<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: September 30, 1996 Commission File Number: 0-19463
SPECTRUM HOLOBYTE, INC.
-----------------------
Exact Name of registrant as specified in its charter
Delaware 52-1728656
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
Incorporation or organization) Number)
2490 Mariner Square Loop, Suite 100, Alameda, CA 94501
- ------------------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(510) 522-3584
--------------------------------------------------
Registrant's telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
26,995,716 shares of Common Stock were outstanding as of October 31, 1996.
<PAGE>
SPECTRUM HOLOBYTE, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30 and
March 31, 1996 3
Consolidated Statements of Operations for the three and
six months ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the six months
ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 23
EXHIBITS 24
2
<PAGE>
SPECTRUM HOLOBYTE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 30, March 31,
ASSETS 1996 1996
------------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,925 $ 35,369
Accounts receivable, less allowances
of $8,403 and $9,179 7,091 9,718
Inventories 3,796 3,673
Prepaid royalties 3,082 2,126
Other current assets 1,575 2,133
--------- ---------
Total current assets 55,469 53,019
Property and equipment, net 8,375 5,670
Goodwill, net 799 818
Investments 5,945 4,300
Other assets 1,172 2,115
--------- ---------
$ 71,760 $ 65,922
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes and borrowings under lines of credit $ - $ 504
Accounts payable 3,627 5,694
Salaries, wages and related accruals 4,667 3,909
Royalties payable 2,987 1,703
Current portion of capital lease obligations 296 431
Other current liabilities 5,797 5,093
--------- ---------
Total current liabilities 17,374 17,334
Capital lease obligations 247 384
Other liabilities 1,202 1,238
Long-term debt 32,969 50,000
--------- ---------
Total liabilities 51,792 68,956
Redeemable preferred stock, $0.001 par value, 4,000,000
Series A shares issued and outstanding, redemption and
liquidation amount of $5,120 and $4,980 5,881 5,881
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 9,000,000 shares
authorized (of which 4,000,000 shares have been
designated Series A):
730,000 Series B convertible shares issued and
outstanding at September 30, 1996 1 -
1,136,660 Series B-1 convertible shares issued and
outstanding at September 30, 1996 1 -
Common stock, $0.001 par value, 40,000,000 shares
authorized, 26,261,866 and 24,282,813 shares issued
and outstanding 26 24
Additional paid-in capital 141,780 119,923
Accumulated deficit (127,261) (128,456)
Foreign currency translation adjustment (460) (406)
--------- ---------
Total stockholders' equity (deficit) 14,087 (8,915)
--------- ---------
$ 71,760 $ 65,922
--------- ---------
--------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
<PAGE>
SPECTRUM HOLOBYTE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ----------------------
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net revenue $27,413 $ 13,845 $40,485 $ 30,774
Cost of revenue 10,186 9,177 15,085 16,880
------- -------- ------- --------
Gross profit 17,227 4,668 25,400 13,894
Operating expenses:
Sales and marketing 5,011 5,187 9,593 11,230
General and administrative 3,772 4,246 7,444 8,190
Research and development 6,215 6,277 11,903 14,544
------- -------- ------- --------
Total operating expenses 14,998 15,710 28,940 33,964
------- -------- ------- --------
Operating income (loss) 2,229 (11,042) (3,540) (20,070)
Interest expense, net (154) (296) (635) (485)
Other income (expense), net (244) (253) 1,823 (434)
------- -------- ------- --------
Net income (loss) before extraordinary item 1,831 (11,591) (2,352) (20,989)
Extraordinary item (note 5) 879 - 3,547 -
------- -------- ------- --------
Net income (loss) $ 2,710 $(11,591) $ 1,195 $(20,989)
------- -------- ------- --------
------- -------- ------- --------
Net income (loss) per share:
Net income (loss) before extraordinary item $ 0.06 $ (0.49) $ (0.09) $ (0.92)
Extraordinary item, net of tax effect 0.03 - 0.13 -
------- -------- ------- --------
Net income (loss) $ 0.09 $ (0.49) $ 0.04 $ (0.92)
------- -------- ------- --------
------- -------- ------- --------
Shares used in per share computations 28,214 23,666 26,674 23,037
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
<PAGE>
SPECTRUM HOLOBYTE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
---------------------
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,195 $(20,989)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,021 1,775
Gain on the sale of investment in FASA (1,895) -
Extraordinary gain on the extinguishment of debt (3,547) -
Changes in assets and liabilities:
Accounts receivable 1,471 6,090
Inventories 1,439 972
Prepaid royalties (933) (59)
Other current assets 921 139
Other assets 166 (462)
Accounts payable (2,727) (2,585)
Salaries, wages and related accruals 684 1,981
Royalties payable 1,269 1,050
Other current liabilities 362 (181)
Other liabilities - (548)
------- --------
Net cash provided by (used in) operating activities 426 (12,817)
Cash flows from investing activities:
Acquisitions of property and equipment, net (1,491) (1,602)
Acquisition of German distributor, net of cash acquired (447) -
Investment in Virtual World Entertainment Group, Inc. (570) -
Proceeds from the sale of investment in FASA 570 -
------- --------
Net cash used in investing activities (1,938) (1,602)
Cash flows from financing activities:
Extinguishment of debt (2,959) -
Proceeds from issuance of common stock,
net of issuance costs 10,003 22,211
Borrowings under notes and lines of credit - 751
Repayments under notes and lines of credit (499) (4,496)
Principal payments on capital lease obligations (275) (405)
------- --------
Net cash provided by financing activities 6,270 18,061
Effect of exchange rate changes on cash (202) (128)
------- --------
Increase in cash and cash equivalents 4,556 3,514
Cash and cash equivalents at beginning of period 35,369 7,723
------- --------
Cash and cash equivalents at end of period $39,925 $ 11,237
------- --------
------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,106 $ 533
Cash paid for taxes 56 -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred $ - $ 305
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
5
<PAGE>
SPECTRUM HOLOBYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements are the unaudited historical financial
statements of Spectrum HoloByte, Inc. and subsidiaries (the "Company") and
reflect all adjustments (consisting only of normal recurring accruals) that, in
the opinion of management, are necessary for a fair presentation of interim
period results. The consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996,
as filed with the Securities and Exchange Commission on June 28, 1996. The
March 31, 1996 consolidated balance sheet included herein was derived from
audited financial statements, but does not include all disclosures, including
notes, required by generally accepted accounting principles.
The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other future
interim periods.
For the purposes of presentation the Company has indicated its interim fiscal
periods as ending on September 30, 1996 and 1995. As the Company's annual
fiscal period is accounted for on a 52-53 week year, the interim period
financial statements included herein represent interim results through September
29, 1996 and October 1, 1995, respectively.
Certain amounts in the consolidated financial statements have been reclassified
to conform with the current period's presentation. These reclassifications had
no effect on previously reported earnings or stockholders' equity (deficit).
NOTE 2. NET INCOME (LOSS) PER SHARE OF COMMON STOCK
Net income (loss) per share has been computed by dividing the net income (loss)
by the weighted average number of common shares and dilutive common stock
equivalents outstanding for the period. Net income (loss) has been adjusted for
cumulative but undeclared dividends on Series A preferred stock.
NOTE 3. ACQUISITIONS AND INVESTMENTS
OT SPORTS
The Company entered into a Limited Liability Company ("LLC") agreement with
Capital Cities/ABC, Inc. ("ABC") effective July 1, 1995. The LLC (subsequently
named "OT Sports") was formed for the purpose of developing a sports-based line
of products. In May 1996, the Company sold its interest in OT Sports to ABC.
Under the terms of the agreement, the Company received a note for $250,000 which
was paid in full in November 1996. The Company is not obligated to make future
contributions to OT Sports.
FASA AND VIRTUAL WORLD
In fiscal 1995 and 1996, the Company invested a total of $1.5 million in FASA
Interactive Technologies, Inc. ("FASA"), a developer of interactive
entertainment software for PC and next-generation console platforms. This
investment was accounted for by the Company under the cost method of
accounting. In June 1996, the Company sold its investment in FASA to FASA for
approximately $3.4 million. The Company received cash of $570,000 and a $2.8
million note bearing interest at a rate of 6% per annum and due June 2001. A
gain of $1.9 million was recorded on the sale of this investment.
Proceeds from the sale of this investment were reinvested in Virtual World
Entertainment Group, Inc. ("VWEG"), a corporation formed for the purpose of
acquiring Virtual World Entertainment, Inc., a developer and operator of
location-based entertainment, and FASA. The investment in VWEG is being
accounted for under the cost method of accounting.
GERMAN DISTRIBUTOR
6
<PAGE>
SPECTRUM HOLOBYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In June 1996, the Company entered into an agreement to acquire certain net
assets of a German distributor of computer software and related products for
DM1.2 million (approximately $0.8 million). The transaction was accounted
for as a purchase. Approximately $130,000 of goodwill was recorded
representing the excess of the purchase price over the identifiable net
assets acquired. Goodwill is amortized on a straight-line basis over five
years. The consolidated financial statements contain the operating results
from the date of acquisition, which includes approximately $2.2 million in
net revenue.
NOTE 4. INVENTORIES
Inventories are stated at the lower of cost or market on a first-in, first-out
(FIFO) basis, net of allowances for write-downs. Inventories at September 30,
1996 and March 31, 1996 consisted of (IN THOUSANDS):
September 30, March 31,
1996 1996
------------- ---------
Raw materials and work in process $ 899 $ 705
Finished goods 2,897 2,968
------ ------
$3,796 $3,673
------ ------
------ ------
NOTE 5. LONG-TERM DEBT
In June 1996, the Company exchanged 1,918,860 shares of Series B and Series B-1
preferred stock for subordinated notes with a face value of approximately $14.9
million. An extraordinary gain of approximately $2.7 million was realized on the
retirement of the long-term debt. In July 1996, the Company repurchased
subordinated notes with a face value of $4.0 million for approximately $2.9
million. An extraordinary gain of approximately $.9 million was realized on the
retirement of the long-term debt.
NOTE 6. ISSUANCE OF CONVERTIBLE PREFERRED STOCK
In June 1996, the Company issued 750,000 shares of Series B and 1,168,860 shares
of Series B-1 convertible preferred stock in exchange for the retirement of
subordinated notes with a face value of approximately $14.9 million. Both the
Series B and Series B-1 preferred stock are convertible into an equivalent
number of common shares. In September 1996, 20,000 shares and 32,200 shares
of Series B and Series B-1 preferred stock, respectively, were converted into
common stock. Dividends on the Series B and Series B-1 preferred
stock are non-cumulative and non-accruing, and shall be paid only at such time
and such rate as determined by the Board of Directors. As of September 30,
1996, no dividends had been declared. Subject to the liquidation preference of
the Series A preferred shares, the Series B and Series B-1 convertible preferred
stock have a liquidation preference of $8.00 per share and $7.57 per share,
respectively, plus all declared but unpaid dividends.
NOTE 7. ISSUANCE OF COMMON STOCK
In June 1996, the Company completed a private placement of 1,818,367 shares of
common stock which generated approximately $9.7 million in proceeds, after
discounts, commissions and other issuance costs.
NOTE 8. CANCELLATION AND RE-GRANT OF STOCK OPTIONS
In June 1996, the Board of Directors of the Company approved the cancellation
of the majority of outstanding stock options with an exercise price in excess
of $5.375 per share and the re-grant of options to purchase an equivalent
number of shares at $5.375 per share. A total of 1,927,408 options were
canceled and re-granted.
7
<PAGE>
SPECTRUM HOLOBYTE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9. LICENSE AGREEMENT WITH MITSUI & CO.
In April 1996, the Company's wholly-owned Japanese subsidiary ("Spectrum
Japan") granted an exclusive license to Mitsui & Co., Ltd. ("Mitsui") for the
localization, manufacturing, marketing and distribution of certain Company
titles in Japan. The Company received an up-front license fee of
approximately $300,000, and will earn royalties based upon revenue generated
by Mitsui during the three-year term of the agreement. In connection with the
license agreement, Spectrum Japan subcontracted all of its employees to
Mitsui and largely discontinued its operations in Japan. During the six
months ended September 30, 1996, the Company recognized net revenue of
$406,000 related to the license agreement.
8
<PAGE>
SPECTRUM HOLOBYTE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
historical financial information and the notes thereto included in ITEM 1 of
this Quarterly Report and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1996, as filed with the Securities
and Exchange Commission on June 28, 1996.
This Quarterly Report on Form 10-Q contains forward-looking statements which
involve risks and uncertainties. The Company may, from time to time, make
oral forward-looking statements. The factors discussed in "Risk Factors"
below are important factors that could cause actual results to differ
materially from those projected in any such forward-looking statements.
OVERVIEW
Spectrum HoloByte (the "Company") develops, publishes and distributes
interactive entertainment software. The entertainment software market primarily
consists of software products published for the following platforms:
- - Compact-Disc Read-Only Memory ("CD-ROM") for the personal computer ("PC").
- - Videogame consoles, which include 32-bit and 64-bit "next-generation"
systems.
The Company primarily generates revenue from PC CD-ROM and next-generation, Sony
PlayStation products. These products are distributed worldwide, although the
majority of revenue is generated in North America and Europe.
See additional discussion in "Risk Factors" below.
9
<PAGE>
SPECTRUM HOLOBYTE, INC.
OPERATING RESULTS
Consolidated net revenue generated in North America and the rest of the world
consisted of the following (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
Net Revenue % of Total
Three Months Ended September 30 ----------------- ----------------
1996 1995 % CHANGE 1996 1995
----------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
North America $7,541 $8,388 -10.1% 27.5% 60.6%
International 19,872 5,457 264.2% 72.5% 39.4%
----------------- ----------------
Consolidated $27,413 $13,845 98.0% 100.0% 100.0%
----------------- ----------------
----------------- ----------------
Six Months Ended September 30
North America $14,787 $19,519 -24.2% 36.5% 63.4%
International 25,698 11,255 128.3% 63.5% 36.6%
----------------- ----------------
Consolidated $40,485 $30,774 31.6% 100.0% 100.0%
----------------- ----------------
----------------- ----------------
The following table sets forth the components of net revenue in
dollars and as a percentage of net revenue (DOLLARS IN THOUSANDS):
Net Revenue % of Total
Three Months Ended September 30 ----------------- ----------------
1996 1995 % CHANGE 1996 1995
----------------- -------- ----------------
PC CD-ROM $22,182 $11,410 94.4% 80.9% 82.4%
PlayStation ("PSX") 2,856 - - 10.4% -
Other 2,375 2,435 -2.4% 8.7% 17.6%
----------------- ----------------
Consolidated $27,413 $13,845 98.0% 100.0% 100.0%
----------------- ----------------
----------------- ----------------
Six Months Ended September 30
PC CD-ROM $31,130 $25,463 22.3% 76.9% 82.7%
PlayStation ("PSX") 5,477 - - 13.5% -
Other 3,878 5,311 -27.0% 9.6% 17.3%
----------------- ----------------
Consolidated $40,485 $30,774 31.6% 100.0% 100.0%
----------------- ----------------
----------------- ----------------
</TABLE>
The increases in net revenue for the second quarter and first six months of
fiscal 1997 as compared with the same periods of the prior year are due
principally to the success of GRAND PRIX II and SID MEIER'S CIVILIZATION II,
both for PC CD-ROM. GRAND PRIX II accounted for $16.0 million of second quarter
net revenue. SID MEIER'S CIVILIZATION II accounted for $4.9 million and $13.6
million of net revenue for the second quarter and first six months of fiscal
1997, respectively.
The decline in North American net revenue as compared to the second quarter
and first six months of fiscal 1996 is due primarily to a decrease in the
number of new titles introduced in North America. This decrease reflects the
shift in the Company's focus to produce fewer, but higher quality titles with
broad consumer appeal. The Company released ten titles, including four
affiliated label titles, in North America in the first six months of fiscal
1996 (including STAR TREK: THE NEXT GENERATION "A FINAL UNITY"), which
accounted for $8.5 million in net revenue. In the first six months of fiscal
1997, the Company released three new titles in North America: TOP GUN: FIRE
AT WILL (PSX), GUNSHIP 2000 (PSX) AND GRAND PRIX II (PC CD-ROM) which
contributed $6.5 million of net revenue. Partially offsetting this decrease
was the success of SID MEIER'S CIVILIZATION II, which generated $7.2 million
of net revenue in North America during the six-month period.
International net revenue increased substantially from the second quarter and
first six months of fiscal 1996 due primarily to shipments of GRAND PRIX II,
which generated net revenue outside of the U.S. of $14.9 million for the
September 1996
10
<PAGE>
SPECTRUM HOLOBYTE, INC.
quarter. Also contributing to the increase was the consolidation of the
operations of Leisuresoft, a German distribution company acquired in June 1996.
Net revenue from this distribution company accounted for 8% of consolidated
net revenue for the second quarter of fiscal 1997.
Partially offsetting the increased net revenue was a decline in revenue from
products published by affiliated label partners. This revenue accounted for 7%
of total net revenue for the second quarter and 2% for the first six months of
fiscal 1997, as compared to 22% and 15% of total net revenue for the second
quarter and the first six months of fiscal 1996, respectively.
The following table sets forth cost of revenue and gross profit in dollars and
as a percentage of net revenue (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
% of Net Revenue
----------------
Three Months Ended September 30 1996 1995 % CHANGE 1996 1995
----------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Net Revenue $27,413 $13,845 98.0% 100.0% 100.0%
Cost of Revenue 10,186 9,177 11.0% 37.2% 66.3%
----------------- ----------------
Gross profit $17,227 $4,668 269.0% 62.8% 33.7%
----------------- ----------------
----------------- ----------------
Six Months Ended September 30
Net Revenue $40,485 $30,774 31.6% 100.0% 100.0%
Cost of Revenue 15,085 16,880 -10.6% 37.3% 54.9%
----------------- ----------------
Gross profit $25,400 $13,894 82.8% 62.7% 45.1%
----------------- ----------------
----------------- ----------------
</TABLE>
The increases in gross profit as a percent of net revenue in the second quarter
and first six months of fiscal 1997 as compared to the same periods in the prior
year were primarily due to reduced product costs and a shift away from lower-
margin, affiliated label products. In addition, product write-offs decreased as
provisions were made in the quarter ended September 1995 to write-off older,
back catalog floppy disk and 8/16-bit cartridge inventories.
Partially offsetting the increase in gross profit was the shipment of lower-
margin PSX titles and the consolidation of the lower-margin operations of
Leisuresoft. Additionally, royalties paid to third-party developers were 13% of
net revenue in the first six months of fiscal 1997, up from 11% of net revenue
in the comparable period of fiscal 1996 due to higher net revenue from
externally-developed products such as GRAND PRIX II, which generate third-party
royalty costs.
The following table sets forth operating expenses and interest and other income
(expense) (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
Costs and Expenses % of Net Revenue
----------------- ----------------
Three Months Ended September 30 1996 1995 % CHANGE 1996 1995
----------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Sales and marketing $ 5,011 $ 5,187 -3.4% 18.3% 37.5%
General and administrative 3,772 4,246 -11.2% 13.8% 30.7%
Research and development 6,215 6,277 -1.0% 22.7% 45.3%
----------------- ----------------
Total operating expenses $14,998 $15,710 -4.5% 54.7% 113.5%
----------------- ----------------
----------------- ----------------
Interest and other expense ($ 398) ($ 549) -27.5% -1.5% -4.0%
----------------- ----------------
----------------- ----------------
</TABLE>
11
<PAGE>
SPECTRUM HOLOBYTE, INC.
<TABLE>
<CAPTION>
Costs and Expenses % of Net Revenue
----------------- ----------------
Six Months Ended September 30 1996 1995 % CHANGE 1996 1995
----------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Sales and marketing $9,593 $11,230 -14.6% 23.7% 36.5%
General and administrative 7,444 8,190 -9.1% 18.4% 26.6%
Research and development 11,903 14,544 -18.2% 29.4% 47.3%
----------------- ----------------
Total operating expenses $28,940 $33,964 -14.8% 71.5% 110.4%
----------------- ----------------
----------------- ----------------
Interest and other income (expense) $ 1,188 ($ 919) - 2.9% -3.0%
----------------- ----------------
----------------- ----------------
</TABLE>
Sales and marketing expenses decreased in the second quarter and first six
months of fiscal 1997 as compared to the same periods in the prior year.
These decreases were a result of the centralization of the Company's domestic
marketing and sales functions, a reduction in distributor and retailer
cooperative marketing costs, and lower variable marketing spending. The
decrease in variable marketing expense was primarily due to the introduction
of fewer new titles and more than $400,000 of costs related to the release of
STAR TREK: THE NEXT GENERATION "A FINAL UNITY" in fiscal 1996.
The decreases in general and administrative expenses in the second quarter and
first six months of fiscal 1997 as compared to the same periods in the prior
year were primarily due to the consolidation of the Company's domestic finance
and administration function. Additionally, the declines were due to decreased
legal, accounting and recruiting fees. Partially offsetting this decrease was
an increased bad debt provision of $.9 million and $1.7 million in the second
quarter and first six months of fiscal 1997, respectively, due to concerns
regarding the credit-worthiness of certain domestic distributors and retailers.
Research and development expenses decreased slightly in the second quarter of
fiscal 1997 as compared to the same period in the prior year. The decline in
expenses for the first six months of fiscal 1997 was due principally to
reductions in development personnel. Additionally, in fiscal 1996, the Company
recognized a $500,000 increased charge to write-off development advances of
discontinued products and $400,000 of additional outside labor costs related
mostly to the development of STAR TREK: THE NEXT GENERATION "A FINAL UNITY".
The decrease in interest and other expense in the second quarter of fiscal 1997
reflects lower interest expense due to the retirement of $18.9 million in debt.
Interest and other income for the first six months of fiscal 1997 includes a
$1.9 million gain from the sale of the Company's investment in FASA and reduced
interest costs.
No income tax provision was recorded for the second quarter and the first six
months of fiscal 1997 due to the utilization of net operating loss carryforwards
generated in prior periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by approximately $4.6 million during the
six-month period. This increase was principally due to a $9.7 million equity
financing in June 1996 offset partially by the repurchase of subordinated notes,
the acquisition of capital equipment, and the purchase of certain net assets of
Leisuresoft.
As of September 30, 1996, the Company's working capital was $38.1 million
compared to $35.7 million at March 31, 1996. Net accounts receivable decreased
due to increased collections coupled with $0.8 million of write-offs of
uncollectible accounts. Reserves for bad debts and sales returns as a
percentage of gross accounts receivable increased from 49% at March 31, 1996 to
54% at September 30, 1996, due to the deteriorating financial condition of
certain U.S. distributors and retailers.
Inventories decreased primarily due to the success of GRAND PRIX II and SID
MEIER'S CIVILIZATION II, the return of excess inventories to a former
affiliated label partner, and the Company's focus on fewer products.
12
<PAGE>
SPECTRUM HOLOBYTE, INC.
As of September 30, 1996, the Company's primary source of liquidity included
cash and cash equivalents of $39.9 million. The Company uses working capital to
finance ongoing operations, fund the development and marketing of new products
and acquire capital equipment. Periodically, the Company may evaluate other
business, product or technology opportunities that are complimentary to those of
the Company.
In October 1996, a UK facility was obtained consisting of an overdraft/line
of credit facility based upon qualifying receivables and certain other bank
requirements for amounts up to a maximum credit limit of approximately $2.9
million, bears interest at the rate of 2.75% over the bank's base rate, and
expires September 1997. The acquisition of Leisuresoft provided a German
facility consisting of an overdraft/line of credit facility based upon
certain bank requirements for amounts up to a maximum credit limit of
approximately $325,000, bears interest at the German equivalent of the prime
rate, and expires March 1997.
Management believes the existing cash and cash equivalents will be sufficient to
meet the Company's liquidity and capital needs for the foreseeable future.
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS PROSPECTS.
OPERATING LOSSES. Although the Company reported net income for the quarter and
first six months ended September 30, 1996 of $2.7 million or $.09 per share, and
$1.2 million or $.04 per share, respectively, the Company had net losses of
approximately $1.5 million, $39.8 million, $18.1 million and $58.5 million for
the first quarter of fiscal 1997 and the fiscal years 1996, 1995 and 1994,
respectively. Since the merger with MicroProse in December 1993, the Company has
not been able to achieve profitability on an annual basis. There can be no
assurance that any of the Company's business strategies and tactics will be
successful or that the Company will be able to sustain profitability.
SIGNIFICANT LEVERAGE. As of September 30, 1996, the Company had outstanding
indebtedness for borrowed funds of approximately $32.9 million, cumulative
manditorily redeemable preferred stock of $5.9 million, and certain additional
indebtedness. This substantial leverage will have several important consequences
for the Company's future operations, including the following: (i) a substantial
portion of the Company's cash flows from operations will be dedicated to the
payment of interest on, and principal of, its indebtedness; (ii) the Company's
ability to obtain additional financing in the future for capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired; and
(iii) the Company's ability to withstand competitive pressures, adverse economic
conditions and adverse changes in governmental regulations and to make
acquisitions or otherwise take advantage of significant business opportunities
that may arise may be negatively impacted.
The Company in the future may enter into lines of credit or other borrowing
arrangements, any of which would add to the total outstanding indebtedness of
the Company. The Company's ability to meet its debt service obligations and to
reduce its total indebtedness will be dependent upon the Company's future
performance, which will be subject to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
If the Company is unable to generate sufficient cash flow from operations in the
future to service its debt, it may be required to convert or refinance all or a
portion of such debt, including the Notes (see below), or to obtain additional
financing. However, there can be no assurance that any refinancing would be
possible or that any additional financing could be obtained.
13
<PAGE>
SPECTRUM HOLOBYTE, INC.
NASDAQ LISTING. The Company was notified in February 1996 by the Nasdaq
Stock Market ("Nasdaq") that the Company was no longer in compliance with the
net tangible assets requirement of the National Association of Securities
Dealers' ByLaws for listing on the Nasdaq National Market. Nasdaq granted
the Company a temporary exemption from the net tangible assets requirement.
The exemption required that the Company achieve compliance with the listing
on or before July 12, 1996.
In the first quarter of fiscal 1997, management implemented tactics to achieve
compliance with the net tangible assets listing requirement. These actions
enabled the Company to regain compliance with the Nasdaq National Market listing
requirements as of the end of the fiscal quarter ended June 30, 1996. There can
be no assurance that the Company will be able to maintain compliance with the
listing requirements of the Nasdaq National Market in the future. If the
Company is unable to maintain compliance, it may qualify for listing under the
Nasdaq SmallCap Market. If for any reason the Company is unable to achieve and
maintain compliance with the SmallCap listing requirements and is delisted from
both the Nasdaq National Market and the Nasdaq SmallCap Market, the holders of
the Company's 6 1/2 % Convertible Subordinated Notes Due 2002 (the "Notes")
would be entitled to require the Company to repurchase all or any portion of
such holders' Notes for cash at a price equal to the principal amount plus
accrued interest. In such event, the Company's business, results of operations
and financial condition would be materially and adversely affected.
FLUCTUATIONS IN OPERATING RESULTS; SEASONALITY. The Company's operating results
have varied significantly in the past, and are expected to vary significantly in
the future. This variability is a result of factors such as: 1) the
commencement of volume shipments of significant new products, 2) the degree of
market acceptance of the Company's products, 3) the introduction of products
competitive with those of the Company, 4) the timing and market acceptance of
new hardware and software product introductions, 5) the size and rate of growth
of the consumer software market, 6) development and promotional expenses
relating to the introduction of new products or new versions of existing
products, 7) product returns and markdowns, 8) changes in pricing policies by
the Company and its competitors, 9) the accuracy of retailers' forecasts of
consumer demand, 10) the timing of orders from major customers, 11) order
cancellations, 12) delays of shipment, and 13) write-offs of advance royalty
payments. Because a majority of the unit sales for a product typically occurs in
the first 90 to 120 days following the introduction of the product, the
Company's revenue may increase significantly in a period in which a major
product introduction occurs and may decline in following periods or in periods
in which there are no major product introductions. The Company's expenses are
based, in part, on expected future revenue. Certain overhead and product
development expenses are fixed and do not vary directly in relation to revenue.
Consequently, if net revenue is below expectations, the Company's operating
results are likely to be materially and adversely affected. In certain past
periods the Company's revenue or operating results were below the expectations
of, and certain new products were not introduced when anticipated by, public
market analysts and investors. These circumstances could recur in future
periods, and in such event, the prices of the Company's common stock and Notes
would likely be materially and adversely affected.
The entertainment software business is highly seasonal. Typically, net revenue
is highest during the last calendar quarter (which includes the holiday buying
season), declines in the first calendar quarter, is lowest in the second and
increases in the third calendar quarter. This seasonal pattern is due primarily
to the increased demand for entertainment software products during the year-end
holiday buying season. The Company's net revenue, however, is largely dependent
on releases of major new products and, as such, may not necessarily reflect the
seasonal patterns of the industry as a whole. The Company expects that its net
revenue and operating results will continue to fluctuate significantly in the
future.
14
<PAGE>
SPECTRUM HOLOBYTE, INC.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS; PRODUCT DELAYS. A significant portion
of the Company's fiscal year revenue is generated by products introduced during
that fiscal year. The Company depends on both the timely introduction of
successful new products or sequels to existing products to replace declining
revenue from older products and continued revenue from back-catalog products. If
for any reason revenue from new products or other activities fails to replace
declining revenue from existing products, or if revenue from back-catalog titles
declines significantly, the Company's business, operating results and financial
condition may be materially and adversely affected. In order to maintain or
grow its current revenue levels, the Company believes it will be necessary to
develop or obtain rights to new products that achieve market acceptance, are
developed for the appropriate platforms, are introduced in a timely manner and
are able to sustain market acceptance. The Company is continuing to devote
considerable resources toward the development of new products and has secured
rights to intellectual properties owned by third parties. As is typical in the
industry, while the Company maintains internally developed release schedules,
there can be no assurance that new products under development will be released
on schedule or at all, or that any such products will generate significant
revenue. Historically, the Company has frequently missed product release
schedules. To the extent that major new products are not released on schedule,
both net revenue and gross profit are likely to be adversely affected. In
addition, as access to distribution channels and retail shelf space becomes
increasingly competitive, the Company's ability to produce and bring to market
new and compelling products in a timely fashion plays an increasingly important
role in the Company's ability to retain adequate access to these channels.
The Company's current production schedules contemplate that the Company will
commence shipments of a number of new products in fiscal 1997. As with any
software product, however, until all aspects of the development and initial
distribution of a game are completed, there can be no assurance of its release
date. Release dates will vary depending on quality assurance testing and other
development factors. If the Company were unable to commence volume shipments of
a significant new product during the scheduled quarter, the Company's revenue
and earnings would likely be materially and adversely affected in that quarter.
In the past, the Company has experienced significant delays in the introduction
of certain new products. It is likely in the future that certain new products
will not be released in accordance with the Company's internal development
schedule or the expectations of public market analysts and investors. A
significant delay in the introduction of, or the presence of a defect in, one or
more new products could have a material adverse effect on the ultimate success
of such products and on the Company's business, operating results and financial
condition, particularly in the quarter in which such products were scheduled to
be introduced.
The process of developing software products such as those offered by the Company
is extremely complex and is expected to become more complex and expensive in the
future as consumers demand products with more sophisticated and elaborate
multimedia features and as new platforms and technologies are supported. At the
same time, the introduction of new technologies and competitive products, the
increase in competition for retail shelf space among software products and other
factors may cause the effective lives of the Company's products to become
shorter and the Company's ability to introduce new products on a timely basis to
become increasingly important. As the Company intends to focus its resources on
a smaller number of titles, its exposure to the risks of delays of any one title
will increase.
UNCERTAINTY OF MARKET ACCEPTANCE; UNPREDICTABLE PRODUCT LIFE CYCLES. Consumer
preferences for entertainment software products are continually and rapidly
changing and are extremely difficult to predict. Few entertainment software
products achieve sustained market acceptance, for example, beyond one holiday
buying season. There can be no assurance that new products introduced by the
Company will achieve any significant degree of market acceptance, or that
acceptance, if achieved, will be sustained for any significant period. Further,
there can be no assurance that such products will not be subject to changes in
consumer preferences or that product life cycles will be sufficient to permit
the Company to recover development and other associated costs. In addition,
sales of any single title of the Company's entertainment software products will
decline over time. A majority of the unit sales for a product typically occurs
in the first 90 to 120 days after the product is introduced. Therefore, the
Company cannot rely on the sales of current products to sustain its business in
the future. Failure of new products or platforms to achieve or sustain market
acceptance would have a material and adverse effect on the Company's business,
operating results and financial condition. In addition, the Company does not
carry significant inventory of its new products. As a result, significant
production delays would have a material and adverse effect on the Company's
business and operating results. Further, if demand for a particular product is
greater than anticipated,
15
<PAGE>
SPECTRUM HOLOBYTE, INC.
the Company may not have sufficient inventory to meet customer demands.
COMPETITION. The entertainment software industry is intensely competitive and
in the process of consolidation. The Company's competitors vary in size from
very small companies with limited resources to very large corporations with
greater financial, marketing and product development resources than those of the
Company. The Company competes primarily with other developers of PC
entertainment and video game entertainment software. Significant competitors of
the Company in the entertainment software industry include Electronic Arts,
Sierra On-Line, Lucas Arts, Interplay, GT Interactive, Maxis, Acclaim
Entertainment, and Broderbund Software, along with Virgin Interactive in Europe.
Additionally, the entry and participation of new industries and companies,
including diversified entertainment companies, in markets in which the Company
competes may adversely affect the Company's performance in such markets. The
availability of significant financial resources has become a major competitive
factor in the entertainment software industry, principally as a result of the
technical sophistication of advanced multimedia computer game products requiring
substantial investments in research and development and the increasing need to
license products and rights to use other intellectual properties from third
parties. Also, competitors with large product lines and popular titles typically
have greater leverage with retailers and distributors and other customers who
may be willing to promote titles with less consumer appeal in return for access
to such competitors' most popular titles.
The Company believes that large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft, 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 computer games and
interactive networks that will be competitive with the Company's products. As
competition increases, significant price competition and reduced profit margins
may result. In addition, competition from new technologies may reduce demand in
markets in which the Company has traditionally competed. Prolonged price
competition or reduced demand as a result of competing technologies would have a
material and adverse effect on the Company's business, financial condition and
operating results. 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.
Retailers of the Company's products typically have a limited amount of shelf
space and promotional resources, and there is intense competition among consumer
software producers for adequate levels of shelf space and promotional support
from retailers. To the extent that the number of consumer software products and
computer platforms increases, this competition for shelf space may intensify.
Due to increased competition for limited shelf space, retailers and distributors
are increasingly in a better position to negotiate favorable terms of sale,
including price discounts and product return policies. Retailers often require
software publishers to pay fees in exchange for preferred shelf space. The
Company's products constitute a relatively small percentage of a retailer's
sales volume, and there can be no assurance that retailers will continue to
purchase the Company's products or provide the Company's products with adequate
levels of shelf space and promotional support.
As more consumers own multimedia PCs, the distribution channels for
entertainment software have changed, and are expected to continue to change,
to increasingly depend on mass merchandisers, on-line services and the
Internet to reach the broader market. There can be no assurance that the
Company will make this transition successfully. In addition, while this trend
has increased the number of distribution channels, it has intensified
competition for shelf space because these new channels generally carry only
top-selling titles. In addition, other types of retail outlets and methods of
product distribution, such as online services and the Internet, may become
important in the future, and it will be important for the Company to gain
access to these channels of distribution. There can be no assurance that the
Company will gain such access or that the Company's access will allow the
Company to maintain its historical levels of sales volume.
CONCENTRATION OF CUSTOMER BASE; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT
RETURNS. The Company principally sells its products to retailers and
distributors, who in turn resell the products to consumers. During the quarter
and first six months ended September 30, 1996, sales to the top ten such
customers represented approximately 48% and 47% of the Company's net revenue,
respectively. Sales are typically made on credit, with terms that vary depending
upon the customer and the nature of the product. The Company does not hold
collateral to secure
16
<PAGE>
SPECTRUM HOLOBYTE, INC.
payment. Retailers and distributors compete in a volatile industry and are
subject to the risk of business failure. Certain of the Company's
distributors and retailers have recently experienced financial difficulties
and the Company has increased its reserves accordingly. However, the
business failure of a significant distributor or customer could have a
material and adverse effect on the Company's business, operating results and
financial condition.
The Company is exposed to the risk of product returns from distributors and
retailers. The Company currently maintains a stock balancing policy that allows
distributors and retailers to return products subject to certain conditions. The
Company provides reserves for returns that it believes are adequate, and the
Company's agreements with various customers place certain limits on product
returns. However, new product introductions by the Company or its competitors,
or changes in consumer demand from that anticipated, could cause customers to
seek to return inventory to the Company. Due to the unpredictability of consumer
demand and the uncertainties associated with a rapidly changing market, there
can be no assurance that the Company or its customers will be able to forecast
demand accurately. Consistent with industry trends, the Company has accepted
substantial increased product returns and markdowns on products in the last
fiscal year and the Company could continue to be forced to accept such returns
and markdowns in the distribution channel to maintain its relationships with
retailers and its access to distribution channels. These returns and markdowns
are likely to increase in periods in which the Company does not have a
significant number of new product introductions. Any significant amount of
product returns or markdowns could have a material and adverse effect on the
Company's business, operating results and financial condition.
DEPENDENCE UPON STRATEGIC RELATIONSHIPS. The Company's business strategy relies
to a significant extent on its strategic relationships with other companies and
on its alliances with key developers. Certain agreements allow third parties to
approve a product prior to its release, and therefore, subject the product to
delay. There can be no assurance that these relationships will be successful or
that the Company will continue to maintain and develop strategic relationships,
or that licenses between the Company and any third party will be renewed or
extended at their expiration dates. For example, the Company's licenses from
Paramount Pictures Corporation for the STAR TREK: THE NEXT GENERATION property
expire on December 31, 1998, and for the TOP GUN property on April 30, 1998. In
addition, these agreements may be terminated at Paramount's option in the event
that the Company fails to meet certain specified milestone dates. The Company's
failure to renew or extend a key license or maintain its strategic relationships
could materially and adversely affect the Company's business, operating results
and financial condition. In addition, under certain key license agreements, the
Company must obtain approval on a timely basis from the licensor in order to
market products it develops under the license. There can be no assurance that
the Company will obtain such approval, and failure to do so could have a
material and adverse effect on the Company's operating results, financial
condition and business prospects.
17
<PAGE>
SPECTRUM HOLOBYTE, INC.
CHANGES IN TECHNOLOGY AND PRODUCT PLATFORMS. The market for entertainment
software, including entertainment software platforms, is undergoing rapid
technological change. As a result, the Company must continually anticipate and
adapt its products to emerging platforms and evolving consumer preferences. The
introduction of new platforms and technologies can render existing products
obsolete and unmarketable. Development of entertainment software products for
new hardware platforms requires substantial investments in research and
development for technologies such as enhanced sound, digitized speech, music and
video and requires the Company to anticipate and develop products for those
platforms that will ultimately be successful. Such research and development
efforts, which generally require 12 to 24 months, must occur well in advance of
the release of new platforms in order to introduce products on a timely basis
following the release of such platforms. In addition, the Company expects that
the trend toward more complex multimedia products and increasing product
development costs will continue for the foreseeable future.
Although the Company intends to develop and market games for certain advanced
and emerging platforms, these development and marketing efforts may require
greater financial and technical resources than those currently possessed by the
Company. In addition, there can be no assurance that the platforms for which the
Company develops products 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 products or products that generate
sufficient revenue to offset research and development costs incurred in
connection with their development. There can be no assurance that the Company
will be successful in developing and marketing products for new platforms.
Failure to develop products for new platforms that achieve significant market
acceptance may have a material and adverse effect on the Company's business,
operating results and financial condition. The Company is developing games that
may be played interactively over on-line services and the Internet, but there
can be no assurance that the market for networked videogame play will evolve or
develop as anticipated. Consumer preferences change continually and are
extremely difficult to predict. Even if a market for networked videogame play
develops, no assurance can be given that the Company's products will meet the
requirements of such market and achieve market acceptance.
The Company is heavily dependent on the success of the entertainment software
developed for use on the PC. However, there are multiple, competing and
incompatible formats being introduced in this new market. PlayStation, Sega
Saturn, 3DO Multiplayer and Nintendo's Ultra 64 are currently available. There
can be no assurance that the Company's strategy of developing primarily for the
PC or the other platforms the Company chooses to support ultimately will be
successful. The development, marketing and distribution of products for game
consoles the Company chooses to support will involve substantial investment and
risks. The Company believes that the principal target audience for game consoles
may be younger than the Company's traditional customers, and there can be no
assurance that the Company's products will be successful with this different
audience. In addition, the Company anticipates that products in the game console
market will require substantially greater expenditures for marketing,
advertising and inventory buildup, often before the market acceptance of a
product is known. Inventory will be two or more times more expensive as a result
of license fees that are required to be prepaid to the manufacturers of the
hardware platforms. Further, game console products will be sold through channels
that overlap with, but are somewhat different from, the retail channels
currently utilized by the Company, and the Company will be competing in
distribution against much larger organizations with greater financial resources.
There can be no assurance that the Company will be successful in marketing and
distributing software for game consoles.
RISK OF SOFTWARE ERRORS OR FAILURES. Software products as complex as those
offered by the Company may contain undetected errors when first introduced or
when new versions are released. In the past, the Company has discovered software
errors in certain of its product offerings after their introduction and has
experienced delays or lost revenue during the period required to correct these
errors. The Company's products must maintain compatibility with certain
hardware, software and accessories. Any changes that result in incompatibility
could result in significant product returns and customer service costs. In
particular, the PC hardware environment is characterized by a wide variety of
nonstandard peripherals (such as sound and graphics cards) and configurations
that make prerelease testing for programming or compatibility errors very
difficult and time consuming. There can be no assurance that, despite testing by
the Company, errors will not be found in new products or releases after
commencement of commercial shipments, resulting in loss of or delay in market
acceptance, which could have a material and adverse effect on the Company's
business, operating results and financial condition. The risk of
18
<PAGE>
SPECTRUM HOLOBYTE, INC.
undetected product errors can be expected to increase as products and their
development processes become more complex and as growing competition leads to
increased pressure to reduce time to market.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT CHANGES. The Company's future success
depends in large part on the continued service of its key product development,
technical and management personnel and on its ability to continue to attract,
motivate and retain highly qualified employees, including additional management
personnel. The loss of certain key employees could have a material and adverse
effect on the Company's business. In addition, the Company depends on teams of
programmers, game designers and artists. Competition for these skilled employees
is intense, and the loss of the services of key development personnel could have
a material and adverse effect upon the Company's current business, new product
development efforts and prospects. Sid Meier, the Company's former Executive
Vice President of Product Development, resigned in May 1996. He will continue as
a consultant until the completion of MAGIC: THE GATHERING. Since January 1,
1996, the Company has hired a new Senior Vice President of Sales, Senior Vice
President of Operations, Senior Vice President of Marketing, and a Senior Vice
President of Development Studios and intends to hire other senior management
positions including a new Chief Financial Officer. The Company has also hired a
financial consultant to advise the Chief Executive Officer on financial
planning, controls and reporting structures. The Chief Executive Officer and
other officers and senior managers of the Company can be expected to expend
significant time and effort in the transition process as new officers assume
their positions with the Company and become integrated into the Company, its
operations and its culture. There can be no assurance that qualified personnel
can be readily identified and hired wherever necessary, that any new personnel
will be successfully integrated into the Company, its operations and culture, or
that new personnel, if hired, will improve the Company's business, operations or
operating results. The Company does not currently have key person life insurance
on any employees.
USE OF INDEPENDENT SOFTWARE DEVELOPERS. In addition to marketing internally
developed software, the Company also markets entertainment software created by
independent software developers. The cost to retain independent developers is
increasing in the form of guaranteed advances and royalties. Additionally, the
Company has less control over the scheduling and the quality of work of
independent contractors than that of its own employees. Furthermore, the
Company's agreements to publish and market certain independent software
developers' titles will terminate after specified dates unless renewed. The
Company's business and future operating results will depend in part on the
Company's continued ability to attract and maintain relationships with skilled
independent software developers, and to enter into and renew product development
agreements with such developers. There can be no assurance that the Company will
be able to maintain such relationships or enter into and renew such agreements.
INTERNATIONAL REVENUE. International net revenue represented approximately 64%,
49%, and 29% of the Company's net revenue for the first six months of fiscal
1997, and for fiscal years ended March 31, 1996 and 1995, respectively. The
Company expects that international net revenue will continue to account for a
significant portion of its net revenue in future periods. International revenue
is subject to inherent risks, including unexpected changes in regulatory
requirements, tariffs and other economic barriers, fluctuating exchange rates,
difficulties in staffing and managing foreign operations and the possibility of
difficulty in accounts receivable collection. Because the Company does not
believe exposure to foreign currency losses is currently material, the Company
currently has no formal financial instruments in place as a hedge against
foreign currency risks. In some markets, localization of the Company's products
is essential to achieve market penetration. The Company may incur substantial
costs and experience delays in localizing its products, and there can be no
assurance that any localized product will ever generate significant revenue
These or other factors could have a material and adverse effect on the Company's
future international revenue and, consequently, on the Company's business,
operating results and financial condition.
RECOVERY OF PREPAID ROYALTIES AND GUARANTEES. The Company, from time to time,
enters into agreements with licensors of intellectual property and developers of
games that involve advance payments of royalties and guaranteed minimum royalty
payments. If the sales volumes of products subject to such arrangements are not
sufficient to recover such advances and guarantees, the Company will be required
to write-off unrecovered portions of such payments. The Company has been
required to write-off a material portion of these advances in past fiscal
quarters and, if the Company must write-off additional portions of such advances
or ultimately accrue for the guarantees, its results of operations may be
materially and adversely affected.
19
<PAGE>
SPECTRUM HOLOBYTE, INC.
INTELLECTUAL PROPERTY. The Company regards the software that it owns or
licenses as proprietary and relies primarily on a combination of copyrights,
trade secret laws, patent and trademark laws, nondisclosure agreements and other
copy protection methods to protect its product and proprietary rights. It is the
Company's policy that all employees and third-party developers sign
nondisclosure agreements. There can be no assurance that these measures will be
sufficient to protect the Company's intellectual property rights against
infringement. The Company owns or licenses various trademarks and copyrights.
However, the Company has no license agreements with the end users of its
products and does not copy protect its software. Rather, the Company relies on
the copyright laws to prevent unauthorized distribution of its software.
Existing copyright laws afford only limited protection. It may be possible for
unauthorized parties to copy the Company's products or to reverse engineer or
otherwise obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult, and software
piracy can be expected to be a persistent problem. Further, the laws of certain
countries in which the Company's products are or may be distributed do not
protect the Company's products and intellectual property rights to the same
extent as the laws of the United States.
The Company believes that its products, trademarks and other proprietary rights
do not infringe on the proprietary rights of parties. As the number of
entertainment software products in the industry increases, the Company believes
that software increasingly will become the subject of claims that such software
infringes upon the rights of others. From time to time, the Company has received
communications from parties asserting that features or content of certain of its
products may infringe upon intellectual property rights of such parties. The
Company believes such claims have been without merit. To date, no such claims
have had an adverse effect on the Company's ability to develop, market or sell
its products. There can be no assurance that existing or future infringement
claims against the Company will not result in costly litigation or require the
Company to license the intellectual property rights of parties. There can be no
assurance that such licenses will be available on reasonable terms or at all.
STRATEGIC RESTRUCTURING. In fiscal 1996 and early fiscal 1997, the Company
undertook a strategic restructuring with the goals of better integrating the
operations of Spectrum HoloByte and MicroProse, streamlining product development
efforts and reducing operating costs. Certain domestic operations were
streamlined and consolidated in California, including marketing, operations,
customer support, finance and product planning. The Company largely discontinued
its Japanese operations, and entered into an exclusive three-year distribution
agreement in Japan which is expected to generate royalties in future periods.
The Company's domestic affiliated label programs were largely terminated and the
number of products being published and actively marketed was significantly
reduced in order to focus the Company's sales and distribution efforts. As a
result of these changes, the Company has improved operating efficiencies,
reduced headcount and reduced operating costs. There can be no assurance,
however, that the Company will be successful in meeting the objectives of this
restructuring. Furthermore, as a result of reducing the number of the Company's
products, there can be no assurance that the Company's expected revenue will be
sufficient to generate operating profits.
VOLATILITY OF PRICE OF STOCK AND NOTES. There has been a history of significant
volatility in the market prices of companies engaged in the entertainment
software industry, including the Company. It is likely that the market price of
the Company's common stock will continue to be highly volatile and the price of
the Company's Notes will also be subject to such fluctuations. Factors such as
the timing and market acceptance of new product introductions by the Company,
the introduction of new products by the Company's competitors, loss of key
personnel of the Company, variations in quarterly operating results or changes
in market conditions in the entertainment software industry may have a
significant impact on the market price of the Company's common stock and Notes.
In the past, the Company has experienced fluctuations in its operating results,
and it is likely that in some future quarter the Company's revenue or operating
results will be below the expectations of, and certain new products will not be
introduced when anticipated by, public market analysts and investors. In such
event, the price of the Company's common stock would likely be materially
adversely affected. Volatility in the price of the Company's common stock,
changes in prevailing interest rates and changes in perceptions of the Company's
creditworthiness may in the future adversely affect the price of the Notes.
20
<PAGE>
SPECTRUM HOLOBYTE, INC.
Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 9, 1996, a lawsuit entitled Acclaim Entertainment, Inc. v.
Spectrum HoloByte California, Inc. No. 96-2462 WHO, was filed in the United
States District Court for the Northern District of California. MicroProse
Software, Inc. was also named as a defendant. The complaint alleged various
causes of action related to an exclusive license Acclaim holds from Wizard of
the Coast, Inc. ("WOTC") to develop certain computer game products based on
the world and characters of the MAGIC: THE GATHERING card game. Acclaim
alleged that its license is being infringed by the MAGIC:THE GATHERING
computer game being developed by the Company, which also holds an exclusive
license from WOTC.
On September 20, 1996, the Company filed an answer and counterclaim
denying the allegations in the complaint and asserting claims for unfair
competition, copyright infringement, and interference with contract against
Acclaim.
On November 4, 1996, the Company, MicroProse and Acclaim entered into an
agreement settling the lawsuit. Under the terms of the settlement, the
Company is not required to make any monetary payment or alter its computer
game product. The parties have agreed to differentiate their respective titles
in the marketplace. Acclaim will market its product for Windows 95 under the
name MAGIC: THE GATHERING-BATTLEMAGE. The title will be positioned as a
real-time, multi-player strategy game, based on the characters and scenarios
of the fantasy adventure world of MAGIC:THE GATHERING. The Company's title
will be released under the MicroProse brand name and will be positioned as an
interactive version of the MAGIC:THE GATHERING card game. The Company's
title will feature a fantasy world developed by the Company to simulate the
features of the MAGIC:THE GATHERING card game, including card collection,
deck-building and dueling.
The parties have also agreed to coordinate the release dates for their
respective products. Acclaim will have the right to release its title on or
before January 10, 1997, and the Company has agreed not to release its product
until after such date. In the event Acclaim releases its title on or before
January 10, 1997, then the Company will release its title no earlier than
February 1, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING EXHIBITS ARE FILED HEREWITH:
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------
3.1+ Certificate of Incorporation of the Registrant
3.2 Amended Bylaws of Registrant
4.1+ Specimen Common Stock Certificate of the Registrant
4.2+ Warrants issuable to the Grotech Investors and Corporate Venture
Partners, L.P., dated as of October 17, 1991
4.3+ Form of Warrant issuable to Paragon Investors, dated July 1992
4.4+ Form of Warrant, issued to Ince & Co. (incorporated by reference to
Exhibit 2.3 of Spectrum HoloByte, Inc.'s Quarterly Report on Form
10-Q, File No. 0-19463, filed on December 31, 1994)
4.5+ Registration Rights Agreement, dated June 12, 1995 by and among
Spectrum HoloByte, Inc. and Stephen Barcia and Maria Barcia
(incorporated by reference to Exhibit 2.3 of Spectrum HoloByte,
Inc.'s Current Report on Form 8-K, File No. 0-19463, filed on
June 27, 1995)
4.6+ Registration Rights Agreement, dated as of May 16, 1995, by and
among Spectrum HoloByte, Inc. and IPWEL LTD (incorporated by
reference to Exhibit 4.7 of Spectrum HoloByte, Inc.'s Registration
on Form S-3, File No. 33-94580, filed October 24, 1995)
4.7+ Registration Rights Agreement, dated as of May 16, 1995, by and
among Spectrum HoloByte, Inc. and GFL Advantage Fund Limited
(incorporated by reference to Exhibit 4.8 of Spectrum HoloByte,
Inc.'s Registration on Form S-3, File No. 33-94580, filed October
24, 1995)
4.8+ Registration Rights Agreement, dated as of August 28, 1995, by and
among Spectrum HoloByte, Inc. and GFL Advantage Fund Limited
(incorporated by reference to Exhibit 4.9 of Spectrum HoloByte,
Inc.'s Registration on Form S-3, File No. 33-94580, filed
October 24, 1995)
4.9+ Registration Rights Agreement, dated as of June 27, 1995, by and
among Spectrum HoloByte, Inc. and Banque Scandinave en Suisse
(incorporated by reference to
21
<PAGE>
SPECTRUM HOLOBYTE, INC.
EXHIBIT
NUMBER DESCRIPTION
- ------- ------------------------------------------------------------------
Exhibit 4.10 of Spectrum HoloByte, Inc.'s Registration on Form S-3,
File No. 33-94580, filed October 24, 1995)
4.10+ Registration Rights Agreement, dated as of August 25, 1995, by and
among Spectrum HoloByte, Inc. and PJP International, Ltd.
(incorporated by reference to Exhibit 4.11 of SpectrumHoloByte,
Inc.'s Registration on Form S-3, File No. 33-94580, filed
October 24, 1995)
4.11+ Registration Rights Agreement, dated as of May 16, 1995, by and
among Spectrum HoloByte, Inc. and Tanner, Owen & Co. Incorporated
(incorporated by reference to Exhibit 4.12 of Spectrum HoloByte,
Inc.'s Registration on Form S-3, File No. 33-94580, filed October
24, 1995)
4.12+ Registration Rights Agreement, dated as of September 6, 1995, by
and among Spectrum HoloByte, Inc. and Tanner, Owen & Co.
Incorporated (incorporated by reference to Exhibit 4.13 of
Spectrum HoloByte, Inc.'s Registration on Form S-3, File No.
33-94580, filed October 24, 1995)
4.13+ Indenture, dated as of September 15, 1995, between Spectrum
HoloByte, Inc. and Chemical Trust Company of California
(incorporated by reference to Exhibit 3 of Spectrum HoloByte,
Inc.'s Current Report on Form 8-K, File No. 0-19463, filed October
17, 1995)
4.14+ Registration Rights Agreement, dated as of September 26, 1995,
by and among Spectrum HoloByte, Inc. and Robertson, Stephens &
Company, L.P., Jeffries & Company, Inc. and Piper Jaffray Inc.
(incorporated by reference to Exhibit 4 of Spectrum HoloByte,
Inc.'s Current Report on Form 8-K, File No. 0-19463, filed
October 17, 1995)
4.15+ Certificate of Designation for Series B Convertible Preferred Stock
4.16+ Certificate of Designation for Series B-1 Convertible Preferred
Stock
10.1+ Form of Purchase Agreement, by and between Spectrum HoloByte,
Inc. and certain investors, effective June 26, 1996 (incorporated
by reference to Exhibit 4.3 of Spectrum HoloByte, Inc.'s
Registration on Form S-3, File No. 333-08385, filed July 18, 1996)
11.1 Statement Re: Computation of Net Income (Loss) Per Share
27.1 Statement Re: Financial Data Schedule
+ Previously filed.
(B) REPORTS ON FORM 8-K:
None.
22
<PAGE>
SPECTRUM HOLOBYTE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on November 13, 1996.
SPECTRUM HOLOBYTE, INC.
By: /s/ Stephen M. Race
-------------------------------------
Stephen M. Race
CHIEF EXECUTIVE OFFICER, ACTING CHIEF
FINANCIAL OFFICER AND DIRECTOR
23
<PAGE>
BYLAWS
OF SPECTRUM HOLOBYTE, INC.
<PAGE>
TABLE OF CONTENTS
OF
SPECTRUM HOLOBYTE, INC.
PAGE
----
ARTICLE I - CORPORATE OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - MEETING OF STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS. . . 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE . . . . . . . . . . . . 3
2.7 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.8 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . . 4
2.9 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING . . . . . . 4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS. . . . . 4
2.13 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . . . . . . . 5
2.15 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE III - DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.1 POWERS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 NUMBER OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . 6
3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTORS . . . . . . . 6
3.4 RESIGNATION AND VACANCIES. . . . . . . . . . . . . . . . . . . . . . 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE . . . . . . . . . . . . . . 7
3.6 FIRST MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.7 REGULAR MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.8 SPECIAL MEETINGS; NOTICE . . . . . . . . . . . . . . . . . . . . . . 8
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
3.9 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.10 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.11 ADJOURNED MEETING; NOTICE. . . . . . . . . . . . . . . . . . . . . . 9
3.12 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 9
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . . . . . . . 9
3.14 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . . . . . . . 9
3.15 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV - COMMITTEES. . . . . . . . . . . . . . . . . . . . . . . . . . . .10
4.1 COMMITTEES OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .10
4.2 COMMITTEE MINUTES. . . . . . . . . . . . . . . . . . . . . . . . . .10
4.3 MEETINGS AND ACTION OF COMMITTEES. . . . . . . . . . . . . . . . . .10
ARTICLE V - OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
5.1 OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
5.2 ELECTION OF OFFICERS . . . . . . . . . . . . . . . . . . . . . . . .11
5.3 REMOVAL AND RESIGNATION OF OFFICERS. . . . . . . . . . . . . . . . .11
5.4 CHAIRMAN OF THE BOARD. . . . . . . . . . . . . . . . . . . . . . . .12
5.5 PRESIDENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.6 VICE PRESIDENTS. . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.7 SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
5.8 TREASURER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
5.9 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . . . . . . .13
5.10 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . . . . . . .13
ARTICLE VI - INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. . . . . . . . . . . . . .14
6.2 INDEMNIFICATION OF OTHERS. . . . . . . . . . . . . . . . . . . . . .14
6.3 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ARTICLE VII - RECORDS AND REPORTS. . . . . . . . . . . . . . . . . . . . . . .15
7.1 MAINTENANCE AND INSPECTION OF RECORDS. . . . . . . . . . . . . . . .15
7.2 INSPECTION BY DIRECTORS. . . . . . . . . . . . . . . . . . . . . . .15
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS . . . . . . . . . . .16
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE VIII - GENERAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . .16
8.1 STOCK CERTIFICATES; PARTLY PAID SHARES . . . . . . . . . . . . . . .16
8.2 LOST CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . . . . .16
8.3 CONSTRUCTION; DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .17
8.4 DIVIDENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.5 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.6 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.7 TRANSFER OF STOCK. . . . . . . . . . . . . . . . . . . . . . . . . .17
8.8 STOCK TRANSFER AGREEMENTS. . . . . . . . . . . . . . . . . . . . . .18
8.9 REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . .18
ARTICLE IX - AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
ARTICLE X - DISSOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . .18
ARTICLE XI - CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES. . . . . . . . . . . . .19
11.2 DUTIES OF CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . . . .19
-iii-
<PAGE>
BYLAWS
OF
SPECTRUM HOLOBYTE, INC.
ARTICLE I
CORPORATE OFFICERS
1.1 REGISTERED OFFICE
The registered office of the corporation in the State of Delaware shall be
in the City of Wilmington, Country of New Castle, State of Delaware. The name
of the registered agent of the corporation at such location is Corporation Trust
Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETING OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at the principal executive offices
of the corporation, or at any other place, within or outside the State of
Delaware, designated by the board of directors. In the absence of any such
designation, stockholders' meetings shall be held at the principal executive
offices of the corporation.
2.2 ANNUAL MEETING
An annual meeting of stockholders shall be held for the election of
directors at such date, time and place, either within or without the State of
Delaware, as may be designated by resolution of the board of directors from time
to time. Any other proper business may be transacted at the annual meeting.
<PAGE>
2.3 SPECIAL MEETINGS
A special meeting of the stockholders may be called at any time by the
board of directors, by the chairman of the board, or by the president. No other
person or entity may call a special meeting of the stockholders under any
circumstances.
If a special meeting is called, the request shall be in writing, specifying
the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the secretary of the corporation.
No business may be transacted at such special meeting otherwise than specified
in such notice. The secretary shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5, that a meeting will be held at the time requested by the person or
persons who called the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of the request. If the notice is not given
within twenty (20) days after the receipt of the request, the Board of
Directors, chairman of the board, president, as applicable, requesting the
meeting may give notice.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings of stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.6 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the corporation not less than ninety (90) days prior to the
meeting; provided, however, that in the event that less than one-hundred (100)
days notice or prior public disclosure of the date of the meeting is given or
made to stockholders, notice by the stockholder to be timely must be so received
not later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. To be in proper form, a stockholder's notice to the secretary shall set
forth:
(i) the name and address of the stockholder who intends to make the
nominations or propose the business and, as the case may be, the name and
address of the person or persons to be nominated or the nature of the
business to be proposed;
-2-
<PAGE>
(ii) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or introduce the
business specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to be
proposed by the board of directors; or
(v) if applicable, the consent of each nominee to serve as director
of the corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant or of the transfer agent of the
corporation that the notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then either (i) the chairman of the meeting or (ii) the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
When a quorum is present or represented at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provisions of the statutes
-3-
<PAGE>
or of the certificate of incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of the
question.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.12 and Section 2.14 of
these bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as may otherwise be provided in the certificate of incorporation,
each stockholder be entitled to one vote for each share of capital stock held by
such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
The stockholders of the corporation may not take action by written consent
without a meeting but must take any such actions at a duly called annual or
special meeting.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.
In order that the corporation may determine the stockholders entitled to
notice of, or to vote at, any meeting of stockholders or any adjournment thereof
or entitled to express consent or dissent to
-4-
<PAGE>
corporate action in writing without a meeting (if otherwise permitted by
these bylaws and the corporation's certificate of incorporation), or entitled
to receive payment of any dividend or other distribution or allotment of any
rights or entitled to receive any rights in respect of any conversion or
exchange of stock or for the purpose of any other lawful action, the board of
may fix, in advance, a record date, which shall be not more than sixty (60)
nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any other action.
If the board of directors does not so fix a record date, the fixing of such
record date shall be governed by the provisions of Section 213 of the General
Corporation Law of Delaware.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall approve to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or entitled
to express consent or dissent to corporate action in writing without a meeting
(if otherwise permitted by these bylaws and the corporation's certificate of
incorporation) may authorize another person, or persons to act for him by a
written proxy, signed by the stockholder and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date, unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
-5-
<PAGE>
2.15 CONDUCT OF BUSINESS
Meetings of stockholders shall be presided over by the chairman of the
board, if any, or in his absence by the president, or in his absence by a vice
president, or, in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such matters as the regulation of the manner of voting and conduct of business.
ARTICLE III
DIRECTORS
3.1 POWERS.
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
The number of directors that shall constitute the whole board shall be
determined by resolution of the Board of Directors or by the stockholders at the
annual meeting of the stockholders.
3.3 ELECTION QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Each director shall hold office until his successor is elected and
qualified or until his earlier resignation or removal. Directors need not be
stockholders unless so required by the Certificate of Incorporation or these
bylaws. Election of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the corporation.
Any vacancy occurring in the board of directors may be filled by a majority of
the remaining members of the board of directors, although such majority is less
than a quorum, or by a plurality of the votes cast at a meeting of stockholders,
and each director so elected shall hold office until the expiration of the term
of office of the director whom he has replaced.
-6-
<PAGE>
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or
by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the
directors elected by such class or classes or series thereof then in
office, or by a sole remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or of a stockholder, or other
fiduciary entrusted with like responsibility for the person or estate of a
stockholder may apply to the Court of Chancery for a decree summarily ordering
an election as provided in Section 211 of the General Corporation Law of
Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election she be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or those
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a
-7-
<PAGE>
quorum shall be present. In the event of the failure of the stockholders to fix
the time or place of such meeting of the newly elected board of directors, or in
the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place, within or without the State of Delaware, as shall
from time to time be determined by the board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors may be held at such time and at
such place, within or without the State of Delaware, whenever called by the
chairman of the board, the president, the secretary or a majority of the
directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone or facsimile to each director or sent by first-class
mail or telegram, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the corporation. If the notice is
mailed, it shall be deposited in the United States mail at least four (4) days
before the time of the holding of the meeting. If the notice is delivered
personally or by telephone, facsimile or by telegram, it shall be delivered
personally or by telephone, facsimile or to the telegraph company at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. The
notice need not specify the place of the meeting, if the meeting is to be held
at the principal executive office of the corporation.
3.9 QUORUM
At all meetings of the board of directors, a majority of the number of
authorized directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of any regular or special meeting
of the directors, or
-8-
<PAGE>
members of a committee of directors, need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 CONDUCT OF BUSINESS
Meetings of the board of directors shall be presided over by the of the
board, if any, or in his absence by the president, or in their absence by a
chairman chosen at the meeting. The secretary shall act as secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting. The chairman of any meeting shall determine
the order of business and the procedures at the meeting.
3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.14 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors. The directors may be paid their expenses, if any, of attendance
at each meeting of the board of directors and may be paid a fixed sum for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.15 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
-9-
<PAGE>
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets,
(iv) recommend to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or (v) amend the bylaws of the corporation; and,
unless the board resolution establishing the committee, the bylaws or the
certificate of incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of
stock, or to adopt a certificate of ownership and merger pursuant to Section 253
of the General Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment),
Section 3.12
-10-
<PAGE>
(conduct of business) and Section 3.13 (action without a meeting), with such
changes in the context of those bylaws as are necessary to substitute the
committee and its members for the board of directors and its members; provided,
however, that the time of regular meetings of committees may also be called by
resolution of the board of directors and that notice of special meetings of
committees shall also be given to all alternate members, who shall have the
right to attend all meetings of the committee. The board of directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, one or more vice
presidents, secretary and a treasurer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, one or more
assistant vice presidents, assistant secretary and any such other officers as
may be appointed in accordance with the provisions of Section 5.2 of these
bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
Except as otherwise provided in this Section 5.2, the officers of the
corporation shall be chosen by the board of directors, subject to the rights, if
any, of an officer under any contract of employment. The board of directors may
appoint, or empower the president to appoint (whether or not such officer is
described in this Article V), such officers and agents of the business as the
corporation may require, each of whom shall hold office for such period, have
such authority, and perform duties as we provided in these bylaws or as the
board of directors may from time to time determine. Any vacancy occurring in
any office of the corporation shall be filled by the board of directors or may
be filled by the president (if the president appointed such officer).
5.3 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract or
employment, any officer may be removed, either with or without cause, by an vote
of the majority of the board of directors at any regular or special meeting of
the board or, except in the case of an officer chosen by the board of directors,
by any officer upon whom such power of removal may be conferred by the board of
directors or, in the case of an officer appointed by the president, by the
president.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make
-11-
<PAGE>
it effective. Any resignation is without prejudice to the rights, if any, of
the corporation under any contract to which the officer is a party.
5.4 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and, shall have the powers and duties prescribed in
Section 5.5 of these bylaws.
5.5 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president, unless otherwise determined by the board of directors, shall be the
chief executive officer of the corporation and shall, subject to the control of
the board of directors, have general supervision, direction, and control of the
business and the officers of the corporation. He shall preside at all meetings
of the stockholders and, in the absence or nonexistence of a chairman of the
board, at all meetings of the board of directors. He shall have the general
powers and duties of management usually vested in the office of president of a
corporation and shall have such other powers and duties as may be prescribed by
the board of directors or these bylaws.
5.6 VICE PRESIDENTS
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.7 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their
-12-
<PAGE>
addresses, the number and classes of shares held by each, the number and date of
certificates evidencing such shares, and the number and date of cancellation of
every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted in
safe custody and shall have other powers and perform such other duties as may be
prescribed by the board of directors or by these bylaws.
5.8 TREASURER
The treasurer shall keep and maintain, or cause to be kept and maintained,
and correct books and records of accounts of the properties and business
transactions of the corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, retained earnings and shares.
The books of account shall at all reasonable times be open to inspection by any
director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositories as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his directors,
whenever they request it, an account of all of his transactions as treasurer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
these bylaws.
5.9 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.10 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
-13-
<PAGE>
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extend and in the manner permitted by
the General Corporation Law of Delaware, as these laws may be amended and
supplemented from time to time, indemnify each of its directors and officers
against expenses (including attorneys' fees), judgments, fines, settlements, and
other amounts actually and reasonably incurred in connection with any
proceeding, or threatened proceeding, arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Section 6.1,
a "director" or "officer" of the corporation includes any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, including, without
limitation, any direct or indirect subsidiary of the corporation, or (iii) who
was a director or officer of a corporation which was a predecessor corporation
of the corporation or of another enterprise at the request of such predecessor
corporation; provided, however, that the corporation shall indemnify any such
agent in connection with a proceeding initiated by such agent only if such
proceeding was authorized by the Board of Directors of the corporation. The
indemnification provided in this Article VI shall not be deemed exclusive of any
other rights to which those indemnified may be entitled under any bylaw,
agreement or vote of stockholders or disinterested directors or otherwise, both
as to action in their official capacities and as to action in another capacity
while holding such office.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (in addition to directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation
includes any person (i) who is or was an employee or agent of the corporation,
(ii) who is or was serving at the request of the corporation as an employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, including, without limitation, any direct or indirect subsidiary of
the corporation, or (iii) who was an employee or agent of a corporation which
was a predecessor corporation of the corporation or of another enterprise at the
request of such predecessor corporation; provided, however, that the corporation
shall indemnify any such agent in connection with a proceeding initiated by such
agent only if such proceeding was authorized by the Board of Directors of the
corporation. The indemnification provided in this Article VI shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any bylaw, agreement or vote of stockholders or disinterested directors or
otherwise.
-14-
<PAGE>
6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof have the right during
the usual hours for business to inspect for any proper purpose the corporation's
stock ledger, a list of its stockholders, and its other books and records and to
make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholders. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its holders, and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to any and all books and records, the stock
ledger, and the stock list and to make copies or extracts therefrom. The Court
may, in its discretion, prescribe any limitations or conditions with references
to the inspection, or award such other and further relief as the Court may deem
just and proper.
-15-
<PAGE>
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and, upon request,
every holder of uncertificated shares, shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman the board of
directors, or the president or vice-president, and by the treasurer, or the
secretary or an assistant secretary of such corporation representing the number
of shares registered in certificated form. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate has ceased to be such officer, transfer agent or registrar before
such certificate is issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent or registrar at the date of
issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same but only upon the basis
of the percentage of the consideration actually paid thereon.
8.2 LOST CERTIFICATES
Except as provided in this Section 8.2, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any
-16-
<PAGE>
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged lose, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.3 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.4 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve.
8.5 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.6 SEAL
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.7 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
-17-
<PAGE>
8.8 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.9 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books u the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws pursuant to the voting
procedures for stockholder actions otherwise set forth in these bylaws as
amended from time to time.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in
-18-
<PAGE>
accordance with Section 103 of the General Corporation Law of Delaware. Upon
such certificate's becoming effective in accordance with Section 103 of the
General Corporation Law of Delaware, the corporation shall be dissolved.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification
of their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for
action by the board of directors cannot be obtained and the stockholders
are unable to terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its
assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
-19-
<PAGE>
CERTIFICATE OF SECRETARY OF
SPECTRUM HOLOBYTE, INC.
The undersigned, Gregory S. Kennedy, Esq., hereby certifies that he is the
duly elected and acting Secretary of Spectrum HoloByte, Inc., a Delaware
corporation (the "Corporation"), and that the Bylaws attached hereto constitute
the Bylaws of said Corporation as duly adopted by resolution of the Board of
Directors at a duly and validly called regular meeting of the Board of Directors
on the 30th day of October, 1996.
IN WITNESS WHEREOF, the undersigned has hereunto subscribed his name this
12th day of November, 1996.
--------------------------------------------
Gregory S. Kennedy, Esq., Secretary
<PAGE>
EXHIBIT 11.1
SPECTRUM HOLOBYTE, INC.
STATEMENT RE: COMPUTATION OF NET INCOME (LOSS) PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss) before extraordinary item $ 1,831 $(11,591) $(2,352) $(20,989)
Cumulative dividends on Series A preferred stock (70) (70) (140) (140)
------- -------- ------- --------
Net income (loss) for the purposes of calculating the
earnings per share before extraordinary item 1,761 (11,661) (2,492) (21,129)
Extraordinary item, net of tax effect 879 - 3,547 -
------- -------- ------- --------
Net income (loss) for the purposes of calculating the
earnings per share $ 2,640 $(11,661) $ 1,055 $(21,129)
------- -------- ------- --------
------- -------- ------- --------
Shares used in per share computations 28,214 23,666 26,674 23,037
------- -------- ------- --------
------- -------- ------- --------
Net income (loss) per share:
Net income (loss) before extraordinary item $ 0.06 $ (0.49) $ (0.09) $ (0.92)
Extraordinary item, net of tax effect 0.03 - 0.13 -
------- -------- ------- --------
Net income (loss) $ 0.09 $ (0.49) $ 0.04 $ (0.92)
------- -------- ------- --------
------- -------- ------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS
FOUND ON PAGES 3 AND 4 OF THE COMPANY'S 10-Q FOR THE YEAR-TO-DATE, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 39,925
<SECURITIES> 0
<RECEIVABLES> 7,091
<ALLOWANCES> 8,403
<INVENTORY> 3,796
<CURRENT-ASSETS> 55,469
<PP&E> 8,375
<DEPRECIATION> 10,965
<TOTAL-ASSETS> 71,760
<CURRENT-LIABILITIES> 17,374
<BONDS> 34,418
5,881
11,594
<COMMON> 130,214
<OTHER-SE> (127,721)
<TOTAL-LIABILITY-AND-EQUITY> 71,760
<SALES> 38,183
<TOTAL-REVENUES> 40,485
<CGS> 15,085
<TOTAL-COSTS> 15,085
<OTHER-EXPENSES> 11,903
<LOSS-PROVISION> 8,267
<INTEREST-EXPENSE> 635
<INCOME-PRETAX> (2,352)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,547
<CHANGES> 0
<NET-INCOME> 1,195
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
