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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1997, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-19463
SPECTRUM HOLOBYTE, INC.
(Exact name of registrant as specified in its charter)
State of Incorporation: DELAWARE I.R.S. Employer Identification No.: 52-1728656
2490 MARINER SQUARE LOOP, SUITE 100, ALAMEDA, CA 94501
(Address of principal executive offices)
Registrant's telephone number: (510) 522-3584
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of June 18, 1997, was approximately $116,075,324 (based on the
June 18, 1997 closing price for shares of the Registrant's Common Stock as
reported by the Nasdaq National Market). Shares of Common Stock held by each
officer, director and holder of 5% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
On June 18, 1997, approximately 28,327,557 shares of the Registrant's
Common Stock, par value $.001, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on September 18, 1997, are incorporated by reference
into Part III of this Report on Form 10-K to the extent stated herein.
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TABLE OF CONTENTS
PAGE
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PART I.........................................................................3
ITEM 1. BUSINESS........................................................3
ITEM 2. FACILITIES AND PROPERTY........................................12
ITEM 3. LEGAL PROCEEDINGS..............................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............12
PART II.......................................................................13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................13
ITEM 6. SELECTED FINANCIAL DATA........................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................16
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA...........................................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................44
PART III......................................................................45
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.......................45
ITEM 11. EXECUTIVE COMPENSATION.........................................45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................................45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................45
PART IV.......................................................................45
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM S-K ...................................................45
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PART I
ITEM 1. BUSINESS
Spectrum HoloByte, Inc. ("Spectrum HoloByte" or the "Company") is a
developer, producer and publisher of entertainment software for personal
computers and certain console platforms. The Company creates, acquires or
licenses properties with mass market appeal and develops branded products
based on these properties. A range of advanced technologies are incorporated
into these products, such as multiplayer networking, simulation, real-time
response and 3-D texture-mapped graphics to enhance each product's
distinctive characteristics. The Company also distributes entertainment
software and related products published by third-parties.
Spectrum HoloByte primarily develops products in the categories of
Simulation, Strategy, and 3-D Action. Management believes these three
categories leverage the Company's product development core competencies. The
Company's most popular products to date include the FALCON series, GRAND PRIX
II, MAGIC: THE GATHERING, MASTER OF ORION-TM-II, SID MEIER'S CIVILIZATION II,
the STAR TREK-TM- series, TOP GUN-TM-: FIRE AT WILL!-TM- and the X-COM series.
During fiscal 1996 and early fiscal 1997, the Company undertook a
strategic restructuring with the goal of better integrating the operations of
Spectrum HoloByte and MicroProse, streamlining product development efforts,
and reducing operating costs. Certain domestic operations were consolidated
in California, including marketing, operations, customer support, finance and
product planning. The Company largely discontinued its Japanese operations,
and entered into an exclusive 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. See Item 7 - "Strategic Restructuring".
PRODUCTS
The Company's simulation products feature advanced 3D graphics, digital
sound effects and sophisticated artificial intelligence ("AI") algorithms
designed to create compelling, realistic experiences for players in a variety of
perilous circumstances or historical contexts. The Company's strategy products
allow players to assume the role of specified characters or god-like beings to
experience or control the creation of new civilizations, discover or colonize
new worlds or battle powerful alien forces to save the world. The Company also
leverages its established areas of expertise such as 3D graphic environments,
digital sound and strong AI to develop fast-paced, action-oriented products.
As a result of consumer research, the Company discontinued publishing
products under the Spectrum HoloByte and SimTex brands in fiscal 1997, and is
currently publishing all of its products under the MicroProse brand name. The
individual branded identities created or licensed by the Company and the related
products which are either currently being published or are under development by
the Company include, but are not necessarily limited to, the following:
STAR TREK: THE NEXT GENERATION-Registered Trademark- BRAND
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The Company has the rights to release a series of games based on the STAR
TREK: THE NEXT GENERATION television series, one game based on the STAR TREK
GENERATIONS-TM- movie, and one game based on STAR TREK: FIRST CONTACT-TM-,
the latest feature film from Paramount Pictures. Products currently offered
or under development include:
- - STAR TREK: THE NEXT GENERATION-Registered Trademark- "A FINAL UNITY"-TM-:
This game combines traditional adventure, simulation, and role playing
elements as players embark on missions for the Federation and find
themselves caught up in an unfolding mystery which they and the crew of the
Starship Enterprise must solve.
- - STAR TREK GENERATIONS: This 3D action game follows and expands upon the plot
of the feature film of the same name. The game features the two captains of
the U.S.S. Enterprise joining forces to battle the evil Soran, in first
person point of view, along with exciting space combat.
- - STAR TREK: KLINGON HONOR GUARD-TM- (Under Development): A 3D action shooter
game where the player is a member of an elite Navy Seal-like Klingon combat
unit.
- - STAR TREK: BIRTH OF THE FEDERATION-TM- (Under Development): A strategy game
in which players build a space-faring civilization as one of the five STAR
TREK races: Federation, Klingon, Cardassian, Ferengi, or Romulan.
- - STAR TREK: FIRST CONTACT (Under Development): A 3D action game based on
fighting the Borg in real time first person.
WORLD CIRCUIT RACING-TM- BRAND
This series of products lets the player take the wheel in simulations of
real world car races. Products include:
- - GRAND PRIX II: This sequel to the GRAND PRIX/WORLD CIRCUIT RACING game is a
challenging Formula 1 racing simulation where the player experiences the
excitement of international Grand Prix racing on real tracks against real
drivers.
- - GRAND PRIX MANAGER-TM- II: This game moves the player from behind the wheel
to behind the desk as a team owner on the Formula 1 circuit. The player
controls all aspects of team management including hiring and firing staff
and drivers, negotiating contracts and funding R&D.
CIVILIZATION BRAND
This series of award winning imaginative strategy games is educational,
dynamic and highly entertaining. Strong AI and historical data combined with
ease of use make these games appealing and accessible to players of all levels.
Products currently offered or under development include:
- - SID MEIER'S CIVILIZATION II: This strategy game has won Game of the Year
awards from Time Magazine, PC Gamer and Computer Retail Week. New features
include additional technologies, new "Wonders of the World" video clips and
more sophisticated diplomacy.
- - SID MEIER'S CIVILIZATION-Registered Trademark- II SCENARIOS: This add-on
pack has 20 new scenarios including the American Civil War, Alien Invasion
and After the Apocalypse.
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- - ULTIMATE CIV II-TM- (Under development): Capitalizing on the success of SID
MEIER'S CIVILIZATION II is the ULTIMATE CIV II construction set. This
product allows players to create terrains, units, wonders, and worlds by
offering a powerful new set of editing tools for gamers to reconstruct
history.
MAGIC: THE GATHERING BRAND
The MAGIC: THE GATHERING product line is based on the popular trading card
game of the same name by Wizards of the Coast. Products currently offered or
under development include:
- - MAGIC: THE GATHERING: This game offers the player the ability to play the
card game against the computer, as well as play Shandalar, a strategy card
game where players collect and trade cards to build custom decks and duel
other wizards represented by the sophisticated AI.
- - MAGIC: THE GATHERING-Registered Trademark- PC EXPANSIONS (Under
Development): Players have a chance to play with more cards to build a
library of magic spells with increased powers to duel other wizards. The
first of two expansions will feature multi-player networking.
FALCON BRAND
In the award-winning FALCON series, a player pilots a jet fighter in
realistic combat campaigns. The original FALCON was introduced in 1984 and the
FALCON series now includes upgraded versions with advanced 3D graphics and the
availability of compatible add-on products with new missions and different
planes. Products include:
- - FALCON-Registered Trademark- 4.0 (Under Development): This game will
simulate a real-time war in which the player takes the role of a single
pilot in an F-16 jet fighter. The Campaign Manager feature will create all
of the tension, chaos and adventure that exists in modern air combat. The
game will also feature multi-player capability, advanced 3D terrain
graphics, highly developed avionics and strong AI.
MICROPROSE MILITARY SIMULATION BRAND
The MicroProse line of military simulation titles include award-winning,
popular games such AS F-15 STRIKE EAGLE-Registered Trademark-, M1 TANK
PLATOON-Registered Trademark-, GUNSHIP-Registered Trademark- and FLEET
DEFENDER-Registered Trademark-. Products currently offered or under development
include:
- - GUNSHIP: An AH-64A Apache gunship simulation including full texture mapped
terrain, ground troop support and competing helicopters and tanks. The
player can choose a "quick fire" mode or a full campaign mode for a more
in-depth experience.
- - EUROPEAN AIR WAR-TM- (Under Development): This flight simulation depicts
the air battles over Europe during World War II. The player can fly over
a dozen of the greatest fighter aircraft of the era for the Allied or
German forces. The title will have multiplayer capabilities to further
enhance the experience.
- - M1 TANK PLATOON-Registered Trademark- II (Under Development): An M1 Abrams
simulation featuring an accurate and realistic simulation of the US Main
Battle Tank in a modern day combat environment.
X-COM BRAND
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In this award-winning series, players battle for survival against alien races in
suspenseful science fiction tales that take them to all corners of the galaxy.
Products currently offered or under development include:
- - X-COM: UFO DEFENSE-TM-: This adventure pits the player against aliens
terrorizing the Earth. Players must command groups of scientists,
engineers and soldiers as well as develop a strategy to ensure human
survival.
- - X-COM: TERROR FROM THE DEEP-TM-: This sequel to UFO DEFENSE brings alien
terror into a totally new dimension as creatures begin to stir deep in our
oceans and X-COM's space foes attack from below.
- - X-COM: APOCALYPSE-TM- (Under Development): This product will be a
continuation of the X-COM saga where aliens have infiltrated human society
by taking on human form; the player must battle the aliens in human
disguise.
- - X-COM: INTERCEPTOR-TM- (Under Development): This action-packed product will
allow players to fight the aliens in outer space by piloting spacecraft,
exploring alien worlds, and thwarting another alien threat to humanity.
MASTER OF ..... BRAND
This popular line of science fiction titles adds a new dimension to
strategic adventure games. Players trade, negotiate and steal technology as
they battle to expand their empires. Products currently offered or under
development include:
- - MASTER OF MAGIC-TM-: A strategy game in which players choose from a varied
selection of "wizards" possessing specialized powers and battle with other
wizards for ultimate domination of mythical worlds.
- - MASTER OF ORION II: This product is a sequel to MASTER OF ORION-TM-. New
gameplay features include a larger, more diverse "space universe", the
addition of cinematics and multi-player capability over a LAN and Total
Entertainment Network ("TEN").
- - MASTER OF MAGIC-TM- II (Under Development): This sequel to the highly
acclaimed MASTER OF MAGIC will include several new features including three
new goals, new spells and multiple planes of existence.
TOP GUN BRAND
The Company has developed products for both the PC CD-ROM and Sony
PlayStation-TM- based on TOP GUN, the popular feature film from Paramount
Pictures. In these games, the player assumes the role of "Maverick" and
engages in combat scenarios, experiencing sights and sounds of the feature
film. The Company plans to develop follow-up products under this brand in
the future. Products include:
- - TOP GUN: FIRE AT WILL!: A fast action dog-fighting adventure story in which
the player graduates from the Top Gun Flight Academy and pilots an F-14
fighter jet on over 40 possible missions. Live action video is used to
effectively tell the story as seen through the player's eyes.
BATTLETECH-Registered Trademark- BRAND
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The Company is developing two products in the popular BATTLETECH line. With
over 13 million words in print, the BATTLETECH UNIVERSE delivers extensive
storyline depth and integrity. The intense action of 31st Century armored combat
is this brand's calling card. Products include:
- - MECHWARRIOR-Registered Trademark- III (Under Development): This sequel to
MECHWARRIOR-Registered Trademark- II is being developed by FASA
Interactive, the creators of the BATTLETECH UNIVERSE. Players will be able
to choose their own missions and objectives, driving the plot at their own
speed. The 'MECH-Registered Trademark- LAB allows the players to build a
custom killing machine to their own unique specifications.
- - BATTLETECH-Registered Trademark-: MECHCOMMANDER-TM- (Under Development):
This game will put the player in command of up to 12 MechWarriors as they
battle enemy 'Mech, Elementals, and armored vehicles. Players can create
their own 'Mech, develop their own strategy, and choose the missions they
want to play. In this game, combat action, real-time communications, and
realistic battlefield dynamics combine to give the player the true
experience of command.
OTHER BRANDS
- - STARSHIP TROOPERS-TM- (Under Development): A fast-paced action title that
blends story elements from the upcoming major motion picture release and
the classic Robert Heinlein science fiction novel.
- - GUARDIANS-TM-: AGENTS OF JUSTICE-TM- (Under Development): A superheroic
game that combines strategy and animated adventure into a challenge where
the player commands a team of super-powered crime fighters against the
forces of evil. Encased in 3D graphics, GUARDIANS: AGENTS OF JUSTICE is a
turn-based game that can be played with up to six players over a network.
- - WORMS-TM- 2 (Under Development): As follow up to the european hits
WORMS-TM- and WORMS-TM- UNLIMITED, WORMS 2 is a turn-based arcade strategy
game where up to eight players participate in a match. WORMS 2 uses
over 8,000 frames of animation to create a cartoon-style environment
where humor and strategy join to make an irresistible game. Players
choose from an assortment of devastating weapons or create their own
with the weapons editor to eliminate all of the opposing worms.
There can be no assurance that products listed as "Under Development" will be
released in a timely manner or at all. See Item 7 - "Dependence on New Product
Introductions; Product Delays" and "Item 7 - "Changes in Technology and Product
Platforms."
PRODUCT DEVELOPMENT AND ACQUISITION
The Company uses both internal and external resources to develop products.
The Company supplements its internal development efforts with third-party
subcontractors for the development of certain features or the programming of
portions of internally developed products. The Company has also acquired
products through publishing arrangements and the acquisition of other software
companies.
The Company must continually anticipate and adapt its products to emerging
platforms and evolving consumer preferences. Failure to develop products for new
platforms and incorporate new technologies may render the Company's products
obsolete. In addition, there can be no assurance that the platforms for which
the Company develops products will achieve market acceptance. See Item 7 -
"Changes in Technology and Product Platforms," Item 7 - "Dependence on New
Product Introductions; Product Delays" and Item 7 - "Risk of Software Errors or
Failures."
INTERNAL PRODUCT DEVELOPMENT. The Company's internal product development
function is performed at five separate development studios, located in
California, Maryland, Texas, North Carolina and the United
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Kingdom. Development Studios are organized to incorporate both internal and
external research and development and quality assurance functions. The Studios
work with marketing brand managers who define product positioning and product
and platform mix. The internal development process includes game development and
design, prototyping, programming, art, computer graphic design, animation, sound
engineering, technical writing, editorial review and quality assurance.
Typically, 12 to 24 months or longer are required to complete a new title with a
new engine and 6 to 14 months or longer are required to develop existing titles
for different platforms or to develop a derivative product using a previously
developed engine. Internally developed products are based on characters, brands
and themes that are either owned by the Company or licensed from third parties.
The Company develops games that may be played interactively over on-line
services and the Internet.
The Company's proprietary software development library of tools and content
includes animation, three-dimension, texture-mapped graphic algorithms and
images, networking capability, artificial intelligence and simulation
technology. To supplement its internal research and development efforts, the
Company also buys, licenses, or contracts to have developed third-party
development tools and content. The Company maintains a worldwide database of its
libraries, tools and other software assets. This database is electronically
accessible by each Development Studio and exclusive third-party developers and
publishers via a secured network. The Company believes that the use of this
library streamlines the development process, allowing members of the development
team to focus their efforts on the play and simulation aspects of the product.
EXTERNAL PRODUCT DEVELOPMENT. In addition to its internal development
teams, the Company also contracts with independent software developers. The
Company's strategy in contracting with third-party developers is to attract
the broadest base of available talent for creating new products. It is the
intent of the Company to attract and maintain exclusive relationships with
third-party developers. The Company engages in consulting or development
agreements with its independent software developers, and manages the
development process by establishing program schedules and milestones. In
addition, the Company may provide its third-party developers with access to
its extensive library of tools and content as well as program specifications,
such as audio/visual displays, artwork, musical work, sound recordings, rules
of play, networking and other components for the developer's use in creating
the product. In general, the Company has less control over the scheduling and
the quality of work of independent contractors than that of the Company's own
employees. The Company's success in its external development efforts will
depend in part on its continued ability to maintain relationships with
skilled independent software developers, to obtain and renew product
development agreements with such developers and to attract new product
development relationships. As is customary in the industry, the Company
compensates outside developers with nonrefundable royalty advances that are
paid as milestones are reached. See Item 7 - "Use of Independent Software
Developers."
LICENSING. The Company from time to time licenses intellectual properties
such as trademarks, brands, characters and entertainment properties to
complement both internal and external development projects. Typically these
licenses are obtained for certain identified platforms over a specific length of
time in a specific territory. As is customary in the industry, this type of
license typically involves a royalty, a portion of which is paid in advance,
normally with a minimum guaranteed payment over the term of the license.
PUBLISHING. The Company extends its product offerings through
relationships with outside developers with whom it enters into publishing
agreements. Products subject to publishing agreements are typically either
partially or fully completed at the time the publishing agreement is formalized.
The Company attempts to select products for publishing that will enhance its
existing product line. The publishing agreements provide the Company with the
rights to publish, market and sell a product for certain identified platforms,
over a specific length of time in a specific territory, in exchange for
royalties based on sales of the product.
AFFILIATED LABEL. Through its affiliated label program, the Company has
historically sold and distributed products that are marketed by and under the
name of the affiliated label publisher, with an indication on the package that
the product is distributed by Spectrum HoloByte. The Company has purchased the
software products directly from the affiliated label publisher and resold the
products with a distribution
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mark up. Affiliate label products typically have lower margins than internally
developed products. In fiscal 1996, the company terminated most of it U.S.
affiliated label agreements, including the agreement with its largest affiliated
label publisher (Domark).
ACQUISITIONS AND JOINT VENTURES. Spectrum HoloByte has acquired properties
through the acquisition of businesses and strategic joint ventures. The Company
acquired SimTex Software Corporation, a software developer, in June 1995. The
Company has also made an equity investment in Virtual World Entertainment Group,
Inc., through which the rights to its BATTLETECH properties were obtained.
MARKETING, SALES AND DISTRIBUTION
MARKETING. Although the Company concentrates its marketing efforts in
North America and Europe, its products are sold around the world in places such
as Australia, Japan, Korea, Taiwan, Mexico, Singapore, the Middle East and South
America under export sales and license arrangements. The Company's marketing
activities include print advertising in consumer and trade periodicals,
television advertising, retail-supported print advertising, targeted direct mail
programs, retail in-store promotions, trade shows, user support programs and
product publicity programs. The Company participates in retailers' advertising
programs based upon the sales of products to a participating retailer and the
commitment of the retailer to advertise certain products. The Company maintains
an extensive database of customers who have purchased products directly from the
Company or who have returned product warranty cards, and also rents lists of
potential customers with profiles similar to its current customers. The Company
targets these lists with mailings of full-color product catalogs and other
promotional materials.
SALES AND DISTRIBUTION. There are two primary Sales and Distribution
groups: Americas and International. Each group has sales and distribution
responsibilities for its territories. The Company uses a combination of a direct
sales force and independent sales representatives in North America, where its
products are sold primarily by large computer and software specialty retail
chains, as well as by mass merchants and warehouse club stores.
The Company's International sales group is primarily located in Chipping
Sodbury, England, and in Gutersloh, Germany. Revenues are consummated through
distribution to software specialty retail stores, independent retailers,
large department stores and distributors. In June 1996, the Company acquired
certain net assets of Leisuresoft GmbH ("Leisuresoft"), a German distributor
of computer software and related products, for 1.2 million German Deutsche
Marks (approximately $0.8 million). Sales in other European countries and
Asia are made primarily through distributor, export and licensing
arrangements with local distributors.
In April 1996, the Company's wholly-owned Japanese subsidiary ("Spectrum
Japan") granted an exclusive license to Mitsui & Co., Ltd. ("Mitsui") for the
localization, manufacture, marketing and distribution of certain Company titles
in Japan. In connection with the license agreement, Spectrum Japan subcontracted
all of its employees to Mitsui and largely discontinued its operations. The
Company received an up-front license fee, and earns royalties based upon
revenues generated by Mitsui during the three-year term of the agreement.
The Company also enters into other license agreements which provide for: 1)
the manufacturing and distribution of the Company's products into specified
geographic markets, 2) the development and distribution of the Company's titles
on additional platforms, or 3) the bundled distribution of the Company's
products along with other software products. These agreements generally involve
a prepaid royalty, guaranteed minimum purchase or a minimum royalty to be paid
to the Company over a specified term.
The Company provides technical support in the United States, Europe and
Japan for its products through its customer support department. The Company also
uses its support personnel to sell upgraded and
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replacement software, inform customers about new products and conduct market
surveys. In the United States, the Company also responds to customer inquiries
through its telephone and electronic bulletin board services and conducts direct
mail services.
The Company's prices are standardized and are communicated on the Company's
order form. The Company annually publishes a trade policy that details the terms
and conditions under which customers may purchase from the Company. Payment
terms of 30 to 60 days are typically granted to accounts that are in good credit
standing. The Company does not require collateral to secure payment. Retailers
and distributors compete in a volatile industry and are subject to the risk of
business failure. Although the Company maintains a reserve for uncollectible
receivables that it believes to be adequate, a payment default of a significant
customer could materially and adversely affect its operating results and
financial condition.
In addition, the Company is exposed to the risk of product returns from
distributors and retailers. Stock balancing and other product returns are
restricted, based upon previous levels of purchases during specified time
periods and the customer's credit standing with the Company. Although the
Company provides reserves for returns that it believes are adequate, and
although the Company's agreements with certain of its customers place certain
limits on product returns, the Company could be forced to accept substantial
product returns or provide markdowns on products in the distribution channel to
maintain its relationships with retailers and its access to such channels. These
charges are likely to increase in periods in which the Company does not have
significant new product introductions. Any significant amount of product returns
or markdowns could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company provides a 90-day limited warranty that its products will be
free from manufacturing defects. There can be no assurance that the Company will
not experience material warranty claims in the future, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
In fiscal 1997, sales to the ten largest customers represented
approximately 40% of the Company's revenue. The Company's principal direct
retail accounts include Best Buy, Electronics Boutique, Babbages, and Egghead
Software stores. The Company's distributors include Pinnacle, Navarre, GT Value
Products Divison, Beamscope, Media Market, and Sony Electronic Publishing, Ltd.
For the year ended March 31, 1997, one customer (Pinnacle) accounted for 12% of
the Company's consolidated net revenue. As the installed base of multimedia PCs
increases, the distribution channels for entertainment software are expected to
increasingly depend on mass merchandisers to reach the broader consumer market.
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, CUC
International, Lucas Arts, Interplay, GT Interactive, Acclaim Entertainment, and
Broderbund Software, along with Virgin Interactive in Europe. The success of one
or more of these companies or the entry and participation of new companies,
including diversified entertainment companies, may adversely affect the
Company's future performance. 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 addition to such competitors' most popular
titles.
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Many of the Company's competitors are developing on-line interactive
computer games 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 continue 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 promotional 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, online services and the Internet to
reach the broader market. 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.
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 proprietary rights to its products. 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 only standard "shrink wrap" license agreements or no
license agreements at all 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 third
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 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 third 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 third 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
11
<PAGE>
claim has 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 of third parties. There
can be no assurance that such licenses will be available on reasonable terms or
at all.
MANUFACTURING
The Company's PC CD-ROM and console products consist of disks, user manuals
and packaging. All of the Company's CD-ROM printing is performed by unaffiliated
third parties. Printing of the user manual and packaging, manufacturing of
related materials and assembly of completed packages are performed to the
Company's specifications by outside sources. To date, the Company has not
experienced any material difficulties or delays in the manufacture and assembly
of its PC CD-ROM and console products.
EMPLOYEES
As of May 31, 1997, the Company employed 390 persons, excluding temporary
employees and consultants, including 212 in product development, 88 in sales,
marketing and customer support, 23 in manufacturing and operations, and 67 in
administration and finance, systems support, legal and human resources. None of
the Company's employees are represented by a labor union or bound by a
collective bargaining agreement, and the Company has experienced no work
stoppages. The Company believes that its employee relations are good.
Competition in recruiting of personnel in the software industry is intense.
The Company believes that its future success will depend in part on its
continued ability to recruit and retain highly skilled management, marketing,
creative and technical personnel.
ITEM 2. FACILITIES AND PROPERTY
The Company leases approximately 31,900 square feet of office space in
Alameda County, California which is utilized for the Company's headquarters,
product development, sales and administration under a lease that expires in
2002. Also in Alameda County, California, is an additional 14,000 square feet of
manufacturing and warehouse space that the Company leases under a lease that
expires in 1997. The Company's MicroProse subsidiary, located in Hunt Valley,
Maryland, leases approximately 35,800 square feet of office space under a lease
that expires in August 1998. The Company's Chapel Hill, North Carolina
development facility consists of approximately 3,200 square feet under a lease
that expires in March 1998. The Company's SimTex subsidiary leases
approximately 11,500 square feet of office space in Austin, Texas, pursuant to a
lease that expires in 2002. The Company's United Kingdom subsidiary leases
approximately 28,700 square feet of office space in Chipping Sodbury, England
under a lease that expires in September 2003. The Company leases approximately
2,400 square feet of office space in Gutersloh, Germany, under a lease that
expires in March 1999. The Company owns 31,800 square feet of office and
warehouse space and 47,900 square feet of land in Bonen, Germany. The Company
believes that its existing facilities are adequate to meet its current needs and
that, if required, suitable additional or substitute space is likely to be
available on reasonably acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
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 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 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 agreed to differentiate their respective titles in
the marketplace. Acclaim agreed to market its product for Windows 95 under
the name MAGIC: THE GATHERING-BATTLEMAGE and to position the title 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 agreed
to release its title under the MICROPROSE brand name and position it as an
interactive version of the MAGIC: THE GATHERING card game. The parties also
agreed to coordinate the release dates for their respective products.
On January 23, 1997, the Company filed suit against Acclaim for violation of
certain terms of the settlement agreement. On February 18, 1997, Acclaim
filed an answer and counterclaims for breach of contract and abuse of
process. On April 30, 1997, Acclaim's counterclaim for abuse of process was
dismissed without leave to amend by the United States District Court for the
Northern District of California. The Company believes that Acclaim's
remaining counterclaim is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the Nasdaq National Market under
the symbol SBYT. The following table sets forth, for the periods indicated, the
high and low closing sale prices for the common stock as reported by the Nasdaq
National Market.
HIGH LOW
------------------------
FISCAL 1997
Fourth Quarter $ 9.50 $ 6.62
Third Quarter 7.75 4.87
Second Quarter 7.25 3.87
First Quarter 8.62 5.37
FISCAL 1996
Fourth Quarter $ 9.63 $ 4.75
Third Quarter 13.13 6.00
Second Quarter 21.38 12.38
First Quarter 17.13 13.13
On June 18, 1997, the closing sale price of the common stock as reported on
Nasdaq was $4.56 per share. As of that date, there were approximately 235
holders of record (not including beneficial holders of stock held in street
name) and approximately 28,327,557 shares of common stock were outstanding.
There has historically been significant volatility in the share price for the
Company's common stock, and the market price of the Company's common stock may
be highly volatile in the future.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C>
Net revenue $100,253 $ 59,694 $ 84,350 $ 40,887 $ 13,632
Cost of revenue 39,317 30,554 43,434 24,519 6,881
------------------------------------------------------------------
Gross profit 60,936 29,140 40,916 16,368 6,301
Operating expenses:
Sales and marketing 18,741 21,642 26,063 11,703 3,254
General and administrative 14,670 14,409 12,985 7,276 4,058
Research and development 23,145 27,490 19,995 10,712 3,268
In-process research and development - - - 46,319 -
Restructuring charges - 1,123 - - -
------------------------------------------------------------------
Total operating expenses 56,556 64,664 59,043 76,010 10,580
------------------------------------------------------------------
Operating income (loss) 4,380 (35,524) (18,127) (59,642) (3,779)
Other income (expense), net 511 (4,317) 76 (85) (254)
------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 4,891 (39,841) (18,051) (59,727) (4,033)
Income tax provision (benefit) 450 - - (1,267) 26
------------------------------------------------------------------
Income (loss) before extraordinary item 4,441 (39,841) (18,051) (58,460) (4,059)
Extraordinary item, net of tax effect 3,547 - - - -
------------------------------------------------------------------
Net income (loss) $ 7,988 $ (39,841) $ (18,051) $ (58,460) $(4,059)
------------------------------------------------------------------
Per share data:
Income (loss) before extraordinary item $ 0.15 $ (1.70) $ (0.91) $ (5.54) $ (1.14)
Extraordinary item, net of tax effect 0.13 - - - -
------------------------------------------------------------------
Net income (loss) $ 0.28 $ (1.70) $ (0.91) $ (5.54) $ (1.14)
------------------------------------------------------------------
------------------------------------------------------------------
Number of shares used in computation of
per share data 27,776 23,636 20,111 10.612 3,678
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
(CONTINUED)
14
<PAGE>
CONSOLIDATED BALANCE SHEET DATA
IN THOUSANDS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $44,333 $ 35,685 $ 6,203 $ (7,008) $ 8,930
Total assets 80,305 65,922 59,350 33,191 14,529
Notes and borrowings under
lines of credit and long-term debt 32,739 50,504 11,474 4,701 -
Notes payable and amounts
due to related parties - - - 1,739 -
Capital lease obligations 409 815 1,816 3,096 1,087
Redeemable preferred stock 5,881 5,881 5,881 5,881 5,881
Total stockholders' equity (deficit) 21,598 (8,915) 8,562 (6,025) 4,170
</TABLE>
QUARTERLY FINANCIAL DATA
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1997 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 23,880 $ 35,888 $ 27,413 $ 13,072
Gross profit 13,536 22,000 17,227 8,173
Operating income (loss) 1,473 6,447 2,229 (5,769)
Net income (loss) 1,135 5,658 2,710 (1,515)
Net income (loss) per share 0.04 0.20 0.09 (0.07)
<CAPTION>
1996 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 15,531 $ 13,389 $ 13,845 $ 16,929
Gross profit 8,889 6,357 4,668 9,226
Operating loss (7,228) (8,226) (11,042) (9,028)
Net loss (8,905) (9,947) (11,591) (9,398)
Net loss per share (0.37) (0.41) (0.49) (0.42)
<CAPTION>
1995 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $ 13,150 $ 25,503 $ 26,550 $ 19,147
Gross profit 3,268 14,674 14,188 8,786
Operating income (loss) (14,195) (848) 363 (3,447)
Net income (loss) (13,970) (628) 98 (3,551)
Net income (loss) per share (0.68) (0.03) 0.00 (0.18)
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Spectrum HoloByte, Inc. ("the Company") derives revenue primarily from
publishing and distributing entertainment software. This software is generally
published by the Company for the following platforms:
- Compact-Disc Read-Only Memory ("CD-ROM") for the personal computer
("PC").
- Videogame consoles, which include 32-bit "next-generation" systems.
In addition, the Company generates revenue from the licensing of its
products to third-party publishers and the distribution of third-party software
and related products.
The Company generates a substantial portion of its revenue from the
introduction of new products. In order to maintain or grow its current revenue
levels, the Company believes it will be necessary to develop or obtain rights to
new products that achieve market acceptance, are developed for the appropriate
platforms, 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, the Company
maintains internally developed release schedules, but 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 net income
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 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) 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
growth rate of the consumer software market, 6) the seasonality of sales, 7)
development and promotional expenses relating to the introduction of new
products or new versions of existing products, 8) product returns and markdowns,
9) changes in pricing policies by the Company and its competitors, 10) the
accuracy of retailers' forecasts of consumer demand, 11) the timing of orders
from major customers, 12) order cancellations, 13) delays of shipment, and 14)
write-offs of advance royalty payments. Because a majority of the unit sales for
most 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 one or more major product introductions occur 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 relatively fixed
and do not vary directly with revenue. Consequently, if net revenue is below
expectations, the Company's operating results are likely to be materially
adversely affected. In addition, the market price of the Company's shares could
be adversely impacted in future periods.
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.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company may, from time to time, make oral
forward-looking statements. The factors discussed herein and in the Company's
Securities and Exchange Commission filings, including but not limited to Item 7
of the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
1997, are important factors that could cause actual results to differ materially
from those projected in any such forward-looking statements.
16
<PAGE>
OPERATING RESULTS
Consolidated net revenue for fiscal 1997, 1996 and 1995 consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT % CHANGE % OF CONSOLIDATED NET REVENUE
--------------------------------- ----------------- -----------------------------
1997 1996 1995 1997 1996 1997 1996 1995
--------------------------------- ----------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
By Territory:
North America $ 36,522 $ 30,351 $ 60,249 20.3% -49.6% 36.4% 50.8% 71.4%
International 63,731 29,343 24,101 117.2% 21.8% 63.6% 49.2% 28.6%
--------------------------------- ----------------- -----------------------------
Consolidated $ 100,253 $ 59,694 $ 84,350 67.9% -29.2% 100.0% 100.0% 100.0%
--------------------------------- ----------------- -----------------------------
--------------------------------- ----------------- -----------------------------
By Platform/Type:
CD-ROM $ 74,606 $ 40,338 $ 28,331 85.0% 42.4% 74.4% 67.6% 33.6%
Videogame 10,226 2,125 11,517 381.2% -81.5% 10.2% 3.6% 13.7%
Licensing/OEM 4,539 4,212 7,403 7.8% -43.1% 4.5% 7.0% 8.8%
Distribution 9,664 8,703 3,327 11.0% 161.6% 9.7% 14.6% 3.9%
Floppy disk and other 1,218 4,316 33,772 71.8% -87.2% 1.2% 7.2% 40.0%
--------------------------------- ----------------- -----------------------------
Consolidated $ 100,253 $ 59,694 $ 84,350 67.9% -29.2% 100.0% 100.0% 100.0%
--------------------------------- ----------------- -----------------------------
--------------------------------- ----------------- -----------------------------
</TABLE>
The increase in consolidated fiscal 1997 net revenue was largely due to the
strong success of two PC CD-ROM titles, GRAND PRIX II, a racing simulation game
released in fiscal 1997, and SID MEIER'S CIVILIZATION-Registered Trademark- II,
a strategy game released late in fiscal 1996. Net revenue related to these two
products comprised approximately 51% of fiscal 1997 consolidated net revenue.
The increases in the amount and proportion of international revenue were mostly
due to European shipments of GRAND PRIX II. Approximately 88% of the GRAND PRIX
II revenue for fiscal 1997 was generated internationally. Other significant
fiscal 1997 PC CD-ROM releases included MASTER OF ORION-TM- II and MAGIC: THE
GATHERING-Registered Trademark-.
The increase in videogame revenue in fiscal 1997 was due to the release of
three videogame console titles as compared to one title in fiscal 1996. The
three fiscal 1997 titles (all for the Sony PlayStation-TM-) were TOP GUN-TM-:
FIRE AT WILL!-TM-, GUNSHIP 2000-Registered Trademark-, and X-COM: TERROR FROM
THE DEEP-TM-.
In total, the Company released eight new products in fiscal 1997 as
compared to 23 new products released in fiscal 1996. The average unit volume per
new title during the year of release increased significantly, however, from
approximately 62,000 units in fiscal 1996 to 246,000 units in fiscal 1997. The
decrease in the number of new products released and the increase in the number
of units shipped per title were due to the Company's focus on a fewer number of
titles with greater market appeal. There can be no assurances that the Company's
continued focus on this strategy will be successful.
Net revenue in fiscal 1997 was also favorably impacted by a percentage
decrease in the provisions recorded for returns and markdowns. These decreases
were due to a focused effort to better manage inventories of the Company's
products in the distribution channel and better product sell-through.
Distribution revenue includes shipments of computer software and related
products published or manufactured by third parties and distributed by the
Company, including shipments under affiliated label agreements to distribute
third-party entertainment software titles. In late fiscal 1996, the Company
terminated most of its U.S. affiliated label agreements. In fiscal 1997, the
Company acquired a majority interest in Leisuresoft GmbH, a German distribution
company. Substantially all of the distribution revenue generated in fiscal 1997
relates to shipments by Leisuresoft. The increase in distribution revenue in
fiscal 1996 was due to an increase in the number of new affiliated label titles
released, which increased from three in fiscal 1995 to eight in fiscal 1996.
In fiscal 1996, the proportion of net revenue generated from floppy disk
and other products decreased and the proportion of net revenue generated from
CD-ROM products increased due to the transition of the personal computer
entertainment market towards fully integrated, multimedia products on the CD-ROM
platform. This trend continued in fiscal 1997, and the Company is generating
virtually no floppy disk revenue. Videogame console revenue declined in fiscal
1996 as the Company ceased developing or selling products for 8-bit and 16-bit
console platforms. The fiscal 1996 decline in licensing/OEM net revenue was due
to the Company's election to distribute a number of older titles at reduced
prices through retail channels rather than through OEM channels.
17
<PAGE>
Gross profit consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT % CHANGE % OF CONSOLIDATED NET REVENUE
-------------------------------- ---------------- -----------------------------
1997 1996 1995 1997 1996 1997 1996 1995
-------------------------------- ---------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROSS PROFIT $ 60,936 $ 29,140 $ 40,916 109.1% -28.8% 60.8% 48.8% 48.5%
-------------------------------- -----------------------------
-------------------------------- -----------------------------
</TABLE>
Gross profit as a percentage of consolidated net revenue increased in
fiscal 1997 due to reductions in both the direct per unit costs of products
shipped and the amounts provided for in-house and channel inventory reserves.
The direct per unit costs decreased due to a reduction in the cost of both
materials and outside order fulfillment services. The amounts provided for
inventory reserves declined in fiscal 1997 as significant charges related to
floppy disk products were made in fiscal 1996. Partially offsetting these
increases in fiscal 1997 gross margins were declines caused by increased
revenue from lower-margin distribution and next-generation products.
The Company believes that gross profit could be adversely impacted in
future periods by an increased proportion of distribution revenue, increased
license royalties and by competitive pricing pressures.
Operating expenses were as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT % CHANGE % OF CONSOLIDATED NET REVENUE
--------------------------------- ----------------- -----------------------------
1997 1996 1995 1997 1996 1997 1996 1995
--------------------------------- ----------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and marketing $ 18,741 $ 21,642 $ 26,063 -13.4% -17.0% 18.7% 36.3% 30.9%
General and administrative 14,670 14,409 12,985 1.8% 11.0% 14.6% 24.1% 15.4%
Research and development 23,145 27,490 19,995 -15.8% 37.5% 23.1% 46.1% 23.7%
Restructuring charges - 1,123 - 100.0% - - 1.9% -
--------------------------------- -----------------------------
Total operating costs $ 56,556 $ 64,664 $ 59,043 -12.5% 9.5% 56.4% 108.3% 70.0%
--------------------------------- -----------------------------
--------------------------------- -----------------------------
</TABLE>
The decrease in sales and marketing expense in fiscal 1997 was largely due
to a decline in variable marketing costs due to fewer new product releases and
due to high fiscal 1996 promotional costs related to the release of the PC
versions of STAR TREK: THE NEXT GENERATION-TM- "A FINAL UNITY-TM-" and TOP GUN:
FIRE AT WILL!. In addition, certain redundant domestic sales and marketing
functions were eliminated or consolidated during fiscal 1997. The decrease in
fiscal 1996 costs as compared to fiscal 1995 was primarily due to a $2.6 million
reduction in distributor and retailer cooperative marketing costs and the
reorganization of certain domestic marketing and sales functions ($1.1 million).
In addition, variable marketing costs decreased due to the release of fewer new
products in fiscal 1996.
The increase in general and administrative costs in fiscal 1997 included
increased charges for bad debt expense ($1.0 million) and incentive compensation
($1.2 million). Before these charges, general and administrative costs decreased
by approximately $2 million due to a domestic consolidation in certain
administrative functions and reductions in professional fees, severance costs
and recruiting costs. The increase in general and administrative costs from
fiscal 1995 to fiscal 1996 was due primarily to a $1.6 million increase in the
provision for bad debts related to specific customer accounts and to costs
related to turnover in executive and administrative staff. Partially offsetting
these increases was a $1.4 million reduction due to the consolidation of certain
domestic administrative functions.
18
<PAGE>
Research and development costs decreased in fiscal 1997 due partially to
the elimination of redundant product test functions ($0.9 million) and certain
product development headcount in the Company's Maryland and UK studios ($1.8
million). In addition, write-offs of development advances decreased by $1.4
million as the Company canceled a larger number of products in fiscal 1996 as a
part of the strategic refocusing of its product lines. The increase in research
and development costs in fiscal 1996 was due to: 1) higher costs associated with
the development of full multimedia products for CD-ROM and next-generation
hardware platforms, 2) research and development expenses of $1.7 million
associated with the SimTex development studio, acquired in the first quarter of
fiscal 1996 through a pooling of interests (research and development
expenditures in prior fiscal periods were not restated for the SimTex
acquisition due to the immateriality of the related SimTex expenditures), and 3)
the write-off of $1.9 million of development advances associated with
discontinued projects as part of the Company's continued efforts to refocus its
product lines.
The fiscal 1996 restructuring charges of approximately $1.1 million
included severance costs related to the Company's downsizing efforts, reserves
on inventories related to terminated affiliated label publishing agreements, and
charges to write down the net assets of the Company's wholly-owned Japanese
subsidiary to their estimated realizable values.
The following table sets forth other income and expense, provision for
income taxes and extraordinary items (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT % CHANGE % OF CONSOLIDATED NET REVENUE
--------------------------------- ---------------- ------------------------------
1997 1996 1995 1997 1996 1997 1996 1995
--------------------------------- ---------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other income (expense), net $ 511 $(4,317) $ 76 - - 0.5% -7.2% 0.1%
--------------------------------- ------------------------------
--------------------------------- ------------------------------
Provision for income taxes $ 450 $ - $ - - - 0.4% - -
--------------------------------- ------------------------------
--------------------------------- ------------------------------
Extraordinary item,
net of tax effect $ 3,547 $ - $ - - - 3.5% - -
--------------------------------- ------------------------------
--------------------------------- ------------------------------
</TABLE>
Other income increased in fiscal 1997 due primarily to the following
factors: 1) a $1.9 million gain was recorded in fiscal 1997 on the sale of the
Company's investment in FASA Interactive Technologies, Inc., 2) equity losses
and writedowns of $1.6 million were recorded in fiscal 1996 from the Company's
investment in OT Sports, Inc.; this investment was sold in early fiscal 1997 for
its net book value of $250,000, 3) interest expense was down in fiscal 1997 due
to a reduction in borrowings under Notes and revolving lines of credit, and 4)
net foreign currency transaction gains increased. The net expense recorded in
fiscal 1996 was due mostly to interest expense ($1.5 million) recorded on the
October 1995 debt financing and the losses related to OT Sports.
The fiscal 1997 provision for income taxes was made to provide for earnings
of the Company's foreign subsidiaries. The extraordinary item recorded in fiscal
1997 reflects the gains realized upon the repurchase or the conversion to equity
of a portion of the Company's Subordinated Notes at a discount from face value.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to over $44 million and cash increased $11.7
million to approximately $47 million during fiscal 1997. The main sources of
funds in fiscal 1997 were from operations and from a private placement of common
stock.
The Company generated positive cash flows from operations during fiscal
1997 due to the net income generated, strong collections of receivables and
non-cash increases in certain accrued liabilities. Accounts receivable decreased
as days sales outstanding declined from 57 days at March 1996 to 30 days at
March 1997.
In fiscal 1997, the Company generated $5.2 million from financing
activities and used $3.1 million in investing activities. Private placements of
1,818,367 shares of common stock generated approximately $9.6 million in
proceeds, net of associated issuance costs including placement fees. The Company
repurchased $4 million of Notes (see below) for approximately $2.9 million of
cash, and exchanged another $14.9 million of Notes for 1,918,860 shares of
Series B and B-1 preferred stock. The investing activities included investments
in property and equipment and in Leisuresoft.
On October 2, 1995, the Company completed a private offering of $50 million
face value Convertible Subordinated Notes (the "Notes") pursuant to Rule 144A of
the Securities Act of 1933. Net proceeds to the Company approximated $48.0
million, after discounts, commissions and other issuance costs. The Notes, which
bear interest at the rate of 6.5 percent per annum, will mature on September 15,
2002, and are convertible into shares of the Company's common stock at any time
after 60 days following the latest date of original issuance through maturity,
unless previously redeemed or repurchased, at a conversion price of $15.84 per
share (subject to adjustment for certain events). The Notes may be redeemed at
the option of the Company subsequent to September 17, 1998, in whole or in part,
at various declining redemption prices from 103.7% to 100%, together with
accrued interest thereon. The Notes may also be redeemed at the option of the
holder at 100% upon the occurrence of certain events. As of March 31, 1997,
Notes with a face value of approximately $31.1 million were outstanding.
The substantial debt incurred by the Company will have several important
consequences for the Company's future operations, including the following: 1) a
substantial portion of the Company's cash flow from operations will be dedicated
to the payment of interest on, and principal of, its indebtedness; 2) 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 3) 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's ability
to meet its debt service obligations and to reduce its total indebtedness will
be dependent upon its 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 flows from operations in the future to service its debt, it may be required
to refinance all or a portion of such debt, including the Notes, 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.
The Company has an overdraft/line of credit facility in the UK that is
based upon qualifying receivables and certain other bank requirements for
amounts up to a maximum credit limit of 1,850,000 pounds sterling (approximately
$2.9 million at March 31, 1997). This facility bears interest at the rate of
2.75% over the bank's base rate, and expires September 10, 1997. There can be no
assurance that the Company will be able to renegotiate this facility upon its
expiration or that any additional borrowing facilities will be made available to
the Company on acceptable terms.
Management believes that existing cash and cash equivalents, together with
cash generated from operations, will be sufficient to meet the Company's
liquidity and capital needs for the next 12 months.
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RISK FACTORS
The foregoing Management's Discussion and Analysis of Financial Condition
and Results of Operations and Item 1 of this Annual Report on Form 10-K contain
forward-looking statements which involve risks and uncertainties. The Company
may, from time to time, make oral forward-looking statements. The factors
discussed above and in the Company's Securities and Exchange Commission filings,
as well as the following, are important factors that could cause actual results
to differ materially from those projected in any such forward-looking
statements.
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE
COMPANY AND ITS BUSINESS PROSPECTS.
OPERATING RESULTS. Although the Company reported net income for the year ended
March 31, 1997 of $8.0 million or $0.28 per share, the Company had net losses of
approximately $39.8 million and $18.1 million in fiscal years 1996 and 1995,
respectively. There can be no assurance that the Company's business strategies
and tactics will be successful and that the Company will be able to generate
profitability in future quarterly or annual periods. In particular, the
Company announced that it expects to report a loss in the first quarter of
fiscal 1998 of between $0.22 and $0.28 per share.
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) 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 growth rate of the consumer software
market, 6) the seasonality of sales, 7) development and promotional expenses
relating to the introduction of new products or new versions of existing
products, 8) product returns and markdowns, 9) changes in pricing policies by
the Company and its competitors, 10) the accuracy of retailers' forecasts of
consumer demand, 11) the timing of orders from major customers, 12) order
cancellations, 13) delays of shipment, and 14) 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.
SIGNIFICANT LEVERAGE. As of March 31, 1997, the Company had outstanding
indebtedness for borrowed funds of approximately $32.7 million and cumulative
manditorily redeemable preferred stock of $5.9 million. 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
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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.
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 and sustain market
acceptance, are developed for the appropriate platforms and are introduced in a
timely manner. 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 materially and 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 1998. 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.
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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, 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, CUC
International, Lucas Arts, Interplay, GT Interactive, Acclaim Entertainment, and
Broderbund Software, along with Virgin Interactive in Europe. The success of one
or more of these companies or the entry and participation of new companies,
including diversified entertainment companies, may adversely affect the
Company's future performance. 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.
Many games of the Company's competitors are developing on-line interactive
computer games 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 continue 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 promotional 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.
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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, online services and the Internet to
reach the broader market. 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 year
ended March 31, 1997, sales to the top ten such customers represented
approximately 40% of the Company's net revenue. Sales are typically made on
credit, with terms that vary depending upon the customer and the nature of the
product. The Company does require collateral to secure 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. 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. 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.
The Company has made certain minority equity investments that it believes
will provide future access to products, technologies or distribution
channels. Management performs ongoing evaluations of the future realization
of these investments, and charges any declines in value that are other than
temporary in nature to other expense in its quarterly Consolidated Statements
of Operations. A write down of one or more of these investments could have a
material adverse impact on the Company's operating results and financial
condition.
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
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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. 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 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
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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. 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. 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 fiscal years 1997, 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. For example, the
Company attempts to minimize its exposure to currency fluctuations by entering
into forward currency contracts, however, there can be no assurance that the
Company will be successful at mitigating 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 royalty advances 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 accrue for
the guarantees, its results of operations may be materially and adversely
affected.
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
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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 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 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. 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.
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.
The Company regained 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 6.5% 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.
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
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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.
28
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND 1996
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 47,110 $ 35,369
Accounts receivable, less allowances of $6,568 and $9,179
at March 31, 1997 and 1996, respectively 7,891 9,718
Inventories 4,042 3,673
Prepaid royalties 2,139 2,126
Other current assets 1,958 2,133
---------- ----------
Total current assets 63,140 53,019
Property, plant and equipment, net 7,802 5,670
Goodwill, net 892 818
Investments 6,050 4,300
Other assets 2,421 2,115
---------- ----------
$ 80,305 $ 65,922
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,508 $ 5,694
Salaries, wages and related accruals 6,337 3,909
Royalties payable 1,840 1,703
Other current liabilities 7,122 6,028
---------- ----------
Total current liabilities 18,807 17,334
Other liabilities 1,280 1,622
Long-term debt 32,739 50,000
---------- ----------
Total liabilities 52,826 68,956
---------- ----------
Commitments and contingencies (Note 11)
Redeemable preferred stock, $0.001 par value, 4,000 shares designated
Series A issued and outstanding, redemption and liquidation amount
of $5,260 and $4,980 at March 31, 1997 and 1996, respectively 5,881 5,881
---------- ----------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 9,000 shares authorized (of which
4,000 shares have been designated Series A), 16 Series B-1 convertible
shares issued and outstanding at March 31, 1997 - -
Common stock, $0.001 par value, 40,000 shares authorized, 28,287 and
24,283 shares issued and outstanding at March 31, 1997 and 1996, respectively 29 24
Additional paid-in capital 142,558 119,923
Accumulated deficit (120,468) (128,456)
Foreign currency translation adjustment (521) (406)
---------- ----------
Total stockholders' equity (deficit) 21,598 (8,915)
---------- ----------
$ 80,305 $ 65,922
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
29
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Net revenue $ 100,253 $ 59,694 $ 84,350
Cost of revenue 39,317 30,554 43,434
----------- ----------- -----------
Gross profit 60,936 29,140 40,916
----------- ----------- -----------
Operating expenses:
Sales and marketing 18,741 21,642 26,063
General and administrative 14,670 14,409 12,985
Research and development 23,145 27,490 19,995
Restructuring charges - 1,123 -
----------- ----------- -----------
Total operating expenses 56,556 64,664 59,043
----------- ----------- -----------
Operating income (loss) 4,380 (35,524) (18,127)
Other income (expense), net 511 (4,317) 76
----------- ----------- -----------
Income (loss) before income taxes
and extraordinary item 4,891 (39,841) (18,051)
Provision for income tax 450 - -
----------- ----------- -----------
Income (loss) before extraordinary item 4,441 (39,841) (18,051)
Extraordinary item, net of tax effect 3,547 - -
----------- ----------- -----------
Net income (loss) $ 7,988 $ (39,841) $ (18,051)
----------- ----------- -----------
----------- ----------- -----------
Per share data:
Income (loss) before extraordinary item $ 0.15 $ (1.70) $ (0.91)
Extraordinary item, net of tax effect 0.13 - -
----------- ----------- -----------
Net income (loss) $ 0.28 $ (1.70) $ (0.91)
----------- ----------- -----------
----------- ----------- -----------
Number of shares used in the computation of
per share data 27,776 23,636 20,111
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
30
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
IN THOUSANDS
<TABLE>
<CAPTION>
SERIES B AND B-1 FOREIGN
PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY
----------------- ---------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at march 31, 1994 - $ - 17,147 $ 17 $ 64,539 $ (70,564) $ (17) $ (6,025)
Issuance of common stock in a public
offering, net of issuance costs - - 2,545 3 20,075 - - 20,078
Issuance of common stock pursuant
To the exercise of warrants - - 2,070 2 10,238 - - 10,240
Issuance of common stock under
Employee stock option and
purchase plans - - 715 1 3,530 - - 3,531
Issuance of common stock in a
private equity placement, net
of issuance costs - - 700 - 8,184 - - 8,184
Acquisition of treasury stock - - (1,834) (2) (9,293) - - (9,295)
Net loss - - - - - (18,051) - (18,051)
Foreign currency
translation adjustment - - - - - - (100) (100)
-----------------------------------------------------------------------------------------
Balance at march 31, 1995 - - 21,343 21 97,273 (88,615) (117) 8,562
Issuance of common stock under
employee stock option and
purchase plans - - 604 1 3,230 - - 3,231
Issuance of common stock in private
placements, net of issuance costs - - 1,498 1 19,420 - - 19,421
Issuance of common stock pursuant to
acquisition of simtex software corp. - - 838 1 - - - 1
Net loss - - - - - (39,841) - (39,841)
Foreign currency translation
adjustment - - - - - (289) (289)
-----------------------------------------------------------------------------------------
Balance at march 31, 1996 - - 24,283 24 119,923 (128,456) (406) (8,915)
Issuance of series B preferred
stock to extinguish debt 750 1 - - 4,844 - - 4,845
Issuance of series B-1 preferred
stock to extinguish debt 1,169 1 - - 7,072 - - 7,073
Issuance of common stock pursuant
to the conversion of series B
and B-1 preferred stock (1,903) (2) 1,903 2 - - - -
Issuance of common stock under
employee stock option and
purchase plans - - 282 1 1,155 - - 1,156
Issuance of common stock in
a private equity placement,
net of issuance costs - - 1,819 2 9,564 - - 9,566
Net income - - - - - 7,988 - 7,988
Foreign currency translation
adjustment - - - - - - (115) (115)
-----------------------------------------------------------------------------------------
Balance at march 31, 1997 16 $ - 28,287 $ 29 $ 142,558 $ (120,468) $ (521) $ 21,598
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 7,988 $ (39,841) $ (18,051)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 3,944 4,102 6,651
Non-cash licensing revenue - (750) -
Minority interest in joint venture losses - 1,074 -
Restructuring charges - 1,123 -
Gain on sale of investment in FASA Interactive Technologies (1,895) - -
Extraordinary gain on extinguishment of long-term debt (3,547) - -
Other (17) - (123)
Changes in assets and liabilities:
Accounts receivable 2,697 8,291 (8,007)
Inventories 925 1,539 219
Prepaid royalties 25 260 (1,384)
Other current assets 337 2,026 (424)
Other assets (1,175) 1,055 (865)
Accounts payable (3,107) (3,988) 545
Salaries, wages and related accruals 2,388 1,031 (104)
Royalties payable 105 79 (1,278)
Other current liabilities 1,479 (742) (490)
Other liabilities (32) (675) (834)
-------------------------------------------------
Net cash provided by (used in) operating activities 10,115 (25,416) (24,145)
-------------------------------------------------
-------------------------------------------------
INVESTING ACTIVITIES (3,102) (5,589) (5,311)
Acquisitions of property, plant and equipment (2,931) (2,334) (4,036)
Proceeds from sale of property, plant and equipment 486 19 -
Acquisition of certain net assets of Leisuresoft GmbH,
net of cash acquired (802) - -
Proceeds from sale of investment in FASA Interactive Technologies 570 - -
Investment in Virtual World Entertainment Group, Inc. (570) - -
Investment in Total Entertainment Network,
net of licensing revenue - (1,750) -
Investment in FASA Interactive Technologies - (200) (1,275)
Investment in OT Sports (105) (1,324) -
Proceeds from sale of OT Sports 205 - -
------------------------------------------------
Net cash used in investing activities (3,102) (5,589) (5,311)
------------------------------------------------
------------------------------------------------
</TABLE>
(continued)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
32
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Extinguishment of long-term debt $ (2,959) $ - $ -
Proceeds from issuance of common stock, net of issuance costs 10,722 22,653 42,047
Acquisition of treasury stock - - (9,295)
Borrowings under notes and lines of credit, net of non-cash note
issuance costs - 48,500 6,761
Payment of note issuance costs - (467) -
Repayments under notes and lines of credit (2,132) (11,238) (122)
Repayments on notes payable and amounts due to related parties - - (1,739)
Principal payments on capital lease obligations (411) (846) (1,291)
------------------------------------------------
Net cash provided by financing activities 5,220 58,602 36,361
------------------------------------------------
Effect of exchange rate changes on cash (492) 49 138
------------------------------------------------
Increase in cash and cash equivalents 11,741 27,646 7,043
Cash and cash equivalents at beginning of year 35,369 7,723 680
------------------------------------------------
Cash and cash equivalents at end of year $ 47,110 $ 35,369 $ 7,723
------------------------------------------------
------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid for interest $ 2,223 $ 2,418 $ 733
Cash paid for income taxes 111 4 2
Non-cash investing and financing activities:
Note issuance costs $ - $ 1,500 $ -
Issuance of common stock pursuant to conversion
of Series B and B-1 preferred stock 11,820 - -
Issuance of Series B and B-1 preferred stock pursuant to
the extinguishment of long-term debt 11,916 - -
Issuance of common stock pursuant to the
acquisition of SimTex Software Corp. - 11,729 -
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES
OF CONSOLIDATION:
Spectrum HoloByte, Inc. (the "Company") develops and publishes
entertainment software for use on CD-ROM personal computer systems and select
game console platforms and distributes third-party software and related
products. The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.
For purposes of presentation, the Company has indicated its 1997, 1996 and
1995 fiscal periods as ended on March 31. The Company reports its financial
results on a 52-53 week fiscal year ending on the Sunday nearest to March 31.
The financial statements presented are therefore representative of the 52-week
periods ended March 30, 1997, March 31, 1996 and April 2, 1995, respectively.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reported
periods. Actual results could differ from those estimates.
RECLASSIFICATIONS:
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. These
reclassifications had no effect on previously reported net losses or
stockholders' equity (deficit).
CASH AND CASH EQUIVALENTS:
Highly liquid investments with original maturities of 90 days or less at
the date of purchase are classified as cash and cash equivalents.
CERTAIN RISKS AND CONCENTRATIONS:
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and trade accounts receivable.
At March 31, 1997, 1996 and 1995, the Company had deposits in excess of
insured amounts of approximately $46,711,000, $34,596,000, and $7,296,000,
respectively.
Sales are typically made on credit, with terms that vary depending upon the
customer and the nature of the product. The Company's receivables are
principally from distributors, software specialty retailers, computer
superstores, mass merchandisers and discount warehouse stores. These customers
compete in a volatile industry and are subject to the risk of business failure.
Accounts receivable are recorded net of allowances for estimated
uncollectible amounts due to potential credit losses, sales returns and in-
channel markdowns. Although the Company believes these allowances are adequate,
a payment default of a significant customer could materially and adversely
affect its operating results and financial condition. At March 31, 1997, 1996
and 1995, accounts receivable from the Company's five largest customers in the
aggregate were $4,148,000, $5,278,000 and $4,837,000, respectively.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The actual losses related to
uncollectible amounts have generally been within management's expectations. For
the year ended March 31, 1997, one customer accounted for 12% of the Company's
consolidated net revenue. In fiscal 1996, two customers accounted for 13% and
10% of the Company's consolidated net revenue. For the year ended March 31,
1995, no customer accounted for greater than 10% of the Company's consolidated
net revenue.
INVENTORIES:
Inventories, generally consisting of software products and related
materials, are stated at the lower of cost (on a first-in, first-out (FIFO)
basis) or market.
Inventories consist of the following at March 31, 1997 and 1996 (in
thousands):
1997 1996
-------------------------
Raw materials $ 413 $ 705
Finished goods 3,629 2,968
-------------------------
$ 4,042 $ 3,673
-------------------------
-------------------------
PREPAID ROYALTIES AND ROYALTIES PAYABLE:
Prepaid royalties consist of advances made to independent software
developers and licensors of intellectual properties. Amortization of prepaid
royalties is based on actual realized sales of the related product and the
contractual royalty rates. Management performs ongoing evaluations of the future
realization of prepaid royalties and charges any amounts deemed unlikely to be
realized to research and development expense.
Royalties payable are accrued based on cash receipts, revenue or units
shipped of software products published by the Company pursuant to contractual
agreements.
Royalty expense, which is included in cost of revenue, was $11,846,000,
$6,075,000 and $8,431,000 for the fiscal years ended March 31, 1997, 1996 and
1995, respectively.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, including equipment acquired under capital
leases, is recorded at cost and depreciated using the straight-line method over
the estimated useful lives of the assets, generally three to five
34
<PAGE>
years for equipment and furniture and 25 years for buildings. Leasehold
improvements are amortized over the estimated useful lives of the assets or the
length of the respective leases, whichever is shorter. Assets and accumulated
depreciation accounts are relieved at disposition with the resulting gains or
losses reflected in earnings. Repairs and maintenance costs are expensed
as incurred.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
During fiscal year 1997, the Company adopted SFAS No. 121 and determined that no
impairment loss needs to be recognized for applicable assets of continuing
operations.
Property, plant and equipment, net, consists of the following at March 31,
1997 and 1996 (in thousands):
1997 1996
--------------------
Equipment $ 12,016 $ 8,651
Equipment under capital leases 2,089 3,904
Land and building 2,193 -
Furniture 1,341 876
Leasehold improvements 1,029 986
--------------------
18,668 14,417
Less accumulated depreciation
and amortization:
Equipment under capital leases (1,559) (3,293)
All other assets (9,307) (5,454)
--------------------
$ 7,802 $ 5,670
--------------------
--------------------
Depreciation and amortization expense related to property, plant and
equipment was $3,376,000, $3,662,000 and $2,607,000 for the fiscal years ended
March 31, 1997, 1996 and 1995, respectively.
REVENUE RECOGNITION:
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 91-1, "Software Revenue
Recognition." Revenue from product sales or licensing agreements is recognized
upon shipment or fulfillment of deliverable obligations provided no significant
vendor obligations or contingencies remain and collection of the resulting
receivable is deemed probable. Provisions are made at the time of shipment for
estimated future product returns and in-channel markdowns.
SOFTWARE DEVELOPMENT COSTS:
SFAS No. 86 provides for the capitalization of certain software development
costs after technological feasibility of the software is attained. Software
development costs subject to potential capitalization were not material in
fiscal 1997, 1996 and 1995, and, as such, there were no additions to capitalized
software development costs in these years. The Company capitalized $5,144,000 of
software development costs in connection with its fiscal 1994 merger with
MicroProse, Inc., and fully amortized these costs in fiscal 1994 and 1995.
Amortization of these costs was $3,744,000 in fiscal 1995.
FOREIGN EXCHANGE:
The functional currency for each principal foreign subsidiary is its local
currency. In accordance with SFAS No. 52, assets and liabilities of foreign
operations are translated into U.S. dollars at the rates of exchange as of the
balance sheet dates. Revenue and expenses are translated into U.S. dollars using
weighted average rates of exchange prevailing during each respective fiscal
year. The effects of translation adjustments are deferred and included as a
component of stockholders' equity (deficit). Gains and losses resulting from
foreign currency transactions are included in results of operations.
The Company enters into foreign exchange forward contracts to hedge certain
foreign currency denominated balances against changes in rates of exchange.
These contracts require the Company to exchange foreign currencies and generally
mature within three months. Gains and losses on contracts that are designated
and effective as hedges of transactions for which a firm commitment has been
attained are deferred and recognized in income in the same period that the
underlying transactions are settled. Gains and losses on any instruments not
meeting the above criteria are recognized as income in the current period.
INCOME TAXES:
The Company accounts for income taxes using the liability method under
which deferred tax assets or liabilities are calculated at the balance sheet
date using current tax laws and rates in effect.
NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares (when dilutive) outstanding during each
period. Net income (loss) has been adjusted for cumulative but undeclared
dividends on Series A preferred stock.
RECENT PRONOUNCEMENTS:
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15
and is effective for financial statements issued for periods ending after
December 15, 1997. The Company will report its earnings per share in accordance
with this standard beginning with the quarter ended December 31, 1997.
35
<PAGE>
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values and estimated fair values of the Company's significant
financial instruments were as follows (in thousands):
1997 1996
--------------------------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
------------------ ------------------
Investments $ 6,050 $ 6,050 $ 4,300 $ 4,300
Long-term debt 32,739 26,181 50,000 37,000
Currency contracts 5,599 5,599 - -
The fair values of cash and cash equivalents, receivables and accounts
payable approximate their carrying value due to their short maturities. The fair
values of long-term debt and foreign currency exchange contracts were based upon
quotes obtained from brokers. For long-term investments which have no quoted
market prices, a reasonable estimate of fair value was made using available
market information and appropriate valuation techniques. The estimates presented
above require considerable judgment and are not necessarily indicative of the
amounts that would be realized in a current market exchange.
3. ACQUISITIONS
SIMTEX SOFTWARE CORPORATION:
On June 12, 1995, the Company completed a merger with SimTex Software
Corporation ("SimTex"), a privately-held software developer, through the
issuance of 837,802 shares of the Company's common stock. SimTex, located in
Austin, Texas, has developed products under two brands, MASTER OF MAGIC-TM- and
MASTER OF ORION-TM-. The combination was accounted for as a pooling of
interests. The historical operating results and assets and liabilities of
SimTex, however, are immaterial to the Company's consolidated financial
statements. As a result, this combination had no impact upon the previously
reported net losses or accumulated deficit of the Company. Earnings per share
information has been restated to reflect the pro forma shares outstanding for
all periods presented.
LEISURESOFT GMBH:
In June 1996, the Company entered into an agreement to acquire certain net
assets of Leisuresoft GmbH, a German distributor of computer software and
related products, for 1.2 million German Deutsche Marks (approximately $0.8
million). The transaction was accounted for as a purchase. Approximately
$407,000 of goodwill was recorded representing the excess of the purchase price
over the identifiable net assets acquired. Goodwill is being amortized on a
straight-line basis over five years.
4. INVESTMENTS
The Company has invested in certain equity securities that are categorized
as held-to-maturity. For investments accounted for under the equity method of
accounting, the Company records its share of the investee's operating results as
a component of other income and expense. For cost-basis investments, management
performs ongoing evaluations of the future realization and charges any declines
in value that are other-than-temporary in nature to other income and expense.
FASA INTERACTIVE TECHNOLOGIES, INC. AND
VIRTUAL WORLD ENTERTAINMENT GROUP, INC.:
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 console platforms. 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.
TOTAL ENTERTAINMENT NETWORK:
In fiscal 1996 and 1997, the Company made a minority equity investment of
$2.6 million in Total Entertainment Network, Inc. This investment was made
pursuant to an investment and licensing arrangement whereby the Company
committed to allow certain of the Company's future titles to be played over the
Total Entertainment Network in exchange for a $750,000 license fee. This license
fee was recognized as revenue in fiscal 1996 in the accompanying consolidated
statement of operations.
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.
5. 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, manufacture, 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. During fiscal 1997, the Company recognized
approximately $800,000 of licensing revenue under this agreement. In connection
36
<PAGE>
with the license agreement, Spectrum Japan subcontracted all of its employees to
Mitsui and largely discontinued its operations. The Company recognized a
restructuring charge of approximately $350,000 in fiscal 1996 to write down the
net assets of Spectrum Japan to their estimated realizable values.
6. INCOME TAXES
The provision for income taxes for the year ended March 31, 1997 consists
entirely of foreign taxes currently payable.
The differences between the federal statutory and effective tax rates for
the years ended March 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
----------------------------
Federal statutory rate
(benefit) 35.0% (34.0)% (34.0)%
State tax rate (benefit),
net of federal effect 5.6 (5.3) (5.3)
Foreign tax rate (benefit) (6.6) 0.2 1.0
Nondeductible items 4.8 0.7 12.1
Benefit of foreign net
operating loss (52.2) (0.5) (1.0)
Loss producing no
current tax benefit 22.6 38.9 27.2
----------------------------
Effective tax rate 9.2% 0.0% 0.0%
----------------------------
----------------------------
The components of deferred income taxes included in the consolidated balance
sheets at March 31, 1997 and 1996 are as follows (in thousands):
1997 1996
---------------------
Deferred income tax
liabilities $ - $ (455)
Deferred income tax assets:
Net operating loss
carryforwards 33,216 34,798
Research and experimentation
tax credits 3,696 3,519
Financial statement reserves
and accruals not recognized
for income tax purposes 4,602 5,125
Capitalized research and
experimentation costs 674 -
Other 1,089 905
---------------------
43,377 44,347
Valuation allowance (43,377) (43,892)
---------------------
Net deferred income tax assets $ - $ -
---------------------
---------------------
Due to the uncertainty surrounding the realization of the favorable tax
attributes in future years, the Company has placed a valuation allowance against
its net deferred tax assets.
At March 31, 1997, the Company had federal, state and foreign net operating
loss carryforwards for income tax purposes of $82,506,000, $52,204,000 and
$845,000, respectively, which expire at various dates from 1997 through 2012.
At March 31, 1997, the Company had federal and state research and
experimentation tax credits for income tax purposes of $3,021,000 and $675,000,
respectively, which expire at various dates from 2003 through 2012.
The Company's ability to use its net operating loss carryforwards and credits
to offset future taxable income is subject to restrictions attributable to
equity transactions that result in changes in ownership as defined by the
Internal Revenue Code.
7. CREDIT FACILITY
The Company has an overdraft/line of credit facility in the UK that is
based upon qualifying receivables and certain other bank requirements for
amounts up to a maximum credit limit of 1,850,000 pounds sterling (approximately
$2.9 million at March 31, 1997). This facility bears interest at the rate of
2.75% over the bank's base rate, expires September 10, 1997 and is
collateralized by substantially all the assets of MicroProse Ltd.
8. OTHER CURRENT LIABILITIES
The components of other current liabilities at March 31, 1997 and 1996
consist of the following (in thousands):
1997 1996
-----------------------
Accrued customer promotion
and deferred revenue $ 1,279 $ 991
Accrued accounts
payable--other 3,000 2,551
Other 2,843 2,486
----------------------
$ 7,122 $ 6,028
----------------------
----------------------
37
<PAGE>
9. LONG-TERM DEBT
On October 2, 1995, the Company completed a private offering of $50.0
million face value Convertible Subordinated Notes (the "Notes") pursuant to Rule
144A of the Securities Act of 1933. The Notes, which bear interest at the rate
of 6.5 percent per annum, will mature on September 15, 2002, and are convertible
into shares of the Company's common stock at any time after 60 days following
the latest date of original issuance at a conversion price of $15.84 per share,
subject to adjustment based upon the occurrence of certain events. The Notes may
be redeemed at the option of the Company subsequent to September 17, 1998, in
whole or in part, at various declining redemption prices together with accrued
interest thereon. The Notes may also be redeemed at the option of the holder at
100% upon the occurrence of certain events. Net proceeds to the Company were
approximately $48.0 million, after associated issuance costs of approximately
$2.0 million which are being amortized over the term of the Notes.
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 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 $0.9 million was realized on the retirement of the long-term debt.
In June 1996, the Company assumed certain debt related to the acquisition
of real property and equipment from Leisuresoft GmbH (Note 3). These loans,
which are denominated in German Deutsche Marks, bear interest at fixed rates of
6.15 percent and 7.55 percent per annum, are payable in monthly installments,
and expire in September 1998 and October 2009, respectively. The loans are
collateralized by the assets acquired and certain other assets of the Company.
The aggregate loan payments for the five years after March 31, 1997 are
$266,000, $237,000, $179,000, $179,000 and $179,000, respectively.
10. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
PREFERRED STOCK:
The Company has authorized 9,000,000 shares of preferred stock, $0.001 par
value, of which 4,000,000 shares are designated Series A redeemable preferred
stock (Series A Stock). At March 31, 1997 and 1996, there were 4,000,000 shares
of Series A Stock outstanding. The Series A Stock is convertible into 196,078
shares of common stock and accrues dividends at an annual rate of 7%. Preferred
stockholders receive one vote for each common share into which their preferred
shares are convertible. The Series A Stock has a liquidation preference of $1.00
per share plus all accumulated but unpaid dividends and is redeemable for $1.00
per share plus all accumulated but unpaid dividends (i) at any time by the
Company, (ii) commencing on September 24, 1997, for up to 50% of the Series A
Stock until September 24, 1998, upon written demand of holders of the majority
of Series A Stock, or (iii) in its entirety commencing on September 24, 1998,
upon written demand of holders of the majority of Series A Stock.
Shares of Series B and Series B-1 preferred stock are convertible into an
equivalent number of common shares. Dividends on the Series B-1 preferred shares
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 March 31, 1997, no
dividends had been declared. Subject to the liquidation preference of the Series
A preferred shares, the Series B-1 convertible preferred shares have a
liquidation preference of $7.57 per share, plus all declared but unpaid
dividends. Prior to March 31, 1997, 750,000 and 1,152,815 shares of Series B and
Series B-1 preferred stock, respectively, were converted into common shares.
COMMON STOCK:
On April 6, 1994, the Company completed a secondary offering of 2,545,000
shares of common stock which generated proceeds of approximately $20.0 million,
net of underwriters' commissions and offering expenses.
Beginning in November 1994 through December 13, 1994, the Company issued
2,070,039 shares of common stock pursuant to the exercise of warrants at prices
ranging from $5.00 to $9.00 per share. This generated proceeds of approximately
$10.2 million, net of associated issuance costs.
On March 7, 1995, the Company completed a private placement of 700,000
shares of common stock pursuant to Regulation S of the Securities Act of 1933.
This generated proceeds of approximately $8.2 million, net of associated
issuance costs.
During fiscal 1996, the Company issued 1,497,414 shares of common stock in
a series of private placements which generated approximately $19.4 million in
proceeds, net of associated issuance costs.
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.
TREASURY STOCK:
In connection with the Company's fiscal 1994 merger with MicroProse, Inc.,
the Company obtained an option to purchase up to 1,833,576 shares of common
stock held by the former Chief Executive Officer of MicroProse, at $5.00 per
share. The option was exercised on December 2, 1994, and the Company accounted
for this transaction as an acquisition of treasury stock.
38
<PAGE>
COMMON STOCK WARRANTS:
In fiscal 1994, the Company issued warrants to related parties to purchase
an aggregate of 125,000 shares of common stock. During fiscal 1995, these
warrants were exercised. In fiscal 1993, the Company issued certain noteholders
of Paragon Software, a former subsidiary of MicroProse, 20,400 seven-year
warrants to purchase common stock at $13.88 per share. The warrants expire on
July 13, 1999 and none of the warrants have been exercised. Effective August 17,
1991, Grotech Investors and Corporate Venture Partners, L.P. received six-year
warrants from MicroProse entitling them to purchase 270,833 shares at $9.00 per
share. These warrants remain outstanding at March 31, 1997.
STOCK OPTION PLANS:
The Company has reserved for the issuance of 5,536,506 shares of common
stock under three plans under which options to purchase common stock may be
granted to employees, directors and consultants.
In March 1993, the Company adopted the 1992 Stock Option Plan (the "1992
Plan"). Options under this plan are immediately exercisable. Any shares issued
upon the exercise of options under the 1992 Plan, however, are
subject to repurchase by the Company at the original exercise price, upon the
optionee's termination of employment prior to vesting in such shares. As of
March 31, 1997, options on 86,746 shares are outstanding under the 1992 Plan. No
additional options may be granted under the 1992 Plan.
The Company maintains the 1994 Stock Option Plan (the "1994 Plan"). Options
granted under the 1994 Plan may be granted either as incentive stock options, or
as non-statutory options, and generally remain exercisable over a maximum of
seven or 10 years from the grant date. Options granted under the 1994 Plan
generally vest ratably over 48 to 60 months beginning six months after the
vesting commencement date.
In fiscal 1997, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). Under the terms of the 1996 Plan, non-statutory options may be granted
which generally vest ratably over 36 to 60 months beginning six months after the
vesting commencement date and which remain exercisable over a maximum of seven
or 10 years from the grant date.
Option activity under these plans during fiscal 1997, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED
AVERAGE
AVAILABLE AGGREGATE EXERCISE PRICE
FOR GRANT NUMBER PER SHARE
---------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1994 388,975 2,365,652 $ 4.55
Increase in options available for grant 1,500,000 - -
Granted (1,736,699) 1,736,699 9.36
Exercised - (659,177) (4.55)
Canceled 504,544 (504,544) (3.80)
Retired (317,922) - -
---------------------------------------------
Balance at March 31, 1995 338,898 2,938,630 7.52
Increase in options available for grant 1,500,000 - -
Granted (1,811,200) 1,811,200 11.53
Exercised - (536,055) (4.90)
Canceled 629,502 (629,502) (8.09)
Retired (111,810) - -
---------------------------------------------
Balance at March 31, 1996 545,390 3,584,273 9.84
Granted (3,137,416) 3,137,416 5.93
Exercised - (173,202) (3.96)
Canceled 3,732,802 (3,732,802) (10.20)
Retired (54,222) - -
---------------------------------------------
Balance at March 31, 1997 1,086,554 2,815,685 $ 5.38
---------------------------------------------
---------------------------------------------
</TABLE>
39
<PAGE>
At March 31, 1997, options to purchase 1,104,492 shares were exercisable at
prices ranging from $0.39 to $13.25 per share. The weighted average fair values
of stock options granted during fiscal 1997 and 1996 were $2.85 and $5.58,
respectively
In August 1995, the Company entered into an employment agreement with the
Company's Chief Executive Officer whereby options to purchase 500,000 shares of
common stock were granted. Under the terms of that agreement, the Company may be
obligated to pay certain compensation to the Chief Executive Officer, contingent
upon his continued employment through March 31, 1999, and the market price of
the Company's common stock as of that date. As of March 31, 1997, the Company
has accrued a liability of $1,448,000 related to this agreement.
In June 1996, the Board of Directors of the Company approved the
cancellation of the majority of outstanding stock options with an exercise price
ranging from $6.50 to $19.13 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.
EMPLOYEE STOCK PURCHASE PLAN:
In fiscal 1995, the Company adopted the Employee Stock Purchase Plan (the
"ESPP") under which employees may purchase shares of the Company's common stock
at 85% of the lower of the fair market value of the common stock on either the
first or last day of a six-month offering period. A total of 108,919, 68,059 and
55,970 shares of the Company's common stock were issued under the ESPP in fiscal
1997, 1996 and 1995, respectively, at prices ranging from $4.25 to $11.16 per
share.
PRO FORMA INFORMATION:
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which established a fair value-based method for stock-based
compensation plans. The Company has elected to continue following the
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees"
with disclosures of pro forma net income and earnings per share under the SFAS
No. 123. This information is required to be determined as if the Company had
accounted for its employee stock option and ESPP share grants subsequent to
March 31, 1995 under the fair value method of
SFAS No. 123.
The following table summarizes information with respect to stock options
outstanding at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF CONTRACTUAL LIFE EXERCISE PRICE NUMBER OF EXERCISE PRICE
RANGE OF EXERCISE PRICES SHARES (YEARS) PER SHARE SHARES PER SHARE
- ----------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
$0.39-$3.78 77,064 6.04 $ 0.48 71,693 $ 0.46
$4.25-$5.00 333,640 8.90 $ 4.63 34,652 $ 4.51
$5.38-$5.38 2,150,144 7.89 $ 5.38 888,079 $ 5.38
$5.56-$6.50 113,350 8.62 $ 5.98 15,212 $ 6.28
$7.00-$13.25 141,487 6.40 $ 9.38 94,856 $ 9.71
- ----------------------------------------------------------------------------------- ----------------------------------
$0.39-$13.25 2,815,685 7.92 $ 5.38 1,104,492 $ 5.41
- ----------------------------------------------------------------------------------- ----------------------------------
- ----------------------------------------------------------------------------------- ----------------------------------
</TABLE>
40
<PAGE>
The fair value of options and ESPP shares granted in fiscal 1997 and 1996
has been estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
EMPLOYEE
STOCK OPTIONS ESPP SHARES
--------------- ---------------
1997 1996 1997 1996
--------------- ---------------
Expected volatility rate 60% 60% 60% 60%
Expected life
(in years) 4.0 4.0 0.5 0.5
Expected forfeiture rate 50% 50% - -
Average risk-free
interest rates 6.4% 5.9% 5.4% 5.4%
For purposes of pro forma disclosures, the estimated fair value of the
options and stock participation shares is amortized to expense over the related
vesting period. The pro forma effects on net income (loss) and per share data
are as follows (in thousands, expected per share data):
1997 1996
--------------------------
Pro forma net income (loss) $ 6,005 $ (40,811)
Pro forma net income (loss)
per share $ 0.21 $ (1.74)
The Black-Scholes option valuation model requires the input of highly
subjective assumptions including the expected stock price volatility. As such,
changes in the subjective assumptions can materially affect the fair value
estimates and related impact on pro forma net income (loss) and per share data.
The above pro forma effects on income (loss) may not be representative of
the effects on net income (loss) for future years as option grants typically
vest over several years and additional options are generally granted each year.
STOCKHOLDERS' RIGHTS PLAN:
In February 1996, the Board of Directors adopted a Stockholders' Rights
Plan and declared a dividend of one preferred stock Purchase Right (a "Right")
for each outstanding share of common stock. Such Rights only become exercisable,
or transferable apart from the common stock, 10 business days after a person or
affiliated group (an "Acquiring Person") acquires beneficial ownership of, or
commences a tender or exchange offer for, 15% or more of the Company's common
stock (with an exception up to 20% for existing stockholders who have filed
Reports on Form 13D or 13G to acquire a "Triggering Position").
Each Right may then be exercised to acquire one share of the Company's
preferred stock at an exercise price of $35.00, subject to adjustment.
Thereafter, upon the occurrence of certain events, the Rights entitle holders
other than the Acquiring Person to acquire common stock having a value of twice
the exercise price of the Rights.
Alternatively, upon the occurrence of certain other events, the Rights
entitle holders other than the Acquiring Person to acquire common stock of the
Acquiring Person having a value of twice the exercise price of the Rights.
The Rights may be redeemed by the Company at a redemption price of $.001
per Right at any time until the tenth business day following public announcement
that a Triggering Position has been acquired or 10 business days after
commencement of a tender or exchange offer. The Rights will expire on February
26, 2006.
11. COMMITMENTS AND CONTINGENCIES
LEASES:
The Company leases office and warehouse space under non-cancelable
operating leases expiring at various dates through the year 2004. Certain of the
Company's leases provide for free rent periods and scheduled rent increases.
Under such leases, rent expense is recognized on a straight-line basis over the
term of the related leases. The difference between rent expense on a
straight-line basis and cash payments for rent is accounted for as deferred
rent. Rent expense was $1,987,000, $1,919,000 and $1,899,000 for fiscal years
1997, 1996 and 1995, respectively.
At March 31, 1997, future minimum lease payments were as follows (in
thousands):
YEAR ENDING MARCH 31,
1998 $ 1,608
1999 1,047
2000 821
2001 703
2002 701
Thereafter 730
---------
$ 5,610
---------
---------
41
<PAGE>
UNITED SOFTWARE GMBH:
In March 1993, MicroProse acquired United Software, GmbH ("United"). In
September 1993, MicroProse became aware of several non-disclosed liabilities of
United, including a claim by a German bank of approximately $2,000,000.
MicroProse also became aware of the deterioration of the financial condition of
the seller and the seller's parent (which had guaranteed the seller's
obligations under the United purchase agreement) and by October 29, 1993,
determined that the seller and its parent were incapable of complying with the
guarantees and warranties included in the purchase agreement. Therefore,
primarily as a result of the seller's nondisclosure of the bank debt described
above and the misrepresentations as to the financial condition of the seller and
its parent, MicroProse assessed its options and decided to rescind the agreement
as provided under German law. On October 29, 1993, MicroProse notified the
seller and its parent of the rescission of the March 1993 agreement. This action
has resulted in a charge of approximately $4,900,000 which was recorded in the
quarter ended September 30, 1993 (prior to MicroProse's merger with the
Company). This charge consisted primarily of the original purchase price, asset
write-offs of approximately $1.8 million and rescission-related liabilities of
approximately $1.6 million. United and its parent company are now in
receivership. The Company does not expect to incur material additional charges
in connection with the rescission of the United purchase agreement or related
matters.
12. DEFINED CONTRIBUTION PLANS
The Company has defined contribution plans (the "Plans") in the United
States pursuant to Section 401(a) of the Internal Revenue Code (the "Code") and
in Europe. All eligible full and part-time employees of the Company who meet
certain age requirements may participate in the Plans after three to six months
of continuous service. Participants may contribute a percentage of their pre-tax
compensation, but not in excess of the maximum allowable under the Code. The
Plans allow participants to make contributions and provide for a matching
contribution by the Company as a percentage of employee contributions.
The Company's matching contributions under the Plans were $327,000,
$820,000, and $435,000 in fiscal 1997, 1996 and 1995, respectively. Matching
contributions vest based on the participant's length of service. In addition,
the Company may make profit-sharing contributions at the discretion of the Board
of Directors. There were no discretionary contributions in the
three-year period ended March 31, 1997. All amounts contributed are deposited in
a trust fund which is administered by the Company under the custody of a
national fund service company. The Company has no other retirement or pension
programs.
13. OTHER INCOME (EXPENSE), NET
The components of other income (expense), net, for the years ended March
31, 1997, 1996 and 1995 consist of the following (in thousands):
1997 1996 1995
-------------------------------------
Interest income $1,797 $1,118 $271
Interest expense (2,631) (2,495) (814)
Gain on the sale of
investment in FASA 1,895 - -
Equity share of joint
venture losses - (1,074) -
Other income (expense) (550) (1,866) 619
-------------------------------------
$ 511 $(4,317) $ 76
-------------------------------------
-------------------------------------
14. RESTRUCTURING CHARGES
During the year ended March 31, 1996, the Company approved a plan to
restructure certain operations and accrued expenses of approximately $1.1
million estimated to be incurred in connection with this restructuring. The
restructuring included severance costs related to the Company's downsizing
efforts, reserves on inventories related to terminated affiliated label
publishing agreements and charges to write down the net assets of the Company's
wholly-owned Japanese subsidiary to their estimated realizable values.
42
<PAGE>
15. SEGMENT INFORMATION
The Company operates in one business segment. The Company's current
operations are located primarily in North America and Europe. Information
regarding geographic operations for the years ended March 31, 1997, 1996 and
1995 is as follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1997 NORTH AMERICA EUROPE OTHER ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue:
Customer $ 36,522 $ 62,687 $ 1,044 $ - $ 100,253
Intercompany 13,629 1,338 - (14,967) -
- -----------------------------------------------------------------------------------------------------
Total net revenue 50,151 64,025 1,044 (14,967) 100,253
Operating income (loss) (4,445) 7,992 832 - 4,380
Identifiable assets 54,606 25,072 627 - 80,305
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1996 NORTH AMERICA EUROPE OTHER ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue:
Customer $ 30,351 $ 28,281 $ 1,062 $ - $ 59,694
Intercompany 4,837 2,054 - (6,891) -
- -----------------------------------------------------------------------------------------------------
Total net revenue 35,188 30,335 1,062 (6,891) 59,694
Operating loss (34,383) (356) (785) - (35,524)
Identifiable assets 53,147 12,260 515 - 65,922
<CAPTION>
- -----------------------------------------------------------------------------------------------------
1995 NORTH AMERICA EUROPE OTHER ELIMINATIONS TOTAL
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue:
Customer $ 60,249 $ 23,395 $ 706 $ - $ 84,350
Intercompany 1,422 2,141 - (3,563) -
- -----------------------------------------------------------------------------------------------------
Total net revenue 61,671 25,536 706 (3,563) 84,350
Operating income (loss) (18,116) 314 (325) - (18,127)
Identifiable assets 46,288 12,186 876 - 59,350
</TABLE>
43
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Spectrum HoloByte, Inc.:
We have audited the accompanying consolidated balance sheets of Spectrum
HoloByte, Inc. and subsidiaries as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Spectrum
HoloByte, Inc. and subsidiaries as of March 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand LLP
- --------------------------
San Jose, California
April 28, 1997
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
44
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The following table lists the names, ages and position of all executive
officers and directors of the Registrant Executive officers serve at the
discretion of the Board of Directors.
Name Age Position
- ------------------------ --- ----------------------------------------
Gilman G. Louie 36 Chairman of the Board
David C. Costine 56 Director
Vinod Khosla 42 Director
Keith Schaefer 48 Director
Stephen M. Race 47 Director, Chief Executive Officer
Alden (Stretch) Andersen 47 Senior Vice President, Operations
Charles (Ken) Balthaser 57 Senior Vice President, Studios
Tim Christian 42 Managing Director, European Sales &
Distribution
Jeffrey J. Forestier 40 Senior Vice President, Sales
Gregory S. Kennedy 35 Senior Vice President, Business and Legal
Affairs and Secretary
Derek W. McLeish 49 Senior Vice President, Marketing
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"Ownership of Securities" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"Certain Transactions" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders and is incorporated herein by reference.
45
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM S-K
(a) (1) FINANCIAL STATEMENTS - See the Consolidated Financial Statements and
Financial Statement Schedule beginning on page 29 of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULE - See the Consolidated Financial
Statements and Financial Statement Schedule beginning on page 49 of
this Form 10-K.
(3) EXHIBITS - See Exhibit Index at page 51 of this Form 10-K.
(b) Current report on Form 8-K dated December 31, 1996.
(c) See Exhibit Index at page 51 of this Form 10-K.
(d) See the Consolidated Financial Statements and Financial Statement Schedule
beginning on page 29 of this Form 10-K.
46
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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.
SPECTRUM HOLOBYTE, INC.
By: /s/ Stephen M. Race
-------------------
Stephen M. Race
Date: June 27, 1997 CHIEF EXECUTIVE OFFICER, ACTING CHIEF
FINANCIAL OFFICER AND DIRECTOR
47
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
Signature Title Date
--------- ----- ----
/s/ Stephen M. Race
- ------------------- Chief Executive Officer, Acting Chief June 27, 1997
(Stephen M. Race) Financial Officer and Director
WILLIAM E. MEYER* Vice President, Corporate Controller June 27, 1997
- -----------------
(William E. Meyer)
GILMAN G. LOUIE* Chairman of the Board of Directors June 27, 1997
- ----------------
(Gilman G. Louie)
DAVID C. COSTINE* Director June 27, 1997
- -----------------
(David C. Costine)
VINOD KHOSLA* Director June 27, 1997
- -------------
(Vinod Khosla)
KEITH SCHAEFER* Director June 27, 1997
- ---------------
(Keith Schaefer)
* By:/s/ Stephen M. Race
---------------------------------
(Stephen M. Race, Attorney-in-Fact)
48
<PAGE>
SCHEDULE II
SPECTRUM HOLOBYTE, INC.
Valuation and Qualifying Accounts
(in thousands)
ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS:
- --------------------------------------------------
Balance at Balance at
Beginning Charged to End
FISCAL YEAR ENDED: of Period Expense Deductions of Period
---------- ---------- ---------- ----------
March 31, 1995 $ 4,963 $ 16,871 $ 12,440 $ 9,394
March 31, 1996 9,394 20,821 21,036 9,179
March 31, 1997 9,179 14,604 17,215 6,568
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Spectrum HoloByte, Inc.
Our report on the consolidated financial statements of Spectrum HoloByte, Inc.
and subsidiaries is included on page 44 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule on page 49 of this Form 10-K.
In our opinion, the financial schedule referred to above when considered in
relation to the basic financial statements, taken as a whole, present fairly, in
all material respects, the information required to be included herein.
/s/ Coopers & Lybrand, L.L.P.
-----------------------------
COOPERS & LYBRAND, L.L.P.
San Jose, California
June 27, 1997
50
<PAGE>
INDEX TO FORM 10-K EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ------------------- --------
<S> <C> <C>
2.1 Agreement and Plan of Reorganization, dated as of July 14, 1993, as amended +
as of November 15, 1993, by and among MicroProse, Inc., MicroProse
Merger Sub, Inc. and Spectrum HoloByte, Inc. (incorporated by reference to
Exhibit 2 of MicroProse, Inc.'s Registration Statement on Form S-4, File No.
33-72216, filed on November 29, 1993). . . . . . . . . . . . . . . . . . . . . .
2.2 Amendment No. 1 to Amended and Restated Agreement and Plan of +
Reorganization, dated November 28, 1993. . . . . . . . . . . . . . . . . . . . .
2.3 Agreement and Plan of Reorganization, dated as of September 14, 1992, by +
and between Spectrum HoloByte, Inc. and Sphere, Inc. . . . . . . . . . . . . . .
2.4 Stock Purchase and Exchange Agreement by and among Spectrum HoloByte, +
Inc., SimTex Software Corporation, Stephen Barcia and Maria Barcia, dated
as of June 6, 1995 (incorporated by reference to Exhibit 2.1 of Spectrum
HoloByte, Inc.'s Form 8-K filed on June 27, 1995). . . . . . . . . . . . . . . .
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 Paragron Investors, dated July 1992. . . . . . . . . +
4.4 Amended and Restated Investor Rights Agreement, dated December 8, 1993 . . . . . +
4.5 Form of Warrant, issued to Ince & Co. (incorporated by reference to +
Exhibit 4.8 of Spectrum HoloByte, Inc.'s Form 10-Q filed on
December 31,1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.1 Sterling Overdraft and Barclays Tradeline Facilities between MicroProse +
Limited and Barclays Bank PLC, dated July 2, 1993 (incorporated by
reference to Exhibit of same number of MicroProse, Inc.'s Annual Report on
Form 10-K filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . .
10.2 Sterling Overdraft and Barclays Tradeline Facilities between MicroProse +
Limited and Barclays Bank PLC, dated July 2, 1993, as amended. . . . . . . . . .
10.3 Agreement between MicroProse, Inc. and WordStar International +
Corporation, dated May 23, 1991 (incorporated by reference to Exhibit 10.6
of MicroProse, Inc.'s Registration Statement on Form S-1, File No. 33-42238,
filed on August 13, 1991). . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
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10.4 MicroProse, Inc. 1991 Employee Stock Option Plan, as amended and restated. . . . +
10.5 Lease Agreement between MicroProse, Inc. and Lakefront Limited +
Partnership, dated July 9, 1987, as amended (incorporated by reference to
Exhibit 10.11 of MicroProse, Inc.'s Registration Statement on Form S-1, File
No. 33-42238, filed on August 13, 1991). . . . . . . . . . . . . . . . . . . . .
10.6 Second Amendment to Lease Agreement between MicroProse, Inc. and +
Lakefront Limited Partnership III, dated June 12, 1992 (incorporated by
reference to Exhibit 10.14 of MicroProse, Inc.'s Annual Report on Form 10-K
filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.7 Lease Agreement between MicroProse, Inc. and Saft America, Inc., dated +
March 19, 1991 (incorporated by reference to Exhibit 10.12 of MicroProse,
Inc.'s Registration Statement on Form S-1, File No. 33-42238, filed on
August 13, 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.8 Lease Agreement between Ashpalm PLC and MicroProse Unlimited, dated +
June 9, 1993 (incorporated by reference to Exhibit 10.16 of MicroProse, Inc.'s
Annual Report on Form 10-K filed on July 14, 1993) . . . . . . . . . . . . . . .
10.9 Lease Agreement by and between MicroProse Limited and ARC Limited, +
dated September 25, 1992 (incorporated by reference to Exhibit 10.17 of
MicroProse, Inc.'s Annual Report on Form 10-K filed on July 14, 1993). . . . . .
10.10 Underlease Agreement between MicroProse Limited and London and +
Metropolitan Investments Limited, dated May 11, 1993 (incorporated by
reference to Exhibit 10.18 of MicroProse, Inc.'s Annual Report on Form 10-K
filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.11 Consulting and Product Development Agreement between MicroProse, Inc. +
and Sidney K. Meier, dated August 12, 1991 (incorporated by reference to
Exhibit 10.17 of MicroProse, Inc.'s Registration Statement on Form S-1, File
No. 33-42238, filed on August 13, 1991). . . . . . . . . . . . . . . . . . . . .
10.12 Option Agreement and Irrevocable Proxy by and among Spectrum HoloByte, +
Inc., John W. Stealey, Sr. and MicroProse, Inc. (incorporated by reference to
Exhibit 99.2 of MicroProse, Inc.'s Report on Form 8-K filed on July 7, 1993) . .
10.13 Consulting Services Agreement between MicroProse, Inc. and John W. +
Stealey, Sr., dated June 22, 1993 (incorporated by reference to Exhibit 10.38
of MicroProse, Inc.'s Annual Report on Form 10-K filed on July 14, 1993) . . . .
10.14 Master Lease Agreement between General Electric Capital Corporation and +
MicroProse, Inc., dated December 31, 1992 (incorporated by reference to
Exhibit 10.41 of MicroProse, Inc.'s Annual Report on Form 10-K filed on
July 14, 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.15 Lease Agreement between Ashpalm PLC and MicroProse Unlimited, dated +
52
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
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<S> <C> <C>
August 8, 1989 (incorporated by reference to Exhibit 10.13 to MicroProse,
Inc.'s Registration Statement on Form S-1, File No. 33042238, filed on
August 13, 1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.16 Lease Agreement between Paragon Alameda Gateway Associates, Ltd. and +
Sphere, Inc., dated May 5, 1992. . . . . . . . . . . . . . . . . . . . . . . . .
10.17 Underlease Agreement between MicroProse Limited and Thamsedown +
Computer Supplies Limited, dated 1993. . . . . . . . . . . . . . . . . . . . . .
10.18 Merchandising License Agreement between Paramount Pictures Corporation +*
and Sphere, Inc. dated October 1, 1991 . . . . . . . . . . . . . . . . . . . . .
10.19 License Agreement between V/O Electronorgtechnica, Moscow and Sphere, +*
Inc., dated June 1, 1990, and all amendments thereto . . . . . . . . . . . . . .
10.20 Super Tetris License Agreement between A/O Elorg and Sphere, Inc., dated +*
September 1, 1991. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.21 Master Lease Agreement between General Electric Corporation and +
MicroProse Software, Inc., dated December 31, 1992 (incorporated by
reference to Exhibit 10.44 to MicroProse, Inc.'s Annual Report on Form 10-K
filed on July 14, 1993). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.22 First Amendment to Lease between Paragon Alameda Gateway Associates, +
Ltd. and Sphere, Inc., dated July 28, 1992 . . . . . . . . . . . . . . . . . . .
10.23 Master Lease Agreement between Comdisco, Inc. and Spectrum HoloByte, +
Inc., dated December 16, 1992. . . . . . . . . . . . . . . . . . . . . . . . . .
10.24 Security and Loan Agreement among Spectrum HoloByte, Inc., MicroProse +
Software, Inc. and Imperial Bank, dated as of December 30, 1993. . . . . . . . .
10.25 Security and Loan Agreement among Spectrum HoloByte, Inc., MicroProse +
Software, Inc. and Imperial Bank, dated as of December 30, 1993, as
amended (incorporated by reference to Exhibit 10.89 and 10.90 of Spectrum
HoloByte, Inc.'s Form 10-Q filed on December 31, 1994) . . . . . . . . . . . . .
10.26 Spectrum HoloByte, Inc. 1992 Stock Option Plan . . . . . . . . . . . . . . . . . +
10.27 MicroProse, Inc. 1994 Employee Stock Purchase Plan . . . . . . . . . . . . . . . +
10.28 401(k) Plan of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . +
10.29 Form of Indemnification Agreement between the Company and each of its +
officers and directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.30 Amended and Restated Employment and Consulting Agreement between +
Patrick S. Feely and the registrant, dated December 13, 1994 (incorporated by
reference to Exhibit 10.90 of Spectrum HoloByte, Inc.'s Form 10-Q filed on
53
<PAGE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
------- ------------------- --------
<S> <C> <C>
December 31, 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.1 Statement Re: Computation of Earnings Per Share. . . . . . . . . . . . . . . . .
16.1 Letter from Ernst & Young regarding change in certifying accountant +
(incorporated by reference to Exhibit 7(c)(3) of the Company's Amendment
No. 2 to Form 8-K filed on March 22, 1994) . . . . . . . . . . . . . . . . . . .
21.1 Subsidiaries of Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.1 Consent of Coopers & Lybrand, L.L.P. . . . . . . . . . . . . . . . . . . . . . .
27.1 Statement Re: Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . .
</TABLE>
+ Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 33-75408), as amended.
* Confidential treatment granted as to certain portions of these exhibits.
54
<PAGE>
Exhibit 11.1
SPECTRUM HOLOBYTE, INC.
Statement Re: Computation of Net Income (Loss) Per Share
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Income (loss) before extraordinary item $ 4,441 $ (39,841) $ (18,051)
Cumulative dividends on Series A preferred stock (280) (280) (280)
---------- ---------- ----------
Income (loss) for the purposes of calculating
earnings per share before extraordinary item 4,161 (40,121) (18,331)
Extraordinary item, net of tax effect 3,547 - -
---------- ---------- ----------
Net income (loss) for the purposes of calculating
earnings per share $ 7,708 $ (40,121) $ (18,331)
---------- ---------- ----------
---------- ---------- ----------
Number of shares used in the computation of
per share data 27,776 23,636 20,111
---------- ---------- ----------
---------- ---------- ----------
Per share data:
Income (loss) before extraordinary item $ 0.15 $ (1.70) $ (0.91)
Extraordinary item, net of tax effect 0.13 - -
---------- ---------- ----------
Net income (loss) $ 0.28 $ (1.70) $ (0.91)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON STOCK EQUIVALENTS
ARE THE SAME FOR PRIMARY AND FULLY DILUTED EARNINGS PER SHARE.
<PAGE>
EXHIBIT 22.1
List of Subsidiaries
1. MicroProse, Inc. (a California Company)
2. MicroProse Texas, Inc. (a Delaware Company)
3. MicroProse Software, Inc. (a Maryland Company)
4. Stealey, Inc. (a Maryland Company)
5. Sid Co., Inc. (a Maryland Company)
6. Bullet-Proof Software, Inc. (a Washington Company)
7. Spectrum Holobyte Japan, Inc. (a Japanese Company)
8. MPS Software Distribution GmbH (a German Company)
9. MicroProse Limited (a United Kingdom Company)
10. MicroProse Software Ltd. (a United Kingdom Company)
11. MPS Technologies Ltd. (a United Kingdom Company)
12. MicroProse France SARL (a French Company)
13. MicroProse Software GmbH (a German Company)
14. Leisuresoft Vertriebs GmbH (a German Company)*
*Except with regard to Leisuresoft Vertriebs GmbH, the Registrant directly or
indirectly owns 100% of the above listed subsidiaries. The Registrant
indirectly, through MicroProse, Inc., owns only 90% of Leisuresoft Vertriebs
GmbH.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Spectrum HoloByte, Inc. on Form S-8 (File No.33-85024) of our report
dated April 28, 1997, on our audits of the consolidated financial statements
and financial statement schedule of Spectrum HoloByte, Inc. as of March 31,
1997 and 1996, and for each of the three years in the period ended March 31,
1997, which report is included (or incorporated by reference) in this Annual
Report on Form 10-K.
/s/ Coopers & Lybrand, L.L.P.
----------------------------------
COOPERS & LYBRAND, L.L.P.
San Jose, California
June 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-31-1996
<PERIOD-END> MAR-31-1997
<CASH> 47,110
<SECURITIES> 0
<RECEIVABLES> 14,459
<ALLOWANCES> (6,568)
<INVENTORY> 4,042
<CURRENT-ASSETS> 63,140
<PP&E> 18,668
<DEPRECIATION> (10,866)
<TOTAL-ASSETS> 80,305
<CURRENT-LIABILITIES> 18,807
<BONDS> 34,019
5,881
97
<COMMON> 142,490
<OTHER-SE> (120,989)
<TOTAL-LIABILITY-AND-EQUITY> 80,305
<SALES> 95,500
<TOTAL-REVENUES> 100,253
<CGS> 39,317
<TOTAL-COSTS> 39,317
<OTHER-EXPENSES> 23,144
<LOSS-PROVISION> (14,607)
<INTEREST-EXPENSE> 834
<INCOME-PRETAX> 4,891
<INCOME-TAX> 450
<INCOME-CONTINUING> 4,441
<DISCONTINUED> 0
<EXTRAORDINARY> 3,547
<CHANGES> 0
<NET-INCOME> 7,988
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.28
</TABLE>
