SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
EXPERT SOFTWARE, INC.
- - - - - - - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- - - - - - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
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/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
EXPERT SOFTWARE, INC.
802 DOUGLAS ROAD
NORTH TOWER, SUITE 600
CORAL GABLES, FLORIDA 33134-3160
May 26, 1999
Dear Expert Stockholder:
As you may be aware, Expert Software, Inc., a Delaware corporation
("Expert"), and Activision, Inc., a Delaware corporation ("Activision"), have
entered into an Agreement and Plan of Merger, dated as of March 3, 1999 (as
amended and restated on April 19, 1999, the "Merger Agreement"), providing for
the acquisition of Expert by Activision (the "Merger"). The Merger is more fully
described in the accompanying Proxy Statement. A special meeting of the
stockholders of Expert (the "Special Meeting") will be held at The Arch Room,
800 Douglas Road, Coral Gables, FL 33134 on Monday, June 21, 1999 at 10:00 a.m.
local time.
At the Special Meeting, stockholders of Expert will be asked to approve and
adopt the Merger Agreement and the transactions contemplated thereby, including
the Merger. A copy of the Merger Agreement is attached as Annex I to the
accompanying Proxy Statement.
Expert's Board of Directors has determined that the transactions
contemplated by the Merger Agreement, including the Merger, are fair to, and in
the best interests of, Expert and its stockholders. The Board of Directors
recommends that the stockholders of Expert vote FOR the approval and adoption of
the Merger Agreement and the transactions contemplated thereby, including the
Merger. In reaching its decision, the Board of Directors considered, among other
things, the oral opinion of U.S. Bancorp Piper Jaffray Inc. delivered to the
Board of Directors on March 3, 1999, which was subsequently confirmed in writing
as of the same date, to the effect that the cash consideration to be received in
the Merger by the stockholders of Expert is fair to the stockholders of Expert
from a financial point of view.
Stockholders of Expert will be entitled to appraisal rights under applicable
Delaware law in connection with the Merger as described in the accompanying
Proxy Statement.
IT IS VERY IMPORTANT TO US THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL
MEETING, WHETHER OR NOT YOU PLAN TO ATTEND PERSONALLY. THEREFORE, YOU SHOULD
COMPLETE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT AS SOON AS POSSIBLE IN
THE ENCLOSED POSTAGE-PAID ENVELOPE. THIS WILL ENSURE THAT YOUR SHARES ARE
REPRESENTED AT THE SPECIAL MEETING.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES UNTIL INSTRUCTED TO DO SO
AFTER THE MERGER IS COMPLETED.
Sincerely,
KENNETH P. CURRIER
Director and Chief Executive Officer
EXPERT SOFTWARE, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Special
Meeting") of Expert Software, Inc., a Delaware corporation ("Expert"), will be
held on Monday, June 21, 1999 at 10:00 a.m. local time at The Arch Room, 800
Douglas Road, Coral Gables, FL 33134 to consider and vote upon the following
proposal:
1. To approve and adopt the Agreement and Plan of Merger, dated as of March
3, 1999 (as amended and restated on April 19, 1999, the "Merger
Agreement"), by and among Expert, Activision, Inc., a Delaware
corporation ("Activision"), and Expert Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Activision ("Merger Sub"),
pursuant to which Merger Sub will be merged with and into Expert with
Expert continuing as the surviving corporation and as a wholly-owned
subsidiary of Activision (the "Merger"). A copy of the Merger Agreement
is attached as Annex I to the Proxy Statement accompanying this Notice.
2. To transact such other business as may properly come before the Expert
Special Meeting or any adjournment or postponement thereof.
The Merger Agreement, the Merger and other related matters are more fully
described in the attached Proxy Statement.
The Board of Directors has fixed the close of business on May 21, 1999 as
the record date for determining the stockholders of Expert entitled to notice of
and to vote at the Special Meeting and any adjournments or postponements
thereof. Only holders of record of shares of Expert common stock at the close of
business on the record date are entitled to notice of and to vote at the Special
Meeting and any adjournments or postponements thereof.
The affirmative vote of a majority of the shares of Expert common stock
outstanding as of the record date and entitled to vote at the Special Meeting is
required to approve and adopt the Merger Agreement and the transactions
contemplated thereby, including the Merger.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF HOW MANY SHARES OF EXPERT COMMON
STOCK YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO
ITS EXERCISE. IF YOU ARE PRESENT AT THE SPECIAL MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF, YOU MAY REVOKE YOUR PROXY AND VOTE PERSONALLY ON THE
MATTERS PROPERLY BROUGHT BEFORE THE SPECIAL MEETING.
BY ORDER OF THE BOARD OF DIRECTORS
KENNETH P. CURRIER
Chief Executive Officer and Secretary
May 26, 1999
NOTICE OF APPRAISAL RIGHTS
If the Merger Agreement is adopted by the stockholders of Expert at the
Special Meeting and the Merger is consummated, any stockholder (1) who files
with Expert, before the taking of the vote on the adoption of the Merger
Agreement, a written demand stating that he or she intends to seek appraisal for
his or her shares of Expert common stock if the Merger is consummated and (2)
whose shares of Expert common stock are not voted in favor of the adoption of
the Merger Agreement, has or may have the right to seek appraisal of his or her
shares of Expert common stock within 120 days of the date a certificate of
merger is filed with the Secretary of State of the State of Delaware. Expert and
any such stockholder shall in such cases have the rights and duties and shall
follow the procedures set forth in Section 262 of the Delaware General
Corporation Law ("DGCL"). A copy of Section 262 of the DGCL is attached as Annex
III to the accompanying Proxy Statement. See the section entitled "Appraisal
Rights" in the Proxy Statement for more information.
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
OF
EXPERT SOFTWARE, INC.
To be held on Monday, June 21, 1999
10:00 a.m.
Activision, Inc., a Delaware corporation ("Activision"), and Expert
Software, Inc., a Delaware corporation ("Expert"), have entered into an
Agreement and Plan of Merger, dated as of March 3, 1999 (as amended and restated
on April 19, 1999, the "Merger Agreement"), pursuant to which Expert Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of Activision
("Merger Sub"), will be merged with and into Expert (the "Merger"). After the
Merger, Expert will continue as the surviving corporation (the "Surviving
Corporation") and shall be a wholly-owned subsidiary of Activision. Upon
completion of the Merger, Expert's stockholders will receive $2.65 in cash in
exchange for each outstanding share of Expert common stock they own.
This Proxy Statement is being furnished to stockholders of Expert in
connection with the solicitation by the Board of Directors of Expert of proxies
for use at the Special Meeting of Stockholders (the "Special Meeting") to be
held at The Arch Room, 800 Douglas Road, Coral Gables, FL 33134 at 10:00 a.m.,
local time, on Monday, June 21, 1999. At the Special Meeting, Expert's
stockholders will be asked to consider and vote upon the approval of the Merger
Agreement and the Merger.
Expert's Board of Directors has fixed the close of business on May 21, 1999
as the record date (the "Record Date") for determining the stockholders of
Expert entitled to notice of and to vote at the Special Meeting and any
adjournments or postponements thereof. Only holders of record of shares of
Expert common stock at the close of business on the Record Date are entitled to
notice of and to vote at the Special Meeting. The Merger cannot be completed
unless a majority of the shares of Expert common stock outstanding as of the
Record Date and entitled to vote at the Special Meeting adopt the Merger
Agreement in accordance with Section 251 of the Delaware General Corporation Law
(the "DGCL") and pursuant to the terms and conditions of the Merger Agreement.
This document gives you detailed information about the Merger Agreement and
the Merger. Activision has provided the information concerning Activision, and
Expert has provided the information concerning Expert. Please see "Available
Information" and "Incorporation of Certain Documents by Reference" on pages 33
and 34, respectively, for additional information about Expert on file with the
United States Securities and Exchange Commission (the "SEC").
Neither the SEC nor any state securities regulator has determined if this
proxy statement is accurate or adequate. Any representation to the contrary is a
criminal offense.
This Proxy Statement and Proxy are first being mailed to stockholders of
Expert beginning on or about May 26, 1999.
FORWARD-LOOKING STATEMENTS
Certain information contained in this Proxy Statement as to the future
financial or operating performance of Expert may constitute "forward-looking
statements." Forward-looking statements include statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. Forward-looking statements can be identified by, among other things, the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "pro forma," "anticipates" or "intends" or the negative of
any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Forward-looking statements involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of Expert, or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, the following:
GENERAL BUSINESS AND ECONOMIC CONDITIONS
General business and economic conditions have an impact on Expert's
financial results. From time to time, Expert's customer base, which is largely
retailers and distributors for resale to retailers, may be impacted by weak
economic conditions and, as a result, may reduce their inventories of products
purchased from Expert. Expert's customers are not contractually required to make
future purchases of Expert's products and therefore could discontinue carrying
Expert's products in favor of a competitor's products or for any other reason.
The retail market for traditional tangible box or jewel case software is under
attack. The use of the Internet by home and business PC users has increased
dramatically in recent years. Sales of products on the Internet, including
software, have increased and the Internet is likely to become an important sales
channel for software. Consumer buying habits may be influenced by the
availability of products on the Internet, and the ease of buying. As more
content, products and services become available on the Internet, it may become
increasingly difficult to garner the attention of prospective customers.
Expert's financial results could be affected by the size and rate of growth of
the consumer software market and consumer PC market. The consumer software
business is seasonal due primarily to the increased demand for consumer software
during the year-end holiday buying season. General business and economic
conditions and consumer confidence, both domestically and internationally, may
impact retail sales of consumer software. Currency fluctuations associated with
international sales and accounts receivable may also affect Expert's financial
results.
COMPETITION
The market for Expert's products is intensely and increasingly competitive.
Existing consumer software companies may broaden their product lines to compete
with Expert's products and potential new competitors, including computer
hardware and software manufacturers, diversified media companies and book
publishing companies, may enter or increase their focus on the consumer software
market, resulting in even greater competition for Expert. There has been a
consolidation among competitors in the market for Expert's products, and many of
the companies with which Expert currently competes or may compete in the future
have greater financial, technical, marketing, sales and customer support
resources, as well as greater name recognition and better access to consumers,
than Expert. Competition for retail space has increased as retailers continue to
focus on sales per square foot of shelf space and other measures of product
performance. The competition for retail space is also likely to increase due to
the proliferation of consumer software products and companies. Expert also
competes with other developers for access to quality products developed by third
parties. Expert's results of operations and financial position are also
dependent upon satisfactory relationships with independent developers and other
parties through whom Expert acquires propriety rights.
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DEPENDENCE ON RETAILERS AND DISTRIBUTORS
Retailers and distributors compete in a volatile industry that is subject to
rapid change, consolidation, financial difficulty and increasing competition
from new distribution channels. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts, promotional
support and product return policies. Expert's financial results may be impacted
by the accuracy of retailers' forecasts of consumer demand, the timing of the
receipt of orders from major customers, account cancellations or delays in
shipment, competitors' marketing strategies and promotions, changes in pricing
strategies by Expert or its competitors and the collectibility of accounts
receivable. Furthermore, a significant portion of sales within a quarter is
typically not realized until late in that quarter. As a result, it may be
difficult for Expert to predict its net revenues for the quarter or to quickly
adapt its spending levels within a quarter to reflect changes in demand for its
products.
UNCERTAINTY OF MARKET ACCEPTANCE; CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS
The consumer software industry is undergoing rapid changes, including
evolving industry standards, frequent product introductions and changes in
consumer requirements and preferences. Consumer preferences are difficult to
predict, and few consumer software products achieve sustained market acceptance.
Expert's financial results will be impacted by market acceptance of Expert's
products and those of its competitors, development and promotional expenses
relating to the introduction of new products, new versions of existing products
or new operating systems, and evolving distribution channels. The growth in
popularity of the Internet and other new technologies has impacted the
distribution and purchase of software and there can be no assurance that Expert
will utilize such new technologies in the most effective manner.
OTHER FACTORS
In addition to the important factors discussed above, Expert's financial
results, financial position and cash flows may be impacted by, among other
factors, future cash flow and working capital requirements, continued listing of
Expert common stock on the Nasdaq National Market and the outcome of current and
future examinations by taxing authorities. The market price of Expert common
stock has been, and in the future will likely be, subject to significant
fluctuations in response to variations in quarterly operating results and other
factors, such as announcements of technological innovations or new products by
Expert or its competitors, or other events. The stock prices for many companies
in the technology sector have experienced wide fluctuations which often have
been unrelated to their operating performance. Such fluctuations may adversely
affect the market price of Expert common stock.
iii
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS............................................................ ii
GENERAL BUSINESS AND ECONOMIC CONDITIONS.......................................... ii
COMPETITION....................................................................... ii
DEPENDENCE ON RETAILERS AND DISTRIBUTORS.......................................... iii
UNCERTAINTY OF MARKET ACCEPTANCE; CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS.... iii
OTHER FACTORS..................................................................... iii
SUMMARY............................................................................... 1
THE COMPANIES..................................................................... 1
REASONS FOR THE MERGER............................................................ 1
RECOMMENDATION OF EXPERT'S BOARD OF DIRECTORS TO EXPERT'S STOCKHOLDERS............ 2
OPINION OF EXPERT'S FINANCIAL ADVISOR............................................. 2
COMPLETION OF THE MERGER.......................................................... 2
WHAT EXPERT'S STOCKHOLDERS WILL RECEIVE IN THE MERGER............................. 2
THE EFFECT OF THE MERGER ON EXPERT................................................ 2
CONDITIONS TO THE MERGER.......................................................... 3
TERMINATION OF THE MERGER AGREEMENT............................................... 3
TERMINATION FEES.................................................................. 4
INTERESTS OF CERTAIN PERSONS IN THE MERGER........................................ 4
VOTE REQUIRED AND VOTING PROCEDURES............................................... 4
PROCEDURE FOR EXCHANGING YOUR STOCK CERTIFICATES.................................. 5
GOVERNMENTAL AND REGULATORY MATTERS............................................... 5
ACCOUNTING TREATMENT.............................................................. 5
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES......................................... 5
RIGHTS OF DISSENTING STOCKHOLDERS................................................. 5
DELISTING OF EXPERT COMMON STOCK.................................................. 5
SELECTED CONSOLIDATED FINANCIAL DATA OF EXPERT.................................... 5
THE SPECIAL MEETING OF EXPERT'S STOCKHOLDERS.......................................... 6
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING................................... 6
VOTING AT THE SPECIAL MEETING..................................................... 6
PROXIES; SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS........................ 7
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM....................................... 7
THE MERGER............................................................................ 8
PURPOSE OF THE MERGER............................................................. 8
CERTAIN EFFECTS OF THE MERGER..................................................... 8
RISK THAT THE MERGER WILL NOT BE CONSUMMATED...................................... 9
BACKGROUND OF THE MERGER.......................................................... 9
RECOMMENDATION OF EXPERT'S BOARD OF DIRECTORS; EXPERT'S REASONS FOR THE MERGER.... 10
DETRIMENTS AND ADVERSE EFFECTS ON EXPERT AND ITS STOCKHOLDERS OF THE MERGER....... 12
OPINION OF EXPERT'S FINANCIAL ADVISOR............................................. 12
ACTIVISION'S REASONS FOR THE MERGER............................................... 18
INTERESTS OF CERTAIN PERSONS IN THE MERGER........................................ 19
MERGER CONSIDERATION.............................................................. 21
EFFECTIVE TIME.................................................................... 22
CONVERSION OF MERGER SUB COMMON STOCK............................................. 22
CONVERSION OF EXPERT COMMON STOCK; PROCEDURES FOR EXCHANGE OF CERTIFICATES........ 22
iv
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS......................................... 22
ANTICIPATED ACCOUNTING TREATMENT.................................................. 23
GOVERNMENTAL AND REGULATORY MATTERS............................................... 23
NASDAQ DELISTING.................................................................. 23
MERGER FINANCING.................................................................. 24
THE MERGER AGREEMENT.................................................................. 24
THE MERGER........................................................................ 24
REPRESENTATIONS AND WARRANTIES.................................................... 24
CONDITIONS TO THE MERGER.......................................................... 25
NO SOLICITATION; ACQUISITION PROPOSALS............................................ 26
TERMINATION OF THE MERGER AGREEMENT............................................... 27
TERMINATION FEES.................................................................. 28
CONDUCT OF EXPERT'S BUSINESS UNTIL THE EFFECTIVE TIME............................. 28
AMENDMENTS; EXTENSIONS; WAIVERS................................................... 29
THE COMPANIES......................................................................... 30
EXPERT SOFTWARE................................................................... 30
ACTIVISION........................................................................ 30
UNAUDITED PER SHARE INFORMATION....................................................... 31
PER SHARE MARKET PRICE DATA........................................................... 31
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 31
APPRAISAL RIGHTS...................................................................... 31
INDEPENDENT PUBLIC ACCOUNTANTS........................................................ 33
STOCKHOLDER PROPOSALS................................................................. 33
OTHER MATTERS......................................................................... 33
AVAILABLE INFORMATION................................................................. 33
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 34
ANNEX I -- THE AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, DATED AS OF
APRIL 19, 1999, BY AND AMONG EXPERT SOFTWARE, INC., ACTIVISION, INC.
AND EXPERT ACQUISITION CORP. (W/O EXHIBITS).
ANNEX II -- FAIRNESS OPINION OF U.S. BANCORP PIPER JAFFRAY INC.
ANNEX III -- EXCERPTS FROM DELAWARE GENERAL CORPORATION LAW RELATING TO APPRAISAL
RIGHTS.
ANNEX IV -- ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998.
ANNEX V -- QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH
31, 1999.
v
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
Merger and the Merger Agreement fully and for a more complete description of the
legal terms of the Merger and the Merger Agreement, you should carefully read
this entire document and the documents to which we have referred you.
THE COMPANIES
EXPERT SOFTWARE, INC.
802 Douglas Road
North Tower, Suite 600
Coral Gables, Florida 33134-3160
(305) 567-9990
http://www.expertsoftware.com
Expert is a leading developer and publisher of high-quality, value-priced
software titles. Expert specializes in sophisticated yet easy-to-use programs
addressing a broad array of everyday consumer interests, including
entertainment, education, lifestyle, personal productivity and small office/home
office. Most Expert titles are priced under $15 and are available in more than
25,000 retail locations throughout the world including computer superstores,
office supply stores, warehouse clubs and supermarkets. Over 29.3 million units
of Expert products have been sold, including Home Design
3D-Registered Trademark-, Landscape Design 3D-Registered Trademark-, Diet &
Fitness, Resume Writer, and Casino. The Expert family of brands also includes
the popular Sega PC Collection, and Bicycle-Registered Trademark- Card Games.
ACTIVISION, INC.
3100 Ocean Park Boulevard
Santa Monica, California 90405
(310) 255-2000
http://www.activision.com
Activision is a leading international publisher, developer and distributor
of interactive entertainment and leisure products. Activision's products span a
wide range of genres and target markets. Activision currently focuses its
development, publishing and distribution efforts on products designed for
personal computers ("PCs"), the Sony PlayStation console system and the Nintendo
64 console system. In selecting titles for development and publishing,
Activision focuses on titles that are, or have the potential to become,
franchise properties with substantial consumer appeal and brand recognition.
REASONS FOR THE MERGER
Expert's Board of Directors believes that the terms of the Merger and the
Merger Agreement are fair to, and in the best interests of, Expert and its
stockholders. In reaching its decision, Expert's Board of Directors considered,
among other things, the following:
- The combined experience, financial resources, and size and breadth of
product offerings of the combined company should allow the combined
company to respond more quickly and effectively to technological change,
increased competition and market demands in an industry experiencing rapid
innovation and change.
- The resources of the combined company should counter Expert's lack of
critical mass in software and Internet exposure and create a positive
impact on the retail channel.
- The Merger should provide Expert with greater resources to support its
marketing, distribution and product development efforts.
- Activision's substantial domestic and international sales, marketing and
distribution capabilities should provide an expanded opportunity for
distribution of Expert's products both within the United States and in
international markets, thereby allowing Expert to expand its customer
base.
- The combination of the customer service and technical support system
should permit the combined company to provide more efficient support
coverage to its customers.
- The Merger should provide Expert with greater resources to support
Internet initiatives, offering a broader range of products on the Internet
than are available in retail stores.
- The addition of senior Activision executives should increase management
breadth and strengthen organizational infrastructure.
- The opinion, dated March 3, 1999, of U.S. Bancorp Piper Jaffray Inc.
("U.S. Bancorp Piper Jaffray") that the cash consideration to be received
by the holders of Expert common stock is fair to such holders of Expert
common stock from a financial point of view.
RECOMMENDATION OF EXPERT'S BOARD OF DIRECTORS TO EXPERT'S STOCKHOLDERS
Expert's Board of Directors believes that the Merger is in the best interest
of Expert and its stockholders and recommends that you vote FOR the adoption of
the Merger Agreement.
OPINION OF EXPERT'S FINANCIAL ADVISOR
In deciding to approve the Merger Agreement, Expert's Board of Directors
considered the opinion of its financial advisor, U.S. Bancorp Piper Jaffray,
that, as of March 3, 1999, and subject to certain assumptions and other matters
described therein, the cash price of $2.65 per share offered in the Merger was
fair, from a financial point of view, to Expert's stockholders. We encourage you
to read this opinion, which is attached as Annex II. Please note that the
opinion does not constitute a recommendation as to how you should vote.
COMPLETION OF THE MERGER
The Merger will be completed at such time when all of the conditions to
completion of the Merger set forth in the Merger Agreement are satisfied or
waived. The Merger will become effective upon the filing of a certificate of
merger (the "Certificate of Merger") with the State of Delaware.
We are working toward completing the Merger as quickly as possible. We hope
to complete the Merger promptly after the Special Meeting.
The Merger Agreement is attached as Annex I to this Proxy Statement. We
encourage you to read the Merger Agreement as it is the legal document that
governs the Merger.
WHAT EXPERT'S STOCKHOLDERS WILL RECEIVE IN THE MERGER
As a result of the Merger, Expert's stockholders will receive $2.65 in cash
in exchange for each share of Expert common stock that they own.
After the Merger, Expert's stockholders will no longer retain any equity
interest in the Expert and accordingly will neither participate in any future
earnings of Expert nor be at risk for any future losses of Expert.
THE EFFECT OF THE MERGER ON EXPERT
If the Merger is completed, Merger Sub will be merged with and into Expert
and Expert will continue as the Surviving Corporation and shall be a
wholly-owned subsidiary of Activision. As a result of the Merger, Expert will no
longer meet the requirements of a public company and its shares will no longer
be listed or traded in the public market.
2
CONDITIONS TO THE MERGER
The completion of the Merger depends upon satisfying a number of conditions.
Among such conditions is a statutory requirement, which cannot be waived, that
the holders of a majority of the shares of Expert common stock outstanding as of
the Record Date and entitled to vote at the Special Meeting adopt the Merger
Agreement and approve the Merger.
In addition, under the terms of the Merger Agreement, the conditions that
must be satisfied or waived before the completion of the Merger include, without
limitation, the following:
- No injunction or order preventing the completion of the Merger may be in
effect.
- The respective representations and warranties of Expert and Activision in
the Merger Agreement must be true and correct, including the absence of
material adverse changes in Expert's and Activision's respective
businesses.
- Expert must have obtained any required consents from third parties
relating to the Merger.
- There shall not have occurred any change, circumstance or event concerning
either Expert or Activision or any of their respective subsidiaries that
has had or could be reasonably likely to have a material adverse effect on
the business, assets, financial condition or results of operations of
either of the companies or any of their subsidiaries.
- Neither Kenneth Currier nor Susan Currier shall have terminated their
employment with Expert and their employment and non-competition agreements
with Activision shall be in full force and effect.
- The amended and restated stockholders' agreement, dated as of October 31,
1995, by and among certain stockholders of Expert shall have been
terminated.
- Holders of no more than 5% of the issued and outstanding shares of Expert
common stock shall have demanded an appraisal of their shares under
Section 262 of the Delaware General Corporation Law.
TERMINATION OF THE MERGER AGREEMENT
Expert and Activision can mutually agree in writing to terminate the Merger
Agreement without completing the Merger.
Either Expert or Activision may unilaterally terminate the Merger Agreement
without completing the Merger if any of the following occurs:
- if the conditions to completion of the Merger would not be satisfied
because of a material breach of the Merger Agreement by the other party or
a representation or warranty of the other party in the Merger Agreement
becomes untrue, either of which cannot be cured through reasonable
efforts;
- if the Merger is not completed by August 31, 1999;
- if a final court order prohibiting the Merger is issued and is not
appealable;
- if the Expert's stockholders do not adopt the Merger Agreement at the
Special Meeting;
- if either Expert or Activision becomes insolvent or seeks protection under
any bankruptcy proceeding;
- if the other party suffers a material adverse effect on its business,
assets (including intangible assets), financial condition or results of
operations taken as a whole; or
- if a proposal from another party to acquire Expert is publicly proposed,
publicly disclosed or communicated to Expert and Expert's Board of
Directors, after determining that such action is
3
required in order to comply with its fiduciary duties to Expert's
stockholders, either (i) withdraws or modifies in a material and negative
respect its approval or recommendation of the Merger Agreement or the
Merger or (ii) approves or recommends or enters into an agreement with
respect to such acquisition proposal.
In addition, Activision may unilaterally terminate the Merger Agreement
without completing the Merger if Expert's Board of Directors fails to recommend
that Expert's stockholders adopt the Merger Agreement or withdraws, modifies or
amends in any negative respect its approval or recommendation of the Merger or
resolves to do any of the foregoing, unless such failure, withdrawal,
modification or amendment results from Activision's or Merger Sub's breach of
any of their respective obligations under the Merger Agreement.
TERMINATION FEES
Expert has agreed to pay Activision a termination fee of $1,100,000 if the
Merger Agreement is terminated in any of the following circumstances:
- either Expert or Activision terminates the Merger Agreement after a
proposal from another party to acquire Expert is commenced, publicly
proposed, publicly disclosed or communicated to Expert and Expert's Board
of Directors, after determining that such action is required in order to
comply with its fiduciary duties to Expert's stockholders, either (i)
withdraws or modifies in a material and negative respect its approval or
recommendation of the Merger Agreement or the Merger or (ii) approves or
recommends or enters into an agreement with respect to such acquisition
proposal;
- Activision terminates the Merger Agreement after Expert's Board of
Directors fails to recommend that Expert's stockholders adopt the Merger
Agreement or withdraws, modifies or amends in any negative respect its
approval or recommendation of the Merger or resolves to do any of the
foregoing, unless such failure, withdrawal, modification or amendment
results from Activision's or Merger Sub's breach of any of their
respective obligations under the Merger Agreement; or
- either Expert or Activision terminates the Merger Agreement because
Expert's stockholders do not adopt the Merger Agreement and, at the time
of such termination, there exists a proposal from another party to acquire
Expert that is accepted, publicly announced or documented in a letter of
intent or binding agreement within 12 months of such termination.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the recommendation of Expert's Board of Directors, you
should be aware that certain Expert directors and officers participate in
arrangements and have continuing indemnification against liabilities that
provide them with interests in the Merger that are different from, or are in
addition to, yours. See "The Merger--Interests of Certain Persons in the
Merger."
VOTE REQUIRED AND VOTING PROCEDURES
In order to consummate the Merger, the Merger Agreement must be adopted by a
majority of the shares of Expert common stock outstanding as of the Record Date
and entitled to vote at the Special Meeting.
Please mail your signed proxy card in the enclosed return envelope as soon
as possible so that your shares of Expert common stock may be represented at the
special meeting. If you do not include instructions on how to vote your properly
executed proxy, your shares will be voted FOR adoption of the Merger Agreement.
If your shares are held by your broker in street name, your broker will vote
your shares only if you provide instructions on how to vote by following the
information provided to you by your broker. If you do
4
not provide your broker with voting instructions, your shares will not be voted
at the Special Meeting and this will have the same effect as voting against
adoption of the Merger Agreement.
If you want to change your vote, just send the Secretary of Expert a
later-dated, signed proxy card before the Special Meeting or attend the Special
Meeting and vote in person. You may also revoke your proxy by sending written
notice to the Secretary of Expert before the Special Meeting.
PROCEDURE FOR EXCHANGING YOUR STOCK CERTIFICATES
After the Merger is completed, Activision will arrange to send you written
instructions for exchanging your Expert stock certificates for the cash
consideration. PLEASE DO NOT SEND YOUR EXPERT STOCK CERTIFICATES NOW.
GOVERNMENTAL AND REGULATORY MATTERS
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, Activision and Expert provided certain information and materials to the
Antitrust Division of the Department of Justice and the Federal Trade
Commission. On April 2, 1999, the Federal Trade Commission provided notice that
the required waiting period that follows the submission of such information and
materials had been terminated as of that date.
ACCOUNTING TREATMENT
Activision expects that the Merger will be accounted for in accordance with
the principles of purchase accounting.
IMPORTANT FEDERAL INCOME TAX CONSEQUENCES
The cash that will be received by each stockholder in exchange for his or
her shares generally will be treated as a sale of stock generating capital gain
(or loss) equal to $2.65 minus the amount that the stockholder paid for the
shares. Individual stockholders should consult their tax advisor to determine
the tax treatment applicable to the sale of their particular shares. For a more
complete discussion of the federal tax consequences of the Merger, see "The
Merger--Certain Federal Income Tax Considerations."
RIGHTS OF DISSENTING STOCKHOLDERS
Under Delaware law, stockholders who do not vote in favor of the Merger
Agreement and who comply with certain notice requirements and other procedures
will have the right to be paid cash for the "fair value" of their shares. "Fair
value" may be more or less than the $2.65 to be paid to the stockholders under
the Merger Agreement. Dissenting stockholders must precisely follow specific
procedures to exercise this right, or the right may be lost. These procedures
are described in this Proxy Statement, and a copy of the applicable portion of
Delaware law that grants dissenters' rights is attached as Annex III.
DELISTING OF EXPERT COMMON STOCK
Immediately following the completion of the Merger, Expert will no longer
meet the requirements of a public company and its shares of common stock will no
longer be traded on the Nasdaq National Market.
SELECTED CONSOLIDATED FINANCIAL DATA OF EXPERT
The selected financial data of Expert is incorporated by reference to Item 6
of Expert's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, which was filed with the SEC on March 30, 1999.
5
THE SPECIAL MEETING OF EXPERT'S STOCKHOLDERS
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, Expert's stockholders will be asked to consider and
vote upon a proposal to adopt the Merger Agreement. If the requisite votes in
favor of the proposal are obtained and certain other conditions are satisfied
or, where permissible, waived:
(i) Merger Sub will be merged with and into Expert and Expert shall continue
as the Surviving Corporation and shall be a wholly-owned subsidiary of
Activision; and
(ii) The Merger will become effective upon the filing of the Certificate of
Merger or upon such other date as is specified in the Certificate of
Merger in accordance with the DGCL and as Activision and Expert shall
agree (the "Effective Time") and, except as described below, each share
of Expert common stock issued and outstanding immediately prior to the
filing of the Certificate of Merger will be converted into the right to
receive $2.65 in cash, without interest.
Shares of Expert common stock held at the Effective Time in Expert's
treasury or by Activision will be canceled without payment. Shares in respect of
which appraisal rights have been perfected properly under Section 262 of the
DGCL will be entitled to receive the consideration provided for by the DGCL.
The affirmative vote of a majority of the outstanding shares of Expert
common stock entitled to vote at the Special Meeting is required by the DGCL to
adopt the Merger Agreement and to effect the Merger.
It is currently anticipated that the Merger will occur as promptly as
practicable after adoption of the Merger Agreement by Expert's stockholders at
the Special Meeting and the satisfaction or, where permissible, waiver of the
other conditions to the consummation of the Merger. There can be no assurance
that, even if the requisite stockholder approval is obtained, the other
conditions to the Merger will be satisfied or waived, or that the Merger will be
consummated.
VOTING AT THE SPECIAL MEETING
Expert's Board of Directors has fixed the close of business on May 21, 1999
as the "Record Date" for determining Expert's stockholders entitled to notice of
and to vote at the Special Meeting. Accordingly, only holders of record of
shares of Expert common stock as of the Record Date will be entitled to notice
of and to vote at the Special Meeting. On the Record Date, there were 7,627,881
shares of Expert common stock, held by approximately 73 holders of record,
outstanding and entitled to vote. Stockholders may cast one vote per share of
Expert common stock, either in person or by properly executed proxy, on each
matter to be voted on at the Special Meeting. Under the DGCL, 3,813,941 shares
of Expert common stock must vote in favor of adopting the Merger Agreement.
Votes cast in person or by Proxy at the Special Meeting will be tabulated by
Boston EquiServe LP (the "Transfer Agent"). The Transfer Agent will treat
abstentions as shares of Expert common stock that are present and entitled to
vote. In addition, if a broker submits a Proxy indicating that it does not have
discretionary authority as to certain shares of Expert common stock to vote on a
particular matter, those shares will be treated as present and entitled to vote.
Because the vote on the Merger Agreement and the transactions contemplated
thereby, including the Merger, requires the approval of holders of a majority in
interest of the votes entitled to be cast by the holders of all outstanding
shares of Expert common stock, an abstention and a broker non-vote will have the
same effect as a vote against the adoption of the Merger Agreement and the
transactions contemplated thereby, including the Merger.
THE MERGER CONSTITUTES A MATTER OF GREAT IMPORTANCE TO STOCKHOLDERS OF
EXPERT. IF THE MERGER AGREEMENT IS ADOPTED AND THE MERGER IS CONSUMMATED, THE
OWNERSHIP INTERESTS OF THE STOCKHOLDERS IN EXPERT WILL CEASE
6
IN EXCHANGE FOR THE RIGHT TO RECEIVE A CASH PAYMENT OF $2.65 PER SHARE OR TO
PURSUE APPRAISAL RIGHTS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND
CONSIDER CAREFULLY THE INFORMATION PRESENTED IN THIS PROXY STATEMENT.
PROXIES; SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS
All shares of Expert common stock represented at the Special Meeting by
properly executed Proxies received prior to or at the Special Meeting, and not
revoked before their use, will be voted in accordance with the instructions
thereon. If no instructions are given, properly executed Proxies will be voted
FOR the adoption of the Merger Agreement and approval of the Merger. If any
other matters are properly presented to the Special Meeting or any adjournments
or postponements thereof, the persons named in the enclosed form of Proxy as
acting thereunder will have discretion to vote on such matters in accordance
with their best judgment. Expert does not know of any matters other than the
adoption of the Merger Agreement and approval of the Merger that will be
presented at the Special Meeting.
An Expert stockholder who has given a Proxy may revoke it at any time before
it is voted at the Special Meeting, or any postponements or adjournments
thereof, by filing with the Secretary of Expert, at Expert's address set forth
herein, a written revocation bearing a later date than the Proxy being revoked,
or by submission of a validly executed Proxy bearing a later date than the Proxy
being revoked, or by attending the Special Meeting, or any postponements or
adjournments thereof, and voting in person (although attendance at the Special
Meeting, or any postponements or adjournments thereof, will not in and of itself
constitute revocation of a Proxy).
Proxies are being solicited by and on behalf of Expert's Board of Directors.
Expert will bear the cost of the Special Meeting and the cost of soliciting
Proxies therefor, including the cost of printing and mailing the Proxy material.
In addition to solicitation by mail, directors, officers and regular employees
of Expert may solicit proxies from Expert's stockholders by telephone, telegram,
personal interview or otherwise. Such directors, officers and employees will not
receive additional compensation, but may be reimbursed for out-of-pocket
expenses in connection with such solicitation. Brokers, nominees, fiduciaries
and other custodians have been requested to forward soliciting material to the
beneficial owners of shares of Expert common stock held of record by them, and
such custodians will be reimbursed for their reasonable expenses.
HOLDERS OF EXPERT COMMON STOCK ARE REQUESTED TO SIGN, DATE AND PROMPTLY MAIL
THE ACCOMPANYING PROXY CARD IN THE ENCLOSED SELF-ADDRESSED POSTAGE-PREPAID
ENVELOPE. PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR PROXY CARDS.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
Only holders of Expert common stock at the close of business on the Record
Date will be entitled to receive notice of and to vote at the Special Meeting.
At the close of business on the Record Date, Expert had outstanding and entitled
to vote 7,627,881 shares of Expert common stock. Shares of Expert common stock
represented by properly executed Proxies which are marked "abstain" will be
counted as shares present for purposes of determining the presence of a quorum
on all matters. Proxies relating to "street name" shares that are voted by
brokers will be counted as shares present for purposes of determining the
presence of a quorum on all matters, but will not be treated as shares having
voted at the Special Meeting as to any proposal as to which authority to vote is
withheld by the broker.
The presence, in person or by Proxy, at the Special Meeting of the holders
of at least 3,813,941 shares of Expert common stock (I.E., a majority of the
shares of Expert common stock outstanding on the Record Date) is necessary to
constitute a quorum for the transaction of business.
7
THE MERGER
PURPOSE OF THE MERGER
The purpose of the Merger is for Activision to acquire the entire equity
interest in Expert. Merger Sub was formed solely for the purpose of effecting
the Merger. In connection with the Merger, (i) Merger Sub will be merged with
and into Expert with Expert continuing as the Surviving Corporation and as a
wholly-owned subsidiary of Activision and (ii) Expert's stockholders (other than
such stockholders who properly perfect appraisal rights in accordance with
Section 262 of the DGCL) will receive the $2.65 per share merger consideration
(the "Merger Consideration").
The acquisition of Expert is structured as a cash merger. Expert's purpose
in submitting the Merger to the vote of its stockholders with a favorable
recommendation at this time is to allow the stockholders an opportunity to
receive a cash payment at a fair price in order to provide a prompt and orderly
transfer of ownership of Expert to Activision and to provide Expert's
stockholders with cash for all of their shares of Expert common stock.
If the Merger is consummated, Expert's stockholders will no longer have any
equity interest in Expert and therefore will not share in its future earnings
and growth. Instead, each stockholder (other than stockholders who properly
perfect appraisal rights in accordance with Section 262 of the DGCL) will
receive, upon surrender of the certificate or certificates evidencing the
appropriate number of shares of Expert common stock, the Merger Consideration in
exchange for each share of Expert common stock owned immediately prior to the
Effective Time.
Except for the Merger, Activision does not have any present plans that
relate to or would result in (i) an extraordinary corporate transaction such as
a merger, reorganization or liquidation involving Expert or any of its
subsidiaries, (ii) a sale or other transfer of a material amount of assets of
Expert or any of its subsidiaries or (ii) any changes in Expert's corporate
structure or business. Activision, however, will continue to evaluate the
business and operations of Expert after the Merger and make such changes as are
deemed appropriate.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, each Expert stockholder will be entitled
(i) to receive a payment in cash of $2.65 per share of Expert common stock,
without interest, or (ii) to exercise appraisal rights pursuant to the DGCL if
properly demanded prior to the vote on the adoption of the Merger Agreement at
the Special Meeting. Expert's stockholders, as of the Effective Time, will have
no continuing ownership interest in Expert and will no longer participate in the
future earnings and potential growth of Expert.
As a result of the Merger, Merger Sub will be merged with and into Expert
and Expert will become a wholly-owned subsidiary of Activision. From the
Effective Time, shares of Expert common stock will no longer be traded on the
Nasdaq National Market, and price quotations with respect to sales of shares of
Expert common stock in the public market will no longer be available. The
registration of the shares of Expert common stock under the Exchange Act will
terminate and this termination will eliminate Expert's obligation to file
periodic financial and other information with the SEC and will make certain of
the provisions of the Exchange Act, such as the short-swing profit recovery
provisions of Section 16(b) and the requirement, under the proxy rules of
Regulation 14A, of furnishing a proxy or information statement in connection
with stockholders meetings, no longer applicable to Expert.
Pursuant to the terms of the Merger Agreement, Merger Sub's Board of
Directors and officers will become, upon consummation of the Merger, the Board
of Directors and officers, respectively, of the Surviving Corporation.
8
RISK THAT THE MERGER WILL NOT BE CONSUMMATED
Consummation of the Merger is subject to a number of conditions, including,
among other things, (i) receipt of the required stockholder approval, (ii) the
absence of an injunction or other order restraining consummation of the
transactions contemplated by the Merger Agreement and (ii) no more than 5% of
the issued and outstanding shares of Expert common stock shall have demanded an
appraisal of their shares under Section 262 of the DGCL.
It is expected that if the Merger Agreement is not adopted by Expert's
stockholders, or if the Merger is not consummated for any other reason, Expert's
current management, under the direction of Expert's Board of Directors, will
continue to manage Expert as an on-going business. No other transaction is
currently being considered by Expert as an alternative to the Merger.
BACKGROUND OF THE MERGER
The decision of Expert's Board of Directors to approve, and recommend
adoption and approval by Expert's stockholders of the Merger Agreement and the
transactions contemplated thereby, including the Merger, followed extensive
negotiations between Expert and Activision regarding the terms of the Merger
Agreement. Expert's Board of Directors's deliberations included a detailed
review of Expert's business, results of operations and prospects, including the
likelihood of effecting an alternative transaction and the ranges of values to
Expert's stockholders that might be achievable in an alternative transaction and
the financial and other terms of the Merger. For a statement of the material
factors considered by Expert's Board of Directors in connection with its
approval and recommendation, see "--Recommendation of Expert's Board of
Directors; Expert's Reasons for the Merger."
Throughout 1997, Expert experienced the market for value-priced consumer
software becoming increasingly competitive, and the overall software industry
undergoing significant consolidation. In response to these conditions, Expert
contacted U.S. Bancorp Piper Jaffray on December 18, 1997 to explore engaging
U.S. Bancorp Piper Jaffray as Expert's investment banker to assist Expert in
evaluating strategic business alternatives.
On January 21, 1998, Expert's Board of Directors approved the terms of an
agreement to engage U.S. Bancorp Piper Jaffray as Expert's investment banker to
assess strategic alternatives for Expert.
On January 23, 1998, Expert signed an engagement letter with U.S. Bancorp
Piper Jaffray providing for U.S. Bancorp Piper Jaffray to advise Expert in
connection with exploring Expert's strategic alternatives, including a potential
sale of the company.
On February 18, 1998, Expert and Activision signed a non-disclosure
agreement, and Expert provided certain financial and other confidential
information to Activision for use in its due diligence review of Expert.
On March 13, 1998, Kenneth P. Currier, Expert's Chief Executive Officer, and
Susan A. Currier, Expert's President, had an introductory meeting at
Activision's Santa Monica, California headquarters with Robert A. Kotick,
Activision's Co-Chairman and Chief Executive Officer, and John Jacobs of U.S.
Bancorp Piper Jaffray's Corporate Finance Division.
On July 31, 1998, Ken Currier held further discussions with Robert Kotick,
Brian Kelly, Activision's Co-Chairman, and John Jacobs of U.S. Bancorp Piper
Jaffray at Activision's headquarters concerning the feasibility of a business
combination between Expert and Activision. Conversations ceased due to valuation
differences.
In September 1998, U.S. Bancorp Piper Jaffray re-initiated conversations
with Activision executives regarding a potential combination with Expert and
organized a meeting between Activision and Expert at Activision's Santa Monica
headquarters.
9
Prior to October 14, 1998, Expert held discussions with other companies as
to potential strategic transactions, but none of those discussions resulted in
any transactions.
From October 14, 1998 through mid-February 1999, senior executives of Expert
and Activision and representatives of U.S. Bancorp Piper Jaffray held a number
of meetings and negotiating sessions.
On or about February 23, 1999, Expert and attorneys from Goodwin, Procter &
Hoar LLP received an initial draft of the Merger Agreement from Robinson
Silverman Pearce Aronsohn & Berman LLP, Activision's outside legal counsel. From
February 23, 1999 through March 3, 1999, counsel to Activision and counsel to
Expert negotiated the Merger Agreement and the related documents.
On March 1, 1999, Expert's Board of Directors met telephonically and
reviewed with management, attorneys from Goodwin, Procter & Hoar LLP and
representatives of U.S. Bancorp Piper Jaffray: (i) the status of the Merger,
(ii) the benefits and potential risks of the Merger with Activision and (iii)
the terms and conditions of the Merger Agreement. Expert's Board of Directors
deferred a vote to adopt the Merger Agreement pending a resolution of certain
related issues.
On March 2, 1999, Expert's Board of Directors met telephonically and further
reviewed with management, attorneys from Goodwin, Procter & Hoar LLP and
representatives of U.S. Bancorp Piper Jaffray various business and legal issues
relating to the Merger. Expert's Board of Directors recommended that management
and their advisors complete negotiations of the Merger Agreement with
Activision.
On March 3, 1999, Expert's Board of Directors met telephonically and further
reviewed with management, attorneys from Goodwin, Procter & Hoar LLP and
representatives of U.S. Bancorp Piper Jaffray certain outstanding issues
concerning the Merger. Following those discussions and the resolution of those
issues, Expert's Board of Directors voted unanimously to adopt the Merger
Agreement.
On March 4, 1999, after close of trading on the Nasdaq National Market,
Expert and Activision issued a joint press release announcing the execution of
the Merger Agreement.
On April 19, 1999, Expert, Activision and Merger Sub executed an Amended and
Restated Agreement and Plan of Merger (the "Amended Merger Agreement"). The
Amended Merger Agreement, among other things, (a) extended the date by which
Activision could elect to pay cash consideration to the holders of shares of
Expert common stock from March 25, 1999 to April 20, 1999 and (b) provides that
Merger Sub will be merged with and into Expert, with Expert continuing as the
surviving corporation and becoming a wholly owned subsidiary of Activision.
Pursuant to its rights under the Amended Merger Agreement, on April 19, 1999,
Activision gave Expert notice of its election to pay all cash to the holders of
shares of Expert common stock.
RECOMMENDATION OF EXPERT'S BOARD OF DIRECTORS; EXPERT'S REASONS FOR THE MERGER
In light of Expert's Board of Directors' consideration of various strategic
alternatives and its review of Expert's competitive position and recent
operating results, Expert's Board of Directors has determined that the Merger is
fair to, and in the best interests of, Expert and its stockholders. In making
this recommendation and in approving the Merger Agreement and the transactions
contemplated thereby, Expert's Board of Directors considered a number of
factors, including but not limited to, the factors described below. Expert's
Board of Directors believes that the factors it considered operate both
individually and in combination to support its determination that the Merger is
fair to, and in the best interest of, Expert's stockholders.
- The combined experience, financial resources, and size and breadth of
product offerings of the combined company should allow the combined
company to respond more quickly and effectively to technological change,
increased competition and market demands in an industry experiencing rapid
innovation and change.
10
- The resources of the combined company should counter Expert's lack of
critical mass in software and Internet exposure and create a positive
impact on the retail channel.
- The Merger should provide Expert with greater resources to support its
marketing, distribution and product development efforts.
- Activision's substantial domestic and international sales, marketing and
distribution capabilities should provide an expanded opportunity for
distribution of Expert's products both within the United States and in
international markets, thereby allowing Expert to expand its customer
base.
- The combination of the companies' customer service and technical support
systems should permit the combined company to provide more efficient
support coverage to its customers.
- The addition of senior Activision executives should increase management
breadth and strengthen organizational infrastructure.
- The Merger should provide Expert with greater resources to support
Internet initiatives, offering a broader range of products on the Internet
than are available in retail stores.
- The application of titles from Activision's library to value-priced
category distribution by Expert should allow Expert to expand its customer
base.
- Activision's recognizable brands in sports and lifestyle software should
complement Expert's Sega and Bicycle branded software.
- Activision's recognizable brands and strong domestic and international
marketing and distribution capabilities should enhance Expert's presence
in the marketplace.
- The Merger Consideration represents a premium of approximately 37% over
the $1.938 closing sale price for the shares on the Nasdaq National Market
on March 3, 1999, the last trading day prior to the public announcement of
the Merger.
- The Merger Consideration represents a premium of approximately 391% above
Expert's book value per share of Expert common stock as of December 31,
1998. See "Unaudited Per Share Information."
- Expert's Board of Directors' concluded that it was not likely that any
party other than Activision would propose and complete a transaction that
was more favorable than the Merger to Expert and Expert's stockholders.
- U.S. Bancorp Piper Jaffray opined that, as of March 3, 1999, the $2.65 per
share of Expert common stock consideration to be received by Expert's
stockholders in the Merger is fair to such stockholders from a financial
point of view. The full text of U.S. Bancorp Piper Jaffray's opinion,
which sets forth the assumptions made, the matters considered and
limitations on the review undertaken by U.S. Bancorp Piper Jaffray, is
attached as Annex II to this Proxy Statement, and is incorporated herein
by reference. U.S. Bancorp Piper Jaffray's opinion is directed only to the
fairness, from a financial point of view, of the cash consideration to be
received by Expert's stockholders in the Merger and is not intended to
constitute, and does not constitute, a recommendation as to whether any
Expert stockholder should vote to adopt the Merger Agreement and approve
the Merger. Holders of Expert common stock are urged to read U.S. Bancorp
Piper Jaffray's opinion in its entirety. Expert's Board of Directors has
relied upon U.S. Bancorp Piper Jaffray's opinion in determining that the
Merger is fair to, and in the best interests of, Expert and its
stockholders.
The foregoing discussion of the information and factors discussed by
Expert's Board of Directors is not meant to be exhaustive, but includes all
material factors considered by Expert's Board of Directors to support its
decision to recommend the Merger and to determine that the Merger is fair to,
and in the best interests of, Expert and Expert's stockholders. Expert's Board
of Directors did not assign relative weights
11
to the above factors or determine that any factor was of particular importance.
Rather, Expert's Board of Directors viewed its position and recommendation as
being based on the totality of the information presented to and considered by
it, except that particular consideration was placed on (i) the opinion of U.S.
Bancorp Piper Jaffray that, as of the date of such opinion, the $2.65 per share
of Expert common stock to be received by Expert's stockholders in the Merger is
fair to such stockholders from a financial point of view, (ii) the active arm's
length bargaining that had occurred between Expert, on the one hand, and
Activision on the other hand, that resulted in the Merger Consideration, which
the members of the Board of Directors believed was the highest price that
Activision would agree to pay and (iii) the fact that the terms of the Merger
Agreement permit Expert to abandon the Merger if a superior transaction is
proposed. While Expert's Board of Directors noted that certain of the individual
analyses contained in the U.S. Bancorp Piper Jaffray presentation and opinion
were, in the judgment of Expert's Board of Directors, more supportive of its
decision to approve the Merger than others, Expert's Board of Directors
considered the totality of the presentation and the opinion in determining
whether the Merger was fair from a financial point of view to Expert's
stockholders.
EXPERT'S BOARD OF DIRECTORS RECOMMENDS THAT EXPERT'S STOCKHOLDERS VOTE FOR
THE ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE MERGER.
DETRIMENTS AND ADVERSE EFFECTS ON EXPERT AND ITS STOCKHOLDERS OF THE MERGER
While Expert's Board of Directors believes, for the reasons set forth above,
that the Merger is fair to, and in the best interests of, Expert and its
stockholders, Expert's Board of Directors considered that the Merger might have
certain detriments and adverse effects on Expert and its stockholders. Such
detriments and adverse effects include:
- The fact that, as a result of the Merger, Expert's stockholders will cease
to have any interest in Expert as an ongoing corporation with potential
for future growth.
- The possibility that the Merger might not be consummated and the effect of
the public announcement of the merger on (i) Expert's sales and operating
results, (ii) Expert's ability to attract and retain key technical,
management and marketing personnel and (iii) the progress of certain
development projects.
Notwithstanding these potential detriments and adverse effects of the
Merger, Expert's Board of Directors determined that the Merger is fair to, and
in the best interests of, Expert and its stockholders for the reasons described
above under "--Background of the Merger" and "--Recommendation of Expert's Board
of Directors; Expert's Reasons for the Merger."
OPINION OF EXPERT'S FINANCIAL ADVISOR
On January 23, 1998, Expert and U.S. Bancorp Piper Jaffray executed an
engagement letter (the "U.S. Bancorp Piper Jaffray Engagement Letter") pursuant
to which U.S. Bancorp Piper Jaffray was engaged to act as Expert's financial
advisor in connection with the Merger. Pursuant to the U.S. Bancorp Piper
Jaffray Engagement Letter, Expert retained U.S. Bancorp Piper Jaffray to provide
financial advisory and investment banking services in connection with a possible
strategic transaction, including a potential strategic combination, and to
render an opinion as to the fairness of any such transaction, from a financial
point of view, to the holders of Expert common stock. See "The
Merger--Background of the Merger."
At a meeting of Expert's Board of Directors held on March 3, 1999, U.S.
Bancorp Piper Jaffray gave a presentation on the financial terms of the Merger
and rendered its oral opinion, which opinion was subsequently confirmed in
writing (the "U.S. Bancorp Piper Jaffray Opinion"), that as of March 3, 1999 and
based on the matters described therein, the Merger Consideration was fair, from
a financial point of view, to the holders of Expert common stock. The Merger
Consideration was determined through
12
negotiations between the senior management of Expert (assisted by U.S. Bancorp
Piper Jaffray) and the senior management of Activision. U.S. Bancorp Piper
Jaffray does not admit that it is an expert within the meaning of the term
"expert" as used in the Securities Act or the rules and regulations promulgated
thereunder, or that its opinion constitutes a report or valuation within the
meaning of Section 11 of the Securities Act and the rules and regulations
promulgated thereunder.
The full text of the U.S. Bancorp Piper Jaffray Opinion, which sets forth,
among other things, assumptions made, matters considered and limitations on the
review undertaken, is attached hereto as Annex II and is incorporated herein by
reference. Stockholders of Expert are urged to read the U.S. Bancorp Piper
Jaffray Opinion in its entirety. The U.S. Bancorp Piper Jaffray Opinion was
prepared for the benefit and use of Expert's Board of Directors in its
consideration of the Merger on March 3, 1999 and does not constitute a
recommendation to stockholders of Expert as to how they should vote at the
Special Meeting. The U.S. Bancorp Piper Jaffray Opinion does not address (i) any
change in the business or financial condition of Expert since March 3, 1999,
(ii) the relative merits of the Merger and any other transactions or business
strategies discussed by Expert's Board of Directors as alternatives to the
Merger or (iii) except with respect to the fairness of the Merger Consideration,
from a financial point of view, to the holders of Expert common stock, the
underlying business decision of Expert's Board of Directors to proceed with or
effect the Merger. The summary of the U.S. Bancorp Piper Jaffray Opinion set
forth in this Proxy Statement is qualified in its entirety by reference to the
full text of the U.S. Bancorp Piper Jaffray Opinion.
In arriving at its opinion, U.S. Bancorp Piper Jaffray reviewed financial
and other information that was publicly available or furnished to it by Expert
and Activision, including information provided during discussions with the
management of each company. In addition, U.S. Bancorp Piper Jaffray compared
certain financial data of Expert and Activision with various other companies
whose securities are traded in public markets, reviewed prices and premiums paid
in certain other business combinations and conducted such other financial
studies, analyses and investigations as it deemed appropriate for purposes of
its opinion.
U.S. Bancorp Piper Jaffray relied upon and assumed the accuracy and
completeness of the financial statements and other information provided by
Expert and Activision or otherwise made available to it and did not assume
responsibility independently to verify such information. U.S. Bancorp Piper
Jaffray further relied upon the assurances of Expert's management that the
information provided was prepared on a reasonable basis in accordance with
industry practice and, with respect to financial planning data of Expert,
reflected the best currently available estimates and judgment of Expert's
management as to the expected future financial performance of Expert. Expert
also indicated that it was not aware of any information or facts that would make
the information provided to U.S. Bancorp Piper Jaffray incomplete or misleading.
With respect to Activision, U.S. Bancorp Piper Jaffray was not provided any
financial planning data or internal projections regarding Activision's financial
prospects and relied exclusively on published reports prepared by financial
analysts, as supported by its discussions with Activision's management. Without
limiting the generality of the foregoing, for the purpose of its opinion, U.S.
Bancorp Piper Jaffray assumed that neither Expert nor Activision was a party to
any pending transaction, including external financing, recapitalizations,
acquisitions or merger discussions, other than the Merger or in the ordinary
course of business. U.S. Bancorp Piper Jaffray also assumed that the Merger will
be taxable to the holders of Expert common stock and that the Merger will be
accounted for as a purchase transaction under generally accepted accounting
principles. In arriving at its opinion, U.S. Bancorp Piper Jaffray assumed that
all the necessary regulatory approvals and consents required for the Merger will
be obtained in a manner that will not change the Merger Consideration.
In arriving at its opinion, U.S. Bancorp Piper Jaffray did not perform any
appraisals or valuations of specific assets or liabilities of Expert or
Activision and was not furnished with any such appraisals or valuations. Without
limiting the generality of the foregoing, U.S. Bancorp Piper Jaffray undertook
no
13
independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities, to which Expert, Activision
or any of their respective affiliates was a party or might be subject and, at
Expert's direction and with its consent, the U.S. Bancorp Piper Jaffray Opinion
makes no assumption concerning, and therefore does not consider, the possible
assertion of claims, outcomes or damages arising out of any such matters.
Although developments following the date of the U.S. Bancorp Piper Jaffray
Opinion may affect the U.S. Bancorp Piper Jaffray Opinion, U.S. Bancorp Piper
Jaffray assumed no obligation to update, revise or reaffirm the U.S. Bancorp
Piper Jaffray Opinion.
The following is a summary of the material financial analyses performed by
U.S. Bancorp Piper Jaffray in connection with rendering the U.S. Bancorp Piper
Jaffray Opinion:
COMPARABLE COMPANY ANALYSIS. U.S. Bancorp Piper Jaffray compared certain
financial information and valuation ratios relating to Expert to corresponding
publicly-available data and ratios from a group of selected publicly traded
companies that it deemed comparable to Expert. The comparable companies selected
included ten publicly traded companies primarily engaged in the Consumer
Software market, including: Acclaim Entertainment, Inc., Activision, Inc., Eidos
PLC, Electronic Arts, Inc., GT Interactive Software Corporation, Interplay
Entertainment, Inc., International Microcomputer Software, Inc., Midway Games,
Inc., Mysoftware Corporation and THQ, Inc.
The analysis, with respect to Expert, produced multiples of selected
valuation data based upon closing stock prices of the comparable companies as of
March 2, 1999, which were then compared to the equity value of Expert of $2.65
per share implied by the Merger Consideration. The multiples included in the
analysis were: (i) market price per share to 1998 calendar earnings per share
estimates of the comparable companies ranging from not meaningful to 29.4x, with
a mean and median of 17.7x and 19.9x, respectively, and for management estimates
for Expert a ratio which was not meaningful; (ii) market price per share to 1999
calendar earnings per share estimates of the comparable companies ranging from
not meaningful to 49.0x, with a mean and median of 18.0x and 14.7x,
respectively, and for management estimates for Expert a ratio of 9.1x and for
research analyst estimates for Expert a ratio of 53.0x; (iii) market
capitalization of the selected company, plus such company's debt, less such
company's cash ("Company Value") to calendar 1998 revenue estimate for
comparable companies ranging from 0.5x to 4.8x, with a mean and median of 1.4x
and 1.1x, respectively, and for management estimates for Expert a ratio of 0.7x;
(iv) Company Value to calendar 1999 revenue estimate for comparable companies
ranging from 0.4x to 3.8x, with a mean and median of 1.2x and 0.9x,
respectively, and for management estimates for Expert a ratio of 0.7x and for
research analyst estimates for Expert a ratio of 0.7x. Company Value for Expert
was based upon the implied purchase price per share multiplied by the number of
fully-diluted shares outstanding, plus outstanding debt less cash held. Earnings
estimates for comparable companies were based on consensus earnings per share
estimates taken from First Call, an investor service that monitors earnings
estimates for publicly traded companies.
COMPARABLE TRANSACTION ANALYSIS. Using publicly available information, U.S.
Bancorp Piper Jaffray analyzed the ratio of Company Value to revenue recorded
over the last twelve months and the ratio of the product of the total number of
shares of Expert outstanding, on a fully diluted basis multiplied by the Merger
Consideration of $2.65 per share (the "Equity Value") to net income over the
last twelve months, involving two separate Comparable Transaction Analyses. The
first set of Comparable Transaction Analysis was based on 56 publicly traded and
privately held companies with SIC 7372, Prepackaged Software, including: Empower
Solutions/Intelligroup, Inc. (February 1999); Key Communication Services, Inc./
ProxyMed Inc. (January 1999); Knowledge Revolution, Inc./MacNeal-Schwendler
Corp. (December 1998); Palladium Interactive/The Learning Company (December
1998); Imageware Corporation/Structural Dynamics Research (October 1998);
Consilium, Inc/Applied Materials, Inc. (October 1998); Red Brick Systems,
Inc./Informix Corp. (October 1998); Crystal Dynamics/Eidos PLC (September 1998);
Elekom Corp./Clarus Corp. (August 1998); Cayenne Software, Inc./Sterling
Software, Inc. (August 1998); Westwood Studios/Electronic Arts, Inc. (August
1998); Microsprose/Hasbro (August 1998); CyberMedia, Inc./ Network Associates,
Inc. (July 1998); IQ Software Corporation/Information Advantage Software
14
(June 1998); Sofsource/The Learning Company (June 1998); Award Software
International/Phoenix Technologies LTD (April 1998); Mindscape/The Learning
Company (March 1998); ForeFront Group, Inc./ CBT Group PLC (March 1998); IC
Verify, Inc./Cybercash, Inc. (March 1998); Stingray Software Company, Inc./Rogue
Wave Software, Inc. (March 1998); Microsystems Software, Inc./The Learning
Company, Inc. (February 1998); Progressive Software, Inc./Tridex Corp. (February
1998); Vivo Software, Inc./ Real Networks, Inc. (February 1998); Isolation
Systems Ltd./Shiva Corp. (February 1998); Visigenic Software, Inc./Borland
International, Inc. (November 1997); CUSA Technologies, Inc./Fiserv, Inc.
(November 1997); Rosetta Technologies, Inc./Engineering Animation, Inc. (October
1997); Prememos Technology Corp./Harbinger Corp. (October 1997); Creative
Wonders/The Learning Company (October 1997); National Health Enhancement
Systems/HBO & Co. (October 1997); SkillsBank/The Learning Company (September
1997); Coral Systems, Inc./Lightbridge, Inc. (September 1997); Technology
Modeling Associates/Avant! Corp. (September 1997); United Software,
Inc./Peregrine Systems, Inc. (September 1997); Raven Software/Activision, Inc.
(August 1997); CPLEX Optimization, Inc./ILOG SA (August 1997); Network Software
Associates/Netmanage, Inc. (July 1997); Maxis, Inc./Electronic Arts, Inc. (June
1997); Parsons Technology/Broderbund Software (May 1997); Berkeley Systems/CUC
International (April 1997); Fractal Design Corp./MetaTools, Inc. (February
1997); AssureNet Pathways, Inc./AXENT Technologies, Inc. (January 1997);
Softdesk, Inc./Autodesk, Inc. (December 1996); Edmark Corp./IBM Corp. (November
1996); Knowledge Adventure/CUC International (November 1996); Software
Publishing Corp./Allegro New Media (October 1996); Datalogix
International/Oracle Corp. (September 1996); Management Software, Inc./HBO & Co.
(September 1996); Meta Software, Inc./Avant! Corp. (August 1996);
T/Maker/Broderbund Software (July 1996); Humongous Entertainment/GT Interactive
Software (July 1996); FormGen/GT Interactive Software (July 1996); New World
Computing/3DO, Inc. (June 1996); Cybernetics Systems International Corp./EIS
International, Inc. (February 1996); TGV Software, Inc./Cisco Systems, Inc.
(January 1996); Technalysis Corp./CompuWare Corp. (January 1996). An analysis of
the comparable transactions produced multiples of selected valuation data with
respect to the purchased companies as follows: Company Value to revenues
recorded over the last twelve months ranging from 0.1x to 7.6x, with a mean and
a median of 2.7x and 2.1x, respectively, and a multiple of 0.7x for Expert and
Equity Value to net income over the last twelve months ranging from not
meaningful to 65.5x, with a mean and median of 27.9x and 24.1x, respectively,
and a multiple which was not meaningful for Expert. Estimated multiples paid in
the comparable transactions were based on information obtained from public
filings, public company disclosures, press releases, industry and popular press
reports, databases and other sources.
The second set of Comparable Transaction Analysis was based on four publicly
traded companies whose primary business was focused on the Consumer Software
market, including: Microsprose/Hasbro (August 1998); Broderbund/The Learning
Company (June 1998); Maxis, Inc./Electronic Arts, Inc. (June 1997) and Edmark
Corp./IBM Corp. (December 1996). An analysis of these comparable transactions
produced multiples of selected valuation data with respect to the purchased
companies as follows: Company Value to revenues recorded over the last twelve
months ranging from 0.8x to 3.0x, with a mean and a median of 1.8x and 1.7x,
respectively, and a multiple of 0.7x for Expert and Equity Value to net income
over the last twelve months ranging from not meaningful to 21.1x, with a mean
and median of 21.1x and 21.1x, respectively, and a multiple which was not
meaningful for Expert.
Estimated multiples paid in the comparable transactions were based on
information obtained from public filings, public company disclosures, press
releases, industry and popular press reports, databases and other sources.
No company, transaction or business used in the Comparable Company Analysis
or Comparable Transaction Analysis as a comparison is identical to Expert or the
Merger. Accordingly, an analysis of the results of the foregoing is not entirely
mathematical; rather it involves complex considerations and judgments concerning
differences in financial and operating characteristics and other factors that
could
15
affect the acquisition, public trading and other values of the comparable
companies, comparable transactions or the business segment, company or
transactions to which they are being compared.
PREMIUMS PAID ANALYSIS. U.S. Bancorp Piper Jaffray reviewed comparable
transactions of companies as well as certain other transactions to determine the
premiums paid, represented by the difference between the transaction values and
the market prices for the target companies one day, one week and one month prior
to the announcement (each, an "Announcement") of such comparable transaction.
The first set of comparable transactions was based on 20 publicly traded
companies with SIC 7372, Prepackaged Software. This analysis indicated premiums
as follows: (i) one day before the Announcement, premiums ranging from -14.3% to
146.9%, with a mean and a median of 33.1% and 21.8%, respectively, and a premium
for Expert of 36.8%; (ii) one week before the Announcement, premiums ranging
from -14.3% to 146.9%, with a mean and a median of 40.7% and 39.3%,
respectively, and a premium for Expert of 41.3%; and (iii) one month before the
Announcement, premiums ranging from -14.3% to 146.7%, with a mean and a median
of 55.1% and 45.8%, respectively and a premium for Expert of 57.0%.
The second set of comparable transactions was based on four publicly traded
companies whose primary business was focused on the Consumer Software market.
This analysis indicated premiums as follows: (i) one day before the
Announcement, premiums ranging from 2.3% to 35.5%, with a mean and a median of
22.6% and 26.4%, respectively, and a premium for Expert of 36.8%; (ii) one week
before the Announcement, premiums ranging from 2.3% to 79.4%, with a mean and a
median of 40.3% and 39.8%, respectively, and a premium for Expert of 41.3%; and
(iii) one month before the Announcement, premiums ranging from 19.0% to 40.6%,
with a mean and a median of 29.5% and 29.1%, respectively and a premium for
Expert of 57.0%. Estimated premiums paid in the comparable transactions were
based on information obtained from public filings, public company disclosures,
press releases, industry and popular press reports, databases and other sources.
PRO FORMA EARNINGS ANALYSIS--NO SYNERGY ADJUSTMENTS. U.S. Bancorp Piper
Jaffray analyzed pro forma effects resulting from the impact of the Merger on
the projected EPS of the combined company for fiscal year 2000 (March fiscal
year), per Expert's management estimates and research analyst estimates for
Expert and research analyst estimates for Activision, without taking into
account certain operating cost synergies that the combined company may realize
following consummation of the Merger. The results of the pro forma earnings
analysis suggested that the Merger could be dilutive to the combined company's
EPS in fiscal year 2000. The actual results achieved by the combined company
after the Merger may vary from projected results and the variations may be
material.
PRO FORMA EARNINGS ANALYSIS--SYNERGY ADJUSTMENTS. U.S. Bancorp Piper
Jaffray analyzed pro forma effects resulting from the impact of the Merger on
the projected EPS of the combined company for fiscal year 2000, per Expert's
management estimates and research analyst estimates for Expert and research
analyst estimates for Activision, after taking into account certain operating
cost synergies that the combined company may realize following consummation of
the Merger. The results of the pro forma earnings analysis suggested that the
Merger could be non-dilutive to the combined company's EPS in the fiscal year
2000, based on Expert's management estimates and Activision's research analyst
estimates and could be dilutive to the combined company's EPS in fiscal year
2000, based on Expert's research analyst estimates and Activision's research
analyst estimates. The actual results achieved by the combined company after the
Merger may vary from projected results and the variations may be material.
CONTRIBUTION ANALYSIS. U.S. Bancorp Piper Jaffray analyzed the respective
contributions of Expert and Activision to the estimated revenue, operating
income, pre-tax income and net income for the year ending fiscal 2000 per
Expert's management estimates and research analyst estimates for Expert and
research analyst estimates for Activision. The analysis indicated that: (i)
based on Expert's research analyst estimates in fiscal year 2000, Expert would
contribute approximately 5.7% of total revenues, approximately 4.3% of total
operating income, approximately 4.6% of total pre-tax income and approximately
4.6% of total net income; (ii) based on Expert's management estimates in fiscal
year 2000, Expert would contribute
16
approximately 5.8% of total revenues, approximately 10.5% of total operating
income, approximately 10.9% of total pre-tax income and approximately 10.9% of
total net income.
DISCOUNTED CASH FLOW ANALYSIS. U.S. Bancorp Piper Jaffray estimated the
present value of the projected future cash flows of Expert on a stand-alone
basis using internal financial planning data prepared by management of Expert
for the years ending December 31, 1999 through December 31, 2003. U.S. Bancorp
Piper Jaffray applied terminal value multiples of forecasted 2003 earnings
before interest and taxes of 7.0x, 8.0x and 9.0x. In all cases, U.S. Bancorp
Piper Jaffray used a range of discount rates from 22% to 26%. This analysis
yielded a range of estimated present values of Expert's equity value from $2.67
per share to $3.49 per share, compared to the Expert equity value of $2.65 per
share implied by the Merger Consideration. U.S. Bancorp Piper Jaffray also
estimated the present value of the projected future cash flows of Expert on a
stand-alone basis using internal financial planning based on U.S. Bancorp Piper
Jaffray equity research estimates and assumptions reviewed by Expert for the
years ending December 31, 1999 through December 31, 2003. U.S. Bancorp Piper
Jaffray applied terminal value multiples of forecasted 2003 earnings before
interest and taxes of 7.0x, 8.0x and 9.0x. In all cases, U.S. Bancorp Piper
Jaffray used a range of discount rates from 18% to 22%. This analysis yielded a
range of estimated present values of Expert's equity value from $2.27 per share
to $3.06 per share, compared to the Expert equity value of $2.65 per share
implied by the Merger Consideration.
OTHER FACTORS AND COMPARATIVE ANALYSES. In rendering its opinion, U.S.
Bancorp Piper Jaffray considered certain other factors and conducted certain
other comparative analyses, including, among other things, a review of: (i) the
history of trading prices and volume for Expert common stock from February 26,
1998 through March 2, 1999, and Activision common stock from February 26, 1998
through March 2, 1999; and (ii) selected published analysts' reports on each of
Expert and Activision, including analysts' estimates as to the earnings growth
potential of Expert and Activision.
While the foregoing summary describes certain analyses and factors that U.S.
Bancorp Piper Jaffray deemed material in its presentation to Expert's Board of
Directors, it is not a comprehensive description of all analyses and factors
considered by U.S. Bancorp Piper Jaffray. The preparation of a fairness opinion
is a complex process that involves various determinations as to the most
appropriate and relevant methods of financial analysis and the application of
these methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. U.S. Bancorp Piper Jaffray
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and of the factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
evaluation process underlying the U.S. Bancorp Piper Jaffray Opinion. Several
analytical methodologies were employed and no one method of analysis should be
regarded as critical to the overall conclusion reached by U.S. Bancorp Piper
Jaffray. Each analytical technique has inherent strengths and weaknesses, and
the nature of the available information may further affect the value of
particular techniques. The conclusions reached by U.S. Bancorp Piper Jaffray are
based on all analyses and factors taken as a whole and also on application of
U.S. Bancorp Piper Jaffray's own experience and judgment. Such conclusions may
involve significant elements of subjective judgment and qualitative analysis.
U.S. Bancorp Piper Jaffray therefore gives no opinion as to the value or merit
standing alone of any one or more parts of the analysis it performed. In
performing its analyses, U.S. Bancorp Piper Jaffray considered general economic,
market and financial conditions and other matters, many of which are beyond the
control of Expert and Activision. The analyses performed by U.S. Bancorp Piper
Jaffray are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than those suggested by such
analyses. Accordingly, analyses relating to the value of a business do not
purport to be appraisals or to reflect the prices at which the business actually
may be purchased. Furthermore, no opinion is being expressed as to the prices at
which shares of Activision common stock may trade at any future time.
Expert engaged U.S. Bancorp Piper Jaffray pursuant to the U.S. Bancorp Piper
Jaffray Engagement Letter on January 23, 1998. The U.S. Bancorp Piper Jaffray
Engagement Letter provides that, for its services, U.S. Bancorp Piper Jaffray is
entitled to receive, contingent upon consummation of the Merger, a
17
fee equal to one and one-quarter percent (1.25%) of the aggregate consideration
paid to holders of Expert common stock in connection with the Merger. In no
event shall U.S. Bancorp Piper Jaffray's fee be less than $650,000. A payment of
$250,000 became due and payable to U.S. Bancorp Piper Jaffray upon delivery of
its fairness opinion to Expert's Board of Directors. The remainder of the U.S.
Bancorp Piper Jaffray fee is due and payable upon consummation of the Merger.
Expert has also agreed to reimburse U.S. Bancorp Piper Jaffray for its out of
pocket expenses and to indemnify and hold harmless U.S. Bancorp Piper Jaffray
and its affiliates and any person, director, employee or agent acting on behalf
of U.S. Bancorp Piper Jaffray or any of its affiliates, or any person
controlling U.S. Bancorp Piper Jaffray or its affiliates for certain losses,
claims, damages, expenses and liabilities relating to or arising out of services
provided by U.S. Bancorp Piper Jaffray as financial advisor to Expert. The terms
of the fee arrangement with U.S. Bancorp Piper Jaffray, which Expert and U.S.
Bancorp Piper Jaffray believe are customary in transactions of this nature, were
negotiated at arm's length between Expert and U.S. Bancorp Piper Jaffray, and
Expert's Board of Directors was aware of such fee arrangements.
U.S. Bancorp Piper Jaffray was retained based on U.S. Bancorp Piper
Jaffray's experience as a financial advisor in connection with mergers and
acquisitions and in securities valuations generally, as well as U.S. Bancorp
Piper Jaffray's investment banking relationship with Expert and familiarity with
Expert's business and its market.
U.S. Bancorp Piper Jaffray has performed investment banking services for
Activision in the past which have included co-managing a convertible debt
offering in December 1997 and may, at any time, hold discussions with Activision
regarding potential mergers or acquisitions or hold long or short positions in
Activision's common stock.
U.S. Bancorp Piper Jaffray is a nationally recognized investment banking
firm. As part of its investment banking business, U.S. Bancorp Piper Jaffray is
frequently engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes. U.S. Bancorp
Piper Jaffray may actively trade the equity securities of Expert and Activision
for its own account and for the accounts of its customers and, accordingly, may
at any time hold a long or short position in such securities. U.S. Bancorp Piper
Jaffray regularly publishes research reports regarding the Consumer Software
industry and the business and securities of publicly traded companies in
Consumer Software industry.
ACTIVISION'S REASONS FOR THE MERGER
Activision's Board of Directors has adopted and approved the Merger
Agreement. The following are among the reasons Activision's Board of Directors
believes the Merger will be beneficial to Activision:
- One of Activision's strategies for growth is to position itself as a
leader in the value-priced software category, one of the fastest growing
segments in the entertainment software business. Following Activision's
acquisition ten months ago of Head Games Publishing, a leading developer
and publisher of value-priced sports and lifestyle software products,
Activision has strengthened its focus on this category, particularly its
sales and marketing organization. Activision believes that the addition of
Expert's product line, catalogue titles, recognized brands and sales and
marketing structure will further establish Activision as a leading player
in the value-priced software category.
- Activision's addition of Expert's product lines, including its catalogue
of titles, will enhance the scope and breadth of Activision's product
offerings and will allow Activision to enter into new product lines.
- Activision believes that the combination of Expert with Activision will
allow Activision to leverage the existing Expert products and brands and
its catalogue of titles to support Activision's existing sales and
marketing infrastructure and its European and domestic distribution
businesses, and will
18
enhance Activision's ability to acquire additional value priced brands and
titles as well as publishing and distribution operations.
In the course of its deliberations, Activision's Board of Directors, with
Activision's management, reviewed and considered a number of other factors
relevant to the Merger. In particular, Activision's Board of Directors
considered, among other things, (i) information concerning Activision's and
Expert's respective businesses, prospects, financial performance and conditions,
operations and product development schedules, (ii) the comparative stock prices
of Activision and Expert at various points in time prior to execution of the
Merger Agreement, (iii) the charges expected to be incurred in connection with
the Merger, primarily in the quarter ending June 30, 1999, including the
transaction costs and the costs of integrating the companies' businesses, (iv)
alternatives for growth in the PC market, particularly the value-priced software
category and (v) the results of management's due diligence investigation and
analysis of Expert.
Activision's Board of Directors also considered a variety of potentially
negative factors in its deliberations concerning the Merger, including: (i) the
fact that Expert has reported operating losses for the past fiscal periods and
the possibility that Expert, as a subsidiary of Activision, could continue to
record losses from its operations, (ii) the risk that despite the best efforts
of the combined company, key personnel of Expert may not be retained, and (iii)
the risks that the benefits sought to be obtained in the Merger may not be
realized.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the recommendation of Expert's Board of Directors, you
should be aware that certain Expert directors and officers participate in
arrangements and have continuing indemnification against liabilities that
provide them with interests in the Merger that are different from, or are in
addition to, yours. These arrangements and continuing indemnifications are
described below. As of the Record Date, directors and executive officers of
Expert and their affiliates beneficially owned approximately 13.9% of the
outstanding shares of Expert common stock.
CHANGE OF CONTROL BONUSES. On February 25, 1998, Expert's Compensation
Committee approved a bonus equal to one-year's salary to each of the Curriers in
the event Expert was sold during 1998 and the transaction closed on terms
acceptable to Expert's Board of Directors (the "Sale Bonus Arrangement"). On
February 16, 1999, Expert's Compensation Committee extended the Sale Bonus
Arrangement through December 31, 1999. The Curriers' employment agreements with
Activision, executed in connection with the Merger, provide that the Curriers
will receive a portion of these bonuses in restricted stock.
Effective February 18, 1998, all Expert employees qualify under a program
which entitles any employee who might lose his or her employment as a result of
a change in control to receive three months base compensation at the time of
separation, provided the employee has performed his or her duties to the date of
separation. This policy was extended for all Expert employees until February 17,
2000.
TREATMENT OF OPTIONS GRANTED UNDER EXPERT'S PLANS. Since April 1997,
options granted to officers, employees and directors under Expert's stock option
plans have provided for acceleration of unvested shares in the event of a change
of control of Expert. Accordingly, unvested stock options granted under Expert's
stock option plans to officers and directors of Expert will vest upon the
completion of the Merger. The number of shares of Expert common stock subject to
unvested options held by the officers, employees and directors that will vest
upon completion of the Merger totaled 1,300,130 on March 3, 1999.
Under the terms of the Merger Agreement, each stock option issued by Expert,
as well as each option plan or agreement pursuant to which such options were
granted, will be assumed by Activision. Upon completion of the Merger, each
outstanding and unexercised option to purchase Expert common stock will be
converted automatically, in accordance with its terms, into an option to
purchase the number of shares of Activision common stock equal to the "exchange
ratio" (as defined in the Merger Agreement) times the number of shares of Expert
common stock which could have been obtained before the Merger upon the exercise
of each option, rounded down to the nearest whole share. The exercise price will
be equal to the
19
exercise price per share of Expert common stock subject to the option before
conversion divided by the exchange ratio, rounded up to the nearest whole cent.
The other terms of each option and the Expert option plans under which the
options were issued will continue to apply in accordance with their terms.
Activision will file a registration statement on Form S-8 for the shares of
Activision common stock issuable with respect to options under the Expert stock
options plans and will use its commercially reasonable efforts to maintain the
effectiveness of that registration statement for as long as any of the options
remain outstanding, to the same extent as Activision maintains the effectiveness
of its existing Forms S-8.
ACTIVISION EMPLOYMENT AGREEMENTS. Activision has entered into employment
agreements with the following executive officers and/or directors of Expert:
Kenneth Currier, Susan Currier, Anne Aitken, Tim Leary, David Turner and
Katherine Brunn.
The employment agreements commit Kenneth Currier and Susan Currier to
employment terms of two years commencing on the date of completion of the
Merger, and Activision has the right to extend each such term for three
additional consecutive one-year periods. Each of the Curriers will receive a
base annual salary of $200,000, subject to annual increases in the event
Activision exercises its option to extend the term of the employment agreements.
On the commencement date of employment, each of the Curriers will receive
options to purchase 80,000 shares of Activision's common stock which options
will vest as to one-fifth on each of the first five anniversaries of the date of
grant.
The employment agreements of Anne Aitken, Tim Leary, David Turner and
Katherine Brunn commit such employees to employment terms of one year, each term
commencing on the date of completion of the Merger, and Activision has the right
to extend each such term for two additional consecutive one-year periods. Each
employee will receive a base annual salary and annual increases in the event
Activision exercises its option to extend the term of any or all of the
employment agreements. On the commencement date of employment, each such
employee will receive options to purchase 30,000 shares of Activision's common
stock which options will vest as to one-fifth on each of the first five
anniversaries of the date of grant.
INDEMNIFICATION. Expert is a Delaware corporation. Section 102(b)(7) of the
DGCL enables a corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability of a director to
the corporation or its stockholders for monetary damages for violations of the
director's fiduciary duty, except (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions) or (iv) for any transactions from which a director derived an
improper personal benefit. Expert's Restated Certificate of Incorporation
contains provisions eliminating the liability of directors to the extent
permitted by Section 102(b)(7) of the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any such
person serving in any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the
20
corporation to procure a judgment in its favor, against expenses actually and
reasonably incurred in connection with the defense or settlement of such action
or suit if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or such other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper. Expert's Restated Certificate of Incorporation provides for
indemnification of each of Expert's directors to the full extent permitted by
the DGCL. Expert's Amended and Restated By-Laws provide that each of Expert's
directors and officers and, at the discretion of Expert's Board of Directors,
non-director and non-officer employees of Expert shall be indemnified to the
full extent permitted by the DGCL.
From and after the Effective Time, pursuant to the Merger Agreement, the
Surviving Corporation will, to the fullest extent permitted under applicable law
or under the Surviving Corporation's Certificate of Incorporation or By-Laws,
indemnify and hold harmless, each present and former director, officer or
employee of Expert or any of its subsidiaries against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, (i) arising out of or pertaining to the transactions contemplated
by the Merger Agreement or (ii) otherwise with respect to any acts or omissions
occurring at or prior to the Effective Time, to the same extent as provided in
Expert's Restated Certificate of Incorporation or Amended and Restated By-Laws
or any applicable contract or agreement, in each case for a period of six (6)
years after the Effective Time.
In addition, Activision will, until the sixth anniversary of the Effective
Time, cause to be maintained in effect, to the extent available, the policies of
directors' and officers' liability insurance maintained by Expert and its
subsidiaries (or policies of at least the same coverage and amounts containing
terms that are not less advantageous to the insured parties) with respect to
claims arising from facts that occurred on or prior to the Effective Time,
including without limitation all claims based upon, arising out of, directly or
indirectly resulting from, in consequence of, or in any way involving the Merger
and any and all related events. In lieu of the purchase of such insurance by
Activision, Activision may purchase a six-year extended reporting period
endorsement ("Reporting Tail Coverage") under Expert's existing directors' and
officers' liability insurance coverage, providing that such Reporting Tail
Coverage shall extend the directors' and officers' liability coverage in force
for a period of at least six (6) years from the Effective Time for any claim
based upon, arising out of, directly or indirectly resulting from, in
consequence of, or any way involving wrongful acts or omissions occurring or
prior to the Effective Time, including without limitation all claims based upon,
arising out of, directly or indirectly resulting from, in consequence of, or any
way involving the Merger or any and all related events. Expert has agreed to
cooperate with Activision in obtaining such insurance coverage.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling Expert pursuant to the foregoing provisions,
Expert has been informed that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
MERGER CONSIDERATION
Except for shares of Expert common stock owned by Activision and dissenting
shares, as of the Effective Time, each issued and outstanding share of Expert
common stock shall be converted into the right to receive cash from Activision
in an amount equal to $2.65, the Merger Consideration. Any shares of Expert
common stock owned by Expert and Activision will automatically be canceled at
the Effective Time, will not be converted into the right to receive the Merger
Consideration and will cease to exist.
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EFFECTIVE TIME
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or upon such other
date as is specified in the Certificate of Merger in accordance with the DGCL
and as Activision and Expert shall agree. Subject to certain limitations, the
Merger Agreement may be terminated by either party if, among other reasons, the
Merger has not been consummated on or before August 31, 1999.
CONVERSION OF MERGER SUB COMMON STOCK
In the Merger, the shares of capital stock of Merger Sub issued and
outstanding immediately prior to the Effective Time will become the shares of
the Surviving Corporation.
CONVERSION OF EXPERT COMMON STOCK; PROCEDURES FOR EXCHANGE OF CERTIFICATES
At the Effective Time, shares of Expert common stock (other than shares of
Expert common stock held by stockholders who properly demand their appraisal
rights pursuant to Section 262 of the DGCL, shares held in Expert's treasury and
shares owned by Activision) will be converted into the right to receive the
Merger Consideration.
As soon as practicable following the Effective Time, Continental Stock
Transfer & Trust Company, or such other bank or trust company as shall be
reasonably acceptable to Expert (the "Exchange Agent"), will send a letter of
transmittal to each holder of Expert common stock. The letter of transmittal
will contain instructions with respect to the surrender of certificates
representing shares of Expert common stock or fractions thereof in exchange for
cash.
STOCKHOLDERS OF EXPERT SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, each Expert stockholder
(other than stockholders who perfect their appraisal rights and other than
Activision) of an outstanding certificate or certificates at such time which
prior thereto represented shares of Expert common stock will, upon surrender to
the Exchange Agent of such certificate or certificates and acceptance thereof by
the Exchange Agent, be entitled to receive the Merger Consideration. The
Exchange Agent will accept such certificates upon compliance with such
reasonable terms and conditions as the Exchange Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices. After the
Effective Time, there will be no further transfer on the records of Expert or
its transfer agent of certificates representing shares of Expert common stock
which have been converted, in whole or in part, pursuant to the Merger Agreement
into the right to receive cash, and if such certificates are presented to Expert
for transfer, they will be canceled against delivery of cash. Until surrendered
as contemplated by the Merger Agreement, each certificate for shares of Expert
common stock will be deemed at any time after the Effective Time to represent
only the right to receive, upon such surrender, the Merger Consideration. No
interest will be paid or will accrue on any cash payable to stockholders as
consideration in the Merger.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the principal federal income tax
consequences of the Merger to Expert's United States stockholders whose shares
of Expert common stock are surrendered pursuant to the Merger (including any
cash amounts received by dissenting stockholders pursuant to the exercise of
appraisal rights). This discussion does not address all of the aspects of
federal income taxation that may be relevant to certain investors in light of
their particular investment or other circumstances. In addition, it does not
discuss any state, local, or foreign income or other tax consequences.
This summary is based upon the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury Regulations and administrative and
judicial interpretations thereof, all as in effect
22
on the date of this Proxy Statement and all of which are subject to change or
differing interpretation, possibly with retroactive effect. The discussion below
deals only with shares of Expert common stock held as capital assets (generally,
for investment), and does not address holders of Expert common stock that may be
subject to special rules, including, without limitation, certain U.S.
expatriates, financial institutions, insurance companies, tax-exempt entities,
dealers in securities, traders in securities that elect mark-to-market
accounting treatment, foreign corporations or entities or persons who are not
citizens or residents of the United States, and persons who hold shares of
Expert common stock as part of a straddle, hedge, conversion, or other
integrated transaction. The discussion also may not apply to shares of Expert
common stock received pursuant to the exercise of employee stock options or
otherwise as compensation. Because individual circumstances may differ, each
stockholder is urged to consult such stockholder's own tax advisor to determine
the applicability of the rules discussed below to such stockholder and the
particular tax effects of the Merger, including the application and effect of
state, local and other tax laws.
The receipt of cash pursuant to the Merger (including any cash amounts
received by dissenting stockholders pursuant to the exercise of appraisal
rights) will be a taxable transaction for federal income tax purposes under the
Code and also may be a taxable transaction under applicable state, local and
other income tax laws. In general, for federal income tax purposes, a
stockholder will recognize gain or loss equal to the difference between the cash
received by the stockholder pursuant to the Merger and the stockholder's
adjusted tax basis in the shares of Expert common stock surrendered pursuant to
the Merger. Such gain or loss will be capital gain or loss and will be long-term
gain or loss if, at the Effective Time of the Merger, the shares of Expert
common stock were held for more than one year. The Code imposes limits on the
deductibility of capital losses.
Payments in connection with the Merger may be subject to "backup
withholding" at a 31% rate. Backup withholding generally applies if the
stockholder fails to furnish such stockholder's social security number or other
taxpayer identification number ("TIN"), or furnishes an incorrect TIN. Backup
withholding is not an additional tax but merely an advance payment, which may be
refunded to the extent it results in an overpayment of tax. Certain persons
generally are exempt from backup withholding, including corporations and
financial institutions. Certain penalties apply for failure to furnish correct
information and for failure to include the reportable payments in income.
Stockholders should consult with their own tax advisors as to the qualifications
for exemption from withholding and procedures for obtaining such exemption.
ANTICIPATED ACCOUNTING TREATMENT
It is expected that the Merger will be accounted for in accordance with the
principles of purchase accounting.
GOVERNMENTAL AND REGULATORY MATTERS
Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, Activision and Expert provided certain information and materials to the
Antitrust Division of the Department of Justice and the Federal Trade
Commission. On April 2, 1999, the Federal Trade Commission provided notice that
the required waiting period that follows the submission of such information and
materials had been terminated as of that date.
Neither Activision nor Expert is aware of any other material governmental or
regulatory approval required for completion of the Merger, other than compliance
with applicable Delaware laws.
NASDAQ DELISTING
Immediately following the completion of the Merger, Expert will no longer
meet the requirements of a public company and its shares of common stock will no
longer be traded on the Nasdaq National Market.
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MERGER FINANCING
Activision has made a representation and warranty in the Merger Agreement
that it has, and will have at the Effective Time, bank facilities in place that,
either alone or with cash presently available to it, will provide sufficient
funds to consummate the Merger in accordance with the terms of the Merger
Agreement and to consummate the other transactions contemplated by the Merger
Agreement. Activision has made a further representation and warranty in the
Merger Agreement that its bank facilities permit it to borrow money under such
facilities and use such funds to consummate the Merger and the other
transactions contemplated by the Merger Agreement.
THE MERGER AGREEMENT
The following is a brief summary of material provisions of the Merger
Agreement which is attached as Annex I to this Proxy Statement. The summary does
not purport to be complete and is qualified in its entirety by reference to the
complete text of the Merger Agreement, which is incorporated herein by
reference.
THE MERGER
The Merger Agreement provides that, following the satisfaction or waiver of
the conditions described below under "--Conditions to the Merger," upon the
filing of the Certificate of Merger with the Delaware Secretary of State and in
accordance with Delaware law, at the Effective Time, Merger Sub shall be merged
with and into Expert with Expert continuing as the Surviving Corporation and as
a wholly-owned subsidiary of Activision. Under Section 251 of the DGCL, the
approval of the Board of Directors of Expert and the affirmative vote of the
holders of majority of the outstanding shares of Expert common stock are
required to adopt the Merger Agreement and the transactions contemplated
thereby. As of the Effective Time, each outstanding share of Expert common stock
(other than shares of Expert common stock held by stockholders who properly
demand their appraisal rights pursuant to Section 262 of the DGCL, shares held
in Expert's treasury and shares owned by Activision) shall be converted into the
right to receive the Merger Consideration.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties of Expert (which representations and warranties will not survive
consummation of the Merger) relating to, among other things:
- Expert's due organization, corporate power, good standing and similar
corporate matters;
- Expert's capital structure;
- authorization, execution, delivery and enforceability of the Merger
Agreement and the absence of any conflicts with Expert's charter or
governmental filing requirements;
- Expert's financial statements and documents filed by Expert with the SEC
and the accuracy of information contained therein;
- the absence of certain adverse changes or events since December 31, 1998;
- the absence of undisclosed liabilities of Expert;
- receipt by Expert of a fairness opinion from its financial advisor
regarding the transactions contemplated by the Merger Agreement;
- brokers' and financial advisors' fees; and
24
- the inapplicability to the Merger of the Shareholder Rights Agreement,
dated as of November 9, 1995 (and as amended from time to time), by and
between Expert and BankBoston, N.A. (as successor to The First National
Bank of Boston) and the absence of any other "poison pill."
The Merger Agreement contains various customary representations and
warranties of Activision (which representations and warranties will not survive
consummation of the Merger) relating to, among other things:
- Activision's due organization, corporate power, good standing and similar
corporate matters;
- Activision's capital structure;
- authorization, execution, delivery and enforceability of the Merger
Agreement and the absence of any conflicts with Activision's charter or
governmental filing requirements;
- Activision's financial statements and documents filed by Activision with
the SEC and the accuracy of information contained therein;
- the absence of certain adverse changes or events since December 31, 1998;
- the absence of undisclosed liabilities of Activision;
- the availability of bank facilities that, either alone or with cash
presently possessed by Activision, will provide sufficient funds to
consummate the Merger in accordance with the terms of the Merger
Agreement; and
- the absence of any required vote by Activision's stockholders to approve
the Merger.
CONDITIONS TO THE MERGER
The Merger Agreement provides that the respective obligations of Activision
and Expert to effect the Merger are subject to the satisfaction or waiver of the
following conditions on or prior to the date on which the closing of the Merger
occurs (the "Closing Date"):
- The Merger Agreement shall have been adopted and approved by the
affirmative vote of Expert's stockholders required under the laws of the
State of Delaware.
- There shall not be any temporary restraining order, judgment, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction, or other legal restraint or prohibition preventing the
consummation of the Merger.
- The waiting period applicable to the Merger under the Hart-Scott-Rodino
Act must have expired or terminated.
Expert's obligations to complete the Merger and the other transactions
contemplated by the Merger Agreement are subject to the satisfaction or waiver
of each of the following additional conditions before the Closing Date:
- Activision's representations and warranties must be true and correct as of
April 19, 1999 and as of the Closing Date as if made on the Closing Date
except to the extent that the cumulative effect of all inaccuracies of
these representations and breaches of these warranties does not have a
"Material Adverse Effect" (as defined in the next sentence) on Activision.
A "Material Adverse Effect" is any change, event or effect that
individually or in the aggregate has had, or is reasonably likely to have,
a material adverse effect on the business, assets (including intangible
assets), results of operations or financial condition of Activision and
its subsidiaries, taken as a whole.
- Activision must perform or comply in all material respects with all of its
agreements and covenants required by the Merger Agreement.
25
- Since December 31, 1998, no change, circumstance or event shall have
occurred that has had or could be reasonably likely to have a Material
Adverse Effect on Activision. For the purposes of this condition, (i) a
change in the market price of Activision's common stock, (ii) a report of
quarterly or fiscal year earnings for any period that are lower than the
comparable previous period or lower than analysts' expectations (provided
that this clause (ii) shall not be applicable with respect to a fiscal
quarter if Activision reports a net loss for such fiscal quarter in excess
of $.05 per share on a fully diluted basis), or (iii) the consummation by
Activision or its affiliates of an acquisition, disposition, financing or
similar transaction approved by Activision's Board of Directors, in each
case in and of itself, shall not be deemed to have a Material Adverse
Effect on Activision.
Activision's obligations to complete the Merger and the other transactions
contemplated by the Merger Agreement are subject to the satisfaction or waiver
of each of the following additional conditions before completion of the Merger:
- Expert's representations and warranties must be true and correct as of
April 19, 1999 and as of the Closing Date as if made on the Closing Date
except to the extent that the cumulative effect of all inaccuracies of
these representations and breaches of these warranties does not have a
"Material Adverse Effect" (as defined in the next sentence) on Expert. A
"Material Adverse Effect" is any change, event or effect that individually
or in the aggregate has had, or is reasonably likely to have, a material
adverse effect on the business, assets (including intangible assets),
results of operations or financial condition of Activision and its
subsidiaries, taken as a whole; provided, however, that neither (i)
changes in conditions generally affecting the industry in which Expert
operates nor (ii) a general drop in stock prices in the United States
resulting from political or economic turmoil shall be deemed, either by
themselves or in combination, to be a Material Adverse Effect on Expert.
- Expert must perform or comply in all material respects with all of its
agreements and covenants required by the Merger Agreement.
- Since December 31, 1998, no change, circumstance or event shall have
occurred that has had or could be reasonably likely to have a Material
Adverse Effect on Expert.
- Expert's Amended and Restated Stockholders' Agreement, dated October 31,
1995, by and among certain Expert stockholders must be amended to provide
that it shall terminate upon the consummation of the Merger.
- As of the Closing Date, Kenneth Currier and Susan Currier must be employed
by Expert and their respective employment agreements with Activision,
described in "The Merger--Interests of Certain Persons in the Merger,"
must be in full force and effect.
- Holders of no more than 5% of the issued and outstanding shares of Expert
common stock shall have demanded an appraisal of their shares under
Section 262 of the DGCL.
NO SOLICITATION; ACQUISITION PROPOSALS
Except as described below, until the Merger is completed or the Merger
Agreement is terminated, neither Expert nor any of its subsidiaries will, and
each will use its best efforts to cause its respective officers, directors,
employees, controlling stockholders, agents or representatives (including,
without limitation, any investment banker, attorney or accountant retained by
it) not to, directly or indirectly, (i) take any action to solicit, initiate,
encourage or facilitate any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of the
assets or any equity securities of, Expert or any of its subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal") or
(ii) engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
26
implement an Acquisition Proposal. Expert has agreed to notify Activision
promptly if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated with Expert.
Notwithstanding the foregoing paragraph, Expert's Board of Directors may (i)
furnish information to or enter into discussions or negotiations with, any
person or entity that makes an unsolicited bona fide proposal to acquire Expert
pursuant to a merger, consolidation, share exchange, purchase of a substantial
portion of the assets or stock, business combination or other similar
transaction, if, and only to the extent that, (A) Expert's Board of Directors
determines in good faith that such action is required for it to comply with its
fiduciary duties to stockholders under applicable law as advised by outside
legal counsel to Expert, (B) prior to furnishing such information to, or
entering into discussions or negotiations with, such person or entity, Expert
provides written notice to Activision to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such person
or entity, and (C) subject to any confidentiality agreement with such person or
entity (which Expert's Board of Directors determined in good faith was required
to be executed in order for Expert's Board of Directors to comply with its
fiduciary duties to stockholders imposed by law as advised by outside legal
counsel to Expert), Expert keeps Activision informed of the status (not the
terms) of any such discussions or negotiations; and (ii) to the extent
applicable, comply with Rules 14d-9 and 14e-2 promulgated under the Exchange Act
with regard to an Acquisition Proposal.
In addition, Expert's Board of Directors of Expert may (i) withdraw or
modify in a material and negative respect its approval or recommendation of the
Merger Agreement in a manner adverse to Activision or (ii) approve or recommend
or enter into an agreement with respect to an Acquisition Proposal if, in each
such case, (A) an Acquisition Proposal is publicly proposed, publicly disclosed
or communicated to Expert and (B) Expert's Board of Directors determines in good
faith, based on the advice of its outside legal counsel, that such action is
required in order to comply with its fiduciary duties to the stockholders of
Expert.
TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated and abandoned at any time prior to
the Effective Time, whether before or after adoption of the Merger Agreement by
Expert's stockholders, by the mutual written consent of the Activision and
Expert.
In addition, either Expert or Activision may unilaterally terminate the
Merger Agreement at any time prior to the Effective Time, whether before or
after adoption of the Merger Agreement by Expert's stockholders, if any of the
following occurs:
- if the conditions to completion of the Merger would not be satisfied
because of a material breach of the Merger Agreement by the other party or
a representation or warranty of the other party in the Merger Agreement
becomes untrue, either of which cannot be cured through reasonable
efforts;
- if the Merger is not completed by August 31, 1999;
- if a final court order prohibiting the Merger is issued and is not
appealable;
- if Expert's stockholders do not adopt the Merger Agreement at the Special
Meeting;
- if either Expert or Activision becomes insolvent or seeks protection under
any bankruptcy proceeding;
- if the other party suffers a material adverse effect on its business,
assets (including intangible assets), financial condition or results of
operations taken as a whole; or
- if an Acquisition Proposal is publicly proposed, publicly disclosed or
communicated to Expert and Expert's Board of Directors, after determining
that such action is required in order to comply with
27
its fiduciary duties to Expert's stockholders, either (i) withdraws or
modifies in a material and negative respect its approval or recommendation
of the Merger Agreement or the Merger or (ii) approves or recommends or
enters into an agreement with respect to such Acquisition Proposal.
Finally, Activision may unilaterally terminate the Merger Agreement at any
time prior to the Effective Time, whether before or after adoption of the Merger
Agreement by Expert's stockholders, if Expert's Board of Directors fails to
recommend that Expert's stockholders adopt the Merger Agreement or withdraws,
modifies or amends in any negative respect its approval or recommendation of the
Merger or resolves to do any of the foregoing, unless such failure, withdrawal,
modification or amendment results from Activision's or Merger Sub's breach of
any of their respective obligations under the Merger Agreement.
TERMINATION FEES
Expert has agreed to pay Activision a termination fee of $1,100,000 if the
Merger Agreement is terminated in any of the following circumstances:
- either Expert or Activision terminates the Merger Agreement after an
Acquisition Proposal is commenced, publicly proposed, publicly disclosed
or communicated to Expert and Expert's Board of Directors, after
determining that such action is required in order to comply with its
fiduciary duties to Expert's stockholders, either (i) withdraws or
modifies in a material and negative respect its approval or recommendation
of the Merger Agreement or the Merger or (ii) approves or recommends or
enters into an agreement with respect to such Acquisition Proposal;
- Activision terminates the Merger Agreement after Expert's Board of
Directors fails to recommend that Expert's stockholders adopt the Merger
Agreement or withdraws, modifies or amends in any negative respect its
approval or recommendation of the Merger or resolves to do any of the
foregoing, unless such failure, withdrawal, modification or amendment
results from Activision's or Merger Sub's breach of any of their
respective obligations under the Merger Agreement; or
- either Expert or Activision terminates the Merger Agreement because
Expert's stockholders do not adopt the Merger Agreement and, at the time
of such termination, there exists a proposal from another party to acquire
Expert that is accepted, publicly announced or documented in a letter of
intent or binding agreement within 12 months of such termination.
In the event the termination fee is payable pursuant to the first or second
occurrence described above, Expert must make such payment with ten (10) days
after the date of termination of the Merger Agreement. In the event the
termination fee is payable pursuant to the third occurrence described above,
Expert must make such payment within ten (10) days of acceptance, public
announcement, or the entering into of a letter of intent or binding agreement
with respect to such Acquisition Proposal. Expert's payment of the termination
fee is the sole and exclusive remedy of Activision against Expert and any of
Expert's subsidiaries and their respective directors, officers, employees,
agents, advisors or other representatives with respect to the occurrences giving
rise to such payment.
CONDUCT OF EXPERT'S BUSINESS UNTIL THE EFFECTIVE TIME
Expert has agreed that, until the completion of the Merger or unless
Activision consents in writing, Expert will:
- preserve intact its current business organization and goodwill;
- confer on a regular basis with Activision to report on material
operational matters relating to its business; and
- notify Activision of any material emergency or material change in its
business
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Expert also agreed that, until the completion of the Merger or unless
Activision consents, Expert and its subsidiaries would conduct their respective
businesses in compliance with specific restrictions relating to the following:
- the issuance and redemption of securities;
- the issuance of dividends or other distributions;
- modification of Expert's Restated Certificate of Incorporation and Amended
and Restated By-laws;
- payment of claims, liabilities or obligations;
- the incurrence of indebtedness
- entrance into or modification of contracts;
- employees and employee benefits; and
- preparation and filing of tax returns and tax elections.
THE PROVISIONS IN THE MERGER AGREEMENT RELATED TO THE CONDUCT OF EXPERT'S
BUSINESS ARE COMPLICATED AND NOT EASILY SUMMARIZED. ACCORDINGLY, YOU ARE URGED
TO CAREFULLY READ ARTICLE VI, SECTION 6.1 OF THE MERGER AGREEMENT ENTITLED
"CONDUCT OF BUSINESSES."
AMENDMENTS; EXTENSIONS; WAIVERS
The Merger Agreement may be amended by the parties at any time before or
after any required approval of matters presented in connection with the Merger
by Expert's stockholders; provided, however, that after any such approval, there
shall be made no amendment that by law requires further approval by such
stockholders without the further approval of such stockholders. The Merger
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties.
At any time prior to the Effective Time, each party to the Merger Agreement
may, to the extent legally allowed, (i) extend the time for the performance of
any of the obligations or other acts of the other parties to the Merger
Agreement, (ii) waive any inaccuracies in the representations and warranties
made to such party contained in the Merger Agreement or in any document
delivered pursuant thereto and (c) waive compliance with any of the agreements
or conditions for the benefit of such party contained in the Merger Agreement.
Any agreement on the part of a party to the Merger Agreement to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
29
THE COMPANIES
EXPERT SOFTWARE
GENERAL. Expert is a leading publisher of high-quality, value-priced
consumer software that addresses a broad range of consumer interests and
everyday tasks. Expert currently sells over 170 products in the productivity,
lifestyle, small office/home office, entertainment and education market
categories. Expert promotes the Expert brand name in order to generate customer
loyalty, encourage repeat purchases and differentiate the Expert products to
retailers and consumers. Expert targets the growing audience of home PC users
who value fully-featured and easy-to-use software. Expert brand products sell
primarily for under $15, a price point intended to generate impulse purchases in
mass market environments.
Expert seeks to develop a broad line of products in categories in which a
leading market share can be attained. Expert also creates product franchises by
upgrading successful products and developing product line extensions and
complementary products. Expert's titles are primarily available on the Windows
operating system, and substantially all are available on CD-ROM. Over 29.3
million units of Expert products have been sold since 1989, with more than 5.4
million units sold in 1998 and more than 5.6 million units sold in 1997. Expert
products are currently available at retailers such as Babbages Etc., Best Buy,
CompUSA, Electronics Boutique, K Mart, Microcenter, Office Depot, OfficeMax,
PriceCostco, Sam's Club, Staples and Walmart. Expert products are also available
at Expert's on-line store site on the World Wide Web.
Expert's principal executive offices are located at 802 Douglas Road, North
Tower, Suite 600, Coral Gables, Florida 33134-3160, and its telephone number is
(305) 567-9990. Expert's World Wide Web home page is located at
http://www.expertsoftware.com.
RECENT DEVELOPMENTS. Expert has established a multi-phase Year 2000
compliance program designed to (1) identify information technology ("IT") and
non-information technology ("non-IT") systems that may fail at the turn of the
century; (2) upgrade or replace non-compliant systems, and (3) evaluate the Year
2000 readiness of key customers, suppliers, and service providers. Expert
estimates that it is approximately 80% complete with regard to Year 2000
remediation. Under Phase I, Expert has identified IT and non-IT systems that may
fail at the turn of the century. Expert's primary computer system and its phone
switching system were identified as the most critical systems for upgrading to
be Year 2000 compliant. Under Phase II, Expert recently converted to a Year 2000
compliant version of the same application software it has been using since 1995.
Upgraded hardware and software will be installed on the phone switch during 1999
to make it Year 2000 compliant. In Phase III, Expert is soliciting input from
its key customers, suppliers, and service providers regarding their Year 2000
status.
On February 26, 1999, Expert signed a one year renewable software
distribution agreement with Sega Europe, Ltd., the Sega Entertainment affiliate
in the United Kingdom, which permits Expert to market and distribute Sega UK
titles in the United Kingdom and Ireland.
ACTIVISION
Activision is a leading international publisher, developer and distributor
of interactive entertainment and leisure products. Activision's products span a
wide range of genres and target markets. Activision currently focuses its
development, publishing and distribution efforts on products designed for PCS,
the Sony PlayStation console system and the Nintendo 64 console system. In
selecting titles for development and publishing, Activision focuses on titles
that are, or have the potential to become, franchise properties with substantial
consumer appeal and brand recognition.
Activision's principal executive offices are located at 3100 Ocean Park
Boulevard, Santa Monica, California 90405, and its telephone number is (310)
255-2000. Activision's World Wide Web home page is located at
http://www.activision.com.
30
UNAUDITED PER SHARE INFORMATION
Summarized below is per share information for Expert for the fiscal year
ended December 31, 1998 and for the quarter ended March 31, 1999:
MARCH 31, 1999 DECEMBER 31, 1998
--------------- -----------------
Net income (loss) per common share........................ $ (.04) $ (1.12)
Cash dividends declared per common share.................. None None
Book value per common share............................... $ 0.50 $ 0.54
PER SHARE MARKET PRICE DATA
Expert common stock is traded on the Nasdaq National Market under the symbol
"XPRT." On March 3, 1999, the business day preceding public announcement that
Activision and Expert had entered into the Merger Agreement, the closing price
per share of Expert common stock as reported on the Nasdaq National Market was
$1.938. On April 21, 1999, the business day preceding public announcement that
Activision had elected to pay the Merger Consideration all in cash, the closing
price per share of Expert common stock as reported on the Nasdaq National Market
was $1.969.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the beneficial ownership of Expert common stock
by certain beneficial owners and management is incorporated by reference to Item
12 of Expert's Annual Report on Form 10-K for the fiscal year ended December 31,
1998, which was filed with the SEC on March 30, 1999.
APPRAISAL RIGHTS
If the Merger is consummated, Expert's stockholders who make the demand
described below with respect to their shares of Expert common stock, who
continuously are the record holders of such shares through the Effective Time,
who otherwise comply with the statutory requirements of Section 262 of DGCL
("Section 262") (a copy of which is attached as Annex III) and who neither vote
in favor of the Merger Agreement nor consent thereto in writing will be entitled
to an appraisal by the Delaware Court of Chancery (the "Delaware Court") of the
fair value of their shares of Expert common stock. Except as set forth herein,
Expert's stockholders will not be entitled to appraisal rights in connection
with the Merger.
An Expert stockholder wishing to exercise rights of appraisal must, before
the taking of the vote on the Merger Agreement and the Merger at the Special
Meeting, deliver to Expert a written demand for appraisal of such stockholder's
shares. A demand for appraisal will be sufficient if it reasonably informs
Expert of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his or her shares of Expert common stock.
Merely voting against or not voting for the Merger Agreement and the Merger will
not constitute a demand for appraisal within the meaning of Section 262.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote in favor of the Merger Agreement and the Merger. Voting for
adoption of the Merger Agreement and the Merger, or delivering a proxy signed
and left blank in connection with the Special Meeting (unless the proxy is
marked to vote against, or is marked to abstain from voting on, the Merger
Agreement and the Merger), will constitute a waiver of a stockholder's right of
appraisal and will nullify any written demand for appraisal submitted by the
stockholder. Stockholders who fail to vote against the adoption of the Merger
Agreement and the approval of the Merger will not thereby waive their appraisal
rights.
Within ten (10) days after the Effective Time, the Surviving Corporation is
required to, and will, notify each stockholder who has satisfied the foregoing
conditions on the Effective Date. Within 120 days after the Effective Time,
either the Surviving Corporation or any stockholder who has complied with the
required conditions of Section 262 may file a petition in the Delaware Court,
with a copy served on the
31
Surviving Corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of Expert common stock
of all dissenting stockholders. There is no present intent on the part of the
Surviving Corporation to file an appraisal petition and stockholders seeking to
exercise appraisal rights should not assume that the Surviving Corporation will
file such a petition or that the Surviving Corporation will initiate any
negotiations with respect to the fair value of such shares. Accordingly,
stockholders who desire to have their shares appraised should initiate any
petitions necessary for the perfection of their appraisal rights within the time
periods and in the manner prescribed in Section 262. Within 120 days after the
Effective Time, any stockholder who has theretofore complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the Surviving Corporation a statement setting forth the aggregate number of
shares of Expert common stock not voting in favor of the Merger Agreement and
with respect to which demands for appraisal were received by Expert and the
number of holders of such shares. Such statement must be mailed within ten (10)
days after the written request therefor has been received by the Surviving
Corporation.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders have complied
with the provisions of Section 262 and are entitled to appraisal rights. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the shares of Expert common stock, determining the fair value of such
shares exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. In determining fair value,
the Delaware Court is to take into account all relevant factors. In WEINBERGER
V. UOP INC., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered, and that "fair price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
stated that in making this determination of fair value the court must consider
market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which could be ascertained as of the date of the
merger which throw light on future prospects of the merged corporation. In
WEINBERGER, the Delaware Supreme Court stated that "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." Section 262, however, provides that fair value is to be "exclusive
of any element of value arising from the accomplishment or expectation of the
merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares determined under Section 262 could be more than, the same
as or less than the consideration they are entitled to receive pursuant to the
Merger Agreement if they do not seek appraisal of their shares. The cost of the
appraisal proceeding may be determined by the Delaware Court and taxed against
the parties as the Delaware Court deems equitable in the circumstances. Upon
application of a dissenting stockholder, the Delaware Court may order that all
or a portion of the expenses incurred by any dissenting stockholder in
connection with the appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, be charged pro
rata against the value of all shares of stock entitled to appraisal.
At any time within sixty (60) days after the Effective Time, any stockholder
will have the right to withdraw such demand for appraisal and to accept the
terms offered in the Merger; after this period, the stockholder may withdraw
such demand for appraisal only with the consent of the Surviving Corporation. If
no petition for appraisal is filed with the Delaware Court within 120 days after
the Effective Time, stockholders' rights to appraisal shall cease, and all
holders of shares of Expert common stock will be
32
entitled to receive the consideration offered pursuant to the Merger Agreement.
Inasmuch as Expert has no obligation to file such a petition, and the Surviving
Corporation has no present intention to do so, any holder of shares of Expert
common stock who desires such a petition to be filed is advised to file it on a
timely basis. Any stockholder may withdraw such stockholder's demand for
appraisal by delivering to Expert a written withdrawal of his or her demand for
appraisal and acceptance of the Merger, except (i) that any such attempt to
withdraw made more than sixty (60) days after the Effective Time will require
written approval of the Surviving Corporation, and (ii) that no appraisal
proceeding in the Delaware Court shall be dismissed as to any stockholder
without the approval of the Delaware Court, and such approval may be conditioned
upon such terms as the Delaware Court deems just.
THE FOREGOING IS ONLY A SUMMARY OF SECTION 262, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PROVISIONS THEREOF, THE FULL TEXT OF WHICH IS SET
FORTH AS ANNEX III TO THIS PROXY STATEMENT. EACH STOCKHOLDER IS URGED TO READ
CAREFULLY THE FULL TEXT OF SECTION 262.
INDEPENDENT PUBLIC ACCOUNTANTS
Grant Thornton LLP, independent auditors, have audited the consolidated
financial statements of Expert included in their Annual Report on Form 10-K for
the year ended December 31, 1998, a copy of which is being delivered with and is
incorporated by reference into this Proxy Statement.
Representatives of Grant Thornton LLP are expected to be present at the
Special Meeting, where they will have the opportunity to make a statement if
they desire to do so and will be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
If Expert's stockholders do not approve and adopt the Merger Agreement and
the Merger, or if the Merger is not consummated for any other reason, any
stockholder proposals submitted pursuant to Exchange Act Rule 14a-8 and intended
to be presented at Expert's 1999 Annual Meeting of Stockholders must have been
received by Expert on or before January 30, 1999 to be eligible for inclusion in
the proxy statement and form of proxy to be distributed by Expert's Board of
Directors in connection with such meeting. Stockholder proposals intended to be
presented at Expert's 1999 Annual Meeting of Stockholders that are not submitted
pursuant to Exchange Act Rule 14a-8 must have been received by Expert on or
after January 22, 1999, but no later than March 12, 1999.
Stockholder proposals should have been mailed to: Secretary, Expert
Software, Inc., 802 Douglas Road, North Tower, Suite 600, Coral Gables, Florida
33134-3160 or 800 Douglas Road, North Tower, Sixth Floor, Coral Gables, Florida
33134.
OTHER MATTERS
Management of Expert knows of no other matters that may properly be, or
which are likely to be, brought before the Special Meeting. However, if any
other matters are properly brought before the Special Meeting, the persons named
in the enclosed Proxy or their substitutes will vote the Proxies in accordance
with their judgment with respect to such matters.
AVAILABLE INFORMATION
Expert is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the SEC. Such reports, proxy statements and other information are available for
inspection and copying at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC, located at
33
Suite 1300, 7 World Trade Center, New York, New York 10048 and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies
of such materials can also be obtained by mail from the Public Reference Section
of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. In addition, such materials may be accessed on
the World Wide Web via the SEC's EDGAR database at its website
(http://www.sec.gov).
All information contained in this Proxy Statement concerning Activision and
its affiliates has been supplied by Activision and has not been independently
verified by Expert. Except as otherwise indicated, all other information
contained in this Proxy Statement has been supplied by Expert. No person is
authorized to give any information or to make any representations, other than as
contained in this Proxy Statement, in connection with the Merger Agreement or
the Merger, and, if given or made, such information or representations may not
be relied upon as having been authorized by Expert or Activision.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
This Proxy Statement incorporates by reference documents which are not
presented herein or delivered herewith. Copies of any such documents relating to
Expert, other than exhibits to such documents (unless such exhibits specifically
are incorporated by reference in such documents), are available without charge,
upon written or oral request, from Expert Software, Inc., 802 Douglas Road,
North Tower, Suite 600, Coral Gables, Florida 33134-3160, Attention: David L.
Chiras, Esq., telephone: (305) 567-9990. In order to ensure timely delivery of
the documents requested, any such request should be made by June 7, 1999. Upon
receipt of such request, Expert will mail (via first class mail) the requested
document within one business day of receipt of such request.
The following documents previously filed by Expert (File No. 0-25646) with
the SEC are incorporated in this Proxy Statement by reference:
(1) Expert's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
(2) Expert's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1999.
(3) Expert's Current Report on Form 8-K, dated January 15, 1999.
(4) Expert's Current Report on Form 8-K, dated March 3, 1999.
(5) Expert's Current Report on Form 8-K, dated April 19, 1999.
(6) All other reports filed by Expert pursuant to Section 13(a) or 15(d)
of the Exchange Act since December 31, 1998.
All documents filed by Expert pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act after the date hereof and prior to the date of the Special
Meeting on June 21, 1999, and any adjournment or postponement thereof shall be
deemed to be incorporated by reference herein and to be a part hereof from the
date of filing of such documents.
The information contained in this Proxy Statement should be read together
with the information in the documents incorporated by reference herein. Expert's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 is
attached hereto as Annex IV and Expert's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 1999 is attached hereto as Annex V.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed to
be incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
BY ORDER OF THE BOARD OF DIRECTORS
KENNETH P. CURRIER
Chief Executive Officer and Secretary
34
ANNEX I
- - - - - - - --------------------------------------------------------------------------------
- - - - - - - --------------------------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMONG
EXPERT SOFTWARE, INC.,
ACTIVISION, INC.
AND
EXPERT ACQUISITION CORP.
DATED AS OF APRIL 19, 1999
- - - - - - - --------------------------------------------------------------------------------
- - - - - - - --------------------------------------------------------------------------------
I-1
TABLE OF CONTENTS
PAGE
---------
1. THE MERGER............................................................................................... I-5
1.1 The Merger.................................................................................... I-5
1.2 The Closing................................................................................... I-5
1.3 Effective Time................................................................................ I-5
1.4 Certificate of Incorporation; By-Laws......................................................... I-6
1.5 Directors and Officers........................................................................ I-6
1.6 Tax Consequences.............................................................................. I-6
2. CONVERSION OF SHARES..................................................................................... I-6
2.1 Conversion of Merger Subsidiary Shares........................................................ I-6
2.2 Conversion of Expert Shares................................................................... I-6
2.3 Election by Activision to Pay Cash Consideration.............................................. I-7
2.4 Conversion of Expert Employee Stock Options and Warrants...................................... I-8
2.5 Adjustments................................................................................... I-8
2.6 Dissenting Expert Stockholders................................................................ I-9
3. EXCHANGE OF SHARES....................................................................................... I-9
3.1 Exchange of Certificates...................................................................... I-9
4. REPRESENTATIONS AND WARRANTIES OF EXPERT................................................................. I-11
4.1 Organization; Good Standing; Authority; Compliance With Law................................... I-11
4.2 Authorization, Validity and Effect of Agreements.............................................. I-12
4.3 Capitalization................................................................................ I-12
4.4 Subsidiaries.................................................................................. I-13
4.5 Other Interests............................................................................... I-13
4.6 No Violation.................................................................................. I-13
4.7 SEC Documents................................................................................. I-13
4.8 Financial Statements.......................................................................... I-14
4.9 Litigation.................................................................................... I-14
4.10 Absence of Certain Changes.................................................................... I-14
4.11 Taxes......................................................................................... I-16
4.12 Books and Records............................................................................. I-17
4.13 Properties.................................................................................... I-17
4.14 Environmental Matters......................................................................... I-17
4.15 No Brokers.................................................................................... I-18
4.16 Opinion of Financial Advisor.................................................................. I-18
4.17 Related Party Transactions.................................................................... I-18
4.18 Contracts and Commitments..................................................................... I-18
4.19 Employee Matters and Benefit Plans............................................................ I-19
4.20 Intellectual Property......................................................................... I-22
4.21 Anti-Takeover Plan............................................................................ I-24
4.22 Shareholder Vote Required..................................................................... I-25
4.23 Undisclosed Liabilities....................................................................... I-25
4.24 Insurance..................................................................................... I-25
4.25 Tax Treatment................................................................................. I-25
4.26 Relationships with Suppliers, Licensors and Customers......................................... I-25
4.27 Bank Accounts................................................................................. I-25
4.28 Year 2000 Problem............................................................................. I-25
I-2
PAGE
---------
5. REPRESENTATIONS AND WARRANTIES OF ACTIVISION AND
MERGER SUBSIDIARY........................................................................................ I-26
5.1 Organization; Good Standing; Authority; Compliance With Law................................... I-26
5.2 Authorization, Validity and Effect of Agreements.............................................. I-27
5.3 Capitalization................................................................................ I-27
5.4 No Violation.................................................................................. I-27
5.5 Tax Treatment................................................................................. I-28
5.6 SEC Documents................................................................................. I-28
5.7 Financial Statements.......................................................................... I-28
5.8 Litigation.................................................................................... I-29
5.9 Absence of Certain Changes.................................................................... I-29
5.10 Ownership of Expert Shares.................................................................... I-30
5.11 No Brokers.................................................................................... I-30
5.12 Intellectual Property......................................................................... I-30
5.13 Anti-Takeover Matters......................................................................... I-30
5.14 No Shareholder Vote Required.................................................................. I-30
5.15 Undisclosed Liabilities....................................................................... I-30
5.16 Continuity of Business Enterprise............................................................. I-31
5.17 Financing..................................................................................... I-31
6. COVENANTS AND OTHER AGREEMENTS........................................................................... I-31
6.1 Conduct of Businesses......................................................................... I-31
6.2 Meeting of Stockholders....................................................................... I-33
6.3 Filings; Other Action......................................................................... I-33
6.4 Access to Information......................................................................... I-34
6.5 Publicity..................................................................................... I-34
6.6 Listing of Activision Common Stock............................................................ I-35
6.7 Further Action................................................................................ I-35
6.8 Tax Treatment................................................................................. I-35
6.9 Other Offers.................................................................................. I-35
6.10 Notice of Certain Events...................................................................... I-36
6.11 Affiliate Letters............................................................................. I-36
6.12 Termination of Amended and Restated Stockholders' Agreement................................... I-37
6.13 Indemnification and Insurance................................................................. I-37
6.14 Employee Matters.............................................................................. I-38
6.15 Employment Agreements; Non-Competition Agreements............................................. I-38
7. CONDITIONS............................................................................................... I-38
7.1 Conditions to Each Party's Obligation to Effect the Merger.................................... I-38
7.2 Conditions to Obligations of Expert to Effect the Merger...................................... I-39
7.3 Conditions to Obligation of Activision and Merger Subsidiary to Effect the Merger............. I-40
8. TERMINATION.............................................................................................. I-41
8.1 Termination................................................................................... I-41
8.2 Effect of Termination......................................................................... I-42
8.3 Expenses and Termination Fees................................................................. I-42
8.4 Extension; Waiver............................................................................. I-42
I-3
PAGE
---------
9. GENERAL PROVISIONS....................................................................................... I-43
9.1 Nonsurvival of Representations, Warranties and Agreements..................................... I-43
9.2 Notices....................................................................................... I-43
9.3 Assignment; Binding Effect; Benefit........................................................... I-43
9.4 Entire Agreement.............................................................................. I-44
9.5 Confidentiality............................................................................... I-44
9.6 Amendment..................................................................................... I-44
9.7 Governing Law................................................................................. I-44
9.8 Counterparts.................................................................................. I-44
9.9 Headings...................................................................................... I-44
9.10 Waivers....................................................................................... I-44
9.11 Incorporation................................................................................. I-45
9.12 Severability.................................................................................. I-45
9.13 Interpretation and Certain Definitions........................................................ I-45
9.14 Specific Performance.......................................................................... I-45
I-4
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement") is
made and entered into as of April 19, 1999 among Expert Software, Inc., a
Delaware corporation ("Expert"), Activision, Inc., a Delaware corporation
("Activision"), and Expert Acquisition Corp., a Delaware corporation and
wholly-owned subsidiary of Activision ("Merger Subsidiary").
RECITALS
WHEREAS, the respective Boards of Directors of Expert, Activision and Merger
Subsidiary each have determined that a business combination between Expert,
Activision and Merger Subsidiary is fair to and in the best interests of their
respective companies and stockholders and accordingly have approved this
Agreement and agreed to effect the merger provided for herein upon the terms and
subject to the conditions set forth herein;
WHEREAS, Expert, Activision and Merger Subsidiary entered into that certain
Agreement and Plan of Merger dated as of March 3, 1999 (the "Original
Agreement"); and
WHEREAS, the parties desire to amend the outside date set forth in Section
2.3 hereof by which Activision may elect to pay cash consideration to the
holders of shares of Expert common stock and certain other provisions.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree that the Original Agreement is amended and restated
in its entirety as follows:
1. THE MERGER
1.1 THE MERGER. On the terms and subject to the conditions contained in
this Agreement, at the Effective Time (as defined in Section 1.3 hereof), Merger
Subsidiary shall be merged with and into Expert in accordance with this
Agreement and the separate corporate existence of Merger Subsidiary shall
thereupon cease (the "Merger"). Expert shall be the surviving corporation in the
Merger and shall continue under the corporate name "Expert Software, Inc."
(Expert, after the Effective Time, is sometimes hereinafter referred to as the
"Surviving Corporation"). From and after the Effective Time, all the properties,
rights, privileges, powers and franchises both of a public and of a private
nature of Expert and Merger Subsidiary shall vest in the Surviving Corporation
and all debts, liabilities and duties of Expert and Merger Subsidiary shall
become the debts, liabilities and duties of the Surviving Corporation. The
Merger shall have the effects provided in this Agreement and the applicable
provisions of the Delaware General Corporation Law ("DGCL").
1.2 THE CLOSING. On the terms and subject to the conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place at the
offices of Robinson Silverman Pearce Aronsohn & Berman LLP, 1290 Avenue of the
Americas, New York, New York, at 10:00 a.m., local time, on the first business
day immediately following the day on which the last of the conditions set forth
in Article 7 shall be fulfilled or waived in accordance herewith but, unless the
parties otherwise agree, not earlier than May 25, 1999. Unless the parties shall
otherwise agree, the parties shall use their reasonable best efforts to cause
the Closing to occur as soon as possible after the Special Meeting (as defined
in Section 6.2). The date on which the Closing occurs is hereinafter referred to
as the "Closing Date."
1.3 EFFECTIVE TIME. If all the conditions to the Merger set forth in
Article 7 shall have been fulfilled or waived in accordance herewith, and this
Agreement shall not have been terminated as provided in Article 8, the parties
hereto shall cause a Certificate of Merger satisfying the requirements of the
DGCL to be properly executed, verified and delivered for filing in accordance
with the DGCL on the Closing Date. The Merger shall become effective upon the
acceptance for record of the Certificate of Merger by the
I-5
Secretary of State of the State of Delaware in accordance with the DGCL (but not
earlier than the Closing Date) or at such later time which the parties hereto
shall have agreed upon and designated in such filing in accordance with
applicable law as the effective time of the Merger (the "Effective Time").
1.4 CERTIFICATE OF INCORPORATION; BY-LAWS.
(a) CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of
Merger Subsidiary in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Corporation (except that the name
of the Surviving Corporation shall be "Expert Software, Inc."), until duly
amended in accordance with applicable law.
(b) BY-LAWS. The By-laws of Merger Subsidiary in effect immediately prior
to the Effective Time shall be the By-laws of the Surviving Corporation (except
that the name of the Surviving Corporation shall be "Expert Software, Inc."),
until duly amended in accordance with applicable law.
1.5 DIRECTORS AND OFFICERS.
(a) DIRECTORS. The directors of Merger Subsidiary immediately prior to the
Effective Time, shall automatically become the directors of the Surviving
Corporation as of the Effective Time.
(b) OFFICERS. The officers of Merger Subsidiary immediately prior to the
Effective Time shall automatically become the officers of the Surviving
Corporation as of the Effective Time.
1.6 TAX CONSEQUENCES. If the Section 2.3 Election is not made, it is
intended by the parties hereto that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and the parties shall report the Merger consistent
therewith. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Section 1.368-2(g) and 1.368-3(a) of the
United States Treasury Regulations.
2. CONVERSION OF SHARES
2.1 CONVERSION OF MERGER SUBSIDIARY SHARES. At the Effective Time, each
share of common stock, $1.00 par value per share, of Merger Subsidiary that is
issued and outstanding immediately prior to the Effective Time shall be
converted into one share of common stock, par value $1.00 per share, of the
Surviving Corporation that is issued and outstanding immediately after the
Effective Time, and such shares will be the only shares of capital stock of the
Surviving Corporation that are issued and outstanding immediately after the
Effective Time. Each certificate evidencing ownership of shares of Merger
Subsidiary common stock shall evidence ownership of an equal number of shares of
common stock of the Surviving Corporation.
2.2 CONVERSION OF EXPERT SHARES.
(a) Except as provided in Section 2.3, at the Effective Time, by virtue of
the Merger and without any action on the part of Activision, Merger Subsidiary,
Expert or the holder thereof, each issued and outstanding share of common stock,
par value $.01 per share, of Expert (each an "Expert Share" and collectively,
the "Expert Shares") shall be converted into the right to receive a number of
shares of common stock, par value $.000001 per share, of Activision (the
"Activision Common Stock"), equal to the Exchange Ratio (as hereinafter defined)
and cash, to the extent set forth in Section 2.2(f). The shares of Activision
Common Stock to be issued in connection with the Merger are sometimes referred
to as the "Activision Shares."
(b) The Exchange Ratio shall be equal to (i) $2.65, divided by (ii) the
Activision Per Share Market Value. For purposes of the foregoing, the
"Activision Per Share Market Value" shall be the arithmetic average of the per
share closing sales prices of Activision Common Stock as reported on the Nasdaq
National Market ("NASDAQ") (or such other national securities exchange or
automated quotation system which is then the principal place of listing or
quotation of shares of Activision Common Stock) on the ten (10) trading days
ending on and including the trading day which is two (2) trading days
immediately prior
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to the date of the Special Meeting (as defined in Section 6.2) which will be
held in accordance with the provisions of Section 6.2 for the purpose of
approving this Agreement and the transactions contemplated hereby.
(c) Notwithstanding anything to the contrary set forth in Section 2.2(b),
(i) in no event shall the number of Activision Shares to be issued in connection
with the Merger exceed 20% of the total number of shares of Activision Common
Stock issued and outstanding at the Effective Time (the "Maximum Activision
Share Issuance"), and (ii) in no event shall the Exchange Ratio be higher than
(x) the Maximum Activision Share Issuance, divided by (y) the total number of
Expert Shares issued and outstanding as at the Effective Time (other than
Cancelled Expert Shares, as hereinafter defined).
(d) Each Expert Share held in Expert's treasury, if any, and each Expert
Share owned by Activision or by any direct or indirect subsidiary of Expert or
Activision immediately prior to the Effective Time (collectively, "Cancelled
Expert Shares") shall, at the Effective Time, by virtue of the Merger and
without any action on the part of the holder thereof, be canceled and retired
and cease to exist and no payment shall be made with respect thereto.
(e) No fractional shares of Activision Common Stock shall be issued pursuant
to this Agreement. In lieu of the issuance of any fractional shares of
Activision Common Stock pursuant to this Agreement, each holder of Expert Shares
shall be paid an amount in cash (without interest), rounded to the nearest cent,
determined by multiplying (i) the Activision Per Share Market Value by (ii) the
fractional amount of a share of Activision Common Stock which such holder would
otherwise be entitled to receive under this Article 2.
(f) Notwithstanding the provisions of Section 2.2(b), in the event:
(i) the Activision Per Share Market Value is less than $10.00,
Activision shall fix the Exchange Ratio at .2650 and pay the holders of
Expert Shares, in addition to the number of shares of Activision Common
Stock determined based on an Exchange Ratio of .2650, cash equal to the
Shortfall Cash Payment (as defined below) in lieu of the number of
Activision Shares that would have been issued had the Exchange Ratio been
computed in accordance with Section 2.2(b), and
(ii) the provisions of Section 2.2(c) are applicable and the Exchange
Ratio is calculated in accordance with such section, Activision shall pay to
the holders of Expert Shares, in addition to the number of shares of
Activision Common Stock determined based on the Exchange Ratio determined
pursuant to Section 2.2(c), cash equal to the Shortfall Cash Payment in lieu
of the number of Activision Shares that would have been issued had the
Exchange Ratio been computed in accordance with Section 2.2(b).
In the case of clause (i) or (ii), the cash payment on account of any Expert
Share (the "Shortfall Cash Payment") shall be equal to the Activision Per Share
Market Value multiplied by the fraction of a share of Activision Common Stock
determined by subtracting the Exchange Ratio computed under clause (i) or (ii),
as applicable, from the Exchange Ratio calculated under Section 2.2(b).
Notwithstanding the foregoing provisions of this Section 2.2(f), (a) in the
event Section 2.2(f)(i) is applicable, the total of all Cash Shortfall Payments,
and any cash payable in lieu of fractional shares, with respect to all Expert
Shares shall not exceed 60% of the total Exchange Merger Consideration (as
hereinafter defined), and the Exchange Ratio computed in accordance with Section
2.2(f)(i) shall be adjusted so that Activision Shares are issued in lieu of any
portion of the Cash Shortfall Payment that could not be made due to this clause
(a), and (b) in the event Section 2.2(f)(ii) is applicable, the total of all
Cash Shortfall Payments, and any cash payable in lieu of fractional shares,
shall not exceed 60% of the total Exchange Merger Consideration, but the
Exchange Ratio shall not be adjusted and no other payments of cash, Activision
Common Stock or any other forms of consideration shall be payable to holders of
Expert Shares.
2.3 ELECTION BY ACTIVISION TO PAY CASH CONSIDERATION. Activision shall
have the right, exercisable at any time on or before April 20, 1999, on notice
to Expert, to elect to pay cash consideration to the holders
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of Expert Shares in lieu of issuance of Activision Shares pursuant to Section
2.2 (the "Section 2.3 Election"). In the event of a Section 2.3 Election, at the
Effective Time, by virtue of the Merger and without any action on the part of
Activision, Merger Subsidiary, Expert or the holder thereof, each issued and
outstanding Expert Share (other than Dissenting Common Stock as defined in
Section 2.6) shall be converted into the right to receive $2.65 per share, in
cash, without interest. The provisions of Section 2.2(d) shall apply in the
event of any such election by Activision. The amount of cash payable with
respect to each Expert Share is hereinafter referred to as the "Per Share Cash
Consideration," and the aggregate Per Share Cash Consideration payable is
referred to as the "Aggregate Cash Consideration."
2.4 CONVERSION OF EXPERT EMPLOYEE STOCK OPTIONS AND WARRANTS.
(a) At the Effective Time, each option or warrant, whether vested or
unvested, to purchase Expert Shares which is then outstanding and unexercised
(an "Expert Option" or an "Expert Warrant," as the case may be) shall cease to
represent a right to acquire shares of Expert Common Stock and shall be
converted automatically into an option or warrant to acquire, under the same
terms and conditions as were applicable to such Expert Option or Expert Warrant
immediately prior to the Effective Time, shares of Activision Common Stock, and
Activision shall assume each Expert Option and Expert Warrant and each option
plan or agreement pursuant to which any such Expert Option and Expert Warrant
were granted; PROVIDED, HOWEVER, that from and after the Effective time, (i) the
number of shares of Activision Common Stock purchasable upon exercise of such
Expert Option or Expert Warrant shall be equal to the number of shares of Expert
Common Stock that were purchasable under such Expert Option or Expert Warrant
immediately prior to the Effective Time multiplied by the Exchange Ratio,
(without adjustment pursuant to Sections 2.2(c) or 2.2(f)) rounding to the
nearest whole share, and (ii) the per share exercise price under each such
Expert Option and Expert Warrant shall be adjusted by dividing the per share
exercise price of each such Expert Option and Expert Warrant by the Exchange
Ratio (without adjustment pursuant to Section 2.2(c) or (f)), rounding to the
nearest cent. The terms of each Expert Option and Expert Warrant shall, in
accordance with its terms, be subject to further adjustment as appropriate to
reflect any stock split, stock dividend, recapitalization or other similar
transaction with respect to Activision Common Stock on or subsequent to the
Effective Time. Notwithstanding the foregoing, the number of shares and the per
share exercise price of each Expert Option which is intended to be an "incentive
stock option" (as defined in Section 422 of the Code) shall be adjusted in
accordance with the requirements of Section 424 of the Code. Accordingly, with
respect to any incentive stock options, fractional shares shall be rounded down
to the nearest whole number of shares and where necessary the per share exercise
price shall be rounded up to the nearest cent.
(b) As soon as practicable after the Effective Time, Activision shall
deliver to each holder of an outstanding Expert Option or Expert Warrant an
appropriate notice setting forth such holder's rights pursuant thereto, and such
Expert Option and Expert Warrant shall continue in effect on the same terms and
conditions (including antidilution provisions).
(c) At or prior to the Effective Time, Activision shall reserve for issuance
the number of shares of Activision Common Stock necessary to satisfy
Activision's obligations under Section 2.4(a). At or prior to the Effective
Time, Activision shall file with the Securities and Exchange Commission ("SEC")
a registration statement on Form S-8 (to the extent such form is available)
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the shares of Activision Common Stock subject to Expert Options and
Expert Warrants assumed pursuant to Section 2.4(a) hereof, and shall use its
reasonable best efforts to maintain the current status of the prospectus
contained therein, as well as comply with any applicable state securities or
"blue sky" laws, for so long as such options and warrants remain outstanding.
2.5 ADJUSTMENTS. If at any time during the period between the date of this
Agreement and the Effective Time, any change in the Expert Shares or Activision
Common Stock shall occur by reason of any reclassification, recapitalization,
stock dividend, stock split or combination, exchange or readjustment of
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shares, or any stock dividend thereon with the record date during such period,
the Exchange Ratio or the Per Share Cash Consideration, as applicable, shall be
appropriately adjusted.
2.6 DISSENTING EXPERT STOCKHOLDERS. Notwithstanding any provision of this
Agreement to the contrary, if required by the DGCL but only to the extent
required thereby, shares of Expert Common Stock which are issued and outstanding
immediately prior to the Effective Time and which are held by holders of such
shares of Expert Common Stock who have properly exercised appraisal rights with
respect thereto (the "Dissenting Common Stock") in accordance with Section 262
of the Delaware General Corporation Law ("DGCL") will not be exchangeable for
the right to receive the Cash Merger Consideration, and holder of such shares of
Dissenting Common Stock will be entitled to receive payment of the appraised
value of such shares of Dissenting Common Stock in accordance with the
provisions of such Section 262 unless and until such holders fail to perfect or
effectively withdraw or lose their rights to appraisal and payment under the
DGCL. If, after the Effective Time, any such holder fails to perfect or
effectively withdraws or loses such right, such shares of Dissenting Common
Stock will thereupon be treated as if they had been converted into and have
become exchangeable for, at the Effective Time, the right to receive the Cash
Merger Consideration, without any interest thereon. Notwithstanding anything to
the contrary contained in this Section 2.6, if the Merger is not consummated,
then the right of any stockholder to be paid the fair value of such
stockholder's Dissenting Common Stock pursuant to Section 262 of the DGCL shall
cease. Expert will give Activision prompt notice of any demands and withdrawals
of such demands received by Expert for appraisals of shares of Dissenting Common
Stock. Expert shall not, except with the prior written consent of Activision,
make any payment with respect to any demands for appraisal or offer to settle or
settle any such demands.
3. EXCHANGE OF SHARES
3.1 EXCHANGE OF CERTIFICATES.
(a) Prior to the Effective Time, Activision shall designate Continental
Stock Transfer & Trust Company, or such other bank or trust company as shall be
reasonably acceptable to Expert, to act as Exchange Agent in connection with the
Merger (the "Exchange Agent"). At, or immediately prior to, the Effective Time,
Activision will take all steps necessary to deposit with the Exchange Agent for
the benefit of the holders of Expert Shares (i) certificates representing the
aggregate number of shares of Activision Common Stock issuable pursuant to
Section 2.2 in exchange for outstanding Expert Shares, cash in lieu of
fractional shares of Activision Common Stock, and any Cash Shortfall Payment, or
(ii) if Activision shall have made the Section 2.3 Election, the Aggregate Cash
Consideration (the shares or cash referred to in clause (i) or (ii), as
applicable, being hereinafter referred to as the "Exchange Fund").
(b) Promptly after the Effective Time, Activision and the Surviving
Corporation shall cause the Exchange Agent to mail to each person who was a
record holder, as of the Effective Time, of an outstanding certificate or
certificates which immediately prior to the Effective Time represented Expert
Shares (the "Certificates"), a form letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to the Exchange
Agent), instructions for use in effecting the surrender of the Certificates in
exchange for (i) certificates evidencing Activision Shares, cash in lieu of
fractional shares in accordance with Section 2.2(e) and any Cash Shortfall
Payment, or (ii) the Per Share Cash Consideration, if Activision has made the
Section 2.3 Election. Upon surrender to the Exchange Agent of a Certificate,
together with such letter of transmittal duly executed, and any other required
documents, the holder of such Certificate shall be entitled to receive in
exchange therefor (A) (i) a certificate representing the number of whole shares
of Activision Common Stock, if any, to which such holder shall be entitled
pursuant to Section 2.2, (ii) a check representing the amount of cash in respect
of fractional shares, if any, to which such holder shall be entitled in
accordance with Section 2.2(e), (iii) any dividends or other distributions to
which such holder is entitled pursuant to Section 3.1(c), and (iv) a check
representing the amount of any Cash Shortfall Payment to which such holder shall
be entitled pursuant to Section 2.2(f) (the Activision Shares and cash
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paid pursuant to Sections 2.2(e), 2.2(f) and 3.1(c) being referred to,
collectively as the "Exchange Merger Consideration"), or (B) if Activision has
made the Section 2.3 Election, a check representing the Per Share Cash
Consideration to which such holder shall be entitled (such cash payment is
referred to as the "Cash Merger Consideration" and the Exchange Merger
Consideration and the Cash Merger Consideration are sometimes referred to as the
"Applicable Merger Consideration"), and such Certificate shall forthwith be
canceled. No interest will be paid or accrued on the Applicable Merger
Consideration or payable upon the surrender of the Certificates. If payment is
to be made to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of payment that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer as determined by the Exchange Agent, and that the person
requesting such payment shall pay any transfer, or other taxes required by
reason of the payment to a person other than the registered holder of the
Certificate surrendered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Until surrendered
in accordance with the provisions of this Section 3.1, each Certificate (other
than Certificates representing Canceled Expert Shares and other than
Certificates representing Dissenting Common Stock) shall represent for all
purposes only the right to receive the Applicable Merger Consideration, without
any interest thereon. In the event of a transfer of ownership of Expert Shares
which is not registered in the stock transfer records of Expert, the amount and
type of Applicable Merger Consideration may be issued to such a transferee if
the certificate representing Expert Shares is presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and
to evidence that any applicable stock transfer taxes have been paid.
(c) No dividends or other distributions declared or made after the Effective
Time with respect to shares of Activision Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the shares of Activision Common Stock they are entitled to
receive until the holder of such Certificate shall surrender such Certificate.
Subject to applicable law, following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of Activision Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore paid with respect to such whole
shares of Activision Common Stock.
(d) Any portion of the Exchange Fund that remains unclaimed by the former
stockholders of Expert one year after the Effective Time shall be returned to
Activision (provided that Activision shall issue such shares of Activision
Common Stock and/or pay such cash in accordance with this Article 3 to former
stockholders of Expert who thereafter surrender their Certificates), subject to
the provisions and effect of applicable abandoned property, escheat or similar
laws. Any former stockholders of Expert who have not theretofore complied with
this Article 3 shall thereafter look only to Activision for issuance or payment
of the Applicable Merger Consideration, without any interest thereon. Neither
the Surviving Corporation, the Exchange Agent nor Activision shall be liable to
any holder of an Expert Share for any consideration set forth in Section 2.2 or
Section 2.3 hereof delivered in respect of such Expert Share to a public
official pursuant to any abandoned property, escheat or other similar law.
(e) After the Effective Time there shall be no registration on the share
transfer books of the Surviving Corporation of transfers of the Expert Shares
which were outstanding immediately prior to the Effective Time, and as of the
Effective Time, the share ledger of Expert shall be closed. All Applicable
Merger Consideration paid upon the surrender of Certificates in accordance with
the terms of this Article 3 shall be deemed to have been paid in full
satisfaction of all rights pertaining to the Expert shares previously evidenced
by Certificates. After the Effective Time, the holders of Expert Shares
outstanding at the Effective Time shall cease to have any rights with respect to
such Expert Shares except as provided herein or by applicable law. If, after the
Effective Time, certificates evidencing Expert Shares are presented to the
Surviving Corporation, they shall be canceled and exchanged for the Applicable
Merger Consideration as provided in this Article 3.
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(f) In the event any Certificates shall have been lost, stolen or destroyed,
the Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof, (i) such shares of Activision Common Stock as may be required pursuant
to Section 2.2, cash for fractional shares, as may be required by Section 2.2(e)
and any dividends or distributions payable pursuant to Section 3.1(c), or (ii)
the Cash Merger Consideration, if Activision has made the Section 2.3 Election,
PROVIDED, HOWEVER, that Activision may, in its discretion and as a condition
precedent to the issuance and/or payment thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
Activision, the Surviving Corporation or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
4. REPRESENTATIONS AND WARRANTIES OF EXPERT
Expert hereby represents and warrants to Activision and Merger Subsidiary as
follows:
4.1 ORGANIZATION; GOOD STANDING; AUTHORITY; COMPLIANCE WITH LAW.
(a) Expert is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as now conducted. Expert is duly licensed or qualified and is in good standing
to transact business as a foreign corporation in each jurisdiction in which the
character of the properties owned or leased by it therein or in which the nature
of its business makes such qualification or licensing necessary, except where
the failure to be so licensed or qualified would not have, individually or in
the aggregate, an Expert Material Adverse Effect. For purposes of this
Agreement, an "Expert Material Adverse Effect" means a material adverse effect
on the business, assets (including intangible assets), financial condition or
results of operations of Expert and the Expert Subsidiaries (as defined below)
taken as a whole; PROVIDED, HOWEVER, that none of the following shall be deemed
by itself or by themselves, either alone or in combination, to constitute an
Expert Material Adverse Effect: (i) conditions generally affecting the industry
in which Expert operates, including, without limitation, actual or proposed
changes in law or regulations or (ii) any effect that is related to a general
drop in stock prices in the United States resulting from political or economic
turmoil.
(b) Each of the Expert Subsidiaries is a corporation or partnership duly
incorporated or organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation or organization, has the corporate or
partnership power and authority to own its properties and to carry on its
business as it is now being conducted, and is duly qualified to transact
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not, individually or in the aggregate, have an Expert Material
Adverse Effect.
(c) Except as set forth in Section 4.1(c) of the disclosure letter delivered
at or prior to the execution hereof to Activision, which shall refer to the
relevant sections of this Agreement (the "Expert Disclosure Letter"), the
business of Expert and the Expert Subsidiaries has been operated in compliance
with all laws, ordinances, regulations and orders of all governmental entities,
except for violations which would not have, individually or in the aggregate, an
Expert Material Adverse Effect. Expert and the Expert Subsidiaries have all
permits, certificates, licenses, approvals, consents and other authorizations
(collectively, "Government Approvals") of all governmental agencies, entities,
commissions, boards, bureaus, tribunals, officials or authorities, whether
Federal, state or local (collectively, "Governmental Agencies"), required by law
with respect to the operation of their businesses, except those the absence of
which would not, individually or in the aggregate, have an Expert Material
Adverse Effect or prevent or delay consummation of the Merger. All such
Government Approvals are in full force and effect, and, Expert and the Expert
Subsidiaries are in compliance with all conditions and requirements of the
Government Approvals and with all rules and regulations relating thereto, other
than failures that would not have an Expert Material Adverse Effect. Expert has
not received any notices of violations of any Federal, state and local laws,
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regulations and ordinances relating to its business, operations or assets which,
if it were determined that a violation had occurred, would have an Expert
Material Adverse Effect.
(d) The certificate of incorporation or other charter documents, bylaws,
organizational documents and partnership, shareholder, joint venture or similar
agreements (and in each such case, all amendments thereto) of Expert and each of
the Expert Subsidiaries are listed in Section 4.1(d) of the Expert Disclosure
Letter, true and correct copies of which have previously been delivered or made
available to Activision and its counsel.
4.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Expert has the
requisite corporate power and authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby. The Board of Directors
of Expert has approved this Agreement, the Merger, and the transactions
contemplated by this Agreement and has unanimously agreed to recommend that the
holders of Expert Shares adopt and approve this Agreement, the Merger, and the
transactions contemplated by this Agreement at the Special Meeting (as defined
in Section 6.2). Expert has taken all action necessary to exempt the
transactions contemplated by this Agreement from the operation of any "fair
price," "moratorium," "control share acquisition," or other similar
anti-takeover statute or regulation enacted under the state or federal laws of
the United States. As of the date hereof, each director and executive officer of
Expert and each entity that is a stockholder of Expert and that has a
representative on the Board of Directors has indicated that he, she or it
intends to vote all Expert Shares that he, she or it controls to approve this
Agreement, the Merger, and the transactions contemplated by this Agreement at
the Special Meeting. Subject only to the approval of this Agreement and the
transactions contemplated hereby by the holders of a majority of the outstanding
Expert Shares and the filing and acceptance for record of appropriate merger
documents as required by the DGCL, the execution by Expert of this Agreement and
the consummation of the transactions contemplated by this Agreement have been
duly authorized by all requisite action on the part of Expert. Assuming this
Agreement constitutes a valid and binding obligation of Activision and Merger
Subsidiary, this Agreement constitutes the valid and legally binding obligation
of Expert, enforceable against Expert in accordance with its terms, subject to
applicable bankruptcy, insolvency, moratorium or other similar laws relating to
creditors' rights and general principles of equity.
4.3 CAPITALIZATION. The authorized capital stock of Expert consists of
30,000,000 Expert Shares and 1,000,000 shares of preferred stock, par value $.01
per share (the "Expert Preferred Shares") of which 25,000 shares are designated
as Series A Junior Participating Cumulative Preferred Stock. As of the date
hereof, there are not more than 7,627,881 Expert Shares issued and outstanding
and no Expert Preferred Shares issued and outstanding. All such outstanding
shares of Expert are duly authorized, validly issued, fully paid, nonassessable
and free of preemptive rights. Except as set forth in Section 4.3 of the Expert
Disclosure Letter, Expert has no outstanding bonds, debentures, notes or other
obligations the holders of which have or upon the happening of certain events
would have the right to vote (or which are convertible into or exercisable for
securities having the right to vote) with the stockholders of Expert on any
matter. Except as set forth in Section 4.3 of the Expert Disclosure Letter,
there are no existing options, warrants, calls, subscriptions, convertible
securities, or other rights, agreements, stock appreciation rights or similar
derivative securities or instruments or commitments which obligate Expert to
issue, transfer or sell any Expert Shares or make any payments in lieu thereof,
and Section 4.3 of the Expert Disclosure Letter sets forth the exercise prices
of all such options, warrants or other rights or securities, the weighted
average exercise price of which is not less than $1.26 per share. Except as set
forth in Section 4.3 of the Expert Disclosure Letter, there are no agreements or
understandings to which Expert or any Expert Subsidiary is a party with respect
to the voting of any Expert Shares or which restrict the transfer of any such
shares, nor does Expert have knowledge of any such agreements or understandings
with respect to the voting of any such shares or which restrict the transfer of
any such shares. There are no outstanding contractual obligations of Expert or
any Expert Subsidiary to repurchase, redeem or otherwise acquire any Expert
Shares or any other securities of Expert or any Expert Subsidiary. Except as set
forth in Section 4.3 of the Expert Disclosure Letter, neither Expert nor any
Expert Subsidiary is under any obligation, contingent or
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otherwise, by reason of any agreement to register any of their securities under
the Securities Act. Expert has delivered to Activision complete and correct
copies of all Expert option plans and all forms of options issued pursuant to
any Expert option plan, including all amendments thereto. Section 4.3 of the
Expert Disclosure Letter contains a complete and correct list setting forth as
of the date hereof (i) the number of options and warrants outstanding, (ii) the
dates on which such options or warrants were granted, (iii) the dates on which
such options or warrants shall vest and (iv) the exercise or conversion price of
each outstanding option or warrant, as the case may be.
4.4 SUBSIDIARIES. Section 4.4 of the Expert Disclosure Letter lists all
Subsidiaries of Expert (the "Expert Subsidiaries" and, individually, an "Expert
Subsidiary"). Except as set forth in Section 4.4 of the Expert Disclosure
Letter, Expert owns directly or indirectly all of the outstanding shares of
capital stock or other equity interests of each of the Expert Subsidiaries. All
of the outstanding shares of capital stock in each of the Expert Subsidiaries
are duly authorized, validly issued, fully paid and nonassessable. Except as set
forth in Section 4.4 of the Expert Disclosure Letter, all of the outstanding
shares of capital stock of each of the Expert Subsidiaries owned, directly or
indirectly, by Expert are owned free and clear of all liens, pledges, security
interests, claims or other encumbrances. Except as set forth in Section 4.4 of
the Expert Disclosure Letter, there are no options, warrants, calls,
subscriptions, convertible securities, or other rights, agreements or
commitments which obligate Expert or any Expert Subsidiary to issue, transfer or
sell any shares of capital stock of any Expert Subsidiary. The following
information for each Expert Subsidiary is set forth in Section 4.4 of the Expert
Disclosure Letter: (i) its name and jurisdiction of incorporation; (ii) its
authorized capital stock; and (iii) the name of each stockholder and the number
of issued and outstanding shares of capital stock held by it.
4.5 OTHER INTERESTS. Except for interests in the Expert Subsidiaries,
neither Expert nor any Expert Subsidiary owns directly or indirectly any
interest or investment (whether equity or debt) in any corporation, partnership,
joint venture, business, trust or other entity (other than investments in
short-term investment securities).
4.6 NO VIOLATION. Except as set forth in Section 4.6 of the Expert
Disclosure Letter, neither the execution and delivery by Expert of this
Agreement nor the consummation by Expert of the transactions contemplated by
this Agreement in accordance with its terms will: (i) conflict with or result in
a breach of any provisions of Expert's Certificate of Incorporation or Bylaws;
(ii) violate, result in a breach of any provision of, or constitute a default
under, or require any approval or consent under or result in the termination or
in a right of termination or cancellation of, or accelerate the performance
required by or result in a material adverse change to, or result in the creation
of any lien, security interest, charge or encumbrance upon any of the properties
owned or leased by Expert under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust or any license, franchise,
permit, lease, contract, agreement or other instrument to which Expert or any of
the Expert Subsidiaries is a party, or by which Expert or any of the Expert
Subsidiaries or any of the properties owned or leased by Expert is bound or
affected, except for any of the foregoing matters in this clause which,
individually or in the aggregate, would not have an Expert Material Adverse
Effect; (iii) contravene or conflict with or constitute a violation of any
provision of any law, rule, regulation, judgment, injunction, order or decree
binding upon or applicable to Expert or any Expert Subsidiary; or (iv) other
than the filings provided for in this Agreement, required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Securities
Act or applicable state securities and "Blue Sky" laws (collectively, the
"Regulatory Filings"), require any consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority which has not been obtained or made, except where the failure to
obtain any such consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority would not have an
Expert Material Adverse Effect.
4.7 SEC DOCUMENTS. Since December 31, 1996, Expert has timely filed with
the Securities and Exchange Commission ("SEC") all forms, reports and documents
required to be filed by Expert since
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December 31, 1996 under the Securities Act, the Exchange Act and the rules and
regulations promulgated thereunder (the "Securities Laws"), including, without
limitation, (i) all Annual Reports on form 10-K, (ii) all Quarterly Reports on
form 10-Q, (iii) all proxy statements relating to meetings of stockholders
(whether annual or special), (iv) all Current Reports on form 8-K and (v) all
other reports, schedules, registration statements and other documents, each as
amended (collectively, the "Expert SEC Reports"), all of which were prepared in
compliance in all material respects with the applicable requirements of the
Exchange Act or the Securities Act, as applicable. Expert has no knowledge that
any Expert SEC Reports required to be filed with the SEC prior to December 31,
1996 have not been filed. As of their respective dates, except as set forth in
Section 4.11 of the Expert Disclosure Letter, the Expert SEC Reports (i)
complied as to form in all material respects with the applicable requirements of
the Securities Laws and (ii) did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in the light of the circumstances under
which they were made, not misleading.
4.8 FINANCIAL STATEMENTS. Except as set forth in Section 4.11 of the
Expert Disclosure Letter, each of the consolidated balance sheets of Expert
included in or incorporated by reference into the Expert SEC Reports (including
the related notes and schedules) fairly presents the consolidated financial
position of Expert and the Expert Subsidiaries as of its date and each of the
consolidated statements of operations, cash flows and stockholders' equity
included in or incorporated by reference into the Expert SEC Reports (including
any related notes and schedules) fairly presents the results of operations, cash
flows and stockholders' equity, as the case may be, of Expert and the Expert
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments which would not be
material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein and except, in the case of the unaudited
statements, as permitted by applicable law. Except as set forth in Section 4.11
of the Expert Disclosure Letter, the consolidated balance sheet as of December
31, 1998 of Expert (which is set forth in Section 4.8 of the Expert Disclosure
Letter) delivered to Activision prior to the date hereof (including the related
notes and schedules) (the "Recent Balance Sheet") fairly presents the
consolidated financial position of Expert and the Expert Subsidiaries as of its
date and the consolidated statements of operations, cash flows and stockholders'
equity for the year ended December 31, 1998 of Expert delivered to Activision
prior to the date hereof (including any related notes and schedules) (together
with the Recent Balance Sheet, the "Recent Financial Statements") fairly present
the results of operations, cash flows and shareholders' equity, as the case may
be, of Expert and the Expert Subsidiaries for the periods set forth therein, in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved.
4.9 LITIGATION. Except as set forth in Section 4.9 of the Expert
Disclosure Letter, there are (i) no continuing orders, injunctions or decrees of
any court, arbitrator or governmental authority to which Expert or any Expert
Subsidiary is a party or by which any of its properties or assets are bound or
likely to be affected and (ii) no actions, suits or proceedings pending against
Expert or any Expert Subsidiary or to which any of their respective properties
or assets are subject or, to the knowledge of Expert, threatened against Expert
or any Expert Subsidiary or to which any of their respective properties or
assets are subject, at law or in equity, that in each such case could,
individually or in the aggregate, have an Expert Material Adverse Effect.
4.10 ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 4.10 of
the Expert Disclosure Letter, since December 31, 1998, Expert and the Expert
Subsidiaries have conducted their business only in the ordinary course of such
business and consistent with past practices and there has not been any:
(a) material adverse change in the financial condition, properties,
assets (including intangible assets), businesses, operations or results of
operations of Expert or any of the Expert Subsidiaries;
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(b) amendment or change in the Certificate of Incorporation or By-Laws
of Expert or in any similar organizational documents of any Expert
Subsidiaries;
(c) incurrence, creation or assumption by Expert or any of the Expert
Subsidiaries of (i) any mortgage, deed of trust, security interest, pledge,
lien, title retention device, collateral assignment, claim, charge,
restriction or other encumbrance of any kind on any of the assets or
properties of Expert or any of the Expert Subsidiaries; or (ii) any
obligation or liability of any indebtedness for borrowed money;
(d) issuance or sale of any debt or equity securities of Expert or any
of the Expert Subsidiaries, or the issuance or grant of any options,
warrants or other rights to acquire from Expert or any of the Expert
Subsidiaries, directly or indirectly, any debt or equity securities of
Expert or any of the Expert Subsidiaries (except upon the exercise of then
outstanding Expert Options and Expert Warrants);
(e) payment or discharge by Expert or any of the Expert Subsidiaries of
any security interest, lien, claim, or encumbrance of any kind on any asset
or property of Expert or any of the Expert Subsidiaries, or the payment or
discharge of any liability that was not either shown or reflected on the
Recent Balance Sheet or incurred in the ordinary course of Expert's business
after the December 31, 1998 in an amount in excess of $50,000 for any single
liability to a particular creditor;
(f) purchase, license, sale, assignment or other disposition or
transfer, or any agreement or other arrangement for the purchase, license,
sale, assignment or other disposition or transfer, of any of the assets,
properties or goodwill of Expert other than a license or sale of any product
or products of Expert or any of the Expert Subsidiaries made in the ordinary
course of Expert's business;
(g) damage, destruction or loss of any property or asset, whether or not
covered by insurance, having (or likely with the passage of time to have) an
Expert Material Adverse Effect;
(h) declaration, setting aside or payment of any dividend on, or the
making of any other distribution in respect of, the capital stock of Expert,
any split, combination or recapitalization of the capital stock of Expert or
any direct or indirect redemption, purchase or other acquisition of the
capital stock of Expert or any change in any rights, preferences, privileges
or restrictions of any outstanding security of Expert;
(i) increase in the compensation payable or to become payable to any of
the officers, directors, or employees of Expert or any of the Expert
Subsidiaries, or any bonus or pension, insurance or other benefit payment or
arrangement (including without limitation stock awards, stock option grants,
stock appreciation rights or stock option grants) made to or with any of
such officers, employees or agents;
(j) obligation or liability incurred by Expert or any of its
Subsidiaries to any of its officers, directors or stockholders except for
normal and customary compensation and expense allowances payable to officers
in the ordinary course of Expert's business consistent with past practice;
(k) making by Expert or any of the Expert Subsidiaries of any loan,
advance or capital contribution to, or any investment in, any officer,
director or stockholder of Expert or any Expert Subsidiary or any firm or
business enterprise in which any such person had a direct or indirect
material interest at the time of such loan, advance, capital contribution or
investment;
(l) entering into, amendment of, relinquishment, termination or
non-renewal by Expert or any Expert Subsidiary of any contract, lease,
transaction, commitment or other right or obligation other than in the
ordinary course of its business or any written or oral indication or
assertion by the other party thereto of any material problems with Expert's
or any Expert Subsidiary's services or performance under such contract,
lease, transaction, commitment or other right or obligation or of such other
party's demand to amend, terminate or not renew any such contract, lease,
transaction, commitment or other right or obligation;
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(m) material change in the manner in which Expert or any Expert
Subsidiary extends discounts, credits or warranties to customers or
otherwise deals with its customers;
(n) entering into by Expert or any of the Expert Subsidiaries of any
transaction, contract or agreement that by its terms requires or
contemplates a required minimum current and/or future financial commitment,
expenses (inclusive of overhead expenses) or obligation on the part of
Expert or any of the Expert Subsidiaries involving in excess of $50,000
(provided that the amount of such financial commitments and expenses for all
such transactions, contracts or agreements does not exceed $150,000 in the
aggregate) or that is not entered into in the ordinary course of Expert's
business, or the conduct of any business or operations by Expert or any
Expert Subsidiary that is other than in the ordinary course of Expert's or
such Expert Subsidiary's business; or
(o) license, transfer or grant of a right under any Expert Intellectual
Property (as defined in Section 4.20 below), other than those licensed,
transferred or granted in the ordinary course of business consistent with
its past practices.
4.11 TAXES. Except as set forth in Section 4.11 of the Expert Disclosure
Letter or where such failure would not have, individually or in the aggregate,
an Expert Material Adverse Effect:
(a) Expert and each of the Expert Subsidiaries has paid or caused to be
paid all federal, state, local, foreign, and other taxes, and all
deficiencies, or other additions to tax, interest, fines and penalties
(collectively, "Taxes"), owed or accrued by it and due and payable through
the date hereof (including any Taxes payable pursuant to Treasury Regulation
Section1.1502-6 (and any similar state, local or foreign provision)).
(b) Expert and each of the Expert Subsidiaries has timely filed all
federal, state, local and foreign tax returns (collectively "Tax Returns")
required to be filed by any of them through the date hereof, and all such
returns accurately set forth the amount of any Taxes relating to the
applicable period.
(c) Expert and each of the Expert Subsidiaries has withheld and paid all
Taxes required to have been withheld and paid in connection with amounts
paid or owing to any employee, independent contractor, creditor, shareholder
or other party.
(d) The Recent Financial Statements reflect adequate reserves for Taxes
payable by Expert and each Expert Subsidiary for all taxable periods and
portions thereof through the date of such financial statements.
(e) Since the date of the Recent Financial Statements, each of Expert
and the Expert Subsidiaries has made sufficient accrual for Taxes in
accordance with generally accepted accounting principles with respect to
periods for which Tax Returns have not been filed.
(f) There are no outstanding agreements, waivers or arrangements
extending the statutory period of limitations applicable to any claim for,
or the period for the collection or assessment of, Taxes due from Expert or
any Expert Subsidiary for any taxable period and there have been no
deficiencies proposed, assessed or asserted for such Taxes.
(g) There are no closing agreements that could affect Taxes of Expert or
any Expert Subsidiary for periods after the Effective Time pursuant to
Section 7121 of the Code or any similar provision under state, local or
foreign tax laws.
(h) No audit or other proceedings by any court, governmental or
regulatory authority or similar authority has occurred, been asserted or is
pending and none of Expert or any Expert Subsidiary has received notice that
any such audit or proceeding may be commenced.
(i) No election has been made or filed by or with respect to, and no
consent to the application of, Section 341(f)(2) of the Code has been made
by or with respect to, Expert, any Expert Subsidiary or any of their
properties or assets.
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(j) None of Expert or any Expert Subsidiary has agreed to, or filed
application for, or is required, to make any changes or adjustment to its
accounting method.
(k) There is no contract, agreement, plan or arrangement covering any
person that, individually or collectively, could give rise to the payment of
any amount that would not be deductible by Expert or any Expert Subsidiary
by reason of Section 280G or Section 162(m) of the Code.
4.12 BOOKS AND RECORDS.
(a) The books of account and other financial records of Expert and each of
the Expert Subsidiaries are true, complete and correct in all material respects,
have been maintained in accordance with good business practices, and are
accurately reflected in all material respects in the financial statements
included in the Expert SEC Reports and the Recent Financial Statements.
(b) The minute books and other records of Expert and each of the Expert
Subsidiaries that have been, or will be prior to the Closing, made available to
Activision, contain accurate records of all meetings and accurately reflect all
other action of the stockholders and Board of Directors and any committees of
the Board of Directors of Expert and each of the Expert Subsidiaries.
4.13 PROPERTIES.
(a) None of Expert or any of the Expert Subsidiaries owns any real property,
nor have they ever owned any real property. Section 4.13(a) of the Expert
Disclosure Letter sets forth a list of all real property currently, or at any
time in the past five years, leased by Expert or any of the Expert Subsidiaries,
and, with respect to all real property currently leased by Expert or any of the
Expert Subsidiaries, the name of the lessor, the date of the lease and each
amendment thereto and the aggregate annual rental and/or other fees payable
under any such lease. All such current leases are, to the knowledge of Expert,
in full force and effect, are valid and effective in accordance with their
respective terms, and there is not to the knowledge of Expert any existing
material default or event of default under any such lease (or event which with
notice or lapse of time, or both, would constitute such a material default).
(b) Expert and each of its Subsidiaries has good and valid title to, or, in
the case of leased properties and assets, valid leasehold interests in, all of
its tangible properties and assets, real, personal and mixed, used or held for
use in its business, free and clear of any liens, except as reflected in the
Recent Financial Statements or in Section 4.13(b) of the Expert Disclosure
Letter and except for liens for taxes not yet due and payable and such
imperfections of title and encumbrances, if any, which are not material in
character, amount or extent, and which do not materially detract from the value,
or materially interfere with the present use, of the property subject thereto or
affected thereby.
4.14 ENVIRONMENTAL MATTERS. Except as set forth in Section 4.14 of the
Expert Disclosure Letter, neither Expert nor any of its Subsidiaries is in
violation of any laws, regulations, judgments or consent decrees relating to
hazardous substances or hazardous waste (collectively, "Environmental Laws")
which violation could reasonably be expected to result in an Expert Material
Adverse Effect. Except as set forth in Section 4.14 of the Expert Disclosure
Letter, neither Expert, any of the Expert Subsidiaries, nor, to the knowledge of
Expert, any third party, has used, released, discharged, generated,
manufactured, produced, stored, or disposed of in, on, or under or about its
owned or leased property or other assets, or transported thereto or therefrom,
any hazardous substances or hazardous wastes, including asbestos, lead and
petroleum, during the period of Expert's or the Expert Subsidiary's ownership or
lease of such property in a manner that could reasonably be expected to subject
Expert or any Expert Subsidiary to a material liability under the Environmental
Laws. None of Expert or any of the Expert Subsidiaries has received written
notice from any governmental authority that any property owned or leased by
Expert or any of the Expert Subsidiaries is in violation of any Environmental
Laws. There is no pending civil, criminal or administrative suit or other legal
proceeding against Expert or any of the Expert Subsidiaries with respect to any
Environmental Laws. Expert has provided Activision complete copies of all
environmental reports, assessments and studies in Expert's possession and
control with respect to properties owned or leased by
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Expert or any Expert Subsidiary. As used in this Agreement, the terms "hazardous
substances" and "hazardous wastes" shall have the meanings set forth in the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, and the regulations thereunder; the Resource Conservation and Recovery
Act, as amended, and the regulations thereunder; the Federal Clean Water Act, as
amended, and the regulations thereunder; the Clean Air Act, 42 U.S.C. Sections
7401 ET SEQ.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.
Sections 136 ET SEQ.; the Emergency Planning and Community Right-to-Know Act, 42
U.S.C. Sections 11001 ET SEQ.; the Occupational Safety and Health Act of 1970;
the Hazardous Materials Transportation Act, as amended by the Hazardous
Materials Transportation Authorization Act of 1994, 49 U.S.C. Sections 5101 ET
SEQ.; the Toxic Substances Control Act, 15 U.S.C. Sections 2601 ET SEQ.; the Oil
Pollution Act of 1990, 33 U.S.C. Sections 2701 ET SEQ.; as each of these may be
amended from time to time; and any and state or local analogues to any of these
statutes.
4.15 NO BROKERS. Neither Expert nor any of the Expert Subsidiaries has
entered into any contract, arrangement or understanding with any person or firm
that may result in the obligation of such entity or Activision or Merger
Subsidiary to pay any finder's fees, brokerage or agent's commissions or other
like payments in connection with the negotiations leading to this Agreement or
the consummation of the transactions contemplated hereby, except that Expert has
retained Piper Jaffray Inc. ("Piper Jaffray") pursuant to an engagement letter
to act as its financial advisor in connection with the transactions contemplated
by this Agreement. Expert is not aware of any claim for payment of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby other than fees payable to Piper Jaffray as set
forth in Section 4.15 of the Expert Disclosure Letter, which shall not exceed
$650,000 plus expenses not in excess of $25,000.
4.16 OPINION OF FINANCIAL ADVISOR. The Board of Directors of Expert has
received the opinion of Piper Jaffray, to the effect that, as of the date
hereof, the consideration to be received in the Merger by the Expert
stockholders is fair from a financial point of view to holders of the Expert
Shares.
4.17 RELATED PARTY TRANSACTIONS. Section 4.17 of the Expert Disclosure
Letter sets forth all arrangements, agreements and contracts or understandings
entered into by Expert or any of the Expert Subsidiaries (which are or will be
in effect as of or after the date of this Agreement) with (i) any consultant (X)
involving payments in excess of $60,000 or (Y) which may not be terminated at
will by Expert or the Expert Subsidiary which is a party thereto without
penalty, or (ii) any person who is an officer, director or affiliate of Expert
or any of the Expert Subsidiaries. All such documents are listed in Section 4.17
of the Expert Disclosure Letter and the copies of such documents, which have
previously been provided or made available to Activision and its counsel, are
true and correct copies. Except as disclosed in Section 4.17 of the Expert
Disclosure Letter, Expert (including all Expert Subsidiaries) has not made any
payments to, received any services from, or is dependent on any services of, any
affiliate of Expert other than services provided by officers and directors in
such capacities and payments to such officers and directors of Expert in such
capacities.
4.18 CONTRACTS AND COMMITMENTS. Except as set forth in Section 4.18(a) of
the Expert Disclosure Letter, neither Expert nor any of the Expert Subsidiaries
has, or is party to or is bound by:
(i) any consulting or sales agreement, contract or commitment under
which any firm or other organization provides services to Expert or any of
the Expert Subsidiaries;
(ii) any fidelity or surety bond or completion bond;
(iii) any agreement of indemnification or guaranty;
(iv) any agreement, contract, commitment, transaction or series of
transactions for any purpose other than in the ordinary course of Expert's
or any of the Expert Subsidiaries' business relating to capital expenditures
or commitments or long-term obligations in excess of $50,000;
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(v) any agreement, contract or commitment relating to the disposition or
acquisition of assets or any interest in any business enterprise outside the
ordinary course of Expert's or any of the Expert Subsidiaries' business;
(vi) any mortgages, indentures, loans or credit agreements, security
agreements or other arrangements or instruments relating to the borrowing of
money or extension of credit, including guaranties referred to in clause
(iii) hereof;
(vii) any purchase order or contract for the purchase of inventory or
other materials involving $50,000 or more;
(viii) any distribution, joint marketing or development agreement;
(ix) any assignment, license or other agreement with respect to any form
of intangible property; or
(x) any other agreement, contract or commitment that involves $50,000 or
more or is not cancelable without penalty in excess of $50,000 within thirty
(30) days (collectively, any of (i) through (x) above shall be known as
"Contracts").
(a) Except as would not individually or in the aggregate have an Expert
Material Adverse Effect, all such Contracts are valid and binding on Expert and
are in full force and effect and enforceable against Expert in accordance with
their respective terms. Except as disclosed in Section 4.18(b) of the Expert
Disclosure Letter, no approval or consent of, or notice to any Person the
failure of which to obtain would have an Expert Material Adverse Effect is
needed in order that such Contracts shall continue in full force and effect in
accordance with its terms without penalty, acceleration or rights of early
termination following the consummation of the transactions contemplated by this
Agreement. Except to the extent any of the following would not individually or
in the aggregate have an Expert Material Adverse Effect, Expert is not in
violation of, breach of or default under any such Contract nor, to Expert's
knowledge, is any other party to any such Contract. Except as set forth in
Section 4.18 of the Expert Disclosure Letter, Expert is not in violation or
breach of or default under any such Contract (including leases of real property)
relating to non-competition, indebtedness, guarantees of indebtedness of any
other person, employment, or collective bargaining.
4.19 EMPLOYEE MATTERS AND BENEFIT PLANS.
(a) DEFINITIONS. With the exception of the definition of "Affiliate" set
forth in Section 4.19(a)(i) below (which definition shall apply only to this
Section 4.19), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other Person under common control with or
otherwise required to be aggregated with Expert or any Subsidiary as set
forth in Section 414(b), (c), (m) or (o) of the Code and the regulations
thereunder;
(ii) "Employee" shall mean any current, former or retired employee,
officer, or director of Expert or any Subsidiary or any Affiliate:
(iii) "Employee Agreement" shall refer to any material management,
employment, severance, consulting, relocation, repatriation, expiration,
visas, work permit or similar agreement or contract between Expert or any
Subsidiary or any Affiliate and any Employee or consultant that is not an
Employee Plan;
(iv) "Employee Plan" shall refer to any plan, program, policy, practice,
contract, agreement or other arrangement providing for compensation,
severance, termination pay, performance awards, stock or stock-related
awards, fringe benefits or other employee benefits or remuneration of any
kind, whether formal or informal, funded or unfunded and whether or not
legally binding, including without limitation, each "employee benefit plan"
within the meaning of Section 3(3) of ERISA (as defined
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below), which is or has been maintained, contributed to, or required to be
contributed to, by Expert or any of its Subsidiaries or any Affiliate for
the benefit of any "Employee" (as defined below), and pursuant to which
Expert or any Subsidiary or any Affiliate has or may have any material
liability contingent or otherwise;
(v) "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as defined
below) which is a "multiemployer plan," as defined in Sections 3(37) and
4001(a)(3) of ERISA; and
(viii) "Pension Plan" shall refer to each Expert and Subsidiary Employee
Plan which is an "employee pension benefit plan," within the meaning of
Section 3(2) of ERISA.
(b) Section 4.19(b) of the Expert Disclosure Letter contains an accurate and
complete list of each Employee Plan (including for each such plan a description
of any of the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement of the value of any of the benefits of which will
be calculated on the basis of any transactions contemplated by this Agreement)
and each Employee Agreement of Expert. Except as set forth in Section 4.19(b) of
the Expert Disclosure Letter, neither Expert nor any of its Subsidiaries or
Affiliates has any announced plan or commitment, whether legally binding or not,
to establish any new Employee Plan or Employee Agreement, to modify any Employee
Plan or Employee Agreement (except to the extent required by law or to conform
any such Employee Plan or Employee Agreement to the requirements of any
applicable law, in each case as previously disclosed to Expert in writing, or as
required by this Agreement), or to enter into any Employee Plan or Employee
Agreement, nor does it have any intention or commitment to do any of the
foregoing.
(c) DOCUMENTS. Expert has provided to Activision correct and complete
copies of all material documents embodying or relating to each Employee Plan and
each Employee Agreement including: (i) all amendments thereto and written
interpretations thereof; (ii) the most recent annual actuarial valuations, if
any, prepared for each Employee Plan; (iii) the three most recent annual reports
(Series 5500 and all schedules thereto), if any, required under ERISA or the
Code in connection with each Employee Plan or related trust; (iv) if the
Employee Plan is funded, the most recent annual and periodic accounting of
Employee Plan assets; (v) the most recent summary plan description together with
the most recent summary of material modifications, if any, required under ERISA
with respect to each Employee Plan; (vi) all IRS determination letters and
rulings relating to Employee Plans and copies of all applications and
correspondence to or from the IRS or the Department of Labor ("DOL") with
respect to any Employee Plan; (vii) all communications material to any Employee
or Employees relating to any Employee Plan and any proposed Employee Plans, in
each case, relating to any amendments, terminations, establishments, increases
or decreases in benefits, acceleration of payments or vesting schedules or other
events which would result in any material liability to Expert or any Expert
Subsidiary; and (viii) all registration statements and prospectuses prepared in
connection with each Employee Plan.
(d) EMPLOYEE PLAN COMPLIANCE. (i) Except as set forth in Section 4.19(d)
of the Expert Disclosure Letter, Expert and each of the Expert Subsidiaries and
Affiliates has performed in all material respects all obligations required to be
performed by them under each Employee Plan, and each Employee Plan has been
established and maintained in all material respects in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA and the Code; (ii) no
"prohibited transaction," within the meaning of Section 4975 of the Code or
Section 406 of ERISA for which no class or statutory exemption is available, has
occurred with respect to any Employee Plan; (iii) there are no material actions,
suits or claims pending or, to the knowledge of Expert, threatened or
anticipated (other than routine claims for benefits) against any Employee Plan
or against the assets of any Employee Plan; (iv) such Employee Plan can be
amended, terminated or otherwise discontinued after
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the Effective Time in accordance with its terms, without material liability to
Expert or any of the Expert Subsidiaries or any of its Affiliates (other than
ordinary administration expenses typically incurred in a termination event); (v)
there are no audits, inquiries or proceedings pending or, to the knowledge of
Expert, threatened by the IRS or DOL with respect to any Employee Plan; (vi)
neither Expert nor any of its Subsidiaries is subject to any penalty or tax with
respect to any Employee Plan under Section 402(i) of ERISA or Section 4975
through 4980 of the Code; and (vii) all contributions, including any top heavy
contributions, required to be made prior to the Closing by Expert or any ERISA
Affiliate to any Employee Plan have been made or shall be made on or before the
Closing Date.
(e) PENSION PLANS. Neither Expert nor any of the Expert Subsidiaries or
Affiliates currently maintain, sponsor, participate in or contribute to, nor
have they ever maintained, established, sponsored, participated in, or
contributed to, any Pension Plan which is subject to Part 3 of Subtitle B of
Title I of ERISA, Title IV of ERISA or Section 412 of the Code.
(f) MULTIEMPLOYER PLANS. At no time has Expert or any of the Expert
Subsidiaries or Affiliates contributed to or been requested or obligated to
contribute to any Multiemployer Plan.
(g) NO POST-EMPLOYMENT OBLIGATIONS. Except as set forth in Section 4.19(g)
of the Expert Disclosure Letter or as required by local, state or federal law,
no Employee Plan or any other employment agreement or arrangement to which
Expert is a party provides, or is required to provide, life insurance, medical
or other employee benefits to any Employee upon his or her retirement or
termination of employment for any reason, and Expert and each of the Expert
Subsidiaries has never represented, promised or contracted (whether in oral or
written form) to any Employee (either individually or to Employees as a group)
that such Employee(s) would be provided with life insurance, medical or other
employee welfare benefits upon their retirement or termination of employment.
(h) EFFECT OF TRANSACTION. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee, except as set forth in
Schedule 4.19(h) of the Expert Disclosure Letter.
(i) EMPLOYMENT MATTERS. Expert and each of the Expert Subsidiaries (i) is
in compliance in all respects with all applicable foreign, federal, state and
local laws, rules and regulations respecting employment, employment practices,
terms and conditions of employment and wages and hours, in each case, with
respect to Employees except as would not have an Expert Material Adverse Effect;
(ii) has withheld all amounts required by law or by agreement to be withheld
from the wages, salaries, and other payments to Employees; (iii) is not liable
for any arrears of wages of any taxes or any penalty for failure to comply with
any of the foregoing; and (iv) is not liable for any payment to any trust or
other fund or to any governmental or administrative authority, with respect to
unemployment compensation benefits, social security or other benefits or
obligations for Employees (other than routine payments to be made in the normal
course of business and consistent with past practice).
(j) LABOR. No work stoppage or labor strike against Expert or any Expert
Subsidiary is pending or, to the knowledge of Expert, threatened. Neither Expert
nor any of the Expert Subsidiaries is involved in or, to the knowledge of
Expert, threatened with, any labor dispute, grievance, administrative proceeding
or litigation relating to labor, safety, employment practices or discrimination
matters involving any Employee, including, without limitation, charges of unfair
labor practices or discrimination complaints, which, if adversely determined,
would, individually or in the aggregate, have an Expert Material Adverse Effect.
Neither Expert nor any of the Expert Subsidiaries has engaged in any unfair
labor practices within the meaning of the National Labor Relations Act which
would, individually or in the aggregate, directly or indirectly have an Expert
Material Adverse Effect. Neither Expert nor any of the Expert Subsidiaries or
Affiliates has ever been a party to any agreement with any labor organization or
union, and none of the
I-21
Employees are represented by any labor organization or union, nor have any
Employees threatened to organize or join a union or filed a petition for
representation with the National Labor Relations Board.
(k) Section 4.19(k) of the Expert Disclosure Letter sets forth (i) the
aggregate amounts of bonus and severance payments that could be payable to
employees of Expert under existing Employee Agreements or Employee Plans on
account of the transactions contemplated by this Agreement (without regard to
termination of employment), and (ii) the aggregate amounts of severance
obligations that could be payable to employees of Expert under existing Employee
Agreements and Employee Plans on account of terminations of employment following
the Effective Time, separately stating the amounts that are payable by reason of
a termination following a change of control of Expert.
4.20 INTELLECTUAL PROPERTY.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
(i) "Intellectual Property" shall mean any or all of the following and
all rights in, arising out of, or associated therewith: (a) all United
States, international and foreign patents and applications therefor and all
reissues, divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (b) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data, customer lists,
proprietary processes and formulae, all source and object code, algorithms,
architectures, structures, display screens, layouts, inventions, development
tools and all documentation and media constituting, describing or relating
to the above, including, without limitation, manuals, memoranda and records;
(c) all copyrights, copyrights registrations and applications therefor, and
all other rights corresponding thereto throughout the world; (d) all
industrial designs and any registrations and applications therefor
throughout the world; (e) all trade names, logos, common law trademarks and
service marks, trademark and service mark registrations and applications
therefor throughout the world; (f) all proprietary databases and data
collections and all rights therein throughout the world; and (g) any
equivalent rights to any of the foregoing anywhere in the world.
(ii) "Expert Intellectual Property" shall mean that Intellectual
Property owned by, licensed to, or used by Expert or any of the Expert
Subsidiaries.
(iii) "Expert Registered Intellectual Property" means those United
States, international and foreign: (a) patents and patent applications
(including provisional applications); (b) registered trademarks and service
marks, applications to register trademarks or service marks, intent-to-use
applications, or other registrations or applications related to trademarks
or service marks; and (c) registered copyrights and applications for
copyright registration. All of the foregoing are listed in Section
4.20(a)(iii) of the Expert Disclosure Letter.
(b) Section 4.20(b) of the Expert Disclosure Letter lists all non-routine
proceedings or actions known to Expert before any court, tribunal (including the
United States Patent and Trademark Office ("PTO") or equivalent authority
anywhere in the world) related to any Expert Intellectual Property. No Expert
Intellectual Property is the subject of any non-routine proceeding or
outstanding decree, order, judgment, agreement, or stipulation restricting in
any manner the use, transfer, or licensing thereof by Expert or any of the
Expert Subsidiaries, or which may affect the validity, use or enforceability of
such Expert Intellectual Property.
(c) With respect to each item of Expert Registered Intellectual Property,
necessary registration, maintenance and renewal fees in connection with such
Expert Registered Intellectual Property have been made and all necessary
documents and certificates in connection with such Expert Registered
Intellectual Property have been filed with the relevant patent, trademark or
copyright authorities in the United States or abroad for the purposes of
maintaining such Expert Registered Intellectual Property.
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(d) Expert and each Expert Subsidiary has the right to use, market,
distribute, sell or license all Expert Intellectual Property used in its
business as presently conducted and as it is expected to be conducted as of the
Effective Time, including without limitation, all Intellectual Property used or
to be used in the Expert Products (as defined below), and such rights to use,
market, distribute, sell or license are sufficient for such conduct of their
respective businesses.
(e) Neither the manufacture, development, publication, marketing, license,
sale, distribution or use intended by the Expert or any of the Expert
Subsidiaries of any software products currently being licensed, produced or sold
by Expert or any of the Expert Subsidiaries or currently under development or
consideration by Expert or any of the Expert Subsidiaries (the "Expert
Products") violates any license or agreement between Expert or any of the Expert
Subsidiaries and any third party or infringes any Intellectual Property right,
moral right or right of publicity or privacy of any other party, and there is no
pending or, to the knowledge of Expert, threatened claim or litigation
contesting the validity, ownership or right to use, market, distribute, sell,
license or dispose of any Expert Intellectual Property nor, to the knowledge of
Expert, is there any basis for any such claim under applicable law, nor has
Expert or any of the Expert Subsidiaries received any notice asserting that any
Expert Intellectual Property or the proposed use, marketing, distribution, sale,
license or disposition thereof conflicts or will conflict with the rights of any
other party, nor, to the knowledge of Expert, is there any basis for any such
assertion under applicable law. Section 4.20(e) of the Expert Disclosure Letter
sets forth a list of all Expert Products.
(f) Expert and the Expert Subsidiaries have timely and satisfactorily
complied with their respective milestone delivery requirements under all
material agreements pursuant to which Expert or any of the Expert Subsidiaries,
as the case may be, has agreed to program, design or develop on behalf of a
third party, whether for original use or for porting or conversion (for use on a
different hardware platform or in a different language), any software products
or any part thereof, except where the failure to so comply could not reasonably
be expected to have an Expert Material Adverse Effect.
(g) Except as set forth in Section 4.20(g) of the Expert Disclosure Letter,
to the extent that any work, invention, or material has been developed or
created by a third party for Expert or any of the Expert Subsidiaries, Expert
and each of the Expert Subsidiaries has a written agreement with such third
party with respect thereto and Expert and each of the Expert Subsidiaries
thereby has obtained ownership of, and is the exclusive owner of, or has a valid
license to use, all Expert Intellectual Property in such work, material or
invention by operation of law or by valid assignment or by agreement, as the
case may be.
(h) Section 4.20(h) of the Expert Disclosure Letter lists all material
contracts, licenses and agreements to which Expert or any of the Expert
Subsidiaries is a party that are currently in effect (i) with respect to Expert
Intellectual Property licensed or offered to any third party; or (ii) pursuant
to which a third party has licensed or transferred any Intellectual Property to
Expert or any of the Expert Subsidiaries. Except as set forth in Section 4.20(h)
of the Expert Disclosure Letter, neither Expert nor any of the Expert
Subsidiaries has transferred ownership of, or granted any exclusive license with
respect to, any Expert Intellectual Property, to any third party.
(i) Except as set forth in Section 4.20(i) of the Expert Disclosure Letter,
the contracts, licenses and agreements listed in Section 4.20(h) are in full
force and effect. The consummation of the transactions contemplated by this
Agreement will not violate or result in the breach, modification, cancellation,
termination, or suspension of such contracts, licenses and agreements listed in
Section 4.20(i) and will not cause the forfeiture or termination or give rise to
a right of forfeiture or termination of any rights of Expert to any Expert
Intellectual Property or impair the right of Expert or any of the Expert
Subsidiaries or the Surviving Corporation to use, market, distribute, sell or
license any Expert Intellectual Property or portion thereof. Expert and each of
the Expert Subsidiaries is in material compliance with, and has not materially
breached any term any of such contracts, licenses and agreements listed in
Section 4.20(i) and, to the knowledge of Expert, all other parties to such
contracts, licenses and agreements listed in Section 4.20(i) are in compliance
with, and have not breached any term of, such contracts, licenses and
I-23
agreements. Except as set forth in Section 4.20(i) of the Expert Disclosure
Letter, following the Effective Time the Surviving Corporation will be permitted
to exercise all of Expert's and each of the Expert Subsidiaries', if any, rights
under the contracts, licenses and agreements listed in Section 4.20(h) to the
same extent Expert and such Expert Subsidiary would have been able to had the
transactions contemplated by this Agreement not occurred and without the payment
of any additional funds other than ongoing fees, royalties or payments which
Expert or such Expert Subsidiary would otherwise be required to pay.
(j) Section 4.20(j) of the Expert Disclosure Letter lists all contracts,
licenses and agreements between Expert or any of its Subsidiaries and any third
party wherein or whereby Expert or any of its Subsidiaries has agreed to, or
assumed, other than in the ordinary course of business, any obligation or duty
to warrant, indemnify, hold harmless or otherwise assume or incur any obligation
or liability with respect to the infringement or misappropriation by Expert or
any of the Expert Subsidiaries or such third party of the Intellectual Property
of any third party.
(k) Except as set forth in Section 4.20(k) of the Expert Disclosure Letter,
(a) Expert and each of the Expert Subsidiaries (including each of their
executive officers, directors and, to the knowledge of Expert, employees) has
not received any notice or claim (whether written, oral or otherwise)
challenging Expert's ownership or rights in the Expert Intellectual Property or
claiming that any other person or entity has any legal or beneficial ownership
with respect thereto; (b) all the Expert Intellectual Property rights owned by
Expert and embodied in its products are legally valid and enforceable without
any material qualification, limitation or restriction on their use, and Expert
has not received any notice or claim (whether written or oral) challenging the
validity or enforceability of any of the Expert Intellectual Property rights;
and (c) to Expert's knowledge, no third party is infringing or misappropriating
any part of the Expert Intellectual Property.
(l) Expert and each of the Expert Subsidiaries has taken reasonable and
practicable measures designed to protect their respective rights in their
respective confidential information and trade secrets or any trade secrets or
confidential information of third parties provided to Expert or any of the
Expert Subsidiaries. None of Expert or any of the Expert Subsidiaries, or any
employees or, to Expert's knowledge, consultants of Expert or any of the Expert
Subsidiaries, has permitted any such confidential information or trade secrets
to be used, divulged or appropriated for the benefit of Persons to the material
detriment of Expert or any of the Expert Subsidiaries.
(m) Section 4.20(n) of the Expert Disclosure Letter sets forth a list of all
Internet domain names used by Expert in its business (collectively, the "Domain
Names"). Expert has, and after the Effective Time the Surviving Corporation will
have, a valid registration and all material rights (free of any material
restriction) in and to the Domain Names, including, without limitation, all
rights necessary to continue to conduct Expert's business as it is currently
conducted.
4.21 ANTI-TAKEOVER PLAN. Except for the Shareholders' Rights Agreement
dated November 9, 1995 between Expert and The First National Bank of Boston (the
"Rights Agreement") or as set forth in Section 4.21 of the Expert Disclosure
Letter, neither Expert nor any Expert Subsidiary has in effect any plan, scheme,
device or arrangement, commonly or colloquially known as a "poison pill" or, an
"anti-takeover" plan or any similar plan, scheme, device or arrangement. Under
the Rights Agreement, as a result of the Merger or the execution of this
Agreement, neither Activision nor any stockholder of Activision or any Affiliate
or Associate (as such terms are defined in the Rights Agreement) of Activision
or of any such stockholder of Activision will become an "Acquiring Person"; no
"Stock Acquisition Date" or "Distribution Date" (as such terms are defined in
the Rights Agreement) will occur; and the holders of any rights issued pursuant
to the Rights Agreement will not be entitled to receive any benefits under the
Rights Agreement as a result of the approval, execution or delivery of this
Agreement or the consummation of the transactions contemplated hereby. From and
after the date of this Agreement until the Effective Time, Expert shall not take
any action that would cause, as a result of the Merger or the execution of this
Agreement, Activision or any stockholder of Activision or any Affiliate or
Associate of
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Activision or of any such stockholder to become an "Acquiring Person" under the
Rights Agreements, or that would cause a "Stock Acquisition Date" or
"Distribution Date" to occur or give the holders of any Rights (as such term is
defined in the Rights Agreement) any benefits under the Rights Agreement, as a
result of the Merger or any of the transactions contemplated by this Agreement.
4.22 SHAREHOLDER VOTE REQUIRED. The only vote of the holders of any class
or shares of capital stock of Expert necessary to approve the Merger and the
transactions contemplated by this Agreement is the affirmative vote of holders
of a majority of the outstanding Expert Shares.
4.23 UNDISCLOSED LIABILITIES. Except as and to the extent reflected,
reserved against or otherwise disclosed in The Recent Financial Statements
(including the notes thereto) or as set forth in Section 4.23 of the Expert
Disclosure Letter, neither Expert nor any Expert Subsidiary had, at December 31,
1998, any liabilities or obligations of any kind, whether accrued, absolute,
asserted or unasserted, contingent or otherwise, whether or not such liabilities
would have been required to be reflected in a balance sheet prepared in
accordance with generally accepted accounting principles consistently applied,
which would have, individually or in the aggregate, an Expert Material Adverse
Effect.
4.24 INSURANCE. Expert maintains, and has maintained or caused to be
maintained, without interruption, during its existence, policies or binders of
insurance covering such risk, and events, including personal injury, property
damage, errors and omissions and general liability in amounts Expert reasonably
believes adequate for its business and operations, and its current insurance
policies (other than directors' and officers' insurance) will not terminate due
to the consummation of the Merger. Section 4.24 of the Expert Disclosure Letter
sets forth a summary of all current insurance policies (including, without
limitation, limits, deductibles and terms) maintained by Expert and the Expert
Subsidiaries.
4.25 TAX TREATMENT. To Expert's knowledge, neither Expert nor any of the
Expert Subsidiaries has taken any action or engaged in any activities that would
preclude the treatment of the Merger as a reorganization under Section 368(a) of
the Code other than, if applicable, accepting Activision's Section 2.3 Election.
In addition, neither Expert nor any of the Expert Subsidiaries has any plan or
intention to take any action or engage in any activities that would preclude the
treatment of the Merger as a reorganization under Section 368(a) of the Code.
4.26 RELATIONSHIPS WITH SUPPLIERS, LICENSORS AND CUSTOMERS. No current
distributor, customer of Expert or supplier to Expert or any of the Expert
Subsidiaries has notified Expert or such Expert Subsidiary of an intention to
terminate or substantially alter its existing business relationship with Expert
or such Expert Subsidiary, nor has any licensor under a license agreement with
Expert or any of the Expert Subsidiaries notified Expert or such Expert
Subsidiary of an intention to terminate or substantially alter Expert's or such
Expert Subsidiary's rights under such license, which termination or alteration
would have an Expert Material Adverse Effect.
4.27 BANK ACCOUNTS. Section 4.27 of the Expert Disclosure Letter contains
(a) a true and complete list of names and locations of all banks, trust
companies, securities brokers, and other financial institutions at which Expert
and each Expert Subsidiary has an account or safe deposit box or maintains a
banking, custodial, trading, trust, or other similar relationship, (b) a true
and complete list and description of each such account, box and relationship,
(c) a list of all signatories for each such account and box and (d) a list of
all compensating balances required with respect to each such account.
4.28 YEAR 2000 PROBLEM. Except as set forth in Section 4.28 of the Expert
Disclosure Letter, each hardware, software and firmware product used by Expert
or any Expert Subsidiary in its business and all Expert Products (collectively,
the "Software") will accurately process date data (including, but not limited
to, calculating, comparing and sequencing) from, into and between the twentieth
and twenty-first centuries, including, without limitation, leap year
calculations, without a decrease in the functionality of the Software except for
such inaccuracies that do not have an Expert Material Adverse Effect. Except as
set forth in Section 4.28 of the Expert Disclosure Letter, the Software is
designed to be used prior to, during and after
I-25
the calendar year 2000 A.D. and will operate during each such time period
without error relating to date data, specifically including any error relating
to, or the product of, date data which represents or references different
centuries or more than one century except for such errors as do not have an
Expert Material Adverse Effect. Without limiting the generality of the
foregoing, except as set forth in Section 4.28 of the Expert Disclosure Letter,
the Software (a) will not abnormally end or provide invalid or incorrect results
as a result of date data, specifically including date data which represents or
references different centuries or more than one century and (b) has been
designed to ensure year 2000 compatibility, including, but not limited to, date
data century recognition, calculations which accommodate same century and
multi-century formulas and date values, and date data interface values that
reflect the century.
5. REPRESENTATIONS AND WARRANTIES OF ACTIVISION AND MERGER SUBSIDIARY
Activision and Merger Subsidiary hereby represent and warrant to Expert as
follows:
5.1 ORGANIZATION; GOOD STANDING; AUTHORITY; COMPLIANCE WITH LAW.
(a) Activision is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and Merger Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Activision and Merger Subsidiary has all
requisite power and authority to own, lease and operate its properties and to
carry on its business as now conducted. Activision is duly licensed or qualified
and is in good standing to transact business as a foreign corporation in each
jurisdiction in which the character of the properties owned or leased by it
therein or in which the nature of its business makes such qualification or
licensing necessary, except where the failure to be so licensed or qualified
would not have, individually or in the aggregate, an Activision Material Adverse
Effect. For purposes of this Agreement, an "Activision Material Adverse Effect,"
means a material adverse effect on the business, assets (including intangible
assets), financial condition or results of operations of Activision and its
Material Activision Subsidiaries (as defined below), taken as a whole.
(b) Each of Activision's material Subsidiaries (the "Material Activision
Subsidiaries") is a corporation or partnership duly incorporated or formed,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or formation, has the corporate or partnership power and authority
to own its properties and to carry on its business as it is now being conducted,
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not have,
individually or in the aggregate, an Activision Material Adverse Effect. Each of
the Material Activision Subsidiaries is wholly-owned, directly or indirectly, by
Activision (other than directors' qualifying shares).
(c) Except as described in the Activision SEC Reports (as defined below),
the business of Activision and the Material Activision Subsidiaries has been
operated in compliance with all laws, ordinances, regulations and orders of all
governmental entities, except for violations which would not have, individually
or in the aggregate, an Activision Material Adverse Effect. Activision and the
Material Activision Subsidiaries have all Government Approvals of all
Governmental Agencies, required by law with respect to the operation of their
businesses, except those the absence of which would not, individually or in the
aggregate, have an Activision Material Adverse Effect or prevent or delay
consummation of the Merger. All such Government Approvals are in full force and
effect, and Activision and the Material Activision Subsidiaries are in
compliance with all conditions and requirements of the Government Approvals and
with all rules and regulations relating thereto other than failures that would
not have an Activision Material Adverse Effect. Activision has not received any
notices of violations of any Federal, state and local laws, regulations and
ordinances relating to its business, operations or assets which, if it were
determined that a violation had occurred, would have an Activision Material
Adverse Effect.
I-26
(d) The Certificate of Incorporation or other charter documents and Bylaws
(and in each such case, all amendments thereto) of Activision are described in
the Activision SEC Reports, and true and correct copies have previously been
delivered or made available to Expert and its counsel.
5.2 AUTHORIZATION, VALIDITY AND EFFECT OF AGREEMENTS. Activision and
Merger Subsidiary each has the requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. To the extent required by law, the Board of Directors of
each of Activision and Merger Subsidiary have approved this Agreement, the
Merger, and the transactions contemplated by this Agreement. No vote of the
Activision stockholders is required to approve the issuance of the Activision
Common Stock as contemplated by this Agreement. The execution by Activision and
Merger Subsidiary of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by all requisite action
on the part of Activision and Merger Subsidiary. Assuming this Agreement
constitutes a valid and binding obligation of expert, this Agreement constitutes
the valid and legally binding obligation of Activision and Merger Subsidiary,
enforceable against Activision and Merger Subsidiary in accordance with its
terms, subject to applicable bankruptcy, insolvency, moratorium or other similar
laws relating to creditors' rights and general principles of equity.
5.3 CAPITALIZATION. The authorized capital stock of Activision consists of
50,000,000 shares of Activision Common Stock and 5,000,000 shares of preferred
stock, $.000001 par value (the "Activision Preferred Shares"). As of the date
hereof, there are not more than 22,509,792 shares of Activision Common Stock
issued and outstanding and no Activision Preferred Shares issued and
outstanding. All such outstanding shares of Activision are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. The
authorized capital stock of Merger Subsidiary consists of 1,000 shares of common
stock, par value $1.00. As of the date hereof, 100 shares of common stock of
Merger Subsidiary are issued and outstanding, fully paid and non-assessable and
owned by Activision. Except as described in the Activision SEC Reports,
Activision has no outstanding bonds, debentures, notes or other obligations the
holders of which have or upon the happening of certain events would have the
right to vote (or which are convertible into or exercisable for securities
having the right to vote) with the stockholders of Activision on any matter.
Except as described in the Activision SEC Reports, there are no existing
options, warrants, calls, subscriptions, convertible securities, or other
rights, agreements, stock appreciation rights or similar derivative securities
or instruments or commitments which obligate Activision to issue, transfer or
sell any Shares of Activision Common Stock or make any payments in lieu thereof
other than options granted to employees, directors and consultants after the
date of the most recent SEC Report.
(a) The shares of Activision Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and unassessable and
free of preemptive rights of any nature.
(b) As of the date hereof, Activision has outstanding and effective three
employee or director stock purchase or option plans, each of which has been
approved and adopted by the Board of Directors of Activision and approved by the
stockholders of Activision: (i) the 1991 Stock Option and Stock Award Plan (the
"Option Plan"), (ii) the Employee Stock Purchase Plan (the "ESPP"), and (iii)
the 1998 Incentive Plan (the "Incentive Plan"). The Option Plan, as amended,
authorizes the granting of options and other awards with respect to an aggregate
of 7,566,677 shares of Activision Common Stock. As at December 31, 1998, no
shares were available for grant under the Option Plan. The Incentive Plan
authorizes the granting of options and other awards with respect to an aggregate
of 3,000,000 shares of Activision Common Stock. As at December 31, 1998, there
were an aggregate of 1,667,950 remaining shares of Activision Common Stock
reserved and available for grant under the Incentive Plan. The Option Plan and
the ESPP are described in Activision's Annual Report on Form 10-K for the fiscal
year ended March 31, 1998. The Incentive Plan is described in Activision's
definitive proxy statement for its annual meeting of stockholders held on
September 23, 1998.
5.4 NO VIOLATION. Neither the execution and delivery by Activision and
Merger Subsidiary of this Agreement nor the consummation by Activision and
Merger Subsidiary of the transactions contemplated
I-27
by this Agreement in accordance with its terms will: (i) conflict with or result
in a breach of any provisions of Activision's or Merger Subsidiary's respective
certificate of incorporation or by-laws; (ii) violate, result in a breach of any
provision of, or constitute a default under, or require any approval or consent
under or result in the termination or in a right of termination or cancellation
of, or accelerate the performance required by or result in a material adverse
change to, or result in the creation of any lien, security interest, charge or
encumbrance upon any of Activision's or Merger Subsidiary's properties under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust or any license, franchise, permit, lease, contract,
agreement or other instrument to which Activision or Merger Subsidiary is a
party, or by which Activision or Merger Subsidiary or any of their properties is
bound or affected, except for any of the foregoing matters in this clause which,
individually or in the aggregate, would not have an Activision Material Adverse
Effect; (iii) contravene or conflict with or constitute a violation of any
provision of any law, rule, regulation, judgment, injunction, order or decree
binding upon or applicable to Activision or Merger Subsidiary; or (iv) other
than the filings provided for in this Agreement and the Regulatory Filings,
require any consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority which has not been
obtained or made, except where the failure to obtain any such consent, approval
or authorization of, or declaration, filing or registration with, any
governmental or regulatory authority would not have an Activision Material
Adverse Effect.
5.5 TAX TREATMENT. Neither Activision nor Merger Subsidiary has taken any
action or engaged in any activities that would preclude the treatment of the
Merger as a reorganization under Section 368(a) of the Code other than, if
applicable, making a Section 2.3 Election. In addition, neither Activision nor
Merger Subsidiary has engaged in or planned to engage in any activities that
would preclude the treatment of the Merger as a reorganization under Section
368(a) of the Code.
5.6 SEC DOCUMENTS. Since March 31, 1997, Activision has timely filed with
the SEC all forms, reports and documents required to be filed by Activision
since March 31, 1997 under the Securities Laws, including, without limitation,
(i) all Annual Reports on form 10-K, (ii) all Quarterly Reports on form 10-Q,
(iii) all proxy statements relating to meetings of stockholders (whether annual
or special), (iv) all Current Reports on form 8-K and (v) all other reports,
schedules, registration statements and other documents, each as amended
(collectively, the "Activision SEC Reports"), all of which were prepared in
compliance in all material respects with the applicable requirements of the
Exchange Act and the Securities Act. Activision has no knowledge that any
Activision SEC Reports required to be filed with the SEC prior to March 31, 1997
have not been filed. As of their respective dates, except as set forth in
Section 5.6 of the disclosure letter delivered at or prior to the execution
hereof to Expert, which shall refer to the relevant sections of this Agreement
(the "Activision Disclosure Letter"), the Activision SEC Reports (i) complied as
to form in all material respects with the applicable requirements of the
Securities Laws and (ii) did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading. Each of the consolidated balance sheets of
Activision included in or incorporated by reference into the Activision SEC
Reports (including the related notes and schedules) fairly presents the
consolidated financial position of Activision and its consolidated subsidiaries
as of its date and each of the consolidated statements of operations, cash flows
and shareholders' equity included in or incorporated by reference into the
Activision SEC Reports (including any related notes and schedules) fairly
presents the results of operations, cash flows and shareholders' equity, as the
case may be, of Activision and its consolidated subsidiaries for the periods set
forth therein (subject, in the case of unaudited statements, to normal year-end
audit adjustments which would not be material in amount or effect), in each case
in accordance with generally accepted accounting principles consistently applied
during the periods involved, except as may be noted therein and except, in the
case of the unaudited statements, as permitted by Form 10-Q pursuant to Section
13 or 15(d) of the Exchange Act.
5.7 FINANCIAL STATEMENTS. Except as set forth in Section 5.7 of the
Activision Disclosure Letter, each of the consolidated balance sheets of
Activision included in or incorporated by reference into the
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Activision SEC Reports (including the related notes and schedules) fairly
presents the consolidated financial position of Activision and the Material
Activision Subsidiaries as of its date and each of the consolidated statements
of operations, cash flows and stockholders' equity included in or incorporated
by reference into the Activision SEC Reports (including any related notes and
schedules) fairly presents the results of operations, cash flows and
stockholders' equity, as the case may be, of Activision and the Material
Activision Subsidiaries for the periods set forth therein (subject, in the case
of unaudited statements, to normal year--end audit adjustments which would not
be material in amount or effect), in each case in accordance with generally
accepted accounting principles consistently applied during the periods involved,
except as may be noted therein and except, in the case of the unaudited
statements, as permitted by applicable law.
5.8 LITIGATION. Except as set forth in Section 5.8 of the Activision
Disclosure Letter, there are (i) no continuing orders, injunctions or decrees of
any court, arbitrator or governmental authority to which Activision or any
Material Activision Subsidiary is a party or by which any of its properties or
assets are bound or likely to be affected and (ii) no actions, suits or
proceedings pending against Activision or any Material Activision Subsidiary as
to which any of their respective properties or assets are subject or, to the
knowledge of Activision threatened against Activision or any Material Activision
Subsidiary or to which any of their respective properties or assets are subject,
at law or in equity, that in each such case could, individually or in the
aggregate, have an Activision Material Adverse Effect.
5.9 ABSENCE OF CERTAIN CHANGES. Except as disclosed in the Activision SEC
Reports filed with the SEC prior to the date hereof, since December 31, 1998,
Activision and the Material Activision Subsidiaries have conducted their
business only in the ordinary course of such business and consistent with past
practices and there has not been any:
(a) material adverse change in the financial condition, properties,
assets (including intangible assets), businesses, operations or results of
operations of Activision and the Material Activision Subsidiaries, taken as
a whole, PROVIDED, HOWEVER, that none of the following, in and of itself,
shall constitute a material adverse change within the meaning of this clause
(a): (i) a change in the market price of Activision Common Stock; (ii) a
report of quarterly or fiscal year earnings for any period that are lower
than the comparable previous period or lower than analysts' expectations,
provided, that this clause (ii) shall not be applicable with respect to a
fiscal quarter if Activision reports a net loss for such fiscal quarter in
excess of $.05 per share on a fully diluted basis; and (iii) the
consummation by Activision or its subsidiaries of an acquisition,
disposition, financing or similar transaction approved by Activision's Board
of Directors;
(b) amendment or change in the Certificate of Incorporation or By-Laws
of Activision;
(c) except as set forth in Section 5.9(c) of the Activision Disclosure
Letter, issuance or sale of any debt or equity securities of Activision or
any of its Subsidiaries, other than exercises of stock options, or any
options, warrants or other rights to acquire from Activision or any of its
Subsidiaries, directly or indirectly, any debt or equity securities of
Activision or any of its Subsidiaries, other than the granting of stock
options to employees, directors and consultants;
(d) agreement or arrangement made by Activision to take any action after
the date hereof which, if taken prior to the date hereof, would have made
any representation or warranty of Activision set forth in Article 5 of this
Agreement untrue or incorrect as of the date when made; or
(e) declaration, setting aside or payment of any dividend on, or the
making of any other distribution in respect of, the capital stock of
Activision, any split, combination or recapitalization of the capital stock
of Activision or any direct or indirect redemption, purchase or other
acquisition of the capital stock of Activision or any change in any rights,
preferences, privileges or restrictions of any outstanding security of
Activision.
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5.10 OWNERSHIP OF EXPERT SHARES. As of the date hereof, and during the
three (3) year period immediately preceding the date hereof, neither Activision
nor, to Activision's knowledge, any affiliate or associate (as defined in
Section 203 of the DGCL) thereof, is an "interested stockholder" of Expert
within the meaning of Section 203 of the DGCL.
5.11 NO BROKERS. Neither Activision nor Merger Subsidiary has entered into
any contract, arrangement or understanding with any person or firm which may
result in the obligation of such entity or Expert to pay any finder's fees,
brokerage or agent's commissions or other like payments in connection with the
negotiations leading to this Agreement or the consummation of the transactions
contemplated hereby. Neither Activision nor Merger Subsidiary is aware of any
claim for payment directly by Activision or Merger Subsidiary of any finder's
fees, brokerage or agent's commissions or other like payments in connection with
the negotiations leading to this Agreement or the consummation of the
transactions contemplated hereby.
5.12 INTELLECTUAL PROPERTY. Except as set forth in Section 5.12 of the
Activision Disclosure Letter, Activision owns or is licensed or otherwise
possesses legally enforceable rights to use, sufficient patents, trademarks,
trade names, trade secrets, service marks, copyrights, and any applications
therefor, schematics, methodologies, technology, know-how, computer software
programs or applications, and tangible or intangible proprietary information or
material that are required for the conduct of business of Activision as
currently conducted and contemplated (the "Activision Intellectual Property
Rights"), except where the failure to own, license or otherwise possess such
rights is not reasonably likely to have an Activision Material Adverse Affect.
Except as set forth in the Activision Disclosure Letter or as would otherwise
not have an Activision Material Adverse Effect, either individually or in the
aggregate, no claims with respect to Activision Intellectual Property Rights
have been asserted or are, to Activision's knowledge, threatened by any person.
To Activision's knowledge, all U.S. registered copyrights, issued patents and
trademarks held by Activision are valid and subsisting and have been properly
maintained and renewed in accordance with all applicable provisions of law and
administrative regulations of the United States and other jurisdictions, as
applicable, except where the failure to maintain and renew the same has not and
is not reasonably likely to have an Activision Material Adverse Effect. Except
as set forth in Section 5.12 of the Activision Disclosure Letter, to
Activision's knowledge, the present and contemplated business, activities and
products of Activision do not infringe any intellectual property of any other
person. Except as set forth in Section 5.12 of the Activision Disclosure Letter,
no proceeding charging Activision with infringement of the intellectual property
rights of any other person has been filed or, to Activision's knowledge, is
threatened to be filed.
5.13 ANTI-TAKEOVER MATTERS. Activision has taken all action necessary to
exempt the transactions contemplated by this Agreement from the operation of any
"fair price," "moratorium," "control share acquisition," or other similar
anti-takeover statute or regulation enacted under the state or federal laws of
the United States. Neither Activision nor any Material Activision Subsidiary has
in effect any plan, scheme, device or arrangement commonly or colloquially known
as a "poison pill" or an "anti-takeover" plan or any similar plan, scheme,
device or arrangement.
5.14 NO SHAREHOLDER VOTE REQUIRED. No vote of the holders of any class of
capital stock of Activision is required to approve the Merger.
5.15 UNDISCLOSED LIABILITIES. Except as set forth in Section 5.15 of the
Activision Disclosure Letter and except as and to the extent reflected, reserved
against or otherwise disclosed in Activision's consolidated balance sheet dated
December 31, 1998 (including the notes thereto), Activision and its consolidated
subsidiaries did not, at December 31, 1998, have any liabilities or obligations
of any kind, whether accrued, absolute, asserted or unasserted, contingent or
otherwise, whether or not such liabilities would have been required to be
reflected in a balance sheet prepared in accordance with generally accepted
accounting principles consistently applied, which would have, individually or in
the aggregate, an Activision Material Adverse Effect.
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5.16 CONTINUITY OF BUSINESS ENTERPRISE. Unless Activision shall have made
the Section 2.3 Election, it is the present intention of Activision to continue
at least one significant historic business line of Expert, or to use at least a
significant portion of Expert's historic assets in a business, in each case
within the meaning of the United States Treasury Regulations Section 1.368-1(d).
5.17 FINANCING. Activision has, and will have at the Effective Time, bank
facilities in place which, either alone or with cash presently on hand, will
provide sufficient funds to consummate the Merger in accordance with the terms
of this Agreement and to consummate the other transactions contemplated hereby.
Activision's bank facilities permit it to borrow money under such facilities and
use such funds to consummate the Merger and other transactions contemplated
hereby.
6. COVENANTS AND OTHER AGREEMENTS
6.1 CONDUCT OF BUSINESSES.
(a) GENERAL. During the period from the date of this Agreement until the
Effective Time, except as specifically permitted by this Agreement, unless the
other party has consented in writing thereto:
(i) Expert and Activision shall use their reasonable best efforts, and
shall cause their respective Subsidiaries to use their reasonable best
efforts, to preserve intact their business organizations and goodwill;
(ii) Expert and Activision shall confer on a regular basis with one or
more representatives of the other to report on material operational matters
relating to the business of Expert and the Expert Subsidiaries;
(iii) Activision will cooperate with and, at the request of Expert,
provide reasonable assistance to Expert to seek to reduce or avoid
disruptions to Expert's business that may result from or arise out of the
announcement or pendency of the transactions contemplated hereby; provided
that Expert shall reimburse Activision for any costs and expenses directly
incurred by Activision in connection with providing any such assistance
(such as personnel expenses for any Activision employees that may be used by
Expert in connection with its business), and Activision shall not be
required to incur any material expenses or liabilities in connection with
such cooperation or assistance;
(iv) Expert and Activision shall promptly notify the other of any
material emergency or other material change in the condition (financial or
otherwise), business, properties, assets, liabilities or the normal course
of its businesses or in the operation of their properties, any material
governmental complaints, investigations or hearings (or communications
indicating that the same may be contemplated);
(v) Expert and Activision shall promptly deliver to the other true and
correct copies of any report, statement or schedule filed with the SEC
subsequent to the date of this Agreement; and
(vi) In the event either party becomes aware that any of its respective
representations or warranties set forth in Sections 4 and 5 hereof will not
be true and correct in all material respects on the Closing Date as if made
at and as of the Closing Date, such party shall give prompt written notice
thereof to the other party, and shall give access to all appropriate
information related thereto that is in its possession or control.
(b) CONDUCT BY EXPERT. Prior to the Closing Date, without the prior
consent of Activision, Expert:
(i) Shall, and shall cause each Expert Subsidiary to, conduct its
operations according to their usual, regular and ordinary course in
substantially the same manner as heretofore conducted and keep available the
services of its officers and employees;
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(ii) Shall not amend Expert's Certificate of Incorporation or By-laws,
and shall cause each Expert Subsidiary not to amend its certificates of
incorporation, bylaws or equivalent organizational documents;
(iii) Shall not, and shall cause each Expert Subsidiary not to, (A)
issue or authorize for issue any Expert Shares (except for shares issued
upon the exercise of currently outstanding share options therefor) or any
security convertible into or exercisable for the foregoing, effect any share
split, reverse share split, share dividend, recapitalization or other
similar transaction or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for Expert Shares or
shares of any Expert Subsidiary, (B) grant, confer or award any option,
warrant, conversion right or other right not existing on the date hereof to
acquire, redeem or repurchase any Expert Shares, except that Expert may
grant options to purchase up to an aggregate of 40,000 Expert Shares under
the Expert 1992 Stock Option Plan or the Expert 1997 Stock Option Plan to
new or replacement employees provided such options (x) do not provide for
accelerated vesting upon a change of control, (y) provide for an exercise
price no less than fair market value at the date of grant, and (z) otherwise
contain terms that are consistent with Expert's past practice, (C) increase
any compensation or enter into or amend any employment agreement with any of
its present or future officers, directors or employees except that Expert
may engage in its annual compensation review process consistent with past
practice and make appropriate increases in compensation not in excess of 5%
in the aggregate and not in excess of 5% in the aggregate for any department
or similar business unit, provided that Expert shall consult with Activision
prior to effecting any such compensation increases, (D) adopt any new
employee benefit plan or (except as contemplated in this Agreement) amend
any existing Employee Plan or severance or termination pay policies in any
material respect, except for changes which are less favorable to
participants in such plans; or (E) authorize, declare, set aside or pay any
dividends or make any other distribution or payments with respect to any
Expert Shares, directly or indirectly redeem, purchase or otherwise acquire
any Expert Shares or shares of any of the Expert Subsidiaries, or make any
commitment for any such action;
(iv) Shall not, and shall not permit any of the Expert Subsidiaries to,
pay, discharge or satisfy any claims, liabilities or obligations (absolute,
accrued, asserted or unasserted, contingent or otherwise), other than the
payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the Recent
Financial Statements (or the notes thereto) or incurred after the date
thereof in the ordinary course of business consistent with past practice;
(v) Shall not, and shall not permit any of the Expert Subsidiaries to,
enter into or amend, modify or terminate any contract which may result in
total fixed or guaranteed payments or liability by or to it in excess of
$100,000 other than contracts for expenses of attorneys and accountants
incurred in connection with the Merger;
(vi) Shall not, and shall not permit any of the Expert Subsidiaries to,
enter into any contract with any officer, trustee, director, consultant or
affiliate of Expert or any of the Expert Subsidiaries;
(vii) Shall, and shall cause each Expert Subsidiary to, timely prepare,
in a manner consistent with past practice, and file all Tax Returns required
to be filed the due date of which (including reasonable extensions) occurs
on or before the Effective Time and pay all Taxes due with respect to any
such Tax Returns;
(viii) Shall not make or rescind any express or deemed election relating
to Taxes, settle or compromise any claim, suit, litigation, proceeding,
investigation, audit or controversy relating to Taxes (unless required by
law);
(ix) Shall not enter into, terminate or materially amend or renew any
contract other than with third parties in the ordinary course of operating
its business consistent with past practice; and
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(x) Shall not incur any indebtedness or other obligation for borrowed
money other than trade payables and other accruals made in the ordinary
course of business consistent with past practice; provided, however, that
Activision shall not unreasonably withhold its consent to borrowings by
Expert under its existing line of credit with First National Bank of Boston
for working capital purposes.
6.2 MEETING OF STOCKHOLDERS. Expert will take all action necessary in
accordance with applicable law and its Certificate of Incorporation, to convene
a special meeting of its stockholders (the "Special Meeting") as promptly as
practicable to consider and vote upon the approval of this Agreement and the
transactions contemplated hereby. The Board of Directors of Expert shall
recommend that its stockholders approve this Agreement and the transactions
contemplated hereby and Expert shall use its reasonable best efforts to obtain
such approval; PROVIDED, HOWEVER, that nothing contained in this Section 6.2
shall prohibit the Directors of Expert from failing to make such recommendation
or using their reasonable best efforts to obtain such approval if the Directors
of Expert have determined in good faith, based upon the advice of its outside
legal counsel, that such action is necessary for such Directors to comply with
their fiduciary duties to Expert's stockholders under applicable law.
6.3 FILINGS; OTHER ACTION.
(a) Subject to the terms and conditions herein provided, Expert and
Activision shall: (i) to the extent required, promptly, but in no event later
than March 31, 1999, make their respective filings and thereafter make any other
required submissions under the HSR Act with respect to the Merger; (ii) use all
reasonable best efforts to cooperate with one another in (x) determining which
filings are required to be made prior to the Effective Time with, and which
consents, approvals, permits or authorizations are required to be obtained prior
to the Effective Time from, governmental or regulatory authorities of the United
States, the several states and any third parties in connection with the
execution and delivery of this Agreement, the consummation of the transactions
contemplated by this Agreement and (y) timely making all such filings and timely
seeking all such consents, approvals, permits or authorizations; (iii) use all
reasonable best efforts to obtain in writing any consents required from third
parties to effectuate the Merger, such consents to be in form reasonably
satisfactory to Expert and Activision; and (iv) use all reasonable best efforts
to take, or cause to be taken, all other actions and do, or cause to be done,
all other things necessary, proper or appropriate to consummate and make
effective the transactions contemplated by this Agreement. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purpose of this Agreement, the proper officers and directors Activision and
Expert shall take all such necessary action.
(b) As promptly as practicable following the date hereof, but in no event
prior to March 31, 1999 or such earlier date as Activision makes the Section 2.3
Election or definitively notifies Expert in writing that it will not make such
election, and in any event prior to April 30, 1999, Expert and Activision shall
prepare and file with the SEC (with appropriate requests for confidential
treatment, unless the parties hereto otherwise agree) under the Exchange Act, a
proxy statement/prospectus (or in the event Activision makes the Section 2.3
Election, a proxy statement) and forms of proxies (such proxy
statement/prospectus or proxy statement and forms of proxy, together with any
amendments or supplements thereto, the "Proxy Statement") relating to the
Special Meeting and the vote of the stockholders of Expert with respect to this
Agreement and the transactions contemplated by this Agreement. Promptly after
clearance by the SEC of the Proxy Statement, unless Activision has made the
Section 2.3 Election, Activision shall prepare and thereafter file with the SEC
under the Securities Act a registration statement on Form S-4 (such registration
statement, together with any amendments or supplements thereto, the "Form S-4"),
in which the Proxy Statement will be included as a prospectus, in connection
with the registration under the Securities Act of the Activision Shares to be
issued to the stockholders of Expert in the Merger (such Activision Shares
referred to herein as the "Registered Securities"). Activision and Expert will
cause the Proxy Statement and the Form S-4 to comply as to form in all material
respects with the applicable provisions of the Securities Act and the Exchange
Act and the rules and regulations thereunder. Each of
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Activision, on the one hand, and Expert, on the other hand, shall furnish all
information about itself and its business and operations and all necessary
financial information to the other as the other may reasonably request in
connection with the preparation of the Proxy Statement and if applicable the
Form S-4. If applicable, Activision shall use its reasonable best efforts, and
Expert will cooperate with it, to have the Form S-4 declared effective by the
SEC as promptly as practicable (including clearing the Proxy Statement with the
SEC). Each of Activision and Expert agrees promptly to correct any information
provided by it for use in the Proxy Statement and if applicable the Form S-4 if
and to the extent that such information shall have become false or misleading in
any material respect, and each of the parties hereto further agrees to take all
steps necessary to amend or supplement the Proxy Statement and if applicable the
Form S-4 and to cause the Proxy Statement and if applicable the Form S-4, as so
amended or supplemented, to be filed with the SEC and to be disseminated to the
Expert stockholders, in each case as and to the extent required by applicable
federal and state securities laws and the DGCL. Each of Activision and Expert
agrees that the information provided by it for inclusion in the Proxy Statement
and if applicable the Form S-4 and each amendment or supplement thereto at the
time of mailing of the Proxy Statement or effectiveness of the Form S-4 will not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. Each of
Activision and Expert will advise the other parties, and deliver copies (if any)
to them, promptly after receipt thereof, of (i) any request by or correspondence
or communication from the SEC with respect to the Proxy Statement and if
applicable the Form S-4, (ii) any responses thereto and (iii) notice of the time
when the Form S-4 has become effective or any supplement or amendment has been
filed, the issuance of any stop order, and the suspension of the qualification
of the Registered Securities for offering or sale in any jurisdiction.
Expert shall use its best efforts to timely mail the Proxy Statement to its
stockholders.
6.4 ACCESS TO INFORMATION.
(a) Upon reasonable notice and subject to restrictions contained in
confidentiality agreements by which Expert and Activision are bound, Expert and
Activision shall (and shall cause their respective subsidiaries to) afford to
the officers, employees, accountants, counsel and other representatives of the
other reasonable access, during normal business hours during the period prior to
the Effective Time, to all their properties, books, contracts, commitments and
records and permit such persons to make such inspections as they may reasonably
require and, during such period, each of Expert and Activision shall (and shall
cause their respective subsidiaries to) furnish promptly to the other all
information concerning its business, properties and personnel as the other may
reasonably request; provided that if a party is withholding information because
it is obligated to do so pursuant to a confidentiality agreement by which it is
bound, the party shall give the other notice of such withholding.
(b) All such information shall be Evaluation Material, as defined in the
Non-Disclosure Agreement (as defined in Section 9.5), except as otherwise
provided in such Non-Disclosure Agreement. In the event of termination of this
Agreement for any reason each party shall promptly return all Evaluation
Material obtained from the other, and any copies made of, or reports or analyses
based on, such Evaluation Material, to the other and not use any such Evaluation
Material for any purpose that would be competitive with or cause material harm
to the other.
6.5 PUBLICITY. Activision and Expert shall consult with each other before
issuing any press release or otherwise making any public statements with respect
to this Agreement or any transaction contemplated herein and shall not issue any
such press release or make any such public statement without the prior consent
of the other party, which consent shall not be unreasonably withheld; PROVIDED,
HOWEVER, that a party may, without the prior consent of the other party, issue
such press release or make such public statement as may be required by law or
the rules of the applicable stock exchange if it has used its reasonable best
efforts to consult with the other party and to obtain such party's consent but
has been unable to do so in a timely manner.
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6.6 LISTING OF ACTIVISION COMMON STOCK. Unless Activision shall have made
the Section 2.3 Election, Activision shall use its reasonable best efforts to
cause the Activision Shares to be listed, upon official notice of issuance, on
NASDAQ prior to the Effective Time.
6.7 FURTHER ACTION. Each party hereto shall, subject to the fulfillment at
or before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may reasonably be required to effect the Merger. In connection with
the Closing, Expert and each Expert Subsidiary shall use its reasonable best
efforts to deliver to Activision such bills of sale, assignments, certificates,
affidavits and indemnities as are required to effectuate the consummation of the
transactions described herein.
6.8 TAX TREATMENT. The parties hereto shall provide any certificates,
representations, or information reasonably requested by counsel for the parties
for the purpose of rendering the tax opinions, if applicable, described in
Sections 7.2(d) and 7.3(d). Unless and until Activision makes a Section 2.3
Election, no party shall take any action either prior to or after the Effective
Time that could reasonably be expected to cause the Merger to fail to qualify as
a "reorganization" under Section 368(a) of the Code. Expert covenants that at
the time of the Merger, its assets will satisfy the "substantially all" test
within the meaning of Revenue Procedure 77-37, 1977-2 C.B. 568.
6.9 OTHER OFFERS. From the date hereof until the termination of this
Agreement, Expert and the Expert Subsidiaries will not, and will use their best
efforts to cause their officers, directors, employees, controlling stockholders,
agents or representatives (including, without limitation, any investment banker,
attorney or accountant retained by it or any of its Subsidiaries) not to,
directly or indirectly, (i) take any action to solicit, initiate, encourage or
facilitate any inquiries or the making or implementation of any proposal or
offer (including, without limitation, any proposal or offer to its stockholders)
with respect to a merger, acquisition, consolidation or similar transaction
involving, or any purchase of all or any significant portion of the assets or
any equity securities of, Expert or any of the Expert Subsidiaries (any such
proposal or offer being hereinafter referred to as an "Acquisition Proposal") or
(ii) engage in any negotiations concerning, or provide any confidential
information or data to, or have any discussions with, any person relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal. Expert will promptly cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted heretofore with respect to any of the foregoing and will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 6.9. Expert will notify Activision
promptly if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it; PROVIDED, HOWEVER, that nothing
contained in this Section 6.9 shall prohibit the Board of Directors of Expert
from (i) furnishing information to or entering into discussions or negotiations
with, any person or entity that makes an unsolicited bona fide proposal to
acquire Expert pursuant to a merger, consolidation, share exchange, purchase of
a substantial portion of the assets or stock, business combination or other
similar transaction, if, and only to the extent that, (A) the Board of Directors
of Expert determines in good faith that such action is required for the Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law as advised by outside legal counsel to Expert, (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, Expert provides written notice to Activision to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity, and (C) subject to any confidentiality agreement with
such person or entity (which the Board of Directors of Expert determined in good
faith was required to be executed in order for the Board of Directors to comply
with its fiduciary duties to stockholders imposed by law as advised by outside
legal counsel to Expert), Expert keeps Activision informed of the status (not
the terms) of any such discussions or negotiations; and (ii) to the extent
applicable, complying with Rules 14d-9 and 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal. Notwithstanding anything to the
contrary in this Agreement, the Board of Directors of Expert shall be permitted
from time to time to take the following actions in the circumstances
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described below: (i) to withdraw or modify in a material and negative respect
its approval or recommendation of this Agreement or the Merger in a manner
adverse to Activision or (ii) to approve or recommend or enter into an agreement
with respect to an Acquisition Proposal if, in each such case, (x) an
Acquisition Proposal is publicly proposed, publicly disclosed or communicated to
Expert and (y) the Board of Directors of Expert determines in good faith, based
on the advice of its outside legal counsel, that such action is required in
order to comply with its fiduciary duties to the stockholders of Expert. No
action by the Board of Directors of Expert permitted by the preceding sentence
(each, a "Permitted Action") shall constitute a breach of this Agreement by
Expert, provided that such Permitted Action shall give rise to the rights of
Activision set forth in Section 8.3. hereof.
6.10 NOTICE OF CERTAIN EVENTS.
(a) Expert shall as promptly as reasonably practicable notify Activision of:
(i) any notice or other communication from any person alleging that the consent
of such person (or another person) is or may be required in connection with the
transactions contemplated by this Agreement; (ii) any notice or other
communication from any governmental or regulatory agency or authority in
connection with the transactions contemplated by this Agreement; (iii) any
actions, suits, claims, investigations or proceedings commenced or threatened
against, relating to or involving or otherwise affecting Expert or any Expert
Subsidiary that, if pending on the date of this Agreement, would have been
required to have been disclosed pursuant to Section 4.9 or which relate to the
consummation of the transactions contemplated by this Agreement; and (iv) of any
fact or occurrence between the date of this Agreement and the Effective Time of
which it becomes aware which makes any of its representations and warranties
contained in this Agreement untrue in any material respect (without regard to
any materiality qualification contained in such representation or warranty) or
causes any breach of its obligations under this Agreement in any material
respect (without regard to any materiality qualification contained in such
obligation).
(b) Each of Activision and Merger Subsidiary shall as promptly as reasonably
practicable notify Expert of: (i) any notice or other communication from any
person alleging that the consent of such person (or another person) is or may be
required in connection with the transactions contemplated by this Agreement,
(ii) any notice or other communication from any governmental or regulatory
agency or authority in connection with the transactions contemplated by this
Agreement; (iii) any actions, suits, claims, investigations or proceedings
commenced or threatened against, relating to or involving or otherwise affecting
Activision or Merger Subsidiary that, if pending on the date of this Agreement,
would have been required to have been disclosed pursuant to Section 5.8 or which
relate to the consummation of the transactions contemplated by this Agreement;
and (iv) of any fact or occurrence between the date of this Agreement and the
Effective Time of which it becomes aware which makes any of its representations
and warranties contained in this Agreement untrue in any material respect
(without regard to any materiality qualification contained in such
representation or warranty) or causes any breach of its obligations under this
Agreement in any material respect (without regard to any materiality
qualification contained in such obligation).
6.11 AFFILIATE LETTERS. Unless Activision makes the Section 2.3 Election,
at least 30 days prior to the Closing Date, Expert shall deliver to Activision a
list of names and addresses of the executive officers, directors and those
persons who were, in Expert's reasonable judgment, at the record date for the
Special Meeting, "Affiliates" (each such person, an "Affiliate") of Expert
within the meaning of Rule 145 of the rules and regulations promulgated under
the Securities Act. Expert shall use its reasonable best efforts to deliver or
cause to be delivered to Activision prior to the Closing Date, from each of the
Affiliates of Expert identified in the foregoing list, an Affiliate Letter in
the form attached hereto as EXHIBIT A. Activision shall be entitled to place
legends as specified in such Affiliate Letters on the certificates evidencing
any Activision Shares to be received by such Affiliates pursuant to the terms of
this Agreement and to issue appropriate stock transfer instructions to the
transfer agent for the Activision Common Stock consistent with the terms of such
Affiliate Letter.
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6.12 TERMINATION OF AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT. Expert
shall obtain on or before the Closing Date the approval of the stockholders of
Expert parties to that certain Amended and Restated Stockholders' Agreement
dated October 31, 1995 (the "Stockholders' Agreement"), holding a majority of
the Registrable Securities (as defined in the Stockholders' Agreement)
outstanding to amend the Stockholders' Agreement to provide that it shall
terminate upon the consummation of the transactions contemplated by this
Agreement.
6.13 INDEMNIFICATION AND INSURANCE.
(a) The By-Laws and Certificate of Incorporation of the Surviving
Corporation shall contain the provisions with respect to indemnification set
forth in the By-Laws and Certificate of Incorporation of Expert, which
provisions shall not be amended, repealed or otherwise modified for a period of
six (6) years from the Effective Time in any manner that would adversely affect
the rights thereunder as of the Effective Time of individuals who at the
Effective Time were directors, officers, employees or agents of the Company,
unless such modification is required after the Effective Time by law.
(b) Notwithstanding the foregoing, the Surviving Corporation shall, to the
fullest extent permitted under applicable law or under the Surviving
Corporation's Certificate of Incorporation or By-Laws, indemnify and hold
harmless, each present and former director, officer or employee of Expert or any
of its Subsidiaries (collectively, the "Indemnified Parties") against any costs
or expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, (x) arising out of or pertaining to the
transactions contemplated by this Agreement or (y) otherwise with respect to any
acts or omissions occurring at or prior to the Effective Time, to the same
extent as provided in Expert's Certificate of Incorporation or By-Laws or any
applicable contract or agreement as in effect on the date hereof, in each case
for a period of six (6) years after the Effective Time. In the event of any such
claim, action, suit, proceeding or investigation (whether arising before or
after the Effective Time), (i) the Indemnified Parties may retain as its counsel
Goodwin, Procter & Hoar LLP, or other counsel reasonably satisfactory to the
Surviving Corporation, (ii) after the Effective Time, the Surviving Corporation
shall advance to the Indemnified Party the reasonable fees and expenses of such
counsel, and other reasonable costs incurred in the defense of such matter, and
(iii) the Surviving Corporation will cooperate in the defense of any such
matter; provided, however, that the Surviving Corporation shall not be liable
for any settlement effected without its written consent (which consent shall not
be unreasonably withheld); and provided, further, that, in the event that any
claim or claims for indemnification are asserted or made within such six (6)
year period, all rights to indemnification in respect of any such claim or
claims shall continue until the disposition of any and all such claims. The
Indemnified Parties as a group may retain only one law firm to represent them in
each applicable jurisdiction with respect to any single action unless there is,
under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties,
in which case each Indemnified Person with respect to whom such a conflict
exists (or group of such Indemnified Persons who among them have no such
conflict) may retain one separate law firm in each applicable jurisdiction.
(c) This Section 6.13 shall survive the consummation of the Merger at the
Effective Time, is intended to benefit Expert, the Surviving Corporation and the
Indemnified Parties, shall be binding on all successors and assigns of the
Surviving Corporation and Activision and shall be enforceable by the Indemnified
Parties.
(d) Activision shall, until the sixth anniversary of the Effective Time,
cause to be maintained in effect, to the extent available, the policies of
directors' and officers' liability insurance maintained by Expert and the Expert
Subsidiaries as of the date hereof (or policies of at least the same coverage
and amounts containing terms that are not less advantageous to the insured
parties) with respect to claims arising from facts that occurred on or prior to
the Effective Time, including without limitation all claims based upon, arising
out of, directly or indirectly resulting from, in consequence of, or in any way
involving the Merger
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and any and all related events. In lieu of the purchase of such insurance by
Activision, Activision may purchase a six-year extended reporting period
endorsement ("Reporting Tail Coverage") under Expert's existing directors' and
officers' liability insurance coverage, providing that such Reporting Tail
Coverage shall extend the directors' and officers' liability coverage in force
as of the date hereof for a period of at least six (6) years from the Effective
Time for any claim based upon, arising out of, directly or indirectly resulting
from, in consequence of, or any way involving wrongful acts or omissions
occurring or prior to the Effective Time, including without limitation all
claims based upon, arising out of, directly or indirectly resulting from, in
consequence of, or any way involving the Merger or any and all related events.
Expert shall cooperate with Activision in obtaining such insurance coverage.
6.14 EMPLOYEE MATTERS. As soon as practicable after the Effective Time,
Activision or the Surviving Corporation shall provide the employees of Expert
("Expert Employees") with the same 401(k) plan, health, dental, stock option
plan, stock purchase plan, life insurance, vacation, disability plan, dependent
care plan, travel accident plan, accidental death and dismemberment plan,
education reimbursement plan and other benefits, if any, as Activision then
provides generally to its employees. With respect to the provision of such
benefits to Expert Employees, all prior service of the Expert Employees with
Expert shall be recognized under such plans for purposes of eligibility and
vesting, and all prior service of the Expert Employees with Expert shall be
recognized for purposes of determining such employees' vacation entitlement
under Activision's vacation plans and policies and for purposes of vesting under
Activision's 401(k) plan. Neither Activision nor the Surviving Corporation shall
treat any Expert Employees as a "new" employee for purposes of any exclusion
under any health, dental or vision plan of Activision or the Surviving
Corporation, as the case may be, for a pre-existing medical condition.
6.15 EMPLOYMENT AGREEMENTS; NON-COMPETITION AGREEMENTS. Contemporaneously
with the execution of this Agreement, each of Kenneth Currier, Susan Currier and
four (4) additional Senior Employees of Expert have executed employment
agreements in forms approved by Activision, and Kenneth Currier and Susan
Currier have executed a non-competition agreement in form approved by
Activision. Expert shall use its reasonable best efforts, subject to the
covenants contained in this Agreement, including Section 6.1(b)(iii), to cause
such agreements to be in full force and effect as of the Closing Date.
7. CONDITIONS
7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the fulfillment at or prior
to the Closing Date of the following conditions, any or all of which may be
waived, in whole or in part by the parties hereto, to the extent permitted by
applicable law:
(a) SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated hereby shall have been approved by the requisite vote of
stockholders of Expert.
(b) HSR ACT. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(c) EFFECTIVENESS OF THE REGISTRATION STATEMENT; CLEARANCE OF THE PROXY
STATEMENT. Unless Activision shall have made the Section 2.3 Election, the
Registration Statement on Form S-4 shall have been declared effective by the
SEC under the Securities Act. In the event Activision shall have made the
Section 2.3 Election, the Proxy Statement shall have been cleared by the
SEC. No stop order suspending the effectiveness of the Registration
Statement (if applicable) shall have been issued by the SEC, and no
proceeding for that purpose and no similar proceeding in respect of the
Proxy Statement shall have been initiated or, to the knowledge of Activision
or Expert, threatened by the SEC.
(d) GOVERNMENTAL ACTIONS. None of the parties hereto shall be subject
to any order, ruling or injunction of a court of competent jurisdiction
which restrains or prohibits the consummation of the transactions
contemplated by this Agreement (an "Injunction"). In the event any such
Injunction shall
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have been issued, each party agrees to use its reasonable best efforts to
have any such Injunction lifted, stayed or reversed.
7.2 CONDITIONS TO OBLIGATIONS OF EXPERT TO EFFECT THE MERGER. The
obligation of Expert to effect the Merger shall be subject to the fulfillment at
or prior to the Closing Date of the following conditions, unless waived by
Expert:
(a) Each of the representations and warranties of Activision contained
in this Agreement shall be true and correct as of the date of this Agreement
and as of the Closing Date as though made on and as of the Closing Date,
except to the extent that any changes, circumstances or events making such
representations and warranties not true or correct would not, individually
or in the aggregate, constitute an Activision Material Adverse Effect
(without regard to any materiality qualification contained in such
representation or warranty), and Expert shall have received a certificate,
dated the Closing Date, signed on behalf of Activision by the Co-Chairman,
President, Chief Financial Officer or General Counsel of Activision to the
foregoing effect.
(b) Activision shall have performed or complied in all material respects
(without regard to any materiality qualification contained in such
representation or warranty) with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Closing Date, and Expert shall have received a certificate, dated the
Closing Date, signed on behalf of Activision by the Co-Chairman, President,
Chief Financial Officer or General Counsel of Activision to the foregoing
effect.
(c) From the date of this Agreement through the Effective Time and,
except as disclosed in the Activision Disclosure Letter and the Activision
SEC Reports filed prior to the date of this Agreement, since December 31,
1998 there shall not have occurred any change, circumstance or event
concerning Activision and its consolidated subsidiaries, taken as a whole,
that has had or could be reasonably likely to have an Activision Material
Adverse Effect, and Expert shall have received a certificate, dated the
Closing Date, signed on behalf of Activision by the Co-Chairman, President,
Chief Financial Officer or General Counsel of Activision to the foregoing
effect; PROVIDED, HOWEVER, that for purposes of this Section 7.2(c), (i) a
change in the market price of the Activision Common Stock; (ii) a report of
quarterly or fiscal year earnings for any period that are lower than the
comparable previous period or lower than analysts' expectations (provided
that this clause (ii) shall not be applicable with respect to a fiscal
quarter if Activision reports a net loss for such fiscal quarter in excess
of $.05 per share on a fully diluted basis); or (iii) the consummation by
Activision or its affiliates of an acquisition, disposition, financing or
similar transaction approved by Activision's Board of Directors, in each
case in and of itself, shall not be deemed an Activision Material Adverse
Effect.
(d) Unless Activision shall have made the Section 2.3 Election, Expert
shall have received a written opinion from its counsel, Goodwin, Procter &
Hoar LLP, in form and substance reasonably satisfactory to it, to the effect
that the Merger will constitute a tax free reorganization within the meaning
of Section 368(a) of the Code and such opinion shall not have been
withdrawn; PROVIDED, HOWEVER, that if such counsel does not render such
opinion, this condition shall nonetheless be deemed to be satisfied with
respect to Expert if counsel to Activision renders such opinion to Expert.
Each party agrees to make all reasonable representations as requested by
such counsel for the purpose of rendering such opinion.
(e) Unless Activision shall have made the Section 2.3 Election,
Activision shall have caused the Activision Shares to be listed, subject to
official notice of issuance, on NASDAQ.
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7.3 CONDITIONS TO OBLIGATION OF ACTIVISION AND MERGER SUBSIDIARY TO EFFECT
THE MERGER. The obligations of Activision and Merger Subsidiary to effect the
Merger shall be subject to the fulfillment at or prior to the Closing Date of
the following conditions, unless waived by Activision:
(a) Each of the representations and warranties of Expert contained in
this Agreement shall be true and correct as of the date of this Agreement
and as of the Closing Date as though made on and as of the Closing Date,
except to the extent that any changes, circumstances or events making such
representations and warranties not true or correct would not, individually
or in the aggregate, constitute an Expert Material Adverse Effect (without
regard to any materiality qualification contained in such representation or
warranty), and Activision shall have received a certificate, dated the
Closing Date, signed on behalf of Expert by the Chief Executive Officer of
the President of Expert to the foregoing effect. Notwithstanding any
provision of this Agreement to the contrary, a breach or violation of the
representations and warranties of Expert set forth in the first five
sentences of Section 4.3 or of the covenants set forth in Section
6.1(b)(iii)(A), (B), (D) and (E) shall be deemed to have an Expert Material
Adverse Effect.
(b) Expert shall have performed or complied in all material respects
(without regard to any materiality qualification contained in such
representation or warranty) with all agreements and covenants required by
this Agreement to be performed or complied with by it on or prior to the
Effective Time, and Activision shall have received a certificate, dated the
Closing Date, signed on behalf of Expert by the Chief Executive Officer or
the President of Expert to the foregoing effect.
(c) From the date of this Agreement through the Effective Time and,
except as disclosed in the Expert Disclosure Letter or in the Expert SEC
Reports filed prior to the date of this Agreement, since December 31, 1998
there shall not have occurred any change, circumstance or event, concerning
Expert, any of the Expert Subsidiaries, that has had or could be reasonably
likely to have an Expert Material Adverse Effect and Activision shall have
received a certificate, dated the Closing Date, signed on behalf of Expert
by the Chief Executive Officer or the President of Expert to the foregoing
effect.
(d) Unless Activision has made the Section 2.3 Election, Activision
shall have received a written opinion from its counsel, Robinson Silverman
Pearce Aronsohn & Berman LLP, in form and substance reasonably satisfactory
to it, to the effect that the Merger will constitute a tax free
reorganization within the meaning of Section 368(a) of the Code and such
opinion shall not have been withdrawn; PROVIDED, HOWEVER, that if such
counsel does not render such opinion, this condition shall nonetheless be
deemed to be satisfied with respect to Activision if counsel to Expert
renders such opinion to Activision. Each party agrees to make all reasonable
representations as requested by such counsel for the purpose of rendering
such opinion.
(e) As of the Closing Date, neither Kenneth Currier nor Susan Currier
shall have terminated their employment with Expert and the respective
employment agreements and non-competition agreement of Kenneth Currier and
Susan Currier described in Section 6.15 shall be in full force and effect.
(f) To the extent required under Section 6.11, Activision shall have
received from each of the persons named in the list provided pursuant to
Section 6.12 hereof an executed copy of an Affiliate Letter substantially in
the form of EXHIBIT A attached hereto.
(g) The Stockholders' Agreement shall have been terminated as set forth
in Section 6.13 hereof.
(h) In the event Activision shall have made the Section 2.3 Election,
holders of no more than 5% of the Expert Shares shall have demanded an
appraisal of their shares under Section 262 of the DGCL.
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8. TERMINATION
8.1 TERMINATION. This Agreement may be terminated and abandoned at any
time prior to the Effective Time, whether before or after approval and adoption
of this Agreement by the stockholders of Expert:
(a) by mutual written consent of Activision and Expert;
(b) by either Activision or Expert if any United States federal or state
court of competent jurisdiction or other governmental entity shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and non-appealable,
provided that the party seeking to terminate shall have used its best
efforts to appeal such order, decree, ruling or other action;
(c) by Activision upon a breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of Expert and
as a result of such breach the conditions set forth in Section 7.3(a) or
Section 7.3(b), as the case may be, would not then be satisfied; provided,
that if such breach is capable of being cured within ten (10) business days
after written notice to Expert, Activision shall not have the right to
terminate this Agreement under this Section 8.1(c) unless such breach has
not been so cured;
(d) by Expert upon a breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Activision or Merger
Subsidiary and as a result of such breach the conditions set forth in
Section 7.2(a) or Section 7.2(b), as the case may be, would not then be
satisfied; provided, that if such breach is capable of being cured within
ten (10) business days after written notice to Activision, Expert shall not
have the right to terminate this Agreement under this Section 8.1(d) unless
such breach has not been so cured;
(e) by Activision or Expert, if the Board of Directors of Expert shall
have taken any Permitted Action in accordance with the provisions of Section
6.9;
(f) by Expert if (i) the Board of Directors of Expert pursuant to
Section 6.9 withdraws or modifies its approval or recommendation of this
Agreement or (ii) Expert enters into a definitive agreement providing for
the implementation of an Acquisition Proposal in accordance with the
provisions of Section 6.9;
(g) by either Activision or Expert, if the Merger shall not have been
consummated on or before August 31, 1999 (other than due to the failure of
the party seeking to terminate this Agreement to perform its obligations
under this Agreement required to be performed by it at or prior to the
Effective Time or a breach by such party of this Agreement);
(h) by Activision if the Board of Directors of Expert shall have failed
to recommend, or shall have withdrawn, modified or amended in any material
and negative respects its approval or recommendations of the Merger or shall
have resolved to do any of the foregoing; PROVIDED, HOWEVER, that such
failure, withdrawal, modification or amendment has not been due to or the
result of Activision's or the Merger Subsidiary's breach of any of their
obligations hereunder;
(i) by Activision or Expert if this Agreement and the transactions
contemplated hereby shall have failed to receive the requisite vote for
approval and adoption by the stockholders of Expert upon the holding of a
duly convened stockholders meeting;
(j) by Activision if Expert suffers an Expert Material Adverse Effect,
or by Expert if Activision suffers an Activision Material Adverse Effect; or
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(k) by either party, if the other party becomes insolvent or seeks
protection under any bankruptcy, receivership, trust deed, creditors
arrangement, composition or comparable proceeding, or if any such proceeding
is instituted against such other party (and not dismissed within sixty (60)
days).
The right of any party hereto to terminate this Agreement pursuant to this
Section 8.1 shall remain operative and in full force and effect regardless of
any investigation made by or on behalf of any party hereto, any person
controlling any such party or any of their respective employees, officers,
directors, agents, representatives or advisors, whether prior to or after the
execution of this Agreement.
8.2 EFFECT OF TERMINATION. In the event of the termination and abandonment
of this Agreement pursuant to Section 8.1 hereof, this Agreement shall forthwith
become void and have no effect, without any liability on the part of any party
hereto or its affiliates, directors, officers or stockholders and all rights and
obligations of any party hereto shall cease except for the agreements contained
in Section 8.3, Section 8.4 and Section 9.5; PROVIDED, HOWEVER, that nothing
contained in this Section 8.2 shall relieve any party from liability for any
breach of this Agreement.
8.3 EXPENSES AND TERMINATION FEES.
(a) Except as set forth in this Section 8.3, all fees and expenses incurred
in connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses, whether or not the Merger is
consummated; provided, however, that Expert and Activision shall share equally
all SEC filing fees and printing expenses incurred in connection with the
printing and filing of the Proxy Statement and the Form S-4 and any amendments
or supplements thereto.
(b) Expert shall pay Activision a termination fee equal to $1,100,000 (the
"Termination Fee") upon the earliest to occur of the following events:
(i) an Acquisition Proposal is commenced, publicly proposed, publicly
disclosed or communicated to Expert after the date of this Agreement, and
(A) the Board of Directors of Expert takes any Permitted Action under
Section 6.9, and (B) this Agreement is terminated by Activision or Expert
pursuant to Section 8.1(e) or by Expert pursuant to Section 8.1(f);
(ii) the termination of this Agreement by Activision pursuant to Section
8.1(h); or
(iii) the termination of this Agreement by either Activision or Expert
pursuant to Section 8.1(i) and an Acquisition Proposal by a person other
than Activision or Merger Subsidiary exists at the time of such termination
and at the time of such termination the required approval of the
stockholders of Expert had not been obtained, provided that within 12 months
of such termination Expert or its stockholders accept, publicly announce or
enter into a letter of intent or binding agreement with respect to such
Acquisition Proposal.
Expert's payment of the Termination Fee pursuant to this Section 8.3 shall be
the sole and exclusive remedy of Activision against Expert and any of the Expert
Subsidiaries and their respective directors, officers, employees, agents,
advisors or other representatives with respect to the occurrences giving rise to
such payment.
(c) The Termination Fee shall be paid by Expert to Activision (i) in the
event the Termination Fee is payable pursuant to Section 8.3(b)(i) or (ii),
within ten (10) days after the date of termination of this Agreement; or (ii) in
the event the Termination Fee is payable pursuant to Section 8.3(b)(iii), within
ten (10) days of acceptance, public announcement, or the entering into of a
letter of intent or binding agreement with respect to such Acquisition Proposal.
8.4 EXTENSION; WAIVER. At any time prior to the Effective Time, any party
hereto, by action taken by its Board of Directors, may, to the extent legally
allowed, (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto and
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(c) waive compliance with any of the agreements or conditions for the benefit of
such party contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.
9. GENERAL PROVISIONS
9.1 NONSURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. All
representations, warranties, certifications and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall terminate as of the
Effective Time and shall not survive the Merger, PROVIDED, HOWEVER, that the
agreements contained in Article 2, Article 3, the last sentence of Section
6.3(a), Sections 6.13, 6.14 and 8.3 and this Article 9 shall survive the Merger.
9.2 NOTICES. Any notice required to be given hereunder shall be in writing
and shall be sent by facsimile transmission (confirmed by any of the methods
that follow), courier service (with proof of service), hand delivery or
certified or registered mail (return receipt requested and first-class postage
prepaid) and addressed as follows:
If to Activision: Activision, Inc.
3100 Ocean Park Boulevard
Santa Monica, CA 90405
Attn: Brian G. Kelly
Tel.: (310) 255-2000
Fax: (310) 255-2155
With a copy to: Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Attn: Kenneth L. Henderson, Esq.
Tel.: (212) 541-2000
Fax: (212) 541-4630
If to Expert: Expert Software, Inc.
800 Douglas Road
North Tower, Suite 600
Coral Gables, FL 33134-3160
Attn: Kenneth Currier
Tel.: (305) 567-9990
Fax: (305) 443-0786
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: John J. Egan III, P.C.
Tel: (617) 570-1000
Fax: (617) 523-1231
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date received.
9.3 ASSIGNMENT; BINDING EFFECT; BENEFIT. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties; PROVIDED, HOWEVER, Activision and Merger
Subsidiary may each assign their respective rights, interests or obligations
hereunder to any affiliate provided that Activision remains obligated hereunder
and such assignment does not alter the rights, interests or obligations of
Expert hereunder. Subject to the preceding sentence, this Agreement shall be
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binding upon and shall inure to the benefit of the parties hereto and their
respective Surviving Corporations and assigns. Notwithstanding anything
contained in this Agreement to the contrary, except for the provisions of
Sections 2.2, 2.4 and 6.13, nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties hereto or their
respective heirs, surviving corporations, executors, administrators and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement.
9.4 ENTIRE AGREEMENT. This Agreement, the Expert Disclosure Letter and any
documents delivered by the parties in connection herewith constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with respect
thereto except that the Non-Disclosure Agreement (as hereinafter defined) shall
remain in effect and shall be binding upon Activision and Expert in accordance
with its terms. No addition to or modification of any provision of this
Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
9.5 CONFIDENTIALITY. Activision and Expert understand and agree that they
are and shall remain bound by and subject to the terms of the non-disclosure
agreement, dated as of February 18, 1999, by and between Activision and Expert
(the "Non-Disclosure Agreement").
9.6 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective authorized person, persons or governing bodies,
at any time before or after approval of matters presented in connection with the
Merger by the stockholders of Expert, but after any such stockholder approval,
no amendment shall be made which by law requires the further approval of
stockholders without obtaining such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
9.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws. Each of Activision and Expert hereby irrevocably and
unconditionally consent to submit to the exclusive jurisdiction of the courts of
the State of Delaware and the United States of America located in the State of
Delaware (the "Delaware Courts") for any litigation arising out of or relating
to this Agreement and the transactions contemplated hereby (and agree not to
commence any litigation relating thereto except in such courts), consent to the
service of process in such Delaware Courts, waive any objection to the laying of
venue of any such litigation in the Delaware Courts and agree not to plead or
claim in any Delaware Court that such litigation brought therein has been
brought in any inconvenient forum.
9.8 COUNTERPARTS. This Agreement may be executed by the parties hereto in
separate counterparts, each of which so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid and binding obligation of the party executing (or
on whose behalf such signature is executed) the same with the same force and
effect as if such facsimile signature were the original thereof.
9.9 HEADINGS. Headings of the Articles and Sections of this Agreement are
for the convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
9.10 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
I-44
9.11 INCORPORATION. The Expert Disclosure Letter and the Activision
Disclosure Letter and all Schedules attached hereto and thereto and referred to
herein and therein are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
9.12 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of this
Agreement is so broad as to be unenforceable, the provision shall be interpreted
to be only so broad as is enforceable.
9.13 INTERPRETATION AND CERTAIN DEFINITIONS.
(a) In this Agreement, unless the context otherwise requires, words
describing the singular number shall include the plural and vice versa, and
words denoting any gender shall include all genders.
(b) As used in this Agreement, the word "Subsidiary" or "Subsidiaries" when
used with respect to any party means any corporation, partnership, joint
venture, business trust or other entity, of which such party directly or
indirectly owns or controls at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority of the
board of directors or others performing similar functions with respect to such
corporation or other organization.
(c) As used in this Agreement, the word "Person" means an individual, a
corporation, a partnership, an association, a joint-stock company, a trust, a
limited liability company, any unincorporated organization or any other entity.
(d) As used in this Agreement unless otherwise indicated, the word
"Affiliate" shall have the meaning set forth in Rule 1sec-2 of the Exchange Act.
9.14 SPECIFIC PERFORMANCE. The parties hereto agree that if any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist, and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, without the posting of any bond whatsoever in addition to any other
remedy at law or equity.
[SIGNATURE PAGE FOLLOWS]
I-45
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the day and year first written
above.
EXPERT SOFTWARE, INC.
By: /s/ KENNETH CURRIER
-----------------------------------------
Name: Kenneth Currier
Title: Chief Executive Officer
ACTIVISION, INC.
By: /s/ BRIAN G. KELLY
-----------------------------------------
Name: Brian G. Kelly
Title: Co-Chairman
EXPERT ACQUISITION CORP.
By: /s/ BRIAN G. KELLY
-----------------------------------------
Name: Brian G. Kelly
Title: President
I-46
CERTIFICATIONS
It is hereby certified that all of the outstanding shares of each class of
capital stock of Expert Acquisition Corp. entitled to vote on this Amended and
Restated Agreement and Plan of Merger have been voted for the adoption of such
Agreement.
-----------------------------------------
By:
Title: Secretary
It is hereby certified that of the issued and outstanding shares
of each class of capital stock of Expert Software, Inc. have voted in favor of
the adoption of this Amended and Restated Agreement and Plan of Merger and such
number of shares represents % of the issued and outstanding shares of Expert
Software, Inc. entitled to vote for the adoption of such Agreement.
-----------------------------------------
By:
Title: Secretary
I-47
ANNEX II
- - - - - - - --------------------------------------------------------------------------------
- - - - - - - --------------------------------------------------------------------------------
CONFIDENTIAL
March 3, 1999
Board of Directors
Expert Software, Inc.
800 Douglas Road
Coral Gables, FL 33134-3160
Members of the Board:
We understand that Expert Software, Inc. ("Expert" or the "Company"), a
Delaware corporation, Activision, Inc. ("Activision" or the "Acquiror"), a
Delaware corporation ("Activision") and Expert Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Activision ("Merger Subsidiary")
propose to enter into an Agreement and Plan of Merger (the "Agreement") pursuant
to which the Merger Subsidiary will be merged with and into Expert (the
"Transaction"). We understand that in the Transaction each outstanding share of
Expert's common stock, $.01 par value per share, (the "Expert Shares") will be
converted into the right to receive either (i) shares of Activision Common
Stock, par value $0.000001 per share, (the "Acquiror Shares") equal to $2.65
divided by the Activision Per Share Market Value (as such item is defined in
Section 2.2 of the Agreement) (the "Exchange Ratio")or (ii), at the option of
Activision, exercisable on or before April 30, 1999, $2.65 in cash (the "Cash
Consideration"). We also understand that, in certain circumstances set forth in
2.2(f) of the Agreement, the Exchange Ratio will become fixed and holders of
Expert Common Stock will receive cash in addition to the Acquiror Shares. For
purposes of our opinion, the term "Stock Consideration" means the aggregate
amount of Acquiror Shares and cash received by a holder of Expert Shares in
accordance with the terms of the preceding sentence. We further understand that,
under the Agreement, Activision generally must decide whether to use Cash
Consideration or Stock Consideration at Activision's option. For purposes of our
opinion, the term "Consideration" means the aggregate Cash Consideration or
Stock Consideration, as the case may be, paid to holders of Expert Shares under
the Agreement. You have requested our opinion as to whether the Consideration to
be received in connection with the Transaction is fair, from a financial point
of view, to the holders of Company Shares.
U.S. Bancorp Piper Jaffray Inc. ("U.S. Bancorp Piper Jaffray"), as a
customary part of its investment banking business, is engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
underwritings and secondary distributions of securities, private placements, and
valuations for estate, corporate and other purposes. For our services in
rendering this opinion, the Company will pay us a fee and indemnify us against
certain liabilities. Our fee is not contingent upon consummation of the
Transaction. In the ordinary course of our business, we and our affiliates may
actively trade securities of Expert and Activision for our own account or the
accounts of our customers and, accordingly, may at any time hold a long or short
position in such securities. We have performed investment banking and other
services for Activision and Expert in the past and have been compensated for
such services.
In arriving at our opinion, we have reviewed the draft dated March 3, 1999
of the Agreement. We also have reviewed financial and other information that was
publicly available or furnished to us by the Acquiror and the Company, including
information provided during discussions with the management of each company. In
addition, we have compared certain financial data of the Company and the
Acquiror with various other companies whose securities are traded in public
markets, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as we deemed appropriate for purposes of this opinion.
II-1
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by Expert and Activision or
otherwise made available to us and have not assumed responsibility independently
to verify such information. We have further relied upon the assurances of
Expert's management that the information provided has been prepared on a
reasonable basis in accordance with industry practice and, with respect to
financial planning data of Expert, reflects the best currently available
estimates and judgment of Expert's management as to the expected future
financial performance of Expert and that they are not aware of any information
or facts that would make the information provided to us incomplete or
misleading. With respect to Activision, we were not provided any financial
planning data or internal projections regarding Activision's financial prospects
and have relied exclusively on published reports prepared by financial analysts,
as supported by our discussions with Activision's management. Without limiting
the generality of the foregoing, for the purpose of this opinion, we have
assumed that neither Expert nor Activision are a party to any pending
transaction, including external financing, recapitalizations, acquisitions or
merger discussions, other than the Transaction or in the ordinary course of
business. We have also assumed that (i) if Cash Consideration is used in the
Transaction, the Transaction will be taxable to Expert, and (ii) if Stock
Consideration is used in the Transaction, the Transaction will be tax free to
Expert and the holders of Expert Shares and that the Transaction will be
accounted for as a purchase transaction under generally accepted accounting
principles. In arriving at our opinion, we have assumed that all the necessary
regulatory approvals and consents required for the Transaction will be obtained
in a manner that will not change the purchase price for Expert.
In arriving at our opinion, we have not performed any appraisals or
valuations of specific assets or liabilities of Expert or Activision and have
not been furnished with any such appraisals or valuations. Without limiting the
generality of the foregoing, we have undertaken no independent analysis of any
pending or threatened litigation, possible unasserted claims or other contingent
liabilities, to which Expert, Activision or any of their respective affiliates
is a party or may be subject and, at Expert's direction and with its consent,
our opinion makes no assumption concerning and therefore does not consider, the
possible assertion of claims, outcomes or damages arising out of any such
matters.
Our opinion is necessarily based upon information available to us, facts and
circumstances and economic, market and other conditions as they exist and are
subject to evaluation on the date hereof; events occurring after the date hereof
could materially affect the assumptions used in preparing this opinion. We have
not undertaken to reaffirm or revise this opinion or otherwise comment upon any
events occurring after the date hereof and do not have any obligation to update,
revise or reaffirm this opinion. We are not expressing any opinion herein as to
the prices at which Activision's shares will trade following the consummation of
the Transaction or the prices at which Expert's shares or Activision's shares
will trade between the date hereof and the consummation of the Transaction. In
addition, we express no opinion or recommendation as to how the holders of
Expert Shares should vote at the stockholders meeting to be held in connection
with the Transaction.
This opinion is for the benefit of the Board of Directors of Expert in
evaluating the Transaction and shall not be published or otherwise used, nor
shall any public references to U.S. Bancorp Piper Jaffray be made without our
prior written consent. In connection with this opinion, we were not requested to
opine as to, and this opinion does not address, the underlying business decision
to proceed with or effect the Transaction.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that the Consideration to be received by
the holders of Expert Shares in connection with the Transaction is fair, from a
financial point of view, to such holders, as of the date hereof.
Sincerely,
U.S. BANCORP PIPER JAFFRAY INC.
II-2
ANNEX III
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- - - - - - - --------------------------------------------------------------------------------
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.--(a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to Section
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
III-1
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of such stockholder's shares shall deliver
to the corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such stockholder's shares. A proxy or vote against
the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written
demand as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation shall notify
each stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or
III-2
assistant secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given shall, in the
absence of fraud, be prima facie evidence of the facts stated therein. For
purposes of determining the stockholders entitled to receive either notice,
each constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given, provided,
that if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion,
III-3
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
III-4
ANNEX IV
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-25646
EXPERT SOFTWARE, INC.
STATE OF DELAWARE--I.R.S. EMPLOYER IDENTIFICATION NO.: 65-0359860
802 DOUGLAS ROAD
SIXTH FLOOR
CORAL GABLES, FL 33134
(305) 567-9990
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK (PAR VALUE OF $0.01 PER SHARE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
The aggregate market value of shares of Common Stock held by non-affiliates
of the Registrant as of February 26, 1999 was approximately $8,249,000. For
purposes of this computation, all executive officers, directors and 5% owners of
the Registrant's Common Stock have been deemed to be affiliates.
As of February 26, 1999, there were 7,627,881 shares of the Registrant's
Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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Page IV-1 of IV-56.
The exhibit index is on page IV-54.
IV-1
INDEX TO ITEMS
PAGE
---------
PART 1
Item 1. Business................................................................................... IV-3
Item 2. Properties................................................................................. IV-10
Item 3. Legal Proceedings.......................................................................... IV-10
Item 4. Submission of Matters to a Vote of Security Holders........................................ IV-11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... IV-12
Item 6. Selected Financial Data.................................................................... IV-13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................... IV-14
Item 8. Consolidated Financial Statements and Supplementary Data................................... IV-22
Item 9. Changes and Disagreements With Accountants on Accounting and
Financial Disclosure....................................................................... IV-40
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... IV-40
Item 11. Executive Compensation..................................................................... IV-43
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. IV-46
Item 13. Certain Relationships and Related Transactions............................................. IV-48
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... IV-48
SIGNATURES.................................................................................................. IV-51
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference are discussed in the section entitled "Factors Affecting Future
Operating Results" on page IV-20 of this Form 10-K.
IV-2
PART I
ITEM 1. BUSINESS
GENERAL
Expert Software, Inc. ("Expert" or the "Company") is a leading publisher of
high-quality, value-priced consumer software that addresses a broad range of
consumer interests and everyday tasks. The Company currently sells over 170
products in the productivity, lifestyle, small office/home office, entertainment
and education market categories. The Company promotes the Expert brand name in
order to generate customer loyalty, encourage repeat purchases and differentiate
the Expert products to retailers and consumers. Expert targets the growing
audience of home PC users who value fully-featured and easy-to-use software.
Expert brand products sell primarily for under $15, a price point intended to
generate impulse purchases in mass market environments.
The Company seeks to develop a broad line of products in categories in which
a leading market share can be attained. The Company also creates product
franchises by upgrading successful products and developing product line
extensions and complementary products. The Company's titles are primarily
available on the Windows operating system, and substantially all are available
on CD-ROM. Over 29.3 million units of Expert products have been sold since 1989,
with more than 5.4 million units sold in 1998 and more than 5.6 million units
sold in 1997. Expert products are currently available at retailers such as
Babbages Etc, Best Buy, CompUSA, Electronics Boutique, K Mart, Microcenter,
Office Depot, OfficeMax, PriceCostco, Sam's Club, Staples and Walmart. Expert
products are also available at the Company's on-line store site on the world
wide web.
"Expert Software", "Swfte" and all of Expert's logos and product names are
trademarks of the Company. This annual report also contains trademarks of
companies other than those of the Company. The Company includes its wholly-owned
subsidiaries, Swfte International, Ltd. and ES International, Inc.
On March 3, 1999, Expert announced the execution of an Agreement and Plan of
Merger dated as of March 3,1999 (the "Merger Agreement") by and among Expert,
Activision, Inc., a Delaware corporation ("Activision") and Expert Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of Activision ("Expert
Acquisition Sub"), pursuant to which, among other things, Expert will be merged
with and into Expert Acquisition Sub and will become a wholly owned subsidiary
of Activision (the "Merger").
Pursuant to the terms of the Merger Agreement, Activision has the right,
exercisable until April 1, 1999, to elect whether the merger consideration will
be entirely cash or entirely stock (subject to a cash component in certain
situations described below). If Activision chooses cash consideration, holders
of shares of Expert Common Stock ("Expert Shares") will receive $2.65 per Expert
Share. If Activision chooses stock consideration, holders of Expert Shares will
receive that number of shares of Activision Common Stock ("Activision Shares")
equal to the quotient of (i) $2.65 divided by (ii) the arithmetic average of the
per share closing sales prices of an Activision Share as reported on the Nasdaq
National Market on the ten (10) trading days ending on and including the trading
day which is two (2) trading days immediately prior to the date of the special
meeting of Expert stockholders that will be convened to consider and vote upon
the approval of the Merger Agreement and the transactions contemplated thereby
(such arithmetic average, the "Activision Per Share Market Value"); provided,
however, that, if the Activision Per Share Market Value is less than $10.00 per
Activision Share, holders of Expert Shares will be entitled to receive for each
Expert Share (A) 0.265 of an Activision Share and (B) cash in an amount equal to
the product of (x) the Activision Per Share Market Value multiplied by (y) the
number that remains when 0.265 is subtracted from the quotient of 2.65 divided
by the Activision Per Share Market Value.
The Merger is currently anticipated to be consummated in the summer of 1999.
IV-3
INDUSTRY BACKGROUND
In recent years, the installed base of PCS in homes has grown substantially
as prices have declined and as power and capability have improved. Such PCS have
improved enabling technologies and standards, such as graphical user interfaces
and the Windows operating system, which have made PCS easier to use for a broad
range of applications resulting in the transformation of PCS into
general-purpose tools. These advanced capabilities have allowed software
developers to produce more engaging software with advanced three-dimensional
graphics, realistic sound and full motion video. Well-equipped PCS are now
available for $1,000 and less. Today's lower-priced PCS feature high-speed
microprocessors, large amounts of memory, high-speed CD-ROM technology, and
enhanced sound and graphics capabilities.
The increased penetration of PCS into the home has created a large and
growing mass market for consumer software as consumers wish to maximize the
utility of their PCS. The distribution of consumer software has expanded beyond
traditional software retailers and computer stores to include general mass
merchandisers. In response to these developments, increasing numbers of consumer
software products are being developed to address a broad range of consumer
interests and everyday tasks. Consequently, the Company believes that consumers
are more frequently purchasing software on impulse in the same way that they buy
books, music CDS and movie videos and the distribution channels for consumer
software could continue to expand to include book and music stores, video
outlets and supermarkets. Consumer preferences for software products, however,
are difficult to predict, and few consumer software products achieve sustained
market acceptance.
As consumer software becomes more of a mass market product, it will become
increasingly important for consumer software companies to have direct
relationships with retailers and to effectively market their products to
consumers. Competition for retail shelf space is also likely to increase due to
the proliferation of consumer software products and competition from large
consumer product companies. As a result, the Company believes that, in order to
be successful, consumer software companies must have a consumer-driven focus, a
broad offering of category-leading products, close relationships with retailers,
a recognized brand name and a cost-efficient business model.
The use of the Internet by home and business PC users has increased
dramatically in recent years. Sales of products on the Internet, including
software, have increased and the Internet is likely to become an important sales
channel for software.
The Company maintains a web site that offers its products for sale on-line.
Expert encourages its customers to visit its web site through its CD ROM
installation process and advertising messages on its packaging and printed
materials. Visitors to the site may browse through the Company's catalog of
products, and place an order on-line, by telephone or by fax.
The Internet provides companies such as Expert the opportunity to offer a
broader range of products on the Internet than is available at retail stores.
Generally, direct sales of product on the Internet currently are at higher
prices than the Company realizes when selling to its retail and distribution
channels. Internet sales currently do not involve certain of the selling and
promotional costs the Company incurs when selling to its traditional channels,
however other types of marketing and advertising costs may be required to
promote the site and draw traffic.
Consumer buying habits may be influenced by the availability of products on
the Internet, however the Company believes it is not possible to predict the
impact of such changes on its business. For example, customers might purchase
more impulse products because they are easier to buy, but electronic commerce on
the Internet is also new, rapidly evolving and highly competitive. As more
content, products and services become available on the Internet, it may become
increasingly difficult to garner the attention of prospective shoppers.
IV-4
BUSINESS STRATEGY
The Company's objective is to be a leading publisher of high-quality,
value-priced consumer software and plans to pursue the following strategies:
MAINTAIN CONSUMER-DRIVEN FOCUS. The Company seeks to develop creative and
innovative products with mass appeal. The Company believes that many consumers
base their software purchasing decisions largely on recognized brands, quality,
value and ease of use. As a result, the Company is committed to providing
products that are high quality and value priced, and require minimal technical
expertise to operate. The Company's consumer-oriented marketing strategy
combines attractive and informative packaging with promotional campaigns to
encourage impulse purchases. To enhance customer satisfaction, the Company also
provides technical support for all of its products. In addition, the Company
revises products in response to consumer feedback and upgrades products to
utilize new technologies, such as upgraded graphical user interfaces and the
Internet, as those technologies gain broader acceptance in the consumer market.
DEVELOP DIVERSIFIED TITLES WITH STRONG FRANCHISE VALUE. The Company seeks
to develop a broad line of products in sustainable categories in which a leading
market share can be obtained. The Company currently has over 170 products
available for sale in stores in the productivity, lifestyle, small office/home
office, entertainment and education market categories. The Company creates
franchises by upgrading successful products and developing product line
extensions and complementary products. For example, HOME DESIGN became the
foundation of a product franchise that includes HOME DESIGN
3D-REGISTERED TRADEMARK-, HOME DESIGN PREMIER-TM-, LANDSCAPE DESIGN
3D-REGISTERED TRADEMARK-, CAD 3-D-TM-, and COMPLETE HOME GARDENER. The Company
also seeks to create evergreen titles with extended life cycles by upgrading
successful products to incorporate new features and to adapt to new
technologies. Such titles include the Bicycle-Registered Trademark- line of card
games, CHAMPIONSHIP CHESS-TM-, FORMS-TM- and LABELS-TM-.
LEVERAGE DISTRIBUTION STRENGTHS. The Company has established a distribution
network based largely upon direct sales to, and established relationships with,
a broad base of retailers, including office supply stores, software specialty
stores, warehouse clubs, consumer electronic stores, mall-based chains and mass
merchants, which it believes to be one of its major strengths. The Company
believes that its broad product line, self-supporting packaging,
consumer-oriented marketing programs, and retail support enable it to
effectively sell directly to retailers. Direct sales to retailers allow the
Company to assist retailers in offering a suitable mix of Expert products and
tracking inventory levels and sell-through rates. In addition, direct sales to
retailers allow the Company to tailor marketing efforts, promotions and
merchandising displays to fit the needs of specific retailers. This strategy
enables the Company to identify and react to trends in the retail consumer
market and to help build incremental sales. The Company believes that its
attention to detail at the retail level and careful execution have been the key
factors to its successful marketing programs and have contributed to the sales
growth of its products. The Company also promotes its products via the Internet
and, beginning in February 1999, offers a wide assortment of products at its
on-line storefront on the world wide web.
PROMOTE BRAND NAMES. The Company currently promotes its products under
three brands: Expert, Bicycle-Registered Trademark-, and the Sega PC
Collection-TM-. The Company promotes these brand names in order to encourage
customer loyalty and repeat purchases. Expert believes that its brand name
products are recognized by consumers as high-quality, fully-featured software
that consistently exceed consumer expectations. Drawing upon established
consumer marketing techniques, the Company uses its brand names and easily
identifiable packaging which emphasizes high-impact design and concise,
non-technical product information.
The Company believes that by promoting recognizable brand names and
consistent packaging, satisfied consumers are more likely to purchase additional
products when faced with multiple options in a software category. The Company
also has an established public relations effort which seeks to broaden
IV-5
consumer awareness and acceptance of the Expert, Bicycle-Registered Trademark-,
and Sega PC Collection-TM- brand names. As the consumer software industry
becomes more of a mass market, the Company believes that brand name recognition
will become an increasingly important means of product differentiation among
retailers and consumers.
MANAGE DEVELOPMENT PROCESS. The Company seeks to carefully manage its
development process to provide consistent product quality, shorter and more
predictable delivery schedules, and lower investment risks and overall
development costs. Historically, the Company's internal development efforts have
been focused primarily on product design and features, consistent user
interfaces, ease of use, and product quality and consistency to supplement its
externally developed programming and content. This process allows the Company to
maintain internal control over the creative and market-driven aspects of its
product development efforts, while using outside resources to lessen its
development risks.
OPERATE PROFITABLY AT CONSUMER PRICE POINTS. To maintain its ability to
profitably deliver value-priced consumer software, the Company seeks to
carefully manage its development process, control its component costs while out
sourcing its production and warehousing overhead, and invest in systems that
permit efficient management of high sales volume. As consumer software becomes
more of a mass market driven by consumer demand and lower price points, the
Company believes that the ability to profitably develop, produce, market and
support value-priced products will be an important competitive factor.
ACQUIRE COMPLEMENTARY PRODUCTS, TECHNOLOGIES AND BUSINESSES. The Company
believes that the consumer software industry will continue to consolidate in
response to pressures to expand market offerings and develop broad distribution
channels. The Company intends to explore opportunities to expand its business by
acquiring or licensing products or technologies or acquiring businesses that are
consistent with its overall business strategy. The Company anticipates that its
future acquisitions may be structured as purchases for accounting purposes. As a
result, the Company expects that any such acquisitions will create intangible
assets which will be amortized over time and may be accompanied by write-offs of
purchased research and development and other intangible assets.
Prior to consummation of the Company's pending merger with Activision, the
Company intends to continue to pursue these strategies in conducting its
business. Following consummation of the Merger, some or all of these strategies
may change or be revised as the two companies are integrated. In the event that
the Merger is not consummated for any reason, Expert currently intends to
continue to pursue its historical business objectives and strategies.
PRODUCTS
The Expert product line addresses a wide range of interests and hobbies. The
Company's products sell in retail stores primarily for under $15, a price point
intended to generate impulse purchases in high-traffic mass market environments.
Currently, the Company's product line includes over 170 titles. Expert
introduced over 50 new titles in 1998, and over 60 new titles in 1997.
The Company currently targets five consumer software market categories:
productivity, lifestyle, small office/home office, entertainment and education.
Due to the diversity of its product offerings, the Company is not dependent on
any single product.
In addition, the Company seeks to develop products with long life cycles; as
a result, approximately 81% of its sales in each of 1998 and 1997 came from
existing and upgraded products. Most of the Company's titles are compatible with
Windows, and substantially all are available on CD-ROM.
ENTERTAINMENT. Expert entertainment products target users who seek
entertainment which can be easily mastered and can provide gratification in
short periods of time. For example, CASINO is an entertainment product that
includes blackjack, roulette, draw poker, baccarat, craps and slot machine
IV-6
games, using graphics, animation and sound effects to simulate actual game play.
Entertainment products also include the Bicycle-Registered Trademark- brand
playing card series, and the Sega PC Collection-TM- brand of game software.
PRODUCTIVITY. Expert productivity products enable users to more efficiently
accomplish a wide variety of tasks using their PCS. The Company has focused on
productivity tasks such as designing personalized calendars, adding clip art to
an Internet web site, creating personalized greeting cards, or creating a family
newsletter. For example, CALENDAR SHOP-TM- allows users to organize events
daily, weekly, monthly or yearly for events related to home, business, school or
clubs and organizations.
LIFESTYLE. Expert lifestyle products are designed to provide enrichment for
all family members. The lifestyle products include an astronomy product that
allows users to plot the night sky, a diet and nutrition advisor, a home design
product, a wedding planner and engaging screen savers. For example, HOME DESIGN
3D-REGISTERED TRADEMARK- is a simple-to-use design program that can be used to
lay out a three-dimensional building plan complete with furniture objects that
are provided with the program. Designs can be tested with various color schemes
and movable walls, rooms and furniture that can be resized or modified with
simple design tools; and the user can "walk through" the three-dimensional
design.
SMALL OFFICE/HOME OFFICE. Small office and home office ("SOHO") users
require powerful, easy-to-use and inexpensive software for business functions
such as creating simple forms, printing labels and generating standard business
agreements. For example, RESUME WRITER is a SOHO product that provides a variety
of tools for a job search, including video clips of interviewing advice and
examples, resume templates, sample resumes, and a word processor for creating
cover letters. RESUME WRITER also includes a contact database to track where
resumes were sent and an appointment calendar to assist in tracking appointments
and follow up.
EDUCATION. Expert education products are designed to make learning an
interactive adventure for children and adults. TYPING provides personalized
lessons and tests designed for varying skill levels. SPEAK SPANISH offers an
interactive immersion into a 3D city where the user builds vocabulary and
pronunciation skills, while ALGEBRA provides animated examples to allow a
student to review and practice algebra at their own pace.
SALES AND MARKETING
Consumers can purchase Expert products at over 25,000 retail stores
worldwide. Expert sells its products primarily on a direct basis to office
supply stores, software specialty stores, warehouse clubs, consumer electronics
stores, mall-based chains and mass merchants, as well as to distributors.
Retailers selling the Company's products include Babbages Etc, Best Buy,
CompUSA, Electronics Boutique, K Mart, Microcenter, Office Depot, OfficeMax,
PriceCostco, Sam's Club, Staples and Walmart.
The Company's customers are not contractually required to make future
purchases of the Company's products and therefore could discontinue carrying the
Company's products in favor of a competitor's products or for any other reason.
There can be no assurance that the Company will be able to increase or sustain
its current amount of retail shelf space or promotional resources, and as a
result, the Company's operating results could be adversely affected.
In 1998, Office Depot and OfficeMax each represented 10% or more of the
Company's sales. In 1997, Office Depot represented more than 10% of the
Company's sales. The Company believes that mass market retailers will
increasingly be significant outlets for consumer software.
International sales represented approximately 24%, 24%, and 25% of Expert's
sales in fiscal years ended 1998, 1997 and 1996, respectively. International
sales have been primarily to customers in the United Kingdom, Canada, Australia
and Western Europe. The Company conducts its international sales efforts
primarily by establishing relationships with foreign publishers and
distributors.
IV-7
Internet sales and electronic commerce through sales on its web site may
become increasingly important to the Company. Expert established its on-line
store in February 1999. Sales to date have not been significant, but management
believes that sales through this channel will increase as consumers become
increasingly aware of the convenience of shopping from this site, the breadth of
product available there, and promotions and sales incentives the Company plans
to offer to its on-line shoppers.
The Company is exposed to the risk of product returns, primarily from
retailers and distributors. The Company establishes reserves for returns that it
believes to be adequate based upon historical return data and its analysis of
current customer inventory levels and sell-through rates. Nonetheless, the
Company may accept substantial product returns to maintain its relationships
with retailers and its access to distribution channels. The Company's policies
also allow for returns of defective merchandise for credit. Any significant
amount of product returns could have a material adverse effect on the Company's
business, operating results and financial condition. Sales are typically made on
credit with varying terms, and the Company does not hold collateral to secure
payment. If a significant portion of the Company's accounts receivable was to
become uncollectible or subject to extended payment terms, the Company's
business, operating results and financial condition could be adversely affected.
DEVELOPMENT
Expert believes that its efficient development model has certain key
advantages including consistent product quality, reliable delivery schedules,
cost containment and low investment risk. The Company depends primarily upon
third parties for the acquisition or licensing of software products or
technologies. Development costs associated with externally licensed technology
are generally paid by royalties based on sales, which are included in cost of
revenues in the accompanying consolidated financial statements. The Company may
also acquire products through the acquisition of other software companies.
Development expenses, including technical support to customers, totaled $2.4
million, $2.7 million, and $3.3 million in 1998, 1997, and 1996, respectively.
The Company's product managers oversee the development of various products
from conception through completion, and control the content, design, scope and
schedule of the project. New product ideas are evaluated based upon market
research on the subject area, the type and demographics of the target consumer,
and the existence and characteristics of competitive products. The Company seeks
to design new products which incorporate all of the important functions and
features of the leading competitive products and to add innovative, helpful
concepts and upgrades.
The Company provides technical support to customers by telephone and
facsimile machine at no additional charge. The Company has a call handling
center to facilitate its response to customer inquiries. The Company offers
technical support on its web page on the Internet at
http://www.expertsoftware.com.
There can be no assurance that the Company will be successful in developing
and marketing products for emerging operating systems and media formats,
including the Internet, and the introduction of new technologies could render
the Company's existing products obsolete or unmarketable.
OPERATIONS
The Company controls all purchasing, inventory, scheduling, order processing
and accounting functions related to its operations, with all production and
warehousing performed by independent contractors in accordance with the
Company's specifications. The Company invests in computer systems to handle high
sales volumes, including order processing, inventory management, purchasing and
tracking of shipments. The Company has electronic data interchange (EDI) links
with key customers to increase the efficiency and accuracy of order processing
as well as to shorten order turnaround time. By investing in automated systems
to efficiently process high sales volumes, the Company believes it can minimize
out-of-stock positions. The Company has invested in, and intends to continue to
invest in, management information
IV-8
systems and other capital equipment which it believes are necessary to achieve
operational efficiencies and support increasing sales volumes.
The Company intends to manage and maintain inventory levels to support
shipments within 48 hours of receiving an order. The Company has relatively
little backlog at any given date, and its backlog is not indicative of potential
sales for any future period.
Disk and CD-ROM duplication, printing of documentation and packaging, as
well as the assembly of purchased components and the shipment of finished
products, are performed by third parties in accordance with the Company's
specifications. The Company has multiple sources for substantially all
components, with assembly and shipping of the Company's products currently
performed by three independent fulfillment houses. To date, the Company has not
experienced any material difficulties or delays in the production and assembly
of its products. To the extent that the Company's fulfillment houses do not
continue to perform assembly and shipping functions in a cost-efficient and
timely manner, and transition to substitute fulfillment houses is not completed
in a timely fashion, the Company's business, operating results and financial
condition could be adversely affected.
COMPETITION
The market for the Company's consumer software products is intensely and
increasingly competitive. The Company's competitors range from small companies
with limited resources to large companies with substantially greater financial,
technical and marketing resources than those of the Company. Existing consumer
software companies may broaden their product lines to compete with the Company's
products, and potential new competitors, including computer hardware and
software manufacturers, diversified media companies and book publishing
companies, may enter or increase their focus on the consumer software market,
resulting in greater competition for the Company. Although the Company competes
with a number of different companies across its product lines, the Company
regards GT Interactive Software Corp., Havas Interactive, Inc., The Learning
Company, Inc. and Electronic Arts Inc. as its closest competitors based upon
price points and product offerings. In addition, the Company believes that new
competitors, including large software companies and diversified media companies,
are increasing their focus on the consumer software market, resulting in greater
competition for the Company.
Only a small percentage of products introduced in the consumer software
market achieve any degree of sustained market acceptance. Principal competitive
factors in marketing consumer software include product features, quality,
reliability, brand recognition, ease of use, merchandising, access to
distribution channels and retail shelf space, marketing, price, and the
availability and quality of support services. The Company believes that it
competes effectively in these areas, particularly in the areas of quality, brand
recognition, ease of use, merchandising, access to distribution channels and
retail shelf space and price. To the extent that competitors achieve
performance, price or other selling advantages, the Company could be adversely
affected. There can be no assurance that the Company will have the resources
required to respond to market or technological changes or to compete
successfully in the future. In addition, increasing competition in the consumer
software market may cause prices to fall, which could adversely affect the
Company's business, operating results and financial condition.
PROPRIETARY RIGHTS AND LICENSES
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and third
party nondisclosure agreements and other methods to protect its proprietary
rights. The Company does not include in its products any mechanism to prevent or
inhibit unauthorized copying. Unauthorized copying occurs within the software
industry, and if a significant amount of unauthorized copying of the Company's
products were to occur, the Company's business, operating results and financial
condition could be adversely affected. Also, as the number of software products
in the industry increases and the functionality of these products further
overlaps, software
IV-9
developers and publishers may increasingly become subject to infringement
claims. There can be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current or
future products. Any such claims, with or without merit, can be time consuming
and expensive to defend and resolve.
The Company has in the past received communications suggesting that its
products may incorporate material covered by the copyrights, trademarks or other
proprietary rights of third parties. All such communications were, in the
Company's judgment, without merit or immaterial in nature. However, there can be
no assurance that there will not be any such communications in the future. The
Company's policy is to investigate the factual basis of such communications and
to resolve such matters promptly by negotiating licenses, enforcing its rights
or taking other appropriate actions.
The Company licenses software from third party developers under standard
format software license agreements for multi-year terms, typically five years
with provisions for renewal. In a few instances, however, certain third party
developer licenses contain other provisions. For example, the Company's January,
1997 license with McDonald's Corporation for use of McDonald's Marks on
family-oriented software has a five year term, and requires the Company to pay
minimum royalty guarantees during the term. The Company's December 31, 1997
license with The United States Playing Card Company for use of the trademark
Bicycle-Registered Trademark- on software card games continues in effect until
August 2001, with provisions for renewal.
EMPLOYEES
As of December 31, 1998, the Company had 101 employees, including 33 in
sales and marketing, 13 in development, 17 in customer support and 38 in
operations, administration and finance. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
Expert subleases approximately 20,000 square feet of office space in Coral
Gables, Florida. Subleases for this space expire in August, 2000. The Company
currently expects that these facilities will be sufficient for its needs at
least through that time.
ITEM 3. LEGAL PROCEEDINGS
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the Predecessor from Bloc in October 1992, and related amortization
and other deductions with respect to the acquired assets. In June 1997, the IRS
proposed assessments for additional taxes of $442,000, $553,000 and $857,000 for
the tax years 1992, 1993 and 1994, respectively, plus penalties totaling
$371,000 and interest to the date of payment. If the IRS prevailed on all
issues, such interest through December 31, 1998 would total approximately
$700,000. The preliminary adjustments proposed by the IRS would also reduce the
Company's federal income taxes for the years 1995, 1996 and 1997 by $242,000,
$68,000 and $55,000, respectively. The IRS has not yet issued a notice of
deficiency assessing actual additional taxes and penalties. The Company believes
that it has properly reported its income and paid its taxes in accordance with
applicable laws and intends to contest the proposed adjustments vigorously.
Additionally, the Company's federal income tax return for 1996 reported a net
operating loss of approximately $17.8 million, which is available as a carryback
subject to statutory limitations to offset a substantial portion of the proposed
tax assessments. The Company believes that the ultimate resolution of this
matter will not have a material adverse effect on its financial position.
IV-10
The Company's federal tax filing with respect to the year ended December 31,
1996 is presently being reviewed by the IRS, which has questioned the allocation
of the purchase price made by the Company in connection with the acquisition of
Swfte International, Ltd. in November 1995, and related amortization and other
deductions. The IRS has not proposed any assessment from its review, nor has it
indicated when it expects to conclude its audit or if it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional
taxes, if any, the IRS will claim are due. There can be no assurance that the
Company will prevail in its position, or that the appeals, if any, and final
resolution of any IRS claims will not have a material adverse impact on the
Company's liquidity, financial position, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
IV-11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market under the
symbol XPRT. On February 26, 1999, there were approximately 100 registered
holders of record of the Company's common stock, although the Company believes
that the number of beneficial owners of its common stock as of that date was
substantially greater. The Company does not currently pay dividends on its
common stock and is generally restricted from paying dividends pursuant to the
terms of its revolving credit agreement. The Company currently intends to retain
its earnings for future growth and, therefore, does not anticipate paying any
cash dividends in the foreseeable future. The following table sets forth the
high and low sales prices for the Common Stock as reported by the Nasdaq
National Market for each of the periods indicated.
HIGH LOW
------- -------
FISCAL YEAR ENDED DECEMBER 31, 1998
Fourth Quarter......................................................................................... 3 1/8 11/16
Third Quarter.......................................................................................... 4 1/2 1 3/8
Second Quarter......................................................................................... 5 3/4 3 7/8
First Quarter.......................................................................................... 5 2 1/2
FISCAL YEAR ENDED DECEMBER 31, 1997
Fourth Quarter......................................................................................... 8 1/4 2 7/8
Third Quarter.......................................................................................... 7 11/16 3 3/4
Second Quarter......................................................................................... 4 5/8 1 1/2
First Quarter.......................................................................................... 4 1/4 1 3/4
As discussed in Item 1 above, the Company has entered into a Merger
Agreement with Activision, Inc., whose common stock trades on the Nasdaq
National Market under the symbol ATVI.
IV-12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth has been derived from the consolidated
financial statements of the Company and should be read in conjunction with the
consolidated financial statements of the Company and the related notes.
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- ---------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Net revenues.............................................. $ 30,896 $ 33,208 $ 31,012 $ 27,638 $ 19,727
--------- --------- ---------- --------- ---------
Operating costs and expenses:
Cost of revenues (1).................................... 13,692 12,985 16,420 10,121 8,066
Marketing and sales..................................... 12,446 10,489 9,888 6,180 4,303
General and administrative.............................. 6,271 4,554 10,124 4,293 2,824
Development............................................. 2,367 2,744 3,320 2,192 1,328
Purchased research and development...................... -- -- -- 8,392 --
Loss on impairment of assets............................ -- -- 5,700 -- --
Amortization of non-compete agreement................... -- -- -- 338 417
--------- --------- ---------- --------- ---------
34,776 30,772 45,452 31,516 16,938
--------- --------- ---------- --------- ---------
Operating income (loss)................................. (3,880) 2,436 (14,440) (3,878) 2,789
Other income (expense), net............................... 289 268 92 369 (366)
--------- --------- ---------- --------- ---------
Income (loss) before provision (benefit) for income
taxes................................................. (3,591) 2,704 (14,348) (3,509) 2,423
Provision (benefit) for income taxes...................... 4,927 1,001 (4,067) (1,324) 90
--------- --------- ---------- --------- ---------
Net income (loss)....................................... $ (8,518) $ 1,703 $ (10,281) $ (2,185) $ 2,333
--------- --------- ---------- --------- ---------
Diluted earnings (loss) per share of common stock....... $ (1.12) $ .21 $ (1.37) $ (.33) $ .38
--------- --------- ---------- --------- ---------
BALANCE SHEET DATA:
Working capital......................................... $ 3,247 $ 7,916 $ 5,076 $ 10,651 $ 5,283
Total assets............................................ 11,614 22,233 19,077 29,069 10,682
Subordinated debt....................................... -- -- -- -- 2,200
Total stockholders equity (deficit)..................... 4,106 12,532 10,425 20,634 355
- - - - - - - ------------------------
(1) Includes amortization of software technology which amounted to $33,000 in
1998, $98,000 in 1997, $404,000 in 1996, $283,000 in 1995, $477,000 in 1994,
and $4,362,000 in 1993.
IV-13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Expert operates as a single business segment, publishing and distributing
consumer computer software. The following table sets forth, for the periods
indicated, the percentages of net revenues represented by each item reflected in
the Company's statements of operations.
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Net revenues....................................................................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Cost of revenues................................................................. 44.3 39.1 52.9
Marketing and sales.............................................................. 40.3 31.6 31.9
General and administrative....................................................... 20.3 13.7 32.7
Development...................................................................... 7.7 8.3 10.7
Loss on impairment of assets..................................................... -- -- 18.4
--------- --------- ---------
112.6 92.7 146.6
--------- --------- ---------
Operating income (loss).......................................................... (12.6) 7.3 (46.6)
Other income (expense), net........................................................ 1.0 0.8 0.3
--------- --------- ---------
Income (loss) before provision (benefit) for income taxes........................ (11.6) 8.1 (46.3)
Provision (benefit) for income taxes............................................... 16.0 3.0 (13.1)
--------- --------- ---------
Net income (loss)................................................................ (27.6)% 5.1% (33.2)%
--------- --------- ---------
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
NET REVENUES. Net revenues decreased 7.0% to $30.9 million in 1998 from
$33.2 million in 1997, due primarily to higher provisions for returns,
particularly in the third quarter of 1998, and lower average sales prices,
partially offset by broader distribution of product and increased unit
shipments. Provisions for returns in the third quarter of 1998 increased
primarily due to higher promotional sales on which returns occurred at rates
higher than usually experienced by the Company. Average selling prices declined
due to increased competition for shelf space at retail outlets. Average selling
prices may continue to decline as the Company expands its distribution network,
particularly in the mass merchandising channel. International sales were
approximately 24% of net revenues in each of 1998 and 1997. International
markets have been subject to economic trends, including currency exchange rate
fluctuations, outside of the Company's control and, as a result, there can be no
assurance as to whether international activity will increase or decrease in the
future.
Net revenues consist of gross sales net of allowances for returns and
discounts, and royalty income related to licensing of products, primarily to
publishers in Europe. The Company adjusts its allowance for returns as it deems
appropriate. The Company may accept substantial product returns or make other
concessions to maintain its relationships with retailers and distributors and
its access to distribution channels. If the Company chooses to accept product
returns, some of that product may be defective, shelf-worn or damaged and may
not therefore be salable in the ordinary course of business. At December 31,
1998, the Company's allowance for potential returns and doubtful accounts was
$3.4 million. See Note 1 of Notes to the Company's Consolidated Financial
Statements. There can be no assurance, however, that the Company will not
experience significant returns, which could be greater than the Company's
provision for returns or could have a material adverse affect on the Company's
results of operations. In accordance with its policy, the Company will continue
to reassess market conditions and adjust its provision for returns as it deems
appropriate. Due in part to the high level of returns experienced on recent
promotional sales, the Company limited such sales in the third and fourth
quarters of 1998. The
IV-14
Company may pursue additional promotional sales in the future when it believes
market conditions make it appropriate to do so.
COST OF REVENUES. Cost of revenues increased to $13.7 million in 1998 from
$13.0 million in 1997 and increased as a percentage of net revenues to 44.3%
from 39.1%. This higher percentage was due primarily to the higher provisions
for returns noted under NET REVENUES above. This dollar increase was primarily
due to higher costs associated with increased sales volume and higher provisions
for excess and obsolete inventories. The Company expects cost of revenues may
vary from period to period based on the relative mix of products sold, the level
of promotional sales in a given period and other market factors.
Cost of revenues consists primarily of product cost, freight charges,
royalties to outside programmers and content providers, as well as amortization
of software licenses and an inventory provision for damaged and obsolete
products, if any. Product costs consist of the costs to purchase the underlying
materials and print both boxes and manuals, media costs (disks and CD-ROMs) and
fulfillment (assembly and shipping).
MARKETING AND SALES. Marketing and sales expenses increased to $12.4
million in 1998 from $10.5 million in 1997 and increased as a percentage of net
revenues to 40.3% from 31.6%. The increase was primarily due to increased
marketing activities to promote the Company's products and brand names, costs
associated with the design and release of new and revised packaging for
products, and increased personnel. In response to increased competition for
shelf space in retail outlets, the Company intends to continue to launch new and
innovative marketing promotions. As a result, the Company expects marketing and
sales expenses to increase in dollar amount, and expects competition for shelf
space to continue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $6.3 million in 1998 from $4.6 million in 1997 and increased as a percentage
of net revenues to 20.3% from 13.7%. This increase was primarily due to the
provision of $1.3 million for doubtful accounts, primarily related to amounts
due from a distributor which are unlikely to be collectible in the near term;
and approximately $0.4 million for costs of computer systems conversions,
including costs to address the "Year 2000" issue. The systems conversions were
substantially completed early in 1999.
DEVELOPMENT. Development expenses decreased to $2.4 million in 1998 from
$2.7 million in 1997 and decreased as a percentage of net revenues to 7.7% from
8.3%, mainly due to reduced outside development costs. Development expenses
include costs relating to product upgrades, new products development activities,
quality control and expanded customer service support. The Company currently
believes that development expenses will increase in future periods due to
additional costs to develop new brands and titles, including the development of
products to take advantage of the Internet and other on-line capabilities,
operating systems upgrades such as Windows 98, and the localization of product
for international sales.
OTHER INCOME (EXPENSE). Net interest income increased to $289,000 in 1998
from $268,000 in 1997, primarily due to the receipt of interest of approximately
$117,000 in connection with the refund of prior years' income tax payments,
partially offset by lower balances of interest-bearing assets.
TAX PROVISION (BENEFIT). The Company accounts for income taxes under SFAS
No. 109, ACCOUNTING FOR INCOME TAXES, which requires that deferred income taxes
be recognized for the tax consequences in future years of differences between
the tax basis of assets and liabilities and their financial reporting basis at
rates based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. A valuation allowance was recorded
to offset 100% of the Company's net deferred tax asset as of September 30, 1998,
resulting in a deferred provision for income taxes of $4.7 million in the third
quarter of 1998. The net deferred tax asset is comprised of tax basis net
operating losses and the estimated tax effect of expected future temporary
differences related to charges taken for book purposes that are not deductible
for federal income tax purposes until the amounts are
IV-15
realized in the future. Management believes that, due to recent financial
results, it is appropriate to record a full valuation allowance until such time
as it becomes more likely than not that the Company will realize some or all of
the benefit of the net deferred tax assets.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
NET REVENUES. Net revenues increased 7.1% to $33.2 million in 1997 from
$31.0 million in 1996, due primarily to broader distribution of product,
partially offset by lower average sales prices. Average selling prices declined
due to increased competition for shelf space at retail outlets. Net revenues for
the fourth quarter of 1997 were affected by lower
McDonaldland-Registered Trademark- software sales than anticipated and higher
returns of such products than usually experienced by the Company's other brands.
International sales were approximately 24% of net revenues in 1997 and 25% of
net revenues in 1996.
COST OF REVENUES. Cost of revenues decreased to $13.0 million in 1997 from
$16.4 million in 1996 and decreased as a percentage of net revenues to 39.1%
from 52.9%. This decrease was primarily due to provisions of $2.6 million and
$1.4 million recorded in 1996, partially offset by higher costs associated with
increased sales volume.
MARKETING AND SALES. Marketing and sales expenses increased to $10.5
million in 1997 from $9.9 million in 1996 and decreased as a percentage of net
revenues to 31.6% from 31.9%. The increase in dollar amount was primarily due to
increased marketing activities to promote the Company's products and brand
names, increased personnel and increased competition for shelf space in retail
outlets. The Company intends to continue to launch new and innovative marketing
promotions and to hire additional personnel as needed.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
to $4.6 million in 1997 from $10.1 million in 1996 and decreased as a percentage
of net revenues to 13.7% from 32.7%. This decrease was primarily due to lower
provision for doubtful accounts and legal costs. Legal costs decreased due to
the settlement in the fourth quarter of 1996 of litigation involving the former
owners of Swfte.
DEVELOPMENT. Development expenses decreased to $2.7 million in 1997 from
$3.3 million in 1996 and decreased as a percentage of net revenues to 8.3% from
10.7%, mainly due to lower personnel costs. Development expenses include costs
relating to product upgrades, new products development activities, quality
control and expanded customer service support. During the fourth quarter of
1996, the Company reduced development personnel and did not renew the lease for
facilities previously occupied by Swfte, which contributed to the decrease in
expenses in 1997.
OTHER INCOME (EXPENSE). Net interest income increased to $268,000 in 1997
from $92,000 in 1996, due primarily to higher balances of interest-bearing
assets.
TAX PROVISION (BENEFIT). The Company accounts for income taxes under SFAS
No. 109, ACCOUNTING FOR INCOME TAXES, which requires that deferred income taxes
be recognized for the tax consequences in future years of differences between
the tax basis of assets and liabilities and their financial reporting basis at
rates based on enacted tax laws and statutory tax rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. The effective tax rate used in
recording the provision for income taxes was approximately 37% in 1997.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited financial data for the
Company's eight most recent financial quarters, as well as such data expressed
as a percentage of the Company's net revenues. This data has been derived from
unaudited financial statements that, in the opinion of management, include all
adjustments (consisting of normal recurring adjustments and the charges recorded
in the third quarter of
IV-16
1998 and the fourth quarter of 1997 discussed above) necessary for a fair
presentation of such quarterly information when read in conjunction with the
Company's Consolidated Financial Statements and the related Notes thereto
included in Item 8. The operating results for any quarter are not necessarily
indicative of results for any future period.
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30,
1998 1998 1998 1998 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net revenues............................. $ 8,732 $ 5,020 $ 7,854 $ 9,290 $ 9,071 $ 9,035 $ 7,075
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Cost of revenues....................... 3,669 2,765 3,515 3,743 3,699 3,503 2,649
Marketing and sales.................... 3,107 3,424 3,163 2,752 3,075 2,719 2,268
General and administrative............. 1,039 2,757 1,178 1,297 1,068 1,162 1,109
Development............................ 581 589 584 613 636 724 743
----------- ----------- ----------- ----------- ----------- ----------- -----------
8,396 9,535 8,440 8,405 8,478 8,108 6,769
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss)................ 336 (4,515) (586) 885 593 927 306
Other (expense) income, net.............. 18 40 62 169 106 84 50
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision
(benefit) for income taxes........... 354 (4,475) (524) 1,057 699 1,011 356
Provision (benefit) for income taxes..... -- 4,731 (194) 390 259 374 132
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...................... $ 354 $ (9,206) $ (330) $ 664 $ 440 $ 637 $ 224
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted earnings (loss) per share of
common stock........................... $ .04 $ (1.21) $ (.04) $ .08 $ .05 $ .08 $ .03
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
AS A PERCENTAGE OF NET REVENUES:
Net revenues............................. 100% 100% 100% 100% 100% 100% 100%
Operating costs and expenses:
Cost of revenues....................... 42 55 45 40 41 39 37
Marketing and sales.................... 36 68 40 30 34 30 32
General and administrative............. 12 55 15 14 12 13 16
Development............................ 7 12 7 6 7 8 10
----------- ----------- ----------- ----------- ----------- ----------- -----------
96 190 107 90 94 90 96
Operating income....................... 4 (90) (7) 10 6 10 4
Other (expense) income, net.............. -- 1 1 1 1 1 1
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before provision (benefit) for
income taxes......................... 4 (89) (6) 11 7 11 5
Provision (benefit) for income taxes..... -- 94 (2) 4 2 4 2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...................... 4% (183)% (4 )% 7% 5% 7% 3%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
MARCH 31,
1997
-----------
Net revenues............................. $ 8,027
-----------
Operating costs and expenses:
Cost of revenues....................... 3,134
Marketing and sales.................... 2,427
General and administrative............. 1,215
Development............................ 641
-----------
7,417
-----------
Operating income (loss)................ 610
Other (expense) income, net.............. 28
-----------
Income (loss) before provision
(benefit) for income taxes........... 638
Provision (benefit) for income taxes..... 236
-----------
Net income (loss)...................... $ 402
-----------
-----------
Diluted earnings (loss) per share of
common stock........................... $ .05
-----------
-----------
AS A PERCENTAGE OF NET REVENUES:
Net revenues............................. 100%
Operating costs and expenses:
Cost of revenues....................... 39
Marketing and sales.................... 30
General and administrative............. 15
Development............................ 8
-----------
92
Operating income....................... 8
Other (expense) income, net.............. --
-----------
Income before provision (benefit) for
income taxes......................... 8
Provision (benefit) for income taxes..... 3
-----------
Net income (loss)...................... 5%
-----------
-----------
The Company has experienced, and may continue to experience, fluctuations in
operating results due to a variety of factors, including, but not limited to
market acceptance of the Company's products and those of its competitors,
development and promotional expenses, new versions of existing products or
operating systems, product returns, acquisitions of new businesses by the
Company and related charges and write-offs, and those items included in "FACTORS
AFFECTING FUTURE OPERATING RESULTS" discussed below. The Company's expense
levels are based, in part, on its expectations as to future sales and, as a
result, operating results would be disproportionately affected by a reduction in
sales or a failure to meet the Company's sales expectations.
The consumer software business is seasonal. Typically, net revenues are the
highest during the fourth calendar quarter and decline sequentially in the first
and second calendar quarters. The seasonal pattern is due primarily to the
increased demand for consumer software during the year-end holiday buying
season. The Company expects its net revenues and operating results to continue
to reflect seasonality.
IV-17
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $3.2 million in working capital,
including $1.6 million in cash. To date, the Company has not invested in any
financial instruments that involve a high level of complexity or risk. Net cash
used by operating activities was $3.7 million for the year ended December 31,
1998, primarily due to payments of accounts payable and accrued expenses and
losses during the period, partially offset by collections on accounts receivable
and the receipt of income tax refunds related to prior years' taxes paid.
Management has responded by reducing expenses, including, among other actions,
reducing personnel. Longer term, management believes that its expense reduction
efforts, together with its efforts to focus on its core business, should return
the Company to profitability and provide for positive cash flow sufficient to
fund future operations.
The Company's working capital requirements increased as personnel and other
costs were incurred in an effort to expand operations. In response to such
growth in working capital requirements, the Company entered into a loan
agreement with a bank which provides for a revolving line of credit
collateralized by substantially all of the Company's assets. Borrowings under
the line are limited to a percentage of eligible receivables as defined in the
agreement and may not exceed $2.5 million through May 31, 1999, the maturity
date. The loan agreement contains restrictive covenants. The Company is in
compliance with the bank line of credit covenants. There can be no assurance
that the Company's future results of operations will continue to be in
compliance with the line of credit covenants which, among other things, prohibit
two consecutive quarterly losses, or that the line of credit would be otherwise
available to the Company. To date, there have been no borrowings under the line.
Even if the bank line of credit is unavailable, the Company believes there are
alternative sources of capital available which will be sufficient to meet
working capital and capital expenditures requirements through the next twelve
months. At this time, the Company has not sought financing from any such
alternative source and, accordingly, cannot give any assurances that such
financing will be available, if at all, on acceptable terms. Without any
additional financing, management believes the Company's existing capital
resources are sufficient to meet working capital and capital expenditure
requirements through at least the first half of 1999.
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the Predecessor from Bloc in October 1992, and related amortization
and other deductions with respect to the acquired assets. In June 1997, the IRS
proposed assessments for additional taxes of $442,000, $553,000 and $857,000 for
the tax years 1992, 1993 and 1994, respectively, plus penalties totaling
$371,000 and interest to the date of payment. If the IRS prevailed on all
issues, such interest through December 31, 1998 would total approximately
$700,000. The preliminary adjustments proposed by the IRS would also reduce the
Company's federal income taxes for the years 1995, 1996 and 1997 by $242,000,
$68,000 and $55,000, respectively. The IRS has not yet issued a notice of
deficiency assessing actual additional taxes and penalties. The Company believes
that it has properly reported its income and paid its taxes in accordance with
applicable laws and intends to contest the proposed adjustments vigorously.
Additionally, the Company's federal income tax return for 1996 reported a net
operating loss of approximately $17.8 million, which is available as a carryback
subject to statutory limitations to offset a substantial portion of the proposed
tax assessments. The Company believes that the ultimate resolution of this
matter will not have a material adverse effect on its financial position,
although there can be no assurance that an adverse resolution will not have such
an effect.
The Company's federal tax filing with respect to the year ended December 31,
1996 is presently being reviewed by the IRS, which has questioned the allocation
of the purchase price made by the Company in connection with the acquisition of
Swfte International, Ltd. in November 1995, and related amortization and other
deductions. The IRS has not proposed any assessment from its review, nor has it
indicated when it expects to conclude its audit or if it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional
IV-18
taxes, if any, the IRS will claim are due. There can be no assurance that the
Company will prevail in its position, or that the appeals, if any, and final
resolution of any IRS claims will not have a material adverse impact on the
Company's liquidity, financial position, or results of operations.
From time to time, the Company evaluates potential acquisitions of products,
businesses and technologies that would complement or expand the Company's
business. The Company currently does not have any commitments or agreements with
respect to any such acquisitions. There can be no assurance that any such
acquisitions will be made or, if made, will be successfully integrated.
As previously disclosed, the Company engaged a financial advisor to assist
it in assessing strategic alternatives to enhance shareholder value. In March
1999, the Company entered into the Merger Agreement with Activision discussed in
Item 1 above. In connection with the negotiations and due diligence procedures
leading to that agreement, the Company has incurred, and will continue to incur,
costs related to its financial advisor and other professionals. Currently, the
Company has incurred such costs totaling approximately $0.5 million. Additional
costs will be incurred as the Company undertakes the proxy solicitation and
other regulatory and other filings required in connection with submitting the
proposed merger to the Company's shareholders and regulatory authorities for
approval, likely in the summer of 1999.
YEAR 2000 READINESS
The statements in the following section include "Year 2000 readiness
disclosures" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Software that is not
compliant with the Year 2000 issue is time-sensitive and may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations resulting in disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has established a comprehensive Year 2000 compliance program
designed to (1) identify information technology ("IT") and non-information
technology ("non-IT") systems that may fail at the turn of the century, (2)
upgrade or replace non-compliant systems, and (3) evaluate the Year 2000
readiness of key customers, suppliers and service providers. IT systems include
computer systems (hardware and software) used to process business data such as
customer orders and accounting information. Non-IT systems include technology
such as telephone switching systems and other devices that employ embedded chip
technology in the function and design. The progress of the Year 2000 program is
as follows.
Phase I, the identification of IT and non-IT systems that may fail at the
turn of the century, is substantially completed. The Company's primary computer
system and its phone switching system were identified as the most critical
systems for upgrading to be Year 2000 compliant.
Phase II, upgrading or replacing non-compliant systems, is approximately 80%
complete. The Company recently converted to a Year 2000 compliant version of the
same application software it has been using since 1995. The same version of the
software is operating successfully at other companies. Upgraded hardware and
software will be installed on the phone switch during 1999 to make it Year 2000
compliant. The Company is currently assessing the potential effects of, and
costs of remediating, the Year 2000 problem on its office equipment, however,
such costs are not expected to be material.
Phase III, evaluating the Year 2000 readiness of critical suppliers and
service providers, has begun and is less than 50% complete. The Company is
soliciting input from its key customers, suppliers and service providers
regarding their Year 2000 status. The Company will determine which, if any, pose
a threat to the uninterrupted operation of its business in the event that they
experience system errors or failures.
IV-19
The Company estimates that it is approximately 80% complete with regard to
Year 2000 remediation. To date, the Company has incurred about $500,000 in
connection with such remediation, and anticipates additional costs of
approximately $100,000 to complete this work. All expenditures related to the
Year 2000 issue have been and likely will continue to be made from internally
generated funds.
The Company believes it has no material exposure to contingencies related to
the Year 2000 issue for products it has sold.
Management has assessed the most reasonably likely worst case Year 2000
scenario. Given its efforts to minimize the risk of Year 2000 failure by its
internal systems, the Company believes the worst case scenario would occur if
its primary telecommunications vendors and/or its electric supplier experiences
a Year 2000 failure which results in an outage. The Company is in the process of
developing a contingency plan and anticipates having such a plan in place by the
third quarter of 1999.
While the Company believes that it has an effective program in place to
resolve the Year 2000 in a timely manner, there can be no assurance that the
failure of the Company or of the third parties with whom the Company transacts
business to adequately address their respective Year 2000 issues will not have a
material adverse affect on the Company's business, financial condition, cash
flows and results of operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company is providing the following cautionary
statements identifying important factors, some of which are beyond the Company's
control, that in the past have caused or in the future could cause the Company's
actual results to differ materially from its historical operating results and
from those projected in any forward-looking statements made by, or on behalf of,
the Company.
GENERAL BUSINESS AND ECONOMIC CONDITIONS
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely retailers and
distributors for resale to retailers, may be impacted by weak economic
conditions and, as a result, may reduce their inventories of products purchased
from the Company. The Company's customers are not contractually required to make
future purchases of the Company's products and therefore could discontinue
carrying the Company's products in favor of a competitor's products or for any
other reason. The Company's financial results could be affected by the size and
rate of growth of the consumer software market and consumer PC market. The
consumer software business is seasonal due primarily to the increased demand for
consumer software during the year-end holiday buying season. General business
and economic conditions and consumer confidence, both domestically and
internationally, may impact retail sales of consumer software. Currency
fluctuations associated with international sales and accounts receivable may
also affect the Company's financial results.
COMPETITION
The market for the Company's products is intensely and increasingly
competitive. Existing consumer software companies may broaden their product
lines to compete with the Company's products and potential new competitors,
including computer hardware and software manufacturers, diversified media
companies and book publishing companies, may enter or increase their focus on
the consumer software market, resulting in even greater competition for the
Company. There has been a consolidation among competitors in the market for the
Company's products, and many of the companies with which the Company currently
competes or may compete in the future have greater financial, technical,
marketing, sales and customer support resources, as well as greater name
recognition and better access to consumers, than the Company. Competition for
retail space has increased as retailers continue to focus on sales per
IV-20
square foot of shelf space and other measures of product performance. The
competition for retail space is also likely to increase due to the proliferation
of consumer software products and companies.
The Company also competes with other developers for access to quality
products developed by third parties. The Company's results of operations and
financial position are also dependent upon satisfactory relationships with
independent developers and other parties through whom Expert acquires propriety
rights.
DEPENDENCE ON RETAILERS AND DISTRIBUTORS
Retailers and distributors compete in a volatile industry that is subject to
rapid change, consolidation, financial difficulty and increasing competition
from new distribution channels. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate favorable terms of sale, including price discounts, promotional
support and product return policies. The Company's financial results may be
impacted by the accuracy of retailers' forecasts of consumer demand, the timing
of the receipt of orders from major customers, account cancellations or delays
in shipment, competitors' marketing strategies and promotions, changes in
pricing strategies by the Company or its competitors and the collectibility of
accounts receivable. Furthermore, a significant portion of sales within a
quarter is typically not realized until late in that quarter. As a result, it
may be difficult for the Company to predict its net revenues for the quarter or
to quickly adapt its spending levels within a quarter to reflect changes in
demand for its products.
UNCERTAINTY OF MARKET ACCEPTANCE; CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS
The consumer software industry is undergoing rapid changes, including
evolving industry standards, frequent product introductions and changes in
consumer requirements and preferences. Consumer preferences are difficult to
predict, and few consumer software products achieve sustained market acceptance.
The Company's financial results will be impacted by market acceptance of the
Company's products and those of its competitors, development and promotional
expenses relating to the introduction of new products, new versions of existing
products or new operating systems, and evolving distribution channels. The
growth in popularity of the Internet and other new technologies has impacted the
distribution and purchase of software and there can be no assurance that the
Company will utilize such new technologies in the most effective manner.
OTHER FACTORS
In addition to the important factors discussed above, the Company's
financial results, financial position and cash flows may be impacted by, among
other factors, future cash flow and working capital requirements, continued
listing of the Company's Common Stock on the Nasdaq National Market, the outcome
of current and future examinations by taxing authorities, and the stockholder
vote and other approvals relating to the pending Merger. The market price of the
Company's Common Stock has been, and in the future will likely be, subject to
significant fluctuations in response to variations in quarterly operating
results and other factors, such as announcements of technological innovations or
new products by the Company or its competitors, or other events. The stock
prices for many companies in the technology sector have experienced wide
fluctuations which often have been unrelated to their operating performance.
Such fluctuations may adversely affect the market price of the Company's Common
Stock.
IV-21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
Reports of Independent Certified Public Accountants....................................................... IV-23
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997................................. IV-24
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996................ IV-25
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996...... IV-26
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................ IV-27
Notes to Consolidated Financial Statements................................................................ IV-28
IV-22
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Expert Software, Inc.
We have audited the consolidated balance sheet of Expert Software, Inc. and
Subsidiaries, (a Delaware corporation) as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit. The financial statements of Expert
Software, Inc. and Subsidiaries as of and for the two years ended December 31,
1997, were audited by other auditors whose report dated February 6, 1998,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Expert
Software, Inc. and Subsidiaries as of December 31, 1998 and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Miami, Florida
February 17, 1999
- - - - - - - --------------------------------------------------------------------------------
To the Stockholders of
Expert Software, Inc.:
We have audited the accompanying consolidated balance sheet of Expert
Software, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Expert
Software, Inc. and subsidiaries, as of December 31, 1997, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 6, 1998.
IV-23
EXPERT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................... $ 1,595 $ 5,685
Accounts receivable, net................................................................ 5,411 4,636
Income taxes receivable................................................................. 65 1,924
Inventories............................................................................. 2,830 2,922
Prepaid expenses........................................................................ 854 834
Deferred income taxes................................................................... -- 1,616
---------- ----------
Total current assets................................................................ 10,755 17,617
PROPERTY AND EQUIPMENT, net............................................................... 854 1,270
ACQUIRED SOFTWARE TECHNOLOGY, net......................................................... -- 30
DEFERRED INCOME TAXES..................................................................... -- 3,311
OTHER ASSETS.............................................................................. 5 5
---------- ----------
Total assets........................................................................ $ 11,614 $ 22,233
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................................ $ 3,914 $ 4,755
Accrued expenses........................................................................ 3,594 4,900
Current portion of capital lease obligations............................................ -- 46
Total current liabilities........................................................... 7,508 9,701
NONCURRENT LIABILITIES.................................................................... -- --
---------- ----------
COMMITMENTS and CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized; 975,000 shares
undesignated, 25,000 shares designated as Series A Junior Participating Cumulative;
none outstanding...................................................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized; 7,627,881 and 7,604,775
shares issued and outstanding in 1998 and 1997, respectively.......................... 76 76
Additional paid-in capital.............................................................. 23,693 23,601
Accumulated deficit..................................................................... (19,663) (11,145)
---------- ----------
Total stockholders' equity.......................................................... 4,106 12,532
---------- ----------
Total liabilities and stockholders' equity.......................................... $ 11,614 $ 22,233
---------- ----------
---------- ----------
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
IV-24
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
NET REVENUES.................................................................... $ 30,896 $ 33,208 $ 31,012
--------- --------- ----------
OPERATING COSTS AND EXPENSES
Cost of revenues.............................................................. 13,692 12,985 16,420
Marketing and sales........................................................... 12,446 10,489 9,88
General and administrative.................................................... 6,271 4,554 10,12
Development................................................................... 2,367 2,744 3,320
Loss on impairment of assets.................................................. -- -- 5,700
--------- --------- ----------
34,776 30,772 45,45
--------- --------- ----------
Operating income (loss)................................................... (3,880) 2,436 (14,440)
--------- --------- ----------
OTHER INCOME (EXPENSE):
Interest and other expense.................................................... (14) (5) (26)
Interest income............................................................... 303 273 118
--------- --------- ----------
289 268 92
--------- --------- ----------
Income (loss) before provision (benefit) for income taxes................. (3,591) 2,704 (14,348)
PROVISION (BENEFIT) FOR INCOME TAXES............................................ 4,927 1,001 (4,067)
--------- --------- ----------
Net income (loss)......................................................... $ (8,518) $ 1,703 $ (10,281)
--------- --------- ----------
--------- --------- ----------
Earnings (Loss) per Share:
Basic......................................................................... $ (1.12) $ .23 $ (1.37)
--------- --------- ----------
--------- --------- ----------
Diluted....................................................................... $ (1.12) $ .21 $ (1.37)
--------- --------- ----------
--------- --------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
IV-25
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL
----------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ----------- -------------- ------------ ---------
Balance, December 31, 1995........................ 7,470,451 $ 75 $ 23,126 $ (2,567) $ 20,634
Issuance of common stock in connection with
exercise of stock options..................... 37,353 -- 65 -- 65
Compensation expense on stock option grants..... -- -- 7 -- 7
Net loss........................................ -- -- -- (10,281) (10,281)
Balance, December 31, 1996........................ 7,507,804 75 23,198 (12,848) 10,425
Issuance of common stock in connection with
exercise of stock options..................... 96,971 1 349 -- 350
Compensation expense on stock option grants..... -- -- 54 -- 54
Net income...................................... -- -- -- 1,703 1,703
---------- --- ------- ------------ ---------
Balance, December 31, 1997........................ 7,604,775 76 23,601 (11,145) 12,532
Issuance of common stock in connection with
exercise of stock options..................... 23,106 -- 8 -- 8
Compensation expense on stock option grants..... -- -- 84 -- 84
Net loss........................................ -- -- -- (8,518) (8,518)
---------- --- ------- ------------ ---------
Balance, December 31, 1998........................ 7,627,881 $ 76 $ 23,693 $ (19,663) $ 4,106
---------- --- ------- ------------ ---------
---------- --- ------- ------------ ---------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
IV-26
EXPERT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ (8,518) $ 1,703 $ (10,281)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation of property and equipment......................................... 730 818 1,105
Amortization of acquired software technology................................... 30 133 544
Compensation expense on stock option grants.................................... 84 54 7
Loss on impairment of assets................................................... -- -- 5,700
Deferred income tax provision (benefit)........................................ 4,927 1,275 (2,100)
Changes in net assets and liabilities:
(Increase) decrease in accounts receivable..................................... (775) (861) 1,899
(Increase) decrease in income taxes receivable................................. 1,858 473 (2,397)
(Increase) decrease in inventories............................................. 91 (1,666) 2,556
(Increase) decrease in prepaid expenses........................................ (19) (409) (31)
(Increase) decrease in other assets............................................ -- (2) 10
Increase (decrease) in accounts payable........................................ (841) 1,529 405
Increase (decrease) in accrued expenses........................................ (1,398) (138) 934
Increase (decrease) in income taxes payable.................................... 93 -- (2,125)
Increase (decrease) in noncurrent liabilities.................................. -- (300) 300
--------- --------- ----------
Net cash provided by (used in) operating activities.......................... (3,738) 2,609 (3,474)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................. (314) (191) (644)
Maturities and sales of marketable securities.................................. -- -- 6,222
--------- --------- ----------
Net cash provided by (used in) investing activities.......................... (314) (191) 5,578
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised........................................................ 8 350 65
Payments on capital lease obligation........................................... (46) (42) (122)
--------- --------- ----------
Net cash provided by (used in) financing activities.......................... (38) 08 (57)
--------- --------- ----------
Net increase (decrease) in cash and equivalents.............................. (4,090) 2,726 2,047
CASH AND EQUIVALENTS, beginning of period........................................ 5,685 2,959 912
CASH AND EQUIVALENTS, end of period.............................................. $ 1,595 $ 5,685 $ 2,959
--------- --------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest....................................... $ -- $ 5 $ 26
--------- --------- ----------
Cash paid during the period for income taxes................................... $ 11 $ -- $ 2,555
--------- --------- ----------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fixed assets obtained under capital leases..................................... -- -- $ 102
--------- --------- ----------
--------- --------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
IV-27
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
THE ORGANIZATION--
Expert Software, Inc. (the "Company") publishes and distributes computer
software under the "Expert" trade name. The Company's products address a broad
range of consumer interest and everyday tasks for the productivity, lifestyle,
small office/home office, entertainment and education market categories. The
Company's titles are primarily available on the Windows operating system, and
substantially all are available on CD-ROM. The Company sells its products
directly to retailers, as well as to distributors.
PRINCIPLES OF CONSOLIDATION--
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Swfte International, Ltd.
("Swfte") and ES International, Inc. All intercompany transactions and balances
have been eliminated in consolidation. The Company operates as a single business
segment.
USE OF ESTIMATES--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS--
The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses reflected in the consolidated financial
statements approximate fair value.
CASH EQUIVALENTS--
The Company considers all highly liquid investment instruments with a
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents include investments in repurchase agreements and tax-exempt bond
instruments.
ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK--
Accounts receivable are principally from retailers and distributors of the
Company's products. The Company performs periodic credit evaluations of its
customers and maintains allowances for potential credit losses and potential
returns of $3,352,000 and $4,361,000 at December 31, 1998 and 1997,
respectively.
The Company's customers are invoiced upon shipment, at which time a
provision is recorded for expected future returns. The Company estimates returns
based on management's evaluation of historical experience and current industry
trends and charges such estimates against gross revenues. Retailers and
distributors compete in a volatile industry that is subject to rapid change,
consolidation, financial difficulty and increasing competition from new
distribution channels. Due to increased competition for limited shelf space,
retailers and distributors are increasingly in a better position to negotiate
favorable terms of sale,
IV-28
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
including price discounts, promotional support and product return policies. The
Company's financial results may be impacted by the accuracy of retailers'
forecasts of consumer demand, the timing of the receipt of orders from major
customers, account cancellations or delays in shipment, competitors' marketing
strategies and promotions, changes in pricing strategies by the Company or its
competitors and the collectibility of accounts receivable. Furthermore, a
significant portion of sales within a quarter is typically not realized until
late in that quarter. As a result, it may be difficult for the Company to
predict its net revenues for the quarter or to quickly adapt its spending levels
within a quarter to reflect changes in demand for its products.
Sales to the Company's customers which represented 10% or more of gross
sales less actual returns in any of the periods shown below are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
Customer A........................................................ 14.1% 15.2% 19.6%
Customer B........................................................ 11.1 7.7 --
Customer C........................................................ 1.8 4.5 10.4
The two major customers at December 31, 1998 and 1997 also account for 10.8%
and 19.1% of gross outstanding accounts receivable at December 31, 1998 and
1997, respectively.
INVENTORIES--
Inventories, which consist primarily of software media, manuals and related
packaging materials, are stated at the lower of cost or market with cost
determined on a first-in, first-out ("FIFO") basis. Management performs periodic
assessments to determine the existence of obsolete, slow-moving and nonsalable
inventories and records necessary provisions to reduce such inventories to net
realizable value.
During the years ended December 31, 1998 and 1997 the Company had one
supplier which accounted for approximately 56.3% and 42.8%, respectively, of
total purchases. A second supplier accounted for 8.1% and 22.3% of total
purchases in 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT--
Property and equipment are stated at cost less accumulated depreciation.
Property and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets. Depreciation expense includes the
amortization of capital lease assets.
Maintenance and repairs are charged to expense when incurred; betterments
are capitalized. Upon the sale or retirement of assets, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized
currently.
REVENUE RECOGNITION--
Sales are recognized at the time the product is shipped, net of allowances
for returns, in accordance with the provisions of the AICPA Statement of
Position 97-2, "Software Revenue Recognition." While the Company has no other
obligation to perform future services subsequent to shipment, the Company
IV-29
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
provides telephone customer support as an accommodation to purchasers of its
products as a means of fostering customer loyalty. Costs associated with this
effort are insignificant and immaterial to the consolidated financial
statements, and accordingly, are expensed as incurred.
AMORTIZATION--
Acquired software technology related to the 1995 acquisition of Swfte
discussed in Note 2 represents the fair value of certain software technology and
licenses acquired. The recorded value of $3,835,000 was based on independent
appraisal and was being amortized on a straight-line basis over two to two and
one-half years, the anticipated period of benefit. As discussed in Note 2, a
loss on impairment of these intangibles was recorded during the second quarter
of 1996. Additionally, amortization of $98,000 and $459,000 on these assets was
recorded during 1997 and 1996, respectively. Accumulated amortization on
acquired software technology totaled $4,454,000 and $3,672,000 at December 31,
1997 and 1996, respectively.
ROYALTIES--
Royalties are accrued based on net revenues pursuant to agreements with
external software developers of software products published by the Company.
Royalty costs, which are included in cost of revenues, were $2,789,000,
$3,012,000, and $2,715,000, during the years ended December 31, 1998, 1997, and
1996, respectively.
SOFTWARE DEVELOPMENT COSTS--
In accordance with Statement of Financial Accounting Standards No. 86 ("SFAS
86"), ACCOUNTING FOR THE COST OF CAPITALIZED SOFTWARE TO BE SOLD, LEASED OR
OTHERWISE MARKETED, the Company examines its software development costs after
technological feasibility has been established to determine the amount of
capitalization that is required. For all periods presented herein, software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial and therefore expensed as incurred.
STOCK-BASED COMPENSATION--
Beginning in 1996, the Company implemented the provisions of SFAS 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, in accounting for stock-based
transactions with non-employees and accordingly records compensation expense in
the consolidated statements of operations for such transactions. The Company
continues to apply the provisions of APB 25 for transactions with employees, as
permitted by SFAS 123.
INCOME TAXES--
The Company accounts for income taxes under SFAS 109, ACCOUNTING FOR INCOME
TAXES, which requires that deferred income taxes be recognized for the tax
consequences in future years of differences between the tax basis of assets and
liabilities and their financial reporting basis at rates based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income.
IV-30
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Current income tax expense
represents the tax payable for the period. The deferred income tax expense
(benefit) represents the change during the period in the balance of deferred
taxes.
EARNINGS PER SHARE OF COMMON STOCK--
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS 128, EARNINGS PER SHARE. This statement simplifies the standards for
computing and presenting earnings per share ("EPS") and makes them comparable to
international EPS standards. SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures. SFAS 128 became effective for financial statements
issued for periods after December 15, 1997 and requires restatement of all prior
periods presented. Basic EPS is calculated by dividing income available to
common shareholders by the weighted average number of common shares outstanding
during each period. Diluted EPS includes the potential impact of convertible
securities and dilutive common stock equivalents using the treasury stock method
of accounting. For periods in which the Company reports a loss from continuing
operations, diluted earnings per share do not include stock options as their
effect would be antidilutive.
2. ACQUISITION AND LOSS ON IMPAIRMENT OF ASSETS:
In November 1995, the Company acquired all of the outstanding common stock
of Swfte International, Ltd., a developer of consumer software for the education
and entertainment markets. Total consideration paid was $7.0 million in cash,
subject to post-closing adjustments, and 320,630 unregistered shares of the
Company's common stock which were independently valued at approximately $4.4
million. Additionally, the Company assumed $1.3 million of Swfte's bank debt
which was repaid by the Company subsequent to the consummation of the
transaction.
The acquisition of Swfte was accounted for using the purchase method of
accounting and, accordingly, the results of Swfte since November 2, 1995 are
included in the accompanying consolidated statements of operations. Based on an
independent appraisal, of the excess of purchase price over the fair value of
the net assets acquired, approximately $8.4 million or approximately 65% of the
purchase price was expensed during the Company's 1995 fourth quarter as
incomplete purchased research and development projects that had not reached
technological feasibility as defined by SFAS No. 86.
During the second quarter of 1996, management reevaluated the carrying value
of the intangible assets recorded in connection with the acquisition of Swfte.
This reevaluation was necessitated by management's determination based on recent
results of operations that the expected sales and cash flows from the acquired
assets would be substantially lower than had been previously expected by
management. Since these factors were not expected to be short-term or temporary
in nature, the carrying value of the intangible assets was reduced by $3,478,000
in accordance with SFAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. Management also determined that the
lower demand for the acquired products and claims from customers arising during
1996 for pre-acquisition cooperative marketing and price protection credits
required an additional provision for returns of $1,065,000 higher than
originally provided on the acquired accounts receivable; and a provision for
reserves $150,000 higher than originally provided on the acquired inventories.
The lower than expected
IV-31
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
2. ACQUISITION AND LOSS ON IMPAIRMENT OF ASSETS: (CONTINUED)
sales and higher than expected returns levels on the acquired products indicate
that the minimum royalties will not be recouped in the ordinary course of
business and $339,000 of such royalties were accrued as part of the loss on
impairment of intangibles during the second quarter. Similarly, losses totaling
$668,000 on fixed assets and certain other assets determined to have lower
values than originally assigned were accrued as part of the loss on impairment
of intangibles as of June 30, 1996. Such losses totaled $5,700,000 and are
reflected as "Loss on impairment of assets" in the accompanying consolidated
statements of operations.
3. INVENTORIES:
Inventories consisted of the following at December 31 (in thousands):
1998 1997
--------- ---------
Finished goods............................................................. $ 2,009 $ 2,439
Raw materials.............................................................. 821 483
--------- ---------
$ 2,830 $ 2,922
--------- ---------
--------- ---------
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following at December 31 (in
thousands):
USEFUL
LIFE
1998 1997 IN YEARS
--------- --------- -------------
Equipment................................................... $ 3,466 $ 3,280 3-5
Furniture and fixtures...................................... 705 716 5-10
--------- ---------
4,171 3,996
Less: Accumulated depreciation.............................. (3,317) (2,726)
--------- ---------
$ 854 $ 1,270
--------- ---------
--------- ---------
Equipment includes $102,000 and $147,000 of capital lease assets at December
31, 1998 and 1997, respectively. Amortization of such costs is computed by the
straight-line method over the primary lease terms and is included in
depreciation expense in the accompanying consolidated financial statements.
5. ACCRUED EXPENSES:
Accrued expenses consisted of the following at December 31 (in thousands):
1998 1997
--------- ---------
Royalties.................................................................. $ 964 $ 1,271
Marketing.................................................................. 1,502 1,953
Settlement costs (Note 10)................................................. -- 300
Other...................................................................... 1,128 1,376
--------- ---------
$ 3,594 $ 4,900
--------- ---------
--------- ---------
IV-32
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
6. REVOLVING LINE OF CREDIT
The Company has entered into a loan agreement with a bank (also a
shareholder of the Company) which provides for a revolving line of credit
collateralized by substantially all of the Company's assets. Borrowings under
the line of credit are limited to a percentage of eligible accounts receivable
as defined in the agreement and may not exceed $2,500,000 through May 31, 1999,
the maturity date. Interest is payable at the bank's base rate plus 1%. To date,
there have been no borrowings under the line.
The loan agreement contains restrictive covenants, including the achievement
of certain earnings, as defined in the agreement, and the maintenance of a
minimum net worth and various financial ratios. At December 31, 1998, the
Company was in compliance with the agreement.
7. STOCKHOLDERS' EQUITY AND PROPOSED MERGER:
In November 1995, the Company adopted a Shareholder Rights Plan and the
Board of Directors declared a dividend distribution of one preferred stock
purchase right for each outstanding share of common stock to stockholders of
record as of the close of business on November 29, 1995. Initially, these rights
will not be exercisable and will trade with the shares of the Company's common
stock. Under the Shareholder Rights Plan, the rights become exercisable if a
person becomes an "acquiring person" by acquiring 15% or more of the common
stock of Expert Software, if a person who owns 10% or more of the common stock
of the Company is determined to be an "adverse person" by the Board of
Directors, or if a person commences a tender offer that would result in that
person owning 15% or more of the common stock of the Company. In the event that
a person becomes an "acquiring person" or is declared an "adverse person" by the
Board, each holder of a right (other than the acquiring person or the adverse
person) would be entitled to acquire such number of shares of preferred stock
which are equivalent to Expert Software common stock having a value of twice the
then-current exercise price of the right. If the Company is acquired in a merger
or other business combination transaction after any such event, each holder of a
right would then be entitled to purchase, at the then current purchase price,
shares of the acquiring company's common stock having a value of twice the
exercise price of the right. The rights will expire at the close of business on
November 9, 2005, unless previously redeemed or exchanged by the Company. In
connection with the Shareholder Rights Plan, the Board of Directors authorized
the designation of 25,000 shares of Series A Junior Participating Cumulative
Preferred Stock, $0.01 par value, none of which are outstanding at December 31,
1998 or 1997.
On March 3, 1999, Expert announced the execution of an Agreement and Plan of
Merger dated as of March 3, 1999 (the "Merger Agreement") by and among Expert,
Activision, Inc., a Delaware corporation ("Activision") and Expert Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of Activision ("Expert
Acquisition Sub"), pursuant to which, among other things, Expert will be merged
with and into Expert Acquisition Sub and will become a wholly owned subsidiary
of Activision (the "Merger").
Pursuant to the terms of the Merger Agreement, Activision has the right,
exercisable until March 25, 1999, to elect whether the merger consideration will
be entirely cash or entirely stock (subject to a cash component in certain
situations described below); provided, however, that Activision has the right to
extend the March 25, 1999 deadline to April 1, 1999 if Activision has made and
continues to make good faith efforts to secure any financing required for
payment of the merger consideration in cash. If Activision chooses cash
consideration, holders of shares of Expert Common Stock ("Expert Shares") will
receive $2.65 per Expert Share. If Activision chooses stock consideration,
holders of Expert Shares will receive that number of shares of Activision Common
Stock ("Activision Shares") equal to the quotient of (i) $2.65
IV-33
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
7. STOCKHOLDERS' EQUITY AND PROPOSED MERGER: (CONTINUED)
divided by (ii) the arithmetic average of the per share closing sales prices of
an Activision Share as reported on the Nasdaq on the ten (10) trading days
ending on and including the trading day which is two (2) trading days
immediately prior to the date of the special meeting of Expert stockholders that
will be convened to consider and vote upon the approval of the Merger Agreement
and the transactions contemplated thereby (such arithmetic average, the
"Activision Per Share Market Value");provided, however, that, if the Activision
Per Share Market Value is less than $10.00 per Activision Share, holders of
Expert Shares will be entitled to receive for each Expert Share (A) 0.265 of an
Activision Share and (B) cash in an amount equal to the product of (x) the
Activision Per Share Market Value multiplied by (y) the number that remains when
0.265 is subtracted from the quotient of 2.65 divided by the Activision Per
Share Market Value.
As contemplated by the Merger Agreement, on March 3, 1999, Expert executed a
first amendment (the "Amendment No. 1") to that certain Shareholders' Rights
Agreement dated as of November 9, 1995 between Expert and The First National
Bank of Boston (the "Rights Agreement"), which Amendment No. 1 modified the
Rights Agreement to provide that such Rights Agreement would not be triggered by
the execution of the Merger Agreement.
8. STOCK OPTIONS:
The Company has reserved 2,250,000 shares of its common stock for issuance
under its 1992 Stock Option Plan (the "1992 Plan"), 1,000,000 shares under its
1997 Stock Option Plan for Officers and Employees (the "1997 Plan"), and 250,000
shares under the 1997 Stock Option Plan for Directors (the "Directors' Plan"),
(the 1992 Plan, the 1997 Plan and the Directors' Plan are referred to herein
collectively as the "Plans"). Under the Plans, options may be granted to
purchase common stock at exercise prices generally determined by a committee of
the Board of Directors. Incentive stock options may be granted at exercise
prices not less than the fair market value of the common stock at the date of
grant, and in certain instances, at prices in excess of the current fair market
value. Non-employee members of the Board of Directors are granted non-qualified
options annually at a price equal to the fair market value of the common stock
at the date of the grant. Incentive stock options are available to officers,
directors who are also employees and other full-time employees and non-qualified
options are available to the same group and consultants and other key persons
who provide services to the Company. The terms and vesting schedule of each
option agreement are determined by the Board of Directors; vesting typically is
ratably over four years. All options expire on the date specified in the
agreement and in no event later than the
IV-34
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
8. STOCK OPTIONS: (CONTINUED)
tenth anniversary of the date which the option was granted. A summary of stock
option activity is as follows:
WEIGHTED
AVERAGE
OPTIONS OPTIONS EXERCISE
AVAILABLE OUTSTANDING PRICE ($)
----------- ----------- -----------
Balance at December 31, 1995................................................ 1,090,179 685,770 2.40
Options granted............................................................. (544,000) 544,000 9.80
Options exercised........................................................... -- (37,353) 1.76
Options canceled............................................................ 137,000 (137,000) 12.49
----------- -----------
Balance at December 31, 1996................................................ 683,179 1,055,417 4.97
Options authorized.......................................................... 1,250,000 --
Options granted............................................................. (605,000) 605,000 2.44
Options exercised........................................................... -- (96,971) 3.60
Options canceled............................................................ 364,556 (364,556) 10.75
----------- -----------
Balance at December 31, 1997................................................ 1,692,735 1,198,890 2.05
Options granted............................................................. (1,250,000) 1,250,000 1.56
Options exercised........................................................... -- (23,106) 0.36
Options canceled............................................................ 249,212 (249,212) 3.57
----------- -----------
Balance at December 31, 1998................................................ 691,947 2,176,572 1.26
----------- -----------
----------- -----------
A summary of currently outstanding and exercisable options is as follows:
OPTIONS OUTSTANDING
---------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- - - - - - - -------------- ----------- --------------- --------------- ----------- ---------------
$0.10--$0.85 460,070 4.6 $ 0.51 451,737 $ 0.50
$1.00--$1.32 1,554,651 9.3 $ 1.31 247,880 $ 1.32
$2.00 88,401 8.3 $ 2.00 52,802 $ 2.00
$3.05--$5.38 73,450 8.5 $ 4.13 45,607 $ 4.04
----------- --- ----- ----------- -----
2,176,572 8.3 $ 1.26 798,026 $ 1.26
----------- --- ----- ----------- -----
----------- --- ----- ----------- -----
In December 1998, the Board of Directors authorized the repricing of options
to purchase approximately 739,000 shares of common stock previously granted to
officers and employees to a revised exercise price of $1.32 per share. The
revised exercise price represented the average market price of the Company's
common stock for a period of five days ending on the repricing date. Such
options previously were granted at exercise prices ranging from $2.00 to $6.63
per share.
The Company applied APB Opinion 25 and related interpretations in accounting
for its stock option plans. Accordingly, no compensation cost for stock options
granted to employees has been recognized under the Plans. Had compensation been
recorded based on the fair value at the grant dates for awards
IV-35
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
8. STOCK OPTIONS: (CONTINUED)
under the Plans consistent with the method of SFAS 123, the Company's proforma
net income (loss) and diluted income (loss) per share would have been as follows
(in thousands, except per share data):
1998 1997 1996
--------- --------- ----------
Net income (loss), as reported................................ $ (8,518) $ 1,703 $ (10,281)
Net income (loss), proforma................................... $ (8,857) $ 1,237 $ (10,469)
Diluted earnings per share, as reported....................... $ (1.12) $ .21 $ (1.37)
Diluted earnings per share, proforma.......................... $ (1.16) $ .15 $ (1.40)
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option pricing model with the following weighted average
assumptions: expected volatility ranging from 40% to 70%, risk-free interest
rate of 5%, expected dividends of $0 and expected lives of five years. In 1998
and 1997, the Company recorded compensation expense of $84,000 and $54,000,
respectively, related to options to purchase common stock granted to
non-employees of the Company accounted for under the provisions of SFAS 123.
9. INCOME TAXES:
The components of the provision (benefit) for income taxes are as follows
(in thousands):
1998 1997 1996
--------- --------- ---------
Current:
Federal....................................................... $ -- $ (243) $ (1,711)
State......................................................... -- (31) (256)
--------- --------- ---------
-- (274) (1,967)
--------- --------- ---------
Deferred:
Federal....................................................... 4,272 1,132 (1,930)
State......................................................... 655 143 (170)
--------- --------- ---------
4,927 1,275 (2,100)
--------- --------- ---------
$ 4,927 $ 1,001 $ (4,067)
--------- --------- ---------
--------- --------- ---------
IV-36
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
9. INCOME TAXES: (CONTINUED)
A reconciliation of the provision for income tax expense (benefit) with the
expected income tax (benefit) computed by applying the federal statutory income
tax rate to income (loss) before income taxes is as follows:
1998 1997 1996
--------- --------- ---------
Income tax (benefit) computed at federal statutory
tax rate..................................................... (34.0)% 34.0% (34.0)%
State and local taxes (net of federal benefit)................. (3.6) 3.6 (3.6)
Increase in valuation allowance................................ 171.7 -- 7.4
Other, net..................................................... (3.1) (0.6) 1.9
--------- --- ---------
137.2% 37.0% (28.3)%
--------- --- ---------
--------- --- ---------
The components of the net deferred tax asset recorded in the accompanying
consolidated balance sheets are as follows (in thousands):
1998 1997
--------- ---------
Allowance for doubtful accounts and potential returns.................... $ 896 $ 1,147
Inventory reserves....................................................... 275 381
Net operating loss carryforward.......................................... 6,105 4,311
Other, net............................................................... 49 248
--------- ---------
Gross deferred tax assets.............................................. 7,325 6,087
Valuation allowance...................................................... (7,325) (1,160)
--------- ---------
Net deferred tax assets................................................ -- $ 4,927
--------- ---------
--------- ---------
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. The net deferred assets
reflects management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
10. EARNINGS PER SHARE
Basic earnings per common share were computed by dividing income available
to common shareholders by the weighted average number of shares of common stock
outstanding during the year. Diluted earnings per share were determined by
including assumptions of stock option conversions, except for periods in which
the Company reported a loss from continuing operations. Effective December 31,
1997,
IV-37
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
10. EARNINGS PER SHARE (CONTINUED)
the Company adopted SFAS 128. As a result, the earnings (loss) per share of
common stock for the year ended December 31, 1996 have been restated in
accordance with the requirements of SFAS 128.
YEAR ENDED DECEMBER 31,
------------------------------------
INCOME PER-SHARE
(LOSS) SHARES AMOUNT
---------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
1998
Basic and Diluted Earnings Per Share
(Loss) available to common shareholders......................................... $ (8,518) 7,608 $ (1.12)
---------- ----- -----------
---------- ----- -----------
1997
Basic Earnings Per Share
Income available to common shareholders......................................... $ 1,703 7,533 $ .23
-----------
-----------
Options assumed to be converted................................................. 635
---------- -----
Diluted Earnings Per Share
Income available to common shareholders plus assumed conversions................ $ 1,703 8,168 $ .21
---------- ----- -----------
---------- ----- -----------
1996
Basic and Diluted Earnings Per Share
(Loss) available to common shareholders......................................... $ (10,281) 7,480 $ (1.37)
---------- ----- -----------
---------- ----- -----------
Options to purchase approximately 172,300 shares of common stock at prices
from $5.375 to $6.625 were outstanding during 1997 but were not included in the
computation of diluted EPS because the options' prices were greater than the
average market price of the common shares. The options, which expire between
January 1999 and December 2001, were still outstanding at December 31, 1997. No
options were included in the computation of diluted EPS for 1998 as options are
antidilutive for periods in which losses are incurred.
11. LEGAL PROCEEDINGS:
In October 1996, the Company settled litigation with David H. Goodman, the
former Chairman and Chief Executive Officer of Swfte International, Ltd., and
others. The original dispute involved the contingent purchase price to the
Agreement and Plan of Merger among Expert, ES I Acquisition Corp., Swfte and the
Stockholders of Swfte, dated as of October 16, 1995. The results for the third
quarter of 1996 include expenses of $1,900,000 for the settlement, as well as
related legal and associated costs. A portion of the settlement was paid in
agreed-upon installments through April 1, 1998.
12. COMMITMENTS AND CONTINGENCIES:
The Company leases office space under operating leases. Rent expense under
operating leases was $415,000, $510,000, and $661,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. Future minimum lease payments
under non-cancelable operating leases at December 31, 1998 are approximately
$331,000 and $201,000 in 1999 and 2000, respectively.
IV-38
EXPERT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
12. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company is subject to minimum royalty guarantees under certain
agreements with developers and licensers. Minimum royalty guarantees under such
contracts are approximately $150,000, $175,000 and $200,000 for the years ended
December 31, 1999, 2000 and 2001, respectively.
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the Predecessor from Bloc in October 1992, and related amortization
and other deductions with respect to the acquired assets. In June 1997, the IRS
proposed assessments for additional taxes of $412,000, $553,000 and $857,000 for
the tax years 1992, 1993 and 1994, respectively, plus penalties totaling
$371,000 and interest to the date of payment. If the IRS prevailed on all
issues, such interest through December 31, 1998 would total approximately
$700,000. The preliminary adjustments proposed by the IRS would also reduce the
Company's federal income taxes for the years 1995, 1996 and 1997 by $242,000,
$68,000 and $55,000, respectively. The IRS has not yet issued a notice of
deficiency assessing actual additional taxes and penalties. The Company believes
that it has properly reported its income and paid its taxes in accordance with
applicable laws and intends to contest the proposed adjustments vigorously.
Additionally, the Company's federal income tax return for 1996 reported a net
operating loss of approximately $17.8 million, which is available as a carryback
subject to statutory limitations to offset a substantial portion of the proposed
tax assessments. The Company believes that the ultimate resolution of this
matter will not have a material adverse effect on its financial position.
The Company's federal tax filing with respect to the year ended December 31,
1996 is presently being reviewed by the IRS, which has questioned the allocation
of the purchase price made by the Company in connection with the acquisition of
Swfte International, Ltd. in November 1995, and related amortization and other
deductions. The IRS has not proposed any assessment from their review, nor has
it indicated when it expects to conclude its audit or if it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional
taxes, if any, the IRS will claim are due. There can be no assurance that the
Company will prevail in its position, or that the appeals, if any, and final
resolution of any IRS claims will not have a material adverse impact on the
Company's liquidity, financial position, or results of operations.
IV-39
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On January 15, 1999, Arthur Andersen LLP resigned as auditors of Expert
Software, Inc. (the "Company"), and, concurrently, management of the Company
engaged Grant Thornton LLP to audit the consolidated financial statements of
Expert Software, Inc. and Subsidiaries as of and for the year ending December
31, 1998. The decision to change auditors was approved by the Audit Committee of
the Company's Board of Directors.
The reports of Arthur Andersen LLP on the Company's consolidated financial
statements for the past two fiscal years ended December 31, 1997 and 1996 did
not contain an adverse opinion or a disclaimer of opinion and were not qualified
or modified as to uncertainty, audit scope, or accounting principles. In
connection with the audits of the Company's financial statements for each of the
two fiscal years ended December 31, 1997 and 1996, and in the subsequent interim
periods, there were no disagreements with Arthur Andersen LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Arthur
Andersen LLP, would have caused Arthur Andersen LLP to make reference to the
matter in their reports.
During the two most recent fiscal years ended December 31, 1997 and during
the subsequent interim period prior to engaging Grant Thornton LLP, neither the
Company nor someone on the Company's behalf consulted with Grant Thornton LLP
regarding either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements.
The predecessor auditor informed the Company of the existence of no
reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.
Arthur Andersen LLP furnished a letter addressed to the Commission agreeing
with the above statements. A copy of that letter, dated January 19, 1999, was
filed as Exhibit 16 to the Company's Form 8-K dated January 15, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION REGARDING DIRECTORS
Set forth below is certain information regarding the Directors of the
Company, based on information furnished by them to the Company.
NAME AGE DIRECTOR SINCE
- - - - - - - ----------------------------------------------------------------------- --------- ---------------
CLASS I--TERM EXPIRES 1999
Kenneth P. Currier..................................................... 50 1992
A. Bruce Johnston...................................................... 39 1992
CLASS II--TERM EXPIRES 2000
Douglas G. Carlston.................................................... 51 1998
Michael S. Murray...................................................... 36 1998
CLASS III--TERM EXPIRES 1998
Susan A. Currier....................................................... 49 1992
William H. Lane III.................................................... 60 1997
IV-40
The principal occupation and business experience during at least the last
five years for each Director of the Company is set forth below.
KENNETH P. CURRIER, a co-founder of the Company, has served as a Director,
Chief Executive Officer and Secretary of the Company since its inception in
October 1992. Mr. Currier also co-founded the Company's predecessor, Softsync,
Inc. ("Softsync") a publisher of consumer software, in 1982, and served as
President of Softsync from 1990 until formation of the Company in 1992. Mr.
Currier is the spouse of Susan A. Currier, President and a Director of the
Company.
A. BRUCE JOHNSTON has served as a Director of the Company since October
1992. Mr. Johnston has been a Principal of TA Associates, a private equity
investor, since January 1996 and was a Vice President of TA Associates from June
1992 to December 1995. Prior to that, Mr. Johnston was a General Manager of
Lotus Development Corporation, a software publisher, from June 1988 to June
1992. Mr. Johnston serves as a director of Restrac, Inc., a client-server
application company, as well as a number of privately-held companies.
DOUGLAS G. CARLSTON has served as a Director of the Company since October
1998. Mr. Carlston previously served on the Company's Board of Directors from
December 1993 until December 1996. He was the Chief Executive Officer and
Chairman of the Board of Broderbund Software, Inc., a publisher of consumer
software, which was acquired by The Learning Company Inc. in August 1998. Mr.
Carlston co-founded Broderbund Software, Inc. in 1980 and served there in
executive capacities until its acquisition in 1998.
MICHAEL S. MURRAY has served as a Director of the Company since October
1998. Mr. Murray has been General Partner of New Millennium Venture Partners,
LLC since September 1998. Prior to that, Mr. Murray served as the General
Manager of Broderbund Software's Online Business Unit and was the Managing
Director of that company's Online Venture Fund. Prior to joining Broderbund in
1996, Mr. Murray was managing the Broadband product development group for
Pacific Telesis, where he served in various management positions from 1984 to
1996.
SUSAN A. CURRIER, a co-founder of the Company, has served as a Director and
President of the Company since its inception in October 1992. Ms. Currier also
co-founded the Company's predecessor, Softsync, in 1982, and served as Vice
President responsible for sales and marketing of Softsync from 1990 until
formation of the Company in 1992. Ms. Currier is the spouse of Kenneth P.
Currier, Chief Executive Officer and a Director of the Company.
WILLIAM H. LANE III has served as a Director of the Company since his
appointment by the Board of Directors on January 29, 1997. Mr. Lane retired as
Vice President, Chief Financial Officer, Secretary and Treasurer of Intuit, Inc.
a software publisher, in July 1996. He held the same positions at ChipSoft, Inc.
from July 1991 until Intuit acquired ChipSoft in December 1993. He also served
as Vice President, Finance and Administration for Honeywell Information Systems.
Mr. Lane also serves as a director of International Microcomputer Software,
Inc., a developer and publisher of visual productivity software for businesses
and consumers, and Metacreations Corporation, a developer and publisher of
graphics software for use in print and computer graphics applications.
IV-41
EXECUTIVE OFFICERS
The names and ages of all current executive officers of the Company and the
principal occupation and business experience during at least the last five years
for each are set forth below.
NAME AGE POSITION
- - - - - - - ----------------------------------------------------- --- -----------------------------------------------------
Kenneth P. Currier................................... 50 Chief Executive Officer and Secretary
Susan A. Currier..................................... 49 President
Timothy R. Leary..................................... 47 Executive Vice President of Sales
Katherine A. Brunn................................... 51 Vice President of North American Sales
Anne E. Aitken....................................... 40 Vice President of Marketing
David R. Turner...................................... 33 Vice President of Development
Michael A. Appel..................................... 54 Vice President of Operations
Steven R. Mountain................................... 42 Chief Financial Officer
MR. CURRIER has held the positions of Chief Executive Officer and Secretary
of the Company since the Company's inception in October 1992. Mr. Currier has
also been a Director of the Company since 1992. See "Information Regarding
Directors" above.
MS. CURRIER has held the position of President of the Company since the
Company's inception in October 1992. Ms. Currier has also been a Director of the
Company since 1992. See "Information Regarding Directors" above.
TIMOTHY R. LEARY has served as Executive Vice President of Sales of the
Company since January 1998, and as Vice President of Sales of the Company from
its formation in October 1992 until December 1997.
KATHERINE A. BRUNN has served as Vice President of North American Sales of
the Company since January 1998. Prior to that, Ms. Brunn was the President and
Chief Executive Officer of MicroTech Marketing Services, Inc., a sales,
marketing and consulting firm serving the computer industry, since June 1984.
ANNE E. AITKEN has served as Vice President of Marketing of the Company
since March 1997. Prior to that, Ms. Aitken served as Senior Director of
Marketing at Blockbuster Entertainment Inc. from September 1995 to January 1997.
Prior to Blockbuster, Ms. Aitken was Director of Advertising with Burger King
Corporation from September 1992 to September 1995.
DAVID R. TURNER has served as Vice President of Development of the Company
since December 1997. Prior to that, Mr. Turner was Director, External
Applications Engineering for Walt Disney Interactive from April 1995 to December
1997. Prior to Disney, Mr. Turner was Vice President and Director of Development
for IntraCorp, Inc., from October 1987 to March 1995.
MICHAEL A. APPEL has served as Vice President of Operations of the Company
since March 1996. Prior to that, Mr. Appel was Director of Manufacturing for
Bleyer Industries from January 1992 through February 1996. Prior to that, Mr.
Appel was Vice President of Operations for Superior Toy from June 1990 through
December 1991.
STEVEN R. MOUNTAIN has served as Chief Financial Officer of the Company
since September 1998, and previously served the Company as Controller, and as
Manager of Financial Reporting and Analysis, since December 1995. Prior to that,
Mr. Mountain was Controller at Tiger Direct, Inc., a catalog reseller of
computer software and hardware, from June 1995 to November 1995. Prior to Tiger
Direct, Mr. Mountain was Manager, Investor Relations, and Manager, Financial
Reporting and Analysis, of Equinox Systems Inc., which designs and markets
server-based communications products for remote access, industrial and
commercial point-of-sale systems, from August 1992 to June 1995. Mr. Mountain
has indicated that he will leave the Company near the end of March 1999, and has
agreed to assist with transition issues on a
IV-42
consulting basis. The Company has engaged an interim chief financial officer to
provide continuity in this function.
Each of the officers holds his respective office until the regular annual
meeting of the Board of Directors following the annual meeting of stockholders
and until his successor is duly elected and qualified or until his earlier
resignation or removal.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of the Company's
outstanding shares of Common Stock, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and Nasdaq. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Section 16(a)
reports were required for those persons, the Company believes that during the
fiscal year ended December 31, 1998, all filing requirements were complied with,
except in the case of Susan A. Currier who failed to timely file one report
regarding a scheduled sale of the Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
The following sections of this Annual Report set forth and discuss the
compensation paid or awarded during the last three years to the Company's Chief
Executive Officer and the four other most highly compensated executive officers
who earned in excess of $100,000 during the year ended December 31, 1998
(collectively, the "Named Executives").
SUMMARY COMPENSATION TABLE
The following table shows for the fiscal years ended December 31, 1998,
1997, and 1996 compensation paid by the Company to the Named Executives.
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------------- -------------------------- PAYOUTS
OTHER ANNUAL RESTRICTED SECURITIES ---------------
NAME AND PRINCIPAL COMPENSATION STOCK UNDERLYING LTIP
POSITION YEAR SALARY ($) BONUS($) ($) AWARDS ($) OPTIONS (#) PAYOUTS ($)
- - - - - - - ----------------------- --------- ----------- ----------- ----------------- ------------- ----------- ---------------
Kenneth P. Currier..... 1998 200,000 32,564 -- -- 90,000 --
Chief Executive 1997 170,000 -- -- -- 70,000 --
Officer and Secretary 1996 170,000 -- -- -- 130,000(1) --
Susan A. Currier....... 1998 200,000 32,564 -- -- 90,000 --
President 1997 170,000 -- -- -- 70,000 --
1996 170,000 -- -- -- 130,000(1) --
Timothy R. Leary....... 1998 150,000 17,948 -- -- 75,000 --
Executive Vice 1997 100,000 7,551 -- -- 65,000 --
President of Sales 1996 100,000 26,332 -- -- 10,000 --
Katherine A. Brunn..... 1998 130,000 24,874 -- -- 95,000 --
Vice President of
North American Sales
Anne E. Aitken......... 1998 124,000 9,695 -- -- 75,000 --
Vice President of 1997 97,308 10,146 -- -- 40,000 --
Marketing
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION ($)(2)
- - - - - - - ----------------------- ---------------------
Kenneth P. Currier..... 5,079
Chief Executive 5,579
Officer and Secretary --
Susan A. Currier....... 5,079
President 5,579
--
Timothy R. Leary....... --
Executive Vice --
President of Sales --
Katherine A. Brunn..... --
Vice President of
North American Sales
Anne E. Aitken......... 2,100
Vice President of 1,620
Marketing
- - - - - - - ------------------------------
(1) The options granted to Mr. and Mrs. Currier during 1996 were canceled by the
Board of Directors in April 1997.
(2) Represents matching contributions to the accounts of each Named Executives
participating under the Company's 401(k) savings plan, which was implemented
January 1, 1997.
IV-43
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during 1998 to
the Named Executives. No stock appreciation rights ("SARs") have been granted.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------------------- VALUE AT
NUMBER OF ASSUMED ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK
UNDERLYING OPTIONS/SARS PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM (3)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME (#) (1) FISCAL YEAR (2) ($/SH) DATE 5% ($) 10%($)
- - - - - - - ------------------------------ ----------- ----------------- ------------- --------------------- --------- ---------
Kenneth P. Currier............ 90,000 8.2% 1.32 02/25/08--12/11/08 74,713 189,337
Susan A. Currier.............. 90,000 8.2 1.32 02/25/08--12/11/08 74,713 189,337
Timothy R. Leary.............. 75,000 6.9 1.32 04/06/08--12/11/08 62,261 157,781
Katherine A. Brunn............ 95,000 8.7 1.32 01/14/08--12/11/08 78,863 199,855
Anne E. Aitken................ 75,000 6.9 1.32 04/06/08--12/11/08 62,261 157,781
- - - - - - - ------------------------
(1) All options were granted pursuant to the Amended and Restated 1992 Stock
Option Plan (the "1992 Option Plan") and vest in equal quarterly increments
over a four year period. Unvested shares accelerate and become vested upon a
change of control of the Company.
(2) Percentages are based on a total of shares of Common Stock underlying all
options granted to employees of the Company in 1998.
(3) This column shows the hypothetical gains or option spreads of the options
granted based on assumed annual compound stock appreciation rates of 5% and
10% over the full 10-year terms of the options. The 5% and 10% assumed rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
future Common Stock prices.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END VALUES
The following table sets forth the shares acquired and the value realized
upon exercise of stock options during 1998 by the Named Executives and certain
information concerning the number and value of unexercised options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)(1)
SHARES ACQUIRED VALUE REALIZED -------------------------- --------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - - - - - ---------------------------------- --------------- ----------------- ----------- ------------- ----------- -------------
Kenneth P. Currier................ 20,000 -- 233,775 124,975 312,981 90,816
Susan A. Currier.................. -- -- 253,775 124,975 351,601 90,816
Timothy R. Leary.................. -- -- 83,130 114,440 111,041 81,367
Katherine A. Brunn................ -- -- 18,437 87,563 13,109 62,257
Anne E. Aitken.................... -- -- 22,314 92,686 15,865 65,900
- - - - - - - ------------------------
(1) Based on the fair market value of the Common Stock on December 31, 1998
($2.031 per share), less the aggregate option exercise price. Options are
in-the-money if the market value of the shares covered thereby is greater
than the option exercise price.
COMPENSATION OF DIRECTORS
The compensation plan for non-employee directors was amended by the Board on
February 3, 1997. In accordance with the plan, such outside directors receive an
annual retainer of $5,000, $1,500 per Board
IV-44
meeting except for telephonic meetings, $250 per each telephonic Board meeting,
and additional compensation to members of the Audit and Compensation Committees
in the amount of $500 per meeting attended in person, and $250 per each
telephonic committee meeting. All directors are reimbursed for expenses incurred
in connection with attendance at meetings.
The Company has an Amended and Restated 1992 Stock Option Plan (the "1992
Option Plan") pursuant to which eligible non-employee directors are entitled to
receive options to purchase shares of Common Stock in accordance with the
formula provisions thereof. Although the non-employee directors are eligible to
receive options pursuant to certain formula provisions of the 1992 Option Plan,
no options have been granted to date pursuant to such formula provisions.
The Company also has the 1997 Stock Option Plan for Directors (the "1997
Directors Plan") pursuant to which eligible non-employee directors receive
non-qualified options to purchase 30,000 shares of Common Stock upon their
election or appointment as a director, which options shall vest in calendar
quarterly installments over four years; and options to purchase 5,000 shares of
Common Stock each January 1 during his/her service as a director, which options
shall vest in quarterly installments over one year. All options granted under
the 1997 Directors Plan have a per share exercise price equal to the per share
fair market value of the Common Stock on the date of grant.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
As of February 23, 1995, the Company entered into employment agreements with
each of Kenneth P. Currier and Susan A. Currier pursuant to which they are
employed as Chief Executive Officer and President of the Company, respectively.
These employment agreements currently provide for the payment of an annual
salary to each of the Curriers, which is subject to change by the Compensation
Committee of the Board of Directors.
These employment agreements also entitle each of the Curriers to receive
annual cash bonuses in amounts, and based upon the achievement of Company
objectives, established from year-to-year by the Compensation Committee. These
agreements are subject to automatic one-year extensions on each December 31st
unless earlier terminated by either the executive or the Company. Under the
employment agreements, each of the Curriers is entitled to severance benefits
equal to six months salary and benefits plus a pro rated cash bonus in the event
of either a termination of their employment by the Company without cause or a
termination by the executive in response to certain changes in the executive's
employment circumstances, subject to increase to one-year's salary and benefits
plus a pro rated cash bonus after a change in control of the Company (as defined
in the agreements) in the event of either a termination of employment by the
Company without cause or a termination by the executive in response to certain
changes in the executive's employment circumstances. On February 16, 1999, the
Compensation Committee also approved a bonus equal to one-year's salary to each
of the Curriers in the event the Company is sold during 1999, and the
transaction closes at terms acceptable to the Board of Directors. Employment
Agreements executed in connection with the Merger provide that the Curriers will
receive a portion of these bonuses in restricted stock.
Under the terms of his employment, Mr. Mountain would receive three months'
severance pay in the event his employment is terminated without cause, or six
month's salary in the event his employment is terminated due to change of
control.
Effective February 18, 1998, all employees of the Company qualify under a
program which entitles any employee who might lose their employment as a result
of a change in control to receive three months base compensation at the time of
separation, provided the employee has performed their duties to the date of
separation. This policy was extended for all employees until February 17, 2000.
Since April 1997, options granted to officers, employees and directors under
the Company's stock option plans have provided for acceleration of unvested
shares in the event of a change of control of the
IV-45
Company (as defined in the option plans). At December 31, 1998, there were
options to purchase approximately 1,299,000 shares of the Company's common stock
that would become vested in the event of such a change in control of the
Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1998 to October 1998, the members of the Compensation Committee
of the Board of Directors were Stephen J. Clearman and A. Bruce Johnston. Since
October 1998, the Compensation Committee consists of Douglas G. Carlston and
William H. Lane III. Messrs. Clearman and Johnston are each associated with
investment partnerships which own or previously owned Common Stock and which
previously held shares of preferred stock of the Company and subordinated notes
issued by the Company. During 1995, the Company redeemed all of the outstanding
preferred stock and repaid all of its subordinated indebtedness. See "Certain
Relationships and Related Transactions". No executive officers of the Company
serve on the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, to the best knowledge and belief of the
Company, certain information regarding the beneficial ownership of the Company's
Common Stock as of February 28, 1999 by (i) each person known by the Company to
be the beneficial owner of more than 5% of the outstanding Common Stock, (ii)
each of the Company's Directors, (iii) each of the Named Executive Officers and
(iv) all of the Company's executive officers and Directors as a group.
SHARES
BENEFICIALLY PERCENT OF
DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS OWNED (1) CLASS (2)
- - - - - - - -------------------------------------------------------------------------------------- -------------- -----------
TA Associates Group................................................................... 2,241,914(3) 29.4%
High Street Tower, Suite 2500
125 High Street
Boston, MA 02110
Special Situations Group.............................................................. 1,121,100(4) 14.7%
153 East 53 Street, Floor 51
New York, NY 10022
Kenneth P. Currier.................................................................... 816,053(5) 10.0%
Susan A. Currier...................................................................... 816,053(6) 10.0%
A. Bruce Johnston..................................................................... 26,517(7) *
William H. Lane III................................................................... 31,720(8) *
Douglas G. Carlston................................................................... 6,399(9) *
Michael S. Murray..................................................................... 6,399(10) *
Timothy R. Leary...................................................................... 139,935(11) 1.8%
Katherine A. Brunn.................................................................... 41,519(12) *
Anne E. Aitken........................................................................ 36,689(13) *
All directors and executive officers as a group (12 persons).......................... 1,173,811(14) 13.9%
- - - - - - - ------------------------
* Represents less than 1% of the outstanding shares.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options that are currently exercisable or exercisable within 60 days of
February 28, 1999 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of computing
the purpose of an other person.
IV-46
(2) Applicable percentage of ownership is based on 7,627,881 shares of Common
Stock outstanding as of February 28, 1999 together with applicable options
for each stockholder.
(3) Includes 1,121,304 shares of Common Stock held by Advent VI L.P., 503,329
shares held by Advent Atlantic and Pacific II L.P., 181,759 shares held by
Advent Industrial II L.P., 139,814 shares held by Advent New York L.P.,
197,138 shares held by Chestnut II Limited Partnership, 81,792 shares held
by Chestnut Capital International III L.P., and 16,778 shares held by TA
Venture Investors, L.P. The respective general partners of Advent VI L.P.,
Advent Atlantic and Pacific II L.P., Advent Industrial II L.P., Advent New
York L.P. and TA Venture Investors L.P. (collectively, the "TA Associates
Group") exercise sole investment and voting power with respect to shares of
Common Stock held by such entities. A. Bruce Johnston, a Director of the
Company, is a Principal of TA Associates.
(4) Includes 768,800 shares of Common Stock held by Special Situations Fund III,
L.P., 90,900 shares of Common Stock held by Special Situations Technology
Fund, L.P., and 261,400 shares of Common Stock held by Special Situations
Cayman Fund, L.P. The respective general partners of Special Situations Fund
III, L.P., Special Situations Technology Fund, L.P., and Special Situations
Cayman Fund, L.P (collectively, the "Special Situations Group") exercise
sole investment and voting power with respect to shares of Common Stock held
by such entities.
(5) Includes 385,976 shares of Common Stock beneficially owned by Mr. Currier's
wife, Susan A. Currier, as to which Mr. Currier disclaims beneficial
ownership, 76,000 shares beneficially owned by Mr. and Ms. Currier jointly,
and 263,777 shares which Mr. Currier may acquire upon the exercise of stock
options within 60 days of February 28, 1999.
(6) Includes 354,077 shares of Common Stock beneficially owned by Ms. Currier's
husband, Kenneth P. Currier, as to which Ms. Currier disclaims beneficial
ownership, 76,000 shares beneficially owned by Mr. and Ms. Currier jointly,
and 283,776 shares which Ms. Currier may acquire upon the exercise of stock
options within 60 days of February 28, 1999.
(7) Includes 3,117 shares of Common Stock beneficially owned by A. Bruce
Johnston through TA Venture Investors L.P. which are included in the 16,778
shares described in footnote (3) above as being owned by TA Venture
Investors L.P. Does not include any shares beneficially owed by Advent VI
L.P., Advent Atlantic and Pacific II L.P., Advent Industrial II L.P. or
Advent New York L.P., or the remainder of the shares described in footnote
(2) above as being owned by TA Venture Investors L.P., as to which Mr.
Johnston disclaims beneficial ownership. Also includes 23,400 shares of
Common Stock which Mr. Johnston may acquire upon the exercise of stock
options within 60 days of February 28, 1999.
(8) Includes 27,720 shares of Common Stock which Mr. Lane may acquire upon the
exercise of stock options within 60 days of February 28, 1999, and 4,000
shares of Common Stock owned by Mr. Lane's wife and grandchildren.
(9) Consists of 6,399 shares of Common Stock which Mr. Carlston may acquire upon
the exercise of stock options within 60 days of February 28, 1999.
(10) Consists of 6,399 shares of Common Stock which Mr. Murray may acquire upon
the exercise of stock options within 60 days of February 28, 1999.
(11) Includes 102,505 shares of Common Stock which Mr. Leary may acquire upon
the exercise of stock options within 60 days of February 28, 1999.
(12) Consists of 9,831 shares beneficially owned by Ms. Brunn's husband, as to
which Ms. Brunn disclaims beneficial ownership, and 31,688 shares which Ms.
Brunn may acquire upon the exercise of stock options within 60 days of
February 28, 1999.
(13) Consists of 36,689 shares of Common Stock which Ms. Aitken may acquire upon
the exercise of stock options within 60 days of February 28, 1999.
IV-47
(14) Includes 869,366 shares of Common Stock which may be acquired upon the
exercise of stock options within 60 days of February 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. Bruce Johnston, a Director of the Company, is a Principal of TA
Associates. Stephen J. Clearman, until October 1998 a Director of the Company,
is a general partner of the general partner of Geocapital II, L.P. Charles E.
Noell III, until October 1998 a Director of the Company, is a general partner of
the general partner of JMI Equity Fund, L.P. Kenneth and Susan Currier, who are
married to one another, are Directors and the Chief Executive Officer and
President of the Company, respectively.
Katherine A. Brunn, Vice President of North American Sales since January
1998, was the President and Chief Executive Officer of MicroTech Marketing
Services, Inc. Ms. Brunn has retained her interest and position in MicroTech.
This firm provided sales and marketing services to the Company in each of the
last five years, and continues to provide such services. During 1998 and 1997,
the Company paid MicroTech commissions totaling $140,000 and $221,000,
respectively, for services performed on its behalf.
The Company has a policy whereby all transactions between the Company and
its officers, directors and affiliates (other than employment and compensation
matters) will be reviewed by the Audit Committee of the Company's Board of
Directors or a comparable committee.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS:
Reference is made to the Index set forth on page IV-22 of this Annual Report
on Form 10-K.
(2) FINANCIAL STATEMENTS SCHEDULES:
PAGE
---------
Reports of Independent Certified Public Accountants on Schedules........................................... IV-52
Schedule II--Valuation and Qualifying Accounts............................................................. IV-53
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and therefore have been omitted.
(3) EXHIBITS
EXHIBIT
NO. DESCRIPTION
- - - - - - - ---------- ---------------------------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of March 3, 1999, by and among the Expert, Activision, Inc. and
Expert Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Activision (11)
3.1 Restated Articles of Incorporation of the Company (5)
3.2 Amended and Restated By-Laws of the Company (5)
4.1 Shareholders Rights Agreement between the Company and The First National Bank of Boston dated November 9,
1995 (10)
4.2 Amendment No. 1 to Shareholder Rights Agreement, dated as of November 2, 1995, between Expert and The
First National Bank of Boston (12)
10.1 Employment Agreement between the Company and Kenneth Currier dated as of February 23, 1995 (2)
IV-48
EXHIBIT
NO. DESCRIPTION
- - - - - - - ---------- ---------------------------------------------------------------------------------------------------------
10.2 Employment Agreement between the Company and Susan Currier dated as of February 23, 1995 (2)
10.3 Amended and Restated Stockholders Agreement among the Company and certain stockholders dated as of
October 31, 1995 (5)
10.4 Lease between the Company and Douglas Entrance Holdings Limited Partnership dated February 25, 1994 (3)
10.5 Sublease Agreement between the Company and Commodore Cruise Line, Limited dated May 9, 1994 (3)
10.6 1992 Stock Option Plan, as amended (3)
10.7 Revolving Credit Agreement between the Company and the First National Bank of Boston dated as of October
23, 1992, as amended in December 1993 and on May 19, 1994, June 30, 1994 and August 1, 1994 (3)
10.8 Summary of the Company's Management Incentive Plan (3)
10.10 Agreement and Plan of Merger among the Company, ESI Acquisition Corp., Swfte and the stockholders of
Swfte dated as of October 16, 1995 (5)(+)
10.11 Registration Rights Agreement by and among the Company and certain stockholders dated as of November 2,
1995 (5)(+)
10.13 Amended and Restated Licensing Agreement between Swfte and The United States Playing Card Company dated
as of May 1993, as amended on July 14, 1994, July 7, 1995 and July 21, 1995 (5)
10.14 Licensing and Royalty Agreement between the Company and McDonald's Corporation dated as of January 2,
1997 (6)
10.15 Sublease Agreement Between the Company and Enterprise Consulting, Inc. dated as of May 1, 1996 (7)
10.16 Announcement of Preliminary Fourth-Quarter Results (9)
10.17 1997 Stock Option Plan for Directors (8)
10.18 1997 Stock Option Plan for Officers and Employees (8)
21 Subsidiaries of the Company (5)
23.1 Consent of Grant Thornton LLP (1)
23.2 Consent of Arthur Andersen LLP (1)
27 Financial Data Schedule (EDGAR filing only)
- - - - - - - ------------------------
(1) Filed herewith.
(2) Incorporated by reference to the designated exhibit of Amendment No. 1 to
the Registration Statement on Form S-1 (No. 33-89758 filed March 30, 1995).
(3) Incorporated by reference to the designated exhibit of the Registration
Statement on Form S-1 (No. 33-89758 filed February 24, 1995).
(4) Incorporated by reference to the designated exhibit of registrant's Form 8-K
(filed November 12, 1995).
(5) Incorporated by reference to the designated exhibit of registrant's Annual
Report on Form 10-K for the year ended December 31, 1995.
(6) Incorporated by reference to the designated exhibit of registrant's Form 8-K
(filed February 26, 1997).
IV-49
(7) Incorporated by reference to the designated exhibit of registrant's Annual
Report on Form 10-K for the year ended December 31, 1996.
(8) Incorporated by reference to addenda to registrant's Proxy Statement on
Schedule 14A (filed May 23, 1997).
(9) Incorporated by reference to the designated exhibit of registrant's Form 8-K
(filed February 10,1998).
(10) Incorporated by reference to Exhibit 10.12 of registrant's Form 8-K (filed
November 12, 1995).
(11) Incorporated by reference to the designated exhibit of Form 8-K (filed
March 9, 1999).
(12) Incorporated by reference to Exhibit 4.1 of registrant's Form 8-K (filed
March 9, 1999).
(+) Confidential treatment granted as to portions of this document.
(B) REPORTS ON FORM 8-K
No Forms 8-K were filed during the last quarter of the year ended December
31, 1998. Subsequent to such time, two Forms 8-K have been filed.
On January 15, 1999, the Company filed a report on Form 8-K in regard to its
announcement of a change in its auditing firm (Item 4).
On March 9, 1999, the Company filed a report on Form 8-K in regard to its
announcement of an Agreement and Plan of Merger dated as of March 3, 1999 by and
among Expert, Activision, Inc. and Expert Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Activision, Inc. (Items 5, 7).
(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The index to exhibits that are listed in Item 14(a)(3) of this report and
not incorporated by reference follows the "Signatures" section hereof and is
incorporated by reference.
(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X
Reference is made to Item 14(a)(2).
IV-50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EXPERT SOFTWARE, INC.
By: /s/ KENNETH P. CURRIER
-----------------------------------------
Kenneth P. Currier
Date: March 30, 1999 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- - - - - - - ------------------------------ --------------------------- -------------------
Director, Chief Executive
/s/ KENNETH P. CURRIER Officer and Secretary
- - - - - - - ------------------------------ (Principal Executive March 30, 1999
Kenneth P. Currier Officer)
Chief Financial Officer
/s/ STEVEN R. MOUNTAIN (Principal Financial
- - - - - - - ------------------------------ Officer and Principal March 30, 1999
Steven R. Mountain Accounting Officer)
/s/ SUSAN A. CURRIER Director, President
- - - - - - - ------------------------------ March 30, 1999
Susan A. Currier
/s/ DOUGLAS G. CARLSTON Director
- - - - - - - ------------------------------ March 30, 1999
Douglas G. Carlston
/s/ A. BRUCE JOHNSTON Director
- - - - - - - ------------------------------ March 30, 1999
A. Bruce Johnston
/s/ WILLIAM H. LANE III Director
- - - - - - - ------------------------------ March 30, 1999
William H. Lane III
/s/ MICHAEL S. MURRAY Director
- - - - - - - ------------------------------ March 30, 1999
Michael S. Murray
IV-51
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
Expert Software, Inc.
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements as of and for the year ended December 31,
1998 included in this Form 10-K and have issued our report thereon dated
February 17, 1999. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed under Item 14(a) of this
Form 10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
GRANT THORNTON LLP
Miami, Florida,
February 17, 1999
- - - - - - - --------------------------------------------------------------------------------
To the Stockholders
of Expert Software, Inc.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements as of and for the two years ended December
31, 1997 included in this Form 10-K and have issued our report thereon dated
February 6, 1998. Our audit was made for the purpose of forming an opinion on
those statements taken as a whole. The schedule listed under Item 14(a) of this
Form 10-K is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 6, 1998.
IV-52
EXPERT SOFTWARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
BALANCE AT BALANCE AT
BEGINNING CHARGED TO COSTS END
DESCRIPTION OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
- - - - - - - ----------------------------------------------------------- ----------- ---------------- ----------- -----------
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND RETURNS:
Fiscal year ended December 31, 1998........................ $ 4,361 $ 10,976 $ (11,985) $ 3,352
----------- ------- ----------- -----------
----------- ------- ----------- -----------
Fiscal year ended December 31, 1997........................ $ 5,061 $ 6,868 $ 7,568 $ 4,361
----------- ------- ----------- -----------
----------- ------- ----------- -----------
Fiscal year ended December 31,1996......................... $ 1,659 $ 7,311 $ 3,909 $ 5,061
----------- ------- ----------- -----------
----------- ------- ----------- -----------
IV-53
INDEX TO EXHIBITS
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
- - - - - - - ------------- ------------------------------------------------------------------------------------------- -----------
23.1....... Consent of Grant Thornton LLP.............................................................. IV-55
23.2....... Consent of Arthur Andersen LLP............................................................. IV-56
IV-54
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports dated February 17, 1999 included in this Form 10-K,
into the Company's previously filed Form S-8 Registration Statement File No.
33-93920.
GRANT THORNTON LLP
Miami, Florida,
March 25, 1999.
IV-55
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our reports dated February 6, 1998 included in this Form 10-K,
into the Company's previously filed Form S-8 Registration Statement File No.
33-93920.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 25, 1999.
IV-56
ANNEX V
- - - - - - - --------------------------------------------------------------------------------
- - - - - - - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-25646
------------------------
EXPERT SOFTWARE, INC.
STATE OF DELAWARE--I.R.S. EMPLOYER IDENTIFICATION NO.: 65-0359860
802 DOUGLAS ROAD
NORTH TOWER, 6TH FLOOR
CORAL GABLES, FL 33134
(305) 567-9990
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of April 30, 1999, there were 7,627,881 shares of the Registrant's Common
Stock, $.01 par value, outstanding.
- - - - - - - --------------------------------------------------------------------------------
- - - - - - - --------------------------------------------------------------------------------
The exhibit index is on page V-14.
Page V-1 of V-15.
V-1
EXPERT SOFTWARE, INC.
INDEX TO FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1999
PAGE
---------
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998........................ V-3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998...... V-4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998...... V-5
Notes to Condensed Consolidated Financial Statements.................................................... V-6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. V-9
PART II--OTHER INFORMATION
Item 5. Other Information................................................................................. V-13
Item 6. Exhibits and Reports on Form 8-K.................................................................. V-14
Signatures................................................................................................ V-15
This Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Factors that might cause such
a difference are discussed in the section entitled "Factors That May Affect
Future Operating Results" on page V-13 of this Form 10-Q.
V-2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
1999 1998
-------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents.............................................................. $ 1,605 $ 1,595
Accounts receivable, net.......................................................... 5,258 5,411
Inventories, net.................................................................. 2,655 2,830
Income taxes receivable........................................................... 65 65
Prepaid expenses.................................................................. 683 854
-------------- ------------
Total current assets.......................................................... 10,266 10,755
PROPERTY AND EQUIPMENT, net......................................................... 692 854
OTHER ASSETS, net................................................................... 5 5
-------------- ------------
Total assets.................................................................. $ 10,963 $ 11,614
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................................................. $ 2,672 $ 3,914
Accrued expenses.................................................................. 4,470 3,594
-------------- ------------
Total current liabilities..................................................... 7,142 7,508
-------------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock................................................................... -- --
Common stock...................................................................... 76 76
Additional paid-in capital........................................................ 23,719 23,693
Accumulated deficit............................................................... (19,974) (19,663)
-------------- ------------
Total stockholders' equity.................................................... 3,821 4,106
-------------- ------------
Total liabilities and stockholders' equity.................................... $ 10,963 $ 11,614
-------------- ------------
-------------- ------------
The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets.
V-3
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
NET REVENUES................................................................................ $ 7,394 $ 9,290
--------- ---------
OPERATING COSTS AND EXPENSES:
Cost of revenues.......................................................................... 3,112 3,743
Marketing and sales....................................................................... 2,686 2,752
General and administrative................................................................ 1,506 1,297
Development............................................................................... 414 613
--------- ---------
Total operating costs and expenses...................................................... 7,718 8,405
--------- ---------
Operating income (loss)................................................................. (324) 885
Other income, net........................................................................... 13 169
--------- ---------
Income (loss) before provision for income taxes........................................... (311) 1,054
Provision for income taxes.................................................................. -- 390
--------- ---------
Net income (loss)......................................................................... $ (311) $ 664
--------- ---------
--------- ---------
Earnings (Loss) per Share:
Basic..................................................................................... $ (.04) $ .09
--------- ---------
--------- ---------
Diluted................................................................................... $ (.04) $ .08
--------- ---------
--------- ---------
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
V-4
EXPERT SOFTWARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................................ $ (311) $ 664
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation of property and equipment..................................................... 162 181
Amortization of acquired intangibles....................................................... -- 24
Compensation expense on stock option grants................................................ 26 391
Deferred income tax provision.............................................................. -- 21
Changes in current assets and liabilities:
(Increase) decrease in accounts receivable................................................. 153 (2,045)
(Increase) decrease in income tax receivable............................................... -- 1,859
(Increase) decrease in inventories......................................................... 175 (139)
(Increase) decrease in prepaid expenses.................................................... 171 147
Increase (decrease) in accounts payable.................................................... (1,242) (1,054)
Increase (decrease) in accrued expenses.................................................... 876 (423)
Increase (decrease) in income taxes payable................................................ -- 92
--------- ---------
Net cash provided by (used in) operating activities...................................... 10 (282)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................................................ -- (2)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised.................................................................... -- 4
Payments on capital lease obligations...................................................... -- (13)
--------- ---------
Net cash provided by (used in) financing activities...................................... -- (9)
--------- ---------
Net increase (decrease) in cash and equivalents.......................................... 10 (293)
CASH AND EQUIVALENTS, beginning of period.................................................... 1,595 5,685
--------- ---------
CASH AND EQUIVALENTS, end of period.......................................................... $ 1,605 $ 5,392
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest................................................... $ -- 4
--------- ---------
--------- ---------
Cash paid during the period for income taxes............................................... $ -- $ --
--------- ---------
--------- ---------
The accompanying notes to condensed consolidated financial statements
are an integral part of these statements.
V-5
EXPERT SOFTWARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. THE ORGANIZATION
Expert Software, Inc. (the "Company") publishes and distributes computer
software under the "Expert" trade name. The Company's products address a broad
range of consumer interests and everyday tasks for the productivity, lifestyle,
small office/home office, entertainment and education market categories. The
Company sells its products directly to large retailers, as well as to
distributors.
2. BASIS OF PRESENTATION
The condensed consolidated balance sheet as of December 31, 1998, which has
been derived from audited financial statements, and the unaudited interim
condensed consolidated financial statements included herein, have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1998.
In the opinion of the Company, the accompanying condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of March 31, 1999, and the results of
operations and cash flows for the periods presented herein. Results of
operations and cash flows for the period ending March 31, 1999, are not
necessarily indicative of the results of operations of the entire fiscal year.
The accounting policies followed for quarterly financial reporting purposes
are the same as those disclosed in the Company's audited financial statements
for the year ended December 31, 1998 included in the Form 10-K.
3. INVENTORIES
Inventories consisted of the following as of March 31, 1999 and December 31,
1998 (in thousands):
1999 1998
--------- ---------
Finished goods............................................................. $ 1,917 $ 2,009
Raw materials.............................................................. 738 821
--------- ---------
$ 2,655 $ 2,830
--------- ---------
--------- ---------
4. EARNINGS PER SHARE
Earnings per share are computed in accordance with the requirements of SFAS
128. Basic earnings per common share were computed by dividing income available
to common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share were determined by
including assumptions of stock option conversions. For periods in which the
Company reports a loss from continuing operations, diluted earnings per share do
not include stock options as their
V-6
effect would be antidilutive. Shares used in the computations for the three
months ended March 31, 1999 and 1998 are as follows:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
PER-SHARE
INCOME SHARES AMOUNT
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
1999
Basic Earnings Per Share
Income (loss) available to common shareholders..................................... $ (311) 7,628 $ (.04)
-----
-----
1998
Basic Earnings Per Share
Income available to common shareholders............................................ $ 664 7,605 $ .09
-----
-----
Options assumed to be converted.................................................... -- 626
----- -----
Diluted Earnings Per Share
Income available to common shareholders plus assumed conversions................... $ 664 8,231 $ .08
----- ----- -----
----- ----- -----
5. PENDING MERGER AGREEMENT
On March 3, 1999, the Company announced the execution of an Agreement and
Plan of Merger (as amended and restated on April 19, 1999 collectively, the
"Merger Agreement") by and among Expert, Activision, Inc., a Delaware
corporation ("Activision") and Expert Acquisition Corp., a Delaware corporation
and wholly-owned subsidiary of Activision ("Merger Sub"). The Merger Agreement
anticipates that the Merger Sub will be merged with and into Expert (the
"Merger"). After the Merger, Expert will continue as the surviving corporation
and shall be a wholly-owned subsidiary of Activision. Upon completion of the
Merger, Expert's stockholders will receive $2.65 in cash in exchange for each
outstanding share of Expert common stock they own.
The foregoing description is a brief summary of the Merger Agreement, and is
qualified in its entirety by reference to the Merger Agreement attached as
Exhibit 2.2 to the Company's Form 8-K filed on March 9, 1999.
As contemplated by the Merger Agreement, Expert executed an amendment (the
"Amendment") to that certain Shareholders' Rights Agreement dated as of November
9, 1995 between Expert and Bank of Boston, N.A. (the "Rights Agreement"), which
Amendment modified the Rights Agreement to provide that such Rights Agreement
would not be triggered by the execution or operation of the Merger Agreement.
The foregoing description is a brief summary of the terms and conditions of the
Amendment, and is qualified in its entirety by reference to the Amendment
attached as Exhibit 4.1 to the Company's Form 8-K filed on March 9, 1999.
6. COMMITMENTS AND CONTINGENCIES
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the predecessor in October 1992, and related amortization and other
deductions with respect to the acquired assets. In June 1997, the IRS proposed
assessments for additional taxes of $412,000, $553,000 and $857,000 for the tax
years 1992, 1993 and 1994, respectively, plus penalties totaling $371,000 and
interest to the date of payment. If the IRS prevailed on all issues, such
interest through March 31, 1999 would total approximately $735,000. The
preliminary adjustments proposed by the IRS would also reduce
V-7
the Company's federal income taxes for the years 1995, 1996 and 1997 by
$242,000, $68,000 and $55,000, respectively. The Company believes that it has
properly reported its income and paid its taxes in accordance with applicable
laws and intends to contest the proposed adjustments vigorously. The Company
believes that the ultimate resolution of this matter will not have a material
adverse effect on its financial position.
The Company's federal tax filing with respect to the year ended December 31,
1996 is presently being reviewed by the IRS, which has questioned the allocation
of the purchase price made by the Company in connection with the acquisition of
Swfte International, Ltd. in November 1995, and related amortization and other
deductions. The IRS has not proposed any assessment from their review, nor has
it indicated when it expects to conclude its audit or if it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional
taxes, if any, the IRS will claim are due. There can be no assurance that the
Company will prevail in its position, or that the appeals, if any, and final
resolution of any IRS claims will not have a material adverse impact on the
Company's liquidity, financial position, or results of operations.
7. PROVISION FOR INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES, which requires that deferred income taxes be recognized for the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting basis at rates based on enacted
tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. A valuation allowance was recorded to offset 100% of the
Company's net deferred tax asset as of September 30, 1998. The net deferred tax
asset is comprised of tax basis net operating losses and the estimated tax
effect of expected future temporary differences related to charges taken for
book purposes that are not deductible for federal income tax purposes until the
amounts are realized in the future. Management believes that, due to recent
financial results, it is appropriate to record a full valuation allowance until
such time as it becomes more likely than not that the Company will realize some
or all of the benefit of the net deferred tax assets.
V-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of net revenues, for comparative purposes, for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
----- -----
Net revenues..................................................................................... 100% 100%
--- ---
Operating costs and expenses:
Cost of revenues............................................................................... 42 40
Marketing and sales............................................................................ 36 30
General and administrative..................................................................... 20 14
Development.................................................................................... 6 6
--- ---
104 90
--- ---
Operating income (loss).......................................................................... (4) 10
Other income (expense)........................................................................... -- 1
--- ---
Income (loss) before provision for income taxes.................................................. (4) 11
Provision for income taxes....................................................................... -- 4
--- ---
Net income (loss)................................................................................ (4)% 7%
--- ---
--- ---
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
NET REVENUES. Net revenues for the three months ended March 31 decreased to
$7.4 million in 1999 from $9.3 million in 1998, a decrease of $1.9 million, or
20%. The decrease in net revenues was due primarily to decreased units shipped
domestically, partially offset by higher average selling prices.
International revenues represented 23% and 13% of net revenues in 1999 and
1998, respectively. International markets have been subject to economic trends,
including currency exchange rate fluctuations, outside of the Company's control
and, as a result, there can be no assurance as to whether international activity
will increase or decrease in the future.
Net revenues consist of gross sales net of allowances for returns and
discounts, and royalty income related to licensing of products. The Company
adjusts its allowance for returns as it deems appropriate. The Company may
accept substantial product returns or make other concessions to maintain its
relationships with retailers and distributors and its access to distribution
channels. If the Company chooses to accept product returns, some of that product
may be defective, shelf-worn or damaged and may not therefore be salable in the
ordinary course of business. There can be no assurance, that the Company will
not experience significant returns, which could be greater than the Company's
provision for returns or could have a material adverse affect on the Company's
results of operations. In accordance with its policy, the Company will continue
to reassess market conditions and adjust its provision for returns as it deems
appropriate.
COST OF REVENUES. Cost of revenues decreased to $3.1 million in 1999 from
$3.7 million in 1998, a decrease of $0.6 million, or 17%, due primarily to
decreased gross sales and product costs. As a percentage of net revenues, cost
of revenues represented 42% and 40% of net revenues in 1999 and 1998,
respectively. This increased percentage was due primarily to higher royalty
expenses as a result of higher royalty rates on certain product lines;
provisions for inventory losses due to damaged or obsolete products and
increased provisions for returns. The Company expects cost of revenues may vary
from period to period
V-9
based on the relative mix of products sold, the level of promotional sales in a
given period, inventory losses due to damaged or obsolete inventory and other
market factors.
Cost of revenues consists primarily of product cost, freight charges,
royalties to outside programmers and content providers, as well as amortization
of software licenses, storage and returns processing charges, and an inventory
provision for damaged and obsolete products, if any. Product costs consist of
the costs to purchase the underlying materials, print both boxes and manuals,
media costs (CD-ROM's and disks) and fulfillment (assembly and shipping).
MARKETING AND SALES. Marketing and sales expense decreased to $2.7 million
in 1999 from $2.8 million in 1998, a decrease of $0.1 million, or 2%, and
increased as a percentage of net revenues to 36% of net revenues in 1999 from
30% in 1998. The decrease in amount was related primarily to decreased general
advertising costs and lower costs associated with the design and release of new
and revised packaging for products as the number of product upgrades and new
releases were lower for the three months ended March 31 1999 than during the
same period in 1998; and a decline in commission and merchandising costs. These
decreased costs were partially offset by increases in international distribution
costs and domestic co-op marketing activities to promote the Company's products
and brand names.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased to
$1.5 million in 1999 from $1.3 million in 1998, an increase of $0.2 million, or
16%. This increase was primarily due to the Company incurring $0.5 million in
professional fees and other costs associated with the proposed merger with
Activision offset by a reduction in both compensation costs and bad debt
provision.
DEVELOPMENT. Development expense decreased to $0.4 million in 1999 from
$0.6 million in 1998, a decrease of $0.2 million, or 33%, and remained as a
percentage of net revenues at 6% of net revenues in both 1999 and 1998. The
reduction in expenses is primarily due to lower compensation costs as a result
of lower staffing and reduced new product development costs. Development expense
includes expenses related to product upgrades, new products development
activities, quality control and customer service support. The Company currently
believes that development expenses may increase over current levels in future
periods due to additional costs to develop new brands and titles, including the
development of products to take advantage of the Internet and other on-line
capabilities, operating system upgrades such as Windows 98, and the adaptation
of product for international sales.
OTHER INCOME. Other income, which includes interest income and interest
expense, decreased to $13,000 in 1999 from $169,000 in 1998, primarily due to
the decreased balance of interest bearing deposits and investments and the
receipt in 1998 of interest of approximately $117,000 in connection with the
refund of prior years' income tax payments.
PROVISION FOR INCOME TAXES. The Company accounts for income taxes under
SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which requires that deferred income
taxes be recognized for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
basis at rates based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. A valuation allowance was recorded
to offset 100% of the Company's net deferred tax asset as of September 30, 1998.
The net deferred tax asset is comprised of tax basis net operating losses and
the estimated tax effect of expected future temporary differences related to
charges taken for book purposes that are not deductible for federal income tax
purposes until the amounts are realized in the future. Management believes that,
due to recent financial results, it is appropriate to record a full valuation
allowance until such time as it becomes more likely than not that the Company
will realize some or all of the benefit of the net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $3.1 million in working capital,
including $1.6 million in cash. To date, the Company has not invested in any
financial instruments that involve a high level of complexity
V-10
or risk. Net cash provided from operating activities was $10,000 for the three
months ended March 31, 1999, primarily due to an increase in accrued expenses,
and a decrease in both inventories and accounts receivable; offset by a net
reduction in accounts payable and the operating loss during the period,
The Company entered into a loan agreement with a bank which provides for a
revolving line of credit collateralized by substantially all of the Company's
assets. Borrowings under the line are limited to a percentage of eligible
receivables as defined in the agreement and may not exceed $2.5 million through
May 31, 1999, the maturity date. The loan agreement contains customary
restrictive covenants. As a result of the loss during the first quarter of 1999,
the Company is no longer in compliance with the certain loan convenants and the
Company has entered discussions with the bank to obtain a waiver of such
convenants that would allow the Company to borrow on the line in the future.
There can be no assurance that the Company will obtain the waiver or that the
Company's future results of operations will continue to be in compliance with
the line of credit convenants which among other things, requires the Company to
have quarterly net income of at least $100,000 or that the line of credit would
be otherwise available to the Company. To date, there have been no borrowings
under the line.
The Company has also entered into discussions with the bank to extend the
maturity date of the line of credit to enable the Company to assess it's
financing needs, if any, after the Stockholder vote on the Merger with
Activision. At this time, the Company has not sought financing from any
alternative source and, accordingly, cannot give any assurances that financing
will be available, if at all, on acceptable terms. Without any additional
financing, management believes the Company's existing capital resources are
sufficient to meet working capital and capital expenditure requirements through
at least the end of 1999.
As a result of recent losses, management has reason to believe that the
Company may not meet certain requirements for continued listing on the Nasdaq
National Market, including the requirement to maintain total net tangible assets
of at least $4 million. In the event that the Company's Common Stock is no
longer listed on the Nasdaq National Market and is ineligible to be listed on
the Nasdaq SmallCap Market, sales of the Company's Common Stock would likely be
conducted in the over-the-counter market or potentially in regional exchanges.
This may negatively impact the liquidity and price of the Common Stock and
investors may find it more difficult to purchase or dispose of, or to obtain
accurate quotations as to the market value of, the Company's Common Stock.
The Company's federal tax filings with respect to the year ended December
31, 1992 and subsequent years are presently being reviewed by the Internal
Revenue Service ("IRS"). The IRS has questioned the allocation of the purchase
price made by the Company in connection with the acquisition of assets and
business of the predecessor in October 1992, and related amortization and other
deductions with respect to the acquired assets. In June 1997, the IRS proposed
assessments for additional taxes of $412,000, $553,000 and $857,000 for the tax
years 1992, 1993 and 1994, respectively, plus penalties totaling $371,000 and
interest to the date of payment. If the IRS prevailed on all issues, such
interest through March 31, 1999 would total approximately $735,000. The
preliminary adjustments proposed by the IRS would also reduce the Company's
federal income taxes for the years 1995, 1996 and 1997 by $242,000, $68,000 and
$55,000, respectively. The Company believes that it has properly reported its
income and paid its taxes in accordance with applicable laws and intends to
contest the proposed adjustments vigorously. The Company believes that the
ultimate resolution of this matter will not have a material adverse effect on
its financial position.
The Company's federal tax filing with respect to the year ended December 31,
1996 is presently being reviewed by the IRS, which has questioned the allocation
of the purchase price made by the Company in connection with the acquisition of
Swfte International, Ltd. in November 1995, and related amortization and other
deductions. The IRS has not proposed any assessment from their review, nor has
it indicated when it expects to conclude its audit or if it intends to propose
adjustments to the Company's federal income tax returns claiming additional tax
due. At this time, it is not possible to quantify the amount of additional
taxes, if any, the IRS will claim are due. There can be no assurance that the
Company will
V-11
prevail in its position, or that the appeals, if any, and final resolution of
any IRS claims will not have a material adverse impact on the Company's
liquidity, financial position, or results of operations.
As previously disclosed, the Company engaged a financial advisor to assist
it in assessing strategic alternatives to enhance shareholder value. In March
1999, the Company entered into a merger agreement with Activision. In connection
with the negotiations and due diligence procedures leading to that agreement,
the Company has incurred, and will continue to incur, costs related to its
financial advisor and other professionals. Currently, the Company has incurred
costs totaling approximately $0.5 million. Additional costs will be incurred as
the Company undertakes the proxy solicitation and other regulatory and other
filings required in connection with submitting the proposed merger to the
Company's shareholders for a vote, likely in the summer of 1999.
YEAR 2000 READINESS
The statements in the following section include "Year 2000 readiness
disclosures" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Software that is not
compliant with the Year 2000 issue is time-sensitive and may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations resulting in disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company has established a comprehensive Year 2000 compliance program
designed to (1) identify information technology ("IT") and non-information
technology ("non-IT") systems that may fail at the turn of the century, (2)
upgrade or replace non-compliant systems, and (3) evaluate the Year 2000
readiness of key customers, suppliers and service providers. IT systems include
computer systems (hardware and software) used to process business data such as
customer orders and accounting information. Non-IT systems include technology
such as telephone switching systems and other devices that employ embedded chip
technology in the function and design. The progress of the Year 2000 program is
as follows:
Phase I, the identification of IT and non-IT systems that may fail at the
turn of the century, is substantially completed. The Company's primary computer
system and its phone switching system were identified as the most critical
systems needed to be upgraded to be Year 2000 compliant.
Phase II, upgrading or replacing non-compliant systems, is approximately 80%
complete. The Company recently converted to a Year 2000 compliant version of the
same application software it has been using since 1995. The same version of the
software is operating successfully at other companies. Upgraded hardware and
software will be installed on the phone switch later during 1999 to make it Year
2000 compliant. The Company is currently assessing the potential effects of, and
costs of, remediating the Year 2000 problem on its office equipment; however,
such costs are not expected to be material.
Phase III, evaluating the Year 2000 readiness of critical suppliers and
service providers, has begun and is approximately 90% complete. The Company is
soliciting input from its key customers, suppliers and service providers
regarding their Year 2000 status. The Company will determine which, if any, pose
a threat to the uninterrupted operation of its business in the event that they
experience system errors or failures.
The Company estimates that it is approximately 80% complete with regard to
Year 2000 remediation. To date, the Company has incurred about $0.5 million in
connection with such remediation, and anticipates additional costs of
approximately $100,000 to complete this work. All expenditures related to the
Year 2000 issue have been and likely will continue to be made from internally
generated funds.
The Company believes it has no material exposure to contingencies related to
the Year 2000 issue for products it has sold.
Management has assessed the most reasonably likely worst case Year 2000
scenario. Given its efforts to minimize the risk of Year 2000 failure by its
internal systems, the Company believes the worst case scenario would occur if
its primary telecommunications vendors and/or its electric supplier experiences
a
V-12
Year 2000 failure which results in an outage. The Company is in the process of
developing a contingency plan and anticipates having such a plan in place by the
third quarter of 1999.
While the Company believes that it has an effective program in place to
resolve the Year 2000 issue in a timely manner, there can be no assurance that
the failure of the Company or of the third parties with whom the Company
transacts business to adequately address their respective Year 2000 issues will
not have a material adverse affect on the Company's business, financial
condition, cash flows and results of operations.
PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, as amended, the Company is providing the
following cautionary statements identifying important factors, some of which are
beyond the Company's control, that in the past have caused or in the future
could cause the Company's actual results to differ materially from its
historical operating results and from those projected in any forward-looking
statements made by, or on behalf of, the Company.
GENERAL BUSINESS AND ECONOMIC CONDITIONS
General business and economic conditions have an impact on the Company's
financial results. The Company's customer base, which is largely retailers and
distributors for resale to retailers, may be impacted by weak economic
conditions and, as a result, may reduce their inventories of products purchased
from the Company. The Company's customers are not contractually required to make
future purchases of the Company's products and therefore could discontinue
carrying the Company's products in favor of a competitor's products or for any
other reason. The affinity of the public for Internet based sales and any
limitations of the Company's ability to cultivate such e-commerce, may also
affect the Company's financial results The Company's financial results could be
affected by the size and rate of growth of the consumer software market and
consumer PC market. The consumer software business is seasonal due primarily to
the increased demand for consumer software during the year-end holiday buying
season. General business and economic conditions and consumer confidence, both
domestically and internationally, may impact retail sales of consumer software.
Currency fluctuations associated with international sales and accounts
receivable may also affect the Company's financial results.
COMPETITION
The market for the Company's products is intensely and increasingly
competitive. Existing consumer software companies may broaden their product
lines to compete with the Company's products and potential new competitors,
including computer hardware and software manufacturers, diversified media
companies and book publishing companies, may enter or increase their focus on
the consumer software market, resulting in even greater competition for the
Company. There has been a consolidation among competitors in the market for the
Company's products, and many of the companies with which the Company currently
competes or may compete in the future have greater financial, technical,
marketing, sales and customer support resources, as well as greater name
recognition and better access to consumers, than the Company. Competition for
retail space has increased as retailers continue to focus on sales per square
foot of shelf space and other measures of product performance. The competition
for retail space is also likely to increase due to the proliferation of consumer
software products and companies.
DEPENDENCE ON RETAILERS AND DISTRIBUTORS
Retailers and distributors compete in a volatile industry that is subject to
rapid change, consolidation, financial difficulty and increasing competition
from new distribution channels. Due to increased competition for limited shelf
space, retailers and distributors are increasingly in a better position to
negotiate
V-13
favorable terms of sale, including price discounts, promotional support and
product return policies. The Company's financial results may be impacted by the
accuracy of retailers' forecasts of consumer demand, the timing of the receipt
of orders from major customers, account cancellations or delays in shipment,
competitors' marketing strategies and promotions, changes in pricing strategies
by the Company or its competitors and the collectibility of accounts receivable.
Furthermore, a significant portion of sales within a quarter is typically not
realized until late in that quarter. As a result, it may be difficult for the
Company to predict its net revenues for the quarter or to quickly adapt its
spending levels within a quarter to reflect changes in demand for its products.
UNCERTAINTY OF MARKET ACCEPTANCE; CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS
The consumer software industry is undergoing rapid changes, including
evolving industry standards, frequent product introductions and changes in
consumer requirements and preferences. Consumer preferences are difficult to
predict, and few consumer software products achieve sustained market acceptance.
The Company's financial results will be impacted by market acceptance of the
Company's products and those of its competitors, development and promotional
expenses relating to the introduction of new products, new versions of existing
products or new operating systems, and evolving distribution channels. The
growth in popularity of the Internet and other new technologies has impacted the
distribution and purchase of software and there can be no assurance that the
Company will utilize such new technologies in the most effective manner.
OTHER FACTORS
In addition to the important factors discussed above, the Company may be
impacted by, among other factors, future cash flow and working capital
requirements, the results of the stockholder vote on the merger with Activision,
the continued listing of the Company's Common Stock on the Nasdaq National
Market, the outcome of current and future examinations by taxing authorities,
and the acquisitions of new businesses by the Company and related charges and
write-offs. The market price of the Company's Common Stock has been, and in the
future will likely be, subject to significant fluctuations in response to
variations in quarterly operating results and other factors, such as
announcements of technological innovations or new products by the Company or its
competitors, or other events. The stock prices for many companies in the
technology sector have experienced wide fluctuations which often have been
unrelated to their operating performance. Such fluctuations may adversely affect
the market price of the Company's Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBIT 27.
Financial Data Schedule (EDGAR filing only).
(B) REPORTS ON FORM 8 K.
On January 15, 1999, the Company filed a report on Form 8-K in regard to its
announcement of a change in its auditing firm (Item 4).
On March 9, 1999, the Company filed a report on Form 8-K in regard to its
announcement of an Agreement and Plan of Merger dated as of March 3, 1999 by and
among Expert, Activision, Inc. and Expert Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Activision, Inc. The company also
reported signing an Amendment to a certain Shareholder Rights Agreement dated as
of November 9, 1995 between the Company and Bank of Boston N.A.. (Items 5, 7).
V-14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
EXPERT SOFTWARE, INC.
/s/ KENNETH P. CURRIER
---------------------------------------------
Kenneth P. Currier
Chief Executive Officer and
Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: May 14, 1999
V-15
EXPERT SOFTWARE, INC.
Dear Stockholder:
Please take note of the important information enclosed with this Proxy
Ballot. You are encouraged to read carefully the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your
right to vote your shares.
Please mark the boxes on the proxy card to indicate how your shares
shall be voted. Then sign the card, detach it and return your proxy vote in the
enclosed postage paid envelope.
Your vote must be received prior to the Special Meeting of Stockholders
to be held on Monday, June 21, 1999.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Kenneth P. Currier
Chief Executive Officer
- - - - - - - --------------------------------------------------------------------------------
Please Fold and Detach Here and Mail in the Envelope Provided
EXPERT SOFTWARE, INC.
PLEASE MARK YOUR VOTES AS INDICATED IN THIS EXAMPLE /X/
Please sign this Proxy exactly as your name appears on the books of the Company.
Joint owners should each sign personally. Trustees and other fiduciaries should
indicate the capacity in which they sign, and, where more than one name appears,
a majority must sign. If a corporation, the signature should be that of any
authorized officer, who should state his or her title.
1. To approve and adopt (i) the Agreement and Plan of Merger dated as of March
3, 1999 (as amended and restated on April 19, 1999), by and among Activision,
Inc., a Delaware corporation ("Activision"), Expert Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Activision ("Merger Sub"),
and the Company, pursuant to which, among other things, (a) Merger Sub will be
merged with and into the Company, which will continue as the surviving
corporation and become a wholly-owned subsidiary of Activision (the "Merger"),
and (b) each outstanding share of common stock, par value $.01 per share, of the
Company will be converted into the right to receive $2.65 and (ii) the Merger.
FOR AGAINST ABSTAIN
/ / / / / /
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENTS OR
POSTPONEMENTS THEREOF. A VOTE FOR PROPOSAL 1 IS RECOMMENDED BY THE BOARD OF
DIRECTORS. RECORD DATE SHARES: _______________
SIGNATURE DATE SIGNATURE DATE
--------------- -------- ------------------ ----------
PROXY EXPERT SOFTWARE, INC. PROXY
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MONDAY, JUNE 21, 1999
The undersigned, having received notice of the meeting and the proxy
statement therefor, and revoking all prior proxies, hereby appoint(s) Kenneth P.
Currier and Susan A. Currier, and each of them, attorney or attorneys of
the undersigned (with full power of substitution) for and in the name(s) of the
undersigned to attend the Special Meeting of Stockholders of Expert Software,
Inc. (the "Company"), to be held at The Arch Room, 800 Douglas Road, Coral
Gables, FL 33134 on Monday, June 21, 1999 at 10:00 a.m. and any adjourned or
postponed sessions thereof, and to vote and act upon the matters in respect of
all shares of stock of the Company that the undersigned will be entitled to vote
or act upon, with all powers the undersigned would possess if personally
present.
Attendance of the undersigned at the meeting or at any adjourned or
postponed sessions thereof will not be deemed to revoke this proxy unless the
undersigned shall affirmatively indicate at the meeting the intention of the
undersigned to vote said shares in person. If the undersigned is not the
registered direct holder of his or her shares, the undersigned must obtain
appropriate documentation from the registered holder in order to be able to vote
the shares in person. If the undersigned hold(s) any of the shares of the
Company in fiduciary, custodial or joint capacity or capacities, this proxy is
signed by the undersigned in every such capacity as well as individually.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED BY THE UNDERSIGNED STOCKHOLDER(S). IF NO DIRECTION IS
MADE, THE PROXIES SHALL VOTE "FOR" PROPOSAL 1.
This proxy is solicited on behalf of the Board of Directors of the Company.
PLEASE VOTE AND SIGN ON THE OTHER SIDE AND
RETURN PROMPTLY IN ENCLOSED ENVELOPE.