<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
______
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file No.: 0-18813
ToHQ, INC.
(Exact name of registrant as specified in its charter)
New York 13-3541686
- ------------------------------- --------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
5016 North Parkway Calabasas, Suite 100, Calabasas, CA 91302
(Address of principal executive offices)
818-591-1310
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $0.0001 par value: 4,715,085 shares (as of November 11, 1996).
<PAGE> 2
ToHQ, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
for the Three and Nine Months Ended September 30, 1996
and 1995 4
Consolidated Statements of Cash Flows -
for the Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
- ----------
</TABLE>
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements.
ToHQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash $ 2,044,000 $ 1,895,000
Accounts receivable - net 9,041,000 9,362,000
Inventory 1,786,000 1,150,000
Inventory deposits 246,000
Prepaid and deferred royalties 1,932,000 1,776,000
Capitalized development costs 3,264,000 2,037,000
Income tax refund receivable 27,000 27,000
Prepaid expenses and other current assets 443,000 153,000
----------- -----------
Total current assets 18,783,000 16,400,000
Equipment - net 609,000 516,000
Other long term assets 801,000
----------- -----------
TOTAL ASSETS $20,193,000 $16,916,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,392,000 $ 4,707,000
Accrued royalties 4,710,000 1,752,000
Accrued returns and allowances 2,859,000
Advance from bank 1,478,000
----------- -----------
Total current liabilities 10,580,000 9,318,000
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.0001, 100,000,000 shares authorized;
4,701,420 shares and 4,217,391 shares issued and outstanding as
of September 30, 1996 and December 31, 1995, respectively 4,000 4,000
Additional paid-in capital 34,452,000 33,317,000
Cumulative foreign currency translation adjustment (367,000) (360,000)
Accumulated deficit (24,476,000) (25,363,000)
Total shareholders' equity 9,613,000 7,598,000
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $20,193,000 $16,916,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
ToHQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $11,102,000 $ 7,752,000 $29,772,000 $18,935,000
Costs and expenses:
Cost of sales 5,737,000 4,532,000 16,783,000 10,798,000
Royalties 2,045,000 737,000 5,084,000 2,103,000
Product development 226,000 240,000 767,000 527,000
Project abandonment 125,000 125,000 375,000 375,000
Selling 987,000 666,000 2,304,000 1,689,000
General and administrative 999,000 751,000 2,764,000 2,475,000
Operating interest 271,000 370,000 589,000 722,000
----------- ----------- ----------- -----------
Total costs and expenses 10,390,000 7,421,000 28,666,000 18,689,000
----------- ----------- ----------- -----------
Income from operations 712,000 331,000 1,106,000 246,000
Interest expense, net (60,000) (26,000) (215,000) (92,000)
----------- ----------- ----------- -----------
Income before income taxes 652,000 305,000 891,000 154,000
Provision for income taxes 4,000
----------- ----------- ----------- -----------
Net income $ 652,000 $ 305,000 $ 887,000 $ 154,000
=========== =========== =========== ===========
Net income per share $ .13 $ .09 $ .19 $ .05
=========== =========== =========== ===========
Shares used in per share calculation 4,992,000 3,433,000 4,684,000 3,007,000
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
ToHQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 887,000 $ 154,000
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 176,000 176,000
Provision for doubtful accounts, discounts and returns 3,282,000 1,908,000
Changes in operating assets and liabilities:
Accounts receivable (2,696,000) (1,825,000)
Inventory and inventory deposits (868,000) 2,154,000
Prepaid and deferred royalties and
capitalized development costs 1,922,000 1,396,000
Prepaid and deferred taxes (19,000) 66,000
Prepaid expenses and other current assets (290,000) 52,000
Accounts payable and accrued expenses (58,000) 94,000
Accrued royalties (348,000) (2,870,000)
Accrued returns and allowances (3,132,000) (4,465,000)
------------ -----------
Net cash used in operating activities (1,144,000) (3,160,000)
Cash flows used in investing activities:
Long term assets (501,000)
Acquisition of equipment (267,000) (108,000)
------------ -----------
Cash used in investing activities (768,000) (108,000)
Cash flows from financing activities:
Advances from bank 1,478,000
Net proceeds from issuance of convertible preferred stock 2,728,000
Proceeds from exercise of options and warrants 606,000
------------ -----------
Cash provided by financing activities 2,084,000 2,728,000
------------ -----------
Effect of exchange rate changes on cash (23,000) 57,000
------------ -----------
Net increase (decrease) in cash 149,000 (483,000)
Cash - beginning of period 1,895,000 2,807,000
------------ -----------
Cash - end of period $ 2,044,000 $2,324,000
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 0 $ 7,000
============ ===========
Cash paid during the period for interest $ 260,000 $ 175,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
(continued)
5
<PAGE> 6
Non-cash Transactions:
During the first quarter of 1995 a reclassification of approximately
$1,000,000 was made reducing both accrued returns and allowances and inventory
to adjust to the net realizable value of the XBAND Modem inventory. The entry
reflects an agreement, which was completed on May 31, 1995, with Catapult
Entertainment, Inc., pursuant to which the Company received certain
compensation for its accounts receivable and inventory related to the XBAND
Modem.
On July 1, 1996 the Company issued 70,000 shares of common stock in
lieu of cash to a consultant 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 assets and additional
paid-in capital by $300,000.
See notes to consolidated financial statements.
6
<PAGE> 7
ToHQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information. The financial statements
included herein have 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
have been condensed or omitted pursuant to such rules and regulations. While
the Company believes that the disclosures made are adequate to make the
information presented not misleading, it is recommended that these financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
In the opinion of management, the accompanying unaudited financial
statements include 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 or for any interim
period.
Earnings Per Share. Net income per share has been computed using the
weighted average number of common shares and common share equivalents (which
consist of warrants and options, to the extent they are dilutive). The
difference between primary and fully diluted earnings per share is not
significant.
Reclassifications. Certain items in the 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.
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.
7
<PAGE> 8
2. 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.
On July 18, 1996, the Company terminated the BNY Agreement and entered
into a new financing and banking arrangement with Imperial Bank (the "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% (9.5% 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 the
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 was
presented as a liability in periods prior to the closing of the Imperial
Agreement. Since
8
<PAGE> 9
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 September 30, 1996 and December 31, 1995 are composed of
the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Receivables assigned to factor $ 7,348,000
Advances from factor (2,085,000)
-------------
Due from factor 5,263,000
Accounts receivable - domestic $ 11,655,000
Other accounts receivable, primarily foreign 1,997,000 5,739,000
Other receivables 4,000 51,000
Allowance for foreign doubtful accounts (1,310,000 (1,380,000)
Allowance for foreign discounts and returns (112,000) (311,000)
Allowance for domestic accrued returns
and allowances (3,193,000)
-------------- -------------
Accounts receivable - net $ 9,041,000 $ 9,362,000
============== =============
</TABLE>
3. OTHER LONG TERM ASSETS
On July 1, 1996, the Company acquired a twenty-five percent interest
in Inland Productions, Inc. ("Inland"), a software developer for home
entertainment game systems. The investment consisted of $300,000 in cash and
52,660 shares of ToHQ 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 World Championship Wrestling.
On August 2, 1996, the Company acquired the business of Heliotrope
Studios, Inc. ("Heliotrope"), a software developer for personal computer
platforms, and an assignment of the distribution license and certain
work-in-progress for a PC CD-ROM title (Pax Imperia II) from Blizzard
Entertainment ("Blizzard"), a division of Davidson Associates. In connection
with the acquisition, the Company incurred costs and assumed certain
liabilities 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 asset 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. The Company paid Blizzard $350,000; these costs have
been recorded as a prepaid royalty and will be amortized over the estimated
economic life of the product.
4. STOCK OPTIONS
In 1996, the Company issued 200,000 options outside of its employee
stock option plan to Brian Farrell, the Company's President, at $5.00 per
share.
___________________________________________
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
ToHQ, Inc. (the "Company") develops, publishes and distributes interactive
entertainment software ("Software"). The Company derives its net sales from
Software used with the hardware platforms that collectively dominate the market,
the 16-bit Super Nintendo Entertainment System ("SNES") and the portable Game
Boy ("Game Boy") manufactured by Nintendo Co., Ltd., and its subsidiary,
Nintendo of America, Inc. (collectively, "Nintendo") and the Sega Genesis
("Genesis"), and the 32-bit Sega Saturn ("Saturn") manufactured by Sega
Enterprises, Ltd. ("Sega"), and the 32-bit Sony PlayStation manufactured by Sony
Computer Entertainment of America ("Sony"). 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 Software products. As is typical in the Software industry, the
Company depends on the introduction of new software titles ("Titles") or sequels
to replace declining revenues from older Titles. In order to maintain or grow
its current revenue levels, the Company believes it will be necessary to develop
or obtain rights to new Titles that achieve market acceptance, are developed for
the appropriate platforms and are introduced in a timely manner. The Company
intends to focus more of its resources on software for the newly introduced
32-bit and 64-bit platforms, as well as software for the personal computer
platform.
The Company acquires licenses to develop and market Software based on
popular cultural trends and high recognition names such as sports and
entertainment personalities, arcade games, movies, and television shows
("Properties"). Examples of Software developed based on licenses acquired to
date include Disney's Pocahontas, Disney's Toy Story, Bass Master's Classic,
Home Alone, The Mask, and Olympic Summer Games. The Company has also entered
into an agreement with Turner New Media, Inc. to develop and publish
entertainment software for next generation game systems based on Turner's World
Championship Wrestling. This product is being developed by Inland in which ToHQ
has a 25% equity interest. The Company has also entered into license agreements
with Electronic Arts, Inc. ("Electronic Arts") whereby ToHQ will develop and
publish numerous Software products based upon existing Electronic Arts' titles,
primarily for the SNES and Game Boy platforms, including Madden 97, FIFA Soccer
97, NHL Hockey 97, and College Football USA 97.
As part of its business strategy, the Company intends to develop and
publish Software for multiple hardware platforms. ToHQ intends to develop
Software for some or all of such platforms, including personal computers with
CD-ROM devices, in order to reach a larger target audience, minimize the risks
of being committed to a single platform, and increase the likelihood of
recovering its development costs by spreading such costs across multiple
platforms. The particular 32-bit and 64-bit platforms that the Company will
publish Software for, however, will depend on a number of factors, including the
Company's ability to secure licenses for a platform, the popularity of a
particular platform among consumers, and the Company's estimate of the
anticipated profits it can generate from a platform.
10
<PAGE> 11
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. After securing the Property, the Company commences software
development for the Title.
The Company capitalizes certain Software development costs upon the
establishment of technological feasibility. In addition, the Company
capitalizes advances to licensors for its Properties. Amortization of such
costs is provided on a product by product basis based on the greater of the
ratio of current gross revenues for the product to the sum of current and
anticipated gross revenues or the straight line method over the estimated
remaining economic life of the product. The amortization of Software
development costs is included in royalties expense in the Statements of
Operations. The Company analyzes such capitalized costs quarterly, and
expenses as project abandonment losses advanced or capitalized Software
development costs when, in management's estimate, future revenues will not be
sufficient to recover previously capitalized costs.
Upon approval by Sony, Nintendo, or Sega, the Company places a
purchase order for the CD-ROM's or Software cartridges for completed games and
generally causes a letter of credit to be opened in favor of Sony, Nintendo, or
Sega, who manufacture the Software. Manufactured inventory is 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 sells its Software primarily to mass merchandisers and
national retail chain stores through its sales staff and third-party regional
sales representatives. The Company's seven largest customers accounted for
approximately 46% and 44% of gross sales in the nine months ended September 30,
1996 and 1995, respectively. To a lesser extent, the Company also sells
through distributors. The Company's marketing and sales strategy has allowed
the Company to keep its internal sales and marketing staff relatively small,
while maintaining close contact with its large customers.
If consumer demand for a product is below the amount a retailer
anticipated when it ordered the product from the Company, the Company may not
insist that its customers accept all booked orders or products shipped. The
Company also may consent to negotiated price discounts, returns or credits with
respect to future orders, which could materially and adversely affect net sales
and operating results. 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 lower per unit
manufacturing costs than do cartridge-based Products. However, such savings
may be offset by typically greater development costs for Titles published on
CD-ROMs.
Although the Company believes that sales of Software for the 16-bit
and Game Boy platforms are declining, it believes that because of the large
current installed base of such platforms, the relatively low cost of
development of Titles for such platforms, and reduced competition in these
markets, the Company can still generate meaningful revenues from sales of such
Software. The Company intends to continue to publish high-profile Software
Titles for
11
<PAGE> 12
these platforms such as those obtained pursuant to the agreements with Disney
Interactive and Electronic Arts.
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 Sony, Nintendo or
Sega, 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 a 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.
Finally, the interactive game market is highly seasonal, with sales typically
significantly higher during the fourth quarter (due primarily to the increased
demand for Software 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.
The Company sells its products directly to retailers in the United
Kingdom and to distributors in Europe and Australia. Because the majority of
sales are made in U.S. dollars, the Company does not believe that foreign
currency fluctuations have had a material effect on sales or operating results
to date. To the extent the Company's international sales increase and such
sales are not denominated in U.S. dollars, the Company's reported sales and
operating results could be affected by foreign currency fluctuations. To date,
the Company has not engaged in any hedging activity and does not have any
current plans to engage in any such activities in the future.
The Company presently is wholly dependent on Sony, Nintendo, and Sega
for the proprietary information and technology needed to develop and
manufacture such Software, under agreements predominantly with three year
terms, expiring in 1996 through 1999. A majority of these agreements are
renewals of originally issued agreements. In the event that at the end of the
term of the current licenses Sony, Nintendo, or Sega do not renew or further
extend their respective licenses with the Company, or terminate their
respective licenses for any reason, the Company would be unable to market and
sell Sony, Nintendo, or Sega Software and its operations would be materially
and adversely affected.
12
<PAGE> 13
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>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Domestic sales 83.9% 94.4% 74.8% 82.0%
Foreign sales 16.1 5.6 25.2 18.0
------ ------ ------ ------
Net sales 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of sales 51.7 58.5 56.4 57.0
Royalties 18.4 9.5 17.1 11.1
Product development 2.0 3.1 2.6 2.8
Project abandonment 1.1 1.6 1.3 2.0
Selling 8.9 8.6 7.7 8.9
General and administrative 9.0 9.7 9.2 13.1
Operating interest 2.5 4.7 2.0 3.8
------ ------ ------ ------
Total costs and expenses 93.6 95.7 96.3 98.7
------ ------ ------ ------
Income from operations 6.4 4.3 3.7 1.3
Interest expense, net (0.5) (0.3) (0.7) (0.5)
------ ------ ------ ------
Income before income taxes 5.9 4.0 3.0 0.8
------ ------ ------ ------
Net income 5.9% 4.0% 3.0% 0.8%
====== ====== ====== ======
</TABLE>
The following table sets forth, for the three months and nine months
ended September 30, 1996 and 1995 the Titles released during such periods for
the Platforms indicated below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
PlayStation 2 3
Saturn 2 3
SNES 3 1 6 4
Genesis 1 1 2 2
Game Boy 2 2 7 7
Game Gear 1
------ ------ ------ ------
Total 10 4 21 14
====== ====== ====== ======
</TABLE>
13
<PAGE> 14
The Company's net sales increased to $11,102,000 in the three months
ended September 30, 1996, from $7,752,000 in the same period of 1995, and
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 an increase in the
number of new titles released. In the three months ended September 30, 1996,
net sales of products based on the Company's Disney's Toy Story, Alone in the
Dark, and PGA European Tour licenses were $1,723,000 (16% of net sales),
$1,537,000 (14% of net sales), and $1,480,000 (13% of net sales), respectively.
In the third quarter of 1995 net sales of the Company's BASS Masters Classic,
The Mask, and Madden 96 licenses were $4,378,000 (56% of net sales), $1,102,000
(14% of net sales), and $946,000 (12% of net sales), respectively. Foreign net
sales grew to $7,508,000 in 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 $1,200,000 in sales and
$600,000 of cost of sales resulting from the sale of inventory pursuant to the
revised agreement with Catapult Entertainment related to the XBAND Video Game
Modem.
Cost of sales decreased as a percentage of net sales to 51.7% and
56.4% in the three months and nine months ended September 30, 1996,
respectively, from 58.5% and 57.0% of net sales in the corresponding periods of
1995. The drop in cost of sales as a percentage of net sales is a result of
the commencement in 1996 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 18.4% and
17.1% in the three months and nine months ended September 30, 1996, compared to
9.5% and 11.1% in 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.
In the three months and nine months ended September 30, 1996, selling
expenses increased $321,000 and $615,000, respectively, as a result of
increased marketing efforts for new releases.
Operating interest, which consisted of fees paid to the Company's bank
and fees paid to the Company's domestic and European lenders for letters of
credit, decreased to $271,000 and $589,000 in the three and nine months ended
September 30, 1996, respectively, from $370,000 and $722,000 in the same
periods 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.
14
<PAGE> 15
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 Sony,
Nintendo, and Sega, 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 and open letters of credit of $4,710,000 and
$7,759,000, respectively.
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 funds provided by operations and funds available
under the Imperial Agreement 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. There can be no assurance
that, in the event additional financing is required, the Company will be able
to raise such financing on terms acceptable to it.
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.
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
acquisition of Heliotrope and the investment in Inland), compared to $108,000
for the same period in 1995. See Note 3 of Notes to Consolidated Financial
Statements included elsewhere herein.
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. Financing activities were primarily the receipt of the
proceeds from the exercise of warrants and options and bank borrowings in 1996
and the issuance of convertible preferred stock in 1995.
___________________________________________
15
<PAGE> 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Stock Purchase Agreement
dated as of June 28, 1996, by
and between the Company and
Inland Productions, Inc.
10.2 Stock Purchase Agreement
dated as of August 2, 1996,
by and between the Company
and Heliotrope Studios, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 13, 1996 ToHQ, INC.
-----------------
By: /s/ Brian J. Farrell
--------------------------
Brian J. Farrell
President and Chief
Executive Officer
ToHQ, INC.
By: /s/ Deborah A. Lake
--------------------------
Deborah A. Lake
Vice President Finance
and Administration
Principal Accounting Officer
17
<PAGE> 1
EXHIBIT 10.1
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT dated as of June 28, 1996 and effective as of
July 1, 1996, among TH-Q, Inc., a New York corporation (the "Buyer"), Inland
Productions, Inc., an Illinois corporation (the "Company"), Scott Williamson
and Michael Cihak (collectively, the "Principal Stockholders").
The Company proposes to issue and sell for an aggregate purchase price
of $600,000 to the Buyer, two hundred fifty (250) shares (the "Shares") of its
common stock, no par value (the "Common Stock"). The Shares will be issued
pursuant to and subject to all of the terms and conditions of this Agreement.
In connection with the foregoing, the parties agree as follows:
1. Sale and Purchase of Shares.
1.1 Sale of Shares. On the Closing Date (as defined in
Section 2), the Company shall sell the Shares to the Buyer and the Buyer shall
purchase the Shares for the purchase price provided in Section 1.2. The Buyer
will have piggyback registration rights with respect to the Shares as set forth
in the Registration Rights Agreement dated as of June 28, 1996 between the
Company and the Buyer.
1.2 Purchase Price. The aggregate purchase price for the
Shares (the "Purchase Price") is $600,000. The Purchase Price shall be paid by
the Buyer as follows:
(i) on the Closing Date, the Buyer shall pay to
the Company an aggregate of $300,000 in cash;
(ii) the balance of the Purchase Price shall be
paid by the Buyer on the Closing Date in shares of common stock, par
value $.0001 (the "TH-Q Stock"), of the Buyer with an aggregate fair
market value equal to $300,000. For purposes of this provision "fair
market value" is to be determined on the basis of the average per
share trading price of the TH-Q Stock over the twenty (20) days
immediately prior to June 25, 1996. The Company will have certain
demand and piggyback registration rights with respect to the TH-Q
Stock obtained pursuant to this Agreement as set forth in the
Registration Rights Agreement dated as of June 28, 1996 between the
Buyer and the Company.
1.3 Delivery of Shares. On the Closing Date (as defined
in Section 2), the Company shall deliver to the escrow agent for the Shares
(the "Stock Escrow Agent") under the escrow agreement referred to in Section
7.1, stock certificates representing the Shares in proper form for transfer.
<PAGE> 2
2. Closing; Closing Date. The closing of the sale and purchase
of the Shares contemplated hereby (the "Closing") shall take place upon
satisfaction of the conditions precedent in Sections 6 and 7 on June 28, 1996,
or such other time or date as the Buyer, the Company and the Principal
Stockholders agree in writing. The date upon which the Closing occurs is
herein called the "Closing Date."
3. Representations and Warranties. The Company and the Principal
Stockholders, jointly and severally, represent and warrant to the Buyer as
follows:
3.1 Principal Stockholders. Each Principal Stockholder
represents and warrants to the Buyer that such Principal Stockholder has the
full legal right and power and all authority and approval required to enter
into, execute and deliver this Agreement and to perform fully such Principal
Stockholder's obligations hereunder. This Agreement has been duly executed
and delivered and is the valid and binding obligation of the Principal
Stockholder enforceable in accordance with its terms. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated hereby and the performance by the Principal Stockholder of this
Agreement in accordance with its respective terms and conditions will not (i)
require the approval or consent of any governmental or regulatory body or the
approval or consent of any other person; or (ii) constitute (or with notice or
lapse of time or both constitute) a default under any instrument, contract or
other agreement to which the Principal Stockholder is a party or by or to which
the Company is or the Shares are bound or subject. There are no shareholder
agreements relating to the Common Stock of the Company, including the Shares.
3.2 Due Incorporation. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Illinois. The Company does not do business in or own or lease property in any
jurisdiction other than its jurisdiction of incorporation.
3.3 Corporate Power. The Company has the requisite
corporate power and authority to execute, deliver and carry out this Agreement
and all other instruments, documents and agreements contemplated or required by
the provisions of this Agreement to be executed, delivered or carried out by
the Company. The Company has all requisite corporate power and lawful
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being and as heretofore conducted. The Company
has taken all necessary corporate action to approve this Agreement and to
authorize the execution, delivery and performance of this Agreement by the
Company, the issuance by the Company of the Shares, and the
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consummation of the transactions contemplated hereby. This Agreement has been
duly and properly executed and delivered by the Company and constitutes the
legally valid and binding obligations of the Company enforceable against it in
accordance with its terms.
3.4 Outstanding Capital Stock. The Company is authorized
to issue 1,000,000 shares of common stock, no par value, seven hundred fifty
(750) shares of which are issued and outstanding and owned by the Principal
Stockholders. No other class of capital stock of the Company is authorized or
outstanding. The Company does not own, directly or indirectly, any shares of
capital stock of any corporation or any equity investment in any partnership,
association or any other business organization. All of the Shares are duly
authorized and are validly issued, fully paid and non-assessable.
3.5 Options or Other Rights. There is no outstanding
right, subscription, warrant, call, unsatisfied preemptive right, option or
other agreement or commitment of any kind to purchase or otherwise to receive
from the Company any of the outstanding, authorized but unissued, unauthorized
or treasury shares of the capital stock or any other security of the Company,
and there is no outstanding security of any kind convertible into such capital
stock.
3.6 Organizational Documents. The Company has delivered
to the Buyer true and complete copies of the Articles of Incorporation and
By-laws of the Company as in effect on the date hereof. The minute books of
the Company contain true and complete records of all meetings and consents in
lieu of meeting of the Board of Directors and of the stockholders since the
time of incorporation and accurately reflect all transactions referred to in
such minutes and consents in lieu of meeting. The stock books of the Company
are true and complete.
3.7 Tax Matters. The Company has paid all federal,
state, county, local, foreign and other taxes (hereinafter, "Taxes" or,
individually, a "Tax") required to be paid by it through the date hereof, and
all deficiencies or other additions to tax, interest and penalties owed by it,
in connection with any such Taxes. The Company has filed all returns for Taxes
that it is required to file through the date hereof. No penalties or other
charges are or will become due with respect to the late filing of any return
required to be filed by the Company through the date hereof.
3.8 Compliance with Laws; Permits. The Company and all
products sold or services provided by it are in compliance in all material
respects with all federal, state, local and foreign statutes, laws, ordinances,
regulations, rules, judgments, orders
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<PAGE> 4
and decrees applicable to it or its respective assets, properties, business or
operations. The Company has all licenses, permits, orders or approvals of any
federal, state, local or foreign governmental or regulatory body (collectively,
"Permits") that are material to or necessary for the conduct of the Company
Business (as defined in Section 8.1); such Permits are in full force and
effect; no violations are or have been recorded in respect of any Permit; and
no proceeding is pending or, to the knowledge of the Company, threatened to
revoke or limit any Permit.
3.9 No Breach. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
will not (i) violate any provision of the Articles of Incorporation or By-laws
of the Company; (ii) violate, conflict with or result in the breach of any of
the terms of, result in a material modification of the effect of, otherwise
give any other contracting party the right to terminate, or constitute (or with
notice or lapse of time or both constitute) a default under, any contract or
other agreement to which the Company or any Principal Stockholder is a party or
by or to which it or any of its assets or properties may be bound or subject;
(iii) violate any order, judgment, injunction, award or decree of any court,
arbitrator or governmental or regulatory body against, or binding upon, the
Company or upon the securities, properties or Company Business; (iv) violate
any statute, law or regulation of any jurisdiction as such statute, law or
regulation relates to the Company or to the securities, properties or Company
Business; or (v) violate any Permit.
3.10 Actions and Proceedings. There are no outstanding
orders, judgments, injunctions, awards or decrees of any court, governmental or
regulatory body or arbitration tribunal against or involving the Company or a
Principal Stockholder relating to the Company Business. There are no actions,
suits or claims or legal, administrative or arbitral proceedings or, to the
knowledge of the Company, investigations pending or, to the knowledge of the
Company, threatened against or involving the Company or any of its properties
or assets or any Principal Stockholder, that, individually or in the aggregate,
could have a material adverse effect upon the transactions contemplated hereby
or upon the assets, properties, business, operations, or condition (financial
or otherwise) of the Company.
3.11 Contracts and Other Agreements; Consents. Schedule
3.11 sets forth all of the material contracts and other agreements to which the
Company or a Principal Stockholder is a party or by or to which they or their
assets or properties are bound or subject, relating to the Company Business.
All of such contracts and other agreements are valid, subsisting, in full
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<PAGE> 5
force and effect and binding upon the parties thereto in accordance with their
terms, and the Company or Principal Stockholder, as the case may be, has paid
in full or accrued all amounts due thereunder and has satisfied in full or
provided for all of its liabilities and obligations thereunder, and is not in
default under any of them, nor does any condition exist that with notice or
lapse of time or both would constitute a default thereunder. Neither the
Company nor any Principal Stockholder is a party to or bound by a contract or
other agreement that either individually or in the aggregate materially
adversely affects the Company's assets, properties, business, operations or
condition (financial or otherwise). Except as separately identified on
Schedule 3.11, no approval or consent of any person is needed in order that the
contracts and other agreements continue in full force and effect following the
consummation of the transactions contemplated by this Agreement.
3.12 Real Estate. Schedule 3.12 sets forth a list and
summary description of all leases, subleases or other agreements under which
the Company or contractual obligations on their part to purchase or acquire any
interest in real property. The Company is the lessee under the leases or
holder of the options, as the case may be, of each of the items set forth on
Schedule 3.12. Such leases, subleases and other agreements are in full force
and effect and the Company has not received any notice of any default
thereunder. The leasehold interests of the Company are subject to no lien or
other encumbrance and enjoy a right of quiet possession as against any lien or
other encumbrance on the property.
3.13 Tangible Property. All interests owned or claimed by
the Company or a Principal Stockholder in or to the plant, machinery,
equipment, furniture, leasehold improvements, fixtures, vehicles, structures,
any related capitalized items and other tangible property material to the
Company Business and material leases, conditional sale contracts, franchises or
licenses pursuant to which the Company may hold or use and any interest owned
or claimed by the Company in or to such property and all other depreciable or
amortizable property owned by the Company ("Tangible Property") are in full
force and effect and, with respect to the performance of the Company, there is
no default or event of default or event which with notice or lapse of time or
both would constitute a default. The Tangible Property is in good operating
condition and repair, and neither the Company nor any Principal Stockholder has
received notice that it is in violation of any existing law or any building,
zoning, health, safety or other ordinance, code or regulation.
3.14 Intangible Property. Schedule 3.14 sets forth all
patents, trademarks, service marks, trade names and franchises, all
applications for any of the foregoing, and all
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<PAGE> 6
permits, grants and licenses or other rights running to or from the Company or
a Principal Stockholder relating to any of the foregoing that are material to
the Company Business. Except as set forth on Schedule 3.14, the rights of the
Company or the Principal Stockholder, as the case may be, in the property set
forth on Schedule 3.14 are free and clear of any liens or other encumbrances.
Except as set forth on Schedule 3.14, the Company has no notice of any
adversely held patent, invention, trademark, service mark or trade name of any
other person relating to any of the property set forth on Schedules 3.13 and
3.14 or any process or confidential information of the Company, and the Company
knows of no basis for any such charge or claim.
3.15 Liens. The Company owns outright and has good and
marketable title to all of its assets and properties, in each case free and
clear of any lien or other encumbrance, except for (i) immaterial assets and
properties; (ii) assets and properties disposed of, or subject to purchase or
sales orders, in the ordinary course of business; or (iii) liens or other
encumbrances securing taxes, assessments, governmental charges or levies, or
the claims of materialmen, carriers, landlords and like person, all of which
are not yet due and payable.
3.16 Liabilities. Except as set forth on Schedule 3.16,
the Company does not have any direct or indirect indebtedness, liability,
claim, loss, damage, deficiency, obligation or responsibility, known or
unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
secured or unsecured, accrued, absolute, contingent or otherwise, including,
without limitation, liabilities on account of Taxes, other governmental charges
or lawsuits brought, whether or not of a kind required by generally accepted
accounting principles to be set forth on a financial statement ("Liabilities").
The Company has no knowledge of any circumstance, condition, event or
arrangement that may hereafter give rise to any Liabilities of the Company
except in the ordinary course of business or as otherwise set forth on Schedule
3.16.
3.17 Employee Benefit Plans. The Company has no pension,
profit sharing, retirement, deferred compensation, stock purchase, stock
option, incentive, bonus, vacation, severance, disability, hospitalization,
medical insurance, life insurance and other employee benefit plans, programs or
arrangements, maintained by the Company or under which the Company has any
obligations in respect of, or which otherwise cover, any of the current or
former officers or employees of the Company or its beneficiaries (hereinafter
individually referred to as a "Plan" and collectively referred to as the
"Plans").
3.18 Insurance. Schedule 3.18 sets forth a list and brief
description of all policies or binders of fire, liability,
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product liability, workmen's compensation, vehicular and other insurance held
by or on behalf of the Company or Principal Stockholder relating to the Company
Business. Such policies and binders are valid and enforceable in accordance
with their terms, are in full force and effect. The Company is not in default
with respect to any provision contained in any such policy or binder. There
are no outstanding unpaid claims under any such policy or binder.
3.19 Officers, Directors and Key Employees. Schedule 3.19
sets forth (i) the name and total compensation of each officer and director of
the Company and of each other key employee, consultant, agent or other
representative of the Company. None of such persons has made a written threat
to the Company or to any of their officers or directors to cancel or otherwise
terminate such person's relationship with the Company.
3.20 Section 341(f) of Internal Revenue Code. The Company
has not at any time consented under section 341(f)(1) of the Code to have the
provisions of section 341(f)(2) of the Code apply to any sale of its stock.
3.21 TH-Q Stock Not Registered. The Company acknowledges
that the TH-Q Stock issued as part of the Purchase Price is not being
registered under the Securities Act of 1933, as amended (the "Act") based upon
an exemption from registration under Section 4(2) and Regulation D of the Act,
in that the issuance of the TH-Q Stock does not involve any public offering.
The Company represents that it is buying the TH-Q Stock for investment and not
for resale or distribution.
4. Representations and Warranties of the Buyer. The Buyer
represents and warrants to the Company and the Principal Stockholders as
follows:
4.1 Due Incorporation. The Buyer is duly organized,
validly existing and in good standing under the laws of the State of New York.
4.2 Corporate Power of the Buyer. The Buyer has the
corporate power and authority to own, lease and operate its assets, properties
and business and to carry on its business as now being and as heretofore
conducted. The Buyer has the requisite corporate power and authority to
execute, deliver and carry out this Agreement and all other instruments,
documents and agreements contemplated or required by the provisions of this
Agreement to be executed, delivered or carried out by the Buyer. The Buyer has
taken all necessary corporate action to approve this Agreement and to authorize
the execution, delivery and performance of this Agreement by the Buyer, the
issuance by the Buyer of the TH-Q Stock, and the consummation of the
transactions
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<PAGE> 8
contemplated hereby. This Agreement has been duly and properly executed and
delivered by the Buyer and constitutes the legally valid and binding
obligations of the Buyer enforceable in accordance with its terms.
4.3 Purchase for Investment. The Buyer acknowledges that
the Shares are not registered under the Act based on an exemption from
registration under Section 4(2) of the Act, in that the issuance of the Shares
does not involve any public offering. The Buyer represents that it is an
"accredited investor" as defined under Regulation D the Act and is purchasing
the Shares for investment and not for resale or distribution.
4.4 No Breach. The execution, delivery and performance
of this Agreement and the consummation of the transactions contemplated hereby
will not (i) violate any provision of the Articles of Incorporation or By-laws
of the Buyer; (ii) violate, conflict with or result in the breach of any of the
terms of, result in a material modification of the effect of, otherwise give
any other contracting party the right to terminate, or constitute (or with
notice or lapse of time or both constitute) a default under, any contract or
other agreement to which the Buyer is a party or by or to which it or any of
its assets or properties may be bound or subject; (iii) violate any order,
judgment, injunction, award or decree of any court, arbitrator or governmental
or regulatory body against, or binding upon, the Buyer or upon the securities
or properties of the Buyer; (iv) violate any statute, law or regulation of any
jurisdiction as such statute, law or regulation relates to the Buyer or to the
securities, properties or business of the Buyer; or (v) violate any Permit.
4.5 Actions and Proceedings. There are no actions, suits
or claims or legal, administrative or arbitral proceedings or, to the knowledge
of the Buyer, investigations pending or, to the knowledge of the Buyer,
threatened against or involving the Buyer or any of its properties or assets,
that, individually or in the aggregate, could have a material adverse effect
upon the transactions contemplated hereby or upon the assets, properties,
business, operations, or condition (financial or otherwise) of the Buyer.
4.6 Financial Condition. The Buyer has previously
delivered to the Company its Annual Report on Form 10-K for the Buyer's Fiscal
Year 1995 and its Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1996, including financial statements (the "Financial Statements").
The Buyer has no knowledge of any material adverse change in the financial
condition of the Company since the date of the Financial Statements.
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5. Covenants and Agreements. The parties covenant and agree as
follows:
5.1 Financial Information. The Company shall furnish to
the Buyer financial statements as soon as available after the close of each
fiscal year of the Company, balance sheet of the Company and the related
statement of earnings and stockholders' equity and statement of cash flows of
the Company.
5.2 Access to Information. The Company shall provide to
the Buyer such information concerning the operations of the Company as the
Buyer may from time to time reasonably request in writing and discuss the
affairs, accounts and finances of the Company with the financial and management
personnel of the Buyer. All such information shall be treated by the Buyer as
confidential.
5.3 Notice of Certain Events. The Company shall promptly
give written notice to the Buyer of (i) any casualty to any property, force
majeure, legislative or regulatory change, revocation of license or right to do
business, accident, labor dispute, confiscation or condemnation, the result of
any of which might have an adverse effect upon the financial condition,
business or prospects of the Company or (ii) any litigation, action,
proceeding, investigation or claim, including, without limitation, those
involving a governmental agency or regulatory body, which relates in whole or
in part to any of the transactions contemplated by this Agreement.
5.4 Insurance. The Company shall maintain insurance with
respect to its properties and business against such casualties and
contingencies of such types in such amounts and with such deductible amounts as
is customary in the case of corporations of established reputations engaged in
the same or a similar business and similarly situated.
5.5 Maintenance of Company Business. The Company shall
maintain and preserve its existence, present form of Company Business, and all
rights, privileges and franchises necessary or desirable in the normal course
of its business; continue to engage in businesses of the same general type as
now conducted by the Company; and keep all of its property necessary to operate
its business in good working order and condition, ordinary wear and tear
excepted.
5.6 Compliance With Laws. The Company and the Principal
Stockholders shall comply in all respects with all laws, rules, regulations,
orders and directives of any governmental or regulatory authority having
jurisdiction over the Company and the Company Business and with all agreements
to which the Company or a Principal Stockholder is a party, provided the
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Company or Principal Stockholder, as the case may be, may in good faith contest
any ruling or directive.
5.7 Taxes and Other Liabilities. The Company shall pay
all of its obligations when due; pay all taxes and other governmental or
regulatory assessments before delinquency or before any penalty attaches
thereto, except as may be contested in good faith by the appropriate
procedures; and timely file all required tax returns.
5.8 Environmental Matters. The Company shall comply with
all federal, state and local environmental laws.
5.9 Board Representation. As set forth in the
Stockholder's Agreement, the Buyer may designate (the "Designated Director") up
to twenty-five percent (25%) of the members of the Board of Directors of the
Company. Initially, one (1) of the three (3) members of the Company's Board of
Directors shall be a Designated Director.
5.10 Organic Changes. The Company shall not allow or
cause the occurrence of any Organic Change (as defined below) unless it has
received the affirmative vote of all Designated Directors for such Organic
Change. For purposes of this Section 5.10, "Organic Change" means (i) any
sale, lease or exchange of property or assets of the Company in a transaction
involving One Million Dollars ($1,000,000) or more whether or not in the
ordinary course of business; (ii) the issuance by the Company of any capital
stock in excess of five percent (5%) of the outstanding capital stock of the
Company; (iii) any merger or consolidation to which the Company is party; (iv)
the direct or indirect acquisition of any business by the Company, whether by
purchase of assets, stock or otherwise, for consideration having a price of
fair value of One Million Dollars ($1,000,000) or more; or (v) an initial
public offering of the capital stock of the Company; provided, that in
determining the value of consideration given or the amount involved in a
transaction described in the foregoing clauses (i) through (iv), there shall be
included the fair value of cash and non-cash consideration, deferred payments,
and all liabilities assumed by the purchaser or acquirer.
5.11 Compensation. The Company will maintain a
compensation committee (the "Compensation Committee") comprised of certain
members of the Board of Directors and performing the functions set forth in the
Stockholders Agreement.
5.12 Consent to Jurisdiction and Service of Process. Any
legal action, suit or proceeding arising out of or relating to this Agreement
or the transactions contemplated hereby shall be instituted in any state or
federal court located in Los
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Angeles County, State of California, and each party agrees not to assert, by
way of motion, as a defense, or otherwise, in any such action, suit or
proceeding, any claim that it is not subject personally to the jurisdiction of
such court, that its property is exempt or immune from attachment or execution,
that the action, suit or proceeding is brought in an inconvenient forum, that
the venue of the action, suit or proceeding is improper or that this Agreement
or the subject matter hereof may not be enforced in or by such court, and
hereby waives any offsets or counterclaims in any such action, suit or
proceeding. Each party further irrevocably subjects to the jurisdiction of any
such court in any such action, suit or proceeding.
5.13 Employment Agreements. The Company and each of the
Principal Stockholders shall enter into employment agreements setting forth
terms of employment, including non-competition provisions, within a reasonable
period after the Closing Date.
6. Conditions precedent to the Obligation of the Buyer to Close.
The obligation of the Buyer to enter into and complete the Closing is subject
to the fulfillment on or prior to the Closing Date of the following conditions,
any one or more of which may be waived by it:
6.1 Third-Party Consents. All Permits and governmental
approvals and consents, permits and approvals from parties to contracts or
other agreements with the Company or any Principal Stockholder that may be
required in connection with the performance by the Company or the Principal
Stockholders of its obligations under this Agreement or the continuance of such
contracts or other agreements with the Company after the Closing shall have
been obtained.
6.2 Opinion of Counsel to the Principal Shareholders and
the Company. The Buyer shall have received the opinion of Huck, Bouma, Martin,
Charlton & Bradshaw, P.C., counsel to the Company, dated the Closing Date,
addressed to the Buyer, in a form satisfactory to the Buyer.
6.3 Escrow Agent Letter Agreement. Counsel to the
Company, or such other agent as designated by the Company (the "Escrow Agent"),
shall have delivered to the Buyer and the Company a completed and executed
escrow letter agreement substantially in the form of Exhibit A.
6.4 Stockholders Agreement. The parties hereto shall
have entered into a Stockholders Agreement.
6.5 Appointment of Directors. The Designated Director(s)
shall have been designated in accordance with the Stockholders Agreement.
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6.6 Delivery of Stock Certificates. The Company shall
have delivered to the Stock Escrow Agent on the Closing Date stock certificates
representing the Shares in proper form for transfer.
7. Conditions Precedent to the Obligation of the Company and
Principal Stockholders to Close. The obligation of the Company and Principal
Stockholders to enter into and complete the Closing is subject, to the
fulfillment of the following conditions, any one or more of which may be
waived:
7.1 Stock Escrow Agent Letter. Counsel to the Buyer, or
such other agent as designated by the Buyer, shall have delivered to Buyer and
the Company a completed and executed escrow agreement substantially in the form
of Exhibit A.
7.2 Opinion of Counsel to the Buyer. The Company shall
have received the opinion of Sidley & Austin, counsel to the Buyer, dated the
Closing Date, addressed to the Company and the Principal Stockholders, in a
form acceptable to the Company.
7.3 Stockholders Agreement. The parties hereto shall have
entered into a Stockholders Agreement.
7.4 Delivery of Payment of Purchase Price. The Buyer
shall have delivered to the Escrow Agent, the TH-Q Stock and cash comprising
the Purchase Price.
8. Covenants of the Principal Stockholders.
8.1 Covenants Against Competition. Each Principal
Stockholder acknowledges that (i) the Company is engaged in the business of
software development for video games and video game platform conversions (the
"Company Business"); (ii) his work for the Company has given him and will
continue to give him access to trade secrets of and confidential information
concerning the Company; (iii) the agreements and covenants contained in this
Section 8 are essential to protect the Company Business and the equity interest
purchased by the Buyer; (iv) the Buyer would not purchase the Shares but for
such agreements and covenants; and (v) he has means to support himself and his
dependents other than by engaging in the Company Business and the provisions of
this Section 8 will not impair such ability. Accordingly, each covenants and
agrees, with respect to himself, as follows:
8.1.1 Non-Compete. During the term of the
Principal Stockholder's employment with the Company or any of its affiliates
and for a period of eighteen (18) months following the termination, for cause
or otherwise, of the Principal Stockholder's employment with the Company (the
"Restricted Period"), the Principal Stockholder shall not in any state or
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county of the United States and any other location where the Company is engaged
in the Company Business, directly or indirectly, (i) engage in the Company
Business for the Principal Stockholder's own account with respect to any video
game or game platform that the Company has marketed within two (2) years prior
to such time, is then marketing or is then developing (i.e., wrestling game
versus wrestling game; racing game versus racing game; fishing game versus
fishing game); (ii) enter the employ of, or render any services to, any person
engaged in such activities; or (iii) have an economic interest in any such
person in any capacity, including, without limitation, as an individual,
partner, shareholder, officer, director, principal, agent, trustee or
consultant; provided, however, the Principal Stockholder may own, directly or
indirectly, solely as an investment, securities of any person traded on any
national securities exchange if the Principal Stockholder is not a controlling
person of, or a member of a group which controls, such person and does not,
directly or indirectly, own 1% or more of any class of securities of such
person.
8.1.2 Confidential Information. During and after
the Restricted Period, the Principal Stockholder shall keep secret and retain
in strictest confidence, and shall not use for the benefit of himself or
others, all confidential matters of the Company and its affiliates, including,
without limitation, "know-how," trade secrets, customer lists, details of
client or consultant contracts, pricing policies, operational methods,
marketing plans or strategies, product development techniques or plans,
business acquisition plans, new personnel acquisition plans, technical
processes, designs and design projects, inventions and research projects of the
Company or its affiliates learned by the Principal Stockholder heretofore or
hereafter.
8.1.3 Property of the Company. All memoranda,
notes, lists, records and other documents or papers (and all copies thereof),
including such items stored in computer memories, on microfiche or by any other
means, including, but not limited to, programs, utilities, routines and tools
made or compiled by or on behalf of the Principal Stockholder, or made
available to the Principal Stockholder relating to the Company Business, the
Company or its affiliates, are and shall be the Company's property and shall be
delivered to the Company promptly upon the termination of the Principal
Stockholder's employment with the Company or its affiliates or at any other
time on request of the Company.
8.1.4 Employees and Consultants of the Company.
During the Restricted Period, the Principal Stockholder shall not, directly or
indirectly, hire or solicit any employee of the Company or its affiliates or
consultants then under contract with
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<PAGE> 14
the Company or encourage any such employee to leave such employment or to
terminate such consulting relationship.
8.2 Rights and Remedies Upon Breach. If the Principal
Stockholder breaches, or threatens to commit a breach of, any of the provisions
of Section 8.1 (the "Restrictive Covenants"), the Company shall have the
following rights and remedies, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to the
Company under law or in equity:
8.2.1 Specific Performance. The right and remedy
to have the Restrictive Covenants specifically enforced by any court of
competent jurisdiction, it being agreed that any breach or threatened breach of
the Restrictive Covenants would cause irreparable injury to the Company and
that money damages would not provide an adequate remedy to the Company.
8.2.2 Accounting. The right and remedy to require
the Principal Stockholder to account for and pay over to the Company, as the
case may be, all compensation, profits, monies, accruals, increments or other
benefits derived or received by the Principal Stockholder as the result of any
transactions constituting a breach of the Restrictive Covenants.
8.3 Severability of Covenants. Each Principal
Stockholder acknowledges and agrees that the Restrictive Covenants are
reasonable and valid in geographical and temporal scope and in all other
respects. If any court determines that any of the Restrictive Covenants, or
any part thereof, is invalid or unenforceable, the remainder of the Restrictive
Covenants shall not thereby be affected and shall be given full effect, without
regard to the invalid portions.
8.4 Blue-Pencilling. If any court determines that any of
the Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall have the power
to reduce the duration or scope of such provision, as the case may be, and, in
its reduced form, such provision shall then be enforceable.
8.5 Enforceability in Jurisdiction. The Buyer, the
Company and the Principal Stockholders intend to and hereby confer jurisdiction
to enforce the Restrictive Covenants upon the courts of any jurisdiction within
the geographical scope of such Covenants. If the courts of any one or more of
such jurisdictions hold the Restrictive Covenants unenforceable by reason of
the breadth of such scope or otherwise, it is the intention of the Buyer and
the Principal Stockholders that such determination not bar or in any way affect
the Company's right to
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<PAGE> 15
the relief provided above in the courts of any other jurisdiction within the
geographical scope of such Covenants, as to breaches of such Covenants in such
other respective jurisdiction, such Covenants, as they relate to each
jurisdiction being, for this purpose, severable into diverse and independent
covenants.
9. Survival of Representations and Warranties of the Sellers.
Notwithstanding any right of the Buyer fully to investigate the affairs of the
Company and notwithstanding any knowledge of facts determined or determinable
by the Buyer pursuant to such investigation or right of investigation, the
Buyer has the right to rely fully upon the representations, warranties,
covenants and agreements of the Company and of each Principal Stockholder
contained in this Agreement. All such representation, warranties, covenants
and agreements shall survive the execution and delivery hereof and the Closing
hereunder.
10. Indemnification.
10.1 Obligation of the Company and Principal Stockholders
to Indemnify. Subject to the limitations contained herein, the Company and the
Principal Stockholders jointly and severally agree to indemnify, defend and
hold harmless the Buyer (and its directors, officers, employees, affiliates and
assigns) from and against all losses, liabilities, damages, deficiencies, costs
or expenses (including interest, penalties and reasonable attorneys' fees and
disbursements) ("Losses") based upon, arising out of or otherwise in respect of
any inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Company contained in this Agreement. Each Principal
Stockholder agrees to indemnify, defend and hold harmless the Buyer (and its
directors, officers, employees, affiliates and assigns) from and against any
Losses based upon, arising out of or otherwise in respect of any inaccuracy in
or any breach of any representation, warranty, covenant or agreement of such
Principal Stockholder contained in Section 3.1.
10.2 Obligation of the Buyer to Indemnify. The Buyer
agrees to indemnify, defend and hold harmless the Company and Principal
Stockholders from and against any Losses based upon, arising out of or
otherwise in respect of any inaccuracy in or breach of any representation,
warranty, covenant or agreement of the Buyer contained in Section 4.
11. Miscellaneous.
11.1 Certain Definitions. As used in this Agreement, the
following terms have the following meanings unless the context otherwise
requires:
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<PAGE> 16
(i) "affiliate" with respect to any person, means
any other person controlling, controlled by or under common control with such
person.
(ii) "contracts and other agreements" means all
contracts, agreements, understandings, indentures, notes, bonds, loans,
instruments, leases, mortgages, franchises, licenses, commitments or other
binding arrangements, express or implied.
(iii) "document or other papers" means any
document, agreement, instrument, certificate, notice, consent, affidavit,
letter, telegram, telex, statement, schedule (including any Schedule to this
Agreement), exhibit (including any Exhibit to this Agreement) or any other
paper whatsoever.
(iv) "governmental or regulatory body" means any
government or political subdivision thereof, whether federal, state, local or
foreign, or any agency or instrumentality of any such government or political
subdivision.
(v) "lien or other encumbrance" means any lien,
pledge, mortgage, security interest, claim, lease, charge, option, right of
first refusal, easement, servitude, transfer restriction under any shareholder
or similar agreement, encumbrance or any other restriction or limitation
whatsoever.
(vi) "person" means any individual, corporation,
partnership, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, governmental or regulatory body or other entity.
(vii) "property" means real, personal or mixed
property, tangible or intangible.
11.2 Knowledge. As used in this Agreement, the term
"knowledge," with respect to the Company or the Buyer, means the actual
knowledge of its officers, directors or shareholders.
11.3 Publicity. No publicity release or announcement
concerning this Agreement or the transactions contemplated hereby shall be made
without advance approval thereof by the Company and the Buyer.
11.4 Notices. Any notice or other communication required
or permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed two days after the date of deposit in the United
States mails, as follows:
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<PAGE> 17
(i) if to the Buyer, to:
TH-Q, Inc.
5016 North Parkway Calabasas
Calabasas, CA 91302
Attention: Brian J. Farrell
Telecopy: (818) 591-1615
with a copy to:
Sidley & Austin
555 West Fifth Street, 40th Flr
Los Angeles, CA 90013
Attention: Sherwin L. Samuels, Esq.
Telecopy: (213) 896-6600
(ii) if to the Company or Principal
Stockholders, to:
Inland Productions, Inc.
572 East Farnham Lane
Wheaton, IL 60187
Attention: Scott Williamson
with a copy to:
Huck, Bouma, Martin, Charlton & Bradshaw,
P.C.
1755 S. Naperville Road, Suite 200
Wheaton, IL 60187
Attention: George M. Bradshaw, Esq.
Telecopy: (708) 221-1756
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
11.5 Entire Agreement. This Agreement (including the
Schedules) and the collateral agreements executed in connection with the
consummation of the transactions contemplated herein contain the entire
agreement among the parties with respect to the purchase of the Shares and
related transactions, and supersedes all prior agreements, written or oral,
with respect thereto.
11.6 Waivers and Amendments; Non-Contractual Remedies;
Preservation of Remedies. This Agreement may be amended, superseded,
cancelled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by the parties or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or
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<PAGE> 18
privilege hereunder shall operate as a waiver thereof. Nor shall any waiver on
the part of any party of any such right, power or privilege, nor any single or
partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or privilege.
The rights and remedies herein provided are cumulative and are not exclusive of
any rights or remedies that any party may otherwise have at law or in equity.
The rights and remedies of any party based upon, arising out of or otherwise in
respect of any inaccuracy in or breach of any representation, warranty,
covenant or agreement contained in this Agreement shall in no way be limited by
the fact that the act, omission, occurrence or other state of facts upon which
any claim of any such inaccuracy or breach is based may also be the subject
matter of any other representation, warranty, covenant or agreement contained
in this agreement (or in any other agreement between the parties) as to which
there is no inaccuracy or breach.
11.7 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of California.
11.8 Further Assurances. The Company and the Buyer will,
at any and all times, execute and deliver all such further documents,
resolutions, assignments, transfers and assurances as may be necessary or
desirable for the better assuring and confirming of all of the rights and
remedies hereunder and to comply with applicable law.
11.9 Legend. The Company and the Buyer shall place
appropriate legends on the certificates evidencing the Shares and TH-Q Stock,
respectively, as set forth in the Stockholders Agreement.
11.10 Binding Effect. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors
and legal representatives.
11.11 Variations in Pronouns. All pronouns and any
variations thereof refer to the masculine, feminine or neuter, singular or
plural, as the context may require. The term "or" is not exclusive.
11.12 Counterparts. This Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument.
11.13 Exhibits and Schedules. The Exhibits and Schedules
are a part of this Agreement as if fully set forth
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herein. All references herein to Sections, subsections, clauses, Exhibits and
Schedules shall be deemed references to such parts of this Agreement, unless
the context shall otherwise require.
11.14 Headings. The headings in this Agreement are for
reference only, and shall not affect the interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
TH-Q, INC.
/s/Brian J. Farrell
---------------------------------------
By: Brian J. Farrell
Title: President
INLAND PRODUCTIONS, INC.
/s/ Michael Cihak
---------------------------------------
By: Michael Cihak
Title:President
SCOTT WILLIAMSON
/s/Scott Williamson
---------------------------------------
MICHAEL CIHAK
---------------------------------------
/s/Michael Cihak
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<PAGE> 1
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
AGREEMENT dated as of August 2, 1996, among TH-Q, Inc., a New York
corporation (the "Buyer"), on the one hand, and Andrew G. Sispoidis and Peter
G. Sispoidis (collectively, the "Sellers", and each individually, a "Seller"),
severally, on the other hand, to purchase and sell shares of capital stock of
Heliotrope Studios, Inc., a Connecticut corporation (the "Company").
The Sellers are the beneficial and record owners of all of the issued
and outstanding shares (the "Shares") of capital stock of the Company. The
Sellers wish to sell and the Buyer wishes to purchase the Shares upon the terms
of this Agreement.
Accordingly, the parties agree as follows:
1. Sale and Purchase of Shares.
1.1 Sale of Shares. On the Closing Date provided for in
Section 2, the Sellers shall sell their Shares to the Buyer and the Buyer shall
purchase the Shares for the purchase price provided in Section 1.2. The Shares
owned by each Seller respectively, consist of the following:
Seller Shares
Andrew Sispoidis 50
Peter Sispoidis 50
1.2 Purchase Price. The aggregate purchase price for the
Shares (the "Purchase Price") is $100 cash.
1.2.1 Payment of Purchase Price. The Purchase
Price shall be paid by the Buyer on the Closing Date. The Buyer shall make the
deliveries due to Sellers pursuant to this Section 1.2. in the amount equal to
such Seller's interest in the Purchase Price, set forth as follows:
Seller Cash
Andrew Sispoidis $50
Peter Sispoidis $50
1.3 Delivery of Shares. On the Closing Date, the
Sellers shall deliver to the Buyer stock certificates representing all of the
Shares, duly endorsed in blank or accompanied by stock powers duly executed in
blank, in proper form for transfer. The stock certificates for the Shares shall
be deemed to be delivered in Guilford, Connecticut.
<PAGE> 2
2. Closing; Closing Date. The closing of the sale and purchase
of the Shares contemplated hereby (the "Closing") shall take place on August 2,
1996 by express mail, or such other date and in such other manner as the Buyer
and the Sellers agree. The time and date upon which the Closing occurs is
herein called the "Closing Date."
3. Representations and Warranties of the Sellers. The Sellers,
jointly and severally, represent and warrant to the Buyer as follows:
3.1 Due Incorporation and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Connecticut and has the corporate power and lawful
authority to own, lease and operate its assets, properties and business and to
carry on its business as now being and as heretofore conducted. The Company
does not transact business in any other jurisdiction and files no franchise,
income or other tax returns in any other jurisdiction based upon the ownership
or use of property therein or the derivation of income therefrom nor does it
own or lease property in any other jurisdiction.
3.2 Outstanding Capital Stock. The Company is
authorized to issue 20,000 shares of Common Stock, no par value, 100 shares of
which are issued and outstanding. No other class of capital stock of the
Company is authorized or outstanding. All of the Shares are duly authorized
and are validly issued, fully paid and non-assessable.
3.3 Options or Other Rights. There is no outstanding
right, subscription, warrant, call, unsatisfied preemptive right, option or
other agreement of any kind to purchase or otherwise to receive from the
Company or any Seller any of the outstanding, authorized but unissued,
unauthorized or treasury shares of the capital stock or any other security of
the Company, and there is no outstanding security of any kind convertible into
such capital stock.
3.4 Subsidiaries and Other Affiliates. The Company has
no subsidiaries or affiliates.
3.5 Articles of Incorporation and By-laws. The Company
has heretofore delivered to the Buyer true and complete copies of the Articles
of Incorporation and By-laws of the Company as in effect on the date hereof.
The minute books of the Company contain true and complete records of all
meetings and consents in lieu of meeting of the Board of Directors and of the
stockholders since incorporation and accurately reflect all transactions
referred to in such minutes and consents in lieu of meeting. The stock books
of the Company are true and complete.
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3.6 Balance Sheet. The unaudited balance sheet of the
Company (the "Balance Sheet") dated June 30, 1996 (the "Balance Sheet Date")
attached as Exhibit A to this Agreement, fairly presents the financial
condition of the Company as of June 30, 1996.
3.7 No Material Adverse Change. Since the Balance Sheet
Date, there has been no material adverse change in the assets, properties,
business, operations or condition (financial or otherwise) of the Company,
other than a continuation for the period since the Balance Sheet Date of the
operating losses reflected on the Balance Sheet, and neither the Company nor
any Seller knows of any such change that is threatened, nor has there been any
damage, destruction or loss materially adversely affecting the assets,
properties, business, operations or condition (financial or otherwise) of the
Company whether or not covered by insurance.
3.8 Tax Matters. Except as disclosed on Schedule 3.8,
the Company has paid all federal, state, county, local, foreign and other
taxes, including, without limitation, income taxes, estimated taxes, excise
taxes, sales taxes, use taxes, gross receipts taxes, franchise taxes,
employment and payroll related taxes, property taxes and import duties, whether
or not measured in whole or in part by net income (hereinafter, "Taxes" or,
individually, a "Tax") required to be paid by it through the date hereof, and
all deficiencies or other additions to tax, interest and penalties owed by it,
in connection with any such Taxes, and (ii) has filed all returns for Taxes
that it is required to file through the date hereof.
3.9 Compliance with Laws. Except as set forth on
Schedule 3.9, the Company is not in violation of any applicable order,
judgment, injunction, award or decree. Except as set forth on Schedule 3.9,
the Company is not in violation of any federal, state, local or foreign law,
ordinance or regulatory body, court or arbitrator applicable to the Company
Business (as defined in Section 8 below) which violation may have a material
adverse effect on the Company or the Company Business. Except as set forth on
Schedule 3.9, the Company has all licenses, permits, orders or approvals of any
federal, state, local or foreign governmental or regulatory body (collectively,
"Permits", which term shall not include copyrights) that are material to or
necessary for the conduct of the Company Business; such Permits are in full
force and effect; no violations are or have been recorded in respect of any
Permit; and no proceeding is pending or, to the knowledge of the Company or any
of the Sellers, threatened to revoke or limit any Permit.
3.10 No Breach. The execution, delivery and performance
of this Agreement and the consummation of the
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transactions contemplated hereby will not (i) violate any provision of the
Articles of Incorporation or By-laws of the Company; (ii) violate, conflict
with or result in the breach of any of the terms of, result in a material
modification of the effect of, otherwise give any other contracting party the
right to terminate, or constitute (or with notice or lapse of time or both
constitute) a default under, any contract or other agreement to which the
Company is a party or by or to which the Company or any of its assets or
properties may be bound or subject; (iii) violate any order, judgment,
injunction, award or decree of any court, arbitrator or governmental or
regulatory body against, or binding upon, the Company or upon the securities or
properties of the Company or the Company Business; (iv) violate any statute,
law or regulation of any jurisdiction as such statute, law or regulation
relates to the Company or the securities or properties of the Company or to the
Company Business; or (v) violate any Permit.
3.11 Actions and Proceedings. Except as set forth on
Schedule 3.11, there are no outstanding orders, judgments, injunctions, awards
or decrees of any court, governmental or regulatory body or arbitration
tribunal against or involving the Company or the Sellers. Except as set forth
on Schedule 3.11, there are no actions, suits or claims or legal,
administrative or arbitral proceedings or, to the knowledge of the Company or
any Seller, investigations pending or, to the knowledge of the Company or any
Seller, threatened against or involving the Company or any of its properties or
assets, that, individually or in the aggregate, could have a material adverse
effect upon the transactions contemplated hereby or upon the assets,
properties, business, operations, or condition (financial or otherwise) of the
Company. As set forth on Schedule 3.11, except for the Company's exposure to
suits to collect unpaid obligations, to the knowledge of the Company or any
Seller, there is no fact, event or circumstance that may give rise to any suit,
action, claim, investigation or proceeding that would be required to be set
forth on Schedule 3.11 if currently pending or threatened. There are no
actions, suits, claims or legal, administrative or arbitral proceedings pending
or, to the knowledge of the Company or any Seller, threatened that would give
rise to any right of indemnification on the part of any director or officer of
the Company, or the heirs, executors or administrators of such director or
officer, against the Company or any successor to the Company Business.
3.12 Contracts and Other Agreements; Consents. Schedule
3.12 sets forth all of the contracts and other agreements to which the Company
is a party or by or to which the Company or its assets or properties are bound
or subject which are deemed to be material by the Company to the Company
Business. All of such contracts and other agreements are valid, subsisting,
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<PAGE> 5
in full force and effect and binding upon the parties in accordance with their
terms. Except as separately identified on Schedule 3.12, the Company is not a
party to or bound by an contract or other agreement (i) under which the Company
or the other party thereto, to the knowledge of the Company, is in material
default, or (ii) that either individually or in the aggregate materially
adversely affects its assets, properties, business, operations or condition
(financial or otherwise), or that was entered into other than in the ordinary
course of business. Except as separately identified on Schedule 3.12, no
approval or consent of any person is needed in order that the contracts and
other agreements set forth on Schedule 3.12 or on any other Schedule continue
in full force and effect following the consummation of the transactions
contemplated by this Agreement.
3.13 Real Estate. Except as specified in this Section
3.13, the Company is party to no lease, sublease or other agreements under
which the Company is bound or contractual obligations on its part to purchase
or acquire any interest in real property. The only lease of real property to
which the Company is a party is the lease of its office premises at 536
Whitfield Street, Guilford, Connecticut, a copy of which has been supplied to
Buyer. Such leases, subleases and other agreements are in full force and
effect and the Company has not received any notice of any default thereunder.
The leasehold interests of the Company are subject to no lien or other
encumbrance and enjoy a right of quiet possession as against any lien or other
encumbrance on the property.
3.14 Accounts and Notes Receivable. The Company has no
accounts or notes receivable.
3.15 Inventory. The Company has no inventory.
3.16 Tangible Property. The only items of tangible
property used by the Company are computers, office furniture and supplies, all
of which are listed on Schedule 3.16. The items listed on Schedule 3.16 as
"borrowed" have been loaned to the Company by its shareholders without charge.
None of the items listed on Schedule 3.16 held under lease. The physical
condition of such property is adequate for the continued conduct of the Company
Business.
3.17 Intangible Property. The Company owns no registered
patents, trademarks, service marks, trade names or franchises, has not
completed and filed any applications for any of the foregoing, and owns no
permits or licenses of any of the foregoing.
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3.18 Liens. Except for liens arising under statute as
security for unpaid judgments, the Company owns outright and has good and
marketable title to all assets and properties owned by it, including, without
limitation, all of the assets and properties reflected on the Balance Sheet, in
each case free and clear of any lien or other encumbrance.
3.19 Accounts Payable. Schedule 3.19 sets forth a true
and correct aged list of all accounts payable of the Company as of July 29,
1996.
3.20 Liabilities. As at the Balance Sheet Date, the
Company had no direct or indirect indebtedness, liability, claim, loss, damage,
deficiency, obligation or responsibility, known or unknown, fixed or unfixed,
choate or inchoate, liquidated or unliquidated, secured or unsecured, accrued,
absolute, contingent or otherwise, including, without limitation, liabilities
on account of Taxes, other governmental charges or lawsuits brought, whether or
not of a kind required by generally accepted accounting principles to be set
forth on a financial statement ("Liabilities"), that were not fully and
adequately reflected or reserved against on the Balance Sheet, other than
fines, penalties and interest charges related to the late payment or
non-payment of Taxes. Except as set forth on Schedule 3.20, the Company has no
Liabilities, other than (i) Liabilities fully and adequately reflected or
reserved against on the Balance Sheet, (ii) Liabilities incurred since the
Balance Sheet Date in the ordinary course of business, and (iii) possible
liabilities for attorneys' fees, court costs and interest on judgments for
unpaid amounts owed by the Company. Neither the Company nor any Seller has any
knowledge of any circumstance, condition, event or arrangement that may
hereafter give rise to any Liabilities of the Company or any successor to their
business except in the ordinary course of business or as otherwise set forth on
Schedule 3.20.
3.21 Suppliers and Customers. The Company has no
suppliers or any customer other than Blizzard Entertainment.
3.22 Employee Benefit Plans. The Company has no pension,
profit sharing, retirement, deferred compensation, stock purchase, stock
option, incentive, bonus, vacation, severance, disability, hospitalization,
medical insurance, life insurance and other employee benefit plans, programs or
arrangements, maintained by the Company or under which the Company in respect
of, or which otherwise cover, any of the current or former officers or
employees of the Company or their beneficiaries.
3.23 Employee Relations. The Company has two employees,
in addition to the Sellers. The Company has not, nor, to the knowledge of the
Company or any Seller, is there now
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threatened, work stoppage, work slowdown, or other labor trouble that had or
may have a material adverse effect on the assets, properties, business,
operations or condition (financial or otherwise) of the Company. The Company
has not made a commitment or agreement to increase the compensation or to
modify the conditions or terms of employment of any employee.
3.24 Insurance. The Company carries no insurance of any
kind.
3.25 Company Products. The Company neither manufactures
nor markets nor distributes any tangible products.
3.26 Operations of the Company. Except as set forth on
Schedule 3.26, since the Balance Sheet Date the Company has not:
(i) declared or paid any dividends or
declared or made any other distributions of any kind to its shareholders, or
made any direct or indirect redemption, retirement, purchase or other
acquisition of any shares of its capital stock;
(ii) made any change in its accounting
methods or practices;
(iii) materially changed any of its business
policies;
(iv) made any wage or salary increase or
bonus, or increase in any other direct or indirect compensation, for or to any
of its officers, directors, employees, consultants, agents or other
representatives, or any accrual for or commitment or agreement to make or pay
the same;
(v) made any loan or advance to any of its
shareholders, officers, directors, employees, consultants, agents or other
representatives;
(vi) made any payment or commitment to pay
any severance or termination pay to any of its officers, directors, employees,
consultants, agents or other representatives;
(vii) except in the ordinary course of
business, and in the case of liens, as stated in Section 3.18: entered into
any lease (as Lessor or lessee); disposed of or granted or suffered any lien or
other encumbrance on any of its assets or properties; entered into or amended
any contract or other agreement to which it is a party, or by or to which it or
its assets or properties are bound or subject, or pursuant to which it agrees
to indemnify any party or to refrain from competing with any party;
-7-
<PAGE> 8
(viii) except for any advances made by the
Buyer and accounts payable for rent, utilities, taxes and salaries in the
ordinary course of business, and the fees and disbursements of Sullivan &
Worcester LLP for services in connection with the negotiation, drafting and
closing under this Agreement, incurred or assumed any indebtedness for borrowed
money, debt, obligation or liability;
(ix) made any acquisition of all or any part
of the assets, properties, capital stock or business of any other person out of
the ordinary course of business;
(x) suffered or incurred any damage,
destruction or loss materially adversely affecting the assets, properties,
business, operations or condition (financial or otherwise) of the Company;
(xi) made any change in the types, nature,
composition or quality of its products which could have a material effect on
the business or condition (financial or otherwise) of the Company;
(xii) terminated or failed to renew, or
received any written threat to terminate or fail to renew, any contract or
other agreement that is or was material to the assets, properties, business,
operations or condition (financial or otherwise) of the Company; or
(xiii) except in the ordinary course of
business, entered into any other material contract or other agreement or other
material transaction.
3.27 Section 341(f) of Internal Revenue Code. The
Company has not at any time consented under section 341(f)(1) of the Code to
have the provisions of section 341(f)(2) of the Code apply to any sale of its
stock.
4. Representations and Warranties of Each Seller Severally. Each
Seller, severally and not jointly, represents and warrants to the Buyer as
follows:
4.1 Title to Shares. Such Seller owns beneficially and
of record, free and clear of any lien or other encumbrance, or owns of record
and has full power and authority to convey free and clear of any lien or other
encumbrance, the Shares purported to be sold by such Seller under Section 1.1
of this Agreement and, upon delivery of and payment for such Shares as herein
provided, the Buyer will acquire good and valid title thereto, free and clear
of any lien or other encumbrance.
-8-
<PAGE> 9
4.2 Authority to Execute and Perform Agreements. Such
Seller has the full legal right and power and all authority and approval
required to enter into, execute and deliver this Agreement and to perform fully
such Seller's obligations hereunder. This Agreement has been duly executed
and delivered and is the valid and binding obligation of such Seller
enforceable in accordance with its terms. The execution and delivery of this
Agreement, the consummation of the transactions contemplated hereby and the
performance by such Seller of this Agreement in accordance with its respective
terms and conditions will not (i) require the approval or consent of any
governmental or regulatory body or the approval or consent of any other person;
(ii) conflict with or result in any breach or violation of any of the terms and
conditions of, or constitute a default under, any statute, regulation, order,
judgment or decree applicable to such Seller or to the Shares held by such
Seller, or any instrument, contract or other agreement to which such Seller is
a party or by or to which such Seller is or the Shares held by such Seller are
bound or subject; (iii) result in the creation of any lien or other encumbrance
on the Shares held by such Seller. Such Seller has delivered to the Buyer true
and complete copies of all shareholder agreements relating to the Shares.
4.3 Delivery of Buyer Information. Such Seller
acknowledges that the Buyer has delivered to such Seller a copy of the Buyer's
Annual Report on Form 10-K for the year ended December 31, 1995, Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996, and Proxy Statement
in connection with the Annual Meeting of Shareholders of the Buyer held on June
18, 1996 (such documents constituting the "Financial Information").
5. Representations and Warranties of the Buyer. The Buyer
represents and warrants to the Sellers as follows:
5.1 Due Incorporation. The Buyer is duly organized,
validly existing and in good standing under the laws of the State of New York,
and has the corporate power and lawful authority to own, lease and operate its
assets, properties and business and to carry on its business as now being and
as heretofore conducted.
5.2 Corporate Power and Authority of the Buyer. The
Buyer has the full legal right and power and all authority and approval
required to enter into, execute and deliver this Agreement and to perform fully
its obligations under this Agreement. This Agreement has been duly executed
and delivered, and is the valid and binding obligation of the Buyer enforceable
in accordance with its terms. The execution and delivery of this Agreement,
the consummation of the transactions contemplated hereby, and the performance
by the Buyer of this Agreement in accordance with its respective terms and
conditions will not (i) require the approval or consent of any governmental or
regulatory
-9-
<PAGE> 10
body or the approval or consent of any other person or (ii) conflict with or
result in any breach of default under, the Articles of Incorporation or Bylaws
of the Buyer, or any statute, regulation, order, judgment or decree applicable
to the Buyer or any instrument, contract or other agreement to which Buyer is a
party or by which the Buyer is bound or subject.
5.3 Purchase for Investment. The Buyer acknowledges
that the Shares are not registered under the Securities Act or registered or
qualified under applicable state securities laws and the Buyer is purchasing
the Shares for investment and not for resale or distribution.
5.4 Buyer's Financial Information. The financial
statements included in the Financial Information fairly present the
consolidated financial condition and consolidated results of operations of
Buyer and Buyer's subsidiaries as of the dates and for the periods covered
thereby (subject in the case of interim reports for the first quarter of 1996,
to year-end adjustments consisting only of normal recurring accruals and
customary notes) in accordance with generally accepted accounting principles
applied in a manner consistent with the principles applied during Buyer's
fiscal year ended December 31, 1995.
6. Conditions precedent to the Obligation of the Buyer to Close.
The obligation of the Buyer to enter into and complete the Closing is subject,
at the option of Buyer, to the fulfillment on or prior to the Closing Date of
the following conditions, any one or more of which may be waived by it:
6.1 Representations and Covenants. The representations
and warranties of the Sellers contained in this Agreement shall be true and
correct in all material respects.
6.2 Permits, Approvals and Consents. All Permits and
consents and approvals from parties to contracts or other agreements with the
Company or with any Seller that may be required in connection with the
performance by either Seller of his obligations under this Agreement or the
continuance of such contracts or other agreements and required for the lawful
consummation of the Closing shall have been obtained.
6.3 Satisfactory Due Diligence. The Buyer shall have
satisfied itself, after receipt and consideration of the Schedules and after
the Buyer and its representatives have completed the business and legal review
of the Company Business contemplated by this Agreement, that none of the
information revealed thereby has resulted in, or in the reasonable opinion of
the Buyer may result in, a materially adverse change in the assets, properties,
business of condition (financial or otherwise) of the Company.
-10-
<PAGE> 11
6.4 Resignations of Officers and Directors. The Buyer
shall have received the resignation, dated the Closing Date, of each officer
and director of the Company.
6.5 Litigation. No action, suit or proceeding shall
have been instituted before any court or governmental or regulatory body, or
instituted or threatened by any governmental or regulatory body, to restrain,
modify or prevent the carrying out of the transactions contemplated hereby, or
to seek damages or a discovery order in connection with such transactions, or
that has or may have, in the opinion of the Buyer, a materially adverse effect
on the assets, properties, business, operations or conditions (financial or
otherwise) of the Company.
6.6 Delivery of Stock Certificates; Transfer Taxes. The
Sellers shall have delivered to the Buyer on the Closing Date stock
certificates representing all of the Shares duly endorsed in blank or
accompanied by stock powers duly executed in blank, in proper form for
transfer. Each Seller shall have paid, or caused to be paid, all stock
transfer and other taxes required to be paid in connection with the sale and
delivery to the Buyer of the Shares owned by such Seller.
6.7 Employment Agreements. Simultaneously with the
Closing, the Company, the Buyer and each of the Key Employees (as defined in
Section 8) shall enter into Employment Agreements with the Company in the form
of Exhibit B.
6.8 Stock Option Agreements. Simultaneously with the
Closing, the Buyer and each of the Key Employees shall enter into Stock Option
Agreements with the Company in the form of Exhibit C.
7. Conditions Precedent to the Obligation of the Sellers to
Close. The obligation of the Sellers to enter into and complete the Closing is
subject, at the option of the Sellers acting in accordance with the provisions
of this Agreement with respect to termination hereof, to the fulfillment of the
following conditions, any one or more of which may be waived by them:
7.1 Representations and Covenants. The representations
and warranties of the Buyer contained in this Agreement shall be true and
correct in all material respects.
7.2 Litigation. No action, suit or proceeding shall
have been instituted before any court or governmental or regulatory body, or
instituted or threatened by any governmental or regulatory body, to restrain,
modify or prevent the carrying out of the transactions contemplated hereby, or
to seek damages or a discovery order in connection with such transaction.
-11-
<PAGE> 12
7.3 Employment Agreements. Simultaneously with the
Closing, the Company, the Buyer and each of the Key Employees shall enter into
Employment Agreements with the Company in the form of Exhibit B.
7.4 Stock Option Agreements. Simultaneously with the
Closing, the Buyer shall enter into Stock Option Agreements with each of the
Key Employees in the form of Exhibit B.
8. Covenants of Sellers.
8.1 Covenants Against Competition. Andrew Sispoidis and
Peter Sispoidis (the "Key Employees") each acknowledges that (i) the Company is
engaged in the business of developing software for games for use on various
home entertainment systems, including without limitation, video, personal
computers and home console entertainment systems (the "Company Business"),
(ii) he is one of the limited number of persons who developed such business;
(iii) the Company Business is conducted in the United States; (iv) his work for
the Company has given him and will continue to give him access to trade secrets
of and confidential information concerning the Company; (v) the agreements and
covenants contained in this Section 8 are essentially to protect the business
and goodwill purchased by the Buyer; and (vi) the Buyer would not purchase the
Shares but for such agreements and covenants. Accordingly, each covenants and
agrees, with respect to himself, as follows:
8.1.1 Non-Compete. During the term of the Key
Employee's employment with the Company or any of its affiliates and for a
period of one year following the termination, for cause or otherwise, of the
Key Employee's employment with the Company (the "Restricted Period"), the Key
Employee shall not in the United States, or, any political subdivision thereof,
or any other location where the Company is engaged in the Company Business,
directly or indirectly, (i) engage in the Company Business for the Key
Employee's own account; (ii) enter the employ of, or render any services to,
any person engaged in a business which competes with the Company Business or
(iii) become interested in any such person in any capacity, including, without
limitation, as an individual, partner, shareholder, officer, director,
principal, agent, trustee or consultant; provided, however, the Key Employee
may own, directly or indirectly, solely as an investment, securities of any
person traded on any national securities exchange if the Key Employee is not a
controlling person of, or a member of a group which controls, such person and
does not, directly or indirectly, own 5% or more of any class of securities of
such person.
-12-
<PAGE> 13
8.1.2 Confidential Information; Personal
Relationships. During and after the Restricted Period, the Key Employee shall
keep secret and retain in strictest confidence, and shall not use for the
benefit of himself or others, all confidential matters of the Company and other
affiliates, including, without limitation, "know-how," trade secrets, customer
lists, details of client or consultant contracts, pricing policies, operational
methods, marketing plans or strategies, product development techniques or
plans, business acquisition plans, new personnel acquisition plans, methods of
manufacture, technical processes, designs and design projects, inventions and
research projects of the Company or other affiliates learned by the Key
Employee heretofore or hereafter, other than information which is now, or
hereafter becomes, publicly known without any breach by either Employee of the
provisions of this Section 8.1.2; nor may the Key Employee exploit for his own
benefit or the benefit of others personal relationships with customers or
suppliers of the Company formed heretofore or hereafter in competition with the
Company or any affiliate of the Company.
8.1.3 Property of the Company. All memoranda,
notes, lists, records and other documents or papers (and all copies thereof),
including such items stored in computer memories, on microfiche or by any other
means, made or compiled by or on behalf of the Key Employee, or made available
to the Key Employee relating to the Company or other affiliates, are and shall
be the Company's property and shall be delivered to the Company promptly upon
the termination of the Key Employees employment with the Company or other
affiliates or at any other time on request.
8.1.4 Employees and Consultants of the
Company. During the Restricted Period, the Key Employee shall not, directly or
indirectly, hire or solicit any employee or any consultant of the Company or
other affiliates or encourage any such employee or consultant to leave such
employment or terminate such consulting agreement, respectively.
8.2 Rights and Remedies Upon Breach. If the Key
Employee breaches, or threatens to commit a breach of, any of the provisions of
Section 8.1 (the "Restrictive Covenants"), the Company shall have the following
rights and remedies, each of which rights and remedies shall be independent of
the others and severally enforceable, and each of which is in addition to, and
not in lieu of, any other rights and remedies available to the Company under
law or in equity:
8.2.1 Specific Performance. The right and
remedy to have the Restrictive Covenants specifically enforced by any court of
competent jurisdiction, it being agreed that any
-13-
<PAGE> 14
breach or threatened breach of the Restrictive Covenants would cause
irreparable injury to the Company and that money damages would not provide an
adequate remedy to the Company.
8.2.2 Accounting. The right and remedy to
require the Key Employee to account for and pay over to the Company, as the
case may be, all compensation, profits, monies, accruals, increments or other
benefits derived or received by the Key Employee as the result of any
transactions constituting a breach of the Restrictive Covenants.
8.3 Severability of Covenants. Each Key Employee
acknowledges and agrees that the Restrictive Covenants are reasonable and valid
in geographical and temporal scope and in all other respects. If any court
determines that any of the Restrictive Covenants, or any part thereof, is
invalid or unenforceable, the remainder of the Restrictive Covenants shall not
thereby be affected and shall be given full effect, without regard to the
invalid portions.
8.4 Blue-Pencilling. If any court determines that any
of the Restrictive Covenants, or any part thereof, is unenforceable because of
the duration or geographic scope of such provision, such court shall have the
power to reduce the duration or scope of such provision, as the case may be,
and, in its reduced form, such provision shall then be enforceable.
8.5 Outstanding Liabilities. In the event that the
Liabilities of the Company as of the Closing Date (whether billed or not as of
the Closing Date) exceed an aggregate amount of $90,000 (which $90,000 amount
shall include the $25,000 advance made by the Buyer to the Company prior to
Closing) (the "Permitted Liabilities"), the Sellers jointly and severally agree
to pay such Liabilities to the extent and in the amount that such Liabilities
exceed, whether individually or in the aggregate, the Permitted Liabilities.
Payment of the Liabilities by the Sellers shall be made to the respective
parties to whom such Liabilities are owed or, in the event that such
Liabilities are repaid by the Buyer, to the Buyer pursuant to Section 10.1.
9. Survival of Representations and Warranties of the Sellers.
Notwithstanding any right of the Buyer fully to investigate the affairs of the
Company and notwithstanding any knowledge of facts determined or determinable
by the Buyer pursuant to such investigation or right of investigation, the
Buyer has the right to rely fully upon the representations, warranties,
covenants and agreements of the Sellers and of each Seller contained in this
Agreement. All such representation, warranties, covenants and agreements shall
survive the execution and delivery hereof and the Closing hereunder for a
period of twelve (12) months after the Closing.
-14-
<PAGE> 15
10. Indemnification.
10.1 Obligation of the Sellers to Indemnify. The Sellers
jointly and severally agree to indemnify, defend and hold harmless the Buyer
(and its directors, officers, employees, affiliates and assigns) from and
against all losses, liabilities, damages, deficiencies, costs or expenses
(including interest, penalties and reasonable attorneys' fees and
disbursements) ("Losses") based upon, arising out of or otherwise in respect of
any inaccuracy in or any breach of any representation, warranty, covenant or
agreement of the Sellers contained in this Agreement or in any document or
other papers delivered pursuant to Sections 3 or 6. The Sellers also jointly
and severally agree to indemnify and hold harmless the Buyer (and its
directors, officers, employees, affiliates and assigns) payments made by the
Buyer in respect of Liabilities of the Company which exceed Permitted
Liabilities (as referred to in Section 8.5), including, without limitation,
damages, deficiencies, costs or expenses (including interest, penalties and
reasonable attorneys' fees and disbursements). The obligation to indemnify set
forth in this Section 10.1 are hereinafter referred to as the "Joint
Obligation." Each Seller agrees to indemnify, defend and hold harmless the
Buyer (and its directors, officers, employees, affiliates and assigns) from and
against any Losses based upon, arising out of or otherwise in respect of any
inaccuracy in or any breach of any representation, warranty, covenant or
agreement of such Seller contained in Section 4.1 or 4.2 or in any document or
other papers delivered pursuant to Sections 4.1, 4.2 or 6 (the "Individual
Obligation").
10.2 Obligation of the Buyer to Indemnify. The Buyer
agrees to indemnify, defend and hold harmless the Sellers from and against any
Losses based upon, arising out of or otherwise in respect of any inaccuracy in
or breach of any representation, warranty, covenant or agreement of the Buyer
contained in Section 5 or in any document of other papers delivered pursuant to
Section 5 or 7.
11. Miscellaneous.
11.1 Certain Definitions. As used in this Agreement, the
following terms have the following meanings unless the context otherwise
requires:
(i) "affiliate" with respect to any person
at any time, means any other person which at such time is controlling,
controlled by or under common control with such person.
(ii) "contracts and other agreements" means
all contracts, agreements, indentures, notes, bonds, loans,
-15-
<PAGE> 16
instruments, leases, mortgages, franchises, licenses or other binding
arrangements.
(iii) "document or other papers" means any
document, agreement, instrument, certificate, notice, consent, affidavit,
letter, telegram, telex, statement, schedule (including any Schedule to this
Agreement), exhibit (including any Exhibit to this Agreement) or any other
paper whatsoever.
(iv) "governmental or regulatory body" means
any government or political subdivision thereof, whether federal, state, local
or foreign, or any agency or instrumentality of any such government or
political subdivision.
(v) "lien or other encumbrance" means any
lien, pledge, mortgage, security interest, claim, lease, charge, option, right
of first refusal, easement, servitude, transfer restriction under any
shareholder or similar agreement, encumbrance or any other restriction or
limitation whatsoever.
(vi) "person" means any individual,
corporation, partnership, firm, joint venture, association, joint-stock
company, trust, unincorporated organization, governmental or regulatory body or
other entity.
(vii) "property" means real, personal or mixed
property, tangible or intangible.
11.2 Knowledge. As used in this Agreement, the term
"knowledge," with respect to the Company or the Buyer, means the actual
knowledge of its officers, directors or shareholders and, with respect to the
Sellers, means the actual knowledge of any of the Sellers.
11.3 Notices. Any notice or other communication required
or permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered, or express mail, postage prepaid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission or, if mailed, on the date on which received or on which delivery
is refused, as follows:
(i) if to the Buyer, to:
TH-Q, Inc.
5016 North Parkway Calabasas
Calabasas, California 91302
Attention: Brian J. Farrell
with a copy to:
Sidley & Austin
-16-
<PAGE> 17
555 West Fifth Street, 40th Floor
Los Angeles, California 90013
Attention: Sherwin J. Samuels, Esq.
(ii) if to the Sellers, to:
Heliotrope Studios, Inc.
530 Whitfield Street
Guilford, Connecticut 06437
Attention: Andrew G. Sispoidis
with a copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02108
Attention: Thomas E. Weesner, Esq.
Any party may by notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
11.4 Entire Agreement. This Agreement
(including the Schedules) and the collateral agreements executed in connection
with the consummation of the transactions contemplated herein contain the
entire agreement among the parties with respect to the purchase of the Shares
and related transactions, and supersedes all prior agreements, written or oral,
with respect thereto.
11.5 Waivers and Amendments; Non-Contractual
Remedies; Preservation of Remedies. This Agreement may be amended, superseded,
cancelled, renewed or extended, and the terms hereof may be waived, only by a
written instrument signed by the parties or, in the case of a waiver, by the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof. Nor
shall any waiver on the part of any party of any such right, power or
privilege, nor any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege. The rights and remedies herein provided are
cumulative and are not exclusive of any rights or remedies that any party may
otherwise have at law or in equity. The rights and remedies of any party based
upon, arising out of or otherwise in respect of any inaccuracy in or breach of
any representation, warranty, covenant or agreement contained in this Agreement
shall in no way be limited by the fact that the act, omission, occurrence or
other state of facts upon which any claim of any such inaccuracy or breach is
based may also be the subject matter of any other representation, warranty,
covenant or agreement contained in this agreement (or in any other agreement
between the parties) as to which there is no inaccuracy or breach.
-17-
<PAGE> 18
11.6 Governing Law. This Agreement shall be
governed and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed entirely within such State
(without regard to any conflicts of law provisions hereof). By its execution
and delivery of this Agreement, Buyer and each Seller agrees that any action,
suit or proceeding against it arising out of or by reason of this Agreement,
the Employment Agreement, the Option Agreements or the transaction contemplated
by any of them may be brought in any state or federal court of competent
jurisdiction sitting in the Borough of Manhattan in the City, county and State
of New York, in addition to any other court in which such action, suit or
proceeding might have been brought, agrees that process may be served in any
such action, suit or proceeding in any manner provided by the rules of such
court, and without limitation by delivering a copy thereof by registered or
certified mail, return receipt requested, postage prepaid, to such party at its
or his address for notices provided for herein, and agrees to be bound by the
judgment of such court, in any such action, suit or proceeding.
11.7 Binding Effect; Third Party
Beneficiaries. This Agreement shall be binding upon and inure to the sole
benefit of the parties to this Agreement and their respective successors and no
other party shall have any right, priority or benefit under this Agreement.
11.8 Variations in Pronouns. All pronouns
and any variations thereof refer to the masculine, feminine or neuter, singular
or plural, as the context may require.
11.9 Counterparts. This Agreement may be
executed by the parties hereto in separate counterparts, each of which when so
executed and delivered shall be an original, but all such counterparts shall
together constitute one and the same instrument. Each counterpart may consist
of a number of copies hereof each signed by less than all, but together signed
by all of the parties hereto.
11.10 Exhibits and Schedules. The Exhibits
and Schedules are a part of this Agreement as if fully set forth herein. All
references herein to Sections, subsections, clauses, Exhibits and Schedules
shall be deemed references to such parts of this Agreement, unless the context
shall otherwise require.
11.11 Headings. The headings in this
Agreement are for reference only, and shall not affect the interpretation of
this Agreement.
-18-
<PAGE> 19
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
BUYER: TH-Q, Inc.
/s/ Brian J. Farrell
-----------------------------------
Name: Brian J. Farrell
Title: President
SELLERS: Andrew G. Sispoidis
/s/ Andrew G. Sispoidis
-----------------------------------
Peter G. Sispoidis
/s/ Peter G. Sispoidis
-----------------------------------
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS FOUND IN THE FORM 10Q, AS FILED WITH THE
SECURITIES EXCHANGE COMMISSION ON NOVEMBER 12, 1996.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,044,000
<SECURITIES> 0
<RECEIVABLES> 13,657,000
<ALLOWANCES> 1,310,000
<INVENTORY> 2,032,000
<CURRENT-ASSETS> 18,783,000
<PP&E> 1,178,000
<DEPRECIATION> 569,000
<TOTAL-ASSETS> 20,193,000
<CURRENT-LIABILITIES> 10,580,000
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 9,610,000
<TOTAL-LIABILITY-AND-EQUITY> 20,193,000
<SALES> 29,772,000
<TOTAL-REVENUES> 29,772,000
<CGS> 16,783,000
<TOTAL-COSTS> 16,783,000
<OTHER-EXPENSES> 11,883,000
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 215,000
<INCOME-PRETAX> 891,000
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 887,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 887,000
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
