<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 June 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
T-HQ, 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: 4,531,594 shares (as of August 8, 1996).
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T-HQ, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
for the Three and Six Months Ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
for the Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
- ---------------------------
Item 4, Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
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Part I - Financial Information
Item 1. Financial Statements.
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------------- -----------------
(unaudited)
ASSETS
------
<S> <C> <C>
Current assets:
Cash $ 2,700,000 $ 1,895,000
Accounts receivable - net 9,889,000 9,362,000
Inventory 892,000 1,150,000
Prepaid and deferred royalties 1,494,000 1,776,000
Capitalized development costs 2,296,000 2,037,000
Income tax refund receivable 27,000 27,000
Prepaid expenses and other current assets 361,000 153,000
----------------- -----------------
Total current assets 17,659,000 16,400,000
Equipment - net 535,000 516,000
----------------- -----------------
TOTAL ASSETS $ 18,194,000 $ 16,916,000
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 4,493,000 $ 4,707,000
Accrued royalties 2,977,000 1,752,000
Accrued returns and allowances 2,731,000 2,859,000
----------------- -----------------
Total current liabilities 10,201,000 9,318,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, par value $.01, 5,000 shares authorized; 0 shares
and 325 shares issued and outstanding as of June 30,
1996 and December 31, 1995, respectively
Common stock, par value $.0001, 100,000,000 shares authorized; 4,433,100
shares and 4,217,391 shares issued and outstanding as
of June 30, 1996 and December 31, 1995, respectively 4,000 4,000
Additional paid-in capital 33,503,000 33,317,000
Cumulative foreign currency translation adjustment (386,000) (360,000)
Accumulated deficit (25,128,000) (25,363,000)
----------------- -----------------
Total shareholders' equity 7,993,000 7,598,000
================= =================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,194,000 $ 16,916,000
================= =================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ------------------------------------
1996 1995 1996 1995
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 12,087,000 $ 6,855,000 $ 18,670,000 $ 11,183,000
-------------- -------------- --------------- ---------------
Costs and expenses:
Cost of sales 7,290,000 3,825,000 11,046,000 6,266,000
Royalties 1,842,000 756,000 3,039,000 1,366,000
Product development 326,000 150,000 541,000 287,000
Project abandonment 125,000 125,000 250,000 250,000
Selling 780,000 612,000 1,317,000 1,024,000
General and administrative 923,000 909,000 1,765,000 1,722,000
Operating interest 221,000 152,000 318,000 351,000
-------------- -------------- --------------- ---------------
Total costs and expenses 11,507,000 6,529,000 18,276,000 11,266,000
-------------- -------------- --------------- ---------------
Operating income (loss) 580,000 326,000 394,000 (83,000)
Interest expense, net (84,000) (45,000) (155,000) (67,000)
-------------- -------------- --------------- ---------------
Income (loss) before income taxes 496,000 281,000 239,000 (150,000)
Provision for income taxes 0 0 4,000 0
-------------- -------------- --------------- ---------------
Net income (loss) $ 496,000 $ 281,000 $ 235,000 $ (150,000)
============== ============== =============== ===============
Primary earnings (loss) per share $ 0.10 $ 0.10 $ 0.05 $ (0.05)
============== ============== =============== ===============
Shares used in per share calculation 4,731,000 2,866,000 4,530,000 2,850,000
============== ============== =============== ===============
</TABLE>
See notes to consolidated financial statements.
4
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T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 235,000 $ (150,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 116,000 128,000
Provision for doubtful accounts, discounts and returns 2,118,000 657,000
Changes in operating assets and liabilities:
Accounts receivable (466,000) 1,087,000
Inventory and inventory deposits 258,000 596,000
Prepaid and deferred royalties and
capitalized development costs 1,411,000 (488,000)
Prepaid expenses and other current assets (226,000) 2,000
Accounts payable and accrued expenses (196,000) (944,000)
Accrued royalties (163,000) (359,000)
Accrued returns and allowances (2,298,000) (2,493,000)
-------------- -------------
Net cash provided by (used in) operating activities 789,000 (1,964,000)
Cash flows used in investing activities:
Acquisition of equipment (134,000) (58,000)
-------------- -------------
Cash flows from financing activities:
Proceeds from exercise of options and warrants 185,000 0
-------------- -------------
Effect of exchange rate changes on cash (35,000) 55,000
-------------- -------------
Net increase (decrease) in cash 805,000 (1,967,000)
Cash - beginning of period 1,895,000 2,807,000
-------------- -------------
Cash - end of period $ 2,700,000 $ 840,000
============== =============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 3,700 $ 0
============== =============
Cash paid during the period for interest $ 178,000 $ 117,000
============== =============
</TABLE>
Non-cash Transactions:
During the first quarter of 1995 a reclassification of approximately
$1,000,000 reducing both accrued returns and allowances and inventory to adjust
to the net realizable value of the XBAND Modem inventory to reflect 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.
See notes to consolidated financial statements.
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T-HQ, 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 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 six months ended June 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 (loss) per share has been computed using
the weighted average number of common shares and common share equivalents (which
consists 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.
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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. There were no open letters of credit under
the BNY agreement at June 30, 1996.
On July 18, 1996, the Company terminated its factoring and credit
agreement with BNY and entered into a new financing and banking arrangement with
Imperial Bank ("Imperial Agreement"). The Imperial Agreement permits the Company
to draw down working capital advances and open letters of credit in amounts
determined by a formula based on 70% of eligible accounts receivable and 50% of
eligible inventory. The amount of eligible inventory in the formula may not
exceed $1,500,000. The facility provides for maximum borrowings of $7,500,000,
with advances bearing interest at the bank's prime rate plus 1.25%. The Company
has granted Imperial Bank a security interest in its domestic accounts
receivable and inventories. The agreement expires on June 30, 1997.
The Imperial Agreement contains covenants that include, among other
things, restrictions on additional borrowings, payment of dividends, and capital
expenditures. The Company must also maintain a current ratio, defined as current
assets divided by current liabilities, of not less than 1.5 to 1, and maintain
profitable operations on a fiscal year basis. Additionally, the Company is
required to maintain a minimum tangible net worth of $5,900,000 and minimum
working capital of $5,000,000.
The Company also has lines of credit with two additional lenders
pursuant to which such lenders have agreed to issue letters of credit on the
Company's behalf to Sony, Nintendo, and Sega for the purchase of software for
the Company's domestic and European operations. The domestic and European lines
are $5,000,000 and $2,500,000, respectively. Each of these lenders receives a
fee for the issuance of such letters of credit, and each lender retains title to
the inventory financed by such lender until such time as that inventory is sold
to the customer. 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 $2,594,000 at June 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 $482,000 as of June 30, 1996.
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Accounts receivable are due primarily from domestic and foreign
retailers and distributors, including mass merchants and specialty stores.
Accounts receivable at June 30, 1996 and December 31, 1995 are composed of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------------- -----------------
<S> <C> <C>
Receivables assigned to factor $ 5,155,000 $ 7,348,000
Advances from factor (2,909,000) (2,085,000)
----------------- -----------------
Due from factor 2,246,000 5,263,000
Unfactored accounts receivable 4,654,000 0
Other accounts receivable, primarily foreign 4,455,000 5,739,000
Other receivables 90,000 51,000
Allowance for foreign doubtful accounts (1,317,000) (1,380,000)
Allowance for foreign discounts and returns (238,000) (311,000)
----------------- -----------------
Accounts receivable - net $ 9,889,000 $ 9,362,000
================= =================
</TABLE>
3. SUBSEQUENT EVENTS.
On July 1, 1996, the Company acquired a twenty-five percent interest in
Inland Productions, Inc., a software developer for "next generation" home
entertainment game systems, including Nintendo 64, Sony PlayStation and Sega
Saturn. The investment consisted of $300,000 in cash and 52,660 shares of T-HQ
common stock.
On August 7, 1996, the Company acquired the business and assets of
Heliotrope Studios, Inc. ("Heliotrope"), an interactive software developer for
PC CD-ROM for consideration of approximately $100,000. In connection with the
acquisition, the Company assumed certain liabilities of Heliotrope and acquired
an assignment of the distribution license and certain work- in-progress for a PC
CD-ROM title Pax Imperia II from Blizzard Entertainment, a division of Davidson
Associates.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
T-HQ, Inc. (the "Company") develops and publishes 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 six months ended June 30,
1996, sales of Nintendo Software constituted 78% of the Company's sales, Sega
Software sales were 16%, and the remaining 6% were derived from sales of Sony
PlayStation Software products. As is typical in the Software industry, the
Company depends on the introduction of new products or sequels to replace
declining revenues from older products. In order to maintain or grow its current
revenue levels, the Company believes it will be necessary to develop or obtain
rights to new products 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- 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 Productions,
Inc. in which T-HQ has a 25% equity interest. The Company has also entered into
license agreements with Electronic Arts, Inc. ("Electronic Arts") whereby T-HQ
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. Several hardware manufacturers
have introduced new and advanced systems using 32-bit and 64-bit technology,
such as Sony and Sega. Nintendo has announced that it will launch a 64-bit
system in the United States in September 1996. T-HQ 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- and 64-bit platforms that
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<PAGE> 10
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.
The Company's business cycle generally commences with the securing of a
license or a product concept. Such licenses typically require an advance payment
to the licensor, in addition to a guarantee of future royalties to be received
by the licensor. After the license and/or product concept has been secured, the
Company commences development of the Software.
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 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 U.S. operations, or in the
United Kingdom for European operations.
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 44% of gross sales in the six months ended June 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 from period to period due to a
variety of factors. Profit margins can vary within the same platform based on
the size of the memory chip used for a particular Software product. As Software
has grown more complex, the trend in the interactive entertainment industry has
been to utilize these higher cost/higher memory chips in cartridge products. The
Company believes that the new platforms that are CD-ROM based will result in
Software with the lower per unit manufacturing costs associated with
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CD-ROM technology. Such savings in unit costs may be consumed, however, by
increased development costs.
Although the Company believes that sales of 16-bit Software is
declining, it believes that because of the large current installed base of
16-bit hardware platforms, the Company can still generate meaningful revenues
from sales of such Software. The Company also believes that the market for
portable Game Boy Software will continue through 1997, and the Company intends
to continue to publish high-profile Software titles for the platform such as
those obtained pursuant to the agreements with Disney Interactive and Electronic
Arts.
The Company's Software business, as is typical in the Software
industry, is seasonal. Generally, net revenues in the interactive entertainment
software industry are highest during the last calendar quarter (which includes
the holiday buying season), decline in the third quarter and are lower in the
first and second calendar quarters. This seasonal pattern is due primarily to
the increased demand for Software products during the year-end holiday buying
season. The Company expects its revenues and operating results will continue to
generally reflect these seasonal factors.
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 predominately 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.
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RESULTS OF OPERATIONS
The following table sets forth consolidated operating data as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 60.3 55.8 59.2 56.0
Royalties 15.2 11.0 16.3 12.2
Product development 2.7 2.2 2.9 2.6
Project abandonment 1.0 1.8 1.3 2.2
Selling 6.5 8.9 7.1 9.2
General and administrative 7.6 13.3 9.5 15.4
Operating interest 1.8 2.2 1.7 3.1
----- ----- ----- -----
Total costs and expenses 95.1 95.2 98.0 100.7
----- ----- ----- -----
Income (loss) from operations 4.9 4.8 2.0 (0.7)
Interest expense, net (0.7) (0.7) (0.8) (0.6)
----- ----- ----- -----
Income (loss) before income taxes 4.2 4.1 1.2 (1.3)
----- ----- ----- -----
Net income (loss) 4.2% 4.1% 1.2% (1.3)%
===== ===== ===== =====
</TABLE>
The Company's net sales increased to $12,087,000 in the three months
ended June 30, 1996, from $6,855,000 in the same period of 1995, and increased
to $18,670,000 in the six months ended June 30, 1996, from $11,183,000 in the
same period of 1995, as a result of an increase in the number of new software
products shipped, combined with an increase in unit volumes of newly released
titles. 1996 results also included sales of $2,685,000 that were related to
reorders of product which were released in previous periods. Reorders of
previously released titles were not significant the first six months of 1995.
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The Company's product releases were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PlayStation 1
Saturn 1 1
Super NES 3 2 3 3
Genesis 1 1 1
Game Boy 3 3 5 5
Game Gear 1 1
---- ---- ---- ----
Total 8 6 11 10
==== ==== ==== ====
</TABLE>
In the three months ended June 30, 1996, net sales of products based on
the Company's Olympic Summer Games, Toy Story, and BASS Masters Classic licenses
were $5,556,000 (46% of net sales), $2,341,000 (19% of net sales), and
$1,897,000 (16% of net sales), respectively. In the second quarter of 1995 net
sales of the Company's BASS Masters Classic, NHL Hockey 95 and PGA European Tour
licenses were $1,591,000 (23% of net sales), $1,001,000 (15% of net sales) and
$696,000 (10% of net sales), respectively. International net sales grew to
$5,719,000 in the six months ended June 30, 1996, from $2,984,000, in the same
period of 1995, as a result of the increase in unit volumes of newly released
titles. The results for the second quarter and first six 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 increased as a percentage of net sales to 60.3% and 59.2%
in the three months and six months ended June 30, 1996, respectively, from 55.8%
and 56.0% of net sales in the corresponding periods of 1995. The increase is due
in part to increased international sales (for which margins are generally lower)
and a greater percentage of sales of SNES products (for which margins are
slightly lower). In addition, the sale of inventory pursuant to the revised
XBAND agreement with Catapult Entertainment increased gross margins by 1.7% and
1.0% in the three months and six months ended June 30, 1995, respectively.
Royalty expense as a percentage of net sales increased to 15.2% and
16.3% in the three months and six months ended June 30, 1996, compared to 11.0%
and 12.2% in the same period of 1995. License agreements for products released
in 1996 provided for royalties at higher rates, particularly the Company's
licenses for Disney's Pocahontas, Disney's Toy Story, In the Hunt, and Olympic
Summer Games.
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Product development expenses increased $176,000 and $254,000 in the
three months and six months of 1996 due to higher research and development
expenditures for new hardware platforms.
In the three months and six months ended June 30, 1996, selling
expenses increased $168,000 and $293,000, respectively, as a result of increased
marketing efforts for new releases, but decreased to 6.5% and 7.1% of net sales
in such periods from 8.9% and 9.2% in the comparable periods of 1995, due to the
increase in net sales. General and administrative expenses increased slightly in
dollar terms in the three months and six months ended June 30, 1996 ($14,000 and
$43,000, respectively) from the same periods of 1995, but due to the increase in
net sales decreased to 7.6% and 9.5% as a percentage of net sales from 13.3% and
15.4% in the three months and six months ended June 30, 1995.
Operating interest, which consisted of factoring fees paid to BNY, and
fees paid to the Company's domestic and European lenders for letters of credit,
increased to $221,000 in the three months ended June 30, 1996, from $152,000 in
the same period of 1995 due to an increase in letters of credit issued during
the current period relating to increased purchases. Operating interest decreased
to $318,000 in the six months ended June 30, 1996, from $351,000 in the same
period of 1995. The decline is the result of lower rates in effect for the
current period as a result of negotiating more favorable agreement terms with
the Company's domestic and European letter of credit providers and increased
utilization of BNY (which charged a lower fee for opening letters of credit).
LIQUIDITY AND CAPITAL RESOURCES
The primary demands on the Company's liquidity and capital resources
are Software product purchases, guaranteed payments to licensors, and advance
payments to Software developers, and internal development expenditures. In order
to purchase Software CD-ROM'S or cartridges from Sony, Nintendo, or Sega, the
Company must open letters of credit in favor of the manufacturer. At June 30,
1996, open letters of credit and future guaranteed minimum royalties were
$3,076,000 and $2,977,000, respectively.
In the six months ended June 30, 1996, the Company's operations
generated $789,000 of cash, due in part to net income and depreciation totaling
$351,000 and to expensing previously capitalized prepaid and deferred royalties
and capitalized development costs as a result of product sales. The Company's
cash at the end of any period will vary based on the timing of cash collections
and disbursements.
The Company's level of accounts receivable is subject to significant
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. 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.
14
<PAGE> 15
If the funds available under the Company's financing agreements,
including the Imperial Agreement, together with its current cash and cash
equivalents, are not sufficient to meet the Company's cash needs, the Company
may from time to time seek to raise capital from additional sources, including
extension of its current lending facilities, project-specific financings and
additional public or private debt or equity financings. 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.
15
<PAGE> 16
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on June 18, 1996.
The following matters were voted upon:
1. Six directors were elected:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Withheld
--------- ------- --------
<S> <C> <C> <C>
Brian J. Farrell 3,529,359 0 9,620
Lawrence Burstein 3,529,359 0 9,620
Murray L. Skala 3,529,352 0 9,626
Bruce Jagid 3,529,193 0 9,786
Jeffrey C. Lapin 3,529,359 0 9,620
L. Michael Haller 3,529,359 0 9,620
</TABLE>
2. A proposal to amend the Company's Stock Option Plan
which would conform the Plan to the rules of the California
Commissioner of Corporations and adjust the timing and the
number of the Stock Options granted each year to the Company's
non-employee directors was ratified by a vote of 3,255,383 for
122,095 against, and 20,086 withheld.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10 Loan Agreement between the Company and
Imperial Bank dated July 18, 1996.
27 Financial Data Schedule.
(b) Reports From 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: August 12, 1996 T-HQ, INC.
By: /s/ Brian J. Farrell
-----------------------------
Brian J. Farrell
President and Chief
Executive Officer
T-HQ, INC.
By: /s/ Stefan J. Dietrich
-----------------------------
Stefan J. Dietrich
Vice President Finance
and Administration
Principal Accounting Officer
17
<PAGE> 1
EXHIBIT 10
[IMPERIAL BANK LOGO]
SECURITY AND LOAN AGREEMENT
(ACCOUNTS RECEIVABLE AND/OR INVENTORY)
This Agreement is entered into between BLACK PEARL SOFTWARE, INC., MALIBU GAME,
INC., T-HQ, INC.
corporations
(herein called "Borrower") and IMPERIAL BANK (herein called "Bank").
1. Bank hereby commits, subject to all the terms and conditions of this
Agreement and prior to the termination of its commitment as hereinafter
provided, to make loans to Borrower from time to time in such amounts as may
be determined by Bank up to, but not exceeding in the aggregate unpaid
principal balance, the following Borrowing Base:
70,000 % of Eligible Accounts
50,000 % of the Value of Inventory
and in no event more than $7,500,000.00.
2. The amount of each loan made by Bank to Borrower hereunder shall be debited
to the loan ledger account of Borrower maintained by Bank (herein called
"Loan Account") and Bank shall credit the Loan Account with all loan
repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid
balance of Borrower's Loan Account on demand and (b) or before the tenth day
of each month, interest on the average daily unpaid balance of the Loan
Account during the immediately preceding month at the rate of either (i) One
and 250/1000ths percent (1.250%) per annum in excess of the rate of interest
which Bank has announced as its prime lending rate ("Prime Rate") which
shall vary concurrently with any change in such Prime Rate. Interest shall
be computed at the above rates on the basis of the actual number of days
during which the principal balance of the loan account is outstanding
divided by 360, which shall for interest computation purposes be considered
one year. Bank at its option may demand payment of any or all of the amount
due under the Loan Account including accrued but unpaid interest at any
time. Such notice may be given verbally or in writing and should be
effective upon receipt by Borrower. The amount of interest payable each
month by Borrower shall not be less than a minimum monthly charge of
$250.00. Bank is hereby authorized to charge Borrower's deposit account(s)
with Bank for all sums due Bank under this Agreement.
3. Requests for loans hereunder shall be in writing duly executed by Borrower
in a form satisfactory to Bank and shall contain a certification setting
forth the matters referred to in Section 1, which shall disclose that
Borrower is entitled to the amount of loan being requested.
4. As used in this Agreement, the following terms shall have the following
meanings:
A. "Accounts" means any right to payment for goods sold or leased, or to be
sold or to be leased, or for services rendered or to be rendered no
matter how evidenced, including accounts receivable, contract rights,
chattel paper, instruments, purchase orders, notes, drafts, acceptances,
general intangibles and other forms of obligations and receivables.
B. "Inventory" means all of the Borrower's goods, merchandise and other
personal property which are held for sale or lease, including those held
for display or demonstration or out on lease or consignment or to be
furnished under a contract of service or are raw materials, work in
process or materials used or consumed, or to be used or consumed in
Borrower's business, and shall include all property rights, patents,
plans, drawings, diagrams, schematics, assembly and display materials
relating thereto.
C. "Collateral" means any and all personal property of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank
now has or hereafter acquires a security interest.
D. "Eligible Accounts" means all of Borrower's Accounts excluding, however,
(1) all Accounts under which payment is not received within * days from
any invoice data, (2) all Accounts against which the account debtor or
any other person obligated to make payment thereon asserts any defense,
offset, counterclaim or other right to avoid or reduce the liability
represented by the Account and (3) any Accounts if the account debtor or
any other person liable in connection therewith is insolvent, subject to
bankruptcy or receivership proceedings or has made an assignment for the
benefit of creditors or whose credit standing is unacceptable to Bank
and Bank has so notified Borrower. Eligible Accounts shall only include
such accounts as Bank in its sole discretion shall determine are
eligible from time to time.
E. "Value of Inventory" means the value of Borrower's Inventory determined
in accordance with generally accepted accounting principals consistently
applied excluding, however, the amount of progress payments,
pre-delivery payments, deposits and any other sums received by Borrower
in anticipation of the sale and delivery of Inventory, all Inventory on
consignment or lease to others, and all property on consignment or lease
from others to Borrower.
5. Borrower hereby assigns to Bank all Borrower's present and future Accounts,
including all proceeds due thereunder, all guaranties and security therefor,
and hereby grants to Bank a continuing security interest in all moneys in
the Collateral Account referred to in Section 6 hereof as security for any
and all obligations of Borrower to Bank, whether now owing or hereafter
incurred and whether direct, indirect, absolute or contingent. So long as
Borrower is indebted to Bank or Bank is committed to extend credit to
Borrower, Borrower will execute and deliver to Bank such assignments,
including Bank's standard forms of Specific or General Assignment covering
individual Accounts, notices, financing statements, and other documents and
papers as Bank may require in order to affirm, effectuate or further assure
the assignment to Bank of the Collateral or to give any third party,
including the account debtors obligated on the Accounts, notice of Bank's
interest in the Collateral.
6. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10, Borrower will collect with diligence all Borrower's Accounts,
provided that no legal action shall be maintained thereon or in connection
therewith without Bank's prior written consent. Any collection of Accounts
by Borrower, whether in the form of cash, checks, notes, or other
instruments for the payment of money (properly endorsed or assigned where
required to enable Bank to collect same), shall be in trust for Bank, the
proceeds of such collections when received by Bank may be applied by Bank
directly to the payment of Borrower's Loan Account or any other obligation
secured hereby. Any credit given by Bank upon receipt of said proceeds shall
be conditional credit subject to collection. Returned items at Bank's option
may be charged to Borrower's general account.
7. Until Bank exercises its rights to collect the Accounts pursuant to
paragraph 10. Borrower may continue its present policies with respect to
returned merchandise and adjustments.
8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation,
that Borrower is duly organized and existing in the State of its
Incorporation and the execution, delivery and performance hereof are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with law or the terms of any charter, by-law or other incorporation
papers, or of any indenture, agreement or undertaking to which Borrower is a
party or by which Borrower is found or affected; (ii) Borrower is, or at the
time the collateral becomes subject to Bank's security interest will be, the
true and lawful owner of and has, or at the time the Collateral becomes
subject to Bank's security interest will have, good and clear title to the
Collateral, subject only to Bank's rights therein; (iii) Each Account is, or
at the time the Account comes into existence will be, a true and correct
statement of a bona fide indebtedness incurred by the debtor named therein
in the amount of the Account for either merchandise sold or delivered (or
being held subject to Borrower's delivery instructions) to, or services
rendered, performed and accepted by, the account debtor; (iv) That there are
or will be no defenses,
Page 1 of 2
EXHIBIT 10
<PAGE> 2
counterclaims, or setoffs which may be asserted against the Accounts; and
(v) any and all financial information, including information relating to
the Collateral, submitted by Borrower to Bank, whether previously or in the
future, is or will be true and materially correct.
9. Borrower will: (i) Furnish Bank from time to time such financial statements
and information as Bank may reasonably request and inform Bank immediately
upon the occurrence of a material adverse change therein; (ii) Furnish Bank
periodically, in such form and detail and at such times as Bank may
require, statements showing aging and reconciliation of the Accounts and
collections thereon; (iii) Permit representatives of Bank to inspect
Borrower's books and records relating to the Collateral and make extracts
therefrom at any reasonable time and to arrange for verification of the
Accounts, under reasonable procedures, acceptable to Bank, directly with
the account debtors or otherwise at Borrower's expense; (iv) Promptly
notify Bank of any attachment or other legal process levied against any of
the Collateral and any information received by Borrower relative to the
Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of
the Collateral or the rights and remedies of Bank in respect thereto; (v)
Reimburse Bank upon demand for any and all legal costs, including
reasonable attorneys' fees, and other expense incurred in collecting any
sums payable by Borrower under Borrower's Loan Account or any other
obligation secured hereby, enforcing any term or provision of this Security
Agreement or otherwise or in the checking, handling and collection of the
Collateral and the preparation and enforcement of any agreement relating
thereto; (vi) Notify Bank of each location and of each office of Borrower
at which records of Borrower relating to the Accounts are kept; (vii)
Provide, maintain and deliver to Bank policies insuring the Collateral
against loss or damage by such risks and in such amounts, forms and
companies as Bank may require and with loss payable solely to Bank, and, in
the event Bank takes possession of the Collateral, the insurance policy or
policies and any unearned or returned premium thereon shall at the option
of Bank become the sole property of Bank, such policies and the proceeds of
any other insurance covering or in any way relating to the Collateral,
whether now in existence or hereafter obtained, being hereby assigned to
Bank; and (viii) in the event the unpaid balance of Borrower's Loan Account
shall exceed the maximum amount of outstanding loans to which Borrower is
entitled under Section 1 hereof, Borrower shall immediately pay to Bank,
from its own funds and not from the proceeds of Collateral, for credit to
Borrower's Loan Account the amount of such excess.
10. Bank may at any time, upon the occurrence of an event of default, and
without prior notice to Borrower, collect the Accounts and may give notice
of assignment to any and all account debtors, and Borrower does hereby
make, constitute and appoint Bank its irrevocable, true and lawful attorney
with power to receive, open and dispose of all mail addressed to Borrower,
to endorse the name of Borrower upon any checks or other evidences of
payment that may come into the possession of Bank upon the Accounts; to
endorse the name of the undersigned upon any document or instrument
relating to the Collateral; in its name or otherwise, to demand, sue for,
collect and give acquittances for any and all moneys due or to become due
upon the Accounts; to compromise, prosecute or defend any action, claim or
proceeding with respect thereto; and to do any and all things necessary and
proper to carry out the purpose herein contemplated.
11. Until Borrower's Loan Account and all other obligations secured hereby
shall have been repaid in full, Borrower shall not sell (except in the
ordinary course of Borrower's business), dispose of or grant a security
interest in any of the Collateral other than to Bank, or execute any
Financing statements covering the Collateral in favor of any secured party
or person other than Bank, except as permitted in the Credit Terms and
Conditions referenced below.
12. Should: (i) Default be made in the payment of any obligation within ten
(10) days of the date when due, or breach be made in any warranty,
statement, promise, term or condition, contained herein or hereby secured
and Borrower has failed to cure same within thirty (30) days from notice
from Bank; (ii) Any statement or representation made for the purpose of
obtaining credit hereunder prove materially false; (iii) Bank deem the
Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower
become insolvent or make an assignment for the benefit of creditors; or (v)
Any proceeding be commended by or against Borrower under any bankruptcy,
reorganization, arrangement, readjustment of debt or moratorium law or
statute; than in any such event. Bank may, at its option and without demand
first made and without notice to Borrower, do any one or more of the
following: (a) Terminate its obligation to make loans to Borrower as
provided in Section 1 hereof; (b) Declare all sums secured hereby
immediately due and payable; (c) immediately take possession of the
Collateral wherever it may be found, using all necessary force so to do, or
require Borrower to assemble the Collateral and make it available to Bank
at a place designated by Bank which is reasonably convenient to Borrower
and Bank and Borrower waives all claims for damages due to or arising from
or connected with any such taking; (d) Proceed in the foreclosure of Bank's
security interest and sale of the Collateral in any manner permitted by
law, or provided for herein; (e) Sell, lease or otherwise dispose of the
Collateral at public or private sale, with or without having the Collateral
at the place of sale, and upon terms and in such manner as Bank may
determine, and Bank may purchase same at any such sale; (f) Retain the
Collateral in full satisfaction of the obligations secured thereby; (g)
Exercise any remedies of a secured party under the Uniform Commercial Code.
Prior to any such disposition, Bank may, at its option, cause any of the
Collateral to be repaired or reconditioned in such manner and to such
extent as Bank may deem advisable, and any sums expended therefor by Bank
shall be repaid by Borrower and secured hereby. Bank shall have the right
to enforce one or more remedies hereunder successively or concurrently, and
any such action shall not stop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of Collateral to pay all obligations
secured by this Security Agreement, Borrower hereby promises and agrees to
pay Bank any deficiency.
13. If any writ of attachment, garnishment, execution or other legal process be
issued against any property of Borrower, or if any material assessment for
taxes against Borrower, other than real property, is made by the Federal or
State government or any department thereof, the obligation of Bank to make
loans to Borrower as provided in Section 1 hereof shall immediately
terminate and the unpaid balance of the Loan Account, all other obligations
secured hereby and all other sums due hereunder shall immediately become
due and payable without demand, presentment or notice.
14. Borrower authorizes Bank to destroy all invoices, delivery receipts,
reports and other types of documents and records submitted to Bank in
connection with the transactions contemplated herein at any time subsequent
to four months from the time such items are delivered to Bank.
15. Nothing herein shall in any way limit the effect of the conditions set
forth in any other security or other agreement executed by Borrower, but
each and every condition hereof shall be in addition thereto.
16. Additional Provisions: *SEE EXHIBIT "A" ADDENDUM TO SECURITY AND LOAN
AGREEMENT ATTACHED.
Executed this 7th day of June, 1996
BLACK PEARL SOFTWARE, INC.
--------------------------------------
(Name of Borrower)
/s/ Brian J. Farrell
By:-----------------------------------
IMPERIAL BANK Brian J. Farrell, President/CEO
/s/ Kathryn Burton MALIBU GAMES, INC.
By:----------------------------------- --------------------------------------
Kathryn Burton, Vice President (Name of Borrower)
/s/ Brian J. Farrell
By:-----------------------------------
Brian J. Farrell, President/CEO
T.HQ, Inc.
--------------------------------------
(Name of Borrower)
/s/ Brian J. Farrell
By:-----------------------------------
Brian J. Farrell, President/CEO
Page 2 of 2
<PAGE> 3
EXHIBIT "A"
ADDENDUM TO SECURITY AND LOAN AGREEMENT ("Security and Loan Agreement") BETWEEN
T-HQ, INC., BLACK PEARL SOFTWARE, INC., MALIBU GAMES, INC. AND IMPERIAL BANK.
Dated: June 7, 1996
This Addendum is made and entered into June 7, 1996, between T-HQ, INC., BLACK
PEARL SOFTWARE, INC., MALIBU GAMES, INC. ("Borrowers") hereby jointly and
severally, and Imperial Bank ("Bank"). This Addendum amends and supplements
the Security and Loan Agreement. In the event of any inconsistency between the
terms herein and the terms of the Security and Loan Agreement, the terms herein
shall in all cases govern and control. All capitalized terms herein, unless
otherwise defined herein, shall have the meaning set forth in the Security and
Loan Agreement.
1. Subject to the terms and conditions of this Agreement and prior to the
termination of its commitment as hereinafter provided, at the request of
Borrowers, Bank will issue, at Bank's then prevailing rate, standby letters of
credit, in lieu of advances otherwise available to Borrowers hereunder,
provided, however, that the expiration date of such letters of credit shall
fall on or before June 30, 1997, and shall not exceed ninety (90) days from the
date of issue.
2. Any commitment of Bank, pursuant to the terms of the Security and Loan
Agreement, to make advances against Eligible Accounts and Eligible Inventory
shall expire on June 30, 1997 subject to Bank's right to renew said commitment
at its sole discretion. Any renewal of the commitment shall not be binding upon
the Bank unless it is in writing and signed by an officer of the Bank.
3. Borrowers represent and warrant that:
<PAGE> 4
a. Litigation. There is no litigation or other proceeding pending
or threatened against or affecting Borrowers, and Borrowers are not in default
with respect to any order, writ, injunction, decree or demand of any court or
other governmental or regulatory authority.
b. Financial Condition. The balance sheet of Borrowers as of
December 31, 1995, and the related profit and loss statement on that date, a
copy of which has heretofore been delivered to Bank by Borrowers, and all other
statements and data submitted in writing by Borrowers to Bank in connection
with this request for credit are true and correct, and said balance sheet and
profit and loss statement truly present the financial condition of Borrowers as
of the date thereof and the results of the operations of Borrowers for the
period covered thereby, and have been prepared in accordance with generally
accepted accounting principles on a basis consistently maintained. Since such
date, there have been no material adverse changes. Borrowers have no knowledge
of any liabilities, contingent or otherwise, at such date not reflected in said
balance sheet in accordance with G.A.A.P., and Borrowers have not entered into
any special commitments or substantial contracts which are not reflected in
said balance sheet, other than in the ordinary and normal course of their
business, which may have a material adverse effect upon its financial
condition, operations or business as now conducted.
c. Trademarks, Patents. Borrowers, as of the date hereof,
possesses all necessary trademarks, trade names, copyrights, patents, patent
rights, and licenses to conduct their business as now operated, without any
known conflict with valid trademarks, trade names, copyrights patents and
license rights of others.
(a) The Borrowers shall use all reasonable commercial efforts
(i) to obtain from all persons, corporations, partnerships, limited liability
companies, and other entities from whom the Borrowers have obtained or from
time to time will obtain licenses in connection with the video games which they
sell (the "Licensors") the consent of such Licensors to the Borrowers'
granting to the Bank of a security interest in such licenses, (ii) to obtain
from the Licensors their cooperation in connection with the Bank obtaining a
perfected first priority security interest in
<PAGE> 5
such licenses, which cooperation shall include, without limitation, the
execution and delivery by the Licensors of memoranda of licenses and other
documents which may be filed in the U.S. Copyright Office to evidence the
licenses granted to the Borrowers, and (iii) to obtain from Licensors the right
of the Bank to have a reasonable period of time in which to foreclose on
Borrowers' inventory and liquidate the same before said Licensors terminate the
right of the Borrowers (or the Bank) to sell the remaining inventory.
(b) The Borrowers hereby jointly and severally represent and
warrant that all agreements between "Licensors" (as that term is defined
herein) and Borrowers are in full force and effect and are enforceable in
accordance with their respective terms against the parties thereto. The
foregoing representations and warranties shall be deemed made again each time
that the Bank advances any monies to the Borrowers under this Agreement or any
other agreement by and among any of the Borrowers and the Bank.
d. Tax Status. Borrowers have no liability for any delinquent
state, local or federal taxes, and, if Borrowers have contracted with any
government agency, Borrowers have no liability for renegotiation of profits.
4. Borrowers agree that so long as they are indebted to Bank, they will
not, without Bank's written consent:
a. Type of Business, Management. Make any substantial change in
the character of their business; or make any change in their executive
management.
b. Outside Indebtedness. Create, incur, assume or permit to exist
any indebtedness for borrowed moneys other than loans from Bank except
obligations now existing as shown in financial statement dated December 31,
1995, excluding those being refinanced by Bank; or sell or transfer, either
with or without recourse, any accounts or notes receivable or any moneys due to
become due.
<PAGE> 6
c. Liens and Encumbrances. Create, incur, assume any mortgage,
pledge, encumbrance, lien or charge of any kind (including the charge upon
property at any time purchased or acquired under conditional sale or other
title retention agreement) upon any asset now owned or hereafter acquired by
them, other than liens for taxes not delinquent and liens in Bank's favor.
d. Loans, Investments, Secondary Liabilities. Make any loans or
advances to any person or other entity other than in the normal and ordinary
course of their business as now conducted or make any investment in the
securities of any person or other entity other than the United States
Government; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of their business.
e. Acquisition or Sale of Business; Merger or Consolidation.
Purchase or otherwise acquire the assets or business of any person or other
entity; or liquidate, dissolve, merge or consolidate, or commence any
proceedings therefor; or sell any assets except in the ordinary and normal
course of their business as now conducted; or sell, lease, assign, or transfer
any substantial part of their business or fixed assets, or any property or
other assets necessary for the continuance of their business as now conducted,
including without limitation the selling of any property or other asset
accompanied by leasing back of same.
f. Dividends, Stock Payments. Declare or pay any dividend (other
than dividends payable in common stock of Borrower) or make any other
distribution of any of their capital stock now outstanding or hereafter issued
or purchase, redeem or retire any of such stock.
g. Capital Expenditures. Make or incur obligations for Capital
expenditures in excess of $300,000 in any one fiscal year period in addition to
a maximum of $30,000 for capital lease payments.
<PAGE> 7
h. Lease Liability. Make or incur liability for payments of rent under
leases of real property in excess of $300,000 and personal property in excess of
$60,000 in any one fiscal year.
5. Should there be a default under the Security and Loan Agreement, the
General Security Agreement or under the Note, all obligations, loans and
liabilities of Borrowers to Bank, due or to become due, whether now existing or
hereafter arising, shall at the option of the Bank, become immediately due and
payable without notice or demand, and Bank shall thereupon have the right to
exercise all of its default rights and remedies.
6. In addition to the provisions in the Security and Loan Agreement, Bank
will advance 70% of Eligible Accounts which shall only include such accounts as
Bank in its sole discretion shall determine are eligible from time to time.
"Eligible Accounts" shall also NOT include any of the following:
a. Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower.
b. Accounts with respect to which 25% or more of the account debtor's
total accounts or obligations outstanding to Borrowers are more than 90 days
from invoice date for those accounts on 30 day terms, or 150 days from date of
invoice for all other accounts.
c. For accounts representing more than 20% of total accounts receivable,
the balance in excess of the 20% is not eligible, provided, however, that, with
respect to Toys R Us, balances up to and including 25% of this account shall be
eligible. Special concentration limits may be extended from time to time at
Bank's sole discretion, for selected accounts receivable of Borrowers.
d. C.O.D. accounts.
e. All accounts sold to and purchased from a company of common
name/ownership, whereby a potential offset exists.
f. Consignment or guaranteed sales.
<PAGE> 8
g. Bill and hold accounts.
h. Equipment rental offsets.
i. Collection accounts.
j. Foreign accounts, except those accounts insured to the satisfaction
of Bank or supported by letters of credit satisfactory to Bank.
7. Bank will advance 50% of eligible inventory, with a maximum sublimit of
$1.5 million for inventory located at the Commerce warehouse. All eligible
inventory, to include inventory in transit as represented by Letter of Credits,
under the Security Agreement shall NOT include the following:
a. Goods on consignment.
b. Inventory not insured.
c. Obsolete Inventory.
d. Finished goods inventory with no liquidation value due to various
causes, i.e., service requirements, warranty requirements, etc.
e. Inventory located in areas making it difficult to verify its
existence, or which will cause undue expense in liquidation due to
transportation costs, or other logistical reasons.
f. Inventory more than 5 weeks old domiciled at the designated warehouse
currently located in Commerce, Ca.
8. The issuance of sight letters of credit to support the Company's domestic
operations only, up to a maximum of 90 days, to import inventory, in addition
to the provisions in the Security and Loan Agreement.
<PAGE> 9
9. All financial covenants and financial information referenced herein shall
be interpreted and prepared in accordance with generally accepted accounting
principles applied on a basis consistent with previous years. Compliance with
financial covenants shall be calculated on a consolidated basis and monitored on
a quarterly basis.
10. Borrowers affirmatively covenant that so long as any loans, obligations
or liabilities remain outstanding or unpaid to Bank, they will:
a. Maintain a minimum tangible net worth (meaning the excess of all
assets, including prepaid royalties, excluding any value for goodwill,
trademarks, patents, copyrights, organization expense and other similar
intangible items, over its liabilities, less subordinated debt) on a quarterly
basis, of not less than $5,300,00 @ 3/31/96 and thereafter, and $5,900,000 as
of 12/31/96.
b. Maintain working capital (Borrower's current assets minus current
liabilities) of not less than $5,000,000 as of 12/31/95 and thereafter.
c. Maintain a current ratio of at least 1.50 to 1.0 as of 12/31/95 and
as of 3/31/96 and thereafter not less than 1.60 to 1.0.
d. Maintain a maximum ratio of total debt to tangible net worth not
greater than 1.75 to 1.0 as of 12/31/95 and as of 3/31/96 and thereafter not
greater than 2.0 to 1.0.
e. Maintain all significant domestic bank accounts and banking
relationship with Bank.
f. Maintain profitable operations on a fiscal year basis.
g. Within 15 days (or 20 days at FYE) form each month-end, deliver to
Bank an accounts receivable aging reconciled to the general ledger of
Borrowers, a detailed accounts payable aging reconciled to the Borrowers'
general ledger and setting forth the
<PAGE> 10
amount of any book overdraft or the amount of checks issued but not sent, and
an inventory certification outlining both inventory composition and activity
for the month. All the foregoing will be in form satisfactory to the Bank. Also
provide the Bank on a quarterly basis, or more frequently if demanded by Bank,
a complete address list of all active customers.
h. Within 45 days after the end of each quarter, deliver to Bank a
profit and loss statement and a balance sheet, in form satisfactory to Bank,
all certified by an officer of Borrowers.
i. Within 120 days after end of Borrowers' fiscal year, deliver to
Bank the same financial statements as otherwise provided quarterly together
with Changes in Financial Position Statement, audited by an independent
certified public accountant selected by Borrowers but acceptable to Bank. This
will be accompanied by Form 10-K. Additionally, Borrowers will provide their
quarterly F/S accompanied by Form 10-Q within 45 days of quarter end.
j. Rights and Facilities. Maintain and preserve all rights,
franchises and other authority adequate for the conduct of their business;
maintain their properties, equipment and facilities in good order and repair;
conduct their business in an orderly manner without voluntary interruption and
if a corporation or partnership; maintain and preserve its existence.
k. Insurance. Maintain public liability, property damage and
workers' compensation insurance and insurance on all their insurable property
against fire and other hazards with responsible insurance carriers to the
extent usually maintained by similar businesses. Borrowers shall provide
evidence of property insurance in amounts and types acceptable to the Bank.
Bank to be named as loss payee.
l. Taxes and Other Liabilities. Pay and discharge, before the same
become delinquent and before penalties accrue thereon, all taxes, assessments
and governmental changes upon or against them or any of their properties, and
any of their liabilities at any time existing, except to the extent and so long
as:
<PAGE> 11
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any material adverse
effect upon their financial condition or the loss of any right
of redemption from any sale thereunder; and
(b) They shall have set aside on their books reserves segregated to
the extent required by generally accepted accounting practice)
deemed adequate with respect thereto.
m. Records and Reports. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine their properties, books and records at all reasonable times.
11. The rate of interest applicable to the Loan Account shall be 1.25% per
year in excess of the rate of interest which Bank has announced as its prime
lending rate ("Prime Rate") which shall vary concurrently with any change in
such Prime Rate. Interest shall be computed at the above rate on the basis of
the actual number of days during which the principal balance of the loan
account is outstanding divided by 360, which shall, for interest computation
purposes, be considered one year. Should Borrowers be in default, as default is
defined herein, Bank at its option may demand payment of any or all of the
amount due under the Loan Account including accrued but unpaid interest, at any
time. Notice of such demand may be given verbally or in writing and should be
effective upon receipt by Borrower. The default rate of interest shall be five
percent per year in excess of the rate otherwise applicable. A fee of .5% of
the committed line ($37,500) shall be due from the Borrowers upon execution of
the documents.
The fee for an Import Letters of Credit is 1/8% for 180 days, $90 minimum. The
cost of amendments which include increasing amounts/extension is 1/8% (minimum
$90.) Negotiations (document examination) for sight is 1/8% per set of
documents, $90 minimum. Usage (Acceptance) credit is .2% P.A. ($100 minimum
per draft.)
<PAGE> 12
The expired unutilized credit fee is $40 flat, and discrepancy fee is $50 flat.
All other specific transaction fees related to facsimile, courier service,
cable, credit information, etc. are detailed by Imperial Bank's International
Banking Division schedule of fees, effective June 1, 1993.
12. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure
or delay on the part of Bank or any holder of Notes issued hereunder, in the
exercise of any power, right or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof or of any other
right, power or privilege. All rights and remedies existing under this
agreement or any not issued in connection with a loan that Bank may make
hereunder are cumulative to, not exclusive of, any rights or remedies otherwise
available.
13. Notwithstanding the provisions of the Security and Loan Agreement
(Accounts Receivable and/or Inventory), the following provision shall apply to
all obligations of the Borrowers to the Bank: All sums received by Bank,
whether from Borrowers or from Borrowers' account debtors, shall be applied to
the outstanding loan balance on the 2nd (second) day following receipt thereof
by the Bank. Interest shall continue to accrue on all loans outstanding
pursuant to the Loan and Security Agreement until sums received are applied as
herein provided.
14. Late Charges. If any installment payment, interest payment, principal
payment or principal balance payment due hereunder is delinquent ten or more
days, Borrowers agree to pay Bank a late charge in the amount of 5% of the
payment so due and unpaid, in addition to the payment; but nothing in this
paragraph is to be construed as any obligation on the part of the Bank to
accept Payment of any payment past due or less than the total unpaid principal
balance after maturity.
<PAGE> 13
15. This addendum is executed by and on behalf of the parties as of the
date first above written.
T-HQ, INC. "Borrower"
By: /s/ B.J. Farrell
---------------------------
Title: President/CEO
---------------------------
BLACK PEARL SOFTWARE, INC. "Borrower"
By: /s/ B.J. Farrell
---------------------------
Title: President/CEO
---------------------------
MALIBU GAMES, INC. "Borrower"
By: /s/ B.J. Farrell
---------------------------
Title: President/CEO
---------------------------
IMPERIAL BANK "Bank"
By: /s/ Kathryn Burton
---------------------------
Title: Vice President
---------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) 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 (B) FINANCIAL STATEMENTS FOUND IN THE JUNE 30, 1996 10Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,700,000
<SECURITIES> 0
<RECEIVABLES> 11,445,000
<ALLOWANCES> 1,317,000
<INVENTORY> 892,000
<CURRENT-ASSETS> 17,659,000
<PP&E> 1,047,000
<DEPRECIATION> 512,000
<TOTAL-ASSETS> 18,194,000
<CURRENT-LIABILITIES> 10,201,000
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 7,989,000
<TOTAL-LIABILITY-AND-EQUITY> 18,194,000
<SALES> 18,670,000
<TOTAL-REVENUES> 18,670,000
<CGS> 11,046,000
<TOTAL-COSTS> 11,046,000
<OTHER-EXPENSES> 7,230,000
<LOSS-PROVISION> 11,000
<INTEREST-EXPENSE> 155,000
<INCOME-PRETAX> 239,000
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 235,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 235,000
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
