<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1997.
REGISTRATION NO. 333-18641
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
T-HQ, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEW YORK 13-3541686
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5016 NORTH PARKWAY CALABASAS, CALABASAS, CALIFORNIA 91302
(818) 591-1310
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRIAN J. FARRELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
T-HQ, INC.
5016 NORTH PARKWAY CALABASAS
CALABASAS, CALIFORNIA 91302
(818) 591-1310
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
KENNETH H. LEVIN, ESQ.
SIDLEY & AUSTIN
555 WEST FIFTH STREET, SUITE 4000
LOS ANGELES, CALIFORNIA 90013
(213) 896-6000
ANTHONY J. BISHOP, ESQ.
SHEPPARD, MULLIN, RICHTER & HAMPTON LLP
333 SOUTH HOPE STREET, 48TH FLOOR
LOS ANGELES, CALIFORNIA 90071
(213) 620-1780
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file an amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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T-HQ, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
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FORM S-2 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ------------------------------------------------------------ ---------------------------------
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus............... Facing Page of Registration
Statement and Outside Front Cover
Page
2. Inside Front and Outside Back Cover Pages of
Prospectus........................................... Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earning to Fixed Charges............................. Prospectus Summary; Risk Factors;
Capitalization
4. Use of Proceeds...................................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Risk
Factors; Market Price of Common
Stock; Underwriting
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page;
Underwriting
9. Description of Securities to be Registered........... Prospectus Summary; Market Price
of Common Stock; Dividend Policy;
Description of Securities
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside Front and Inside Front
Cover Pages; Prospectus Summary;
Risk Factors; Market Price of
Common Stock; Dividend Policy;
Use of Proceeds; Capitalization;
Selected Consolidated Financial
Data; Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Principal
Stockholders; Description of
Securities; Shares Eligible for
Future Sale; Consolidated
Financial Statements
12. Incorporation of Certain Information by Reference.... Incorporation of Certain
Documents by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities....................... Not Applicable
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<PAGE> 3
PROSPECTUS
1,500,000 Shares
[T-HQ, INC. LOGO]
COMMON STOCK
------------------------
All of the 1,500,000 shares of Common Stock, par value $0.0001 per share
(the "Common Stock"), offered hereby are being issued and sold by T-HQ, Inc.
("T-HQ" or the "Company"). The Common Stock is quoted on the Nasdaq SmallCap
Market under the symbol "TOYH." The Company has been approved for listing on the
Nasdaq National Market under the symbol "THQI" upon completion of this offering.
On February 10, 1997, the last reported sale price of the Common Stock on the
Nasdaq SmallCap Market was $8.56 per share.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share......................... $7.50 $0.49 $7.01
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Total(3).......................... $11,250,000 $731,250 $10,518,750
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $400,000.
(3) The Company has granted to the Underwriters' a 30-day option to purchase up
to 225,000 additional shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $12,937,500,
$840,938 and $12,096,563, respectively. See "Underwriting."
The shares of Common Stock are being offered by the several underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. The underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that the certificates for the shares of Common Stock will be available
for delivery in New York, New York, on or about February 14, 1997.
WEDBUSH MORGAN SECURITIES
THE DATE OF THIS PROSPECTUS IS FEBRUARY 11, 1997
<PAGE> 4
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE
"UNDERWRITING."
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and consolidated financial statements and notes thereto
appearing elsewhere in this Prospectus. Unless the context otherwise requires,
references in this Prospectus to "T-HQ" or the "Company" are to T-HQ, Inc., a
New York corporation, and its subsidiaries. The term "Title" is used in this
Prospectus to mean an interactive software title that is released by the Company
for use on a particular hardware platform. Unless otherwise stated in this
Prospectus, information in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised. See "Underwriting." All references to
shares of Common Stock, including shares subject to warrants and options and
warrant and option exercise prices, have been adjusted to reflect the
one-for-fifteen reverse stock split effective February 15, 1995.
This Prospectus includes statements of a forward-looking nature relating to
future events or the future financial performance of the Company. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors" and elsewhere in this
Prospectus.
THE COMPANY
T-HQ develops, publishes and distributes interactive entertainment software
for the various hardware platforms that collectively dominate the home video
game market. The Company currently publishes Titles for all major dedicated
platforms manufactured by Sony, Sega and Nintendo, and in 1997 intends to
release Titles for the recently introduced Nintendo 64 platform and multimedia
personal computers. The Company currently publishes products in most interactive
software genres, including action, adventure, arcade, fighting, driving,
strategy, simulation and sports. The Company's principal customers include Toys
"R" Us, Wal-Mart, Target and Best Buy, other national and regional retailers,
discount store chains and specialty retailers.
The Company achieved a turnaround in 1995, reversing two years of
significant losses. Under new leadership, the Company focused its product
strategy, improved inventory management and reduced fixed costs. As a result,
T-HQ's revenues increased from $13.3 million in 1994 to $33.3 million in 1995.
For the nine months ended September 30, 1996, revenues were $29.8 million,
compared to $18.9 million for the same period in 1995.
The Company's objective is to become a leading provider of exciting,
high-quality interactive entertainment software that appeals to a broad range of
consumers for use on a variety of platforms. The Company's business strategy is
based on the following:
- Developing a portfolio of games, primarily for use on advanced platforms,
based on properties that are proprietary or are exclusively licensed to
the Company ("franchise" properties). Franchise properties allow the
Company to release Titles based on such properties on a variety of
hardware platforms, to create sequels to such Titles and to re-release
such Titles at secondary and tertiary price points in the future. The
Company's exclusively licensed properties currently consist of BASS
Masters Classic, Turner's World Championship Wrestling and Brunswick's
Tournament of Champions. Currently, the Company's sole proprietary
product is Pax Imperia II.
- Identifying and licensing titles originally developed in foreign
territories with proven or anticipated consumer acceptance and publishing
localized versions for advanced platforms for distribution in the United
States and other countries. This strategy enables the Company to
participate in the market for advanced platform games while limiting
risk. In 1996, the Company commenced publishing and distributing Sony
PlayStation and Sega Saturn Titles under license from foreign independent
software developers, primarily from Japan. In 1997, the Company expects
to publish approximately 12 additional Titles acquired in such manner,
including K1: The Arena Fighters, Ghost in the Shell and Destruction
Derby XL.
- Publishing high quality software for the large installed base of 16-bit
and Game Boy platforms for so long as the Company believes there is a
significant market for such Titles. The Company believes that the
relatively low cost of development of Titles for such platforms and
reduced competition in these
3
<PAGE> 6
markets creates an opportunity to generate continuing sales and profits
from these segments of the video game market. Examples of such Titles
published by the Company include Disney's Toy Story and Disney's
Pocahontas and LucasArts' Super Empire Strikes Back and Super Return of
the Jedi. Licenses acquired for Titles currently under development
include Disney's Hunchback of Notre Dame and Disney's Hercules (an
animated feature film to be released in 1997). The Company has also
entered into agreements with Electronic Arts Inc., a competing
independent software company, pursuant to which the Company develops,
publishes and distributes Titles based on existing Electronic Arts
titles, primarily for SNES and Game Boy. Representative Electronic Arts
titles include Madden Football, FIFA International Soccer, NBA Live, NHL
Hockey and PGA Tour Golf. The Company intends to continue to seek
licenses of such high-recognition properties to publish Titles for older
platforms.
- Expanding its presence in foreign markets that demonstrate (through an
increasing installed base of platforms) the potential for commercial
success of the Company's Titles. To accomplish this strategy, the Company
has established an office in the United Kingdom to oversee its operations
in Europe and has developed strategic relationships with Japanese
publishers, resulting in foreign sales constituting 25% of the Company's
revenues in 1995 and for the first nine months of 1996.
- Managing the development and marketing of its Titles in a manner that
minimizes financial risk. The Company attempts to minimize its fixed
expenses by such means as adjusting the relative use of employees and
independent contractors who perform software development, adopting
warehouse and shipping systems that closely link product fulfillment
costs to sales volume, and compensating sales representatives based on
sales volume. In addition, by implementing strict product ordering and
inventory controls, the Company attempts to reduce the risks associated
with excessive or obsolete inventory.
As of January 9, 1997, the Company had approximately 37 new Titles under
license or in various stages of development that are currently scheduled for
release in 1997, including seven Titles for PlayStation, seven Titles for
Saturn, one Title for Nintendo 64 and two Titles for use on multimedia personal
computers.
The Company was incorporated in 1989, and its principal executive offices
are located at 5016 North Parkway Calabasas, Calabasas, California 91302. Its
telephone number at that location is (818) 591-1310.
THE OFFERING
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Common Stock offered by the Company........... 1,500,000 shares
Common Stock outstanding after this
offering(1)................................. 6,242,454 shares
Use of proceeds............................... General corporate purposes, including
obtaining licenses for and development
expenditures related to new titles, repayment
of borrowings under the Company's revolving
credit facility, and making acquisitions of
related businesses. See "Use of Proceeds."
Nasdaq SmallCap symbol........................ TOYH
Proposed Nasdaq National Market symbol........ THQI
</TABLE>
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(1) Based on shares outstanding as of January 9, 1997. Excludes 502,833 shares
of Common Stock issuable upon exercise of options issued pursuant to the
Company's Amended and Restated 1990 Stock Option Plan (the "Stock Option
Plan") at a weighted-average exercise price of $3.53 per share, 481,010
shares of Common Stock issuable upon exercise of other options at a
weighted-average exercise price of $4.09 per share, and 706,431 shares of
Common Stock issuable upon exercise of other warrants at a weighted-average
exercise price of $16.81 per share. See "Description of Securities," "Shares
Eligible for Future Sale" and "Underwriting."
T-HQ is a registered trademark and trade name of the Company. Nintendo(R),
Super Nintendo Entertainment System(R) ("SNES"), Game Boy(R) and Nintendo 64(R)
are registered trademarks of Nintendo of
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<PAGE> 7
America, Inc. ("Nintendo"). Sega(R), Genesis(R), Game Gear(R) and Saturn(R) are
registered trademarks of Sega of America, Inc. ("Sega"). Sony PlayStation(R) is
a registered trademark of Sony Computer Entertainment Inc. ("Sony"). Nintendo,
Sega and Sony are referred to herein collectively as the "Manufacturers." This
Prospectus includes trademarks other than those identified in this paragraph.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
----------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
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STATEMENT OF OPERATIONS DATA:
Net sales......................... $32,940 $56,478 $ 37,478 $ 13,289 $33,250 $18,935 $29,772
Operating income (loss)........... 6,114 6,762 (19,233) (17,367) 757 246 1,106
Income (loss) before income
taxes........................... 6,224 6,686 (19,653) (17,479) 623 154 891
Net income (loss)................. 4,088 4,046 (16,240) (17,490) 601 154 887
Net income (loss) per share....... $ 4.94 $ 2.79 $ (10.80) $ (8.75) $ .17 $ .05 $ .19
Weighted-average number of common
and common equivalent shares
outstanding..................... 828 1,448 1,504 1,998 3,482 3,007 4,684
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(1)
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BALANCE SHEET DATA:
Working capital.............................................................. $ 8,203 $ 18,322
Total assets................................................................. 20,193 28,834
Revolving Credit Facility.................................................... 1,478 --
Long-term debt............................................................... -- --
Stockholders' equity......................................................... 9,613 19,732
</TABLE>
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(1) Adjusted to give effect to the sale of 1,500,000 shares of Common Stock by
the Company in this offering and the application of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
RECENT DEVELOPMENTS
On February 4, 1997, the Company announced results of operations for the
fiscal quarter and year ended December 31, 1996. Net sales for the fourth
quarter were approximately $20.4 million, a 43% increase over the $14.3 million
of net sales for the fourth quarter of 1995. Net income for the fourth quarter
was approximately $1,010,000, a 126% increase over the $447,000 of net income
reported for the fourth quarter of 1995. Net income per share for the fourth
quarter was $0.19, calculated on approximately 5.3 million weighted-average
shares of Common Stock outstanding, as compared to $0.10 per share for the
fourth quarter of 1995, calculated on 4.6 million weighted-average shares.
Net sales for the year ended December 31, 1996 were approximately $50.2
million, a 51% increase over the $33.3 million reported for 1995, and net income
was approximately $1,900,000, or $0.39 per share, for 1996, as compared to net
income of $601,000, or $0.17 per share, for 1995.
The foregoing financial information is unaudited but in the opinion of
management includes all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's net sales, net income and net income
per share for the periods indicated.
5
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RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully, in addition to the other information contained in this Prospectus,
the risk factors set forth below before making a decision to purchase the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus. In each instance in
which a risk factor identifies an event that would or could adversely affect the
Company, such risk should be viewed as potentially adversely affecting the
Company's business, results of operations and financial condition.
ACQUISITION OF PROPERTIES AND DEVELOPMENT OF NEW TITLES
The Company's continuing profitability is a direct result of its ability to
timely develop and sell new Titles to replace declining revenues from older
Titles. Consumer preferences for interactive entertainment software ("Software")
are difficult to predict, and few Software titles achieve sustained market
acceptance. If revenues from new Titles fail to replace declining revenues from
existing Titles, the Company would be materially and adversely affected.
The development of new Titles is dependent in substantial part upon the
Company's identification and exploitation in a timely manner of Titles based
upon entertainment projects (such as movies, television programs and arcade
games), sports and entertainment personalities, or popular sports, trends or
concepts ("Properties") that have high public visibility or recognition or that
reflect the trends of popular culture. The determination of which Titles the
Company should develop is highly subjective and there can be no assurances that
any new Title will be successful. In addition, the Company is in competition
with numerous other Software companies for licenses to develop Software based on
such Properties. To the extent competition intensifies for licenses to highly
desirable Properties, the Company may encounter increased difficulty in
obtaining these licenses. See "Business -- Competition." The failure of the
Company to accurately identify and secure the rights to Properties that are or
will become popular would have a material adverse effect on the Company.
Properties generate significant public interest for periods that are
unpredictable and short. Consequently, the Company's commercially successful
Titles may be marketable in material quantities for only a limited time, often
for less than six months. As is typical of Software, the life cycle of a Title
generally consists of a relatively high level of sales during the first few
months after introduction, followed by market saturation and a decline in sales.
Accordingly, substantially all of the Company's net sales for a particular year
are generated by Titles released in that year. In some instances, a sales
decline may also be accompanied by decreasing sales prices, which may result in
credits or allowances to the Company's customers. See "-- Discounts, Allowances
and Returns; Inventory Management." In addition, the development cycle for new
Titles, including the development of the necessary game software, approval by
the Manufacturer and production of the initial cartridges or CD-ROMs, typically
has ranged from nine to 18 months. During such period, the market appeal of a
Title may decline. To the extent the Company experiences delays in the
development or shipment of new Titles, or if new Titles are not successful in
the market, the Company would be materially and adversely affected. See
"Business -- Software Design and Development" and "Business -- Manufacturing."
As of January 9, 1997, the Company had approximately 37 new Titles under
license or in various stages of development that are currently scheduled for
release in 1997. For the reasons set forth above, there can be no assurance that
the Company will be able to release each of these Titles within such time or at
all, or that the Company will be able to secure the rights to new Titles at a
rate that will maintain the Company's current development and release schedule.
DISCOUNTS, ALLOWANCES AND RETURNS; INVENTORY MANAGEMENT
Although the Company's arrangements with its distributors and retailers
generally do not give such customers the right to return manufactured products
embodying the Titles (the "Products") to the Company (other than defective
Products) or to cancel firm orders, the Company often negotiates accommodations
to
6
<PAGE> 9
retailers (and, less often, to distributors) when demand for specific items
falls below expectations for the purpose of maintaining its relationships with
its customers. Such accommodations consist of acquiescing to the customer's
request that not all booked orders be filled or that not all shipped orders be
accepted, negotiated price discounts, credits against future orders and, less
often, the return of Products to the Company. It is the Company's practice to
accept all returns of defective or damaged Products.
At the time of Product shipment, the Company establishes provisions against
the gross revenues generated by such shipment based on estimates of future
returns of, and other customer accommodations that may be granted with respect
to, such Products, based on the Company's historical experience, retailer
inventories of the Titles and other factors. For the year ended December 31,
1995 and the nine months ended September 30, 1996, provisions of approximately
$3.6 million and $3.3 million, respectively, were taken against gross sales made
during such periods, and as of September 30, 1996, the Company's aggregate
reserve against accounts receivable for returns and customer accommodations was
approximately $3.3 million.
The Company cannot predict the amount or nature of accommodations that will
be provided to its customers in future periods. Although the Company believes
its reserves are adequate with respect to such matters, there can be no
assurance that actual returns and other customer accommodations will not exceed
the reserves established. To the extent such accommodations were to exceed the
Company's reserves, the Company would be adversely affected.
The identification by the Company of slow-moving or obsolete inventory,
whether as a result of requests from customers for accommodations or otherwise,
would require the Company to establish reserves against such inventory or to
write-down the value of such inventory to its estimated net realizable value. In
1993 and 1994 the Company incurred material charges to income as a result of
such write-downs, but has not experienced such problems subsequent to those
periods. While the Company believes that substantially all of its current
inventory is saleable in the ordinary course, there can be no assurance that in
the future the Company will not be required to incur charges related to
slow-moving or obsolete inventory.
REVENUE FLUCTUATIONS AND SEASONALITY
The Company has experienced and may continue to experience significant
quarterly fluctuations in net sales and operating results due to a variety of
factors, including the timing of releases of new Titles by the Company, the
popularity of both new Titles and Titles released in prior periods, fluctuations
in the mix of Titles with varying profit margins, the timing of customer orders,
the timing of shipments by the Manufacturers, fluctuations in the size and rate
of growth of consumer demand for Software for various hardware platforms
("Platforms"), the timing of the introduction of new Platforms and the accuracy
of retailer's forecasts of consumer demand. The Company's expenses are based, in
part, on its expectations of future revenues and, as a result, operating results
would be disproportionately and adversely affected by a decrease in sales or a
failure by the Company to meet its sales expectations. In addition, the Software
market is highly seasonal, with sales typically significantly higher during the
fourth quarter (due primarily to the increased demand for interactive games
during the year-end holiday buying season). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview." There
can be no assurance that the Company can maintain consistent profitability on a
quarterly or annual basis.
CUSTOMER CONCENTRATION AND CREDIT RISK
Sales to the Company's ten largest customers collectively accounted for
approximately 52% of the Company's gross sales in 1995 and 54% for the nine
months ended September 30, 1996. Toys "R" Us, Wal-Mart and Kay Bee accounted for
approximately 12%, 10% and 7%, respectively, of the Company's gross sales in
1995. For the nine months ended September 30, 1996, Toys "R" Us, Wal-Mart and
Target accounted for 12%, 9% and 7% of the Company's gross sales, respectively.
The Company has no written agreement or other understanding with any of its
customers that relate to future purchases by such customers, and thus such
purchases could be terminated at any time. A termination of or other adverse
change in the Company's relationship with any of its largest customers would
have a material adverse effect on the Company.
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The Company's sales of Products are typically made on credit, with terms
that vary depending upon the customer and demand for such Products. The Company
does not hold any collateral to secure payment by its customers, and currently
does not factor any of its receivables. Thus, the Company bears the risk of its
customers' and distributors' inability to pay such receivables or the effect of
any delay in such payment. Retailers and distributors compete in a volatile
industry and are subject to the risk of business failure. A business failure by
any of the Company's largest customers would have, and a business failure by any
of the Company's distributors or other retailers could have, a material adverse
effect on the Company.
RISKS ASSOCIATED WITH TITLES FOR MULTIMEDIA PERSONAL COMPUTERS AND PROPRIETARY
TITLES
In 1996, the Company acquired Heliotrope Studios, Inc. ("Heliotrope") in
order to expand its offerings of interactive games and to enable the Company to
develop Titles for the multimedia personal computer ("PC") market. See
"Business -- Business Strategy" and "Business -- Software Design and
Development." While the principals of Heliotrope have certain experience
developing and marketing CD-ROM games for PCs, prior to this acquisition the
Company had no experience in this segment of the Software market. The
development and marketing of such Titles can be expected to subject the Company
to risks in addition to those encountered in the operation of the Company's
historical business, some of which may not be anticipated by the Company. Such
risks include the ability to accurately predict which Titles will appeal to the
purchasers of interactive games for PCs, greater reliance on distributors in
order to obtain retail distribution, and the greater retailer returns
experienced for CD-ROMs for PCs. There can be no assurance that the Company will
be able to successfully develop and market Titles for the PC market.
In 1997, the Company expects to release its first proprietary Title, Pax
Imperia II, an intergalactic strategy game. The Company's strategy includes
acquiring or developing other Properties that are proprietary to the Company.
The developing and marketing of such Titles can also be expected to subject the
Company to additional risks, including the risk that Titles that do not have
high public visibility or recognition will have more limited market appeal.
GROWTH STRATEGY
From time to time the Company evaluates potential acquisitions of, or
investments in, other Software publishers or developers that the Company
believes will complement or enhance its business. In connection with any such
acquisitions, the Company may incur debt or issue debt or additional equity
securities, depending on market conditions and other factors. There can be no
assurance that the Company will consummate any such acquisitions or investments
or, if consummated, that such acquisitions or investments will prove to be
beneficial to the Company. The Company is not currently negotiating, nor does it
have any commitments or understandings with respect to, any future acquisitions
or investments.
DEPENDENCE ON THE PLATFORM MANUFACTURERS
The Company is wholly dependent on the Manufacturers and its licenses with
the Manufacturers (the "Platform Licenses") for the right to publish Titles for
the Manufacturers' Platforms and for the manufacture of its Titles. For the year
ended December 31, 1995, 79% of the Company's net sales consisted of Nintendo
Titles and 21% consisted of Sega Titles, and for the nine months ended September
30, 1996, 74% of net sales consisted of Nintendo Titles, 15% consisted of Sega
Titles and 11% consisted of Sony Titles. The Company's current Platform License
with Sega limits the Company to introducing three titles for the Sega Genesis
per year of the license. In addition, the Company's Platform License with Sony,
and with Nintendo for Nintendo 64, require that the Company obtain approval for
the publication of new Titles on a title-by-title basis. As a result, the number
of Titles the Company is able to publish for these Platforms, and thus the
Company's revenues from Titles for these Platforms, may be limited.
In the event that, at the end of the term of the current Platform License
with a Manufacturer, such Manufacturer chooses not to renew or extend such
agreement, or if a Manufacturer were to terminate such license for any reason,
the Company would be unable to publish additional Titles for such Manufacturer's
Platform, which would materially and adversely affect the Company.
8
<PAGE> 11
Each of the Manufacturers is the sole manufacturer of the Products
published by the Company under license from such Manufacturer. The Platform
Licenses provide that such Manufacturer may raise prices for the Titles at any
time and include other provisions giving the Manufacturer substantial control
over the Company's release of new Titles. Furthermore, the relatively long
manufacturing cycle for cartridge-based Products (from 30 to 75 days) requires
the Company to accurately forecast retailer and consumer demand for its Titles.
Since each of the Manufacturers is also a publisher of Software for its own
Platforms, and also manufactures products for all of their other licensees, the
Manufacturers may give priority to their own products or those of other
publishers in the event of insufficient manufacturing capacity. If the Company
experiences unanticipated delays in the delivery of Products for these or any
other reasons, the Company would be materially and adversely affected. See
"Business -- Manufacturing."
RECOVERY OF PREPAID ROYALTIES, GUARANTEES AND CAPITALIZED DEVELOPMENT COSTS
The Company typically enters into agreements with licensors of Properties
and developers of Titles that require advance payments of royalties and/or
guaranteed minimum royalty payments. There can be no assurance that the sales of
Products for which such royalties are paid will be sufficient to cover the
amount of these required royalty payments. The Company capitalizes its prepaid
royalties, and capitalizes software development costs upon the establishment of
technological feasibility of the Title under development. Amortization of these
payments and costs is determined on a title-by-title basis based on the greater
of (i) the ratio of current gross revenues for a Title to the sum of its current
and anticipated gross revenues, or (ii) the straight-line method over the
estimated remaining economic life of the Title. The Company analyzes such
capitalized costs quarterly and writes off as project abandonment losses these
capitalized payments and costs (and expenses any unpaid guaranteed minimum
royalties) when, based on the Company's estimate, future revenues will not be
sufficient to recover such costs. As of September 30, 1996, the Company had
prepaid royalties and capitalized development costs of approximately $5.2
million. If the Company were required to write off a material portion of its
prepaid royalties or capitalized development costs, the Company's results of
operations could be adversely affected.
CHANGES IN CONSUMER DEMAND AND TECHNOLOGY
During the approximately 20-year history of the interactive entertainment
industry, there have been periods of significant growth in consumer interest,
followed by periods in which growth has substantially declined. The Company's
sales are dependent, among other factors, on the popularity and unit sales of
Platforms generally, as well as the relative popularity and unit sales of the
Platforms of the various Manufacturers. The relative popularity of Platforms has
experienced wide fluctuations in recent years. Unexpected declines in the
popularity of a particular Platform can be expected to have a material adverse
effect on consumer demand for Titles released or scheduled for release for such
Platform.
The interactive game industry is characterized by rapid technological
change. As a result, the Company must continually anticipate and adapt its
offerings to emerging Platforms and evolving consumer preferences. The
development of Software for new Platforms requires substantial investment.
Generally, such development efforts must occur well in advance of the release of
new Platforms in order to introduce Titles on a timely basis following the
release of such Platforms. The development and marketing of Titles for new
Platforms may require greater financial and technical resources than are
currently available to the Company. In addition, there can be no assurance that
the new Platforms for which the Company develops Titles will achieve market
acceptance and, as a result, there can be no assurance that the Company's
development efforts with respect to such new Platforms will lead to marketable
Titles or Titles that generate sufficient revenues to recover their development
and marketing costs. This risk can be expected to increase in the future, as
continuing increases in development costs require corresponding increases in net
sales in order for the Company to maintain profitability. In addition, as the
Company introduces CD-ROM Titles for PCs, the Company's game software must
maintain compatibility with such computers, their operating software and their
hardware accessories. The failure of the Company to timely develop Titles for
new Platforms that achieve significant market acceptance, to maintain net sales
that are commensurate with product development costs, or to maintain such
compatibility would have a material adverse effect on the Company.
9
<PAGE> 12
The introduction of new Platforms and technologies can render existing
Software obsolete and unmarketable. More commonly, as more advanced Platforms
are introduced, consumer demand for Software for older Platforms diminishes. For
example, while the Company's experience indicates that competition for licenses
to develop new Titles for 16-bit Platforms is significantly less intense than
for 32-bit and 64-bit Platforms, there can be no assurance that, as a result of
such reduced consumer demand for such Titles, the Company's Titles for 16-bit
Platforms will generate sufficient sales to make such Titles profitable. Despite
this diminishing demand, the Company intends to continue to publish new Titles
for older Platforms for so long as the Company believes there is a significant
market for such Titles.
A number of Software publishers who compete with the Company are currently
developing Software for use by consumers over the Internet. While the Company
believes that the market for such Software is currently insignificant, future
increases in the availability of such Software or technological advances in such
Software could result in a decline in Platform-based Software and thus have a
material adverse effect on the Company.
COMPETITION
The interactive entertainment industry is intensely competitive. The
Company competes, for both licenses to Properties and the sale of Software, with
the Manufacturers, each of whom is the largest developer and marketer of
Software for its Platforms. There can be no assurance that these companies will
not increase their own Software development efforts. As a result of their
commanding positions in the industry as the manufacturers of Platforms and
publishers of Software for their Platforms, the Manufacturers generally have
better bargaining positions with respect to retail pricing, shelf space and
purchases than do any of their licensees, including the Company. In addition,
each of the Manufacturers has dozens of active licensees, each of which is also
a competitor of the Company. Each of the Manufacturers and many of these other
competitors (such as Acclaim Entertainment, Inc., Disney Interactive, Inc.,
Electronic Arts Inc., GT Interactive Software Corp., Midway Games Inc. and
Microsoft Corporation) have broader Software lines and greater financial,
marketing and other resources than the Company; these competitive advantages
enable such competitors to market their Software more aggressively and make
higher offers or guarantees in connection with the acquisition of licensed
Properties. In addition, as competition for retail shelf space becomes more
intense, the Company may need to increase marketing expenditures to maintain
sales of its Titles; and as competition for popular Properties increases, the
cost of acquiring licenses for such Properties is likely to increase, resulting
in reduced margins. Prolonged price competition, increased licensing costs or
reduced profit margins would have a material adverse effect on the Company.
There can be no assurance that the Company will be able to compete successfully
with the Manufacturers and their other licensees in the future.
In addition, the market for the Company's products is characterized by
significant price competition, and the Company expects that it will face
increasing pricing pressures from its current and future competitors.
Accordingly, there can be no assurance that the Company will be able to provide
products that compare favorably with the products of the Company's competitors
or that competitive pressures will not require the Company to reduce its prices.
Any material reduction in the price of the Company's products would negatively
affect operating income as a percentage of net revenue and would require the
Company to increase unit sales in order to maintain net revenue.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment market, which will
result in greater competition for the Company. In particular, many of the
Company's competitors are developing on-line interactive games and interactive
networks that will be competitive with the Company's interactive products. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating results
and financial condition.
10
<PAGE> 13
DEPENDENCE ON KEY PERSONNEL
The Company relies to a substantial extent on the management, marketing,
sales, technical and software development skills of a limited number of
employees to formulate and implement its business plan, including the
development of its Titles. The Company's success depends upon, to a significant
extent, its ability to attract and retain key management and software
development personnel. Competition for such employees is acute and the process
of locating key personnel with the combination of skills and attributes required
to execute the Company's strategy is often lengthy. The loss of services of key
personnel could have a material adverse effect on the Company. The only officer
with whom the Company has an employment agreement is Brian J. Farrell, its
President and Chief Executive Officer. See "Management."
PROPRIETARY RIGHTS OF THE MANUFACTURERS
The Company depends on the Manufacturers for the protection of intellectual
property rights to their respective Platforms, cartridges and CD-ROMs, their
ability to control the proliferation of new titles by licensees and others, and
their ability to discourage unauthorized persons from producing Software for
their Platforms. There can be no assurance that the Manufacturers will be able
to continue to (i) protect their rights so that the proprietary information and
technology licensed by the Company from the Manufacturers will not become
generally available, (ii) control the proliferation of Software, (iii)
discourage unauthorized persons from producing Software, or (iv) believe that it
is in their best interests to continue any of the foregoing policies. A change
in any of these policies could have a material adverse effect on the Company.
PROPRIETARY RIGHTS OF THE COMPANY
As a result of the Company's acquisition of Heliotrope, the Company owns
the rights to certain intellectual property with respect to Pax Imperia II. See
"Business -- Strategy." However, other than such rights, its licenses from the
Manufacturers to produce Titles and its licenses to develop and/or publish
Titles based on Properties owned or controlled by others, the Company does not
have any material proprietary rights, technology or intellectual property.
As a result of the proprietary rights of the Manufacturers and the efforts
taken by the Manufacturers to protect such rights, the Company does not believe
that there is a material amount of unauthorized copying of the Company's Titles.
However, unauthorized production occurs in the computer software industry
generally, and were a significant amount of unauthorized production of the
Company's CD-ROM Products for PCs to occur, the Company could be materially and
adversely affected.
FOREIGN SALES AND CURRENCY FLUCTUATIONS
For fiscal year 1995 and the first nine months of 1996, foreign sales
represented approximately 25% of the Company's net sales, and the Company
expects that foreign sales will continue to account for a significant portion of
its net sales in future periods. Foreign sales are subject to inherent risks,
including unexpected changes in regulatory requirements, tariffs and other
barriers, difficulties in staffing and managing foreign operations and the
possibility of difficulty in accounts receivable collection. There can be no
assurance that these or other factors will not have an adverse effect on the
Company's future foreign sales.
Because the majority of foreign sales are made in U.S. dollars, the Company
does not believe that foreign currency fluctuations have had a material effect
on its results of operations. To the extent the Company's foreign sales increase
and such sales are not denominated in U.S. dollars, the Company's reported sales
and results of operations could be adversely affected by foreign currency
fluctuations. The Company has not engaged in any foreign exchange hedging
activities and does not have any current plans to engage in any such activities.
11
<PAGE> 14
LIMITATION ON USE OF NET OPERATING LOSS CARRYFORWARDS
At December 31, 1995, for federal income tax purposes the Company had
reported approximately $17.5 million of net operating loss ("NOL") carryforwards
incurred since 1993. The sale of the shares of Common Stock offered by the
Company hereby will result in an "ownership change" of the Company for purposes
of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. As a
result, the amount of the NOL carryforward available to reduce the Company's
federal income tax liability in future years in which the Company has taxable
income will be limited to an annual amount equal to (i) the fair market value of
the Company's capital stock immediately prior to the consummation of the
offering made hereby, multiplied by (ii) the "long-term tax exempt rate"
published by the Internal Revenue Service for the month in which this offering
is consummated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview."
VOLATILITY OF SHARE PRICE
The market price of the Common Stock has been, and is likely to continue to
be, highly volatile. Such price has fluctuated substantially in recent periods.
See "Market Price of Common Stock" and "Dividend Policy." In addition, there has
been a history of significant volatility in the market prices for shares of
other companies engaged in the Software industry. Factors such as the timing and
market acceptance of new Titles, the introduction of new Software by the
Company's competitors, loss of key personnel of the Company, variations in
quarterly operating results or changes in market conditions in the Software
industry generally could have a significant impact on the market price of the
Common Stock. Thus, there can be no assurance that the market price of the
Common Stock will not decline below the public offering price or experience
extreme volatility.
NO DIVIDENDS
The Company has not paid any cash or other dividends on its Common Stock
and does not expect to declare or pay any cash dividends in the foreseeable
future. In addition, the Company's revolving credit agreement restricts the
payment of any cash dividends. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock. Upon completion of this
offering, the 1,500,000 shares of Common Stock offered hereby (1,725,000 million
if the Underwriters' over-allotment option is exercised in full) will be
eligible for sale in the open market. Upon the expiration of "lock-up
agreements" with the Underwriters, 180 days after the consummation of this
offering (or earlier if the Underwriters decide to release shares from the
lock-up agreements), the shares subject to these agreements will be eligible for
sale subject to the limitations of Rule 144 promulgated under the Securities Act
of 1933, as amended (the "Securities Act") with respect to shares held by
"affiliates" of the Company (as that term is defined under the Securities Act).
In addition, the Company has reserved for issuance sufficient shares to fulfill
its obligations to issue shares upon the exercise of certain options and
warrants to purchase shares of Common Stock. See "Description of Securities --
Warrants and Options" and "Shares Eligible for Future Sale."
12
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered by the Company hereby, after deducting underwriting
discounts and commissions and estimated offering expenses, are estimated to be
approximately $10,119,000 (approximately $11,697,000 if the Underwriters' over-
allotment option is exercised in full). The Company intends to use such proceeds
for general corporate purposes including obtaining licenses for, and development
expenditures related to, new Titles and the repayment of amounts outstanding
under the Company's revolving credit facility with a bank (the "Revolving Credit
Facility"). A portion of such proceeds may also be used to fund acquisitions
related to the Company's business. The Company is not currently negotiating, nor
does it have any commitments or understandings with respect to, any acquisitions
of or investments in other companies. Following the repayment of indebtedness
under the Revolving Credit Facility, and pending the use of the balance of such
proceeds for such other purposes, the Company will invest such proceeds
principally in United States government securities, short-term certificates of
deposit, money market funds or other short-term, interest-bearing investments.
All borrowings under the Revolving Credit Facility are due in full on June
30, 1997, at which time the Revolving Credit Facility will terminate if not
extended. The interest rate under the Revolving Credit Facility is the bank's
prime lending rate plus 1.25% per annum. At January 9, 1997, the Company had
$4,497,000 of borrowings outstanding under the Revolving Credit Facility, all of
which the Company used for general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
MARKET PRICE OF COMMON STOCK
Through approximately February 17, 1995, the Common Stock traded on the
Nasdaq National Market under the symbol "TOYH." Since February 20, 1995, the
Common Stock has been quoted on the Nasdaq SmallCap Market under the same
symbol. The Company has been approved for listing on the Nasdaq National Market
under the symbol "THQI" upon completion of this offering. The following table
sets forth for the periods indicated the high and low closing sales prices of
the Common Stock as reported on the Nasdaq National Market or the Nasdaq
SmallCap Market.
<TABLE>
<CAPTION>
CLOSING SALES
PRICES
-------------------
HIGH LOW
----- -----
<S> <C> <C>
1995
First Quarter................................. $ 9 3/8 $2 3/4
Second Quarter................................ 3 1/8 1 35/6
Third Quarter................................. 4 3/4 1 15/1
Fourth Quarter................................ 6 2 3/4
1996
First Quarter................................. 5 3/1 3 1/2
Second Quarter................................ 6 1/4 3 3/1
Third Quarter................................. 7 9/1 4 1/8
Fourth Quarter................................ 10 3/8 7 1/1
1997
First Quarter (through February 10, 1997)..... 9 1/4 8 1/8
</TABLE>
The closing sale price of the Common Stock on February 10, 1997, as
reported on the Nasdaq SmallCap Market was $8.56 per share. As of February 10,
1997, there were approximately 417 holders of record of the Common Stock.
13
<PAGE> 16
DIVIDEND POLICY
The Company has never declared or paid any dividends on the Common Stock
and does not intend to pay any cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain its earnings, if any, for the
future operation and expansion of its business. The Revolving Credit Facility
prohibits the Company from declaring or paying any dividend on, or making any
distribution in respect of, the Company's capital stock. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
CAPITALIZATION
The following sets forth (i) the actual capitalization of the Company at
September 30, 1996, (ii) such capitalization as adjusted to give effect to the
receipt of the net proceeds from the sale of 1,500,000 shares of Common Stock
offered by the Company hereby at the public offering price of $7.50 per share,
less underwriting discounts and commissions and estimated offering expenses.
This information is qualified in its entirety by, and should be read in
conjunction with, the consolidated financial statements and the notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Revolving Credit Facility (1)....................... $ 1,478 $ --
-------- --------
Stockholders' equity:
Common stock, par value $0.0001;
100,000,000 shares authorized; 4,701,420 shares
issued and outstanding; 6,201,420 shares issued
and outstanding as adjusted(2)................. 4 4
Cumulative foreign currency translation
adjustment..................................... (367) (367)
Additional paid-in capital........................ 34,452 44,571
Accumulated deficit............................... (24,476) (24,476)
-------- --------
Total stockholders' equity..................... 9,613 19,732
-------- --------
Total capitalization...................... $ 11,091 $ 19,732
======== ========
</TABLE>
- ---------------
(1) As of January 9, 1997, the actual amount outstanding under the Revolving
Credit Facility was $4,497,000. In addition, as of such date the Company's
lenders had issued and outstanding an aggregate of $5,043,000 of letters of
credit. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
(2) Excludes shares of Common Stock issuable upon exercise of options and
warrants. See "Description of Securities."
14
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of the Company for each
of the years ended December 31, 1993, 1994 and 1995 have been derived from and
are qualified by reference to the audited consolidated financial statements of
the Company included elsewhere in this Prospectus which have been audited by
Deloitte & Touche LLP, independent auditors. The following selected consolidated
financial data as of and for the periods ended December 31, 1991 and 1992 were
derived from audited financial statements not included in this Prospectus. The
selected financial data as of and for the nine months ended September 30, 1995
and 1996 are derived from unaudited financial statements but have been prepared
on a basis substantially consistent with the audited consolidated financial
statements and, in the opinion of the Company, contain all adjustments (which
consist only of normal recurring adjustments) necessary to present fairly the
financial position and results of operations of the Company as of such dates and
for such periods. The results of operations for interim periods are not
necessarily indicative of a full year's operations. This selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEARS ENDED DECEMBER 31, 30,
------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $32,940 $56,478 $ 37,478 $ 13,289 $33,250 $18,935 $29,772
------- ------- -------- -------- ------- ------- -------
Cost and expenses:
Cost of sales......................... 16,933 31,521 31,415 12,651 19,501 10,798 16,783
Royalties............................. 4,427 7,179 6,028 2,327 3,641 2,103 5,084
Product development................... 284 831 1,186 713 761 527 767
Project abandonment................... -- -- 5,489 3,754 1,025 375 375
Selling............................... 1,466 4,237 4,843 5,909 2,393 1,689 2,304
General and administrative............ 3,716 5,948 7,221 4,806 3,988 2,475 2,764
Operating interest.................... -- -- 529 496 1,184 722 589
------- ------- -------- -------- ------- ------- -------
Total costs and expenses....... 26,826 49,716 56,711 30,656 32,493 18,689 28,666
------- ------- -------- -------- ------- ------- -------
Income (loss) from operations........... 6,114 6,762 (19,233) (17,367) 757 246 1,106
Interest income (expense) -- net........ 110 (76) (420) (112) (134) (92) (215)
------- ------- -------- -------- ------- ------- -------
Income (loss) before income taxes....... 6,224 6,686 (19,653) (17,479) 623 154 891
Provision (benefit) for income taxes.... 2,136 2,640 (3,413) 11 22 -- 4
------- ------- -------- -------- ------- ------- -------
Net income (loss)....................... $ 4,088 $ 4,046 $(16,240) $(17,490) $ 601 $ 154 $ 887
======= ======= ======== ======== ======= ======= =======
Net income (loss) per share............. $ 4.94 $ 2.79 $ (10.80) $ (8.75) $ .17 $ .05 $ .19
======= ======= ======== ======== ======= ======= =======
Weighted-average number of common and
common equivalent shares
outstanding........................... 828 1,448 1,504 1,998 3,482 3,007 4,684
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $17,036 $25,036 $11,046 $ 3,736 $ 7,082 $ 8,203
Total assets................................... 30,776 53,394 22,305 15,531 16,916 20,193
Revolving Credit Facility...................... 2,021 14,868 -- -- -- 1,478
Long-term debt................................. -- -- -- -- -- --
Stockholders' equity........................... 17,408 26,064 11,627 4,254 7,598 9,613
</TABLE>
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, publishes and distributes Software for the major
Platforms sold by the Manufacturers. For the nine months ended September 30,
1996, sales of Nintendo Software constituted 74% of the Company's sales, Sega
Software sales were 15%, and the remaining 11% were derived from sales of Sony
PlayStation Titles.
The Company achieved a turnaround in 1995, reversing two years of
significant losses. Under new leadership, the Company focused its product
strategy, improved inventory management and reduced fixed costs. As a result,
the Company's revenues increased from $13.3 million in 1994 to $33.3 million in
1995. For the nine months ended September 30, 1996, revenues were $29.8 million,
as compared to $18.9 million for the same period of 1995.
Although there remains a large installed base of 16-bit Platforms, the
Company believes that growth in the Software market will be derived principally
from games developed for the more advanced Platforms. Accordingly, the Company
intends to devote an increasing portion of its resources to the development of
Titles for 32-bit and 64-bit Platforms and PCs.
The Company's business cycle generally commences with the securing of a
license to publish one or more Titles based on a Property. Such licenses
typically require an advance payment to the licensor and a guarantee of minimum
future royalties. See "-- Recovery of Prepaid Royalties, Guarantees and
Capitalized Development Costs." After securing the Property, the Company
commences software development for the Title. Upon completion of development and
approval of the Title by the Manufacturer, the Company orders Products and
generally causes a letter of credit to be opened in favor of the Manufacturer.
Products are shipped at the Company's expense to a public warehouse in
California for domestic distribution or in the United Kingdom for foreign
distribution.
The Company has unfilled sales orders the amount of which fluctuates from
time to time, commonly referred to as "backlog." However, substantially all of
the Company's Product orders are fulfilled shortly after they are received.
Accordingly, the Company does not believe that the amount of its unfilled sales
orders as of the end of a period is a meaningful indicator of sales in future
periods.
Revenue Fluctuations and Seasonality. The Company has experienced and may
continue to experience significant quarterly fluctuations in net sales and
operating results due to a variety of factors, including the timing of releases
of new Titles by the Company, the popularity of both new Titles and Titles
released in prior periods, fluctuations in the mix of Titles with varying profit
margins, the timing of customer orders, the timing of shipments by the
Manufacturers, fluctuations in the size and rate of growth of consumer demand
for Software for various Platforms, the timing of the introduction of new
Platforms and the accuracy of retailer's forecasts of consumer demand. The
Company's expenses are based, in part, on its expectations of future revenues
and, as a result, operating results would be disproportionately and adversely
affected by a decrease in sales or a failure by the Company to meet its sales
expectations. In addition, the Software market is highly seasonal, with sales
typically significantly higher during the fourth quarter (due primarily to the
increased demand for interactive games during the year-end holiday buying
season). There can be no assurance that the Company can maintain consistent
profitability on a quarterly or annual basis.
Profit margins may vary over time as a result of a variety of other
factors. Profit margins for cartridge Products can vary based on the cost of the
memory chip used for a particular Title. As Software has grown more complex, the
trend in the Software industry has been to utilize chips with greater capacity
and thus greater cost. CD-ROMs have significantly lower per unit manufacturing
costs than cartridge-based Products. However, such savings may be offset by
typically higher development costs for Titles published on CD-ROMs; such higher
costs result from the creation of increased and enhanced content to take
advantage of the greater storage capacity available on CD-ROMs.
16
<PAGE> 19
Recovery of Prepaid Royalties, Guarantees and Capitalized Development
Costs. The Company typically enters into agreements with licensors of Properties
and developers of Titles that require advance payments of royalties and/or
guaranteed minimum royalty payments. There can be no assurance that the sales of
Products for which such royalties are paid will be sufficient to cover the
amount of these required royalty payments. The Company capitalizes its prepaid
royalties, and capitalizes software development costs upon the establishment of
technological feasibility of the Title under development. Amortization of these
payments and costs is determined on a title-by-title basis based on the greater
of (i) the ratio of current gross revenues for a Title to the sum of its current
and anticipated gross revenues, or (ii) the straight-line method over the
estimated remaining economic life of the Title. The Company analyzes such
capitalized costs quarterly and writes off as project abandonment losses these
capitalized payments and costs (and expenses any unpaid guaranteed minimum
royalties) when, based on the Company's estimate, future revenues will not be
sufficient to recover such costs. As of September 30, 1996, the Company had
prepaid royalties and capitalized development costs of approximately $5.2
million. If the Company were required to write off a material portion of its
prepaid royalties or capitalized development costs, the Company's results of
operations could be adversely affected.
Discounts, Allowances and Returns; Inventory Management. Although the
Company's arrangements with its customers generally do not give such customers
the right to return Products to the Company (other than defective Products) or
to cancel firm orders, the Company often negotiates accommodations to retailers
(and, less often, to distributors) when demand for specific items falls below
expectations for the purpose of maintaining its relationships with its
customers. Such accommodations consist of acquiescing to the customer's request
that not all booked orders be filled or that not all shipped orders be accepted,
negotiated price discounts, credits against future orders and, less often, the
return of Products to the Company. It is the Company's practice to accept all
returns of defective or damaged Products.
At the time of Product shipment, the Company establishes provisions against
the gross revenues generated by such shipment based on estimates of future
returns of, and other customer accommodations that may be granted with respect
to, such Products, based on the Company's historical experience, retailer
inventories of the Titles and other factors. For the year ended December 31,
1995, and the nine months ended September 30, 1996, provisions of approximately
$3.6 million and $3.3 million, respectively, were taken against gross sales made
during such periods, and as of September 30, 1996 the Company's aggregate
reserve against accounts receivable for returns and customer accommodations was
approximately $3.3 million.
The identification by the Company of slow-moving or obsolete inventory,
whether as a result of requests from customers for accommodations or otherwise,
would require the Company to establish reserves against such inventory or to
write-down the value of such inventory to its estimated net realizable value. In
1993 and 1994 the Company incurred material charges to income as a result of
such write-downs, but has not experienced such problems subsequent to those
periods.
XBAND Modem. Pursuant to an agreement between the Company and Catapult
Entertainment, Inc. ("Catapult") entered into in April 1994, the Company was
granted exclusive distribution rights for Catapult's modems (the "XBAND Modem")
for use in connection with the Genesis and SNES systems in North America. The
XBAND Modem enables video game players to compete against each other in real
time from different locations through a communications network created and
maintained by Catapult.
The Company spent approximately $5.8 million through December 31, 1994 in
connection with inventory purchases and the marketing and promotion of the XBAND
Modem. In May 1995, the Company sold to Catapult the Company's XBAND Modem
inventory and related accounts receivable for $3.2 million, of which $1.3
million was paid at such time and the balance was payable over a specified
period (less the amount collected by the Company with respect to such
receivables). Subsequently, Catapult filed for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code. Under Catapult's plan of reorganization, the Company
received approximately 15% of its remaining claim against Catapult, or
approximately $200,000, in December 1996. Because the Company determined in May
1995 that receipt of any additional payment by Catapult was highly uncertain, at
such time the Company established a reserve in the amount of such remaining
payments. As a result, substantially all of the amount received pursuant to the
plan of reorganization will be reflected in the Company's statement of
operations for the year ended December 31, 1996.
17
<PAGE> 20
Traditional Toy Sales. Through May 1994, the Company developed and marketed
non-Software traditional toys. Toy sales accounted for approximately 16% of the
Company's net sales in 1993 and approximately 2% of net sales in 1994. The
Company made the determination in 1993 to phase out its toy division based on
its lack of profitability and the Company's belief that growth prospects for the
division appeared limited. Remaining toy inventory was sold in the ordinary
course of business and costs associated with the closure of the toy division
were charged to income in 1993.
Net Operating Loss Carryforwards. At December 31, 1995, for federal income
tax purposes the Company had reported approximately $17.5 million of NOL
carryforwards incurred since 1993. The sale of the shares of Common Stock
offered by the Company hereby will result in an "ownership change" of the
Company for purposes of Sections 382 and 383 of the Internal Revenue Code of
1986, as amended. As a result, the amount of the NOL carryforwards available to
reduce the Company's federal income tax liability in future years in which the
Company has taxable income will be limited to an annual amount equal to (i) the
fair market value of the Company's capital stock immediately prior to the
consummation of the offering made hereby, multiplied by (ii) the "long-term tax
exempt rate" published by the Internal Revenue Service for the month in which
this offering is consummated. Based upon a long-term tax exempt rate for
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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components
of the Company's net sales and its consolidated operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ---------------
1993 1994 1995 1995 1996
----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C>
Domestic sales.................................... 79.4% 83.6% 74.9% 82.0% 74.8%
Foreign sales..................................... 20.6 16.4 25.1 18.0 25.2
----- ----- ----- ----- -----
Net sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales................................... 83.8% 95.2% 58.6% 57.0% 56.4%
Royalties....................................... 16.1 17.5 10.9 11.1 17.1
Product development............................. 3.2 5.4 2.3 2.8 2.6
Project abandonment............................. 14.6 28.2 3.1 2.0 1.3
Selling......................................... 12.9 44.5 7.2 8.9 7.7
General and administrative...................... 19.3 36.2 11.9 13.1 9.2
Operating interest.............................. 1.4 3.7 3.6 3.8 2.0
----- ----- ----- ----- -----
Total costs and expenses.......................... 151.3 230.7 97.6 98.7 96.3
----- ----- ----- ----- -----
Income (loss) from operations..................... (51.3) (130.7) 2.4 1.3 3.7
Interest expense -- net........................... (1.1) (0.8) (0.5) (0.5) (0.7)
----- ----- ----- ----- -----
Income (loss) before income taxes................. (52.4) (131.5) 1.9 0.8 3.0
----- ----- ----- ----- -----
Net income (loss)................................. (43.3)% (131.6)% 1.8% 0.8% 3.0%
===== ===== ===== ===== =====
</TABLE>
18
<PAGE> 21
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1996 TO THE NINE MONTHS
ENDED
SEPTEMBER 30, 1995
The following table sets forth, for the first nine months of 1995 and 1996,
the Titles released during such periods for the Platforms indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1996
---- ----
<S> <C> <C>
PlayStation........................................ -- 3
Saturn............................................. -- 3
SNES............................................... 4 6
Genesis............................................ 2 2
Game Boy........................................... 7 7
Game Gear.......................................... 1 --
-- --
Total.................................... 14 21
== ==
</TABLE>
The Company's net sales increased to $29,772,000 in the nine months ended
September 30, 1996, from $18,935,000 in the same period of 1995, as a result of
the increase in the number of new Titles released in 1996. For the nine months
ended September 30, 1996, net sales of the Company's Olympic Summer Games,
Disney's Toy Story and BASS Masters Classic Titles were $6,350,000 (21% of net
sales), $4,064,000 (14% of net sales) and $2,951,000 (10% of net sales),
respectively. Foreign net sales grew to $7,508,000 for the nine months ended
September 30, 1996, from $3,417,000, for the same period of 1995, as a result of
an increase in the number of Titles shipped and an increase in unit sales per
Title. The results for the first nine months of fiscal 1995 included sales of
$1,200,000 and cost of sales of $600,000 resulting from the sale of the XBAND
Modem inventory to Catapult. See "-- Overview -- XBAND Modem."
Cost of sales decreased slightly as a percentage of net sales to 56.4% for
the nine months ended September 30, 1996 from 57.0% of net sales for the
corresponding period of 1995, as a result of the commencement in 1996 of the
sale of higher-margin CD-ROM Titles. This improvement was mitigated by increased
foreign sales (for which margins are generally lower) and a greater percentage
of sales of SNES Titles (for which margins are slightly lower).
Royalty expense as a percentage of net sales increased to 17.1% for the
nine months ended September 30, 1996 from 11.1% for the same period of 1995.
License agreements for Titles released in 1996 provided for royalties at higher
rates, particularly the Company's licenses for Disney's Pocahontas and Disney's
Toy Story and its Titles for advanced Platforms.
For the nine months ended September 30, 1996, selling expenses increased by
$615,000 compared to the nine months ended September 30, 1995, as a result of
increased marketing efforts for new Titles (primarily print and retail
cooperative advertising).
Operating interest (which consists of interest and fees paid to the
Company's bank and fees paid to other issuers of letters of credit) decreased to
$589,000 for the nine months ended September 30, 1996, from $722,000 for the
same period of 1995. The decline is the result of the Company's entering into
more favorable agreements with the Company's domestic and European letter of
credit providers. See "-- Liquidity and Capital Resources."
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 TO THE YEAR ENDED DECEMBER
31, 1994
The Company's net sales increased to $33,250,000 in the year ended December
31, 1995, from $13,289,000 in the year ended December 31, 1994, primarily as a
result of an increase in the number of new Titles released in 1995. The Company
introduced 24 new Software Titles in 1995 as compared to ten new Titles in 1994.
Net sales of the Company's BASS Masters Classic Titles constituted $7,054,000,
(21.2%) of sales in the year ended December 31, 1995. Approximately $2,941,000
(22%) of net sales in 1994 consisted of the Company's The Ren & Stimpy Show
Titles.
19
<PAGE> 22
Foreign net sales grew to $8,356,000, or 25.1% of net sales in 1995, from
$2,175,000, or 16.4% of net sales in 1994, as a result of the increase in the
number of new Titles released and increased emphasis on sales to foreign
customers.
The results for fiscal 1995 included sales of $1,200,000 and cost of sales
of $600,000 resulting from the sale of the XBAND Modem inventory to Catapult.
See "-- Overview -- XBAND Modem."
Cost of sales declined dramatically, as a percentage of net sales, from
1994 to 1995. In 1995, 92% of sales were generated by new Titles, which
traditionally have higher profit margins, as compared to 56% in 1994. Close-out
sales (defined as sales at substantially reduced margins or at a loss) were not
material in 1995; however, close-out sales represented approximately 44% of net
sales in 1994. The Company attributes the decline in close-out sales to a
substantial improvement in the management of its inventory ordering. Costs of
sales as a percentage of net sales in 1994 was also adversely affected by a
reserve for discounts and allowances for the XBAND Modem in the amount of
approximately $2,000,000 established in that year.
Royalty expense was higher in 1994 than in 1995 because (i) license
agreements for Titles released in 1994 provided for royalties at higher rates,
and (ii) many of the Company's royalty agreements for Titles sold in 1994
provided for royalties on a per-unit basis, or provided for royalties payable by
the Company on gross sales prices before markdowns and allowances (which, as a
consequence of the substantial close-out sales in 1994, resulted in a higher
royalty rate).
Selling expense as a percent of net sales decreased to 7.2% in 1995, from
44.5% in 1994, as a result of the higher sales volume in 1995 and the Company's
decision to discontinue marketing the XBAND Modem. Selling expense in 1994
included $2,679,000 for the XBAND Modem.
The decrease in general and administrative expenses in 1995 compared to
1994 resulted from continuation of cost reductions, which was offset in part by
a charge of $483,000 in 1995 resulting from the bankruptcy of one of the
Company's European customers. See "-- Comparison of the Year Ended December 31,
1994 to the Year Ended December 31, 1993."
The lower project abandonment charges in 1995 are the result of the Company
bringing a greater portion of its Titles in development to market successfully
than in 1994.
The increase in operating interest in 1995 resulted from an increase in the
number of letters of credit opened in 1995 (which is directly related to the
increase in sales volume), and increased costs of opening letters of credit with
lenders other than the Company's bank.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 TO THE YEAR ENDED DECEMBER
31, 1993
The Company's net sales declined to $13,289,000 in 1994 from $37,478,000 in
1993, as a result of a decrease in new Titles in 1994, a decrease in average
units sold per Title for releases in 1994 and close-out sales of inventory
(which accounted for 44% of net sales). The Company cancelled several Titles
that were under development in 1994 and five other Titles scheduled for release
in 1994 and instead released in 1995.
Toy sales in 1994 decreased to $278,000 from $5,996,000 in 1993 as a result
of the closure in 1994 of the Company's toy division. See
"-- Overview -- Traditional Toy Sales." The Company's revenues in 1994 were also
adversely affected by a reserve for discounts and returns for the XBAND Modem of
approximately $2,000,000.
Net sales of The Ren & Stimpy Show Titles constituted $2,941,000 (or 22%)
of net sales in 1994 and $8,999,000 (or 24%) of net sales in 1993. Net sales in
1994 included $2,789,000 (21% of net sales) generated by the Sports Illustrated
Titles and $1,636,000 (or 12% of net sales) generated by Madden Football '95.
The decrease in cost of goods sold in 1994 was a result of the decrease in
net sales for that year. Close-out sales in both 1994 and 1993 increased costs
of goods sold both in dollar terms and as a percentage of net sales.
Royalty expense decreased in 1994 due to the decline in net sales, but
increased as a percentage of sales because of the reasons set forth above. See
"-- Comparison of the Year Ended December 31, 1995 to the
20
<PAGE> 23
Year ended December 31, 1994." In addition, the Company incurred generally
higher royalty rates on license and development agreements that were in effect
in 1994 as compared to 1993.
Selling expense increased in 1994, both in absolute amount and as a
percentage of net sales, as a result of (i) $2,679,000 in marketing expenses
incurred in that year related to the XBAND Modem and (ii) the write-off of
$914,000, consisting of the Company's remaining trade credit balance available
for the purchase of radio and television time; such amount was written off
because of the Company's termination of its television advertising campaigns.
General and administrative expenses in 1994 decreased approximately
$2,415,000 from 1993 primarily as a result of general cost reductions, including
reduced employee staffing levels and related costs, warehousing costs and travel
expenditures.
Project abandonment charges in the year ended December 31, 1994 include
$918,000 related to Akira, $494,000 related to The Ren & Stimpy Show, $525,000
related to seaQuest DSV, $446,000 related to Sports Illustrated, $306,000
related to Time Trax and $582,000 related to The Mask.
In 1993, the Company recognized a tax benefit of $3,413,000, which reflects
the carryback to 1991 and 1992 of a portion of the loss incurred in 1993. For
information concerning the Company's current NOL, see "-- Overview -- Net
Operating Loss Carryforwards."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are Product purchases, guaranteed
payments to licensors, advance payments to developers and the costs of internal
Software development. In order to purchase Products from the Manufacturers, the
Company must open letters of credit in their favor. As of September 30, 1996,
the Company had obligations with respect to future guaranteed minimum royalties
of $4,710,000 (substantially all of which was payable within the subsequent
twelve months). As of January 9, 1997, the Company had obligations with respect
to open letters of credit of $5,043,000.
The amount of the Company's accounts receivable is subject to significant
seasonal variations due to the seasonality of sales, and is typically highest at
the end of the year. As a result, the Company's working capital requirements are
greatest during its third and fourth quarters. The Company believes that the
proceeds from this offering, together with funds provided by operations and
funds available under the Revolving Credit Facility, will be adequate to meet
the Company's anticipated requirements for operating expenses, Product
purchases, guaranteed payments to licensors and Software development through
1997. However, to the extent accounts receivable, inventories and guarantees and
advance payments increase as a result of growth of the Company's business, the
Company could require additional working capital to fund its operations. The
Company does not anticipate making material capital expenditures in 1997.
For the nine months ended September 30, 1996, the Company's net cash used
in operating activities was $1,144,000, compared to $3,160,000 for the same
period in 1995. During 1995 and 1994, the Company's net cash used in operating
activities was $3,395,000 and $9,986,000, respectively.
For the nine months ended September 30, 1996, the Company's net cash used
in investing activities was $768,000 (primarily as a result of the Heliotrope
Acquisition and the Company's purchase of 25% of Inland Productions, Inc.
("Inland")), compared to $108,000 for the same period in 1995. For additional
information concerning the Company's acquisition and investment, see Note 9 of
Notes to Consolidated Financial Statements included elsewhere herein. For 1995
and 1994, the Company's net cash used in investing activities was $239,000 and
$188,000, respectively.
For the nine months ended September 30, 1996, the Company's net cash
provided by financing activities was $2,084,000, compared to $2,728,000 for the
same period in 1995. For 1995 and 1994, the Company's net cash provided by
financing activities was $2,661,000 and $9,833,000, respectively. Financing
activities were primarily the receipt of the proceeds from the exercise of
warrants and options and bank borrowings in 1996, the issuance of convertible
preferred stock in 1995 and the issuance of Common Stock in 1994. See
"Description of Securities -- Warrants and Options."
21
<PAGE> 24
Credit Facilities. In July 1996, the Company terminated its factoring and
credit agreement and entered into the Revolving Credit Facility. Under the
Revolving Credit Facility, the Company may draw down working capital advances
and open letters of credit in an aggregate amount not to exceed the lesser of
$9,000,000, or an amount equal to the sum of 70% of eligible accounts
receivable, 50% of eligible inventory and 50% of the amount of letters of credit
opened by the Company in favor of the Manufacturers. The portion of the
borrowing base that consists of eligible inventory may not exceed $1,500,000.
Advances under the Revolving Credit Facility bear interest at the bank's prime
lending rate plus 1.25%. The Company has granted the bank a security interest in
its domestic accounts receivable and inventories. The Revolving Credit Facility
matures on June 30, 1997, subject to earlier termination. As of January 9, 1997,
the Company had advances under the Revolving Credit Facility of $4,497,000 and
open letters of credit from its revolving credit lender of $2,589,000.
The Revolving Credit Facility contains customary covenants including, among
others, restrictions on the incurrence of debt, encumbrances on or sales of
assets, mergers and acquisitions, payments of dividends and capital
expenditures. Financial covenants include the maintenance of (i) a current ratio
of not less than 1.4 to 1, (ii) profitable operations on a fiscal year basis,
(iii) minimum tangible net worth of $7,000,000, (iv) a ratio of debt to tangible
net worth of not greater than 1.75 to 1, and (v) minimum working capital of
$5,000,000.
The Company has also entered into agreements with two additional lenders
(the "North American Lender" and the "European Lender") pursuant to which such
lenders have agreed to issue letters of credit ("L/Cs") on the Company's behalf
to the Manufacturers for the purchase of Products for the Company's North
American operations (up to a maximum of $5,000,000) and the Company's European
operations (up to a maximum of $2,500,000), respectively. Each of these lenders
receives a fee for the issuance of such L/Cs, and each lender retains title to
the Products financed by such lender until such time as such Products are sold
to the Company's customers. The North American Lender has a security interest in
the domestic assets of the Company subordinate to the security interest of the
Company's bank. The term of the agreement with the North American Lender expires
on March 13, 1997, subject to automatic renewals on such date and every nine
months thereafter, unless terminated by either party. The European Lender has a
first priority security interest in all of the Company's European subsidiary's
receivables, inventory and other assets. The agreement with the European Lender
may be terminated at any time by such lender. As of January 9, 1997, there were
no open letters of credit issued by the North American Lender and open letters
of credit in the amount of $2,454,000 issued by the European lender.
22
<PAGE> 25
BUSINESS
OVERVIEW
T-HQ develops, publishes and distributes interactive entertainment software
for the various hardware Platforms that collectively dominate the home video
game market. The Company currently publishes Titles for all major dedicated
Platforms manufactured by Sony, Sega and Nintendo, and in 1997 intends to
release Titles for the recently introduced Nintendo 64 Platform and multimedia
personal computers. The Company currently publishes products in most interactive
software genres, including action, adventure, arcade, fighting, driving,
strategy, simulation and sports. The Company's principal customers include Toys
"R" Us, Wal-Mart, Target and Best Buy, other national and regional retailers,
discount store chains and specialty retailers.
The Company's Titles are developed both internally and under contract with
independent developers, and are typically based on Properties licensed from
third parties. Other than Titles that the Company may release on CD-ROM for use
on PCs, all of the Company's Products consist of cartridges and CD-ROMs
manufactured for the Company by the Manufacturers.
The Company achieved a turnaround in 1995, reversing two years of
significant losses. Under new leadership, the Company focused its product
strategy, improved inventory management and reduced fixed costs. As a result,
T-HQ's revenues increased from $13.3 million in 1994 to $33.3 million in 1995.
For the nine months ended September 30, 1996, revenues were $29.8 million,
compared to $18.9 million for the same period in 1995.
THE INTERACTIVE ENTERTAINMENT INDUSTRY AND TECHNOLOGY
The home video game software market consists both of (i) cartridge-based
and CD-ROM-based Software for use solely on dedicated hardware systems
manufactured by the Manufacturers, and to a significantly lesser extent, other
vendors, and (ii) Software distributed on CD-ROMs for use on PCs. Most Software
for dedicated Platforms is currently sold in cartridge form. However, CD-ROMs
have become increasingly popular because they have substantially greater data
storage capacity and lower manufacturing costs than cartridges.
The first modern Platform was introduced by Nintendo in 1985 using "8-bit"
technology. "8-bit" means that the central processing unit, or "chip," on which
the Software operates is capable of processing data in 8-bit units. Subsequent
advances in technology have resulted in continuous increases in the processing
power of the chips that power both the Platforms and PCs. As the technology of
the hardware has advanced, the Software designed for the Platforms has similarly
advanced, with faster and more complex images, more lifelike animation and sound
effects and more intricate scenarios. The larger data storage capacity of
CD-ROMs enable them to provide richer content and longer play. Portable
Platforms manufactured by the Manufacturers are less sophisticated
technologically and do not require television monitors. Currently, the
non-portable Platforms being marketed are based primarily on 16-bit and 32-bit
technology, and the 64-bit Nintendo 64 Platform was released in the United
States in September 1996.
The following table sets forth the year of release in the United States of
each of the Manufacturers' Platforms for which the Company publishes Titles and
the technology on which such Platforms are based:
<TABLE>
<CAPTION>
DATE OF U.S.
MANUFACTURER PRODUCT NAME INTRODUCTION TECHNOLOGY
- ------------ ------------ ------------- -----------------
<S> <C> <C> <C>
Nintendo Game Boy 1989 8-bit (portable)
Sega Game Gear 1991 8-bit (portable)
Sega Genesis 1989 16-bit
Nintendo SNES 1991 16-bit
Sega Saturn 1995 32-bit
Sony PlayStation 1995 32-bit
Nintendo Nintendo 64 1996 64-bit
</TABLE>
23
<PAGE> 26
The Company believes that the success of Software is dependent on the
graphic look and feel of the Software, the depth and variation of game play and
the popularity of the Property on which the Software is based. As new Platforms
are introduced, software for such Platforms requires new standards of design and
technology to fully exploit such Platforms' capabilities and requires that
Software developers devote substantial resources to product design and
development.
BUSINESS STRATEGY
The Company's objective is to become a leading provider of exciting,
high-quality interactive entertainment software that appeals to a broad range of
consumers for use on a variety of Platforms. The Company's business strategy is
based on the following:
- Developing a portfolio of games, primarily for use on advanced Platforms,
based on Properties that are proprietary or are exclusively licensed to
the Company ("franchise" Properties). Franchise Properties allow the
Company to release Titles based on such Properties on a variety of
hardware Platforms, to create sequels to such Titles and to re-release
such Titles at secondary and tertiary price points in the future. The
Company's exclusively licensed Properties currently consist of BASS
Masters Classic, Turner's World Championship Wrestling and Brunswick's
Tournament of Champions. Currently, the Company's sole proprietary
product is Pax Imperia II.
- Identifying and licensing titles originally developed in foreign
territories with proven or anticipated consumer acceptance and publishing
localized versions for advanced Platforms for distribution in the United
States and other countries. This strategy enables the Company to
participate in the market for advanced Platform games while limiting
risk. In 1996, the Company commenced publishing and distributing Sony
PlayStation and Sega Saturn Titles under license from foreign independent
software developers, primarily from Japan. In 1997, the Company expects
to publish approximately 12 additional Titles acquired in such manner,
including K1: The Arena Fighters, Ghost in the Shell and Destruction
Derby XL.
- Publishing high quality Software for the large installed base of 16-bit
and Game Boy Platforms for so long as the Company believes there is a
significant market for such Titles. The Company believes that the
relatively low cost of development of Titles for such Platforms and
reduced competition in these markets creates an opportunity to generate
continuing sales and profits from these segments of the video game
market. Examples of such Titles published by the Company include Disney's
Toy Story and Disney's Pocahontas and LucasArts' Super Empire Strikes
Back and Super Return of the Jedi. Licenses acquired for Titles currently
under development include Disney's Hunchback of Notre Dame and Disney's
Hercules (an animated feature film to be released in 1997). The Company
has also entered into agreements with Electronic Arts Inc., a competing
independent Software company, pursuant to which the Company develops,
publishes and distributes Titles based on existing Electronic Arts
titles, primarily for SNES and Game Boy. Representative Electronic Arts
titles include Madden Football, FIFA International Soccer, NBA Live, NHL
Hockey and PGA Tour Golf. The Company intends to continue to seek
licenses of such high-recognition Properties to publish Titles for older
Platforms.
- Expanding its presence in foreign markets that demonstrate (through an
increasing installed base of Platforms) the potential for commercial
success of the Company's Titles. To accomplish this strategy, the Company
has established an office in the United Kingdom to oversee its operations
in Europe and has developed strategic relationships with Japanese
publishers, resulting in foreign sales constituting 25% of the Company's
revenues in 1995 and for the first nine months of 1996.
- Managing the development and marketing of its Titles in a manner that
minimizes financial risk. The Company has experienced and expects to
continue to experience fluctuations in its revenues, both on a quarterly
basis and otherwise, as a result of numerous factors. See "Risk
Factors -- Revenue Fluctuations and Seasonality." The Company attempts to
minimize its fixed expenses by such means as adjusting the relative use
of employees and independent contractors who perform software
development, adopting warehouse and shipping systems that closely link
product fulfillment costs to
24
<PAGE> 27
sales volume, and compensating sales representatives based on sales
volume. In addition, by implementing strict product ordering and
inventory controls, the Company attempts to reduce the risks associated
with excessive or obsolete inventory.
As of January 9, 1997, the Company had approximately 37 new Titles under
license or in various stages of development that are currently scheduled for
release in 1997, including seven Titles for PlayStation, seven Titles for
Saturn, one Title for Nintendo 64 and two Titles for use on multimedia personal
computers.
To further its strategy of obtaining or creating franchise Properties, the
Company has enhanced its development abilities by making certain strategic
acquisitions. In 1993, the Company acquired Black Pearl Software, Inc. ("Black
Pearl"), an independent Software developer. In August 1996, the Company
consummated the acquisition of Heliotrope and retained the services of that
company's principals (the "Heliotrope Acquisition") in order to develop and
publish Pax Imperia II for release in 1997 and to develop other strategy games
for the PC market. See "-- Software Design and Development."
The Company may also rely upon strategic investments to facilitate access
to proprietary Software and skilled developers outside the Company. In July
1996, the Company acquired a 25% interest in Inland, a recently formed Software
developer. Inland is currently developing the Company's PlayStation and Nintendo
64 versions of Turner's World Championship Wrestling and PC and PlayStation
versions of BASS Masters Classic.
The Company seeks to acquire or invest in other Software development
companies to further its development of proprietary titles. However, as of the
date of this Prospectus, the Company was not negotiating, nor did it have any
commitments or understandings with respect to, any additional acquisitions or
investments.
TITLES
Since its inception, the Company has developed and released an aggregate of
101 Titles, consisting of 32 SNES Titles, 36 Game Boy Titles, 13 Nintendo
Entertainment Systems Titles, seven Genesis Titles, six Game Gear Titles, three
Saturn Titles and four PlayStation Titles. The Company continually seeks to
acquire licenses to publish and distribute additional Titles.
The following tables set forth, for each Platform, the Titles (i) released
by the Company in 1996 and anticipated to be released in 1997, and (ii) the date
of release (or anticipated release) of each Title. There can be no assurance
that each of the Titles anticipated for release in 1997 will be released when
scheduled or at all.
<TABLE>
<CAPTION>
TITLES RELEASED IN 1996 CATEGORY PLATFORM RELEASE DATE
------------------------------------- ----------- ------------------ ------------
<S> <C> <C> <C>
Disney's Pocahontas.................. Adventure Game Boy 3/96
In the Hunt.......................... Arcade PlayStation 3/96
Saturn 5/96
NBA Live '96......................... Sports Game Boy 3/96
NHL Hockey '96....................... Sports Game Boy 4/96
Olympic Summer Games................. Sports SNES 5/96
Genesis 5/96
Game Boy 6/96
Disney's Toy Story................... Adventure Game Boy 5/96
SNES (U.K. only) 6/96
BASS Masters Classics: Pro Edition... Simulation SNES 5/96
Genesis 12/96
Time Killers......................... Arcade Genesis 7/96
Mohawk & Headphone Jack.............. Adventure SNES 8/96
Battlezone/Super Breakout............ Arcade Game Boy 8/96
Robopit.............................. Action PlayStation 8/96
Saturn 9/96
Alone in the Dark: One-Eyed Jack's
Revenge............................ Adventure Saturn 8/96
PlayStation 8/96
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
TITLES RELEASED IN 1996 CATEGORY PLATFORM RELEASE DATE
------------------------------------- ----------- ------------------ ------------
<S> <C> <C> <C>
Disney's Pinocchio................... Adventure Game Boy 9/96
Genesis 11/96
SNES (U.K. only) 11/96
PGA European Tour.................... Sports SNES 9/96
Mr. Do!.............................. Arcade SNES 9/96
Urban Strike......................... Action Game Boy 10/96
Game Gear 10/96
Floating Runner...................... Action PlayStation 10/96
Disney's Donald Duck and Maui
Mallard............................ Adventure SNES (U.K. only) 11/96
Madden '97 Football.................. Sports Game Boy 11/96
FIFA International Soccer '97........ Sports Game Boy 11/96
NHL Hockey '97....................... Sports SNES 11/96
Sim City 2000........................ Simulation SNES 11/96
College Football USA '97............. Sports SNES 12/96
</TABLE>
<TABLE>
<CAPTION>
ANTICIPATED
TITLES ANTICIPATED TO BE RELEASED IN RELEASE
1997* CATEGORY PLATFORM DATE
------------------------------------ ----------- ----------------- -----------
<S> <C> <C> <C>
K-1: The Arena Fighters............. Fighting PlayStation Spring '97
WCW vs. The World................... Fighting PlayStation Spring '97
Disney's Hunchback of Notre Dame.... Adventure Game Boy Spring '97
Tazmania............................ Adventure Game Boy Spring '97
Demolition Derby XL................. Driving Saturn Spring '97
Krazy Ivan.......................... Action Saturn Spring '97
Super Empire Strikes Back........... Action SNES Spring '97
Super Return of the Jedi............ Action SNES Spring '97
Game Boy Spring '97
Adidas Power Soccer................. Sports Saturn Summer '97
Brunswick's Tournament of
Champions......................... Simulation SNES Summer '97
Disney's Timon & Pumbaa............. Action SNES Summer '97
Disney's Hercules................... Adventure Game Boy Summer '97
Ghost in the Shell.................. Action PlayStation Summer '97
Pax Imperia II...................... Strategy PC Summer '97
Assault Rigs........................ Action Saturn Summer '97
Sentient............................ Action Saturn Summer '97
Angry Streets (working title)....... Fighting PlayStation Fall '97
Air Race (working title)............ Driving PlayStation Fall '97
FIFA World Cup Soccer '98........... Sports Game Boy Fall '97
Madden Football '98................. Sports Genesis Fall '97
SNES Fall '97
NHL Hockey '98...................... Sports Genesis Fall '97
SNES Fall '97
NBA Live '98........................ Sports SNES Fall '97
Genesis Fall '97
BASS Masters Classic: Pro Edition... Simulation PlayStation Fall '97
PC Fall '97
World Championship Wrestling........ Fighting Playstation Fall '97
Nintendo 64 Fall '97
Tenka............................... Action Saturn Fall '97
G Police............................ Action Saturn Fall '97
</TABLE>
- ---------------
* Excludes Titles the Company expects to release in 1997 but which have not yet
been publicly announced.
26
<PAGE> 29
INTELLECTUAL PROPERTY LICENSES
The Company's strategy includes the creation of exciting games based on
licensed Properties that have attained a high level of consumer recognition or
acceptance. The Company believes it enjoys excellent relationships with a number
of licensors, including Disney, Electronic Arts and LucasArts.
The Company pays royalties to its Property licensors that generally range
from 2% to 22% of the Company's net sales of the Title. The Company must
typically pay minimum guaranteed royalties over the license term and advance
payments against such guarantees. License fees tend to be higher for Properties
with proven popularity and less perceived risk of commercial failure. To the
extent competition intensifies for licenses of highly desirable Properties, the
Company may encounter difficulty in obtaining these licenses. See
"-- Competition." Licenses typically extend for two to three years, may be
exclusive for a specific Title or line of Titles, and may be renewable upon
payment of certain minimum royalties or the attainment of specified sales
levels.
The Company's Property licenses generally grant to the Company exclusive
use of the Property for the specified Titles, on specified Platforms, within the
defined territory and during the license term. However, licensors typically
retain the right to exploit the Property for all other purposes, including the
right to license the Property for use with other Platforms. Software published
by third parties for use with other Platforms based on such Property may compete
with Titles offered by the Company.
PLATFORM LICENSES
The Company's business is dependent on its license agreements with the
Manufacturers. All of such licenses are for fixed terms and are not exclusive.
Each license grants to the Company the right to develop, publish and distribute
Titles for use on such Manufacturers' Platforms, and requires that such Titles
be embodied in Products that are manufactured solely by such Manufacturer.
The following table sets forth information with respect to the Company's
Platform Licenses. In some instances, the Company has more than one Platform
License for a particular Platform.
<TABLE>
<CAPTION>
MANUFACTURER PLATFORM NUMBER OF TITLES TERRITORY EXPIRATION DATE(S)
- ---------- ---------- ------------------- ------------------- ---------------------------
<S> <C> <C> <C> <C>
Nintendo SNES 12/contract yr. North America and September and October 1997
Latin America
Nintendo SNES 20/contract yr. Europe and certain March and July 1997
Asian countries
Nintendo Game Boy 15/contract yr. North America and April and September 1997
Latin America and January 1998
Nintendo Game Boy 10/contract yr. Europe and certain March 1997 and January 1998
Asian countries
Sega Genesis 3/contract yr. U.S. and Canada October 1996(1)
Sega Game Gear 2/contract yr. U.S. and Canada March 1998(2)
Sega Saturn 3/contract yr. U.S. and Canada February 1998(2)
Sony PlayStation title-by-title(3) U.S. and Canada June 1998
Sony PlayStation title-by-title(3) Europe December 2005(2)
</TABLE>
- ---------------
(1) The Company has applied for, and consistent with past practice expects to
receive, a one- or two-year renewal of such license.
(2) Agreement continues year-to-year after such date unless terminated by either
party.
(3) This Platform License does not set a maximum number of Titles that the
Company may publish in the designated territory; however, each Title must be
approved by the Manufacturer prior to development of the software.
27
<PAGE> 30
The Company has applied for, and expects to receive, a license to publish
Titles for use on Nintendo's Nintendo 64 Platform, on a title-by-title basis. In
November 1996, Nintendo approved the development by the Company of Turner's
World Championship Wrestling for this Platform.
Sega and Nintendo charge the Company a fixed amount for each cartridge,
which amount varies based, in part, on memory capacity and processor power. Sega
and Sony similarly charge a per unit amount for each CD-ROM. These charges
include a manufacturing, printing and packaging fee as well as a royalty for the
use of the Manufacturer's name, proprietary information and technology, and are
subject to adjustment by the Manufacturers at their discretion. The
Manufacturers have the right to review, evaluate and approve a prototype of each
Title and all packaging used by the Company in connection with the Products.
In addition, the Company must indemnify the Manufacturers with respect to
all loss, liability and expense resulting from any claim against the
Manufacturer involving the development, marketing, sale or use of the Company's
Titles, including any claims for copyright or trademark infringement brought
against the Manufacturer. As a result, the Company bears a risk not only that
the Properties upon which the Titles are based, but also the information and
technology licensed from the Manufacturer and incorporated in the Products, may
infringe the rights of third parties. While the Company's agreements with its
independent Software developers and Property licensors typically provide for
indemnification of the Company with respect to certain matters, there can be no
assurance that, if any claim is brought by a Manufacturer against the Company
for indemnification, such developers or licensors would have sufficient
resources to in turn indemnify the Company, or that such indemnification would
cover the matter that gave rise to the Manufacturer's claim against the Company.
Each Platform License may be terminated by the Manufacturer if a breach or
default by the Company is not cured by the Company after receipt of written
notice thereof from the Manufacturer, or if the Company becomes insolvent. Upon
termination of a Platform License for any reason other than a breach or default
by the Company, the Manufacturer has the right to purchase from the Company, at
the price paid by the Company, any Product inventory manufactured by such
Manufacturer for the Company that remains unsold for a specified period after
such termination. Any such inventory not purchased by the Manufacturer must be
destroyed. Upon termination as a result of a breach or default by the Company,
any remaining inventory at such time must be destroyed, subject to the right of
any institutional lender to the Company to sell such inventory for a specified
period.
SOFTWARE DESIGN AND DEVELOPMENT
Once the Company identifies and acquires a Property from a licensor, the
Company designs and develops a game with features intended to exploit the
characteristics of the Property and to appeal to the target consumers for such
game. The Company's Software development process generally takes one of two
forms.
Internal Software Development. Prior to the Company's acquisition in 1993
of Black Pearl, an independent Software developer (the "Black Pearl
Acquisition"), all of the Company's Software was developed by independent
developers. The Black Pearl Acquisition resulted from the Company's
determination that the internal development of certain Software permits better
control over its quality and timeliness, and this acquisition provided the
Company with Software development facilities, personnel and equipment permitting
the Company to commence internal software development. The Company's in-house
development team is supervised by the Company's Vice President -- Software
Development and is staffed by producers, programmers, Software engineers,
artists, animators and game testers. The Heliotrope Acquisition enhanced the
Company's internal development capabilities by adding a Software development
team and related facilities in Connecticut. The Heliotrope team is currently
working with the Company's other development staff to produce Pax Imperia II for
publication on CD-ROM for PCs. The Company uses a variety of advanced hardware
and software development tools, proprietary hardware emulator systems, and
various graphics, animation, sound and compression applications. As of January
9, 1997, the Company had 22 development employees.
External Software Development. The Company also contracts with independent
software developers to conceptualize and develop Titles under the Company's
supervision. As of January 9, 1997, the Company had
28
<PAGE> 31
contracted development efforts to 11 such developers. The Company generally pays
independent developers certain advances against royalties based on specified
development completion milestones. Royalties in excess of the advances are based
on a fixed amount per unit sold and range from $.25 to $7.00 per unit. The
Company generally obtains ownership of the Software code and related
documentation. The Company's agreements with its independent Software developers
are usually entered into on a title-by-title basis.
Although the predominant portion of the Company's Titles continue to be
developed by independent developers, approximately 30% of the Company's net
sales in 1995 and 10% of the Company's net sales for the nine months ended
September 30, 1996 were derived from Titles developed by the Company internally.
The Company may make strategic investments in independent developers for
the purpose of securing access to proprietary Software and talented developers.
In June 1996, the Company acquired a 25% interest in Inland, the developer of
Turner's World Championship Wrestling and BASS Masters Classics.
Upon completion of development, each title is extensively "play-tested" by
the Company and sent to the Manufacturer for its review and approval. Related
artwork, user instructions, warranty information, brochures and packaging
designs are also developed under the Company's supervision. The development
cycle for new Titles, including the development of the necessary Software,
approval by the Manufacturer and production of the initial Products, typically
has ranged from nine to 18 months. This relatively long development cycle
requires the Company to determine whether there will be adequate retailer and
consumer demand for a Title well in advance of its release. See "Risk
Factors -- Acquisition of Properties and Development of New Titles."
MANUFACTURING
Except for certain Genesis cartridges, the Manufacturers are the sole
manufacturers of the Products sold for use on their respective Platforms.
After placing a purchase order with a Manufacturer and opening a letter of
credit, the Company sends to the Manufacturer the Title's software code and a
prototype, together with related artwork, user instructions, warranty
information, brochures and packaging designs, for approval, defect testing and
manufacture. The Manufacturers currently deliver cartridges to the Company
within 30 to 75 days, and CD-Roms within 15 to 30 days, after their receipt of
an order and a corresponding letter of credit, if required.
MARKETING, SALES AND DISTRIBUTION
The Company depends in large part on the high name recognition of the
Properties on which its Titles are based to attract customers and to obtain
shelf space in stores. The Company's marketing activities are directed by a
sales team, led by the Company's Senior Vice President -- Sales, which maintains
contact with major retail accounts and manages the activities of the Company's
independent regional sales representatives.
The Company is required by the Platform Licenses to provide a standard
defective product warranty on all of the Products sold. Generally, the Company
is responsible for resolving, at its own expense, any warranty or repair claims.
The Company has not experienced any material warranty claims.
United States and Canadian Sales. The Company's Titles are promoted to
retailers by display at trade shows, such as the annual Electronic Entertainment
Expo (E3). The Company also conducts print and cooperative retail advertising
campaigns for most Titles and prepares promotional materials, including product
videos, to increase awareness among retailers and consumers.
During 1995, the Company's marketing efforts included nationwide promotions
for many of its Titles. Mail-in rebate offers for The Mask and seaQuest were
included with boxes of Nabisco(R) cookies and crackers, and for Super Return of
the Jedi and Jungle Strike with boxes of Post(R) cereals. The Company's Game Boy
Titles licensed from Electronic Arts, such as Madden '96, FIFA Soccer '96, PGA
Tour '96 and NHL '96, were included in Electronic Arts' print, television and
point-of-purchase advertising. National newspaper and radio promotions included
editorial and advertising support in key children's consumer and electronic
gaming publications, such as Disney Adventures, Nintendo Power, GamePro, Game
Players and Electronic Gaming
29
<PAGE> 32
Monthly. In 1996, the Company's marketing efforts for Olympic Summer Games
included a mail-in rebate program with Reebok Shoes.
Most of the Company's gross sales consist of direct sales to retailers. The
Company distributes its Titles primarily to mass merchandisers and national
retail chain stores, including Toys "R" Us, Wal-Mart, Best Buy, Blockbuster
Video, Kay Bee Toys, Electronics Boutique and Sears. Sales to the Company's ten
largest customers collectively accounted for approximately 52% of the Company's
gross sales in 1995 and 54% of the Company's gross sales for the nine months
ended September 30, 1996. The Company has no written agreement or other
understanding with any of its customers that relate for future purchases by such
customers, and thus, purchases by such customers may terminate at any time.
The Company utilizes electronic data interchange with most of its major
domestic customers in order to (i) efficiently receive, process and ship
customer Product orders, and (ii) accurately track and forecast sell-through of
Products to consumers in order to determine whether to order additional Products
from the Manufacturers. The Company ships its Products to its domestic customers
from a public bonded warehouse in Southern California.
The Company's agreements with its independent regional sales
representatives set forth the representatives' exclusive territory, types of
customers to be solicited, commission rate and payment terms. Such
representatives do not have contractual authority to obligate the Company. The
Company's principal independent sales representatives are Vaughn Associates,
Watt & Co. and Original Marketing Concepts.
The domestic retail price for the Company's Software generally ranges
between $20 and $70 for SNES, between $15 and $35 for Game Boy, between $20 and
$55 for Genesis and between $39 and $59 for PlayStation and Saturn.
Foreign Sales. In 1992, the Company commenced the sale of its Titles in the
United Kingdom, Europe and Australia. The Company sells its Titles directly to
retailers in the United Kingdom and to distributors for distribution in Europe
and in Australia. The Company is the exclusive distributor for Disney's SNES and
Game Boy products in the United Kingdom for such Titles as Disney's Toy Story,
Disney's Pocahontas and Disney's Pinocchio. The Company ships its Products to
its foreign customers from a public bonded warehouse in the United Kingdom. The
Company is currently negotiating with distributors for other countries,
including Japan.
INTELLECTUAL PROPERTY RIGHTS
Each Product and Title typically embody a number of separately protected
intellectual property rights of the Manufacturer, the Property licensors and, to
a lesser extent, the Company. The licensors of the Properties own the
trademarks, trade names, copyrights and other intellectual property rights
relating to the Property on which the Titles are based. The Manufacturer owns
the patents and substantially all of the other intellectual property embodied in
the Products. While the Company owns the game software embodied in the Products,
the Company believes that such software has little independent economic value.
Accordingly, the Company must rely on the Manufacturers and the Property
licensors with respect to protection from infringement of these property rights
by third parties.
Each of the Manufacturers incorporates security devices in their respective
Platforms and Products to prevent unlicensed use of its Platforms. In addition,
Nintendo requires its licensees to display the "Nintendo Seal of Approval" to
notify the public that the Title has been approved by Nintendo for use with a
Nintendo Platform.
COMPETITION
The interactive entertainment industry is intensely competitive. The
ability of the Company to compete successfully is based on its ability to
identify and obtain licenses to commercially marketable Properties, to develop
appealing Titles, to adapt its development capabilities with new technologies
and to secure retail distribution. The Company competes, for both licenses to
Properties and the sale of its Titles, with the Manufacturers, each of which is
the largest developer and marketer of Software for its Platforms. There can be
no assurance that these companies will not increase their own development
efforts. As a result of their commanding positions in the industry as primary
manufacturers of dedicated interactive entertainment
30
<PAGE> 33
hardware and publishers of software, the Manufacturers generally have better
bargaining positions with respect to retail pricing, shelf space and purchases
than do any of their licensees, including the Company. The Manufacturers often
have lower suggested retail prices for their Software than do their licensees.
Each of the Manufacturers has dozens of active licensees, each of which is
also a competitor of the Company. Each of the Manufacturers and many of these
other competitors (such as Acclaim Entertainment, Inc., Disney Interactive,
Inc., Electronic Arts Inc., GT Interactive Software Corp., Microsoft Corporation
and Midway Games Inc.) have broader Software lines and greater financial,
marketing and other resources than the Company; these competitive advantages
enable such competitors to market their Software more aggressively and make
higher offers or guarantees in connection with the acquisition of licensed
Properties. In addition, as competition for retail shelf space becomes more
intense, the Company may need to increase marketing expenditures to maintain
sales of its Titles; and as competition for popular Properties increases, the
cost of acquiring licenses for such Properties is likely to increase, resulting
in reduced margins.
In addition, the market for the Company's Products is characterized by
significant price competition, and the Company expects that it will face
increasing pricing pressures from its current competitors. Accordingly, there
can be no assurance that the Company will be able to provide Products that
compare favorably with the Products of the Company's competitors or that
competitive pressures will not require the Company to reduce its prices. Any
material reduction in the price of the Company's Products would negatively
affect operating income as a percentage of net revenue and would require the
Company to increase unit sales in order to maintain net revenue.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies, are
increasing their focus on the interactive entertainment market, which will
result in greater competition for the Company. In particular, many of the
Company's competitors are developing on-line interactive games and interactive
networks that will be competitive with the Company's interactive Products. There
can be no assurance that the Company will be able to compete successfully
against current or future competitors or that competitive pressures faced by the
Company will not materially and adversely affect its business, operating results
and financial condition.
EMPLOYEES
As of January 9, 1997, the Company had 48 full-time employees. All but five
of such persons are located in the United States. None of the Company's
employees is represented by a labor union or covered by a collective bargaining
agreement. The Company believes that its relations with its employees are good.
PROPERTIES
The Company's executive offices occupy approximately 7,000 square feet of
office space at 5016 North Parkway Calabasas, Calabasas, California, pursuant to
a lease expiring in July 1998. The Company also leases office space for
marketing personnel in Cupertino, California and Epsom, England, and for
development personnel in Guilford, Connecticut. The Company believes that its
office facilities are adequate.
LEGAL PROCEEDINGS
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 shortly after its formation for consideration consisting of
$300,000 in cash and 52,660 shares of Common Stock with a value at such time of
approximately $300,000; and the Company has contracted with Inland for the
development of Turner's World Championship Wrestling for the Play Station and
Nintendo 64. 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. The Company denies
all allegations of wrongdoing asserted against it in the complaint and intends
to vigorously defend against such claims.
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<PAGE> 34
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth certain information as of January 14, 1997,
concerning the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- -----------------------------------------
<S> <C> <C>
Brian J. Farrell 42 President, Chief Executive Officer and
Director
Lawrence Burstein 54 Director
L. Michael Haller 53 Senior Vice President and Director
Bruce Jagid 56 Director
Jeffrey C. Lapin 40 Director
Deborah A. Lake 29 Vice President - Finance and
Administration, Secretary and Treasurer
</TABLE>
The following table sets forth certain information as of January 14, 1997,
concerning certain key employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- -----------------------------------------
<S> <C> <C>
Germaine Gioia 35 Vice President - Marketing
Alison Locke 41 Senior Vice President - Software Sales
Steve Ryno 30 Vice President - Product Development
Karen Shillcock 40 Managing Director, T-HQ International
Ltd.
</TABLE>
BRIAN J. FARRELL has been the Company's President and Chief Executive
Officer since January 1995. Between October 1992 and January 1995, Mr. Farrell
was the Executive Vice President and Chief Operating Officer of the Company.
From July 1991 to October 1992, Mr. Farrell served as the Vice President, Chief
Financial Officer and Treasurer of the Company. Mr. Farrell has been a director
of the Company since March 1993. Prior to joining the Company, Mr. Farrell was
Vice President and Chief Financial Officer of Starwood Lodging Trust, a real
estate investment trust ("Starwood"). Mr. Farrell was employed by Deloitte
Haskins & Sells, a predecessor of Deloitte & Touche LLP, an international
accounting firm and the Company's current auditors ("Deloitte"), from 1978 to
1984 and is a certified public accountant.
LAWRENCE BURSTEIN has been a director of the Company since July 1991. Since
October 1982, Mr. Burstein has been Chairman of the Board and a principal
stockholder of Trinity Capital Corporation, a private investment company. Mr.
Burstein is a director of U.S. Communications, Inc., Brazil Fast Food Corp. and
CAS Medical Systems, Inc.
L. MICHAEL HALLER has been a director of the Company and the Company's
Senior Vice President since December 1995. Mr. Haller's responsibilities include
obtaining new licenses from foreign markets. Between January and December 1995,
Mr. Haller was a consultant to the Company. For more than five years prior to
1995, Mr. Haller was an agent of and consultant to companies in the interactive
entertainment business, principally representing Kodansha Ltd., Japan's leading
publisher of literature, magazines and comics. Mr. Haller is also a director of
Pacific Advisors Fund, Inc.
BRUCE JAGID has been a director of the Company since April 1995. Mr. Jagid
has served as the Chairman (since March 1991) and Chief Executive Officer (since
January 1992) of Ultralife Batteries, Inc., a manufacturer of lithium batteries.
JEFFREY C. LAPIN has been a director of the Company since April 1995. Mr.
Lapin has been the President and Chief Executive Officer of House of Blues, Inc.
Hospitality and Executive Vice President of House of Blues, Inc. Entertainment
since July 1996. From May 1991 to June 1996, Mr. Lapin was the President and
Chief Executive Officer of Starwood. Mr. Lapin was a Vice President of Starwood
from January 1988 to May 1991, Secretary from September 1986 to May 1991, and
served as Trustee of Starwood from September 1992 to June 1996. Prior to his
employment by Starwood, Mr. Lapin was an attorney at Mitchell, Silberberg &
Knupp in Los Angeles.
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<PAGE> 35
DEBORAH A. LAKE has been the Vice President -- Finance and Administration,
Treasurer and Secretary of the Company, since September 1996. Ms. Lake is
responsible for information systems, financial reporting and internal controls.
From August 1995 to August 1996, Ms. Lake was Chief Financial Officer of MCL
Distributing, Inc., a company engaged in produce sales and distribution. Between
June 1991 and August 1995, Ms. Lake rendered services to the Company in a number
of capacities, including serving as Vice President -- Finance and Administration
from January 1995 until August 1995. Previously, Ms. Lake was employed by
Deloitte as a management consultant.
GERMAINE GIOIA has been Vice President -- Marketing since December 1995 and
has been employed by the Company since November 1993. Ms. Gioia served as
Director of Corporate Communications at CIC, a software company, from 1991 to
1993. From 1989 to 1991, Ms. Gioia was employed by LucasArts Entertainment
Company in corporate marketing.
ALISON LOCKE, the Company's Senior Vice President -- Software Sales, is
responsible for sales in North America. Ms. Locke has been employed by the
Company since February 1991. Previously, Ms. Locke served as Vice President of
Computer Product and Nintendo Game Sales of Data East USA Incorporated, an
interactive entertainment company and in various sales capacities with
Activision Inc. and Broderbund Software Inc.
STEVE RYNO has been Vice President -- Product Development of the Company
since December 1995. From June 1993 to December 1995, Mr. Ryno was the Company's
Director of Product Development. Mr. Ryno was also the Director of Product
Development of Black Pearl Software from 1993 until its acquisition by the
Company. From 1988 to 1993, Mr. Ryno was employed as an executive producer at
Atari Corporation. Mr. Ryno also previously served as an editor of Electronic
Gaming Monthly.
KAREN SHILLCOCK has been a Managing Director of T-HQ International Ltd. (a
subsidiary of T-HQ) and responsible for the Company's European operations since
October 1995. From March 1993 to September 1995, Ms. Shillcock was the
Advertising and Public Relations Director of Columns Ltd., an advertising
agency. From October 1991 to February 1993, Ms. Shillcock was an Associate
Director at KPR Public Relations. Previously, Ms. Shillcock was the Head of
Business Development at TMD Carat Advertising, Ltd.
EMPLOYMENT AGREEMENT WITH MR. FARRELL
Upon Mr. Farrell's appointment as the Company's President and Chief
Executive Officer in January 1995, the Company entered into a new employment
agreement (the "Employment Agreement") with Mr. Farrell. The term of the
Employment Agreement expires on December 31, 1997. In December 1996, Mr. Farrell
and the Company agreed to extend the term of the Employment Agreement for an
additional five years at a base salary of $300,000 per year and to provide that
he will be entitled to an annual bonus equal to the lesser of $300,000 or 4.5%
of the Company's net income for each year of the extended term.
The Employment Agreement provides for an annual base salary of $200,000 in
1995, $225,000 in 1996 and $300,000 in 1997. Mr. Farrell is also entitled to a
bonus equal to 4.5% of the Company's net income before taxes for each of 1996
and 1997.
The Employment Agreement provides that if Mr. Farrell's employment is
terminated by him voluntarily or by the Company for cause, he will be precluded
during the subsequent 12 months from engaging, directly or indirectly, in any
business activity that competes with the Company's business and from
detrimentally affecting any relationship between the Company and, or soliciting
away from the Company, any customer, supplier or employee of the Company for one
year.
33
<PAGE> 36
The Employment Agreement also provides that in the event any person or
group of persons (i) acquires at least 10% of the Common Stock or files a
Schedule 13D or 13G with the Commission, and the Board of Directors believes
that the ownership of Common Stock by such person or group of persons would
cause a material adverse impact on the Company's business or prospects, or (ii)
acquires or has the right to acquire beneficial ownership of 30% or more of the
Common Stock (a "Change of Control"):
1. If after a Change of Control Mr. Farrell's employment is terminated
other than for cause, or if Mr. Farrell voluntary terminates his employment
within 180 days after a Change of Control, he would be entitled to receive
a lump sum payment equal to 2.99 times the average annual compensation paid
to him for the five years immediately preceding such termination; and
2. All options held by Mr. Farrell to purchase Common Stock would
immediately vest, and he would be entitled to surrender all of such options
and receive an amount in cash per share equal to the difference between the
option prices of the options surrendered and the greater of (i) the average
price per share paid by the person acquiring control of the Company, (ii)
the average price paid in connection with a tender offer for the Common
Stock, or (iii) the average trading price of the Common Stock on the date
of termination of Mr. Farrell's employment.
At the time of his appointment as the Company's President and Chief
Executive Officer, and in consideration for his previous service to the Company,
Mr. Farrell was granted an option to purchase up to 140,000 shares of Common
Stock at a price of $3.06 per share. In August 1996, in recognition of Mr.
Farrell's performance as the Company's President and Chief Executive Officer and
in consideration for his services rendered in those capacities, Mr. Farrell was
granted an option to purchase 200,000 shares of Common Stock at a price of
$5.00. The exercise prices of these options are the market prices of the Common
Stock on their respective grant dates.
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<PAGE> 37
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of January 9, 1997 by (i) each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the outstanding shares of its Common Stock, (ii) each director
and executive officer of the Company and (iii) all executive officers and
directors of the Company as a group. Except as indicated in the footnotes to
this table, the persons named in this table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
-------------------
NUMBER PERCENT
OF OF
NAME AND ADDRESS SHARES CLASS
---------------------------------------------------------- ------- -------
<S> <C> <C>
Wisdom Tree Associates, LP(1)............................. 665,000 14.0%
333 Seventh Avenue, 5th Floor
New York, NY 10001
Brian J. Farrell.......................................... 232,000(2) 4.7%
Lawrence Burstein......................................... 62,831(3) *
Bruce Jagid............................................... 37,500(4) *
Jeffrey C. Lapin.......................................... 37,500(4) *
L. Michael Haller......................................... 26,667(5) *
Deborah A. Lake........................................... 36,108(6) *
All Directors and Executive Officers as a group
(6 persons).......................................... 432,606(7) 8.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Based on information set forth in Amendment No. 4 to the Schedule 13D dated
September 3, 1996 and filed with the Commission by Wisdom Tree Associates,
L.P. and its affiliates, Jonathan L. Steinberg, Wisdom Tree Capital
Management Inc. and Wisdom Tree Offshore, Ltd.
(2) Includes 206,667 shares issuable upon exercise of options exercisable within
60 days and 1,333 shares issuable upon exercise of a warrant.
(3) Includes 1,533 shares owned by Mr. Burstein's wife, as to which Mr. Burstein
disclaims beneficial ownership, and 40,832 shares issuable upon exercise of
options exercisable within 60 days.
(4) Consists of 37,500 shares issuable upon exercise of options exercisable
within 60 days.
(5) Consists of 26,667 shares issuable upon exercise of options exercisable
within 60 days.
(6) Includes 33,333 shares issuable upon exercise of options exercisable within
60 days.
(7) Includes an aggregate of 382,499 shares issuable upon exercise of options
within 60 days and 1,333 shares issuable upon exercise of a warrant.
35
<PAGE> 38
DESCRIPTION OF SECURITIES
The Company is authorized to issue 100,000,000 shares of Common Stock, par
value $.0001 per share, and 5,000 shares of Preferred Stock, par value $0.01 per
share.
COMMON STOCK
As of January 9, 1997, 4,742,454 shares of Common Stock were issued and
outstanding. The outstanding Common Stock is fully paid and nonassessable.
The holders of Common Stock are entitled to one vote per share for the
election of directors and with respect to all other matters to be voted on by
stockholders. Shares of Common Stock do not have cumulative voting rights, which
means that the holders of more than 50% of such shares voting for the election
of directors can elect all of the directors if they choose to do so and, in such
event, the holders of the remaining shares so voting will not be able to elect
any directors. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor, subject to the rights accorded any class of Preferred Stock
that may be issued. In the event of liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of liabilities
and after provision has been made for each class of stock, if any, having
preference over the Common Stock. The holders of Common Stock have no
conversion, preemptive or redemption rights.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges, qualifications, limitations and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series. No shares of Preferred Stock are
currently outstanding and the Company has no current plans to issue any shares
of Preferred Stock.
WARRANTS AND OPTIONS
As of January 9, 1997, the Company had outstanding 502,833 shares of Common
Stock issuable upon exercise of options issued pursuant to the Stock Option Plan
at a weighted-average exercise of $3.53 per share. The following table sets
forth certain information as of January 9, 1997 with respect to the Company's
outstanding warrants to purchase Common Stock and outstanding options to
purchase Common Stock that were not issued under the Stock Option Plan (an
aggregate of 1,187,441 shares of Common Stock issuable at a weighted-average
exercise price of $11.66):
<TABLE>
<CAPTION>
NUMBER OF SHARES
ISSUABLE UPON EXPIRATION EXERCISE
EXERCISE DATE PRICE
- ---------------- ---------- --------
<S> <C> <C>
284,444 6/1/97 $15.00
33,333 3/25/97 12.15
113,333 8/31/97 22.50
100,000 8/31/97 11.25
33,333 4/23/98 18.75
8,333 10/1/98 49.65
6,667 12/6/98 15.00
101,660 12/1/97 20.25
10,164 12/1/98 11.10
10,164 12/1/98 20.25
5,000 6/30/98 1.93
1,667 6/9/00 2.87
25,000 6/9/00 2.87
89,343 12/31/98 3.75
140,000 2/15/00 3.06
200,000 8/28/06 5.00
25,000 8/2/06 5.19
</TABLE>
36
<PAGE> 39
TRANSFER AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 6,242,454
shares of Common Stock outstanding (6,467,454 if the Underwriters'
over-allotment option is exercised in full), assuming that no warrants or
options are exercised prior to such time. The shares sold in this offering will
be freely tradable without restrictions or further registration under the
Securities Act, other than shares purchased by affiliates of the Company, as
that term is defined under the Securities Act ("Affiliates").
The directors and executive officers of the Company have agreed that they
will not, without the prior written consent of the Representative, sell any
shares of Common Stock for a period of 180 days after the date of the
consummation of this offering (the "Lock-Up Agreements"). After the expiration
of the Lock-Up Agreements, 50,307 shares of Common Stock, plus any additional
shares issued to such individuals pursuant to the exercise of warrants or stock
options, will become freely tradeable subject to the restrictions imposed by
Rule 144.
As of January 9, 1997, 706,431 shares of Common Stock were reserved for
issuance pursuant to outstanding warrants at a weighted-average exercise price
of $16.81 per share, substantially all of which have been registered for resale
under the Securities Act subject to the limitations of Rule 144 promulgated
under the Securities Act with respect to shares held by Affiliates. Only 5,000
of such warrants are exercisable at a price of less than $11.00 per share. See
"Description of Securities -- Warrants and Options."
As of January 9, 1997, 502,833 shares of Common Stock were reserved for
issuance pursuant to options granted under the Company's Stock Option Plan at a
weighted-average exercise price of $3.53 per share. The shares granted under the
Stock Option Plan have been registered under the Securities Act and may be sold
in the public market at any time (subject to the limitations of Rule 144 with
respect to shares underlying options held by Affiliates). 150,834 of the shares
issuable pursuant to these options would, if exercised, be subject to the
Lock-Up Agreements. The Company also has an additional 481,010 shares reserved
for issuance pursuant to other stock options granted by the Company at a
weighted-average exercise price of $4.09 per share, of which 256,010 shares have
been registered for resale and may be sold in the public market at any time,
subject to the limitations of Rule 144 with respect to shares held by
Affiliates. 365,000 of the shares issuable pursuant to these options would, if
issued, be subject to the Lock-Up Agreements.
The Company cannot predict the effect, if any, that sales of shares of
Common Stock, or the availability of such shares for sale will have on the
market price prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices.
37
<PAGE> 40
UNDERWRITING
The Underwriters named below (the "Underwriters"), acting through the
Representative, Wedbush Morgan Securities Inc., have severally agreed with the
Company, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names below. The Underwriters are committed to
purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
Wedbush Morgan Securities Inc. ................................... 800,000
Cowen & Company................................................... 40,000
Montgomery Securities............................................. 40,000
Oppenheimer & Co., Inc. .......................................... 40,000
Advest, Inc. ..................................................... 25,000
Robert W. Baird & Co. Incorporated................................ 25,000
Black & Company Inc. ............................................. 25,000
Crowell, Weedon & Co. ............................................ 25,000
Cruttenden Roth Incorporated...................................... 25,000
Dain Bosworth Incorporated........................................ 25,000
Dakin Securities Corporation...................................... 25,000
EVEREN Securities, Inc. .......................................... 25,000
Furman Selz LLC................................................... 25,000
Gerard Klauer Mattison & Co., Inc. ............................... 25,000
Hanifen, Imhoff Inc. ............................................. 25,000
Interstate/Johnson Lane Corporation............................... 25,000
Jefferies & Company, Inc. ........................................ 25,000
Needham & Company, Inc. .......................................... 25,000
Piper Jaffray Inc. ............................................... 25,000
Ragen MacKenzie Incorporated...................................... 25,000
Sands Brothers & Co., Ltd. ....................................... 25,000
The Seidler Companies Incorporated................................ 25,000
Southwest Securities, Inc. ....................................... 25,000
Stifel, Nicolaus & Company, Incorporated.......................... 25,000
Sutro & Co. Incorporated.......................................... 25,000
Van Kasper & Company.............................................. 25,000
GBS Financial Corp. .............................................. 10,000
TriQuest Financial Inc. .......................................... 10,000
Waldron & Company, Inc. .......................................... 10,000
---------
Total................................................... 1,500,000
=========
</TABLE>
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $.25 per share, of which $.10 may be
reallowed to other dealers. After the public offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representative. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the public offering price, less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase
38
<PAGE> 41
approximately the same percentage of such additional shares that the number of
shares of Common Stock to be purchased by it shown in the above table represents
as a percentage of the 1,500,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 1,500,000 shares are being sold.
The Underwriting Agreement contains certain covenants of indemnity among
the Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
Pursuant to the terms of the Lock-Up Agreements, the executive officers and
directors of the Company have agreed with the Representative that, until 180
days after the consummation of this offering, they will not, directly or
indirectly, sell, contract to sell, make any short sale, pledge or otherwise
dispose of any shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock, exclusive of securities purchased in
connection with this offering or in the public trading market, without the prior
written consent of the Representative. Subject to certain exceptions, the
Company has also agreed until 90 days after the closing date of this offering
not to issue, offer, sell, or grant options to purchase or otherwise dispose of
any shares of the Company's Common Stock or any other securities convertible
into or exchangeable for Common Stock or any other equity security, except with
the prior written consent of the Representative. See "Shares Eligible for Future
Sale."
The Representative has advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In connection with this offering, certain Underwriters and selling group
members (if any) may engage in passive market-making transactions in the
Company's Common Stock on the Nasdaq National Market, or otherwise, accordance
with Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon the
satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market-making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A prohibits underwriters and selling group
members engaged in passive market-making, generally, from entering a bid or
effecting a purchase that exceeds the highest bid for these securities displayed
on Nasdaq by a market maker that is not participating in the distribution. Under
Rule 10b-6A, each underwriter or selling group member engaged in passive
market-making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately preceding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be distributed.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Sidley & Austin, Los
Angeles, California. Certain other legal matters will be passed upon for the
Company by Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, New York, New
York. Certain legal matters will be passed upon for the Underwriters by
Sheppard, Mullin, Richter & Hampton LLP, Los Angeles, California.
EXPERTS
The financial statements of the Company as of December 31, 1995, 1994 and
for each of the three years in the period ended December 31, 1995 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1995 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 1996,
June 30, 1996 and September 30, 1996, which
39
<PAGE> 42
have been filed by the Company with the Securities and Exchange Commission under
the Exchange Act are incorporated by reference in this Prospectus. Any statement
contained in a document incorporated herein by reference shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of that person, a copy of
any or all of the documents which have been incorporated by reference in this
Prospectus (other than certain exhibits to such documents, unless such exhibits
are specifically incorporated by reference in such documents). Written or
telephone requests should be directed to T-HQ, Inc., 5016 North Parkway
Calabasas, Calabasas, California 91302, Attention: Secretary (telephone (818)
591-1310).
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission or are
contained in exhibits and schedules to the Registration Statement as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed as
a part thereof. Statements made in this Prospectus concerning the contents of
any agreement or other document are not necessarily complete. With respect to
each such agreement or other document filed with the Commission as an exhibit,
reference is made to such exhibit for a more complete description, and each such
statement is deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and the rules and regulations thereunder, and in accordance therewith files
reports and other information with the Commission. Such reports and other
information filed by the Company can be inspected and copied at the Public
Reference Section maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7
World Trade Center, 13th Floor, New York, New York 10007 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained upon written request addressed to the Commission,
Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its public reference facilities in New York, New
York and Chicago, Illinois, at prescribed rates. The Commission maintains a site
on the World Wide Web at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Common Stock is quoted on the Nasdaq
Smallcap Market System under the trading symbol "TOYH". The Company has been
approved for listing on the Nasdaq National Market under the trading symbol
"THQI" upon completion of this offering. Other information concerning the
Company may be inspected at the National Association of Securities Dealers, Inc.
at 1735 K Street, N.W., Washington, D.C. 20006.
40
<PAGE> 43
T-HQ, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEPENDENT AUDITORS' REPORT.......................................................... F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets -- December 31, 1994 and December 31, 1995 and unaudited
September 30, 1996............................................................... F-3
Consolidated Statements of Operations for each of the Three Years in the Period
Ended December 31, 1995 and the unaudited nine months ended September 30, 1995
and 1996......................................................................... F-4
Consolidated Statements of Shareholders' Equity for each of the Three Years in the
Period Ended December 31, 1995 and the unaudited nine months ended September 30,
1996............................................................................. F-5
Consolidated Statements of Cash Flows for each of the Three Years in the Period
Ended December 31, 1995 and the unaudited nine months ended September 30, 1995
and 1996......................................................................... F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-7
</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> 44
INDEPENDENT AUDITORS' REPORT
To the Shareholders of T-HQ, Inc.,
Calabasas, California
We have audited the accompanying consolidated balance sheets of T-HQ, Inc. and
subsidiaries (the "Company") as of December 31, 1994 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1994
and 1995 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 16, 1996
F-2
<PAGE> 45
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- SEPTEMBER 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash........................................... $ 2,807,000 $ 1,895,000 $ 2,044,000
Accounts receivable -- net..................... 4,739,000 9,362,000 9,041,000
Inventory...................................... 1,739,000 1,150,000 1,786,000
Inventory deposits............................. 196,000 -- 246,000
Prepaid and deferred royalties................. 2,861,000 1,776,000 1,932,000
Software development costs..................... 2,202,000 2,037,000 3,264,000
Income tax refund receivable................... 209,000 27,000 27,000
Prepaid expenses and other current assets...... 260,000 153,000 443,000
------------- ------------- -------------
Total current assets................... 15,013,000 16,400,000 18,783,000
Equipment -- net................................. 518,000 516,000 609,000
Other long-term assets........................... -- -- 801,000
------------- ------------- -------------
TOTAL ASSETS........................... $ 15,531,000 $ 16,916,000 $ 20,193,000
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......... $ 3,664,000 $ 4,707,000 $ 4,392,000
Accrued royalties.............................. 4,039,000 1,752,000 4,710,000
Accrued returns and allowances................. 3,574,000 2,859,000 --
Advance from bank.............................. -- -- 1,478,000
------------- ------------- -------------
Total current liabilities.............. 11,277,000 9,318,000 10,580,000
Commitments and contingencies
Shareholders' equity:
Convertible preferred stock, par value $.01,
5,000 shares authorized
Common stock, par value $.0001, 100,000,000
shares authorized; 2,790,650 shares,
4,217,391 shares, and 4,701,420 shares
issued and outstanding as of December 31,
1994, 1995, and September 30, 1996,
respectively................................ 4,000 4,000 4,000
Additional paid-in capital....................... 30,656,000 33,317,000 34,452,000
Cumulative foreign currency translation
adjustment..................................... (442,000) (360,000) (367,000)
Accumulated deficit.............................. (25,964,000) (25,363,000) (24,476,000)
------------- ------------- -------------
Total shareholders' equity............. 4,254,000 7,598,000 9,613,000
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................... $ 15,531,000 $ 16,916,000 $ 20,193,000
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 46
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............. $ 37,478,000 $ 13,289,000 $33,250,000 $18,935,000 $29,772,000
Costs and expenses:
Cost of sales....... 31,415,000 12,651,000 19,501,000 10,798,000 16,783,000
Royalties........... 6,028,000 2,327,000 3,641,000 2,103,000 5,084,000
Product
development...... 1,186,000 713,000 761,000 527,000 767,000
Project
abandonment...... 5,489,000 3,754,000 1,025,000 375,000 375,000
Selling............. 4,843,000 5,909,000 2,393,000 1,689,000 2,304,000
General and
administrative... 7,221,000 4,806,000 3,988,000 2,475,000 2,764,000
Operating
interest......... 529,000 496,000 1,184,000 722,000 589,000
------------ ------------ ----------- ----------- -----------
Total costs and
expenses............ 56,711,000 30,656,000 32,493,000 18,689,000 28,666,000
------------ ------------ ----------- ----------- -----------
Income (loss) from
operations.......... (19,233,000) (17,367,000) 757,000 246,000 1,106,000
Interest expense,
net................. (420,000) (112,000) (134,000) (92,000) (215,000)
------------ ------------ ----------- ----------- -----------
Income (loss) before
income taxes........ (19,653,000) (17,479,000) 623,000 154,000 891,000
Provision for (benefit
from) income
taxes............... (3,413,000) 11,000 22,000 -- 4,000
------------ ------------ ----------- ----------- -----------
Net income (loss)..... $(16,240,000) $(17,490,000) $ 601,000 $ 154,000 $ 887,000
============ ============ =========== =========== ===========
Net income (loss) per
share............... $ (10.80) $ (8.75) $ .17 $ .05 $ .19
============ ============ =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 47
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
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, 1993............. -- 1,463,354 $2,000 $18,824,000 $(528,000) $ 7,766,000 $ 26,064,000
Exercise of warrants and options....... -- 45,814 -- 2,001,000 -- -- 2,001,000
Net loss............................... -- -- -- -- -- (16,240,000) (16,240,000)
Foreign currency translation
adjustment........................... -- -- -- -- (198,000) -- (198,000)
------ --------- ----- ----------- --------- ------------ ------------
Balance at December 31, 1993........... -- 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
(unaudited).......................... -- 233,652 -- 606,000 -- -- 606,000
Conversion of preferred stock to common
stock (unaudited).................... (325) 127,717 -- -- -- -- --
Issuance of stock (unaudited).......... -- 122,660 -- 529,000 -- -- 529,000
Net income (unaudited)................. -- -- -- -- -- 887,000 887,000
Foreign currency translation adjustment
(unaudited).......................... -- -- -- -- (7,000) -- (7,000)
------ --------- ----- ----------- --------- ------------ ------------
Balance at September 30, 1996
(unaudited).......................... -- 4,701,420 $4,000 $34,452,000 $(367,000) $(24,476,000) $ 9,613,000
====== ========= ===== =========== ========= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 48
T-HQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................. $(16,240,000) $(17,490,000) $ 601,000 $ 154,000 $ 887,000
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization.............. 1,398,000 253,000 240,000 176,000 176,000
Provision for doubtful accounts, discounts
and returns.............................. 9,756,000 3,888,000 4,145,000 1,908,000 3,282,000
Deferred income tax benefit................ (203,000) -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable........................ 16,503,000 (2,127,000) (5,875,000) (1,825,000) (2,696,000)
Inventory and inventory deposits........... 6,933,000 3,796,000 779,000 2,154,000 (868,000)
Prepaid and deferred royalties and software
development costs........................ 6,685,000 1,602,000 2,592,000 1,396,000 1,922,000
Prepaid and deferred taxes................. -- -- -- 66,000 (19,000)
Prepaid expenses and other current
assets................................... (282,000) 2,292,000 99,000 52,000 (290,000)
Income tax refund receivable............... (2,630,000) 2,398,000 201,000 -- --
Accounts payable and accrued expenses...... (1,029,000) 1,365,000 1,040,000 94,000 (58,000)
Accrued royalties.......................... (4,202,000) (2,083,000) (3,628,000) (2,870,000) (348,000)
Accrued returns and allowances............. (4,258,000) (3,898,000) (3,589,000) (4,465,000) (3,132,000)
Income taxes payable....................... (2,232,000) 18,000 -- -- --
----------- ----------- ---------- ---------- ----------
Net cash used in operating activities.......... 10,199,000 (9,986,000) (3,395,000) (3,160,000) (1,144,000)
----------- ----------- ---------- ---------- ----------
Cash flows used in investing activities:
Long term investments...................... -- -- -- -- (501,000)
Acquisition of equipment................... (952,000) (188,000) (239,000) (108,000) (267,000)
----------- ----------- ---------- ---------- ----------
Net cash used by investing activities.......... (952,000) (188,000) (239,000) (108,000) (768,000)
Cash flows from financing activities:
Restricted cash - letters of credit........ 4,250,000 -- -- -- --
Borrowings under notes payable bank........ 1,241,000 -- -- -- --
Repayments of notes payable bank........... (16,109,000) -- -- -- --
Advances from bank......................... -- -- -- -- 1,478,000
Proceeds from exercise of warrants and
options.................................. 2,001,000 13,000 48,000 606,000
Net proceeds from issuance of convertible
preferred stock.......................... -- -- 2,613,000 2,733,000 --
Net proceeds from issuance of common
stock.................................... -- 9,820,000 -- (5,000) --
----------- ----------- ---------- ---------- ----------
Net cash provided by financing activities...... (8,617,000) 9,833,000 2,661,000 2,728,000 2,084,000
----------- ----------- ---------- ---------- ----------
Effect of exchange rate changes on cash........ (53,000) 133,000 61,000 57,000 (23,000)
----------- ----------- ---------- ---------- ----------
Net increase (decrease) in cash................ 577,000 (208,000) (912,000) (483,000) 149,000
Cash -- beginning of period.................... 2,438,000 3,015,000 2,807,000 2,807,000 1,895,000
----------- ----------- ---------- ---------- ----------
Cash -- end of period.......................... $ 3,015,000 $ 2,807,000 $ 1,895,000 $ 2,324,000 $ 2,044,000
=========== =========== ========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period for income
taxes...................................... $ 1,432,000 -- $ 22,000 $ 7,000 --
=========== =========== ========== ========== ==========
Cash paid during the period for interest..... $ 462,000 $ 235,000 $ 230,000 $ 175,000 $ 260,000
=========== =========== ========== ========== ==========
</TABLE>
NON-CASH TRANSACTIONS (UNAUDITED):
On July 1, 1996 the Company issued 70,000 shares of common stock in
lieu of cash to a former employee of the Company. This transaction resulted
in a reduction in accounts payable and accrued expenses and a like increase
in additional paid-in capital in the amount of $229,000, the fair value of
the stock issued on the date of issuance. Also on July 1, 1996, the Company
issued 52,660 shares of common stock as part of the purchase price for a
25% interest in Inland Productions, Inc. ("Inland") increasing other
long-term investments and additional paid-in capital by $300,000.
F-6
<PAGE> 49
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
1. ORGANIZATION
Business. T-HQ, Inc. a New York corporation, develops and publishes
interactive entertainment software ("Software"). Substantially all of the
Company's products are based on licenses for popular cultural trends and
high-recognition names ("Properties").
Unless the context otherwise requires, references in this document to
"T-HQ" or the "Company" include T-HQ, Inc. and all of its wholly owned
subsidiaries.
License Agreements. The Company has 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. The Company
also seeks to participate in the newly emerging 64-bit Software market. 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. In particular, all of the Company's Software products
are manufactured by Sony, Nintendo, and Sega, who charge the Company a fixed
amount for each Software CD-ROM or cartridge manufactured, which charge includes
a manufacturing, printing and packaging fee as well as a royalty for the use of
their respective names, proprietary information and technology.
In addition, the Company must indemnify Sony, Nintendo, or Sega as
appropriate, with respect to all loss, liability and expense resulting from any
claim against Sony, Nintendo, or Sega involving the development, marketing, sale
or use of the Company's Titles, including any claims for copyright or trademark
infringement brought against Sony, Nintendo, or Sega. As such, the Company bears
the risk that the Properties and information and technology licensed from Sony,
Nintendo, or Sega and incorporated in the Software may infringe the rights of
third parties. Generally, the Company is entitled to indemnification from its
Software developers and Property licensors to cover its indemnification
obligations to Sony, Nintendo, or Sega, but no assurance can be given that, if
any claim is brought against the Company, said developers and/or licensors will
have sufficient resources to indemnify the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements include
the accounts of T-HQ, Inc. and its wholly owned subsidiaries. All material
intercompany balances and transaction have been eliminated.
Unaudited Interim Financial Information. The interim financial information
included herein has been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange
F-7
<PAGE> 50
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted pursuant to such rules and
regulations.
In the opinion of management, such unaudited financial information includes
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth herein. The results for the nine months
ended September 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
Foreign Currency Translations. Assets and liabilities of foreign operations
are translated at current rates of exchange while results of operations are
translated at average rates in effect for the period. Translation gains or
losses are shown as a separate component of shareholders' equity. Foreign
currency translation gains and losses result from exchange rate changes
denominated in currencies other than the functional currency. The Company has
not experienced significant foreign currency transaction gains or losses.
Fair Values of Financial Instruments. The carrying value of accounts
receivable and trade payables approximate the fair value due to their short-term
maturities. The carrying value of the Company's advances from its bank is
considered to approximate its fair value because the interest rate of this
instrument is based on a variable reference rate.
Inventory and Inventory Deposits. Inventories, which consist principally of
finished products, are stated at the lower of cost (first-in, first-out basis)
or market. On a quarterly basis, the Company estimates the net realizable value
of slow-moving inventory on a title by title basis, and charges the excess of
cost over net realizable value to cost of sales. Inventory deposits are
prepayments to Software 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,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Furniture, fixtures and equipment.......... $ 776,000 $ 897,000 $ 1,158,000
Leasehold improvements..................... 10,000 20,000 20,000
Less accumulated depreciation.............. (268,000) (401,000) (569,000)
--------- --------- ----------
$ 518,000 $ 516,000 $ 609,000
========= ========= ==========
</TABLE>
Depreciation expense for the years ended December 31, 1993, 1994 and 1995
was $1,209,000, $209,000, and $199,000, respectively, and for the nine months
ended September 30, 1995 and 1996 was $176,000 and $176,000, respectively.
Royalties and Software Development Costs. Advance royalty payments for
intellectual property licenses are recorded as prepaid royalties. All minimum
guaranteed royalty payments are initially recorded as an asset (deferred
royalties) and as a liability (accrued royalties) at the contractual amount upon
execution of the contract. Royalty payments for intellectual property licenses
are classified as current assets to the extent they relate to anticipated sales
during the subsequent year. The Company utilizes both independent Software
developers (who are paid advances against future royalties) and internal
development teams to develop its Software. Under generally accepted accounting
principles, such Software development costs are capitalizable when technological
feasibility has been established. Technological feasibility for entertainment
software such
F-8
<PAGE> 51
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
as the Company's has been established by Sony, Nintendo, and Sega for use with
their respective hardware platforms. Royalty expense is computed using either a
percentage of the related product dollar sales or a per unit sold calculation as
sales are made. Amortization of prepaid royalty and software development costs,
as a part of royalties expense, is provided on a product-by-product basis
commencing with the general release of each product, based on the greater of the
ratio of current gross revenues for the product to the sum of its current and
anticipated gross revenues, or the straight line method over the remaining
estimated economic life of the product. The Company also expenses as project
abandonment losses advances or capitalized Software development costs when, in
management's estimate, future revenues will not be sufficient to recover
previously capitalized costs. Such abandonment losses are solely attributable to
changes in market conditions or product quality considerations. Software
development costs of $2,293,000, $935,000, and $1,768,000 were amortized in
1993, 1994, and 1995, respectively, and of $1,033,000 and $1,625,000 were
amortized in the nine months ended September 30, 1995 and 1996, respectively.
Project abandonment losses related to Software development costs of $4,818,000,
$2,743,000, and $1,025,000, were charged to expense in 1993, 1994, and 1995,
respectively, and of $375,000 was charged to expense in each of the nine-month
periods ended September 30, 1995 and 1996. 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,
1993, 1994, and 1995 were 1,504,000, 1,998,000, and 3,482,000, respectively, and
in the nine months ended September 30, 1995 and 1996 were 3,007,000 and
4,684,000, respectively. The difference between primary and fully diluted
earnings per share is not significant.
Non-monetary Transactions. Prior to 1995, the Company exchanged its
products for 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 1993, 1994, and 1995 financial
statements have been reclassified to conform to the 1996 presentation.
Pervasiveness of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates relate to prepaid and deferred royalties,
software development costs, accrued returns and allowances and the allowance for
doubtful accounts.
F-9
<PAGE> 52
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
Impact of Recently Issued Accounting Standards. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." The Company does
not plan to adopt the fair value features of the statement and will instead base
its accounting on the provisions of Accounting Principles Board Opinion No. 25,
which uses the intrinsic value method of accounting for stock options.
3. ACCOUNTS RECEIVABLE, FACTORING AGREEMENT, DUE FROM FACTOR AND ACCRUED
RETURNS AND ALLOWANCES
Until July 18, 1996, the Company had a factoring and credit agreement (the
"BNY Agreement") with BNY Financial Corporation ("BNY"), a wholly owned
subsidiary of The Bank of New York. There were no open letters of credit under
the BNY agreement at June 30, 1996.
On July 18, 1996, the Company terminated its factoring and credit agreement
with BNY and entered into a new financing and banking arrangement with Imperial
Bank ("Imperial Agreement"). The Imperial Agreement permits the Company to draw
down working capital advances and open letters of credit in amounts determined
by a formula based on 70% of eligible accounts receivable and 50% of eligible
inventory. The amount of eligible inventory in the formula may not exceed
$1,500,000. The facility provides for maximum borrowings of $7,500,000, with
advances bearing interest at the bank's prime rate plus 1.25% (% as of September
30, 1996. The Company has granted Imperial Bank a security interest in its
domestic accounts receivable and inventories. The Imperial Agreement expires on
June 30, 1997. Open letters of credit under the Imperial Agreement totaled
$3,844,000 at September 30, 1996. On December 11, 1996, the Imperial Agreement
was amended to increase the maximum borrowings to $9,000,000.
The amended 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 1.4 to 1, and maintain
profitable operations on a fiscal year basis. Additionally, the Company is
required to maintain a minimum tangible net worth of $7,000,000 and minimum
working capital of $5,000,000.
The Company also has lines of credit with two additional lenders pursuant
to which such lenders have agreed to issue letters of credit on the Company's
behalf to Sony, Nintendo, and Sega for the purchase of software for the
Company's domestic and European operations. The domestic and European lines are
$5,000,000 and $2,500,000, respectively. Each of these lenders receives a fee
for the issuance of such letters of credit, and each lender retains title to the
inventory financed by such lender until such time as that inventory is sold. The
domestic lender has a security interest in the domestic assets of the Company,
subordinated to Imperial Bank's priority security interest. The current term of
the agreement with the domestic lender expires on March 15, 1997, with automatic
renewals at such date and every six months thereafter, unless terminated by
either party. Open letters of credit with the domestic lender were $3,187,000 at
September 30, 1996. The European lender has a first security interest in all of
the Company's European subsidiaries' receivables, inventory, and other assets.
The agreement may be canceled at any time at the lender's sole discretion. Open
letters of credit under the agreement with the European lender were $728,000 as
of September 30, 1996.
Because BNY owned the Company's domestic receivables pursuant to the BNY
agreement, prior to the effective date of the Imperial agreement the Company's
domestic accounts receivables were presented net of advances from BNY (see table
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
is periods prior to the closing of the Imperial Agreement. Because Imperial does
not own the Company's domestic receivables, advances from Imperial are
F-10
<PAGE> 53
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
now shown as a liability in the accompanying financial statements, and reserves
for markdowns and allowances are now presented as a deduction from the Company's
gross receivables.
Accounts receivable are due primarily from domestic and foreign retailers
and distributors, including mass merchants and specialty stores. Accounts
receivable at December 31, 1994 and 1995 and the nine months ended September 30,
1996 are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Receivables assigned to factor...................... $ 5,031,000 $ 7,348,000 $ --
Advances from factor................................ (1,035,000) (2,085,000) --
----------- ----------- -----------
Due from factor..................................... 3,996,000 5,263,000 --
Accounts receivable -- domestic..................... -- -- 11,655,000
Other accounts receivable -- primarily foreign...... 1,753,000 5,739,000 1,997,000
Other receivables................................... 7,000 51,000 4,000
Allowance for foreign doubtful accounts............. (827,000) (1,380,000) (1,310,000)
Allowance for foreign discounts and returns......... (190,000) (311,000) (112,000)
Allowance for domestic accrued returns and
allowances........................................ -- -- (3,193,000)
----------- ----------- -----------
Accounts receivable -- net................ $ 4,739,000 $ 9,362,000 $ 9,041,000
=========== =========== ===========
</TABLE>
The allowance for foreign doubtful accounts consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1................ $(115,000) $(536,000) $ (827,000) $(827,000) $(1,380,000)
Provision for doubtful accounts..... (536,000) (256,000) (505,000) (24,000) (10,000)
Actual write-offs (recoveries)...... 115,000 (35,000) (48,000) (62,000) 80,000
--------- --------- ----------- --------- -----------
Ending balance...................... $(536,000) $(827,000) $(1,380,000) $(913,000) $(1,310,000)
========= ========= =========== ========= ===========
</TABLE>
The allowance for foreign discounts and returns consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1.......... $(1,039,000) $(666,000) $(190,000) $(190,000) $(311,000)
Provision for discounts and
returns..................... (842,000) (280,000) (766,000) (199,000) (275,000)
Actual write-offs............. 1,215,000 756,000 645,000 223,000 474,000
----------- --------- --------- --------- ---------
Ending balance................ $ (666,000) $(190,000) $(311,000) $(166,000) $(112,000)
=========== ========= ========= ========= =========
</TABLE>
F-11
<PAGE> 54
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
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, 1993, 1994, and 1995 and the nine months ended September 30, 1995,
and which is netted against accounts receivable in the accompanying balance
sheet for the nine months ended September 30, 1996, consists of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1.... -- $(4,120,000) $(3,574,000) $(3,574,000) $(2,859,000)
Provision for discounts
and returns........... $(8,378,000) (3,352,000) (2,874,000) (1,430,000) (2,997,000)
Actual write-offs....... 4,258,000 3,898,000 3,589,000 2,969,000 2,663,000
----------- ----------- ----------- ----------- -----------
Ending balance.......... $(4,120,000) $(3,574,000) $(2,859,000) $(2,035,000) $(3,193,000)
=========== =========== =========== =========== ===========
</TABLE>
4. EMPLOYEE PENSION PLAN
The Company sponsors for its employees a defined contribution plan intended
to qualify under Section 401(k) of the Internal Revenue Code (the "Plan"). The
Plan, as amended in 1991, provides that employees may defer up to 12% of annual
compensation, and that the Company will make a matching contribution equal to
each employee's deferral, up to 4% of compensation. The Company may also
contribute funds to the Plan in the form of a profit sharing contribution.
Expenses under the Plan were $116,000, $61,000, and $30,000 in 1993, 1994 and
1995, respectively, and $13,000 and $89,000 for the nine months ended September
30, 1995 and 1996, respectively.
5. INCOME TAXES
The provision for (benefit from) for income taxes consists of the
following:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ------- -------
<S> <C> <C> <C>
Current
Federal.................................. $(2,973,000) -- $22,000
State.................................... (96,000) -- --
Foreign.................................. (141,000) $11,000 --
----------- ------- -------
(3,210,000) 11,000 22,000
----------- ------- -------
Deferred
Federal.................................. (301,000) -- --
State.................................... 98,000 -- --
----------- ------- -------
(203,000) -- --
----------- ------- -------
Provision for (benefit from) income
taxes.................................... $(3,413,000) $11,000 $22,000
=========== ======= =======
</TABLE>
F-12
<PAGE> 55
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
A reconciliation of the provision for income taxes at the federal statutory
rate to the provision recorded in the accompanying financial statements is as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Federal provision at statutory rate................. (35.0)% (35.0)% 35.0%
Effect of foreign income taxes and other............ .7 .1 --
Effect of net operating loss carryforward (utilized)
not utilized...................................... 16.9 35.0 (31.5)
----- ----- -----
(17.4)% 0.1% 3.5%
===== ===== =====
</TABLE>
The components of deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1994 1995
------------------------- ---------------------------
FEDERAL STATE FEDERAL STATE
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts,
discounts and returns............. $ 1,215,000 $ 228,000 $ 973,000 $ 216,000
Net operating loss................... 5,881,000 453,000 5,852,000 1,168,000
License abandonment.................. 804,000 151,000 539,000 559,000
Other -- net......................... 346,000 65,000 250,000 56,000
---------- -------- ---------- ----------
Total deferred tax assets:............. 8,246,000 897,000 7,614,000 1,999,000
Deferred tax liabilities:
Software development costs........... (854,000) (47,000) (893,000) (573,000)
State income taxes................... (288,000) -- (484,000) --
---------- -------- ---------- ----------
Net deferred tax assets................ 7,104,000 850,000 6,237,000 1,426,000
Valuation reserve...................... (7,104,000) (850,000) (6,237,000) (1,426,000)
---------- -------- ---------- ----------
Deferred income taxes.................. $ -- $ -- $ -- $ --
========== ======== ========== ==========
</TABLE>
A valuation reserve has been provided in 1994 and 1995 because of the
uncertainty regarding the realization of net deferred tax assets. The valuation
reserve increased $5,407,000 during fiscal 1994 and decreased $291,000 in fiscal
1995.
As of December 31, 1995 the Company 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. Any significant increase in the number of common shares outstanding
would result in an "ownership change" of the Company for purposes of Sections
382 and 383 of the Internal Revenue Code of 1986, as amended (the "Code"). As a
result, the amount of the Company's net operating loss carryforward available to
reduce the Company's federal income tax liability in future years in which the
Company has taxable income would be limited to an annual amount equal to the
product of (i) the fair market value of the Company's capital stock on the date
of consummation of the sale of shares that would result in such an ownership
change, multiplied by (ii) the "long-term tax exempt rate" published by the
Internal Revenue Code.
F-13
<PAGE> 56
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
6. STOCK OPTION PLAN (SEE NOTE 8)
The Company has a stock option plan (the "Option Plan") which provides for
the issuance of up to 200,000 options to acquire the Company's common stock. In
May 1995, the Company's shareholders approved an increase in the number of
shares available under the Option Plan to 650,000 shares available for
employees, consultants and non-employee directors. 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 in 1994, 1995, and the
nine months ended September 30, 1996 has been the market price of the stock on
the date of the grant. Generally, options granted become exercisable over three
years and must be exercised within four years of the date of grant.
<TABLE>
<CAPTION>
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................................ 121,500
Exercised at $2.87 - $3.75 per share.............................. (90,673)
Canceled at $2.87 - $82.65 per share.............................. (158,254)
--------
Balance at September 30, 1996..................................... 527,164
========
Options exercisable at September 30, 1996......................... 270,331
========
</TABLE>
Included in the 1994 stock option grants is an option granted to Jack
Friedman, the former president of the Company. This option was originally
granted on February 24, 1994 at the price of $13.95 per share. Upon the
resignation of Mr. Friedman and the re-negotiation of his employment agreement,
options previously granted in 1994 were repriced to the then current market
price of the stock of $3.75.
During 1995, the Company granted 240,000 options outside of the Option
Plan, which consists 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 $5.00 per share. Share prices for these
options equal the market price of the Company's common stock at the date of the
grant.
F-14
<PAGE> 57
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
7. MAJOR CUSTOMERS AND RELATED PARTY TRANSACTIONS
Sales (before returns and allowances) to a major customer represented 16%
and 18% of gross sales in the years ended December 31, 1993 and 1994,
respectively. Sales (before returns and allowances) to two major customers were
12% and 10% in the year ended December 31, 1995. Sales (before returns and
allowances) to a customer were 11% and 12% in the nine months ended September
30, 1995 and 1996, respectively. Sales (before returns and allowances) to two
other customers represented 12% and 10% of sales, respectively, in 1993. In 1994
one other customer represented 18% of sales (before returns and allowances).
The Company also had sales of $407,000 in the year ended December 31, 1993,
to Grand Toys, Ltd. ("Grand"). A director of the Company who resigned in 1994 is
a principal officer and director of Grand.
The Company has an agreement with Trinity Capital Corp., an officer and
owner of which is a director of the Company, whereby the Company paid it $46,000
for financial consulting services in 1993.
In 1993, 1994 and 1995, the Company paid the law firm of Feder, Kaszovitz,
Isaacson, Weber, Skala & Bass, of which Mr. Skala, a director of the Company
through January 14, 1997, is a partner, approximately $167,000, $275,000, and
$214,000, respectively, and in the nine months ended September 30, 1995 and
1996, the Company paid such firm $214,000 and $177,000, respectively.
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 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.
F-15
<PAGE> 58
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
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.
On July 1, 1996, the Company issued 70,000 shares of common stock, at the
fair market value of the stock on such date, in lieu of settlement of an accrued
liability of $229,000 due to a former employee.
During the years ended December 31, 1993 and 1995, and the nine months
ended September 30, 1996, the number of warrants to purchase the Company's
common stock exercised were 40,000, 74,864, and 70,000, respectively. The
Company received proceeds from the exercise of such warrants totaling
$2,049,000. There were no warrants exercised during the year ended December 31,
1994.
9. OTHER LONG-TERM ASSETS
On July 1, 1996, the Company acquired a 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, 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 Classic.
On August 7, 1996, the Company acquired the business of Heliotrope Studios,
Inc. ("Heliotrope"), an interactive software developer for PC CD-ROM and an
assignment of the distribution license and certain work-in-progress for a PC
CD-ROM title (Pax Imperia II) from Blizzard Entertainment, a division of
Davidson Associates. In connection with the acquisition, the Company incurred
costs of $100,000 and assumed certain liabilities ($90,000) of Heliotrope. The
excess of the Company's cost of the acquisition over the estimated fair value of
assets acquired (approximately $190,000) has been included as a long-term
investment in the accompanying balance sheet. Such excess cost is being
amortized over 60 months. Because Heliotrope's assets and operations prior to
the acquisition were insignificant, no pro forma information is presented.
10. COMMITMENTS AND CONTINGENCIES
XBAND Modem Agreement. On April 23, 1994, the Company entered into a letter
of agreement with Catapult Entertainment, Inc. ("Catapult"), pursuant to which
T-HQ was the exclusive North American distributor of certain hardware products
developed by Catapult. The Company was required to spend a minimum of $3,000,000
in 1994 and a minimum of $2,000,000 in the first quarter of 1995 to market and
sell the XBAND Modem, and the Company was also required to finance all inventory
purchases. By mutual agreement between the Company and Catapult, approximately
$2,679,000 was spent in marketing efforts by the Company 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.
F-16
<PAGE> 59
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
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, at
such time the Company established a reserve in the amount of such remaining
payments. As a result, substantially all of the amount received pursuant to such
plan of reorganization will be reflected in the Company's Statement of
Operations for the year ended December 31, 1996.
Nintendo-Alpex Litigation. The Company has been advised by Nintendo that a
lawsuit has been instituted against Nintendo by Alpex alleging that certain NES
products, including licensee Software, manufactured and sold by Nintendo for its
NES system infringed a certain patent, and that the party is seeking monetary
damages and injunctive relief against Nintendo. Although Nintendo has asserted
that its products do not infringe such patent, an adverse verdict was recently
received and damages awarded by a jury against Nintendo. Nintendo has filed an
appeal in the Federal Circuit Court of Appeals. The Company has also been
advised that the relevant patent has expired and therefore there is no risk of
injunctive relief. The impact of this decision, the ultimate outcome of such
claim, and the effect on the Company, is uncertain. No claims have been asserted
against the Company by Nintendo or any other party to the action.
The Company has been advised by Nintendo that Alpex may assert that certain
SNES and Game Boy Software also infringe the patent involved in the litigation.
No legal proceedings have been commenced at this time against Nintendo or any
other party. The Company has been advised that the relevant patent has expired
and therefore, if any action is instituted, there is no risk of injunctive
relief. Since the Company is not required to indemnify Nintendo from any claims
arising from such suit, and the Company has not been named as a party to the
suit, management believes that the risk of loss associated with these matters is
remote.
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 shortly after its formation for
consideration consisting of $300,000 in cash and 52,660 shares of Common Stock
with a value at such time of approximately $300,000; and the Company has
contracted with Inland for the development of Turner's World Championship
Wrestling for the Play Station and Nintendo 64. 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. The Company denies all allegations of wrongdoing asserted
against it in the complaint and intends to vigorously defend against such
claims.
Royalties. At December 31, 1994 and 1995, future minimum guaranteed
royalties were $4,039,000 and $1,752,000, respectively and at September 30, 1996
were $4,710,000. Royalties are classified as current liabilities based upon
contractual payment dates.
F-17
<PAGE> 60
T-HQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF AND SUBSEQUENT TO SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995 IS UNAUDITED)
Leases. The Company is committed under operating leases with lease
termination dates to July 1998. Minimum future rentals pursuant to these leases
as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................. $ 255,000
1997.............................................. 160,000
1998.............................................. 95,000
--------
$ 510,000
========
</TABLE>
Rent expense was $239,000, $251,000, and $184,000 in 1993, 1994, and 1995,
respectively, and $156,000 and $133,000 in the nine months ended September 30,
1995 and 1996, 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, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE ASIA ELIMINATION CONSOLIDATED
-------- ------- ------ ----------- ------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Sales to unaffiliated customers...... $ 26,986 $ 7,725 $2,767 -- $ 37,478
Transfers between geographic areas... -- -- 1,106 $(1,106) --
--------- -------- ------- -------- ---------
Total net revenue.................... $ 26,986 $ 7,725 $3,873 $(1,106) $ 37,478
========= ======== ======= ======== =========
Pretax earnings (loss)............... $(16,764) $(2,411) $ (642) $ 164 $(19,653)
========= ======== ======= ======== =========
Identifiable assets at December 31,
1993............................... $ 17,805 $ 4,649 $ 139 $ (288) $ 22,305
========= ======== ======= ======== =========
Year ended December 31, 1994:
Sales to unaffiliated customers...... $ 11,114 $ 2,175 -- -- $ 13,289
Transfers between geographic areas... -- -- $ 84 $ (84) --
--------- -------- ------- -------- ---------
Total net revenue.................... $ 11,114 $ 2,175 $ 84 $ (84) $ 13,289
========= ======== ======= ======== =========
Pretax earnings (loss)............... $(16,017) $(1,459) $ 108 $ (111) $(17,479)
========= ======== ======= ======== =========
Identifiable assets at December 31,
1994............................... $ 12,136 $ 3,484 $ 113 $ (202) $ 15,531
========= ======== ======= ======== =========
Year ended December 31, 1995:
Sales to unaffiliated customers...... $ 24,894 $ 8,356 -- -- $ 33,250
Transfers between geographic areas... -- -- -- -- --
--------- -------- ------- -------- ---------
Total net revenue.................... $ 24,894 $ 8,356 -- -- $ 33,250
========= ======== ======= ======== =========
Pretax earnings (loss)............... $ 1,621 $ (869) $ (4) $ (125) $ 623
========= ======== ======= ======== =========
Identifiable assets at December 31,
1995............................... $ 13,681 $ 3,415 $ 2 $ (182) $ 16,916
========= ======== ======= ======== =========
Nine months ended September 30, 1996:
Sales to unaffiliated customers...... $ 22,264 $ 7,508 -- -- $ 29,772
Transfers between geographic areas... -- -- -- -- --
--------- -------- ------- -------- ---------
Total net revenue.................... $ 22,264 $ 7,508 -- -- $ 29,772
========= ======== ======= ======== =========
Pretax earnings (loss)............... $ 663 $ 209 $ 19 -- $ 891
========= ======== ======= ======== =========
Identifiable assets at September 30,
1996............................... $ 17,144 $ 3,232 -- $ (183) $ 20,193
========= ======== ======= ======== =========
</TABLE>
F-18
<PAGE> 61
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER AND SALE
OF THE SECURITIES OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF
THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Market Price of Common Stock.......... 13
Dividend Policy....................... 14
Capitalization........................ 14
Selected Consolidated Financial
Data................................ 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 32
Principal Stockholders................ 35
Description of Securities............. 36
Shares Eligible for Future Sale....... 37
Underwriting.......................... 38
Legal Matters......................... 39
Experts............................... 39
Incorporation of Certain Documents by
Reference........................... 39
Available Information................. 40
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 SHARES
[T-HQ LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
WEDBUSH MORGAN SECURITIES
------------------------
FEBRUARY 11, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered. All amounts shown are estimates except for
the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee.................................................. $ 5,065
NASD filing fee................................................... $ 2,172
Nasdaq National Market fee........................................ $ 15,000
Blue sky fees and expenses........................................ $ 15,000
Printing and engraving expenses................................... $120,000
Accountants' fees and expenses.................................... $ 65,000
Attorneys' fees and expenses...................................... $150,000
Transfer agent and registrar fees................................. $ 27,763
--------
Total................................................... $400,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 721 through 726 of the New York Business Corporation Law permit
indemnification of officers and directors under certain circumstances and
subject to certain limitations. Article SEVENTH of the Certificate of
Incorporation of the Company provides with respect to the indemnification of
directors and officers that the Registrant may indemnify any and all directors
and officers, to the fullest extent permitted by the New York Business
Corporation Law, from and against any and all of the expenses, liabilities or
other matters referred to in or covered by the New York Business Corporation
Law, and that the indemnification provided for therein shall not be deemed
exclusive of any other rights to which the persons so indemnified may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to acting in their official capacity and as to
action in another capacity by holding such office, and such indemnification
shall continue as to a person who has ceased to be a director or officer and
shall inure to the heirs, executors and administrators of such a person.
These indemnification provisions and the indemnification agreements between
the Company and its directors and officers may be sufficiently broad to permit
indemnification of the Company's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act
or otherwise.
The Company maintains a directors' and officers' liability insurance policy
covering certain liabilities that may be incurred by directors and officers in
connection with the performance of their duties. The entire premium for such
insurance is paid by the Company.
II-1
<PAGE> 63
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------------
<S> <C>
**1.1 Form of Underwriting Agreement
**5 Opinion of Sidley & Austin
*10.1 Amended and Restated 1990 Stock Option Plan, as amended
10.2 Confidential Second Renewal License Agreement for Super Nintendo
Entertainment System effective October 16, 1995, between Nintendo of
America Inc. and the Company (Filed as Exhibit 10.2(a) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference)
10.3 Confidential First Renewal License Agreement for Gameboy effective
January 1, 1995, between Nintendo of America Inc. and the Company (Filed
as Exhibit 10.3(a) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference)
10.4 Confidential First Renewal International License Agreement for Super
Nintendo Entertainment System effective February 6, 1995, between
Nintendo Co., Ltd., and the Company (Filed as Exhibit 10.4(a) to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference)
*10.5 First Extension Letter dated June 5, 1996, and Second Extension Letter
dated September 13, 1996 to Confidential First Renewal International
License Agreement for Super Nintendo Entertainment System between
effective February 6, 1995, between Nintendo Co., Ltd., and the Company.
10.6 Confidential First Renewal International License Agreement for Gameboy
dated November 6, 1995, between Nintendo Co., Ltd., and the Company
(Filed as Exhibit 10.5(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference)
10.7 Confidential License Agreement for Super Nintendo Entertainment System
dated September 28, 1995, between Nintendo of America, Inc. and Black
Pearl Software. (Filed as Exhibit 10.6(a) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995, and incorporated
herein by reference)
10.8 Confidential License Agreement for Gameboy dated April 4, 1994, between
Nintendo of America, Inc. and Malibu Games, Inc. (Filed as an Exhibit to
the Company's Registration Statement on Form S-2 (File No. 33-81632)
which became effective December 7, 1995, and incorporated herein by
reference)
10.9 Confidential First Renewal International License Agreement for Super
Nintendo Entertainment System dated as of July 19, 1995, between
Nintendo Co., Ltd., and Black Pearl Software, Inc. (Filed as Exhibit
10.8(a) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference)
10.10 Confidential International License Agreement for Gameboy dated July 19,
1993, between Nintendo Co., Ltd., and Malibu Games, Inc. (Filed as an
Exhibit to the Company's Registration Statement on Form S-2 (File No.
33-81632) which became effective December 7, 1995, and incorporated
herein by reference)
*10.11 Addendum dated September 28, 1995, together with Extension Letter dated
July 9, 1996, and Second Extension Letter dated November 21, 1996, to
Confidential International License Agreement for Game Boy dated July 19,
1993, between Nintendo Co., Ltd., and Black Pearl Software Inc.
</TABLE>
II-2
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------------
<S> <C>
10.12 License Agreement for Sega Genesis System dated as of October 20, 1994,
between Sega Enterprises, Ltd., and the Company (Filed as Exhibit
10.10(a) to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by reference)
*10.13 License Agreement for North American Sega Saturn System effective as of
February 26, 1996, between Sega Enterprises, Ltd., and the Company
10.14 Confidential License Agreement for Gameboy effective as of September 28,
1995, between Nintendo of America Inc. and Black Pearl Software Inc.
(Filed as Exhibit 10.7(a) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference)
10.15 Employment Agreement of Brian Farrell dated as of February 15, 1995,
between the Company and Brian J. Farrell (Filed as Exhibit 10.34 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference)
10.16 Stock Option Agreement dated as of February 15, 1995, between the
Company and Brian J. Farrell (Filed as an Exhibit to the Registration
Statement on Form S-8 (Registration No. 333-00136) filed on January 11,
1996, and incorporated herein by reference)
10.17 401(k) Plan of the Company (Filed as an exhibit to Registration
Statement on Form S-18 (File No. 33-35582-NY) of Trinity, and
incorporated herein by reference. Amendments made since original filing
were filed as exhibits to the Company's Proxy Statements dated April 24,
1992, April 30, 1993 and April 28, 1994, respectively, as are
incorporated herein by reference and modification made to this document
was filed as an exhibit to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991, and incorporated herein by reference)
10.18 Form of Indemnification Agreement (Filed as an Exhibit to the Company's
Registration Statement on Form S-1 (File No. 33-47767) or Amendment No.
1, Amendment No. 2, Amendment No. 3 or Amendment No. 4 thereto and
incorporated herein by reference)
10.19 Security and Loan Agreement dated June 7, 1996, by and between the
Company and Imperial Bank (Filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference)
*10.20 First Amendment to Security and Loan Agreement dated June 7, 1996, by
and between the Company and Imperial Bank.
10.21+ Conversion, Manufacturing and Distribution Agreement dated as of March
8, 1995, by and between Electronic Arts Inc. and the Company (Filed as
Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, and incorporated herein by reference)
10.22+ Licensed Publisher Agreement dated November 10, 1995, by and between the
Company and Sony Computer Entertainment Europe, a division of Sony
Electronic Publishing Limited (Filed as Exhibit 10.42 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference)
*10.23 Licensed Publisher-Supplemental Agreement dated April 11, 1996, by and
between the Company and Sony Computer Entertainment Europe, a division
of Sony Electronic Publishing Limited
</TABLE>
II-3
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------------------
<S> <C>
*10.24 Sony PSX License Agreement dated June 29, 1994, by and between the
Company and Sony Computer Entertainment of America, a division of Sony
Electronic Publishing Company
10.25 Termination Agreement and Mutual Release dated May 31, 1995, by and
between the Company and Catapult Entertainment, Inc. (Filed as an
Exhibit to the Company's Registration Statement on Form S-2 (File No.
33-81632) which became effective December 7, 1995, and incorporated
herein by reference)
10.26 Stock Purchase Agreement dated as of June 28, 1996, by and between the
Company and Inland Productions, Inc. (Filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, and incorporated herein by reference)
10.27 Stock Purchase Agreement dated as of August 2, 1996, by and between the
Company and Heliotrope Studios, Inc. (Filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996, and incorporated herein by reference)
10.28 License Agreement dated July 11, 1994, between the Company and B.A.S.S.,
Inc. (Filed as Exhibit 10.38 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, and incorporated herein by
reference)
10.29 License Agreement dated December 29, 1995, between the Company and
Turner New Media, Inc. (Filed as Exhibit 10.41 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, and
incorporated herein by reference)
*10.30 Assignment of Rights dated as of July 23, 1996, between the Company and
Blizzard Entertainment
*10.31 Financing Contract dated 1994 between Opal Finance Corporation and the
Company.
*11 Statement re: computation of per share earnings
**23.1 Consent of Deloitte & Touche LLP
**23.2 Consent of Sidley & Austin (included in Exhibit 5.1)
*24.1 Power of Attorney
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
+ Confidential treatment requested as to portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to Item 15 of this Part II to the Registration Statement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
II-4
<PAGE> 66
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(2) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
II-5
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable ground to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Calabasas, State of California, on the
10th day of February, 1997.
T-HQ, INC.
By: /s/ BRIAN J. FARRELL
------------------------------
Brian J. Farrell
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- -------------------
<S> <C> <C>
/s/ BRIAN J. FARRELL President, Chief Executive February 10, 1997
- ------------------------------------------ Officer and Director
Brian J. Farrell
/s/ LAWRENCE BURSTEIN* Director February 10, 1997
- ------------------------------------------
Lawrence Burstein
/s/ L. MICHAEL HALLER* Senior Vice President and February 10, 1997
- ------------------------------------------ Director
L. Michael Haller
/s/ BRUCE JAGID* Director February 10, 1997
- ------------------------------------------
Bruce Jagid
/s/ JEFFREY C. LAPIN* Director February 10, 1997
- ------------------------------------------
Jeffrey C. Lapin
/s/ DEBORAH A. LAKE Vice President - Finance February 10, 1997
- ------------------------------------------ and Administration
Deborah A. Lake (Chief Financial Officer and
Principal Accounting Officer)
By: /s/ BRIAN J. FARRELL
- ------------------------------------------
Brian J. Farrell, Attorney-in-fact.
</TABLE>
II-6
<PAGE> 68
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------------- -----------
<S> <C> <C>
**1.1 Form of Underwriting Agreement (20)................................
**5 Opinion of Sidley & Austin (20)....................................
*10.1 Amended and Restated 1990 Stock Option Plan, as amended (22)....... *
10.2 Confidential Second Renewal License Agreement for Super Nintendo
Entertainment System effective October 16, 1995, between Nintendo
of America Inc. and the Company (1)................................ *
10.3 Confidential First Renewal License Agreement for Gameboy effective
January 1, 1995, between Nintendo of America Inc. and the Company
(2)................................................................ *
10.4 Confidential First Renewal International License Agreement for
Super Nintendo Entertainment System dated February 6, 1995, between
Nintendo Co., Ltd., and the Company (21)........................... *
*10.5 First Extension Letter dated June 5, 1996, and Second Extension
Letter dated September 13, 1996 to Confidential First Renewal
International License Agreement for Super Nintendo Entertainment
System effective February 6, 1995, between Nintendo Co., Ltd., and
the Company (22)................................................... *
10.6 Confidential First Renewal International License Agreement for
Gameboy dated November 6, 1995, between Nintendo Co., Ltd., and the
Company (4)........................................................ *
10.7 Confidential License Agreement for Super Nintendo Entertainment
System dated September 28, 1995, between Nintendo of America, Inc.
and Black Pearl Software (5)....................................... *
10.8 Confidential License Agreement for Gameboy dated April 4, 1994,
between Nintendo of America, Inc. and Malibu Games, Inc. (3)....... *
10.9 Confidential First Renewal International License Agreement for
Super Nintendo Entertainment System dated as of July 19, 1995,
between Nintendo Co., Ltd., and Black Pearl Software, Inc. (6)..... *
10.10 Confidential International License Agreement for Gameboy dated July
19, 1993, between Nintendo Co., Ltd., and Malibu Games, Inc. (3)... *
*10.11 Addendum dated September 28, 1995, together with Extension Letter
dated July 9, 1996, and Second Extension Letter dated November 21,
1996, to Confidential International License Agreement for Game Boy
dated July 19, 1993, between Nintendo Co., Ltd., and Black Pearl
Software Inc. (22)................................................. *
10.12 License Agreement for Sega Genesis System dated as of October 20,
1994, between Sega Enterprises, Ltd., and the Company (7).......... *
10.13 License Agreement for North American Sega Saturn System effective
as of February 26, 1996, between Sega Enterprises, Ltd., and the
Company (22)....................................................... *
10.14 Confidential License Agreement for Gameboy effective as of Septem-
ber 28, 1995, between Nintendo of America Inc. and Black Pearl
Software, Inc. (8)................................................. *
10.15 Employment Agreement of Brian Farrell dated as of February 15,
1995, between the Company and Brian J. Farrell (9)................. *
10.16 Stock Option Agreement dated as of February 15, 1995, between the
Company and Brian J. Farrell (23)..................................
10.17 401(k) Plan of the Company (10).................................... *
10.18 Form of Indemnification Agreement (11)............................. *
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER EXHIBIT DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------------- -----------
<S> <C> <C>
10.19 Security and Loan Agreement dated June 7, 1996, by and between the
Company and Imperial Bank (12)..................................... *
10.20 First Amendment to Security and Loan Agreement dated June 7, 1996,
by and between the Company and Imperial Bank....................... *
10.21+ Conversion, Manufacturing and Distribution Agreement dated as of
March 8, 1995, by and between Electronic Arts Inc. and the Company
(13)............................................................... *
10.22+ Licensed Publisher Agreement dated November 10, 1995, by and
between the Company and Sony Computer Entertainment Europe, a
division of Sony Electronic Publishing Limited (14)................ *
10.23 Licensed Publisher-Supplemental Agreement dated April 11, 1996, by
and between the Company and Sony Computer Entertainment Europe, a
division of Sony Electronic Publishing Limited (22)................ *
10.24 Sony PSX License Agreement dated June 29, 1994, by and between the
Company and Sony Computer Entertainment of America, a division of
Sony Electronic Publishing Company (22)............................ *
10.25 Termination Agreement and Mutual Release dated May 31, 1995, by and
between the Company and Catapult Entertainment, Inc. (3)........... *
10.26 Stock Purchase Agreement dated as of June 28, 1996, by and between
the Company and Inland Productions, Inc. (18)...................... *
10.27 Stock Purchase Agreement dated as of August 2, 1996, by and between
the Company and Heliotrope Studios, Inc. (18)...................... *
10.28 License Agreement dated July 11, 1994, between the Company and
B.A.S.S., Inc. (15)................................................ *
10.29 License Agreement dated December 29, 1995, between the Company and
Turner New Media, Inc. (19)........................................ *
10.30 Assignment of Rights dated as of July 23, 1996, between the Company
and Blizzard Entertainment (22).................................... *
10.31 Financing Contract dated 1994 between Opal Finance Corporation and
the Company (22)................................................... *
11 Statement re: computation of per share earnings (22)............... *
23.1 Consent of Deloitte & Touche LLP(20)...............................
23.2 Consent of Sidley & Austin (16)(20)................................
</TABLE>
- ---------------
* Not applicable. See the footnote below for the reference to the copy of the
Exhibit incorporated by reference as an Exhibit hereto as such Exhibit has
been heretofore filed with the Commission, to which there have been no
amendments or changes; or to be filed by amendment hereto.
+ Confidential treatment requested as to portions of this exhibit.
(1) Filed as Exhibit 10.2(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(2) Filed as Exhibit 10.3(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-2
(File No. 33-81632) which became effective December 7, 1995, and
incorporated herein by reference.
(4) Filed as Exhibit 10.5(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
<PAGE> 70
(5) Filed as Exhibit 10.6(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(6) Filed as Exhibit 10.8(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(7) Filed as Exhibit 10.10(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(8) Filed as Exhibit 10.7(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference.
(9) Filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(10) Filed as an exhibit to Registration Statement on Form S-18 (File No.
33-35582-NY) of Trinity, and incorporated herein by reference. Amendments
made since original filing were filed as exhibits to the Company's Proxy
Statements dated April 24, 1992, April 30, 1993 and April 28, 1994,
respectively, as are incorporated herein by reference and modification made
to this document was filed as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1991, and incorporated herein by
reference.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-47767) or Amendment No. 1, Amendment No. 2, Amendment No. 3 or
Amendment No. 4 thereto and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 and incorporated herein by reference.
(13) Filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(14) Filed as Exhibit 10.42 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(15) Filed as Exhibit 10.38 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(16) Included in Exhibit 5.1.
(17) Incorporated by reference to the signature page of this Registration
Statement.
(18) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 and incorporated herein by reference.
(19) Filed as Exhibit 10.41 to the company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein by reference.
(20) Filed herewith.
(21) Filed as Exhibit 10.4(a) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995, and incorporated herein by reference
(22) Filed as an Exhibit to the Company's Registration Statement on Form S-2
(File No. 333-18641) filed on December 23, 1996, and incorporated herein by
reference.
(23) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(File No. 333-00136) filed on January 11, 1996, and incorporated herein by
reference.
<PAGE> 1
EXHIBIT 1.1
1,500,000 Shares
T-HQ, Inc.
Common Stock
UNDERWRITING AGREEMENT
February 11, 1997
WEDBUSH MORGAN SECURITIES INC.
As Representative of the several Underwriters
1000 Wilshire Boulevard
Los Angeles, California 90017-2465
Gentlemen:
T-HQ, Inc., a New York corporation (the "Company"), proposes
to issue and sell to you and other firms and corporations named in Schedule A
attached hereto (the "Underwriters," which term shall also include any
underwriter substituted as provided in Section 9 hereof), for which you are
acting as representative ("Representative"), 1,500,000 shares of the Company's
Common Stock (the "Primary Shares"). In addition, the Company proposes to grant
to the Underwriters an option to purchase, for the purpose of covering
over-allotments, up to an additional 225,000 shares of the Company's Common
Stock (the "Over-Allotment Shares"). The Primary Shares and the Over-Allotment
Shares are collectively referred to below as the "Shares." The Company agrees
with the several Underwriters as set forth below.
-1-
<PAGE> 2
1. Representations, Warranties and Certain Covenants of the
Company. The Company represents and warrants to, and the Company also covenants
and agrees with, each of the Underwriters as follows:
(a) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form
S-2 (No. 333-18641), including a preliminary prospectus, relating to
the Shares and such amendments to the registration statement and
prospectus included therein as may have been required to the date
hereof. The Company will file with the Commission either: (i) prior to
effectiveness of such registration statement, a further amendment
thereto, including a form of prospectus, and if required after
effectiveness of such registration statement, a final prospectus in
accordance with Rule 424(b) of the rules and regulations ("Rules and
Regulations") under the Securities Act of 1933, as amended (the "Act"),
or (ii) after effectiveness of such registration statement, a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations (a "Rule 430A Filing"). Any such preliminary prospectus and
any prospectus included in the registration statement at the time it
becomes effective that omits information pursuant to Rule 430A of the
Rules and Regulations, is referred to herein as a "preliminary
prospectus"; such registration statement, as it may have been amended
at the time when it becomes effective, including financial statements,
exhibits, and the information, if any, deemed to be a part of such
registration statement by virtue of Rule 430A of the Rules and
Regulations, is referred to herein as the "Registration Statement"; and
such final form of prospectus, in the form in which it was first filed
pursuant to Rule 424(b) of the Rules and Regulations or, if no filing
pursuant to Rule 424(b) of the Rules and Regulations is made, in the
form included in the Registration Statement at the time it becomes
effective, is referred to herein as the "Prospectus."
(b) The Commission has not issued, nor has it had cause
to issue, an order preventing or suspending the use of any preliminary
prospectus and each such preliminary prospectus has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and has not included any untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. At the date
of this Agreement, when the Registration Statement becomes effective
and at the Closing Date (as defined below) (i) the
-2-
<PAGE> 3
Registration Statement and Prospectus and any amendments or supplements
thereto will contain all statements that are required to be stated
therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules
and Regulations, (ii) the Registration Statement will not include any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein not misleading, and (iii) the Prospectus will not
include any untrue statement of a material fact and will not omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the
Company makes no representations, warranties or agreements as to
information contained in or omitted from the Registration Statement or
Prospectus or any such amendment or supplement in reliance upon, and in
conformity with, written information furnished to the Company by the
Underwriters expressly for use therein.
(c) The consolidated financial statements of the Company
set forth in the Registration Statement and Prospectus present fairly,
in all material respects, the financial condition of the Company and
its Subsidiaries (as herein defined) as of the dates indicated and the
results of operations and cash flows for the periods therein specified
in conformity with generally accepted accounting principles
consistently applied throughout the periods involved (except as
otherwise stated therein). As used in this Agreement, the term
"Subsidiary" shall mean a corporation or other entity of which the
Company owns, directly or indirectly, more than 50% of the voting stock
or the capital or equity.
(d) Each of the Company and its Subsidiaries has been
duly organized and is validly existing in good standing under the laws
of its jurisdiction of incorporation. Each of the Company and its
Subsidiaries has all requisite power and authority to own, lease and
operate its properties and to conduct its business as is described in
the Prospectus. Each of the Company and its Subsidiaries is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which such qualification is required
except where the failure to so qualify or be in good standing will not
have a material adverse effect on the Company and its Subsidiaries
taken as a whole.
-3-
<PAGE> 4
(e) Assuming that no warrants or options to purchase the
Company's Common Stock are exercised after the respective dates set
forth in the Prospectus, the authorized, issued and outstanding capital
stock of the Company is as set forth under the caption "Capitalization"
in the Prospectus and the issued and outstanding shares of Common Stock
of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. The sale of the Shares has been duly
authorized and after issuance of and payment for the Shares in
accordance with this Agreement, the Shares will be validly issued,
fully paid and nonassessable, and will be sold free of any pledge,
lien, claim or equitable interest, and the holders of the Common Stock
of the Company are not entitled to any preemptive rights. The issued
and outstanding shares of the capital stock of each of the Subsidiaries
of the Company have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially and of record by the
Company free and clear of all liens, claims or encumbrances whatsoever.
Except as disclosed in or contemplated by the Prospectus and the
financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any of its
Subsidiaries has outstanding any options or warrants to purchase, any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, warrants, rights, convertible securities or obligations. Other
than agreements between the Company and (i) Inland Productions, Inc.,
(ii) Frost Capital Management, (iii) Brian J. Farrell, (iv) Ira Edelson
(warrant holder), (v) Sovereign Equity Management Corp. (warrant
holder), (vi) Broad Capital Associates, Inc. (warrant holder), (vii)
Neidiger and Tucker, as Placement Agents (warrant holders), (viii)
Grand Group Inc. (warrant holders), (ix) holders of American Stock
Transfer & Trust Company warrants, (x) holders of warrants issued in
the Company's June 1994 private placement, and (xi) holders of warrants
issued in the Company's December 1994 private placement, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act or to participate in a
registration statement filed by the Company under the Act. The
Company's Common Stock has been approved for inclusion in the NASDAQ
National Market System ("NASDAQ/NMS") upon completion of the sale of
the Primary Shares.
-4-
<PAGE> 5
(f) Except as contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any
of its Subsidiaries has incurred any liabilities or obligations, direct
or contingent, or entered into any transactions, not in the ordinary
course of business, that are material to the Company and its
Subsidiaries taken as a whole, and there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company, or any material adverse change in the condition (financial or
other), business, properties, prospects, net worth or results of
operations of the Company and its Subsidiaries taken as a whole.
(g) Except as set forth in the Prospectus, there is not
pending or, to the knowledge of the Company, threatened, any action,
suit or proceeding of which the Company or any of its Subsidiaries is a
party, before or by any court or governmental agency or body, that
would result in any material adverse change in the condition (financial
or other), business, properties, prospects, net worth or results of
operations of the Company and its Subsidiaries taken as a whole, or
might materially and adversely affect the properties or assets thereof.
(h) There are no statutes, regulations, contracts or
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations that
are not described or have not been filed as required.
(i) Except as set forth in the Prospectus, the Company
and its Subsidiaries owns or has valid leasehold interests in all
properties and assets required for the operation of their business as
now conducted or as proposed to be conducted, including those described
in the Registration Statement and the Prospectus as being owned by
them; and each of the Company and its Subsidiaries has good title to
all properties and assets owned by it material to its business. All
material leases to which the Company or any of its Subsidiaries is a
party are valid, subsisting and enforceable and no default by the
Company or any of its Subsidiaries has occurred and is continuing
thereunder; and each of the Company and its Subsidiaries enjoys
peaceful and undisturbed possession under all such material leases to
which it is a party as lessee.
(j) The Company has full right, power and authority to
enter into this Agreement and to perform all of its obligations
hereunder. The
-5-
<PAGE> 6
execution, delivery and performance of this Agreement by the Company
does not and will not violate, breach or conflict with the Articles or
Certificate of Incorporation or bylaws of the Company or any of its
Subsidiaries or any agreement to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their properties is bound or any statute or
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its Subsidiaries or any
of their properties; and no consent, approval, authorization or order
of, or filing with, any court or governmental agency or body is
required in connection with the transactions contemplated hereby except
as may be required under the Act or state securities or "Blue Sky"
laws. This Agreement has been duly authorized, executed and delivered
by the Company and constitutes a valid and binding obligation of the
Company in accordance with its terms, except as the enforceability
thereof may be limited (i) by the effect of bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other similar laws
now or hereafter in effect relating to or affecting the rights and
remedies of creditors, (ii) by the effect of general principles of
equity, whether enforcement is considered in a proceeding in equity or
law, and the discretion of the court before which any proceeding
therefor may be brought, and (iii) to the extent that rights to
indemnification and contribution thereunder may be limited by federal
or state securities laws or public policy relating thereto.
(k) Neither the Company nor any of its Subsidiaries is
(i) in violation of its articles of incorporation or bylaws or (ii) in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
loan, credit or factoring agreement, note, lease or other agreement or
instrument to which the Company or any Subsidiary is a party or by
which it may be bound, or to which any of the property or assets of the
Company or such Subsidiary is subject, excluding in each case in this
clause (ii), breaches or defaults which could not reasonably be
expected to have a material adverse effect on the Company and its
Subsidiaries taken as a whole.
(l) The Company and its Subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them,
-6-
<PAGE> 7
and have not received any notice of infringement of or conflict with
asserted rights of others with respect to any intellectual property
rights that, if determined adversely to the Company or any of its
Subsidiaries, would individually or in the aggregate have a material
adverse effect on the Company and its Subsidiaries taken as a whole.
(m) Except for its Subsidiaries and Inland Productions,
Inc., the Company does not own any shares of capital stock or any other
securities of any corporation or have any equity interest in any firm,
partnership, association or other entity or subsidiary.
(n) The Company has not done, and is not presently doing,
business with the government of Cuba or with any person or any
affiliate located in Cuba.
(o) Except as disclosed in the Prospectus, neither the
Company nor any of its Subsidiaries is in violation of any statute,
rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substance or relating to the protection
or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "environmental laws"), owns or operates
any real property contaminated with any substance that is subject to
any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or in the
aggregate have a material adverse effect on the Company and its
Subsidiaries taken as a whole; and the Company is not aware of any
pending investigation which might lead to such a claim.
(p) The Company maintains insurance of the types and in
the amounts generally deemed adequate for its business, all of which
insurance is in full force and effect. The Company has no reason to
believe that it will not be able to renew existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business.
(q) There are no outstanding loans, advances or
guarantees of indebtedness by the Company to or for the benefit,
directly or indirectly, of any
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<PAGE> 8
of the officers or directors of the Company or any other related party
transactions required to be disclosed in the Registration Statement,
except as disclosed in the Registration Statement.
2. Sale and Purchase of the Shares.
(a) The Company hereby agrees to sell the Primary Shares
to the several Underwriters as set forth in Schedule A attached hereto,
and the several Underwriters, in reliance upon the representations,
warranties and agreements herein contained, but subject to the
conditions hereinafter stated, agree, severally and not jointly, to
purchase from the Company, at the place and the time specified below,
the respective aggregate numbers of Primary Shares set forth in
Schedule A opposite their respective names, plus any additional Shares
which such Underwriters may become obligated to purchase pursuant to
the provisions of Section 2(b) hereof, at a price of $7.0125 per Share.
(b) In addition, on the basis of the representations and
warranties herein contained, upon not less than five days' notice from
the Representative to the Company, or its counsel, the Company agrees
to sell to the Underwriters (but only for the purpose of covering
over-allotments in the sale of the Primary Shares), all or any portion
of the Over-Allotment Shares, as specified by the Representative in
such Notice, at the purchase price stated in Section 2(a) hereof. The
Over-Allotment Shares may be purchased on the Closing Date or at any
one time thereafter so long as the notice to purchase is given within a
period of 30 days following the effective date of the Registration
Statement. Over-Allotment Shares shall be purchased by each Underwriter
in the proportion which the number of Primary Shares set opposite the
name of each Underwriter in Schedule A hereto bears to the total number
of Primary Shares. No Over-Allotment Shares shall be delivered to or
for the accounts of the Underwriters unless the Primary Shares shall be
simultaneously delivered and paid for or shall theretofore have been
delivered and paid for as herein provided.
(c) The respective purchase obligation of each
Underwriter shall be subject to such adjustments as the Representative
may in its absolute discretion make so long as the Underwriters'
aggregate purchase obligation vis-a-vis the Company remains the same.
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<PAGE> 9
3. Terms of Offering and Authority to Use Prospectus. The
terms of the initial public offering by the Underwriters of the Shares to be
purchased by them shall be as set forth in the Registration Statement and the
Prospectus.
The Company has authorized the Representative to use
preliminary prospectuses and to make them available for use by prospective
Underwriters and dealers and authorize the Underwriters and all dealers
acquiring Shares from an Underwriter to use the Prospectus (as amended or
supplemented, if the Company shall have furnished any amendments or supplements
thereto) in connection with the sale of the Shares until the earlier of
completion of the public offering or the 90th day following effectiveness of the
Registration Statement.
4. Payment and Delivery.
(a) Payment for the Primary Shares which the Underwriters
agree to purchase hereunder shall be made to the Company by wire
transfer at the offices of Sheppard, Mullin, Richter & Hampton LLP, or
at such other place as shall be agreed upon by the Representative and
the Company, at 7:00 a.m., Pacific Time, on the third (fourth, if the
pricing occurs after 4:30 p.m. New York time) business day after the
date hereof (unless postponed in accordance with the provisions of
Section 9 hereof), or at the time, date (not later than seven full
business days thereafter) and place agreed upon by the Representative
and the Company, against delivery to the Representative for the
respective accounts of the several Underwriters of the Primary Shares
in the form of certificates for the securities comprising the Primary
Shares. The date and time of this payment and delivery (which may be
postponed as provided in Section 10 hereof) are sometimes referred to
below as the "First Closing Date."
(b) Payment for the Over-Allotment Shares which the
Underwriters purchase hereunder shall be made to the Company by wire
transfer at the office specified in the immediately preceding paragraph
at the time or times and on the date or dates specified in the notice
or notices delivered by the Representative against delivery for the
respective accounts of the several Underwriters of the Over-Allotment
Shares in the form of certificates for the securities comprising the
Over-Allotment Shares. The dates and times of these payments and
deliveries are herein singularly or collectively sometimes referred to
as the "Second Closing Date." The term "Closing Date" refers to both
the First Closing Date and the Second Closing Date.
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<PAGE> 10
(c) You, individually and not as Representative of the
Underwriters, may (but shall not be obligated to) make payment to the
Company for Shares to be purchased by any Underwriter whose wire
transfer shall not have been received by you at the date of payment
therefor for the account of that Underwriter. Any payment by you shall
not relieve that Underwriter from any of its obligations hereunder.
(d) The certificates for the Shares shall be registered in
the name or names and shall be in the denominations you, as
Representative, at least two full business days prior to the First
Closing Date, in the case of the Primary Shares, and at least two full
business days prior to the Second Closing Date, in the case of the
Over-Allotment Shares, may request. The Company agrees to cause
certificates for the Shares to be delivered pursuant to this Agreement
at your offices, at the offices of The Depositary Trust Company, New
York, New York, or at such other places as may be designated by you as
Representative, and to be made available for checking and packaging at
one of the above offices or such other places as may be designated by
you as the Representative at least one full business day prior to the
First Closing Date in the case of the Primary Shares, and at least one
full business day prior to the Second Closing Date, in the case of the
Over-Allotment Shares.
5. Conditions of the Underwriters' Obligations. The several
obligations of the Underwriters hereunder are subject to the following
conditions:
(a) The Registration Statement shall have become effective
under the Act not later than (i) 2:00 p.m., Pacific Time, on the day
following the date of this Agreement or (ii) such other time and date,
but not later than 2:00 p.m, Pacific Time, on the second day following
the date of this Agreement, as may be approved by the Underwriters
(including the Representative) that are obligated to purchase an
aggregate of more than 50% of the Shares; and, at the Closing Date, no
stop order suspending the effectiveness of the Registration Statement
or the qualifications of the Shares shall have been issued and no
proceedings for that purpose shall be pending before or threatened by
the Commission or any state securities or "Blue Sky" commissioner or
authority.
(b) At each Closing Date, (i) the representations and
warranties of the Company contained in this Agreement shall be true and
correct with the same effect as if made on and as of such Closing Date
and the
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<PAGE> 11
Company shall have performed all of the obligations and complied with
all of the conditions hereunder on its part to be performed or complied
with on or prior to the Closing Date; (ii) the Registration Statement
and the Prospectus and any amendments or supplements thereto shall
contain all statements required to be stated therein in accordance with
the Act and the Rules and Regulations and shall in all material
respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, not misleading; (iii)
there shall have been, since the respective dates as of which
information is given, no material adverse change in the business,
properties or condition (financial or otherwise), results of
operations, properties, prospects, capital stock, long-term debt or
general affairs of the Company from that set forth in the Registration
Statement and the Prospectus, except changes which the Registration
Statement indicates might occur after the effective date of the
Registration Statement, and neither the Company nor any of its
Subsidiaries shall have incurred any material liabilities or material
obligations, direct or contingent, or entered into any material
transaction, contract or agreement not in the ordinary course of
business other than as referred to or contemplated in the Registration
Statement; and, (iv) except as set forth in the Prospectus, no action,
suit or proceeding at law or in equity shall be pending or threatened
against the Company or any of its Subsidiaries which would be required
to be set forth in the Registration Statement, and no proceedings shall
be pending or threatened against the Company or any of its Subsidiaries
before or by any commission, board or administrative agency in the
United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property,
condition (financial or otherwise), results of operations, properties,
prospects, or general affairs of the Company and its Subsidiaries
considered as a whole; and you shall have received at each Closing
Date, a certificate of the principal executive officer and the
principal financial or accounting officer of the Company, dated as of
such Closing Date, evidencing compliance with the provisions of this
subsection (b), and confirming the accuracy of the representations of
the Company set forth in Section 1 hereof and confirming that all
conditions set forth herein have been met as of such date.
(c) No Underwriter shall have discovered and disclosed to
the Company prior to either Closing Date that the Registration
Statement or the
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<PAGE> 12
Prospectus or any amendment or supplement thereto, contains an untrue
statement of a fact that in the reasonable opinion of the
Representative is material, or omits to state any material fact
required to be stated therein or necessary in order to make the
statements therein, not misleading.
(d) On each Closing Date you shall have received a signed
opinion, dated as of such date, of Sheppard, Mullin, Richter & Hampton
LLP, counsel to the several Underwriters, with respect to the
sufficiency of all corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby,
and the Company shall have furnished to such counsel such documents as
they may have requested for the purpose of enabling them to pass upon
such matters.
(e) On each Closing Date you shall have received the
signed opinion, dated as of such date, of Sidley & Austin, counsel to
the Company, in form reasonably satisfactory to counsel for the
Underwriters, together with signed or photostatic copies thereof for
each of the other Underwriters to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power
and authority to own its property and to conduct its business
as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction
in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the
Company and its Subsidiaries taken as a whole;
(ii) each Subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
the property and to conduct the business described in the
Prospectus, and is duly qualified to transact business and is
in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to
be so qualified or be in good standing would
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<PAGE> 13
not have a material adverse effect on the Company and its
Subsidiaries taken as a whole;
(iii) the Shares have been duly authorized and, when
issued and delivered against payment therefor in accordance
with the terms of this Agreement, will be validly issued,
fully paid and nonassessable, and will not to our actual
knowledge have been issued in violation of any preemptive or
similar rights;
(iv) this Agreement has been duly authorized, executed
and delivered by the Company;
(v) the execution and delivery by the Company of, and
the performance by the Company of its obligations under, this
Agreement will not (a) contravene any provision of any law,
rule or regulation applicable to general business corporations
engaged in the type of business described in the Registration
Statement (provided, however, that in rendering such opinion
such counsel need express no opinion with respect to the
indemnification and contribution obligations contained herein
or the anti-fraud provisions of federal or state securities
laws), (b) result in any violation of the articles of
incorporation or by-laws of the Company, (c) to such counsel's
actual knowledge, result in the material breach or violation
of any of the terms and provisions of any agreement or other
instrument binding upon the Company or any of its Subsidiaries
that is material to the Company and its Subsidiaries, taken as
a whole, or (d) to such counsel's actual knowledge, result in
the material breach or violation of any judgment or decree of
any governmental body, agency or court having jurisdiction
over the Company or any of its Subsidiaries; and to such
counsel's actual knowledge, no consent, approval,
authorization or order of or qualification with any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except
such as may be required by the securities or "blue sky" laws
of the various states in connection with the offer and sale of
the Shares by the Underwriters;
(vi) to such counsel's actual knowledge, (a) there are
no legal or governmental proceedings pending or threatened to
which the
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<PAGE> 14
Company or any of its Subsidiaries is a party or to which any
of the properties of the Company or any of its Subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus by the Act or the applicable Rules
and Regulations and are not so described, and (b) there are no
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(vii) the Company is not an "investment company" or an
entity "controlled" by an investment company," as such terms
are defined in the Investment Company Act of 1940, as amended;
(viii) at the time the Registration Statement becomes
effective (but after giving effect to the Rule 430A Filing, if
any), the Registration Statement (except for financial
statements and schedules included therein as to which such
counsel need not express any opinion) complied as to form in
all material respects with the Act and the Rules and
Regulations;
(ix) the form of the certificates for the Shares
comply with the requirements of New York corporate law, the
requirements of the NASDAQ/NMS and the Company's articles of
incorporation and bylaws and has been duly approved by the
Board of Directors of the Company;
(x) the Registration Statement has become effective
under the Act, any required filing of the Prospectus pursuant
to Rule 424(b) has been made in the manner and within the time
period required by Rule 424(b) and, to such counsel's actual
knowledge, no stop order proceedings suspending the
effectiveness of the Registration Statement have been
instituted or threatened or are pending under the Act.
In addition, such counsel shall state that although such
counsel is not passing upon, and do not assume responsibility for, the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or Prospectus, nothing has come to their
attention that causes them to believe that
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<PAGE> 15
(a) the Registration Statement (except for the financial statements,
financial schedules and accounting data, and the other financial and
statistical information derived therefrom and included therein, as to
which such counsel need express no statement), at the time it became
effective (but after giving effect to the Rule 430A Filing, if any),
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, including the occurrence of any
default by the Company in the due performance or observance of any
agreement or instrument filed as an exhibit to the Registration
Statement that would have a material adverse effect on the Company and
its Subsidiaries taken as a whole, or (b) the Prospectus or any
amendment or supplement thereto (except for the financial statements,
financial schedules and accounting data, and the other financial and
statistical information derived therefrom and included therein, as to
which such counsel need express no statement), at the time the
Prospectus was issued, at the time any such amended or supplemental
prospectus was issued or on the Closing Date, included or includes an
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in
light of the circumstance under which they were made, not misleading,
including the occurrence of any default by the Company in the due
performance or observance of any agreement or instrument filed as an
exhibit to the Registration Statement that would have a material
adverse effect on the Company and its Subsidiaries taken as a whole.
(f) On each Closing Date, you shall have received the
signed opinion, dated as of such date, of Feder, Kaszovitz, Isaacson,
Weber, Skala & Bass LLP, counsel to the Company, in form reasonably
satisfactory to counsel for the Underwriters, together with signed or
photostatic copies thereof for each of the other Underwriters, to the
effect that:
(i) assuming that no warrants or options to purchase
the Company's Common Stock are exercised after the respective
dates set forth in the Prospectus, the authorized, issued and
outstanding capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus; and none of
the outstanding shares of capital stock of the Company was
issued in violation of preemptive or similar rights of any
stockholder of the Company arising by operation of law, under
the
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<PAGE> 16
articles of incorporation or bylaws of the Company or, to such
counsel's actual knowledge, under any agreement to which the
Company is a party;
(ii) the shares of the Company's Common Stock out
standing prior to the issuance of the Shares have been duly
authorized and are validly issued, fully paid and
nonassessable;
(iii) the statements (a) in the Prospectus under the
captions "Description of Securities" and "Shares Eligible for
Future Sale" and (b) in the Registration Statement in Item 15,
in each case insofar as such statements constitute summaries
of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein; and
(iv) to the best of such counsel's knowledge, there
are no outstanding options, warrants or other rights calling
for the issuance of, and no commitments, plans or arrangements
to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of
the Company, except as disclosed in the Prospectus.
(g) At the time of the signing of this Agreement and on
each Closing Date, you shall have received a signed letter, dated,
respectively, as of each such date, from Deloitte & Touche LLP in form
and substance satisfactory to you, together with, in each case, signed
or photostatic copies thereof for each of the other Underwriters, to
the effect that:
(i) they are independent auditors with respect to the
Company within the meaning of the Act and the published Rules
and Regulations thereunder;
(ii) in their opinion, the financial statements and
schedules audited by them and included in the Registration
Statement comply as to form in all material respects with the
applicable accounting requirements of the Act and the
published Rules and Regulations thereunder;
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<PAGE> 17
(iii) on the basis of procedures referred to in such
letter, including a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company responsible for financial and accounting matters
and the performance of procedures specified by the American
Institute of Certified Public Accountants for a review of
interim financial statements as described in SAS No. 71,
Interim Financial Information, nothing caused them to believe
that:
(A) the unaudited financial statements as at
September 30, 1996, and for the nine months then ended
included in the Registration Statement, do not comply in
form in all material respects with the applicable accounting
requirements of the Act and the published Rules and
Regulations thereunder;
(B) at the date of the latest available internal
balance sheet of the Company and at a subsequent specified
date not more than five days prior to the date of such
letter, there was any change in the capital stock or
long-term debt of the Company or any decrease in net current
assets or net assets as compared with amounts shown in the
September 30, 1996 unaudited balance sheet included in the
Registration Statement, except in all instances for changes
or decreases that the Registration Statement discloses have
occurred or may occur or as may be set forth in such letter;
or
(C) the period from the date of the latest
available internal balance sheet of the Company to a
subsequent specified date not more than five days prior to
the date of such letter, there was any decrease, as compared
with the corresponding period in the previous year, in sales
or in the total net income or net income per share, except
in all instances for decreases that the Registration
Statement discloses have occurred or may occur or as may be
set forth in such letter;
(iv) they shall have carried out certain procedures
specified by you and shall have disclosed to you their
findings with respect to the amounts, percentages and
financial information specified
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<PAGE> 18
by you and set forth in the Registration Statement and the
Prospectus and derived from general accounting and financial
records of the Company.
Any changes (increases or decreases) in the items set forth in these
letters which, in the reasonable judgment of the Representative, are
materially adverse with respect to the financial position or results of
operations of the Company and its Subsidiaries taken as a whole shall
be deemed to constitute a failure of the Company to comply with the
conditions to the obligations of the Underwriters hereunder.
(h) On or prior to the effective date of the Registration
Statement, the Common Stock of the Company shall have been designated
NASDAQ/NMS securities and shall have been duly authorized for inclusion
in the NASDAQ/NMS and, as of the effective date of the Registration
Statement, the Common Stock shall be registered under the Securities
Exchange Act of 1934, as amended.
(i) All proceedings taken at or prior to each Closing Date
in connection with the sale of the Shares shall be satisfactory in form
and substance to you and Sheppard, Mullin, Richter & Hampton LLP,
counsel to the several Underwriters, and at the time of signing this
Agreement and on the Closing Date, you and such counsel shall have
received each and every additional document, letter, opinion,
certificate or other item dated and executed in a manner reasonably
satisfactory to you and such counsel, as you or such counsel may
reasonably request in connection with the Prospectus, the Registration
Statement, the offer and sale of the Shares hereunder, or proceedings
at the Closing Date.
If any of the conditions herein provided for in this Section
shall not have been fulfilled as of the date indicated, all obligations of the
several Underwriters under this Agreement may be canceled by the Representative
by notifying the Company of such cancellation on or prior to the applicable
Closing Date.
6. Covenants of the Company.
6.1 The Company covenants and agrees as follows:
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<PAGE> 19
(a) To use its best efforts to bring about the
effectiveness of the Registration Statement and not, at any time,
whether before or after the effective date, file any amendment to the
Registration Statement or Prospectus or supplement thereto of which you
shall not previously have been advised and furnished with a copy or to
which you or your counsel reasonably shall have objected or which is
not in compliance with the Act and the Rules and Regulations, and as
soon as the Company is advised thereof, to advise the Representative
and confirm this advice in writing (i) when the Registration Statement
has become effective and (ii) of the issuance by the Commission or any
state securities or "blue sky" commissioner or authority of any order
suspending the effectiveness of the Registration Statement or any
qualification of the Shares or prohibiting the sale of the Shares or
the initiation or threatening of any proceedings for any such purpose.
(b) To deliver, during the period when such documents are
required to be delivered under the Act or the Securities Exchange Act
of 1934, as amended, without charge, to the Representative and the
several Underwriters, at such office or offices as the Representative
may designate, as many copies of the preliminary prospectus and
Prospectus as the Representative may reasonably request.
(c) To furnish the Representative, without charge, one
executed copy of the Registration Statement (including exhibits) and of
any amendments thereto and to furnish the Representative, without
charge, a reasonable number of conformed copies of the Registration
Statement (excluding exhibits) and of any amendments thereto.
(d) To furnish the Representative with a copy of each
proposed amendment or supplement before amending or supplementing the
Registration Statement or the Prospectus.
(e) Until the completion of the offering, if any event
shall occur as a result of which it shall be necessary to amend or
supplement the Prospectus in order to make the statements therein, in
light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, forthwith to prepare and furnish, at its own
expense, to the Underwriters and to dealers (whose names and addresses
the Representative will furnish to the Company) to whom Shares may have
been sold by the Representative and to any other
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<PAGE> 20
dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not, in light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading.
(f) To make generally available to the Company's security
holders, as soon as practicable, but not later than fifteen months
after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a period of twelve
months beginning after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of the
last paragraph of Section 11(a) of the Act.
(g) For a period of three years following the date of this
Agreement, to supply to the Representative, and to each other
Underwriter who may so request in writing, copies of such financial
statements and other periodic and special reports as the Company may
from time to time furnish generally to holders of any class of its
securities, and to furnish the Representative a copy of each annual
report on Form 10-K which it files with the Commission.
(h) To cooperate with the Representative in an endeavor to
qualify the Shares for offer and sale under the "blue sky" laws of such
jurisdic tions of the United States as the Representative may request,
and to pay, or reimburse if paid by the Representative, fees and
disbursements of counsel for the Underwriters and all other expenses
and filing fees in connection therewith; provided, however, that the
Company shall not be required to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation as doing business in any jurisdiction.
(i) To comply to the best of its ability with the Act, the
Rules and Regulations and the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
(j) To apply the net proceeds from the sale of the Shares
in accordance with the statement made under "Use of Proceeds" in the
Prospectus.
(k) To supply the Representative with copies of all
correspondence to and from and all documents issued to and by the
Commission in connection with the registration of the Shares under the
Act.
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<PAGE> 21
6.2 The Company covenants and agrees to pay, or
reimburse if paid by the Representative, whether or not the transactions
contemplated hereunder are consummated or this Agreement is terminated, all
costs and expenses incident to the entry into and performance under this
Agreement by the Company, and without limiting the generality of the foregoing,
all costs and expenses incident to (a) the issuance, purchase, sale and delivery
of the Shares to the Underwriters, (b) the registration of the Shares and
preparing, printing and shipping the Registration Statement and the underwriting
documents, (c) the filing fees of the Commission, the National Association of
Securities Dealers, Inc. (including fees for NASDAQ/NMS) and state securities
and "blue sky" commissioners and authorities in connection with the Registration
Statement and this Agreement, and the fees, disbursements and expenses of
counsel in connection with state securities or "blue sky" matters, (d) the fees
and disbursements of counsel and accountants for the Company, (e) the furnishing
to the Representative and the other Underwriters of copies of the Registration
Statement, any preliminary prospectus, the Prospectus, this Agreement, the Blue
Sky Survey (preliminary and final), and of the documents required by paragraphs
(b), (c), (d) and (e) of Section 6.1, to be so furnished, including costs of
preparing, printing and shipment, (f) the preparation, printing, mailing,
delivery, filing and distribution by the Company of all supplements and
amendments to the Prospectus required by paragraph (e) of Section 6.1, (g) the
furnishing to the Representative and the other Underwriters of all reports and
financial statements required by paragraphs (f) and (g) of Section 6.1, and (h)
the holding of informational meetings related to the offer and sale of the
Shares, other than the Underwriters' expenses for air transportation and hotel
accommodations. Except as set forth above, the Representative will pay the fees
and costs of its counsel and the costs of "tombstone" advertisements. If the
sale of any of the Shares to the several Underwriters pursuant to this Agreement
is not consummated for any reason, other than as a result of the termination of
this Agreement pursuant to Section 9, the Company will reimburse the
Representative for all of its out-of-pocket expenses (including fees and
expenses of counsel) incurred by the Representative in connection with this
Agreement or in investigating, preparing to market or marketing the Shares.
6.3 The Company covenants and agrees that it will not
offer to sell, sell or otherwise dispose of any shares of Common Stock of the
Company, or securities convertible or exchangeable for, or any rights to
purchase or acquire, Common Stock, other than as provided in this Agreement or
as disclosed in or contemplated by the Registration Statement, for a period of
90 days after the effective
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<PAGE> 22
date of the Registration Statement, without the prior written consent of the
Representative; provided, however, that nothing in this Section 6.3 shall
prohibit (a) the exercise of currently outstanding warrants or options to
purchase the Company's Common Stock, (b) the granting of new options to purchase
the Company's Common Stock pursuant to the Company's Amended and Restated 1990
Stock Option Plan or any similar successor employee stock option plan, or (c)
the granting of options to purchase the Company's Common Stock to Frost Capital
Management in consideration of the closing of certain business acquisitions by
the Company and the exercise of such options. The Company also will, at or prior
to the First Closing Date, furnish you with a written agreement of each of the
persons listed on Schedule B hereto to the effect that they will not offer to
sell, sell or otherwise dispose of any shares of Common Stock or securities
convertible into or exchangeable for, or any rights to purchase or acquire,
Common Stock, for a period of 180 days after the effective date of the
Registration Statement, without the prior written consent of the Representative.
7. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each
Underwriter (including specifically each person who may be substituted
for an Underwriter as provided in Section 9 hereof) and each person, if
any, who controls any Underwriter within the meaning of Section 15 of
the Act, from and against any and all losses, claims, damages, expenses
or liabilities, joint or several, to which they or any of them may
become subject under the Act or any other statute or at common law or
otherwise, and except as provided below, will reimburse each of the
Underwriters and each such controlling person, if any, for any legal or
other expenses incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment or supplement thereto, or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus, or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading,
unless the untrue statement or omission or alleged untrue statement or
omission was made in such Registration Statement,
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<PAGE> 23
preliminary prospectus or Prospectus in reliance upon and in conformity
with information furnished in writing to the Company by you or any
Underwriter through you expressly for use therein. Promptly after
receipt by any Underwriter or any person controlling the Underwriter of
notice of the commencement of any action in respect of which indemnity
may be sought against the Company under this Section 7, the Underwriter
will notify the Company in writing of the commencement thereof, and,
subject to the provisions stated below, the Company shall assume the
defense of the action (including the employment of counsel, who shall
be counsel reasonably satisfactory to such Underwriter or such person,
as the case may be, and the payment of expenses) insofar as such action
shall relate to any alleged liability in respect of which indemnity may
be sought against it. Any Underwriter or any controlling person shall
have the right to employ separate counsel in the action and to
participate in the defense thereof, but the fees and expenses of its
counsel shall not be at the expense of the Company unless the
employment of that counsel has been specifically authorized by the
Company. The Company shall not be liable to indemnify any person for
any settlement of any action effected without the Company's consent.
(b) Each Underwriter will severally, and not jointly,
indemnify and hold harmless the Company, each of its directors, each of
its officers who have signed the Registration Statement, each person,
if any, who controls the Company within the meaning of Section 15 of
the Act from and against any and all losses, claims, damages, expenses
or liabilities, joint or several, to which they or any of them may
become subject under the Act or any other statute or at common law or
otherwise, and, except as provided below, will reimburse the Company
and each such director, officer or controlling person for any legal or
other expenses incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment or supplement thereto, or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or
the Prospectus, or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were
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<PAGE> 24
made, not misleading, but only insofar as any such untrue statement or
omission or alleged untrue statement or omission was made in reliance
upon and in conformity with information furnished in writing to the
Company by you or any Underwriter through you expressly for use
therein. Promptly after receipt of notice of the commencement of any
action in respect of which indemnity may be sought against one or more
Underwriters under this Section 7, the indemnified party will notify
the Representative in writing of the commencement thereof, and the
Underwriter or Underwriters against whom indemnity may be sought shall,
subject to the provisions stated below, assume the defense of the
action (including the employment of counsel, who shall be counsel
reasonably satisfactory to the Company, and the payment of expenses)
insofar as such action shall relate to any alleged liability in respect
to which indemnity my be sought against the Underwriter or
Underwriters. The Company and each director, officer or controlling
person shall have the right to employ separate counsel in any action
and to participate in the defense thereof, but the fees and expenses of
their counsel shall not be at the expense of any Underwriter unless the
employment of that counsel has been specifically authorized by the
Underwriter or Underwriters obligated to defend the action. The
Underwriter against whom indemnity may be sought shall not be liable to
indemnify any person for any settlement of any action effected without
the Underwriter's consent.
(c) It is agreed that the only information supplied
by the Underwriters in writing for use in the Registration Statement,
the preliminary prospectus or the Prospectus are set forth in the last
paragraph on the cover of the Prospectus and in the table and the first
paragraph under the table under the heading "Underwriting" in the
Prospectus.
(d) In order to provide for just and equitable
contribution under the Act in any case in which (i) any indemnified
party makes claim for indemnification pursuant to this Section 7, but
it is judicially determined (by the entry of a final judgment or decree
by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 7 provide for
indemnification in such case, or (ii) contribution under the Act may be
required on the part of any indemnified party; then the Company and any
such Underwriter shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be
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<PAGE> 25
subject (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all
attorneys' fees) in either such case (after contribution from others)
in such proportions so that all such Underwriters are responsible in
the aggregate for that portion of such losses, claims, damages or
liabilities as is determined by multiplying the total amount of such
losses, claims, damages or liabilities times the difference between the
public offering price and the purchase price to the Underwriter and
dividing the product thereof by the public offering price, and the
Company shall be responsible for the portion of such losses, claims,
damages or liabilities as determined by multiplying the total amount of
such losses, claims, damages or liabilities times the purchase price to
the Underwriters and dividing the product thereof by the public
offering price; provided, however, that the contribution of each
contributing Underwriter shall not be in excess of its proportionate
share (based on the ratio of the number of Shares purchased by such
Underwriter to the number of Shares purchased by all contributing
Underwriters) of the portion of such losses, claims, damages or
liabilities for which the Underwriters are responsible and the
contribution of the Company shall not be in excess of its proportionate
share (based on the ratio of the number of Shares sold by the Company
to the total number of Shares sold) of the portion of such losses,
claims, damages or liabilities for which the Company is responsible. No
person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. The
foregoing contribution agreement shall in no way affect the
contribution liabilities of any person having liability under Section
11 of the Act other than the Company and the Underwriters. If the full
amount of the contribution specified in this paragraph is not permitted
by law, then the Company and any Underwriter, as the case may be, shall
be entitled to contribution from the Company and/or the Underwriters,
as the case may be, to the full extent permitted by law.
8. Termination.
(a) This Agreement, except for Sections 6.2, 7, 10,
11 and 12, may be terminated by the Representative by notifying the
Company at any time at or prior to the First Closing Date, and the
option referred to in Section 2(b) hereof, if exercised, may be
canceled at any time prior to the Second Closing Date, if, in the
Representative's judgment, payment for and delivery of the Shares is
rendered impracticable or inadvisable by reason of (i) the Company
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<PAGE> 26
having sustained a material loss, whether or not insured, by reason of
fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree, (ii) trading in
securities on the NASDAQ/NMS having been suspended or limited, (iii)
material governmental restrictions having been imposed on trading in
securities generally, (iv) a banking moratorium not in force or effect
on the date hereof having been declared by Federal or California or New
York state authorities, (v) an outbreak of major international
hostilities or other national or international calamity having occurred
which, in the reasonable opinion of the Representative, makes it
impracticable to offer or sell the Shares, (vi) the passage by the
Congress of the United States or by any state legislative body, of any
act or measure, or the adoption or proposed adoption of any orders,
rules, legislation or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental
executive, which is believed likely by the Representative to have a
material adverse impact on the business, financial condition or
financial statements of the Company or the market for the securities
offered hereby, (vii) any material adverse change having occurred,
since the respective dates as of which information is given in the
Registration Statement and Prospectus, in the condition of the Company,
financial or otherwise, or in the earnings, affairs or business
prospects of the Company, whether or not arising in the ordinary course
of business which, in your judgment, makes it impracticable or
inadvisable to offer or deliver the Shares on the terms contemplated by
the Prospectus, or (viii) any of the conditions specified in Section 5
hereof not having been fulfilled or waived in writing by the
Representative, at or prior to the Closing Date, when and as required
by this Agreement to be fulfilled.
(b) If this Agreement shall be terminated pursuant to
any of the provisions hereof, except as provided in Sections 6.2 and 7,
the Company shall not be under any liability to any Underwriter nor
shall any Underwriter be under any liability to the Company, except
that no Underwriter which shall have failed or refused to purchase the
Shares agreed to be purchased by it hereunder, other than as a result
of the termination of this Agreement pursuant to Section 8(a), shall be
relieved of liability to the Company or to the other Underwriters for
damages occasioned by its default.
9. Default of Underwriters. If one or more of the
Underwriters shall fail or refuse (other than as a result of the termination of
this Agreement pursuant to Section 8(a)) to purchase on the First Closing Date
or the Second Closing Date the
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<PAGE> 27
aggregate number of Primary Shares or Over-Allotment Shares agreed to be
purchased by such Underwriter or Underwriters and the aggregate number of
Primary Shares or Over-Allotment Shares agreed to be purchased by such
defaulting Underwriter or Underwriters does not exceed 10% of the total number
of Primary Shares or Over-Allotment Shares (as the case may be) to be sold
hereunder to the Underwriters, then each of the non-defaulting Underwriters
shall be obligated to purchase these Primary Shares or Over-Allotment Shares on
the terms herein set forth in proportion to their respective obligations
hereunder. In that case, the Representative and the Company shall have the right
to postpone the First Closing Date or the Second Closing Date (as the case may
be) for a period of not more than seven days in order that necessary changes and
arrangements may be effected.
If one or more of the Underwriters shall fail or refuse (other
than as a result of the termination of this Agreement pursuant to Section 8(a))
to purchase on the First Closing Date or the Second Closing Date the aggregate
number of Primary Shares or Over-Allotment Shares agreed to be purchased by such
Underwriter or Underwriters and the aggregate number of Primary Shares or
Over-Allotment Shares agreed to be purchased by such defaulting Underwriter or
Underwriters shall exceed 10% of the total number of Primary Shares or
Over-Allotment Shares (as the case may be) to be sold hereunder to the
Underwriters, then the non-defaulting Underwriters have the right to purchase,
or procure one or more Underwriters reasonably acceptable to the Company, to
purchase, in such proportions as they may agree upon and upon the terms herein
set forth, the Primary Shares or Over-Allotment Shares which such defaulting
Underwriter or Underwriters agreed to purchase, and this Agreement shall be
carried out accordingly. If such other Underwriters do not exercise this right
within twenty-four hours after receiving notice of the default, then the Company
shall be entitled to an additional period of twenty-four hours within which to
procure another party or parties satisfactory to the Representative to purchase
or agree to purchase these Primary Shares or Over-Allotment Shares on the terms
herein set forth. In any such case, the Representative and the Company shall
have the right to postpone the First Closing Date or the Second Closing Date (as
the case may be) for a period of not more than seven days in order that
necessary changes and arrangements may be effected. If this paragraph becomes
applicable and neither the non-defaulting Underwriters nor the Company shall
make arrangements within the period stated for the purchase of the Primary
Shares or Over-Allotment Shares which the defaulting Underwriter or Underwriters
agreed to purchase, this Agreement shall terminate without liability on the part
of any non-defaulting Underwriter to the Company and without liability on the
part of the Company except as provided in Sections 6.2 and 7. The provisions of
this
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<PAGE> 28
Section 9 shall not in any way affect the liability of any defaulting
Underwriter to the Company arising out of the default.
10. Representations and Agreement to Remain in Effect. The
expense, reimbursement and indemnification agreements contained in Sections 6, 7
and 8 shall survive any termination of this Agreement; and the representations,
warranties and covenants of the Company set forth in this Agreement shall remain
operative and in full force and effect regardless of (i) any investigation made
by or on behalf of any of the Underwriters, the Company, any controlling person,
director or officer of the Company or the Underwriters, and (ii) delivery,
acceptance of and payment for the Shares under this Agreement.
11. Parties in Interest. This Agreement has been and is
made solely for the benefit of the Underwriters, the Company and their
respective successors and assigns, to the extent expressed herein, for the
benefit of persons controlling any of the Company or any of the Underwriters,
directors and officers of the Company and their respective successors and
assigns, and no other person, partnership, association or corporation shall
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser of Shares from any
Underwriter merely because of such purchase.
12. Notices, Headings, Applicable Law. Except as otherwise
provided in this Agreement, all statements, requests, notices and other
communications hereunder shall be in writing and shall be mailed, delivered,
telegraphed or sent by facsimile transmission and confirmed to the
Representative at the address set forth above, attention: Investment Banking
(facsimile number: (213) 688-6642); and if to the Company to T-HQ, Inc., 5016
North Parkway Calabasas, Calabasas, CA 91302, attention: President (facsimile
number: (818) 591-1615), with a copy to Sidley & Austin, 533 West Fifth Street,
40th Floor, Los Angeles, Ca. 90013, attention: Kenneth H. Levin (facsimile
number (213) 896-6600). Any party may change the address at which it is to
receive communications hereunder upon notice to the other parties as provided
above. The headings in this Agreement have been inserted as a matter of
convenience and reference and are not a part of this Agreement. The Agreement
shall be construed in accordance with the internal laws, and not the laws
pertaining to choice or conflict of laws, of the State of California.
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<PAGE> 29
Please confirm that the foregoing correctly sets forth the
agreement among us.
Sincerely yours,
T-HQ, Inc.
By /s/ BRIAN J. FARRELL
--------------------------------
Title: President
Confirmed and Accepted as of the
date first above written.
WEDBUSH MORGAN SECURITIES Inc.
By /s/ M. GARY WONG
-------------------------------
For itself and as the Representative
of the several Underwriters.
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<PAGE> 30
SCHEDULE A
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ------
<S> <C>
Wedbush Morgan Securities Inc................................................... 800,000
Cowen & Company................................................................. 40,000
Montgomery Securities........................................................... 40,000
Oppenheimer & Co., Inc.......................................................... 40,000
Advest, Inc..................................................................... 25,000
Robert W. Baird & Co. Incorporated.............................................. 25,000
Black & Company Inc............................................................. 25,000
Crowell, Weedon & Co............................................................ 25,000
Cruttenden Roth Incorporated.................................................... 25,000
Dain Bosworth Incorporated...................................................... 25,000
Dakin Securities Corporation.................................................... 25,000
EVEREN Securities, Inc.......................................................... 25,000
Furman Selz LLC................................................................. 25,000
Gerard Klauer Mattison & Co., Inc............................................... 25,000
Hanifen, Imhoff Inc............................................................. 25,000
Interstate/Johnson Lane Corporation............................................. 25,000
Jefferies & Company, Inc........................................................ 25,000
Needham & Company, Inc.......................................................... 25,000
Piper Jaffray Inc............................................................... 25,000
Ragen MacKenzie Incorporated.................................................... 25,000
Sands Brothers & Co., Ltd....................................................... 25,000
The Seidler Companies Incorporated.............................................. 25,000
Southwest Securities, Inc....................................................... 25,000
Stifel, Nicolaus & Company, Incorporated........................................ 25,000
Sutro & Co. Incorporated........................................................ 25,000
Van Kasper & Company............................................................ 25,000
GBS Financial Corp.............................................................. 10,000
TriQuest Financial Inc.......................................................... 10,000
Waldron & Company, Inc.......................................................... 10,000
Total....................................................................... 1,500,000
=========
</TABLE>
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<PAGE> 31
SCHEDULE B
LIST OF SHAREHOLDERS AND OPTION HOLDERS
Brian J. Farrell
Deborah A. Lake
L. Michael Haller
Lawrence Burstein
Leslie Slutsky
Bruce Jagid
Jeffery C. Lapin
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<PAGE> 1
[SIDLEY & AUSTIN LETTERHEAD]
February 11, 1997
Securities and Exchange Commission
450 5th St., N.W.
Judiciary Plaza
Washington, D.C. 20549
Re: ToHQ, Inc. Inc. - Registration Statement on Form S-2
Commission File No. 333-18641
Ladies and Gentlemen:
We have acted as counsel for ToHQ, Inc., a New York corporation (the
"Company"), in connection with registration under the Securities Act of 1933, as
amended (the "Securities Act"), of the sale of up to 1,725,000 authorized but
unissued shares of common stock, $0.0001 par value (the "New Shares"), of the
Company. The New Shares are to be registered for sale pursuant to the
accompanying Registration Statement on Form S-2 (the "Registration Statement").
In our capacity as counsel for the Company and for purposes of this
opinion, we have made such examinations and investigations of the legal and
factual matters we deemed advisable, and have examined the originals or copies
identified to our satisfaction as being true copies of the originals, of the
certificates, documents, corporate records, and other instruments that we, in
our judgment, have considered necessary or appropriate to enable us to render
the opinion expressed below. We have relied, without independent investigation
or confirmation, upon certificates provided by public officials and officers of
the Company as to certain factual matters. In the course of our examinations
and investigations, we have assumed the genuineness of all signatures on
original documents, and the due execution and delivery of all documents
requiring due execution and delivery for the effectiveness thereof.
EXHIBIT 5
<PAGE> 2
Based upon and subject to the foregoing and in reliance thereon, and
subject to the assumptions, exceptions and qualifications set forth herein, it
is our opinion that the New Shares have been duly authorized, and when
certificates representing the New Shares shall have been duly executed,
countersigned, registered, and delivered and paid for in accordance with the
terms of the Underwriting Agreement between the Company and Wedbush Morgan
Securities Inc., as Representative of the several Underwriters, will be legally
issued, fully paid and nonassessable.
We do not find it necessary for the purposes of this opinion to cover,
and accordingly we express no opinion as to, the application of the securities
or blue sky laws of the various states to the sale of the New Shares.
We consent to the filing of this opinion with the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Registration Statement. Subject to the foregoing sentence, this opinion is
solely for your benefit and may not be relied upon by, nor may copies be
delivered to, any other person without our prior written consent. In giving our
consent, we do not hereby admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations thereunder. This opinion is given as of
the date hereof and we assume no obligation to advise you of changes that may
hereafter be brought to our attention.
Very truly yours,
/s/ Sidley & Austin
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-18641 of T-HQ, Inc. on Form S-2 of our report dated February 16, 1996
appearing in the Prospectus, which is part of this Registration Statement, and
to the references to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Los Angeles, California
February 10, 1997
