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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 2001
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BAM! ENTERTAINMENT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 77-0553117
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
333 WEST SANTA CLARA STREET, SUITE 930
SAN JOSE, CA 95113
(408) 298-7500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RAYMOND C. MUSCI
CHIEF EXECUTIVE OFFICER
BAM! ENTERTAINMENT, INC.
333 WEST SANTA CLARA STREET, SUITE 930
SAN JOSE, CA 95113
(408) 298-7500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO
THOMAS J. POLETTI, ESQ. TIMOTHY R. CURRY, ESQ.
TED WEITZMAN, ESQ. COLBY R. GARTIN, ESQ.
MELISSA K. STACK, ESQ. BENJAMIN H. DEBERRY, ESQ.
DAVID R. SCHWARTZ, ESQ. DANIEL H. MORRIS, ESQ.
KIRKPATRICK & LOCKHART LLP BROBECK, PHLEGER & HARRISON LLP
10100 SANTA MONICA BLVD., 7TH FLOOR TWO EMBARCADERO PLACE
LOS ANGELES, CALIFORNIA 90067 2200 GENG ROAD
TELEPHONE (310) 552-5000 PALO ALTO, CALIFORNIA 94303
FACSIMILE (310) 552-5001 TELEPHONE (650) 424-0160
FACSIMILE (650) 496-2885
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
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Common stock.............................. $45,000,000 $11,250
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS
(Subject to Completion) June 6, 2001
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SHARES
[BAM! ENTERTAINMENT LOGO]
COMMON STOCK
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We are selling shares of our common stock. This is our initial
public offering of shares of our common stock. No public market currently exists
for any shares of our capital stock. We currently estimate that the initial
public offering price of our common stock will be between $ and
$ per share.
We intend to apply for quotation of our common stock on the Nasdaq National
Market under the symbol "BFUN."
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL
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Public offering price $ $
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Underwriting discounts and commissions $ $
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Proceeds, before expenses, to us $ $
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The underwriters may also purchase up to shares of our common
stock from us at the public offering price, less underwriting discounts and
commissions, within 30 days from the date of this prospectus. The underwriters
may exercise this option to only cover over-allotments, if any.
The underwriters are offering our common stock on a firm commitment basis as
described under "Underwriting." Delivery of the shares will be made on or about
, 2001.
UBS WARBURG JEFFERIES & COMPANY, INC.
The date of this prospectus is , 2001
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Through and including ____________ (25 days after the date of this prospectus),
all dealers selling shares of our common stock, whether or not participating in
this offering, may need to deliver a prospectus. This delivery requirement is in
addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
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Prospectus summary.............................................. 1 Business............................................ 33
The offering.................................................... 3 Management.......................................... 45
Summary consolidated financial data ............................ 4 Related party transactions.......................... 51
Risk factors.................................................... 5 Principal stockholders.............................. 54
Forward-looking information..................................... 18 Description of capital stock........................ 56
Use of proceeds................................................. 18 Shares eligible for future sale..................... 59
Dividend policy................................................. 18 Underwriting........................................ 61
Capitalization.................................................. 19 Legal matters....................................... 63
Dilution ..................................................... 20 Experts............................................. 63
Selected consolidated financial data............................ 21 Where you can find additional information........... 63
Management's discussion and analysis of financial condition Index to consolidated financial statements.......... F-1
and results of operations....................................... 23
We have filed applications to register the trademarks BAM! Entertainment, BAM!,
BAM!4 and Bay Area Multimedia, Inc. in the United States. This prospectus also
refers to trade names and trademarks of other organizations.
Nintendo(R), Nintendo 64(R), N64(R), Game Boy(R), GameCube, and/or other
Nintendo products referenced herein are either trademarks or registered
trademarks of Nintendo of America, Inc. Sony PlayStation(R), Sony
PlayStation2(R) and/or other Sony products referenced herein are either
trademarks or registered trademarks of Sony Computer Entertainment America Inc.
Sega(R) and Dreamcast(R) are registered trademarks of Sega of America, Inc.
Microsoft(R), Xbox and/or other Microsoft products referenced herein are either
trademarks or registered trademarks of Microsoft Corporation.
Dexter's Laboratory, Powerpuff Girls, and all related characters and elements
are trademarks of The Cartoon Network, an AOL Time Warner company. Yogi Bear and
all related characters and elements are trademarks of Hanna-Barbera Productions,
Inc. Sports Illustrated(R) and Sports Illustrated for Kids(R) are registered
trademarks of Time, Inc., an AOL Time Warner company. Driven and all related
characters and elements are trademarks of Warner Bros., an AOL Time Warner
Company.
This prospectus includes trademarks other than those identified in the preceding
paragraphs. The use of any such trademark herein is in an editorial form only,
and to the benefit of the owner thereof, with no intention of infringement of
the trademark.
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PROSPECTUS SUMMARY
This summary highlights the information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk factors."
OUR BUSINESS
We are a rapidly emerging developer and publisher of interactive entertainment
software. We license properties from a wide variety of sources including
entertainment and media companies and we publish software based on their motion
picture, sports and television cartoon properties. We currently publish software
for many of the most popular interactive entertainment hardware platforms, such
as the PlayStation manufactured by Sony Computer Entertainment ("PlayStation"),
Nintendo 64 and Nintendo's Game Boy Color. We plan to develop and publish
software for next generation hardware platforms such as the PlayStation2
manufactured by Sony Computer Entertainment ("PlayStation2"), Nintendo GameCube
and Game Boy Advance and Microsoft's Xbox, as well as for other portable
handheld devices and personal computers.
According to Euromonitor, worldwide sales of consoles, console games and games
for personal computers grew from $17 billion in 1996 to $27 billion in 2000.
Forrester predicts that in the United States alone, interactive entertainment
console manufacturers and software publishers will generate $26 billion in
revenues in 2005. Of that $26 billion, Forrester estimates that $12.8 billion
will be generated by sales of console game software alone. The Interactive
Digital Software Association, or IDSA, further estimates that 60% of all
Americans, or approximately 145 million people, play video games on a regular
basis.
We believe that our ability to license popular properties, develop content with
internal and third party developers and distribute titles through our broad
distribution channels provides us with significant competitive advantages. We
focus on:
- - Development and promotion of titles based on properties with existing
brand recognition. We believe that by developing interactive entertainment
software titles based on popular properties and existing brands that
appeal to specific segments of the interactive entertainment industry, we
enhance consumer acceptance and product life cycles. We have secured
license agreements with AOL Time Warner's Cartoon Network and Sports
Illustrated for Kids, Spyglass Entertainment Group and Franchise Films, as
well as other entertainment and media property owners, and are developing
titles based on their popular entertainment and media properties for
targeted age groups.
- - Strategic management of product development. We maintain a balanced mix of
internal and external production efforts. We have an experienced in-house
development staff and an internal product development studio where we
develop titles. We have also established relationships with third party
interactive entertainment software developers with proven track records of
developing successful titles.
- - Broad distribution channels. Our sales and marketing efforts are designed
to broaden product distribution and increase the penetration of our
products in domestic and international markets. We further seek to
leverage and expand our channels of distribution in order to reach a
larger number of consumers in the retail, direct and on-line markets, both
domestically and internationally. We sell our interactive entertainment
software to mass merchandisers such as Toys "R" Us, Target, Kmart,
Wal-Mart and Best Buy, specialty chains such as Babbages, Etc. and
Electronics Boutique and independent distributors.
- - Hardware platform flexibility. While we have the technical ability to
develop products for all current hardware platforms, our development
efforts focus on specific hardware platforms for specific demographics. In
addition, we leverage our more popular titles across multiple
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hardware platforms that have sufficient installed bases and appropriate
demographics for development to be successful. We believe this approach
reduces both our reliance on any one hardware platform and the risks
associated with product development.
- - Management experience. Our executive management team has substantial
domestic and international experience in the interactive entertainment
software industry. Key members of our management team have been executives
of other interactive entertainment software companies and in their current
and past service have successfully identified and secured licenses for
popular properties, established relationships with key third party product
developers and successfully negotiated distribution arrangements with
multiple retail channels. In addition, our team has developed strong
working relationships with hardware platform manufacturers, which we
believe provide substantial benefits in managing the product approval and
development process.
COMPANY INFORMATION
Unless otherwise indicated, all references to "we," "us," and "our" refer to
BAM! Entertainment, Inc. and our wholly-owned subsidiaries, BAM Entertainment
Limited and BAM Studios (Europe) Limited.
We were incorporated in California in October 1999 under the name Bay Area
Multimedia, Inc. We reincorporated in Delaware in September 2000 and changed our
name to BAM! Entertainment, Inc. in December 2000. Our principal executive
offices are located at 333 West Santa Clara Street, Suite 930, San Jose,
California 95113. Our telephone number is (408) 298-7500. Our web site is
http://www.bam4fun.com. The information found on our web site is not a part of
this prospectus.
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THE OFFERING
The following information assumes that the underwriters do not exercise the
over-allotment option we granted to them to purchase additional shares in the
offering.
Common stock we are offering................................... ________________ shares
Common stock to be outstanding after this offering............. ________________ shares
Proposed Nasdaq National Market symbol......................... BFUN
Use of proceeds................................................ For general corporate purposes,
including additional product
development, expansion of our
sales and marketing activities,
international operations and
possible acquisitions. See "Use
of proceeds."
The number of shares of our common stock to be outstanding after this offering
is based upon 1,583,600 shares of our common stock outstanding as of March 31,
2001 and gives effect to the sale of 245,659 shares of Series C Preferred Stock
in May 2001 for net proceeds of $5.3 million, our issuance of _____________
shares of common stock being sold by us in this offering and the conversion of
all outstanding shares of our redeemable convertible preferred stock into shares
of our common stock upon the completion of this offering, and excludes:
- - _______________ shares issuable upon exercise of the underwriters'
over-allotment option;
- - 83,000 shares of our common stock issuable upon exercise of options
outstanding as of March 31, 2001 at a weighted average exercise price of
$3.65 per share under our 2000 Stock Incentive Plan. For a description of
our 2000 Stock Incentive Plan, please see "Management--2000 Stock
Incentive Plan";
- - 130,000 shares issuable upon exercise of warrants outstanding as of March
31, 2001 at a weighted average exercise price of $7.92 per share; and up
to 146,250 shares of our common stock issuable pursuant to a third-party
property license agreement as of March 31, 2001; and
- - up to 146,250 shares of our common stock issuable pursuant to a
third-party property agreement as of March 31, 2001.
Unless otherwise noted, all share and per share information in this prospectus
gives effect to:
- - a ____-for-one stock split of our common stock to be effected prior to the
completion of this offering;
- - a 0.195-for-one reverse stock split of our common stock effected as of May
11, 2000; and
- - the automatic conversion of all of our outstanding shares of our
redeemable convertible preferred stock into shares of our common stock
upon the completion of this offering.
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SUMMARY CONSOLIDATED FINANCIAL DATA
Our summary consolidated financial data is presented in the following table to
aid you in your analysis of a potential investment in our common stock. You
should read this data in conjunction with "Management's discussion and analysis
of financial condition and results of operations", our consolidated financial
statements and the notes to those financial statements appearing elsewhere in
this prospectus. The pro forma basic and diluted calculations below reflect the
conversion, upon the completion of this offering, of all outstanding shares of
our redeemable convertible preferred stock into shares of our common stock, as
if it occurred on the dates of original issuance.
OCTOBER 7, 1999
(INCEPTION) THROUGH
---------------------------------- NINE MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001
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(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net revenues.................................... $1,377 $ -- $17,305
Costs and expenses.............................. 2,158 512 16,928
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Income (loss) from operations................... (781) (512) 377
Other expense, net.............................. (22) (5) (952)
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Net loss........................................ (803) (517) (575)
====== ====== =======
Loss per share:
Basic and diluted........................ $(4.54) $(2.97) $ (1.84)
Pro forma basic and diluted (unaudited).. $(4.44) $ (0.41)
Shares used in computation:
Basic and diluted........................ 177 174 313
Pro forma basic and diluted (unaudited).. 181 1,390
MARCH 31, 2001
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(in thousands)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents....................... $ 1,240 $ 6,540 $
Working capital................................. 4,949 10,249
Total assets.................................... 12,767 18,067
Long-term portion of debt....................... -- --
Redeemable convertible preferred stock.......... 6,657 --
Total stockholders' equity (deficit)............ (63) 11,894
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The preceding table presents a summary of our consolidated balance sheet data as
of March 31, 2001:
- - on an actual basis;
- - on a pro forma basis to reflect the sale of 245,659 shares of Series C
Preferred Stock in May 2001 for net proceeds of $5.3 million and the
conversion of all outstanding shares of our redeemable convertible
preferred stock into shares of our common stock upon the completion of
this offering; and
- - on a pro forma as adjusted basis to give effect to the receipt of the
estimated net proceeds from the sale of _____ shares of common stock in
this offering, at an assumed initial public offering price of $______ per
share after deducting the estimated underwriting discount and commissions
and estimated offering expenses payable by us.
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RISK FACTORS
You should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision. The risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that we are unaware of, or that we
currently deem immaterial, also may become important factors that adversely
affect us. If any of the following risks actually occurs, our business,
financial condition or results of operations could be materially adversely
affected. In that case, the trading price of our common stock would decline and
you may lose all or part of your investment.
RISKS RELATED TO OUR FINANCIAL RESULTS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE AN
INVESTMENT IN OUR COMMON STOCK.
We were organized in October 1999 and released our first interactive
entertainment software product in June 2000. It is difficult to evaluate our
future prospects and an investment in our common stock because we have a limited
operating history and the market for our products is rapidly evolving. Our
prospects are uncertain and must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in the early stage of
development.
Our future performance will depend upon a number of factors, including our
ability to:
- - expand our customer base;
- - secure popular entertainment properties upon which to base future
products;
- - develop and enhance products in response to new interactive entertainment
hardware platform releases, customer demand and competitive market
conditions;
- - expand our interactive entertainment software development and sales and
marketing capabilities;
- - expand our international operations;
- - attract, retain and motivate qualified personnel; and
- - maintain adequate control of our expenses.
WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER ACHIEVE PROFITABILITY.
We incurred net losses of $575,000 for the nine months ended March 31, 2001 and
$803,000 for the period from October 7, 1999 (inception) to June 30, 2000. We
may incur a net loss for the year ending June 30, 2001 as we continue to make
significant expenditures for product development, sales and marketing,
international expansion, and general and administrative functions. We will need
to generate significant revenues to achieve profitability. There can be no
assurance that our revenues will grow in the future or that we will achieve
sufficient revenues for profitability. If our revenues do not grow as quickly as
we anticipate, or if our operating expenses exceed our expectations, our
business would be severely harmed.
OUR REVENUES FLUCTUATE DUE TO SEASONAL DEMAND AND THE NATURE OF THE INTERACTIVE
ENTERTAINMENT INDUSTRY.
We have experienced and may continue to experience significant quarterly
fluctuations in net sales and operating results. The interactive entertainment
industry is highly seasonal, with sales typically higher during the fourth and
first calendar quarters, due primarily to the increased demand for games during
and immediately following the holiday buying season. Our failure or inability to
introduce products on a timely basis to meet seasonal fluctuations in demand
will harm our business and operating results. Although we are attempting to
reduce the effect of seasonal patterns on our business by distributing our
product release dates more evenly throughout the year, we cannot assure you that
these efforts will be successful.
These fluctuations could cause our stock price to decline. Other factors that
cause fluctuations include:
- - the timing of our release of new titles;
- - the popularity of both new titles and titles released in prior periods;
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RISK FACTORS
- - fluctuations in the size and rate of growth of consumer demand for titles
for different hardware platforms;
- - the timing of the introduction of new hardware platforms and the accuracy
of retailers' forecasts of consumer demand;
- - the timing of shipments by hardware manufacturers or delays in those
shipments;
- - changes in the mix of titles with varying profit margins;
- - the development and timing of releases of products by competitors;
- - the timing of customer orders; and
- - product returns.
Our expense levels are based, in part, on our expectations regarding future
sales and therefore, our operating results would be harmed by a decrease in
sales or a failure to meet our sales expectations. The uncertainties associated
with interactive entertainment software development, lengthy manufacturing lead
times, production delays and the approval process for products by hardware
manufacturers and other licensors make it difficult to predict the quarter in
which our products will ship and therefore, may cause us to fail to meet
financial expectations. In some future quarters our operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of our common stock could significantly decline.
OUR EARNINGS WILL BE AFFECTED UPON THE ISSUANCE OF SHARES OF OUR COMMON STOCK
PURSUANT TO THIRD PARTY ENTERTAINMENT PROPERTY LICENSE AGREEMENTS.
Pursuant to a license agreement with a production company, we are obligated to
issue 14,625 shares of our common stock to the production company after the
release of any film for which we elect to produce interactive entertainment
software products, up to 10 films or 146,250 shares of common stock. To date, we
have elected to produce titles for three films and have issued 14,625 shares
under this agreement. We are required to issue these shares when the films are
released and will then incur a non-cash charge. If the software product is
released after the release of the film, we will amortize the non-cash charge
over the life of the product, which is expected to be between three and six
months. If the software product is released prior to the release of the film, we
will expense the non-cash charge at the time of the issuance of the shares. We
cannot estimate the aggregate dollar amount of future non-cash charges as they
are based on our share price at a future point in time, but they may be
substantial. The non-cash charge on the initial shares issued is expected to be
incurred in the first or second fiscal quarter of 2002. In addition, in
connection with the issuance of warrants pursuant to a license agreement with
another production company, we incurred a non-cash charge of $354,000, which is
being amortized on a straight-line basis over five years. This amortization
commenced in October 2000. In connection with these warrants, a further non-cash
charge of $556,000 will be amortized over a period, expected to be between three
and six months, commencing on the release of the subject interactive
entertainment software products, expected to be in the first or second fiscal
quarter of 2003. Each of these charges will affect our gross margins and
profitability and may cause the trading price of our common stock to decline
significantly.
RISKS RELATED TO OUR BUSINESS
OUR MARKET IS CHARACTERIZED BY CHANGING CONSUMER PREFERENCES AND SHORT PRODUCT
LIFE CYCLES. TO COMPETE EFFECTIVELY WE MUST CONTINUALLY INTRODUCE NEW PRODUCTS
THAT ACHIEVE MARKET ACCEPTANCE.
The interactive entertainment software market is characterized by short product
life cycles, changing consumer preferences and frequent introduction of new
products. We believe that our success will be dependent on the production of
successful titles on a continuous basis. We cannot assure you that new products
introduced by us will achieve significant market acceptance or that such
acceptance, if achieved, will be sufficient to permit us to recover development
and other associated costs. Consumer preferences for interactive entertainment
software products are continually changing and are difficult to predict.
Historically, very few interactive entertainment software products have achieved
sustained market acceptance. Rather, a limited number of products have become
popular and have accounted for a substantial portion of revenues in the
industry. Even
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RISK FACTORS
the most successful titles remain popular for only limited
periods of time, often less than six months. The life cycle of a game generally
consists of a relatively high level of sales during the first few months after
introduction, followed by a decline in sales. Accordingly, we expect that
substantially all of our net sales for a particular year will be generated by
titles released in that year and in the latter part of the prior year.
In the past, we have experienced delays in the introduction of new titles and we
anticipate that we will experience similar delays in the future in connection
with the introduction of additional new titles, including products currently
under development. Because net revenues associated with the initial shipments of
a new product generally constitute a high percentage of the total net revenues
associated with the life of a product, any delay in the introduction of, or the
presence of a defect in, one or more new products could harm the ultimate
success of the products or our business and operating results.
In addition, the development cycle for new titles is long, typically ranging
from 12 to 24 months. After development of the product, it may take between six
to 12 additional months to develop the product for additional hardware
platforms. In order to distribute a product, we must develop and test the
necessary game software, obtain approval from the manufacturer and licensor if
required, and have the initial order of cartridges or disks manufactured. During
the development cycle, the market appeal of a title may decline. If market
acceptance is not achieved, we may grant markdown allowances to maintain our
relationship with retailers and our access to distribution channels. Because we
introduce a relatively limited number of new products in a given period, the
failure of one or more of our products to achieve market acceptance could harm
our business.
THE INTRODUCTION OF NEW INTERACTIVE ENTERTAINMENT HARDWARE PLATFORMS CREATES
RISKS RELATING TO THE DEVELOPMENT OF TITLES FOR THOSE HARDWARE PLATFORMS.
The interactive entertainment industry is also characterized by rapid
technological change. For example, the 128-bit hardware platform was released
within five years of the release of the 64-bit hardware platform. As a result,
we must continually anticipate these changes and adapt our offerings to emerging
hardware platforms and evolving consumer preferences. Generally, because of the
length of the development cycle, our development efforts must begin well in
advance of the release of new hardware platforms in order to introduce titles on
a timely basis with the release of such hardware platforms. Further, we have no
control over the release dates of new hardware platforms or the number of units
that will be shipped upon such release. It is difficult to ensure that our
schedule for releasing new titles will coincide with the release of the
corresponding hardware platforms. Additionally, if fewer than expected units of
a new hardware platform are produced or shipped, such as recently occurred with
PlayStation2, developers of titles for those hardware platforms may experience
lower than expected sales.
Our development efforts with respect to new hardware platforms may not lead to
marketable titles or titles that generate sufficient revenues to recover their
development and marketing costs, especially if a new hardware platform does not
reach an expected level of acceptance. This risk may increase in the future, as
continuing increases in development costs require corresponding increases in net
sales in order for us to maintain profitability.
The technological advancements of the new hardware platforms also allow more
complex software products. As software products become more complex, the risk of
undetected errors in products when first introduced increases. We cannot assure
you that, despite testing, errors will not be found in new products or releases
after shipments have been made, resulting in loss of or delay in timely market
acceptance, product returns, loss of revenues and damage to our reputation.
The introduction of new hardware platforms and technologies can also render
existing titles obsolete and unmarketable. Generally, as more advanced hardware
platforms are introduced, consumer demand for titles for older hardware
platforms diminishes. In addition, a broad range of competing and incompatible
emerging technologies may lead consumers to postpone buying decisions until a
particular hardware platform gains widespread acceptance. As a result of such
reduced consumer demand for titles on older hardware platforms, our titles for
older hardware platforms may not generate sufficient sales to make our titles
profitable.
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RISK FACTORS
THE COSTS OF DEVELOPING AND MARKETING PRODUCTS FOR NEW INTERACTIVE ENTERTAINMENT
HARDWARE PLATFORMS MAY BE SUBSTANTIAL AND COULD HARM OUR BUSINESS.
The costs associated with the introduction of products for new hardware
platforms, such as Nintendo GameCube, Sony's PlayStation2 and Microsoft's Xbox,
could harm our business. We anticipate that it will be more costly to develop
titles for new hardware platforms and believe the costs of developing and
publishing titles for these hardware platforms may require greater financial and
technical resources than prior development and publishing efforts. Additionally,
during periods of new technology introductions, forecasting our revenues and
earnings is more difficult than in more stable or rising product markets.
IF NEW INTERACTIVE ENTERTAINMENT HARDWARE PLATFORMS FAIL TO ACHIEVE SIGNIFICANT
MARKET ACCEPTANCE, IT MAY HARM OUR BUSINESS.
Our sales are dependent on, among other factors, the popularity and unit sales
of the interactive entertainment hardware platforms of the various
manufacturers. The interactive entertainment industry has experienced periods of
significant growth in consumer interest and popularity, followed by periods in
which consumer demand for interactive entertainment products has slowed.
Unexpected shortfalls in the market acceptance of a particular hardware platform
can significantly harm consumer demand for titles released or scheduled for
release for that hardware platform. Therefore, we are dependent upon the
successful marketing efforts of the manufacturers of the various hardware
platforms to meet financial expectations.
PRODUCT RETURNS AND MARKDOWN ALLOWANCES COULD HARM OUR BUSINESS.
We are exposed to the risk of product returns and markdown allowances with
respect to our customers. The decrease in demand for products based upon older
hardware platforms may lead to a high level of these product returns and
markdown allowances. We allow distributors and retailers to return defective,
shelf-worn and damaged products in accordance with negotiated terms. In
addition, we provide markdown allowances to our customers on certain unsold
merchandise. Product returns and markdown allowances that exceed our
expectations could harm our business.
A SUBSTANTIAL PORTION OF OUR REVENUES HAVE BEEN DERIVED FROM A LIMITED NUMBER OF
PRODUCTS.
To date, a substantial portion of our revenues have been derived from a limited
number of products. Sales of our POWERPUFF GIRLS products accounted for 82% of
our net revenues for the nine months ended March 31, 2001. Sales of our BEAST
WARS product accounted for 100% of our net revenues for the period from
inception through June 30, 2000. If we fail to replace these titles with
additional products generating significant revenues, our business will be
harmed.
OVER 60% OF OUR NET REVENUES ARE DERIVED FROM SALES TO OUR FOUR LARGEST
CUSTOMERS. WE COULD BE ADVERSELY AFFECTED IF ANY OF THEM REDUCED OR TERMINATED
THEIR PURCHASES FROM US OR DID NOT PAY THEIR OBLIGATIONS TO US.
Revenues from our four largest customers collectively accounted for 63% of our
net revenues for the nine months ended March 31, 2001 as compared to 75% from
our three largest customers for the period from inception through June 30, 2000.
Our largest customers for the nine months ended March 31, 2001 were Toys "R" Us
which accounted for 20% of our net revenues, Wal-Mart which accounted for 16% of
our net revenues, Target which accounted for 15% of our net revenues, and Kmart
which accounted for 12% of our net revenues. For the period from inception
through June 30, 2000, Blockbuster accounted for 49% of our net revenues,
Wal-Mart accounted for 16% of our net revenues and KB Toys accounted for 10% of
our net revenues. We have no written agreements or other understandings with any
of our customers that relate to future purchases, so purchases by these
customers or any others could be reduced or terminated at any time. A
substantial reduction or a termination of purchases by any of our largest
customers would harm us.
Our sales are typically made on credit, with terms that vary depending upon the
customer and other factors. While we attempt to carefully monitor the
creditworthiness of our customers and distributors, we bear the risk of their
inability to pay our receivables and of any delay in payment. A business failure
by any of our largest customers would harm us, as could a business failure by
any of our distributors or other retailers.
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RISK FACTORS
WE CANNOT PUBLISH OUR INTERACTIVE ENTERTAINMENT SOFTWARE TITLES WITHOUT THE
APPROVAL OF HARDWARE MANUFACTURERS. OUR ABILITY TO CONTINUE TO DEVELOP AND
MARKET OUR TITLES IS DEPENDENT ON THE HARDWARE MANUFACTURERS CONTINUING TO DO
BUSINESS WITH US.
We are wholly dependent on the manufacturers of interactive entertainment
hardware platforms and our ability to obtain or maintain non-exclusive licenses
with them, both for the right to publish and manufacture titles for their
hardware platforms. We are required to obtain a license to develop and publish
titles for each hardware platform for which we develop and publish titles. Each
license specifies the territory to which it applies, and such licenses range
from as broad as worldwide distribution to as narrow as approval on a
title-by-title basis. Our existing hardware platform licenses for Sony's
PlayStation and PlayStation2, Nintendo's Game Boy Color and Game Boy Advance,
Nintendo 64 and Microsoft's Xbox, and our pending license for Nintendo GameCube,
require that we obtain approval for the publication of new titles on a
title-by-title basis. We expect that our pending license for this next
generation hardware platform will contain similar provisions. As a result, the
number of titles we are able to publish for these hardware platforms, along with
our ability to time the release of these titles and, accordingly, our revenues
from titles for these hardware platforms, may be limited. Should any
manufacturer choose not to renew or extend our license agreement at the end of
its current term, or if the manufacturer were to terminate our license for any
reason, we would be unable to publish additional titles for that manufacturer's
hardware platform. License agreements relating to these rights generally extend
for a term of two to three years. The agreements are terminable upon the
occurrence of a number of factors, including: (1) breach of the agreement by us;
(2) our bankruptcy or insolvency; or (3) our entry into a relationship with, or
acquisition by, a competitor of the manufacturer. We cannot assure you that we
will be able to obtain new or maintain existing licenses on acceptable terms, or
at all.
Generally, when we develop interactive entertainment software titles for a
hardware platform offered by Sony or Nintendo, the products are manufactured
exclusively by that hardware manufacturer. Our hardware platform licenses with
Sony and Nintendo provide that the manufacturer may change prices for the
manufacturing of products at any time and includes other provisions that give
the manufacturer substantial control over our costs and the release of new
titles. Since each of the manufacturers is also a publisher of games for its own
hardware platforms and manufactures products for all of its other licensees, a
manufacturer may give priority to its own products or those of our competitors
in the event of insufficient manufacturing capacity. We would be materially
harmed by unanticipated delays in the manufacturing and delivery of products.
WE MUST RETAIN CURRENT OFFICERS AND DIRECTORS AND ATTRACT ADDITIONAL KEY
PERSONNEL.
Our success depends to a significant extent on the continued service of our key
personnel, in particular our Chief Executive Officer and President, Raymond C.
Musci, and our Vice Chairman, Anthony R. Williams. Our future success will also
depend upon our ability to continue to attract, motivate and retain highly
qualified employees and third party contractors, particularly software design
and development personnel and outside sales representatives. Competition for
highly skilled employees is intense and we may not be successful in attracting
and retaining such personnel. Our failure to retain the services of Raymond C.
Musci, Anthony R. Williams or our other key personnel or to attract and retain
additional qualified employees would harm our business.
WE ARE DEPENDENT UPON LICENSES TO PROPERTIES ORIGINATED AND OWNED BY THIRD
PARTIES FOR THE DEVELOPMENT OF OUR TITLES.
Many of our titles, such as those from our POWERPUFF GIRLS series, DEXTER'S
LABORATORY and DRIVEN, are based upon entertainment properties licensed from
third parties. We cannot assure you that we will be able to obtain new licenses,
or renew existing ones, on reasonable terms, if at all. If we are unable to
obtain licenses for the properties which we believe offer significant consumer
appeal, we would be required to develop titles internally or forego future
product offerings. Any internally developed title would require significantly
greater marketing expense in order to establish brand identity and may not
achieve market acceptance.
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RISK FACTORS
WE ARE DEPENDENT ON THIRD PARTY INTERACTIVE ENTERTAINMENT SOFTWARE DEVELOPERS
FOR DEVELOPING AND COMPLETING MANY OF OUR TITLES.
We rely on third party interactive entertainment software developers for the
development of a significant number of our interactive entertainment software
titles. Quality third party developers are continually in high demand. For this
reason, we cannot assure you that the third party software developers who have
developed titles for us in the past will continue to be available to develop
software for us in the future. Due to the limited number of third party software
developers and the lack of control that we exercise over them, we cannot assure
you that these developers will complete titles for us on a timely basis or
within acceptable quality standards, if at all.
IF WE ARE REQUIRED TO WRITE DOWN PREPAID ROYALTIES OR CAPITALIZED SOFTWARE
DEVELOPMENT COSTS BELOW THEIR CURRENT RECORDED VALUE, OUR RESULTS OF OPERATIONS
COULD BE ADVERSELY AFFECTED.
The agreements we enter into with licensors of popular entertainment properties
and third party developers of interactive entertainment software titles
typically require advance payments of royalties and/or guaranteed minimum
royalty payments. We cannot assure you that the sales of products for which
these royalties are paid or guaranteed payments are made will be sufficient to
cover the amount of these required payments.
We capitalize our advances to developers on our balance sheet once technological
feasibility is achieved. We analyze all of our capitalized costs quarterly and
we take write-offs when, based on our estimates, future individual product
contributions will not be sufficient to recover our investment.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EFFECTIVELY MANAGE OUR GROWTH.
Our operations have rapidly expanded since our inception in October 1999 and we
plan to continue to significantly expand our operations. Our rapid growth has
placed, and will continue to place, significant strain on our management and
operational systems and resources. We anticipate that as our business grows, we
will have to improve and enhance our overall financial and managerial controls,
reporting systems and procedures, and we will need to continue to expand, train
and manage our workforce. We will also have to increase the capacity of our
current systems to meet additional demands. An inability to manage our growth
and meet these additional demands will impair the success of our business.
OBTAINING ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH COULD
IMPAIR THE VALUE OF YOUR INVESTMENT.
If we expand more rapidly than currently anticipated or if our working capital
needs exceed our current expectations, we may need to raise additional capital
through public or private equity offerings or debt financings. Our future
capital requirements depend on many factors including our product development
and sales and marketing activities. We do not know whether additional financing
will be available when and if needed, or whether it will be available on terms
favorable to us. If we cannot raise needed funds on acceptable terms, we may not
be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements.
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution and the new equity securities
may have greater rights, preferences or privileges than our existing common
stock.
OUR SUCCESS IS HIGHLY DEPENDENT ON OUR PROPRIETARY SOFTWARE AND INTELLECTUAL
PROPERTY.
We rely primarily on a combination of copyright, trademark and trade secret
laws, employee and third party nondisclosure agreements and other methods to
protect our proprietary rights. While we provide standard industry, or
shrinkwrap, license agreements or limitations on use with our interactive
entertainment software products, the effectiveness of these agreements or
limitations is uncertain. We are aware that unauthorized copying occurs within
our industry, and if a significantly greater amount of unauthorized copying of
our interactive entertainment software products were to occur, our business
would be harmed. We also outsource some of our product development to third
party developers and contract with them for the ownership of the software code
they develop as well as related documentation. If a third party developer
successfully challenged our ownership rights to the software code for a
particular title or group of titles, our business could be harmed.
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RISK FACTORS
We rely on existing copyright laws to prevent unauthorized distribution of our
products. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy is a
persistent problem, especially in international markets. In addition, the laws
of some countries in which our products are or may be distributed either do not
protect our products and intellectual property rights to the same extent as the
laws of the United States or are weakly enforced. Legal protection of our rights
may be ineffective in these countries. Any unauthorized use of our proprietary
information could result in costly and time-consuming litigation to enforce our
proprietary rights.
We require all of our employees to sign confidentiality agreements providing
that they will not disclose any confidential or proprietary information or trade
secrets regarding us to any third party or use any such information or trade
secrets for their benefit or the benefit of any third party. Although terms of
the confidentiality agreement survive the termination of an employee's work with
us, enforcing these terms and policing our employees during and especially after
employment is difficult. These confidentiality agreements may not be sufficient
to protect our proprietary rights. Any unauthorized disclosure or use of our
confidential or proprietary information or our trade secrets could result in
costly and uncertain litigation, and our business could be harmed.
OUR ABILITY TO LICENSE ENTERTAINMENT PROPERTIES UNDERLYING THE DEVELOPMENT OF
FUTURE TITLES COULD BE IMPAIRED BY AN IMPENDING LABOR STRIKE THAT WOULD AFFECT
THE DEVELOPMENT OF MOTION PICTURES AND TELEVISION SHOWS AND AFFECT THE SCHEDULED
RELEASE OF MOTION PICTURES INTENDED TO COINCIDE WITH THE LAUNCH OF OUR RELATED
TITLES.
The existing collective bargaining agreement governing contracts and agreements
with members of the Screen Actors' Guild is due to expire on June 30, 2001. We
are not a signatory to this collective bargaining agreement, however, we are
dependent on third party licensors for entertainment properties based on the
production of motion pictures requiring the services of members of the Screen
Actors' Guild. Although development efforts have been stepped up in the past
year and projects have been accumulated in anticipation of a strike, if the
collective bargaining agreement with the Screen Actors' Guild is allowed to
expire and such a strike occurs, a prolonged work stoppage could impair our
ability to license entertainment properties underlying the development of our
future software titles and our business could be harmed. In addition, although
we retain our rights to licensed properties whether or not the related motion
picture is ever released, if this collective bargaining agreement is allowed to
expire and a strike occurs, a prolonged work stoppage would delay the production
and release of all motion pictures. This would impair our ability to coordinate
the launch of software titles with the scheduled release of the related motion
pictures, which could affect consumer acceptance of these titles and harm our
business.
OTHER PARTIES MAY ASSERT CLAIMS AGAINST US THAT WE ARE INFRINGING UPON THEIR
INTELLECTUAL PROPERTY RIGHTS AND WE ARE REQUIRED TO INDEMNIFY HARDWARE
MANUFACTURERS FROM CERTAIN CLAIMS IN EXCHANGE FOR THE RIGHT TO PURCHASE TITLES
AND MANUFACTURE OUR SOFTWARE FOR THEIR HARDWARE PLATFORMS.
We cannot be certain that our products do not infringe upon the intellectual
property rights of others. Authorship of intellectual property rights can be
difficult to verify. We may be subject to legal proceedings and claims from time
to time in the ordinary course of our business, including claims of alleged
infringement of the intellectual property rights of third parties. If our
products violate third-party proprietary rights, we cannot assure you that we
would be able to obtain licenses to continue offering such products on
commercially reasonable terms, or at all. In addition, we must indemnify the
hardware manufacturers with respect to all loss, liability and expense resulting
from any claim against them involving the development, marketing, sale or use of
our products, including any claims for copyright or trademark infringement
brought against them. As a result, we bear the risk that the properties upon
which our software titles are based, or that the information and technology
licensed from the hardware manufacturer and incorporated in our software, may
infringe the rights of third parties. Any claims against us or the parties we
indemnify relating to the infringement of third-party proprietary rights, even
if not meritorious, could result in the expenditure of significant financial and
managerial resources and also result in injunctions preventing us from offering
these products. Such claims could severely harm our financial condition and
ability to compete.
We may also be subject to legal proceedings and claims from time to time in the
ordinary course of business, including claims of alleged infringement of the
trademarks and other intellectual property rights of third
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RISK FACTORS
parties. For example, we have recently become aware that other parties are
utilizing the "BAM" mark, or marks that incorporate the letters "BAM", in
businesses similar to ours, and those parties may have rights to such mark that
are superior to ours. These parties could challenge our rights to use the name
"BAM" in their markets. In this event, we could be required to stop using the
name in particular markets or to obtain a license from these parties to use it
in such markets. In addition, in May 2001, Nintendo of America, Inc. and Spike
Co., Ltd. received a letter from counsel to World Wrestling Federation
Entertainment, Inc. claiming a yet-to-be released game violated certain of the
World Wrestling Federation Entertainment, Inc.'s intellectual property rights
and demanding that each of them cease the United States distribution of the
game. We hold the rights to the United States version of the game. We believe
that the game, slated for sale in North America, does not violate the World
Wrestling Federation Entertainment, Inc.'s rights because we believe that the
United States version does not contain references to the characters, moves or
wrestling organizations mentioned in the letter. However, in the event it is
determined that the game we intend to distribute in North America violates the
World Wrestling Federation Entertainment, Inc.'s intellectual property rights,
we may be liable for damages and/or could be enjoined from distributing the
game, which would negatively affect our net revenues.
Our agreements with third party software developers and property licensors
typically provide for us to be indemnified with respect to certain matters.
However, if any claim is brought by a hardware manufacturer against us for
indemnification, our software developers or property licensors may not have
sufficient resources to, in turn, indemnify us. In addition, these parties'
indemnification of us may not cover the matter that gives rise to the hardware
manufacturer's claim, and in either case, our business could be harmed.
THE CALIFORNIA ENERGY CRISIS COULD HARM OUR BUSINESS.
California is currently experiencing a utility crisis and does not have
sufficient sources of affordable power. This energy crisis could impact our
business, financial condition and results of operations. Our domestic
headquarters and principal operations are located in San Jose, California, which
has undergone several periods of rolling blackouts, a technique used by our
power providers to conserve resources. Although our operations have not been
halted for significant periods of time as a result of these conservation
measures, potential suspensions of our operations could result in lost
productivity, materially higher costs and lost revenues. In addition, regulators
have announced electricity rate increases in California, which will also
increase our cost of operations.
THE INTERACTIVE ENTERTAINMENT INDUSTRY IS CONSOLIDATING. IN MAKING ACQUISITIONS,
WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES WITH GREATER FINANCIAL
RESOURCES. WE ALSO FACE INTEGRATION CHALLENGES WITH ANY COMPANIES THAT WE
ACQUIRE.
To enhance our product development and distribution capabilities, we may pursue
acquisitions of companies, intellectual property rights and other assets that
can be acquired on acceptable terms and which we believe can be operated or
exploited profitably. We cannot assure you that we will be successful in
identifying suitable acquisition opportunities. As the interactive entertainment
industry continues to consolidate, we face significant competition in making
acquisitions, which may constrain our ability to complete suitable transactions.
Many of our competitors for potential acquisitions have significant financial
and other resources.
If we attempt an acquisition, we cannot assure you that, given the competitive
environment, we will complete the acquisition or that any completed acquisitions
will benefit our business or operations. In addition, the integration of any
newly acquired company's operations with our existing operations will take
management time and effort. There is a possibility that we may not be successful
in integrating operations of any newly acquired companies. Additionally, there
is a risk of loss of key employees, customers and vendors of any recently
acquired companies.
THE DEVELOPMENT AND MARKETING OF PC TITLES DIFFER FROM CONSOLE TITLES AND ENTAIL
ADDITIONAL RISKS.
We have no experience developing and marketing titles for personal computers, or
PCs. The development and marketing of PC games subject us to some different
risks than those we encounter in connection with console games. These risks
include the ability to accurately predict which titles appeal to the purchasers
of games for PCs and our ability to produce titles using PC technology, which
differs from that of traditional
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RISK FACTORS
interactive entertainment hardware. We cannot assure you that we will be able to
develop and market successful titles for the PC market.
WE FACE RISKS ASSOCIATED WITH DOING BUSINESS IN FOREIGN COUNTRIES, INCLUDING OUR
ABILITY TO GENERATE INTERNATIONAL DEMAND FOR OUR PRODUCTS.
We intend to expand our international sales and marketing activities. This
expansion will require significant management time and attention and financial
resources in order to develop our international operations. We cannot assure you
that we will be able to generate international market demand for our products.
International sales and operations are subject to a number of risks, including:
- - the impact of possible recessions in foreign economies;
- - our ability to protect our intellectual property;
- - the time and costs associated with translating and localizing products for
foreign markets;
- - foreign currency fluctuations;
- - unexpected changes in regulatory requirements;
- - difficulties and costs of staffing and managing foreign operations; and
- - political and economic instability.
OUR OFFICERS AND DIRECTORS OWN A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AND
THEREFORE HAVE SUBSTANTIAL INFLUENCE OVER OUR OPERATIONS AND CAN SIGNIFICANTLY
INFLUENCE MATTERS REQUIRING STOCKHOLDER APPROVAL.
Our officers and directors will beneficially own approximately ___% of our
common stock following the completion of this offering, or approximately ___% if
the underwriters' over-allotment option is exercised in full. As a result, they
will have the ability to control all matters requiring approval by our
stockholders, including the election and removal of directors, approval of
significant corporate transactions and the decision of whether a change in
control will occur.
RISKS RELATED TO OUR INDUSTRY
COMPETITION WITHIN THE INTERACTIVE ENTERTAINMENT SOFTWARE INDUSTRY IS INTENSE
AND POSES AN ONGOING THREAT TO THE SUCCESS OF OUR BUSINESS.
The interactive entertainment industry is intensely competitive. We compete
primarily with other parties that develop and publish interactive entertainment
software titles. Significant competitors include independent software publishers
such as Acclaim Entertainment, Inc., Activision, Inc., Bandai America
Incorporated, Capcom USA, Inc., Eidos PLC, Electronic Arts Inc., Infogrames,
Inc., Interplay Entertainment Corp., Konami Corporation of America, Inc., Midway
Games Inc., Namco Ltd., Sega Enterprises, Inc. (USA), Take-Two Interactive
Software, Inc., THQ, Inc., Ubi Soft Entertainment and The 3DO Company, and
manufacturers of interactive entertainment hardware platforms, such as Sony,
Nintendo and Microsoft.
Many of our competitors have greater name recognition among consumers and
licensors of entertainment properties, broader product lines and greater
financial, marketing and other resources than us. Accordingly, these competitors
may be able to market their products more effectively, make larger offers or
guarantees in connection with the acquisition of licensed entertainment
properties, adopt more aggressive pricing policies or pay more to third party
developers. We believe that the principal competitive factors in the interactive
entertainment software industry include:
- - product features;
- - brand name recognition;
- - access to distribution channels;
- - product quality and ease of use;
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RISK FACTORS
- - price;
- - marketing support;
- - reviews received from independent reviewers;
- - quality of customer service; and
- - ownership of properties.
We believe that other technology, entertainment and media companies are
increasing their focus on the interactive entertainment software market, which
might result in greater competition for us. In addition, many of our competitors
are developing on-line interactive entertainment software products and
interactive networks that will be competitive with our interactive entertainment
software products.
Competitive pressures could have the following effects on us:
- - As competition for popular entertainment properties increases, our cost of
acquiring licenses for those properties may increase, resulting in reduced
margins.
- - As competition for retail shelf space becomes more intense, we may need to
increase our marketing expenditures to maintain sales of our interactive
entertainment software titles.
- - We could be required to reduce the wholesale unit prices of our titles.
COMPETITION FOR LIMITED SHELF SPACE AND PROMOTIONAL RESOURCES AMONG INTERACTIVE
ENTERTAINMENT SOFTWARE PUBLISHERS IS INTENSE AND POSES AN ONGOING THREAT TO THE
SUCCESS OF OUR BUSINESS.
There is intense competition among developers and publishers of interactive
entertainment software products for high quality retail shelf space and
promotional support from retailers. As the number of titles and hardware
platforms increases, competition for shelf space will intensify and may require
us to increase our marketing expenditures. Due to increased competition for
limited shelf space, retailers and distributors are in an increasingly better
position to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return policies. Our products
constitute a relatively small percentage of any retailer's sales volume, and we
cannot assure you that retailers will continue to purchase our products or to
provide our products with adequate levels of shelf space and promotional
support. As a result of their positions in the industry, the manufacturers of
interactive entertainment hardware platforms generally have better bargaining
positions with respect to retail pricing, shelf space and retailer
accommodations than do any of their licensees, including us.
GOVERNMENT RESTRICTIONS INCLUDING THE LIKELY ADOPTION OF AN INTERACTIVE
ENTERTAINMENT SOFTWARE RATING SYSTEM AND POTENTIAL OPPOSITION BY CONSUMER
ADVOCACY GROUPS TO CERTAIN SOFTWARE CONTENT COULD HARM OUR BUSINESS.
Legislation is periodically introduced at the state and federal levels in the
United States and in foreign countries to establish a system for providing
consumers with information about graphic violence and sexually explicit material
contained in interactive entertainment software products. Under such a system
interactive entertainment software publishers would be expected to comply by
identifying particular products within defined rating categories and
communicating such ratings to consumers through appropriate package labeling and
through advertising and marketing presentations consistent with each product's
rating. In addition, many foreign countries have laws which permit governmental
entities to censor the content of products, including interactive entertainment
software. In some instances, we may be required to modify our products to comply
with the requirement of such governmental entities, which could delay the
release of those products in such countries. Such delays could harm our
business. We currently voluntarily submit our products to industry-created
review boards and publish their ratings on our game packaging. Some retailers
may refuse to carry titles that bear an unacceptable rating. We believe that
mandatory government-run interactive entertainment software products rating
systems eventually will be adopted in many countries which represent significant
markets or potential markets for us. Due to the uncertainties in the
implementation of such a rating system, confusion in the marketplace may occur,
and we are unable to predict what effect, if any, such a rating system would
have on our business. In addition to such regulations, consumer advocacy
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RISK FACTORS
groups have in the past opposed sales of interactive entertainment software
products containing graphic violence and sexually explicit content by pressing
for legislation in these areas and by engaging in public demonstrations and
media campaigns. While to date such actions have not harmed our business, we
cannot assure you that these groups will not target our products in the future,
which will possibly require us to significantly change or discontinue a
particular title.
RISKS RELATED TO THIS OFFERING
WE EXPECT OUR STOCK PRICE TO BE VOLATILE.
Prior to this offering, there has been no public market for our common stock.
Accordingly, we cannot assure you that an active trading market will develop or
be sustained or that the market price of our common stock will not decline. The
initial public offering price for the shares of our common stock will be
determined by us and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market. The price at which
our common stock will trade after this offering is likely to be highly volatile
and may fluctuate substantially due to many factors, some of which are:
- - actual or anticipated fluctuations in our results of operations;
- - changes in securities analysts' expectations or our failure to meet those
expectations;
- - announcements of technological innovations or content relationships by us
or our competitors;
- - introductions of new products by us or our competitors;
- - introductions of new hardware platforms;
- - additions or departures of key personnel;
- - commencement of litigation;
- - developments with respect to intellectual property rights, including
increased copyright piracy;
- - conditions and trends in technology industries;
- - changes in the estimation of the future size and growth rate of our
markets;
- - general market conditions; and
- - future sales of our common stock.
In addition, the stock market has experienced significant price and volume
fluctuations that affected the market price for the common stock of many
technology, communications and entertainment and media companies. These market
fluctuations were sometimes unrelated or disproportionate to the operating
performance of these companies. Any significant stock market fluctuations in the
future, whether due to our actual performance or prospects or not, could result
in a significant decline in the market price of our common stock.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND IN DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL AND, AS A RESULT, NEGATIVELY IMPACT OUR
STOCKHOLDERS.
Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger or acquisition or make removal of incumbent directors or
officers more difficult. These provisions may discourage takeover attempts and
bids for our common stock at a premium over the market price. These provisions
include:
- - the ability of our board of directors to alter our bylaws without
stockholder approval;
- - the restriction on the ability of stockholders to call special meetings;
- - the restriction on the ability of our stockholders to act by written
consent;
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RISK FACTORS
- - the establishment of advance notice requirements for nominations for
election to our board of directors or for proposing matters that can be
acted on by stockholders at stockholders meetings; and
- - the establishment of a classified board of directors with staggered,
three-year terms, which prevents a majority of the board from being
elected at one time.
In addition, we are subject to Section 203 of the Delaware General Corporation
Law, which prohibits a publicly held Delaware corporation from engaging in a
merger, asset or stock sale or other transaction with an interested stockholder
for a period of three years following the date such person became an interested
stockholder, unless prior approval of our board of directors is obtained or as
otherwise provided. These provisions of Delaware law also may discourage, delay
or prevent someone from acquiring or merging with us without obtaining the prior
approval of our board of directors, which may cause the market price of our
common stock to decline.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING.
The net proceeds from this offering will be used for general corporate purposes.
Although we list expanding our manufacturing capacity, expanding our research
and development operations, enhancing our technology, expanding our sales and
marketing activities, expanding our international operations and possible
acquisitions as examples of general corporate purposes, we are not obligated to
pursue any of these opportunities. We have not reserved or allocated the net
proceeds for any specific transaction, and we cannot specify with certainty how
we will use the net proceeds. Accordingly, our management will have considerable
discretion in the application of the net proceeds, and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. The net proceeds may be used for corporate
purposes that do not increase our operating results or market value. Until the
net proceeds are used, they may be placed in investments that do not produce
income or that lose value.
A SUBSTANTIAL AMOUNT OF OUR SHARES WILL BE ELIGIBLE FOR SALE SHORTLY AFTER THIS
OFFERING.
If our stockholders sell substantial amounts of common stock in the public
market following this offering, the market price of our common stock could fall.
These sales also might make it more difficult for us to sell equity or our
equity-related securities at a time and price that we deem appropriate. Based on
shares outstanding as of March 31, 2001, upon completion of this offering, we
will have ___________ shares of common stock outstanding. Of these shares, the
____________ shares being offered hereby will be freely tradable and the
remaining shares will become eligible for sale in the public market pursuant to
Rule 144. All of the remaining shares are subject to contractual restrictions
with the underwriters that prevent them from being sold until 180 days after the
date of this prospectus without the consent of UBS Warburg LLC.
Of the remaining shares, 1,583,600 may be sold on the 181st day after the date
of this prospectus without registration under the Securities Act to the extent
permitted by Rule 144 or other exemptions under the Securities Act. An
additional 14,625 shares will be available in April 2002 for sale without
registration under the Securities Act to the extent permitted by Rule 144. The
remaining 245,659 shares will be available in May 2002 for sale without
registration under the Securities Act to the extent permitted under Rule 144.
UBS Warburg LLC may, in its sole discretion, at any time without notice, release
all or any portion of the shares subject to the lock-up agreements, which would
result in more shares being available for sale in the public market at an
earlier date. Sales of common stock by existing stockholders in the public
market, or the availability of such shares for sale, could materially and
adversely affect the market price of our common stock.
In addition, we expect to register for sale 325,000 shares of common stock
reserved for issuance under our 2000 Stock Incentive Plan. As of March 31, 2001,
options to purchase 83,000 shares of our common stock were granted under our
2000 Stock Incentive Plan. Shares acquired upon exercise of these options will
be eligible for sale in the public market from time to time subject to vesting
and the 180 day lock-up restrictions that apply to the outstanding stock. The
exercise price of the majority of these stock options is lower than the initial
public offering price of our common stock. The sale of a significant number of
these shares could cause the price of our common stock to decline.
16
20
RISK FACTORS
OUR SHARES PURCHASED IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL
DILUTION OF APPROXIMATELY $_________ PER SHARE.
The assumed initial public offering price of our common stock is substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock immediately after this offering. Accordingly, assuming an initial
public offering price of $______ per share, if you purchase common stock in this
offering, you will incur immediate and substantial dilution of $______ in the
pro forma net tangible book value per share of the common stock. In addition,
investors will incur additional dilution upon the exercise of outstanding stock
options and warrants after this offering.
17
21
FORWARD LOOKING INFORMATION
This prospectus may contain forward-looking statements. When used in this
prospectus, the words "anticipate," "believe," "estimate," "will," "plan,"
"intend" and "expect" and similar expressions identify forward-looking
statements. Although we believe that our plans, intensions and expectations
reflected in those forward looking statements are reasonable, we cannot assure
you that these plans, intentions or expectations will be achieved. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements contained
in this prospectus. Important factors that could cause actual results to differ
materially from our forward-looking statements are set forth in this prospectus,
including under the heading "Risk factors." Our actual results could differ
materially from those predicated in these forward-looking statements, and the
events anticipated in the forward-looking statements may not actually occur. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements set forth
in this prospectus. Other than with respect to previously issued projections, we
are under no obligation to update any forward-looking statement, whether as a
result of new information, future events or otherwise.
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell and seeking offers to buy
shares of our common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
USE OF PROCEEDS
The net proceeds to us from this offering, at an assumed initial public offering
price of __________ per share, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be $_______
million, or $_______ million if the underwriters' over-allotment option is
exercised in full. We expect to use the net proceeds of the offering for general
corporate purposes, including approximately $__________ million, which have not
been allocated in specific amounts, for product development, expansion of sales
and marketing activities, $_________ million for expansion of our international
operations and possible acquisitions. We currently have no commitments or
agreements and are not involved in any negotiations with respect to any
acquisitions. The amounts and timing of our actual expenditures will depend on
numerous factors, including the status of our product development efforts, sales
and marketing activities, technological advances, the amount of cash generated
or used by our operations and competition. We may find it necessary or advisable
to use the net proceeds for other purposes, and we will have broad discretion in
the application of the balance of the net proceeds. Pending the uses described
above, we intend to invest the net proceeds in short-term, interest-bearing,
investment grade securities.
Our management team made the determination to offer our shares to the public to
fund our future expansion, to compensate our employees and to attract new
employees. We determined the portion of our business to be sold in this offering
through a combination of estimates of our future expansion plans, evaluation of
market conditions and recent offerings of comparable companies.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
anticipate that we will retain any earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends on our capital stock in the foreseeable future. Any future
determination relating to our dividend policy will be made at the discretion of
our board of directors and will depend on a number of factors, including future
earnings, capital requirements, financial conditions, contractual obligations
and future prospects and other factors the board of directors may deem relevant.
18
22
CAPITALIZATION
Our capitalization as of March 31, 2001 is set forth in the following table on:
- - an actual basis;
- - a pro forma basis to reflect the sale of 245,659 shares of Series C
Preferred Stock in May 2001 for net proceeds of $5.3 million and the
conversion of all outstanding shares of our redeemable convertible
preferred stock into shares of our common stock upon the completion of
this offering; and
- - the pro forma information on an as adjusted basis to give effect to the
receipt of the estimated net proceeds from the sale of _______ shares of
common stock in this offering, at an assumed initial public offering price
of $_______ per share after deducting the estimated underwriting discount
and commissions and estimating offering expenses payable by us.
The table does not include:
- - 83,000 shares of our common stock issuable upon exercise of options
outstanding as of March 31, 2001 with a weighted average exercise price of
$3.65 under our 2000 Stock Incentive Plan;
- - 130,000 shares of our common stock issuable upon exercise of warrants
outstanding as of March 31, 2001 with a weighted average exercise price of
$7.92; and
- - up to 146,250 shares of our common stock issuable as of March 31, 2001
pursuant to a third party property license agreement. You should read this
table in conjunction with "Management's discussion and analysis of
financial condition and results of operations" and our consolidated
financial statements and the notes to those financial statements included
elsewhere in this prospectus.
MARCH 31, 2001
-------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(in thousands, except share and per share data)
Long-term debt....................................................... $ -- $ -- $ --
-------- -------- -------
Redeemable convertible preferred stock:
$0.001 par value; 3,000,000 shares authorized; 1,270,840
shares issued and outstanding, actual; no shares issued and
outstanding, pro forma and pro forma as adjusted................. 6,657 -- --
-------- -------- -------
Common stock:
$0.001 par value; 10,000,000 shares authorized; 312,760
shares issued and outstanding, actual; 1,829,259 shares
issued and outstanding, pro forma; ________ shares issued and
outstanding, pro forma as adjusted .............................. 1 2
Additional paid-in-capital........................................... 1,365 13,321
Receivable from stockholder.......................................... (1) (1)
Deferred stock compensation.......................................... (46) (46)
Accumulated deficit.................................................. (1,378) (1,378)
Accumulated other comprehensive loss................................. (4) (4)
-------- -------- -------
Total stockholders' equity (deficit)................................. (63) 11,894
-------- -------- -------
Total capitalization................................................. $ 6,594 $ 11,894 $
======== ======== =======
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23
DILUTION
Our pro forma net tangible book value as of March 31, 2001 was approximately
$_______ per share of our common stock. Our net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities and divided by the total number of shares of our common stock
outstanding, as of March 31, 2001. In making this calculation, we gave effect to
the sale of 245,659 shares of Series C Preferred Stock in May 2001 for net
proceeds of $5.3 million and the conversion of all outstanding shares of our
redeemable convertible preferred stock into shares of our common stock upon the
completion of this offering. After giving effect to our sale in this offering of
_______________ shares of our common stock at an assumed initial public offering
price of $_______ per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses, our pro forma net tangible book
value as of March 31, 2001 would have been _______ per share of our common
stock. This represents an immediate increase in net tangible book value of
______ per share to our existing stockholders and an immediate dilution of
_______ per share to you. The following table illustrates this per share
dilution:
Assumed initial public offering price per share....................................... $
Pro forma net tangible book value per share before this offering................ $
---------
Increase attributable to investors in this offering.............................
Pro forma net tangible book value after the offering..................................
--------
Dilution per share to investors in this offering...................................... $
========
The differences between our existing stockholders and investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid for both common and preferred
stock is summarized on a pro forma basis, as of March 31, 2001 before
underwriters' discount and estimated offering expenses in the following table,
after giving effect to the sale of 245,659 shares of Series C Preferred Stock in
May 2001 for net proceeds of $5.3 million and the conversion of all outstanding
shares of our redeemable convertible preferred stock into shares of our common
stock upon the completion of this offering. The following table does not include
83,000 shares of our common stock issuable upon exercise of options outstanding
as of March 31, 2001 with a weighted average exercise price of $3.65 under our
2000 Stock Incentive Plan; 130,000 shares of our common stock issuable upon
exercise of warrants outstanding as of March 31, 2001 with a weighted average
exercise price of $7.92; and up to 146,250 shares of our common stock issuable
as of March 31, 2001 pursuant to a third party property license agreement. You
should read this table in conjunction with "Management's discussion and analysis
of financial condition and results of operations" and our consolidated financial
statements and the notes to those financial statements included elsewhere in
this prospectus.
See "Management - 2000 Stock Incentive Plan" and note 5 to our consolidated
financial statements.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
(in thousands)
Existing stockholders............................... % % $
Investors in this offering..........................
----- ----- ----- ----- -------
Total............................................... 100.0 % 100.0% $
===== ===== ====== ===== =======
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24
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and related notes thereto
and "Management's discussion and analysis of financial condition and results of
operations" included elsewhere in this prospectus. The selected consolidated
financial data as of June 30, 2000 and March 31, 2001 and for the period from
October 7, 1999 (inception) through June 30, 2000 and for the nine months ended
March 31, 2001 are derived from our audited consolidated financial statements
included elsewhere in this prospectus. The selected consolidated financial data
for the period from October 7, 1999 (inception) through March 31, 2000 is
derived from our unaudited financial statements appearing elsewhere in this
prospectus. The unaudited information has been prepared on the same basis as our
audited consolidated financial statements and, in the opinion of management,
contains all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of our operating results for these periods
and our financial condition as of these dates.
PERIOD FROM PERIOD FROM
OCTOBER 7, 1999 OCTOBER 7, 1999
(INCEPTION) THROUGH (INCEPTION) THROUGH NINE MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001
------------------- ------------------- -----------------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net revenues ............................................... $ 1,377 $ -- $ 17,305
-------- -------- --------
Costs and expenses:
Cost of revenues ...................................... 807 -- 9,766
Royalties, software costs, license costs and
project abandonment ................................... 248 -- 2,028
Research and development* ............................. 260 133 663
Sales and marketing* .................................. 132 -- 3,234
General and administrative* ........................... 711 379 1,218
Amortization of deferred stock compensation ........... -- -- 19
-------- -------- --------
Total costs and expenses .......................... 2,158 512 16,928
-------- -------- --------
Income (loss) from operations .............................. (781) (512) 377
Other expense, net ......................................... (22) (5) (952)
-------- -------- --------
Net loss ................................................... $ (803) $ (517) $ (575)
======== ======== ========
Net loss per share:
Basic and diluted (1) ................................. $ (4.54) $ (2.97) $ (1.84)
Pro forma loss per share
Basic and diluted (unaudited) (2) ..................... $ (4.44) $ (0.41)
Shares used in computation:
Basic and diluted (1) ................................. 177 174 313
Pro forma basic and diluted (unaudited) (2) ........... 181 1,390
*Excludes amortization of deferred stock
compensation:
Research and development .............................. $ --- $ -- $ 16
Sales and marketing ................................... -- -- 3
General and administrative ............................ -- -- --
-------- -------- --------
$ -- $ -- $ 19
======== ======== ========
JUNE 30, 2000 MARCH 31, 2001
------------- --------------
(in thousands)
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents .............. $ 908 $ 1,240
Working capital ........................ 1,318 4,949
Total assets ........................... 2,712 12,767
Long-term portion of debt .............. -- --
Redeemable convertible preferred stock.. 2,103 6,657
Total stockholders' equity (deficit) ... (706) (63)
21
25
SELECTED CONSOLIDATED FINANCIAL DATA
(1) The diluted net loss per share computation excludes potential shares of
common stock issuable upon conversion of redeemable convertible preferred
stock and exercise of options to purchase common stock, as their effect
would be antidilutive. See Notes 1 and 7 of notes to consolidated
financial statements for a detailed explanation of the determination of
the shares used in computing basic and diluted net loss per share.
(2) Includes the weighted average number of shares resulting from the assumed
conversion of all outstanding shares of redeemable convertible preferred
stock upon the completion of this offering. See note 1 of notes to
consolidated financial statements for a detailed explanation of the
determination of the shares used in computing pro forma net loss per
share. The diluted pro forma net loss per share computation excludes
potential shares of common stock issuable upon exercise of options to
purchase common stock as their effect would be antidilutive.
22
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Selected consolidated financial
data" and the consolidated financial statements and related notes to those
statements included elsewhere in this prospectus. This discussion and analysis
may contain forward-looking statements that involve risks, uncertainties and
assumptions. As a result of many factors, such as those set forth under "Risk
factors" and elsewhere in this prospectus, our actual results may differ
materially from those anticipated in the forward-looking statements.
OVERVIEW
We develop and publish interactive entertainment software. We currently publish
titles for many of the most popular interactive entertainment hardware
platforms, such as Sony's PlayStation, Nintendo 64 and Nintendo's Game Boy
Color, and plan to develop and publish titles for next generation hardware
platforms such as Sony's PlayStation2, Nintendo GameCube and Game Boy Advance
and Microsoft's Xbox, as well as for other portable handheld devices and PCs. We
were incorporated in California in October 1999 under the name Bay Area
Multimedia, Inc. We reincorporated in Delaware in September 2000 and changed our
name to BAM! Entertainment, Inc. in December 2000. We commenced operations in
October 1999 and shipped our first products in June 2000.
We license properties from a wide variety of sources, and publish titles based
on the motion picture, sports and television cartoon character properties of our
licensors. We have entered into strategic license arrangements with
entertainment and media companies that have developed well-known characters and
brands and that are producing popular properties that are expected to form the
basis of some of our future products. Our agreements with licensors and
developers generally require us to make advance royalty payments, and we may be
required to spend money on advertising and promotion. We generally pay royalties
based on net revenues.
We design and develop our titles internally, or through third parties with whom
we have established relationships. Our development cycle for new titles is long,
typically ranging from 12 to 24 months. After development of the product, it may
take between six to 12 additional months to develop the product for, or port the
product to, a different hardware platform.
We sell our products to mass merchandisers such as Toys "R" Us, Target, Kmart,
Wal-Mart and Best Buy, specialty chains such as Babbages, Etc. and Electronics
Boutique and independent distributors. Our products are manufactured exclusively
by third parties. We have operations in both the United States and Europe. Our
international operations are conducted through our offices in England, where we
have our internal product development studio, perform international sales and
marketing activities and manage local third-party developers. We currently have
minimal international revenues, but anticipate that these will increase as we
localize our products for international markets.
NET REVENUES
We derive revenues from shipment of finished products to the customer. We may
allow customers to exchange and return our products within certain specified
periods after shipment and provide price protection on certain unsold
merchandise in the form of a credit against amounts due from the customer. Net
revenues from product sales are reflected after deducting the estimated cost of
allowances for returns and price protection. These estimates are based upon
current known circumstances and historical results. Net revenues will be
affected by many factors, including pricing strategies, the channels through
which our products are distributed, product maturity, exchange and return
privileges and price protection.
Net revenues are recognized when we have satisfied the following conditions:
persuasive evidence of an arrangement exists, delivery has occurred, the price
has been fixed or is determinable, and collectibility has been reasonably
assured.
23
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We expect that substantially all of our net revenues for a particular year will
be generated by titles released in that year or in the latter part of the prior
year. The markets for interactive entertainment software are characterized by
short product life cycles, changing consumer preferences and frequent
introduction of new products. The life cycle of a title generally consists of a
relatively high level of sales during the first few months after introduction,
followed by a decline in sales, with only a small percentage of sales occurring
more than six months after release.
We have experienced, and may continue to experience, quarterly fluctuations in
net revenues. The interactive entertainment industry is highly seasonal, with
net revenues typically significantly higher during the fourth calendar quarter,
due primarily to the increased demand for titles during the year-end holiday
buying season. Our failure or inability to introduce products on a timely basis
to meet seasonal increases in demand will harm our business and operating
results. While we are attempting to reduce the effect of seasonal patterns on
our business by distributing our product release dates more evenly throughout
the year, we may not be successful in this endeavor.
COST OF REVENUES
Cost of revenues includes manufacturing costs of finished goods, freight,
inventory management costs and inventory obsolescence costs. Cost of revenues
will vary depending on the volume of products manufactured and shipped, the mix
of products sold and the shipping channel used.
ROYALTIES, SOFTWARE COSTS, LICENSE COSTS AND PROJECT ABANDONMENT
Royalties, software costs, license costs and project abandonment includes
royalties paid to software licensors, software amortization and amortization of
non-cash charges related to warrants and rights to acquire our common stock
issued to certain production companies. These costs will be affected in
particular periods by many factors, including the specific terms or agreements
under which royalties are paid to third parties, the commercial acceptance of
products, the cost of developing a product and the timing of stock and warrants
issued pursuant to the terms of our license agreements as described below.
Our agreements with licensors and developers generally require us to make
advance royalty payments and pay royalties based on product sales. Prepaid
royalties are amortized commencing upon the product release at the greater of
the contractual royalty rate based on actual product sales, or the ratio of
current revenues to total projected revenues. The Company evaluates the future
recoverability of prepaid royalties on a quarterly basis and expenses costs if
and when they are deemed unrecoverable.
Commencing upon product release, we amortize capitalized software development
costs. We capitalize software development costs subsequent to establishing
technological feasibility of a title. Technological feasibility is evaluated on
a product-by-product basis. For products where proven game engine technology
exists, this may be early in the development cycle. Software development costs
are expensed to research and development if and when they are deemed
unrecoverable. The following criteria is used to evaluate recoverability of
software development costs: historical performance of comparable products; the
commercial acceptance of prior products released on a given hardware platform;
orders for a product prior to its release and actual development costs of a
product as compared to forward-looking projections. Amortization of software
development costs is based on the greater of the proportion of current revenues
to total projected revenues or the straight-line method over the estimated
product life, generally three to six months. We evaluate the future
recoverability of capitalized amounts on a quarterly basis.
Pursuant to a license agreement with a production company, we are obligated to
issue 14,625 shares of our common stock to the production company after the
release of any film for which we elect to produce interactive entertainment
software products, up to 10 films or 146,250 shares of common stock. To date, we
have elected to produce titles for three films and have issued 14,625 shares
under this agreement. We are required to issue these shares when the films are
released and will then incur a non-cash charge. If the software product is
released after the release of the film, we will amortize the non-cash charge
over the life of the product, which is expected to be between three and six
months. If the software product is released prior to the release of the film, we
will expense the non-cash charge at the time of the issuance of the shares. We
cannot estimate the aggregate dollar amount of these future non-cash charges as
they are based on our share price
24
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
at a future point in time, but they may be substantial. The non-cash charges on
the initial shares issued is expected to be incurred in the first or second
quarter of fiscal 2002. In addition, in connection with the issuance of warrants
pursuant to a license agreement with another production company, we incurred a
non-cash charge of $354,000, which will be amortized on a straight-line basis
over five years. This amortization commenced in October 2000. In connection with
these warrants, a further non-cash charge of $556,000 will be amortized over a
period which is expected to be between three to six months, commencing on the
release of the subject titles, expected to be the first or second fiscal quarter
of 2003. Each of these charges will affect our gross margins and profitability.
RESEARCH AND DEVELOPMENT
Research and development expenses relate to the design and development of new
interactive entertainment software products. These expenses generally consist of
salaries, related expenses for engineering personnel and third-party development
costs. We will continue to develop our products both internally and through
third parties. In absolute dollars we expect to see increases in research and
development expense as we expand our product offerings. However, we expect to
see a reduction in research and development expense as a percentage of revenues
in future periods as our net revenues increase.
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries and related expenses
for our direct sales force and marketing personnel, commissions to independent
sales staff, marketing programs and advertising campaigns. In absolute dollars
we expect to see a significant increase in sales and marketing expense as
revenues increase and we expand our product offerings and international
presence. However, we do not expect to see significant variations in sales and
marketing expenses as a percentage of revenues in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries and related
expenses for finance and other administrative personnel, facilities and
occupancy charges, professional fees and bad debt expense. We expect our general
and administrative expenses to increase in absolute dollars as we expand our
staff, build our infrastructure, grow our business and incur costs associated
with being a public company. As a percentage of revenue, we expect to see a
reduction in general and administrative expenses as our revenues increase.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation consists of deferred compensation
expenses relating to stock option grants to employees. Deferred compensation
represents the difference between the deemed fair market value of our common
stock at the grant date and the exercise price of the related stock options.
Deferred compensation is represented as a reduction of stockholders' equity and
amortized, using a multiple option award valuation and amortization approach,
over the vesting periods of the options, which is generally four years. We
currently expect to amortize $____ in the quarter ending June 30, 2001 and then
$____ during fiscal 2002.
OTHER EXPENSE, NET
Other expense, net consist mostly of interest expense net of interest income. We
expect to be able to negotiate more favorable credit terms after this offering
and therefore expect to see a net improvement in other expense, net in the
future.
25
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth as a percentage of net revenues our consolidated
statements of operations data for the periods indicated. The consolidated
financial information for the nine months ended March 31, 2001 and for the
period from October 7, 1999 (inception) through June 30, 2000 is derived from
our audited consolidated financial statements. The consolidated financial
information for the period from October 7, 1999 (inception) through March 31,
2000 is not presented as we had no revenues. Results for any interim period are
not necessarily indicative of future operating results.
NINE
INCEPTION MONTHS
THROUGH ENDED
JUNE 30, MARCH 31,
2000 2001
--------- --------
Net revenues ............................................. 100.0 % 100.0 %
----- -----
Cost and expenses:
Cost of revenues ................................... 58.6 56.5
Royalties, software costs, license costs and project
abandonment ................................... 18.0 11.7
Research and development (1) ....................... 18.9 3.8
Sales and marketing (1) ............................ 9.6 18.7
General and administrative (1) ..................... 51.6 7.0
Amortization of deferred stock compensation ........ -- 0.1
----- -----
Total costs and expenses .............................. 156.7 97.8
----- -----
Income (loss) from operations ............................ (56.7) 2.2
Other expense, net ....................................... (1.6) (5.5)
----- -----
Net loss ................................................. (58.3)% (3.3)%
===== =====
- -----------------------
(1) Excludes amortization of deferred stock compensation.
NET REVENUES
Net revenues were $17.3 million for the nine months ended March 31, 2001, none
for the period from October 7, 1999 (inception) through March 31, 2000 and $1.4
million for the period from our inception through June 30, 2000. Net revenues in
the periods ended March 31, 2001 and June 30, 2000 arose primarily from sales of
new products released during those periods.
Our four largest customers collectively accounted for 63% of net revenues for
the nine months ended March 31, 2001 as compared to 75% from our three largest
customers for the period from inception through June 30, 2000. Our largest
customers for the nine months ended March 31, 2001 were Toys "R" Us, which
accounted for 20% of net revenues, Wal-Mart, which accounted for 16% of net
revenues, Target, which accounted for 15% of net revenues, and Kmart, which
accounted for 12% of net revenues. For the period from inception through June
30, 2000, Blockbuster accounted for 49% of net revenues, Wal-Mart accounted for
16% of net revenues, and KB Toys accounted for 10% of net revenues.
To date, a substantial portion of our revenues has been derived from a limited
number of products. Sales of our POWERPUFF GIRLS titles accounted for 82% of net
revenues for the nine months ended March 31, 2001. Sales of our BEAST WARS title
accounted for 100% of net revenues for the period from inception through June
30, 2000. As we expand our product offerings in different periods, we expect
that the percentage of total revenue from our largest product offerings will
decrease.
COST OF REVENUES
Cost of revenues were $9.8 million, or 56% of net revenues, for the nine months
ended March 31, 2001 and $807,000, or 59% of net revenues, for the period from
our inception through June 30, 2000. The increase in
26
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
cost of revenues was due to increased sales of product, and the improvement in
cost of revenues as a percentage of revenues arose primarily as a result of a
change in product mix, offset by higher freight costs as a result of changed
shipping channels.
ROYALTIES, SOFTWARE COSTS, LICENSE COSTS AND PROJECT ABANDONMENT
Royalties, software costs, license costs and project abandonment were $2.0
million, or 12% of net revenues, for the nine months ended March 31, 2001, and
$248,000, or 18% of net revenues, for the period from our inception through June
30, 2000. The increase in costs was due to increased sales of product, and the
improvement in costs as a percentage of revenues arose because of a change in
product mix that resulted in sales of product which have lower contracted third
party royalty rates.
RESEARCH AND DEVELOPMENT
Research and development expenses were $663,000, or 4% of net revenues, for the
nine months ended March 31, 2001, $133,000 for the period from our inception
through March 31, 2000, and $260,000, or 19% of net revenues, for the period
from our inception through June 30, 2000. This increase in absolute dollars was
primarily the result of an increased headcount. In October 2000 we opened our
internal development studio in London, England. Prior to opening this studio,
all development was performed by third parties.
SALES AND MARKETING
Sales and marketing expenses were $3.2 million, or 19% of net revenues, for the
nine months ended March 31, 2001, zero for the period from our inception through
March 31, 2000 and $132,000, or 10% of net revenues, for the period from our
inception through June 30, 2000. This increase in absolute dollars was the
result of increased advertising and marketing activities, along with an increase
in commissions.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $1.2 million, or 7% of net revenues,
for the nine months ended March 31, 2001, $379,000 for the period from our
inception through March 31, 2000, and $711,000, or 52% of net revenues, for the
period from our inception through June 30, 2000. This increase in absolute
dollars was attributable to growth in headcount, professional fees, facility
costs, bad debt expense and accounting fees.
AMORTIZATION OF DEFERRED STOCK COMPENSATION
Amortization of deferred stock compensation was $19,000, or 0.1% of revenues,
for the nine months ended March 31, 2001, and zero for each of the periods from
our inception through March 31, 2000 and June 30, 2000. We did not grant any
stock options prior to June 2000.
OTHER EXPENSE, NET
Other expense, net was $952,000 for the nine months ended March 31, 2001, $5,000
for the period from inception through March 31, 2000, and $22,000 for the period
from inception through June 30, 2000.
Interest income was $41,000 for the nine months ended March 31, 2001, $7,000 for
the period from our inception through March 31, 2000, and $8,000 for the period
from our inception through June 30, 2000. Interest income in all periods relates
to interest earned on funds deposited in money market accounts.
Interest expense was $993,000, or 6% of net revenues, for the nine months ended
March 31, 2001, $21,000 for the period from our inception through March 31,
2000, and $39,000, or 3% of net revenues, for the period from our inception
through June 30, 2000. Interest expense incurred during the periods ended March
31, 2000 and June 30, 2000 is comprised of interest and other funding charges
incurred on promissory notes and through a purchase order funding arrangement
with a finance company. The promissory notes were converted to redeemable
convertible preferred stock in June 2000. Subsequent to this conversion,
interest expense comprised primarily interest and other funding charges incurred
through a purchase order funding arrangement with a finance company and through
a commercial line of credit.
27
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
We had zero other income for the nine months ended March 31, 2001, other income
of $9,000 for the period from our inception through March 31, 2000, and other
income of $9,000 for the period from our inception through June 30, 2000. Other
income for the periods from inception to March 31, 2000, and June 30, 2000
comprised rental income.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly consolidated results of
operations, in dollars and as a percentage of net revenues, for our five most
recent fiscal quarters and the period from our inception through December 31,
1999. In the opinion of management, this unaudited financial information has
been prepared on the same basis as the audited financial information, and
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present this information fairly when read in conjunction with our
consolidated financial statements and the related notes contained elsewhere in
this prospectus. These operating results are not necessarily indicative of
results of any future period.
INCEPTION THREE MONTHS ENDED
THROUGH ----------------------------------------------------------------
DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1999 2000 2000 2000 2000 2001
--------- -------- -------- -------- -------- --------
(in thousands)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues ..................................... $ -- $ -- $ 1,377 $ 495 $ 10,717 $ 6,093
-------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of revenues ............................ -- -- 807 179 6,029 3,558
Royalties, software costs, license costs
and project abandonment................. -- -- 248 126 1,113 789
Research and development (1) ................ 32 101 127 114 318 231
Sales and marketing (1) ..................... -- -- 132 252 1,844 1,138
General and administrative (1) .............. 130 249 332 252 360 606
Amortization of deferred stock compensation.. -- -- -- -- 9 10
-------- -------- -------- -------- -------- --------
Total costs and expenses ................ 162 350 1,646 923 9,673 6,332
-------- -------- -------- -------- -------- --------
Income (loss) from operations .................... (162) (350) (269) (428) 1,044 (239)
Other expense, net ............................... (3) (2) (17) (7) (454) (491)
-------- -------- -------- -------- -------- --------
Net income (loss) ................................ $ (165) $ (352) $ (286) $ (435) $ 590 $ (730)
======== ======== ======== ======== ======== ========
- ----------------
(1) Excludes amortization of deferred stock compensation.
THREE MONTHS ENDED
-----------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
2000 2000 2000 2001
-------- --------- -------- --------
AS A PERCENTAGE OF NET REVENUES (2):
Net revenues................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Cost of revenues .......................... 58.6 36.2 56.3 58.4
Royalties, software costs, license costs
and project abandonment .................. 18.0 25.5 10.4 12.9
Research and development .................. 9.2 23.0 3.0 3.8
Sales and marketing ....................... 9.6 50.9 17.2 18.7
General and administrative ................ 24.1 50.9 3.3 9.9
Amortization of deferred stock compensation -- -- 0.1 0.2
----- ----- ----- -----
Total costs and expenses .................. 119.5 186.5 90.3 103.9
----- ----- ----- -----
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED
-----------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
2000 2000 2000 2001
------- -------- -------- -------
AS A PERCENTAGE OF NET REVENUES (2):
Income (loss) from operations .................. (19.5) (86.5) 9.7 (3.9)
Other expense, net ............................. (1.2) (1.4) (4.2) (8.1)
----- ----- ----- -----
Net income (loss) .............................. (20.7) % (87.9) % 5.5 % (12.0) %
===== ===== ===== =====
- -------------------
(1) As we had no revenues for the period from inception through December 31,
1999 and for the three months ended March 31, 2000, these periods are not
presented.
NET REVENUES
We sold our first product, BEAST WARS, in the quarter ended June 30, 2000. Our
second product offering was not released until late in the quarter ended
September 30, 2000 and this, combined with low seasonal demand, reduced
quarterly net revenues for the quarter ended September 30, 2000. In the quarter
ended December 31, 2000 we introduced six additional products, including two
POWERPUFF GIRLS offerings which, in combination with holiday seasonal demand,
resulted in significantly increased net revenues during the quarter. As
expected, demand for product decreased in the quarter ended March 31, 2001, the
quarter after the holiday season, resulting in reduced net revenues in the
quarter.
RESEARCH AND DEVELOPMENT
Prior to the quarter ended December 31, 2000, we developed products solely
through third parties. In the quarter ended December 31, 2000, we opened our
internal development studio, resulting in an increase in research and
development costs. In the quarter ended December 31, 2000, we incurred an
expense of $125,000 relating to a performance bonus paid to a third party
developer. This expense was not repeated in the quarter ended March 31, 2001.
SALES AND MARKETING
Sales commissions and marketing expenses grew significantly in the quarter ended
December 31, 2000 as we actively promoted our products during the holiday
season. Promotion decreased in the first calendar quarter of 2001 and sales and
marketing expenses decreased.
GENERAL AND ADMINISTRATIVE
One off professional and legal costs were the cause of the increase in general
and administrative costs in the quarter ended June 30, 2000. With the exception
of these one off costs, general and administrative costs increased gradually
over each quarter as we expanded our infrastructure.
OTHER EXPENSE, NET
Significant purchase order funding charges were the cause of the significant
expense increase in other expense, net in the quarters ended December 31, 2000
and March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
From inception we have financed our operations primarily through the private
sale of equity securities, cash generated from the sale of our products, a
product financing arrangement with a finance company, the issuance of promissory
notes to stockholders, a commercial line of credit and short-term liabilities.
Net cash used in operating activities was $5.8 million for the nine months ended
March 31, 2001, $651,000 for the period from October 7, 1999 (inception) through
March 31, 2000, and $1.7 million for the period from our inception through June
30, 2000. For these periods, net cash used in operating activities was the
result of net losses and increases in operating assets.
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33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net cash used in investing activities was $1.4 million for the nine months ended
March 31, 2001, $54,000 for the period from our inception through March 31,
2000, and $91,000 for the period from our inception through June 30, 2000, and
consisted primarily of purchases of property and equipment and restricted cash.
Net cash provided by financing activities was $7.5 million for the nine months
ended March 31, 2001, $1.0 million for the period from our inception through
March 31, 2000 and $2.7 million for the period from our inception through June
30, 2000. Financing for the nine months ended March 31, 2001 consisted primarily
of the sale of redeemable convertible preferred stock, net borrowings on finance
agreements and a line of credit with our bankers. Financing for the periods from
our inception through March 31, 2000 and June 30, 2000, consisted primarily of
the sale of common stock, redeemable convertible preferred stock, promissory
notes and net borrowings on finance agreements.
In October 1999 we issued 123,609 shares of common stock to our principal
stockholder in exchange for a promissory note. Also in October 1999 we issued
58,500 shares of common stock at $0.51 per share to consultants in exchange for
services performed valued at approximately $30,000. In each of November 1999 and
January 2000, we issued our principal stockholder convertible promissory notes
in the principal amount of $500,000, and in May 2000 issued him an additional
convertible promissory note in the principal amount of $47,000 for operating
capital. Each note bore interest at 7% per annum with principal and accrued
interest due on demand after one year from the date of issuance. Each note was
automatically convertible into shares of our Series A Preferred Stock upon the
initial closing of our Series A Preferred Stock financing. In May 2000, the
notes were converted and our principal stockholder was issued 482,625 shares of
our Series A Preferred Stock at the price of $2.17 per share. In May 2000,
inclusive of shares issued to our principal stockholder upon the conversion, we
sold and issued 976,220 shares of our Series A Preferred Stock at a price of
$2.17 per share. Each share of our Series A Preferred Stock is convertible into
one share of our common stock. In addition, at the same time we issued the
Series A Preferred Stock, we issued 130,651 shares of our common stock at $0.51
per share for $59,000 in cash and for services valued at $7,000. In December
2000, we sold and issued 294,620 shares of our Series B Preferred Stock at a
price of $17.65 per share. Each share of our Series B Preferred Stock is
convertible into one share of our common stock. In May 2001, we sold and issued
245,659 shares of our Series C Preferred Stock at a price of $22.553 per share.
Each share of our Series C Preferred Stock is convertible into one share of our
common stock.
In February 2000, we entered into a master purchase order assignment agreement
with a finance company, whereby we assign customer purchase orders to the
finance company and request the finance company purchase finished goods to
fulfill such customer purchase orders. Our obligations under the agreement are
secured by our assets and purchase order accounts receivable, and guaranteed by
our President and Chief Executive Officer. Under the agreement, we assign
purchase orders to the finance company as collateral. The agreement required a
security deposit of $90,000 to be made by us to the finance company and
specified that the finance company's funding commitment with respect to a
purchase order shall not exceed 60% of the retail purchase order price. We are
required to pay the finance company's expenses under the contract, a deal fee
comprising a transaction and initiation fee equal to 5% of the face amounts of
letters of credits issued or other funds advanced by the finance company, a
daily maintenance fee of 0.067%, a materials advance fee at prime rate plus 4%,
and a late payment fee where applicable. Outstanding borrowings under the
agreement are collateralized by our inventory, accounts receivable, fixed assets
and intangible assets. Under the initial terms of the agreement, the finance
company's aggregate outstanding funding was limited to $1.0 million and the term
of the agreement was 12 months, ending on February 25, 2001. In September 2000,
the agreement was amended increasing the maximum outstanding funding to $5.0
million. In December 2000, the agreement was further amended extending the term
to March 31, 2002 and increasing the maximum outstanding funding to $8.5
million.
In November 2000 we entered into an agreement with our bankers whereby they
would provide us with a $1.0 million commercial line of credit, repayable on
demand. The interest rate on amounts drawn down is at the bank's prime interest
rate plus 3% and is payable monthly. The line of credit is secured by restricted
cash being held in a money market account with the same bank.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As of March 31, 2001, we had cash and cash equivalents of $1.2 million. As of
March 31, 2000, we had cash and cash equivalents of $315,000. As of June 30,
2000, we had cash and cash equivalents of $908,000.
Capital expenditures were $361,000 for the nine months ended March 31, 2001,
$54,000 for the period from our inception through March 31, 2000, and $91,000
for the period from our inception through June 30, 2000. We did not have any
material commitments for capital expenditures at any of those dates.
Our principal commitments at March 31, 2001 comprised operating leases,
guaranteed royalty payments and contractual marketing commitments. At that date,
we had commitments to spend $252,000 under operating leases, prepay $1.8 million
for royalties under agreements with various content providers and spend $4.1
million in advertising on the networks and websites of these content providers.
Of these amounts, $2.9 million must be paid no later than March 31, 2002.
Guaranteed royalty payments will be applied against any royalties that may
become payable to the content providers.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to various market risks, including changes in foreign exchange
rates and interest rates. Market risk is the potential loss arising from changes
in market rates and prices.
FOREIGN CURRENCY EXCHANGE RATE RISK
Currently, all our net revenues and 85% of our operating expenses are
denominated in US dollars. Remaining expenses are mostly denominated in British
pounds or the Euro and consequently we are currently exposed to fluctuations in
the US dollar to British pound and Euro exchange rates. We estimate that a 10%
change in foreign exchange rates would impact reported operating results by less
than $100,000. Accordingly, we have not entered into any hedging arrangements.
As we expand our international operations, revenues will be generated and more
operating expenses will be incurred in currencies other than the US dollar,
which will increase potential exchange rate risk. We anticipate we will be
entering into customary hedging arrangements to reduce this risk.
INTEREST RATE RISK
We do not consider our cash and cash equivalents to be subject to interest rate
risk due to the short maturities of the instruments in which we have invested.
We are currently exposed to interest rate risk on our product financing
arrangement with a finance company and our line of credit with our bankers. Upon
completion of this public offering our risk may be reduced as we plan to reduce
or eliminate use of the product financing arrangement and the line of credit. We
do not enter into derivatives or other financial instruments for trading or
speculative purposes. We estimate that a 10% increase in interest rates would
impact our results of operations by $100,000 for the nine months ended March 31,
2001 and $2,000 for the period from inception through June 30, 2000.
INFLATION
Inflation has not had a material adverse effect on our results of operations;
however, our results of operations may be materially and adversely affected by
inflation in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement requires
companies to record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains and losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 was effective for us
beginning in the first quarter of fiscal 2001 and did not have a significant
impact on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 summarizes certain of the staff's views in
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
applying generally accepted accounting principles in the United States to
revenue recognition in financial statements and provides interpretations
regarding the application of generally accepted accounting principles to revenue
recognition where there is an absence of authoritative literature addressing a
specific arrangement or a specific industry. SAB101 is effective for our company
in the fourth quarter of fiscal 2001. The adoption of the revenue recognition
practices prescribed by the guidance in SAB 101 is not expected to have a
material effect on our consolidated financial statements.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"), an interpretation of Accounting Principles Board
Opinion No. 25 ("APB No. 25"). FIN 44 clarifies the application of APB No. 25
for various issues, specifically:
- The definition of an employee,
- The criteria for determining whether a plan qualifies as a
noncompensatory plan,
- The accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and
- The accounting for an exchange of stock compensation awards in a
business combination.
FIN No. 44 was effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998 or January 12, 2000. The impact
of FIN 44 did not have a material effect on our consolidated financial
statements.
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BUSINESS
COMPANY OVERVIEW
We are a rapidly emerging developer and publisher of interactive entertainment
software. We license properties from a wide variety of sources including
entertainment and media companies and we publish interactive entertainment
software based on their motion picture, sports and television cartoon
properties. We currently publish interactive entertainment software for many of
the most popular hardware platforms, such as Sony's PlayStation, Nintendo 64 and
Nintendo's Game Boy Color. We plan to develop and publish interactive
entertainment software for next generation hardware platforms such as Sony's
PlayStation2, Nintendo GameCube and Game Boy Advance and Microsoft's Xbox, as
well as for other portable handheld devices and PCs.
Our interactive entertainment software is primarily based on properties that
have consumer recognition and appeal, such as the popular television cartoons
POWERPUFF GIRLS and DEXTER'S LABORATORY distributed by AOL Time Warner's Cartoon
Network. We develop titles that can be leveraged through sequels and extensions
and across multiple hardware platforms. We sell our products to mass
merchandisers such as Toys "R" Us, Target, Kmart, Wal-Mart and Best Buy, and
specialty chains such as Babbages, Etc. and Electronics Boutique and independent
distributors.
INDUSTRY BACKGROUND
According to Euromonitor, worldwide sales of consoles, console games and PC
games grew from $17 billion in 1996 to $27 billion in 2000. Forrester predicts
that, in the United States alone, interactive entertainment console
manufacturers and software publishers will generate $26 billion in revenues in
2005. Of that $26 billion, Forrester estimates that $12.8 billion will be
generated by sales of console game software alone. Interactive Digital
Software Association, or IDSA, further estimates that 60% of all Americans, or
approximately 145 million people, play video games on a regular basis. According
to International Data Corporation, or IDC, the majority of video game households
own more than one video game system.
The interactive entertainment industry includes three distinct forms of hardware
systems:
- portable handheld devices, such as Nintendo's Game Boy and its recently
released Game Boy Advance;
- in-home television connected hardware platforms, such as Sega's
Dreamcast and Saturn, Nintendo's Super Nintendo and Nintendo 64 and
Sony's PlayStation and PlayStation2 and announced consoles such as
Nintendo GameCube and Microsoft's Xbox; and
- personal computers.
According to IDG, 15.7% of all interactive entertainment software dollar sales
for 2000 were attributable to products for portable handheld devices, 59.5% for
in-home hardware platforms and 24.8% for PCs. The hardware platform and video
game console market has evolved from 8- and 16-bit technology in the early 1980s
to 32- and 64-bit technology in the past few years. The terms 8-, 16-, 32- or
64-bit technology means that the central processing unit, or chip, on which the
software operates is capable of processing data in 8-, 16-, 32- or 64-bit units.
Larger per bit capacity translates into a faster and more realistic game
experience. The transition to 128-bit, or next generation, hardware platforms
has already begun with the recent introduction of Sony's PlayStation2.
INDUSTRY TRENDS
Currently, there are a number of trends affecting the interactive entertainment
industry. We believe that the following should result in increased opportunities
for interactive entertainment software developers and publishers:
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BUSINESS
- Hardware platform technology evolution. Consoles that employ 128-bit
technology will provide faster and more complex images and more
lifelike animation and sound than their 32- and 64-bit predecessors.
Additionally, most handheld devices will employ 32-bit technology
instead of 8-bit technology. Titles published for these new hardware
platforms should appeal to the core population of video game players
and attract new players. The transition to 128-bit hardware platforms
is expected to drive demand for titles published for these next
generation systems.
- Introduction of next generation hardware platforms drives software
demand. Historically, as next generation hardware platforms have been
introduced, the number of software units sold per hardware platform
sold has increased. This ratio is known as the tie ratio. Increasing
tie ratios represent an upward trend in units of software products
purchased for each successive generation of hardware platforms.
According to IDG, these ratios had steadily increased from
approximately 6:1 for 16-bit hardware platforms to approximately 9:1
for the 32-bit Sony PlayStation in North America. If historical
patterns are indicative of future tie ratios, interactive entertainment
software developers and publishers should see an increasing demand for
their products as new 128-bit next generation hardware platforms are
introduced and gain wider acceptance.
- Many next generation hardware platforms are DVD compatible and can
access the Internet. Many of the 128-bit hardware platforms, such as
Sony's PlayStation2 and Microsoft's Xbox, will utilize a DVD software
format and have the potential to serve as multi-purpose entertainment
centers by doubling as a player for DVD movies and compact discs.
Moreover, some next generation hardware platforms are expected to have
online capability that will allow users to access the Internet. We
believe these new systems will have cross-over appeal to a segment of
the market that might not otherwise be inclined to purchase hardware
platforms for game use alone, which will drive additional hardware and
software sales.
- Development of hardware platforms utilizing a disk-based software
format. The increased use of disk-based software for new hardware
platforms is expected to result in shortened order lead times, reduced
inventory risk and gross margins that are typically greater than those
achievable with cartridge-based systems. Quicker product manufacturing
and greater pricing flexibility will allow software producers to adjust
to market demands and introduce products to the marketplace more
rapidly. In addition, the memory capacity of disks generally exceeds
cartridges, allowing for enhanced graphic capabilities and more
realistic game play.
- Backward compatibility. Sony's PlayStation2 and Nintendo's Game Boy
Advance are both backward compatible, meaning that titles produced for
the earlier version of the hardware platform may be used on the new
hardware platform. We believe that backward compatibility may result in
a smoother revenue transition for interactive entertainment software
developers and publishers because the lag in consumer demand for
products for existing hardware platforms that typically precedes the
release of a next generation hardware platform may be diminished.
- Broadening demographic appeal. According to IDC, a pattern has emerged
in which male gamers appear to be slowly migrating away as the primary
gamers of older platforms. Other household members - in particular,
females and younger children - transition to become that platform's
primary gamers. IDC reports that the percentages of households where
the primary gamer is female for PlayStation, Nintendo 64 and Super
Nintendo grew from 17.2%, 15.3%, and 22.6% in 1999 to 18.1%, 15.8%,
29.8% in 2000. According to IDSA, 58% of all Americans who play video
games most frequently are over the age of 18 and 43% of Americans who
play video games are female. This demographic expansion broadens
opportunities for interactive entertainment software developers to
produce titles with content focused on a specific sex or targeted age
group.
INDUSTRY CHALLENGES
As the transition to next generation hardware platforms begins and the number of
titles continues to rise, differentiation among developers and publishers will
become increasingly important. This need is heightened by the fact that the
market for interactive entertainment software products tends to be dominated by
a limited
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38
number of successful titles that are typically based on popular properties with
brand name recognition. In order to succeed in this market environment, we
believe interactive entertainment software developers and publishers will need
to:
- identify and license brand name properties from a wide variety of
sources;
- develop creative software both internally and using third-party
interactive entertainment software developers with a proven track
record of developing successful titles;
- aggressively market and sell titles to retailers and through
traditional and emerging distribution channels in both domestic and
international markets;
- develop compelling titles for multiple hardware platforms; and
- develop a network of relationships with hardware platform
manufacturers, mass merchandisers and other industry participants.
OUR SOLUTION
We develop and publish interactive entertainment software for multiple hardware
platforms. We believe our ability to license popular properties, develop content
with internal and third-party developers and distribute titles through our broad
distribution channels provides us with significant opportunities. The following
are the key elements of our business solution:
Development and promotion of titles based on properties with existing brand
recognition. Since the best selling titles are often based on popular properties
and existing brands, we strive to secure license agreements with the owners of
popular entertainment and media properties. We have agreements to utilize
properties from AOL Time Warner's Cartoon Network and Time Inc.'s Sports
Illustrated For Kids, Spyglass Entertainment Group, Franchise Films and other
entertainment and media property owners. We believe that developing interactive
entertainment software titles with brand name recognition and sustainable
consumer appeal may allow us to promote titles over an extended period of time
through the release of sequels and extensions and to re-release products at
different price points. We work closely with the property owners to develop
follow-on products based on both existing and new brands with the potential to
become successful titles.
We focus on developing titles that target specific segments of the interactive
entertainment industry. We identify popular properties that have the potential
to become successful titles, evaluate the demographic segment that the titles
are most likely to appeal to and begin the development process. In this manner,
we are able to develop titles with brand name recognition that appeal to
specific segments of the interactive entertainment software market. We are
currently developing titles in the following categories:
- cartoon titles targeting game players ages 10 and under, based on
properties that appeal to this demographic segment. We have developed
and are developing titles based on the popular television cartoons
POWERPUFF GIRLS and DEXTER'S LABORATORY distributed by AOL Time
Warner's Cartoon Network. We coordinate product release and promotion
with the Cartoon Network and selected mass merchandisers to enhance
consumer acceptance;
- sports titles targeting game players age nine to 14, as well as the
casual sports fan. We believe that existing sports games appeal more to
the older core video game playing and sports audiences than the younger
game player. With AOL Time Warner's Sports Illustrated for Kids, we are
developing a line of sports-based titles that we believe will appeal to
this audience; and
- entertainment titles that target the mass market based on content
originated by independent film production companies. We have entered
into agreements with Spyglass Entertainment Group, producer of the
upcoming Disney motion picture REIGN OF FIRE, and Franchise Films,
producer of the recent Warner Bros. motion picture DRIVEN, to create
games based on these films. We work with our film company content
providers early in the development process to produce titles closely
aligned with the film's plot and endeavor to coordinate product release
concurrently with that of the film.
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BUSINESS
Strategic management of product development. To maintain our position in the
competitive interactive entertainment software industry, we devote significant
resources to the internal development of products and to securing relationships
with third party interactive entertainment software developers with proven track
records of developing successful titles. Product design and development is a
joint effort between our producers and our marketing and sales groups. Members
of each group have unique expertise, which allows for the creation of ideas that
combine the latest technologies, current and future trends, and consumer and
retailer demands. We believe this enables us to better manage our internal and
external production efforts thereby allowing for greater efficiency and improved
predictability in the development process.
Broad distribution channels. Our sales and marketing efforts are designed to
broaden product distribution and increase the penetration of our products in
domestic and international markets. We further seek to leverage and expand our
channels of distribution in order to reach a larger number of consumers in the
retail, direct and on-line markets, both domestically and internationally. We
sell our products to mass merchandisers such as Toys "R" Us, Target, Kmart,
Wal-Mart and Best Buy, specialty chains such as Babbages, Etc. and Electronics
Boutique and independent distributors.
Hardware platform flexibility. While we have the ability to develop products for
all current hardware platforms, our development efforts focus on specific
hardware platforms for specific demographics. For example, our initial titles
targeted at the 14 and under audience have primarily focused on the Nintendo
Game Boy Color hardware platform since this audience primarily uses that
platform. In contrast, games under development for the mass market will be
offered on a wider range of hardware platforms since we believe there will be a
widespread demographic appeal for these products. In addition, we leverage our
more popular titles across multiple hardware platforms that have sufficient
installed bases and appropriate demographics for development to be successful.
For example, follow-on products for POWERPUFF GIRLS, scheduled for release in
2002 and 2003, will be developed for Nintendo GameCube and Sony's PlayStation2,
as well as for PCs. We believe this approach reduces both our reliance on any
one hardware platform and the risks associated with product development.
Management experience. Our executive management team has substantial experience
in the interactive entertainment software industry. Key members of our
management team have been executives of other interactive entertainment software
companies and in their current and past service have successfully identified and
secured licenses for popular properties, established relationships with key
third party product developers and successfully negotiated distribution
arrangements with multiple retail channels. In addition, our team has developed
strong working relationships with hardware platform manufacturers, which we
believe provide substantial benefits in the product approval and development
process. We believe that established relationships with retailers and a track
record for publishing top-selling titles are important factors that affect our
ability to gain access to highly competitive shelf space.
STRATEGY
Our objective is to enhance our position as a developer and publisher of
interactive entertainment software. In pursuing our business strategy we intend
to:
Focus on next-generation hardware platforms to increase market share. We
continue to develop products for hardware platforms that have or we expect will
have large installed bases. We assess the potential acceptance and success of
emerging hardware platforms and the anticipated continued viability of existing
hardware platforms based on many factors, including the number of competing
titles, the tie ratio, the current and potential installed base, the rate of
sales and the cost and timing of developing titles for that hardware platform.
We work with hardware companies to coordinate the release of our new titles with
the launch of the next generation hardware platforms for which those titles are
designed. Over the next 12 to 24 months, we plan to release titles for Nintendo
GameCube and Game Boy Advance, Sony's PlayStation2, Microsoft's Xbox, portable
handheld devices and PCs.
Continue to develop relationships with owners of popular properties. We will
continue to pursue licensing relationships with a wide variety of sources for
well-known properties. We also plan to continue to work closely with licensors
to engage in efficient marketing efforts that capitalize on promotional
campaigns that
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precede the launch of our titles. We believe that we are an attractive partner
for licensors as evidenced by our recent agreement with Time Inc.'s Sports
Illustrated For Kids.
Expand international distribution. We believe we can further expand our presence
in foreign markets. According to the European Leisure Software Publishers
Association Ltd, or ELSPA, the European market for interactive entertainment
software is slightly larger than the U.S. market. We recently opened our office
in Bath, England to enhance our international presence. We plan to increase our
penetration in international markets by licensing our titles to publishers in
these markets, entering into distribution agreements and establishing direct
distribution capabilities. To further grow in global markets, we may also
develop titles that are customized for consumer preferences in these foreign
markets.
Continue to build internal and external development capabilities. We intend to
continue to devote significant resources to expanding existing relationships and
securing new relationships with interactive entertainment software developers
with proven track records of developing successful titles. We believe that our
success as a publisher of well known titles will help us to continue to attract
and retain dependable, creative and innovative developers to enhance product
design creativity and reduce risks associated with dependence on a limited
number of developers.
PRODUCTS
The following tables set forth our existing titles and those anticipated to be
released in the next 12 months. We cannot assure you that any of the titles
anticipated for release in the next 12 months will be released when scheduled,
if ever.
EXISTING TITLES
TITLE GENRE HARDWARE PLATFORM DATE OF RELEASE
----- ----- ----------------- ---------------
Beast Wars Action Nintendo 64/ June 2000
PlayStation
Contender 2 Action PlayStation October 2000
Jimmy White's Cueball 2 Sports PlayStation October 2000
Bad Mojo Jojo (Powerpuff Girls) Adventure Game Boy Color November 2000
Paint the Townsville Green (Powerpuff Girls) Adventure Game Boy Color November 2000
Sgt. Rock Action Game Boy Color November 2000
Dexter's Laboratory: Robot Revenge Adventure Game Boy Color December 2000
Yogi Bear Adventure Game Boy Color December 2000
Battle Him (Powerpuff Girls) Adventure Game Boy Color February 2001
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ANTICIPATED TITLES
TITLE GENRE HARDWARE PLATFORM
----- ----- -----------------
Dexter's Laboratory Adventure Game Boy Advance/PlayStation/PC
Driven Sports PlayStation2/Game Boy
Advance/Xbox/Palm/Handspring
Ecks v. Sever Action Game Boy Advance
Fire Pro Wrestling Sports Game Boy Advance
Hot Potato Puzzle Game Boy Advance
Powerpuff Girls Adventure Game Boy Advance/PlayStation/Nintendo
64/PC/Playstation2
Sports Illustrated For Kids: Baseball Sports Game Boy Advance/Nintendo GameCube
Sports Illustrated For Kids: Basketball Sports Game Boy Advance/Nintendo GameCube
Sports Illustrated For Kids: Football Sports Game Boy Advance/Nintendo GameCube
Riding Spirits Sports PlayStation2
3D Pro Wrestling Sports PlayStation2
STRATEGIC RELATIONSHIPS
We have entered into strategic relationships with entertainment and media
companies that have developed well-known characters and brands and that are
producing popular properties that are expected to form the basis of future
products.
The Cartoon Network. Between March 2000 and October 2000, we entered into three
non-exclusive license agreements that give us the right to develop and
distribute interactive entertainment software based on Warner Bros.' POWERPUFF
GIRLS, DEXTER'S LABORATORY and YOGI BEAR properties. The POWERPUFF GIRLS,
DEXTER'S LABORATORY and YOGI BEAR television shows are aired on AOL Time
Warner's Cartoon Network. Under these agreements, we are obligated to pay
royalties based on a percentage of net sales of the titles and are obligated to
advertise and promote the titles on the Cartoon Network.
We believe that the Cartoon Network has significant brand awareness among six to
11 year olds. According to the Cartoon Network, their programs are viewed in 69
million homes around the world. We participate in promotional programs with the
Cartoon Network and certain retailers who advertise on the Cartoon Network in
connection with the release of our products. For example, our POWERPUFF GIRLS
series of titles were co-promoted with on-air advertisements sponsored in part
by the Cartoon Network and in-store displays with Toys "R" Us, Target, Best Buy,
Sears, Circuit City, Electronics Boutique and Babbages, Etc. We believe this
promotional campaign has helped us sell over 740,000 units of our three
POWERPUFF GIRLS Game Boy Color
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titles since their initial launch in the fourth calendar quarter of 2000. We are
developing additional titles based on the POWERPUFF GIRLS and DEXTER'S
LABORATORY for existing and new hardware platforms.
Franchise Films. In April 2000, we entered into a strategic arrangement with
Franchise Films, Inc. Our agreement gives us the exclusive, first look right to
review screenplays acquired by the studio and develop titles based on films
produced from those screenplays. Our agreement expires upon the later of three
years or the theatrical release of the tenth film on which we base a product.
Franchise Films has also agreed to provide us with free access to any publicity
and advertising materials it prepares and granted us the right to use these
materials to promote and advertise our products. Under the agreement, we agreed
to pay Franchise Films royalties based on the net sales of the titles based on
the films we select and issue 14,625 shares of our common stock following the
theatrical release of each film for which we have developed a title, up to a
maximum of 146,250 shares. Our title based upon the movie DRIVEN, which is the
first property subject to the arrangement, is currently in production for Sony's
PlayStation2, Microsoft's Xbox and Nintendo's Game Boy Advance. DRIVEN, directed
by Renny Harlin, the director of films such as DIE HARD 2 and DEEP BLUE SEA, is
based on the CART racing circuit and has a cast that includes Sylvester Stallone
and Burt Reynolds. Warner Bros. released DRIVEN in April 2001 and we plan a Fall
2001 release for our related title.
Spyglass Entertainment Group. In October 2000, we entered into a strategic
arrangement with Spyglass Entertainment Group, L.P., the studio that produced
the film THE SIXTH SENSE. Our five-year agreement gives us an exclusive right of
first refusal to develop titles based on films produced by the studio and to
distribute them worldwide. In addition, Spyglass Entertainment Group has agreed
to provide us with free access to any publicity and advertising materials it
prepares and to use these materials to promote and advertise our titles. Under
the agreement, we granted Spyglass Entertainment Group a warrant to purchase up
to 100,000 shares of our common stock and agreed to pay the studio royalties
based on the net sales of titles based on its films. We have commenced
development on the first Spyglass Entertainment Group title, REIGN OF FIRE, for
Sony's PlayStation2 and Microsoft's Xbox. REIGN OF Fire, scheduled for release
by Disney in 2002, is being directed by Rob Bowman, producer of AIRBORNE and THE
X-FILES, and will star Christian Bale, Matthew McConaughey and Izabella
Scorupco.
Sports Illustrated For Kids. In May 2000, we signed a strategic arrangement with
Time, Inc. for the development of titles utilizing the Sports Illustrated For
Kids brand name. Our four-year, non-exclusive license gives us the right to
publish titles based on popular sports that are appropriate for children ages
seven to 17 and to distribute those titles in North America, Japan and the
European Union. Our agreement gives us the right to access a portion of their
subscriber base for market research purposes. Under the agreement, we are
obligated to pay a royalty based on the gross wholesale price of the titles and
advertise and promote the titles in the magazine.
We believe that Sports Illustrated For Kids has significant brand awareness,
especially for boys ages 10 to 14. According to Phillips Business Information,
Sports Illustrated For Kids has a subscription base of 950,000 readers and a
circulation of over one million. We are currently developing the first three
titles under this collaboration for Nintendo's Game Boy Advance. The targeted
sports are football, basketball and baseball, and we plan to release these
titles between Fall 2001 and Spring 2002.
SOFTWARE PRODUCT DESIGN AND DEVELOPMENT
We believe our success will depend in large part on our ability to design and
develop innovative interactive entertainment software based on popular content,
design and develop sequels to our more popular products and offer previously
released products on additional hardware platforms. We design and develop some
of our titles internally, while others are developed by third parties with whom
we have established relationships. In deciding whether to use our internal
development staff or an external software developer, we identify particular
developers whose area of expertise matches the specific concept or property that
we would like to develop. We believe that our use of internal and external
developers promotes the creative and entrepreneurial environment necessary to
develop innovative and successful titles in a cost-effective and timely manner.
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PRODUCT DESIGN
Our in-house development staff includes producers who are responsible for
monitoring the progress of our internal design teams and external third party
software developers. Our producers evaluate the work of internal and third party
developers through design review, progress evaluation, milestone review and
quality checks. Each milestone submission is reviewed by our in-house
development staff to ensure compliance with the product's design specifications.
INTERNAL PRODUCT DEVELOPMENT
Our internal product development studio located in London, England, presently
consists of 19 employees. When we decide to develop a title in-house, we
establish a production team, development schedule and budget. Our internal
development process includes initial design and concept layout, computer graphic
design, two-dimensional and three-dimensional artwork, programming, prototype
testing, sound engineering and quality control. We utilize a variety of advanced
hardware and software development tools, including animation, sound compression
utilities, clay modeling and video compression to successfully complete the
production and development of our interactive entertainment titles. Our internal
development staff is organized into teams which are typically led by a producer
and also consist of game designers, software programmers, artists and sound
technicians. We believe that this team approach promotes the creative and
cooperative environment necessary to develop innovative and successful titles.
Our international development efforts are conducted through our office located
in England. In addition to designing software titles, the software designers in
this office manage the efforts of local third-party developers in Europe.
Although to date our international product development efforts have primarily
consisted of the localization of existing products, we are currently designing
and developing original products at our international office.
The development process for an original, internally-developed product for a next
generation hardware platform, such as Sony's PlayStation2, Nintendo GameCube or
Microsoft's Xbox, typically takes 12 to 24 months. This process is shorter for
existing products currently used on 32-bit and 64-bit hardware platforms. It
takes approximately six to 12 months to develop an existing title as a product
for a different hardware platform.
EXTERNAL PRODUCT DEVELOPMENT
When we elect to develop a concept or property externally, we contract with a
third party software developer to develop products under our supervision. In
addition, we may utilize third party developers to develop an existing title for
a different hardware platform. Our agreements with software developers are
typically entered into on a title-by-title basis and provide for the payment of
the greater of a fixed amount or royalties based on actual sales. We generally
pay third party developers installments of the fixed advance based on the
achievement of specific development milestones. Royalties in excess of the fixed
advance are generally based on a fixed amount per unit sold. We generally obtain
ownership of the software code and related documentation from our independent
developers. Upon completion of development, each title is play-tested by us and
sent to the manufacturer for its testing, review and approval. Related artwork,
user instructions, warranty information, brochures and packaging designs are
also developed by third parties under our supervision.
MARKETING, SALES AND DISTRIBUTION
Our marketing, sales and distribution efforts are designed to broaden product
distribution and increase the penetration of our products in domestic and
international markets. We rely in part on the name recognition of the motion
picture, sports and television cartoon properties on which our products are
based to attract consumers and obtain shelf space from mass merchandisers. We
supplement our domestic direct distribution efforts with third party
distributors, and in the last year, we have increased our marketing, sales and
distribution efforts in international markets through licensing and third party
distribution strategies.
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DOMESTIC ACTIVITIES
Our domestic sales and marketing activities are directed by our Vice President
of Sales and Marketing, who maintains contact with major retail accounts,
manages the activities of our marketing department and oversees our independent
regional sales representatives.
Our marketing department develops and implements marketing programs and
campaigns for each of our titles. In preparation for a product launch, our
marketing activities may include print and cooperative retail advertising
campaigns, game reviews in consumer and trade publications, pre-release
giveaways, and retail in-store promotions including demonstrations, videos,
over-size displays and posters. We have selectively included in our marketing
efforts radio, television and Internet advertising campaigns. We also budget a
portion of each of our product's sales and marketing budget for cooperative
advertising and market development with retailers. Every title is launched with
a multi-tiered marketing campaign that is developed on an individual basis to
promote product awareness and customer pre-orders.
We sell our products primarily to mass merchandisers and, to a lesser extent, to
third party distributors. Our principal customers include Toys "R" Us, Target,
Best Buy, Wal-Mart, Kmart, Babbages, Etc. and Electronics Boutique. Revenues
from our four largest customers collectively accounted for approximately 63% of
our net revenues for the nine months ended March 31, 2001 as compared to 75%
from our three largest customers for the period from inception through June 30,
2000. Our largest customers for the nine months ended March 31, 2001 were Toys
"R" Us which accounted for 20% of our net revenues, Wal-Mart which accounted for
16% of our net revenues, Target which accounted for 15% of our net revenues, and
Kmart, which accounted for 12% of our net revenues. For the period from
inception through June 30, 2000, Blockbuster accounted for 49% of our net
revenues, Wal-Mart accounted for 16% of our net revenues, and KB Toys accounted
for 10% of our net revenues. We do not have any written agreements or other
understandings with any of our customers that relate to future purchases, so our
customers could reduce or terminate their purchases from us at any time.
We sell our products to retailers and distributors through 59 independent
regional sales representatives who operate on a commission basis. The sales
staff is largely responsible for generating retail demand for our products by
presenting new products to our customers in advance of the products' scheduled
release dates by providing technical advice with respect to the products and by
working closely with retailers and distributors to sell the products. We
typically ship our products within a short period of time after acceptance of
purchase orders from distributors and other customers. Accordingly, we do not
have a material backlog of unfilled orders and net sales in any quarter are
substantially dependent on orders booked in that quarter.
We seek to extend the life cycle and financial return of many of our products by
marketing those products differently throughout the product's life. Although the
product life cycle for each title varies based on a number of factors, including
the quality of the title, the number and quality of competing titles, and in
certain instances seasonality, we typically consider a title as back catalog six
months after its initial release. We utilize marketing programs appropriate for
the particular title, which generally includes progressive price reductions over
time to increase the product's longevity in the retail channel as we shift
advertising support to newer releases.
We provide terms of sale comparable to competitors in our industry. In addition,
we provide technical support for our products through our customer support
department. To date we have not experienced any material warranty claims.
We utilize an electronic data interchange with most of our major domestic
customers to efficiently receive, process and ship customer product orders and
to accurately track and forecast sell-through of our products to consumers in
order to determine whether to order additional products from manufacturers.
INTERNATIONAL ACTIVITIES
Our international sales and marketing activities are conducted from our office
located in England. Our international marketing activities are planned to
include television advertising and publicity campaigns in interactive
entertainment publications, magazines and newspapers. We anticipate that our
first international
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titles will be introduced in June 2001 and we intend to continue to increase our
international sales by localizing our products for the various international
markets and releasing localized versions of many of our products simultaneously
with the commercial release of the corresponding titles in North America.
MANUFACTURING
Nintendo and Sony are the sole manufacturers of the software products sold for
use on their respective hardware platforms. We begin the manufacturing process
by placing a purchase order for the manufacture of our products with Nintendo or
Sony and opening either a letter of credit in favor of the manufacturer or
utilizing our line of credit with the manufacturer. We then send software code
and a prototype of the product to the manufacturer, together with related
artwork, user instructions, warranty information, brochures and packaging
designs for approval, defect testing and manufacture.
Microsoft appoints approved third party manufacturers to manufacture software
for its hardware platform. Microsoft also offers us the opportunity to enter
into one or more kit licenses, pursuant to which Microsoft would license
software development tools and hardware to assist us in the development of
titles prior to sending such titles to authorized third party manufacturers for
replication.
COMPETITION
The interactive entertainment software industry is intensely competitive and is
characterized by the frequent introduction of new hardware platforms and titles.
Our competitors vary in size from small companies to large corporations,
including the manufacturers of the hardware platforms. We must obtain a license
from and compete with the hardware platform manufacturers in order to develop
and sell titles for their respective hardware platforms, with each such
manufacturer being the largest publisher and seller of software products for its
own hardware platforms. As a result of their commanding positions in the
interactive entertainment industry as the manufacturers of hardware platforms
and publishers of titles for their own hardware platforms, these manufacturers
generally have better bargaining positions with respect to retail pricing, shelf
space and purchases than do any of their licensees.
In addition to the hardware platform manufacturers, we compete with other
interactive entertainment software companies. Many of these competitors are
large corporations that have significantly greater financial, marketing,
personnel and product development resources than us. Due to these greater
resources, certain of these competitors are able to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies, pay higher fees to
licensors of desirable motion picture, television, sports and character
properties and pay more to third party software developers than we can. We
believe that we are able to successfully compete with regard to the principal
factors of the interactive entertainment software industry, including price,
content, product features, brand name recognition, access to distribution
channels, quality, ease of use, marketing support and quality of customer
support, although any significant increase in the development, marketing and
sales efforts of our competitors could harm our business.
INTELLECTUAL PROPERTY
Our business relies on the hardware platform manufacturers and our non-exclusive
licenses with them to publish titles and manufacture our products for their
hardware platforms. Our existing hardware platform licenses for Nintendo's Game
Boy Color and Game Boy Advance, Nintendo 64, Sony's PlayStation and
PlayStation2, Sega's Dreamcast and Microsoft's Xbox and our pending license for
Nintendo GameCube grant us the right to develop, publish and distribute titles
for use on the respective hardware platforms. Each of these hardware platform
licenses requires that our titles be manufactured solely by the respective
manufacturer.
The amounts charged by the manufacturers include a manufacturing, printing and
packaging fee as well as a royalty for the use of the manufacturer's name,
proprietary information and technology. All of these fees are subject to
adjustment by the manufacturers at their discretion. Nintendo charges us a fixed
amount for each cartridge that includes the royalty. This amount varies based,
in part, on the memory capacity of the cartridges. Sony charges us a royalty for
every disk manufactured. The manufacturers have the right to review, evaluate
and approve a prototype of each title and the title's packaging and marketing
materials.
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Each hardware platform license may be terminated by the manufacturer if a breach
or default by us is not cured after we receive written notice from the
manufacturer, or if we become insolvent. Upon termination of a hardware platform
license for any reason other than our breach or default, the manufacturer has
the right to purchase from us, at the price paid by us, any product inventory
manufactured by such manufacturer that remains unsold for a specified period
after termination. We must destroy any such inventory not purchased by the
manufacturer. Upon termination as a result of our breach or default, we must
destroy any remaining inventory, subject to the right of any of our
institutional lenders to sell such inventory for a specified period.
We hold copyrights on our products, product literature and advertising and other
materials. We rely on common law trademark rights to our name and our logo. We
do not currently hold any patents. We outsource some of our product development
to third party developers, contractually retaining all intellectual property
rights related to such projects. No third party developer has challenged our
ownership interest in the intellectual property rights to projects we have
outsourced, but it is always possible that a third party developer could issue
such a challenge and prevail. We also license products developed by third
parties and pay royalties on such products.
We regard our products as proprietary and rely primarily on a combination of
copyright, trademark and trade secret laws, confidentiality and nondisclosure
agreements and other methods to protect our proprietary rights. We require our
employees, consultants and other outside individuals and entities to execute
confidentiality and nondisclosure agreements upon the start of employment,
consulting or other contractual relationships with us. These agreements provide
that all confidential information developed or made known to the individual or
entity during the course of the relationship is to be kept confidential and not
disclosed to third parties except in specific circumstances. However, our
ability to police these individuals and entities and enforce these agreements is
costly and uncertain. While we provide standardized license agreements or
limitations on use with our products, the enforceability of these agreements or
limitations is also costly and uncertain. We are aware that unauthorized copying
occurs within our industry and if a significant amount of unauthorized copying
of our interactive entertainment software products were to occur, our business
would be harmed. While we do not copy protect our products, we do not provide
source code to third parties unless they have signed nondisclosure agreements
with us.
We rely on existing copyright laws to prevent unauthorized distribution of our
products. However, existing copyright laws afford only limited protection.
Policing unauthorized use of our products is difficult and software piracy can
be a persistent problem, especially in certain international markets. In
addition, the laws of some countries in which our products are or may be
distributed either do not protect our products and intellectual property rights
to the same extent as the laws of the United States, or these laws are weakly
enforced. Legal protection of our rights may be ineffective in these countries,
and as we leverage our products using emerging technologies, such as the
Internet and on-line services, our ability to protect our intellectual property
rights, and to avoid infringing the intellectual property rights of others,
becomes more difficult. In addition, intellectual property laws are less clear
with respect to such emerging technologies. Accordingly, existing intellectual
property laws may not provide adequate protection to our products that are
developed in connection with emerging technologies.
As the number of titles in the interactive entertainment software industry
increases and the features and content of these titles further overlap,
interactive entertainment software developers may increasingly become subject to
infringement claims. Although we make reasonable efforts to ensure that our
products do not violate the intellectual property rights of others, we cannot
assure you that claims of infringement will not be made. Any such claims, with
or without merit, can be time consuming and expensive to defend and we cannot
assure you that infringement claims against us will not result in costly
litigation or require us to license the intellectual property rights of third
parties, either of which could harm us.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising
out of our operations in the normal course of business. As of the date of this
prospectus, we are not a party to any legal proceedings.
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EMPLOYEES
As of March 31, 2001, we had 35 full time employees, including 24 in product
development, six in sales and marketing and five in finance, general and
administrative. We also retain independent contractors to provide various
services, primarily in connection with our product development and sales
activities. We are not subject to any collective bargaining agreements and we
believe that our relationship with our employees is good.
FACILITIES
Our headquarters are located in San Jose, California, where we lease
approximately 2,100 square feet of office space. We plan to lease additional
space in the same building within the next six months. This lease expires in
December 2003. We currently lease approximately 1,000 square feet in London,
England for our development studio. This lease expires in 2002. We believe that
our facilities are adequate for our current needs and suitable additional or
substitute space will be available in the future to replace our existing
facilities, if necessary, or accommodate expansion of our operations.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Set forth below is information concerning our current and proposed directors,
executive officers and other key employees.
NAME AGE POSITION
- ---- --- --------
Robert W. Holmes, Jr..................................... 47 Chairman of the Board of Directors
Anthony R. Williams...................................... 42 Vice Chairman of the Board of Directors
Raymond C. Musci ........................................ 40 Chief Executive Officer, President and Director
Stephen M. Ambler........................................ 41 Chief Financial Officer and Vice President of Finance
Joseph P. Morici......................................... 45 Vice President of Sales and Marketing
Aaron H. Endo............................................ 35 Director of Business Development
George M. Sundheim, III.................................. 48 Secretary and Director
Mark Dyne................................................ 41 Director
David E. Tobin (1)(2).................................... 29 Director
Anthony G. Williams (1)(2)............................... 43 Director
Steven J. Massarsky (1).................................. 53 Director
Robert T. Slezak (2)..................................... 43 Director
- ---------------
(1) Member of our compensation committee.
(2) Member of our audit committee.
Robert W. Holmes, Jr. has served as our Chairman since May 2001 and as a member
of our board of directors since October 1999. From March 1998 to the present,
Mr. Holmes has pursued independent investment and consulting opportunities. In
April 1987, Mr. Holmes co-founded Acclaim Entertainment, where he was a General
Manager, Senior Vice President, and Director. He became Chief Operating Officer
of Acclaim in March 1989 and President in January 1990. He served as President
until October 1996, and as a Director until February 1997, after which time he
remained as Special Consultant to the Chairman until August 1999. Mr. Holmes
earned a B.A. in Romance Languages from Wesleyan University and his M.B.A. from
Western Michigan University.
Anthony R. Williams has served as our Vice Chairman since May 2001 and as our
Co-Chairman of the board of directors from July 2000 to April 2001. Mr. Williams
served as our Chief Executive Officer from July 2000 to May 2001 and as our
Chief Financial Officer from July 2000 to March 2001. From February 1998 to July
2000, Mr. Williams served as the Co-Chairman and Chief Operating Officer of
Take-Two Interactive Software, Inc. (NASDAQ:TTWO), a developer, publisher and
distributor of interactive entertainment software. From April 1988 to February
1998, Mr. Williams was employed in various executive positions at Acclaim
Entertainment, Inc. (NASDAQ:AKLM), a developer, publisher and distributor of
interactive entertainment software. Mr. Williams currently serves as a director
of the Near East Foundation, a private, nonprofit development agency dedicated
to assisting people in the Middle East and Africa. Mr. Williams earned a B.A. in
Economics from Cambridge University. In 2000, Mr. Williams and the staff of the
Securities and Exchange Commission, or SEC, agreed to settle a proposed
administrative proceeding relating to a press release issued by Acclaim in
October 1995. Under the settlement, Acclaim and Mr. Williams, without admitting
or denying the findings and conclusions of the SEC, have agreed to cease and
desist from future violations of Sections 10(b) and 13(b) of the Securities and
Exchange Act of 1934.
Raymond C. Musci is our founder and has served as our Chief Executive Officer
since May 2001, as our Chief Operating Officer and Co-Chairman of the Board from
July 2000 to April 2001 and as our President and a member of our board of
directors since October 1999. From October 1999 to July 2000, Mr. Musci served
as our Chief Financial Officer and Secretary. From May 1996 through July 1999,
Mr. Musci was President, Chief Executive Officer and a member of the board of
directors of the US division of Infogrames Entertainment, S.A., a developer,
publisher
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and distributor of interactive entertainment software. From September 1994 to
July 1996, Mr. Musci served as a director of Ocean International, Ltd., the
holding company of Ocean of America. From 1990 until its merger with Infogrames
Entertainment (Paris Bourse:5257), in May 1996, Mr. Musci was co-founder,
President, and Chief Operating Officer of Ocean of America, a private developer,
publisher and distributor of interactive entertainment software. From October
1996 to the present, Mr. Musci is a member of the board of directors of
Brilliant Digital Entertainment, Inc., a developer, publisher and distributor of
interactive entertainment software (AMEX: BDE), where he is a member of the
audit and compensation committees. Mr. Musci earned a B.A. in Criminal Justice
from Western New Mexico University.
Stephen M. Ambler has served as our Chief Financial Officer and Vice President
of Finance since April 2001. From April 1994 to March 2001, Mr. Ambler served in
various executive capacities, including Chief Financial Officer, Secretary and
Senior Vice President Finance, at Insignia Solutions PLC (NASDAQ:INSG), a
software developer. Mr. Ambler received his diploma in Accounting Studies, with
distinction, from Oxford Polytechnic, and he is a member of the Institute of
Chartered Accountants in England and Wales.
Joseph P. Morici has served as our Vice President of Sales and Marketing since
March 2000. From November 1998 through March 2000, Mr. Morici was the Executive
Vice President of Metro3D, Inc., developer, publisher and distributor of
interactive entertainment software. From November 1996 through November 1998,
Mr. Morici was Vice President of Fujitsu Interactive, a producer of interactive
CD-ROMs for children. From January 1995 through November 1996, Mr. Morici served
as a consultant to Simply Interactive, Inc., Titus Interactive, S.A. and Gametek
Inc. Mr. Morici earned a B.S. in Economics from Santa Clara University.
Aaron H. Endo has served as our Director of Business Development since November
1999. From December 1997 through November 1999, Mr. Endo was the Business
Development Manager at Warner Bros. Interactive Entertainment, a division of AOL
Time Warner (NYSE:AOL). From March 1997 through December 1997, Mr. Endo was an
independent consultant. From July 1996 through March 1997, Mr. Endo was a senior
financial analyst at Macromedia, Inc. (NASDAQ: MACR). Mr. Endo earned a B.S. in
Mechanical Engineering from Northwestern University and an M.B.A. from the
University of North Carolina.
George M. Sundheim III has served as our Secretary since July 2000 and as a
member of our board of directors since October 1999. From April 1986 to the
present, Mr. Sundheim has been a partner of the law firm of Doty Sundheim &
Gilmore, a professional corporation. Mr. Sundheim earned a B.A. in Economics
from Stanford University and a J.D. from Northwestern University.
Mark Dyne has served on our board of directors since July 2000. From June 1995
to October 1996, Mr. Dyne served as Co-Chief Executive Officer of Sega
Enterprises, a theme park developer. From October 1996 to the present, Mr. Dyne
has served as Chairman of the Board and Chief Executive Officer at Brilliant
Digital Entertainment, Inc. From September 1997 to the present, Mr. Dyne has
also served as the Chairman of the Board of Tag-It Pacific, Inc. (ASE:TAG), a
specialty printing and packaging company for the garment, accessories and
related market areas. Additionally, from October 1998 though January 2000, Mr.
Dyne was Chairman and Chief Executive Officer of Virgin Interactive
Entertainment Ltd., a distributor of software programs and video games that is
based in London, England. Mr. Dyne is a founder and a director of Ozisoft Pty
Ltd., a leading distributor of entertainment software in Australia and New
Zealand. Mr. Dyne attended the University of California, Los Angeles.
David E. Tobin has served on our board of directors since December 2000. From
April 1996 to the present, Mr. Tobin has served as a Vice President at PAR
Capital Management, Inc., an investment management firm in Boston, MA. Mr. Tobin
earned a B.A. in Finance from Saint Anselm College.
Anthony G. Williams has served on our board of directors since April 2001. From
July 2000 to the present, Dr. Williams has been pursuing independent investment
opportunities and non-commercial activities. From November 1994 to July 2000,
Dr. Williams served in various Director positions as a partner at Goldman Sachs
& Co., London, including Global Co-Head Swaps 2000, Global Head of FICC Risk,
and Global Head of Fixed Income Arbitrage. Dr. Williams earned a B.A., M.A., and
Ph.D. in Physics from Cambridge University.
Steven J. Massarsky has served on our board of directors since May 2001. From
February 1999 to the present, Mr. Massarsky has served as the Chief Executive
Officer of The Business Incubation Group, a business incubator. From May 1997 to
January 1999, Mr. Massarsky pursued independent investment opportunities and
personal interests. From May 1996 to April 1997, Mr. Massarsky was the President
of Acclaim Comics, Inc.,
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a comic book publishing company. Mr. Massarsky earned a B.A. in political
science from Brown University and a J.D. from Rutgers University.
Robert T. Slezak has served on our board of directors since June 2001. From
November 1999 to the present, Mr. Slezak has worked as an independent management
consultant. From October 1989 through November 1999, Mr. Slezak served as the
Chief Financial Officer of Ameritrade Holding Corporation, an online brokerage
firm (NASDAQ: AMTD) and is currently a member of their board of directors. Mr.
Slezak earned a B.S. in business administration from the University of Nebraska
at Omaha and an M.B.A. from Creighton University.
Our board of directors currently consists of nine members. Our board of
directors is divided into three classes, each serving staggered three-year
terms. Robert W. Holmes, Jr., Anthony R. Williams and Raymond C. Musci have been
designated Class I Directors whose terms expire at the 2001 annual meeting of
stockholders. George M. Sundheim, III, David E. Tobin and Mark Dyne have been
designated Class II Directors, whose terms expire at the 2002 annual meeting of
the stockholders. Anthony G. Williams, Steven Massarsky and Robert T. Slezak
have been designated Class III Directors, whose terms expire at the 2003 annual
meeting of stockholders. This classification of our board of directors may delay
or prevent a change in control of our company or our management.
Subject to existing employment agreements, our board of directors appoints our
executive officers on an annual basis to serve until their successors have been
duly elected and qualified. There are no family relationships among any of our
directors or officers.
BOARD COMMITTEES
- - AUDIT COMMITTEE -- In April 2001, our board of directors established an
audit committee composed of three independent directors, who are currently
David E. Tobin, Robert T. Slezak and Anthony G. Williams. The audit
committee will generally meet with and consider suggestions from members
of management and our internal accounting personnel, as well as our
independent accountants, concerning our financial operations.
The audit committee will also have the responsibility to:
- review the audit committee charter at least annually and recommend any
changes to our board of directors;
- review our annual financial statements and any other relevant reports
or other financial information;
- review the regular internal financial reports prepared by management
and any internal auditing department;
- recommend to the board of directors the selection of the independent
accountants and approve the fees and other compensation to be paid to
the independent accountants;
- review and discuss with the accountants all significant relationships
the accountants have with us to determine the accountants'
independence;
- review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant;
- review separately with the independent accountants, the internal
auditing department, if any, and management, following completion of
the annual audit, any significant difficulties encountered during the
course of the audit; and
- review the independence of each member of the committee.
- - COMPENSATION COMMITTEE -- In April 2001, our board of directors
established a compensation committee composed of three directors, who are
currently Steven J. Massarsky, Anthony G. Williams and David E. Tobin. The
compensation committee is responsible for the design, review,
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recommendation and approval of compensation arrangements for our
directors, executive officers and key employees, and for the
administration of our 2000 Stock Incentive Plan, including the approval of
grants under such plan to our employees, consultants and directors.
Our board of directors may establish other committees to facilitate the
management of our business.
DIRECTOR COMPENSATION
We provide annual compensation of $10,000 to each of our non-employee directors
for serving on our board of directors and for attendance of meetings of the
board of directors and the committees of the board of directors. Non-employee
directors are reimbursed for reasonable travel and other out-of-pocket expenses
incurred in connection with attendance at meetings of the board of directors and
committees of the board of directors. Employee directors are eligible to receive
option grants and direct stock issuances under our 2000 Stock Incentive Plan.
Non-employee directors will each receive, from time to time, grants of options
to purchase a number of shares of our common stock determined by our
compensation committee. Those shares will vest upon the optionee's completion of
four years of board service measured from the grant date. See "2000 Stock
Incentive Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee or other board committee performing
equivalent functions until April 2001. All members of our board of directors,
some of whom were executive officers, participated in deliberations concerning
executive officer compensation. No interlocking relationship exists between our
board of directors and the board of directors or compensation committee of any
other company other than Mr. Musci who serves on the board of directors and
compensation committee of Brilliant Digital Entertainment, Inc., a company of
which Mr. Dyne is the Chairman of the Board.
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND OTHER COMPENSATION FOR FISCAL YEAR ENDED JUNE 30, 2000
The following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal year ended June 30, 2000 by our Chief
Executive Officer. No other executive officers received compensation that
exceeded $100,000 in the fiscal year ended June 30, 2000.
EXECUTIVE COMPENSATION TABLE (FISCAL YEAR ENDED JUNE 30, 2000)
- ------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
COMPENSATION
SECURITIES
BASE OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SAR COMPENSATION
- --------------------------- ---- -------- ------ ------------ ------------- ------------
Raymond C. Musci............................. 2000 $168,750 -- -- -- --
Chief Executive Officer,
President and Director (1)
- ------------------------
(1) Mr. Musci previously served as our Chief Operating Officer, Chief Financial
Officer and Secretary.
We did not grant any stock options or stock appreciation rights to Mr. Musci
during the fiscal year ended June 30, 2000. Mr. Musci did not hold any
unexercised options at June 30, 2000 and he did not exercise any options in the
fiscal year ended June 30, 2000.
2000 STOCK INCENTIVE PLAN
Our 2000 Stock Incentive Plan provides for the grant of qualified incentive
stock options that meet the requirements of Section 422 of the Internal Revenue
Code, nonqualified stock options and restricted stock awards. Our board of
directors adopted our 2000 Stock Incentive Plan in July 2000 and our
stockholders approved it in July 2000. We have reserved a total of 325,000
shares of our common stock for issuance
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under our 2000 Stock Incentive Plan, which is subject to anti-dilution
provisions for stock splits, reverse stock splits, stock dividends,
combinations, reclassifications and similar events.
Our 2000 Stock Incentive Plan may be administered by our board of directors or a
committee or subcommittee of a committee designated by our board of directors.
The administrator of our 2000 Stock Incentive Plan has the power to select
participants among eligible people and to determine the terms of options or
awards. Under current law, incentive stock options may only be granted to a
person who is an employee or officer of ours or of any future subsidiary of
ours.
The exercise price of an award under the 2000 Stock Incentive Plan is payable in
full in cash, by promissory note with recourse approved by the administrator of
the plan, by surrender of shares of common stock owned equal to the aggregate
exercise price, withholding whole shares of common stock then issuable upon the
exercise of an option or any combination of the foregoing.
In the event of a change of control, all stock option and restricted stock
awards will terminate unless the award is assumed by our successor corporation
and there will be no acceleration of vesting or exercisability of an award
unless an individual's award agreement provides otherwise. A change of control
is defined in our 2000 Stock Incentive Plan as (i) a merger or consolidation
where we are not the successor entity; (ii) the sale or disposition of
substantially all of our assets; (iii) a reverse merger where we are the
surviving entity but the holders of our common stock prior to the merger do not
possess more than 50% of the total control voting power of the surviving
entity's outstanding securities after the merger; or (iv) if any person obtains
beneficial ownership of 50% or more of the combined voting power of our
outstanding securities.
Incentive stock options and restricted stock awards generally may not be
transferred, although non-qualified stock options may be transferred pursuant to
California Code of Regulations Section 260.140.41 or by will or intestacy. Our
board of directors may from time to time amend, suspend or terminate our 2000
Stock Incentive Plan unless stockholder approval is required.
As of March 31, 2001, no shares of restricted stock had been issued and options
to purchase 83,000 shares of our common stock were outstanding under our 2000
Stock Incentive Plan at an exercise price between $2.17 and $5.00 per share.
401(K) RETIREMENT PLAN
We have in place a contributory retirement plan, or 401(k) plan, for employees
age 21 and older. Our 401(k) plan is designed to be tax deferred in accordance
with the provisions of Section 401(k) of the Internal Revenue Code of 1986, as
amended. Under our 401(k) Plan, employees may elect to enroll as of the first
day of the month coinciding with or following the date on which the employee
meets the eligibility requirements. Our 401(k) plan provides that each
participant may contribute up to the maximum amount per year allowed by federal
law, which was $10,500 in 2000, and we may contribute to the participant's plan
account at the end of each plan year a percentage of salary contributed by the
participant. We may make such matching contributions in our sole discretion.
Subject to the rules for maintaining the tax status of our 401(k) plan, we may
make an additional contribution in our sole discretion that vests upon the
employees' number of years of service, and this contribution is divided among
eligible employees on a pro-rata share based on the amount of total compensation
each eligible employee receives in comparison to all eligible employees. Total
contributions to our 401(k) plan for the period from October 7, 1999 (inception)
through June 30, 2000 were $6,500 and $28,000 for the nine months ended March
31, 2001.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have included in our certificate of incorporation a provision that, to the
extent permitted by Delaware General Corporation Law, our directors will not be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as directors, except for liability:
- - for any breach of the director's duty of loyalty to us or our
stockholders;
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- - for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- - under Section 174 of the General Corporation Law of the State of Delaware,
which relates to unlawful dividends; or
- - for any transaction from which the director derived an improper personal
benefit.
Our bylaws provide for the indemnification of our directors to the fullest
extent permitted by the Delaware General Corporation Law. Our bylaws further
provide that our board of directors has sole discretion to indemnify our
officers and other employees. We may limit the extent of such indemnification by
individual contracts with our directors and executive officers, but have not
done so. We are not, however, required to indemnify any director or executive
officer in connection with any proceeding initiated by us and approved by a
majority of our board of directors, that alleges (a) unlawful misappropriation
of corporate assets, (b) disclosure of confidential information or (c) any other
willful breach of such director or executive officer's duty to us or our
stockholders. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by, or on behalf of, that director or executive officer to repay
those amounts if it should be determined ultimately that he or she is not
entitled to be indemnified under our bylaws or otherwise.
We have entered into agreements with our directors and executive officers
containing provisions specifying that the Company will indemnify and defend
these directors and officers against any liability incurred in performance of
services in their capacity as directors and officers to the fullest extent
authorized by our certificate of incorporation, bylaws and applicable law.
EMPLOYMENT AGREEMENTS
In October 1999 we entered into a two year employment agreement with Raymond C.
Musci, our Chief Executive Officer and President. In July 2000 we entered into a
two year employment agreement with Anthony R. Williams, our Vice Chairman, which
was subsequently amended to reflect his change in title.
Messrs. Musci and Williams are each entitled to an annual base salary of
$225,000 and are both eligible for any bonus program or plan established for our
employees. The employment agreements entitle the employees to receive stock
options or other equity rights to be determined in the sole discretion of our
Compensation Committee and to receive certain insurance and other employee plans
and benefits established for our employees.
If the employment agreement of either Messrs. Musci or Williams is terminated
for any reason, except for disability or cause, or if either of Messrs. Musci or
Williams resign for good cause, he shall receive severance in an amount equal to
24 months of his then-current base salary, with 50% payable within 60 days of
the termination date and 50% payable as salary continuing for 12 months
following the termination date. In addition, they will receive 12 months of
insurance coverage following the termination date.
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RELATED PARTY TRANSACTIONS
In October 1999, Raymond C. Musci, our Chief Executive Officer and President,
purchased 123,609 shares of our common stock for $634.
In October 1999, each of Robert W. Holmes, Jr., our Chairman of the Board, and
D&S Partners, whose general partner, Mr. George Sundheim, III is our Secretary
and a director, purchased 9,750 shares of our common stock for $0.51 per share,
or an aggregate purchase price of $5,000.
In each of November 1999 and January 2000, we issued Mr. Musci a convertible
promissory note each in the principal amount of $500,000, and in May 2000 we
issued him an additional convertible promissory note in the principal amount of
$47,000. Each note bore interest at 7% per annum with principal and accrued
interest due on demand after one year from the date of issuance. Each note was
automatically convertible into shares of our Series A Preferred Stock upon the
initial closing of our Series A Preferred Stock financing. In May 2000, the
notes were converted and Mr. Musci was issued 482,625 shares of our Series A
Preferred Stock at the price of $2.17 per share.
In February 2000, we entered into an agreement with Transcap Trade Finance to
have Transcap finance the purchase of materials required to produce our
products. As a condition of this agreement, Mr. Musci entered into a separate
agreement with Transcap to guarantee our obligations under the agreement.
In May 2000, we sold and issued 976,220 shares of our Series A Preferred Stock
at a price of $2.17 per share. Each share of our Series A Preferred Stock is
convertible into one share of our common stock. In addition, at this time, we
sold shares of our common stock at a price of $0.51 per share to certain
purchasers of our Series A Preferred Stock. In addition to Mr. Musci, who
converted promissory notes into 482,625 shares of Series A Preferred Stock,
purchasers included the following officers, directors and entities affiliated
with them:
SHARES OF SERIES A PREFERRED SHARES OF COMMON STOCK
PURCHASER STOCK PURCHASED PURCHASED
- --------- ---------------------------- ----------------------
Anthony R. Williams(1) 351,000 89,897
Robert W. Holmes, Jr. 87,750 22,474
Mark Dyne 10,969 3,656
FIMAS, L.P. 10,969 3,656
(1) Mr. Williams' shares of Series A Preferred Stock are currently held in an
irrevocable trust administered by Breams Trust Limited. Although Breams
Trust Limited has the power to dispose of trust property, Mr. Williams has
the right to appoint new or additional trustees and to require any trustee
to resign.
Mr. Williams is our Vice Chairman, Mr. Dyne is a director and Mr. Sundheim is a
general partner of FIMAS, L.P.
In October 2000, we issued to Spyglass Entertainment Group, L.P. a warrant with
a six year term to purchase 100,000 shares of our common stock at an exercise
price of $5.00 per share in connection with our strategic arrangement with
Spyglass.
In November 2000, we entered into an agreement with Comerica Bank-California to
have Comerica provide a revolving note for an amount of up to $1 million. As
consideration for providing the note, Comerica was given a security interest in
a money market account in the name of Anthony R. Williams maintained at the
bank. In addition, as a condition of this agreement, Mr. Musci entered into a
separate agreement with Comerica to guarantee our obligations under the
agreement. Both guarantees lapsed in December 2000, when the revolving note
became secured by restricted cash held in a money market account with the same
bank.
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RELATED PARTY TRANSACTIONS
In December 2000, we sold shares of our Series B Preferred Stock at a price of
$17.65 per share. Each share of our Series B Preferred Stock is convertible into
one share of our common stock. Purchasers included the following officers,
directors and 5% stockholders:
PURCHASER SHARES OF SERIES B PREFERRED STOCK PURCHASED
- --------- --------------------------------------------
PAR Investment Partners, L.P. 198,301
Raymond C. Musci 28,329
Anthony R. Williams(1) 28,329
Merchant Bankers, Inc.(2) 28,329
Robert W. Holmes, Jr. 11,332
- -------------
(1) Mr. Williams' shares of Series B Preferred Stock are currently held in an
irrevocable trust administered by Breams Trust Limited. Although Breams
Trust Limited has the power to dispose of trust property, Mr. Williams has
the right to appoint new or additional trustees and to require any trustee
to resign.
(2) Merchant Bankers, Inc. is the general partner of Morgan Keegan Early Stage
Fund, L.P., which purchased 22,092 shares of Series B Preferred Stock, and
Morgan Keegan Employee Investment Fund, L.P., which purchased 6,237 shares
of Series B Preferred Stock. Merchant Bankers, Inc. is deemed to
beneficially own these shares. Merchant Bankers, Inc. is a wholly-owned
subsidiary of Morgan Keegan & Co., Inc.
In connection with the sale of the Series B Preferred Stock, we paid placement
agent fees of $253,000 to Morgan Keegan & Co., Inc.
Mr. Tobin, a director, is a Vice President of PAR Capital Management, Inc ("PAR
Capital"). A three year warrant for 30,000 shares of our common stock has also
been issued to PAR Investment Partners, L.P. ("PIP") at an exercise price of
$17.65 per share. PAR Capital is a Delaware S Corporation and the sole general
partner of PAR Group, L.P. ("PAR Group"). The principal business of PAR Capital
is to act as the general partner of PAR Group. PAR Group is a Delaware limited
partnership and the sole general partner of PIP. The principal business of PAR
Group is that of a private investment partnership engaging in the purchase and
sale of securities for its own account. PIP is a Delaware limited partnership
and its principal business is that of a private investment partnership engaging
in the purchase and sale of securities for its own account.
Mr. Sundheim is a partner of the law firm Doty, Sundheim & Gilmore, a
professional corporation, which provides legal services to us. For the nine
months ended March 31, 2001, we paid Doty, Sundheim & Gilmore $87,000 for legal
services rendered and $9,000 for the period from our inception through June 30,
2000.
In May 2001, we sold shares of our Series C Preferred Stock at a price of
$22.553 per share. Each share of our Series C Preferred Stock is convertible
into one share of our Common Stock. Purchasers included the following officers,
directors and 5% stockholders.
PURCHASER SHARES OF SERIES C PREFERRED STOCK PURCHASED
- --------- --------------------------------------------
Merchant Bankers, Inc.(1) 88,680
PAR Investment Partners, L.P. 88,680
Anthony R. Williams 13,302
Raymond C. Musci 13,302
Robert W. Holmes, Jr. 6,651
Mark Dyne 4,434
Stephen M. Ambler(2) 1,109
Joseph P. Morici(3) 887
(1) Merchant Bankers, Inc. is the general partner of Morgan Keegan Early Stage
Fund, L.P., which purchased 70,944 shares of Series C Preferred Stock, and
Morgan Keegan Employee Investment Fund, L.P., which purchased 17,736
shares of Series C Preferred Stock. Merchant Bankers, Inc. is deemed to
beneficially own these shares.
(2) Mr. Ambler is our Chief Financial Officer and Vice President of Finance.
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RELATED PARTY TRANSACTIONS
(3) Mr. Morici is our Vice President of Sales and Marketing.
In connection with the sale of the Series C Preferred Stock, we paid placement
agent fees of $200,000 and issued a five-year warrant to purchase 3,500 shares
of common stock at a per share exercise price of $22.553 to Morgan Keegan & Co.,
Inc.
Anthony R. Williams has accrued approximately $113,000 in salary that has not
yet been paid to him. Mr. Musci has accrued approximately $281,000 in salary
that has not yet been paid to him.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership of
our common stock as of June 1, 2001 reflecting its sale of 245,659 shares of
Series C Preferred Stock in May 2001, shares of our common stock in this
offering and the conversion of all shares of our preferred stock into shares of
our common stock prior to the completion of this offering, for each of the
following persons:
- - all executive officers;
- - all directors; and
- - each person who is known by us to beneficially own prior to this offering,
5% or more of our common stock
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage of ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or become exercisable within 60 days of June 1, 2001
are included. Those shares, however, are not deemed outstanding for the purpose
of computing the percentage ownership of any other person. Each stockholder's
percentage of ownership in the following table is based upon 1,843,884 shares of
common stock outstanding as of June 1, 2001, after giving effect to the sale of
245,659 shares of Series C Preferred Stock in May 2001. Unless otherwise
indicated in the table, the persons and entities named in the table have sole
voting and sole investment power with respect to the shares set forth opposite
the stockholder's name. All share numbers and percentages assume no exercise of
the underwriters over-allotment option. Unless otherwise indicated, the address
of each beneficial owner listed below is c/o: BAM! Entertainment, Inc., 333 West
Santa Clara Street, Suite 930, San Jose, California 95113.
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -----------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ ---------------- -------- --------
Raymond C. Musci ................................... 647,865 35.1% --%
Anthony R. Williams(1) ............................. 482,528 26.2 --
PAR Investment Partners, L.P. ...................... 316,981 16.9 --
David E. Tobin(2)
One Financial Center, Suite 1600
Boston, MA 02111
Robert W. Holmes, Jr.(3) ........................... 138,957 7.5 --
Merchant Bankers, Inc.(4) .......................... 117,009 6.3
50 North Front Street, 19th Floor
Memphis, TN 38103
Spyglass Entertainment Group, L.P.(5) .............. 100,000 5.1 --
500 S. Buena Vista Street
Burbank, CA 91521-1855
George M. Sundheim III(6) .......................... 26,275 1.4 *
Mark Dyne(7) ....................................... 20,059 1.1 *
Steven J. Massarsky ................................ 2,217 * *
Stephen M. Ambler .................................. 1,109 * *
Robert T. Slezak ................................... -- -- --
Anthony G. Williams ................................ -- -- --
All directors and executive officers as a
group(10 persons)(1)(2)(3)(4)(6)(7) ........... 1,635,991 87.2% --%
- ----------
* Less than 1%.
(1) Mr. Williams' shares of Series A and Series B Preferred Stock are
currently held in an irrevocable trust administered by Breams Trust
Limited. Although Breams Trust Limited has the power to dispose of trust
property, Mr. Williams has the right to appoint new or additional trustees
and to require any trustee to resign.
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PRINCIPAL STOCKHOLDERS
(2) Includes 30,000 shares of our common stock issuable upon exercise of a
warrant exercisable within 60 days held by PAR Investment Partners, L.P.
Mr. Tobin is a Vice President of PAR Capital Management, Inc. and
disclaims beneficial ownership of the shares held by this entity except to
the extent of his pecuniary interest in the shares.
(3) Includes 1,000 options exercisable within 60 days.
(4) Merchant Bankers, Inc. is the general partner of Morgan Keegan Early Stage
Fund, L.P., which holds 22,092 shares of our Series B Preferred Stock and
88,680 shares of our Series C Preferred Stock, and Morgan Keegan Employee
Investment Fund, L.P., which holds 6,237 shares of Series B Preferred
Stock. Merchant Bankers, Inc. is deemed to beneficially own these shares.
Merchant Bankers, Inc. is a wholly-owned subsidiary of Morgan Keegan &
Co., Inc. Excludes 3,500 shares of common stock issuable upon exercise of
a warrant exercisable within 60 days held by Morgan Keegan & Co., Inc., of
which Merchant Bankers, Inc. disclaims beneficial ownership.
(5) Represents shares of our common stock issuable upon exercise of warrants
exercisable within 60 days.
(6) Includes 9,750 shares held by D&S Partners, and 15,525 shares held by
FIMAS, L.P., of which Mr. Sundheim is a general partner. Mr. Sundheim
disclaims beneficial ownership of the shares held by these entities except
to the extent of his pecuniary interest in these shares. Also includes
1,000 options exercisable within 60 days.
(7) Includes 1,000 options exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
The following information describes our common stock and preferred stock, as
well as options to purchase our common stock, and provisions of our certificate
of incorporation and our bylaws, all as will be in effect upon the completion of
this offering. This description is only a summary. You should also refer to our
certificate of incorporation and bylaws which have been filed with the
Securities and Exchange Commission as exhibits to our registration statement, of
which this prospectus forms a part. The descriptions of the common stock and
preferred stock, as well as options to purchase our common stock, reflect
changes to our capital structure that will occur upon the completion of this
offering in accordance with the terms of the certificate of incorporation.
As of March 31, 2001, all outstanding shares of our capital stock were held of
record by 16 stockholders. Upon the completion of this offering, our authorized
capital stock will consist of ten million shares of common stock, par value
$0.001 per share. We will also have three million shares of authorized
redeemable convertible preferred stock, par value $0.001 per share.
COMMON STOCK
We are authorized to issue ten million shares of common stock, par value $0.001
per share. Options to purchase an aggregate of 83,000 shares of our common
stock, and warrants to purchase 130,000 shares of our common stock and a
contractual obligation to issue 146,250 shares of our common stock were
outstanding. There will be _____________ shares of our common stock outstanding
after giving effect to the sale of the shares offered in this offering.
- - Voting rights -- The holders of our common stock are entitled to one vote
for each share held of record.
- - Dividends -- Holders of record of shares of our common stock are entitled
to receive dividends when, if and as may be declared by the board of
directors out of funds legally available for such purposes, subject to the
rights of preferred stockholders. We presently intend to retain future
earnings, if any, for use in the operation and expansion of our business
and do not anticipate paying cash dividends in the foreseeable future.
- - Liquidation rights -- Upon our liquidation, dissolution or winding-up, the
holders of our common stock are entitled to share ratably in all assets
available for distributions after payment in full to creditors and holders
of preferred stock.
- - Other provisions -- The holders of our common stock are not entitled to
cumulative voting, preemptive rights, subscription rights or the right to
convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares are, and the shares of our common stock sold in the
offering will be validly issued, fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of our redeemable
convertible preferred stock will be automatically converted on a one to one
basis into shares of common stock. Thereafter, our board of directors has the
authority, without action by our stockholders, to issue up to three million
shares of preferred stock in one or more series and to designate the rights,
preferences and privileges of each series, any or all of which may be greater
than the rights of the common stock. The effect of the issuance of any shares of
preferred stock upon the rights of holders of the common stock, diluting the
voting power of the common stock, impairing the liquidation rights of the common
stock and delaying or preventing a change in control of our company without
further action by the stockholders. We have no plans to issue any shares of
preferred stock upon completion of this offering.
56
60
DESCRIPTION OF CAPITAL STOCK
OPTIONS
As of March 31, 2001, options to purchase a total of 83,000 shares of common
stock were outstanding. Additional options to purchase a total of 242,000 shares
of common stock may be granted under the 2000 Stock Incentive Plan. See
"Management -- 2000 Stock Incentive Plan."
WARRANTS
As of March 31, 2001, warrants to purchase a total of 130,000 shares of common
stock were outstanding at prices ranging from $5.00 to $17.65.
CONTINGENT ISSUANCES OF COMMON STOCK
We are obligated to issue up to 146,250 shares of our common stock pursuant to a
license agreement with a production studio. Pursuant to the terms of that
license agreement, we have agreed to issue 14,625 shares of our common stock
following the theatrical release of each film for which we have developed a
software title, up to ten films. To date, we have issued 14,625 shares under
this agreement.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Following the completion of this offering, there will be _______________ shares
of authorized but unissued common stock, or ______________ if the underwriters'
over-allotment option is exercised in full. Of this amount, 325,000 shares of
common stock are reserved for issuance upon exercise of options outstanding or
available for future grant under our 2000 Stock Incentive Plan or outside of our
2000 Stock Incentive Plan. A total of 130,000 shares of common stock are also
issuable upon the exercise of warrants that were outstanding as of March 31,
2001. In addition, following the completion of this offering, there will be
3,000,000 shares of authorized preferred stock. Delaware law does not require
stockholder approval for the issuance of authorized shares. However, the listing
requirements of The Nasdaq Stock Market, Inc., which apply so long as the common
stock remains included in that inter-dealer quotation system, require prior
stockholder approval of specified issuances, including issuances of shares
bearing voting power equal to or exceeding 20% of the pre-issuance outstanding
voting power or pre-issuance outstanding number of shares of common stock. These
additional shares could be used for a variety of corporate purposes, including,
but not limited to, facilitating corporate acquisitions. One of the effects of
the unissued and unreserved common stock and preferred stock may be to enable
our board of directors to issue shares to persons who may agree or be inclined
to vote in concert with current management on issues put to consideration of
stockholders, which issuance could render more difficult or discourage an
attempt to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise, and protect the continuity of our management and possibly
deprive our stockholders of the opportunity to sell their shares of common stock
at prices higher than prevailing market prices.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless, with certain exceptions, the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns or within three years prior, did own 15% or more of the
corporation's voting stock. These provisions may have the effect of delaying,
deferring or preventing a change in control of us without further action by our
stockholders.
Our certificate of incorporation and bylaws contain provisions that could have
the effect of discouraging potential acquisition proposals or making a tender
offer or delaying or preventing a change in control of our company, including
changes a stockholder might consider favorable. In particular, our certificate
of incorporation and bylaws, as applicable, among other things, will:
- - provide our board of directors with the ability to alter our bylaws
without stockholder approval;
57
61
DESCRIPTION OF CAPITAL STOCK
- - provide that special meetings of stockholders can only be called by our
president or secretary at the request in writing of a majority of the
members of our board of directors or holders of at least 10% of the total
voting power of all outstanding shares of stock entitled to vote. In
addition, the business permitted to be conducted at any special meeting of
stockholders is limited to the business brought before the meeting by our
board of directors or the stockholders;
- - provide for an advance notice procedure with regard to the nomination,
other than by or at the direction of the board of directors, of candidates
for election as directors and with regard to business to be brought before
a meeting of stockholders;
- - provide that vacancies on our board of directors may be filled by a
majority of directors in office, although less than a quorum; and
- - allow us to issue up to 3,000,000 shares of preferred stock with rights
senior to those of the common stock and that otherwise could adversely
affect the rights and powers, including voting rights, of the holders of
common stock. In some circumstances, this issuance could have the effect
of decreasing the market price of our common stock, as well as having the
anti-takeover effects discussed above.
Such provisions may have the effect of discouraging a third-party from acquiring
us, even if doing so would be beneficial to our stockholders. These provisions
are intended to enhance the likelihood of continuity and stability in the
composition of our board of directors and in the policies formulated by them,
and to discourage some types of transactions that may involve an actual or
threatened change in control of our company. These provisions are designed to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that the
benefits of increased protection of our potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure our
company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiation of such proposals could result in an improvement of
their terms. However, these provisions could have the effect of discouraging
others from making tender offers for our shares that could result from actual or
rumored takeover attempts. These provisions also may have the effect of
preventing changes in our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is __________________.
58
62
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices. Furthermore, only a limited number of
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale (as described below), sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding __________________
shares of our common stock. Of these shares, the _________________ shares sold
in the offering, plus any shares issued upon exercise of the underwriters'
over-allotment option, will be freely tradable without restriction under the
Securities Act, unless purchased by our "affiliates" as that term is defined in
Rule 144 under the Securities Act, which generally would be our officers,
directors and 10% stockholders.
The remaining 1,843,884 shares outstanding are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration, such as the exemption provided under Rules 144 or 701
promulgated under the Securities Act, which are summarized below. Sales of the
restricted securities in the public market, or the availability of such shares
for sale, could adversely affect the market price of the common stock.
All of our stockholders and option holders have entered into lock-up agreements
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the effective date of the registration statement filed
pursuant to this offering without the prior written consent of UBS Warburg LLC.
As a result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under an effective registration statement or an exemption
from registration, shares subject to lock-up agreements may not be sold until
such agreements expire or are waived by the designated underwriters'
representative, which is at their sole discretion. Taking into account the
lock-up agreements, and assuming UBS Warburg LLC does not release stockholders
from these agreements, the following shares will be eligible for sale in the
public market at the following times:
- - beginning on the effective date of the offering, only the shares sold in
this offering will be immediately available for sale in the public market;
- - 1,583,600 shares will become eligible for sale pursuant to Rule 144
beginning 180 days after the date of this prospectus, 14,625 shares will
be eligible for sale in April 2002 and 245,659 shares will be eligible for
sale in May 2002. Shares eligible to be sold by affiliates pursuant to
Rule 144 are subject to volume restrictions as described below; and
- - 143,500 shares issuable upon exercise of outstanding warrants and 131,625
shares issuable pursuant to a contractual arrangement will be eligible for
sale one year after issuance.
In general, under Rule 144 currently in effect, and beginning after the
expiration of the lock-up agreements, a person, or persons whose shares are
aggregated, who has beneficially owned restricted shares for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- - 1% of the number of shares of common stock then outstanding, which will
equal approximately _______________ shares immediately after the offering;
or
- - the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been an affiliate of us at
any time during the three months preceding a sale, and who has beneficially
owned
59
63
SHARES ELIGIBLE FOR FUTURE SALE
the shares proposed to be sold for at least two years, is entitled to sell
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Beginning 90 days after the effective date, any employee, officer or director of
or consultant to us who purchased shares pursuant to a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, we intend to file
registration statements under the Securities Act as promptly as possible after
the effective date to register shares to be issued pursuant to our employee
benefit plans. As a result, any options exercised under our 2000 Stock Incentive
Plan or any of our other benefit plans after the effectiveness of such
registration statement will also be freely tradable in the public market
following the expiration of the 180-day lock-up period, except that shares held
by affiliates will still be subject to the volume limitation, manner of sale,
notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. The sale of a significant number of these shares could
cause the price of our common stock to decline.
60
64
UNDERWRITING
We and the underwriters for the offering named below have entered into an
underwriting agreement concerning the shares being offered. Subject to
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. UBS Warburg LLC and Jefferies & Co.,
Inc. are the representatives of the underwriters.
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
UBS Warburg LLC...........................................................
Jefferies & Co., Inc. ....................................................
---------
Total..............................................................
=========
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have a 30-day option to buy from us up to an
additional _______________ shares at the initial public offering price less the
underwriting discounts and commissions to cover these sales. If any shares are
purchased under this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above. The following
table shows the per share and total underwriting discounts and commissions we
will pay to the underwriters. These amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase up to an additional
__________________ shares.
NO EXERCISE FULL EXERCISE
----------- -------------
Per share ...................................... $ $
Total .......................................... $ $
We estimate that the total expenses of the offering payable by us, excluding
underwriting discounts and commissions, will be approximately _________________.
Shares sold by the underwriters to the public will initially be offered at the
initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $________________ per share from the initial public offering price. Any
of these securities dealers may resell any shares purchased from the
underwriters to other brokers or dealers at a discount of up to
$________________ per share from the initial public offering price. If all the
shares are not sold at the initial public offering price, the representatives
may change the offering price and the they selling terms. The underwriters have
informed us that they do not expect discretionary sales to exceed __% of the
shares of common stock to be offered.
Our company and each of, our directors, officers, stockholders and optionholders
have agreed with the underwriters not to offer, sell, contract to sell, hedge or
otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable for shares of common
stock during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, without the prior written
consent of UBS Warburg LLC.
The underwriters have reserved for sale, at the initial public offering price,
_____________ shares of our common stock being offered for sale to our customers
and business partners. At the discretion of our management, other parties,
including our employees, may participate in the reserved shares program. The
number of shares available for sale to the general public in the offering will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price was negotiated by us and the representatives.
The principal factors to be considered in determining the initial public
offering price included:
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65
UNDERWRITING
- - the information set forth in this prospectus and otherwise available to
the representatives;
- - the history and the prospects for the industry in which we compete;
- - the ability of our management;
- - our prospects for future earnings, the present state of our development
and our current financial position;
- - the general condition of the securities markets at the time of this
offering; and
- - recent market prices of, and demand for, publicly traded common stock of
comparable companies.
In connection with the offering, the underwriters may purchase and sell shares
of our common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. "Naked" short sales are any
sales in excess of the overallotment option. The underwriters must close out any
naked short position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the common stock in the open
market after pricing that could adversely affect investors who purchase in the
offering.
Stabilizing transactions consist of bids or purchases made for the purpose of
preventing or retarding a decline in the market price of our common stock while
the offering is in progress. The underwriters also may impose a penalty bid.
This occurs when a particular underwriter repays to the underwriters a portion
of the underwriting discount received by it because the representatives have
repurchased shares sold by or for the account of that underwriter in stabilizing
or short covering transactions. These activities by the underwriters may
stabilize, maintain or otherwise affect the market price of our common stock. As
a result, the price of our common stock may be higher than the price that
otherwise might exist in the open market. If these activities are commenced,
they may be discontinued by the underwriters at any time. These transactions may
be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
We have agreed to indemnify the several underwriters against liabilities,
including liabilities under the Securities Act and to contribute to payments
that the underwriters may be required to make in respect thereof.
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66
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Los Angeles, California, will pass for us on the
validity of the common stock offered hereby. Brobeck, Phleger & Harrison LLP,
Palo Alto, California, is acting as counsel for the underwriters in connection
with selected legal matters. An affiliate of Kirkpatrick & Lockhart LLP owns
1,109 shares of our Series C Preferred Stock and holds a warrant to purchase
10,000 shares of our common stock at an exercise price of $22.553 per share.
EXPERTS
The consolidated financial statements as of June 30, 2000 and March 31, 2001 and
for the period from October 7, 1999 (inception) through June 30, 2000, and for
the nine months ended March 31, 2001 included in this prospectus and the related
consolidated financial statement schedule included elsewhere in the registration
statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and have been so included in reliance upon the reports of such firm
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We filed a registration statement on Form S-1 under the Securities Act with the
SEC to register the shares of our common stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the registration
statement and the exhibits to the registration statement. You should refer to
the registration statement and the exhibits and schedules to the registration
statement for more information about us and our common stock. Our statements in
this prospectus concerning the contents of any document are not necessarily
complete, and in each instance, we refer you to the copy of the document filed
as an exhibit to the registration statement. Each statement about those
documents is qualified in its entirety by this reference.
Following this offering, we will become subject to the reporting requirements of
the Securities Exchange Act of 1934. In accordance with that law, we will be
required to file reports and other information with the SEC. The registration
statement and exhibits, as well as those reports and other information when we
file them, may be inspected without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W, Washington, D.C. 20549, and at
the regional offices of the SEC located at Seven World Trade Center, 13th Floor,
New York, New York 10048, and the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Copies of all or any part of the registration statement may be
obtained from the SEC's offices upon payment of fees prescribed by the SEC. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the site is http://www.sec.gov.
We will furnish to our stockholders annual reports and unaudited quarterly
reports for the first three quarters of each fiscal year. Annual reports will
include audited consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of America. The
consolidated financial statements included in those annual reports will be
audited and reported upon, with an opinion expressed, by our independent
auditors.
This prospectus contains statistical data regarding Internet usage and other
industry estimates that we obtained from industry publications, including
reports generated by the International Data Corporation, Euromonitor, the
Interactive Digital Software Association, Forrester and the European Leisure
Software Publishers Association, Ltd. These industry publications generally
indicate that they have obtained their information from sources believed to be
reliable, but we do not guarantee the accuracy and completeness of their
information and we have not independently verified their data.
63
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BAM! ENTERTAINMENT, INC.
(FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of June 30, 2000 and March 31, 2001......................................... F-3
Consolidated Statements of Operations for the Period from October 7, 1999 (inception) through June 30,
2000, the Period from October 7, 1999 (inception) through March 31, 2000 (Unaudited) and the
Nine Months Ended March 31, 2001....................................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Loss for the Period from
October 7, 1999 (Inception) through June 30, 2000 and the Nine Months Ended March 31, 2001............. F-5
Consolidated Statements of Cash Flows for the Period from October 7, 1999 (inception) through
June 30, 2000, the Period from October 7, 1999 (inception) through March 31, 2000 (Unaudited) and
the Nine Months Ended March 31, 2001................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
F-1
68
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
BAM! Entertainment, Inc.
(formerly Bay Area Multimedia, Inc.):
We have audited the accompanying consolidated balance sheets of BAM!
Entertainment, Inc. (formerly Bay Area Multimedia, Inc.) and its subsidiaries
(the "Company") as of June 30, 2000 and March 31, 2001, and the related
consolidated statements of operations, stockholders' equity (deficit) and
comprehensive loss, and cash flows for the period from October 7, 1999
(inception) through June 30, 2000 and the nine months ended March 31, 2001.
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of June 30, 2000 and
March 31, 2001, and the results of its operations and its cash flows for the
period from October 7, 1999 (inception) through June 30, 2000 and for the nine
months ended March 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
June 1, 2001
F-2
69
BAM! ENTERTAINMENT, INC.
(FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA
MARCH 31,
JUNE 30, 2000 MARCH 31, 2001 2001
------------- -------------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 908 $ 1,240
Restricted cash .............................................................. -- 1,014
Accounts receivable, net of allowance of $77 as of June 30, 2000 and $788
as of March 31, 2001 ....................................................... 1,299 4,667
Inventory .................................................................... 6 718
Prepaid royalties, capitalized software costs and licensed assets ............ 368 3,100
Prepaid expenses and other ................................................... 52 383
-------- --------
Total current assets .................................................... 2,633 11,122
Prepaid royalties, capitalized software costs and licensed assets, net of current
portion ............................................................. -- 1,260
Property and equipment, net ..................................................... 79 385
-------- --------
Total assets .................................................................... $ 2,712 $ 12,767
======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable - trade ..................................................... $ 118 $ 1,055
Short-term borrowings ........................................................ 610 3,292
Royalties payable ............................................................ 248 273
Accrued compensation and related benefits .................................... 221 943
Accrued expenses - other ..................................................... 118 610
-------- --------
Total current liabilities ............................................... 1,315 6,173
Redeemable convertible preferred stock; $0.001 par value; shares
authorized: 976,220 and 3,000,000 as of June 30, 2000 and March 31,
2001, respectively; shares issued and outstanding: 976,220 and 1,270,840
as of June 30, 2000 and March 31, 2001, respectively, none issued and
outstanding on a pro forma basis ........................................... 2,103 6,657
Stockholders' equity (deficit):
Common stock, $0.001 par value; shares authorized: 5,000,000 and
10,000,000 as of June 30, 2000 and March 31, 2001, respectively; shares
issued and outstanding: 312,760 as of June 30, 2000 and March 31, 2001,
1,583,600 issued and outstanding on a pro forma basis ...................... 1 1 $ 2
Additional paid-in capital ................................................... 97 1,365 8,021
Receivable from stockholder .................................................. (1) (1) (1)
Deferred stock compensation .................................................. -- (46) (46)
Accumulated deficit .......................................................... (803) (1,378) (1,378)
Accumulated other comprehensive loss ......................................... -- (4) (4)
-------- -------- --------
Total stockholders' equity (deficit) .................................... (706) (63) $ 6,594
-------- -------- ========
Total liabilities and stockholders' equity (deficit) ............................ $ 2,712 $ 12,767
======== ========
See notes to consolidated financial statements
F-3
70
BAM! ENTERTAINMENT, INC.
(FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PERIOD FROM
OCTOBER 7, 1999 (INCEPTION)
THROUGH
------------------------------- NINE MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001
------------- -------------- -----------------
(UNAUDITED)
Net revenues .................................................................. $ 1,377 $ -- $ 17,305
Costs and expenses:
Cost of revenues ........................................................... 807 -- 9,766
Royalties, software costs, license costs and project abandonment ........... 248 -- 2,028
Research and development (exclusive of amortization of deferred stock
compensation) ............................................................ 260 133 663
Sales and marketing (exclusive of amortization of deferred stock
compensation) ............................................................ 132 -- 3,234
General and administrative (exclusive of amortization of deferred stock
compensation) ............................................................ 711 379 1,218
Amortization of deferred stock compensation* ............................... -- -- 19
------- ----- --------
Total costs and expenses .............................................. 2,158 512 16,928
------- ----- --------
Income (loss) from operations ................................................. (781) (512) 377
Interest income ............................................................... 8 7 41
Interest expense .............................................................. (39) (21) (993)
Other income .................................................................. 9 9 --
------- ----- --------
Net loss ...................................................................... $ (803) $(517) $ (575)
======= ===== ========
Net loss per share:
Basic and diluted .......................................................... $ (4.54) $(2.97) $ (1.84)
======= ===== ========
Shares used in computation:
Basic and diluted .......................................................... 177 174 313
======= ===== ========
Pro forma net loss per share (Note 1):
Basic and diluted (unaudited) .............................................. $ (4.44) $ (0.41)
======= ========
Shares used in pro forma computation (Note 1):
Basic and diluted (unaudited) .............................................. 181 1,390
======= ========
* Amortization of deferred stock compensation:
Research and development ................................................... $ -- $ -- $ 16
Sales and marketing ........................................................ -- -- 3
General and administrative ................................................. -- -- --
------- ----- --------
$ -- $ -- $ 19
======= ===== ========
See notes to consolidated financial statements
F-4
71
BAM! ENTERTAINMENT, INC.
(FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DEFERRED
COMMON STOCK ADDITIONAL RECEIVABLE STOCK ACCUMU-
--------------- PAID-IN FROM STOCK- COMPEN- LATED
SHARES AMOUNT CAPITAL HOLDER SATION DEFICIT
------- ------ ---------- ----------- -------- -------
Issuance of common stock for note
receivable ........................... 123,609 $- $ 1 $(1) $ -- $ --
Issuance of common stock for services ... 73,124 -- 37 -- -- --
Sale of common stock .................... 116,027 1 59 -- -- --
Net loss and comprehensive loss ......... -- -- -- -- -- (803)
------- --- ------ --- ---- -------
Balance, June 30, 2000 .................. 312,760 1 97 (1) -- (803)
Issuance of common stock warrants
in connection with a license
agreement ............................ -- -- 910 -- -- --
Issuance of common stock
warrants in connection with
Series B redeemable
convertible preferred stock .......... -- -- 283 -- -- --
Issuance of stock options to
consultant ............................ -- -- 10 -- -- --
Deferred stock compensation ............. -- -- 65 -- (65) --
Amortization of deferred stock
compensation .......................... -- -- -- -- 19 --
Net loss ................................ -- -- -- -- -- (575)
Change in accumulated other
comprehensive loss .................... -- -- -- -- -- --
Comprehensive loss ...................... -- -- -- -- -- --
------- --- ------ --- ---- -------
Balance, March 31, 2001 ................. 312,760 $ 1 $1,365 $(1) $(46) $(1,378)
======= === ====== === ==== =======
ACCUMULATED TOTAL STOCK- TOTAL
OTHER HOLDERS' COMPRE-
COMPRE- EQUITY HENSIVE
HENSIVE LOSS (DEFICIT) LOSS
------------- ------------ ---------
Issuance of common stock for note
receivable ........................... $ -- $ --
Issuance of common stock for services ... -- 37
Sale of common stock .................... -- 60
Net loss and comprehensive loss ......... -- (803)
---- -----
Balance, June 30, 2000 .................. -- (706)
Issuance of common stock warrants
in connection with a license
agreement ............................ -- 910
Issuance of common stock
warrants in connection with
Series B redeemable
convertible preferred stock .......... -- 283
Issuance of stock options to
consultant ............................ -- 10
Deferred stock compensation ............. -- --
Amortization of deferred stock
compensation .......................... -- 19
Net loss ................................ -- (575) $(575)
Change in accumulated other
comprehensive loss .................... (4) (4) (4)
-----
Comprehensive loss ...................... -- -- $(579)
---- ----- =====
Balance, March 31, 2001 ................. $ (4) $ (63)
==== =====
See notes to consolidated financial statements
F-5
72
BAM! ENTERTAINMENT, INC.
(FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM OCTOBER 7, 1999
(INCEPTION) THROUGH
------------------------------- NINE MONTHS ENDED
JUNE 30, 2000 MARCH 31, 2000 MARCH 31, 2001
------------- -------------- -----------------
(UNAUDITED)
Cash flows from operating activities:
Net loss .................................................................... $ (803) $ (517) $ (575)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................................ 12 3 550
Amortization of deferred stock compensation .............................. -- -- 19
Provision for bad debts and price protection ............................. 77 -- 838
Consulting services performed in exchange for common stock and options ... 37 -- 10
Consulting services performed in exchange for redeemable convertible
preferred stock ........................................................ 96 -- --
Other .................................................................... -- -- (4)
Changes in operating assets and liabilities:
Accounts receivable .................................................... (1,376) (54) (4,206)
Inventory .............................................................. (6) -- (712)
Prepaid expenses and other ............................................. (52) (31) (331)
Accounts payable - trade ............................................... 118 21 937
Prepaid royalties, capitalized software costs and licensed assets ...... (368) (242) (3,577)
Royalties payable ...................................................... 248 -- 25
Accrued compensation and related benefits .............................. 221 117 722
Accrued expenses - other ............................................... 118 52 492
-------- -------- --------
Net cash used in operating activities ............................... (1,678) (651) (5,812)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................................... (91) (54) (361)
Increase in restricted cash .............................................. -- -- (1,014)
-------- -------- --------
Net cash used in investing activities ............................... (91) (54) (1,375)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of promissory notes ........................... 1,047 1,020 --
Advances under short-term borrowings ..................................... 610 -- 10,656
Net repayments of short-term borrowings .................................. -- -- (7,974)
Net proceeds from issuance of common stock ............................... 60 -- --
Net proceeds from issuance of redeemable convertible preferred stock ..... 960 -- 4,837
-------- -------- --------
Net cash provided by financing activities ........................... 2,677 1,020 7,519
-------- -------- --------
Net increase in cash and cash equivalents ................................... 908 315 332
Cash and cash equivalents, beginning of period .............................. -- -- 908
-------- -------- --------
Cash and cash equivalents, end of period .................................... $ 908 315 1,240
======== ======== ========
Noncash investing and financing activities:
Conversion of promissory notes to redeemable convertible preferred
stock .................................................................. $ 1,047 $ -- $ --
======== ======== ========
Issuance of common stock for promissory notes ............................ $ 1 $ 1 $ --
======== ======== ========
Issuance of common stock warrants in connection with license agreement ... $ -- $ -- $ 910
======== ======== ========
Issuance of common stock warrants in connection with redeemable
convertible preferred stock ............................................ $ -- $ -- $ 283
======== ======== ========
Deferred stock compensation .............................................. $ -- $ -- $ 65
======== ======== ========
See notes to consolidated financial statements
F-6
73
BAM! ENTERTAINMENT, INC.
(FORMERLY BAY AREA MULTIMEDIA, INC.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH JUNE 30, 2000,
PERIOD FROM OCTOBER 7, 1999 (INCEPTION) THROUGH MARCH 31, 2000 (UNAUDITED)
AND NINE MONTHS ENDED MARCH 31, 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business - BAM! Entertainment, Inc. (formerly Bay Area
Multimedia, Inc.) and subsidiaries (the "Company") is a developer and
publisher of interactive entertainment software products for popular
interactive entertainment hardware platforms and personal computers. The
Company licenses popular properties that have consumer recognition and
appeal from a wide variety of sources and publishes software based on
their motion picture, television, sports and cartoon character
properties. The Company sells its software to mass merchandisers and
independent distributors.
Principles of Consolidation - The consolidated financial statements
include the Company and its wholly-owned subsidiaries in the United
Kingdom. All intercompany transactions and balances have been eliminated
in consolidation.
Foreign Currency Translation - The functional currency for the Company's
foreign operations is the applicable local currency. The translation of
the applicable foreign currencies into U.S. dollars is performed for
balance sheet accounts using exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted-average
exchange rate during the period. The gains or losses resulting from such
translation are reported as a separate component of equity as
accumulated other comprehensive loss, whereas gains or losses resulting
from foreign currency transactions are included in results of
operations.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates include, but are not limited to:
allowances for price protection, uncollectible accounts receivable and
sales returns; inventory valuations; recoverability of prepaid
royalties, capitalized software costs and licensed assets; depreciation
and amortization; taxes and contingencies. Actual results could differ
from those estimates.
Certain Significant Risks and Uncertainties - Financial instruments
which potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts receivable.
Cash and cash equivalents are held with one financial institution and
consist primarily of cash in bank accounts. The Company generates
revenue primarily from large retailers in the United States and
generally does not require its customers to provide collateral or other
security to support accounts receivable. To reduce credit risk,
management performs ongoing credit evaluations of its customers'
financial condition and maintains allowances for estimated potential bad
debt losses.
The Company participates in a dynamic high-technology industry and
believes that changes in any of the following areas could have a
material adverse effect on the Company's future financial position,
results of operations or cash flows: ability to obtain future financing;
advances and trends in new technologies and industry standards;
competitive pressures in the form of new and more popular products by
competitors; changes in the overall demand by customers and consumers
for products offered by the Company; unexpected quantities of product
returns and mark-down allowances; changes in certain strategic
relationships or customer relationships; the loss of significant
customers; litigation or claims against the Company based on
intellectual property, patent, product, regulatory or other factors; the
inability to procure the necessary third-party licenses or proprietary
software needed to develop its products; risk associated with changes in
domestic and international economic and/or political conditions or
regulations; risks associated with regulation within the industry;
availability of necessary product components; the Company's ability to
attract and retain employees necessary to
F-7
74
support its growth; the Company's reliance on senior management; the
Company's limited operating history; inability to manage the growth of
the business; delays and cost overruns on products under development;
risks associated with development of products by third-party developers;
failure to anticipate changing consumer preferences; dependence on
hardware manufacturers for the provision of the platforms necessary to
generate revenue; the Company's inability to protect its proprietary
rights or to avoid claims from other companies; short product life
cycles and the reliance on platform manufacturers in manufacturing the
Company's products.
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with maturities at the date of purchase of three
months or less to be cash equivalents. The recorded carrying amounts of
the Company's cash and cash equivalents approximate their fair market
value due to their short maturities.
Restricted Cash - Restricted cash of $1,014,000 at March 31, 2001
represents a money market account held with a bank, which is not
accessible by the Company until its obligations to the bank under a line
of credit are satisfied in full.
Inventories - Inventories, which consist primarily of finished goods,
are stated at the lower of cost (based upon the first-in, first-out
method) or market value. The Company estimates the net realizable value
of slow moving inventories on a product-by-product basis and charges the
excess of cost over net realizable value to cost of revenues.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets of three years.
Prepaid Royalties, Capitalized Software Costs and Licensed Assets -
Advance royalty payments for intellectual property licenses are
capitalized and recorded as prepaid royalties. Royalty payments for
intellectual property licenses are classified as current assets to the
extent they relate to anticipated sales during the subsequent year and
long-term assets if the sales are anticipated after one year. Prepaid
royalties are amortized to cost of revenues commencing upon the product
release at the greater of the contractual royalty rate based on actual
product sales, or the ratio of current revenues to total projected
revenues. The Company evaluates the future recoverability of prepaid
royalties on a quarterly basis and expenses to costs of revenue if and
when they are deemed unrecoverable.
The Company utilizes both independent software developers (who are paid
advances against future royalties) and internal development teams to
develop its software. The Company accounts for prepaid royalties
relating to development agreements and capitalized software costs in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed. Payments made to independent software developers
under development agreements are capitalized to software development
costs once technological feasibility is established or if the
development costs have an alternative future use. Internal development
costs are capitalized to software development costs once technological
feasibility is established. Technological feasibility is evaluated on a
product-by-product basis. For products where proven game engine
technology exists, this may occur early in the development cycle.
Commencing upon product release, capitalized software development costs
are amortized to "royalties, software costs, license costs and project
abandonment." Software development costs are expensed if and when they
are deemed unrecoverable. The following criteria is used to evaluate
recoverability of software development costs: the commercial acceptance
of prior products released on a given hardware platform; orders for a
product prior to its release and actual development costs of a product
as compared to forward-looking projections. Amortization of such costs
is based on the greater of the proportion of current revenues to total
projected revenues, or the straight-line method over the estimated
product life (generally three to six months). The Company evaluates the
future recoverability of capitalized amounts on a quarterly basis.
Research and development costs are expensed as incurred.
F-8
75
During the period from October 7, 1999 (inception) through June 30, 2000
and the nine months ended March 31, 2001, the Company amortized $0 and
$495,000, respectively, of capitalized software development costs.
Fair Value of Financial Instruments - The Company's financial
instruments include cash equivalents and short-term debt. Cash
equivalents are stated at cost, which approximates fair market value,
based on quoted market prices. The recorded carrying amount of the
Company's short-term debt approximates fair value since such debt
instruments bear interest at rates which approximate market rates.
Long-Lived Assets - The Company evaluates long-lived assets, such as
property and equipment and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by comparison of the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets, as
defined in SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of.
Income Taxes - The Company accounts for income taxes under an asset and
liability approach. Deferred income taxes reflect the impact of
temporary differences between assets and liabilities recognized for
financial reporting purposes and such amounts recognized for income tax
reporting purposes, and operating loss and other tax credit
carryforwards measured by applying currently enacted tax laws. Valuation
allowances are provided when necessary to reduce net deferred tax assets
to an amount that is more likely than not to be realized in the future.
Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, and to nonemployees using the fair value method in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
Revenue Recognition - The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the price has
been fixed or is determinable and collectibility has been reasonably
assured. This occurs when finished goods in the form of software on a
cartridge, CD-ROM or similar media are shipped to the customer. Subject
to certain limitations, the Company permits customers to obtain
exchanges and returns for defective, shelf-worn and damaged products
within certain specified periods and provides price protection on
certain unsold merchandise. On a product by product basis, revenue from
product sales is reflected net of the allowance for returns and price
protection. The Company estimates the amount of future returns, and
price protection based upon current known circumstances and historical
results. No right of return exists for sales to distributors.
Cost of Revenues - Cost of revenues includes manufacturing costs of the
finished goods, freight, and inventory management costs.
Advertising - Advertising and sales promotion costs are generally
expensed as incurred. Advertising costs were $54,000 and $1,400,000 for
the period from October 7, 1999 (inception) through June 30, 2000 and
the nine months ended March 31, 2001, respectively.
Net Loss per Share - Basic earnings per share (EPS) excludes dilution
and is computed by dividing net loss attributable to common shareholders
by the weighted average number of common shares outstanding for the
period excluding the weighted average common shares subject to
repurchase. Diluted EPS reflects the potential dilution that could occur
if securities or other contracts to issue common stock (redeemable
convertible preferred stock, common stock options and warrants using the
treasury stock method) were exercised or converted into common stock.
Potential common shares in the diluted EPS computation are excluded in
net loss periods as their effect would be antidilutive.
Unaudited Pro Forma Net Loss per Share - Pro forma net loss per share,
basic and diluted, is computed to give effect to the conversion of
redeemable convertible preferred stock that will
F-9
76
automatically convert upon completion of the Company's initial public
offering (using the if-converted method).
Unaudited Pro Forma Information - The unaudited pro forma information in
the accompanying consolidated balance sheet assumes that the conversion
of the outstanding shares of redeemable convertible preferred stock into
1,270,840 shares of common stock resulting from the completion of an
initial public offering had actually occurred on March 31, 2001. Common
shares issued resulting from such an initial public offering and its
related estimated net proceeds are excluded from such pro forma
information.
Unaudited Interim Financial Information - The interim financial
information for the period from October 7, 1999 (inception) through
March 31, 2000 is unaudited and has been prepared on the same basis as
the audited consolidated financial statements. In the opinion of
management, such unaudited financial information includes all
adjustments (consisting only of normal recurring adjustments) necessary
for a fair presentation of this interim information.
Comprehensive Loss - In fiscal 2000, the Company adopted SFAS No. 130,
Reporting Comprehensive Income, which requires that an enterprise
report, by major components and as a single total, the change in its net
assets during the period from nonowner sources. Comprehensive loss for
the period from October 7, 1999 (inception) through June 30, 2000, and
for the nine months ended March 31, 2001 has been disclosed within the
statement of stockholders' equity (deficit).
Recently Adopted Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement requires
companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for
hedge accounting. SFAS No. 133 was effective for the Company beginning
in the first quarter of fiscal year 2001. The adoption of this statement
did not have a significant impact on the Company's consolidated
financial statements during the nine months ended March 31, 2001.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the staff's views in applying
generally accepted accounting principles in the United States to revenue
recognition in financial statements and provides interpretations
regarding the application of generally accepted accounting principles to
revenue recognition where there is an absence of authoritative
literature addressing a specific arrangement or a specific industry. SAB
101 is effective for the Company in the fourth quarter of fiscal 2001.
The Company's revenue recognition practices comply with the applicable
guidance in SAB 101 and the adoption of SAB 101, therefore, will not
have a material effect on the financial statements for the nine months
ended March 31, 2001.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation ("FIN 44"), an interpretation of APB No. 25. FIN 44
clarifies the application of APB No. 25 for various issues,
specifically:
- The definition of an employee,
- The criteria for determining whether a plan qualifies as a
noncompensatory plan,
- The accounting consequence of various modifications to the terms
of a previously fixed stock option or award, and
- The accounting for an exchange of stock compensation awards in a
business combination.
FIN No. 44 was effective July 1, 2000, but certain conclusions cover
specific events that occur after either December 15, 1998 or January 12,
2000. The impact of FIN 44 did not have a material effect on the
Company's financial statements.
F-10
77
2. PREPAID ROYALTIES, CAPITALIZED SOFTWARE COSTS AND LICENSED ASSETS
Prepaid royalties, capitalized software costs and licensed assets
consisted of the following:
JUNE 30, MARCH 31,
2000 2001
-------- ---------
(IN THOUSANDS)
Prepaid royalties ................. $ 150 $ 1,251
Capitalized software costs ........ 218 2,230
Licensed assets ................... -- 879
----- -------
(368) 4,360
Less current portion:
Prepaid royalties ............. (150) (1,047)
Capitalized software costs .... (218) (1,982)
Licensed assets ............... -- (71)
----- -------
368 (3,100)
----- -------
Long-term portion ................. $ -- $ 1,260
During the period from October 7, 1999 (inception) through June 30, 2000
and the nine months ended March 31, 2001, the Company amortized $0 and
$495,000, respectively, of capitalized software costs.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
JUNE 30, MARCH 31,
2000 2001
-------- ---------
(IN THOUSANDS)
Furniture and equipment ................................ $ 27 $ 113
Computer equipment ..................................... 23 277
Computer software ...................................... 41 62
----- -----
91 452
Less accumulated depreciation and amortization ......... (12) (67)
----- -----
Total property and equipment, net ...................... $ 79 $ 385
===== =====
4. SHORT-TERM BORROWINGS
Financing Agreement
In February 2000, the Company entered into a master purchase order
assignment agreement (the "Agreement") with a finance company, whereby
the Company assigns customer purchase orders to the finance company and
requests the finance company to purchase the finished goods to fulfill
such customer purchase orders.
The Agreement specifies that the finance company's funding commitment
with respect to a customer purchase order shall not exceed 60% of the
retail purchase order price. Under the Agreement the finance company's
aggregate outstanding funding (i.e., advance of funds or purchase of
finished goods to fulfill customer purchase orders) shall not exceed
$8,500,000.
The Company is required to pay the finance company's expenses under the
contract, a deal fee (consisting of a transaction and initiation fee
equal to 5.0% of the face amounts of letters of credit issued or other
funds advanced by the finance company), a daily maintenance fee of
0.067%, a materials advance fee at prime rate plus 4.0% and a late
payment fee where applicable; all of which are included in interest
expense.
F-11
78
Upon the signing of the agreement, the Company paid the finance company
a security deposit of $90,000. An extension payment of $50,000 was made
when the contract was amended in December 2000.
The agreement expires on March 31, 2002. The amount outstanding under
the agreement as of June 30, 2000 and March 31, 2001 was $610,000 and
$2,332,000, respectively.
Outstanding borrowings under the above agreement are collateralized by
inventory, accounts receivable, fixed assets and intangible assets of
the Company. As of March 31, 2001, the Company had outstanding letters
of credit issued of $607,000. Management does not expect any material
losses to result from these off-balance sheet instruments.
Line of Credit
In November 2000, the Company entered into a short-term revolving line
of credit under which it may borrow up to $1,000,000, of which $960,000
has been utilized as of March 31, 2001. Borrowings are payable on demand
and interest is paid at the bank's base rate until time of demand or
default, when interest becomes payable at the bank's base rate plus 3.0%
(8.5% as of March 31, 2001). The line of credit is secured by restricted
cash being held in a money market account with the same bank.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND COMMON STOCK
Stock Split
In May 2000, the Company effected a reverse stock split of 0.195 to one
with an adjusted par value of $0.001. All share and per share amounts in
these financial statements have been adjusted to give effect to the
reverse stock split.
Redeemable Convertible Preferred Stock
Under the Company's certificate of incorporation, as amended in December
2000, the Company is authorized to issue 3,000,000 shares of redeemable
convertible preferred stock. The Company issued 976,220 shares of Series
A redeemable convertible preferred stock on June 30, 2000 for cash,
services and through the conversion of promissory notes. On December 28,
2000, the Company issued 294,620 shares of Series B redeemable
convertible preferred stock. As of March 31, 2001, redeemable
convertible preferred stock consisted of the following:
AMOUNT NET
OF
ORIGINAL ISSUANCE SHARES ISSUED AND PAR VALUE LIQUIDATION COMMON STOCK
ISSUE PRICE COSTS DESIGNATED OUTSTANDING AMOUNT PREFERENCE EQUIVALENTS
----------- ---------- ---------- ----------- --------- ----------- ------------
(IN THOUSANDS) (IN THOUSANDS)
Series A ......... $ 2.17 $ 2,103 976,220 976,220 $ 0.001 $ 2,118 976,220
Series B ......... $ 17.65 4,554 320,000 294,620 $ 0.001 5,750 294,620
--------- --------- --------- -------- ---------
$ 6,657 1,296,220 1,270,840 $ 7,868 1,270,840
========= ========= ========= ======== =========
Significant terms of the redeemable convertible preferred stock are as
follows:
- Each share of Series A and Series B redeemable convertible
preferred stock is convertible into one share of common stock,
subject to adjustments for events of dilution, at the option of
the holder any time after the date of issuance. In addition,
each share of redeemable convertible preferred stock will
automatically be converted into common stock upon the completion
of a public offering of common stock with aggregate proceeds
greater than $15,000,000 and at a price per share not less than
$75 per share.
- If, as, and when declared by the Board of Directors, the holders
of Series A and Series B redeemable convertible preferred stock
are entitled to receive noncumulative dividends at the rate
F-12
79
of $0.031 and $1.25 per share per annum, respectively, in
preference to holders of common shares.
- In the event of liquidation, dissolution or winding up of the
Company, the holders of Series A redeemable convertible
preferred stock shall be entitled to receive, prior and in
preference to common stock, an amount equal to the original
issuance price of $2.17 per share, plus any declared but unpaid
dividends thereon. The holders of Series B redeemable preferred
stock shall be entitled to receive prior and in preference to
common stock an amount equal to the original issuance price of
$17.65 per share plus an amount per each outstanding share of
Series B preferred stock equal to 7.0% per annum accruing on the
Series B issuance price of $17.65 per share, calculated from the
date of issuance until the date of payment of the liquidation
preference, plus any declared, but unpaid dividends thereon. If
the amount that would have been payable if the conversion of the
redeemable convertible preferred stock took place prior to the
liquidation event is greater than the amounts specified above,
this amount will be payable. Any remaining assets will be
distributed to the holders of common stock.
- In the event of a change in control or sale or disposition of
substantially all of the Company's assets, a majority of the
preferred shareholders may elect to require the Company to
redeem the redeemable convertible preferred stock at the above
liquidation preference.
- Each share has the voting rights equivalent to the number of
shares of common stock into which it is convertible.
Common Stock
In October 1999, the Company issued 123,609 shares of common stock to
its founder in exchange for a note receivable from the founder. Also in
October 1999, the Company issued 58,500 shares at $0.51 per share to
consultants in exchange for services performed valued at $30,000.
In June 2000, an additional 130,651 shares were issued at $0.51 per
share in exchange for cash of $59,000 and services valued at $7,000.
Note Receivable from Stockholder - At June 30, 2000, the note receivable
from stockholder represents a full-recourse promissory note of $634
received in connection with the sale of common stock. The note bears
interest at 7.0% and is payable on demand.
Warrants
In connection with the execution of a license agreement (the
"Agreement") during October 2000, the Company issued a production
company warrants to purchase 100,000 shares of common stock at an
exercise price of $5.00 per share. The warrants expire in September
2006. Under the warrant agreement, 50% of the warrants became vested and
exercisable upon execution of the Agreement, while the remaining
warrants become vested in equal portions in December 2000, representing
the date on which certain performance measures were met. The fair value
of these warrants at the grant date was estimated to be $708,000, using
the Black-Scholes option pricing model with the following assumptions:
expected term equal to six years; risk-free interest rate of 5.8%;
volatility of 95%; and no dividends during the expected term. Of this
amount $354,000 relates to 50% of the warrants that vested upon
execution of the Agreement and will be amortized on a straight-line
basis over the five-year term of the Agreement. The fair value of the
remaining 50% of the warrants has been estimated at the date of vesting
using the Black-Scholes option pricing model with the following
assumptions: expected term equal to 6.00 years; risk-free interest rate
of 5.0%; volatility of 95%; and no dividends during the expected term.
In December 2000, when the remaining warrants vested, the fair value of
the remaining 50% of the warrants of $556,000 was capitalized to prepaid
royalties, capitalized software costs and licensed assets and will be
amortized over the life of the products to which it relates when these
products are released. During the nine months ended March 31, 2001,
$31,000 was amortized to cost of revenues.
In connection with the Series B redeemable convertible preferred stock
offering, the Company issued warrants to purchase 30,000 shares of its
common stock at an exercise price of $17.65 per share. The warrants
expire on the earlier of either (i) December 2003, (ii) upon the
completion of a public
F-13
80
offering of common stock with aggregate proceeds greater than
$15,000,000 and at a price per share not less than $75 per share or
(iii) upon the completion of a subsequent private equity financing or in
the event of a change in control, sale or disposition of substantially
all of the Company's assets or recapitalization, reclassification or
reorganization of the Company's stock resulting in aggregate proceeds
greater than $10,000,000 and at a price per share not less than $35 per
share. The value of these warrants has been estimated using the
Black-Scholes option pricing model with the following assumptions:
expected term equal to three years; risk-free interest rate of 5.1%;
volatility of 95%; and no dividends during the expected term. The fair
value of these warrants of $283,000 was recorded as an issuance cost
against the proceeds of the Series B redeemable convertible preferred
stock offering.
Stock Plans
Under the Company's 2000 Stock Incentive Plan adopted on July 10, 2000,
the Company may grant options to purchase or directly issue up to
150,000 shares of common stock to employees, directors and consultants
at prices not less than the fair market value (as determined by the
Board of Directors) at the date of grant for incentive stock options and
not less than 85% of fair market value at the date of grant for
nonstatutory stock options. These options generally vest over a four
year period and expire ten years from the date of grant. The Company has
a right to repurchase (at the lesser of the fair market value on the
date of repurchase and option exercise price, with the right to
repurchase the shares at the original exercise price lapsing ratably in
accordance with the vesting schedule of the options granted) common
stock issued under option exercises for unvested shares. The right to
repurchase generally expires 25% after the first 12 months from the date
of grant and then ratably over a 36-month period.
The Board of Directors, in their determination of fair market value on
the date of grant, takes into consideration many factors including, but
not limited to, the Company's financial performance, current economic
trends, actions by competitors, market maturity, emerging technologies,
near-term backlog and, in certain circumstances, valuation analyses
performed by independent appraisers. These valuation analyses utilize
generally accepted valuation methodologies such as the income and market
approaches to valuing the Company's business.
Stock option activity under the stock plans is summarized as follows:
OPTIONS OUTSTANDING
----------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
--------- --------- --------
Balances, June 30, 2000 ......................... -- -- $ --
Reserved ........................................ 150,000 -- --
Granted (weighted average fair value of
$1.54 per share) ............................. (83,000) 83,000 3.65
------- ------- -------
Balances, March 31, 2001 ........................ 67,000 83,000 $ 3.65
======= ======= =======
Additional information regarding options outstanding as of March 31,
2001 is as follows:
OPTIONS OUTSTANDING
-----------------------------------------------------------------------
EXERCISE WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
PRICES NUMBER OF SHARES CONTRACTUAL LIFE (YEARS) EXERCISE PRICE
------------- ---------------- -------------------------- ----------------
$ 2.17 39,500 9.27 $ 2.17
5.00 43,500 9.52 5.00
--------- ---------
83,000 $ 3.65
========= =========
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No options were vested as of March 31, 2001.
Deferred Stock Compensation
As discussed in Note 1, the Company accounts for its stock-based awards
to employees using the intrinsic value method in accordance with APB No.
25. Accordingly, the Company records deferred stock compensation equal
to the difference between the grant price and deemed fair value of the
Company's common stock on the date of grant. No deferred stock
compensation was recorded for the period from October 7, 1999
(inception) through June 30, 2000. Deferred stock compensation
aggregated $65,000 for the nine months ended March 31, 2001, and is
being amortized to expense over the vesting period of the options,
generally four years, using a multiple option award valuation approach,
which results in accelerated amortization of the expense resulting in
amortization of deferred stock compensation of $19,000 for the nine
months ended March 31, 2001.
During the nine months ended March 31, 2001, the Company granted options
to purchase 5,000 shares of common stock to a nonemployee at a weighted
average exercise price of $2.17 per share. These options vest on the
date of grant and expire ten years from the date of grant. The fair
value of these options at grant date was estimated to be $10,000 using
the Black-Scholes option pricing model with the following assumptions:
expected term equal to 10 years; risk-free interest rate of 6.1%;
volatility of 95%; and no dividends during the expected term.
Additional Stock Plan Information
Since the Company continues to account for its stock-based awards to
employees using the intrinsic value method in accordance with APB No.
25, SFAS No. 123 requires the disclosure of pro forma net income (loss)
as if the Company had adopted the fair value method. Under SFAS No. 123,
the fair value of stock-based awards is calculated through the use of
option pricing models, even though such models were developed to
estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the
Company's stock option awards. The Company's calculations were made
using the minimum value pricing model, which requires subjective
assumptions, including expected time to exercise, which greatly affects
the calculated values. The following weighted average assumptions were
used in the model for the nine months ended March 31, 2001: expected
life, 4 years; risk-free interest rate, 5.9%; and no dividends during
the expected term. The Company's calculations are based on a multiple
option award valuation and amortization approach, which results in
accelerated amortization of the expense. Forfeitures are recognized as
they occur. If the computed fair values of the employee awards had been
amortized to expense over the vesting period of the awards, the
Company's pro forma net loss would have been $612,000 ($1.96 per share,
basic and diluted) for the nine months ended March 31, 2001.
6. INCOME TAXES
Due to the Company's net loss position, there was no income tax
provision for the period from July 1, 2000 through March 31, 2001 and
the period October 7, 1999 (inception) through June 30, 2000.
Significant components of the Company's net deferred tax assets consist
of:
JUNE 30, MARCH 31,
2000 2001
-------- ---------
Deferred tax assets:
Deferred stock compensation .............. $ -- $ 21
Reserves and accruals .................... 124 235
Other .................................... (2) 35
Net operating loss carryforwards ......... 203 242
----- -----
Total deferred tax assets .................... 325 533
Valuation allowance .......................... (325) (533)
----- -----
Net deferred tax asset ....................... $ -- $ --
===== =====
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The Company established a 100% valuation allowance at June 30, 2000 and
March 31, 2001 due to the uncertainty of realizing future tax benefits
from its net operating loss carryforwards and other deferred tax assets.
At March 31, 2001, the Company has federal and state net operating loss
carryforwards of approximately $263,000 and $635,000, respectively,
expiring through 2021 and 2011, respectively. Foreign net operating loss
carryforwards at March 31, 2001 are approximately $371,000.
Current federal and California laws include substantial restrictions on
the utilization of net operating losses and credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability
to utilize net operating loss and tax credit carryforwards may be
limited as a result of such "ownership change." Such a limitation could
result in the expiration of carryforwards before they are utilized.
7. COMPUTATION OF LOSS PER SHARE
The following table sets forth the computations of basic and diluted
loss per share (in thousands, except per share data):
PERIOD FROM
OCTOBER 7, 1999
(INCEPTION) THROUGH NINE MONTHS
--------------------------- ENDED
JUNE 30, MARCH 31, MARCH 31,
2000 2000 2001
---------------------------------------------
(UNAUDITED)
Numerator:
Numerator for basic and diluted net loss per share -
net loss attributable to common shareholders ............ $(803) $(517) $(575)
====== ====== ======
Denominator:
Denominator for basic and diluted net loss per share -
weighted average - common shares outstanding ............ 177 174 313
Basic and diluted net loss per share ......................... $(4.54) $(2.97) $(1.84)
====== ====== ======
The following table summarizes common stock equivalents that are not
included in the denominator used in the diluted net loss per share
calculation because to do so would be antidilutive for the periods
indicated (in thousands):
EFFECT OF COMMON STOCK EQUIVALENTS AT: JUNE 30, MARCH 31, MARCH 31,
2000 2000 2001
---------------------------------------------
(UNAUDITED)
Series A redeemable convertible preferred stock .............. 11 -- 976
Series B redeemable convertible preferred stock .............. -- -- 101
Options to purchase common stock ............................. -- -- 46
Warrants to purchase common stock ............................ -- -- 47
--- --- -----
Total common stock equivalents ............................... 11 -- 1,170
=== === =====
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8. EMPLOYEE BENEFIT PLAN
In January 2000, the Company adopted a 401(k) tax deferred savings plan
(the 401(k) Plan) to provide for retirement of its employees. Employee
contributions were limited to $10,500 for calendar year 2000. The
Company may make matching contributions and employer profit sharing
contributions at the Board of Directors' discretion. For the period from
October 7, 1999 (inception) through June 30, 2000, and for the nine
months ended March 31, 2001, the Company made employer contributions to
the 401(k) Plan amounting to $6,500 and $28,000, respectively.
9. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
As defined by the requirements of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, the Company operates
in one reportable segment: the development and publishing of interactive
entertainment products. International sales and assets were
insignificant for all periods presented.
10. CUSTOMER CONCENTRATIONS
The following table summarizes net revenues and accounts receivable for
customers which accounted for 10% or more of net revenues or accounts
receivable:
NET REVENUES
------------------------------
PERIOD
FROM
OCTOBER 7,
1999 NINE
ACCOUNTS RECEIVABLE (INCEPTION) MONTHS
--------------------------- THROUGH ENDED
JUNE 30, MARCH 31, JUNE 30, MARCH 31,
CUSTOMER 2000 2001 2000 2001
-------- -------- --------- ----------- ------------
A ................... 52% -- 49% --
B ................... -- 29% -- 20%
C ................... -- 19% -- 15%
D ................... 17% -- 16% 16%
E ................... -- 15% -- 12%
F ................... -- 11% -- --
G ................... 10% -- 10% --
11. COMMITMENTS AND CONTINGENCIES
Under a license agreement entered into between the Company and a
production company, the Company will be obligated to issue 14,625 shares
of common stock upon the release of a film for which the Company elects
to produce software products, up to a total of ten films. As at March
31, 2001, the Company has elected to produce software products for three
films under this agreement. As none of these films have been released as
at March 31, 2001, the Company is not yet required to issue any stock
under this agreement.
Under various licensing agreements entered into between the Company and
content providers, the Company has contractual marketing commitments to
spend $5,250,000 in advertising on the content providers' networks and
online mediums. As at March 31, 2001, the Company has made payments
totaling $1,150,000 under these agreements. Future minimum annual
advertising payments under these contractual marketing commitments are
as follows (in thousands):
Year ending March 31,
---------------------
2002.................................. $1,150
2003.................................. 1,650
2004.................................. 1,300
------
Total $4,100
======
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In connection with a number of licensing and developing agreements, the
Company is required to pay guaranteed minimum royalties with respect to
these agreements. As at March 31, 2001, the Company has capitalized
payments totaling $1,800,000 under these agreements. These guaranteed
amounts will be applied against future royalties that may become payable
to the respective licensors under the agreement. Future minimum annual
advertising payments under these contractual licensing and developing
commitments are as follows (in thousands):
Year ending March 31,
---------------------
2002.................................. $1,575
2003.................................. 200
------
Total $1,775
======
Under the finance agreement as described in Note 4, a maximum commitment
fee of $1,125,000 is payable to the finance company. A portion of the
commitment fee is waived based on the Company's usage of the financing
agreement and on amounts advanced to the Company. As the Company had
already utilized a portion of the amount available under the contract,
$504,000 of the total commitment fee has been waived at March 31, 2001.
An amount of $621,000 therefore remains as a contingent liability and
would be payable before the end of the contract term of December 31,
2001, or earlier, depending on amounts advanced to the Company under the
financing agreement.
The Company leases its principal facilities under a noncancelable
operating lease expiring in 2003. Future minimum annual rental payments
under the lease agreement at March 31, 2001 are as follows (in
thousands):
Year ending March 31,
---------------------
2002.......................... $ 130
2003.......................... 70
2004.......................... 52
------
$ 252
======
Rent expense was $34,950 for the period from October 7, 1999 (inception)
through June 30, 2000 and $89,000 for the nine months ended March 31,
2001.
12. RELATED PARTY TRANSACTIONS
In October 1999, the Company issued 123,609 shares of common stock to an
officer in exchange for a note receivable from the officer.
As of March 31, 2001, the Company has recorded a payroll accrual of
$394,000 related to two employees of the Company.
In each of November 1999 and January 2000, the Company issued an officer
a convertible promissory note each in the principal amount of $500,000,
and in May 2000 issued the officer an additional convertible promissory
note in the principal amount of $47,000. Each note bore interest at 7.0%
per annum with principal and accrued interest due on demand after one
year from the date of issuance. Each note was automatically convertible
into shares of Series A Preferred Stock upon the initial closing of the
Company's Series A Preferred Stock financing. In May 2000, the notes
were converted and the officer was issued 482,625 shares of Series A
Preferred Stock at $2.17 per share.
In February 2000, the Company entered into an agreement with a financing
company to finance the purchase of materials required to produce
products. As a condition of this agreement, an officer of
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85
the Company entered into a separate agreement with the financing company
to guarantee the Company's obligations under the agreement.
In November 2000, the Company entered into a revolving note agreement
with a bank. The note is secured by a personal guarantee from an officer
of the Company and by a security interest in a money market account
maintained at the bank in the name of a director of the Company.
The Company incurred legal services of $9,000 and $87,000 for the
period from October 7, 1999 (inception) through June 30, 2000 and the
nine months ended March 31, 2001, respectively, to a law firm whose
partner is also a director of the Company.
13. SUBSEQUENT EVENTS
Stock Option Grants
In April and May, 2001, the Company granted options to purchase 70,250
shares of its common stock to employees, officers, and directors and in
May, 2001 increased the number of shares issuable under its 2000 Stock
Incentive Plan to 325,000 shares.
Common Stock Issued Under License Agreement
In April, 2001, the Company issued 14,625 shares of common stock
pursuant to a license agreement with a production company in connection
with the release of a film for which the Company intends to develop and
publish a title. The Company will capitalize the cost of this issuance
of common stock at the fair market value of the common stock and
amortize this amount to royalties, software costs, license costs and
project abandonment upon the release of the software products.
Private Placement of Securities
In May, 2001, the Company sold 245,659 shares of its Series C redeemable
convertible preferred stock. Proceeds from these sales totaled $5.3
million, net of expenses. These shares of redeemable convertible
preferred stock include, among other items, 13,500 warrants to purchase
common stock and conversion rights into shares of common stock on a
one-for-one basis in connection with a proposed initial public offering
of the Company's common stock. The Company will recognize a deemed
dividend for the Series C redeemable convertible preferred stock
resulting from its beneficial conversion into common stock.
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87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market Listing
Fee.
SEC registration fee ....................... $ 11,250
NASD filing fee ............................ $ 5,000
Nasdaq National Market listing fee ......... $ 50,000
Printing and engraving costs ............... $ 250,000
Legal fees and expenses .................... $ 400,000
Accounting fees and expenses ............... $ 750,000
Blue Sky fees and expenses ................. $ 5,000
Directors and Officers Insurance ........... $ 600,000
Transfer Agent and Registrar fees .......... $ 20,000
Miscellaneous expenses ..................... $ 108,750
----------
Total ................................ $2,200,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporation Law of the State of Delaware, we
can indemnify our directors and officers against liabilities they may incur in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). Our certificate of incorporation provides that,
pursuant to Delaware law, our directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to us and our stockholders.
This provision in the certificate of incorporation does not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as injunctive
or other forms of nonmonetary relief will remain available under Delaware law.
In addition, each director will continue to be subject to liability for breach
of the director's duty of loyalty to us or our stockholders, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of the law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
Our bylaws provide for the indemnification of our directors to the fullest
extent permitted by the Delaware General Corporation Law. Our bylaws further
provide that our Board of Directors has sole discretion to indemnify our
officers and other employees. We may limit the extent of such indemnification by
individual contracts with our directors and executive officers, but have not
done so. We are not, however, required to indemnify any director or executive
officer in connection with any proceeding initiated by us and approved by a
majority of our Board of Directors, that alleges (a) unlawful misappropriation
of corporate assets, (b) disclosure of confidential information or (c) any other
willful breach of such director or executive officer's duty to us or our
stockholders. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay those
amounts if it should be determined ultimately that he or she is not entitled to
be indemnified under our bylaws or otherwise.
We also have directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of our sales of our securities during the past three
fiscal years involving sales of our securities that were not registered under
the Securities Act of 1933, as amended:
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88
In October 1999, we sold in private placements, 123,609 shares of common stock
to our Chief Executive Officer and President, Raymond C. Musci, at a price of
$0.001 per share. In October 1999, we sold 9,750 shares of common stock at a
price per share of $.10 to each of the following investors: (1) Robert E. Lloyd;
(2) Tracy Ann Sebastian; (3) Philip L. Rosenberg; (4) Robert W. Holmes, Jr.; (5)
Gary Nemetz; and (6) D&S Partners, a California general partnership.
In March 2001 we effected a 0.195-for-one stock split.
In May 2000, in a private placement, we sold shares of common stock to private
investors at a price per share of $0.513 as follows: (1) Anthony R. Williams,
89,897 shares; (2) Robert W. Holmes, Jr., 22,474; (3) Kevin Bermeister, 3,656
shares; (4) Mark Dyne, 3,656 shares; (5) Elie Samaha, 7,312; and (6) FIMAS,
L.P., a partnership, 3,656.
In May 2000, in a private placement, we sold shares of our Series A convertible,
redeemable preferred stock at a price per share of $2.17 to the following
investors: (1) Raymond C. Musci, 482,625 shares; (2) Anthony R. Williams,
351,000 shares; (3) Robert W. Holmes, Jr., 87,750 shares; (4) Kevin Bermeister,
10,969 shares; (5) Mark Dyne, 10,969 shares; (6) Elie Samaha, 21,938 shares; and
(7) FIMAS, L.P., a partnership, 10,969 shares.
In October 2000, we entered into a strategic arrangement with a studio which
gives us the exclusive right of first refusal to develop titles based on films
produced by that studio and to distribute them worldwide. In connection with
this strategic arrangement, we granted the studio a warrant to purchase up to
100,000 shares of common stock. The exercise price for shares issued under the
warrant is $17.45 and the term of the warrant is five years from the date of
issuance.
In December 2000, we entered into an agreement to sell a warrant for 30,000
shares of common stock to PAR Investment Partners, L.P. The exercise price for
shares issued under the warrant is $17.65 and the term of the warrant is three
years from the date of issuance.
In December 2000, in a private placement, we sold shares of our Series B
convertible, redeemable preferred stock at a price per share of $17.45 to the
following investors: (1) Raymond C. Musci, 28,329 shares; (2) Anthony R.
Williams, 28,329 shares; (3) Morgan Keegan Early Stage Fund, L.P., 22,092; (4)
Robert W. Holmes, Jr., 11,332 shares; (5) PAR Investment Partners, L.P.,
198,301; and (6) Morgan Keegan Employee Investment Fund, L.P., 6,237 shares.
In April 2000, we entered into an agreement that gave us the exclusive first
look right to review screenplays acquired by a studio and to develop titles
based on films produced from those screenplays. Our agreement expires upon the
later of three years or the theatrical release of the tenth film on which we
base a product. In connection with the agreement, we agreed to issue 14,625
shares of our common stock to the studio following the theatrical release of a
film for which we have developed a title, up to a maximum of 146,250 shares. In
April 2001, we issued 14,625 shares of common stock to the studio in connection
with the release of a film upon which we had based a product.
In May 2001, in a private placement, we sold shares of our Series C convertible,
redeemable preferred stock at a price per share of $22.553 to the following
investors: (1) Raymond C. Musci, 13,302 shares; (2) PAR Investment Partners,
L.P., 88,680 shares; (3) Morgan Keegan Early Stage Fund, L.P., 88,680 shares;
(4) Anthony R. Williams, 13,302 shares; (5) Robert W. Holmes, Jr., 6,651 shares;
(6) Stephen Ambler, 1,109 shares; (7) Joseph Morici, 887 shares; (8) Mark Dyne,
4,434 shares; (9) Kevin Bermeister, 4,434 shares; (10) K&L 2000 LLC, 1,109
shares; (11) Pam Colburn, 1,109 shares; (12) Anthony Neumann, 1,109 shares; (13)
Terry Phillips, 13,302 shares; (14) Steven Massarsky, 2,217 shares; (15) David
Clark, 4,434 shares; and (16) FIMAS L.P., a partnership, 900 shares.
In May 2001, we sold a warrant for 10,000 shares of common stock to K&L 2000
LLC. The exercise price of the warrant is $22.553 per share and the term of the
warrant is five years.
In May 2001, we sold a warrant for 3,500 shares of common stock to Morgan Keegan
Early Stage Fund, L.P. The exercise price for these shares is $22.553 and the
term of the warrant is five years from the date of issuance.
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89
Each of the above sales was made pursuant to the exemption provided by (1) Rule
506, promulgated by the Commission under the Securities Act of 1933, as amended
(the "Securities Act"), or (2) Section 4(2) of the Securities Act. No
underwriter was used in connection with these sales.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Exhibits
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger dated September 21, 2000 of Bay Area
Multimedia, Inc. (a Delaware corporation) and Bay Area Multimedia, Inc.
(a California corporation)
3.1 Second Amended and Restated Certificate of Incorporation
3.2 Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2 Warrant to Purchase Shares of Common Stock between the Registrant and
Spyglass Entertainment Group, LP.
4.3 Warrant to Purchase Shares of Common Stock, dated December 27, 2000,
between the Registrant and PAR Capital Management, Inc.
4.4* Warrant to Purchase Shares of Common Stock between the Registrant and K
& L 2000 LLC.
4.5* Warrant to Purchase Shares of Common Stock between the Registrant and
Morgan Keegan & Co., Inc.
4.6 Convertible Promissory Note, dated November 24, 1999 between the
Registrant and Raymond C. Musci.
4.7 Convertible Promissory Note dated January 7, 2000 between the Registrant
and Raymond C. Musci.
4.8 Convertible Promissory Note dated May 25, 2000 between the Registrant
and Raymond C. Musci.
5.1* Opinion of Kirkpatrick & Lockhart LLP
10.1 2000 Stock Incentive Plan
10.2 Common Stock Purchase Agreement dated October 9, 1999 between the
Registrant and Raymond C. Musci.
10.3 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and D&S Partners.
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10.4 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and Robert Holmes.
10.5 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and Gary Nemetz.
10.6 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and Tracy Ann Sebastian.
10.7 Common Stock Purchase Agreement dated December 30, 1999 between the
Registrant and Philip L. Rosenberg.
10.8 Series A Preferred Stock and Common Stock Purchase Agreement dated May
17, 2000 among the Registrant and Raymond C. Musci, Anthony R. Williams,
Robert Holmes, Mark Dyne, Kevin Bermeister, Franchise Films, and FIMAS
L.P.
10.9 Investor Rights Agreement dated May 17, 2000 among the Registrant and
Raymond C. Musci, Anthony R. Williams, Robert Holmes, Mark Dyne, Kevin
Bermeister, Franchise Films, and FIMAS L.P.
10.10 Common Stock Purchase Agreement dated September 21, 2000 between the
Registrant and Bay Area Multimedia, Inc., a California corporation.
10.11 Series B Preferred Stock Purchase Agreement dated December 28, 2000
among the Registrant and PAR Capital Management, Inc., Raymond C. Musci,
Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund
L.P.
10.12 Co-Sale and Right of First Refusal Agreement dated December 28, 2000
among the Registrant and PAR Capital Management, Inc., Raymond C. Musci,
Anthony R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund
L.P.
10.13 Registration Rights Agreement dated December 28, 2000 among the
Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony
R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P.
10.14 Series C Preferred Stock Purchase Agreement dated May 24, 2001 among the
Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony
R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen
Ambler, Mark Dyne, Joseph Morici, Kevin Bermeister, K&L 2000 LLC, Pam
Colburn, Anthony Neumann, Terry Phillips, Steven Massorsky, Daniel
Clark, and FIMAS, L.P.
10.15 Registration Rights Agreement dated May 24, 2001 among the Registrant
and PAR Capital Management, Inc., Raymond C. Musci, Anthony R. Williams,
Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen Ambler, Mark
Dyne, Joseph Morici, Kevin Bermeister, K&L 2000 LLC, Pam Colburn,
Anthony Neumann, Terry Phillips, Steven Massorsky, Daniel Clark, and
FIMAS, L.P.
10.16 Co-Sale and Right of First Refusal Agreement dated May 24, 2001 among
the Registrant and PAR Capital Management, Inc., Raymond C. Musci,
Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P.,
Stephen Ambler, Mark Dyne, Joseph Morici, Kevin Bermeister, K&L 2000
LLC, Pam Colburn, Anthony Neumann, Terry Phillips, Steven Massorsky,
Daniel Clark, and FIMAS, L.P.
10.17 Master Purchase Order Assignment Agreement dated February 23, 2000
between the Registrant and Transcap Trade Finance.
10.18 Security Agreement and Financing Statement dated February 23, 2000
between the Registrant and Transcap Trade Finance.
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91
10.19 Subordination Agreement dated February 23, 2000 between the Registrant,
Raymond C. Musci, and Transcap Trade Finance.
10.20 Guaranty and Pledge Agreement dated February 23, 2000 between the
Registrant , Raymond C. Musci, and Transcap Trade Finance.
10.21 Master Revolving Note dated November 13, 2000 between the Registrant and
Comerica Bank-California.
10.22 Security Agreement dated November 13, 2000 between the Registrant and
Comerica Bank-California.
10.23 Letter Agreement dated November 13, 2000 between the Registrant and
Comerica Bank-California.
10.24 Guaranty Agreement dated November 13, 2000 between Comerica
Bank-California and Raymond C. Musci.
10.25 Letter Agreement dated December 26, 2000 between the Registrant and
Comerica Bank-California.
10.26 Sony PlayStation Licensed Publisher Agreement dated February 2, 2000
between the Registrant and Sony Computer Entertainment America, Inc.
10.27 Amendment to the Licensed Publisher Agreement dated April 1, 2000
between the Registrant and Sony Computer Entertainment America, Inc.
10.28 PlayStation 2 Licensed Publisher Agreement dated April 1, 2000 between
the Registrant and Sony Computer Entertainment America, Inc.
10.29 PlayStation 2 Development System Agreement dated August 2, 2000 between
the Registrant and Sony Computer Entertainment America, Inc.
10.30 Licensed Publisher Agreement for Game Boy, Game Boy Color and Game Boy
Pocket dated February 18, 2000 between the Registrant and Nintendo of
America, Inc.
10.31 Licensed Publisher Agreement for Nintendo 64 dated February 18, 2000
between the Registrant and Nintendo of America, Inc.
10.32 Confidential License Agreement for Game Boy Advance dated May 21, 2001
between the Registrant and Nintendo of America, Inc.
10.33 Xbox Publisher License Agreement dated November 28, 2000 between the
Registrant and Microsoft Corporation.
10.34 Retail License Agreement #12177-PPG dated March 8, 2000 between the
Registrant and Warner Bros. Consumer Products.
10.35 Amendment #1 to Retail License Agreement #12177-PPG dated November 27,
2000 between the Registrant and Warner Bros. Consumer Products.
10.36 License Agreement #12697-DEX dated October 4, 2000 between the
Registrant and Warner Bros. Consumer Products.
10.37 License Agreement #12698-YOGI dated October 4, 2000 between the
Registrant and Warner Bros. Consumer Products.
10.38 License Agreement dated March 31, 2000 between the Registrant and Takara
Co., Ltd.
II-5
92
10.39 Exclusive Output Agreement dated April 7, 2000 between the Registrant
and Franchise Films, Inc.
10.40 First Amendment to Exclusive Output Agreement dated July 10, 2000
between the Registrant and Franchise Films, Inc.
10.41 License Agreement dated July 12, 2000 between the Registrant and Time,
Inc. for its Sports Illustrated for Kids division.
10.42 Exclusive Output Agreement dated October 25, 2000 between the Registrant
and Spyglass Entertainment Group, L.P.
10.43 Office Lease dated November 15, 1999 between the Registrant and Macanan
Investments, L.P.
10.44 Employment Agreement dated October 1, 1999 between the Registrant and
Raymond C. Musci.
10.45 Amended and Restated Employment Agreement dated May 24, 2001 between the
Registrant and Raymond C. Musci.
10.46 Employment Agreement dated July 1, 2000 between the Registrant and
Anthony R. Williams.
10.47 Amended and Restated Employment Agreement dated May 24, 2001 between the
Registrant and Anthony R. Williams.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Kirkpatrick & Lockhart LLP (contained in exhibit 5.1)
24.1 Power of attorney (included on signature page of Registration Statement)
27 Financial Data Schedules
* to be filed by amendment.
(b) Financial Statement Schedules
The following consolidated financial statement schedule is filed as part of this
registration statement and should be read with the consolidated financial
statements:
Schedule Page
-------- ----
Schedule II - Valuation and Qualifying Accounts S-2
Schedules other than those referred to above have been omitted because they are
not applicable or not required or because they are not applicable or not
required or because the information is included elsewhere in the consolidated
financial statements or the related notes.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement certificates in denominations as
required by the underwriters and registered in names as required by the
underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that
II-6
93
in the opinion of the Securities and Exchange Commission indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against
liabilities, other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of the registrant in the successful
defense of any action, suit or proceeding, is asserted by a director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of this issue.
The undersigned hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and this offering of these securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on June 6, 2001.
BAM! Entertainment, Inc.
By: /s/ RAYMOND C. MUSCI
-------------------------------------
Raymond C. Musci
Chief Executive Officer and President
95
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert W. Holmes, Jr. and Raymond C. Musci, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, or any related
registration statement filed pursuant to Rule 462 (b) under the Securities Act
of 1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission and any other
regulatory authority, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or either of them, or
their, his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RAYMOND C. MUSCI Chief Executive Officer, June 6, 2001
- -------------------------------------------------------- President and Director
Raymond C. Musci (Principal Executive Officer)
/s/ ANTHONY R. WILLIAMS Vice Chairman of the Board June 6, 2001
- --------------------------------------------------------
Anthony R. Williams
/s/ STEPHEN M. AMBLER Chief Financial Officer and June 6, 2001
- -------------------------------------------------------- Vice President of Finance
Stephen M. Ambler (Principal Financial and
Accounting Officer)
/s/ ROBERT W. HOLMES, JR. Chairman of the Board June 6, 2001
- --------------------------------------------------------
Robert W. Holmes, Jr.
/s/ GEORGE M. SUNDHEIM, III Secretary and Director June 6, 2001
- --------------------------------------------------------
George M. Sundheim, III
/s/ MARK DYNE Director June 6, 2001
- --------------------------------------------------------
Mark Dyne
/s/ DAVID E. TOBIN Director June 6, 2001
- --------------------------------------------------------
David E. Tobin
/s/ ANTHONY G. WILLIAMS Director June 6, 2001
- --------------------------------------------------------
Anthony G. Williams
/s/ STEVEN J. MASSARSKY Director June 6, 2001
- --------------------------------------------------------
Steven J. Massarsky
/s/ ROBERT T. SLEZAK Director June 6, 2001
- --------------------------------------------------------
Robert T. Slezak
96
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
BAM! Entertainment, Inc.
We have audited the consolidated balance sheets of BAM! Entertainment, Inc. and
its subsidiaries (the "Company") as of June 30, 2000 and March 31, 2001, and the
related consolidated statements of operations, stockholders' equity (deficit)
and comprehensive loss, and cash flows for the period from October 7, 1999
(inception) through June 30, 2000 and the nine months ended March 31, 2001 and
have issued our report thereon dated June 1, 2001. Our audits also included the
consolidated financial statement schedule listed in Item 16(b) of this
registration statement. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
June 1, 2001
S-1
97
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE - BALANCE -
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ----------- --------- --------- ---------- ---------
Allowance for doubtful accounts, sales
returns and price protection:
Period from October 7, 1999 (inception)
through June 30, 2000 ................... $ -- $ 77 $ -- $ 77
===== ===== ===== =====
Nine months ended March 31, 2001 .......... $ 77 $ 838 $(127) $ 788
===== ===== ===== =====
S-2
98
EXHIBIT INDEX
1.1 Form of Underwriting Agreement
2.1 Agreement and Plan of Merger dated September 21, 2000 of Bay Area
Multimedia, Inc. (a Delaware corporation) and Bay Area Multimedia,
Inc. (a California corporation)
3.1 Second Amended and Restated Certificate of Incorporation
3.2 Bylaws of the Registrant
4.1* Specimen Common Stock Certificate
4.2 Warrant to Purchase Shares of Common Stock between the Registrant and
Spyglass Entertainment Group, LP.
4.3 Warrant to Purchase Shares of Common Stock, dated December 27, 2000,
between the Registrant and PAR Capital Management, Inc.
4.4* Warrant to Purchase Shares of Common Stock between the Registrant and
K & L 2000 LLC.
4.5* Warrant to Purchase Shares of Common Stock between the Registrant and
Morgan Keegan & Co., Inc.
4.6 Convertible Promissory Note, dated November 24, 1999 between the
Registrant and Raymond C. Musci.
4.7 Convertible Promissory Note dated January 7, 2000 between the
Registrant and Raymond C. Musci.
4.8 Convertible Promissory Note dated May 25, 2000 between the Registrant
and Raymond C. Musci.
5.1* Opinion of Kirkpatrick & Lockhart LLP
10.1 2000 Stock Incentive Plan
10.2 Common Stock Purchase Agreement dated October 9, 1999 between the
Registrant and Raymond C. Musci.
10.3 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and D&S Partners.
10.4 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and Robert Holmes.
10.5 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and Gary Nemetz.
10.6 Common Stock Purchase Agreement dated October 25, 1999 between the
Registrant and Tracy Ann Sebastian.
10.7 Common Stock Purchase Agreement dated December 30, 1999 between the
Registrant and Philip L. Rosenberg.
99
10.8 Series A Preferred Stock and Common Stock Purchase Agreement dated May
17, 2000 among the Registrant and Raymond C. Musci, Anthony R.
Williams, Robert Holmes, Mark Dyne, Kevin Bermeister, Franchise Films,
and FIMAS L.P.
10.9 Investor Rights Agreement dated May 17, 2000 among the Registrant and
Raymond C. Musci, Anthony R. Williams, Robert Holmes, Mark Dyne, Kevin
Bermeister, Franchise Films, and FIMAS L.P.
10.10 Common Stock Purchase Agreement dated September 21, 2000 between the
Registrant and Bay Area Multimedia, Inc., a California corporation.
10.11 Series B Preferred Stock Purchase Agreement dated December 28, 2000
among the Registrant and PAR Capital Management, Inc., Raymond C.
Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early
Stage Fund L.P.
10.12 Co-Sale and Right of First Refusal Agreement dated December 28, 2000
among the Registrant and PAR Capital Management, Inc., Raymond C.
Musci, Anthony R. Williams, Robert Holmes, and Morgan Keegan Early
Stage Fund L.P.
10.13 Registration Rights Agreement dated December 28, 2000 among the
Registrant and PAR Capital Management, Inc., Raymond C. Musci, Anthony
R. Williams, Robert Holmes, and Morgan Keegan Early Stage Fund L.P.
10.14 Series C Preferred Stock Purchase Agreement dated May 24, 2001 among
the Registrant and PAR Capital Management, Inc., Raymond C. Musci,
Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund
L.P., Stephen Ambler, Mark Dyne, Joseph Morici, and Kevin Bermeister.
10.15 Registration Rights Agreement dated May 24, 2001 among the Registrant
and PAR Capital Management, Inc., Raymond C. Musci, Anthony R.
Williams, Robert Holmes, Morgan Keegan Early Stage Fund L.P., Stephen
Ambler, Mark Dyne, Joseph Morici, and Kevin Bermeister.
10.16 Co-Sale and Right of First Refusal Agreement dated May 24, 2001 among
the Registrant and PAR Capital Management, Inc., Raymond C. Musci,
Anthony R. Williams, Robert Holmes, Morgan Keegan Early Stage Fund
L.P., Stephen Ambler, Mark Dyne, Joseph Morici, and Kevin Bermeister.
10.17 Master Purchase Order Assignment Agreement dated February 23, 2000
between the Registrant and Transcap Trade Finance.
10.18 Security Agreement and Financing Statement dated February 23, 2000
between the Registrant and Transcap Trade Finance.
10.19 Subordination Agreement dated February 23, 2000 between the
Registrant, Raymond C. Musci, and Transcap Trade Finance.
10.20 Guaranty and Pledge Agreement dated February 23, 2000 between the
Registrant , Raymond C. Musci, and Transcap Trade Finance.
10.21 Master Revolving Note dated November 13, 2000 between the Registrant
and Comerica Bank-California.
10.22 Security Agreement dated November 13, 2000 between the Registrant and
Comerica Bank-California.
10.23 Letter Agreement dated November 13, 2000 between the Registrant and
Comerica Bank-California.
10.24 Guaranty Agreement dated November 13, 2000 between Comerica
Bank-California and Raymond C. Musci.
10.25 Letter Agreement dated December 26, 2000 between the Registrant and
Comerica Bank-California.
100
10.26 Sony PlayStation Licensed Publisher Agreement dated February 2, 2000
between the Registrant and Sony Computer Entertainment America, Inc.
10.27 Amendment to the Licensed Publisher Agreement dated April 1, 2000
between the Registrant and Sony Computer Entertainment America, Inc.
10.28 PlayStation 2 Licensed Publisher Agreement dated April 1, 2000 between
the Registrant and Sony Computer Entertainment America, Inc.
10.29 PlayStation 2 Development System Agreement dated August 2, 2000
between the Registrant and Sony Computer Entertainment America, Inc.
10.30 Licensed Publisher Agreement for Game Boy, Game Boy Color and Game Boy
Pocket dated February 18, 2000 between the Registrant and Nintendo of
America, Inc.
10.31 Licensed Publisher Agreement for Nintendo 64 dated February 18, 2000
between the Registrant and Nintendo of America, Inc.
10.32 Confidential License Agreement for Game Boy Advance dated May 21, 2001
between the Registrant and Nintendo of America, Inc.
10.33 Xbox Publisher License Agreement dated November 28, 2000 between the
Registrant and Microsoft Corporation.
10.34 Retail License Agreement #12177-PPG dated March 8, 2000 between the
Registrant and Warner Bros. Consumer Products.
10.35 Amendment #1 to Retail License Agreement #12177-PPG dated November 27,
2000 between the Registrant and Warner Bros. Consumer Products.
10.36 License Agreement #12697-DEX dated October 4, 2000 between the
Registrant and Warner Bros. Consumer Products.
10.37 License Agreement #12698-YOGI dated October 4, 2000 between the
Registrant and Warner Bros. Consumer Products.
10.38 License Agreement dated March 31, 2000 between the Registrant and
Takara Co., Ltd.
10.39 Exclusive Output Agreement dated April 7, 2000 between the Registrant
and Franchise Films, Inc.
10.40* First Amendment to Exclusive Output Agreement dated July 10, 2000
between the Registrant and Franchise Films, Inc.
10.41 License Agreement dated July 12, 2000 between the Registrant and Time,
Inc. for its Sports Illustrated for Kids division.
10.42 Exclusive Output Agreement dated October 25, 2000 between the
Registrant and Spyglass Entertainment Group, L.P.
10.43 Office Lease dated November 15, 1999 between the Registrant and
Macanan Investments, L.P.
10.44 Employment Agreement dated October 1, 1999 between the Registrant and
Raymond C. Musci.
10.45* Amended and Restated Employment Agreement between the Registrant and
Raymond C. Musci.
101
10.46 Employment Agreement dated July 1, 2000 between the Registrant and
Anthony R. Williams.
10.47* Amended and Restated Employment Agreement between the Registrant and
Anthony R. Williams.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Kirkpatrick & Lockhart LLP (contained in exhibit 5.1)
24.1 Power of attorney (included on signature page of Registration
Statement)
27 Financial Data Schedules
* to be filed by amendment.