AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 2004
REGISTRATION NO. 333-115822
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MAJESCO HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 606-1529524
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
160 RARITAN CENTER PARKWAY
EDISON, NEW JERSEY 08837
(732) 225-8910
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAN E. CHASON
CHIEF FINANCIAL OFFICER
MAJESCO HOLDINGS INC.
160 RARITAN CENTER PARKWAY
EDISON, NEW JERSEY 08837
(732) 225-8910
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
FAITH L. CHARLES
MINTZ LEVIN COHN FERRIS
GLOVSKY AND POPEO, P.C.
CHRYSLER CENTER
666 THIRD AVENUE
NEW YORK, NY 10017
(212) 935-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 29, 2004
PROSPECTUS
MAJESCO HOLDINGS INC.
160 RARITAN CENTER PARKWAY
EDISON, NEW JERSEY 08837
(732) 225-8910
61,582,000 SHARES OF COMMON STOCK
Selling stockholders identified in this prospectus may sell up to 61,582,000
shares of common stock of Majesco Holdings Inc. This Prospectus covers the sale
of such shares from time to time by the selling stockholders. We will not
receive any proceeds from the sale of these shares.
Our common stock is quoted on the Over-the-Counter Bulletin Board under the
symbol "MJSH." On July 28, 2004, the last reported sale price of the common
stock was $2.87.
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INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is _______ __, 2004
TABLE OF CONTENTS
PAGE
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Prospectus Summary ...........................................................1
Risk Factors .................................................................3
Special Note Regarding Forward-Looking Statements; ...........................7
Use of Proceeds ..............................................................7
Market for Registrant's Common Equity and Related Stockholder Matters ........8
Selected Financial Data ......................................................9
Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................................11
Description of Business .....................................................19
Management ..................................................................31
Related Party Transactions ..................................................35
Principal Stockholders ......................................................36
Selling Stockholders ........................................................37
Plan of Distribution ........................................................41
Description of Capital Stock ................................................41
Legal Matters ...............................................................44
Experts .....................................................................44
Where You Can Find Additional Information ...................................45
Index to Financial Statements ..............................................F-1
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. This document may only be used where it is legal
to sell these securities. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock.
PROSPECTUS SUMMARY
This summary highlights the most important features of this offering and
the information contained elsewhere in this prospectus. You should read the
entire prospectus carefully, especially the risks of investing in our common
stock discussed under "Risk Factors".
MAJESCO HOLDINGS INC.
Majesco Holdings Inc., through its subsidiary Majesco Sales Inc., or MSI,
is a developer, publisher and distributor of interactive entertainment products
for Microsoft's Xbox(R) video game system, Sony PlayStation(R)2 computer
entertainment system, and Nintendo GameCube(TM) and Game Boy(R) Advance systems,
as well as the personal computer. The Company's 2004 lineup includes BloodRayne
2, the sequel to its popular action/horror series and the launch of its Game
Boy(R) Advance Video product line, which utilizes the Company's proprietary
video compression technology to enable consumers to view commercial-grade video
on a standard Nintendo Game Boy Advance system. Advent Rising, the first in a
trilogy of action/adventure games, will ship to stores in the first half of
2005. Our website address is www.majescogames.com. The information and other
content contained on our website is not incorporated by reference into this
prospectus.
THE OFFERING
Selling stockholders identified in this prospectus may sell up to
61,582,000 shares of our common stock, par value $0.001 per share. The selling
stockholders may sell their shares according to the plan of distribution
described on page 41 below. We will not receive any proceeds from the sale of
these shares. We will bear the expenses related to the registration of the
common stock.
The 61,582,000 shares of common stock being sold by the selling
stockholders include:
o 2,000,000 shares of common stock issued upon conversion of an
outstanding convertible note dated as of November 25, 2003;
o 25,830,000 shares of common stock issuable upon the conversion of 7%
convertible preferred stock that was issued in our private placement
completed on February 26, 2004;
o 25,830,000 shares of common stock issuable upon the exercise of
warrants having an exercise price of $1.00 per share that were issued
in our private placement completed on February 26, 2004;
o 1,000,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (500,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (500,000 shares), that were issued
to Jesse Sutton in exchange for previously outstanding indebtedness;
o 1,000,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (500,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (500,000 shares), that were issued
to Joseph Sutton in exchange for previously outstanding indebtedness; a
o 2,520,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (1,260,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (1,260,000 shares), as the
securities underlying the placement agent warrant to purchase units
that was issued to JMP Securities;
o 1,000,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (500,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (500,000 shares), as the
securities underlying the placement agent warrant to purchase units
that was issued to JMP Asset Management LLC as a portion of the
placement agent fee issued in connection with a private placement
completed on February 26, 2004;
o 1,840,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (920,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (920,000 shares), as the
securities underlying the placement agent warrant to purchase units
that was
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issued to Atlantis Equities, Inc. as a portion of the placement agent
fee issued in connection with a private placement completed on February
26, 2004;
o 302,000 shares of common stock issued to CEOcast, Inc. pursuant to a
consulting agreement, dated as of November 8, 2003;
o 160,000 shares of common stock issued to Hayden Communications, Inc.
pursuant to a consulting agreement, dated as of November 26, 2003; and
o 100,000 shares of common stock issued to Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. pursuant to a settlement agreement, dated as of
December 5, 2003.
Our symbol on the Over-the-Counter Bulletin Board is "MJSH." As of July 28,
2004 there were 81,000,572 shares of our common stock issued and outstanding.
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RISK FACTORS
Investing in our stock is highly speculative and risky. You should be able
to bear a complete loss of your investment. You should carefully consider the
risks described below as well as other information contained in this prospectus
before making an investment decision. Our business, financial condition or
results of operations could be materially adversely affected by any of these
risks. The trading price of our common stock could decline due to any of these
risks, and you may lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
FACTORS AFFECTING OUR BUSINESS CONDITION
The risks described below are those associated with our newly acquired
subsidiary, MSI. In addition to the other information and factors included in
this prospectus, the following factors should be considered in evaluating our
business and future prospects:
WE HAVE EXPERIENCED RECENT NET LOSSES AND WE MAY INCUR FUTURE LOSSES.
In fiscal years 2002 and 2003, we incurred net losses of $751,000 and
$10,841,000, respectively. We believe these net losses were principally related
to financing costs, litigation and impairment reserves. There can be no
assurances that we will not continue to experience net losses.
NON-CASH CHARGES TO OPERATIONS RESULTING FROM THE PRIVATE PLACEMENT MAY CAUSE
OUR STOCK TO BE LESS ATTRACTIVE TO INVESTORS AND/OR ADVERSELY AFFECT OUR
BUSINESS PROSPECTS.
In accordance with Emerging Issues Task Force Issue 00-19, or EITF 00-19,
"Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in, a Company's Own Stock", we have initially accounted for the fair
value of the warrants issued in the private placement as a liability until a
registration statement for the resale of the underlying shares of common stock
to be issued upon the conversion of the preferred stock and the exercise of the
warrants is declared effective. As of the closing date of the private placement,
the fair value of the warrants was approximately $21 million calculated
utilizing the Black-Scholes option pricing model. In addition, changes in the
market value of our common stock from the closing date through the effective
date of the registration statement will result in non-cash charges or credits to
operations to reflect the change in fair value of the warrants during this
period. At the effective date of the registration statement, the fair value of
the warrants will be reclassified to equity and, accordingly, the net effect of
the application of the EITF 00-19 would not be expected to have a material
impact on our financial position and our business. However, in the interim, the
effect of the EITF 00-19 will be to record an initial liability and then to
record non-cash charges or credits to our operating results to reflect the
change in the fair value. Accordingly, the accounting treatment may have a
negative impact on the way we are perceived by investors and by potential
customers and partners. Further, it may have an adverse effect on our stock
price and business prospects.
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, OR NASD, HAS CONDUCTED A REVIEW
OF CERTAIN UNUSUAL TRADING ACTIVITY IN OUR COMMON STOCK WHICH COINCIDES WITH THE
SIGNING OF THE LETTER OF INTENT WITH RESPECT TO THE MERGER, THE OUTCOME OF WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR REPUTATION, LISTING, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND LIQUIDITY.
On December 17, 2003 we received a letter from the NASD's Market Regulation
Department stating that the NASD was conducting a review of unusual trading
activity in our common stock between the time of the signing of the letter of
intent with respect to the Merger and the date that we announced that a letter
of intent was signed. There also appears to be unusual trading activity around
the time of the signing of the definitive agreement for the Merger and prior to
the announcement of such signing.
By letter dated April 22, 2004, the NASD indicated that it had concluded
its review and thanked us for our cooperation in the review. The letter
indicated that the NASD referred the matter to the SEC for whatever action, if
any, the SEC deems appropriate. The letter concluded that "This referral should
not be construed as indicating that any violations of the federal securities
laws or the NASD Conduct Rules have occurred, or as a reflection upon the merits
of the security involved or upon any person who effected transactions in such
security." If we are sanctioned or otherwise held liable for this trading, any
such sanctions could have a material adverse effect on our
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reputation, listing, financial condition, results of operations and liquidity.
In addition, it is possible that such matters may give rise to civil or criminal
actions.
OUR BUSINESS IS SEASONAL AND CYCLICAL WHICH MAY CAUSE OUR OPERATING RESULTS TO
FLUCTUATE, AND IF WE DO NOT PERFORM WELL IN PEAK SELLING SEASONS, OUR EARNINGS
COULD BE ADVERSELY IMPACTED.
Our business is highly seasonal, and fluctuates greatly on a quarterly
basis with the highest levels of consumer demand, and a significant percentage
of our revenue, occurring in the October through December calendar quarter. Our
net revenues for each fourth quarter of each of our last two fiscal years was
approximately one-third of each such year's revenues. The timing of hardware
platform introduction is often tied to the year-end holiday season and is not
within our control. In addition, if we miss this key selling period, due to
product or approval delays, delayed introduction of a new platform for which we
have developed products, shipping delays, weather or any other reason, our sales
will suffer disproportionately.
Our industry is also cyclical. Videogame platforms have historically had a
life cycle of four to six years. As one group of platforms is reaching the end
of its cycle and new platforms are emerging, consumers often defer game software
purchases until the new platforms are available, causing sales to decline. This
decline may not be offset by increased sales of products for the new platform.
Videogame products typically have market life spans of only three to 12
months. Our new products may not achieve and sustain market acceptance during
the short life cycle sufficient to generate revenue to recover our investment in
developing the products and to cover our other costs. Delays that prevent or
otherwise hinder the release of our products, especially during peak selling
seasons, will reduce lifetime sales of those products and our reputation in the
marketplace which could adversely affect our business and financial results.
CUSTOMER ACCOMMODATIONS COULD MATERIALLY ADVERSELY AFFECT OUR EARNINGS WHICH MAY
CAUSE A DECREASE IN OUR STOCK PRICE.
When demand for specific games falls below expectations, we sometimes
negotiate accommodations to retailers or distributors in order to maintain our
relationships with our customers and access to the distribution channels. These
accommodations include our not requiring that all booked orders be filled. We
also negotiate price discounts and credits against future orders with our
customers. The conditions our customers must meet to be granted price protection
or other allowances are, among other things, compliance with applicable payment
terms, delivery to us of weekly inventory and sell-through reports, and
participation in the launches of our premium title releases. When we offer price
protection, we offer it with respect to a particular product to all of our
retail customers, however, only those customers who meet the conditions detailed
above can avail themselves of such price protection. We also offer a 90-day
limited warranty to our end users that our products will be free from
manufacturing defects.
At the time of product shipment, we establish reserves, including reserves
under our policies for price protection and other allowances. These reserves are
established according to our estimates of the potential for markdown allowances
based upon historical rates, expected sales, retailer inventories of products
and other factors. Although we believe that the reserves that we have
established for customer accommodations are adequate, there is the possibility
that actual customer accommodations could exceed our reserves. The effect of
this would be a further reduction in our earnings. We cannot predict with
certainty the amount or nature of accommodations that will be provided to our
customers in the future.
INCREASED COMPETITION FOR LIMITED SHELF SPACE AND PROMOTIONAL SUPPORT FROM
RETAILERS COULD AFFECT THE SUCCESS OF OUR BUSINESS AND REQUIRE US TO INCUR
GREATER EXPENSES TO MARKET OUR PRODUCTS.
Retailers typically have limited shelf space and promotional resources to
support any one product among an increasing number of newly introduced
entertainment software products. Competition for retail shelf space is expected
to increase, which may require us to increase our marketing expenditures.
Competitors with more extensive lines, popular products and financial resources
frequently have greater bargaining power with retailers. Accordingly, we may not
be able to achieve or maintain the levels of support and shelf space that such
competitors receive. As a result, sales of our products may be less than
expected which would have a materially negative effect on our financial
condition, results of operations and future prospects.
OUR ACTIVITIES WILL REQUIRE ADDITIONAL FINANCING, WHICH MAY NOT BE OBTAINABLE ON
ACCEPTABLE TERMS, IF AT ALL.
As our business expands, we expect to increase our expenditures on sales,
marketing, licensing and product development efforts. Although there can be no
assurance, our management believes that there are sufficient
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capital resources from operations, including our factoring and purchase order
financing arrangements, and from funds received in our recently completed
private placement, to finance our operational requirements through October 31,
2004. If we incur operating losses, or if unforeseen events occur that would
require additional funding, we may need to raise additional capital or incur
debt to fund our operations. We would expect to seek such capital through sales
of additional equity or debt securities and/or loans from banks, but there can
be no assurance that such funds will be available to us on acceptable terms, if
at all, and any such sales of additional securities will be dilutive to
investors in this Offering. Failure to obtain such financing or obtaining it on
terms not favorable to us could have a material adverse effect on future
operating prospects and continued growth.
OUR PLATFORM LICENSORS ARE ALSO COMPETITORS AND FREQUENTLY CONTROL THE
MANUFACTURING AND ACCESS TO OUR VIDEOGAME PRODUCTS. IF THEY DO NOT APPROVE OUR
PRODUCTS, WE WILL BE UNABLE TO MAKE SALES OF OUR PRODUCTS.
Our intellectual property licenses generally require that we submit new
products developed under licenses for approval prior to release. In addition,
some of our hardware licensors, such as Sony for the PlayStation 2(TM),
Microsoft for the Xbox(TM) and Nintendo for the GameCube(TM) and Game Boy
Advance(TM)), are also competitors. While we believe our relationships with our
hardware licensors are positive, the potential for delay or refusal to approve
or support our products exists. Such occurrences would hurt our business and
have a material adverse impact on our financial performance and future growth
prospects.
IF WE ARE UNABLE TO MAINTAIN OR ACQUIRE LICENSES TO INTELLECTUAL PROPERTY, WE
WILL PUBLISH FEWER TITLES AND OUR REVENUE MAY DECLINE WHICH MAY CAUSE A DECREASE
IN OUR STOCK PRICE.
Although we continue to develop our own intellectual property, most of our
products are based on or incorporate intellectual property and other character
or story rights acquired or licensed from third parties. The license and
distribution agreements providing for these rights are generally limited in
scope (e.g., platform and geographic territory) and generally last for two to
three years. We cannot be certain that we will be able to obtain new licenses,
renew licenses when they expire or include new products in existing licenses. If
we are unable to obtain new licenses or maintain existing licenses which have
significant commercial value, or maintain such licenses at reasonable costs, we
will be unable to increase our revenue in the future other than through sales or
licensing of our independently created material. While we have generally been
able to renew expiring licenses on acceptable terms, we cannot be certain that
we will be able to do so in the future, and any failure in this regard, may have
a negative impact on our operating results.
IF WE DO NOT DEVELOP PRODUCTS FOR WIDELY ACCEPTED NEW VIDEOGAME PLATFORMS, OUR
BUSINESS WILL SUFFER.
We derive most of our revenue from the sale of products for play on
proprietary videogame platforms of third parties, such as Sony's PlayStation
2(TM), Microsoft's Xbox(TM) and Nintendo's GameCube(TM) and Game Boy(TM).
Therefore, the success of our products is driven in large part by the success of
new videogame hardware systems and our ability to accurately predict which
platforms will be most successful in the marketplace. Technology changes rapidly
in our industry, and if we fail to anticipate new technologies, the quality,
timeliness and competitiveness of our products will suffer. We must make product
development decisions and commit significant resources well in advance of the
anticipated introduction of a new platform. A new platform for which we are
developing products may be delayed, may not succeed or may have a shorter life
cycle than anticipated. If the platforms for which we are developing products
are not released when anticipated or do not attain wide market acceptance, our
revenue growth will suffer.
EVEN IF A NEW PLATFORM IS SUCCESSFUL, WE MUST CONTINUE TO DELIVER AND MARKET
PRODUCTS THAT ARE WIDELY ACCEPTED IN THE MARKETPLACE.
Even if we are able to accurately predict which videogame platforms will be
most successful, we must deliver and market videogames that are accepted in our
extremely competitive marketplace. Development and marketing efforts require
substantial investment of time, money, personnel and other resources that we
cannot be assured to ever recoup from our final products. In the event we are
not successful in developing, licensing, marketing or distributing videogames
that gain wide acceptance in the marketplace, our financial condition, results
of operations and future prospects could be materially negatively affected.
COMPETITION IN THE INTERACTIVE ENTERTAINMENT SOFTWARE INDUSTRY MAY LEAD TO
REDUCED SALES OF OUR PRODUCTS, REDUCED PROFITS AND REDUCED MARKET SHARE.
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Microsoft, Sony and Nintendo, currently the largest companies operating in
the entertainment hardware and software industry, have the financial resources
to withstand significant price competition and to implement extensive
advertising campaigns. Many of our other competitors also have far greater
financial, technical, personnel and other resources than we do, and many are
able to carry larger inventories and adopt more aggressive pricing policies.
Prolonged price competition or reduced operating margins could cause a
significant decrease in our profits. In addition, as competition for popular
properties increases, our cost of acquiring licenses for such properties may
increase, resulting in reduced profit margins. Prolonged price competition,
increased licensing costs or reduced profit margins would have a materially
negative effect on our financial condition, results of operations and future
prospects.
APPROXIMATELY 55% OF OUR SALES FOR THE YEAR ENDED OCTOBER 31, 2003 WERE
GENERATED FROM THREE (3) CUSTOMERS AND, ACCORDINGLY, THE LOSS OF ANY ONE SUCH
CUSTOMER COULD ADVERSELY AFFECT OUR SALES.
As of October 31, 2003, three customers, Toys "R" Us Inc., Best Buy Co., Inc.
and Jack of All Games Inc., a subsidiary of Take-Two Interactive Software Inc.,
accounted for approximately 55% of our sales. While this percentage is due in
part to a consolidation of the retail industry generally, and although we are
seeking to broaden our customer base, no assurance can be made that our efforts
will be successful or that these three customers will not continue to account
for a large concentration of our sales. The loss of one or more of these three
customers, or any other customer that accounts for a significant portion of our
sales, could materially adversely affect our business, operating results, and
financial condition.
OUR INTELLECTUAL PROPERTY IS VULNERABLE TO MISAPPROPRIATION AND THE EFFECTS OF
COMPETITIVE, NON-INFRINGING TECHNOLOGY.
We own or have rights to use proprietary technology that we believe affords
us a current competitive advantage. This technology is not, however, fully
protected from infringement by competitors or from the introduction of
non-infringing technologies. Our rights and the additional steps we have taken
to protect our intellectual property may not be adequate to deter
misappropriation, and our proprietary position remains subject to the risk that
our competitors or others will independently develop non-infringing technologies
substantially equivalent or superior to our technologies.
INTELLECTUAL PROPERTY CLAIMS MAY INCREASE OUR PRODUCT COSTS OR REQUIRE US TO
CEASE SELLING AFFECTED PRODUCTS WHICH COULD ADVERSELY AFFECT OUR EARNINGS AND
SALES.
Development of original content sometimes results in claims of intellectual
property infringement. Although we make reasonable efforts to ensure our
products do not violate the intellectual property rights of others, it is
possible that third parties still may allege such infringement. Such claims, or
litigation resulting therefrom, could require us to stop selling the affected
product(s), redesign such product(s) to avoid infringement and/or obtain a
license for future sales of such product(s). Any of the foregoing could have a
material adverse effect on our business, financial condition, results of
operations and future business prospects.
WE ARE CONTROLLED BY A SMALL NUMBER OF STOCKHOLDERS, SOME OF WHOM ARE KEY
MEMBERS OF OUR EXECUTIVE MANAGEMENT AND SUCH CONTROL COULD PREVENT THE TAKING OF
CERTAIN ACTIONS THAT MAY BE BENEFICIAL TO OTHER STOCKHOLDERS.
A significant portion of our voting securities are owned or controlled by
various members of the Sutton family. Although each member of the Sutton family
may vote their respective shares independently, due to their substantial
ownership of our voting securities, together they control the outcome of
substantially all matters submitted to a vote of our stockholders, including but
not limited to the selection of certain members to our Board of Directors and
the adoption of measures that could delay or prevent a change in control or
impede a merger, takeover or other business combination we may potentially be
involved in. Additionally, Morris Sutton is the Chairman of our Board of
Directors, Jesse Sutton, Morris' son, is our President and Chief Executive
Officer and a member of our Board and Joseph Sutton, Morris' son, is our
executive vice president of research and development and a member of our Board,
thereby also giving them substantial control over matters considered by the
officers and directors of the Company without approval of stockholders. Members
of the Sutton family collectively hold 48.3% of our outstanding voting
securities, all of which is subject to a lock-up agreement whereby these persons
may not sell or otherwise dispose of their securities until one year following
the effective date of this registration statement.
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ANTI-TAKEOVER PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW
COULD PREVENT A POTENTIAL ACQUIRER FROM BUYING YOUR STOCK AT A PRICE YOU DEEM
BENEFICIAL.
Anti-takeover provisions of Delaware law may make a change in control of
our company more difficult, even if a change in control would be beneficial to
our stockholders. These provisions may allow our board of directors to prevent
or make changes in the management and control of our company. Without any
further vote or action on the part of the stockholders, the board of directors
will have the authority to determine the price, rights, preferences, privileges
and restrictions of our preferred stock. This preferred stock may have
preference over and impair the rights of the holders of our common stock.
Although the ability to issue preferred stock may provide us with flexibility in
connection with possible investment acquisitions and other corporate purposes,
this issuance may make it more difficult for a third party to acquire a majority
of our outstanding voting stock. Similarly, our authorized but unissued common
stock is available for future issuance without stockholder approval.
OUR COMMON STOCK IS SUBJECT TO PENNY STOCK REGULATION, WHICH MAY LIMIT THE
LIQUIDITY OF OUR COMMON STOCK AND THE ABILITY OF OUR STOCKHOLDERS TO SELL
SHARES.
Our common stock is subject to regulations of the SEC relating to the
market for penny stocks. These regulations generally require that a disclosure
schedule explaining the penny stock market and the risks associated with the
penny stock market be delivered to purchasers of penny stocks and imposes
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them.
Accordingly, there can be no assurance that an active trading market in our
shares will be developed or sustained.
OUR COMMON STOCK IS THINLY TRADED, AND THE PUBLIC MARKET MAY PROVIDE LITTLE OR
NO LIQUIDITY FOR HOLDERS OF OUR COMMON STOCK.
There is currently a limited volume of trading in our common stock.
Consequently, holders of our common stock may find it difficult to find buyers
for their shares at prices quoted in the market, or at all.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements relate to future events or our
future financial performance and involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
these forward-looking statements. Those factors include, among other things,
those listed under "Risk Factors" and elsewhere in this prospectus. In some
cases, you can identify forward-looking statements by terminology such as "may,"
"will," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. Moreover, neither we nor any other person assumes
responsibility for the accuracy or completeness of these statements. We are
under no duty to update any of the forward-looking statements after the date of
this prospectus to conform these statements to actual results.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of common
stock by the selling stockholders.
We will bear the expenses of the registration of the shares of common stock
offered herein and estimate that these expenses will be approximately $300,000.
7
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Over-The-Counter Bulletin Board under the
symbol "MJSH". The market for the common stock has often been sporadic, volatile
and limited.
The following table shows the high and low sale prices for our common stock
as reported by the National Association of Securities Dealers Over-The-Counter
Bulletin Board during the past two fiscal years and current fiscal year and have
been adjusted, as appropriate, for the 1:10 split on March 12, 2002. The prices
reflect inter-dealer quotations, without retail markup, markdown or commissions
and may not represent actual transactions.
NOVEMBER 1, 2001 TO OCTOBER 31, 2002 HIGH LOW
----- -----
First Quarter $1.50 $ .30
Second Quarter $1.10 $ .26
Third Quarter $ .45 $ .15
Fourth Quarter $ .20 $ .12
NOVEMBER 1, 2002 TO OCTOBER 31, 2003
First Quarter $ .60 $ .15
Second Quarter $ .40 $ .25
Third Quarter $ .50 $ .25
Fourth Quarter $1.30 $ .30
NOVEMBER 1, 2003 TO JULY 28, 2004
First Quarter $2.08 $1.01
Second Quarter $4.48 $1.39
Third Quarter (May 1 through July 28, 2004) $4.90 $2.50
HOLDERS OF RECORD
On July 28, 2004, we had approximately 360 registered holders of record of
our common stock.
DIVIDENDS
We have never paid dividends on our common stock. Each share of our 7%
convertible preferred stock will be entitled to receive a 7% cumulative dividend
payable solely in shares of our common stock, on an annual basis. In addition,
the holders of the 7% convertible preferred stock shall be entitled to share in
any dividends paid on our common stock on an "as converted" basis. We do not
anticipate paying any dividends in the foreseeable future.
"PENNY STOCK" RULES
The bid price of our common stock has been below $5.00 per share, and
therefore, Rules 15g-1 through 15g-9 promulgated under the Securities Exchange
Act of 1934, as amended, impose sales practice and disclosure requirements on
NASD broker-dealers who make a market in a "penny stock." A penny stock
generally includes any non-NASDAQ equity security that has a market price of
less than $5.00 per share. The additional sales practice and disclosure
requirements imposed upon broker-dealers may discourage broker-dealers from
effecting transactions in our shares, which could severely limit the market
liquidity of the shares and impede the sale of our shares in the secondary
market.
8
SELECTED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data, which should be read in conjunction with our consolidated financial
statements and the notes thereto and with management's discussion and analysis
of financial condition and results of operations included elsewhere in this
prospectus. The selected consolidated financial data presented below as of and
for each of the fiscal years in the five year period ended October 31, 2003 are
derived from our audited consolidated financial statements. Our consolidated
financial statements for each of the fiscal years in the three-year period ended
October 31, 2003, and the auditors' report thereon, are included elsewhere in
this prospectus. The consolidated financial information for the six months ended
April 30, 2004 and 2003 is derived from our unaudited consolidated financial
statements. The unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements. On December
5, 2003, Majesco Holdings Inc. consummated a merger with MSI. As a result of the
merger, MSI became a wholly-owned subsidiary and the sole operating business of
the Company. All financial information presented reflects the results of MSI as
if MSI had acquired Majesco Holdings Inc. on December 5, 2003.
($ in thousands)
9
STATEMENTS OF OPERATIONS DATA
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
------------------------------------------------------------------ ------------------------
2003 2002 2001 2000 1999 2004 2003
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net revenues $ 46,608 $ 49,688 $ 60,566 $ 46,034 $ 58,153 $ 41,668 $ 27,144
Cost of sales 30,803 31,992 40,923 33,372 47,925 28,736 17,203
Operating expenses (1) 24,569 16,153 15,619 11,004 11,988 9,452 9,284
Interest and financing costs 2,077 2,093 2,702 1,483 3,117 1,302 1,077
Other (income) / expense (2) -- 201 1,215 (510) 49,629
Provision for income taxes 489
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income / (loss) $(10,841) $ (751) $ 107 $ 685 $ (4,877) $(47,940) $ (420)
========== ========== ========== ========== ========== ========== ==========
Net income (loss) attributable
to common stockhelders per share:
- Basic $ (0.71) $ (0.05) $ 0.01 $ 0.04 $ (0.32) $ (1.37) $ (0.03)
========== ========== ========== ========== ========== ========== ==========
- Diluted $ (0.71) $ (0.05) $ 0.01 $ 0.04 $ (0.32) $ (1.37) $ (0.03)
========== ========== ========== ========== ========== ========== ==========
Weighted average voting rights
outstanding:
- Basic 15,325,000 15,325,000 15,325,000 15,325,000 15,325,000 35,784,903 15,325,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
- Diluted 15,325,000 15,325,000 15,325,000 15,325,000 15,325,000 35,784,903 15,325,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA
OCTOBER 31, APRIL 30,
-------------------------------------------------------------- --------
2003 2002 2001 2000 1999 2004
--------------------------------------------------------------------------
Working capital / (deficiency) $(10,927) $ (2,717) $ 820 $ 710 $ 162 8,212
Total assets 17,611 14,216 13,825 15,290 16,126 27,041
Long-term debt 5,734 3,692 6,434 4,107 3,795 10
Warrant liability -- -- -- -- -- 69,935
Shareholders' equity / (deficiency) (15,730) (4,871) (3,746) (1,259) 198 (60,902)
(1) Operating expenses includes provisions for loss on impairment of software
development costs of $3.7 million and litigation and settlement costs of
$4.9 million (2003) and a charge for bad debts of $577,000 related to the
Kay-Bee Toys bankruptcy (six months ended April 30, 2004).
(2) Other (income) expense includes a loss on an abandoned equity offering of
$201,000 (2002), a provision for loss on an affiliate indebtedness of $1.2
million (2001) and a gain on the disposal of property of $510,000 (2000),
and MSI expenses related to the Merger of $342,000, an unrealized loss on
foreign exchange of $82,000 and $49.2 million non-cash charge related to
the change in fair value of warrants (six months ended April 30, 2004).
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
On December 5, 2003, the Company consummated a merger with Majesco Sales
Inc., or MSI, whereby CTTV Merger Corp., our wholly-owned subsidiary, merged
with and into MSI. As a result of the Merger, MSI became the Company's
wholly-owned subsidiary and sole operating business. On April 13, 2004, we
changed our name from "ConnectivCorp" to "Majesco Holdings Inc." to better
reflect our current operating business.
We are a developer, publisher and marketer of interactive entertainment
software and related accessories.
Our video game software covers a wide variety of genres such as
action/adventure, simulation, first person action and strategy. Our products are
targeted to a wide demographic, from children to active teens and the older,
mass-market consumer. We have released titles for all major videogame platforms
and handhelds, including Sony's PlayStation and PlayStation(R) 2, Nintendo's
N64, SNES, Game Boy(TM), Game Boy(TM) Color, Game Boy(TM) Advance and
GameCube(TM), Microsoft's Xbox(TM), Sega's Dreamcast, Genesis and Game Gear, and
the personal computer or PC. Additionally, we are a manufacturer of a number of
accessories licensed by Nintendo.
One of our strengths is our distribution and sales channels. Our products
are sold directly to major U.S. retail chains such as Wal-Mart, Target, Toys "R"
Us, Best Buy, Electronics Boutique and Gamestop. We also have relationships with
game rental outlets such as Blockbuster and Hollywood Video.
We maintain an international presence through our subsidiary in the UK. We
believe that many of our competitors generate significant portions of their
revenues from sales abroad and part of our growth strategy is to tap into the
expanding international markets. Currently, however, our products sold abroad
are done so through licensing arrangements with other publishers.
Our profitability is directly affected by the mix of revenues from our
publishing and distribution operations. Profit margins are substantially higher
from publishing but there is a higher degree of risk. Development/acquisition
costs and marketing expenses are the primary cost drivers and directly impact
the profitability of any given title. If the title is a highly successful "hit",
once these costs are recouped, economies of scale occurs as the incremental
sales produce greater profitability. Distribution is generally characterized as
lower profit as a result of lower risk.
Consistent with our business strategy, we will continue to develop and
bring to market proprietary, multi-platform videogames and related products, as
well as exploit our franchise titles, an example of which is BloodRayne.
Launched in October 2002, the title has generated major consumer interest
worldwide. In addition, we have sold the movie rights associated with the
BloodRayne title to Brightlight Pictures (Alone in the Dark, House of the Dead),
entered into a strategy guide deal with Prima Publishing, and licensed a comic
book series. We are also in discussions to develop an animated series featuring
the BloodRayne character, as well as collectible action figures and character
and logo-bearing merchandise based on the character. BloodRayne 2, a videogame
sequel, is currently in development and expected to be released in October 2004.
Another new proprietary videogame, scheduled for release in the first half of
2005, is Advent Rising, an epic science-fiction action game with dialogue
written by Hugo and Nebula award winning novelist, Orson Scott Card. The title
has already been selected as one of the Top Games of 2004 by Official Xbox(TM)
Magazine and garnered over 30 pages of print editorial (exposing it to well over
three million videogame enthusiasts) and numerous online plaudits.
Value priced products continue to remain a significant source of our
revenue. Historically, products priced below the manufacturer's suggested retail
price or MSRP of $20 made up the "value market" and Majesco has been a leading
publisher and distributor operating in this category. Targeted at the casual
gaming audience or impulse buyers, Majesco aims to acquire, license, or develop
mass-appeal titles that will perform well at lower prices. We
11
believe that products with MSRP's of $14.99 and even $9.99 Game Boy Advance
games will be attractive to customers. Furthermore, Majesco was the first
publisher of $9.99 MSRP PlayStation 2 titles, and has two new $19.99 titles
slated for Xbox in fall 2004.
Technological innovation, competition for retail shelf space and
recruitment of creative talent are considerations in the way we run our
business. To this end we have developed a proprietary compression technology
that will enable gamers to view color video and stereo audio on a standard
Nintendo Game Boy(TM) Advance System. Nintendo has granted the Company a license
to use our technology for the Game Boy Advance in the North American and
European markets, which have an installed base as of December 31, 2003 of 20
million and 10 million Game Boy Advance owners, respectively. The proprietary
technology enables consumers to view up to 45 minutes of video on a Game Boy(TM)
Advance using a standard Game Boy Advance cartridge. We expect to have the
capability to release cartridges that can contain up to 90 minutes of video,
including feature length content, by the middle of 2005. No other hardware
peripheral will be required and all the user will need to do is insert a regular
Game Boy Advance cartridge into the Game Boy(TM) Advance in order to turn it
into a personal video player. Licensing agreements have been signed with
Nickelodeon (SpongeBob SquarePants, Fairly OddParents, others), 4Kids
Entertainment (Yu-Gi-Oh!, Sonic X, others), Cartoon Network (Code Name: Kids
Next Door, PowerPuff Girls, others), DIC Entertainment (Strawberry Shortcake)
and we are negotiating for other content. We have implemented a large-scale
public relations effort that has resulted in positive editorial coverage in such
mass-market publications as Newsweek, TV Guide and the NY Times. In addition,
Nintendo has developed a large market campaign to support this new use for the
Game Boy Advance that will include TV, print, online and in-store tactics. The
product was launched at retail in May 2004. Additionally, we are the North
American manufacturer and distributor of the officially licensed Game Boy
Advance SP Neckband Style Headphones that was launched in conjunction with our
line-up of Game Boy Advance Video products. From a strategic perspective, the
launch of this new product line is anticipated to somewhat reduce the impact of
the seasonality of our sales cycle, as the spring/summer months have
traditionally been our slower months with respect to sales volume.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results could differ materially from these estimates under different
assumptions or conditions.
We have identified the policies below as critical of our business
operations and the understanding of our financial results. The impact and any
associated risks related to these policies on our business operations is
discussed throughout Management's Discussion and Analysis of Financial Condition
and Results of Operations where such policies affect our reported and expected
financial results. For a detailed discussion on the application of these and
other accounting policies see Note 1 to consolidated financial statements
included elsewhere in this prospectus.
RESERVES FOR PRICE PROTECTION AND OTHER ALLOWANCES. We principally derive
revenue from sales of packaged interactive software games designed for play on
videogame platforms (such as the PlayStation 2, Xbox and Nintendo GameCube) and
hand-held game devices (principally Nintendo Game Boy Advance). We generally
sell our products on a no-return basis, although in certain instances, we may
provide price protection or other allowances on certain unsold products in
accordance with industry practices. Price protection, when granted and
applicable, allows customers a credit against amounts they owe to us with
respect to merchandise unsold by them. Revenue is recognized net of estimates of
these allowances. Sales incentives and other consideration that represent costs
incurred by us for assets or services received, such as the appearance of our
products in a customer's national circular advertisement, are reflected as
selling and marketing expenses. We estimate potential future product price
protection and other discounts related to current period product revenue. We
analyze historical experience, current sell through of retailer inventory of our
products, current trends in the videogame market, the overall economy, changes
in customer demand and acceptance of our products and other related factors when
evaluating the adequacy of price protection and other allowances. However,
actual allowances granted could materially exceed our estimates as unsold
products in the distribution channels are exposed to rapid changes in consumer
preferences, market
12
conditions or technological obsolescence due to new platforms, product updates
or competing products. For example, the risk of requests for allowances may
increase as the PlayStation 2, Xbox and Nintendo GameCube consoles pass the
midpoint of their lifecycle and an increasing number of and aggregate amount of
competitive products heighten pricing and competitive pressures. While
management believes it can make reliable estimates regarding these matters,
these estimates are inherently subjective. Accordingly, if our estimates
changed, our reserves would change, which would impact the net revenues and/or
selling expenses we report. For the years ended October 31, 2003, 2002, and 2001
and for the six month periods ended April 30, 2004 and 2003, we provided
allowances for future price protection and other allowances of $5.2 million,
$13.1 million, $6.2 million, $1.4 million, and $3.0 million, respectively. The
fluctuations in the provisions reflected our estimates of future price
protection based on the factors discussed above. We do not have significant
exposure to credit risk as the factor generally buys our receivables without
recourse. However, during the six-month period ended April 30, 2004, we
recognized bad debt expense of $577,000 as a result of the Kay-Bee Toys' filing
for bankruptcy protection in January 2004 because sales to this customer could
not be factored.
SOFTWARE DEVELOPMENT COSTS AND INTELLECTUAL PROPERTY LICENSES. Software
development costs include milestone payments made to independent software
developers under development arrangements. Software development costs are
capitalized once technological feasibility of a product is established and such
costs are determined to be recoverable against future revenues. For products
where proven game engine technology exists, this may occur early in the
development cycle. Technological feasibility is evaluated on a
product-by-product basis. Amounts related to software development that are not
capitalized are charged immediately to development costs. Intellectual property
license costs represent license fees paid to intellectual property rights
holders for use of their trademarks or copyrights in the development of our
products.
Commencing upon the related product's release, capitalized software
development and property licenses costs are amortized to cost of sales based
upon the higher of (i) the contractual rate based on actual net product sales or
(ii) the ratio of current revenue to total projected revenue. The recoverability
of capitalized software development costs and intellectual property licenses is
evaluated based on the expected performance of the specific products for which
the costs relate. The following criteria are used to evaluate expected product
performance: historical performance of comparable products using comparable
technology; orders for the product prior to its release; and estimated
performance of a sequel product based on the performance of the product on which
the sequel is based. As of October 31, 2003, we charged operations $3.2 million
to write-off all capitalized costs related to the development of a videogame
that we had determined would not be commercially viable and for which
development was stopped. We also provided $500,000 to recognize impairments in
the carrying value originally capitalized in connection with recording the
minimum guaranteed payments for two licensed videogames for which orders
received were significantly below expectations.
RECENT ACCOUNTING PRONOUNCEMENTS. We do not believe that any recently issued,
but not yet effective accounting standards will have a material effect on the
our consolidated financial position, results of operations or cash flows.
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2004 VERSUS SIX MONTHS ENDED APRIL 30, 2003
Net revenues for the six months ended April 30, 2004 were $41.7 million
which represents an increase of 54% over net revenues of $27.1 million in the
same period in 2003. This increase is due to the higher unit volumes of Game Boy
Advance handheld titles, which accounted for 83% of total units sold, compared
to 44% in the six-month period in 2003. Also contributing to the increase in net
revenues was the initial release of five Game Boy Advance Video titles, which
utilizes our new proprietary compression technology and represented 5% of total
units sold in the six-month period ended April 30, 2004. The remaining 12% of
net revenues was generated by titles for the next generation console devices,
primarily "Blow Out" for Microsoft's X-Box.
Gross profit increased to $12.9 million in the six months ended April 30,
2004 from $9.9 million in the comparable six-month 2003 period, an increase of
30%. Gross profit as a percentage of net revenues decreased to 31% in the
six-month 2004 period from 37% in the comparable 2003 period. The shift in gross
profit as a percentage of net revenues is largely due to the higher mix of
"value priced" and "catalogue" Game Boy Advance handheld titles and lower profit
margins relating to initial sales of Game Boy Advance Video titles.
Manufacturing costs per
13
unit for handheld titles are generally higher than all other platforms. Although
there can be no assurances, we expect that gross margins will increase in later
quarters with the release of other Video titles having lower content acquisition
costs and new frontline console games which are sold at considerably higher
price points.
Product research and development costs for the six-month period ended April
30, 2004 were $1.3 million, an increase of 3% compared to $1.2 million in the
six-month period in 2003. The increase over the prior six-month period is due to
higher employee costs related to quality assurance in association with the
launch of Game Boy Advance Video.
Selling and marketing expenses consist mainly of fulfillment and shipping
expenses, advertising and other promotional expenses and related employee costs.
For the six-month period ended April 30, 2004, selling and marketing expenses
decreased to $5.0 million from $5.9 million in the comparable 2003 period. The
16% decrease is due to approximately $1.2million in lower promotion expense
(principally co-op advertising) related to frontline products, for which sales
declined in the current period. The savings in promotion costs was partially
offset by increased freight and fulfillment on the higher sales volumes related
to the Game Boy Advance products. Freight and fulfillment expense for the six
months ended April 30, 2004 was $816,000 compared to $487,000 for the comparable
2003 period. Selling and marketing expenses as a percentage of net revenues
decreased to 12% in the six-month period ended April 30, 2004 compared to 22% in
the same 2003 period.
General and administrative expenses primarily represent employee related
costs, including corporate executive and support staff, general office expenses,
professional fees and various other overhead charges. These expenses for the
six-month period ended April 30, 2004 were $2.9 million compared to $1.9 million
in the comparable 2003 period. The 56 % increase is due to a $577,000 charge for
bad debts as a result of the Kay-Bee Toys bankruptcy and the balance of the
increase is attributable to additional employee related costs, professional
fees, insurance and other costs incurred as a result of being a public company.
Depreciation expense for the six-month period ended April 30, 2004
increased to $187,000 from $178,000 in the same 2003 period due primarily to
office equipment purchases.
Operating income of $3.5 million for the six months ended April 30, 2004
improved $2.8 million, or 430% from $657,000 in the comparable six-month period
in 2003. As a percentage of net revenues, operating income increased to 8.4% in
the current year from 2.4% in the comparable period last year, offsetting the
erosion at the gross profit level. The increase in operating income is due to
favorable market acceptance to the Game Boy Advance products and the
introduction of Game Boy Advance Video, incorporating our new proprietary
compression technology. A shift in emphasis to drive the potential of this
platform also resulted in a reduction in marketing expenditures, which are
typically higher with console based platforms.
Interest expense and financing costs increased approximately 21% to $1.3
million in the six-month period ended April 30, 2004 from $1.1 million in the
same 2003 period as a result of increased volumes subject to purchase order
financing, offset by a reduction in financing rates.
An unrealized loss of approximately $82,000 relating to a foreign exchange
contract (see Note 6 to unaudited consolidated financial statements) was
recorded in the six-month period ended April 30, 2004. There was no
corresponding gain or loss in the same period last year.
Merger costs of approximately $342,000 were incurred by Majesco in the
first quarter of 2004 and consist primarily of professional fees and are
non-recurring.
In accordance with EITF 00-19, we recorded a non-cash charge of
approximately $49.2 million related to the warrants issued in the private
placement in the three-month period ended April 30, 2004. This non-cash charge
to earnings represents the difference in the fair value of the warrants at the
time of issuance of the warrants and at April 30, 2004 and was calculated using
the Black-Scholes option pricing model. At such time as the registration of the
underlying common stock becomes effective, the fair value of the warrant
liability will be reclassified to equity (see Note 7 to unaudited consolidated
financial statements).
A provision for income taxes of $489,000 was recorded in the six months
ended April 30, 2004. There was no provision in the comparable 2003 period as we
elected to be treated as an S Corporation under the Internal Revenue Code and as
a result, income taxes were the responsibility of the individual shareholders.
Effective November 1, 2003, we revoked our S-Corporation election.
14
For the six-month period ended April 30, 2004, we generated a net loss of
$47.9 million, principally as a result of the $49.2 million charge related to
the warrants in the private placement, as compared to a net loss of
approximately $420,000 in the prior year. Excluding the non-cash charge related
to EITF 00-19 we would have reported net income for the period of $1.3 million.
The net loss applicable to common stock for the six months ended April 30,
2004, of $49.0 million includes the net loss after taxes of $47.9 million and
the $759,000 non-cash charge related to a deemed dividend to the holders of the
7% convertible preferred stock and the $339,000 preferred stock dividend payable
in common stock. The deemed dividend represents the beneficial conversion
feature of the 7% preferred stock, after taking into account the value of the
warrants issued.
YEAR ENDED OCTOBER 31, 2003 VERSUS YEAR ENDED OCTOBER 31, 2002
Net revenues for the year ended October 31, 2003 decreased approximately $3.1
million or 6.2% from $49.7 million to $46.6 million in the prior year. The
overall decrease in net revenues in 2003 reflects the fewer number of new titles
launched from 19 in the prior year, including our franchise title BloodRayne, to
seven in 2003. Next generation video games (games for the Playstation2, X-Box,
GameCube platforms) represented 33.2% of total units sold, down from 34.8% for
the year ended October 31, 2002, while Game Boy Advance handheld titles
increased to 64.2% of total unit sales, up considerably from 30.4% in the prior
year. Older platform games continued to phase out representing only 2.6% of unit
sales in the year ended October 31, 2003 compared to 34.8% in 2002. Allowances
may be given to retailers in order to promote the sell through of frontline
titles. These allowances are estimated and recorded as a reduction of net
revenues at the time we record our sales. The lower mix of frontline titles in
the current period versus last year resulted in lower provisions for sales
allowances in this period. For the year ended October 31, 2003 these provisions
amounted to $5.2 million compared to $13.1 million for the year ended October
31, 2002.
Gross profit decreased 10.6% to $15.8 million for the year ended October
31, 2003 from $17.7 million in the comparable 2002 period. The $1.9 million
decrease is due to the lower sales volume coupled with an increase in the
percentage of sales related to value priced products to 90 % of total units in
2003 from 60% in 2002. Accordingly, gross profit as a percentage of net revenues
decreased from 36% in the year ended October 31, 2002 to 34% in the comparable
2003 period.
Product research and development costs decreased approximately $333,000, or
11.5%, to $2.5 million from $2.9 million in the comparable 2002 period. This
savings is the ongoing result of management's decision to become more cost
effective by utilizing the services of external development houses and in
certain instances product testing. By moving to this type of model, savings are
attained by maintaining a smaller staff resulting in lower employee and employee
related costs. Benefits of outsourcing the development of projects is that the
concentration of risk is somewhat mitigated due to the fact that the developer
must meet contractual milestones in order to receive fees. In this manner the
feasibility of a project can be evaluated as it progresses and affords
management the ability to act accordingly.
Selling and marketing expenses primarily include fulfillment and shipping
expenses, advertising and other promotional expenses as well as related
personnel costs. For the year ended October 31, 2003, selling and marketing
expenses increased 25.5%, or approximately $2.0, to $10.2 million from $8.2
million in the comparable 2002 period. Factors causing the increase in promotion
expenses are related to $1.4 million in media support we provided during the
2002 holiday season (first fiscal quarter 2003) for the retail release of
BloodRayne, and, approximately $500,000 of additional costs attributable to our
London office, which was in operation for a full year in the 2003 period
compared to a partial year in the 2002 period. Selling and marketing expenses
increased as a percentage of net revenues to 21.9% for the year ended October
31, 2003 from 16.4% in the comparable 2002 period.
General and administrative expenses primarily represent personnel,
including corporate executive and support staff, facilities and general office
costs, professional fees and various other overhead charges. These expenses for
the year ended October 31, 2003 decreased approximately $1.9 million, or 39.7%,
to $2.8 million from $4.7 million in the comparable 2002 period. The 2002 period
included approximately $1.3 million of professional fees including costs related
to the litigation settled in 2003 and $683,000 for salary and associated
expenses including severance for a former executive officer. Total general and
administrative expenses as a percentage of net revenues decreased to
15
6% for the year ended October 31, 2003 from 10% in the comparable 2002 period
due to the decrease in expenses partially offset by the impact of lower sales
generated in the current year.
Depreciation and amortization for the year ended October 31, 2003 and the
year ended October 31, 2002 remained relatively constant at approximately
$360,000.
Litigation and settlement costs of $4.9 million for the year ended October
31, 2003 relates to the Atari settlement ($4.3 million) and other litigation.
See Note 8 to the audited consolidated financial statements.
Loss on impairment of software development costs of $3.7 million for the
year ended October 31, 2003 represents amounts deemed unrecoverable from current
or future sales.
Interest expense and financing costs remained relatively constant in both
the years ended October 31, 2003 and October 31, 2002 at approximately $2.1
million.
The net loss for the year ended October 31, 2003 increased by $10.1 million
to $10.8 million as a result of the items discussed above.
YEAR ENDED OCTOBER 31, 2002 VERSUS YEAR ENDED OCTOBER 31, 2001
Net revenues for the year ended October 31, 2002 decreased approximately
$10.9 million, or 18%, from $60.6 million to $49.7 million. Although we were
able to release 19 new titles, including our franchise title BloodRayne in the
2002 period and an increase of six titles from the prior period, the total
quantity shipped declined 9% to 3.1 million units from 3.4 million units in 2001
and the average selling price declined to $18.88 from $19.11 in the 2001 period.
These shortfalls are due in part to the transition from older gaming platforms
in 2001 to the next generation platforms in 2002. Increased unit sales of next
generation titles (including Game Boy Advance) increased 16% to 2.1 million
units in 2002 from 950,000 in 2001 were offset by a 56% decrease in unit sales
of older platform titles to 1.1 million units in 2002 from 2.5 million units in
2001. Our entry into frontline product sales also required increased provisions
for sales allowances to promote sell-through at the retail level, which is
estimated and recorded as a reduction of net revenues at the time we record
sales. These provisions amounted to $13.1 million and $6.2 million for the years
ended October 31, 2002 and 2001, respectively.
Gross profit decreased 10.0% to $17.7 million for the year ended October
31, 2002 from $19.6 million in the comparable 2001 period due primarily to the
aforementioned decrease in sales volume and the increase in the provision for
sales allowances. Gross profit as a percentage of net revenues increased to 36%
in the year ended October 31, 2002 from 32% in the comparable 2001 period as a
result of higher margins related to frontline sales of our franchise title
BloodRayne.
Product research and development costs decreased approximately $397,000, or
12.0%, to $2.9 million from $3.3 million in the comparable 2001 period. This
savings is the result of management's decision to become more cost effective by
utilizing the services of external development houses. By moving to this type of
model, savings are attained by maintaining a smaller infrastructure, resulting
in lower employee and employee related costs. Beneficial to the outsourcing of
project development is that the concentration of risk is somewhat mitigated due
to the fact that the developer must meet contractual milestones in order to
receive fees. In this manner the feasibility of a project can be evaluated as it
progresses and affords management the ability to act accordingly.
Selling and marketing expenses primarily include fulfillment and shipping
expenses, advertising and other promotional expenses as well as related
personnel costs. For the year ended October 31, 2002, selling and marketing
expenses increased 42.5%, or approximately $2.5 million, to $8.2 million from
$5.7 million in the comparable 2001 period. The unfavorable variance was
principally due to the bolstering of our marketing efforts to support our new
lines of proprietary and licensed games, including new hires and other
promotional expenditures amounting to approximately $3.4 million. Offsetting was
a reduction in shipping and handling expenses of $1.0 million in 2002 from
2001as a result of the lower sales volume. Selling and marketing expenses
increased as a percentage of net revenues to 16.4% for the year ended October
31, 2002 from 9.5% in the comparable 2001 period.
16
General and administrative expenses primarily represent personnel,
including corporate executive and support staff, facilities and general office
costs, professional fees and various other overhead charges. These expenses for
the year ended October 31, 2002 decreased approximately $100,000 or 2.5%, to
$4.7 million from $4.9 million in the comparable 2001 period. The favorable
variance is the net effect of approximately $700,000 in savings due to the
closure of the California office offset by approximately $325,000 in additional
employee costs needed to build-up our infrastructure to enable us to transition
into a frontline publisher and approximately $450,000 in related professional
fees. Total general and administrative expenses as a percentage of net revenues
increased to 9.5% for the year ended October 31, 2002 from 8% in the comparable
2001 period due to the increase in expenses and the impact of lower sales in the
current year.
Depreciation and amortization for the year ended October 31, 2002 and the
year ended October 31, 2001 was $368,000 and $236,000, respectively, reflecting
the increased investment in equipment to support both research and development
and the administrative support staffs.
Other expenses in the 2002 period of $201,000 related to an abandoned
equity offering and for 2001 include $1.5 million for severance to former key
employees and the write-off of an uncollectible affiliate debt of $1.2 million.
Interest expense and financing costs was $2.1 million for the year ended
October 31, 2002 and $2.7 million for the year ended October 31, 2001. This
decrease reflects a lower level of indebtedness in 2002.
The net loss of $751,000 in the year ended October 31, 2002 versus income
of $107,000 for the prior year period is principally attributable to the lower
net revenues and the build-up of the infrastructure necessary to transition to a
frontline publisher.
LIQUIDITY AND CAPITAL RESOURCES
On February 26, 2004, we completed a private placement of units consisting
of preferred stock and warrants in which we raised approximately $25.8 million
in gross proceeds from a group of institutional and accredited investors. The
private placement resulted in net proceeds of approximately $21.4 million after
deducting the fees and other expenses related to the financing. In connection
with the private placement, the holders of the Series A preferred stock
surrendered an aggregate of 352,112 shares of their Series A preferred stock,
which were convertible into approximately 25,000,000 shares of common stock.
With respect to the warrants to purchase common stock issued in connection with
the private placement as a result of (i) the closing price of our common stock
being greater than $2.50 per share and (ii) the average daily trading volume was
greater than 75,000 shares for a 60 consecutive calendar day period which ended
on May 31, 2004, the warrants are eligible to be called by us for redemption
which redemption will not take effect until such time as a registration
statement for resale of the shares of common stock underlying the warrants has
been declared effective. If the warrants are called, and if they are exercised
for cash, we would receive gross proceeds of approximately $26.8 million. While
we are considering calling the warrants, there can be no assurance that we will
do so or that if we do call the warrants, that the warrant holders would
exercise their right to purchase the common stock.
We used $3.3 million of the net proceeds to pay certain creditors,
including $2.5 million for a previously negotiated settlement amount to Atari
Interactive, Inc. and approximately $2.5 million to repay portions of loans
previously made to us by two of our executive officers. In order to satisfy the
remaining balance of the loans previously provided by the two executive
officers, we agreed to issue to them, in the aggregate, 100 units. We will use
the remaining balance of the proceeds for working capital purposes.
In accordance with Emerging Issues Task Force Issue 00-19 ("EITF 00-19"),
Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in, a Company's Own Stock", we have initially accounted for the fair
value of the warrants as a liability until the above mentioned registration
statement is declared effective. As of the closing date of the private placement
the fair value of the warrants was approximately $21 million calculated
utilizing the Black-Scholes option pricing model. In addition, changes in the
market value of our common stock from the closing date through the effective
date of the registration statement will result in non-cash charges or credits to
operations to reflect the change in fair value of the warrants during this
period. (We recorded a charge to
17
operations of $49.2 million during the three months ended April 30, 2004 to
reflect the change in market value of the warrants). At the effective date, the
fair value of the warrants will be reclassified to equity and, accordingly, the
net effect of the application of the EITF would not be expected to have a
material impact on our financial position and our business.
In May 2004, we received a letter from a warrant holder making demand that
we repurchase for $1.75 million by June 21, 2004 warrants (issued by
ConnectivCorp prior to the Merger) to purchase an aggregate of 147,182 shares at
$.10 per share. Management does not believe that this put is a valid obligation
and intends to contest its validity. However, if this matter proceeds to
litigation there is no assurance that we will prevail and the cost of such
litigation could be significant.
In the opinion of management, upon the advice of counsel, we have made
adequate provision for potential liability, if any, arising from litigation and
other claims. However, the costs and other effects of pending or future
litigation, governmental investigations, legal and administrative cases and
proceedings (whether civil or criminal), settlements, judgments and
investigations, claims and changes in those matters, and developments or
assertions by or against us relating to intellectual property rights and
intellectual property licenses, could have a material adverse effect on the our
business, financial condition and operating results.
Although there can be no assurance, management believes that there are
sufficient capital resources from operations, including our factoring and
purchase order financing arrangements, and as a result of the proceeds received
in our private placement, to finance our operational requirements for the next
twelve months, including the funding of development, production, marketing and
the sale of new products, the purchases of equipment, and the acquisition of
intellectual property rights for future products. Although there can be no
assurances, we also may be able to obtain additional funds through the exercise
of the warrants sold in the private placement as discussed above. If we incur
operating losses, or if unforeseen events occur that would require additional
funding, we may need to raise additional capital or incur debt to fund our
operations. We would expect to seek such capital through sales of additional
equity or debt securities and/or loans from banks, but there can be no assurance
that such funds will be available to us on acceptable terms, if at all. Failure
to obtain such financing or obtaining it on terms not favorable to us could have
a material adverse effect on future operating prospects and continued growth.
CASH FLOWS
Cash was $1.7 million at April 30, 2004 compared to $744,000 at April 30,
2003. The proceeds from the private placement in February 2004 were principally
used to finance the conversion of the working capital deficiency of $10.9
million at October 30, 2003 into positive working capital of $8.3 million at
April 30, 2004.
For the six months ended April 30, 2004 approximately $16.1 million of cash
was used by operations. The usage of cash was attributable to the increase in
due from factor of $8.4 million reflecting higher receivables from customers net
of advances from the factor, decrease in advances from customers for prepayments
of $4.9 million due to fulfillment of related orders, increased development and
software costs of $5.3 million for games in progress as well as royalty advances
to content providers for GBA Video, increased prepaid expenses of $700,000
related to the Electronic Entertainment Expo ("E3") trade show held in May 2004,
decrease in accounts payable and accrued expenses of $800,000 and the $4.0
million payment of the settlement obligation. These uses of cash were partially
offset by a decrease in inventory of $6.3 million resulting from deliveries for
the 2003 holiday season.
During the year ended October 31, 2003, cash of $2.8 million was used by
operating activities to fund (i) the net loss of $10.8 million incurred in the
period, (ii) an increase in inventory of $8.3 million consisting primarily of
new titles to be launched in the first quarter of fiscal 2004, and (iii) an
increase in capitalized software development costs of $2.3 million related to
first quarter 2004 releases as well as games already in development for future
release. This usage of cash was partially offset by the decrease in advances
from customers of $7.5 million, as the result of the fulfillment of related
orders, and other net changes in working capital.
During the year ended October 31, 2002, $602,000 was provided by operating
activities principally as result of the decrease in inventory ($4.9 million)
offset by the net loss of $751,000 incurred in the period, the decrease in due
from factor of $1.7 million (reflecting higher advances received from the factor
as than the prior year), and
18
increases in software development costs and prepaid license fees of $2.9 million
attributable to scheduled 2003 releases and an increase in prepaid expenses of
$1.0 million attributable to prepaid media time buys, etc. related to the
BloodRayne release.
Cash used in investing activities during the six months ended April 30,
2004 and for the years ended October 31, 2003 and 2002 was related to purchases
of computer equipment of $95,000, $152,000, and $297,000, respectively.
Cash generated from financing activities for the six months ended April 30,
2004 was $17.7 million, which included the aforementioned $21.4 million in net
proceeds from the private placement and a loan from a related party of $1.0
million. The proceeds from the financings were used for working capital, the
repayment of borrowings from the finance company ($2.0 million) and $2.8 million
was used to repay loans from shareholders and an officer.
During the year ended October 31, 2003, $2.7 million was provided by
financing activities primarily as a result of loan proceeds from a finance
company (related to financing of inventory) and from shareholders of $2.6
million and $2.3 million, respectively, partially offset by the repayment of a
bank loan of $2.3 million.
During the year ended October 31, 2002, $284,000 was used for financing
activities to pay capital lease payments of $38,000 and a distribution to
stockholders of $374,000 partially offset from loan proceeds from finance
company of $183,000 and a loan from stockholders of $36,000.
We expect continued volatility in the use of cash due to the seasonality of
the business, receivable payment cycles and quarterly working capital needs to
finance our publishing business and growth objectives.
At April 30, 2004 we do not currently have any material commitments with
respect to leases and capital expenditures.
At April 30, 2004 we are committed under agreements with certain developers
for future milestone and license fee payments aggregating $3.2 million and $10.1
million, respectively, which are principally payable over the next two years.
At April 30, 2004 we had open letters of credit aggregating $14.3 million
under our purchase order assignment arrangement for inventory to be delivered
during the subsequent quarter.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including the changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from changes in market rates and prices. Foreign exchange contracts used
to hedge foreign currency exposure are subject to market risk. We do not enter
into derivatives or other financial instruments for trading or speculative
purposes. As of April 30, 2004, the Company has an outstanding foreign currency
forward exchange contract to exchange 2.4 million euros into $2.8 million which
expires March 31, 2005 and, accordingly, recorded as a liability (in accounts
payable and accrued expenses) the unrealized loss of $.1 million.
DESCRIPTION OF BUSINESS
OUR HISTORY
The Company was originally organized in the State of Delaware on May 8,
1998 as SMD Group, Inc. In January 1999, the name was changed to CDBeat.com,
Inc. As CDBeat.com, Inc., the Company's primary business was providing B2B
online marketing services geared toward the entertainment industry. Following
the Company's business combination with Cakewalk LLC, an independent record
company, in November 1999, the name was again changed to Spinrocket.com, Inc. On
September 11, 2000, we changed our name to ConnectivCorp, and prior to the
merger with Majesco Sales Inc., had ceased active operations and were exploring
various business opportunities. Effective upon the filing of an amendment to our
certificate of incorporation, which occurred on April 13, 2004, we changed our
name to "Majesco Holdings Inc." to better reflect our current operating
business.
19
THE MERGER
On December 5, 2003, we consummated a merger with MSI, a New Jersey
corporation, whereby CTTV Merger Corp., our wholly-owned subsidiary, merged with
and into MSI and we exchanged 15,325,000 shares of common stock and 925,000
shares of Series A convertible preferred stock for all of the issued and
outstanding common stock of MSI. The 925,000 shares of Series A convertible
preferred stock that were issued in the merger are convertible into 65,675,000
shares of common stock. As a result of the merger, MSI became our wholly-owned
subsidiary and our sole operating business. Subsequently and in connection with
the private placement, certain holders of the Series A convertible preferred
stock surrendered for cancellation 352,112 shares of Series A convertible
preferred stock that were convertible into approximately 25,000,000 million
shares of common stock. On April 23, 2004, the holders of all of the outstanding
Series A convertible preferred stock converted such shares into 40,675,048
shares of our common stock.
SUMMARY OF OUR CURRENT OPERATIONS
We are, by virtue of our wholly-owned subsidiary, MSI, a developer,
publisher and marketer of interactive entertainment software. MSI has released
titles for all major videogame platforms and handhelds, including Sony's
PlayStation and PlayStation(R) 2, Nintendo's N64, SNES, Game Boy(TM), Game
Boy(TM) Color, Game Boy(TM) Advance and GameCube(TM), Microsoft's Xbox(TM),
Sega's Dreamcast, Genesis and Game Gear, and the personal computer.
Additionally, MSI is a manufacturer of a number of accessories licensed by
Nintendo.
One of MSI's strengths is its distribution and sales channels. With over 19
years in the interactive entertainment industry, MSI has long standing
relationships with many U.S. retail chains including Wal-Mart, Target, Toys "R"
Us, Electronics Boutique, Gamestop, Best Buy and other national and regional
retailers. Additionally, Majesco has strong relationships with game rental
outlets such as Blockbuster and Hollywood Video. MSI has developed a
well-balanced portfolio of software ranging from its new line of Game Boy(TM)
Advance Videos to high profile proprietary and licensed properties to
value-priced games. This product strategy broadens our potential target
demographic, allows us to profit from different sectors of the market and
mitigates our overall risk.
MSI has developed a proprietary compression technology that will enable
gamers to view color video and stereo audio on a standard Nintendo Game Boy(TM)
Advance System. Nintendo has granted the Company a license to use our technology
for the Game Boy Advance in the North American and European markets, which have
an installed base of 20 million and 10 million Game Boy Advance owners
respectively. The proprietary technology enables consumers to view up to 45
minutes of video on a Game Boy(TM) Advance using a standard GBA cartridge. We
expect to have the capability to release cartridges that can contain up to 90
minutes of video, including feature length content by the middle of 2005. No
other hardware peripheral will be required and all the user will need to do is
insert a regular Game Boy(TM) Advance cartridge into the Game Boy(TM) Advance in
order to turn it into a personal video player. Licensing agreements have been
signed with Nickelodeon (SpongeBob, SquarePants, Fairly OddParents, others),
4Kids Entertainment (Yu-Gi-Oh!, Sonic X, others), Cartoon Network (Code Name:
Kids Next Door, PowerPuff Girls, others), DIC Entertainment (Strawberry
Shortcake) and we are negotiating for other content. We have implemented a
large-scale public relations effort that has resulted in positive editorial
coverage in such mass-market publications such as Newsweek, TV Guide and the NY
Times. In addition, Nintendo has developed a large marketing campaign to support
this new use for the Game Boy(TM) Advance that will include TV, print, online
and in-store tactics. The product was launched at retail in May 2004.
Additionally, MSI is the North American manufacturer and distributor of the
officially licensed Game Boy Advance SP Neckband Style Headphones that was
launched in conjunction with our line-up of Game Boy Advance Video products.
An example of our proprietary videogames includes the BloodRayne title.
Launched in October 2002, the title has generated major consumer interest and
worldwide retail sales of more than 600,000 units. In addition, we have sold the
movie rights associated with the BloodRayne title to Brightlight Pictures (Alone
in the Dark, House of the Dead), entered into a strategy guide deal with Prima
Publishing, and licensed a comic book series. In addition, a picture of
BloodRayne, which is also the name of the main character featured in the game,
recently graced the cover of Play magazine's special "Girls of Gaming" issue
(November 2003). We are also in discussions to develop an animated series
featuring the BloodRayne character, as well as collectible action figures, and
logo-bearing merchandise based on the character. BloodRayne 2 is currently in
development and expected to be released in October 2004.
20
A new proprietary videogame, also scheduled for release in the first half
of 2005, is Advent Rising, an epic science-fiction action game with dialogue
written by Hugo and Nebula award winning novelist, Orson Scott Card. The title
has already been selected as one of the Top Games of 2004 by Official Xbox(TM)
Magazine and garnered over 30 pages of print editorial (exposing it to well over
three million videogame enthusiasts) and numerous online plaudits.
MSI is one of the leading publishers of software for the Nintendo Game
Boy(TM) Advance and has established itself as one of the primary suppliers of
value-priced Game Boy Advance software to mass-market retailers. Additionally,
MSI was the first company to publish a Sony PlayStation 2 title at a $9.99 price
point.
Although MSI began its business primarily as a seller of overstock or
republished "value" videogames, it has shifted its focus and product mix
increasingly toward proprietary multi-platform video games and related products.
Another element in our growth strategy is to expand abroad. Our overseas sales
accounted for approximately 7% of our revenues in fiscal 2003. We believe that
many of our competitors generate significantly more of their revenues from sales
abroad. In 2001, we established Majesco Europe Limited, a wholly owned
subsidiary based in England, designed to help grow our overseas revenues.
BUSINESS EVOLUTION
Founded in 1986 as a specialty distributor, MSI initially focused on
acquiring and placing videogame overstock on behalf of the major worldwide
publishing companies. MSI was able to secure slow-moving or surplus inventory
from publishers at highly competitive prices, then place the stock with major
retailers at price points below normal retail prices.
During the early 1990s, MSI increasingly focused on republishing videogames
that had ceased production. MSI was then able to contact the publishers and
guarantee a minimum royalty to republish the game. Upon re-issuing a
discontinued game title, MSI would reduce the game to a value price, often
selling a game for as much as 50% below its original wholesale price. We believe
MSI's strength in the value software sector was enhanced by the growing
acceptance of entertainment software by the largest retailers in the U.S. as a
mass consumer market opportunity. By 1993, MSI was supplying substantial unit
volumes to such major retailers as Wal-Mart, K-Mart, Toys "R" Us and Target. In
many instances, MSI acted as a consolidator for software companies that did not
have sufficient volume or title count to effectively distribute them.
In 1997, MSI became an authorized manufacturer, publisher and distributor
of videogame hardware and software. Specifically, MSI acquired exclusive rights
to republish software for the SNES, Sega Genesis and the PICO Video Game System.
In addition, MSI acquired the exclusive rights from Sega to remanufacture the
Genesis game system and the Game Gear handheld system.
As a result of and following these developments, MSI began to evolve into a
fully integrated development, publishing and distribution business. Three
primary factors drove this business evolution:
1. Becoming a frontline publisher offered an opportunity for rapid growth,
increased profitability, brand recognition and the creation of value.
2. The changing format of storage medium from cartridge to CD for next
generation videogames represented a significantly larger market as well
as a decreased risk due to lower cost of goods and faster manufacturing
capability.
3. The availability of overstocked goods principally fluctuates with the
cyclical introductions of new hardware and software. By developing our
frontline publishing capabilities, we believed we could take advantage
of both sides of the business, thereby creating a more balanced product
mix.
In 1998, MSI created an in-house development studio. As a first project,
the studio focused on acquiring licenses of proven game titles from older
console or PC formats and converting them onto a variety of game platforms (a
process known as "porting"). MSI's first internally developed title, Tom
Clancy's Rainbow Six for the Dreamcast system (originally a PC game), garnered
widespread acclaim after its May 2000 launch and sold more than 200,000 copies
in its first four months. Another internally developed title based on a PC game,
Soldier of Fortune, has sold over 200,000 units.
21
As part of MSI's evolution from a specialty distributor to a publisher, MSI
enhanced its internal capabilities and systems and diversified its business
across several fronts:
o Revenue Mix - In fiscal 2003, new releases and catalog accounted for
84% of net revenues versus 16% in 1999.
o Product Mix - Since the beginning of our transition in 1999 through
October 31, 2003, MSI has published 61 different SKU's ranging from
multi-million dollar, multi-platform titles to licensed properties to
value priced software.
o Platforms - MSI produced games across five different platforms in 2003,
up from three platforms in 1999. MSI is also planning to produce games
for Nintendo's new DS system (DS) expected to be introduced in time for
the 2004 holiday season and Sony's new handheld system (PSP) that is
expected to be released in 2005.
o Personnel - In connection with its growth, MSI has added approximately
16 managerial members, with extensive industry backgrounds, to its
product development, marketing, sales and executive teams.
o Proprietary Intellectual Property (IP) - MSI has developed or acquired
eight proprietary titles and has exclusive "right of first refusal"
publishing rights to four other titles.
o Customers - Over the last five years, MSI has diversified sales among
its top retail accounts. MSI's top two customers comprised 78% of sales
in 1999 whereas MSI's top six customers comprise that same percentage
of sales in 2003.
INDUSTRY OPPORTUNITY
We believe the videogame industry is transitioning from a traditionally
niche market into a more broad-based form of entertainment. It has been one of
the few growing sub-sectors of the technology industry during the past three
years. According to the NPD Group, the market for videogame hardware and
software in the United States was over $10 billion in 2003. Worldwide hardware
and software sales are estimated by industry analysts to have surpassed $25
billion in 2003.
We believe the rapid growth of the videogame industry is explained by the
fact that gamers are older and have more disposable income. They have "grown up"
with games and identify with and readily accept interactive entertainment and
its ever-changing nature. According to the Entertainment Software Association
("ESA"), 54% of all American households have or plan to purchase one or more
games in 2004 and approximately 92% of people who purchase videogames are 18
years or older with an average age of 29 for game players. The first generation
of gamers that played as children are having children of their own and
introducing gaming as a form of family recreation. We believe the potential
audience for videogames has not reached the same state of maturity as other
forms of entertainment and has more room for growth.
In 2003, according to ESA, U.S. computer and video game software sales grew
8 % to $7 billion - a more than doubling of industry software sales since 1996.
U.S. publishers typically sell games within the United States and Europe.
Domestically, we believe the opportunity for existing companies is large. While
the top five publishers, according to Arcadia Investment Corp., own 52% of the
marketplace (on a revenue basis), the remaining publishers each own less than
6%. Only two companies have more than a 10% share of the market.
INDUSTRY OVERVIEW
The interactive entertainment industry is comprised of game hardware
manufacturers and videogame software publishers. Videogame software is played on
game hardware platforms, including home game consoles that connect to a
television set, self-contained handheld platforms and personal computers.
HARDWARE
Historically, a new generation of more powerful game consoles is introduced
to the market every four to five years. With each new generation of hardware, or
cycle, the customer base for videogame software expands. This is because gaming
enthusiasts mature and advances in videogame hardware and software technology
engages new participants, generating greater numbers of console units purchased
than the prior cycle. The beginning of each
22
cycle is largely dominated by console sales as consumers upgrade to the
next-generation technology. As the cycle matures, consumers' focus shifts to
software, resulting in a period of rapid growth for the videogame software
industry. The end of each cycle sees the "older" hardware systems and respective
software move to more value pricing levels.
The industry completed a transition from 32-bit and 64-bit home game
consoles to the new, more powerful generation of game consoles, with the release
of Sony's PlayStation(R) 2 in 2000 and the release of the Nintendo GameCube(TM)
and Microsoft Xbox(TM) in 2001. Similarly, the 32-bit Game Boy(TM) Advance,
introduced in 2001, has succeeded the 8-bit Game Boy(TM) Color handheld
platform.
For consoles, PlayStation(R) 2's early introduction helped establish it as
the leading hardware platform, with an installed base in North America of 22.3
million households in 2003, compared to 6.9 million and 7.8 million households
for GameCube(TM) and Xbox(TM), respectively, according to International Data
Group and the NPD Group. For handhelds, currently Nintendo is the major player
with a worldwide installed base of 40.3 million Game Boy(TM) Advance units and
is planning to launch a new handheld system, the DS, before the end of 2004.
Sony, however, recently announced their handheld entry, the PSP, that is
expected to launch in the first quarter of 2005.
SOFTWARE
Videogame software is created by the platform manufacturers (first parties)
and by many independent publishers/developers (third parties). Platform
manufacturers license publishers to publish games for their platforms and retain
a significant degree of control over the content, quality and manufacturing of
these games. They also receive a royalty for every piece of software
manufactured for their console. The publishers/developers, subject to the
approval of the platform manufacturers, determine the types of games they will
create, and either create them in-house, with their own development teams, or
outsource the development to an independent company.
Advances in microprocessors, graphics chips, hard-drive capacity, operating
systems and memory capacity have greatly enhanced the ability of the PC to serve
as a videogame platform. These technological advances have enabled developers to
introduce videogames for PCs with enhanced game play technology and superior
graphics. Although this market is not growing as quickly as the console and
handheld markets, the fact that publishers are not required to pay hardware
royalties and high manufacturing costs makes this an attractive market for
videogame publishers.
Software for game platforms is sold generally by mass merchandise retailers
such as Wal-Mart, Toys "R" Us, Best Buy and Target, or by regional
retailers, discount store chains, video rental retailers, software specialty
retailers and entertainment software distributors. Software publishers either
distribute their products directly to these retailers and/or sell them through
national distributors.
There are many participants in the videogame value chain - hardware
manufacturers, licensed content providers, developers, publishers, distributors
and retailers - each contributing to the creation and sale of a videogame. The
amount of compensation each of these participants receives varies greatly from
game to game in determining the cost of goods sold for these games. The gross
margin earned on a particular game by a publisher is thus a direct function of
which of these players are involved, their degree of involvement and the
compensation they require. For instance, producing a blockbuster movie licensed
title for multiple platforms is a different business model than producing a
value-priced Game Boy Advance title. Although many variables affect the outcome
of the profitability of a game, we believe the most important are: (1) game
platform, (2) content source, (3) level of marketing and (4) cost of
development.
GROWTH STRATEGY
Management is focused upon building MSI's position as a leading interactive
entertainment software publisher. To achieve this goal, we will seek to execute
the following strategies:
o INCREASE OUR COMMITMENT TO DEVELOPING AND MARKETING ORIGINAL,
MULTI-PLATFORM GAME TITLES, BASED ON CONTROLLED OR OWNED INTELLECTUAL
PROPERTY.
We will attempt to focus our game developing and publishing activities
principally on products that are, or have the potential to become, franchise
properties. These products can serve as the basis for sequels,
23
prequels and related new products in different mediums (such as television,
movies, books and comic books and related themed merchandise such as toys,
clothing and other items), which can be released over an extended period of
time. MSI focuses its efforts and resources on creating its own brands (IP's)
as well as actively pursuing properties to be licensed that have strong sales
potential.
o PURSUE TECHNOLOGY AND ACCESSORY OPPORTUNITIES WITH HIGH POTENTIAL
RETURN.
We endeavor to leverage our experience in, and knowledge of, the console
and handheld businesses, to create non-"game" products targeted to the
existing installed base of videogame consumers. For example, as a result of
our experience with developing products for the Game Boy(TM) Advance, we have
developed a proprietary compression technology that enables gamers to view up
to 90 minutes of color video and stereo audio on a standard Nintendo Game
Boy(TM) Advance System, thereby giving it added functionality as a portable
video player. Additionally, we intend to create a line of accessories for the
Game Boy(TM) Advance including headphones, a wireless link and wireless
instant messaging and non-traditional accessories that will give the unit
functionality. We have filed patent applications with respect to aspects of
the compression technology for the Game Boy(TM) Advance and plan to do so for
other accessory devices.
o FOCUS EFFORTS ON PUBLISHING A DIVERSIFIED MIX OF TITLES FOR THE MOST
COMMERCIALLY VIABLE GAME PLATFORMS, GENRES AND PRICE POINTS.
We intend to concentrate our efforts on publishing a diverse mix of product
offerings because it broadens our demographic market appeal, allows us to
profit from different sectors of the market and mitigates our overall risk.
We plan to develop and publish products across the most popular genres of
games and platforms and target audiences ranging from game enthusiasts to
mass-market consumers and "value priced" buyers. Currently, we develop,
publish and distribute products for Sony's PlayStation(R) 2, Microsoft's
Xbox(TM), and Nintendo's GameCube(TM) console systems and Nintendo's Game
Boy(TM) Advance hand held device and PCs. We strive to offer our products on
multiple platforms in order to leverage our costs of development, increasing
potential unit sales and profitability. We take a number of factors into
consideration when determining the appropriate platform, genre and price of
our products including platform user demographics, the potential growth of
the installed base of each platform, consumer trends and the competitive
landscape at the time of a product's release.
o SEEK OPPORTUNITIES TO SUPPORT, WHEN PROFITABLE, MATURE GAMING
PLATFORMS, OVERSTOCK AND REPUBLISHED PRODUCTS AT A VALUE PRICE POINT.
We will continue to actively pursue opportunities to acquire or create
products that appeal to the value segment of the market, an area of past
success for us. We are one of the leading providers of $14.99 Game Boy
Advance software and we believe we are well known in the industry for
providing large quantities of overstock at appealing prices. To this end, we
frequently have discussions with other leading third party publishers
regarding republishing and overstock opportunities as we seek to add to our
value priced title selections.
o EXPAND INTERNATIONAL PRESENCE BY MOVING TO A DIRECT PUBLISHING MODEL IN
EUROPE AND DEVELOPING LICENSING/DISTRIBUTION AGREEMENTS IN OTHER
TERRITORIES.
International markets represent a significant growth opportunity for us.
Currently, our products are published in Europe through licensing
arrangements with established European publishers. We intend eventually to
become a leading interactive software publisher in Europe in order to achieve
greater profitability, gain full brand exposure to consumers and more control
of the marketing process. To that end, we have established Majesco Europe
Limited, a wholly owned subsidiary based in England.
o GROW THROUGH STRATEGIC ACQUISITIONS AND RELATIONSHIPS.
We believe acquisitions of companies with strong development talent,
proprietary technologies or compelling intellectual properties will be a
critical component in achieving the necessary scale and resources to be a
leader in the industry. We intend to leverage strategic acquisitions and
relationships to augment our internal development capacity and technical
expertise, as well as to enhance our library of intellectual
24
properties, brands and titles. We are also actively pursuing long-term
strategic relationships with entertainment companies to secure license
agreements and/or co-publishing opportunities.
PRODUCT DEVELOPMENT
VIDEOGAME DEVELOPMENT
We develop videogames for console and handheld gaming platforms and PCs. We
seek to develop videogames that are enjoyable, captivating and encourage
repeated play. We take a cautious, but opportunistic "quality vs. quantity"
approach to building our product line and seek to publish games for genres,
price points and hardware platforms that have strong sales potential and nominal
risk.
Before publishing a game, the title must pass through our "green light"
process, which consists of extensive market research, studio due diligence and a
thorough profit and loss analysis. As a final requirement before being accepted
for publication, the title must be approved by the "green light" committee
(comprised of members from our executive, product development, sales and
marketing teams). Once a title is accepted, it is evaluated at regular
milestones to make sure it is progressing on time, according to specifications
and on budget. All members of the "green light" committee continue to be
involved throughout the development process.
Independent third party developers create the majority of our next
generation and original titles. However, we usually have broad rights to
commercially exploit these products. We select third parties to develop
videogames based on their capabilities, suitability, availability and cost.
Contracts with developers are structured to give them incentives to provide
timely and satisfactory performance of the development by associating payments
with performance of substantive development milestones, and by providing for the
payment of royalties to them based on sales of the product developed, only after
we recoup the prepaid amounts.
We are currently working with some of the industry's leading developers,
including Terminal Reality, Inc., HudsonSoft Co., Epic Games Inc. and GlyphX
Games LLC. We are often sought out as a publishing partner and are presented
with a number of projects and opportunities.
We are generally obligated to submit games to the platform manufacturers
(first parties) for approval prior to publishing a game for their platforms.
Additionally, prior to release, each product undergoes careful quality assurance
testing, which involves technical review of each component of the final product
and testing on the applicable platforms. We believe we have developed excellent
relationships with the platform manufacturers.
We endeavor to comply with the rules established by a domestic ratings
board voluntarily established by the videogame industry and some foreign
countries' ratings boards, and we label our products with these ratings. We
believe that ratings labels as to the violence contained in videogames will not
have an adverse effect upon us as long as ratings are consistently applied
throughout the industry.
In 1998, MSI founded an in-house development studio. As a first project,
the studio focused on acquiring licenses of proven game titles from older
console or PC formats and then converting them onto a variety of game platforms.
MSI's first internally developed title, Tom Clancy's Rainbow Six for the
Dreamcast system (originally a PC game), garnered widespread acclaim after its
May 2000 launch and sold more than 200,000 copies in its first four months at
retail. MSI is now capable of internally developing titles for the
consoles/handheld platforms and the PC thanks to this and other experiences.
MSI's familiarity and working knowledge of the process and tools involved
in game development have allowed it to accurately evaluate the work of its
external game developers and provide assistance to such external developers in
order to solve issues or expedite their development schedule.
GAME BOY ADVANCE VIDEO
MSI is one of the leading publishers of software for the Nintendo Game
Boy(TM) Advance. As a result of MSI's experience with developing games for this
platform, MSI has developed a proprietary compression technology that will
enable gamers to view color video and stereo audio on a standard Nintendo Game
Boy(TM) Advance System. Nintendo has officially licensed this technology for the
North American and European markets, which have an installed base of 20 million
and 10 million Game Boy Advance owners respectively. The proprietary technology
enables consumers to view up to 45 minutes of video on a Game Boy(TM) Advance
using a standard GBA cartridge.
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We expect to have the capability to release cartridges that can contain up to 90
minutes of video, including feature length content, by the middle of 2005. No
other hardware peripheral will be required and all the user will need to do is
insert a regular GBA cartridge into the Game Boy(TM) Advance in order to turn it
into a personal video player. Licensing agreements have been signed with both
Nickelodeon (SpongeBob SquarePants, Fairly OddParents, others) and 4Kids
Entertainment (Yu-Gi-Oh!, Sonic X, others) and we are negotiating for other
content.
GAME BOY ADVANCE ACCESSORIES
We also have launched two successful accessory products for the Nintendo
Game Boy(TM) Advance, "Light Boy" and "Arm Light", which have been licensed by
Nintendo, and will seek to continue making inroads in this category in the
future. For example, we have received approval from Nintendo to create licensed
headphones for the GBA SP and expect to ship them in conjunction with the launch
of our Game Boy Advance Video line of products. Additionally, we intend to
create a line of accessories for the Game Boy(TM) Advance, a wireless link and
wireless instant messaging as well as other accessories that are expected to
give Game Boy(TM) Advance non-traditional capabilities.
INTELLECTUAL PROPERTY
PLATFORM LICENSES
The major platform manufacturers require that publishers obtain a license
from them to publish games for play on their platforms. The Company currently
has non-exclusive licenses from Nintendo (GBA, GBC and GameCube(TM)), Sony
(PlayStation(R) and PlayStation(R) 2), Microsoft (Xbox(TM)) and Nokia
(N-Gage(TM)). Each platform manufacturer requires that the software and a
prototype of each title, together with all related artwork and documentation, be
submitted for its pre-publication approval. This approval is generally
discretionary.
INTELLECTUAL PROPERTY LICENSES
While we develop original titles, the majority of our games are licensed
from third party developers or based on trademarks and other rights and
properties owned by third parties. Typically, we are obligated to make minimum
guaranteed royalty payments over the term of these licenses and advance payment
against these guarantees. License agreements generally extend for a term of two
to three years and are terminable under a variety of events. Some licenses are
limited to specific territories or platforms.
We have secured the rights to exploit many major intellectual properties
and proven game franchises from leading publishers and licensors. Our titles
have included such recognizable names as Cartoon Network, Star Trek Voyager, Tom
Clancy's Rainbow Six, Pitfall, Monopoly, Frogger, Castlevania, Pac-Man, Q-Bert,
Disney's Hercules, Battlebots, King of the Cage and Tonka. Our management
believes it has strong relationships with major licensors including Disney,
Paramount, Time Warner, DC Comics, MTV and others.
ORIGINAL TITLES AND PROPRIETARY INTELLECTUAL PROPERTIES (IPS)
We own the intellectual property rights to Advent Rising, an epic
science-fiction action game with dialogue written by Hugo and Nebula award
winning novelist, Orson Scott Card, scheduled for release in 2005. The title has
been selected as one of the Top Games of 2004 by Official Xbox(TM) Magazine and
garnered over 30 pages of print editorial (exposing it to well over 3 million
videogame enthusiasts) and numerous online plaudits. Advent Rising also has been
placed on Microsoft's "watch list" of highly anticipated new releases.
Launched in October 2002, BloodRayne has generated major consumer interest
and worldwide retail sell-in of more than 600,000 units. As a testament to the
popularity of the franchise, we have sold the movie rights associated with the
BloodRayne title to Brightlight Pictures (Alone in the Dark, House of the Dead),
entered into a strategy guide deal with Prima Publishing, and licensed custom
controller rights. In addition, a picture of BloodRayne, which is also the name
of the main character featured in the game, recently graced the cover of Play
magazine's special "Girls of Gaming" issue (November 2003). We are also in
negotiations to develop BloodRayne into an animated series, collectible action
figures, novels, comic books and jewelry. BloodRayne 2 is currently in
development and expected to be released in October 2004.
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Additional original titles Majesco owns intellectual property rights to are
BlowOut, Iridion, Boy and his Blob, Fortress and Picassio.
We have filed patent applications with respect to aspects of the
compression technology for the Game Boy(TM) Advance. There is no assurance that
such applications will be approved or, if approved, provide significant
protection.
MANUFACTURING
We prepare a set of master disks, documentation and packaging materials for
our products for each respective hardware platform on which the product will be
released. Disk duplication, packaging, printing, manufacturing, warehousing,
assembly and shipping are performed by third parties in order to maintain
protection over their hardware technologies, Sony and Nintendo generally specify
or control the manufacturing and assembly of finished products. We deliver the
master materials to the licensor or its approved replicator, which then
manufactures finished goods and delivers them to us for distribution under our
label. At the time our product unit orders are filled by the manufacturer, we
become responsible for the costs of manufacturing, including their applicable
per unit royalty on such units, even if the units do not ultimately sell.
Initial orders generally require seven to 40 days to manufacture depending
on the platform. Reorders of disc-based products generally require only seven to
14 days for manufacturing, while reorders of cartridge-based products require
approximately 30 to 40 days to manufacture. Shipping of orders requires an
additional three to ten days, depending on the mode of transport and location of
the manufacturer. Only the Nintendo Game Boy(TM) Advance uses cartridges, while
the next generation home consoles are all disc-based.
We participate in the electronic data interchange (EDI) program maintained
by most of our large customers. We generally fill re-orders from inventory
within two days. As a result, our videogames traditionally have no backlog of
orders.
To date, we have not experienced any material difficulties or delays in the
manufacture and assembly of our products or material returns due to product
defects.
DOMESTIC SALES AND DISTRIBUTION
WE BELIEVE WE HAVE EFFECTIVE DISTRIBUTION CHANNELS. WE DISTRIBUTE OUR PRODUCTS
DOMESTICALLY THROUGH BOTH DIRECT AND INDIRECT CHANNELS.
o Direct - We believe our sales team has strong relationships with major
retailers and communicates with them frequently. The sales team is led by
Morris Sutton, our Chairman and the founder of Majesco, who manages our
sales representatives and personally handles a number of key accounts.
o Indirect - We currently utilize seven sales representative organizations
located throughout the United States. The firms we use were chosen based on
their performance and retailer relationships. On average, two sales
representatives per organization are assigned to our account. It is
customary for the sales representatives and distributors of our games who
are assigned specific customers to also distribute games produced by other
manufacturers. Distribution channels are dominated by a select group of
companies, and a publisher's access to retail shelf space is a significant
competitive factor.
OUR PRINCIPAL CUSTOMERS ARE:
o National and regional retailers
o Video rental retailers
o Entertainment software distributors and re-sellers
We believe we have enjoyed close relationships with key executives and
buyers of a number of retailers including Wal-Mart, Target, Toys "R" Us, Best
Buy, Electronics Boutique and Game Stop. Over the last five years, MSI has
diversified sales among our top retail accounts. MSI's
27
top two customers comprised 78% of sales in 1999 whereas MSI's top six customers
comprised the same percentage of sales in 2003.
MARKETING
Marketing programs principally support our premium priced publishing
efforts. Our marketing objectives are to create strong brands and franchise
properties, support sell-in to retail and drive sell-through to consumers. As
each of our games has different features, benefits and target markets, we
develop marketing programs for each title on an individual basis. The amount of
support a title receives is directly related to its perceived "hit," or sales,
potential. While all titles will be supported in some way, those with the most
potential will have long lead (12 months or longer), multi-faceted, tactical
marketing programs designed to generate enthusiasm and support long before being
shipped to retail.
Specific consumer marketing strategies we may employ include TV, radio
and/or print advertising, web site, online marketing, demo distribution,
promotions (and cross-promotions with third parties) and point-of-purchase
advertising. Additionally, central to a marketing campaign are customized public
relations programs designed to create awareness with all relevant audiences,
including core gamers and mass entertainment consumers.
To date, public relations efforts have resulted in continuing coverage for
the company and individual titles in the all-important computer and video gaming
publications, as well as major consumer newspapers, magazines and broadcast
outlets, such as The New York Times, USA Today, Entertainment Weekly, Maxim,
Playboy, Newsweek and CNN, among others. We also host media events throughout
the year at which print, broadcast and online journalists can preview, review
and demonstrate our products prior to their release.
In addition to regular face-to-face meetings and communication with our
sales force, we employ extensive trade marketing efforts including direct
marketing to buyers and store managers, trade shows (Electronic Entertainment
Exposition, CES, Interactive Entertainment Merchant Association Show, the
Licensing Show, etc.), premium distribution and sales incentive programs.
INTERNATIONAL OPPORTUNITY
We have historically focused our efforts and resources on established
domestic markets. Over the last two years, we have expanded our international
presence by establishing licensing and/or distribution agreements with leading
international publishers. These established pan-European organizations fulfill
all sales, marketing and distribution needs for our multi-format product line-up
in the European marketplace. We believe this strategy has enabled us to take a
conservative approach to the international market, allowing us to develop our
brands and build knowledge and relationships, while enjoying revenue-generating
capabilities with limited risk. Similar licensing/distribution deals are being
considered for other continents.
As part of this initiative, we have opened an office in the UK. Since its
inception in 2001, Majesco Europe has been responsible for securing and managing
commercial deals with THQ Inc., The Codemasters Software Company Limited and
Vivendi Universal Games International and has to date generated retail revenue
in excess of $55 million.
o Vivendi published BloodRayne, eight other titles throughout Europe and Asia.
o THQ distributed 10 Game Boy Advance titles.
o Codemasters published Star Trek Voyager and Soldier of Fortune.
The current European management infrastructure is responsible for
converting all US products from the NTSC format to the European PAL format,
localizing documentation, managing all European strategic and tactical marketing
with our publishing partners and sourcing and acquiring new titles.
We seek to become a leading stand-alone interactive software publisher in
Europe. Benefits of the direct publishing model include greater revenue
opportunities, full brand exposure to consumers and greater control of the
marketing process. To illustrate what we believe to be our international growth
potential, we derived 7% of our revenue from international markets in 2003. On
average, however, we believe most interactive entertainment publishers realize
significantly more of their revenue from international distribution.
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COMPETITION
Our ability to compete is based on our ability to:
o Select and develop popular titles
o Identify and obtain rights to commercially marketable intellectual
properties
o Adapt products for use with new technologies
Successful competition in our market is also based on:
o Price
o Access to retail shelf space
o Product quality
o Product enhancements
o Brand recognition
o Marketing support
o Access to distribution channels
Our competitors vary in size from small companies to large corporations,
including the manufacturers of the hardware platforms. We must obtain a license
from and compete with the hardware platform manufacturers in order to develop
and sell titles for their respective hardware platforms, with each such
manufacturer typically being the largest publisher and seller of software
products for its own hardware platforms. As a result of their commanding
positions in the interactive entertainment industry as the manufacturers of
hardware platforms and publishers of titles for their own hardware platforms,
these manufacturers generally have better bargaining positions with respect to
retail pricing, shelf space and purchasing than do any of their licensees.
In addition to the hardware platform manufacturers, we compete with other
interactive entertainment software companies. Significant competitors include
Acclaim Entertainment, Inc., Activision, Inc., Capcom USA, Inc., Eidos PLC,
Electronic Arts Inc., Infogrames Entertainment SA., Konami Corporation of
America, Inc., Midway Games Inc., Namco Ltd., Sega Enterprises, Inc. (USA),
Take-Two Interactive Software, Inc., THQ, Inc., Ubi Soft Entertainment and
Vivendi Universal S.A. Many of these competitors are large corporations that
have significantly greater financial, marketing, personnel and product
development resources than us. Due to these greater resources, certain of these
competitors are able to undertake more extensive marketing campaigns, adopt more
aggressive pricing policies, pay higher fees to licensors of desirable motion
picture, television, sports and character properties and pay more to third-party
software developers than we can. Accordingly, we may not be able to achieve the
levels of support and shelf space that such competitors receive. Similarly, as
competition for popular properties increases, our cost of acquiring licenses for
such properties is likely to increase, possibly resulting in reduced margins.
Furthermore, we face additional competition from the entry of new companies
into the market, including large diversified entertainment companies, toy
companies, large software companies, movie studios, and others.
LEGAL PROCEEDINGS
We are currently party to certain material, threatened and pending legal
proceedings as briefly described below:
1. ATARI INTERACTIVE, INC. (FORMERLY KNOWN AS INFOGRAMES INTERACTIVE,
INC.) In August 2003, the US District Court of Massachusetts in Infogrames
Interactive, Inc. v. Majesco Sales Inc. entered judgment against MSI in the
approximate amount of $6.7 million pursuant to an action for a breach of a
license and distribution agreement. As previously disclosed in our public
filings, we entered into a settlement
29
agreement with Atari and as of May 11, 2004, had paid $4.0 million pursuant to
the terms of such settlement agreement. On May 11, 2004, Atari agreed to release
us from the obligations ($2.7 million and accrued interest) and restrictions
contained in the settlement agreement and terminate such agreement in exchange
for a one-time payment of $1.5 million. The $1.5 million was paid on May 21,
2004.
2. RAGE GAMES LIMITED V. MAJESCO SALES INC. On September 20, 2002, Rage
Games Limited ("Rage") filed a complaint against MSI in the United States
District Court for the District of New Jersey. MSI filed and served its Answer
on or about November 6, 2002 (Rage Games Limited is currently in bankruptcy
proceedings and is no longer doing business in the ordinary course).
All five counts in the complaint arise out of two License and Distribution
Agreements between Rage and MSI. Count One alleges breach by MSI of the first of
the two agreements; Count Two alleges breach of the second agreement. Count
Three alleges claims based on an unjust enrichment theory. Count Four asserts a
right to relief on the basis of promissory estoppel. Count Five asserts a claim
on an anticipatory repudiation theory. Rage seeks approximately $6 million in
damages.
MSI asserts substantial defenses that the product was not fit for use.
MSI's Answer included three counterclaims. The First and Second Counterclaim
assert claims for damages arising out of Rage's breach of the first agreement,
and the Third Counterclaim seeks damages for unjust enrichment in connection
with the second agreement.
By order dated July 15, 2004, Chief Judge Bissel granted MSI a partial
summary judgment as to the advances of $77,500 paid for three titles that never
received platform approval. The Court denied the plaintiff's motion for partial
summary judgment as well as the MSI's motion for partial summary judgment as to
its remaining claims. A trial date has not been set.
In the opinion of management and on the advice of counsel, the Company has
made adequate provision for potential liabilities, if any, arising from the
above matters. However, the costs and other effects of pending or future
litigation, governmental investigations, legal and administrative cases and
proceedings (whether civil or criminal), settlements, judgments and
investigations, claims and changes in those matters (including those matters
described above), and developments or assertions by or against the Company
relating to intellectual property rights and intellectual property licenses,
could have a material adverse effect on the Company's business, financial
condition and operating results.
3. NATIONAL ASSOCIATION OF SECURITIES DEALERS REVIEW. On December 17,
2003 we received a letter from the NASD's Market Regulation Department stating
that the NASD was conducting a review of unusual trading activity in our common
stock between the time of the signing of the letter of intent with respect to
the Merger and the date that we announced that a letter of intent was signed.
There also appears to be unusual trading activity around the time of the signing
of the definitive agreement for the Merger and prior to the announcement of such
signing.
By letter dated April 22, 2004, the NASD indicated that it had concluded
its review and thanked us for our cooperation in the review. The letter
indicated that the NASD referred the matter to the SEC for action, if any, the
SEC deems appropriate. The letter concluded that "This referral should not be
construed as indicating that any violations of the federal securities laws or
the NASD Conduct Rules have occurred, or as a reflection upon the merits of the
security involved or upon any person who effected transactions in such
security." If the Company is sanctioned or otherwise held liable for this
trading any such sanctions could have a material adverse effect on the Company's
reputation, listing, financial condition, results of operations and liquidity.
In addition, it is possible that such matters may give rise to civil or criminal
actions.
PROPERTIES
We lease 21,250 square feet of office, development and storage space
located at 160 Raritan Center Parkway, Edison, NJ 08837. The lease, which costs
approximately $28,500 per month (plus taxes, insurance and operating costs),
expires in July 2009.
We also lease 1,082 square feet of office space located at 39 Newhall
Street, Birmingham, UK. This lease costs approximately $3,600 per month and
expires in September 2004.
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EMPLOYEES
We have 66 full time employees. We have not experienced any work stoppages
and consider our relations with our employees to be good. We currently do not
have any formal written employment contracts with any of our employees.
MANAGEMENT
OUR BOARD OF DIRECTORS
NAME AGE POSITION
---- --- --------
Morris Sutton 65 Chairman of the Board
Jesse Sutton 34 Director, Chief Executive Officer and President
Joseph Sutton 32 Director, Executive Vice President of Research
and Development
Louis Lipschitz 59 Director
Marc Weisman 51 Director
MORRIS SUTTON / CHAIRMAN OF THE BOARD. Morris Sutton has been Chairman
since December 5, 2003. Mr. Sutton has more than 40 years of business experience
and most recently, was the founder of MSI, our sole operating company and
wholly-owned subsidiary, and, prior to the merger, was MSI's Chief Executive
Officer from 1986 to December 2003. Morris Sutton is the father of Jesse Sutton
and Joseph Sutton. From 1998 to 2001, Mr. Sutton was the Chairman of Majesco
Biologicals, Inc., a biotechnology development company, which ceased all
operations in 2001 pursuant to an assignment for the benefit of creditors.
JESSE SUTTON / CHIEF EXECUTIVE OFFICER & PRESIDENT / MEMBER OF THE BOARD.
Jesse Sutton has served as one of our directors since December 5, 2003. Mr.
Sutton is currently our Chief Executive Officer and President and has served in
such capacity since December 2003. Mr. Sutton has been the President of our
current wholly-owned subsidiary since 1997 and became its Chief Executive
Officer in December 2003. Jesse Sutton is Morris Sutton's son and Joseph
Sutton's brother. From 1998 to 2001, Mr. Sutton was the President of Majesco
Biologicals, Inc., a biotechnology development company, which ceased all
operations in 2001 pursuant to an assignment for the benefit of creditors.
JOSEPH SUTTON / EXECUTIVE VICE PRESIDENT OF RESEARCH AND DEVELOPMENT /
MEMBER OF THE BOARD. Joseph Sutton has served as one of our directors since
December 5, 2003. Mr. Sutton is currently our Executive Vice President of
Research and Development and has served in such capacity since December 2003.
From 1997 to October 2000 Mr. Sutton was a Vice-President of MSI; from October
2000 through September 2003 he was Vice President-Game Development of MSI and in
December 2003 he became MSI's Executive Vice President of Research and
Development. Joseph Sutton is Morris Sutton's son and Jesse Sutton's brother.
LOUIS LIPSCHITZ / MEMBER OF THE BOARD. Louis Lipschitz has served as one of
our directors since April 20, 2004. He also serves on the audit and compensation
committees of our Board of Directors. From February 1, 1996 to March 2004, Mr.
Lipschitz served as Executive Vice President and Chief Financial Officer of Toys
"R" Us, Inc.
MARC WEISMAN / MEMBER OF THE BOARD. Marc Weisman has served as one of our
directors since June 8, 2004. He is also a member of our audit and compensation
committees of our Board of Directors. From 1988 to January 1995, Mr. Weisman
served as Chief Financial Officer of The Adco Group, a privately held real
estate and financial services company. In January 1995, he joined Credit Suisse
First Boston as a Director in the Principal Transactions Group. In October 1996,
he formed Sagaponack Partners, L.P., a private equity concern.
In conjunction with our recently completed private placement, we had an
obligation to increase the size of our Board of Directors to a maximum of seven
(7) directors, by June 25, 2004. In addition, for so long as 51% of the 7%
convertible preferred stock remains outstanding, based on the number of shares
outstanding as of the final closing of our recently completed private placement,
holders of the 7% convertible preferred stock will have the right to nominate
two members to our Board of Directors.
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Those two members must be "independent" within the meaning of the regulations
promulgated by Nasdaq for companies quoted on the Nasdaq National Market or by
the American Stock Exchange for companies traded on such exchange. Furthermore,
the consent, which shall not be unreasonably withheld, of the holders of the 7%
convertible preferred stock will be required with respect to the appointment by
us of two additional "independent" members of our Board of Directors. On April
20, 2004, Louis Lipschitz was appointed to the Board of Directors as one of the
two additional "independent" members who were to be appointed by us and on June
8, 2004, Marc Weisman was appointed to the Board of Directors as one of the two
directors to be nominated by the holders of the 7% convertible preferred stock.
Subject to applicable federal securities laws and the rules of the Nasdaq
Stock Market with respect to board composition and corporate governance, the
Board members elected by the holders of the 7% convertible preferred stock,
shall serve on the Audit Committee and Compensation Committee of our Board of
Directors and either director shall serve as the chairman of either or both
committees.
COMMITTEES OF THE BOARD OF DIRECTORS
We currently have an Audit Committee and a Compensation Committee whose
members include Louis Lipschitz and Marc Weisman, both of whom are "independent"
directors. Our Board of Directors is currently seeking to appoint additional
members that will be deemed "independent" and may also serve on the Company's
Audit Committee and the Compensation Committee.
DIRECTOR COMPENSATION
In connection with their appointment to our Board, Louis Lipschitz and Marc
Weisman were each granted options to purchase 100,000 shares of our Common Stock
at an exercise price of $3.63 and $3.00 per share, respectively, which options
expire ten years from the grant date. In addition, we pay each $15,000 annually
for serving on our Board and a fee of $1,000 for in-person attendance, and a fee
of $500 for telephone attendance, at Board and committee meetings. Other than
Mr. Lipschitz and Mr. Weisman, we do not pay directors any cash compensation for
serving as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We currently have a Compensation Committee of our Board of Directors
consisting of Louis Lipschitz and Marc Weisman. The Board of Directors as a
whole made decisions relating to the compensation of our executive officers
prior to the establishment of the Compensation Committee on July 15, 2004. Our
committee has no interlocks with other companies.
OUR EXECUTIVE OFFICERS
Our executive officers who are not directors are Jan E. Chason, our Chief
Financial Officer and Joseph Tuchinsky, our Secretary, General Counsel and
Senior Vice President of Business and Legal Affairs. None of our executive
officers have written employment agreements with us and all serve at the
pleasure of the Board of Directors. Certain biographical information with
respect to the executive officers is set forth below.
JAN E. CHASON / CHIEF FINANCIAL OFFICER. Jan E. Chason has served as our
Chief Financial Officer since December 2003 and prior to the merger, as Chief
Financial Officer of MSI, our sole operating business and wholly-owned
subsidiary, since January 2, 2003. Prior to joining MSI, Mr. Chason provided
interim Chief Financial Officer services through JEC Consulting Associates from
June 2001 through December 2002. From June 1996 through June 2001, he served on
the executive team of SFX Broadcasting and SFX Entertainment as the Chief
Financial Officer of the following entities: Triathlon Broadcasting Company, The
Marquee Group, Inc., and Artist Group International. He later served as
Corporate Vice President Finance of Entertainment for SFX Entertainment. After
the acquisition of SFX Entertainment by Clear Channel Communications Inc., he
served as the Chief Financial Officer of Clear Channel Entertainment's Marketing
and Media Divisions. Mr. Chason was a partner at Ernst & Young LLP from October
1982 through September 1994. Mr. Chason is a Certified Public Accountant and has
a Bachelor of Business Administration from City College of New York.
JOSEPH TUCHINSKY / GENERAL COUNSEL/SENIOR VICE PRESIDENT BUSINESS AND LEGAL
AFFAIRS AND SECRETARY. Joseph Tuchinsky joined Majesco on October 1, 2003. In
his role, he is responsible for managing all of our business and legal affairs
including development contracts, licensing relationships, litigation,
intellectual property rights and corporate governance. Prior to joining the
Company,
32
Mr. Tuchinsky served as the Director of Legal and Business Affairs for Atari,
Inc. and its predecessor company from October 2001 through August 2003 and Legal
Counsel to Atari predecessor companies from September 1998 through September
2001. His prior positions included General Counsel for Future Vision Holding,
Inc. and Senior Attorney for Long Island Lighting Corporation. Mr. Tuchinsky has
a Bachelor of Arts from Queens College and Juris Doctor from Syracuse University
College of Law.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth summary information as
to compensation received by our Chief Executive Officer and each of the four
most highly compensated executive officers who were employed by us at the end of
the fiscal year ended October 31, 2003, the most recent fiscal period for which
information is available, for services rendered to us in all capacities during
the three prior fiscal years ended October 31, 2003 and who earned in excess of
$100,000 for services rendered to us during the fiscal year ended October 31,
2003. Pursuant to the Merger, MSI became our wholly-owned subsidiary and our
sole operating business. Therefore, any information set forth in the table
relating to the time period prior to December 5, 2003, the closing date of the
Merger, relates to the operations of MSI for the periods indicated prior to MSI
becoming a wholly-owned subsidiary of a public company.
33
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
----------------------
ALL OTHER
NAME AND PRINCIPAL COMPENSATION
POSITION YEAR SALARY (1)
------------------------------------------------- ----- ------- --------------
Jesse Sutton, President and Chief 2003 350,000 17,000
Executive Officer (2) 2002 340,000 17,000
2001 260,000 16,000
Joseph Sutton, Executive Vice President 2003 350,000 17,000
of Research and Development 2002 328,000 15,600
2001 156,000 16,900
Morris Sutton, Chairman and former Chief 2003 450,000 17,000
Executive Officer (2) 2002 418,000 16,860
2001 450,000 16,000
Jan E. Chason, Chief Financial Officer (3) 2003 159,000 --
2002 -- --
2001 -- --
(1) Other Annual Compensation represents contributions to the Majesco Sales
Inc. Profit Sharing Plan on behalf of Jesse, Morris and Joseph Sutton.
(2) Jesse Sutton was named Chief Executive Officer on December 5, 2003, the
closing date of the Merger. Unless otherwise noted, prior to such date,
Morris Sutton served as Chief Executive Officer of MSI.
(3) Mr. Chason began his employment with Majesco on January 2, 2003.
With respect to the current annual compensation of Joseph Sutton and Jesse
Sutton, each of them has agreed to lower such compensation from $350,000 to
$225,000.
There were no option grants in the last fiscal year to the executive
officers named in the summary compensation table above during our fiscal year
ended October 31, 2003. Of the named individuals, only Jan E. Chason holds
options to purchase shares of our common stock, pursuant to a grant on March 25,
2004 to purchase 300,000 shares, with an exercise price of $1.90 per share,
which expire on March 25, 2014.
EMPLOYEE BENEFIT PLANS
2004 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN
Our 2004 Employee, Director and Consultant Stock Option Plan was approved
by our Board of Directors in February 2004 and adopted by our stockholders on
February 13, 2004, which approval by our stockholders became effective on April
13, 2004. Under this plan, we may grant incentive stock options, nonqualified
stock options and stock. A total of 10,000,000 shares of common stock have been
reserved for issuance under this plan, all of which are currently available for
future grant.
The Stock Option Plan is to be administered by our Board of Directors,
except to the extent that it delegates its authority to a committee of the
Board. The Plan authorizes the issuance of stock grants to our employees,
directors and consultants, the grant of incentive stock options to our employees
and the grant of non-qualified options to our employees and directors
(approximately 26 people), and consultants; provided, however, that any member
of the Sutton family (as specified in the Plan), who is also one of our
directors, executive officers, or greater than 5% beneficial owner of any of our
issued and outstanding securities shall not be eligible to participate in and
receive a grant or grants under the Plan.
For non-qualified options, the exercise price per share is determined by
the Board, subject to the limitation that the exercise price at least equals the
par value per share of our common stock (i.e. $0.001 per share). For incentive
stock options, the exercise price per share is determined by the Board, subject
to the limitation that the exercise price at least equals 100% of the fair
market value per share of our common stock on the date of grant of the incentive
stock option. If the participant in the Plan owns more than 10% of the total
combined voting power of
34
the company, the exercise price per share must at least equal 110% of the fair
market value per share of our common stock on the date of grant of the incentive
stock option.
The maximum term of options granted under this plan is ten years. The
exercise price of non-qualified stock options shall not be less than the par
value of our common stock. The exercise price of incentive stock options shall
not be less than 100% of the fair market value per share of common stock on the
date of the option grant, with respect to plan participants who own 10% or less
of the total combined voting power of all classes of our stock, and not less
than 110% of the fair market value on the date of grant, with respect to plan
participants who own more than 10% of the total combined voting power of all
classes of our stock.
With respect to stock grants, the date prior to which an offer of a stock
grant must be accepted by a grantee and the stock grant purchase price, if any,
shall be determined by the Board. A stock grant may be subject to repurchase by
us upon termination of employment of the grantee with the company, under certain
circumstances
LIMITATION OF DIRECTORS' LIABILITY AND INDEMNIFICATION
The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to certain conditions, the personal liability of directors to
corporations and their stockholders for monetary damages for breach of their
fiduciary duties. Our certificate of incorporation limits the liability of our
directors to the fullest extent permitted by Delaware law.
We have obtained director and officer liability insurance to cover
liabilities of our directors and officers that may occur in connection with
their services to us, including matters arising under the Securities Act of 1933
(the "Securities Act"). Our certificate of incorporation and bylaws also provide
that we will indemnify and advance expenses to, to the fullest extent permitted
by the Delaware General Corporation Law, any of our directors and officers,
against any and all costs, expenses or liabilities incurred by them by reason of
having been a director or officer.
Such limitation of liability and indemnification does not affect the
availability of equitable remedies. In addition, we have been advised that in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is therefore unenforceable.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
RELATED PARTY TRANSACTIONS
Prior to our merger with MSI on December 5, 2003, Jesse Sutton and Joseph
Sutton each previously loaned MSI approximately $1.8 million, for an aggregate
amount of approximately $3.5 million, in order to enable the Company to repay
amounts due under a line of credit from a bank with the remainder used for
working capital purposes. Jesse and Joseph Sutton were repaid, in the aggregate,
approximately $2.5 million from the proceeds of our recently completed private
placement. On February 26, 2004, in conjunction with the closing of the private
placement and pursuant to negotiations with the placement agent, the remaining
$1.0 million owed to them was exchanged for units having a value of $1.0 million
which units consisted of (i) 100 shares ($1.0 million) of 7% Convertible
Preferred Stock, which will be convertible at the option of the holder into
1,000,000 shares of our Common Stock and (ii) a three year warrant to purchase
1,000,000 shares of our Common Stock at an exercise price of $1.00 per share.
Immediately prior to the initial closing of the private placement the market
price of the common stock was $1.70.
On November 25, 2003, Albert Ades, the father-in-law of Jesse Sutton,
loaned MSI $1.0 million. In exchange for the loan, Mr. Ades received a
non-interest bearing convertible promissory note that would automatically
convert into shares of our common stock upon (i) the consummation of our merger
with MSI and (ii) an increase in our authorized shares of common stock
sufficient to allow for the conversion of the note. MSI used the funds to
satisfy a portion of its obligations pursuant to the Atari Settlement. The loan
was satisfied in exchange for 2,000,000 shares of our Common Stock on April 23,
2004.
We currently use the services of a printing and packaging company in which
Morris Sutton's brother is a co-owner. In 2003, we received services from this
company for which we were billed approximately $1.9 million. Such charges are to
our knowledge, on terms no less favorable to what we could receive from
providers of similar services.
35
During 2003, approximately 9,500,000 unregistered shares of our Common
Stock were sold at a price of $0.10 per share. The proceeds of these sales were
used to pay off debts to service providers and our other creditors, including a
consulting fee payment in connection with the merger equal to $450,000 to
Atlantis Equities, Inc. ("Atlantis"), an entity of which Robert S. Ellin, our
former Chairman, is a principal. Atlantis also received consulting fees of
approximately $130,000 for consulting services rendered to the Company in 2002
and 2003. In addition, Atlantis received an additional $300,000 upon completion
of our recently completed private placement. The placement agent we used in
connection with the recently completed private placement paid a referral fee to
Atlantis which included 92 units (92 shares of 7% Convertible Preferred Stock
and a warrant to purchase 920,000 shares of Common Stock) as a portion of the
placement agent warrant that was issued to the placement agent.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our voting stock as of July , 2004, and as adjusted to reflect the
sale of our common stock offered by this prospectus by:
o the executive officers named in the summary compensation table;
o each of our directors;
o all of our current directors and executive officers as a group; and
o each stockholder known by us to own beneficially more than five percent
of our common stock.
Beneficial ownership is based upon 81,000,572 shares of common stock
outstanding as of July 28, 2004 and determined in accordance with the rules of
the SEC and includes voting or investment power with respect to the securities.
Shares of common stock that may be acquired by an individual or group within 60
days of July 28, 2004, pursuant to the exercise of options, warrants or other
derivative securities, are deemed to be outstanding for the purpose of computing
the number of shares beneficially owned and the percentage ownership of such
individual or group, but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person shown in the table.
Percentage of voting power is based on the number of shares beneficially owned
by the person or entity identified and the following shares outstanding: (i)
81,000,572 shares of common stock; and (ii) 2,683 shares of 7% convertible
preferred stock.
Except as indicated in footnotes to this table, we believe that the
stockholders named in this table have sole voting and investment power with
respect to all shares of common stock shown to be beneficially owned by them,
based on information provided to us by such stockholders.
PERCENT OF
NUMBER OF SHARES PERCENT OF VOTING
COMMON STOCK BENEFICIALLY OWNED CLASS POWER
------------------------------- ------------------------------ ------------------- -------------------
Directors and Executive Officers
--------------------------------
Jesse Sutton 15,620,002(1) 19.1% 14.4%
Jesse M. Sutton Foundation (2) 1,520,000 1.9% 1.4%
Joseph Sutton 15,620,002(1) 19.1% 14.4%
Morris Sutton (3) 5,620,042 7.0% 5.2%
Jan E. Chason 0(4) *% *%
Joseph Tuchinsky 0(4) *% *%
Executive officers and directors as a group 38,380,046 46.3% 35.6%
Five Percent Stockholders
Adam Sutton (5) 14,620,002 18.1% 13.6%
7% CONVERTIBLE PREFERRED STOCK (6)
------------------------------
Directors and Executive Officers
Jesse Sutton 50 1.9% 14.4%
Joseph Sutton 50 1.9% 14.4%
Executive officers and directors as a group 100 3.7%
Five Percent Stockholders
-------------------------
033 Growth Partners I LP (7) 172 6.4% 3.1%
Corsair Capital (8) 244 9.1% 4.4%
Harvest Opportunity Partners II LP (9) 343 12.8% 6.2%
Scoggin Capital Management 250 9.3% 4.5%
36
* Represents beneficial ownership of less than 1% of the shares of common
stock
(1) Includes 500,000 shares of common stock which may be acquired upon
conversion of 50 shares of 7% convertible preferred stock and 500,000
shares of common stock which may be acquired upon exercise of warrants
to purchase 500,000 shares of common stock.
(2) Morris Sutton, Jesse Sutton and Joseph Sutton act as officers of the
Jesse M. Sutton Foundation, and each has the power to vote and dispose
of the shares held by the Foundation. The number of shares disclosed
under each of Jesse, Joseph and Morris Sutton does not include the
number of shares held by the Foundation.
(3) Pursuant to a voting agreement, Morris Sutton has the power to vote the
shares held in the name of his daughter, Sarah Sutton. The voting
agreement does not restrict Sarah from exercising all other rights of
beneficial ownership, including disposition and the right to receive
payments of dividends or other distributions from the Company with
respect to the shares.
(4) Does not include shares of common stock underlying outstanding options
which options vest 1/3 annually commencing on March 25, 2005.
(5) Adam Sutton is the adult son of Morris Sutton and brother of Jesse and
Joseph Sutton. Adam is not an executive officer or director of the
company.
(6) All shares of 7% convertible preferred stock are immediately
convertible into shares of common stock at a current conversion ratio
of $1.00 per share for each share of 7% convertible preferred stock
with each share having a value of $10,000. Each share of 7% convertible
preferred stock has voting rights on an as-converted basis and votes
together with the common stock as one class, except as otherwise
regulated by law.
(7) Does not include shares held by 033 Growth Int'l Fund Ltd., 033 Growth
Partners II LP, and Oyster Pond Partners over which Michael T. Vigor
has investment power and Lawrence C. Long Jr. has voting power, along
with the shares held by 033 Growth Partners I LP.
(8) Does not include shares held by Caspian Capital Partners L.P., Mariner
Opportunities, Corsair Capital Investors, Ltd., Corsair Long/Short
International, Corsair Capital Partners 100, and Corsair Select over
which Jay Petschek and Steven Major share voting and investment power,
along with the shares held by Corsair Capital.
(9) Does not include shares held by Harvest Opportunity Offshore Ltd. and
Harvest Opportunity Partners II Qualified L.P., beneficial ownership of
which is held by Joseph A. Jolson, along with the shares held by
Harvest Opportunity Partners II LP.
SELLING STOCKHOLDERS
This prospectus covers offers and sales of the following shares of common stock:
o 2,000,000 shares of common stock issued upon conversion of an
outstanding Convertible Note dated as of November 25, 2003.
o 25,830,000 shares of common stock issuable upon the conversion of
outstanding 7% convertible preferred stock issued in connection with a
private placement completed on February 26, 2004.
o 25,830,000 shares of common stock issuable upon the exercise of
warrants having an exercise price of $1.00 per share that were issued
in connection with a private placement completed on February 26, 2004.
o 1,000,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (500,000 shares) and (ii) warrants having
an exercise price $1.00 per share (500,000 shares) that were issued to
Jesse Sutton in exchange for previously outstanding indebtedness.
o 1,000,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (500,000 shares) and (ii) warrants having
an exercise price $1.00 per share (500,000 shares) that were issued to
Joseph Sutton in exchange for previously outstanding indebtedness.
37
o 2,520,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (1,260,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (1,260,000 shares), as the
securities underlying the placement agent warrant to purchase units
that was issued to JMP Securities LLC as a portion of the placement
agent fee issued in connection with a private placement completed on
February 26, 2004.
o 1,000,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (500,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (500,000 shares), as the
securities underlying the placement agent warrant to purchase units
that was issued to JMP Asset Management LLC as a portion of the
placement agent fee issued in connection with a private placement
completed on February 26, 2004.
o 1,840,000 shares of common stock issuable upon (i) the conversion of 7%
convertible preferred stock (920,000 shares) and (ii) warrants having
an exercise price of $1.00 per share (920,000 shares), as the
securities underlying the placement agent warrant to purchase units
that was issued to Atlantis Equities, Inc. as a portion of the
placement agent fee issued in connection with a private placement
completed on February 26, 2004.
o 302,000 shares of common stock issued to CEOcast, Inc. pursuant to a
consultation agreement, dated as of November 8, 2003.
o 160,000 shares of common stock issued to Hayden Communications, Inc.
pursuant to a consultation agreement, dated as of November 26, 2003.
o 100,000 shares of common stock issued to Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C. pursuant to a settlement agreement, dated as of
December 5, 2003.
The following table provides information on the selling stockholders, their
current beneficial ownership of our securities, the number of shares offered for
each stockholder's account, and the amount and percentage of their beneficial
ownership after this offering, assuming they sell all of the offered shares.
"Beneficial ownership" here means direct or indirect voting or investment power
over outstanding stock and stock which a person has the right to acquire now or
within 60 days after the date of this prospectus. The table also includes stock
issuable on exercise of the warrants described above.
The information in the table was provided by the selling stockholders,
reports furnished to us under rules of the SEC and our stock ownership records,
as of the date of this prospectus. Except as noted in the footnotes, (i) no
selling stockholder has had, within the past three years, any position, office
or other material relationship with us or any of our predecessors or affiliates
and (ii) the shares included in this offering under the column entitled "Shares
Offered" consist of common stock, half of which is to be acquired upon
conversion of our 7 % preferred stock and the other half of which is to be
acquired upon exercise of warrants to purchase common stock. The calculation of
the percentage of common stock beneficially owned after the offering is based on
81,000,572 shares outstanding as of July 28, 2004.
------------------------------------------------------------------------------------------------------------------------------------
SHARES SHARES % OF COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED BEFORE OWNED AFTER OWNED AFTER
NAME OF SELLING STOCKHOLDER THE OFFERING SHARES OFFERED THE OFFERING THE OFFERING
---------------------------------------- -------------------- --------------------- --------------------- --------------------------
033 Growth Partners I LP (1) 3,440,000 3,440,000 0 *
033 Growth Int'l Fund Ltd. (1) 1,700,000 1,700,000 0 *
033 Growth Partners II LP (1) 1,080,000 1,080,000 0 *
Oyster Pond Partners (1) 780,000 780,000 0 *
Asher Roshanzamir 500,000 500,000 0 *
EBR Holdings II L.P. (2) 1,600,000 1,600,000 0 *
Brian Potiker Trustee of the Brain
Potiker Revocable Trust UAD 8/7/96 400,000 400,000 0 *
Corsair Capital (3) 4,880,000 4,880,000 0 *
Caspian Capital Partners LP (3) 900,000 900,000 0 *
Mariner Opportunities (3) 900,000 900,000 0 *
Corsair Capital Investors, Ltd (3) 600,000 600,000 0 *
38
Corsair Long / Short /
International (3) 230,000 230,000 0 *
Corsair Capital Partners 100 (3) 170,000 170,000 0 *
SHARES SHARES % OF COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED BEFORE OWNED AFTER OWNED AFTER
NAME OF SELLING STOCKHOLDER THE OFFERING SHARES OFFERED THE OFFERING THE OFFERING
---------------------------------------- -------------------- --------------------- --------------------- --------------------------
Corsair Select (3) 2,120,000 2,120,000 0 *
Sandor Capital Master Fund (4) 800,000 800,000 0 *
Edward & Heide Stiel 100,000 100,000 0 *
Gigi Mechlowitz 390,000 390,000 0 *
Howard Moher 180,000 180,000 0 *
Charles Spieler 30,000 30,000 0 *
Gotham Holdings, L.P. (5) 2,269,500 2,000,000 269,500 *
Jacob Wizman 515,000 500,000 15,000 *
Jay Rubin 200,000 200,000 0 *
Harvest Opportunity Partners II LP (6) 6,860,000 6,860,000 0 *
Harvest Opportunity Offshore Ltd (6) 2,460,000 2,460,000 0 *
Harvest Opportunity Partners II
Qualified LP (6) 680,000 680,000 0 *
Leonard H. Sherman 500,000 500,000 0 *
Logos Partners, LP (7) 800,000 800,000 0 *
Michael Goldstein Pension Plan 100,000 100,000 0 *
Rachel Landau Family Trust 200,000 200,000 0 *
Michael P. Sheison 288,000 260,000 28,000 *
Richard Molinsky 350,000 100,000 250,000 *
Schottenfeld Qualified Associates (8) 1,600,000 1,600,000 0 *
CSL Associates LP (9) 300,000 300,000 0 *
Scoggin Capital Management 5,000,000 5,000,000 0 *
Stephen S. Taylor 100,000 100,000 0 *
RBC Dain Rauscher Fbo Trevor Colby IRA 160,000 160,000 0 *
Trevor Colby 140,000 140,000 0 *
Dylan Colby 100,000 100,000 0 *
R.H. Realty Money Purchase Plan (11) 200,000 200,000 0 *
Michael G. Balog 1,000,000 1,000,000 0 *
Broadlawn Capital LLC (12) 100,000 100,000 0 *
Nob Hill Capital Partners 0 500,000 0
West End Capital Partners (13) 800,000 800,000 0 *
Jon D. Gruber Ttee FBO Jonathan Wyatt
Gruber Trust (14) 50,000 50,000 0 *
Jon D. Gruber And Linda W. Gruber 600,000 600,000 0 *
Lindsay Gruber Dunham (14) 50,000 50,000 0 *
Lagunitas Partners LP (15) 600,000 600,000 0 *
Gruber McBaine International (15) 2,400,000 2,400,000 0 *
J. Patterson McBaine 300,000 300,000 0 *
Wendy Jo Lewis (Bruce Gropper) 100,000 100,000 0 *
Harvey Bibicoff 1,550,000(16) 200,000 1,350,000 1.9%
39
Dynacap Global (14) 0 1,000,000 0 *
Scott Christie 100,000 100,000 0 *
Michael Solomon 0 100,000 0 *
SHARES SHARES % OF COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED BEFORE OWNED AFTER OWNED AFTER
NAME OF SELLING STOCKHOLDER THE OFFERING SHARES OFFERED THE OFFERING THE OFFERING
---------------------------------------- -------------------- ------------------------------------------- --------------------------
Dan Solomon 300,000 300,000 0 *
Morris Cabasso 200,000 200,000 0 *
Joseph B. Rubin 200,000 200,000 0 *
Albert Ades 2,000,000 2,000,000 0 *
Jesse Sutton 15,620,002 1,000,000 14,620,002(18) 18%
Joseph Sutton 15,620,002 1,000,000 14,620,002(18) 18%
JMP Securities LLC 2,520,000 2,520,000 0 *
JMP Asset Management LLC 1,000,000 1,000,000 0 *
Atlantis Equities, Inc. (19) 3,476,788(20) 1,840,000 3,476,788 4%
CEOcast, Inc 302,000 302,000(21) 0 *
Hayden Communications, Inc. 160,000 160,000(21) 0 *
Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C. 175,000(22) 100,000(21) 75,000 *
--------------
*Less than one percent.
(1) Michael T. Vigor has investment power over the securities and Lawrence
C. Long Jr. has voting power over the securities.
(2) Beneficial ownership of the securities is held by EBR, Inc.
Brian Potiker, Lowell Potiker, Hughes Potiker and Sheila Potiker share
voting and investment power over the securities.
(3) Jay Petschek and Steven Major share voting and investment power over
the securities.
(4) Beneficial ownership of the securities may be deemed to be held by John
S. Lemak.
(5) Beneficial ownership of the securities may be deemed to be held by
Russell L. Anmuth.
(6) Beneficial ownership of the securities may be deemed to be held by
Joseph A. Jolson.
(7) Beneficial ownership of the securities may be deemed to be held by
Clark Lehman.
(8) Beneficial ownership of the securities may be deemed to be held by
Richard Schottenfeld.
(9) Beneficial ownership of the securities may be deemed to be held by
Charles S. Lipson.
(10) Holds the securities as nominee for its affiliate, Game Boy
Partners, L.L.C. Beneficial ownership of the securities may be deemed
to be held by Craig W. Effron and Curtis J. Schenker.
(11) Beneficial ownership of the securities may be deemed to be held by
Ralph Herzka.
(12) Beneficial ownership of the securities may be deemed to be held by Jon
Bloom.
(13) Beneficial ownership of the securities may be deemed to be held by
Charles S. G. Bolton.
(14) John D. Gruber has voting and investment power over the securities.
(15) Gruber & McBaine Capital Management, LLC is the general partner.
John D. Gruber and J. Patterson McBaine share investment power over
the securities.
(16) Includes 200,000 shares held by his wife.
(17) Beneficial ownership of the securities may be deemed to be held by
DynaCapital SA, an investment advisor, of which S. Aeschbecher and T.
Veillet are the principals.
(18) All of the securities are subject to restrictions on transfer that
expire one year from the date of this prospectus.
(19) Robert Ellin is a principal and Nancy Ellin, his wife, is the sole
director and sole stockholder.
(20) This amount does not include 1,840,000 shares being offered hereunder
with respect to which Atlantis Equities, Inc. does not have the right
to acquire now or within 60 days after the date of this prospectus
unless it chooses to waive a restriction on conversion or exercise upon
61 days prior notice which restricts such conversion or exercise to the
extent such holder thereafter would beneficially own more than 4.99% of
our issued and outstanding common stock.
(21) Represents shares of common stock held directly by the selling
stockholder.
(22) Does not include shares which may be held by the individual members of
the law firm.
40
PLAN OF DISTRIBUTION
We have registered the shares on behalf of the selling stockholders. For
the purposes herein, the term "selling stockholder" includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock
received after the date of this prospectus from a selling stockholder as a gift,
pledge, corporate dividend, partnership or limited liability company
distribution or other transfer. We are bearing all costs relating to the
registration of the shares, other than fees and expenses, if any, of counsel or
other advisors to the selling stockholders. Any commissions, discounts, or other
fees payable to broker-dealers in connection with any sale of the shares will be
borne by the selling stockholders. The selling stockholders may offer their
shares at various times in one or more of the following transactions, or in
other kinds of transactions:
o transactions on the Over-The-Counter Bulletin Board;
o in private transactions other than through the Over-The-Counter
Bulletin Board;
o in connection with short sales of our shares;
o by pledge to secure debts and other obligations;
o in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other transactions;
o in standardized or over-the-counter options; or
o in a combination of any of the above transactions.
The selling stockholders also may resell all or a portion of the shares in
open market transactions in reliance on Rule 144 under the Securities Act, if
they meet the criteria and conform to the requirements of that rule.
The selling stockholders may sell their shares at quoted market prices, at
prices based on quoted market prices, at negotiated prices or at fixed prices.
The selling stockholders may use broker-dealers to sell their shares. If this
happens, broker-dealers may either receive discounts or commissions from the
selling stockholders, or they may receive commissions from purchasers of shares
for whom they acted as agents.
The selling stockholders and any broker-dealers or agents that participate
with the selling stockholders in the sale of shares may be "underwriters" within
the meaning of the Securities Act. Any commissions received by broker-dealers or
agents on the sales and any profit on the resale of shares purchased by
broker-dealers or agents may be deemed to be underwriting commissions or
discounts under the Securities Act.
Under the rules and regulations of the SEC, any person engaged in the
distribution or the resale of our shares may not simultaneously buy, bid for or
attempt to induce any other person to buy or bid for our common stock in the
open market for a period of two business days prior to the commencement of the
distribution. The rules and regulations under the Securities Exchange Act of
1934 may limit the timing of purchases and sales of shares of our common stock
by the selling stockholders.
DESCRIPTION OF CAPITAL STOCK
Pursuant to our Certificate of Incorporation, we are authorized to issue
250,000,000 shares of common stock, $.001 par value per share, and 10,000,000
shares of preferred stock, $.001 par value per share, of which 3,000 shares have
been designated 7% convertible preferred stock.
COMMON STOCK
VOTING RIGHTS. HOLDERS OF COMMON STOCK ARE ENTITLED TO ONE VOTE PER SHARE
HELD OF RECORD ON ALL MATTERS TO BE VOTED ON BY THE STOCKHOLDERS.
Dividends. Subject to preferences that may be applicable to any Preferred Stock
outstanding at the time, holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefore, subject to the rights of the
holders of preferred stock, if any.
41
Liquidation Preference. In the event we liquidate, dissolve or wind up, holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of our liabilities and the liquidation preference, if any, of any then
outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no rights to convert their
Common Stock into any other securities, and there are no redemption or sinking
fund provisions with respect to such shares. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be materially
adversely affected by, the rights of the holders of shares of any series of
Preferred Stock which are currently outstanding or which the Board of Directors
may designate and issue in the future. We currently have 250,000,000 shares of
Common Stock authorized.
PREFERRED STOCK
We are authorized to issue up to 10,000,000 shares of Preferred Stock. The
Board of Directors has the authority to issue the Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued shares of Preferred Stock, as well as to
fix the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. The Board of
Directors, without stockholder approval, may issue Preferred Stock with voting
and conversion rights that could materially adversely affect the voting power of
the holders of Common Stock or other series of Preferred Stock. The issuance of
Preferred Stock could also decrease the amount of earnings and assets available
for distribution to holders of Common Stock. In addition, the issuance of
Preferred Stock may have the effect of delaying, deferring or preventing our
change in control.
SERIES A CONVERTIBLE PREFERRED STOCK
We previously authorized 1,000,000 shares of Preferred Stock, designated as
Series A convertible preferred stock, $0.001 par value per share, of which
572,888 shares were issued and outstanding immediately prior to their conversion
into 40,675,048 shares of our Common Stock which occurred on April 23, 2004. All
of the previously outstanding shares of Series A convertible preferred stock
were distributed to the stockholders of MSI as part of the consideration for the
merger which occurred in December 2003. All shares were convertible at the
option of the holder into shares of Common Stock at a ratio of 71 shares of
Common Stock for each share of Series A convertible preferred stock.
7% CONVERTIBLE PREFERRED STOCK
We have currently authorized 3,000 shares of 7% Convertible Preferred
Stock, $0.001 par value per share, of which 2,683 shares are currently
outstanding. The 7% convertible preferred stock is convertible at the option of
the holder into 10,000 shares of Common Stock of the Company per share of 7%
convertible preferred stock at a conversion price of $1.00. Each share of 7%
convertible preferred stock is entitled to receive a 7% cumulative dividend
payable solely in shares of Common Stock, on an annual basis. In addition, the
holders of the 7% convertible preferred stock shall be entitled to share in any
dividends paid on the Common Stock on an "as converted" basis. The holders of
the 7% convertible preferred stock will be entitled to a liquidation preference
equal to the amount invested per share, plus any accrued and unpaid dividends.
The 7% convertible preferred stock has voting rights on an as-converted basis
and votes together with the Common Stock as one class, except that it votes as a
separate class on certain directors as described below and except as otherwise
required by law.
The 7% convertible preferred stock shall rank senior to any other class or
series of our capital stock. In the event of a liquidation, the holders of the
7% convertible preferred stock, after provision for payment of our debts and
liabilities, before any distribution is made with respect to any other class or
series of our capital stock will be entitled to receive a liquidation preference
equal to the original purchase price of the 7% convertible preferred stock plus
all accrued and unpaid dividends thereon.
Each share of 7% convertible preferred stock shall automatically convert
into Common Stock of the Company at a conversion price of $1.00 per share at
such time as the closing price of the Common Stock is equal to or greater than
$2.50 per share for a 60 consecutive calendar day period, provided that during
such 60 consecutive calendar day period, the average daily trading volume for
each day is equal to or greater than 75,000 shares.
The certificate of designation for the 7% convertible preferred stock shall
provide that, within 120 days after the final Closing of the Offering, there
shall be a maximum of seven (7) directors on the Board of Directors. At each
42
election of directors after the final Closing, for so long as 51% of the 7%
convertible preferred stock remains outstanding, based on the number of shares
outstanding as of the final Closing, Harvest Opportunity Partners II, L.P., on
behalf of the holders of the 7% convertible preferred stock will have the right
to nominate two members to the Company's Board of Directors, on behalf of the
holders of the 7% Preferred Stock, who are "independent" within the meaning of
the regulations promulgated by Nasdaq for companies quoted on the Nasdaq
National Market and by the American Stock Exchange for companies traded on such
exchange. In addition, the consent, which shall not be unreasonably withheld, of
Harvest Opportunity Partners II, L.P. on behalf of the holders of the 7%
convertible preferred stock will be required with respect to the appointment by
the Company of two "independent" members of the Company's Board of Directors.
Subject to applicable federal securities laws and the rules of the Nasdaq
Stock Market with respect to board composition and corporate governance, the
Board members elected by the holders of the 7% convertible preferred stock,
shall serve on the Audit Committee and Compensation Committee of the Company's
Board of Directors and either director shall serve as the chairman of either or
both committees.
WARRANTS ISSUED IN RECENT PRIVATE PLACEMENT
Exercise Price and Terms. Each warrant issued in our recently completed
private placement (the "Warrants"), entitles the holder thereof to purchase at
any time until three years after the issue date, up to ten thousand (10,000)
shares of Common Stock at an exercise price equal to $1.00 per share. The holder
of any Warrant may exercise such Warrant by surrendering the Warrant to us, with
the notice of exercise properly completed and executed, together with payment of
the exercise price. The Warrants may be exercised at any time in whole or in
part at the applicable exercise price until expiration of the Warrants. No
fractional shares will be issued upon the exercise of the Warrants.
The Company, at its option, may call, at a price of $.001 per share of
Common Stock underlying the Warrant, up to one hundred percent (100%) of the
Warrants in the event the closing price of the Common Stock is equal to or
greater than $2.50 for a 60 consecutive calendar day period, provided that
during such 60 consecutive calendar day period, the average daily trading volume
for each day is equal to or greater than 75,000 shares. Upon a call, the holder
may exercise such Warrant and in the event the holder elects not to exercise the
Warrant, then the Company may repurchase at such price.
PLACEMENT AGENT WARRANT
Exercise Price and Terms. Each Warrant entitles the holder thereof to
purchase at any time until five years after the issue date, one Unit, consisting
of one share of 7% convertible preferred stock and a Warrant, at a price per
Unit equal to $10,000.00. The Placement Agent may exercise the Placement Agent
Warrant by surrendering it to us, with the notice of exercise properly completed
and executed, together with payment of the exercise price. The Placement Agent
Warrant may be exercised at any time in whole or in part at the applicable
exercise price until expiration of the Warrants. No fractional shares will be
issued upon the exercise of the Warrants.
REGISTRATION OBLIGATION
We have agreed to file on or before May 26, 2004, a registration statement
on Form S-1 or other appropriate registration document with the SEC covering the
resale of the shares of Common Stock issuable upon conversion of the 7%
convertible preferred stock and issuable upon exercise of the Warrants, as well
as the shares of Common Stock issuable upon conversion and exercise, as
applicable, of the securities underlying the Placement Agent Warrants. In the
event we do not file the registration statement by such date, we shall be
obligated to pay an amount, as liquidated damages to each holder of the 7%
Preferred Stock, equal to 1.5% of such holder's initial investment in the Units
for each thirty day period we fail to file subsequent to such date. In addition,
in the event the registration statement is not declared effective by the SEC by
August 23, 2004, we shall be obligated to pay an amount, as liquidated damages
to each holder of the 7% convertible preferred stock, equal to 3.0% of such
holder's initial investment in the Units for each thirty day period the
registration statement is not declared effective by such date.
RESTRICTIONS ON TRANSFER OF SECURITIES PRIOR TO REGISTRATION
The 7% convertible preferred stock, the Warrants and the Placement Agent
Warrant, including, prior to their registration for resale as described above,
the shares of Common Stock issuable upon conversion of the 7% convertible
preferred stock and issuable upon exercise of the Warrants, may not be
transferred except as provided
43
below. Prior to any proposed transfer of any of the identified securities,
including such Common Stock, the holder thereof shall give written notice to us
of such holder's intention to affect such transfer. Each such notice shall
describe the manner and circumstances of the proposed transfer in sufficient
detail, and shall be accompanied by either (i) if required, a written opinion of
legal counsel to the holder which shall be reasonably satisfactory to us to the
effect that the proposed transfer of the securities may be effected without
registration under the Securities Act or (ii) a "no-action" letter from the SEC
to the effect that the distribution of such securities without registration will
not result in a recommendation by the staff of the SEC that action be taken with
respect thereto, whereupon the holder of such securities shall be entitled to
transfer such securities in accordance with the terms of the notice delivered by
such holder to us. We will not require such a legal opinion or "no action"
letter (x) in any transaction in compliance with Rule 144 promulgated under the
Securities Act, (y) in any transaction in which the holder distributes
securities solely to its stockholders on a pro rata basis for no consideration,
or (z) in any transaction in which a holder which is a partnership distributes
securities solely to partners thereof on a pro rata basis for no consideration.
These restrictions will terminate with respect to any such securities following
their registration for resale pursuant to our registration obligation described
above.
OPTION PLAN
We authorized adopting a 2004 Employee, Director and Consultant Stock Plan,
pursuant to which we have reserved 10,000,000 shares of Common Stock for
issuances under the plan to eligible participants; provided, however, eligible
participants will not include any member of the Sutton family who is also one of
our directors, executive officers or greater than 5% beneficial owners of any of
our securities. Our stockholders approved this stock option plan pursuant to a
majority written consent dated February 13, 2004, which approval by our
stockholders was effective on April 13, 2004.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Florida Atlantic
Stock Transfer Inc.
LISTING
Our common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol "MJSH."
LEGAL MATTERS
The legality of the shares of common stock offered in this prospectus has
been passed upon by our counsel, Mintz Levin Cohn Ferris Glovsky and Popeo,
P.C., New York, New York. Members of the Mintz firm hold in the aggregate 11,971
shares of common stock. In addition, Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C. holds 175,000 shares of common stock, of which 100,000 shares are
being offered in this prospectus.
EXPERTS
The consolidated financial statements of Majesco Sales Inc and subsidiary
as of October 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders' deficiency and cash flows for each of the years in the
three-year period ended October 31, 2003, have been included herein in reliance
upon the report of Goldstein Golub Kessler LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
On January 5, 2004, we dismissed our independent auditors, Israeloff,
Trattner & Co. P.C. ("Israeloff"). The decision to change independent auditors
was made in connection with our merger and change of control of the Company, as
reported in our Current Report on Form 8-K, dated December 5, 2003, and filed on
December 22, 2003. In lieu of an audit or similar committee of the Board of
Directors, the decision to dismiss Israeloff was recommended and approved by our
Board of Directors. The report of Israeloff on our financial statements as of
and for the fiscal year ended December 31, 2002 contained no adverse opinion or
disclaimer of opinion, nor was the report qualified or modified as to
uncertainty, audit scope or accounting principles. In connection with its audit
for the fiscal year ended December 31, 2002 and during the subsequent period
that began on January 1, 2003 and ended on January 4, 2004, there were no
disagreements with Israeloff on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if they had occurred and not been resolved to the satisfaction of
Israeloff, would have caused Israeloff to make reference to such disagreements
44
in their report on the financial statements for such year. Israeloff was engaged
by us on April 4, 2003 and had no involvement with us relating to the fiscal
year ended December 31, 2001. On February 11, 2004, we engaged Goldstein Golub
Kessler LLP, our current independent accountants
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered by this prospectus.
This prospectus, which is part of the registration statement, omits certain
information, exhibits, schedules and undertakings set forth in the registration
statement. For further information pertaining to us and our common stock,
reference is made to the registration statement and the exhibits and schedules
to the registration statement. Statements contained in this prospectus as to the
contents or provisions of any documents referred to in this prospectus are not
necessarily complete, and in each instance where a copy of the document has been
filed as an exhibit to the registration statement, reference is made to the
exhibit for a more complete description of the matters involved.
You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC at
prescribed rates from the Public Reference Section of the SEC at such address.
In addition, registration statements and certain other filings made with the SEC
electronically are publicly available through the SEC's web site at
http://www.sec.gov. The registration statement, including all exhibits and
amendments to the registration statement, has been filed electronically with the
SEC.
45
INDEX TO FINANCIAL STATEMENTS
PAGE
------
Independent Auditor's Report............................................. F-2
Majesco Sales Inc. and subsidiary
Consolidated balance sheet - October 31, 2003 and 2002................... F-3
Consolidated statement of operations - Years ended October 31, 2003,
2002 and 2001.......................................................... F-4
Consolidated statement of shareholders' deficiency - Years ended
October 31, 2001, 2002 and 2003........................................ F-5
Consolidated statement of cash flows - Years ended October 31, 2003,
2002 and 2001.......................................................... F-6
Notes to consolidated financial statements............................... F-7-F-14
Majesco Holdings Inc. and subsidiaries
Consolidated Balance Sheet as of April 30, 2004 (unaudited).............. F-15
Consolidated statement of operations and comprehensive loss for the
three and six months ended April 30, 2004 and 2003 (unaudited)......... F-16
Consolidated statement of stockholders' deficiency for the six months
ended April 30, 2004 (unaudited)....................................... F-17
Consolidated statement of cash flows for the six months ended April 30,
2004 and 2003 (unaudited).............................................. F-18
Notes to consolidated financial statements (unaudited)...................F-19-F-24
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Majesco Sales Inc.
We have audited the accompanying consolidated balance sheets of Majesco Sales
Inc. and subsidiary as of October 31, 2003 and 2002, and the related
consolidated statements of operations, shareholders' deficiency and cash flows
for each of the three years in the period ended October 31, 2003. 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 the Standards of the Public Company
Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Majesco Sales Inc.
and subsidiary as of October 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2003, in conformity with accounting principles generally accepted in
the United States of America.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
January 7, 2004, except for the last two paragraphs of Note 14, as to which the
date is February 17, 2004.
F-2
MAJESCO SALES INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
OCTOBER 31,
--------------------------
2003 2002
------------ -----------
ASSETS
Current Assets
Cash and cash equivalents $ 314 $ 692
Due from factor 596 3,510
Inventory 10,995 2,709
Capitalized software development costs and prepaid license fees 3,794 4,666
Prepaid expenses 981 1,101
------------ -----------
TOTAL CURRENT ASSETS 16,680 12,678
------------ -----------
Property and equipment - net 855 1,059
Other assets 76 479
------------ -----------
TOTAL ASSETS $ 17,611 $ 14,216
============ ===========
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses $ 8,155 $ 7,509
Due to financing company 3,066 465
Advances from customers 11,624 4,121
Settlement obligation - current portion 4,000 3,300
Loan payable - shareholders - current portion 562
Advance from officer 200
------------ -----------
TOTAL CURRENT LIABILITIES 27,607 15,395
------------ -----------
Settlement obligation - net of current portion 2,710
Capital lease obligations, net of current obligations 24 65
Loan payable - bank 2,360
Loans payable - shareholders 3,000 1,267
Commitments and contingencies
Shareholders' deficiency
Common stock -$.001 par value; 40,000,000 shares authorized;
15,325,000 shares issued and outstanding 15 15
Series A Convertible Preferred stock - $.001 par value;
1,000,000 shares authorized; 925,000 shares issued and outstanding 1 1
Additional paid in capital 284 284
Accumulated deficit (16,012) (5,171)
Accumulated other comprehensive loss (18)
------------ -----------
TOTAL SHAREHOLDERS' DEFICIENCY (15,730) (4,871)
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 17,611 $ 14,216
============ ===========
See notes to consolidated financial statements
F-3
MAJESCO SALES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
--------------------------------------------
2003 2002 2001
----------- ----------- -----------
Net revenues $ 46,608 $ 49,688 $ 60,566
Cost of sales:
Product costs 25,172 26,198 35,022
Software development costs and license fees 5,631 5,794 5,901
----------- ----------- -----------
30,803 31,992 40,923
----------- ----------- -----------
Gross profit 15,805 17,696 19,643
Operating expenses:
Product research and development 2,554 2,887 3,284
Selling and marketing 10,234 8,156 5,729
General and administrative 2,861 4,742 4,870
Depreciation and amortization 356 368 236
Litigation and settlement expenses 4,908
Loss on impairment of software development costs 3,656
Severance to former key employees 1,500
----------- ----------- -----------
Total operating expenses 24,569 16,153 15,619
----------- -----------
Operating (loss) income (8,764) 1,543 4,022
Other expenses:
Interest and financing costs 2,077 2,093 2,702
Abandoned equity offering expenses 201
Uncollectible affiliate debt 1,215
----------- ----------- -----------
Net income (loss) $ (10,841) $ (751) $ 107
=========== =========== ===========
Net income (loss) per share: Basic $ (.71) $ (.05) $ .01
=========== =========== ===========
Diluted $ (.71) $ (.05) $ --
=========== =========== ===========
Weighted average number of common shares outstanding: Basic 15,325,000 15,325,000 15,325,000
=========== =========== ===========
Diluted 15,325,000 15,325,000 81,000,000
=========== =========== ===========
See notes to consolidated financial statements
F-4
MAJESCO SALES INC. AND SUSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
(IN THOUSANDS)
MAJESCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
(IN THOUSANDS OF DOLLARS)
Series A Accumulated
Preferred Additional Other Total
Common Stock Paid In Accumulated Comprehensive Shareholders'
Stock ($.001 par) Capital Deficit Loss Deficiency
----- ----------- ------- ------- ---- ----------
Balance at October 31, 2000 $15 $1 $284 ($1,558) $0 ($1,258)
Net income - 107 - 107
-----------
Total comprehensive income 107
Distributions to shareholders - (2,595) - (2,595)
-------------------------------------------------------------------------------
Balance at October 31, 2001 15 1 284 (4,046) - (3,746)
Net loss - (751) - (751)
-----------
Total comprehensive loss (751)
Distributions to shareholders - (374) - (374)
-------------------------------------------------------------------------------
Balance at October 31, 2002 15 1 284 (5,171) - (4,871)
Net loss - (10,841) - (10,841)
Foreign currency translation adjustment (18) (18)
-----------
Total comprehensive loss (10,859)
-------------------------------------------------------------------------------
Balance at October 31, 2003 $15 $1 $284 ($16,012) ($18) ($15,730)
-------------------------------------------------------------------------------
See notes to consolidated financial statements
F-5
MAJESCO SALES INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED OCTOBER 31,
----------------------------------------
2003 2002 2001
------------- ------------ -----------
Cash flows from operating activities
Net income (loss) $ (10,841) $ (751) $ 107
Adjustments to reconcile net income (loss) to net cash provided by (used
in)operating activities:
Depreciation and amortization 356 368 236
Settlement obligations 4,908
Loss on impairment of software development costs 3,656
Write off of receivable from affiliate 1,215
Changes in assets and liabilities
Decrease (increase) in due to and from factor, net 2,914 (1,662) 4,543
(Increase) decrease in inventory (8,286) 4,856 (2,777)
Increase in capitalized software development costs and prepaid license fees (2,307) (2,881) (933)
Decrease (increase) in prepaid expenses 120 (1,013) 243
(Increase) decrease in other assets (76) 259 (389)
(Decrease) increase in accounts payable and accrued expenses (821) 702 4,144
Increase (decrease) in advances from customers 7,503 724 (2,603)
------------- ------------ -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (2,874) 602 3,786
------------- ------------ -----------
Cash flows from investing activities
Purchases of property and equipment (152) (297) (596)
Collection of affiliate receivable 269
------------- ------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (152) (297) (327)
------------- ------------ -----------
Cash flows from financing activities
Principal payments on loan payable - bank (2,360) (91) (44)
Net proceeds (repayments) - finance company 2,601 183 (233)
Net proceeds (repayments) - loan from shareholders 2,295 36 (380)
Principal payments on capital lease obligations (44) (38) (24)
Advances from officer 200
Distributions to shareholders (374) (2,595)
------------- ------------ -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,692 (284) (3,276)
------------- ------------ -----------
Effect of exchange rate changes on cash and cash equivalents (44)
------------- ------------ -----------
Net (decrease) increase in cash and cash equivalents (378) 21 183
Cash and cash equivalents at beginning of year 692 671 488
------------- ------------ -----------
Cash and cash equivalents at end of year $ 314 $ 692 $ 671
============= ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,892 $ 1,747 $ 2,182
============= ============ ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
Capital lease obligations incurred $ 163
============= ============ ===========
See notes to consolidated financial statements
F-6
MAJESCO SALES INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS ACTIVITY
Majesco Sales Inc. and subsidiary ("Majesco" or "Company") is a developer,
publisher, and marketer of interactive entertainment software. The Company has
released titles for all major videogame platforms and handhelds, including
Sony's PlayStation and PlayStation(R) 2, Nintendo's N64, SNES, Game Boy(TM),
Game Boy(TM) Color, Game Boy(TM) Advance and GameCube(TM), Microsoft's Xbox(TM),
Sega's Dreamcast, Genesis and Game Gear, and the personal computer ("PC").
Additionally, the Company is a manufacturer of a number of accessories licensed
by Nintendo. The Company's target audiences range from game enthusiasts and
children to mass-market consumers and "value-priced" buyers. The Company's
customers include Wal-Mart, Target, Toys "R" Us, Best Buy, Electronics Boutique,
Gamestop and other national and regional retailers, discount store chains and
specialty retailers. Internationally, the Company's products are published
through licensing arrangements with other publishers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of Majesco Sales Inc. and its wholly owned subsidiary,
Majesco Europe Limited (a company incorporated in the United Kingdom, which
commenced operations in February 2002). Significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition. The Company recognizes revenue upon shipment of its product
when title and risk of loss are transferred. In order to recognize revenue, the
Company must not have any continuing obligations and it must also be probable
that the Company will collect the accounts receivable.
For those agreements, which provide customers with the right to multiple copies
in exchange for guaranteed minimum royalty amounts (such as under the Company's
international distribution agreements) (see Note 7), revenue is recognized at
delivery of the product master or the first copy. Royalties on sales that exceed
the guaranteed minimum are recognized as earned.
The Company generally sells its products on a no-return basis, although in
certain instances, the Company may provide price protection or other allowances
on certain unsold products. Price protection, when granted and applicable,
allows customers a credit against amounts they owe the Company with respect to
merchandise unsold by them. Revenue is recognized net of estimates of these
allowances.
The Company estimates potential future product price protection and other
allowances related to current period product revenue. The Company analyzes
historical experience, current sell through of retailer inventory of the
Company's products, current trends in the videogame market, the overall economy,
changes in customer demand and acceptance of the Company's products and other
related factors when evaluating the adequacy of price protection and other
allowances.
Sales incentives or other consideration given by the Company to customers that
are considered adjustments of the selling price of its products, such as rebates
and product placement fees, are reflected as reductions of revenue. Sales
incentives and other consideration that represent costs incurred by the Company
for assets or services received, such as the appearance of the Company's
products in a customer's national circular ad, are reflected as selling and
marketing expenses.
Shipping and Handling Shipping and handling, which consist principally of
packaging and transportation charges incurred to move finished goods to
customers, amounted to $811,000, $775,000 and $1.7 million, and are included in
selling expenses for the years ended October 31, 2003, 2002 and 2001,
respectively.
Advertising Expenses. The Company generally expenses advertising costs as
incurred except for production costs associated with media campaigns which are
deferred and charged to expense at the first run of the ad. Advertising costs
charged to operations were approximately $2,926,000, $2,105,000, and $311,000
for the years ended October 31, 2003, 2002, and 2001, respectively.
F-7
Income Taxes. Prior to November 1, 2003, the Company elected to be treated as an
S Corporation under the provisions of the Internal Revenue Code. Accordingly,
there is no provision for federal income taxes because such liability is the
responsibility of the individual shareholders. Additionally, the Company has
elected to be treated as an S Corporation under provisions of the New Jersey
State income tax laws. The Company is subject to New Jersey State income taxes
at reduced rates.
Effective November 1, 2003, the Company revoked its S Corporation election. On
that date the Company became subject to federal and state income taxes. No pro
forma provision for income taxes has been provided in the accompanying
consolidated statement of operations due to the history of operating losses.
Cash and cash equivalents. Cash equivalents consist of highly liquid investments
with insignificant rate risk and with maturities of three months or less at the
date of purchase.
At various times, the Company had deposits in excess of the Federal Deposit
Insurance Corporation limit. The Company has not experienced any losses on these
accounts.
The Company utilizes forward contracts in order to reduce financial market
risks. These instruments are used to hedge foreign currency exposures of
underlying assets, liabilities, or certain forecasted foreign currency
denominated transactions. The Company does not use forward exchange contracts
for speculative or trading purposes. The Company's accounting policies for these
instruments are based on whether they meet the criteria for designation as
hedging transactions. The fair value of foreign currency contracts is estimated
based on the spot rate of the various hedged currencies as of the end of the
period. As of October 31, 2003, the fair value of the contract outstanding was
approximately $4,500,000. The Company had no outstanding foreign exchange
forward contracts at October 31, 2002. The risk of counterparty nonperformance
associated with this contract was not considered to be material. Notwithstanding
the Company's efforts to manage foreign exchange risk, there can be no assurance
that the Company's hedging activities will adequately protect against the risks
associated with foreign currency fluctuations.
Software Development Costs and Intellectual Property Licenses. Software
development costs include milestone payments made to independent software
developers under development arrangements. Software development costs are
capitalized once technological feasibility of a product is established and such
costs are determined to be recoverable against future revenues. For products
where proven game engine technology exists, this may occur early in the
development cycle. Technological feasibility is evaluated on a
product-by-product basis. Amounts related to software development that are not
capitalized are charged immediately to development costs. Intellectual property
license costs represent license fees paid to intellectual property rights
holders for use of their trademarks or copyrights in the development of the
Company's products.
Commencing upon the related product's release, capitalized software development
and property licenses costs are amortized to cost of sales based upon the higher
of (i) the contractual rate based on actual net product sales or (ii) the ratio
of current revenue to total projected revenue. The recoverability of capitalized
software development costs and intellectual property licenses is evaluated based
on the expected performance of the specific products for which the costs relate.
The following criteria are used to evaluate expected product performance:
historical performance of comparable products using comparable technology;
orders for the product prior to its release; and estimated performance of a
sequel product based on the performance of the product on which the sequel is
based. During the year ended October 31, 2003, as the result of the Company's
assessment of the recoverability of capitalized development costs, the Company
recognized an impairment charge of approximately $3,656,000 measured by the
amount by which the carrying amount of the asset exceeded its fair value. Of
this amount, approximately $3,200,000 related to the write-off of all costs
capitalized) in the development of a videogame that the Company determined would
not be commercially viable and for which development was stopped.
Inventory. Inventory, which consists of finished goods, is stated at the lower
of cost as determined by the first-in, first-out method, or market. The Company
estimates the net realizable value of slow-moving inventory on a title-by-title
basis and charges the excess of cost over net realizable value to cost of sales.
Property and equipment. Property and equipment is stated at cost. Depreciation
and amortization is being provided for by the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements is
provided for over the term of the lease.
F-8
Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities or the disclosure of gain or loss contingencies at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Among the more significant estimates
included in these financial statements are the estimated customer allowances,
the valuation of inventory and the recoverability of advance payments for
development costs and intellectual property licenses. Actual results could
differ from those estimates.
Foreign Currency Translation. The functional currency of the Company's foreign
subsidiary is its local currency. All assets and liabilities of the Company's
foreign subsidiary are translated into U.S. dollars at the exchange rate in
effect at the end of the year, and revenue and operating expenses are translated
at weighted average exchange rates during the year. The resulting translation
adjustments are reflected as a component of shareholders' deficiency and
included in other comprehensive loss in the statement of shareholders'
deficiency.
Earnings per share. Basic earnings (loss) per share is computed by dividing net
income (loss) by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per share for the year ended
October 31, 2001 reflect the dilutive effect of the Series A preferred stock
that may be converted into common shares. Diluted earnings per share for other
periods has not been presented because the effect of the adjustment for the
conversion of the Series A preferred stock would be antidilutive.
Restatement and reclassifications. All shareholder deficiency accounts,
share data, and earnings (loss) per share data included in the consolidated
financial statements and related notes have been retroactively restated to
reflect the capital structure in effect at the time of the reverse acquisition
transaction with ConnectivCorp (see Note 14). Certain October 31, 2002 and 2001
amounts have been reclassified to conform to the financial statement
presentation used at October 31, 2003.
Recent accounting pronouncements. The Company does not believe that any recently
issued, but not yet effective accounting standards will have a material effect
on the Company's consolidated financial position, results of operations or cash
flows.
3. DUE FROM FACTOR
The Company uses a factor to approve credit and to collect the proceeds from a
substantial portion of its sales. Under the terms of the agreement, the Company
assigns to the factor and the factor purchases from the Company eligible
accounts receivable. Substantially all of the credit risk is then assumed by the
factor for these eligible accounts receivable. The factor remits payments to the
Company for the assigned accounts receivable that are within the financial
parameters set forth in the factoring agreement. Those financial parameters
include requirements that invoice amounts meet approved credit limits and that
the customer does not dispute the invoices. The purchase price of the accounts
receivable that the Company assigns to the factor equals the invoiced amount,
which is adjusted for allowances for discounts and other customer credits.
After the factor purchases the Company's accounts receivable, the factor may, in
its discretion, provide the Company with cash advances taking into account the
assigned accounts receivable due from the Company's customers and inventory. As
of October 31, 2003, the factor was advancing approximately 70% of the eligible
receivables due from eligible customers and 50% of inventory (up to $2 million).
The factor charges the Company a factor charge, as defined, and also charges for
advances taken. Interest is charged on these advances at the prime rate (4% at
October 31, 2003) plus 1%. The factor charges and interest expense on the
advances are included in "interest and financing costs" in the accompanying
consolidated statement of operations.
The due from factor consists of the following:
OCTOBER 31,
-----------------------
(000'S OMITTED)
2003 2002
---------- ----------
Outstanding accounts receivable sold to factor, net of
allowances of $2,173 and $4,666, respectively $ 5,132 $ 11,483
Advances from factor 4,536 7,973
---------- ----------
$ 596 $ 3,510
========== ==========
F-9
The following table sets forth the adjustment to the allowances included as a
reduction of the amounts due from factor:
YEAR ENDED OCTOBER 31,
(000'S OMITTED)
---------------------------------------
2003 2002 2001
----------- ------------ ----------
Balance - beginning of year $ (4,666) $ (2,750) $ (2,333)
Add: provision (5,175) (13,134) (6,229)
Less: amounts charged to operations 7,668 11,218 5,812
----------- ------------ ----------
Balance - end of year $ (2,173) $ (4,666) $ (2,750)
----------- ------------ ----------
An officer of the Company and two officer/shareholders have guaranteed repayment
of the advances from the factor.
4. PREPAID EXPENSES Prepaid expenses consist of the following:
OCTOBER 31,
(000'S OMITTED)
--------------------
2003 2002
-------- --------
Prepaid advertising $ 783 $ 1,025
Prepaid taxes 149
Prepaid insurance 49 76
-------- --------
$ 981 $ 1,101
======== ========
5. PROPERTY AND Property and equipment, net, consists of the following:
EQUIPMENT
OCTOBER 31,
(000'S OMITTED)
--------------------- ESTIMATED
2003 2002 USEFUL LIFE
---------- ---------- ------------------
Software $ 35 $ 22 3 years
Furniture 177 170 5 years
Computer equipment 1,753 1,621 5 years
Leasehold improvements 126 126 Term of lease
---------- ----------
2,091 1,939
---------- ----------
Less accumulated depreciation
and amortization:
Software 7 3
Furniture 114 80
Computer equipment 1,061 756
Leasehold improvements 54 41
---------- ----------
Total accumulated depreciation
and amortization 1,236 880
---------- ----------
$ 855 $ 1,059
========== ==========
F-10
Computer equipment includes amounts acquired under capital leases of
approximately $163 with related accumulated depreciation of approximately $85
and $54 at October 31, 2003 and 2002, respectively.
6. DUE TO FINANCE COMPANY:
The Company has a purchase order assignment arrangement with a finance company
to provide funding for the manufacture of video games to fulfill customer
purchase orders. The Company is obligated for a minimum volume of $25,000,000,
as defined, and to pay a minimum commitment fee subject to waiver, as described
in the agreement, among other matters. The Company is charged 3.3% of the
purchase order amount for each transaction to open a letter of credit. Letters
of credit and advances outstanding beyond the initial 60 days bear interest at
the prime rate (4% at October 31, 2003) plus 1% per annum.
7. ADVANCES FROM CUSTOMERS
The Company has entered into a license and distribution agreement, as amended,
with an interactive game publisher to distribute the Company's videogames in
Europe that expires March 31, 2005. During the years ended October 31, 2003 and
2002, the Company recorded in net revenues approximately $2,763,000 and
$354,000, respectively, for royalties earned under the agreement. At October 31,
2003, under the amended agreement, the Company is guaranteed a minimum royalty
of approximately $5,200,000 over the term of the agreement against which the
Company has already received an advance of $608,000.
In December 2003, the Company was notified by the interactive game publisher
that it was terminating the license and distribution agreement as a result of
the Company's merger with ConnectivCorp (see Note 14). The Company is in
discussion with the publisher who has indicated an interest in entering into a
new contract under revised terms, however, there can be no assurance that the
Company will be successful in negotiating a new contract on acceptable terms, or
at all.
The Company has sales agreements with two customers, which require the Company
to sell certain products to the customer. The sales agreements provide, among
other matters, for the customers to advance to the Company, as of October 31,
2003, approximately $11,000,000 in the aggregate, to be applied against future
sales. In connection with sales agreements with one of the customers, the
Company provided the customer with a performance bond through letters of credit
aggregating $4,573,000 to guarantee performance under the agreement.
As of January 7, 2004, the outstanding advance from the customers was
approximately $2,300,000, and the obligations under the performance bond were
satisfied.
At October 31, 2002, one of the above customers had advanced the Company
approximately $4,121,000 against future sales.
8. SETTLEMENT OBLIGATION
In August 2003, the US District Court of Massachusetts in Infogrames
Interactive, Inc. v. Majesco Sales Inc. entered judgment against the Company in
the amount of $6.7 million pursuant to an action for breach of a licensing and
distribution agreement. In December 2003, the Company settled the matter by
agreeing to pay Atari Interactive, Inc. (formerly Infogrames Interactive, Inc.)
("Atari") $6,700,000 as follows: (a) $1,000,000 within two weeks after signing
(the "Effective Date"), which amount was borrowed (see Note 14) and paid; (b)
$2,500,000 upon the first to occur of (1) Majesco receiving a total of
$15,000,000 or more in third-party financing (subject to various terms and
conditions) (the "Financing Date") or (2) June 30, 2004; (c) $1,000,000 on the
earlier of one year from the Financing Date or June 30, 2005, with interest at
5% per annum; and (d) $2,200,000 on a date which is 42 months from the Effective
Date, such payment accruing interest at the rate of 5% per annum from the
earlier of the Financing Date or June 30, 2004.
As collateral security for Majesco's obligations to Atari, Majesco granted Atari
a continuing security interest in all of its assets, to the extent permitted
under the Company's existing or future indebtedness.
Consistent with the security interest granted to Atari, Majesco also agreed to
assign to Atari its right to receive all revenue under certain of its
distribution agreements, which assignment will be released under certain
circumstances.
Such revenues are payable to Atari in order to satisfy Majesco's obligations
described in (c) above and thereafter to satisfy the obligations in (b) above;
provided that regardless of the revenue received under these agreements,
F-11
Majesco is obligated to pay Atari, no later than March 31, 2004, on account of
the obligations described in (c) above, $500,000.
9. LOAN PAYABLE - SHAREHOLDERS
During the years ended October 31, 2003 and 2002, two of the Company's
shareholders advanced the Company approximately $2,295,000 and $36,000, net of
loan repayments. The outstanding loans bear interest at the rate 10% per annum
with interest payable monthly. The loans are due on demand except for
$3,000,000, which subsequent to October 31, 2003 the shareholders agreed to
convert into an equity security of ConnectivCorp (see note 14). At October 31,
2003 and 2002, there was approximately $24,000 and $36,000, respectively, of
accrued interest outstanding. During the year ended October 31, 2003,
approximately $2,485,000 of the proceeds was used to repay the then outstanding
amounts under a line of credit agreement with a bank. During the years ended
October 31, 2003, 2002 and 2001, the Company charged operations for interest
expense related to this obligation for approximately $276,000, $240,000 and
$153,000, respectively.
10. LOAN PAYABLE - BANK
The Company had a $2,500,000 line of credit with a bank that was to expire on
February 28, 2004. Borrowings under the line of credit bore interest at the
bank's prime rate plus 1% with interest payable monthly. The loan payable-bank
was repaid by the proceeds from shareholder advances (see Note 9).
11. EMPLOYEE RETIREMENT PLANS
During 2003, the Company merged its existing defined contribution pension plan
and a money purchase pension plan which covered all eligible employees.
Contributions are funded as accrued, not to exceed 25% of each eligible
employee's compensation, as defined.
During October 2003, the Company adopted a defined contribution 401(k) plan
covering all eligible employees.
The Company charged to operations approximately $69,000, $162,000 and $160,000
for contributions to retirement plans for the years ended October 31, 2003, 2002
and 2001, respectively.
Certain shareholders and key employees of the Company serve as trustees of
plans.
12. MAJOR CUSTOMERS
Sales to Toys "R" Us Inc. represented approximately 32%, 19% and 31% of net
revenues in 2003, 2002 and 2001, respectively. Sales to Wal-Mart, Inc.
represented approximately 12% and 25% of net revenues in 2002 and 2001,
respectively. In 2003, sales to Jack of All Games, Inc., a subsidiary of
Take-Two Interactive Software, Inc. represented 14% of net revenues and sales
to Electronics Boutique Inc. represented 10% of net revenues in 2002.
13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under noncancelable operating leases for administrative
offices, automobiles, and other equipment expiring at various dates through
2009. The future aggregate minimum rental commitments exclusive of required
payments for operating expenses are as follows:
YEAR ENDING
OCTOBER 31,
---------------
2004 $ 461,000
2005 378,000
2006 342,000
2007 334,000
2008 333,000
2009 251,000
--------------
$ 2,099,000
==============
Rent expense amounted to approximately $536,000, $466,000 and $405,000 for the
years ended October 31, 2003, 2002 and 2001, respectively.
F-12
At October 31, 2003, the Company is committed under its agreements with certain
developers for milestone payments and for acquisition of intellectual property
rights aggregating $4,100,000 through October 31, 2004.
At October 31, 2003, the Company had open letters of credit aggregating
approximately $3,656,000.
In September 2002, Rage Games Limited ("Rage") filed a complaint against the
Company in the United States District Court for the District of New Jersey
alleging the Company breached its two agreements with Rage and alleged claims
based on an unjust enrichment theory, among other matters. Rage has, however,
demanded full payment of "all amounts due and owing" under the agreements
aggregating $6,000,000, and royalties based on retail sales. The Company has
asserted substantial defenses that the product was not fit for use and has
asserted counterclaims for damages, including unjust enrichment in connection
with the second agreement.
The National Association of Securities Dealers ("NASD") is conducting a review
of certain unusual trading activity in the common stock of ConnectivCorp between
the time of the signing of the letter of intent with respect to the merger of
the Company and ConnectivCorp (see Note 14) and the date that ConnectivCorp
announced that a letter of intent was signed. There also appears to be unusual
trading activity around the time of the signing of the definitive agreement for
the merger and prior to the announcement of such signing.
Depending upon the outcome of the review by the NASD, the matter could be
referred to the Securities and Exchange Commission for further action. If the
Company is sanctioned or otherwise held liable for this trading, such sanctions
could have a material adverse effect on the Company's reputation, listing,
financial condition, results of operations and liquidity. In addition, it is
possible that such matters may give rise to civil or criminal actions.
In the opinion of management and the advice of counsel, the Company has made
adequate provision for potential liabilities, if any, arising from the above
matters. However, the costs and other effects of pending or future litigation,
governmental investigations, legal and administrative cases and proceedings
(whether civil or criminal), settlements, judgments and investigations, claims
and changes in those matters (including those matters described above), and
developments or assertions by or against the Company relating to intellectual
property rights and intellectual property licenses, could have a material
adverse effect on the Company's business, financial condition and operating
results.
14. SUBSEQUENT EVENTS
On December 5, 2003, the Company consummated a merger with ConnectivCorp, a
substantially inactive company, in which ConnectivCorp exchanged 15,325,000
shares of its Common Stock and 925,000 shares of its Series A convertible
preferred stock for all of the issued and outstanding common stock of the
Company. (The Series A Preferred Stock is convertible into 65,675,000 shares of
ConnectivCorp's common stock at anytime after ConnectivCorp amends its
Certificate of Incorporation to increase its authorized common stock to allow
for such conversion). As a result of the Merger, the Company became a wholly
owned subsidiary of ConnectivCorp and its sole operating business. Pursuant to
certain settlement agreements between ConnectivCorp and its creditors which were
entered into prior to the merger with the Company, ConnectivCorp is obligated to
pay these creditors $750,000 upon the sale of at least $10,000,000 of equity
securities or convertible debt, if the sale occurs within one year of the
closing of the merger. This transaction has been accounted for as a reverse
acquisition whereby ConnectivCorp is treated as being acquired in a purchase
transaction by the Company, as control rests with the former shareholders of the
Company.
In November 2003, in connection with the settlement with Atari, the Company
borrowed $1,000,000 from the father-in-law of the Company's President. The loan
is convertible into 2,000,000 shares of ConnectivCorp's common stock.
Effective February 17, 2004, in order to assist the Company in its financing
efforts, Jesse Sutton, Joseph Sutton, Adam Sutton and Morris Sutton, on behalf
of Sarah Sutton, agreed to place an aggregate of 1 million shares (250,000 each)
of common stock received in the merger into escrow for five years to satisfy
certain claims that may arise in the future against Majesco or ConnectivCorp in
connection with the issuance of securities by ConnectivCorp from October 1, 2003
through December 31, 2003, and any trading in the securities of ConnectivCorp
from October 1, 2003 through December 31, 2003.
As of February 17, 2004, ConnectivCorp has received subscriptions for 1,337
units, each unit consisting of (i) a share of 7% convertible preferred stock
which is convertible into 10,000 shares of common stock and (ii) warrants to
purchase, at an exercise price of $1 per share, 10,000 shares of common stock
pursuant to a private placement
F-13
memorandum with accredited investors. In connection with the private placement,
the subscribers deposited $13,370,000 into escrow which will be released to
ConnectivCorp upon the filing of Majesco's audited consolidated financial
statements as of October 31, 2003 and 2002 and for each of the three years in
the period ended October 31, 2003, along with certain pro forma information with
the Securities and Exchange Commission. The release of the escrow to
ConnectivCorp is also subject to customary closing conditions
15. RELATED PARTY TRANSACTIONS
The Company uses the services of a company in which the brother of the Chairman
is an officer and co-owner for printing and packaging of the Company's products.
During the years ended October 31, 2003 and 2002, the Company was charged
approximately $1,922,000 and $672,000, respectively, for services provided which
is included in the caption product costs in the accompanying consolidated
statement of operations. At October 31, 2003 and 2002, the amounts due to this
vendor are approximately $876,000 and $219,000, respectively, which are included
in accounts payable and accrued expenses in the accompanying consolidated
balance sheet. During the year ended October 31, 2001, this vendor was not used.
In addition, the father of the four principal shareholders who is also the
Chairman advanced the Company $200,000 during the year ended October 31, 2003.
The amount was repaid in December 2003.
F-14
MAJESCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 30,
2004
-------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents........................................................................... $ 1,760
Due from factor..................................................................................... 8,966
Inventory of finished goods......................................................................... 4,727
Capitalized software development costs and prepaid license fees..................................... 9,118
Prepaid expenses.................................................................................... 1,639
------------
Total current assets.............................................................................. 26,210
Property and equipment - net........................................................................... 763
Other assets........................................................................................... 68
------------
Total assets...................................................................................... $ 27,041
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Accounts payable and accrued expenses............................................................... $ 7,565
Due to financing company............................................................................ 1,027
Advances from customers............................................................................. 6,696
Settlement obligations - current portion............................................................ 2,710
Loans payable - shareholders - current portion...................................................... --
Advance from officer................................................................................ --
------------
Total current liabilities......................................................................... 17,998
Settlement obligations - net of current portion........................................................ --
Capital lease obligations - net of current portion..................................................... 10
Loans payable - shareholders - net of current portion.................................................. --
Warrant liability...................................................................................... 69,935
Commitments and contingencies
Stockholders' deficiency:
Common stock - $.001 par value; 250,000,000 shares authorized; 80,853,440 shares issued and
outstanding;...................................................................................... 81
7% Convertible Preferred Stock - $.001 par value; 3,000 shares authorized; 2,683 issued and
outstanding....................................................................................... --
Additional paid in capital.......................................................................... (12,249)
Accumulated deficit................................................................................. (48,699)
Accumulated other comprehensive loss................................................................ (35)
------------
Total stockholders' deficiency.................................................................... (60,902)
------------
Total liabilities and stockholders' deficiency.................................................... $ 27,041
============
See notes to consolidated financial statements.
F-15
MAJESCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30
----------------------------------
2004 2003
---------------- ----------------
(UNAUDITED)
Net revenues............................................... $ 41,668 $ 27,144
Cost of sales..............................................
Product costs........................................... 25,212 12,755
Software development costs and licenses fees............ 3,524 4,448
---------------- ----------------
28,736 17,203
---------------- ----------------
Gross profit.......................................... 12,932 9,941
Operating expenses
Product research and development........................ 1,263 1,228
Selling and marketing................................... 5,037 5,982
General and administrative.............................. 2,965 1,896
Depreciation and amortization........................... 187 178
---------------- ----------------
9,452 9,284
---------------- ----------------
Operating income...................................... 3,480 657
Other costs and expenses
Unrealized (gain)/loss on foreign exchange contract..... 82 --
Merger costs............................................ 342 --
Interest and financing costs, net....................... 1,302 1,077
Change in fair value of warrants........................ 49,205
---------------- ----------------
Loss before provision for income taxes..................... (47,451) (420)
Provision for income taxes................................. 489 --
---------------- ----------------
Net loss.............................................. $ (47,940) $ (420)
Deemed dividend - beneficial conversion charge............. 759 --
Preferred stock dividend................................... 339 --
---------------- ----------------
Net loss attributable to common stock................. $ (49,038) $ (420)
================ ================
Basic and diluted net loss attributable to common
stockholders per share.................................. $ (1.37) $ (.03)
================ ================
Weighted average shares outstanding........................ 35,784,903 15,325,000
================ ================
Net loss................................................... $ (47,940) $ (420)
Other comprehensive loss
Foreign currency translation adjustments................ $ (17) $ (33)
---------------- ----------------
Comprehensive loss...................................... $ (47,957) $ (453)
================ ================
See notes to consolidated financial statements.
F-16
MAJESCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
Common Stock Series A Preferred Stock 7% Preferred Stock
- $.001 par value - $.001 par value - $.001 par value
------------------- ------------------------ --------------------
Number Amount Number Amount Number Amount
---------- ------- ----------- --------- -------- -------
Balance - October 31, 2003 15,325,000 $ 15 925,000 $ 1
Reclassification of accumulated deficit as a -- -- -- --
result of revocation of S Corporation election
Common stock issued by Majesco Sales Inc.
to acquire Connectivcorp 22,853,392 23
Issuance of units pursuant to
private placement memorandum,
net of related expenses of $4,341 2,583
Deemed dividend - beneficial
conversion charge
Surrender of Series A preferred stock
with equivalent voting rights of
24,999,952 votes (352,112)
Issuance of common stock:
Upon conversion of Series A preferred stock 40,675,048 41 (572,888) (1) --
Upon conversion of loans payable - related party 2,000,000 2
Issuance of units in connection with
settlement of loans payable - stockholders 100
Issuance of stock options for services
rendered
Net loss
Foreign currency translation adjustment
Total comprehensive loss
----------- ---- --------- ----- ------- -----
Balance at April 30, 2004 80,853,440 $ 81 -- $ -- 2,683 $ --
=========== ==== ========= ===== ======= =====
Accumulated
Additional Other Total
Paid in Accumulated Comprehensive Shareholders'
Capital Deficit Loss Deficiency
----------- ------------ ------------- ---------------
Balance - October 31, 2003 $ 284 $(16,012) $(18) $(15,730)
Reclassification of accumulated deficit as a --
result of revocation of S Corporation election (16,012) 16,012
Common stock issued by Majesco Sales Inc.
to acquire Connectivcorp (23) --
Issuance of units pursuant to
private placement memorandum,
net of related expenses of $4,341 759 759
Deemed dividend - beneficial
conversion charge 759 (759) --
Surrender of Series A preferred stock
with equivalent voting rights of
24,999,952 votes --
Issuance of common stock:
Upon conversion of Series A preferred stock (40)
Upon conversion of loans payable - related party 998 1,000
Issuance of units in connection with
settlement of loans payable - stockholders 1,000 1,000
Issuance of stock options for services 26 26
rendered
Net loss (47,940) (47,940)
Foreign currency translation adjustment (17) (17)
--------
Total comprehensive loss (47,957)
-------- --------- ------ ========
Balance at April 30, 2004 (12,249) $ (48,699) $(35) $(60,902)
======== ========= ==== ========
See notes to consolidated financial statements
F-17
MAJESCO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED APRIL 30
-----------------------------
2004 2003
------------ ------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................................................... $ (47,940) $ (420)
Adjustments to reconcile net loss to net cash used in operating activities
Change in fair value of warrants............................................................... 49,205 --
Depreciation and amortization.................................................................. 187 178
Issuance of stock options for services......................................................... 26 --
Changes in operating assets and liabilities
(Increase) in due from factor - net.......................................................... (8,370) (1,755)
Decrease in inventory........................................................................ 6,268 612
(Increase) decrease in capitalized software development costs and prepaid license fees....... (5,324) 995
(Increase) decrease in prepaid expenses...................................................... (658) 673
Decrease in other assets..................................................................... 8 27
(Decrease) in accounts payable and accrued expenses.......................................... (581) (1,636)
(Decrease) in advances from customers........................................................ (4,928) --
Payment of settlement obligations............................................................ (4,000) (2)
------------ -----------
Net cash used in operating activities..................................................... (16,107) (1,328)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................................................... (95) (84)
------------ -----------
Net cash used in investing activities..................................................... (95) (84)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings - bank............................................................................. -- 122
(Repayments) borrowings to/from finance company - net............................................. (2,039) 990
(Repayments) borrowings - loans from shareholders - net........................................... (2,562) 508
Principal payments on capital lease obligations................................................... (23) (21)
Repayment of officer's advances - net............................................................. (200)
Distribution to shareholders...................................................................... -- (103)
Proceeds from private placement, net of expenses.................................................. 21,489 --
Loan from related party........................................................................... 1,000 --
------------ -----------
Net cash provided by (used in) financing activities....................................... 17,665 1,496
Effect of exchange rates on cash and cash equivalents............................................. (17) (33)
------------ -----------
Net increase in cash.............................................................................. 1,446 51
Cash-- beginning of fiscal period................................................................. 314 692
------------ -----------
Cash-- end of fiscal period....................................................................... $ 1,760 $ 743
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest............................................................................ $ 1,302 $ 1,139
============ ===========
Cash paid for income taxes........................................................................ $ 153 --
============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Fair value of warrants issued in connection with sale of units.................................... $ 20,730 --
============
Issuance of 100 Units of 7% preferred stock and warrants in connection with
settlement of loans from shareholders.......................................................... $ 1,000 --
============
Issuance of 2,000,000 shares of common stock as repayment of loan from related party.............. $ 1,000 --
============
Deemed dividend arising from beneficial conversion feature of the preferred stock................. $ 759 --
============
See notes to consolidated financial statements
F-18
MAJESCO HOLDINGS INC. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND PRINCIPAL BUSINESS ACTIVITY
On December 5, 2003, Majesco Holdings Inc. (formerly ConnectivCorp) ("MHI")
consummated a merger with Majesco Sales Inc. ("MSI") (the "Merger"). As a result
of the Merger, MSI became a wholly-owned subsidiary and the sole operating
business of MHI (See Note 2). All financial information presented reflects the
results of MSI as if MSI had acquired MHI on December 5, 2003.
Majesco Holdings Inc. and subsidiaries ("Majesco" or "Company") is a
developer, publisher and marketer of interactive entertainment software. Majesco
has released titles for all major video game platforms and handhelds, including
Sony's PlayStation and PlayStation (Registered Trademark) 2, Nintendo's N64,
Super Nintendo Entertainment System (SNES), Game Boy TM , Game Boy TM Color,
Game Boy TM Advance and GameCube , Microsoft's Xbox TM , Sega's Dreamcast,
Genesis and Game Gear, and the personal computer ("PC"). Additionally, Majesco
is a manufacturer of a number of accessories licensed by Nintendo. Majesco's
customers include Wal-Mart, Target, Toys "R" Us, Best Buy, Electronics Boutique,
Gamestop and other national and regional retailers. Internationally, Majesco's
products are published through licensing agreements with other publishers.
The accompanying interim consolidated financial statements of the Company
are unaudited, but in the opinion of management, reflect all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the results for the interim period. Accordingly, they do not include all
information and notes required by generally accepted accounting principles for
complete financial statements. The results of operations for interim periods are
not necessarily indicative of results to be expected for the entire fiscal year
or any other period. These interim consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
and notes thereto included herein elsewhere in this prospectus.
2. THE MERGER
On December 5, 2003, Majesco Holdings Inc. consummated a merger with MSI
whereby CTTV Merger Corp., a wholly-owned subsidiary, merged with and into MSI
and Majesco Holdings Inc. exchanged 15,325,000 shares of common stock and
925,000 shares of Series A preferred stock for all of the issued and outstanding
common stock of MSI. The 925,000 shares of Series A preferred stock that were
issued in the Merger were convertible into 65,675,000 shares of common stock at
any time after MHI amended its certificate of incorporation to increase the
authorized common stock to allow for such conversion. Pursuant to the merger
agreement, MSI became a wholly-owned subsidiary of Majesco Holdings Inc. For
accounting purposes, this merger has been accounted for as a reverse merger with
MSI as the accounting acquirer. Costs incurred by the Company, principally
professional fees in connection with the Merger, amounting to approximately
$342,000, were charged to operations during the quarter ended January 31, 2004.
MHI amended its Certificate of Incorporation on April 13, 2004 to increase
its authorized common stock to 250,000,000 shares. In connection with the
private placement of securities in February 2004, the holders of the Series A
preferred stock surrendered to the Company for cancellation 352,112 shares of
Series A preferred stock that were convertible into 24,999,952 shares of common
stock. Also, on April 23, 2004 (see Note 7 - Preferred Stock Offering), the
holders converted their remaining 572,888 shares of Series A preferred stock
into 40,675,048 shares of common stock.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition. The Company recognizes revenue upon shipment of its
product when title and risk of loss are transferred. In order to recognize
revenue, the Company must not have any continuing obligations and it must also
be probable that the Company will collect the accounts receivable. For those
agreements, which provide customers with the right to multiple copies in
exchange for guaranteed minimum royalty amounts (such as under the Company's
international distribution agreements), revenue is recognized at delivery of the
product master or the first copy. Royalties on sales that exceed the guaranteed
minimum are recognized as earned.
F-19
The Company generally sells its products on a no-return basis, although in
certain instances, the Company may provide price protection or other allowances
on certain unsold products. Price protection, when granted and applicable,
allows customers a credit against amounts they owe the Company with respect to
merchandise unsold by them. Revenue is recognized net of estimates of these
allowances.
The Company estimates potential future product price protection and other
allowances related to current period product revenue. The Company analyzes
historical experience, current sell through of retailer inventory of the
Company's products, current trends in the videogame market, the overall economy,
changes in customer demand and acceptance of the Company's products and other
related factors when evaluating the adequacy of price protection and other
allowances.
Sales incentives or other consideration given by the Company to customers
that are considered adjustments of the selling price of its products, such as
rebates and product placement fees, are reflected as reductions of revenue.
Sales incentives and other consideration that represent costs incurred by the
Company for assets or services received, such as the appearance of the Company's
products in a customer's national circular advertisement, are reflected as
selling and marketing expenses.
Software Development Costs and Intellectual Property Licenses. Software
development costs include milestone payments made to independent software
developers under development arrangements. Software development costs are
capitalized once technological feasibility of a product is established and such
costs are determined to be recoverable against future revenues. For products
where proven game engine technology exists, this may occur early in the
development cycle. Technological feasibility is evaluated on a
product-by-product basis. Amounts related to software development that are not
capitalized are charged immediately to development costs. Intellectual property
license costs represent license fees paid to intellectual property rights
holders for use of their trademarks or copyrights in the development of the
Company's products.
Commencing upon the related product's release, capitalized software
development and property licenses costs are amortized to cost of sales based
upon the higher of (i) the contractual rate based on actual net product sales or
(ii) the ratio of current revenue to total projected revenue. The recoverability
of capitalized software development costs and intellectual property licenses is
evaluated based on the expected performance of the specific products for which
the costs relate. The following criteria are used to evaluate expected product
performance: historical performance of comparable products using comparable
technology; orders for the product prior to its release; and estimated
performance of a sequel product based on the performance of the product on which
the sequel is based.
Stock Based Compensation. On March 25, 2004, the Board of Directors granted
3,948,000 options to officers and employees at an exercise price of $1.90 per
share and, on April 30, 2004, 100,000 options at an exercise price of $3.63 to a
newly elected member of the Board of Directors. The options vest over a three
year period and have a ten year term.
The Company accounts for the above mentioned stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of FASB Statement No. 123". Under APB Opinion No. 25, compensation expense for
employees is based on the excess, if any, on the date of grant, between the fair
value of the Company's stock over the exercise price.
F-20
If the Company had recognized compensation expense, in accordance with SFAS
No. 123 and 148, based upon the fair value at the grant date for options granted
to employees, officers and directors during the six-month period ended April 30,
2004, the pro forma effect on net loss and net loss per share would have been as
follows:
SIX MONTHS ENDED
APRIL 30, 2004
-------------------------
(IN THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS)
Net loss attributable to common stock, as reported................................ $ (49,038)
Stock-based employee compensation expense determined under fair value-based method -
net of income tax effect....................................................... 133
---------------
Pro forma net loss................................................................ $ (49,171)
===============
Weighted average common shares outstanding........................................ 35,784,903
===============
Net loss per share - as reported.................................................. $ (1.37)
===============
Net loss per share - pro forma.................................................... $ (1.37)
===============
The assumptions used for the stock option grants include:
Risk free interest rate (annual)............. 2.71%
Expected volatility.......................... 30%
Expected life................................ 5 Years
Assumed dividends............................ none
Earnings per share. Basic loss per share is computed by dividing net loss
by the weighted-average number of common shares outstanding for the periods.
Diluted earnings per share has not been presented because the effect of the
conversion of the 7% preferred stock (26,580,000); stock options (4,050,000)
and warrants (25,979,608) for the six month period ended April 30, 2004 and
Series A preferred stock (65,675,000) for the periods presented would be
antidilutive.
4. SETTLEMENT OBLIGATION
In August 2003, the U.S. District Court of Massachusetts, in Infogrames
Interactive, Inc. v. Majesco Sales Inc., entered judgment against MSI in the
approximate amount of $6.7 million pursuant to a breach of contract action. In
December 2003, the Company settled the case by agreeing to pay Atari
Interactive, Inc. (formerly Infogrames Interactive, Inc.) ("Atari") $6.7 million
as follows: (a) $1 million no later than two weeks after signing of the
settlement agreement (the "Effective Date"), which amount was borrowed and paid
(See Note 5 - Issuance of Common Stock to Related Party); (b) $2.5 million upon
the first to occur of (1) the Company receiving a total of $15 million or more
in third party financing (subject to various terms and conditions) (the
"Financing Date") or (2) June 30, 2004; (c) $1 million on the earlier of one
year from the Financing Date or June 30, 2005, with interest at 5% per annum;
and (d) $2.2 million on a date which is 42 months from the Effective Date, such
payment accruing interest at the rate of 5% per annum from the earlier of the
Financing Date or June 30, 2004. As a result of the Preferred Stock Offering
(See Note 7 - Preferred Stock Offering) the Company paid $2.5 million to Atari
on March 9, 2004.
As more fully described in Legal Proceedings all further obligations to
Atari were satisfied by the payment of $1,500,000 in May 2004.
5. RELATED PARTY TRANSACTIONS
In November 2003, in connection with the settlement with Atari, MSI
borrowed $1 million from the father-in-law of MSI's Chief Executive Officer and
President. The loan was convertible into 2,000,000 shares of MHI's common stock
at the time as there were a sufficient number of authorized shares of common
stock to allow for the conversion of the loan. The loan was converted into
common stock in April 2004.
The Company utilized approximately $2.5 million from the proceeds of the
preferred stock offering (see Note 7) to repay portions of loans previously made
to the Company by two of the Company's executive officers. In order
F-21
to satisfy the remaining balance of the loans previously provided by the two
executive officers, the Company agreed to issue to them, in the aggregate, 100
units.
6. COMMITMENTS AND CONTINGENCIES
The Company may utilize forward contracts in order to reduce financial
market risks. These instruments are used to hedge foreign currency exposures of
underlying assets, liabilities, or certain forecasted foreign currency
denominated transactions. The Company does not use forward exchange contracts
for speculative or trading purposes. The Company's accounting policies for these
instruments are based on whether they meet the criteria for designation as
hedging transactions. The fair value of foreign currency contracts is estimated
based on the spot rate of the hedged currency as of the end of the period. As of
April 30, 2004, the fair value of the contract outstanding was approximately
$2.9 million, which required the Company to record an unrealized loss of $82,000
during the six-month period ended April 30, 2004 (which was net of a gain of
$233,000 for the three months then ended). The risk of counter party
nonperformance associated with this contract was not considered to be material.
Notwithstanding the Company's efforts to manage foreign exchange risk, there can
be no assurance that the Company's hedging activities will adequately protect
against the risks associated with foreign currency fluctuations.
At April 30, 2004, the Company is committed under its agreements with
certain developers for future milestone and license fee payments aggregating
$3.2 million and $10.1 million, respectively.
At April 30, 2004, the Company had open letters of credit aggregating $14.3
million under the Company's purchase order assignment arrangements for inventory
to be delivered during the subsequent quarter.
In September 2002, Rage Games Limited ("Rage") filed a complaint against
MSI in the United States District Court for the District of New Jersey alleging
the Company breached its two agreements with Rage and alleged claims based on an
unjust enrichment theory, among other claims. Rage has, however, demanded full
payment of "all amounts due and owing" under the agreements aggregating $6
million, and royalties based on retail sales. MSI has asserted substantial
defenses that the products were not fit for use and has asserted counterclaims
for damages, including unjust enrichment in connection with the second
agreement.
In December 2003, the Company was notified by the interactive game
publisher that distributes the Company's videogames in Europe that it was
terminating the license and distribution agreement as a result of the Company's
failure to obtain such party's consent to the assignment of such agreement in
connection with the Merger. The Company is in discussion with the publisher who
has indicated an interest in entering into a new contract under revised terms,
however, there can be no assurance that the Company will be successful in
negotiating a new contract on acceptable terms, or at all.
On December 17, 2003 the Company received a letter from the NASD's Market
Regulation Department stating that the NASD was conducting a review of unusual
trading activity in the Company's common stock between the time of the signing
of the letter of intent with respect to the Merger and the date that the Company
announced that a letter of intent was signed. There also appeared to have been
unusual trading activity around the time of the signing of the definitive
agreement for the Merger and prior to the announcement of such signing.
By letter dated April 22, 2004, the NASD indicated that it had concluded
its review and thanked the Company for its cooperation in the review. The letter
indicated that the NASD referred the matter to the Securities and Exchange
Commission ("SEC") for action, if any, the SEC deems appropriate. The letter
concluded that "This referral should not be construed as indicating that any
violations of the federal securities laws or the NASD Conduct Rules have
occurred, or as a reflection upon the merits of the security involved or upon
any person who effected transactions in such security." If the Company is
sanctioned or otherwise held liable for this trading any such sanctions could
have a material adverse effect on the Company's reputation, listing, financial
condition, results of operations and liquidity. In addition, it is possible that
such matters may give rise to civil or criminal actions.
In May 2004, the Company received a letter from a warrant holder making
demand that the Company repurchase for $1.75 million by June 21, 2004 warrants
(issued by ConnectivCorp prior to the Merger) to purchase an aggregate of
147,182 shares at $.10 per share. Management does not believe that this put is a
valid obligation and intends to contest its validity. However, if this matter
proceeds to litigation there is no assurance that the Company will prevail and
the cost of such litigation could be significant.
In the opinion of management, upon the advice of counsel, the Company has
made adequate provision for the potential liability, if any, arising from the
above mentioned matters. However, the costs and other effects of pending
F-22
or future litigation, governmental investigations, legal and administrative
cases and proceedings (whether civil or criminal), settlements, judgments and
investigations, claims and changes in those matters (including those matters
described above), and developments or assertions by or against the Company
relating to intellectual property rights and intellectual property licenses,
could have a material adverse effect on the Company's business, financial
condition and operating results.
7. PREFERRED STOCK OFFERING
On February 26, 2004, the Company completed a private placement of
securities in which the Company raised approximately $25.8 million in gross
proceeds from a group of institutional and accredited investors. The private
placement resulted in net proceeds of approximately $21.4 million after
deducting the placement agent fees and other expenses related to the private
placement. In addition, the placement agent received warrants to purchase up to
268 units, exercisable for five years from the date of issuance.
Pursuant to the terms of the private placement, the Company issued 2,583
units, each unit consisting of (i) one share of 7% convertible preferred stock,
convertible into 10,000 shares of common stock and (ii) a three year warrant to
purchase 10,000 shares of common stock at an exercise price of $1.00 per share.
Each share of 7% preferred stock entitles the holder to receive a 7%
cumulative dividend payable solely in shares of common stock, on an annual
basis. In addition, the holders of the 7% preferred stock are entitled to share
in any dividends paid on the common stock on an "as converted" basis. The
holders of the 7% preferred stock are entitled to a liquidation preference equal
to the amount invested per share, plus any accrued and unpaid dividends. The 7%
preferred stock has voting rights on an "as-converted" basis and votes together
with the common stock as one class, except as otherwise required by law. In
addition, so long as 51% of the currently outstanding 7% preferred stock remains
outstanding, the Company will not issue any capital stock, or securities
convertible into capital stock, that is senior to the 7% preferred stock. The
Company recorded a deemed dividend of $759,000 in the quarter ended April 30,
2004, relating to the beneficial conversion feature attributable to the 7%
preferred stock, after taking into account the value of the warrants issued. The
deemed dividend increases the loss applicable to common stockholders in the
calculation of basic and diluted net loss per common share.
Each share of 7% preferred stock will automatically convert into common
stock at a conversion price of $1.00 per share at such time as the closing price
of the common stock is equal to or greater than $2.50 per share for a 60
consecutive calendar day period, provided that during such 60 consecutive
calendar day period, the average daily trading volume for each day is equal to
or greater than 75,000 shares, and that the registration statement as to the
resale of the common stock underlying the 7% preferred stock and the warrants is
in effect. The Company may call the warrants issued in the private placement for
$.001 per share of common stock underlying the warrants upon achievement of
similar conditions as identified in the preceding sentence.
Pursuant to the terms of the 7% preferred stock, the Company agreed within
120 days of closing of the private placement to expand the size of the Board of
Directors to seven members. Four of the seven members are to be "independent,"
and two of those independent members are to be nominated by the holders of the
7% preferred stock, so long as 51% of the currently outstanding 7% preferred
stock remains outstanding.
The Company used $3.3 million of the net proceeds to pay certain creditors,
including $2.5 million for a previously negotiated settlement amount to Atari
Interactive, Inc. and approximately $2.5 million to repay portions of loans
previously made to the Company by two of the Company's executive officers. In
order to satisfy the remaining balance of the loans previously provided by the
two executive officers, the Company agreed to issue to them, in the aggregate,
100 units. The Company used the remaining balance of the proceeds for working
capital purposes. In connection with the private placement, the holders of the
Series A preferred stock surrendered an aggregate of 352,112 shares of their
Series A convertible preferred stock, which were convertible into 24,999,952
shares of common stock. Prior to the offering the stockholders also agreed to
place 1,000,000 shares of their common stock into escrow for five years to
satisfy certain claims that may arise.
All of the former holders of the Company's Series A convertible preferred
stock have agreed not to sell or otherwise dispose of any of the Company's
securities held by such persons, subject to certain exceptions and without the
consent of the placement agent, for a period of one year commencing upon the
effectiveness of the registration statement.
The securities sold in the private placement or issuable upon exercise or
conversion of securities sold in the private placement have not been registered
under the Securities Act of 1933 and may not be offered or sold in the
F-23
United States in the absence of an effective registration statement or exemption
from registration requirements. The Company agreed to file a registration
statement with the SEC, to register for resale the common stock underlying the
7% preferred stock, the warrants, and the securities underlying the placement
agent's warrants, which was filed on May 25, 2004. In addition, in the event the
registration statement is not declared effective by the SEC by August 23, 2004,
the Company shall be obligated to pay liquidated damages to each investor, equal
to 3.0% of such investor's initial investment for each 30 day period the
registration statement is not declared effective.
In accordance with Emerging Issues Task Force Issue 00-19 ("EITF 00-19"),
"Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled in, a Company's Own Stock", the Company has initially accounted for the
fair value of the warrants as a liability until the above mentioned registration
statement is declared effective. As of the closing date of the private placement
the fair value of the warrants was approximately $21 million calculated
utilizing the Black-Scholes option pricing model. In addition, changes in the
market value of the Company's common stock from the closing date through the
effective date of the registration statement will result in non-cash charges or
credits to operations to reflect the change in fair value of the warrants during
this period. (The Company recorded a charge to operations of approximately $49.2
million during the three months ended April 30, 2004 to reflect the change in
market value of the warrants.) At the effective date, the fair value of the
warrants will be reclassified to equity.
The assumptions used valuing the warrants include:
February April 30,
26, 2004 2004
-------- ----
Risk free interest rate (annual)............. 2.15% 2.82%
Expected volatility.......................... 30% 30%
Expected life................................ 3 Years 3 Years
Assumed dividends............................ none none
8. INCOME TAXES
The provision for income taxes for the six-month period ended April 30,
2004 is based on the Company's estimated annualized tax rate after giving effect
to the utilization of available net operating loss carryforwards which arose
prior to the Merger and are subject to annual limitations based on change of
control and ownership changes, and temporary differences related to certain
expenses which were recorded for financial statement purposes in the prior year
and not then deductible for tax purposes.
Prior to November 1, 2003, the Company elected to be treated as an S
Corporation under the provisions of the Internal Revenue Code and as a result,
income taxes were the responsibility of the individual shareholders. Effective
November 1, 2003, the Company revoked its S Corporation election, and
accordingly, the Company reclassified approximately $16.0 million of
undistributed losses from "accumulated deficit" to "additional paid in capital".
9. STOCK-BASED COMPENSATION ARRANGEMENTS
On February 13, 2004, the stockholders approved a stock option plan that
provides for the granting of options to purchase the Company's common stock. The
plan covers employees, directors and consultants and provides for among other
things, the issuance of non-qualified options and incentive stock options. As of
April 30, 2004, the Company has reserved 10 million shares of common stock for
issuance under the plan.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and SFAS No. 148 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. The measurement
date of the fair value of the equity instrument issued is the earlier of the
date on which the counterparty's performance is complete or the date on which it
is probable that performance will occur. Included in the stock option grant on
March 25, 2004 (See Note 3--Significant Accounting Policies) were 50,000 options
for services rendered for which the Company expensed as a non cash charge to
operations approximately $26,000, which is included in selling and marketing
expense in the period ended April 30, 2004.
F-24
[BACK COVER]
This prospectus is part of a registration statement we filed with the Securities
and Exchange Commission. You should rely only on the information or
representations contained in this prospectus. We have not authorized anyone to
provide information other than that provided in this prospectus. We have not
authorized anyone to provide you with any information that is different. We are
not making an offer of these securities in any state or other jurisdiction where
the offer is not permitted. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the front of the
document (or such other date as of which such information is purported to be
given).
61,582,000
Shares of Common Stock
[LOGO OMITTED]
MAJESCO HOLDINGS INC.
The date of this prospectus is ___________, 2004
PROSPECTUS
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
We will bear all expenses, estimated at $300,000, incurred in connection
with the registration of the shares offered in this registration statement under
the Securities Act of 1933 and qualification or exemption of the registered
shares under state securities laws for the named selling stockholders. The
selling stockholders will pay all underwriting discounts and selling commissions
applicable to the sale of registered shares.
SEC registration fees $ 31,795
Blue sky fees and expenses* $ 5,000
Costs of printing and engraving* $ 30,000
Legal fees and expenses* $ 150,000
Accounting fees and expenses* $ 75,000
Miscellaneous* $ 8,205
----------------------- ----------
TOTAL* $ 300,000
==========
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to certain conditions, the personal liability of directors to
corporations and their stockholders for monetary damages for breach of their
fiduciary duties. Our certificate of incorporation limits the liability of our
directors to the fullest extent permitted by Delaware law.
We have obtained director and officer liability insurance to cover
liabilities of our directors and officers that may occur in connection with
their services to us, including matters arising under the Securities Act of 1933
(the "Securities Act"). Our certificate of incorporation and bylaws also provide
that we will indemnify and advance expenses to, to the fullest extent permitted
by the Delaware General Corporation Law, any of our directors and officers,
against any and all costs, expenses or liabilities incurred by them by reason of
having been a director or officer.
Such limitation of liability and indemnification does not affect the
availability of equitable remedies. In addition, we have been advised that in
the opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
is therefore unenforceable.
There is no pending litigation or proceeding involving any of our
directors, officers, employees or agents in which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding that may result in a claim for such indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
We believe that the sale and issuance of the securities described in
paragraphs 1 - 9 below exempt from registration under the Securities Act by
virtue of satisfaction of the conditions of Section 4(2) and Regulation D
promulgated thereunder. All of the issuances listed in paragraphs 1-9 below
were made to accredited investors. No underwriter was involved with these
transactions.
1. On March 18, 2002, we issued 1,205,000 shares of common stock to our then
officers and directors in exchange for services provided to the company,
and in conjunction with such issuance, recognized $22,475 of compensation
expense. During the same period, we issued 500,000 shares of common stock
to satisfy $42,292 of accounts payable outstanding at December 31, 2001.
2. During the quarter ended March 31, 2002, we issued 2,960,000 shares of our
common stock to consultants as compensation for services rendered in
connection with the letter of intent to acquire Aqua Development Corp. and
in conjunction with such issuance, recognized consulting expense of
$58,922.
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3. During the six months ended June 30, 2002, we raised $297,500 through the
issuance of 2,975,000 shares of our common stock at $0.10 per share to four
of our existing shareholders and consultants.
4. During the nine months ended September 30, 2003, we raised $175,000 through
the issuance of 1,750,000 shares of our common stock at $0.10 per share to
various accredited investors. In addition, during such period, we issued
250,000 shares of common stock at $0.10 per share to satisfy a $25,000 loan
payable.
5. During the period from October 1, 2003 through December 5, 2003, we raised
$507,200 through the sale of 5,072,000 shares of common stock at $0.10 per
share to accredited investors.
6. On December 5, 2003, we consummated a merger with Majesco Sales Inc.
("Majesco"), whereby CTTV Merger Corp., our wholly-owned subsidiary, merged
with and into Majesco. Pursuant to the merger, the stockholders of Majesco
received 15,325,000 shares of our common stock and 925,000 shares of series
A convertible preferred stock in exchange for all of the issued and
outstanding common stock of Majesco. On April 23, 2004, the holders of the
series A convertible preferred stock converted, in the aggregate, 572,888
shares, representing all of the series A convertible preferred stock issued
and outstanding immediately prior to their conversion, into 40,675,048
shares of our common stock.
7. On February 26, 2004, we raised gross proceeds of approximately $25.8
million in a private placement in which we issued to accredited investors
2,583 units, each unit consisting of (i) one share of our 7% convertible
preferred stock, convertible into 10,000 shares of our common stock and
(ii) a three year warrant to purchase 10,000 shares of our common stock at
an exercise price of $1.00 per share. The net proceeds of the private
placement were used as follows: (i) approximately $3.3 million to pay
certain creditors, including part of a previously negotiated settlement
amount to Atari Interactive, Inc.; (ii) approximately $2.5 million to repay
portions of loans previously made to us by Jesse Sutton, our President and
Chief Executive Officer, and Joseph Sutton, our Executive Vice President of
Research & Development; and (iii) the remainder for working capital
purposes. In addition, JMP Securities LLC, the placement agent, in the
private placement received a warrant to purchase up to 268 units, on the
same terms as such were issued to the investors.
8. During November 2003, we issued 302,000 shares of common stock to CEOcast,
Inc. and 160,000 shares of common stock to Hayden Communications, Inc. at
$.10 per share pursuant to consultation agreements with these firms, as
compensation for services.
9. During December 2003, we issued 100,000 shares of common stock to Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., pursuant to a settlement
agreement, as compensation for services.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
2.1 Agreement and Plan of Merger, dated as of November 10, 2003 by and
among ConnectivCorp, CTTV Merger Corp. and Majesco Sales Inc.
(incorporated by reference to Exhibit 2.1 to our Current Report on
Form 8-K, filed on December 22, 2003).
2.2 Amendment to Agreement and Plan of Merger, dated December 5, 2003, by
and among ConnectivCorp, CTTV Merger Corp. and Majesco Sales Inc.
(incorporated by reference to Exhibit 2.2 to our Current Report on
Form 8-K, filed on December 22, 2003).
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to our Annual Report on Form 10-K, filed on
April 16, 2002).
3.2 Amendment to Certificate of Incorporation dated September 11, 2000
(incorporated by reference to Exhibit 3.1 to our Current Report on
Form 8-K, filed on September 13, 2000).
3.3 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Majesco Holdings Inc. (incorporated by reference to
Exhibit 3.1 to our Current Report on Form 8-K, filed on April 27,
2004).
3.4 Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to
our Annual Report on Form 10-K, filed on April 16, 2002).
4.1 Certificate of Designations, Preferences and Rights of 7% Cumulative
Convertible Preferred Stock, filed with the Secretary of State of the
State of Delaware on February 20, 2004 (incorporated by reference to
Exhibit 4.1 to our Current Report on Form 8-K, filed on March 1,
2004).
4.2 Form of investor Subscription Agreement (incorporated by reference to
Exhibit 4.2 to our Current Report on Form 8-K, filed on March 1,
2004).
4.3 Form of warrant issued to investors (incorporated by reference to
Exhibit 4.3 to our Current Report on Form 8-K, filed on March 1,
2004).
4.4 Form of placement agent warrant (incorporated by reference to Exhibit
4.4 to our Current Report on Form 8-K, filed on March 1, 2004).
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
counsel to the Registrant, with respect to the legality of securities
being registered.
*10.1 Lease Agreement, dated as of February 2, 1999, by and between 160
Raritan Center Parkway, L.L.C. and Majesco Sales Inc.
**10.2 Xbox Publisher License Agreement, dated January 31, 2001, by and
between Microsoft Corporation and Majesco Sales Inc.
**10.3 Amendment to the Xbox Publisher Licensing Agreement, dated April 4,
2002, by and between Microsoft Corporation and Majesco Sales Inc.
**10.4 Amendment to the Xbox Publisher Licensing Agreement (Xbox Live
Distribution), dated March 17, 2003, by and between Microsoft
Corporation and Majesco Sales Inc.
**10.5 Playstation(R) 2 Licensed Publisher Agreement, dated April 1, 2000,
by and between Sony Computer Entertainment America, Inc. and Majesco
Sales Inc.
**10.6 Renewal Licensed Developer Agreement, dated July 30, 2003, by and
between Sony Computer Entertainment America, Inc. and Majesco Sales
Inc.
**10.7 Licensed Publisher Agreement, dated July 30, 2003, by and between
Sony Computer Entertainment America, Inc. and Majesco Sales Inc.
**10.8 License Agreement for Game Boy Advance (Western Hemisphere), dated
May 10, 2001, by and between Nintendo of America, Inc. and Majesco
Sales Inc.
**10.9 License Agreement for Nintendo Gamecube (Western Hemisphere), dated
January 11, 2002, by and between Nintendo of America, Inc. and
Majesco Sales Inc.
23.1 Consent of Goldstein Golub Kessler LLP
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (see
Exhibit 5.1)
24.1 Powers of Attorney (See signature page)
* To be filed by amendment or as an exhibit to a report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 and incorporated by
reference into this document.
** To be incorporated by reference to a Current Report on Form 8-K to be
filed.
(b) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules are omitted because the information is
included in our financial statements or notes to those financial statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales of securities are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
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(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for purpose of determining any liability under the Securities Act of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered, and the offering of
such securities at that time to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Edison, New Jersey on July 29, 2004.
MAJESCO HOLDINGS INC.
By: /s/ Jesse Sutton
------------------------------------
Jesse Sutton
President & Chief Executive Officer
POWER OF ATTORNEY
We the undersigned officers and directors of Majesco Holdings Inc., hereby
severally constitute and appoint Jesse Sutton and Jan E. Chason, and each of
them singly (with full power to each of them to act alone), our true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution
in each of them for him and in his name, place and stead, and in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Registration Statement (or any other Registration Statement for the same
offering that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933), and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them or their or
his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities held on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jesse Sutton President and Chief Executive July 29, 2004
--------------------- Officer (principal executive
Jesse Sutton officer) and Director
/s/ Jan E. Chason Chief Financial Officer July 29, 2004
--------------------- (principal financial and
Jan E. Chason accounting officer)
/s/ * Chairman of the Board of Directors July 29, 2004
---------------------
Morris Sutton
/s/ * Executive Vice President - July 29, 2004
--------------------- Research and Development
Joseph Sutton and Director
/s/ * Director July 29, 2004
---------------------
Louis Lipschitz
/s/ Marc Weisman Director July 29, 2004
---------------------
Marc Weisman
* By executing his name hereto, Jesse Sutton is signing this document on
behalf of the persons indicated above pursuant to the powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
By: /s/ Jesse Sutton
--------------------
Jesse Sutton
Attorney-in-fact
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