<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
--------------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____________ TO _____________
COMMISSION FILE NUMBER 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
CALABASAS, CA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 591-1310
-----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.0001 par value
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. X
---
As of March 24, 1997, approximately 6,479,000 shares of Common Stock of the
Registrant were outstanding and the aggregate market value of voting Common
Stock held by non-affiliates was approximately $39,488,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the T-HQ, Inc. 1997 Notice of Annual Meeting of Stockholders
and Proxy Statement, to be filed with the Securities and Exchange Commission
within 120 days after the close of the Registrant's fiscal year (incorporated
into Part III).
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<PAGE> 2
T-HQ, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets -- December 31, 1995 and December 31, 1996 F-3
Consolidated Statements of Operations for each of the Three Years in the
Period Ended December 31, 1996 F-4
Consolidated Statements of Shareholders' Equity for each of the Three Years
in the Period Ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for each of the Three Years in the
Period Ended December 31, 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
</TABLE>
All other financial statement schedules have been omitted since either
(i) the schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Consolidated Financial
Statements and Notes thereto or in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
F-1
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Shareholders of T-HQ, Inc.,
Calabasas, California
We have audited the accompanying consolidated balance sheets of T-HQ, Inc. and
subsidiaries (the "Company") as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1995
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 7, 1997
(March 11, 1997 as to Note 12)
F-2
<PAGE> 4
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 1,895,000 $ 2,734,000
Accounts receivable -- net 9,362,000 14,186,000
Inventory 1,150,000 1,013,000
Prepaid and deferred royalties 1,776,000 717,000
Software development costs 2,037,000 2,329,000
Income tax refund receivable 27,000 --
Prepaid expenses and other current assets 153,000 485,000
------------ ------------
Total current assets 16,400,000 21,464,000
Equipment -- net 516,000 581,000
Other long-term assets -- 795,000
------------ ------------
TOTAL ASSETS $ 16,916,000 $ 22,840,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,707,000 $ 3,304,000
Accrued royalties 1,752,000 3,133,000
Accrued returns and allowances 2,859,000 --
Advance from bank -- 5,355,000
------------ ------------
Total current liabilities 9,318,000 11,792,000
Commitments and contingencies -- --
Shareholders' equity:
Convertible preferred stock, par value $.01, 5,000 shares authorized
Common Stock, par value $.0001, 100,000,000 shares authorized; 4,217,391
shares, and 4,739,883 shares issued and outstanding as of December 31,
1995 and 1996, respectively 4,000 4,000
Additional paid-in capital 33,317,000 34,558,000
Cumulative foreign currency translation adjustment (360,000) (52,000)
Accumulated deficit (25,363,000) (23,462,000)
------------ ------------
Total shareholders' equity 7,598,000 11,048,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,916,000 $ 22,840,000
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 5
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED
DECEMBER 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 13,289,000 $ 33,250,000 $ 50,255,000
Costs and expenses:
Cost of sales 12,651,000 19,501,000 29,301,000
Royalties 2,327,000 3,641,000 7,977,000
Product development 713,000 761,000 1,205,000
Project abandonment 3,754,000 1,025,000 610,000
Selling 5,909,000 2,393,000 3,441,000
General and administrative 4,806,000 3,988,000 4,618,000
Operating interest 496,000 1,184,000 878,000
------------ ------------ ------------
Total costs and expenses 30,656,000 32,493,000 48,030,000
------------ ------------ ------------
Income (loss) from operations (17,367,000) 757,000 2,225,000
Interest expense, net (112,000) (134,000) (316,000)
------------ ------------ ------------
Income (loss) before
income taxes (17,479,000) 623,000 1,909,000
Provision for (benefit
from) income taxes 11,000 22,000 8,000
------------ ------------ ------------
Net income (loss) $(17,490,000) $ 601,000 $ 1,901,000
------------ ------------ ------------
Net income (loss) per share $ (8.75) $ .17 $ .39
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 6
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
Cumulative
Foreign Retained
Additional Currency Earnings
Preferred Common Common Paid-in Translation (Accumulated
Stock Shares Amount Capital Adjustment Deficit) Total
--------- --------- ------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 -- 1,509,168 $2,000 $20,825,000 $(726,000) $ (8,474,000) $ 11,627,000
Issuance of Common Stock for cash -- 1,278,148 2,000 9,818,000 -- -- 9,820,000
Exercise of options -- 3,334 -- 13,000 -- -- 13,000
Net loss -- -- -- -- -- (17,490,000) (17,490,000)
Foreign currency translation
adjustment -- -- -- -- 284,000 -- 284,000
--------- --------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1994 -- 2,790,650 4,000 30,656,000 (442,000) (25,964,000) 4,254,000
Exercise of warrants and options -- 91,530 -- 48,000 -- -- 48,000
Issuance of preferred stock for cash 3,190 -- -- 2,613,000 -- -- 2,613,000
Conversion of preferred stock to
Common Stock (2,865) 1,335,211 -- -- -- -- --
Net income -- -- -- -- -- 601,000 601,000
Foreign currency translation
adjustment -- -- -- -- 82,000 -- 82,000
--------- --------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1995 325 4,217,391 4,000 33,317,000 (360,000) (25,363,000) 7,598,000
Exercise of warrants and options -- 272,115 -- 712,000 -- -- 712,000
Conversion of preferred stock to
Common Stock (325) 127,717 -- -- -- -- --
Issuance of stock -- 122,660 -- 529,000 -- -- 529,000
Net income -- -- -- -- -- 1,901,000 1,901,000
Foreign currency translation
adjustment -- -- -- -- 308,000 -- 308,000
--------- --------- ------ ----------- ----------- ------------ ------------
Balance at December 31, 1996 -- 4,739,883 $4,000 $34,558,000 $(52,000) $(23,462,000) $ 11,048,000
========= ========= ====== =========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 7
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(17,490,000) $ 601,000 $ 1,901,000
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 253,000 240,000 337,000
Provision for doubtful accounts,
discounts and returns 3,888,000 4,145,000 5,203,000
Changes in operating assets and liabilities:
Accounts receivable (2,127,000) (5,875,000) (7,270,000)
Inventory and inventory deposits 3,796,000 779,000 202,000
Prepaid and deferred royalties and
Software development costs 1,602,000 2,592,000 2,799,000
Prepaid expenses and other current assets 2,292,000 99,000 (322,000)
Income tax refund receivable 2,398,000 201,000 --
Accounts payable and accrued expenses 1,365,000 1,040,000 (1,233,000)
Accrued royalties (2,083,000) (3,628,000) (649,000)
Accrued returns and allowances (3,898,000) (3,589,000) (5,316,000)
Income taxes payable 18,000 -- --
------------ ------------ ------------
Net cash used in operating activities (9,986,000) (3,395,000) (4,348,000)
------------ ------------ ------------
Cash flows used in investing activities:
Other long-term assets -- -- (578,000)
Acquisition of equipment (188,000) (239,000) (314,000)
------------ ------------ ------------
Net cash used in investing activities (188,000) (239,000) (892,000)
------------ ------------ ------------
Cash flows from financing activities:
Advances from bank -- -- 5,355,000
Proceeds from exercise of warrants and
options 13,000 48,000 712,000
Net proceeds from issuance of
convertible preferred stock -- 2,613,000 --
Net proceeds from issuance of common
stock 9,820,000 -- --
------------ ------------ ------------
Net cash provided by financing activities 9,833,000 2,661,000 6,067,000
------------ ------------ ------------
Effect of exchange rate changes on cash 133,000 61,000 12,000
------------ ------------ ------------
Net increase (decrease) in cash (208,000) (912,000) 839,000
------------ ------------ ------------
Cash -- beginning of period 3,015,000 2,807,000 1,895,000
------------ ------------ ------------
Cash -- end of period $ 2,807,000 $ 1,895,000 $ 2,734,000
============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes -- $ 22,000 $ 14,000
============ ============ ============
Cash paid during the period for interest $ 235,000 $ 230,000 $ 375,000
============ ============ ============
</TABLE>
F-6
<PAGE> 8
NON-CASH TRANSACTIONS:
As of July 1, 1996 the Company issued 70,000 shares of Common Stock in
lieu of cash to a former employee of the Company. This transaction resulted in a
reduction in accounts payable and accrued expenses and a like increase in
additional paid-in capital in the amount of $229,000, the fair value of the
stock issued on the date of issuance. Also on July 1, 1996, the Company issued
52,660 shares of Common Stock as part of the purchase price for a 25% interest
in Inland Productions, Inc. ("Inland") increasing other long-term investments
and additional paid-in capital by $300,000.
F-7
<PAGE> 9
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Business. T-HQ, Inc., a New York corporation, develops and publishes
interactive entertainment software ("Software") for the hardware platforms that
collectively dominate the market ("Platforms"). Substantially all of the
Company's products are based on licenses for popular cultural trends and
high-recognition names ("Properties").
Unless the context otherwise requires, references in this document to
"T-HQ" or the "Company" include T-HQ, Inc. and all of its wholly owned
subsidiaries.
License Agreements. The Company has two license agreements with Sony
pursuant to which it has the non-exclusive right to utilize the Sony name and
its proprietary information and technology in order to develop and market
Software for use with the 32-bit Sony PlayStation in the United States and
Canada, and Europe, respectively, which expire in June of 1998 and December of
2005, respectively.
The Company has various license agreements with Nintendo pursuant to
which it has the non-exclusive right to utilize the Nintendo name and its
proprietary information and technology in order to develop and market Software
for use with the 16-bit Super Nintendo Entertainment System ("SNES") and with
the Nintendo Game Boy portable game console. The license agreements with
Nintendo for such hardware Platforms expire at various times through January
1998. In November, 1996, Nintendo approved the development by the Company of
Turner's World Championship Wrestling for release on the recently introduced
64-bit Nintendo 64.
The Company has various license agreements with Sega pursuant to which
it has the non-exclusive right to utilize the Sega name and its proprietary
information and technology in order to develop and market Software for use with
the 32-bit Sega Saturn, 16-bit Sega Genesis, and the portable Sega Game Gear.
The license agreements with Sega for such hardware Platforms expire at various
times through 1998.
The Company's Software business is dependent on its license agreements
with Sony, Nintendo, and Sega. Substantially, all of the Company's Software
products are manufactured by Sony, Nintendo, and Sega, who charge the Company a
fixed amount for each Software CD-ROM or cartridge manufactured, which charge
includes a manufacturing, printing and packaging fee as well as a royalty for
the use of their respective names, proprietary information and technology.
In addition, the Company must indemnify Sony, Nintendo, or Sega as
appropriate, with respect to all loss, liability and expense resulting from any
claim against Sony, Nintendo, or Sega involving the development, marketing, sale
or use of the Company's Titles, including any claims for copyright or trademark
infringement brought against Sony, Nintendo, or Sega. As such, the
F-8
<PAGE> 10
Company bears the risk that the Properties and information and technology
licensed from Sony, Nintendo, or Sega and incorporated in the Software may
infringe the rights of third parties. Generally, the Company is entitled to
indemnification from its Software developers and Property licensors to cover its
indemnification obligations to Sony, Nintendo, or Sega, but no assurance can be
given that, if any claim is brought against the Company, said developers and/or
licensors will have sufficient resources to indemnify the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of T-HQ, Inc. and its wholly owned subsidiaries. All
material intercompany balances and transaction have been eliminated.
Foreign Currency Translation. Assets and liabilities of foreign
operations are translated at current rates of exchange while results of
operations are translated at average rates in effect for the period. Translation
gains or losses are shown as a separate component of shareholders' equity.
Foreign currency translation gains and losses result from exchange rate changes
denominated in currencies other than the U.S. dollar. The Company has not
experienced significant foreign currency transaction gains or losses.
Fair Values of Financial Instruments. The carrying value of accounts
receivable and trade payables approximate the fair value due to their short-term
maturities. The carrying value of the Company's advances from its bank is
considered to approximate its fair value because the interest rate of this
instrument is based on a variable reference rate.
Inventory and Inventory Deposits. Inventories, which consist
principally of finished products, are stated at the lower of cost (first-in,
first-out basis) or market. The Company estimates the net realizable value of
slow-moving inventory on a title by title basis, and charges the excess of cost
over net realizable value to cost of sales. Inventory deposits are prepayments
to Software Manufacturers or deposits to lenders opening letters of credit on
behalf of the Company for the manufacture of specific products.
Equipment. Equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to five years. Equipment consists of the following at:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Furniture, fixtures and equipment $ 897,000 $ 1,164,000
Leasehold improvements 20,000 20,000
Less accumulated depreciation (401,000) (603,000)
----------- -----------
$ 516,000 $ 581,000
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and
1996 was $209,000, $199,000, and $238,000, respectively.
F-9
<PAGE> 11
Royalties and Software Development Costs. Advance royalty payments for
intellectual Property licenses are recorded as prepaid royalties. All minimum
guaranteed royalty payments are initially recorded as an asset (deferred
royalties) and as a liability (accrued royalties) at the contractual amount upon
execution of the contract. Royalty payments for intellectual Property licenses
are classified as current assets to the extent they relate to anticipated sales
during the subsequent year. The Company utilizes both independent Software
developers (who are paid advances against future royalties) and internal
development teams to develop its Software. Under generally accepted accounting
principles, such Software development costs are capitalizable when technological
feasibility has been established. Technological feasibility for entertainment
Software such as the Company's has been established by Sony, Nintendo, and Sega
for use with their respective hardware Platforms. Amortization of prepaid
royalty and Software development costs, as a part of royalties expense, is
provided on a product-by-product basis commencing with the general release of
each product, based on the greater of the ratio of current gross revenues for
the product to the sum of its current and anticipated gross revenues, or the
straight line method over the remaining estimated economic life of the product.
The Company also expenses as project abandonment losses advances or capitalized
Software development costs when, in management's estimate, future revenues will
not be sufficient to recover previously capitalized costs. Such abandonment
losses are solely attributable to changes in market conditions or product
quality considerations. Software development costs of $935,000, $1,768,000, and
$2,390,000 were amortized in 1994, 1995, and 1996, respectively. Project
abandonment losses related to Software development costs of $2,743,000,
$1,025,000 and $509,000 were charged to expense in 1994, 1995, and 1996,
respectively. Research and development costs are expensed as incurred and to
date have not been material.
Revenue Recognition. Revenue is recognized when the product is
shipped, provided that no significant vendor support obligations remain
outstanding, and provided that the collection of the resulting receivable is
deemed probable by management. Although the Company sells its products on a
no-return basis, in certain circumstances the Company may allow returns, price
concessions, or allowances on a negotiated basis. The Company estimates such
returns and allowances based upon management's evaluation of the Company's
historical experience and current industry trends. Such estimates are deducted
from gross revenue. Software is sold under a limited 90-day warranty against
defects in material and workmanship. To date, the Company has not experienced
material warranty claims. (See Note 3).
Primary and Fully Diluted Earnings Per Share. Net income (loss) per
share has been computed using the weighted-average number of common shares and
common share equivalents (which consists of warrants, convertible preferred
stock, and options, to the extent they are dilutive). The weighted-average
number of common shares and common share equivalents outstanding in the years
ended December 31, 1994, 1995, and 1996 were 1,998,000, 3,482,000, and
4,911,000, respectively. The difference between primary and fully diluted
earnings per share is not significant. As discussed in Note 12, subsequent to
December 31, 1996, the Company raised $11.7 million by issuing Common Stock. If
a portion of the proceeds of the offering had been used to eliminate debt under
the Company's borrowing agreements during 1996, earnings per share would have
been $ .43.
F-10
<PAGE> 12
Non-monetary Transactions. Prior to 1995, the Company exchanged its
products for advertising to facilitate the promotion of the Company's products.
The exchanges are valued at the lower of cost or fair market value of products
exchanged. The Company recorded expense related to these transactions of
$2,061,000 during 1994.
Reclassifications. Certain items in the 1994 and 1995 financial
statements have been reclassified to conform to the 1996 presentation.
Accounting Standard. In March 1995, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed of." This statement addresses the accounting for the impairment of
long lived assets, such as property and equipment, certain identifiable
intangibles and goodwill related to those assets. Long-Lived assets and certain
indentifiable intangibles are to be reviewed for impairment whenever events or
charges in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized when the sum of the future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the asset. The effect of the adopting SFAS No. 121 during the year
ended December 31, 1996 did not have a material adverse effect on the Company's
financial statements.
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.
3. ACCOUNTS RECEIVABLE, FACTORING AGREEMENT, DUE FROM FACTOR AND ACCRUED
RETURNS AND ALLOWANCES
Until July 18, 1996, the Company had a factoring and credit agreement
(the "BNY Agreement") with BNY Financial Corporation ("BNY"), a wholly owned
subsidiary of The Bank of New York. 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, 50% of eligible inventory and 50% of the amount of letters
of credit opened by the Company in favor of its Manufacturers. The portion of
the borrowing base that consists of eligible inventory in the formula may not
exceed $1,500,000. The facility provides for maximum borrowings of $9,000,000,
with advances bearing interest at the bank's prime rate plus 1.25% (weighted
average rate of 9.5% as of December 31, 1996). The Company has granted Imperial
Bank a security interest in its domestic accounts receivable and inventories.
F-11
<PAGE> 13
The Imperial Agreement expires on June 30, 1997. Open letters of credit under
the Imperial Agreement totaled $2,726,000 at December 31, 1996.
The amended Imperial Agreement contains customary covenants including,
among others, restrictions on the incurrence of debt, encumbrances on or sales
of assets, mergers and acquisitions, payments of dividends and capital
expenditures. Financial covenants include the maintenance of (i) a current ratio
of not less than 1.4 to 1, (ii) profitable operations on a fiscal year basis,
(iii) minimum tangible net worth of $7,000,000, (iv) a ratio of debt to tangible
net worth of not greater than 1.75 to 1, and (v) minimum working capital of
$5,000,000.
The Company also has lines of credit with two additional lenders
pursuant to which such lenders have agreed to issue letters of credit on the
Company's behalf to Sony, Nintendo, and Sega for the purchase of Software for
the Company's domestic and European operations. The domestic and European lines
are $5,000,000 and $2,500,000, respectively. Each of these lenders receives a
fee for the issuance of such letters of credit, and each lender retains title to
the inventory financed by such lender until such time as that inventory is sold.
The domestic lender has a security interest in the domestic assets of the
Company, subordinated to Imperial Bank's priority security interest. The current
term of the agreement with the domestic lender expires on March 15, 1997, with
automatic renewals at such date and every six months thereafter, unless
terminated by either party. There were no open letters of credit with the
domestic lender at December 31, 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 $1,683,000 as of December 31, 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 following). 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. Because Imperial does not own the Company's domestic receivables,
advances from Imperial are now shown as a liability in the accompanying
financial statements, and reserves for markdowns and allowances are now
presented as a deduction from the Company's gross receivables.
Accounts receivable are due primarily from domestic and foreign
retailers and distributors, including mass merchants and specialty stores.
Accounts receivable at December 31, 1995 and 1996 are composed of the following:
F-12
<PAGE> 14
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
------------ ------------
<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 -- 13,428,000
Other accounts receivable -- primarily foreign 5,739,000 5,004,000
Other receivables 51,000 112,000
Allowance for foreign doubtful accounts (1,380,000) (1,294,000)
Allowance for foreign discounts and returns (311,000) (292,000)
Allowance for domestic accrued returns and
allowances -- (2,772,000)
------------ ------------
Accounts receivable -- net $ 9,362,000 $ 14,186,000
============ ============
</TABLE>
The allowance for foreign doubtful accounts consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $ (536,000) $ (827,000) $(1,380,000)
Provision for doubtful accounts (256,000) (505,000) (10,000)
Actual write-offs (recoveries) (35,000) (48,000) 96,000
----------- ----------- -----------
Ending balance $ (827,000) $(1,380,000) $(1,294,000)
=========== =========== ===========
</TABLE>
The allowance for foreign discounts and returns consists of the
following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $(666,000) $(190,000) $(311,000)
Provision for discounts and returns (280,000) (766,000) (422,000)
Actual write-offs 756,000 645,000 441,000
--------- --------- ---------
Ending balance $(190,000) $(311,000) $(292,000)
========= ========= =========
</TABLE>
The allowance for domestic accrued returns and allowances, which is
recorded as a liability in the accompanying balance sheets for the periods ended
December 31, 1994 and 1995 and which is presented as a contra against accounts
receivable in the accompanying balance sheet for the period ended December 31,
1996, consists of the following:
F-13
<PAGE> 15
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1 $(4,120,000) $(3,574,000) $(2,859,000)
Provision for discounts and returns (3,352,000) (2,874,000) (4,771,000)
Actual write-offs 3,898,000 3,589,000 4,858,000
----------- ----------- -----------
Ending balance $(3,574,000) $(2,859,000) $(2,772,000)
=========== =========== ===========
</TABLE>
4. EMPLOYEE PENSION PLAN
The Company sponsors for its employees a defined contribution plan
intended to qualify under Section 401(k) of the Internal Revenue Code (the
"Plan"). The Plan, as amended in 1991, provides that employees may defer up to
12% of annual compensation, and that the Company will make a matching
contribution equal to each employee's deferral, up to 4% of compensation. The
Company may also contribute funds to the Plan in the form of a profit sharing
contribution. Expenses under the Plan were $61,000, $30,000, and $161,000 in
1994, 1995 and 1996, respectively.
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ -- $22,000 $ 2,000
State -- -- 6,000
Foreign 11,000 -- --
------- ------- -------
11,000 22,000 8,000
------- ------- -------
Deferred
Federal -- -- --
State -- -- --
------- ------- -------
Provision for income taxes $11,000 $22,000 $ 8,000
======= ======= =======
</TABLE>
A reconciliation of the provision for income taxes at the federal
statutory rate to the provision recorded in the accompanying financial
statements is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Federal provision at statutory rate (35.0)% 35.0% 35.0%
Effect of foreign income taxes and other .1 -- --
Effect of net operating loss carryforward
(utilized) not utilized 35.0 (31.5) (34.9)
------ ------ ------
0.1% 3.5% 0.4%
====== ====== ======
</TABLE>
F-14
<PAGE> 16
The components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1995 1996
------------------------- -------------------------
Federal State Federal State
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts,
Discounts and returns $ 973,000 $ 216,000 $ 943,000 $ 212,000
Net operating loss 5,852,000 1,168,000 5,946,000 1,176,000
License abandonment 539,000 559,000 671,000 151,000
Other -- net 250,000 56,000 121,000 28,000
----------- ----------- ----------- -----------
Total deferred tax assets 7,614,000 1,999,000 7,681,000 1,567,000
Deferred tax liabilities: -- -- --
Software development costs (893,000) (573,000) (897,000) (202,000)
State income taxes (484,000) -- (465,000) --
----------- ----------- ----------- -----------
Net deferred tax assets 6,237,000 1,426,000 6,319,000 1,365,000
Valuation reserve (6,237,000) (1,426,000) (6,319,000) (1,365,000)
----------- ----------- ----------- -----------
Deferred income taxes $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
A valuation reserve has been provided in 1995 and 1996 because of the
uncertainty regarding the realization of net deferred tax assets. The valuation
reserve decreased $291,000 and $21,000 during 1995 and 1996, respectively.
As of December 31, 1995 the Company had federal and state net
operating loss carryforwards of $17,488,000 (expiring from years 2008 to 2009)
and $12,695,000 (expiring from years 1997 to 1999), respectively, which have not
been recorded in the financial statements because of the uncertainty as to
realization. The December 31, 1996 tax return has not been prepared as yet and
as such, the net operating loss figures have not been updated for the 1996
taxable income. The sale of 1,500,000 shares of Common Stock offered by the
Company on February 11, 1997 resulted in an "ownership change" of the Company
for purposes of Sections 382 and 383 of the Internal Revenue Code of 1986, as
amended (the "Code"). As a result, the amount of the Company's net operating
loss carryforward available to reduce the Company's federal income tax liability
in future years in which the Company has taxable income will be limited to an
annual amount equal to (i) the fair market value of the Company's capital stock
immediately prior to the consummation of the offering on February 11, 1997,
multiplied by (ii) the "long-term tax exempt rate" published by the Internal
Revenue Service for the month in which the offering was consummated. Based upon
a long-term tax exempt rate for February 1997 of 5.48% and an assumed market
price of the Common Stock immediately prior to consummation of this offering of
$8.56 per share (the last reported sale price of the Common Stock on February
10, 1997) such amount is estimated to be approximately $2,225,000 per year.
6. STOCK OPTION PLAN
The Company has a stock option plan (the "Option Plan") which provides
for the issuance of up to 650,000 shares available for employees, consultants
and non-employee
F-15
<PAGE> 17
directors. An additional 10,656 options were available for grant at December 31,
1996. Stock options granted under the Option Plan may be incentive stock options
under the requirements of the Internal Revenue Code, or may be nonstatutory
stock options which do not meet such requirements. Options may be granted under
the Option Plan to, in the case of incentive stock options, all employees
(including officers) of the Company; or, in the case of nonstatutory stock
options, all employees (including officers) or non-employee directors of the
Company.
The exercise price per share of all options granted under the plan in
1994, 1995 and 1996 has been the market price of the stock on the date of the
grant. Generally, options granted become exercisable over three years and must
be exercised within five years of the date of grant.
<TABLE>
<CAPTION>
Number of
Stock Options Shares
- ------------------------------------------------------------ ---------
<S> <C>
Outstanding at January 1, 1994 ($13.20 -- $82.65 per share) 67,305
Granted at $3.75 -- $17.25 per share 102,423
Exercised at $3.75 per share (3,334)
Canceled at $31.95 -- $78.75 per share (62,304)
---------
Balance at December 31, 1994 ($13.20 -- $82.65 per share) 104,090
---------
Granted at $2.87 -- $9.30 per share 609,833
Exercised at $2.87 per share (16,666)
Canceled at $2.87 -- $17.25 per share (42,666)
---------
Balance at December 31, 1995 ($2.87 -- $78.675 per share) 654,591
---------
Granted at $3.50 -- $6.00 per share 141,500
Exercised at $2.87 -- $3.75 per share (120,274)
Canceled at $2.87 -- $82.65 per share (185,584)
---------
Balance at December 31, 1996 ($2.81 -- $11.70 per share) 490,233
---------
Options exercisable at December 31, 1996 286,744
---------
</TABLE>
Included in the 1994 stock option grants is an option granted to Jack
Friedman, the former president of the Company. This option was originally
granted on February 24, 1994 at the price of $13.95 per share. Upon the
resignation of Mr. Friedman and the re- negotiation of his employment agreement,
options previously granted in 1994 were repriced to the then current market
price of the stock of $3.75.
During 1995, the Company granted 240,000 options outside of the Option
Plan, which consisted of 140,000 options at $3.06 to Brian J. Farrell, the
Company's president; 70,000 options to a former employee as a part of the
employee's severance package (50,000 at $2.81 and 20,000 at $2.25); and 30,000
options at $2.87 to two outside consultants who have subsequently become
employees of the Company. In 1996, the Company issued 200,000 options outside of
the Option Plan to Mr. Farrell at an exercise price of $5.00 per share. Share
exercise prices for these options equal the market price of the Company's Common
Stock at the date of the grant.
F-16
<PAGE> 18
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE WEIGHTED
RANGE OF EXERCISE OUTSTANDING AT DECEMBER REMAINING CONTRACTUAL AVERAGE
PRICES 31, 1996 LIFE EXERCISE PRICE
- --------------------- ----------------------- --------------------- --------------
<S> <C> <C> <C>
$2.81 - $ 3.82 694,576 4 $ 3.15
$5.00 - $ 6.00 270,000 5 5.13
$9.30 - $11.70 6,668 8 10.50
----------------------- --------------------- --------------
971,244 4 $ 3.75
======================= ===================== ==============
</TABLE>
<TABLE>
<CAPTION>
SHARES WEIGHTED
EXERCISABLE AT DECEMBER AVERAGE
31, 1996 EXERCISE PRICE
----------------------- -----------------------
<S> <C>
414,641 $ 3.11
116,667 5.13
6,668 10.50
----------------------- -----------------------
537,976 $ 3.64
======================= =======================
</TABLE>
All stock options are granted at the fair market value of the
Company's Common Stock at the grant date. The weighted average estimated fair
value of the options granted in 1995 and 1996 was $1,566,000 and $1,094,000,
respectively. The Company applies Accounting Principles Board Opinion No. 25
and related Interpretations in accounting for its stock option plan.
Accordingly, no compensation cost for the Company's stock option plan and has
been recognized in 1994, 1995 or 1996. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant dates for
awards under the plan consistent with FASB Statement No. 123, Accounting for
Stock Based Compensation, the Company's net income and earnings per share for
the years ended December 31, 1995 and December 31, 1996 would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Net income:
As reported $601,000 $ 1,901,000
Pro forma $ 2,000 1,123,000
Net income per common and common equivalent share:
As reported $ .17 $ .39
Pro forma $ -- $ .23
</TABLE>
The fair market value of options granted under the stock option plan
during 1995 and 1996 was determined using the Black-Scholes option pricing model
utilizing the following weighted-average assumptions:
F-17
<PAGE> 19
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
DECEMBER 31, December 31,
------------ ------------
1995 1996
------------ ------------
<S> <C> <C>
Dividend yield 0% 0%
Anticipated volatility 83% 83%
Risk-free interest rate 5.3% - 7.51% 5.2% - 6.7%
Expected lives 4 years 4 years
</TABLE>
7. MAJOR CUSTOMERS AND RELATED PARTY TRANSACTIONS
Sales (before returns and allowances) to a major customer represented
18%, 12% and 12% of gross sales in the years ended December 31, 1994, 1995 and
1996, respectively. In 1994 one other customer represented 18% of sales (before
returns and allowances). In 1995 another customer represented 10% of sales
(before returns and allowances). The Company performs ongoing credit evaluations
of its customers and maintains an allowance for potential credit losses.
In 1994, 1995 and 1996, the Company paid the law firm of Feder,
Kaszovitz, Isaacson, Weber, Skala & Bass, of which Mr. Skala, a director of the
Company through January 14, 1997, is a partner, approximately $275,000,
$214,000, and $215,000, respectively. As of December 31, 1995 and 1996, the
Company had owing to Feder, Kaszovitz, Isaacson, Weber, Skala & Bass
approximately $181,000 and $76,000, respectively.
In 1996, the Company paid Inland Productions, Inc., a Software
developer which the Company acquired 25% interest in on July 1, 1996 (See Note
9), $775,000. As of December 31, 1996, the Company had owing to Inland
Productions, Inc. $625,000.
8. CAPITAL STOCK TRANSACTIONS
In 1993, the Company entered into an agreement with an independent
investor (the "Investor") pursuant to which the Investor posted a standby letter
of credit in the principal amount of $5,000,000, in favor of BNY as additional
collateral, expiring on February 28, 1994. Effective January 31, 1994, the
Company entered into an agreement with the Investor whereby the Investor
extended the expiration date of the standby letter of credit to December 31,
1994. As consideration, the Company reduced the exercise price of 100,000
warrants previously granted to the Investor to $12.15 per share (the then
current market value of the Company's stock), and granted the Investor an
additional 33,334 warrants to purchase the Company's Common Stock at $12.15 per
share.
In March 1994, the Company sold 133,334 shares of its Common Stock
pursuant to Regulation S resulting in net proceeds to the Company of $980,000.
In June 1994, the Company sold units consisting of 564,445 shares of Common
Stock and warrants to purchase an additional 282,222 shares of Common Stock at
$15.00 per share pursuant to Rule 506 of Regulation D of the Securities Act of
1993, as amended ("the Act"), resulting in net proceeds to the Company of
$4,624,000. In September, October, and November 1994, the Company sold an
aggregate of
F-18
<PAGE> 20
478,704 shares of Common Stock resulting in net proceeds to the Company of
$3,328,000, in sales exempt from the registration requirements of the Act
pursuant to Registration S under the Act. In December 1994, the Company sold
units consisting of 101,665 shares of Common Stock and warrants to purchase
101,665 shares of Common Stock at $20.25 per share in private placements
pursuant to Regulation D under the Act, resulting in net proceeds to the Company
of $888,000, (collectively "the Financings").
The net proceeds received by the Company from the Financings were
utilized in part in connection with the marketing and inventory purchase
commitments related to the launch of the XBAND Videogame Modem (the "XBAND
Modem") (See Note 10), and for the completion of certain Software products under
development.
On July 1, 1995, the Company granted a warrant to the Company's
domestic letter of credit lender to purchase 60,000 shares of Common Stock at a
price of $1.93 per share. The warrant is exercisable until June 30, 1998.
In the months of July, August and September 1995, the Company received
aggregate net proceeds of $2,613,000 from the sales of certain of its
convertible preferred stock pursuant to Regulation S under the Act. The
preferred shares were convertible by the holders thereof into approximately
1,462,000 common shares of the Company. These shares were redeemable at the
Company's option upon 30 days' written notice, and earned dividends at the rate
of 9% per annum, payable at the Company's option in cash or by issuance of
common shares equal to the dividend amount divided by the average market price
of the preceding five days. As of December 31, 1995, a total of 1,335,211 shares
of Common Stock had been issued in connection with this transaction. As of
February 1996, all shares of preferred stock had been converted to Common Stock,
a total of 1,462,928 shares of Common Stock were issued in connection with this
transaction.
As of July 1, 1996, the Company issued 70,000 shares of Common Stock,
at the fair market value of the stock on such date, in settlement of an accrued
liability of $229,000 due to a former employee.
During the years ended December 31, 1995 and 1996, the number of
warrants to purchase the Company's Common Stock exercised were 74,864, and
70,000, respectively. The Company received proceeds from the exercise of such
warrants totaling $149,000. There were no warrants exercised during the year
ended December 31, 1994. At December 31, 1996 outstanding warrants were 706,431
at an average exercise price of $16.81.
9. OTHER LONG-TERM ASSETS
On July 1, 1996, the Company acquired a 25% interest in Inland, a
Software developer for home entertainment game systems. The investment consisted
of $300,000 in cash and 52,660 shares of Common Stock valued at $300,000, 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 Turner's World Championship Wrestling and BASS Masters
F-19
<PAGE> 21
Classic. The Company's investment exceeds its equity in the underlying net
assets by $613,000 which is being amortized over five years. The Company's
equity in the operating results of Inland is not material to the results of
operations.
On August 2, 1996, the Company acquired the business of Heliotrope
Studios, Inc. ("Heliotrope"), an interactive Software developer for PC CD-ROM
and an assignment of the distribution license and certain work-in-progress for a
PC CD-ROM title (Pax Imperia: Eminent Domain) from Blizzard Entertainment, a
division of Davidson Associates. In connection with the acquisition, the Company
incurred costs of $115,000 and assumed certain liabilities (approximately
$150,000) of Heliotrope. The excess of the Company's cost of the acquisition
over the estimated fair value of assets acquired (approximately $265,000) has
been included as a long-term investment in the accompanying balance sheet. Such
excess cost is being amortized over 60 months. Because Heliotrope's assets and
operations prior to the acquisition were insignificant, no pro forma information
is presented.
10. COMMITMENTS AND CONTINGENCIES
XBAND Modem Agreement. On April 23, 1994, the Company entered into a
letter of agreement with Catapult Entertainment, Inc. ("Catapult"), pursuant to
which ToHQ was the exclusive North American distributor of certain hardware
products developed by Catapult. The Company was required to spend a minimum of
$3,000,000 in 1994 and a minimum of $2,000,000 in the first quarter of 1995 to
market and sell the XBAND Modem, and the Company was also required to finance
all inventory purchases. By mutual agreement between the Company and Catapult,
approximately $2,679,000 was spent in marketing efforts by the Company through
December 31, 1994, on the XBAND Modem. Because of the slow sales of the XBAND
Modem and the potential for markdowns and returns, the Company reserved
approximately $2,000,000 (by charging such amount against net sales) for such
markdowns and reserves in 1994.
On May 31, 1995, the Company and Catapult entered into a new agreement
related to the marketing and distribution of the XBAND Modem, pursuant to which
Catapult purchased the Company's inventory and accounts receivable related to
the XBAND Modem for approximately $3,200,000. At the closing of the agreement,
Catapult paid approximately $1,100,000 owed by the Company to the manufacturer
of the XBAND Modem, and $100,000 to the Company. The remaining amounts owing to
the Company were to have been received upon the conclusion of equity financing
by Catapult. The Company recorded the cash received at the closing as sales of
the XBAND Modem in the year ended December 31, 1995 pursuant to the new
agreement. Subsequently, Catapult has filed for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code. Under Catapult's plan of reorganization, the Company
received approximately 15% of its remaining claim against Catapult, or
approximately $200,000, in December 1996. Because the Company determined in May
1995 that receipt of any additional payment by Catapult was highly uncertain,
the Company established a reserve for the remaining payments. As a result,
substantially all of the amount received pursuant to such plan of reorganization
is reflected in the Company's Statement of Operations for the year ended
December 31, 1996.
F-20
<PAGE> 22
Studio-e Litigation. On January 13, 1997, a complaint was filed in
Illinois state court by Studio e, Inc. ("Studio e"), a video game Software
development company, against Inland, its two principals and the Company. The
Company acquired 25% of Inland in June 1996. (See note 9). The complaint
alleges, among other things, that the defendants misappropriated trade secrets
of Studio e, caused delays in the development of one of Studio e's titles, and
as a result were responsible for Studio e's loss of future business. The
complaint seeks, among other remedies, to enjoin the Company's alleged use of
Studio e's trade secrets and damages in an unspecified amount. The complaint
makes additional allegations and seeks additional damages and other remedies
against Inland and Inland's principals. On March 12, 1997, the Company filed an
answer to the complaint denying all allegations of wrongdoing asserted against
it. The Company also filed a counterclaim against Studio e alleging trade
defamation and libel and intentional interference with prospective economic
advantage, and a cross-claim for indemnification against Inland.
Royalties. At December 31, 1995 and 1996, future minimum guaranteed
royalties were $1,752,000 and $3,133,000, respectively. Royalties are classified
as current liabilities based upon contractual payment dates.
Leases. The Company is committed under operating leases with lease
termination dates to February 2001. Minimum future rentals pursuant to these
leases as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 234,000
1998 171,000
1999 76,000
2000 72,000
2001 6,000
----------
$ 559,000
==========
</TABLE>
Rent expense was $251,000, $184,000, and $183,000 in 1994, 1995 and
1996, respectively.
11. OPERATIONS IN GEOGRAPHIC AREAS
The Company is engaged in the development, marketing and distribution
of Software products, and formerly was engaged in the development, marketing and
distribution of traditional toys and games which is considered to be a single
segment. The following information sets forth geographic information on the
Company's sales, earnings (losses) from operations and identifiable assets for
the years ended December 31, 1994, 1995 and 1996:
F-21
<PAGE> 23
<TABLE>
<CAPTION>
United
States Europe Asia Elimination Consolidated
-------- -------- -------- ------------------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994:
Sales to unaffiliated customers $ 11,114 $ 2,175 -- -- $ 13,289
Transfers between geographic areas -- -- $ 84 $ (84) --
-------- -------- -------- -------- --------
Total net revenue $ 11,114 $ 2,175 $ 84 $ (84) $ 13,289
======== ======== ======== ======== ========
Pretax earnings (loss) $(16,017) $ (1,459) $ 108 $ (111) $(17,479)
======== ======== ======== ======== ========
Identifiable assets at
December 31, 1994 $ 12,136 $ 3,484 $ 113 $ (202) $ 15,531
======== ======== ======== ======== ========
Year ended December 31, 1995:
Sales to unaffiliated customers $ 24,894 $ 8,356 -- -- $ 33,250
Transfers between geographic areas -- -- -- -- --
-------- -------- -------- -------- --------
Total net revenue $ 24,894 $ 8,356 -- -- $ 33,250
======== ======== ======== ======== ========
Pretax earnings (loss) $ 1,621 $ (869) $ (4) $ (125) $ 623
======== ======== ======== ======== ========
Identifiable assets at
December 31, 1995 $ 13,681 $ 3,415 $ 2 $ (182) $ 16,916
======== ======== ======== ======== ========
Year ended December 31, 1996:
Sales to unaffiliated customers $ 35,399 $ 14,856 -- -- $ 50,255
Transfers between geographic areas -- -- -- -- --
-------- -------- -------- -------- --------
Total net revenue $ 35,399 $ 14,856 -- -- $ 50,255
======== ======== ======== ======== ========
Pretax earnings $ 1,222 $ 668 $ 19 -- $ 1,909
======== ======== ======== ======== ========
Identifiable assets at
December 31, 1996 $ 17,163 $ 5,860 -- $ (183) $ 22,840
======== ======== ======== ======== ========
</TABLE>
12. SUBSEQUENT EVENTS
On February 14, 1997, the Company completed a public offering of
1,500,000 shares of the Company's Common Stock. In conjunction with the
offering, the Company granted to the underwriters an overallotment option,
exercisable within 30 days of the date of February 11, 1997, to purchase up to
225,000 additional shares of the Common Stock at the public offering price. On
March 11, 1997, the underwriters exercised their overallotment option. All of
these shares were newly issued and sold on behalf of the Company.
The net proceeds of the 1,725,000 shares sold by the Company, of $11.7
million, will be used for general corporate purposes including obtaining new
licenses for, and development expenses related to, new titles and the repayment
of amounts outstanding under the Company's revolving credit facility. A portion
of the proceeds may also be used to fund acquisitions related to the Company's
business.
F-22
<PAGE> 24
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-43909, 33-66954, 33-80757, 333-00180, 333-00182, 333-00184, 333-00136, and
333-16975 of T-HQ, Inc. on Form S-8 of our report dated February 7, 1997 (March
11, 1997 as to Note 12) appearing in the Annual Report on Form 10-K/A of T-HQ,
Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
Los Angeles, California
July 1, 1997
