. Farrell was granted an option to purchase up to 140,000 shares of
Common Stock at a price of $3.06 per share. In August 1996, in recognition of
the Company's turnaround since Mr. Farrell's appointment as the Company's
President and Chief Executive Officer and in consideration for his services
rendered in those capacities, Mr. Farrell was granted an option to purchase
200,000 shares of Common Stock at a price of $5.00. The exercise prices of
these options are the market prices of the Common Stock on their respective
grant dates.
-37-
<PAGE> 41
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of December 16, 1996 by
(i) each person (or group of affiliated persons) who is known by the Company to
own beneficially more than 5% of the outstanding shares of its Common Stock,
(ii) each director and executive officer of the Company and (iii) all executive
officers and directors of the Company as a group. Except as indicated in the
footnotes to this table, the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
Beneficial Ownership
------------------------------
Number Percent
of of
Name and Address Shares Class
------- -------
<S> <C> <C>
Wisdom Tree Associates, LP(1) 665,000 14%
333 Seventh Avenue, 5th Floor
New York, NY 10001
Brian J. Farrell (2) 185,333 3.8%
Lawrence Burstein(3) 60,333 *
Murray L. Skala(4) 38,334 *
Bruce Jagid(5) 35,000 *
Jeffrey C. Lapin(5) 35,000 *
L. Michael Haller(6) 26,667 *
Deborah A. Lake(7) 36,108 *
All Directors and Executive Officers 416,775 8.2%
as a group(8)
</TABLE>
- ----------------
* Less than 1%.
(1) Based on information set forth in Amendment No. 4 to the Schedule 13D
dated September 3, 1996 and filed with the Commission by Wisdom Tree
Associates, L.P. and its affiliates, Jonathan L. Steinberg, Wisdom
Tree Capital Management Inc. and Wisdom Tree Offshore, Ltd.
(2) Includes 160,000 shares issuable upon exercise of options exercisable
within 60 days and 1,333 shares issuable upon exercise of a warrant.
(3) Includes 1,533 shares owned by Mr. Burstein's wife, as to which Mr.
Burstein disclaims beneficial ownership, and 38,334 shares issuable
upon exercise of options exercisable within 60 days.
(4) Consists of 38,334 shares issuable upon exercise of options exercisable
within 60 days.
(5) Consists of 35,000 shares issuable upon exercise of options exercisable
within 60 days.
(6) Consists of 26,667 shares issuable upon exercise of options
exercisable within 60 days.
(7) Includes 33,333 shares issuable upon exercise of options exercisable
within 60 days.
(8) Includes an aggregate of 363,333 shares issuable upon exercise of
options within 60 days and 1,333 shares issuable upon exercise of a
warrant.
-38-
<PAGE> 42
DESCRIPTION OF SECURITIES
The Company is authorized to issue 100,000,000 shares of
Common Stock, par value $.0001 per share, and 5,000 shares of Preferred Stock,
par value $0.01 per share.
COMMON STOCK
As of December 16, 1996, 4,738,685 shares of Common Stock were
issued and outstanding. The outstanding Common Stock is fully paid and
nonassessable.
The holders of Common Stock are entitled to one vote per share
for the election of directors and with respect to all other matters to be voted
on by stockholders. Shares of Common Stock do not have cumulative voting
rights, which means that the holders of more than 50% of such shares voting for
the election of directors can elect all of the directors if they choose to do
so and, in such event, the holders of the remaining shares so voting will not
be able to elect any directors. The holders of Common Stock are entitled to
receive dividends when, as and if declared by the Board of Directors out of
funds legally available therefor, subject to the rights accorded any class of
Preferred Stock that may be issued. In the event of liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision has been made for each class of
stock, if any, having preference over the Common Stock. The holders of Common
Stock have no conversion, preemptive or redemption rights.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges, qualifications, limitations and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series. No shares of
Preferred Stock are currently outstanding and the Company has no current plans
to issue any shares of Preferred Stock.
WARRANTS AND OPTIONS
The Company has outstanding 509,999 shares of Common Stock issuable
upon exercise of options issued pursuant to the Stock Option Plan at a
weighted-average exercise of $3.41 per share. The following table sets forth
certain information with respect to the Company's outstanding warrants to
purchase Common Stock and outstanding options to purchase Common Stock that
were not issued under the Stock Option Plan:
<TABLE>
<CAPTION>
Number of Shares Issuable Upon Exercise Expiration Date Exercise Price
--------------------------------------- --------------- --------------
<S> <C> <C>
282,104 06/01/97 $15.00
33,333 05/01/97 $12.15
113,333 08/31/97 $22.50
100,000 $11.25
33,333 04/23/98 $18.75
8,333 10/01/98 $49.65
6,667 12/06/98 $15.00
101,660 12/01/97 $20.25
10,164 12/01/98 $11.10
10,164 12/01/98 $20.25
5,000 06/30/98 $1.93
1,667 06/9/00 $2.87
25,000 06/9/00 $2.87
</TABLE>
-39-
<PAGE> 43
<TABLE>
<S> <C> <C>
89,343 12/31/98 $ 3.75
140,000 02/15/00 $ 3.06
200,000 08/28/01 $ 5.00
25,000 08/02/06 $ 5.00
------- ------
1,185,101 Total/Average Exercise Price $11.65
</TABLE>
TRANSFER AND REGISTRAR
The transfer agent and registrar for the Common Stock is
American Stock Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have
6,238,685 shares of Common Stock outstanding (6,463,685 if the Underwriters'
over-allotment option is exercised in full), assuming that no warrants or
options are exercised prior to such time. The shares sold in this offering
will be freely tradable without restrictions or further registration under the
Securities Act, other than shares purchased by affiliates of the Company, as
that term is defined under the Securities Act ("Affiliates").
The directors and executive officers of the Company have
agreed that they will not, without the prior written consent of the
Representative, sell any shares of Common Stock for a period of 180 days after
the date of the consummation of this offering (the "Lock-Up Agreements").
After the expiration of the Lock-Up Agreements, 415,242 shares of Common Stock,
plus any additional shares issued to such individuals pursuant to the exercise
of warrants or stock options, will become freely tradeable subject to the
restrictions imposed by Rule 144.
As of the date of this Prospectus, 704,091 shares of Common
Stock were reserved for issuance pursuant to outstanding warrants at a
weighted-average exercise price of $16.79 per share, substantially all of which
have been registered for resale under the Securities Act subject to the
limitations of Rule 144 promulgated under the Securities Act with respect to
shares held by Affiliates. Only 5,000 of such warrants are exercisable at a
price of less than $11.00 per share. See "Description of Securities --
Warrants and Options."
As of the date of this Prospectus, 509,999 shares of Common
Stock were reserved for issuance pursuant to options granted under the Company's
Stock Option Plan at a weighted average exercise price of $3.41 per share. The
shares granted under the Stock Option Plan have been registered under the
Securities Act and may be sold in the public market at any time (subject to the
limitations of Rule 144 with respect to shares underlying options held by
Affiliates). 234,167 of the shares issuable pursuant to these options would, if
exercised, be subject to the Lock-Up Agreements. The Company also has an
additional 481,010 shares reserved for issuance pursuant to other stock options
granted by the Company at a weighted-average exercise price of $4.09 per share,
of which 91,010 shares have been registered for resale and may be sold in the
public market at any time, subject to the limitations of Rule 144 with respect
to shares held by Affiliates. 365,000 of the shares issuable pursuant to these
options would, if issued, be subject to the Lock-Up Agreements.
The Company cannot predict the effect, if any, that sales of
shares of Common Stock, or the availability of such shares for sale will have
on the market price prevailing from time to time. Sales of substantial amounts
of Common Stock in the public market could adversely affect prevailing market
prices.
-40-
<PAGE> 44
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting
through the Representative, Wedbush Morgan Securities Inc., have severally
agreed with the Company, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Wedbush Morgan Securities Inc....................
_______________
Total............................................ 1,500,000
</TABLE>
The Representative has advised the Company that the
Underwriters propose to offer the shares of Common Stock to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $0.__ per
share, of which $0.__ may be reallowed to other dealers. After the public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representative. No such reduction shall change the amount of
proceeds to be received by the Company as set forth on the cover page of this
Prospectus.
The Company has granted the Underwriters an option,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 225,000 additional shares of Common Stock at the public offering
price, less the underwriting discounts and commissions set forth on the cover
page of this Prospectus. To the extent the Underwriters exercise such option,
each of the Underwriters will have a firm commitment to purchase approximately
the same percentage of such additional shares that the number of shares of
Common Stock to be purchased by it shown in the above table represents as a
percentage of the 1,500,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 1,500,000 shares are being sold.
The Underwriting Agreement contains certain covenants of
indemnity among the Underwriters and the Company against certain civil
liabilities, including liabilities under the Securities Act.
Pursuant to the terms of the Lock-Up Agreements, the executive
officers and directors of the Company have agreed with the Representative that,
until 180 days after the consummation of this offering, they will not, directly
or indirectly, sell, contract to sell, make any short sale, pledge or otherwise
dispose of any shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock, exclusive of securities purchased in
connection with this offering or in the public trading market, without the
prior written consent of the Representative. Subject to certain exceptions,
the Company has also agreed until 90 days after the closing date of this
offering not to issue, offer, sell, or grant options to purchase or otherwise
dispose of any shares of the Company's Common Stock or any other securities
convertible into or exchangeable for Common Stock or any other equity security,
except with the prior written consent of the Representative. See "Shares
Eligible for Future Sale."
The Representative has advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In connection with this offering, certain Underwriters and
selling group members (if any) may engage in passive market-making transactions
in the Company's Common Stock on the Nasdaq National Market, or otherwise,
accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon
the satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market-making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A prohibits
-41-
<PAGE> 45
underwriters and selling group members engaged in passive market-making,
generally, from entering a bid or effecting a purchase that exceeds the highest
bid for these securities displayed on Nasdaq by a market maker that is not
participating in the distribution. Under Rule 10b-6A, each underwriter or
selling group member engaged in passive market-making is subject to a daily net
purchase limitation equal to 30% of such entity's average daily trading volume
during the two full consecutive calendar months immediately preceding the date
of the filing of the registration statement under the Securities Act pertaining
to the security to be distributed.
LEGAL MATTERS
Certain legal matters with respect to the validity of the
Common Stock offered hereby will be passed upon for the Company by Sidley &
Austin, Los Angeles, California. Certain legal matters with respect to New
York law will be passed upon for the Company by Feder, Kaszovitz, Isaacson,
Weber, Skala & Bass, New York, New York. Certain legal matters will be passed
upon for the Representative by Sheppard, Mullin, Richter & Hampton LLP, Los
Angeles, California.
EXPERTS
The financial statements of the Company as of December 31,
1995, 1994 and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and have been
so included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
-42-
<PAGE> 46
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended
December 31, 1995 and Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 30, 1996, which have been filed by
the Company with the Securities and Exchange Commission under the Exchange Act
are incorporated by reference in this Prospectus. Any statement contained in a
document incorporated herein by reference shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute part of this Prospectus.
The Company will provide without charge to each person to whom
this Prospectus is delivered, upon written or oral request of that person, a
copy of any or all of the documents which have been incorporated by reference
in this Prospectus (other than certain exhibits to such documents, unless such
exhibits are specifically incorporated by reference in such documents).
Written or telephone requests should be directed to T.HQ, Inc., 5016 North
Parkway Calabasas, Calabasas, California 91302, Attention: Secretary
(telephone (818) 591-1310).
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration
Statement on Form S-2 (the "Registration Statement") under the Securities Act.
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission or are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company, reference is
made to the Registration Statement, including the exhibits thereto, and the
financial statements and notes filed as a part thereof. Statements made in
this Prospectus concerning the contents of any agreement or other document are
not necessarily complete. With respect to each such agreement or other
document filed with the Commission as an exhibit, reference is made to such
exhibit for a more complete description, and each such statement is deemed
qualified in its entirety by such reference.
The Company is subject to the informational requirements of
the Exchange Act, and the rules and regulations thereunder, and in accordance
therewith files reports and other information with the Commission. Such
reports and other information filed by the Company can be inspected and copied
at the Public Reference Section maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10007 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained upon written request addressed to the
Commission, Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois, at prescribed rates. The Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Common Stock is
quoted on the Nasdaq Smallcap Market System under the trading symbol "TOYH".
The Company has applied for listing on the Nasdaq National Market under the
trading symbol "THQI." Other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
-43-
<PAGE> 47
T.HQ, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1994 and December 31, 1995 and unaudited
September 30, 1996 F-3
Consolidated Statements of Operations for each of the Three Years in the Period Ended
December 31, 1995 and the unaudited nine months ended September 30, 1995 and 1996 F-4
Consolidated Statements of Shareholders' Equity for each of the Three Years in the Period
Ended December 31, 1995 and the unaudited nine months ended September 30, 1996 F-5
Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended
December 31, 1995 and the unaudited nine months ended September 30, 1995 and 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
</TABLE>
All other financial statement schedules have been omitted since either (i) the
schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Financial Statements
and Notes thereto or in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Shareholders of T.HQ, Inc.,
Calabasas, California
We have audited the accompanying consolidated balance sheets of T.HQ, Inc. and
subsidiaries (the "Company") as of December 31, 1994 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. 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 includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1994 and 1995 and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 16, 1996
F-2
<PAGE> 49
T.HQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995 1996
------------- -------------- ---------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 2,807,000 $ 1,895,000 $ 2,044,000
Accounts receivable - net 4,739,000 9,362,000 9,041,000
Inventory 1,739,000 1,150,000 1,786,000
Inventory deposits 196,000 246,000
Prepaid and deferred royalties 2,861,000 1,776,000 1,932,000
Software development costs 2,202,000 2,037,000 3,264,000
Income tax refund receivable 209,000 27,000 27,000
Prepaid expenses and other current assets 260,000 153,000 443,000
------------- -------------- --------------
Total current assets 15,013,000 16,400,000 18,783,000
Equipment - net 518,000 516,000 609,000
Other long term assets 801,000
------------- -------------- --------------
TOTAL ASSETS $ 15,531,000 $ 16,916,000 $ 20,193,000
============= ============== ==============
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, September 30,
1994 1995 1996
-------------- ------------ ---------------
(unaudited)
<S> <C> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 3,664,000 $ 4,707,000 $ 4,392,000
Accrued royalties 4,039,000 1,752,000 4,710,000
Accrued returns and allowances 3,574,000 2,859,000
Advance from bank 1,478,000
-------------- -------------- --------------
Total current liabilities 11,277,000 9,318,000 10,580,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, par value $.01,
5,000 shares authorized
Common stock, par value $.0001,
100,000,000 shares authorized; 2,790,650
shares, 4,217,391 shares, and 4,701,420 shares
issued and outstanding as of December 31,
1994, 1995, and September 30, 1996,
respectively 4,000 4,000 4,000
Additional paid-in capital 30,656,000 33,317,000 34,452,000
Cumulative foreign currency translation adjustment (442,000) (360,000) (367,000)
Accumulated deficit (25,964,000) (25,363,000) (24,476,000)
-------------- -------------- --------------
Total shareholders' equity 4,254,000 7,598,000 9,613,000
-------------- -------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 15,531,000 $ 16,916,000 $ 20,193,000
============== ============== ===============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 50
T.HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Years Ended For the Nine Months Ended
December 31, September 30,
--------------------------------------------------- -----------------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 37,478,000 $ 13,289,000 $ 33,250,000 $ 18,935,000 $ 29,772,000
Costs and expenses:
Cost of sales 31,415,000 12,651,000 19,501,000 10,798,000 16,783,000
Royalties 6,028,000 2,327,000 3,641,000 2,103,000 5,084,000
Product development 1,186,000 713,000 761,000 527,000 767,000
Project abandonment 5,489,000 3,754,000 1,025,000 375,000 375,000
Selling 4,843,000 5,909,000 2,393,000 1,689,000 2,304,000
General and administrative 7,221,000 4,806,000 3,988,000 2,475,000 2,764,000
Operating interest 529,000 496,000 1,184,000 722,000 589,000
------------- ------------ ------------ -------------- ---------------
Total costs and expenses 56,711,000 30,656,000 32,493,000 18,689,000 28,666,000
------------- ------------ ------------ -------------- ---------------
Income (loss) from operations (19,233,000) (17,367,000) 757,000 246,000 1,106,000
Interest expense, net (420,000) (112,000) (134,000) (92,000) (215,000)
------------- ------------ ------------ -------------- ---------------
Income (loss) before
income taxes (19,653,000) (17,479,000) 623,000 154,000 891,000
Provision for (benefit
from) income taxes (3,413,000) 11,000 22,000 4,000
------------- ------------ ------------ -------------- ---------------
Net income (loss) $ (16,240,00) $ (17,490,000) $ 601,000 $ 154,000 $ 887,000
============= ============= ============= ============== ===============
Net income (loss) per share $ (10.80) $ (8.75) $ .17 $ .05 $ .19
============= ============= ============= ============== ===============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 51
T.HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Years Ended December 31, 1993, 1994 and 1995
and the (unaudited) Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Additional
Preferred Common Common Paid-in
Stock Shares Amount Capital
--------- --------- ---------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 1,463,354 $ 2,000 $ 18,824,000
Exercise of warrants and options 45,814 2,001,000
Net loss
Foreign currency translation adjustment
------ --------- --------- --------------
Balance at December 31, 1993 1,509,168 2,000 20,825,000
Issuance of common stock for cash 1,278,148 2,000 9,818,000
Exercise of options 3,334 13,000
Net loss
Foreign currency translation adjustment
------ --------- --------- --------------
Balance at December 31, 1994 2,790,650 4,000 30,656,000
Exercise of warrants and options 91,530 48,000
Issuance of preferred stock for cash (3,190) 2,613,000
Conversion of preferred stock to common stock 1,335,211
(2,865)
Net income
Foreign currency translation adjustment
------ --------- --------- --------------
Balance at December 31, 1995 325 4,217,391 4,000 33,317,000
Exercise of warrants and options (unaudited) 233,652 606,000
Conversion of preferred stock to common stock
(unaudited) (325) 127,717
Issuance of stock (unaudited) 122,660 529,000
Net income (unaudited)
Foreign currency translation adjustment
(unaudited)
------- --------- --------- --------------
Balance at September 30, 1996 (unaudited) 0 4,701,420 $ 4,000 $ 34,452,000
======= ========= ========= ==============
<CAPTION>
Cumulative
Foreign Retained
Currency Earnings
Translation (Accumulated
Adjustment Deficit) Total
--------------- --------------- --------------
<S> <C> <C> <C>
Balance at January 1, 1993 $ (528,000) $ 7,766,000 $ 26,064,000
Exercise of warrants and options 2,001,000
Net loss (16,240,000) (16,240,000)
Foreign currency translation adjustment (198,000) (198,000)
------------ --------------- --------------
Balance at December 31, 1993 (726,000) (8,474,000) 11,627,000
Issuance of common stock for cash 9,820,000
Exercise of options 13,000
Net loss (17,490,000) (17,490,000)
Foreign currency translation adjustment 284,000 284,000
------------ --------------- --------------
Balance at December 31, 1994 (442,000) (25,964,000) 4,254,000
Exercise of warrants and options 48,000
Issuance of preferred stock for cash 2,613,000
Conversion of preferred stock to common stock
Net income 601,000 601,000
Foreign currency translation adjustment 82,000 82,000
------------ --------------- --------------
Balance at December 31, 1995 (360,000) (25,363,000) 7,598,000
Exercise of warrants and options (unaudited) 606,000
Conversion of preferred stock to common stock
(unaudited)
Issuance of stock (unaudited) 529,000
Net income (unaudited) 887,000 887,000
Foreign currency translation adjustment
(unaudited) (7,000) (7,000)
------------ --------------- --------------
Balance at September 30, 1996 (unaudited) $ (367,000) $ (24,476,000) $ 9,613,000
============ =============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 52
T.HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Years Ended
December 31,
-------------------------------------------------------
1993 1994 1995
-------------- --------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $(16,240,000) $(17,490,000) $ 601,000
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 1,398,000 253,000 240,000
Provision for doubtful accounts,
discounts and returns 9,756,000 3,888,000 4,145,000
Deferred income tax benefit (203,000)
Changes in operating assets and liabilities:
Accounts receivable 16,503,000 (2,127,000) (5,875,000)
Inventory and inventory deposits 6,933,000 3,796,000 779,000
Prepaid and deferred royalties and
software development costs 6,685,000 1,602,000 2,592,000
Prepaid and deferred taxes
Prepaid expenses and other current assets (282,000) 2,292,000 99,000
Income tax refund receivable (2,630,000) 2,398,000 201,000
Accounts payable and accrued expenses (1,029,000) 1,365,000 1,040,000
Accrued royalties (4,202,000) (2,083,000) (3,628,000)
Accrued returns and allowances (4,258,000) (3,898,000) (3,589,000)
Income taxes payable (2,232,000) 18,000
------------ ------------ -----------
Net cash used in operating activities 10,199,000 (9,986,000) (3,395,000)
------------ ------------ -----------
Cash flows used in investing activities:
Long term investments
Acquisition of equipment (952,000) (188,000) (239,000)
------------ ------------ -----------
Net cash used by investing activities (952,000) (188,000) (239,000)
Cash flows from financing activities:
Restricted cash - letters of credit 4,250,000
Borrowings under notes payable bank 1,241,000
Repayments of notes payable bank (16,109,000)
Advances from bank
Proceeds from exercise of warrants and
options 2,001,000 13,000 48,000
Net proceeds from issuance of convertible
preferred stock 2,613,000
Net proceeds from issuance of common
stock 9,820,000
------------ ------------ -----------
Net cash provided by financing activities (8,617,000) 9,833,000 2,661,000
------------ ------------ -----------
Effect of exchange rate changes on cash (53,000) 133,000 61,000
------------ ------------ -----------
Net increase (decrease) in cash 577,000 (208,000) (912,000)
Cash - beginning of period 2,438,000 3,015,000 2,807,000
------------ ------------ -----------
Cash - end of period $ 3,015,000 $ 2,807,000 $ 1,895,000
============ ============ ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income taxes $ 1,432,000 $ 0 $ 22,000
============ ============ ===========
Cash paid during the period for interest $ 462,000 $ 235,000 $ 230,000
============ ============ ===========
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------------
1995 1996
-------------- --------------
Cash flows from operating activities: (unaudited) (unaudited)
<S> <C> <C>
Net income (loss) $ 154,000 $ 887,000
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 176,000 176,000
Provision for doubtful accounts,
discounts and returns 1,908,000 3,282,000
Deferred income tax benefit
Changes in operating assets and liabilities:
Accounts receivable (1,825,000) (2,696,000)
Inventory and inventory deposits 2,154,000 (868,000)
Prepaid and deferred royalties and
software development costs 1,396,000 1,922,000
Prepaid and deferred taxes 66,000 (19,000)
Prepaid expenses and other current assets 52,000 (290,000)
Income tax refund receivable
Accounts payable and accrued expenses 94,000 (58,000)
Accrued royalties (2,870,000) (348,000)
Accrued returns and allowances (4,465,000) (3,132,000)
Income taxes payable
----------- -----------
Net cash used in operating activities (3,160,000) (1,144,000)
----------- -----------
Cash flows used in investing activities:
Long term investments (501,000)
Acquisition of equipment (108,000) (267,000)
----------- -----------
Net cash used by investing activities (108,000) (768,000)
Cash flows from financing activities:
Restricted cash - letters of credit
Borrowings under notes payable bank
Repayments of notes payable bank
Advances from bank 1,478,000
Proceeds from exercise of warrants and
options 606,000
Net proceeds from issuance of convertible
preferred stock 2,733,000
Net proceeds from issuance of common
stock (5,000)
----------- -----------
Net cash provided by financing activities 2,728,000 2,084,000
----------- -----------
Effect of exchange rate changes on cash 57,000 (23,000)
----------- -----------
Net increase (decrease) in cash (483,000) 149,000
Cash - beginning of period 2,807,000 1,895,000
----------- -----------
Cash - end of period $ 2,324,000 $ 2,044,000
=========== ===========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income taxes $ 7,000 $ 0
=========== ===========
Cash paid during the period for interest $ 175,000 $ 260,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
(continued)
F-6
<PAGE> 53
Non-cash transactions (unaudited):
On July 1, 1996 the Company issued 70,000 shares of common stock in
lieu of cash to a former employee of the Company. This transaction resulted in
a reduction in accounts payable and accrued expenses and a like increase in
additional paid in capital in the amount of $229,000, the fair value of the
stock issued on the date of issuance. Also on July 1, 1996, the Company issued
52,660 shares of common stock as part of the purchase price for a 25% interest
in Inland Productions, Inc., increasing other long term investments and
additional paid-in capital by $300,000.
Concluded.
F-7
<PAGE> 54
T.HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1996 and for the nine months ended
September 30, 1995 and 1996 is unaudited)
1. ORGANIZATION
Business. T.HQ, Inc. a New York corporation, develops and publishes
interactive entertainment software ("Software"). Substantially all of the
Company's products are based on licenses for popular cultural trends and
high-recognition names ("Properties").
Unless the context otherwise requires, references in this document to
"T.HQ" or the "Company" include T.HQ, Inc. and all of its wholly owned
subsidiaries.
License Agreements. The Company has a license agreement with Sony
pursuant to which it has the non-exclusive right to utilize the Sony name and
its proprietary information and technology in order to develop and market
software for use with the 32-bit Sony PlayStation. This agreement expires in
June of 1998.
The Company has various license agreements with Nintendo pursuant to
which it has the non-exclusive right to utilize the Nintendo name and its
proprietary information and technology in order to develop and market Software
for use with the 16-bit Super Nintendo Entertainment System ("SNES") and with
the Nintendo Game Boy portable game console. The license agreements with
Nintendo for such hardware platforms expire at various times through December
1997. The Company also seeks to participate in the newly emerging 64-bit
Software market, as it has applied for a license from Nintendo to publish one
of its Titles for the recently introduced 64-bit Nintendo 64.
The Company has various license agreements with Sega pursuant to which
it has the non-exclusive right to utilize the Sega name and its proprietary
information and technology in order to develop and market Software for use with
the 32-bit Sega Saturn, 16-bit Sega Genesis, and the portable Sega Game Gear.
The license agreements with Sega for such hardware platforms expire at various
times through 1999.
The Company's Software business is dependent on its license agreements
with Sony, Nintendo, and Sega. In particular, all of the Company's Software
products are manufactured by Sony, Nintendo, and Sega, who charge the Company a
fixed amount for each Software CD-ROM or cartridge manufactured, which charge
includes a manufacturing, printing and packaging fee as well as a royalty for
the use of their respective names, proprietary information and technology.
In addition, the Company must indemnify Sony, Nintendo, or Sega as
appropriate, with respect to all loss, liability and expense resulting from any
claim against Sony, Nintendo, or Sega involving the development, marketing,
sale or use of the Company's Titles, including any claims for copyright or
trademark infringement brought against Sony, Nintendo, or Sega. As such, the
F-8
<PAGE> 55
Company bears the risk that the Properties and information and technology
licensed from Sony, Nintendo, or Sega and incorporated in the Software may
infringe the rights of third parties. Generally, the Company is entitled to
indemnification from its Software developers and Property licensors to cover
its indemnification obligations to Sony, Nintendo, or Sega, but no assurance
can be given that, if any claim is brought against the Company, said developers
and/or licensors will have sufficient resources to indemnify the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of T.HQ, Inc. and its wholly owned subsidiaries. All
material intercompany balances and transaction have been eliminated.
Unaudited Interim Financial Information. The interim financial
information included herein has been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, such unaudited financial information
includes all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth herein. The results for
the nine months ended September 30, 1996 are not necessarily indicative of the
results to be expected for the full year.
Foreign Currency Translations. Assets and liabilities of foreign
operations are translated at current rates of exchange while results of
operations are translated at average rates in effect for the period.
Translation gains or losses are shown as a separate component of shareholders'
equity. Foreign currency translation gains and losses result from exchange
rate changes denominated in currencies other than the functional currency. The
Company has not experienced significant foreign currency transaction gains or
losses.
Fair Values of Financial Instruments. The carrying value of accounts
receivable and trade payables approximate the fair value due to their
short-term maturities. The carrying value of the Company's advances from its
bank is considered to approximate its fair value because the interest rate of
this instrument is based on a variable reference rate.
Inventory and Inventory Deposits. Inventories, which consist
principally of finished products, are stated at the lower of cost (first- in,
first-out basis) or market. On a quarterly basis, the Company estimates the net
realizable value of slow-moving inventory on a title by title basis, and
charges the excess of cost over net realizable value to cost of sales.
Inventory deposits are prepayments to Software vendors or deposits to lenders
opening letters of credit on behalf of the Company for the manufacture of
specific products.
F-9
<PAGE> 56
Equipment. Equipment is stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
which range from three to five years. Equipment consists of the following at:
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------- -------------
1994 1995 1996
------------ -------------- -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment $ 776,000 $ 897,000 $1,158,000
Leasehold improvements 10,000 20,000 20,000
Less accumulated depreciation (268,000) (401,000) (569,000)
--------- --------- ----------
$ 518,000 $ 516,000 $ 609,000
========== ========= ==========
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and
1995 was $1,209,000, $209,000, and $199,000, respectively and for the nine
months ended September 30, 1995 and 1996 was $176,000 and $176,000,
respectively.
Royalties and Software Development Costs. Advance royalty payments
for intellectual property licenses are recorded as prepaid royalties. All
minimum guaranteed royalty payments are initially recorded as an asset
(deferred royalties) and as a liability (accrued royalties) at the contractual
amount upon execution of the contract. Royalty payments for intellectual
property licenses are classified as current assets to the extent they relate to
anticipated sales during the subsequent year. The Company utilizes both
independent Software developers (who are paid advances against future
royalties) and internal development teams to develop its Software. Such
Software development costs are capitalized when technological feasibility has
been established. Technological feasibility for entertainment Software such as
the Company's has been established by Sony, Nintendo, and Sega for use with
their respective hardware platforms. Royalty expense is computed using either
a percentage of the related product dollar sales or a per unit sold calculation
as sales are made. Amortization of prepaid royalty and software development
costs, as a part of royalties expense, is provided on a product-by-product
basis commencing with the general release of each product, based on the greater
of the ratio of current gross revenues for the product to the sum of its
current and anticipated gross revenues, or the straight line method over the
remaining estimated economic life of the product. The Company also expenses as
project abandonment losses advances or capitalized Software development costs
when, in management's estimate, future revenues will not be sufficient to
recover previously capitalized costs. Such abandonment losses are solely
attributable to changes in market conditions or product quality considerations.
Software development costs of $2,293,000, $935,000, and $1,768,000 were
amortized in 1993, 1994, and 1995, respectively and of $1,033,000 and
$1,625,000 were amortized in the nine months ended September 30, 1995 and 1996.
Project abandonment losses related to Software development costs of
$4,818,000, $2,743,000, and $1,025,000, were charged to expense in 1993, 1994,
and 1995, respectively and of $375,000 was charged to expense in the nine
months ended September 30, 1995 and 1996. Research and development costs are
expensed as incurred and to date have not been material.
F-10
<PAGE> 57
Revenue Recognition. Revenue is recognized when the product is
shipped, provided that no significant vendor support obligations remain
outstanding, and provided that the collection of the resulting receivable is
deemed probable by management. Although the Company sells its products on a
no-return basis, in certain circumstances the Company may allow returns, price
concessions, or allowances on a negotiated basis. The Company estimates such
returns and allowances based upon management's evaluation of the Company's
historical experience and current industry trends. Such estimates are deducted
from gross revenue. Software is sold under a limited 90-day warranty against
defects in material and workmanship. To date, the Company has not experienced
material warranty claims. (See Note 3).
Primary and Fully Diluted Earnings Per Share. Net income (loss) per
share has been computed using the weighted average number of common shares and
common share equivalents (which consists of warrants, convertible preferred
stock, and options, to the extent they are dilutive). The weighted average
number of common shares and common share equivalents outstanding in the years
ended December 31, 1993, 1994, and 1995 were 1,504,000, 1,998,000, and
3,482,000, respectively and in the nine months ended September 30, 1995 and 1996
were 3,007,000 and 4,684,000. The difference between primary and fully diluted
earnings per share is not significant.
Non-monetary Transactions. Prior to 1995, the Company exchanged its
products for media to facilitate the promotion of the Company's products. The
exchanges are valued at the lower of cost or fair market value of products
exchanged. The Company recorded expense related to these transactions of
$2,061,000 during 1994.
Reclassifications. Certain items in the 1993, 1994, and 1995
financial statements have been reclassified to conform to the 1996
presentation.
Pervasiveness 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 disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates relate to prepaid and deferred royalties,
software development costs, accrued returns and allowances and the allowance
for doubtful accounts.
Impact of Recently Issued Accounting Standards. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". The Company does
not plan to adopt the fair value features of the statement and will instead
base its accounting on the provisions of Accounting Principles Board Opinion
No. 25, which uses the intrinsic value method of accounting for stock options.
F-11
<PAGE> 58
3. ACCOUNTS RECEIVABLE, FACTORING AGREEMENT, DUE FROM FACTOR AND ACCRUED
RETURNS AND ALLOWANCES.
Until July 18, 1996 the Company had a factoring and credit agreement
(the "BNY Agreement") with BNY Financial Corporation ("BNY"), a wholly owned
subsidiary of The Bank of New York. There were no open letters of credit under
the BNY agreement at June 30, 1996.
On July 18, 1996, the Company terminated its factoring and credit
agreement with BNY and entered into a new financing and banking arrangement
with Imperial Bank ("Imperial Agreement"). The Imperial Agreement permits the
Company to draw down working capital advances and open letters of credit in
amounts determined by a formula based on 70% of eligible accounts receivable
and 50% of eligible inventory. The amount of eligible inventory in the formula
may not exceed $1,500,000. The facility provides for maximum borrowings of
$7,500,000, with advances bearing interest at the bank's prime rate plus 1.25%
(% as of September 30, 1996. The Company has granted Imperial Bank a security
interest in its domestic accounts receivable and inventories. The Imperial
Agreement expires on June 30, 1997. Open letters of credit under the Imperial
Agreement totaled $3,844,000 at September 30, 1996.
The Imperial Agreement contains covenants that include, among other
things, restrictions on additional borrowings, payment of dividends, and
capital expenditures. The Company must also maintain a current ratio, defined
as current assets divided by current liabilities, of not less than 1.5 to 1,
and maintain profitable operations on a fiscal year basis. Additionally, the
Company is required to maintain a minimum tangible net worth of $5,900,000 and
minimum working capital of $5,000,000.
The Company also has lines of credit with two additional lenders
pursuant to which such lenders have agreed to issue letters of credit on the
Company's behalf to Sony, Nintendo, and Sega for the purchase of software for
the Company's domestic and European operations. The domestic and European
lines are $5,000,000 and $2,500,000, respectively. Each of these lenders
receives a fee for the issuance of such letters of credit, and each lender
retains title to the inventory financed by such lender until such time as that
inventory is sold. The domestic lender has a security interest in the domestic
assets of the Company, subordinated to Imperial Bank's priority security
interest. The current term of the agreement with the domestic lender expires
on March 15, 1997, with automatic renewals at such date and every six months
thereafter, unless terminated by either party. Open letters of credit with the
domestic lender were $3,187,000 at September 30, 1996. The European lender has
a first security interest in all of the Company's European subsidiaries'
receivables, inventory, and other assets. The agreement may be canceled at any
time at the lender's sole discretion. Open letters of credit under the
agreement with the European lender were $728,000 as of September 30, 1996.
Because BNY owned the Company's domestic receivables pursuant to the
BNY agreement, prior to the effective date of the Imperial agreement the
Company's domestic accounts receivables were presented net of advances from BNY
(see table below). In addition, because BNY assumed credit risk for the
Company's domestic receivables but did not assume risk of markdowns or
allowances, the Company's reserve for such markdowns and allowances
F-12
<PAGE> 59
was presented as a liability is periods prior to the closing of the Imperial
Agreement. Because Imperial does not own the Company's domestic receivables,
advances from Imperial are now shown as a liability in the accompanying
financial statements, and reserves for markdowns and allowances are now
presented as a deduction from the Company's gross receivables.
Accounts receivable are due primarily from domestic and foreign
retailers and distributors, including mass merchants and specialty stores.
Accounts receivable at December 31, 1994 and 1995 and the nine months ended
September 30, 1996 are composed of the following:
<TABLE>
<CAPTION>
December 31, September 30,
---------------------------------- ---------------
1994 1995 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Receivables assigned to factor $ 5,031,000 $ 7,348,000 $
Advances from factor (1,035,000) (2,085,000)
-------------- ------------- ---------------
Due from factor 3,996,000 5,263,000
Accounts receivable - domestic 11,655,000
Other accounts receivable, primarily foreign 1,753,000 5,739,000 1,997,000
Other receivables 7,000 51,000 4,000
Allowance for foreign doubtful accounts (827,000) (1,380,000) (1,310,000)
Allowance for foreign discounts and returns (190,000) (311,000) (112,000)
Allowance for domestic accrued returns
and allowances (3,193,000)
-------------- -------------- ---------------
Accounts receivable - net $ 4,739,000 $ 9,362,000 $ 9,041,000
============== ============== ===============
</TABLE>
The allowance for foreign doubtful accounts consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended
December 31, September 30,
------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
------------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ (115,000) $ (536,000) $ (827,000) $ (827,000) $ (1,380,000)
Provision for doubtful
accounts (536,000) (256,000) (505,000) (24,000) (10,000)
Actual write-offs
(recoveries) 115,000 (35,000) (48,000) (62,000) 80,000
------------ ----------- ------------- ----------- --------------
Ending balance
$ (536,000) $ (827,000) $ (1,380,000) $ (913,000) $ (1,310,000)
============ =========== ============= =========== ==============
</TABLE>
F-13
<PAGE> 60
The allowance for foreign discounts and returns consists of the
following:
<TABLE>
<CAPTION>
Nine Months Ended
December 31, September 30,
----------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ (1,039,000) $ (666,000) $ (190,000) $ (190,000) $ (311,000)
Provision for
discounts and
returns (842,000) (280,000) (766,000) (199,000) (275,000)
Actual write-offs 1,215,000 756,000 645,000 223,000 474,000
------------- ----------- ----------- ----------- -----------
Ending balance $ (666,000) $ (190,000) $ (311,000) $ (166,000) $ (112,000)
============= =========== =========== =========== ===========
</TABLE>
The allowance for domestic accrued returns and allowances, which is
recorded as a liability in the accompanying financial statements for the
periods ended December 31, 1993, 1994, and 1995, consists of the following:
<TABLE>
<CAPTION>
Nine Months Ended
December 31, September 30,
---------------------------------------------------- ---------------------------------
1993 1994 1995 1995 1996
------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1 $ 0 $ (4,120,000) $ (3,574,000) $ (3,574,000) $ (2,859,000)
Provision for
discounts and
returns (8,378,000) (3,352,000) (2,874,000) (1,430,000) (2,997,000)
Actual write-offs 4,258,000 3,898,000 3,589,000 2,969,000 2,663,000
------------- -------------- -------------- -------------- -------------
Ending balance $ (4,120,000) $ (3,574,000) $ (2,859,000) $ (2,035,000) $ (3,193,000)
============= ============== ============== ============== =============
</TABLE>
4. EMPLOYEE PENSION PLAN
The Company sponsors for its employees a defined contribution plan
intended to qualify under Section 401(k) of the Internal Revenue Code (the
"Plan"). The Plan, as amended in 1991, provides that employees may defer up to
12% of annual compensation, and that the Company will make a matching
contribution equal to each employee's deferral, up to 4% of compensation. The
Company may also contribute funds to the Plan in the form of a profit sharing
contribution. Expenses under the Plan were $116,000, $61,000, and $30,000 in
1993, 1994 and 1995, respectively, and $13,000 and $89,000 for the nine months
ended September 30, 1995 and 1996 respectively.
F-14
<PAGE> 61
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
Current
Federal $ (2,973,000) $ 0 $ 22,000
State (96,000) 0 0
Foreign (141,000) 11,000 0
--------------- -------------- ---------------
(3,210,000) 11,000 22,000
--------------- -------------- ---------------
Deferred
Federal (301,000) 0 0
State 98,000 0 0
--------------- -------------- ---------------
(203,000) 0 0
--------------- -------------- ---------------
$ (3,413,000) $ 11,000 $ 22,000
=============== ============== ===============
</TABLE>
A reconciliation of the provision for income taxes at the federal
statutory rate to the provision recorded in the accompanying financial
statements is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- ----
<S> <C> <C> <C>
Federal provision at statutory rate (35.0)% (35.0)% 35.0%
Effect of foreign income taxes and other .7 .1
Effect of net operating loss carryforward
(utilized) not utilized 16.9 35.0 (31.5)
----- ---- -----
(17.4)% 0.1% 3.5%
===== ==== =====
</TABLE>
F-15
<PAGE> 62
The components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1994 1995
--------------------------------- --------------------------------------
Federal State Federal State
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Deferred tax assets
Allowance for doubtful
accounts, discounts
and returns $ 1,215,000 $ 228,000 $ 973,000 $ 216,000
Net operating loss 5,881,000 453,000 5,852,000 1,168,000
License abandonment 804,000 151,000 539,000 559,000
Other - net 346,000 65,000 250,000 56,000
-------------- ------------ -------------- --------------
Total deferred tax assets 8,246,000 897,000 7,614,000 1,999,000
-------------- ------------ -------------- --------------
Deferred tax liabilities
Software development costs (854,000) (47,000) (893,000) (573,000)
State income taxes (288,000) (484,000)
-------------- ------------ -------------- --------------
Net deferred tax assets 7,104,000 850,000 6,237,000 1,426,000
Valuation reserve (7,104,000) (850,000) (6,237,000) (1,426,000)
-------------- ------------ -------------- --------------
Deferred income taxes $ 0 $ 0 $ 0 $ 0
============== ============ ============== ==============
</TABLE>
A valuation reserve has been provided in 1994 and 1995 because of the
uncertainty regarding the realization of net deferred tax assets. The
valuation reserve increased $5,407,000 during fiscal 1994 and decreased
$291,000 in fiscal 1995.
As of December 31, 1995 the Company has Federal and State net
operating loss carryforwards of $17,488,000 (expiring from years 2008 to 2009)
and $12,695,000 (expiring from years 1997 to 1999), respectively, which have
not been recorded in the financial statements because of the uncertainty as to
realization. Any significant increase in the number of common shares
outstanding would result in an "ownership change" of the Company for purposes
of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the
"Code"). As a result, the amount of the Company's NOL available to reduce the
Company's federal income tax liability in future years in which the Company has
taxable income would be limited to an annual amount equal to the product of (i)
the fair market value of the Company's capital stock on the date of
consummation of the offering made hereby, multiplied by (ii) the "long-term tax
exempt rate" published by the Internal Revenue Code.
6. STOCK OPTION PLAN (See Note 8)
The Company has a stock option plan (the "Option Plan") which provides
for the issuance of up to 200,000 options to acquire the Company's common
stock. In May 1995, the Company's shareholders approved an increase in the
number of shares available under the Company's Stock Option Plan to 650,000
shares available for employees and non-employee directors. Stock options
granted under the Option Plan may be Incentive Stock Options under the
requirements of
F-16
<PAGE> 63
the Internal Revenue Code, or may be Nonstatutory Stock Options which do not
meet such requirements. Options may be granted under the Option Plan to, in
the case of Incentive Stock Options, all employees (including officers) of the
Company; or, in the case of Nonstatutory Stock Options, all employees
(including officers) or non-employee directors of the Company.
The exercise price per share of all options granted in 1994, 1995, and
the nine months ended September 30, 1996 has been the market price of the stock
on the date of the grant. Generally, options granted become exercisable over
three years and must be exercised within four years of the date of grant.
<TABLE>
<CAPTION>
Stock Options Number of Shares
------------------------------------------------ -------------------
<S> <C>
Outstanding at January 1, 1994
($13.20 - $82.65 per share) 67,305
Granted at $3.75 - $17.25 per share 102,423
Exercised at $3.75 per share (3,334)
Canceled at $31.95 - $78.75 per share (62,304)
-------
Balance at December 31, 1994
($13.20 - $82.65 per share) 104,090
-------
Granted at $2.87 - $9.30 per share 609,833
Exercised at $2.87 per share (16,666)
Canceled at $2.87 - $17.25 per share (42,666)
-------
Balance at December 31, 1995
($2.87 - $78.675 per share) 654,591
-------
Granted at $3.50 - $6.00 per share 121,500
Exercised at $2.87 - $3.75 per share (90,673)
Canceled at $2.87 - $82.65 per share (158,254)
-------
Balance at September 30, 1996 527,164
=======
Options exercisable at September 30, 1996 270,331
=======
</TABLE>
Included in the 1994 stock option grants is an option granted to Jack
Friedman, the former president of the Company. This option was originally
granted on February 24, 1994 at the price of $13.95 per share. Upon the
resignation of Mr. Friedman and the re-negotiation of his employment agreement,
options previously granted in 1994 were repriced to the then current market
price of the stock of $3.75.
During 1995, the Company granted 240,000 options outside of its plan,
140,000 options at $3.06 to Brian Farrell, the Company's president, 70,000
options to a former employee as a part of the employee's severance package
(50,000 at $2.81 and 20,000 at $2.25), and 30,000 options at $2.87 to two
outside consultants who have subsequently become employees of the Company. In
1996, the Company issued 200,000 options outside of its plan to Mr. Farrell at
$5.00 per share.
F-17
<PAGE> 64
Share prices for these options were at the market price of the Company's common
stock at the date of the grant.
7. MAJOR CUSTOMERS AND RELATED PARTY TRANSACTIONS
Sales (before returns and allowances) to a major customer represented
16% and 18% of gross sales in the years ended December 31, 1993 and 1994,
respectively. Sales (before returns and allowances) to two major customers were
12% and 10% in the year ended December 31, 1995. Sales (before returns and
allowances) to a customer were 11% and 12% in the nine months ended September
30, 1995 and 1996, respectively. Sales (before returns and allowances) to two
other customers represented 12% and 10% of sales, respectively in 1993. In 1994
one other customer represented 18% of sales (before returns and allowances).
The Company also had sales of $407,000 in the year ended December 31,
1993, to Grand Toys, Ltd. ("Grand"). A former director of the Company who
resigned in 1994 is a principal officer and director of Grand.
The Company has an agreement with Trinity Capital Corp. ("TCC"), an
officer and owner of which is a director of the Company, whereby the Company
paid TCC $46,000 for financial consulting services in 1993.
In 1993, 1994 and 1995 the Company paid the law firm of Feder,
Kaszovitz, Isaacson, Weber, Skala & Bass, of which Mr. Skala, a director of the
Company, is a partner, approximately $167,000, $275,000, and $214,000,
respectively and in the nine months ended September 30, 1995 and 1996 the
Company paid $214,000 and $177,000 respectively, for legal services.
8. CAPITAL STOCK TRANSACTIONS
In 1993, the Company entered into an agreement with an independent
investor (the "LC Investor") pursuant to which the Investor posted a standby
letter of credit in the principal amount of $5,000,000, in favor of BNY as
additional collateral, expiring on February 28, 1994. Effective January 31,
1994, the Company entered into an agreement with the Investor whereby the
Investor extended the expiration date of the standby letter of credit to
December 31, 1994. As consideration, the Company reduced the exercise price of
100,000 warrants previously granted to the Investor to $12.15 per share (the
then current market value of the Company's stock), and granted the Investor an
additional 33,334 warrants to purchase the Company's common stock at $12.15 per
share.
In March 1994, the Company sold 133,334 shares of its common stock
pursuant to Regulation S resulting in net proceeds to the Company of $980,000.
In June 1994, the Company sold units consisting of 564,445 shares of common
stock and warrants to purchase an additional 282,222 shares of common stock at
$15.00 per share pursuant to Rule 506 of Regulation D of the Securities Act of
1993, as amended ("the Act"), resulting in net proceeds to the Company of
$4,624,000. In September, October, and November 1994, the Company sold an
aggregate of 478,704 shares of common stock resulting in net proceeds to the
Company of $3,328,000, in sales exempt from the registration requirements of
the Act pursuant to Registration S of the Act. In December 1994, the Company
sold units consisting of 101,665 shares of common stock and
F-18
<PAGE> 65
warrants to purchase 101,665 shares of common stock at $20.25 per share in
private placements pursuant to Regulation D of the Act, resulting in net
proceeds to the Company of $888,000, (collectively "the Financings").
The net proceeds received by the Company from the Financings were
utilized in part in connection with the marketing and inventory purchase
commitments related to the launch of the XBAND Videogame Modem (the "XBAND
Modem") (See Note 9), and for the completion of certain Software products under
development.
On July 1, 1995, the Company granted a warrant to the Company's
domestic letter of credit lender to purchase 60,000 common shares at a price of
$1.93 per share. The warrant is excercisable until June 30, 1998.
In the months of July, August and September 1995, the Company received
aggregate net proceeds of $2,613,000 from the sales of certain of its
convertible preferred stock pursuant to Regulation S of the Act. The preferred
shares were convertible by the holders thereof into approximately 1,462,000
common shares of the Company. These shares were redeemable at the Company's
option upon 30 days written notice, and earned dividends at the rate of 9% per
annum, payable at the Company's option in cash or by issuance of common shares
equal to the dividend amount divided by the average market price of the
preceding five days. As of December 31, 1995, a total of 1,335,211 shares of
common stock had been issued in connection with this transaction. As of
February 1996, all preferred shares had been converted to common stock, a total
of 1,462,928 shares of common stock were issued in connection with this
transaction.
On July 1, 1996, the Company issued 70,000 shares of common stock, at
the fair market value of the stock on such date, in lieu of settlement of an
accrued liability of $229,000 due to a former employee.
During the years ended December 31, 1993, 1995 and the nine months
ended September 30, 1996, the number of warrants to purchase the Company's
common stock exercised were 40,000, 74,864, and 70,000, respectively. The
Company received proceeds from the exercise of such warrants totaling
$2,049,000. There were no warrants exercised during the year ended December
31, 1994.
9. OTHER LONG TERM ASSETS
On July 1, 1996, the Company acquired a twenty-five percent interest
in Inland Productions, Inc., a software developer for home entertainment game
systems. The investment consisted of $300,000 in cash and 52,660 shares of
T.HQ common stock, and is included in other long term assets in the
accompanying balance sheet. The Company has contracted with Inland for the
development of 32-bit and 64-bit versions of WCW Wrestling.
F-19
<PAGE> 66
On August 7, 1996, the Company acquired the business of Heliotrope
Studios, Inc. ("Heliotrope"), an interactive software developer for PC CD-ROM
and an assignment of the distribution license and certain work-in-progress for
a PC CD-ROM title (Pax Imperia II) from Blizzard Entertainment, a division of
Davidson Associates. In connection with the acquisition, the Company incurred
costs of $100,000 and assumed certain liabilities ($90,000) of Heliotrope. The
excess of the Company's cost of the acquisition over the estimated fair value
of assets acquired (approximately $190,000) has been included as a long term
investment in the accompanying balance sheet. Such excess cost is being
amortized over 60 months. Because Heliotrope's assets and operations prior to
the acquisition were insignificant, no pro forma information is presented.
10. COMMITMENTS AND CONTINGENCIES
XBAND Modem Agreement. On April 23, 1994 the Company entered into a
letter of agreement with Catapult Entertainment, Inc. ("Catapult"), pursuant
to which T.HQ was the exclusive North American distributor of certain hardware
products developed by Catapult. The Company was required to spend a minimum of
$3,000,000 in 1994 and a minimum of $2,000,000 in the first quarter of 1995 to
market and sell the XBAND Modem, and the Company was also required to finance
all inventory purchases. By mutual agreement between the Company and Catapult,
approximately $2,679,000 was spent in marketing efforts by the Company by
December 31, 1994 on the XBAND Modem. Because of the slow sales of the XBAND
Modem and the potential for markdowns and returns, the Company reserved
approximately $2,000,000 (by charging such amount against net sales) for such
markdowns and reserves in 1994.
On May 31, 1995, the Company and Catapult entered into a new agreement
related to the marketing and distribution of the XBAND Modem, pursuant to which
Catapult purchased the Company's inventory and accounts receivable related to
the XBAND Modem for approximately $3,200,000. At the closing of the agreement,
Catapult paid approximately $1,100,000 owed by the Company to the manufacturer
of the XBAND Modem, and $100,000 to the Company. The remaining amounts owing
to the Company were to have been received upon the conclusion of equity
financing by Catapult. The Company recorded the cash received at the closing
as sales of the XBAND Modem in the year ended December 31, 1995 pursuant to the
new agreement. Catapult has filed for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. If Catapult's plan of reorganization is approved by the
Bankruptcy Court, T.HQ will receive approximately 15% of its remaining claim
against Catapult, or approximately $200,000. Because of the uncertainty
surrounding the receipt of any future proceeds, no accrual has been made for
amounts due under the agreement which have not been received. The Company has
a zero carrying value of the receivable from Catapult. As a result, any
proceeds received in the future will result in a gain to the Company.
Nintendo-Alpex Litigation. The Company has been advised by Nintendo
that a lawsuit has been instituted against Nintendo by a party alleging that
certain NES products, including licensee Software, manufactured and sold by
Nintendo for its NES system infringed a certain
F-20
<PAGE> 67
patent, and that the party is seeking monetary damages and injunctive relief
against Nintendo. Although Nintendo has asserted that its products do not
infringe such patent, an adverse verdict was recently received and damages
awarded by a jury against Nintendo. Nintendo has filed an appeal in the
Federal Circuit Court of Appeals and briefs are being filed directly. The
Company has also been advised that the relevant patent has expired and
therefore there is no risk of injunctive relief. The impact of this decision,
the ultimate outcome of such claim, and the effect on the Company, is
uncertain. No claims have been asserted against the Company by Nintendo or any
other party to the action.
The Company has been advised by Nintendo that Alpex may assert that
certain SNES and Game Boy Software also infringe the patent involved in the
litigation. No legal proceedings have been commenced at this time against
Nintendo or any other party. The Company has been advised that the relevant
patent has expired and therefore, if any action is instituted, there is no risk
of injunctive relief. Since the Company is not required to indemnify Nintendo
from any claims arising from such suit, and the Company has not been named as a
party to the suit, management believes that the risk of loss associated with
these matters is remote.
Royalties. At December 31, 1994 and 1995, future minimum guaranteed
royalties were $4,039,000 and $1,752,000, respectively and at September 30,
1996 were $4,710,000. Royalties are classified as current liabilities based
upon contractual payment dates.
Leases. The Company is committed under operating leases with lease
termination dates to July 1998. Minimum future rentals pursuant to these
leases as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $255,000
1997 160,000
1998 95,000
--------
$510,000
========
</TABLE>
Rent expense was $239,000, $251,000, and $184,000 in 1993, 1994, and 1995,
respectively and $156,000 and $133,000 in the nine months ended September 30,
1995 and 1996.
11. OPERATIONS IN GEOGRAPHIC AREAS
The Company is engaged in the development, marketing and distribution of
Software products, and formerly was engaged in the development, marketing and
distribution of traditional toys and games which is considered to be a single
segment. The following information sets forth geographic information on the
Company's sales, earnings (losses) from operations and identifiable assets for
the years ended December 31, 1993, 1994 and 1995:
F-21
<PAGE> 68
(in thousands of dollars)
<TABLE>
<CAPTION>
United
States Europe Asia Elimination Consolidated
------ ------ ---- ----------- ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993:
Sales to unaffiliated customers 26,986 7,725 2,767 37,478
Transfers between
geographic areas 1,106 (1,106)
------- ------ ----- ------ -------
Total net revenue 26,986 7,725 3,873 (1,106) 37,478
======= ====== ===== ====== =======
Pretax earnings (loss) (16,764) (2,411) (642) 164 (19,653)
======= ====== ===== ====== =======
Identifiable assets at
December 31, 1993 17,805 4,649 139 (288) 22,305
======= ====== ===== ====== =======
Year Ended December 31, 1994:
Sales to unaffiliated customers 11,114 2,175 13,289
Transfers between
geographic areas 84 (84)
------- ------ ----- ------ -------
Total net revenue 11,114 2,175 84 (84) 13,289
======= ====== ===== ====== =======
Pretax earnings (loss) (16,017) (1,459) 108 (111) (17,479)
======= ====== ===== ====== =======
Identifiable assets at
December 31, 1994 12,136 3,484 113 (202) 15,531
======= ====== ===== ====== =======
Year Ended December 31, 1995:
Sales to unaffiliated customers 24,894 8,356 33,250
Transfers between
geographic areas
------- ------ ----- ------ -------
Total net revenue 24,894 8,356 33,250
======= ====== ===== ====== =======
Pretax earnings (loss) 1,621 (869) (4) (125) 623
======= ====== ===== ====== =======
Identifiable assets at
December 31, 1995 13,681 3,415 2 (182) 16,916
======= ====== ===== ====== =======
Nine Months Ended
September 30, 1996:
Sales to unaffiliated customers 22,264 7,508 29,772
Transfers between
geographic areas
------- ------ ----- ------ -------
Total net revenue 22,264 7,508 0 0 29,772
======= ====== ===== ====== =======
Pretax earnings (loss) 663 209 19 0 891
======= ====== ===== ====== =======
Identifiable assets at
September 30, 1996 17,144 3,232 0 (183) 20,193
======= ====== ===== ====== =======
</TABLE>
________________________________________
F-22
<PAGE> 69
No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with the offer and
sale of the Securities other than those contained in this Prospectus, and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the Securities
offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that the information contained herein is correct as of any time
subsequent to the date of this Prospectus.
_______________
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
Prospectus Summary . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . .
Use of Proceeds . . . . . . . . . . . . . . .
Market Price of Common Stock . . . . . . . .
Dividend Policy . . . . . . . . . . . . . . .
Capitalization . . . . . . . . . . . . . . .
Selected Consolidated Financial Data . . . .
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Business . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . .
Principal Stockholders . . . . . . . . . . .
Description of Securities . . . . . . . . . .
Shares Eligible for Future Sale . . . . . . .
Underwriting . . . . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . .
Experts . . . . . . . . . . . . . . . . . . .
Incorporation of Certain Documents
by Reference . . . . . . . . . . . . . . . .
Available Information . . . . . . . . . . . .
Index to Consolidated Financial Statements .
</TABLE>
1,500,000 SHARES
T.HQ, INC.
COMMON STOCK
__________________
PROSPECTUS
__________________
WEDBUSH MORGAN SECURITIES
__________ __, 1997
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered. All amounts shown are
estimates except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee...................................................... $5065
NASD filing fee....................................................... $1954
Nasdaq National Market fee............................................ $ *
Blue sky fees and expenses............................................ $ *
Printing and engraving expenses....................................... $ *
Accountants' fees and expenses........................................ $ *
Attorneys' fees and expenses.......................................... $ *
Transfer agent and registrar fees..................................... $ *
Miscellaneous......................................................... $ *
Total....................................................... $400,000*
</TABLE>
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 721 through 726 of the New York Business Corporation
Law permit indemnification of officers and directors under certain circumstances
and subject to certain limitations. Article SEVENTH of the Certificate of
Incorporation of the Company provides with respect to the indemnification of
directors and officers that the Registrant may indemnify any and all directors
and officers, to the fullest extent permitted by the New York Business
Corporation Law, from and against any and all of the expenses, liabilities or
other matters referred to in or covered by the New York Business Corporation
Law, and that the indemnification provided for therein shall not be deemed
exclusive of any other rights to which the persons so indemnified may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to acting in their official capacity and as to
action in another capacity by holding such office, and such indemnification
shall continue as to a person who has ceased to be a director or officer and
shall inure to the heirs, executors and administrators of such a person.
These indemnification provisions and the indemnification
agreements between the Company and its directors and officers may be
sufficiently broad to permit indemnification of the Company's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act or otherwise.
The Company maintains a directors' and officers' liability
insurance policy covering certain liabilities that may be incurred by directors
and officers in connection with the performance of their duties. The entire
premium for such insurance is paid by the Company.
<PAGE> 71
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
<S> <C>
**1.1 Form of Underwriting Agreement
**5.1 Opinion of Sidley & Austin
**5.2 Opinion of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
*10.1 Amended and Restated 1990 Stock Option Plan, as amended
10.2 Confidential Second Renewal License Agreement for Super Nintendo Entertainment System
effective October 16, 1995, between Nintendo of America Inc. and the Company (Filed as Exhibit
10.2(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference)
10.3 Confidential First Renewal License Agreement for Gameboy effective January 1, 1995, between
Nintendo of America Inc. and the Company (Filed as Exhibit 10.3(a) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by
reference)
10.4 Confidential First Renewal International License Agreement for Super Nintendo Entertainment
System effective February 6, 1995, between Nintendo Co., Ltd., and the Company (Filed as
Exhibit 10.4(a) to the Company's Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference)
*10.5 First Extension Letter dated June 5, 1996, and Second Extension Letter dated September 13,
1996 to Confidential First Renewal International License Agreement for Super Nintendo
Entertainment System between effective February 6, 1995, between Nintendo Co., Ltd., and
the Company.
10.6 Confidential First Renewal International License Agreement for Gameboy dated November 6,
1995, between Nintendo Co., Ltd., and the Company (Filed as Exhibit 10.5(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by
reference)
10.7 Confidential License Agreement for Super Nintendo Entertainment System dated September 28,
1995, between Nintendo of America, Inc. and Black Pearl Software. (Filed as Exhibit 10.6(a) to
the Company's Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference)
10.8 Confidential License Agreement for Gameboy dated April 4, 1994, between Nintendo of America,
Inc. and Malibu Games, Inc. (Filed as an Exhibit to the Company's Registration Statement on
Form S-2 (File No. 33-81632) which became effective December 7, 1995, and incorporated herein
by reference)
10.9 Confidential First Renewal International License Agreement for Super Nintendo Entertainment
System dated as of July 19, 1995, between Nintendo Co., Ltd., and Black Pearl Software, Inc.
(Filed as Exhibit 10.8(a) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference)
10.10 Confidential International License Agreement for Gameboy dated July 19, 1993, between Nintendo
Co., Ltd., and Malibu Games, Inc. (Filed as an Exhibit to the Company's Registration Statement
on Form S-2 (File No. 33-81632) which became effective December 7, 1995, and incorporated
herein by reference)
*10.11 Addendum dated September 28, 1995, together with Extension Letter dated July 9, 1996, and
Second Extension Letter dated November 21, 1996, to Confidential International License
Agreement for Game Boy dated July 19, 1993, between Nintendo Co., Ltd., and Black Pearl
Software Inc.
10.12 License Agreement for Sega Genesis System dated as of October 20, 1994, between Sega
Enterprises, Ltd., and the Company (Filed as Exhibit 10.10(a) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, and incorporated herein by reference)
</TABLE>
II-2
<PAGE> 72
<TABLE>
<S> <C>
*10.13 License Agreement for North American Sega Saturn System effective as of February 26, 1996,
between Sega Enterprises, Ltd., and the Company
10.14 Confidential License Agreement for Gameboy effective as of September 28, 1995, between
Nintendo of America Inc. and Black Pearl Software Inc. (Filed as Exhibit 10.7(a) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference)
10.15 Employment Agreement of Brian Farrell dated as of February 15, 1995, between the Company
and Brian J. Farrell (Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference)
**10.16 Stock Option Agreement dated as of August 28, 1996, between the Company and Brian J. Farrell
10.17 401(k) Plan of the Company (Filed as an exhibit to Registration Statement on Form S-18 (File No.
33-35582-NY) of Trinity, and incorporated herein by reference. Amendments made since original
filing were filed as exhibits to the Company's Proxy Statements dated April 24, 1992, April 30, 1993
and April 28, 1994, respectively, as are incorporated herein by reference and modification made
to this document was filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991, and incorporated herein by reference)
10.18 Form of Indemnification Agreement (Filed as an Exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-47767) or Amendment No. 1, Amendment No. 2, Amendment No. 3
or Amendment No. 4 thereto and incorporated herein by reference)
10.19 Security and Loan Agreement dated June 7, 1996, by and between the Company and Imperial
Bank (Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996, and incorporated herein by reference)
*10.20 First Amendment to Security and Loan Agreement dated June 7, 1996, by and between the Company
and Imperial Bank.
10.21+ Conversion, Manufacturing and Distribution Agreement dated as of March 8, 1995, by and
between Electronic Arts Inc. and the Company (Filed as Exhibit 10.35 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, and incorporated herein by
reference)
10.22+ Licensed Publisher Agreement dated November 10, 1995, by and between the Company and Sony
Computer Entertainment Europe, a division of Sony Electronic Publishing Limited
(Filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference)
*10.23 Licensed Publisher-Supplemental Agreement dated April 11, 1996, by and between the Company
and Sony Computer Entertainment Europe, a division of Sony Electronic Publishing Limited
*10.24 Sony PSX License Agreement dated June 29, 1994, by and between the Company and Sony
Computer Entertainment of America, a division of Sony Electronic Publishing Company
10.25 Termination Agreement and Mutual Release dated May 31, 1995, by and between the Company
and Catapult Entertainment, Inc. (Filed as an Exhibit to the Company's Registration Statement on
Form S-2 (File No. 33-81632) which became effective December 7, 1995, and incorporated herein
by reference)
10.26 Stock Purchase Agreement dated as of June 28, 1996, by and between the Company and Inland
Productions, Inc. (Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, and incorporated herein by reference)
10.27 Stock Purchase Agreement dated as of August 2, 1996, by and between the Company and
Heliotrope Studios, Inc. (Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996, and incorporated herein by reference)
10.28 License Agreement dated July 11, 1994, between the Company and B.A.S.S., Inc. (Filed as
Exhibit 10.38 to the Company's Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference)
</TABLE>
II-3
<PAGE> 73
<TABLE>
<S> <C>
10.29 License Agreement dated December 29, 1995, between the Company and Turner New Media, Inc.
(Filed as Exhibit 10.41 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference)
*10.30 Assignment of Rights dated as of July 23, 1996, between the Company and Blizzard Entertainment
*10.31 Financing Contract dated 1994 between Opal Finance Corporation and the Company.
*11 Statement re: computation of per share earnings
*23.1 Consent of Deloitte & Touche LLP
**23.2 Consent of Sidley & Austin (included in Exhibit 5.1)
**23.3 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
(included in Exhibit 5.2)
*24.1 Power of Attorney (incorporated by reference to the signature page of this Registration Statement)
</TABLE>
- --------------------------
* Filed herewith.
** To be filed by Amendment.
+ Confidential treatment requested as to portions of this exhibit.
(B) FINANCIAL STATEMENT SCHEDULES
None.
II-4
<PAGE> 74
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to Item 15 of this Part II to the Registration
Statement, 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 the 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 matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question 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.
The Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of Prospectus
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.
(2) For the purpose of determining any liability under the
Securities Act, the information omitted from the form of Prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-5
<PAGE> 75
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints Brian J. Farrell and
Deborah A. Lake, and each of them acting individually, as his or her
attorney-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any and all powers of substitution, for him or her
in any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable ground to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Calabasas, State of California, on the 20th day of
December, 1996.
T.HQ, INC.
By: /s/ Brian J. Farrell
-------------------------------------
Brian J. Farrell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/Brian J. Farrell President, Chief Executive December 20, 1996
- ------------------------- Officer and Director
Brian J. Farrell (Chief Financial Officer)
/s/Lawrence Burstein Director December 20, 1996
- -------------------------
Lawrence Burstein
/s/L. Michael Haller Director; Senior Vice President December 20, 1996
- -------------------------
L. Michael Haller
/s/Murray Skala Director December 19, 1996
- -------------------------
Murray Skala
</TABLE>
<PAGE> 76
<TABLE>
<S> <C> <C>
/s/Bruce Jagid Director December 19, 1996
- -------------------------
Bruce Jagid
/s/Jeffrey C. Lapin Director December 19, 1996
- -------------------------
Jeffrey C. Lapin
/s/Deborah A. Lake Vice President-Finance December 19, 1996
- -------------------------- and Administration
Deborah A. Lake (Principal Accounting Officer)
</TABLE>
II-7
<PAGE> 77
As filed with the
Securities and Exchange Commission
on December 23, 1996
Registration No. 333-
---------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------
-----------------------
EXHIBITS TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
T.HQ, INC.
<PAGE> 78
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Exhibit Description Page Number
- ------ ------------------- -----------
<S> <C> <C>
1.1 Form of Underwriting Agreement (20) *
5.1 Opinion of Sidley & Austin (20) *
5.2 Opinion of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass (20) *
10.1 Amended and Restated 1990 Stock Option Plan, as amended
10.2 Confidential Second Renewal License Agreement for Super Nintendo *
Entertainment System effective October 16, 1995, between Nintendo
of America Inc. and the Company (1)
10.3 Confidential First Renewal License Agreement for Gameboy effective *
January 1, 1995, between Nintendo of America Inc. and the
Company (2)
10.4 Confidential First Renewal International License Agreement for *
Super Nintendo Entertainment System dated February 6, 1995,
between Nintendo Co., Ltd., and the Company (21)
10.5 First Extension Letter dated June 5, 1996, and Second Extension
Letter dated September 13, 1996 to Confidential First Renewal
International License Agreement for Super Nintendo Entertainment
System effective February 6, 1995, between Nintendo Co., Ltd., and
the Company.
10.6 Confidential First Renewal International License Agreement for *
Gameboy dated November 6, 1995, between Nintendo Co., Ltd., and
the Company (4)
10.7 Confidential License Agreement for Super Nintendo Entertainment *
System dated September 28, 1995, between Nintendo of America,
Inc. and Black Pearl Software (5)
10.8 Confidential License Agreement for Gameboy dated April 4, 1994, *
between Nintendo of America, Inc. and Malibu Games, Inc. (3)
10.9 Confidential First Renewal International License Agreement for *
Super Nintendo Entertainment System dated as of July 19, 1995,
between Nintendo Co., Ltd., and Black Pearl Software, Inc. (6)
10.10 Confidential International License Agreement for Gameboy dated *
July 19, 1993, between Nintendo Co., Ltd., and Malibu Games, Inc.
(3)
10.11 Addendum dated September 28, 1995, together with Extension Letter
dated July 9, 1996, and Second Extension Letter dated November 21,
1996, to Confidential International License Agreement for Game Boy
dated July 19, 1993, between Nintendo Co., Ltd., and Black Pearl
Software Inc.
</TABLE>
<PAGE> 79
<TABLE>
<S> <C> <C>
10.12 License Agreement for Sega Genesis System dated as of October 20, *
1994, between Sega Enterprises, Ltd., and the Company (7)
10.13 License Agreement for North American Sega Saturn System effective
as of February 26, 1996, between Sega Enterprises, Ltd., and the
Company
10.14 Confidential License Agreement for Gameboy effective as of *
September 28, 1995, between Nintendo of America Inc. and Black
Pearl Software, Inc. (8)
10.15 Employment Agreement of Brian Farrell dated as of February 15, *
1995, between the Company and Brian J. Farrell (9)
10.16 Stock Option Agreement dated as of August 28, 1996, between the *
Company and Brian J. Farrell (20)
10.17 401(k) Plan of the Company (10) *
10.18 Form of Indemnification Agreement (11) *
10.19 Security and Loan Agreement dated June 7, 1996, by and between *
the Company and Imperial Bank (12)
10.20 First Amendment to Security and Loan Agreement dated June 7, 1996,
by and between the Company and Imperial Bank.
10.21+ Conversion, Manufacturing and Distribution Agreement dated as of *
March 8, 1995, by and between Electronic Arts Inc. and the
Company (13)
10.22+ Licensed Publisher Agreement dated November 10, 1995, by and *
between the Company and Sony Computer Entertainment Europe, a
division of Sony Electronic Publishing Limited (14)
10.23 Licensed Publisher-Supplemental Agreement dated April 11, 1996,
by and between the Company and Sony Computer Entertainment
Europe, a division of Sony Electronic Publishing Limited
10.24 Sony PSX License Agreement dated June 29, 1994, by and between
the Company and Sony Computer Entertainment of America, a
division of Sony Electronic Publishing Company
10.25 Termination Agreement and Mutual Release dated May 31, 1995, by *
and between the Company and Catapult Entertainment, Inc. (3)
10.26 Stock Purchase Agreement dated as of June 28, 1996, by and *
between the Company and Inland Productions, Inc. (18)
10.27 Stock Purchase Agreement dated as of August 2, 1996, by and *
between the Company and Heliotrope Studios, Inc. (18)
</TABLE>
<PAGE> 80
<TABLE>
<S> <C> <C>
10.28 License Agreement dated July 11, 1994, between the Company and *
B.A.S.S., Inc. (15)
10.29 License Agreement dated December 29, 1995, between the Company *
and Turner New Media, Inc. (19)
10.30 Assignment of Rights dated as of July 23, 1996, between the
Company and Blizzard Entertainment
10.31 Financing Contract dated 1994 between Opal Finance Corporation
and the Company
11 Statement re: computation of per share earnings.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Sidley & Austin (16)(20) *
23.3 Consent of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass(16)(20) *
</TABLE>
- --------------------------
* Not applicable. See the footnote below for the reference to the copy of
the Exhibit incorporated by reference as an Exhibit hereto as such
Exhibit has been heretofore filed with the Commission, to which there
have been no amendments or changes; or to be filed by amendment hereto.
+ Confidential treatment requested as to portions of this exhibit.
(1) Filed as Exhibit 10.2(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(2) Filed as Exhibit 10.3(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-2
(File No. 33-81632) which became effective December 7, 1995, and
incorporated herein by reference.
(4) Filed as Exhibit 10.5(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(5) Filed as Exhibit 10.6(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(6) Filed as Exhibit 10.8(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(7) Filed as Exhibit 10.10(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(8) Filed as Exhibit 10.7(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference.
(9) Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
<PAGE> 81
(10) Filed as an exhibit to Registration Statement on Form S-18 (File No.
33-35582-NY) of Trinity, and incorporated herein by reference.
Amendments made since original filing were filed as exhibits to the
Company's Proxy Statements dated April 24, 1992, April 30, 1993 and
April 28, 1994, respectively, as are incorporated herein by reference
and modification made to this document was filed as an exhibit to the
Company's Annual Report on Form 10-K for the year ended December 31,
1991, and incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-47767) or Amendment No. 1, Amendment No. 2, Amendment No.
3 or Amendment No. 4 thereto and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996 and incorporated herein by reference.
(13) Filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(14) Filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(15) Filed as Exhibit 10.38 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(16) Included in Exhibit 5.1.
(17) Incorporated by reference to the signature page of this Registration
Statement.
(18) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996 and incorporated herein by
reference.
(19) Filed as Exhibit 10.41 to the company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(20) To be filed by Amendment.
(21) Filed as Exhibit 10.4(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference
<PAGE> 1
Exhibit 10.1
T.HQ, INC.
AMENDED AND RESTATED 1990 STOCK OPTION PLAN
1. Purpose of the Plan. The T.HQ, Inc, Amended and Restated 1990
Stock Option Plan (the "Plan") is intended to advance the interests of T.HQ,
Inc. (the "Company") by inducing persons of outstanding ability and potential
to join and remain with the Company, by encouraging and enabling employees to
acquire proprietary interests in the Company, and by providing the
participating employees with an additional incentive to promote the success of
the Company. This is accomplished by providing for the granting of "Options"
(which term as used herein includes both "Incentive Stock Options" and
"Nonstatutory Stock Options," as later defined, to qualified employees. In
addition, the Plan also provides for the granting of "Nonstatutory Stock
Options" to all non-employee Directors of the Company, as consideration for
their services and for attending meetings of the Board of Directors.
2. Administration. The Plan shall be administered by a committee
(the "Committee") consisting of at least three (3) Directors chosen by the
Board of Directors, each of which is a "disinterested person", as such term is
defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Except as herein specifically provided, the
interpretation and construction by the Committee of any provision of the Plan
or of any Option granted under it shall be final and conclusive. The receipt
of Options by Directors, or any members of the Committee, shall not preclude
their vote on any matters in connection with the administration or
interpretation of the Plan, except as otherwise provided by law.
3. Shares Subject to the Plan. The stock subject to grant under
the Plan shall be shares of the Company's common stock, $.0001 par value (the
"Common Stock"), whether authorized but unissued or held in the Company's
treasury or shares purchased from shareholders expressly for use under the
Plan. The maximum number of shares of Common Stock which may be issued
pursuant to Options granted under the Plan shall not exceed six hundred fifty
thousand (650,000) shares, subject to adjustment in accordance with the
provisions of Section 13 hereof. The Company shall at all times while the Plan
is in force reserve such number of shares of Common Stock as will be sufficient
to satisfy the requirements of a11 outstanding Options granted under the Plan.
In the event any Option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the unpurchased shares subject thereto
shall again be available for Options under this Plan.
4. Stock Option Agreement. Each Option granted under the Plan
shall be authorized by the Committee and shall be evidenced by a Stock Option
Agreement which shall be executed by the Company and by the person to whom such
Option is granted. The Stock Option Agreement shall specify the number of
shares of Common Stock as to which any Option is granted, the period during
which the Option is exercisable and the option price per share thereof.
5. Discretionary Grant Participation. The class of persons which
shall be eligible to receive discretionary grants of Options under the Plan
shall be all key employees (including officers) of either the Company or any
subsidiary corporation of the Company. Such persons shall be entitled to
receive (i) Incentive Stock Options, as described in Section 7 hereafter and
(ii) Nonstatutory Stock Options, as described in Section 8 hereafter. The
Committee, in its sole discretion, but subject to the provisions of the Plan,
shall determine the employees of the Company or its subsidiary corporations to
whom Options shall be granted and the number of shares to be covered by each
Option taking into account the nature of the employment or services rendered by
the individuals being considered, their annual compensation, their present and
potential contributions to the success of the Company and such other factors as
the Committee may deem relevant.
6. Non-Employee Director Participation.
(a) As of April 6, 1995 each non-employee Director then serving in
such capacity will be automatically granted, without further action by the
Committee, an option to purchase shares of the Company's Common
<PAGE> 2
Stock. Thereafter, on the date any person first becomes a non-employee
Director, such person shall automatically be granted, without further action by
the Committee, an option to purchase 25,000 shares of the Company's Common
Stock.
(b) On January 1st of each year up to and including January 1,
1995, non-employee Directors of the Company then serving in such capacity,
shall each be granted an Option to purchase 25,000 shares of the Company''s
Common Stock. Commencing on January 1, 1996, and on each January 1st, April
1st, July 1st and October 1st thereafter during the term of the Plan,
non-employee Directors of the Company then serving in such capacity, shall each
be granted an Option to purchase 2,500 shares of the Company''s Common Stock.
(c) The option price of the shares subject to the Options set
forth in Sections 6(a) and 6(b) hereof shall be the fair market value (as
defined in Section 7(f) hereafter) of the Company's Common Stock on the date
such Options are granted. All of such Options shall be Nonstatutory Stock
Options, as described in Section 8 hereafter. The Options granted pursuant to
this Section 6 shall vest entirely on the date they are granted and shall be
exercisable for a period of ten (10) years.
7. Incentive Stock Options. The Committee may grant Options
under the Plan which are intended to meet the requirements of Section 422 of
the Internal Revenue Code of 1986 (the "Code") (such an Option referred to
herein as an "Incentive Stock Option"), and which are subject to the following
terms and conditions and any other terms and conditions as may at any time be
required by Section 422 of the Code:
(a) No Incentive Stock Option shall be granted to individuals
other than key employees of the Company or of a subsidiary corporation of the
Company.
(b) Each Incentive Stock Option under the Plan must be granted
prior to May 14, 2000, which is within ten (10) years from the date the Plan
was adopted by the Board of Directors.
(c) The option price of the shares subject to any Incentive Stock
Option shall not be less than the fair market value of the Common Stock at the
time such Incentive Stock Option is granted; provided, however, if an Incentive
Stock Option is granted to an individual who owns, at the time the Incentive
Stock Option is granted, more than ten percent (10%) of the total combined
voting power of all classes of stock of the Company or of a subsidiary
corporation of the Company, the option price of the shares subject to the
Incentive Stock Option shall be at least one hundred ten percent (110%) of the
fair market value of the Common Stock at the time the Incentive Stock Option is
granted.
(d) No Incentive Stock Option granted under the Plan shall be
exercisable after the expiration of ten (10) years from the date of its grant.
However, if an Incentive Stock Option is granted to an individual who owns, at
the time the Incentive Stock Option is granted, more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of a
subsidiary corporation, of the Company, such Incentive Stock Option shall not
be exercisable after the expiration of five (5) years from the date of its
grant. Every Incentive Stock Option granted under the Plan shall be subject to
earlier termination as expressly provided in Section 11 hereof.
(e) For purposes of determining stock ownership under this Section
7, the attribution rules of Section 425(d) of the Code shall apply.
(f) For purposes of the Plan, fair market value shall be
determined by the Committee and, if the Common Stock is listed on a national
securities exchange or traded on the Over-the-Counter market, the fair market
value shall be the closing price of the Common Stock on such exchange, or on
the Over-the-Counter market as reported by the National Quotation Bureau,
Incorporated, as the case may be, on the day on which the Option is granted or
on the day on which a determination of fair market value is required under the
Plan, or, if there is no trading or closing price on that day, the closing
price on the most recent day preceding the day for which such prices are
available.
2
-
<PAGE> 3
8. Nonstatutory Stock Options. The Committee may grant Options
under the Plan which are not intended to meet the requirements of Section 422
of the Code, as we11 as Options which are intended to meet the requirements of
Section 422 of the Code but the terms of which provide that they will not be
treated as Incentive Stock Options (referred to herein as a "Nonstatutory Stock
Option"). Nonstatutory Stock Options which are not intended to meet these
requirements shall be subject to the following terms and conditions:
(a) A Nonstatutory Stock Option may be granted to any person
eligible to receive an Option under the Plan pursuant to Section 5 hereof,
except that no such Option may be granted to any person who owns stock
possessing more than 10% of the total combined voting power or value of all
classes of stock of the Company or its parent or subsidiary corporation.
(b) Persons eligible to receive Nonstatutory Stock Options
pursuant to Section 6 hereof are granted Options automatically under the Plan,
without any determination by the Committee.
(c) Subject to the price provisions of Section 6 hereof, the
option price of the shares subject to a Nonstatutory Stock Option shall be
determined by the Committee, in its absolute discretion, at the time of the
grant of the Nonstatutory Stock Option; provided, however, that such option
price shall not be less than 85% of the fair market value of the Common Stock
at the time the Nonstatutory Stock Option is granted.
(d) Subject to the provisions of Section 6 hereof, a Nonstatutory
Stock Option granted under the Plan may be of such duration as shall be
determined by the Committee (not to exceed 10 years), and shall be subject to
earlier termination as expressly provided in Section 11 hereof.
9. Rights of Option Holders. The holder of any Option granted
under the Plan shall have none of the rights of a shareholder with respect to
the shares covered by his Option until such shares shall be issued to him upon
the exercise of his Option.
10. Transferability. No Option granted under the Plan shall be
transferable by the individual to whom it was granted otherwise than by Will or
the laws of decent and distribution, and, during the lifetime of such
individual, shall not be exercisable by any other person, but only by him.
11. Termination of Employment or Death.
(a) If the employment of an employee by, or the services of a
non-employee Director, for the Company or a subsidiary corporation of the
Company shall be terminated voluntarily by the employee or the non-employee
Director, or for cause, then his Options shall expire after thirty (30) days
from the date of termination. Except as provided in subsections (b) and (c) of
this Section 11, if such employment or services shall, terminate for any other
reason, then such Options may be exercised at any time within three (3) months
after such termination, subject to the provisions of subparagraph (d) of this
Section 11. For purposes of the Plan, the retirement of an individual either
pursuant to a pension or retirement plan adopted by the Company or at the
normal retirement date prescribed from time to time by the Company shall be
deemed to be termination of such individual's employment other than voluntarily
or for cause. For purposes of this subparagraph, an employee who leaves the
employ of the Company to become an employee of a subsidiary corporation of the
Company or a corporation (or subsidiary or parent corporation of the
corporation) which has assumed the Option of the Company as a result of a
corporate reorganization, etc., shall not be considered to have terminated his
employment.. For purposes of this Plan, ""Cause"" shall mean termination for
commission of an act of dishonesty, theft, fraud, embezzlement, falsification
of books and records, continued or prolonged intoxication, both alcohol and
drug related, and conviction of a felony or a crime involving moral turpitude
or securities laws, and in any event, the determination of the Committee with
respect thereto shall be final and conclusive.
(b) If the holder of any Options under the Plan dies (i) while
employed by, or while serving as a non-employee Director, for the Company or
subsidiary corporation of the Company, or (ii) within three (3) months after
the termination of his employment or services other than voluntarily by the
employee or non-employee Director or for
3
-
<PAGE> 4
Cause, or (iii) within thirty (30) days of voluntary termination by the
employee or non-employee Director, or for Cause, then such Options may, subject
to the provisions of subparagraph (d) of this Section 11, be exercised by the
estate of the employee or non-employee Director or by a person who acquired the
right to exercise such Options by bequest or inheritance or by reason of the
death of such employee or non-employee Director at any time within one (1) year
after such death.
(c) If the holder of any Options under the Plan ceases employment
because of permanent and total disability (within the meaning of Section 22(e)
(3) of the Code) while employed by, or while serving as a non-employee Director
for, the Company or a subsidiary corporation of the Company, then such Options
may, subject to the provision of subparagraph (d) of this Section 11, be
exercised at any time within one (1) year
(d) An Option may not be exercised pursuant to this Section 11
except to the extent that the holder was entitled to exercise the Option at the
time of termination of employment, termination of Directorship, or death, and
in any event may not be exercised after the expiration of the Option.
(e) For purposes of this Section 11, the employment relationship
of an employee of the Company or of a subsidiary corporation of the Company
will be treated as continuing intact while he is on military or sick leave or
other bona fide leave of absence (such as temporary employment by the
Government) if such leave does not exceed ninety (90) days, or, if longer, so
long as his right to reemployment is guaranteed either by status or by
contract.
12. Exercise of Options.
(a) Unless otherwise provided in the Stock Option Agreement, any
Option granted under the Plan shall be exercisable in whole at any time, or in
part from time to time, prior to expiration. The Committee, in its absolute
discretion, may provide in any Stock Option Agreement that the exercise of any
Option granted under the Plan shall be subject (i) to such condition or
conditions as it may impose, including but not limited to, a condition that the
holder thereof remain in the employ or service of the Company or a subsidiary
corporation of the Company for such period or periods of time from the date of
grant of the Option, as the Committee, in its absolute discretion, shall
determine; and (ii) to such limitations as it may impose, including, but not
limited to, a limitation that the aggregate fair market value of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any employee during any calendar year (under a11 plans of the
Company and its parent and subsidiary corporations) shall not exceed One
Hundred Thousand Dollars ($100,000). In addition, in the event that under any
Stock Option Agreement the aggregate fair market value of the Common Stock with
respect to which Incentive Stock Options are exercisable for the first time by
any employee during any calendar year (under all plans of the Company and its
parent and subsidiary corporations) exceeds One Hundred Thousand Dollars
($100,000), the Committee may, when shares are transferred upon exercise of
such Options, designate those shares which shall be treated as transferred upon
exercise of an Incentive Stock Option and those shares which shall be treated
as transferred upon exercise of a Nonstatutory Stock Option. Notwithstanding
the foregoing, to the extent required by applicable laws, rules and
regulations, the right to exercise Options granted pursuant to this Plan shall
vest at the rate of at least 20% per year from the date of grant.
(b) An Option granted under the Plan shall be exercised by the
delivery by the holder thereof to the Company at its principal office
(attention of the Secretary) of written notice of the number of shares with
respect to which the Option is being exercised. Such notice shall be
accompanied by payment of the full option price of such shares, and payment of
such option price shall be made by the holder's delivery of his check payable
to the order of the Company; provided, however, that notwithstanding the
foregoing provisions of this Section 12 or any other terms, provisions or
conditions of the Plan, at the written request of the optionee and upon
approval by the Board of Directors or the Committee, shares acquired pursuant
to the exercise of any Option may be paid for in full at the time of exercise
by the surrender of shares of Common Stock of the Company held by or for the
account of the optionee at the time of exercise to the extent permitted by
subsection (c) (5) of Section 422 of the Code and, with respect to any person
who is subject to the reporting requirements of Section 16(a) of the Exchange
Act, to the extent permitted by Section 16(b) of the Exchange Act and the Rules
of the Securities and Exchange Commission, without liability to the Company. In
such case, the fair market value of the surrendered shares shall be determined
by the Committee as of the date of exercise in the same manner as such value is
determined upon the grant of an Incentive Stock Option.
4
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<PAGE> 5
13. Adjustment Upon Change in Capitalization.
(a) In the event that the outstanding Common Stock is hereafter
changed by reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, combination of shares, stock dividends or the
like, an appropriate adjustment shall be made by the Committee in the aggregate
number of shares available under the Plan and in the number of shares and
option price per share subject to outstanding Options. If the Company shall be
reorganized, consolidated or merged with another corporation, or if all of
substantially all of the assets of the Company shall be sold or exchanged, the
holder of an Option shall, at the time of issuance of the stock under such a
corporate event, be entitled to receive upon the exercise of his Option the
same number and kind of shares of stock or the same amount of property, cash or
securities as he would have been entitled to receive upon the happening of such
corporate event as if he had been, immediately prior to such event, the holder
of the number of shares covered by his Option; provided, however, that in such
event the Committee shall have the discretionary power to take any action
necessary or appropriate to prevent any Incentive Stock Option granted
hereunder from being disqualified as an "incentive stock option" under the then
existing provisions of the Code or any law amendatory thereof or supplemental
thereto.
(b) Any adjustment in the number of shares shall apply
proportionately to only the unexercised portion of the Option granted
hereunder. If fractions of a share would result from any such adjustment, the
adjustment shall be revised to the next lower whole number of shares.
14. Further Conditions of Exercise.
(a) Unless prior to the exercise of the Option the shares issuable
upon such exercise have been registered with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Securities
Act"), the notice of exercise shall be accompanied by a representation or
agreement of the individual exercising the Option to the Company to the effect
that such shares are being acquired for investment and not with a view to the
resale of distribution thereof or such other documentation as may be required
by the Company unless in the opinion of counsel to the Company such
representation, agreement or documentation is not necessary to comply with the
Securities Act.
(b) The Company shall not be obligated to deliver any Common Stock
until it has been listed on each securities exchange on which the Common Stock
may then be listed or until there has been qualification under or compliance
with such state or federal laws, rules or regulations as the Company may deem
applicable. The Company shall use reasonable efforts to obtain such listing,
qualifications and compliance.
15. Effectiveness of the Plan. The Plan was originally adopted by
the Board of Directors on May 15, 1990, The Plan was approved by the
affirmative vote of a majority of the outstanding shares of capital stock of
the Company present in person or by proxy at a meeting of shareholders of the
Company convened for such purpose on July 6, 1990.
16. Termination, Modification and Amendment.
(a) The Plan (but not Options previously granted under the Plan)
shall terminate on May 14, 2000, which is within ten (10) years from the date
of its adoption by the Board of Directors, or sooner as hereinafter provided,
and no Option shall be granted after termination of the Plan.
(b) The Plan may from time to time be terminated, modified or
amended by the affirmative vote of the holders of a majority of the outstanding
shares of capital stock of the Company present in person or by proxy at a
meeting of shareholders of the Company convened for such purpose; provided,
however, that Section 6 of the Plan may not be amended more than once every six
(6) months, other than to comply with changes in the Code, the Employee
Retirement Income Security Act, or the rules thereunder.
5
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<PAGE> 6
(c) The Board of Directors may at any time, on or before the
termination date referred to in Section 16 (a) hereof, terminate the Plan, or
from time to time make such modifications or amendments to the Plan as it may
deem advisable; provided, however, that the Board of Directors shall not,
without approval by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the Company present in person or by
proxy at a meeting of shareholders of the Company convened for such purpose,
increase (except as provided by Section 13 hereof) the maximum number of shares
as to which Incentive Stock Options may be granted, or change the designation
of the employees or class of employees eligible to receive Options or make any
other change which would prevent any Incentive Stock Option granted hereunder
which is intended to be an "incentive stock option" from disqualifying as such
under the then existing provisions of the Code or any law amendatory thereof or
supplemental thereto.
(d) No termination, modification or amendment of the Plan, may
without the consent of the individual to whom an Option shall have been
previously granted, adversely affect the rights conferred by such Option.
17. Not a Contract of Employment. Nothing contained in the Plan
or in any Stock Option Agreement executed pursuant hereto shall be deemed to
confer upon any individual to whom an Option is or may be granted hereunder any
right to remain in the employ or service of the Company or a subsidiary
corporation of the Company.
18. Use of Proceeds. The proceeds from the sale of shares
pursuant to Options granted under the Plan shall constitute general funds of
the Company.
19. Indemnification of Board of Directors or Committee. In
addition to such other rights of indemnification as they may have, the members
of the Board of Directors or the Committee, as the case may be, shall be
indemnified by the Company to the extent permitted under applicable law against
all costs and expenses reasonably incurred by them in connection with any
action, suit or proceeding to which they or any of them may be a party by
reason of any action taken or failure to act under or in connection with the
Plan or any rights granted thereunder and against all amounts paid by them in
settlement thereof or paid by them in satisfaction of a judgment of any such
action, suit or proceeding, except a judgment based upon a finding of bad
faith. Upon the institution of any such action, suit or proceeding, the member
or members of the Board of Directors or the Committee, as the case may be,
shall notify the Company in writing, giving the Company an opportunity at its
own cost to defend the same before such member or members undertake to defend
the same on their own behalf.
20. Definitions. For purposes of the Plan, the terms "parent
corporation" and "subsidiary corporation" shall have the same meanings a set
forth in Sections 425 (e) and 425 (f) of the Code, respectively, and the
masculine shall include the feminine and the neuter as the context requires.
21. Governing Law. The Plan shall be governed by, and all
questions arising hereunder shall be determined in accordance with, the law of
the State of New York.
22. Delivery of Financial Statements. The Company shall deliver
to each optionee financial statements of the Company at least annually while
such optionee holds an outstanding option.
6
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<PAGE> 1
EXHIBIT 10.5
[LETTERHEAD & LOGO
NINTENDO]
11 September, 1996
Mr. Brian J. Farrell / President & CEO
T.HQ, Inc.
5016 N. Parkway Calabasas, Suite 100
Calabasas, California 91302
Re: T.HQ, Inc. - Nintendo Co., Ltd.
International License Agreement for SNES
Dear Mr. Farrell,
The Confidential International License Agreement for the Super NES between your
company and Nintendo Co., Ltd. was extended until August 13, 1996. Because we
are currently finding revisions to our form license agreement, we would like to
agree to extend your current agreement additionally until March 31, 1997 under
the current terms and conditions. During this time, we plan to complete work
on the revised agreement to offer you. If this is acceptable to you, please
sign below and return a copy of this letter to me at your earliest convenience.
Very truly yours,
NINTENDO CO., LTD.
by KIJMIO MARIKO
--------------------------------
Kijmio Mariko
Director and General Manager
International Business Division
Accepted and agreed to
this 13 day of September 1996.
By SIG
---------------
As PRESIDENT
---------------
Company Name: T.HQ, Inc.
----------
<PAGE> 2
EXHIBIT 10.5
[NINTENDO CO., LTD. LETTERHEAD]
May 28, 1996
Mr. Brian J. Farrell/President & CEO
T.HQ, Inc.
5016 N. Parkway Calabasas, Suite 100
Calabasas, California 91302
Re: T.HQ, Inc. - Nintendo Co., Ltd.
International License Agreement for SNES
Dear Mr. Farrell,
The Confidential International License Agreement for the Super NES between your
company and Nintendo Co., Ltd. was due to expire on May 13, 1996. Because we
are currently considering revisions to our form license agreement, we would
like to agree to extend your current agreement for an additional three (3)
months under the current terms and conditions. During this time, we plan to
complete work on the revised agreement to offer you. If this is acceptable to
you, please sign below and return a copy of this letter to me at your earliest
convenience.
Very truly yours,
NINTENDO CO., LTD.
by KIMIO MARIKO
--------------------------------
Kimio Mariko
Director and General Manager
International Business Division
Accepted and agreed to
this 5 day of June, 1996.
By [SIG]
---------------------------
As PRESIDENT
---------------------------
Company Name: T.HQ, INC.
<PAGE> 1
EXHIBIT 10.11
ADDENDUM TO NINTENDO CO., LTD.,
INTERNATIONAL LICENSE AGREEMENT FOR GAME BOY
THIS ADDENDUM AGREEMENT ("Addendum") is entered into by and between
NINTENDO CO., LTD., a company incorporated in Japan and having its registered
office at 60 Fukuine Kamitakamatsu-chu, Higashiyama-ku Kyoto, Japan,
Attention: President (Facsimile No. 075-531-6860) (hereinafter "NINTENDO"), and
BLACK PEARL SOFTWARE, a division of T.HQ Inc., having a place of business at
5016 North Parkway Calabasas, Suite 100, Calabasas, California 91302,
Attention: President (Facsimile No: 818-591-1310) (hereinafter "BLACK PEARL").
1. Recitals. Effective July 19, 1993, NINTENDO and BLACK PEARL's
predecessor, Malibu Games Inc., a corporation of New York, entered into a
license agreement (the "Agreement") to permit Malibu Games Inc. to develop and
distribute video game software for NINTENDO's Game Boy platform in certain
countries of the Eastern Hemisphere.
1.2 Malibu Games Inc. has changed its name to Black Pearl
Software, a division of T.HQ Inc. The parties desire to substitute BLACK PEARL
in place of Malibu Games Inc. in the subject Agreement with NINTENDO.
NOW, THEREFORE, the parties agree as follows:
2. BLACK PEARL is substituted for Malibu Games Inc. in the
Agreement. All other terms and provisions of the Agreement shall remain
unchanged.
IN WITNESS WHEREOF, NINTENDO and BLACK PEARL have entered into this
Addendum on the dates set forth below.
NINTENDO CO., LTD. BLACK PEARL SOFTWARE,
a division of T.HQ Inc.
By: [SIG] By: [SIG]
------------------------------------ -------------------------------
DIRECTOR & GENERAL MANAGER OF
Office: INTERNATIONAL BUSINESS DIVISION Office: Executive Vice President
-------------------------------- ---------------------------
Date: SEPTEMBER 28, 1995 Date: 14-9-95
---------------------------------- -----------------------------
<PAGE> 2
EXHIBIT 10.11
[NINTENDO CO., LTD. LETTERHEAD]
July 4, 1996
Mr. Brian J. Farrell/President & CEO
T.HQ, Inc.
5016 N. Parkway Calabasas, Suite 100
Calabasas, California 91302
Re: Black Pearl Software - Nintendo Co., Ltd.
International License Agreement for Game Boy
Dear Mr. Farrell,
The Confidential International License Agreement for Game Boy between Black
Pearl Software and Nintendo Co., Ltd. is due to expire on July 19, 1996.
Because we are currently considering revisions to our form license agreement,
we would like to agree to extend your current agreement for an additional three
(3) months under the current terms and conditions. During this time, we plan
to complete work on the revised agreement to offer you. If this is acceptable
to you, please sign below and return a copy of this letter to me at your
earliest convenience.
Very truly yours,
NINTENDO CO., LTD.
by KIMIO MARIKO
--------------------------------
Kimio Mariko
Director and General Manager
International Business Division
Accepted and agreed to
this 9th day of July, 1996.
By [SIG]
---------------------------
As Sr. V-P
---------------------------
Company Name: T.HQ, Inc.
<PAGE> 3
EXHIBIT 10.11
[NINTENDO CO., LTD. LETTERHEAD]
November 19, 1996
Mr. Brian J. Farrell/President & CEO
T.HQ, Inc.
5016 N. Parkway Calabasas, Suite 100
Calabasas, California 91302
Re: Black Pearl Software - Nintendo Co., Ltd.
International License Agreement for Game Boy
Dear Mr. Farrell,
The Confidential International License Agreement for Game Boy between Black
Pearl Software and Nintendo Co., Ltd. was extended until October 19, 1996.
Because we are currently finding revisions to our form license agreement, we
would like to agree to extend your current agreement additionally until March
31, 1997 under the current terms and conditions. During this time, we plan to
complete work on the revised agreement to offer you. If this is acceptable to
you, please sign below and return a copy of this letter to me at your earliest
convenience.
Very truly yours,
NINTENDO CO., LTD.
by KIMIO MARIKO
---------------------------------
Kimio Mariko
Director and General Manager
International Business Division
Accepted and agreed to
this 21 day of November, 1996.
By [SIG]
---------------------------
As PRESIDENT
---------------------------
Company Name: T.HQ
BLACK PEARL SOFTWARE
<PAGE> 1
EXHIBIT 10.13
LICENSING AGREEMENT
for
NORTH AMERICAN SEGASATURN SYSTEM
This Licensing Agreement is entered into and rendered effective as of this 26th
day of February, 1996, by and between SEGA ENTERPRISES, LTD., a Japanese
corporation with principal offices at 2-12, Haneda 1-chome, Ohta-ku, Tokyo 144,
Japan (hereinafter "Sega"), and T.HQ, INC., a New York corporation with
principal offices at 5016 North Parkway Calabasas, Suite 100, Calabasas,
California 91302, U.S.A. (hereinafter "Licensee").
Whereas, Sega has developed and currently distributes a home entertainment
system for playing video games and for other educational and informational
purposes, which is marketed in the United States of America and Canada as the
SegaSaturn System (hereinafter the "SSS"); and
Whereas, Sega has created and/or licensed a variety of video entertainment
properties which embody original game concepts, formats, methods of play,
characters and other visual images, and musical, spoken and other sounds, and
which are programmed and manufactured in CD-ROM format compatible with the SSS
(hereinafter the "SSS Software Series"); and
Whereas, Sega has developed or acquired substantial expertise, know-how and
technical information relating to the SSS and the design, development, and
manufacture of software products that are compatible with the SSS and comprise
the SSS Software Series; and
Whereas, Sega is the owner and developer of U.S. Patent No. 5,371,792; and
Whereas, Sega is also the owner of certain registered and unregistered
trademarks used in connection with the SSS, including "SEGA" and others
(collectively, the "Licensed Trademarks"); and
Whereas, Sega entered into an agreement on or about January 2, 1991, as amended
by an addendum entered into on or about June 7, 1991, with Smith Engineering,
pursuant to which Sega is authorized to grant sublicenses to U.S. Patent No.
4,462,076; and
Whereas, Sega entered into an agreement on or about January 2, 1991, as amended
by an addendum entered into on or about October 12, 1992, with North American
Philips Corporation, pursuant to which Sega is authorized to grant sublicenses
to European Patent No. 80244; Canadian Patent No. 1,183,276; Hong Kong Patent
No. 88-4302; Singapore Patent No. 88-155; United States Patent Nos. 4,442,486
and 4,454,594; and Japanese Patent Application No. 82-205605; and
Whereas, Sega entered into an agreement on or about March 31, 1993, with Alpex
pursuant to which Sega is authorized to grant sublicenses to Canadian Patent
No. 1,082,351; French Patent No. 1,607,209; United Kingdom Patent No.
1,535,999; Japanese Patent No. 1,632,396; and German Patent No. 2,609,826; and
Whereas, the SSS is a newly developed platform and it is in the parties' mutual
interest to ensure high product quality and consumer acceptance of this new
system and its related software; and
Whereas, Licensee has created and/or licensed a variety of video entertainment
properties in and to which Licensee holds copyright or holds an appropriate
license from the applicable copyright owner (collectively, the "Licensee's
Properties"); and
Whereas, Licensee desires to be granted a non-exclusive license to develop,
have manufactured, and distribute Licensee's Properties as part of the SSS
Software Series; and
Whereas, Sega is willing, on the terms and subject to the conditions of this
Agreement, to grant Licensee the desired non-exclusive license concerning the
development, manufacturing, and distribution of Licensee's Properties as part
of the SSS Software Series;
Now therefore, in consideration for the mutual representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Licensee and Sega
hereby agree as follows:
1. DEFINITION OF TERMS.
1.1 As used herein, the term "Licensed Products" shall mean the laser
optical disc-based products compatible with the SSS to be developed by
Licensee in furtherance of this Agreement, which products shall be
derived from Licensee's Properties specified in Exhibit A, attached
hereto, as may be amended by the parties in writing during the term of
this Agreement.
1.2 As used herein, the term "Licensed Territory" shall mean the countries
listed in Exhibit B, attached hereto.
2. LICENSED TECHNOLOGY.
2.1 Sega shall provide Licensee with certain technical information regarding
the SSS and the programming of software products compatible with the
SSS, including, without limitation, information regarding the security
system incorporated within the SSS and the software products compatible
therewith (collectively, the "Licensed Technology") from time to time
during the term of this Agreement.
2.2 Sega agrees to sell and license to Licensee and Licensee may elect (but
is not required) to purchase and license from Sega the hardware and
software items referenced in the SSS Development Equipment Price List,
which will be provided by Sega and/or Sega of America, Inc., a
California corporation with principal offices at 255 Shoreline Drive,
Suite 200, Redwood City, CA 94065 (hereinafter "SOA") from time to time
during the term of this Agreement (such items shall be collectively
called the "Development Equipment"). Sega agrees that it shall use its
commercially reasonable efforts to supply the specific quantities of any
and all such items as may be requested by Licensee.
2.3 Licensee acknowledges and agrees that the Development Equipment which
Licensee may elect or have elected to purchase and license from Sega
contains certain confidential technical information and trade secrets
which are proprietary to Sega, that any and all Development Equipment
shall be a part or parts of the Licensed Technology and that Licensee's
use thereof shall be subject to the provisions of this Agreement and the
Confidentiality Agreement, dated December 29, 1993, separately concluded
between Sega's agent, SOA, and Licensee (hereinafter the
"Confidentiality Agreement").
<PAGE> 2
3. GRANT OF LICENSE.
3.1 Subject to the terms and conditions set forth in this Agreement, Sega
hereby grants Licensee a non-exclusive license to use the Licensed
Technology disclosed by Sega solely to design, develop and have
manufactured (by a Licensed Manufacturer) the Licensed Products based on or
otherwise derived from Licensee's Properties specified in Exhibit A,
attached hereto, which Licensed Products shall be marketed, sold and
distributed by Licensee only within the Licensed Territory in strict
compliance with the provisions of this Agreement, including the Exhibits
attached hereto. The license herein granted to Licensee includes the right
and privilege during the term of this Agreement to use the Licensed
Trademarks identified in Exhibit C, attached hereto, in conjunction with
the Licensed Products to provide notice that the Licensed Products are
designed and intended for use with the SSS.
3.2 By its execution of this Agreement, Licensee accepts the non-exclusive
license granted to it herein and agrees to abide by and comply with all of
the terms and conditions set forth in this Agreement. Licensee agrees that
it shall not directly or indirectly solicit orders from and/or sell any
units of the Licensed Products to any person or entity outside of the
Licensed Territory without the prior written consent of Sega, and Licensee
further agrees that it shall not directly or indirectly solicit orders for
and/or sell any units of the Licensed Products in any situation where
Licensee reasonably should know that such Licensed Products will be
exported or resold outside of the Licensed Territory.
3.3 The license granted to Licensee in Subsection 3.1, above, also includes the
non-exclusive, non-transferable sublicense to use the patents set forth in
Exhibit D (hereinafter the "Licensed Patents"), attached hereto and as may
be amended by Sega during the term of this Agreement, solely in conjunction
with the development, marketing, sale and distribution of Licensed
Products.
3.4 This Agreement in no way grants Licensee the right to manufacture any units
of the Licensed Products. The manufacture of the Licensed Products involves
trade secrets and technology upon which patents are pending. Accordingly,
manufacture of all Licensed Products can only be accomplished by a Licensed
Manufacturer. As used herein, the term "Licensed Manufacturer(s)" shall
mean the manufacturers approved by Sega to utilize Sega's trade secrets and
technology upon which patents are pending, in the manufacture of any units
of the SSS Software Series.
4. LIMITATION OF LICENSE
4.1 Licensee acknowledges and agrees that: (i) the license and sublicense
granted to it in Subsections 3.1 and 3.3, above, shall not be deemed to
extend in any manner to any of Licensee's Properties unless and until Sega
and/or Sega's agent, SOA, shall have expressly approved such development
proposals in accordance with the provisions of Sections 6 and 7, below; and
(ii) the commencement of the design and/or development of any of Licensee's
Properties in a format compatible with the SSS prior to Sega's express
written approval with respect thereto in accordance with the provisions of
Section 6, below, shall be undertaken at Licensee's sole risk and expense
and without any expectancy that such property or properties shall become an
authorized part of the SSS Software Series. Licensee further acknowledges
and agrees that the maximum number of Licensed Products to be released by
Licensee in each successive twelve (12) month period during the term of
this Agreement shall be three (3) products unless the prior written consent
of Sega's agent, SOA, has been obtained, which consent shall be evidenced
by the return of a copy of Licensee's request for authorization to release
such additional Licensed Product(s) with the following legend inscribed on
such copy and signed on behalf of Sega: "Approved by Director, Third Party
Licensing" (or such other representative as Sega shall designate in
writing).
4.2 Licensee shall not make use of any of the Licensed Trademarks, Licensed
Patents and/or Licensed Technology (or any portion thereof) licensed
hereunder except in strict compliance with the provisions of this Agreement
or as may be otherwise expressly authorized in writing by Sega. No right,
license or privilege has been granted to Licensee hereunder concerning the
development of any collateral product or other such after-market use or
purpose which displays or depicts any of the Licensed Trademarks. No
promotional or novelty items or premium products (e.g., T-shirts, posters,
stickers, etc.) displaying or depicting any of the Licensed Trademarks
shall be developed, manufactured, marketed, sold, and/or distributed by
Licensee or in its behalf unless the written consent of Sega shall first
have been obtained.
4.3 Licensee agrees that it shall not at any time, both during and
subsequent to the term of this Agreement, unless the written consent of
Sega shall first have been obtained: (i) use the Licensed Patents and/or
Licensed Technology (or any portion thereof), directly or indirectly, to
develop, manufacture, and/or otherwise produce any article of merchandise
other than the specific Licensed Products expressly authorized during the
term of this Agreement to be developed and distributed hereunder; and/or
(ii) use any of the Licensed Trademarks, directly or indirectly, to market
and/or otherwise promote the sale of any third party products or services.
4.4 Subject to the provisions of Subsection 19.3, below, Licensee represents
and warrants that in the event of the expiration or earlier termination of
this Agreement, Licensee shall not make use of any of the source code,
object code, or technical documentation of or concerning the Licensed
Products, and/or of whatever other related materials used for the
development and/or production of the Licensed Products, which remain within
its custody or under its control for the continued manufacture of any units
of any of the Licensed Products, unless the prior written consent of Sega
shall first have been obtained; provided, however, nothing herein shall be
construed so as to prohibit or otherwise restrict Licensee from using
portions of the source code for any of the Licensed Products which are not
specific to the SSS and which do not contain and are not derived from any
portion of the Licensed Technology and/or Licensed Patents, and which can
be used for the development of separate versions of any of the Licensee's
Properties for other video games or personal computer systems.
4.5 All rights and interests with respect to the Licensed Trademarks, Licensed
Patents and/or the Licensed Technology not specifically granted herein to
Licensee are expressly reserved by Sega and may be used by Sega without
limitation. Any use by Sega of such reserved rights, including, without
limitation, the use or authorization of others to use any of the Licensed
Trademarks, Licensed Patents and/or the Licensed Technology in any manner
in connection with any articles of merchandise other than the specific
Licensed Products expressly authorized hereunder shall not be deemed unfair
competition, interference, or infringement of any of Licensee's rights
hereunder.
4.6 The distribution of any Licensed Product through electronic media,
including, without limitation, via cable, fiber optic, telephone lines,
microwave and/or radio waves, is expressly excluded from the license herein
granted to Licensee.
5. SUBCONTRACTING AND SUBLICENSING.
5.1 Licensee is not authorized to subcontract or sublicense the license and/or
sublicense herein granted without the
2
<PAGE> 3
prior written consent of Sega. Licensee acknowledges and agrees that it
shall not be released from liability with respect to the truth of every
representation and warranty, and the performance of every term,
condition, obligation and covenant set forth in this Agreement by reason
of Sega's consent to any proposed sale, assignment, delegation,
subcontract, sublicense, transfer or encumbrance unless Sega expressly
grants such release in writing.
5.2 In the event Licensee desires to contract with any third party
concerning the design and/or development of any of the Licensed
Products, Licensee represents and warrants that it shall not disclose
any of the Licensed Technology and/or the Licensed Patents to such third
party unless and until Licensee shall have obtained the written consent
of Sega and such third party shall have executed a separate agreement
with Sega concerning such entity's proposed use of the Licensed
Technology and/or Licensed Patents, which separate agreement shall
include confidentiality obligations like those set forth in the
Confidentiality Agreement. Notwithstanding any consent which may be
granted by Sega for License to use the product design and/or development
services of any third party, Licensee shall be responsible and shall
remain liable for compliance with all of the provisions of this
Agreement.
6. CONCEPT APPROVAL OF THE LICENSED PRODUCTS.
6.1 Licensee acknowledges and agrees that the Licensed Products shall be
approved in concept form before Licensee commences programming of the
software for each of the Licensed Products. To this end, Licensee agrees
that Licensed Products, including, without limitation, the concept and
title of each of the Licensed Products and/or the Licensee's use of any
of the Licensed Trademarks, shall be subject to SOA's prior written
approval on behalf of Sega as to acceptable standards of compatibility,
nature, appearance, quality, style and labeling.
6.2 Licensee, in order to be granted the approval described in Subsection
6.1 above for each of the Licensed Products (other than a conversion of
a commercially released computer software product, consumer video game
product or coin-operated arcade video game), agrees to submit to Sega's
agent, SOA, for its written approval on behalf of Sega, the following
materials: (i) a completed Third Party Concept Registration Form, a
sample of which is attached hereto as Exhibit G, and which Form shall
state and provide, without limitation, any and all information regarding
the title and category, the approximate code completion and product
release dates, number of disks, the estimated quantity of the initial
units to be manufactured on behalf of Licensee, proof of license to use
another third party's licensed trademarks or property, compatibility to
peripheral devices, availability on competing hardware systems and the
estimated advertising budget; (ii) a written description setting forth,
without limitation, the proposed game design, storyline, characters,
game style and play features with instructions as to how each proposed
game is to be played, user interface characteristics, multiple player
options, a development team profile, special hardware/software
requirements, a list of differences with other versions developed for
competing hardware systems, and any additional information useful in
evaluating the proposed game; (iii) storyboards and graphic art,
including the appearance of characters; and (iv) a description of any
Easter Eggs, i.e. secret codes, which Licensee intends to include in the
video game programs to allow the player special abilities or knowledge
and which will not be described in the game manual.
6.3 For each Licensed Product which is a conversion of a commercially
released computer software product, consumer video game product or
coin-operated arcade video game, Licensee shall provide Sega's agent,
SOA, for its written approval on behalf of Sega, with the following
materials (as appropriate): (i) a copy of such released computer
software product; (ii) a videotape of the audiovisual work comprising
such released coin-operated arcade video game; (iii) a written delta
design specification that describes the differences between the proposed
Licensed Product and the previously released version of such product,
including, without limitation, any differences with respect to the
music, sound effects, graphics, user interface and/or controls; and (iv)
a completed Third Party Concept Registration Form, a sample of which is
attached hereto as Exhibit G, filled out as described in Subsection
6.2(i) above.
6.4 Notwithstanding any approval SOA may grant on behalf of Sega in
connection with the Third Party Concept Registration Form and materials
attached thereto, Licensee acknowledges and agrees that such approval is
for the concept only, and further approvals of code and packaging will
be necessary when those materials are completed.
7. DEVELOPMENT OF THE LICENSED PRODUCTS/SUBMISSION AND APPROVAL OF SAMPLES.
7.1 Licensee acknowledges and agrees that it shall be solely responsible for
the development, at Licensee's risk and expense, of any and all
materials to be incorporated into the Licensed Products, including,
without limitation, the reproducible computer programs based on or
otherwise derived from Licensee's Properties and the related artwork for
the packaging inlays, product labels and user manuals, as well as any
other printed materials which Licensee proposes to include with any of
the Licensed Products. Sega shall not be obligated to collaborate with
Licensee in the development of any of the materials comprising or
otherwise incorporated into any of the Licensed Products.
7.2 Licensee agrees to use diligent, good faith efforts to submit to Sega's
agent, SOA, on or before the scheduled delivery dates set forth in
Exhibit F, attached hereto, for its written approval on behalf of Sega,
the following materials for each submitted Licensed Product: (i) a
completed SSS Master CD-ROM Release Form, a sample of which will be
provided by SOA; (ii) four (4) write once CDs containing finished game
code, together with a complete description of any Easter Eggs, i.e.
secret codes, which Licensee has included in such finished game code;
(iii) a VHS videotape of all game footage; (iv) a hard copy of all text
appearing in the game; and (v) all packaging, artwork, and written
materials related to such submitted Licensed Product. Sega's agent, SOA,
shall promptly evaluate any write once CD samples containing finished
game code and related materials for each of the Licensed Products
submitted to it by Licensee, and shall use reasonable efforts to approve
or disapprove any such submitted samples of the reproducible materials
required for the production of the Licensed Products in writing within
twenty one (21) working days after receipt of any such items. Sega's
agent, SOA, shall specify the reasons for its disapproval of the write
once CD samples and related materials for any of the Licensed Products
and state the revisions and/or improvements to be undertaken by Licensee
in order to receive approval. After making such revisions and/or
improvements as are deemed necessary, Licensee shall submit such revised
software and/or materials for any affected Licensed Product to Sega's
agent, SOA, for its re-evaluation and potential approval on behalf of
Sega. The procedures described in this Subsection 7.2 shall be repeated
until the write once CD samples of each of the Licensed Products are
expressly approved in writing by Sega's agent, SOA. SOA's approval of
such write once CD samples shall be
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evidenced by the return of a copy of Licensee's request for approval
with the following legend inscribed on such copy and signed on behalf of
Sega: "Approved by Director, Third Party Licensing" (or such other
representative as Sega shall designate in writing).
7.3 After obtaining SOA's written approval on behalf of Sega of the write
once CD samples containing finished game code, Licensee agrees to submit
to Sega's agent, SOA, three (3) pre-production samples of each Licensed
Product for its written approval on behalf of Sega. Sega agrees that
any requested approval to be made by its agent, SOA, of any such
pre-production samples of the Licensed Products shall not be
unreasonably withheld. No production units of any of the Licensed
Products shall be manufactured, marketed, sold or distributed by or for
Licensee unless written approval for such pre-production samples of each
Licensed Product shall first have been obtained from Sega's agent, SOA,
which approval shall be evidenced by the return of a copy of Licensee's
request for approval with the following legend inscribed on such copy
and signed on behalf of Sega: "Approved by Director, Third Party
Licensing" (or such other representative as Sega shall designate in
writing).
7.4 Licensee agrees that: (i) each of the Licensed Products shall be of such
content, quality, style and appearance as shall, in accordance with the
provisions of Section 8, below, provide appropriate notice to third
parties of Sega's proprietary rights, title and interests in and to the
Licensed Patents, the Licensed Technology, and the Licensed Trademarks;
and (ii) each of the Licensed Products shall conform in all material
respects with all standards and specifications of or concerning the SSS
and/or the SSS Software Series which may be promulgated by Sega from
time to time during the term of this Agreement and communicated to
Licensee.
7.5 After the pre-production samples of the final software and related
materials for each of the Licensed Products have been approved by Sega's
agent, SOA, Licensee shall not change them in any material respect
without the prior written consent of Sega or its agent, SOA. Prior to
the initial commercial release of each of the Licensed Products,
Licensee shall send to Sega's agent, SOA, at no charge twelve (12) units
of each of the Licensed Products to evidence Licensee's control over the
production quality of the Licensed Products. In the event any Licensed
Products are changed in any material respect from the units initially
provided pursuant to this Subsection 7.5, Licensee shall send to Sega's
agent, SOA, at no charge two (2) units of each of such Licensed
Products. If any of the Licensed Products distributed by Licensee fail
to conform with the standards previously adopted by Sega and the samples
previously approved by Sega's agent, SOA, then Sega may elect, at its
sole discretion, to: (i) terminate this Agreement in accordance with the
provisions of Subsection 18.2, below; or (ii) require that Licensee
bring any such noncomplying Licensed Products into compliance within
thirty (30) days after receipt of written notice from Sega. The failure
of Licensee to demonstrate that any affected units of such Licensed
Product have been brought into compliance within such prescribed period
shall entitle Sega to terminate this Agreement pursuant to the
provisions of Subsection 18.2, below.
7.6 Licensee agrees that, if so required by Sega and/or any governmental
entity, it shall submit each Licensed Product to such third party as is
designated by Sega and/or the governmental entity for the purpose of
obtaining consumer advisory rating code(s) for the Licensed Product. Any
and all costs and expenses incurred in connection with the procurement
of such consumer advisory rating code(s) shall be borne solely by
Licensee.
7.7 Licensee acknowledges and agrees that its failure to comply with the
provisions of this Section 7 shall result in immediate, irreparable and
irremediable damage to Sega. Licensee further acknowledges and agrees
that there is no adequate remedy at law in the event of such failure,
and that Sega shall be entitled to equitable relief in the way of
temporary and permanent restraining orders and injunctions and such
other and further relief as any court of competent jurisdiction may deem
just and proper.
8. LABELING REQUIREMENTS.
8.1 It is an essential condition of this Agreement that each and every copy
of the Licensed Products and related materials, including, without
limitation, the related packaging, user manuals, labels, and containers
shall have conspicuously, legibly and irremovably affixed thereto the
notices specified in the guidelines provided by SOA, which may be
amended from time to time by Sega at its discretion during the term of
this Agreement. Once any proposed artwork submitted by Licensee is
approved by Sega's agent, SOA, any subsequent modifications thereto
which may be requested by Sega or its agent, SOA, shall be undertaken
and implemented at Sega's expense; provided, however, if any such
modification is requested in order to obtain and/or maintain protection
for any of the Licensed Patents, Licensed Trademarks, and/or Licensed
Technology, such modification shall be implemented at Licensee's expense
in the manner of a rolling change (i.e., Licensee shall promptly
incorporate any such modification into future production units of the
Licensed Products, while being permitted to continue to sell and
distribute those units which then exist in inventory).
8.2 Licensee further agrees that it shall cause to be affixed conspicuously
and legibly on each Licensed Product manufactured, used and/or sold by
or for Licensee, and on the related packaging materials for each such
Licensed Product: (i) any and all consumer advisory rating code(s)
required by Sega and/or any governmental entities subject to the
conditions provided in Subsection 7.6 hereof; and (ii) the following
notice:
Patents:
U.S. Nos. 4,442,486/4,454,594/4,462,076;
Europe No. 80244; France No. 1,607,029;
United Kingdom No. 1,535,999;
Germany No. 2,609,826;
Canada No. 1,183,276/1,082,351;
Hong Kong No. 88-4302;
Singapore No. 88-155;
Japan No. 1,632,396
U.S. Pat. No. 5,371,792
U.S. Pat. No. 5,460,374
Licensee acknowledges and agrees that in the event Sega notifies
Licensee during the term of this Agreement of any modification(s) and/or
additions to the notice set forth in this Subsection 8.2, then Licensee
shall implement such additions and/or modifications at Licensee's
expense in the manner of a rolling change (i.e., Licensee shall promptly
incorporate such modification(s) into future production units of the
Licensed Products, while being permitted to continue to sell and
distribute those units which then exist in Licensee's inventories).
8.3 Licensee agrees that the opening title screen shall, in strict
compliance with the software manual provided to Licensee by Sega,
contain the following items: (i) the blue Sega logo; (ii) Licensee's
name and the title of the product, together with Licensee's trademark
and copyright notices; and (iii) the following attribution line, which
shall appear at the bottom of the screen, below Licensee's name:
"Licensed by Sega Enterprises, Ltd."
9. ADVERTISING MATERIALS.
9.1 Pre-production samples of the advertising, merchandising, promotional
and display materials of or
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concerning the Licensed Products (collectively, the "Advertising
Materials") shall be submitted by Licensee to Sega's agent, SOA, free of
cost, for its evaluation and approval on behalf of Sega as to quality,
style, appearance, and use of any of the Licensed Trademarks, and
appropriate reference of the notices specified in the guidelines provided
by SOA, prior to any actual production, distribution, or use of any such
items by Licensee or in its behalf. No such proposed Advertising Materials
shall be produced, distributed, or otherwise used directly or indirectly by
Licensee unless written approval for such materials shall first have been
obtained from Sega's agent, SOA, which approval shall be evidenced by the
return of a copy of Licensee's request for approval with the following
legend inscribed on such copy and signed on behalf of Sega: "Approved by
Director, Third Party Licensing" (or such other representative as Sega
shall designate in writing).
9.2 Sega's agent, SOA, shall promptly evaluate any and all pre-production
samples of the Advertising Materials submitted to it by Licensee, and shall
use reasonable efforts to approve or disapprove any such submitted
Advertising Materials in writing within ten (10) working days after receipt
of such items. Sega's agent, SOA, shall specify the reasons for its
disapproval of any submitted Advertising Materials and state the revisions
and/or improvements to be undertaken by Licensee in order to receive
approval. After making such revisions and/or improvements as are deemed
necessary, Licensee shall submit revised copies of any affected Advertising
Materials to Sega's agent, SOA, for its re-evaluation and potential
approval on behalf of Sega.
9.3 The procedures described in Subsection 9.2, above, shall be repeated until
the proposed Advertising Materials concerning any of the Licensed Products
are expressly approved in writing by Sega's agent, SOA, or until Licensee,
at its discretion, determines that it does not desire to publish or
otherwise use any affected Advertising Materials which have not been
previously so approved.
9.4 Subject in each instance to the prior written approval of Sega's agent,
SOA, Licensee may use such textual and/or pictorial advertising matter (if
any) as may be created by Sega or in its behalf pertaining to the SSS, the
SSS Software Series, and/or to the Licensed Trademarks on such promotional
and advertising materials as may, in Licensee's judgment, promote the sale
of the Licensed Products within the Licensed Territory.
10. ROYALTY PAYMENTS AND REPORTS.
10.1 The per unit royalty for each unit of the Licensed Products and the minimum
guaranteed royalty for the license granted to Licensee hereunder as a
non-refundable advance payment are specified in Exhibit H, attached hereto.
The payment of such minimum guaranteed royalty shall be made by Licensee
within five (5) working days after the date of SOA's approval on behalf of
Sega of the write once CD samples containing the finished game code (in
CD-ROM form) for each of the Licensed Products in accordance with the
provisions of Subsection 7.2, above, and shall be credited as an advance
against the royalties to be paid to Sega pursuant to Subsection 10.2,
below.
10.2 Upon Licensee's issuance of any purchase order for the manufacture of
Licensed Products (hereinafter a "Purchase Order"), Licensee shall
immediately forward to Sega and SOA a copy of such Purchase Order. Within
five (5) working days of Licensee's issuance of any Purchase Order,
Licensee shall make the non-refundable royalty payment due Sega, pursuant
to the terms set forth in Exhibit H, attached hereto, with respect to the
number of units of the Licensed Products so ordered. Licensee acknowledges
and agrees that, in the event Licensee fails to make the required royalty
payment to Sega within the specified time period, Sega may notify the
Licensed Manufacturer that the units of the Licensed Product(s) requested
pursuant to said Purchase Order may not be released to License until such
time as Sega notifies the Licensed Manufacturer that it has received the
appropriate royalty payment.
10.3 Within thirty (30) days following the end of each calendar quarter
throughout the term of this Agreement (which calendar quarters shall
commence on January 1, April 1, July 1, and October 1), (i) Licensee shall
procure that each Licensed Manufacturer utilized by Licensee shall submit
to Sega a written statement (signed by an officer of the corporation)
indicating, by product title, the number of units of the Licensed Products
which such Licensed Manufacturer has manufactured during the preceding
calendar quarter, and (ii) Licensee shall submit to Sega a written
statement indicating, by country and by product title, the number of units
of the Licensed Products sold by Licensee during such preceding calendar
quarter. A copy of all reports required hereunder shall be sent to (i)
Sega's agent, SOA (Attention: Director, Third Party Licensing - or to such
other department or representative as Sega shall designate in writing), and
(ii) Sega (Attention: CS Third Party Division - or to such other department
or representative as Sega shall designate in writing).
10.4 No costs incurred in the development, manufacture, marketing, sale, and/or
distribution of the Licensed Products shall be deducted from any royalties
payable to Sega hereunder. Similarly, there shall be no deduction from the
royalties otherwise owed to Sega hereunder as a result of any uncollectible
accounts owed to Licensee, or for any credits, discounts, allowances or
returns which Licensee may credit or otherwise grant to any third party
customer of any units of the Licensed Products, or for any taxes, fees,
assessments, or expenses of any kind which may be incurred by Licensee in
connection with its sale and/or distribution of any units of the Licensed
Products.
10.5 Licensee acknowledges and agrees that it shall be solely responsible for
any withholding taxes and/or other such assessments which may be imposed by
any governmental authority within the Licensed Territory with respect to
the royalties paid to Sega hereunder. Licensee shall be entitled to deduct
such payments from royalties otherwise due to Sega; provided, however, that
no such deduction shall be taken unless and until Licensee has deposited
the payments with the governmental authority responsible for the collection
of such taxes and/or assessments. Regardless of the actual amount of
withholding taxes paid or assessed, the deduction from royalties permitted
hereunder for withholding tax deposited by Licensee may not exceed the
lesser of: (i) the actual withholding taxes deposited in connection with
royalty payments or (ii) ten percent (10%) of the royalties against which
the withholding tax is asserted. Licensee further agrees to indemnify and
hold Sega harmless from and against any claims, losses, liabilities,
damages, expenses and costs, including, without limitation, reasonable fees
for attorneys and court costs, which result from Licensee's failure to
timely pay any such withholding taxes or other assessments, and/or which
are incurred in the settlement or avoidance of any such claim. Prior to
January 31 of each year during the term of this Agreement and during the
year immediately following the expiration and/or termination of this
Agreement, Licensee shall forward to Sega a copy of the Annual Withholding
Tax Return for U.S. Source Income of Foreign Persons (Form 1042).
Furthermore, by the end of the month following the month of each royalty
payment during the term of this Agreement and, as appropriate, during the
year immediately following the expiration and/or termination of this
Agreement, Licensee
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shall forward to Sega a copy of the Foreign Person's U.S. Source Income
Subject to Withholding (Form 1042S) (or similar form as appropriate
based on Licensee's country of residence). For example, by January 31,
1996, Licensee shall forward to Sega Form 1042 for the 1995 calendar
year; by the end of May 1996, Licensee shall forward to Sega Form 1042S
for a royalty payment made to Sega in April, 1996. Licensee shall
provide to Sega such reasonable assistance as Sega may request in
connection with any claim by Sega for a credit or refund of such
withholding taxes or assessments.
10.6 All sums to be paid to Sega hereunder shall be paid in Japanese Yen and
shall be remitted by wire transfer on or before the applicable due date
to such bank account as shall be designated by Sega for such purpose.
The receipt and deposit by Sega or any royalty payment tendered by or on
behalf of Licensee shall be without prejudice to any rights or remedies
of Sega and shall not restrict or prevent Sega from thereafter disputing
the accuracy of such payment.
10.7 Licensee acknowledges and agrees that all sums owed or otherwise payable
to Sega hereunder shall bear interest at the rate of one and one-half
percent (1-1/2%) per month, or such lower rate as may be the maximum
rate permitted under applicable law, from the date upon which payment of
the same shall first become due up to and including the date of payment
thereof whether before or after judgment, and that Licensee shall be
additionally liable for all costs and expenses of collection, including,
without limitation, reasonable fees for attorneys and court costs.
Notwithstanding the foregoing, such specified rate of interest shall not
excuse or be construed as a waiver of Licensee's obligation to timely
provide any and all payments owed to Sega hereunder.
11. RECORDS AND AUDIT.
Licensee shall retain at its principal place of business for a period
of two (2) years after making any royalty report, all of the files, records and
books of account prepared in the normal course of business which contain data
reasonably required for the computation and verification of the amounts to be
paid and the information to be given in any such royalty report required
hereunder. Licensee shall permit Sega and/or a licensed certified public
accountant ("CPA") retained by Sega to inspect and/or audit at any reasonable
times (but not more often than quarterly) of all such files, records and books
of account and to take extracts therefrom or make copies thereof for the
purpose of verifying the correctness of the royalty reports and payments
provided by Licensee hereunder. Licensee shall give Sega and/or its CPA such
other information as may be necessary and proper to enable the royalty payments
due to Sega hereunder to be accurately ascertained. All information obtained by
Sega and/or its CPA under this Section 11 shall be maintained in strict
confidence in accordance with the provisions of Section 17, below. In addition
to promptly paying Sega any such sums as are identified by any inspection
and/or audit reveals that Licensee has underpaid Sega by three (3) percent or
more with respect to any calendar month, Licensee shall reimburse Sega for the
costs of such inspection and/or audit promptly upon demand.
12. DISTRIBUTION.
12.1 Licensee acknowledges and agrees that throughout the term of this
Agreement, at no expense to Sega, and in accordance with the provisions
of this Agreement, it shall use diligent, good faith efforts to
stimulate demand for the Licensed Products throughout the Licensed
Territory and to supply any resulting demand for such products.
12.2 Subject to availability, Licensee agrees to sell to Sega and its agent,
SOA, quantities of the Licensed Products at as low a price and on terms
as favorable as Licensee sells similar quantities of the Licensed
Products to the general trade; provided, however, any such units of the
Licensed Products may not be distributed, directly or indirectly, for
resale within the Licensed Territory without Licensee's prior written
consent.
13. REPRESENTATIONS AND WARRANTIES.
13.1 Sega represents and warrants solely for the benefit of Licensee that:
(a) Sega has the right, power and authority to enter into this
Agreement and to fully perform its obligations hereunder.
(b) Sega has the right, power and authority to grant Licensee the
sublicense identified in Subsection 3.3, above, per the terms set
forth therein.
(c) As of the date of execution of this Agreement, Sega has filed
applications for registration of the Licensed Trademarks in the
specific countries and to the extent expressly referenced in
Exhibit E, attached hereto.
(d) The making of this Agreement by Sega does not violate any separate
agreement, rights or obligations existing between Sega and any
other person or entity, and throughout the term of this Agreement,
Sega shall not make any separate agreement with any person or
entity that is inconsistent with any of the provisions of this
Agreement.
13.2 Licensee represents and warrants solely for the benefit of Sega that:
(a) Licensee has the right, power and authority to enter into this
Agreement and to fully perform its obligations hereunder.
(b) Licensee is and will be at all times while the Licensed Products
are offered for sale, either: (i) the exclusive owner of all
rights, title and interests within the Licensed Territory in and to
the audiovisual works based on or otherwise derived from Licensee's
Properties and encoded in the Licensed Products; or (ii) the holder
of the exclusive rights within the Licensed Territory to develop
and distribute Licensed Products based on or otherwise derived from
each of Licensee's Properties which was not originally created by
Licensee and was instead licensed or otherwise obtained by Licensee
from a third party for use in the development of any affected
Licensed Product, and Licensee agrees that it shall furnish
verification of such rights to the satisfaction of Sega promptly
upon request.
(c) Licensee is and will be at all times while the Licensed Products
are offered for sale, either: (i) the exclusive owner of all
rights, title and interests within the Licensed Territory in and to
the name or other designation used as the title for each of the
Licensed Products; or (ii) the holder of the exclusive rights
within the Licensed Territory to develop and distribute Licensed
Products which bear the name or other designation used as the title
for each of the Licensed Products which was not originally created
by Licensee and was instead licensed or otherwise obtained by
Licensee from a third party for use in conjunction with any
affected Licensed Product, and Licensee agrees that it shall
furnish verification of such rights to the satisfaction of Sega
promptly upon request.
(d) As of the date of execution of this Agreement, Licensee is unaware
of any outstanding claim against any rights, title or interests of
Licensee in and to the audiovisual work for each video game program
used in any of the Licensed Products.
(e) As of the date of execution of this Agreement, Licensee is unaware
of any outstanding claim(s) against any rights, title or interest
of Licensee in and to any name or other designation used as the
title for any of the Licensed Products.
(f) The making of this Agreement by Licensee does
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not violate any separate agreement, rights or obligations
existing between Licensee and any other person or entity, and
throughout the term of this Agreement, Licensee shall not make
any separate agreement with any person or entity that is
inconsistent with any of the provisions of this Agreement.
(g) Licensee shall not make any representation or give any warranty
to any person or entity expressly or impliedly on behalf of
Sega or its agent, SOA, or to the effect that the Licensed
Products are connected in any way with Sega or its agent, SOA
(other than that the Licensed Products have been developed,
manufactured, marketed, sold, and/or distributed under license
from Sega).
(h) The Licensed Products shall be promoted, advertised,
merchandised, marketed, sold, and distributed in accordance with
any and all applicable statutes, laws, ordinances, and
regulations within the Licensed Territory.
(i) Licensee shall not, directly or indirectly, solicit orders from
and/or sell any units of the Licensed Products to any person
or entity outside of the Licensed Territory or in any situation
where Licensee reasonably should know that such Licensed
Products will be exported or resold outside of the Licensed
Territory.
(j) Licensee's policies and practices with respect to the
marketing, sale, and/or distribution of the Licensed Products
shall in no manner reflect adversely upon the name, reputation
or goodwill of Sega.
14. INDEMNITIES: ASSUMPTION OF RISK.
14.1 Sega agrees to indemnify and hold Licensee harmless from and against any
and all claims, losses, liabilities, damages, expenses and costs,
including, without limitation, reasonable fees for attorneys and court
costs, which result from a breach of any of the warranties expressly set
forth in Subsection 13.1, above, or incurred in the settlement or
avoidance of any such claim; provided, however, that Licensee shall give
prompt written notice to Sega of the assertion of any such claim, and
provided further that Sega shall have the right to select counsel and
control the defense and/or settlement thereof, subject to the right of
Licensee to participate in any such action or proceeding at its own
expense with counsel of its own choosing. Licensee shall not agree to
the settlement of any such claim, action or proceeding without Sega's
prior written consent.
14.2 Licensee agrees to indemnify and hold Sega and its agent, SOA, harmless,
and at Sega's option defend Sega and its agent, SOA, from and against
any and all claims, losses, liabilities, damages, expenses and costs,
including, without limitation, reasonable fees for attorneys and court
costs, which result from a breach or alleged breach of any of the
warranties expressly set forth in Subsection 13.2, above, or incurred in
the settlement or avoidance or any such claim; provided, however, that
Sega and/or its agent, SOA, shall give prompt written notice to Licensee
of the assertion of any such claim, and provided further that Licensee
shall have the right to select counsel and control the defense and/or
settlement thereof, subject to the right of Sega and its agent, SOA, to
participate in any such action or proceeding at its own expense with
counsel of its own choosing. Neither Sega, nor its agent, SOA, shall
agree to the settlement of any such claim, action or proceeding without
Licensee's prior written consent.
14.3 SEGA EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES UNDER THIS AGREEMENT
WITH RESPECT TO THE LICENSED PRODUCTS AS BETWEEN SEGA AND LICENSEE AND
AS BETWEEN SEGA AND ANY THIRD PARTY PURCHASERS OF ANY UNITS OF THE
LICENSED PRODUCTS, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES
OF MERCHANTABILITY AND/OR OF FITNESS FOR ANY GENERAL OR PARTICULAR
PURPOSE.
14.4 Licensee acknowledges and agrees that, in accordance with the provisions
of this Agreement, neither Sega, nor its agent, SOA, shall bear any
risk, or have any responsibility or liability, of any kind to Licensee
or to any third parties with respect to the quality and/or performance
of any of the Licensed Products, including, without limitation, the
operation or inoperability of the final version of the reproducible
software for any of the Licensed Products. Licensee agrees to indemnify
and hold Sega and its agent, SOA, harmless from and against any and all
claims, losses, liabilities, damages, costs and expenses, including,
without limitation, reasonable fees for attorneys, expert witnesses and
litigation costs, arising from or otherwise concerning the development,
manufacture, marketing, sale, and/or distribution by Licensee or for its
benefit of any of the Licensed Products, including, without limitation,
any claims of copyright, design or publicity right infringement based on
any of Licensee's Properties, any claims of trademark infringement based
on any trademarks (other than the Licensed Trademarks) adopted and used
by Licensee in conjunction with the Licensed Products, as well as any
claims of product defect, or breach of any express or implied warranties
applicable to any of the Licensed Products. In the event any units of
any of the Licensed Products create any risk of loss or damage to any
property or injury to any person, Licensee shall immediately take
effective steps, at Licensee's sole liability and expense, to recall
and/or to remove such defective product units from any affected channels
of distribution.
14.5 Licensee agrees to obtain and maintain throughout the term of this
Agreement and for three (3) years thereafter, at its own expense,
Standard Product Liability Insurance from a qualified insurance company,
naming Sega and each of its subsidiaries and affiliates as additional
named insureds (collectively the "Additional Insured"). The Product
Liability policy shall provide adequate protection for Licensee and the
Additional Insureds against any and all claims, demands and causes of
action as referenced in Subsection 14.4, immediately above, or arising
out of any defects or failure to perform, alleged or otherwise, in
thereof, and with the limit of no less than the equivalent of one
million US dollars (US$1,000,000) combined single limit for each single
occurrence. Twenty (20) days prior to any modification or expiration of
the Product Liability policy, Licensee shall provide Sega with written
notice, by registered mail, return receipt requested, of such
occurrence. Licensee agrees to furnish Sega with a certificate of
insurance evidencing such coverage within thirty (30) days after the
date of this Agreement.
14.6 Sega does not make any representation as to the scope of validity of the
Licensed Trademarks, except as expressly set forth in Subsection 13.1,
above. In addition, Sega makes no representation or warranty of or
concerning the scope of validity of the Licensed Technology and/or the
Licensed Patents, and does not warrant that the sale of the Licensed
Products by Licensee will not infringe upon the patent, trade secret,
copyright, masks work rights or other rights, including, without
limitation, trademark, trade dress and right of publicity and privacy of
another in the Licensed Territory. The risk that the Licensed Products
developed and distributed by Licensee in furtherance of this Agreement
may infringe upon any copyright, trademark, patent, design, publicity
right or other right of any third party within the Licensed Territory is
hereby expressly assumed by Licensee to the extent it exercises its
rights to develop, have manufactured, market, sell, and/or
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distribute the Licensed Products within the Licensed Territory.
15. PATENT, COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS.
15.1 Sega acknowledges and agrees that the copyrights with respect to
Licensee's Properties and the audiovisual works embodied in the Licensed
Products are and shall be the exclusive property of Licensee or of any
third party from which Licensee has been granted the license and related
rights to develop and otherwise exploit any such copyrighted materials.
15.2 Sega acknowledges and agrees that the names or other designations used
as the titles for the Licensed Products are and shall be the exclusive
property of Licensee or of any third party from whom Licensee has been
granted the license and related rights to use and otherwise exploit any
such names or other designations.
15.3 Licensee acknowledges and agrees that the Licensed Patents are and shall
be the exclusive property of Sega and/or the third party from whom Sega
has been granted the license and related rights to use and to
sublicense. Nothing herein shall give Licensee any rights, title or
interest in or to any of the Licensed Patents, other than the
non-exclusive license and privilege during the term hereof to use the
Licensed Patents solely in accordance with the provisions of this
Agreement. Licensee agrees that it shall not use the Licensed Patents in
the development and/or manufacture of any article other than the
specific Licensed Products expressly authorized hereunder, nor shall
Licensee grant or purport to grant any third party any right to use the
Licensed Patents without Sega's prior written consent.
15.4 Licensee acknowledges and agrees that the Licensed Trademarks are and
shall be the exclusive property of Sega. Nothing herein shall give
Licensee any rights, title or interests in or to any of the Licensed
Trademarks, other than the non-exclusive license and privilege during
the term hereof to display and use the Licensed Trademarks solely in
accordance with the provisions of this Agreement. Licensee agrees that
it shall not do or cause to be done any act or thing contesting or in
any way impairing or tending to impair any of Sega's rights, title, or
interests in or to any of the Licensed Trademarks. Licensee further
agrees that it shall not register, in any country, whether in its own
name or in the name of any other person or entity, any trademark which
is the same as, similar to, or is likely to be confused with, any of the
Licensed Trademarks.
15.5 Licensee acknowledges and agrees that all proprietary and contractual
rights with respect to the Licensed Technology are and shall be the
exclusive property of Sega. Nothing herein shall give Licensee any
rights, title or interests in or to the Licensed Technology (or any
portion thereof), other than the non-exclusive license and privilege
during the term hereof to use the Licensed Technology for the
development of the Licensed Products solely in accordance with the
provisions of this Agreement. Licensee agrees that it shall not use the
Licensed Technology in the development and/or manufacture of any article
other than the specific Licensed Products expressly authorized
hereunder, nor shall the Licensee grant or purport to grant any third
party any right to use the Licensed Technology (or any portion thereof),
without Sega's prior written consent; nor shall Licensee, directly or
indirectly, reverse engineer, disassemble and/or decompile the Licensed
Technology. Licensee further agrees that it shall not do or cause to be
done any act or thing contesting or in any way impairing or tending to
impair any of Sega's rights, title, and/or interests in or to the
Licensed Technology (or any portion thereof) nor shall Licensee obtain
any rights, title and/or interests in or to the Licensed Technology (or
any portion thereof).
15.6 To the extent any such rights, title and/or interests in or to the
Licensed Trademarks and/or Licensed Technology are acquired to Licensee,
Licensee agrees to assign such rights to Sega without any consideration
due to Licensee.
15.7 Upon the expiration or earlier termination of this Agreement for any
reason, Licensee shall thereupon immediately cease and desist from any
further use of the Licensed Patents, Licensed Trademarks, and/or
Licensed Technology licensed hereunder, subject to the provisions of
Subsection 19.3 below.
16. PATENT, COPYRIGHT, TRADEMARK AND TRADE SECRET PROTECTION.
16.1 In the event that either Licensee or Sega discovers or otherwise becomes
aware that any of the intellectual property rights embodied in any of
the Licensed Products have been or are being infringed upon by any third
party, then the party with knowledge of such infringement or apparent
infringement shall promptly notify the other party.
16.2 In the event that any third party alleges that any of the Licensed
Products, including, without limitation, the audiovisual works based on
or otherwise derived from any of Licensee's Properties, violate or
infringe upon such third party's copyrights, trademarks or other
proprietary rights, Licensee shall be exclusively responsible for
control of the defense and/or settlement of any such action or
proceeding, at Licensee's sole cost and expense, and Licensee agrees to
indemnify and hold Sega and its agent, SOA, harmless from and against
any and all claims, losses, liabilities, damages, costs and expenses,
including, without limitation, reasonable fees for attorneys and court
costs, which Sega or its agent, SOA, may incur and/or for which Sega or
its agent, SOA, may be held liable as a result of any such action or
proceeding, subject to the following:
(a) If such infringement or apparent infringement concerns any of
the Licensed Patents, Licensed Trademarks, and/or Licensed
Technology herein licensed to Licensee, Sega shall have the
exclusive right, at its discretion, to commence and prosecute at
its own expense a lawsuit or to take such other action with
respect to such matters as shall be deemed appropriate by Sega.
Licensee agrees to provide Sega, at no expense to Licensee,
reasonable assistance and cooperation concerning any such
matter.
(b) If such infringement or apparent infringement concerns any
copyright in any of the audiovisual works encoded in the
Licensed Products or in any printed materials related thereto,
or any trademarks relating to the names or other designations
used as the titles for the Licensed Products, or any of
Licensee's technical know-how incorporated into any of the
Licensed Products, Licensee shall have the exclusive right, at
its discretion, to commence and/or prosecute at its own expense
a lawsuit or to take such other action with respect to such
matter as shall be deemed appropriate by Licensee. Sega agrees
to provide Licensee, at no expense to Sega, reasonable
assistance and cooperation concerning any such matter. If Sega
or its agent, SOA, is joined as a party to any lawsuit initiated
by or against Licensee, Licensee agrees that it shall indemnify
and hold Sega and its agent, SOA, harmless from and against all
claims, losses, liabilities, damages, expenses and costs,
including, without limitation, reasonable fees for attorneys and
court costs, incurred in connection with any such lawsuit.
16.3 Notwithstanding anything to the contrary contained herein, Licensee's
indemnity obligations under Subsection 16.2, above, shall be of no force
or effect if
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<PAGE> 9
any third party claim of infringement is made solely against Licensee's
use of any of the Licensed Patents, Licensed Trademarks, or any portion
of the Licensed Technology when Licensee's use of the Licensed
Trademarks, Licensed Patents and/or Licensed Technology is in strict
compliance with the terms of this Agreement.
17. CONFIDENTIAL INFORMATION.
17.1 The parties mutually acknowledge and agree that certain information that
one party (the "Receiving Party") shall receive from the other party
(the "Disclosing Party") shall be deemed to be confidential information
and subject to restrictions on disclosure and use as set forth below. As
used herein, the term "Confidential Information" shall mean "Sega
Confidential Information" or "Licensee Confidential Information," as the
case may be.
(a) "Sega Confidential Information" means: (i) the fact that Sega is
developing or intends to develop any particular hardware, software
or other product; (ii) any and all of the Licensed Technology,
including, without limitation, any technical specifications
provided by Sega of or concerning the SSS, the SSS Software Series,
and/or the Licensed Technology; (iii) any non-public information
concerning the business or finances of Sega; and (iv) any other
information provided by Sega which is designated in writing by Sega
prior to disclosure as being proprietary to Sega.
(b) "Licensee Confidential Information" means: (i) the fact that
Licensee is developing or intends to develop any particular
hardware, software or other product; (ii) any non-public
information concerning the business or finances of Licensee; and
(iii) any other information which is designated in writing by
Licensee prior to disclosure as being proprietary to Licensee.
17.2 As used herein, the term "Joint Confidential Information" means: (i) the
terms and conditions of this Agreement and any amendments, renewals, or
supplements hereto; and (ii) any other information that the parties
hereafter mutually agree in writing to treat as Joint Confidential
Information.
17.3 Licensee and Sega, each as a Receiving Party, respectively, agrees that
it shall maintain the confidentiality of the "Joint Confidential
Information" and "Confidential Information" of Disclosing Party, and
safeguard the confidential and/or business sensitive information which
it may receive from the other party with the same degree of care used to
protect its own information of a like nature and/or in accordance with
the provisions of any separate non-disclosure agreement applicable to
such information. Each party further agrees that it shall not use for
its own account apart from this Agreement or for the account of any
third party, nor disclose or otherwise disseminate to any third party,
any company trade secret or other such confidential information of or
concerning the other party unless the written consent of the other party
shall first have been obtained; provided that Sega's disclosure to its
subsidiary companies will not be considered a breach of this Section 17.
17.4 The obligations set forth in this Section 17 shall not be applicable to
any information: (i) which is or becomes generally known or part of the
public domain through no default hereunder on the part of the Receiving
Party; (ii) is known to the Receiving Party prior to the disclosure
thereof by the Disclosing Party, as established by documentary evidence;
(iii) lawfully received by the Receiving Party from a third party who
provided such information without breach of any separate confidentiality
obligation owed by such third party; (iv) disclosed by the Disclosing
Party to unaffiliated third parties without restriction on subsequent
disclosure; and/or (v) required to be disclosed in the context of any
administrative or judicial proceeding, but only to the extent required
by such action and only after giving the Disclosing Party not less than
ten (10) working days prior written notice of any such required
disclosure, and provided further that the party required to make such
disclosure shall use its reasonable best efforts to obtain an
appropriate protective order regarding the information to be disclosed
in any such context.
17.5 Each party, as Receiving Party, shall use its reasonable best efforts by
contract, instruction or otherwise to ensure that its officers,
directors, employees, agents and contractors comply with such party's
obligations under this Section 17, and to ensure that no Confidential
Information of the Disclosing Party or Joint Confidential Information
shall be disclosed or made available to any such officers, directors,
employees, agents or contractors of the Receiving Party unless such
persons or third parties have a need to know such information for
purposes of the performance of this Agreement.
17.6 Each party, as Receiving Party, acknowledges that the Disclosing Party
considers its Confidential Information and the Joint Confidential
Information to contain trade secrets of the Disclosing Party and that
any unauthorized copying, use, or disclosure of such information would
cause the Disclosing Party immediate, irreparable and irremediable harm
for which its remedies at law will be inadequate. Accordingly, each
party acknowledges and agrees that the Disclosing Party shall be
entitled, in addition to any other remedies available to it at law or in
equity, to the issuance without bond of ex parte injunctive relief
enjoining any breach or threatened breach of the Receiving Party's
obligations hereunder with respect to the Joint Confidential Information
and the Confidential Information of the Disclosing Party, and such
further relief as any court of competent jurisdiction may deem just and
proper.
17.7 Upon the expiration of this Agreement or its earlier termination, each
party, as a Receiving Party, shall promptly return to the Disclosing
Party any and all documents and related materials of or concerning the
trade secrets and/or confidential information which originated with the
other party and which remains in the Receiving Party's custody or under
its control, or, if requested by the Disclosing Party, shall destroy all
such trade secret and/or confidential information and certify to the
destruction of all such documents and related materials.
17.8 Sega and Licensee shall jointly develop a press release or similar
statement, mutually acceptable to both parties, describing the existence
of the relationship established by this Agreement and the scope of their
respective activities in furtherance hereof.
17.9 Licensee acknowledges and agrees that the provisions of the
Confidentiality Agreement shall also apply to any and all Sega
Confidential Information and that it shall comply with the provisions of
the Confidentiality Agreement, as well as the provisions of this Section
17; provided that in the event any discrepancies should arise between
the terms and conditions of this Agreement and those of the
Confidentiality Agreement, this Agreement shall prevail.
18. TERM.
18.1 This Agreement shall not be binding upon the parties until it has been
signed by or on behalf of each party, in which event it shall be
effective as of the date first written above (the "Effective Date").
Unless sooner terminated in accordance with the provisions hereof, the
initial term of this Agreement shall be for two (2) years from the
Effective Date (the "Initial Term"). Thereafter, this Agreement shall be
automatically renewed on a year to year basis, unless either party
hereto for any reason gives the other party a notice not to extend the
term hereof at least thirty (30) days before the expiration date
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<PAGE> 10
of this Agreement or any extension thereof.
18.2 Sega shall have the right to terminate this Agreement immediately, by
providing written notice of such election to Licensee, upon the
occurrence of any of the following events or circumstances:
(a) If Licensee shall be unable to pay its debts when due, or shall
make an assignment for the benefit of any of its creditors, or
shall file any petition under the bankruptcy or insolvency laws of
any jurisdiction, or shall have or suffer a receiver or trustee to
be appointed for its business or property, or shall be adjudicated
to be bankrupt or insolvent; or
(b) If Licensee shall market, sell, or distribute, whichever comes
first, any of the Licensed Products without the prior written
approval of Sega's agent, SOA, on behalf of Sega as required
hereunder; or
(c) If Licensee shall fail to make any payment owed hereunder on the
date due, and such default is not corrected or cured within ten
(10) working days after receipt of written notice of such default;
or
(d) If control of more than twenty five percent (25%) of the ownership
of Licensee or substantially all of Licensee's assets are
transferred to a person or entity which is in litigation with Sega
concerning any proprietary technology, trade secrets, and/or
intellectual property matters or which is a competitor of Sega or
any of its subsidiary or affiliated companies; or
(e) If Licensee defaults in the performance of any of its other
material obligations provided for in this Agreement and such
default is not corrected or cured within thirty (30) days after
receipt of written notice of such default.
18.3 In addition to the termination rights set forth in Subsection 18.2,
above, Sega, at its option, shall be entitled to terminate, on a
product-by-product basis, the license and related rights herein granted
to Licensee if Licensee fails to provide Sega's agent, SOA, in
accordance with the provisions of Subsection 7.2, above, with the final
software for each of the Licensed Products on or before the scheduled
delivery date(s) specified in Exhibit F, attached hereto; provided,
however, Sega shall not be entitled to exercise such right of
termination if Licensee's failure to provide the final software for any
of the Licensed Products is directly caused by Sega's failure to timely
comply with any of its material obligations expressly set forth herein.
18.4 In the event of the termination of this Agreement in accordance with any
of the provisions of Subsections 18.2 or 18.3, above, no portion of any
royalty payments previously provided to Sega hereunder shall be owed or
be repayable to Licensee.
19. EFFECT OF EXPIRATION OR TERMINATION.
19.1 Within thirty (30) days of the date of expiration or the effective date
of termination, Licensee shall provide Sega with an itemized statement,
certified to be accurate by an officer of Licensee, specifying the
number of unsold units of the Licensed Products, on a title-by-title
basis, which remain in its inventory and/or under its control at the
time of expiration or the effective date of termination. Sega shall be
entitled to conduct a physical inspection of Licensee's inventory and
work in process during normal business hours in order to ascertain or
verify such inventory and/or statement.
19.2 If this Agreement is terminated by Sega as a result of any breach or
default by Licensee, the license and related rights herein granted to
Licensee shall immediately revert to Sega, and Licensee shall cease and
desist from any further use of the Licensed Patents and the Licensed
Technology, and, Licensee shall have no further right to continue the
development, manufacture, marketing, sale, and/or distribution by or for
Licensee of any units of the Licensed Products, nor to continue to use
the Licensed Trademarks, unless the written consent of Sega shall first
have been obtained.
19.3 In the event of the expiration of this Agreement or its termination
other than as a result of any breach or default by Licensee, Licensee
shall be entitled for a period of not more than one hundred and eighty
(180) days following such expiration or termination to sell any unsold
units of the Licensed Products which remain in its inventory and/or
under its control as of the expiration or the effective date of
termination. Licensee expressly agrees that it shall not dispose of any
remaining units of the Licensed Products unless and until it has given
Sega a complete and correctly itemized statement of all such unsold
Licensed Products.
(a) Within ten (10) working days after the end of such one hundred and
eighty (180) day period, Licensee shall provide Sega with a second
itemized statement, certified to be accurate by an officer of
Licensee, specifying the quantity of unsold units of the Licensed
Products, on a title-by-title basis, which remain in Licensee's
inventory.
(b) Sega shall have an option, exercisable for a period of ten (10)
working days after receipt of Licensee's statement pursuant to
Subsection 19.3(a), immediately above, to notify Licensee that it
desires to purchase from Licensee any or all of such remaining
inventory of unsold Licensed Products.
(c) Any and all units of the Licensed Products which Sega does not
elect to purchase pursuant to the immediately preceding paragraph,
shall be destroyed by Licensee within five (5) working days of the
expiration of Sega's option period specified in Subsection 19.3(b),
above. Within five (5) working days after such destruction,
Licensee shall provide Sega with an itemized statement, certified
to be accurate by an officer of Licensee, indicating the number of
units of the Licensed Products which have been destroyed (on a
title-by-title basis), the location and date of such destruction,
and the disposition of the remains of such destroyed materials.
19.4 Licensee acknowledges and agrees that its failure to comply with the
provisions of this Section 19 upon the expiration or earlier termination
of this Agreement would result in immediate, irreparable and
irremediable damage to Sega. Licensee acknowledges that there is no
adequate remedy at law for any failure to cease to use the Licensed
Patents, Licensed Trademarks, or the Licensed Technology, or to cease
the marketing, sale, distribution, and/or any other exploitation of the
Licensed Products, and Licensee agrees that in the event of such
failure, Sega shall be entitled, in addition to any other remedies
available to it at law or in equity, to the issuance without bond of ex
parte injunctive relief enjoining any breach or threatened breach of
Licensee's obligations hereunder, and such other and further relief as
any court of competent jurisdiction may deem just and proper.
19.5 Licensee acknowledges and agrees that Sega shall be under no obligation
to renew or extend this Agreement notwithstanding any actions taken by
either of the parties prior to the expiration of this Agreement. Upon
the expiration of this Agreement neither party shall be liable to the
other for any damages (whether direct, consequential, or incidental, and
including, without limitation, any expenditures, loss of profits, or
prospective profits) sustained or arising out of or alleged to have been
sustained or to have arisen out of such expiration. However, the
expiration of this Agreement shall not excuse either party from its
previous breach of any of the provisions of this Agreement or from any
obligations surviving the expiration of this Agreement, and full legal
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and equitable remedies shall remain available for any breach or
threatened breach of this Agreement or any obligations arising
therefrom.
19.6 The expiration or termination of this Agreement in accordance with the
provisions of Section 18, above, shall be without prejudice to any
rights or remedies which one party may otherwise have against the other
party.
20. NOTICES.
All notices or other communications required or desired to be sent to
either of the parties shall be in writing and shall be sent by registered or
certified mail, postage prepaid, return receipt requested, or sent by recognized
international courier service (e.g., Federal Express, DHL, etc.) with charges
prepaid, or by facsimile which is subject to confirmation by letter. The address
for all notices or other communications required to be sent to Sega or Licensee,
respectively, shall be the mailing address stated in the preamble hereof, or
such other address as may be provided from one party to the other on at least
ten (10) days prior written notice. The address for all notices or other
communications required to be sent to Sega's agent, SOA, is 130 Shoreline Drive,
Redwood City, CA 94065, or such other address as may be provided from SOA to
Licensee on at least ten (10) days prior written notice. Any such notice shall
be effective upon the date of receipt.
21. FORCE MAJEURE.
Neither Sega or its agent, SOA, nor Licensee shall be liable for any
loss or damage or be deemed to be in breach of this Agreement if its failure to
perform or failure to cure any of its respective obligations hereunder results
from any event or circumstance beyond its reasonable control, including, without
limitation, any natural disaster, fire, flood, earthquake, or other Act of God;
shortage of equipment, materials, supplies, or transportation facilities; strike
or other industrial dispute; war or rebellion; or compliance with any law,
regulation, or order (whether valid or invalid) of any governmental body, other
than an order, requirement, or instruction rising out of Licensee's violation of
any applicable law or regulation; provided, however, that the party interfered
with gives the other party written notice thereof promptly, and, in any event,
within fifteen (15) working days of discovery of any such Force Majeure
condition. If notice of the existence of any Force Majeure condition is provided
within such period, the time for performance or cure shall be extended for a
period equal to the duration of the Force Majeure event or circumstance
described in such notice, except that any such cause shall not excuse the
payment of any sums owed to Sega prior to, during, or after any such Force
Majeure condition.
22. NO PARTNERSHIP OR JOINT VENTURE.
The relationship between Sega and Licensee, respectively, is that of
licensor and licensee. Licensee is an independent contractor and is not the
legal representative, agent, joint venturer, partner, or employee of Sega for
any purpose whatsoever. Neither party shall have any right or authority to
assume or create any obligation of any kind or to make any representation or
warranty on behalf of the other party, whether express or implied, or to bind
the other party in any respect or manner whatsoever.
23. ASSIGNMENT.
Sega has entered into this Agreement upon the basis of the particular
capabilities and experience of Licensee and its officers, directors and
employees. Accordingly, Licensee may not assign this Agreement or any of its
rights hereunder, nor delegate or otherwise transfer any of its obligations
hereunder, to any third party unless the prior written consent of Sega shall
first be obtained. Any attempted or purported assignment, delegation or other
such transfer without the required consent of Sega shall be void and a material
breach of this Agreement. Subject to the foregoing, this Agreement shall inure
to the benefit of the parties and their respective successors and permitted
assigns.
24. COMPLIANCE WITH APPLICABLE LAWS.
The parties shall at all times comply with all applicable statutes,
laws, ordinances, regulations and orders of their respective countries, and with
all conventions and treaties to which their countries are a party, which relate
to or in any way affect this Agreement and/or the parties' respective exercise
of their rights or performance of their obligations hereunder. Each party, at
its own expense, shall obtain any license, permit or approval required with
respect to the exercise of any of its rights and/or performance of any of its
obligations hereunder, and shall declare, record or take such steps to render
this Agreement binding, including, without limitation, the recording of this
Agreement with any appropriate governmental authorities (if required).
25. GOVERNING LAW.
This Agreement shall be governed as to all matters, including validity,
construction and performance, by and under the laws of Japan.
26. ARBITRATION.
All disputes, controversies or differences which may arise between the
parties hereto out of, in relation to or in connection with this Agreement,
shall be finally settled by arbitration in Tokyo, Japan in accordance with the
Commercial Arbitration Rules of the Japan Commercial Arbitration Association.
The award rendered by the arbitrator(s) shall be final and binding upon the
parties. However, nothing in this Agreement shall prevent a party from seeking
injunctive relief or a restraining order in so far as allowed by applicable
laws from a court of competent jurisdiction in Japan or elsewhere.
27. LEGAL COSTS AND EXPENSES.
In the event it is necessary for either party to retain the services of
an attorney or attorneys to enforce the terms of this Agreement or to file an
action to enforce any of the terms, conditions or rights contained herein, or
to defend any action, then the prevailing party in any such action shall be
entitled to recover from the other party its reasonable fees for attorneys and
expert witnesses, plus such court costs and expenses as may be fixed by any
court of competent jurisdiction.
28. LIMITATION OF LIABILITY.
Neither party shall be liable to the other party for any incidental,
consequential, special, or punitive damages arising out of this Agreement or
its termination, or the breach of any of its provisions, whether for breach of
warranty or any obligation arising therefrom or otherwise, whether liability is
asserted in contract or tort (including negligence and strict product
liability), and irrespective of whether the parties have advised or been
advised of the possibility of any such loss or damage.
29. REMEDIES.
Unless expressly set forth to the contrary, either party's election of
any remedies provided for in this Agreement shall not be exclusive of any other
remedies available hereunder or otherwise at law or in equity, and all such
remedies shall be deemed to be cumulative.
30. SEVERABILITY.
In the event that any provision of this Agreement (or portion thereof)
is determined by a court of competent jurisdiction to be invalid or otherwise
unenforceable, such provision (or part thereof) shall be enforced to the extent
possible consistent with the stated intention of the parties, or, if incapable
of such enforcement, shall be deemed to be deleted from this Agreement, while
the remainder of this Agreement shall continue in full force and remain in
effect according to its stated terms and conditions.
31. SECTIONS SURVIVING EXPIRATION OR TERMINATION.
The following sections and subsections shall survive the expiration or
earlier termination of this Agreement for any
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reason: 4; 10; 11; 13; 14; 15; 16; 17; 19; 25; 26; 27; 28; and 29.
32. WAIVER.
No failure or delay by either party in exercising any right, power, or
remedy under this Agreement shall operate as a waiver of any such right, power,
or remedy. No waiver of any provision of this Agreement shall be effective
unless in writing and signed by the party against whom such waiver is sought to
be enforced. Any waiver by either party of any provision of this Agreement
shall not be construed as a waiver of any other provision of this Agreement,
nor shall such waiver operate as or be construed as a waiver of such provision
respecting any future event or circumstance.
33. MODIFICATION.
No modification of any provision of this Agreement shall be effective
unless in writing and signed by both of the parties.
34. HEADINGS.
The section headings used in this Agreement are intended for
convenience of reference only and shall not by themselves determine the
construction or interpretation of this Agreement or any portion hereof.
35. INTEGRATION.
This Agreement (together with the Exhibits attached hereto) constitutes
the entire agreement between Sega and Licensee and supersedes all prior or
contemporaneous agreements, proposals, understandings, and communications
between Sega and Licensee, whether oral or written, with respect to the subject
matter hereof.
36. COUNTERPARTS.
All signed copies of this document shall be deemed to be originals of
this Agreement.
37. CONSTRUCTION.
This Agreement shall be fairly interpreted in accordance with its terms
and without any strict construction in favor of or against either of the
parties.
IN WITNESS WHEREOF, the parties have caused this Licensing Agreement to be duly
executed as of the day and year first written above.
SEGA ENTERPRISES, LTD. T.HQ, INC.
By: /s/ NAOYOSHI TAKESHITA By: /s/ BRIAN J. FARRELL
- ------------------------------------- --------------------------------------
Name: Naoyoshi Takeshita Name: Brian J. Farrell
- ------------------------------------- --------------------------------------
Title: Senior Managing Director Title: President & CEO
- ------------------------------------- --------------------------------------
- -------------------------------------------------------------------------------
It is hereby acknowledged and agreed that in the event and to the
extent Sega of America, Inc. (hereinafter "SOA") shall be deemed to hold any
effective license and to have the authority to grant any sublicensable rights
with respect to the Licensed Patents within any portion of the Licensed
Territory (as defined in this Licensing Agreement), SOA hereby confirms its
grant to Licensee, to the extent it lawfully may, of a non-exclusive,
non-sublicensable, non-assignable, and non-transferable sublicense to use the
Licensed Patents solely in connection with the development, manufacture, use,
and sale of the Licensed Products by or for Licensee in accordance with the
terms and subject to the conditions set forth in this Licensing Agreement, and
for no additional consideration other than as expressly set forth therein.
SEGA OF AMERICA, INC.
By: /s/ SHINOBU TOYODA
------------------------------
Name: Shinobu Toyoda
------------------------------
Title: Chief Operating Officer
------------------------------
NOT AN AGREEMENT UNTIL EXECUTED BY ALL PARTIES
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EXHIBIT A
LICENSEE'S PROPERTIES
IN THE HUNT
- -------------------------------------------------------------------------------
EXHIBIT B
LICENSED TERRITORY
The United States of America
Canada
- -------------------------------------------------------------------------------
EXHIBIT C
LICENSED TRADEMARKS
The trademarks licensed to Licensee in accordance with the terms and subject to
the conditions of this Agreement shall be the following:
[LOGO]
SEGA SATURN
- -------------------------------------------------------------------------------
EXHIBIT D
LICENSED PATENTS
As used herein, the term "Licensed Patents" shall mean the following patents
which have been issued and/or applied for, as may be amended by Sega during the
term of this Agreement:
<TABLE>
<S> <C> <C> <C>
(a) United States Patent No. 4,462,076 (h) Canadian Patent No. 1,082,351
(b) United States Patent No. 4,442,486 (i) French Patent No. 1,607,029
(c) United States Patent No. 4,454,594 (j) United Kingdom Patent No. 1,535,999
(d) European Patent No. 80244 (k) Japanese Patent No. 1,632,396
(e) Canadian Patent No. 1,183,276 (l) German Patent No. 2,609,826
(f) Hong Kong Patent No. 88-4302 (m) United States Patent No. 5,371,792
(g) Singapore Patent No. 88-155
</TABLE>
13
<PAGE> 14
EXHIBIT E
TRADEMARK APPLICATIONS AND REGISTRATIONS
Sega, or its related or affiliated entities, has registered and/or filed
applications for registration of the "SEGA" and "SEGASATURN" trademarks within
the Licensed Territory as referenced hereinafter:
<TABLE>
<CAPTION>
TRADEMARK COUNTRY APPL. DATE CLASS APPL. NUMBER REGISTRATION DATE REGISTRATION NUMBER
<S> <C> <C> <C> <C> <C> <C>
SEGA U.S.A. - *9 - Oct. 19, 1976 1050573
SEGA U.S.A. July 11, 1988 *28 742284 Nov. 14, 1989 1566116
SEGA Canada July 22, 1985 *- 546427 Oct. 30, 1987 333672
SEGASATURN U.S.A. Dec. 15, 1993 *28 74-469937
SEGASATURN Canada Oct. 27, 1993 *- 740014
</TABLE>
*... International Class
EXHIBIT F
SCHEDULED DELIVERY DATES
Licensee agrees that it shall use commercially reasonable best efforts to
deliver to Sega's agent, SOA, for its review and approval on behalf of Sega,
the final version of the software for each of the Licensed Products referenced
hereinafter on or before the scheduled delivery dates set forth below, which
list and corresponding delivery dates may be amended by the parties in writing
from time to time during the term of this Agreement.
<TABLE>
<CAPTION>
LICENSED PRODUCTS DELIVERY DATES
In the Hunt
<S> <C>
------------------ ---------------
------------------ ---------------
------------------ ---------------
------------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
EXHIBIT G
THIRD PARTY CONCEPT REGISTRATION FORM
[See the attached page.]
- --------------------------------------------------------------------------------
EXHIBIT H
MINIMUM GUARANTEED ROYALTY
The minimum guaranteed royalty and the per unit royalty for the Licensed
Products shall be in the amounts as follows:
<TABLE>
<S> <C>
1. PER UNIT ROYALTY: Seven hundred Japanese Yen (yen700.-)
2. MINIMUM QUANTITIES: The quantity of each Licensed Product to be manufactured under
the initial Purchase Order shall be no less than five
thousand (5,000) units. In addition, Licensee acknowledges and
agrees that its minimum reorder quantity for any of the Licensed
Products shall be not less than one thousand (1,000) units.
3. MINIMUM GUARANTEED ROYALTIES: To be determined in accordance with the per unit royalty and the
minimum quantities as described in this Exhibit H; provided that
it shall be no less than three million five hundred thousand
Japanese Yen (yen3,500,000.-).
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
THIRD PARTY CONCEPT REGISTRATION FORM
Please complete the entire form and attach all appropriate information.
- ---------------------------------------------------------------------------------------------------------
<S> <C>
THIRD PARTY PUBLISHER
- ---------------------------------------------------------------------------------------------------------
TITLE
- ---------------------------------------------------------------------------------------------------------
DESCRIPTION Please attach a detailed design document with a two (2) page
synopsis of the product. Supply code if available. Ported
products from other platforms require a list of improvements and
changes for the Sega version.
- ---------------------------------------------------------------------------------------------------------
TARGET MACHINE (Check one) [ ] GENESIS/MEGA DRIVE [ ] MEGA CD/SEGA CD [ ] GAME GEAR
[ ] MASTER SYSTEM [ ] SUPER 32X/MEGA 32 [ ] SATURN [ ] PICO
- ---------------------------------------------------------------------------------------------------------
ROM CAPACITY 256K 1MG 2MG 4MG 8MG 12MG 16MG 20MG 24MG 32MG CD
BATTERY BACK UP? [ ] NONE [ ] 64K [ ] 256K [ ]________________
- ---------------------------------------------------------------------------------------------------------
CODE FINISH AND SUBMISSION MONTH____________________________ DAY_____________ YEAR_______
- ---------------------------------------------------------------------------------------------------------
EST. PRODUCT SHIP DATE MONTH____________________________ DAY______________YEAR_______
- ---------------------------------------------------------------------------------------------------------
TERRITORY (Check one) [ ] JAPAN [ ] EUROPE [ ] NORTH AMERICA
- ---------------------------------------------------------------------------------------------------------
TARGET AGE GROUP FROM TO
- ---------------------------------------------------------------------------------------------------------
[ ] ACTION/ARCADE [ ] EDUTAINMENT [ ] PUZZLE
CATEGORY [ ] ADVENTURE [ ] INFORMATION [ ] SIMULATION
[ ] VEHICLE [ ] RPG [ ] _____________________
[ ] STRATEGY [ ] SPORTS [ ] _____________________
- ---------------------------------------------------------------------------------------------------------
DEVELOPER NAME________________________________ LOCATION_________________
- ---------------------------------------------------------------------------------------------------------
NUMBER OF PLAYERS/USERS [ ] 1 [ ] 3 [ ] 5 [ ] 7 [ ] ALTERNATING [ ] COMPETING
[ ] 2 [ ] 4 [ ] 6 [ ] 8 [ ] COOPERATIVE [ ] ________________
- ---------------------------------------------------------------------------------------------------------
MULTIPLE MACHINE LINKAGE [ ] NONE [ ] GEAR TO GEAR [ ] EDGE 16 [ ] ________________
- ---------------------------------------------------------------------------------------------------------
LENGTH OF PLAY [ ] HOURS_______ [ ] MINUTES_________ [ ] UNLIMITED
- ---------------------------------------------------------------------------------------------------------
EST. TOTAL SALES (lifetime) JAPAN_____________ EUROPE____________ NORTH AMERICA____________
- ---------------------------------------------------------------------------------------------------------
EST. INITIAL ORDER QUANTITY
- ---------------------------------------------------------------------------------------------------------
PROOF OF LICENSE [ ] If this product will use a licensed property, [ ] NONE
please attach proof of distribution rights.
- ---------------------------------------------------------------------------------------------------------
PERIPHERAL DEVICE SUPPORT (list) [ ] 6 BUTTON [ ] 4 PLAYER [ ] MOUSE [ ] _______________
- ---------------------------------------------------------------------------------------------------------
PRODUCT AVAILABLE ON OTHER PLATFORMS ADVERTISING
- -------------------------------------------------------------------------------- PLAN FOR
PLATFORM DATE AVAIL. EST. UNITS PLATFORM DATE AVAIL. EST. UNITS TITLE
- ---------------------------------------------------------------------------------------------------------
PROJECT REALITY __/__/__ __________ PC/CDROM __/__/__ __________ TV:__________
SUPER NES __/__/__ __________ MAC/CDROM __/__/__ __________ PRINT:__________
NES __/__/__ __________ TURBO 16/DUO __/__/__ __________ TOTAL BUDGET:__________
GAME BOY __/__/__ __________ 3DO __/__/__ __________ _______________________
JAGUAR __/__/__ __________ SONY PSX __/__/__ __________ PROMOTIONS:____________
AMIGA/AMIGA 32 __/__/__ __________ ____________ __/__/__ __________ OTHER: ________________
CDI __/__/__ __________ ____________ __/__/__ __________ [ ] USE SEGA CLUB LOGOS
- ---------------------------------------------------------------------------------------------------------
OTHER COMMENTS __________________________________________________________________________________________
_________________________________________________________________________________________________________
- ---------------------------------------------------------------------------------------------------------
THIRD PARTY AUTHORIZATION (must be signed)
- --------------------------------------------------------------------------------------------------------
PRINT NAME TITLE SIGNATURE DATE
- --------------------------------------------------------------------------------------------------------
SEGA AUTHORIZATION PRODUCT
CODE
- -----------------------------------------------------------------------------------------------
PRINT NAME TITLE SIGNATURE DATE
- ---------------------------------------------------------------------------------------------------------
SEGA RECOMMENDATION
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.20
FIRST AMENDMENT TO SECURITY AND LOAN AGREEMENT
AND ADDENDUM, EXHIBIT "A", THERETO
This First Amendment ("Amendment") amends that certain Security and Loan
Agreement dated June 7, 1996, by and between Imperial Bank ("Bank") and T.HQ,
Inc., Black Pearl Software, Inc., Malibu Games Inc. ("Borrowers") and the
Addendum, Exhibit "A", (the "Addendum") thereto, of even date, (collectively
herein the Security and Loan Agreement and the Addendum are referred to as the
"Agreement") as follows:
1. Section 1. of the Agreement is modified to increase the total loan
commitment from $7,500,000.00 to $9,000,000.00, based on the terms and
borrowing base of the Agreement to the expiration date of June 30, 1997.
2. Section 6.k. is added to the Addendum to read in its entirety as
follows:
"Accounts over 90 days from invoice date, if on 30 day terms; accounts
over 120 days from invoice date if on 60 or 90 day terms."
3. Section 6.1. is added to the Addendum to read in its entirety as
follows:
"Credit balances greater than 90 days from invoice date on accounts
offered 30 day terms, and 120 days from invoice date for accounts
offered 60 or 90 day terms."
4. Section 6.j. of the Addendum is modified to add the following:
"Accounts from the country of Canada will be included in the borrowing
base according to the advance rate formula previously indicated in the
Agreement. Canadian account exclusions will be those accounts as
indicated in the Agreement and the above 6.k. and 6.1. sections added to
the Addendum."
5. Section 10.a. of the Addendum is modified as follows:
Minimum tangible net worth allowed to be maintained is increased to
$7,000,000.
6. Section 10.c. of the Addendum is modified as follows:
Minimum current ratio allowed to be maintained is changed to 1.40:1.00.
7. Section 10.d. of the Addendum is modified as follows:
Maximum total debt to tangible net worth ratio allowed to be maintained
is changed to 1.75:1.00.
<PAGE> 2
T.HQ, Inc.
First Amendment to Agreement
December 4, 1996
8. Except as provided above, the Agreement remains unchanged.
9. This Amendment is effective as of , 1996, and the
parties hereby confirm that the Agreement is in full force and effect.
T.HQ, Inc. "Borrower" Black Pearl Software, Inc. "Borrower"
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
------------------------------ ------------------------------
Title: V.P. Finance & Admin. Title: V.P. Finance & Admin.
--------------------------- ---------------------------
Malibu Games, Inc. "Borrower" Imperial Bank "Bank"
By: /s/ [ILLEGIBLE] By:
------------------------------ ------------------------------
Title: V.P. Finance & Admin. Title:
--------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.23
PLAYSTATION(R) LICENSED PUBLISHER - SUPPLEMENTAL AGREEMENT
THIS AGREEMENT is entered into the 11 day of April 1996 and is supplemental to
the Licensed Publisher Agreement ("LPA") dated the 10th day of
November 1995 by and between
SONY COMPUTER ENTERTAINMENT EUROPE
(a Division of SONY ELECTRONIC PUBLISHING LIMITED)
of 13 Great Marlborough Street, London W1V 2LP
(hereinafter referred to as "SCEE")
- and -
THQ INCORPORATED
of 5016 North Parkway Calabasas, Suite 100, Calabasas, California 91302, USA
(hereinafter referred to as "Publisher")
PUBLISHER AUTHORISATION #: 062
In consideration of the undertakings, representations and warranties given
herein, and of other good and valuable consideration the receipt and
sufficiency of which is acknowledged, PUBLISHER AND SCEE HEREBY AGREE AS
FOLLOWS:
Licensed Territory
(1) The Licensed Territory as defined in LPA Clause 1.2 and Schedule 1
shall be deemed to have included AUSTRALIA & NEW ZEALAND ab initio.
(2) With effect from 1 June 1996, the Licensed Territory shall
additionally include
CYPRUS
GIBRALTAR
MALTA
BULGARIA
CZECH REPUBLIC
ESTONIA
HUNGARY
LATVIA
LITHUANIA
POLAND
RUSSIAN FEDERATION
BAHRAIN
KUWAIT
OMAN
QATAR
SAUDI ARABIA
UNITED ARAB EMIRATES
YEMEN
(3) Publishing (including, without limitation, distributing) PlayStation
Software products outside the Licensed Territory will continue to be a
breach of the LPA.
- -------------------------------------------------------------------------------
Sony Computer Entertainment Europe Page 1
PlayStation Licensed Publisher - Supplement (ii) CONFIDENTIAL
<PAGE> 2
Rental
(1) With effect from 1 April 1996, the provisions of LPA Clause 3.3 shall
be modified to the effect that Publisher shall be entitled to
undertake or authorise the rental or lending of PlayStation Software
products within the Licensed Territory.
(2) If the Master Disc content of the Rental version of any product varies
from that of the retail version (if any) of the same product, then the
Rental version will be allocated a different SCEE Product Code.
(3) Subject to (2) above, all Rental products (and associated materials)
shall be subject to the Specifications (as defined in the LPA and set
forth in SCEE's Specifications & Procedures manual, as amended from
time to time), and to the Procedures (specifically including, but
without limitation, those relating to submissions, evaluation and
approvals) also set forth in such manual, including specifically but
without limitation any such Specifications and/or Procedures which
relate specifically to Rental products.
(4) The Manufacture of Licensed Products & Associated Materials provisions
of LPA Clause 6, and the Purchase Price provisions of LPA Clauses 7.1
to 7.3 (but not the Returns provisions of LPA Clause 7.4) and of LPA
Schedule 2 (but not Schedule 2[R]), shall apply to all Rental
products.
If the Master Disc content of a Rental product is identical to that of
the retail version (if any) of the same product, there will be no
repeat Mastering Charge (as referred to in LPA Schedule 2). However,
any variance in Master Disc content for a Rental product [for example,
additional Trailers in Start-Up Sequence] will require the payment of
the same Mastering Charge as for retail products.
Purchases of a Rental product and of the retail version (if any) of
the same product will be counted cumulatively for purposes of
Cumulative Purchase Orders Adjustment (as detailed in LPA Schedule 2).
(5) Publisher warrants and represents that it shall obtain all necessary
consents and clearances from, and make all necessary payments to,
third parties whose rights in respect of Rental products are protected
under the European Council Rental Rights Directive and the
corresponding national implementing legislation of European Union
member states (and any similar legislation in any other country of the
Licensed Territory); and the indemnity provisions of LPA Clause 11.2
shall apply to such warranty.
(6) The undertaking or authorising of any renting or lending of
PlayStation Software except as authorised herein and subject to
Specifications and/or Procedures (as referred to in (3) above) shall
continue to be a breach of the LPA. The provisions of LPA Clause 13.2
will apply to any such breach and the repetition of prior material
breach provisions of LPA Clause 13.1(i) will apply to the repetition
of any such breach.
Demonstration & Promotion Discs
(1) With effect from 1 April 1996, the production of Demo Discs (for use
as magazine covermounts and similar or related purposes) and of Promo
Discs (for use as salesmen's samples and similar or related purposes),
will be available on a not-for-retail basis.
(2) All Demo & Promo Discs (and associated materials) shall be subject to
the Specifications (as defined in the LPA and set forth in SCEE's
Specifications & Procedures manual, as amended from
- --------------------------------------------------------------------------------
Sony Computer Entertainment Europe Page 2
PlayStation Licensed Publisher - Supplement (ii) CONFIDENTIAL
<PAGE> 3
time to time), and to the Procedures (specifically including, but
without limitation, those relating to submissions, evaluation and
approvals) also set forth in such manual, including specifically but
without limitation any such Specifications and/or Procedures which
relate specifically to Demo and/or Promo Discs.
(3) The Manufacture of Licensed Products & Associated Materials provisions
of LPA Clause 6, and, subject as provided below, the Purchase Price
provisions of LPA Clauses 7.1 to 7.3 (but not the Returns provisions
of LPA Clause 7.4 and Schedule 2[R]), shall apply to all Demo & Promo
Discs. However, the Purchase Price for Demo & Promo Discs will be as
set forth in Exhibits A and B hereto respectively (and not as set
forth in LPA Schedule 2).
Purchases of Demo and/or Promo Discs and of the retail version(s) of
the same product(s) will not be counted cumulatively for purposes of
Cumulative Purchase Orders Adjustment (as detailed in LPA Schedule 2).
SUBJECT only to the foregoing, all the terms and conditions of the LPA shall
apply to Rental, Demo & Promo Discs and shall continue in full force and
effect.
IN WITNESS WHEREOF the parties hereto have caused this Supplemental Agreement to
be executed as of the date first above written.
SONY COMPUTER ENTERTAINMENT EUROPE THQ INCORPORATED
(a Division of SONY ELECTRONIC
PUBLISHING LIMITED)
[SIG] [SIG]
- ------------------------------ -----------------------------------
Signature Signature
Christopher Deering BJ FARRELL
- ------------------------------ -----------------------------------
Name Signatory's Name (please print)
PRESIDENT PRESIDENT
- ------------------------------ -----------------------------------
Title Title
- --------------------------------------------------------------------------------
Sony Computer Entertainment Europe Page 3
PlayStation Licensed Publisher - Supplement (ii) CONFIDENTIAL
<PAGE> 4
Exhibit A
PURCHASE PRICE - DEMO DISC
For Demo Disc product unit comprising:
<TABLE>
<S> <C>
o 1 (one) black PlayStation interactive software Disc
o standard Demo Disc Label
pound sterling 0.85 per unit
o optional maxicase (audio CD Single jewel case)
or plain paper pochette, including assembly
pound sterling 0.10 per unit
o PlayStation Disc mastering (initial order only) pound sterling 750.00 per product
Minimum order quantity 10,000 units
</TABLE>
Exhibit B
PURCHASE PRICE - PROMO DISC
For Promo Disc product unit comprising:
<TABLE>
<S> <C>
o 1 (one) black PlayStation interactive software Disc
o standard Promo Disc Label
o maxicase (audio CD Single jewel case), including assembly
pound sterling 1.25 per unit
o PlayStation Disc mastering pound sterling 750.00 per product
(unless Disc mastering charge already paid for retail
version of same product)
Minimum order quantity - initial order 1,000 units
- reorders 300 units
Maximum order quantity (single order or aggregate) 2,500 units
</TABLE>
- --------------------------------------------------------------------------------
Sony Computer Entertainment Europe Page 4
PlayStation Licensed Publisher - Supplement (ii) CONFIDENTIAL
<PAGE> 1
EXHIBIT 10.24
SONY PSX LICENSE AGREEMENT
THIS LICENSE AGREEMENT is entered into as of the 29th day of June, 1994, by and
between SONY COMPUTER ENTERTAINMENT OF AMERICA, a division of Sony Electronic
Publishing Company, with offices at 711 Fifth Avenue, New York, New York 10022
(hereinafter "Sony"), and THQ, Inc., with offices at 5016 North parkway
Calabasas, Calabasas, California 91302 (hereinafter "Licensee").
WHEREAS, Sony and/or its affiliates have developed a CD-based interactive
console for playing video games and for other entertainment purposes under the
development code name PS-X (hereinafter referred to as the 'Player') and also
own or have the right to grant licenses to certain intellectual property rights
used in connection with the Player.
WHEREAS, Licensee desires to be granted a non-exclusive license to develop and
distribute Licensed Products (as defined below) pursuant to the terms and
conditions set forth in this Agreement.
WHEREAS, Sony is willing, on the terms and subject to the conditions of this
Agreement, to grant Licensee the desired non-exclusive license to develop and
distribute Licensed Products, and desires to manufacture such Licensed Products
for Licensee.
NOW, THEREFORE, in consideration of the representations, warranties and
covenants contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, Licensee and Sony
hereby agree as follows:
1. DEFINITION OF TERMS.
1.1 "Executable Software" means Licensee's object code software which
includes the Licensee Software and any software (whether in object code or
source code form) provided by Sony which is intended to be combined with
Licensee Software for execution on a Player and has the ability to communicate
with the software resident in the Player.
1.2 "Intellectual Property Rights" means, by way of example but
not by way of limitation, all current and future worldwide patents and other
patent rights, copyrights, trademarks, service marks, trade names, mask work
rights, trade secret rights, technical information, know-how, and the
equivalents of the foregoing under the laws of any jurisdiction, and all other
proprietary or intellectual property rights throughout the universe, including
without limitation all applications and registrations with respect thereto, and
all renewals and extensions thereof.
1.3 "Licensed Territory" means the countries listed in Exhibit A,
as may be in effect from time to time.
1.4 "Licensed Products" shall mean the Executable Software
embodied on CD-ROM media.
1.5 "Licensed Trademarks" means the trademarks, service marks and
logos designated by Sony. Nothing contained in this Agreement shall in any way
grant Licensee the right to use the trademark "Sony" in any manner as a
trademark, trade name, service mark or logo other than as expressly permitted
by Sony. Sony may amend such Licensed Trademarks upon reasonable notice to
Licensee.
1 CONFIDENTIAL
<PAGE> 2
1.6 "Licensee Software" means Licensee's application object code
and data (including audio and video material) developed by Licensee in
accordance with this Agreement, which, when linked to any software provided by
Sony, create Executable Software.
1.7 "Packaging" means, with respect to each Licensed Product, the
carton, containers, packaging and wrapping materials (but excluding
instructional manuals, liners or other user information for such Licensed
Product to be inserted in the jewel case).
1.8 "Sony Materials" means any data, object code, source code,
documentation, and hardware provided or supplied to Licensee by Sony,
including, without limitation, any portion or portions of the development
tools.
2. LICENSE GRANT.
Sony hereby grants to Licensee, and Licensee hereby accepts, for the
term of this Agreement, within the Licensed Territory, under Sony's
Intellectual Property Rights, including without limitation any relevant patents
Sony may own or have acquired by license, a non-exclusive, nontransferable
license, without the right to sublicense (except as specifically provided
herein): (i) to use the object code version of any software supplied by Sony
that is intended to be combined with Licensee Software and executed on a Player
internally as may reasonably be necessary to develop Licensed Products; (ii) to
reproduce and distribute executable files for execution on a Player
incorporating such software in accordance with the provisions of this License
Agreement, including without limitation, Section 7; (iii) to market, distribute
and sell such Licensed Products; (iv) to use the Licensed Trademarks in
connection with the packaging, advertising and promotion of the Licensed
Products; and (v) to sublicense to end users the right to use the Licensed
Products for non-commercial purposes only and not for public performance.
3. DEVELOPMENT TOOLS.
After execution of this Agreement, Sony will provide to Licensee the
hardware and software development tools which Sony deems to be necessary for
development of the Executable Software pursuant to an agreement to be entered
into separately between the parties hereto.
4. LIMITATIONS ON LICENSES; RESERVATION OF RIGHTS.
4.1 REVERSE ENGINEERING PROHIBITED. Licensee hereby agrees not to
disassemble, peel semiconductor components, decompile, or otherwise reverse
engineer or attempt to reverse engineer or derive source code from, all or any
portion of the Sony Materials (whether or not all or any portion of the Sony
Materials are integrated with the Licensee Software) or permit or encourage any
third party to do so. Licensee shall not use, modify, reproduce, sublicense,
distribute, create derivative works from, or otherwise provide to third
parties, the Sony Materials, in whole or in part, other than as expressly
permitted by this License Agreement.
4.2 RESERVATION OF SONY'S RIGHTS. The licenses granted in this
License Agreement extend only to development of Licensed Products for use on
the Player, in such format as may be designated by Sony. Without limiting the
generality of the foregoing, Licensee shall not have the right to distribute or
transmit the Executable Software or the Licensed Products via electronic means
or any other means now known or hereafter devised, including without limitation
(to the extent such Executable Software or the Licensed Products include Sony
Materials), via wireless, cable, fiber optic means, telephone lines, microwave
and/or radio waves, or over a network of interconnected computers or other
devices This License Agreement does not grant any right or license, under any
Intellectual Property Rights of Sony or otherwise, except as expressly provided
herein, and no other right or license is to be implied
2 CONFIDENTIAL
<PAGE> 3
by or inferred from any provision of this License Agreement or the conduct of
the parties hereunder. Licensee shall not make use of any of the Sony
Materials and Player or any Intellectual Property Rights related to the Sony
Materials and Player (or any portion thereof) except as authorized by and in
compliance with the provisions of this License Agreement or as may be otherwise
expressly authorized in writing by Sony. No right, license or privilege has
been granted to Licensee hereunder concerning the development of any collateral
product or other use or purpose of any kind whatsoever which displays or
depicts any of the Licensed Trademarks.
4.3 RESERVATION OF LICENSEE'S RIGHTS. Licensee retains all
rights, title and interest in and to the Licensee Software, including without
limitation, Licensee's Intellectual Property Rights therein, and nothing in
this Agreement shall be construed to restrict the right of Licensee to develop
products incorporating the Licensee Software (separate and apart from the Sony
Materials) for any hardware platform or service other than the Player.
5. QUALITY STANDARDS FOR THE LICENSED PRODUCTS.
5.1 QUALITY ASSURANCE OF PRODUCT PROPOSAL. The Licensed Products,
including, without limitation, the contents and title of each of the Licensed
Products, and/or Licensee's use of any of the Licensed Trademarks, shall be
subject to Sony's prior written approval, which shall be within Sony's sole
discretion as to acceptable standards of quality. Before Licensee commences
programming of the Licensee Software for each of the Licensed Products,
Licensee shall submit to Sony, for Sony's written approval or disapproval which
will not be unreasonably withheld or delayed, a written proposal (the "Product
Proposal") setting forth (i) the description of the proposed Licensed Product,
including the proposed title, story line, characters and game style, (ii) a
description of any licensed rights of third parties to be used by Licensee,
(iii) a description of the user interface characteristics, (iv) a description
of any multiple player options, (v) the development team profile, (vi) a
description of any special hardware/software requirements, (vii) the scheduled
and/or anticipated delivery dates with respect to any deliverable items and/or
release dates with respect to the proposed Licensed Product, and (viii) any
additional information that Sony may deem to be useful in evaluating the
proposed Licensed Product. In the event that Sony rejects such Product
Proposal, Sony shall have the right in its sole discretion to request Licensee
to make revisions or modifications to such proposal, and any such changes shall
be made at Licensee's cost. Licensee shall notify Sony promptly in writing in
the event of any material proposed change in any portion of the Product
Proposal and shall, from time to time at the request of Sony for quality
assurance purposes, submit work-in-progress on the Licensed Product during the
development process, in a medium designated by Sony, for Sony's approval. Sony
shall have the right, from time-to-time with appropriate notice to Licensee, to
limit the number of proposed Licensed Products that Licensee may submit to Sony
for review and approval or disapproval, during any twelve (1 2) month period
following the effective date of this Agreement.
5.2 APPROVAL OF EXECUTABLE SOFTWARE. Following Sony's written
approval of the Product Proposal, Licensee shall on or before the date
specified in the Product Proposal, deliver to Sony for As inspection and
evaluation, a prototype of the Executable Software for the proposed Licensed
Product. Such prototype shall be in the format prescribed by Sony. Sony will
evaluate such prototype Executable Software and notify Licensee in writing of
its approval or disapproval of such Executable Software which will not be
unreasonably withheld or delayed. If such Executable Software is disapproved,
Sony shall specify the reasons for such disapproval and state what corrections
and/or improvements are necessary. After making the necessary corrections
and/or improvements, Licensee may submit a new prototype for approval or
disapproval by Sony. No approval by Sony of any element of the Executable
Software shall be deemed an approval of any other element of the Licensed
Product, nor shall any such approval be deemed to constitute a waiver of any of
Sony's rights under this Agreement.
3 CONFIDENTIAL
<PAGE> 4
5.3 APPROVAL OF PACKAGING AND ARTWORK. For each proposed Licensed
Product, Licensee shall be responsible, at Licensee's expense, for developing
all Packaging, all artwork and mechanicals ("Artwork"), and all instructional
manuals, liners and other user materials inserted into the jewel box
("inserts"). All Packaging, Artwork and Inserts shall comply with the
requirements of the Sony Guidelines (hereinafter "Guidelines") to be provided
to Licensee subsequent to the execution of this License Agreement, and as may
be amended from time to time by Sony. At the time prototype Executable
Software for a proposed Licensed Product is submitted to Sony for inspection
and evaluation, Licensee shall also deliver to Sony, for review and evaluation,
the proposed final Artwork for such proposed Licensed Product, and a form of
limited warranty for the proposed Licensed Product. Licensee agrees that the
quality of such Artwork shall be of the same quality as that associated with
high quality consumer products. If any of the Artwork is disapproved, Sony
shall specify the reasons for such disapproval and state what corrections are
necessary. After making the necessary corrections to the disapproved Artwork,
Licensee may submit new proposed Artwork for approval by Sony. Sony shall not
unreasonably withhold or delay its approval of the proposed Artwork submitted
for review by Licensee. No approval by Sony of any element of the Packaging or
Artwork shall be deemed an approval of any other element of the Licensed
Product, nor shall any such approval be deemed to constitute a waiver of any of
Sony's rights under this Agreement.
5.4 ADVERTISING MATERIALS. Pre-production samples of the
advertising, merchandising, promotional, and display materials of or concerning
the Licensed Products (collectively referred to hereinafter as the "Advertising
Materials') shall be submitted by Licensee to Sony, free of cost, for Sony's
evaluation and approval as to quality, style, appearance, usage of any of the
Licensed Trademarks, and appropriate reference of the notices, prior to any
actual production, use, or distribution of any such items by Licensee or in its
behalf. No such proposed Advertising Materials shall be produced, used, or
distributed directly or indirectly by Licensee without first obtaining the
written approval of Sony which approval will not be unreasonably withheld or
delayed. Subject in each instance to the prior written approval of Sony,
Licensee may use such textual and/or pictorial advertising matter (if any) as
may be created by Sony or in its behalf pertaining to the Sony Materials and/or
to the Licensed Trademarks on such promotional and advertising materials as
may, in Licensee's judgment, promote the sale of the Licensed Products within
the Licensed Territory. Sony shall have the right to use the Licensed Products
in any advertising or promotion for Player at Sony's expense, subject to giving
Licensee reasonable prior notice of such advertisement or promotion. Sony
shall confer with Licensee regarding the text of any such advertisement.
6. LABELING REQUIREMENTS.
All Packaging for each unit of the Licensed Products shall have
conspicuously, legibly and irremovably affixed thereto the notices specified in
a template to be provided to Licensee subsequent to the execution of this
License Agreement, which template may be amended from time to time by Sony
during the term of this License Agreement.
7. MANUFACTURE OF THE LICENSED PRODUCTS.
7.1 MANUFACTURE BY SONY.
7.1.1 APPOINTMENT OF SONY AS EXCLUSIVE MANUFACTURER.
Licensee hereby appoints Sony, and Sony hereby accepts such appointment, as the
exclusive manufacturer of all units of the Licensed Products. Licensee
acknowledges and agrees that it shall purchase from Sony one hundred (100%)
percent of its requirements for finished units of the Licensed Products and
Inserts for such Licensed Products, subject to Section 7.1.3 below, during the
term of the Agreement. Sony shall provide to Licensee written specifications
setting forth terms relating to the manufacturing of Licensed Products and
their component pans ("Specifications") subsequent to execution of this
Agreement,
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which may be amended from time to time upon reasonable notice to Licensee.
Sony shall have the right, but no obligation, to subcontract any phase of
production of any or all of the Licensed Products or any part thereof.
7.1.2 CREATION OF MASTER CD-ROM. Following approval by
Sony of each Licensed Product pursuant to Section 5.2, Licensee shall provide
Sony with two (2) copies (in the form of CD write-once discs or such other form
as may be requested by Sony in the Specifications) of the preproduction
Executable Software for the original master CD-ROM (the "Master CD-ROM") from
which all other copies of the Licensed Product are to be replicated. Promptly
following such receipt of such samples, Sony shall create the Master CD-ROM
from one (1) such sample of the pre-production Executable Software in
compliance with specifications effective at the time of replication. Licensee
shall be responsible for the costs, as set forth in the Specifications, of
creating such Master CD-ROM. In order to insure against loss or damage to the
copies of the Executable Software furnished to Sony, Licensee will retain
duplicates of all such Executable Software. Sony shall not be liable for loss
of or damage to any copies of the Executable Software.
7.1.3 DELIVERY OF PRINTED MATERIALS. Licensee shall
deliver the film for all Artwork and Inserts ("Printed Materials") to Sony or
at Sony's option to Sony's designated manufacturing facility in accordance with
the Specifications, at Licensee's sole risk and expense. In the event that
Licensee elects to be responsible for manufacturing the Printed Materials,
Licensee shall deliver such Printed Materials, in the minimum order quantities
set forth in Section 7.2.2 below.
7.1.4 MANUFACTURE OF UNITS. Upon approval, pursuant to
Section 5, of such preproduction samples of the Executable Software for the
Master CD-ROM and the associated Artwork, Sony will, in accordance with the
terms and conditions set forth in this Section 7, and at Licensee's expense (a)
manufacture units of the Licensed Product for Licensee; (b) manufacture
Licensee's Packaging and Inserts (subject to Licensee's right to manufacture
its own Printed Materials at Licensee's sole cost and expense); and (c) package
the CD-ROMs with the Printed Materials.
7.2 PRICE, PAYMENT AND TERMS.
7.2.1 PRICE. The applicable price for manufacture of any
units of the Licensed Products ordered hereunder shall be determined by Sony
and provided to Licensee in the Specifications prior to manufacture of the
Licensed Products. Such price shall be based on the market price for
manufacture of discs and Printed Materials (subject to Section 7.1.4 above),
packaging costs and costs for other related services provided by Sony.
Purchase price(s) shall be stated in United States dollars and are subject to
change by Sony at any time upon reasonable notice to Licensee; provided,
however, the applicable price shall not be changed with respect to any units of
the Licensed Products which are the subject of an effective purchase order but
which have not yet been delivered by Sony at the designated F.O.B. point.
Prices for the finished units of the Licensed Products are exclusive of any
other federal, state, or local sales, use, excise, or other similar taxes or
duties, which Sony may be required to collect or pay as a consequence of the
sale or delivery of any units of the Licensed Products to Licensee. Licensee
shall be solely responsible for the payment or reimbursement of any such taxes,
fees, and other such charges or assessments applicable to the sale and/or
purchase of any finished units of any of the Licensed Products.
7.2.2 ORDERS. Licensee shall issue to Sony written
purchase order(s) in accordance with the Specifications. Such orders shall
reference this Agreement, give Licensee authorization number, specify
quantities by Licensed Product, state requested delivery date and all packaging
information and be submitted on or with an order form to be provided in the
Specifications. All purchase orders shall be subject to acceptance by Sony.
Licensee shall issue to Sony, for each of the Licensed Products approved by
Sony pursuant to Section 5. 1, a non-cancelable Purchase Order for at
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least one thousand (1,000) units of such Licensed Product. In the event that
Sony manufactures the Printed Materials for the Licensee pursuant to Section
7.1.3 above, Licensee may, at Licensee's option, allow Sony to purchase an
additional 20% of such Printed Materials at Licensee's expense in anticipation
of reorders. Licensee agrees that such Printed Materials will be stored by
Sony for a period of no more than ninety (90) days. Licensee may order
additional units of any of such Licensed Products in the minimum reorder
quantity of one thousand (1,000) units per order, provided that reorder
quantities may be less than one thousand (1,000) units per order (but in no
event less than one hundred (100) units per order) in the event that either
(i) Sony has additional quantities of Printed Materials in stock, with respect
to any such Licensed Product, or (ii) Licensee agrees to provide its own
Printed Materials in accordance with Section 7.1.3 above. Licensee shall have
no right to cancel or reschedule any Purchase Order (or any portion thereof)
for any of the Licensed Products unless the parties shall first have reached
mutual agreement as to Licensee's financial liability with respect to any
desired cancellation or rescheduling of any such Purchase Order (or any portion
thereof).
7.2.3 PAYMENT TERMS. Orders will be invoiced upon
shipment, and will include royalties payable pursuant to Section 9 hereto.
Each invoice will be paid within thirty (30) days of the date of the invoice.
No other deduction may be made from remittances unless an approved credit memo
has been issued by Sony. No claim for credit due to shortage or breakage will
be allowed unless it is made within seven (7) days from the date of shipment.
Each shipment of Licensed Products to Licensee shall constitute a separate sale
obligating Licensee to pay therefore, whether said shipment be whole or partial
fulfillment of any order. All sums owed or otherwise payable to Sony under
this Section 7 and under Section 9 hereto shall bear interest at the rate of
one and one-half (1-1/2%) percent per month, or such lower rate as may be the
maximum rate permitted under applicable law, from the date upon which payment
of the same shall first become due up to and including the date of payment
thereof whether before or after judgment. Licensee shall be additionally
liable for all of Sony's costs and expenses of collection, including, without
limitation, reasonable fees for attorneys and court costs. Notwithstanding the
foregoing, such specified rate of interest shall not excuse or be construed as
a waiver of Licensee's obligation to timely provide any and all payments owed
to Sony hereunder.
7.3 DELIVERY OF LICENSED PRODUCTS. Sony shall have no obligation
to store completed units of Licensed Products. Delivery of Licensed Products
shall be in accordance with the Specifications. Title, risk of loss, or damage
in transit to any and all Licensed Products manufactured by Sony pursuant to
Licensee's orders shall vest in Licensee immediately upon delivery to the
carrier.
7.4 TECHNOLOGY EXCHANGE AND QUALITY ASSURANCE. There will be no
technology exchange between Sony and Licensee under this Agreement. Due to the
proprietary nature of the mastering process, Sony will not under any
circumstances release any master discs or other in- process materials to the
Licensee. All such physical master discs, stampers, etc. shall be and remain
the sole property of Sony.
7.5 INSPECTION AND ACCEPTANCE. Licensee may inspect and test any
units of the Licensed Products at Licensee's receiving destination. Any
finished units of the Licensed Products which fail to conform to the
Specifications and/or any descriptions contained in this Agreement may be
rejected by Licensee by providing written notice thereof to Sony within thirty
(30) days of receipt of such units of the Licensed Products at Licensee's
receiving destination. In such event, the provisions of Section 11.4 regarding
Sony's warranty of the units shall apply with respect to any such rejected
units of the Licensed Products. Notwithstanding the provisions of Section
11.4.1 hereto, if Licensee fails to properly reject any units of the Licensed
Products within such thirty (30) day period, such Licensed Product units shall
be deemed accepted by Licensee and may not be subsequently rejected.
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8. MARKETING AND DISTRIBUTION.
In accordance with the provisions of this License Agreement, Licensee
shall, at no expense to Sony, diligently market, sell and distribute the
Licensed Products, and shall use its reasonable best efforts to stimulate
demand for such Licensed Products in the Licensed Territory and to supply any
resulting demand. Licensee shall use its reasonable best efforts to protect
the Licensed Products from and against illegal reproduction and/or copying by
end users or by any other persons or entities. Such methods of protection may
include, without limitation, markings or insignia providing identification of
authenticity and packaging seals. Subject to availability, Licensee shall sell
to Sony quantities of the Licensed Products at as low a price and on terms as
favorable as Licensee sells similar quantities of the Licensed Products to the
general trade; provided, however, Sony shall not directly or indirectly resell
any such units of the Licensed Products within the Licensed Territory without
Licensee's prior written consent.
9. ROYALTIES.
Licensee shall pay Sony a per unit royalty in United States dollars,
as set forth on Exhibit B hereto, for each unit of the Licensed Products
manufactured. Payment of such royalties shall be made to Sony in conjunction
with the payment to Sony of the manufacturing costs for each unit and pursuant
to the payment terms of Section 7.2.3 hereto. No costs incurred in the
development, manufacture, marketing, sale, and/or distribution of the Licensed
Products shall be deducted from any royalties payable to Sony hereunder.
Similarly, there shall be no deduction from the royalties otherwise owed to
Sony hereunder as a result of any uncollectible accounts owed to Licensee, or
for any credits, discounts, allowances or returns which Licensee may credit or
otherwise grant to any third party customer of any units of the Licensed
Products, or for any taxes, fees, assessments, or expenses of any kind which
may be incurred by Licensee in connection with its sale and/or distribution of
any units of the Licensed Products and/or arising with respect to the payment
of royalties hereunder. In addition to the royalty payments provided to Sony
hereunder, Licensee shall be solely responsible for any withholding taxes
and/or other such assessments which may be imposed by any governmental
authority with respect to the royalties paid to Sony hereunder. Licensee shall
provide Sony with official tax receipts or other such documentary evidence
issued by the applicable tax authorities sufficient to substantiate that any
such taxes and/or assessments have in fact been paid.
10. REPRESENTATIONS AND WARRANTIES.
10.1 REPRESENTATIONS AND WARRANTIES OF SONY. Sony represents and
warrants solely for the benefit of Licensee that Sony has the right, power and
authority to enter into this License Agreement and to fully perform its
obligations hereunder.
10.2 REPRESENTATIONS AND WARRANTIES OF LICENSEE. Licensee
represents and warrants that: (i) there is no threatened or pending action,
suit, claim or proceeding alleging that the use by Licensee of all or any part
of the Licensee Software or any underlying work or content embodied therein, or
any name, designation or trademark used in conjunction with the Licensed
Products infringes or otherwise violates any Intellectual Property Right or
other right or interest of any kind whatsoever of any third party, or otherwise
contesting any right, title or interest of Licensee in or to the Licensee
Software or any underlying work or content embodied therein, or any name,
designation or trademark used in conjunction with the Licensed Products; (ii)
Licensee has the right, power and authority to enter into this License
Agreement and to fully perform its obligations hereunder; (iii) the making of
this License Agreement by Licensee does not violate any separate agreement,
rights or obligations existing between Licensee and any other person or entity,
and, throughout the term of this License Agreement, Licensee shall not make any
separate agreement with any person or entity that is inconsistent with any of
the provisions of this License Agreement; (iv) Licensee shall not make any
representation or give any
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warranty to any person or entity expressly or impliedly on Sony's behalf, or to
the effect that the Licensed Products are connected in any way with Sony (other
than that the Licensed Products have been developed, marketed, manufactured,
sold, and/or distributed under license from Sony), (v) the Executable Software
shall be distributed by Licensee solely in object code form; (vi) each of the
Licensed Products shall be marketed, sold, and distributed in an ethical manner
and in accordance with all applicable laws and regulations; and (vii)
Licensee's policies and practices with respect to the marketing, sale, and/or
distribution of the Licensed Products shall in no manner reflect adversely upon
the name, reputation or goodwill of Sony.
11. INDEMNITIES; LIMITED LIABILITY.
11.1 INDEMNIFICATION BY SONY. Sony shall indemnify and hold
Licensee harmless from and against any and all claims, losses, liabilities,
damages, expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigation costs, and including costs incurred
in the settlement or avoidance of any such claim which result from or are in
connection with a breach of any of the warranties provided by Sony herein
provided, however, that Licensee shall give prompt written notice to Sony of
the assertion of any such claim, and provided, further, that Sony shall have
the right to select counsel and control the defense and/or settlement thereof,
subject to the right of Licensee to participate in any such action or
proceeding at its own expense with counsel of its own choosing. Sony shall
have the exclusive right, at its discretion, to commence and prosecute at its
own expense any lawsuit or to take such other action with respect to such
matters as shall be deemed appropriate by Sony. Licensee agrees to provide
Sony, at no expense to Licensee, reasonable assistance and cooperation
concerning any such matter; and Licensee shall not agree to the settlement of
any such claim, action or proceeding without Sony's prior written consent.
11.2 INDEMNIFICATION BY LICENSEE. Licensee shall indemnify and
hold Sony harmless from and against any and all claims, losses, liabilities,
damages, expenses and costs, including, without limitation, reasonable fees for
attorneys, expert witnesses and litigations costs, and including costs incurred
in the settlement or avoidance of any such claim, which result from or are in
connection with (i) a breach of any of the representations or warranties
provided by Licensee herein, including without limitation claims resulting from
Licensee's failure to timely pay, any withholding taxes or other assessments as
set forth in Section 9 hereto or any breach of Licensee's confidentiality
obligations as set forth in Section 14 hereto; or (ii) any claim of
infringement or alleged infringement of any third party's Intellectual Property
Rights with respect to the Licensee Software; or (iii) any claims of or in
connection with any bodily injury (including death) or property damage, by
whomsoever such claim is made, arising out of, in whole or in part, the sale
and/or use of any of the Licensed Products manufactured by Sony hereunder,
unless due to the negligence of Sony in performing any of the specific duties
and/or providing any of the specific manufacturing services required of it
hereunder; provided, however, that Sony shall give prompt written notice to
Licensee of the assertion of any such claim, and provided, further, that
Licensee shall have the right to select counsel and control the defense and/or
settlement thereof, subject to the right of Sony to participate in any such
action or proceeding at its own expense with counsel of its own choosing.
Licensee shall have the exclusive right, at its discretion, to commence and/or
prosecute at its own expense any lawsuit or to take such other action with
respect to such matter as shall be deemed appropriate by Licensee. Sony shall
provide Licensee, at no expense to Sony, reasonable assistance and cooperation
concerning any such matter. If Sony is joined as a party to any lawsuit
initiated by or against Licensee, Licensee shall indemnify and hold Sony
harmless from and against all claims, losses, liabilities, damages, expenses
and costs, including, without limitation, reasonable fees for attorneys and
court costs, incurred in connection with any such lawsuit. Sony shall not
agree to the settlement of any such claim, action or proceeding without
Licensee's prior written consent.
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11.3 LIMITATION OF LIABILITY; LICENSEE'S OBLIGATIONS.
11.3.1 LIMITATION OF SONY'S LIABILITY. IN NO EVENT SHALL SONY OR ITS
AFFILIATES OR SUPPLIERS BE LIABLE FOR PROSPECTIVE PROFITS, OR ANY SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT, INCLUDING WITHOUT LIMITATION THE BREACH OF THIS AGREEMENT BY SONY,
THE MANUFACTURE OF THE LICENSED PRODUCTS AND THE USE OF THE LICENSED PRODUCTS
BY LICENSEE OR ANY END-USER, WHETHER UNDER THEORY OF CONTRACT, TORT (INCLUDING
NEGLIGENCE), INDEMNITY, PRODUCT LIABILITY OR OTHERWISE. IT IS THE
RESPONSIBILITY OF LICENSEE TO REVIEW THE ACCURACY OF THE DATA ON THE UNITS
MANUFACTURED BY SONY FOR LICENSEE. IN NO EVENT SHALL SONY'S LIABILITY ARISING
UNDER OR IN CONNECTION WITH THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY
LIABILITY FOR DIRECT DAMAGES, AND INCLUDING WITHOUT LIMITATION ANY LIABILITY
UNDER SECTION 11.1 AND ANY WARRANTY IN SECTION 11.4 HERETO, EXCEED THE TOTAL
AMOUNT PAID BY LICENSEE TO SONY UNDER THIS AGREEMENT. EXCEPT AS EXPRESSLY SET
FORTH HEREIN, NEITHER SONY, NOR ANY AFFILIATE, NOR ANY OF THEIR RESPECTIVE
DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, SHALL BEAR ANY RISK, OR HAVE ANY
RESPONSIBILITY OR LIABILITY, OF ANY KIND TO LICENSEE OR TO ANY THIRD PARTIES
WITH RESPECT TO THE QUALITY AND/OR PERFORMANCE OF ANY PORTION OF THE SONY
MATERIALS OR THE LICENSED PRODUCTS, INCLUDING, WITHOUT LIMITATION, THE
OPERATION OR PERFORMANCE OF ANY OF THE LICENSED PRODUCTS.
11.3.2 LIMITATION OF LICENSEE'S LIABILITY. IN NO EVENT SHALL
LICENSEE BE LIABLE TO SONY FOR ANY PROSPECTIVE PROFITS, OR SPECIAL, INCIDENTAL
OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH (i) THIS
AGREEMENT OR (ii) THE USE OR DISTRIBUTION IN ACCORDANCE WITH THE TERMS AND
CONDITIONS OF THIS AGREEMENT OF ANY OBJECT CODE PROVIDED BY SONY, IN WHOLE OR
IN PART, OR ANY LICENSEE SOFTWARE BY LICENSEE OR ANY THIRD PARTY, WHETHER UNDER
THEORY OF CONTRACT, TORT (INCLUDING NEGLIGENCE, INDEMNITY, PRODUCT LIABILITY OR
OTHERWISE, PROVIDED THAT LICENSEE EXPRESSLY AGREES THAT SUCH LIMITATIONS SHALL
NOT APPLY TO DAMAGES RESULTING FROM LICENSEE'S BREACH OF SECTIONS 2, 4, 11.2,
12.2 OR 14 OF THIS AGREEMENT, AND PROVIDED FURTHER THAT SUCH LIMITATIONS SHALL
NOT APPLY TO AMOUNTS WHICH LICENSEE MAY BE REQUIRED TO PAY TO THIRD PARTIES
UNDER SECTIONS 11.2 OR 17.9.
11.3.3 LICENSEE'S OBLIGATIONS. If at any time or times subsequent to
the approval of the Executable Software pursuant to Section 5.2, Sony
identifies any bugs with respect to the Licensed Product or any bugs are
brought to the attention of Sony, Licensee shall, at no cost to Sony, promptly
correct any such bugs, to Sony's reasonable satisfaction. In the event any
units of any of the Licensed Products create any risk of loss or damage to any
property or injury to any person, Licensee shall immediately take effective
steps, at Licensee's sole liability and expense, to recall and/or to remove
such defective product units from any affected channels of distribution.
Licensee shall provide all end-user support for the Licensed Products.
11.4 WARRANTIES; DISCLAIMER OF WARRANTIES.
11.4.1 MANUFACTURING WARRANTY. Sony warrants that the units that are
manufactured by Sony for Licensee pursuant to Section 7 of this Agreement
shall, at time of delivery to Licensee, be free from defects in material. The
sole obligation of Sony under this warranty shall be, for a period of one year
from the date of shipment of such discs by Sony to Licensee, at Sony's
election, either to replace, to issue credit, of to refund to Licensee the
purchase price paid to Sony for any such defective discs. Such warranty is the
only warranty applicable to the Licensed Product manufactured by Sony for
Licensee pursuant to Section 7 of this Agreement. This warranty shall not
apply to damage resulting from accident, alteration, negligence or misuse of the
Licensed Products. If, during
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the aforesaid period, a defective disc is received by Licensee, Licensee shall
notify Sony and, upon request by Sony, provide Sony with the returned disc(s)
and a written description of the defect claimed. Sony shall not accept the
return of any disc(s) except factory defective disc(s) (i.e., those discs that
are not free from defects in material), and all such returns must be authorized
by Sony in writing and in advance. All discs for which return is authorized
will be sent to a place designated by Sony at Sony's expense. If the defect
did not arise from causes placing liability on Sony under the above warranty,
Licensee shall reimburse Sony for expenses incurred in shipping, processing and
analyzing the discs. Sony's judgment as to the origin of the defect shall be
final and binding.
11.4.2 DISCLAIMER OF WARRANTY. EXCEPT AS OTHERWISE EXPRESSLY SET
FORTH ABOVE, NEITHER SONY NOR ITS AFFILIATES AND SUPPLIERS MAKE, NOR DOES
LICENSEE RECEIVE, ANY WARRANTIES, EXPRESS, IMPLIED OR STATUTORY REGARDING THE
SONY MATERIALS AND THE PLAYER AND/OR THE UNITS OF THE LICENSED PRODUCTS
MANUFACTURED HEREUNDER. SONY SHALL NOT BE LIABLE FOR ANY INJURY, LOSS OR
DAMAGE, DIRECT OR CONSEQUENTIAL, ARISING OUT OF THE USE OR INABILITY TO USE THE
UNITS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, SONY AND ITS
AFFILIATES AND SUPPLIERS EXPRESSLY DISCLAIM THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND THEIR EQUIVALENTS
UNDER THE LAWS OF ANY JURISDICTION, REGARDING THE SONY MATERIALS AND THE PLAYER
AND/OR THE UNITS MANUFACTURED HEREUNDER. ANY WARRANTY AGAINST INFRINGEMENT
THAT MAY BE PROVIDED IN SECTION 2-312(3) OF THE UNIFORM COMMERCIAL CODE AND/OR
IN ANY OTHER COMPARABLE STATUTE IS EXPRESSLY DISCLAIMED.
12. COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS.
12.1 LICENSEE RIGHTS. The copyrights with respect to the Licensee
Software (exclusive of the rights licensed from Sony hereunder) and any names
or other designations used as titles for the Licensed Products are and shall be
the exclusive property of Licensee or of any third party from which Licensee
has been granted the license and related rights to develop and otherwise
exploit any such Licensee Software or any such names or other designations.
12.2 SONY RIGHTS.
12.2.1 LICENSED TRADEMARKS. The Licensed Trademarks and the goodwill
associated therewith are and shall be the exclusive property of Sony. Nothing
herein shall give Licensee any right, title or interest in or to any of the
Licensed Trademarks, other than the non-exclusive license and privilege during
the term hereof to display and use the Licensed Trademarks solely in accordance
with the provisions of this License Agreement. Licensee shall not do or cause
to be done any act or thing contesting or in any way impairing or tending to
impair any of Sony's rights, title, or interests in or to any of the Licensed
Trademarks, nor shall Licensee register any trademark in its own name or in the
name of any other person or entity which is similar to or is likely to be
confused with any of the Licensed Trademarks.
12.2.2 LICENSE OF SONY MATERIALS AND PLAYER. Subject to the rights
granted by Sony to Licensee hereunder, all rights with respect to the Sony
Materials and Player, including, without limitation, all of Sony's Intellectual
Property Rights therein, are and shall be the exclusive property of Sony.
Nothing herein shall give Licensee any right, title or interest in or to the
Sony Materials or the Player (or any portion thereof), other than the
non-exclusive license and privilege during the term hereof to use the Sony
Materials and Player for the development of the Executable Software solely in
accordance with the provisions of this License Agreement. Licensee shall not
do or cause to be done any act or thing contesting or in any way impairing or
tending to impair any of Sony's rights, title, and/or interests in or to the
Sony Materials or the Player (or any portion thereof).
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12.3 EFFECT OF TERMINATION. Upon the expiration or earlier
termination of this License Agreement for any reason, Licensee shall
immediately cease and desist from any further use of the Licensed Trademarks
and Sony Materials licensed hereunder, subject to the provisions of Section
16.3, below.
13. COPYRIGHT TRADEMARK AND TRADE SECRET PROTECTION.
In the event that either Licensee or Sony discovers or otherwise
becomes aware that any of the Intellectual Property Rights of the other
embodied in any of the Licensed Products have been or are being infringed upon
by any third party, then the party with knowledge of such infringement or
apparent infringement shall promptly notify the other party.
14. CONFIDENTIALITY.
14.1 NONDISCLOSURE AGREEMENT. Licensee hereby acknowledges that
the Nondisclosure Agreement dated November 30, 1993 between Sony and Licensee
("Nondisclosure Agreement") will remain in full force and effect with respect
to the Confidential Information of Sony throughout the term of this Agreement.
In the event of any conflict or inconsistency between the provisions of the
Nondisclosure Agreement and the provisions of this Section 14, the provisions
of the Nondisclosure Agreement shall control with respect to the Confidential
Information of Sony.
14.2 CONFIDENTIAL INFORMATION. For the purposes of this License
Agreement, "Confidential Information" of Sony means (i) the Sony Materials and
information regarding Sony's finances, business, marketing and technical plans,
(ii) all documentation and information relating to the foregoing (other than
documentation and information expressly intended for use by and released to end
users or the general public), and (iii) any and all other information, of
whatever type and in whatever medium (including without limitation all data,
ideas, discoveries, developments, know-how, trade secrets, inventions, creations
and improvements), that is disclosed in writing or in any other form by Sony to
Licensee. "Confidential Information" of Licensee shall mean the Licensee
Software as provided to Sony pursuant to this License Agreement and all
documentation and information relating thereto that is disclosed in writing or
in any other form by Licensee to Sony if the information is designated as (or is
provided under circumstances indicating the information is) confidential or
proprietary.
14.3 PRESERVATION OF CONFIDENTIALITY; NON-DISCLOSURE. Each party
("receiving party") shall hold all Confidential Information of the other party
("disclosing party") in trust and in strict confidence for the sole benefit of
the disclosing party and for the exercise of the limited rights expressly
granted to the receiving party under this License Agreement. The receiving
party shall take all steps necessary to preserve the confidentiality of the
Confidential Information of the disclosing party, and to prevent it from
falling into the public domain or into the possession of persons other than
those persons to whom disclosure is authorized hereunder, including but not
limited to those steps that the receiving party takes to protect the
confidentiality of its own most highly confidential information. Except as may
be expressly authorized by the disclosing party in writing, the receiving party
shall not at any time, either before or after any termination of this License
Agreement, directly or indirectly: (i) disclose any Confidential Information to
any person other than an employee or subcontractor of the receiving party who
needs to know or have access to such Confidential Information for the purposes
of this License Agreement, and only to the extent necessary for such purposes
(and with respect to any subcontractor, only in accordance with Section 17.5
below); (ii) except as otherwise provided in this License Agreement, duplicate
the Confidential Information for any purpose whatsoever; (iii) use the
Confidential Information for any reason or purpose other than as expressly
permitted in this License Agreement; or (iv) remove any copyright notice,
trademark notice and/or other proprietary legend set forth on or contained
within any of the Confidential Information.
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14.4 OBLIGATIONS UPON UNAUTHORIZED DISCLOSURE.
14.4.1 NOTICE TO DISCLOSING PARTY. If at any time the receiving
party becomes aware of any unauthorized duplication, access, use, possession or
knowledge of any Confidential Information, the receiving party shall
immediately notify the disclosing party. The receiving party shall provide any
and all reasonable assistance to the disclosing party to protect the disclosing
party's proprietary rights in any Confidential Information that the receiving
party or its employees or permitted subcontractors may have directly or
indirectly disclosed or made available and that may be duplicated, accessed,
used, possessed or known in a manner or for a purpose not expressly authorized
by this License Agreement including but not limited to enforcement of
confidentiality agreements, commencement and prosecution in good faith (alone
or with the disclosing party) of legal action, and reimbursement for all
reasonable attorneys' fees (and all related costs), costs and expenses incurred
by the disclosing party to protect its proprietary rights in the Confidential
Information. The receiving party shall take all reasonable steps requested by
the disclosing party to prevent the recurrence of any unauthorized duplication,
access, use, possession or knowledge of the Confidential Information.
14.4.2 ACCOUNTING, ETC. If Licensee violates or fails to comply with
any of the terms or conditions of this Section 14 or Section 4 hereto, Sony
shall be entitled to an accounting and repayment of all forms of compensation,
commissions, remuneration or benefits which Licensee directly or indirectly
realizes as a result of or in connection with any such violation or failure to
comply. Such remedy shall be in addition to and not in limitation of any
injunctive relief or other remedies to which Sony may be entitled under this
Agreement or otherwise, at law or in equity.
14.5 EXCEPTIONS. The foregoing restrictions will not apply to
information to the extent that the receiving party can demonstrate such
information: (i) was known to the receiving party at the time of disclosure to
the receiving party by the disclosing party as shown by the files of the
receiving party in existence at the time of disclosure; (ii) becomes part of
information in the public domain through no fault of the receiving party; (iii)
has been rightfully received from a third party authorized by the disclosing
party to make such disclosure without restriction; (iv) has been approved for
release by prior written authorization of the disclosing party; or (v) has been
disclosed by court order or as otherwise required by law (including without
limitation to the extent that disclosure may be required under Federal or state
securities laws), provided that the receiving party has notified the disclosing
party immediately upon learning of the possibility of any such court order or
legal requirement and has given the disclosing party a reasonable opportunity
(and cooperated with the disclosing party) to contest or limit the scope of
such required disclosure (including application for a protective order).
Information shall not be deemed known to the receiving party or publicly known
for purposes of the above exceptions (A) merely because it is embraced by more
general information in the prior possession of the receiving party or others,
or (B) merely because it is expressed in public material in general terms not
specifically the same as Confidential Information.
14.6 CONFIDENTIALITY OF AGREEMENT. The terms and conditions of
this License Agreement shall be treated as Confidential Information; provided
that each party may disclose the terms and conditions of this License
Agreement: (i) to legal counsel; (ii) in confidence, to accountants, banks and
financing sources and their advisors; and (iii) in confidence, in connection
with the enforcement of this License Agreement or rights under this License
Agreement. Licensee shall treat the fact that the parties have entered into
this License Agreement as Confidential Information until a public announcement
regarding this License Agreement is released.
15. TERM AND TERMINATION.
15.1 EFFECTIVE DATE; TERM. This License Agreement shall not be
binding upon the parties until it has been signed by or on behalf of each
party, in which event it shall be effective as of the date
12 CONFIDENTIAL
<PAGE> 13
first written above (the "Effective Date"). Unless sooner terminated in
accordance with the provisions hereof, the initial term of this License
Agreement shall be for four (4) years from the Effective Date.
15.2 TERMINATION BY SONY. Sony shall have the right to terminate this
License Agreement immediately, by providing written notice of such election to
Licensee, upon the occurrence of any of the following events or circumstances:
(i) If Licensee breaches any of its material obligations provided for in this
License Agreement and such breach is not corrected or cured within thirty (30)
days after receipt of written notice of such breach; (ii) Licensee's failure to
pay, or a statement that it is unable to pay any amount due hereunder, or is
unable to pay its debts generally as they shall become due; or (iii) Licensee's
filing of an application for, or consenting to, or directing the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
all or substantially all of Licensee's property, whether tangible or intangible,
wherever located; or (iv) The making by Licensee of a general assignment for the
benefit of creditors; or (v) The commencing by Licensee or Licensee's intention
to commence a voluntary case under any applicable bankruptcy laws (as now or
hereafter may be in effect); or (vi) The adjudication that Licensee is a
bankrupt or insolvent; or (vii) The filing by Licensee or the intent to file by
Licensee of a petition seeking to take advantage of any other law providing for
the relief of debtors; or (viii) Licensee's acquiescence to, intention to
acquiesce to, or failure to have dismissed within ninety (90) days, any petition
filed against it in any involuntary case under any such bankruptcy law; or (ix)
If control of more than twenty-five percent (25%) of the ownership of Licensee
or substantially all of Licensee's assets are transferred to any person or
entity.
15.3 PRODUCT-BY-PRODUCT TERMINATION BY SONY. In addition to the
events of termination described in Section 15.2, above, Sony, at its option,
shall be entitled to terminate, on a product-by-product basis, the licenses and
related rights herein granted to Licensee (a) in the event that Licensee fails
to notify Sony promptly in writing of any material change to any of the elements
approved in Section 5.1, above; (b) if Licensee fails to provide Sony in
accordance with the provisions of Section 5.2, above, with the prototype
Executable Software for any Licensed Product, in the format required by Sony,
and which meets Sony's specifications; provided, however, Sony shall not be
entitled to exercise such right of termination if Licensee's failure to provide
such final Executable Software for any of the Licensed Products is directly
caused by Sony's failure to timely comply with any of its material obligations
expressly set forth herein.
15.4 ADVANCE PAYMENTS. In the event of the termination of this
License Agreement in accordance with any of the provisions of Sections 15.2 or
15.3, above, no portion of any payments of any kind whatsoever previously
provided to Sony hereunder shall be owed or be repayable to Licensee.
16. EFFECT OF EXPIRATION OR TERMINATION.
16.1 INVENTORY STATEMENT. Within thirty (30) days of the date of
expiration or the effective date of termination with respect to any or all
Licensed Products, Licensee shall provide Sony with an itemized statement,
certified to be accurate by an officer of Licensee, specifying the number of
unsold units of the Licensed Products as to which such termination applies, on
a title-by-title basis, which remain in its inventory and/or under its control
at the time of expiration or the effective date of termination. Sony shall be
entitled to conduct a physical inspection of Licensee's inventory and work in
process during normal business hours in order to ascertain or verify such
inventory and/or statement.
16.2 REVERSION OF RIGHTS. If this License Agreement is terminated
by Sony as a result of any breach or default by Licensee, the licenses and
related rights herein granted to Licensee shall immediately revert to Sony, and
Licensee shall cease and desist from any further use of the Sony Materials and
any Intellectual Property Rights related to the Sony Materials, and, subject to
the provisions of Section 16.3, below, Licensee shall have no further right to
continue the development,
13 CONFIDENTIAL
<PAGE> 14
marketing, sale, and/or distribution of any units of the Licensed Products, nor
to continue to use the Licensed Trademarks.
16.3 DISPOSAL OF UNSOLD UNITS. In the event of the expiration of
this License Agreement or its termination other than as a result of any breach
or default by Licensee, Licensee shall have a period of up to 90 days within
which to sell off all or a portion of its remaining inventory of Licensed
Products. At the expiration of such sell-off period or in the event of
termination as a result of any breach or default of Licensee, any and all units
of the Licensed Products remaining in Licensee's inventory shall be destroyed
by Licensee within five (5) working days of such expiration or termination.
Within five (5) working days after such destruction, Licensee shall provide
Sony with an itemized statement, certified to be accurate by an officer of
Licensee, indicating the number of units of the Licensed Products which have
been destroyed (on a title-by-title basis), the location and date of such
destruction, and the disposition of the remains of such destroyed materials.
16.4 RETURN OF CONFIDENTIAL INFORMATION. Upon the expiration or
earlier termination of this License Agreement, Licensee and Sony shall
immediately deliver to the other party, as the disclosing party all
Confidential Information of the other party, including any and all copies
thereof, which the other party previously furnished to it in furtherance of
this License Agreement, including, without limitation, any such information,
knowledge, or know-how of which either party, as the receiving party, was
apprised and which was reduced to tangible or written form by such party or in
its behalf at any time during the term of this License Agreement.
16.5 RENEWAL OR EXTENSION OF LICENSE AGREEMENT. Sony shall be under
no obligation to renew or extend this License Agreement notwithstanding any
actions taken by either of the parties prior to the expiration of this License
Agreement. Upon the expiration of this License Agreement neither party shall be
liable to the other for any damages (whether direct, consequential, or
incidental, and including, without limitation, any expenditures, loss of
profits, or prospective profits) sustained or arising out of or alleged to have
been sustained or to have arisen out of such expiration. However, the
expiration of this License Agreement shall not excuse either party from its
previous breach of any of the provisions of this License Agreement or from any
obligations surviving the expiration of this License Agreement, and full legal
and equitable remedies shall remain available for any breach or threatened
breach of this License Agreement or any obligations arising therefrom.
16.6 TERMINATION WITHOUT PREJUDICE. The expiration or termination
of this License Agreement in accordance with the provisions of Section 15,
above, shall be without prejudice to any rights or remedies which one party may
otherwise have against the other party.
17. MISCELLANEOUS PROVISIONS.
17.1 NOTICES. All notices or other communications required or
desired to be sent to either of the parties shall be in writing and shall be
sent by registered or certified mail, postage prepaid, return receipt requested,
or sent by recognized international courier service (e.g., Federal Express, DHL,
etc.), telex, telegram or facsimile, with charges prepaid and subject to
confirmation by letter sent via registered or certified mail, postage prepaid,
return receipt requested. The address for all notices or other communications
required to be sent to Sony or Licensee, respectively, shall be the mailing
address stated in the preamble hereof, or such other address as may be provided
by written notice from one party to the other on at least ten (10) days' prior
written notice. Any such notice shall be effective upon the date of receipt.
17.2 FORCE MAJEURE. Neither Sony nor Licensee shall be liable for
any loss or damage or be deemed to be in breach of this License Agreement if its
failure to perform or failure to cure any of its obligations under this License
Agreement results from any event or circumstance beyond its reasonable
14 CONFIDENTIAL
<PAGE> 15
control, including, without limitation, any natural disaster, fire, flood,
earthquake, or other Act of God; shortage of equipment, materials, supplies, or
transportation facilities; strike or other industrial dispute; war or rebellion;
or compliance with any law, regulation, or order (whether valid or invalid) of
any governmental body, other than an order, requirement, or instruction arising
out of Licensee's violation of any applicable law or regulation; provided,
however, that the party interfered with gives the other party written notice
thereof promptly, and, in any event, within fifteen (15) working days of
discovery of any such Force Majeure condition. If notice of the existence of
any Force Majeure condition is provided within such period, the time for
performance or cure shall be extended for a period equal to the duration of the
Force Majeure event or circumstance described in such notice, except that any
such cause shall not excuse the payment of any sums owed to Sony prior to,
during, or after any such Force Majeure condition.
17.3 NO PARTNERSHIP OR JOINT VENTURE. The relationship between
Sony and Licensee, respectively, is that of licensor and licensee. Licensee is
an independent contractor and is not the legal representative, agent, joint
venturer, partner, or employee of Sony for any purpose whatsoever. Neither
party has any right or authority to assume or create any obligations of any
kind or to make any representation or warranty on behalf of the other party,
whether express or implied, or to bind the other party in any respect
whatsoever.
17.4 ASSIGNMENT. Sony has entered into this License Agreement based
upon the particular reputation, capabilities and experience of Licensee and its
officers, directors and employees. Accordingly, Licensee may not assign this
License Agreement or any of its rights hereunder, nor delegate or otherwise
transfer any of its obligations hereunder, to any third party unless the prior
written consent of Sony shall first be obtained. Any attempted or purported
assignment, delegation or other such transfer without the required consent of
Sony shall be void and a material breach of this License Agreement. Subject to
the foregoing, this License Agreement shall inure to the benefit of the parties
and their respective successors and permitted assigns. Sony shall have the
right to assign any and all of its rights and obligations hereunder to any
affiliate(s), including, without limitation, its obligations under Section 7
hereof.
17.5 SUBCONTRACTORS. Licensee shall not sell, assign, delegate,
subcontract, sublicense or otherwise transfer or encumber all or any portion of
the licenses herein granted. Licensee shall have the right to employ suitable
subcontractors for the purposes of assisting Licensee with the development of
the Licensed Products, provided that Licensee must obtain the prior written
consent of Sony. Licensee shall not disclose to any subcontractor any
Confidential Information of Sony (as defined herein and in the Nondisclosure
Agreement), including, without limitation, any Sony Materials, unless and until
Licensee shall have such subcontractor sign a written agreement containing
substantially identical terms to the Nondisclosure Agreement and the
confidentiality provisions of this Agreement and shall submit a copy of such
agreement to Sony. Any and all agreements between Licensee and its permitted
subcontractors shall provide that Sony is a third party beneficiary of such
agreements and has the full right to bring any actions against such
subcontractors to comply in all respects with the terms and conditions of this
Agreement. Notwithstanding any consent which may be granted by Sony for
Licensee to employ any such permitted subcontractor(s), or any such separate
agreement(s) that may be entered into by Licensee with any such permitted
subcontractor, Licensee shall remain fully liable for its compliance with all of
the provisions of this License Agreement and for the compliance of any and all
permitted subcontractors with the provisions of any agreements entered into by
such subcontractors in accordance with this Section 17.5. Licensee shall cause
its subcontractors to comply in all respects with the terms and conditions of
this License Agreement, and hereby unconditionally guarantees all obligations of
its subcontractors.
17.6 COMPLIANCE WITH APPLICABLE LAWS. The parties shall at all
times comply with all applicable regulations and orders of their respective
countries and all conventions and treaties to which
15 CONFIDENTIAL
<PAGE> 16
their countries are a party or relating to or in any way affecting this License
Agreement and the performance by the parties of this License Agreement. Each
party, at its own expense, shall negotiate and obtain any approval, license or
permit required in the performance of its obligations, and shall declare,
record or take such steps to render this License Agreement binding, including,
without limitation, the recording of this License Agreement with any
appropriate governmental authorities (if required).
17.7 GOVERNING LAW; CONSENT TO JURISDICTION. This License
Agreement shall be governed by and interpreted in accordance with the laws of
the State of New York, excluding that body of law related to choice of laws,
and of the United States of America. Any action or proceeding brought to
enforce the terms of this License Agreement or to adjudicate any dispute
arising hereunder shall be brought in the courts of the County of New York,
State of New York (if under State law) or the Southern District of New York (if
under Federal law). Each of the parties hereby submits itself to the exclusive
jurisdiction and venue of such courts for purposes of any such action and
agrees that any service of process may be effected by delivery of the summons
in the manner provided in the delivery of notices set forth in Section 17.1,
above.
17.8 LEGAL COSTS AND EXPENSES. In the event it is necessary for
either party to retain the services of an attorney or attorneys to enforce the
terms of this License Agreement or to file or defend any action arising out of
this Agreement, then the prevailing party in any such action shall be entitled,
in addition to any other rights and remedies available to it at law or in
equity to recover from the other party its reasonable fees for attorneys and
expert witnesses, plus such court costs and expenses as may be fixed by any
court of competent jurisdiction. The term "prevailing party" for the purposes
of this Section shall include a defendant who has by motion, judgment, verdict
or dismissal by the court, successfully defended against any claim that has
been asserted against it.
17.9 REMEDIES. Unless expressly set forth to the contrary, either
party's election of any remedies provided for in this License Agreement shall
not be exclusive of any other remedies available hereunder or otherwise at law
or in equity, and all such remedies shall be deemed to be cumulative. Any
breach of Sections 2, 4, 5, 6, 7.1.1, 12 and 14 of this Agreement would cause
irreparable harm to Sony, the extent of which would be difficult to ascertain.
Accordingly, Licensee agrees that, in addition to any other remedies to which
Sony may be entitled, in the event of a breach by Licensee or any of its
employees or permitted subcontractors of any such sections of this Agreement,
Sony shall be entitled to the immediate issuance without bond of exparte
injunctive relief enjoining any breach or threatened breach of any or all of
such provisions. In addition, Licensee shall indemnify Sony for all losses,
damages, liabilities, costs and expenses (including actual attorneys' fees and
all related costs) which Sony may sustain or incur as a result of such breach.
17.10 SEVERABILITY. In the event that any provision of this License
Agreement (or portion thereof) is determined by a court of competent
jurisdiction to be invalid or otherwise unenforceable, such provision (or part
thereof) shall be enforced to the extent possible consistent with the stated
intention of the parties, or, if incapable of such enforcement, shall be deemed
to be deleted from this License Agreement, while the remainder of this License
Agreement shall continue in full force and remain in effect according to its
stated terms and conditions.
17.11 SECTIONS SURVIVING EXPIRATION OR TERMINATION. The following
sections shall survive the expiration or earlier termination of this License
Agreement for any reason: 4, 6, 7.2, 9, 10.2, 11, 12, 13, 14, 15.4, 16, 17.4,
17.5, 17.7, 17.8, 17.9, 17.10.
17.12 NONSOLICITATION OF PERSONNEL. Licensee agrees not to solicit
personnel of Sony or any of Sony's affiliates during the term of this
Agreement.
16 CONFIDENTIAL
<PAGE> 17
17.13 WAIVER. No failure or delay by either party in exercising any
right, power, or remedy under this License Agreement shall operate as a waiver
of any such right, power, or remedy. No waiver of any provision of this License
Agreement shall be effective unless in writing and signed by the party against
whom such waiver is sought to be enforced. Any waiver by either party of any
provision of this License Agreement shall not be construed as a waiver of any
other provision of this License Agreement, nor shall such waiver operate as or
be construed as a waiver of such provision respecting any future event or
circumstance.
17.14 MODIFICATION. No modification of any provision of this
License Agreement shall be effective unless in writing and signed by both of
the parties.
17.15 HEADINGS. The section headings used in this License Agreement
are intended primarily for reference and shall not by themselves determine the
construction or interpretation of this License Agreement or any portion hereof.
17.16 INTEGRATION. This License Agreement (together with the
Exhibits attached hereto) constitutes the entire agreement between Sony and
Licensee and supersedes all prior or contemporaneous agreements, proposals,
understandings, and communications between Sony and Licensee, whether oral or
written, with respect to the subject matter hereof; provided, however, that
notwithstanding anything to the contrary in the foregoing, the Nondisclosure
Agreement referred to in Section 14 hereto shall remain in full force and
effect.
17.17 COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, and both of which
together shall constitute one and the same instrument.
17.18 CONSTRUCTION. This License Agreement shall be fairly
interpreted in accordance with its terms and without any strict construction in
favor of or against either of the parties.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be duly
executed as of the day and year first written above.
SONY COMPUTER ENTERTAINMENT THQ, INC.
OF AMERICA
By [SIG] By [SIG]
----------------------------- ------------------------------
Title: Vice President Title: VP Software
----------------------------- ------------------------------
Date: July 12, 1994 Date: 6/30/94
----------------------------- ------------------------------
NOT AN AGREEMENT UNTIL
EXECUTED BY BOTH PARTIES
CONFIDENTIAL
17
<PAGE> 18
EXHIBIT A
LICENSED TERRITORY
1. LICENSED TERRITORY: United States and Canada
2. ADDITIONAL PROVISIONS:
(a) DISTRIBUTION CHANNELS. Licensee may, pursuant to the licenses
granted in Section 2 above, distribute Licensee's Licensed Products
throughout the Licensed Territory and may use such distribution
channels as Licensee deems appropriate, including the use of third
party distributors, resellers, dealers and sales representatives
(collectively, "Distributors").
(b) LIMITATIONS ON DISTRIBUTION. Notwithstanding any other
provisions in this License Agreement, Licensee shall not, directly or
indirectly, solicit orders from and/or sell any units of the Licensed
Products to any person or entity outside of the Licensed Territory,
and Licensee further agrees that it shall not directly or indirectly
solicit orders for and/or sell any units of the Licensed Products in
any situation where Licensee reasonably should know that such Licensed
Products will be exported or resold outside of the Licensed Territory.
(c) CHANGES TO LICENSED TERRITORY. The licenses granted in
Section 2 of this License Agreement may only be exercised by Licensee
in the Licensed Territory. Sony shall have the right to delete, and
intends to delete any country or countries from the Licensed Territory
if, in Sony's reasonable judgment, the laws or enforcement of such
laws in such country or countries do not protect Sony's Intellectual
Property Rights. In the event a country is deleted from the Licensed
Territory, Sony shall deliver to Licensee a notice stating the number
of days within which Licensee shall cease exercising such licenses in
the deleted country or countries. Licensee agrees to cease exercising
such licenses, directly or through subcontractors, in such deleted
country or countries, by the and of the period stated in such notice.
E-1
<PAGE> 19
EXHIBIT B
ROYALTIES
A. PER UNIT ROYALTY. The per unit royalty due under Section 9 of the
Agreement with respect to each Licensed Product shall be $7.00, unless
otherwise set forth below with respect to a Licensed Product:
B. ADJUSTMENTS TO ROYALTY - HIT TITLE REBATE
(1) In the event that the total purchases by Licensee from Sony
with respect to any Licensed Product exceed the following numbers of units
during the first three (3) years after first commercial shipment of the
Licensed Product, Licensee shall be entitled to a rebate with respect to
royalties paid by Licensee to Sony pursuant to Section 9 of the Agreement which
shall be credited to Licensee's account 60 days following the date that the
relevant royalties are paid, as follows:
<TABLE>
<CAPTION>
Volume Royalty Rebate
------ --------------
<S> <C> <C>
a. Over 500,000 units and up to 1,000,000 units 3% of Royalty paid
with respect to such units
b. Over 1,000,000 units and up to 2,000,000 units 5% of Royalty paid
with respect to such units
C. Over 2,000,000 units 10% of Royalty paid
with respect to such units
</TABLE>
(2) Each title shall be considered independently for purposes of
calculating and the rebates shall be cumulative. By way of example:
a. If Licensee's aggregate orders for a single Licensed Product are less
than 500,000, no rebate is available.
b. If Licensee's aggregate orders for a single Licensed Product exceed
500,000 but are less than 1,000,000, Licensee will receive 3% of the
Royalty paid as a rebate with respect to the first 500,000 units, at
the time Licensee places such excess order.
C. If Licensee's aggregate orders for a single Licensed Product exceed
1,000,000 but are less than 2,000,000, Licensee will receive 5% of the
Royalty paid as a rebate with respect to the first 1,000,000 units, at
the time Licensee places such excess order. (Please note that in this
case Licensee will only receive a 2% additional rebate with respect to
the first 500,000 units because they have already received a 3%
rebate.
E-2
<PAGE> 1
EXHIBIT 10.30
ASSIGNMENT OF RIGHTS
For good and valuable consideration, the receipt and adequacy of which
is hereby acknowledged, the undersigned Blizzard Entertainment, a division of
Davidson & Associates, Inc., a corporation ("Assignor"), hereby grants, sells,
conveys, transfers and assigns to T#HQ, Inc., a New York corporation
("Assignee"), its successors, licensees and assigns, exclusively, all of
Assignor's right, title and interest (the "Assignment"), for the entire
Universe and in perpetuity, in and to the following:
1. The computer software game titled "Pax Imperia II" (the
"Product") including the exclusive license of the Product, all as set forth,
and as more fully described, in those certain Product Agreements dated as of
February 1, 1995, between the Assignor and Changeling Software, Inc., a
Connecticut corporation (as amended, supplemented or modified, the "Product
Agreement") regarding the development of the Product for IBM PC and Macintosh
systems, respectively. In the event of any inconsistency between this
Assignment and the Product Agreements, the Product Agreements shall control.
2. Any and all causes of action, choses in action and claims which
Assignor now has or hereafter may have with respect to the Product and the
Product Agreements, including without limitation, any causes of action or
claims arising from any past, present or future infringement or interference
with any of the rights granted to Assignee in and to the Product and/or the
Product Agreements.
3. Any and all physical materials and elements relating to the
Product and/or Product Agreements, and any other tangible and intangible
properties respecting all of the foregoing right, title and interest in
connection with the Product and/or Product Agreements ("Materials").
In consideration for this assignment, the Assignee shall pay the total
sum of $350,000. As an accommodation to the Assignee, Assignor shall allow
Assignee to pay such sum by making the following payments to Assignor (the
"Payments") upon the date specified opposite the respective Payment:
Date Payment
---- -------
Upon Execution $200,000
October 1, 1996 $150,000
The obligation of Assignee to make the Payments shall not be
conditioned upon the manufacture, sale and distribution of the Product by the
Assignee or any of its successors, licensees and assigns.
All Materials in the possession of Assignor will be sent to Assignee
promptly after execution of this assignment and receipt of the first payment of
$200,000.
<PAGE> 2
ASSIGNEE ACKNOWLEDGES THAT NO WARRANTIES WITH REGARD TO THE MATERIALS
WHETHER OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE
ARE CREATED BY THIS ASSIGNMENT AND ASSIGNOR HEREBY DISCLAIMS AND EXCLUDES ALL
IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
Assignor represents and warrants that (a) Assignor has full and complete
right and authority to execute and deliver this Assignment; (b) Assignor has not
heretofore sold, assigned or in any way encumbered any right, title or interest
included among, or in the nature of, the right, title or interest granted to
Assignee hereunder; and (c) Assignor will not hereafter sell, assign or in any
way encumber any right, title or interest included among, or in the nature of,
the right, title or interest granted to Assignee hereunder.
The rights granted to Assignee hereunder include, but are not limited
to, the right to do any acts or things necessary to protect the rights granted
hereunder. All rights and remedies of Assignee hereunder shall be cumulative,
and the exercise of any right or remedy hereunder shall not preclude the
exercise of any other right or remedy given Assignee by any contract executed
by Assignor, or by any provisions of law or equity.
No modification of this Assignment shall be valid and enforceable unless
a writing is signed by both parties hereto which makes reference to this
Assignment.
This Agreement (Assignment) incorporates the entire understanding of
the parties hereto with respect to the matters expressly set forth and each
party acknowledges that there are no warranties, representatives or
understandings of any kind, nature or description whatsoever made by either
party to the other except such as are expressly hereinabove set forth.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the undersigned has executed this Assignment of
Rights as of July __, 1996.
Blizzard Entertainment
a division of Davidson &
Associates, Inc.,
a California corporation
/s/ J. R. ALLWAENT
----------------------------------------
Name: J. R. Allwaent
Title: CFO
Agreed to and Acknowledged by:
T.HQ, Inc.,
a New York corporation
/s/ BJ FARRELL
- -------------------------------------
Name: BJ FARRELL
Title: PRESIDENT
-3-
<PAGE> 1
Exhibit 10.31
Zwaaneveld o Loonstein o Gorissen o Eisenmann, advocaten
FINANCING CONTRACT
The undersigned:
1. the body corporate under foreign law OPAL FINANCE CORPORATION LTD.,
registered office in St. Peters Post, Guernsey, Channel Islands, with offices,
inter alia, in Amsterdam, hereinafter to be referred to as "Opal";
and
2. the body corporate under the law of the United Kingdom T.HQ International
Limited, registered office in Epsom, Surrey (United Kingdom), hereinafter to be
referred to as "THQ";
and
3. the body corporate under the law of Germany T.HQ Deutschland GmbH,
registered office in Munchen (Germany), hereinafter to be referred to as "THQ";
whereas:
Opal is a financing company which will provide funds to THQ, an enterprise
engaged in the production of and trade in software for the (computer) games
industry, solely for the import of "Nintendo" and "Sega" game software,
hereinafter to be referred to as "the goods", to be imported from Japan;
Opal will open commercial documentary sight Letters of Credit for this purpose
for a total amount of USD 1,750,000.00, hereinafter to be referred to as: "the
funds", as soon as the terms and conditions laid down in this contract and/or
the law have been fulfilled, in particular after THQ has fulfilled in its
obligations as laid down in article 6 of this contract;
declare that they have agreed the following:
1. The preamble shall form part of this contract.
2. The goods shall be imported from Japan into the United Kingdom and
Germany in Opal's name but in actual fact by THQ, be stored by THQ under
Opal's name and be distributed in the above-mentioned countries by
and/or on behalf of THQ. These orders shall only be placed after Opal
has been given the opportunity to review the purchase orders to Nintendo
Corporation of America Ltd and/or Nintendo Company Ltd and/or Sega
Enterprises Inc. and after Opal's consent in writing;
3. All offers and/or sales contracts made/concluded by THQ to/with its
customers shall require Opal's prior inspection and shall also require
Opal's prior consent. THQ shall, for this purpose provide Opal inter
alia with a copy of the
<PAGE> 2
Zwaaneveld o Loonstein o Gorissen o Eisenmann, advocaten
offer, an estimate of the costs and all other information which could in
fairness influence the assessment by Opal. All sales contracts in
respect of the goods between THQ and its customers shall be insured by
THQ against default of payment by its customers with Hermes Credit
Service. All costs attached thereto shall be borne by THQ. In these
credit insurance policies Opal shall be named as the sole loss payee and
Opal shall, furthermore, be entitled to have (direct) recourse on the
debtors and will have the right to submit claims under the insurance
policy;
4. All offers and invoices relating to the trade in the goods by THQ shall
clearly designate as the sole place of payment: 1. a bank account in the
name of Opal or 2. bank accounts in the name of THQ in which Opal is
the only authorised signatory. THQ shall not be allowed to receive
payments in any other way without Opal's explicit prior consent in
writing;
5. All moneys and/or values to be received by THQ from the sale of the
goods shall be transferred immediately to Opal by way of reduction of
the capital provided by Opal. A further contract may be entered into
between the parties to the extent that 25% of the money to be received
by THQ shall be retained by the latter as working capital whereas the
remaining 75% shall be transferred to Opal as mentioned above;
6. To insure Opal's rights THQ shall establish a (quiet) right of pledge,
in accordance with section 3:237 of the Dutch Civil Code, on all THQ's
goods, moneys and values, including, inter alia, THQ's inventory and
THQ's claims on third parties as described below in article 7, for the
benefit of Opal. THQ shall cooperate in the execution of one or more
authentic deeds of pledge before a competent civil law notary in The
Netherlands;
7. On the basis of the deed(s) of pledge to be passed pursuant to article 6
of this contract, Opal shall obtain:
- a first pledge on THQ's stocks. Opal shall receive from THQ, always
on the 10th of each month at the latest, a statement of the stocks as
per the end of previous month;
- a first pledge on the company furniture and equipment (insofar as
available) of THQ;
- a first pledge on THQ's accounts receivable. THQ shall provide Opal
with an accounts receivable aging report, signed in a legally valid
manner, of accounts receivable pledged to Opal, at the latest on the
10th of each month, simultaneously with THQ's stock list;
- a first pledge on the rights under THQ's credit insurance policies;
<PAGE> 3
8. All companies associated with THQ in the United States of America,
France, Germany and Hong Kong shall submit a statement to Opal in
writing that they are familiar with the contents of this contract and
these companies shall, in addition, confirm in said document that they
will act solely in accordance with the contents of the contract and that
they will not in any way act contrary to the contract and the
obligations and provisions arising thereunder. Furthermore the body
corporate under the law of the State of New York, T.HQ Incorporated,
guarantees by undersigning this contract, towards Opal full compliance
(including payment) with this contract in case of (a) lack of
performance(s) by contract-party sub 2 and/or sub 3;
9. Immediately together with the application to open a Letter of Credit,
THQ shall pay to Opal 20% of the total value of the commercial
documentary sight Letters of Credit, to the extent that these have been
used by the former, by way of security. This security shall be
considered as the final 20% payment of the amount due by THQ (including
Opal's commission) to Opal. As long as the final 20% has not been paid,
Opal will retain these moneys by way of (extra) security. Simultaneously
with the above-mentioned payment THQ shall also pay to Opal the costs
incurred by the latter for the purpose of putting up the commercial
documentary sight Letters of Credit;
10. By way of commission for the amounts borrowed Opal shall receive from
THQ an amount equalling 4.75% of the bank commercial documentary sight
Letters of Credit opened by Opal and used by THQ. Furthermore, THQ
shall, in order to compensate Opal for the loss of interest on the
capital, pay Opal the 30 day libor from the date on which the Letters of
Credit are drawn until the date of repayment, to be increased by an
extra 4%;
11. On the date on which the capital or parts thereof have been outstanding
for more than 90 days, since the date on which the respective Letters of
Credit were drawn, THQ shall owe Opal an extra commission of 2% monthly
until the capital or the relevant part thereof has been repaid to Opal
in full.
12. THQ shall, upon request, pay the costs incurred by Opal relating to
activities and/or trips connected with the present contract in advance.
These activities shall include the trips undertaken by Opal to
California where THQ keeps offices.
13. THQ shall keep a record of all the transactions relating to this
contract in a careful manner and in accordance with the statutory
provisions and provide Opal with a complete insight therein. THQ shall
also regularly supply Opal with information concerning general matters,
whether directly or indirectly related to this contract, such as
financial, legal and fiscal matters.
<PAGE> 4
FINANCING CONTRACT
The undersigned:
1. the body corporate under foreign law OPAL FINANCE CORPORATION LTD.,
registered office in St. Peters Post, Guernsey, Channel Islands, with offices,
inter alia, in Amsterdam, hereinafter to be referred to as "Opal";
and
2. the body corporate under the law of the United Kingdom T.HQ
International Limited, registered office in Epsom, Surray (United Kingdom),
hereinafter to be referred to as "THQ";
and
3. the body corporate under the law of Germany T.HQ Deutschland GmbH,
registered office in Munchen (Germany), hereinafter to be referred to as "THQ";
whereas:
Opal is a financing company which will provide funds to THQ, an enterprise
engaged in the production of and trade in software for the (computer) games
industry, solely for the import of "Nintendo" and "Sega" game software,
hereinafter to be referred to as "the goods", to be imported from Japan;
Opal will open commercial documentary sight Letters of Credit for this purpose
for a total amount of USD 1,750,000.00, hereinafter to be referred to as: "the
funds", as soon as the terms and conditions laid down in this contract and/or
the law have been fulfilled, in particular after THQ has fulfilled in its
obligations as laid down in article 6 of this contract;
declare that they have agreed the following:
1. The preamble shall form part of this contract.
2. The goods shall be imported from Japan into the United Kingdom and
Germany in Opals' name but in actual fact by THQ, be stored by THQ under
Opal's name and be distributed in the above-mentioned countries by
and/or on behalf of THQ. These orders shall only be placed after Opal
has been given the opportunity to review the purchase orders to Nintendo
Corporation of America Ltd and/or Nintendo Company Ltd and/or Sega
Enterprises Inc. and after Opal's consent in writing;
3. All offers and/or all sales contracts made/concluded by THQ to/with its
customers shall require Opal's prior
<PAGE> 5
inspected and [COPY NOT LEGIBLE] shall, for this purpose, provide Opal, inter
alia, with a copy of the offer, an estimate of the costs and all other
information which could in fairness influence the assessment by Opal. All sales
contracts in respect of
<PAGE> 6
the goods between THQ and its customers shall be insured by THQ
against default of payment by its customers with Hermes Credit
Service. All costs attached thereto shall be borne by THQ. In these
credit insurance policies Opal shall be named as the sole loss
payee and Opal shall, furthermore, be entitled to have (direct)
recourse on the debtors and will have the right to submit claims
under the insurance policy;
4. All offers and invoices relating to the trade in the goods by THQ
shall clearly designate as the sole place of payment: 1. a bank
account in the name of Opal or 2. bank accounts in the name of THQ
in which Opal is the only authorised signatory. THQ shall not be
allowed to receive payments in any other way without Opal's
explicit prior consent in writing;
5. All moneys and/or values to be received by THQ from the sale of the
goods shall be transferred immediately to Opal by way of reduction
of the capital provided by Opal. A further contract may be entered
into between the parties to the extent that 25% of the money to be
received by THQ shall be retained by the latter as working capital
whereas the remaining 75% shall be transferred to Opal as mentioned
above;
6. To insure Opal's rights THQ shall establish a (quiet) right of
pledge, in accordance with section 3:237 of the Dutch Civil Code,
on all THQ's goods, moneys and values, including, inter alia, THQ's
inventory and THQ's claims on third parties as described below in
article 7, for the benefit of Opal. THQ shall cooperate in the
execution of one or more authentic deeds of pledge before a
competent civil law notary in The Netherlands;
7. On the basis of the deed(s) of pledge to be passed pursuant to
article 6 of this contract, Opal shall obtain:
- a first pledge on THQ's stocks. Opal shall receive from THQ,
always on the 10th of each month at the latest, a statement of the
stocks as per the end of previous month;
- a first pledge on the company furniture and equipment (insofar as
available) of THQ;
- a first pledge on THQ's accounts receivable. THQ shall provide
Opal with an accounts receivable aging report, signed in a legally
valid manner, of accounts receivable pledged to Opal, at the latest
on the 10th of each month, simultaneously with THQ's stock list;
- a first pledge on the rights under THQ's credit insurance
policies;
<PAGE> 7
8. All companies associated with THQ in the United States or America,
France, the United Kingdom and Hong Kong shall submit a statement to
Opal in writing that they are familiar with the contents of this
contract and these
<PAGE> 8
companies shall, in addition, confirm in said document that they
will act solely in accordance with the contents of the contract and
that they will not in any way act contrary to the contract and the
obligations and provisions arising thereunder. Furthermore the body
corporate under the law of the State of New York, T.HQ
Incorporated, guarantees by undersigning this contract, towards
Opal full compliance (including payment) with this contract in case
of (a) lack of performance(s) by contract-party sub 2 and/or sub 3;
9. Immediately together with the application to open a Letter of
Credit, THQ shall pay to Opal 20% of the total value of the
commercial documentary sight Letters of Credit, to the extent that
these have been used by the former, by way of security. This
security shall be considered as the final 20% payment of the amount
due by THQ (including Opal's commission) to Opal. As long as the
final 20% has not been paid, Opal will retain these moneys by way
of (extra) security. Simultaneously with the above-mentioned
payment THQ shall also pay to Opal the costs incurred by the latter
for the purpose of putting up the commercial documentary sight
Letters of Credit;
10. By way of commission for the amounts borrowed Opal shall receive
from THQ an amount equalling 4.75% of the bank commercial
documentary sight Letters of Credit opened by Opal and used by THQ.
Furthermore, THQ shall, in order to compensate Opal for the loss of
interest on the capital, pay Opal the 30 day libor from the date on
which the Letters of Credit are drawn until the date of repayment,
to be increased by an extra 4%;
11. On the date on which the capital or parts thereof have been
outstanding for more than 90 days, since the date on which the
respective Letters of Credit were drawn, THQ shall owe Opal an
extra commission of 2% monthly until the capital or the relevant
part thereof has been repaid to Opal in full.
12. THQ shall, upon request, pay the costs incurred by Opal relating to
activities and/or trips connected with the present contract in
advance. These activities shall include the trips undertaken by
Opal to California where THQ keeps offices.
13. THQ shall keep a record of all the transactions relating to this
contract in a careful manner and in accordance with the statutory
provisions and provide Opal with a complete insight therein. THQ
shall also regularly supply Opal with information concerning
general matters, whether directly or indirectly related to this
contract, such as [COPY NOT LEGIBLE]
<PAGE> 9
14. THQ shall hold Opal harmless from any claims and/or demands from third
parties relating to the manufacture,
<PAGE> 10
distribution and/or quality of the goods and/or matters directly or
indirectly related thereto.
15. Opal shall at all times be entitled to limit and/or cancel this
contract without stating any reasons for same and without giving
notice of termination.
16. This contract shall be co-signed by the body corporate under the
law of the United Kingdom T.HQ International Limited, registered
office in Epsom, Surrey. By undersigning they guarantee towards
Opal full compliance (including payment) with this contract in case
of (a) lack of performance(s) by contract-party sub 3;
17. This contract shall be governed by Dutch law.
18. The Court of Amsterdam shall be the competent court to take
cognizance of any disputes between the parties concerning this
contract without prejudice to Opal's right to submit the dispute to
another competent court.
19. In the event of any disputes on the interpretation of any of the
provisions of this contract, the Dutch text shall be conclusive.
Thus agreed and prepared in triplicate and signed on ____________ 1994.
1. the body corporate under foreign law OPAL FINANCE CORPORATION LTD.,
registered office in St. Peters Post, Guernsey, Channel Islands;
2. the body corporate under the law of the United Kingdom T.HQ
International Limited, registered office in Epsom, Surrey;
3. the body corporate under German law T.HQ GmbH, registered office in
Munich (Germany);
4. the body corporate under the law of the State of New York T.HQ
Incorporated, registered office in New York (United States of America).
<PAGE> 1
EXHIBIT 11
T#HQ, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF NET EARNINGS PER
COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
For the Three Years Ended For the Nine Months Ended
December 31, September 30,
---------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) used to compute
primary and fully diluted earnings
(loss) per share $(16,240,000) $(17,490,000) $ 601,000 $ 154,000 $ 887,000
------------ ------------ ---------- ---------- ----------
Weighted average number of shares
outstanding 1,504,000 1,998,000 3,327,000 2,855,000 4,458,000
Dilutive effect of stock options and
warrants ---- ---- 113,000 ---- 226,000
Dilutive effect assuming conversion of
preferred stock ---- ---- 42,000 152,000 ----
------------ ------------ ---------- ---------- ----------
Number of shares used to compute
primary and fully diluted earnings
(loss) per share 1,504,000 1,998,000 3,482,000 3,007,000 4,684,000
------------ ------------ ---------- ---------- ----------
Net earnings (loss) per share $ (10.80) $ (8.75) $ .17 $ .05 $ .19
============ ============ ========== ========== ==========
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of T#HQ, Inc. on
Form S-2 of our report dated February 16, 1996 appearing in the prospectus
which is part of this Registration Statement and to the references to us under
the headings "Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Los Angeles, California
December 20, 1996
