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EX-32.2 - EX-32.2 - MAD CATZ INTERACTIVE INC | a58554exv32w2.htm |
EX-31.1 - EX-31.1 - MAD CATZ INTERACTIVE INC | a58554exv31w1.htm |
EX-32.1 - EX-32.1 - MAD CATZ INTERACTIVE INC | a58554exv32w1.htm |
EX-31.2 - EX-31.2 - MAD CATZ INTERACTIVE INC | a58554exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended December 31, 2010
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File No. 001-14944
MAD CATZ INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
Canada (State or other jurisdiction of incorporation or organization) |
Not Applicable (I.R.S. Employer Identification No.) |
|
7480 Mission Valley Road, Suite 101 San Diego, California (Address of principal executive offices) |
92108 (Zip Code) |
(619) 683-9830
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
There were 55,723,132 shares of the registrants common stock issued and outstanding as of February
4, 2010.
MAD CATZ INTERACTIVE, INC.
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED DECEMBER 31, 2010
TABLE OF CONTENTS
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Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
(unaudited)
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 9,921 | $ | 2,245 | ||||
Accounts receivable, net |
51,239 | 14,620 | ||||||
Other receivables |
290 | 123 | ||||||
Income tax receivable |
21 | 21 | ||||||
Inventories |
32,511 | 16,975 | ||||||
Deferred tax assets |
17 | 17 | ||||||
Prepaid expenses and other current assets |
1,559 | 1,410 | ||||||
Total current assets |
95,558 | 35,411 | ||||||
Deferred tax assets |
739 | 766 | ||||||
Other assets |
784 | 626 | ||||||
Property and equipment, net |
3,684 | 3,452 | ||||||
Intangible assets, net |
5,805 | 2,828 | ||||||
Goodwill |
11,387 | 8,466 | ||||||
Total assets |
$ | 117,957 | $ | 51,549 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Bank loan |
$ | 25,813 | $ | 3,829 | ||||
Accounts payable |
29,488 | 11,871 | ||||||
Accrued liabilities |
15,978 | 7,988 | ||||||
Note payable, current |
333 | | ||||||
Contingent consideration, current |
1,035 | | ||||||
Income taxes payable |
4,265 | 1,670 | ||||||
Total current liabilities |
76,912 | 25,358 | ||||||
Convertible notes payable |
14,500 | 14,500 | ||||||
Contingent consideration |
3,297 | | ||||||
Other long-term liabilities |
1,690 | 357 | ||||||
Total liabilities |
96,399 | 40,215 | ||||||
Shareholders equity: |
||||||||
Common stock, no par value, unlimited shares
authorized; 55,716,892 and 55,098,549 shares
issued and outstanding at December 31, 2010 and
March 31, 2010, respectively |
49,681 | 48,865 | ||||||
Accumulated other comprehensive loss |
(95 | ) | (55 | ) | ||||
Accumulated deficit |
(28,028 | ) | (37,476 | ) | ||||
Total shareholders equity |
21,558 | 11,334 | ||||||
Total liabilities and shareholders equity |
$ | 117,957 | $ | 51,549 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(unaudited)
(in thousands of U.S. dollars, except share data)
Three Months Ended | Nine months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 92,957 | $ | 48,763 | $ | 150,276 | $ | 92,745 | ||||||||
Cost of sales |
66,556 | 32,822 | 107,429 | 63,424 | ||||||||||||
Gross profit |
26,401 | 15,941 | 42,847 | 29,321 | ||||||||||||
Operating expenses: |
||||||||||||||||
Sales and marketing |
4,935 | 3,696 | 10,982 | 8,747 | ||||||||||||
General and administrative |
4,047 | 3,465 | 10,565 | 9,533 | ||||||||||||
Research and development |
1,089 | 741 | 2,780 | 2,033 | ||||||||||||
Acquisition related items |
102 | | 708 | | ||||||||||||
Amortization of intangible assets |
244 | 395 | 708 | 1,567 | ||||||||||||
Total operating expenses |
10,417 | 8,297 | 25,743 | 21,880 | ||||||||||||
Operating income |
15,984 | 7,644 | 17,104 | 7,441 | ||||||||||||
Interest expense, net |
(1,046 | ) | (645 | ) | (2,284 | ) | (1,637 | ) | ||||||||
Foreign exchange gain (loss), net |
(736 | ) | 109 | (41 | ) | (310 | ) | |||||||||
Other income |
46 | 42 | 223 | 138 | ||||||||||||
Income before income taxes |
14,248 | 7,150 | 15,002 | 5,632 | ||||||||||||
Income tax expense |
4,552 | 1,558 | 5,554 | 2,007 | ||||||||||||
Net income |
$ | 9,696 | $ | 5,592 | $ | 9,448 | $ | 3,625 | ||||||||
Basic net income per share |
$ | 0.18 | $ | 0.10 | $ | 0.17 | $ | 0.07 | ||||||||
Diluted net income per share |
$ | 0.15 | $ | 0.09 | $ | 0.16 | $ | 0.07 | ||||||||
Weighted average shares basic |
55,278,606 | 55,098,549 | 55,158,786 | 55,098,549 | ||||||||||||
Weighted average shares diluted |
66,684,037 | 65,316,293 | 65,819,064 | 55,098,549 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
MAD CATZ INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands of U.S. dollars)
Nine months Ended | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 9,448 | $ | 3,625 | ||||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,036 | 3,003 | ||||||
Amortization of deferred financing fees |
212 | 114 | ||||||
Provision for deferred income taxes |
27 | 118 | ||||||
Loss on disposal or sale of assets |
2 | 81 | ||||||
Stock-based compensation |
458 | 458 | ||||||
Changes in operating assets and liabilities, net of effects from acquisition: |
||||||||
Accounts receivable |
(36,151 | ) | (12,593 | ) | ||||
Other receivables |
(167 | ) | 296 | |||||
Inventories |
(12,924 | ) | (7,133 | ) | ||||
Prepaid expenses and other current assets |
(65 | ) | 220 | |||||
Other assets |
(343 | ) | 2 | |||||
Accounts payable |
15,026 | 2,479 | ||||||
Accrued liabilities |
8,373 | 3,429 | ||||||
Income taxes receivable/payable |
2,593 | 1,398 | ||||||
Net cash used in operating activities |
(11,475 | ) | (4,503 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,473 | ) | (2,412 | ) | ||||
Cash paid for acquisition, net of cash received |
(1,189 | ) | | |||||
Net cash used in investing activities |
(2,662 | ) | (2,412 | ) | ||||
Cash flows from financing activities: |
||||||||
Payment of financing fees |
(100 | ) | (458 | ) | ||||
Repayments on notes payable |
(470 | ) | | |||||
Repayments on bank loan |
(99,875 | ) | (68,291 | ) | ||||
Borrowings on bank loan |
121,859 | 78,275 | ||||||
Proceeds from exercise of stock options |
358 | | ||||||
Net cash provided by financing activities |
21,772 | 9,526 | ||||||
Effects of foreign exchange on cash |
41 | 324 | ||||||
Net increase in cash |
7,676 | 2,935 | ||||||
Cash, beginning of period |
2,245 | 2,890 | ||||||
Cash, end of period |
$ | 9,921 | $ | 5,825 | ||||
Supplemental cash flow information: |
||||||||
Income taxes paid |
$ | 2,959 | $ | 655 | ||||
Interest paid |
$ | 970 | $ | 1,248 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Fair value of assets acquired in acquisition, net of cash received |
3,306 | | ||||||
Goodwill |
2,928 | | ||||||
Intangible assets |
3,700 | | ||||||
Liabilities assumed in acquisition |
(4,155 | ) | | |||||
Notes payable assumed in acquisition |
(803 | ) | | |||||
Contingent consideration liability, net of $413 working capital adjustment |
(3,787 | ) | | |||||
Net cash paid for acquisition |
$ | 1,189 | $ | | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of Contents
MAD CATZ INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
(1) Basis of Presentation
The condensed consolidated balance sheets and related condensed consolidated statements of
operations and cash flows contained in this Quarterly Report on Form 10-Q, which are unaudited,
include the accounts of Mad Catz Interactive, Inc. (the Company) and its wholly-owned
subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. In the
opinion of management, all entries necessary for a fair presentation of such condensed consolidated
financial statements have been included. These entries consisted only of normal recurring items.
The results of operations for the interim period are not necessarily indicative of the results to
be expected for any other interim period or for the entire fiscal year. The Company generates a
substantial percentage of net sales in the last three months of every calendar year, its fiscal
third quarter.
The condensed consolidated financial statements do not include all information and notes
necessary for a complete presentation of financial position, results of operations and cash flows
in conformity with United States generally accepted accounting principles. Please refer to the
Companys audited consolidated financial statements and related notes for the fiscal year ended
March 31, 2010 contained in the Companys Annual Report on Form 10-K as filed with the United
States Securities and Exchange Commission (the SEC).
The preparation of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. On an ongoing basis, the Company evaluates its estimates, including those
related to asset impairments, reserves for accounts receivable and inventories, contingencies and
litigation, valuation and recognition of share-based payments and income taxes. Illiquid credit
markets, volatile equity markets, foreign currency fluctuations, and declines in customer spending
have combined to increase the uncertainty inherent in such estimates and assumptions. As future
events and their effects cannot be determined with precision, actual results could differ from
these estimates. Changes in estimates resulting from continuing changes in the economic environment
will be reflected in the financial statements in future periods. Actual results could differ from
those estimates.
(2) Acquisition
On May 28, 2010, the Company acquired all of the outstanding stock of Tritton Technologies
Inc. (Tritton), a private corporation incorporated under the laws of Delaware. Tritton designs,
develops, manufactures (through third parties in Asia), markets and sells videogame and PC
accessories, most notably gaming audio headsets. The Company acquired all of Trittons net tangible
and intangible assets, including trade names, customer relationships and product lines. Cash paid
for the acquisition was approximately $1.4 million, subject to a working capital adjustment
currently estimated to be $413,000. The Company is required to make additional cash payments to
former Tritton shareholders of up to an aggregate of $8.7 million based on the achievement of
certain specified performance measures over a five year period. As a result of the acquisition,
Tritton became a wholly-owned subsidiary of the Company and accordingly, the results of operations
of Tritton are included in the Companys consolidated financial statements from the acquisition
date. The Company financed the acquisition through borrowings under the Companys working capital
facility. The acquisition expanded the Companys product offerings in the high growth gaming audio
market and further leveraged the Companys assets, infrastructure and capabilities.
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Table of Contents
The purchase price allocation for the acquisition of Tritton set forth below is preliminary
and the Company expects to finalize the preliminary working capital adjustment to complete the
purchase price allocation by fiscal year end. Fair-value measurements have been determined based on
assumptions that market participants would use in the pricing of the asset or liability. The
following tables summarize the consideration paid for Tritton and the amounts of the assets
acquired and liabilities assumed recognized at the acquisition date (in thousands):
Consideration: | ||||
Cash paid |
1,350 | |||
Preliminary working capital adjustment, net of holdback |
(413 | ) | ||
Fair value of contingent consideration |
4,200 | |||
Total purchase price |
5,137 |
The preliminary working capital adjustment, net of holdback, was adjusted during the three
months ended December 31, 2010 to decrease the adjustment from the previous estimate of $947,000 to
the revised estimate of $413,000 based on new information obtained during the quarter that existed
as of the acquisition date. The working capital adjustment is recorded against the contingent
consideration liability, resulting in an increase in the current contingent consideration liability
of $534,000 during the three months ended December 31, 2010. The $5.1 million purchase price for
Tritton exceeded the value of the acquired tangible and identifiable intangible assets, and
therefore the Company allocated $2.9 million to non tax deductible goodwill.
Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
Net working capital |
(197 | ) | ||
Property, plant and equipment and other assets |
120 | |||
Deferred tax liability |
(1,413 | ) | ||
Goodwill |
2,927 | |||
Other intangible assets |
3,700 | |||
Total purchase price |
5,137 |
The fair values of the acquired identifiable intangible assets with definite lives are as
follows (in thousands):
Customer relationships |
900 | |||
Trademark and trade names |
2,800 |
The contingent consideration arrangement requires the Company to pay the former owners of
Tritton additional consideration based on a percentage of future sales of Tritton products, subject
to maximum annual amounts. The fair value of the contingent consideration arrangement has been
determined primarily by using the income approach and using a discount rate of approximately 19
percent. The amount paid for contingent consideration is expected to be reduced by the amount of
any working capital adjustment. As of December 31, 2010, the liability for contingent consideration
is shown net of the estimated working capital adjustment and holdback of $413,000.
The estimated fair value of the contingent consideration increased $102,000 during the three
months ended December 31, 2010. The Company will assess the estimated fair value of the contractual
obligation to pay the contingent consideration on a quarterly basis and any changes in estimated
fair value will be recorded in acquisition related items in the Companys statement of
operations.
The amortization periods for the acquired intangible assets with definite lives are 8 years
for customer relationships and 12 years for trademarks and trade names and the Company is
amortizing the acquired intangible assets using the straight line method of amortization. The
Company will monitor and assess the acquired intangible assets and will adjust, if necessary, the
expected life, amortization method or carrying value of such assets to best match the underlying
economic value.
The fair value assigned to trademarks and trade names has been determined primarily by using
the income approach, which estimates the future royalties which would have to be paid to the owner
of the brand for its current use. Tax is deducted and a discount rate is used to determine the
present value of future cash flows. This is based on the brand in its current use and is based on
savings from owning the brand, or relief from royalties that would otherwise be paid to the brand
owner. The fair value assigned to customer relationships has been determined primarily by using the
income approach, which estimates the value of an asset based on discounted future earnings
specifically attributed to that asset, that is, in excess of returns for other assets that
contributed to those earnings. The discount rate used in these valuation methods is approximately
19 percent.
Transaction costs related to the acquisition totaled $0 and $163,000 during the three and nine
months ended December 31, 2010, and are recorded in acquisition related items in the accompanying
condensed consolidated statement of operations.
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Table of Contents
Changes in goodwill
Changes in goodwill for the nine months ended December 31, 2010 were as follows (in
thousands):
Goodwill balance as of March 31, 2010 |
8,466 | |||
Changes due to foreign currency translation |
(6 | ) | ||
Increase due to Tritton acquisition |
2,927 | |||
Goodwill balance as of December 31, 2010 |
11,387 |
Accumulated goodwill impairment charges as of December 31, 2010 and March 31, 2010 were $27.9
million.
(3) Notes Payable
On May 28, 2010 in connection with the Tritton acquisition, the Company assumed two notes
payable. The first note, in the principal amount of $333,000, accrues interest at 10% per annum,
calls for monthly interest payments on the first business day of each month and the remaining
balance to be paid on or before May 28, 2011. The second note, in the principal amount of
$470,000, accrued interest at 10% per annum. As of December 31, 2010 this note has been settled in
full.
(4) Bank Loan
On September 30, 2010 the Company entered into an amended agreement with Wells Fargo Capital
Finance, LLC to temporarily increase the maximum borrowing from $30.0 million to $50.0 million
through December 30, 2010, to $35.0 million through January 30, 2011 and back to $30.0 million
thereafter. Costs associated with the amended agreement totaled $100,000. This facility expires on
October 31, 2012. Borrowings under the Credit Facility are secured by a first priority interest in
the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. and by
a pledge of all of the capital stock of the Companys subsidiaries and are guaranteed by the
Company.
(5) Inventories
Inventories consist of the following (in thousands):
December 31, | March 31, | |||||||
2010 | 2010 | |||||||
Raw materials |
$ | 1,054 | $ | 1,546 | ||||
Finished goods |
31,457 | 15,429 | ||||||
Inventories |
$ | 32,511 | $ | 16,975 | ||||
(6) Comprehensive Income
Comprehensive income for the three and nine months ended December 31, 2010 and 2009 consists
of the following components (in thousands):
Three Months Ended | Nine months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 9,696 | $ | 5,592 | $ | 9,448 | $ | 3,625 | ||||||||
Foreign currency translation adjustment |
(484 | ) | (590 | ) | (40 | ) | 822 | |||||||||
Comprehensive income |
$ | 9,212 | $ | 5,002 | $ | 9,408 | $ | 4,447 | ||||||||
The foreign currency translation adjustments are not adjusted for income taxes as
they relate to indefinite investments in non-U.S. subsidiaries.
(7) Basic and Diluted Net Earnings per Share
Basic earnings per share is calculated by dividing the net earnings by the weighted average number
of common shares outstanding during the reporting period. Diluted earnings per share includes the
impact of potentially dilutive common stock-based equity instruments (in thousands, except share data).
Three Months Ended | Nine months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net income |
$ | 9,696 | $ | 5,592 | $ | 9,448 | $ | 3,625 | ||||||||
Effect of convertible notes payable |
310 | 304 | 917 | | ||||||||||||
Numerator for diluted net earnings per share |
10,006 | 5,896 | 10,365 | 3,625 | ||||||||||||
Denominator: |
||||||||||||||||
Weighted average shares used to compute basis EPS |
55,278,606 | 55,098,549 | 55,158,786 | 55,098,549 | ||||||||||||
Effect of convertible debt |
10,217,744 | 10,217,744 | 10,217,744 | | ||||||||||||
Effect of dilutive share share-based awards |
1,187,687 | | 442,534 | | ||||||||||||
Denominator for diluted net earnings per share |
66,684,037 | 65,316,293 | 65,819,064 | 55,098,549 | ||||||||||||
Basic earnings per share |
$ | 0.18 | $ | 0.10 | $ | 0.17 | $ | 0.07 | ||||||||
Diluted earnings per share |
$ | 0.15 | $ | 0.09 | $ | 0.16 | $ | 0.07 |
Outstanding options to purchase an aggregate of 7,094,455 and 7,423,783 shares of
the Companys common stock for the three and nine months ended December 31, 2010, respectively, and
7,590,900 and 7,190,091 shares of the Companys common stock for the three and nine months ended
December 31, 2009, respectively, were excluded from diluted net income per share calculations
because inclusion of such options would have an anti-dilutive effect during these periods. Weighted
average shares of 10,217,744 related to $14,500,000 of convertible notes payable that the Company
issued to the seller of Saitek on November 20, 2007 as part of the consideration relating to that
acquisition were excluded from the calculation for the nine month period ended December 31, 2009
because of their anti-dilutive effect during the period.
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(8) Geographic Data
The Companys sales are attributed to the following geographic regions (in thousands):
Three months ended | Nine months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales: |
||||||||||||||||
United States |
$ | 52,908 | $ | 23,375 | $ | 87,311 | $ | 48,520 | ||||||||
Europe |
35,141 | 22,982 | 55,720 | 38,811 | ||||||||||||
Canada |
3,530 | 1,201 | 4,332 | 2,555 | ||||||||||||
Other countries |
1,378 | 1,205 | 2,913 | 2,859 | ||||||||||||
$ | 92,957 | $ | 48,763 | $ | 150,276 | $ | 92,745 | |||||||||
Revenue is attributed to geographic regions based on the location of the customer.
During the three and nine months ended December 31, 2010, one customer individually accounted for
approximately 24% and 27% of the Companys gross sales, respectively. During each of the three and
nine months ended December 31, 2009, one customer individually accounted for approximately 25% of
the Companys gross sales.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Unless the context otherwise requires, all references in this section to the Company, we,
us or our refer, collectively, to Mad Catz Interactive, Inc. and all of its subsidiaries, and
all references in this section to Mad Catz refer to Mad Catz Interactive, Inc.
This section contains forward-looking statements and forward looking information (collectively
forward-looking statements) as defined in applicable securities legislation involving risks and
uncertainties. Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors including those set out under
Forward-looking Statements herein and in Item 1A. Risk Factors in our Annual Report on Form
10-K for the fiscal year ended March 31, 2010 and in Part II Other Information Item 1A. Risk
Factors in this Quarterly Report on Form 10-Q. The following discussion should be read in
conjunction with our condensed consolidated financial statements and related notes included in this
Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended March
31, 2010.
Overview
Our Business
We design, manufacture (primarily through third parties in Asia), market and distribute
accessories for all major videogame platforms, the PC and, to a far lesser extent, the iPod and
other audio devices. Our accessories are marketed primarily under the Mad Catz, Tritton, Saitek,
Joytech, GameShark, Eclipse and AirDrives brands; we also produce for selected customers a limited
range of products which are marketed on a private label basis. Our products include videogame, PC
and audio accessories, such as control pads, steering wheels, joysticks, memory cards, video
cables, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and
headsets. We also market videogame enhancement products and publish videogames.
Seasonality and Fluctuation of Sales
We generate a substantial percentage of our net sales in the last three months of every
calendar year, our fiscal third quarter. Our quarterly results of operations can be expected to
fluctuate significantly in the future, as a result of many factors, including: seasonal influences
on our sales; unpredictable consumer preferences and spending trends; the introduction of new
videogame platforms or titles; the need to increase inventories in advance of our primary selling
season; and timing of introductions of new products.
Potential Fluctuations in Foreign Currency
During the three and nine month periods ended December 31, 2010, approximately 43% and 42% of
total net sales were transacted outside of the United States, respectively. The majority of our
international business is presently conducted in currencies other than the U.S. dollar. Foreign
currency transaction gains and losses arising from normal business operations are credited to or
charged against earnings in the period incurred. As a result, fluctuations in the value of the
currencies in which we conduct our business relative to the U.S. dollar will cause currency
transaction gains and losses, which we have experienced in the past and continue to experience. Due
to the volatility of currency exchange rates, among other factors, we cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no assurances that we will
not experience currency losses in the future. To date we have not hedged against foreign currency
exposure.
Critical Accounting Policies
Our critical accounting principles and estimates remain consistent with those
reported in our Annual Report on Form 10-K for the year ended March 31, 2010, as filed with the
Securities and Exchange Commission.
9
Table of Contents
RESULTS OF OPERATIONS
Net Sales
From a geographical perspective, our net sales for the three and nine months ended December
31, 2010 and 2009 were as follows (in thousands):
Three months ended December 31, | $ | % | ||||||||||||||||||||||
2010 | %of total | 2009 | %of total | Change | Change | |||||||||||||||||||
United States |
$ | 52,908 | 57 | % | $ | 23,375 | 48 | % | $ | 29,533 | 126 | % | ||||||||||||
Europe |
35,141 | 38 | % | 22,982 | 48 | % | 12,159 | 53 | % | |||||||||||||||
Canada |
3,530 | 4 | % | 1,201 | 2 | % | 2,329 | 194 | % | |||||||||||||||
Other countries |
1,378 | 1 | % | 1,205 | 2 | % | 173 | 14 | % | |||||||||||||||
Consolidated net sales |
$ | 92,957 | 100 | % | $ | 48,763 | 100 | % | $ | 44,194 | 91 | % | ||||||||||||
Nine months ended December 31, | $ | % | ||||||||||||||||||||||
2010 | %of total | 2009 | %of total | Change | Change | |||||||||||||||||||
United States |
$ | 87,311 | 58 | % | $ | 48,520 | 52 | % | $ | 38,791 | 80 | % | ||||||||||||
Europe |
55,720 | 37 | % | 38,811 | 42 | % | 16,909 | 44 | % | |||||||||||||||
Canada |
4,332 | 3 | % | 2,555 | 3 | % | 1,777 | 70 | % | |||||||||||||||
Other countries |
2,913 | 2 | % | 2,859 | 3 | % | 54 | 2 | % | |||||||||||||||
Consolidated net sales |
$ | 150,276 | 100 | % | $ | 92,745 | 100 | % | $ | 57,531 | 62 | % | ||||||||||||
For the three months ended December 31, 2010, consolidated net sales increased 91%
as compared to the three month period ended December 31, 2009. In the United States, the increase
in net sales is primarily attributable to sales of our accessories compatible with the Rock Band 3
game which launched in October 2010, and to a lesser extent, sales of Tritton and Cyborg-branded
products. In Europe the increase is primarily attributable to sales of our accessories compatible
with the Rock Band 3 game and to a lesser extent, the success of sales of third party products on a
distribution basis and Cyborg-branded products, partially offset by foreign exchange fluctuations.
In Canada the increase in net sales is primarily attributable to sales of our accessories
compatible with the Rock Band 3 game.
For the nine months ended December 31, 2010, consolidated net sales increased 62% as compared
to the nine months ended December 31, 2009. In the United States and Europe, the preponderance of
the increase in net sales related to the reasons described above. In Canada the increase in net
sales primarily relates to the reason noted above, partially offset by fewer sales of the Street
Fighter IV Tournament Edition FightStick made during the nine months ended December 31, 2010
compared to the nine months ended December 31, 2009.
Our sales by product group as a percentage of gross sales for the three and nine months ended
December 31, 2010 and 2009 were as follows:
Three months ended | Nine months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Xbox 360 |
31 | % | 31 | % | 33 | % | 30 | % | ||||||||
PlayStation 3 |
19 | % | 17 | % | 18 | % | 16 | % | ||||||||
Wii |
19 | % | 14 | % | 16 | % | 12 | % | ||||||||
PC |
12 | % | 23 | % | 14 | % | 25 | % | ||||||||
Handheld Consoles(a) |
2 | % | 3 | % | 2 | % | 4 | % | ||||||||
PlayStation 2 |
| % | 1 | % | | % | 2 | % | ||||||||
GameCube |
| % | 2 | % | 1 | % | 2 | % | ||||||||
All others |
17 | % | 9 | % | 16 | % | 9 | % | ||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
(a) | Handheld consoles include Sony PSP and Nintendo DS, DS Lite, DSi and DSXL. |
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Our sales by product category as a percentage of gross sales for the three and nine months
ended December 31, 2010 and 2009 were as follows:
Three months ended | Nine months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Specialty controllers |
29 | % | 21 | % | 27 | % | 28 | % | ||||||||
Audio |
24 | % | 10 | % | 26 | % | 10 | % | ||||||||
Controllers |
16 | % | 26 | % | 16 | % | 24 | % | ||||||||
Games |
16 | % | 2 | % | 14 | % | 2 | % | ||||||||
Accessories |
9 | % | 30 | % | 11 | % | 26 | % | ||||||||
Personal computer products |
6 | % | 8 | % | 6 | % | 8 | % | ||||||||
All others |
| % | 3 | % | | % | 2 | % | ||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Gross Profit
Gross profit is defined as net sales less cost of sales. Cost of sales consists of product
costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center
costs, including depreciation and other overhead.
The following table presents net sales, cost of sales and gross profit for the three and nine
months ended December 31, 2010 and 2009 (in thousands):
Three months ended December 31, | ||||||||||||||||||||||||
% of Net | % of Net | $ | % | |||||||||||||||||||||
2010 | Sales | 2009 | Sales | Change | Change | |||||||||||||||||||
Net sales |
$ | 92,957 | 100.0 | % | $ | 48,763 | 100.0 | % | $ | 44,194 | 90.6 | % | ||||||||||||
Cost of sales |
66,556 | 71.6 | % | 32,822 | 67.3 | % | 33,734 | 102.8 | % | |||||||||||||||
Gross profit |
$ | 26,401 | 28.4 | % | $ | 15,941 | 32.7 | % | $ | 10,460 | 65.6 | % | ||||||||||||
Nine months ended December 31, | ||||||||||||||||||||||||
% of Net | % of Net | $ | % | |||||||||||||||||||||
2010 | Sales | 2009 | Sales | Change | Change | |||||||||||||||||||
Net sales |
$ | 150,276 | 100.0 | % | $ | 92,745 | 100.0 | % | $ | 57,531 | 62.0 | % | ||||||||||||
Cost of sales |
107,429 | 71.5 | % | 63,424 | 68.4 | % | 44,005 | 69.4 | % | |||||||||||||||
Gross profit |
$ | 42,847 | 28.5 | % | $ | 29,321 | 31.6 | % | $ | 13,526 | 46.1 | % | ||||||||||||
Gross
profit for the three months ended December 31, 2010 increased
65.6%, while
gross profit as a percentage of net sales, or gross profit margin,
decreased from 32.7% to 28.4%, or 430 basis points.
Gross profit for the nine months ended December 31, 2010
increased 46.1%, while gross profit as a
percentage of net sales decreased from 31.6% to 28.5%. The changes in gross profit margin for the
three and nine months ended December 31, 2010 were primarily due to lower margins related to sales
of our accessories compatible with the Rock Band 3 game and to a lesser extent, foreign exchange
fluctuations, which accounted for approximately 1.3% and 1.7% of the decrease, respectively. We
expect the gross profit margins to remain in the current range, although the gross profit margins
may fluctuate due to factors such as changes in product mix and exchange rate fluctuations.
Operating Expenses
Operating expenses for the three and nine months ended December 31, 2010 and 2009 were as
follows (in thousands):
Three months ended December 31, | ||||||||||||||||||||||||
% of Net | % of Net | $ | % | |||||||||||||||||||||
2010 | Sales | 2009 | Sales | Change | Change | |||||||||||||||||||
Sales and marketing |
$ | 4,935 | 5.3 | % | $ | 3,696 | 7.6 | % | $ | 1,239 | 33.5 | % | ||||||||||||
General and administrative |
4,047 | 4.4 | % | 3,465 | 7.1 | % | 582 | 16.8 | % | |||||||||||||||
Research and development |
1,089 | 1.2 | % | 741 | 1.5 | % | 348 | 47.0 | % | |||||||||||||||
Acquisition related items |
102 | 0.1 | % | | | % | 102 | 100.0 | % | |||||||||||||||
Amortization |
244 | 0.2 | % | 395 | 0.8 | % | (151 | ) | (38.2 | )% | ||||||||||||||
Total operating expenses |
$ | 10,417 | 11.2 | % | $ | 8,297 | 17.0 | % | $ | 2,120 | 25.6 | % | ||||||||||||
Nine months ended December 31, | ||||||||||||||||||||||||
% of Net | % of Net | $ | % | |||||||||||||||||||||
2010 | Sales | 2009 | Sales | Change | Change | |||||||||||||||||||
Sales and marketing |
$ | 10,982 | 7.3 | % | $ | 8,747 | 9.4 | % | $ | 2,235 | 25.6 | % | ||||||||||||
General and administrative |
10,565 | 7.0 | % | 9,533 | 10.3 | % | 1,032 | 10.8 | % | |||||||||||||||
Research and development |
2,780 | 1.8 | % | 2,033 | 2.2 | % | 747 | 36.7 | % | |||||||||||||||
Acquisition related items |
708 | 0.5 | % | | | % | 708 | 100.0 | % | |||||||||||||||
Amortization |
708 | 0.5 | % | 1,567 | 1.7 | % | (859 | ) | (54.8 | )% | ||||||||||||||
Total operating expenses |
$ | 25,743 | 17.1 | % | $ | 21,880 | 23.6 | % | $ | 3,863 | 17.7 | % | ||||||||||||
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Sales and Marketing. Sales and marketing expenses consist primarily of payroll,
commissions, participation at trade shows and travel costs for our worldwide sales and marketing
staff, advertising expense and costs of operating our websites. The increase in sales and marketing
for the three and nine months ended December 31, 2010 is primarily due to increased marketing
spending related to increased trade shows in 2010 compared to 2009. Going forward, we expect fixed
costs to grow approximately at the rate of inflation, with some increase in discretionary marketing
spending in connection with the launch of new products. Altogether, we expect the fixed component
of these expenses to remain at current levels. The variable components of these expenses will
trend with sales.
General and Administrative. General and administrative expenses include salaries and benefits
for our executive and administrative personnel, facilities costs and professional services, such as
legal and accounting. The increase in general and administrative expenses for the three and nine
months ended December 31, 2010 is primarily related to the accrual of amounts during the quarter related to
additional bonuses expected to be granted. Going forward, we expect these expenses to remain at their current levels for the
foreseeable future.
Research and Development. Research and development expenses include the costs of developing
and enhancing new and existing products. The increase in research and development expenses relates
to a greater focus on research and development activities. We expect research and development
expenses to remain at their current levels for the foreseeable future.
Amortization. Amortization expenses consist of the amortization of the acquired intangible
assets from Saitek, Joytech and Tritton. These acquisitions occurred in the third and second
quarters of fiscal 2008 and first quarter of fiscal 2011, respectively. The decrease in
amortization expense is related to the expiration of the life of certain intangibles, partially
offset by additional amortization related to the Tritton acquisition.
Interest Expense, Foreign Exchange Gain(Loss) and Other Income
Interest expense, foreign exchange gain (loss) and other income for the three and nine months
ended December 31, 2010 and 2009 were as follows (in thousands):
Three months ended December 31, | ||||||||||||||||||||||||
% of Net | % of Net | $ | % | |||||||||||||||||||||
2010 | Sales | 2009 | Sales | Change | Change | |||||||||||||||||||
Interest expense |
$ | (1,046 | ) | 1.1 | % | $ | (645 | ) | 1.3 | % | $ | (401 | ) | 62.2 | % | |||||||||
Foreign exchange gain (loss) |
$ | (736 | ) | 0.8 | % | $ | 109 | 0.2 | % | $ | (845 | ) | (775.2 | )% | ||||||||||
Other income |
$ | 46 | 0.0 | % | $ | 42 | 0.1 | % | $ | 4 | 9.5 | % |
Nine months ended December 31, | ||||||||||||||||||||||||
% of Net | % of Net | $ | % | |||||||||||||||||||||
2010 | Sales | 2009 | Sales | Change | Change | |||||||||||||||||||
Interest expense |
$ | (2,284 | ) | 1.5 | % | $ | (1,637 | ) | 1.8 | % | $ | (647 | ) | 39.5 | % | |||||||||
Foreign exchange gain (loss) |
$ | (41 | ) | 0.0 | % | $ | (310 | ) | 0.3 | % | $ | 269 | 86.8 | % | ||||||||||
Other income |
$ | 223 | 0.1 | % | $ | 138 | 0.1 | % | $ | 85 | 61.6 | % |
The increase in interest expense during the three and nine month periods ended December 31,
2010 is related to higher debt balances required to finance inventory levels during the peak annual
sales season. The foreign exchange losses in the three and nine months ended December 31, 2010 and
nine months ended December 31, 2009 are due primarily to the rise in value of the U.S. dollar and
Hong Kong dollar relative to the Great British Pound and the Euro during those periods. The
foreign exchange gain in the three months ended December 31, 2009 was due primarily to the rise in
value of the Great British Pound and the Euro relative to the U.S. dollar and Hong Kong dollar
during that period.
Other income during the three and nine month periods ended December 31, 2010 primarily
consists of an insurance recovery and to a lesser extent, advertising income from our GameShark.com
website.
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Income Tax Expense
Income tax expense for the three and nine months ended December 31, 2010 and 2009 was as
follows (in thousands):
Three months ended December 31, | ||||||||||||||||||||||||
Effective | Effective | $ | % | |||||||||||||||||||||
2010 | Tax Rate | 2009 | Tax Rate | Change | Change | |||||||||||||||||||
Income tax expense |
$ | 4,552 | 31.9 | % | $ | 1,558 | 21.8 | % | $ | 2,994 | 192.2 | % |
Nine months ended December 31, | ||||||||||||||||||||||||
Effective | Effective | $ | % | |||||||||||||||||||||
2010 | Tax Rate | 2009 | Tax Rate | Change | Change | |||||||||||||||||||
Income tax expense |
$ | 5,554 | 37.0 | % | $ | 2,007 | 35.6 | % | $ | 3,547 | 176.7 | % |
The Companys effective tax rate is a blended rate for different jurisdictions in which the
Company operates. The effective tax rate fluctuates depending on the taxable income in each
jurisdiction and the statutory income tax rates in those jurisdictions. Our Canadian operations are
excluded from the effective tax rate calculation due to its continuing operations loss and the full
valuation allowances against its deferred tax assets. The change in the effective tax rate in the
third quarter of fiscal 2011 versus the third quarter of fiscal 2010 was primarily due to the book
losses in certain jurisdictions in the third quarter of fiscal 2010 as compared to income in those
jurisdictions in the third quarter of fiscal 2011.
For fiscal 2011, we project a 38% effective tax rate, with the inclusion of discrete items. This
differs from tax computed at the Canadian statutory rate primarily due to projected Canadian losses
for which no tax benefit will be recognized and a valuation allowance on U.S. deferred tax assets.
This difference is partially offset by the benefit of lower tax rates on earnings of certain
foreign subsidiaries. Our current projected tax rate for fiscal 2011 could change significantly if
actual results differ from our current outlook-based projections
Liquidity and Capital Resources
Sources of Liquidity
As of and for the | ||||||||||||
nine months ended | ||||||||||||
December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | Change | |||||||||
Cash |
$ | 9,921 | $ | 5,825 | $ | 4,096 | ||||||
Percentage of total assets |
8.4 | % | 7.5 | % | ||||||||
Cash used in operating activities |
$ | (11,475 | ) | $ | (4,503 | ) | $ | (6,972 | ) | |||
Cash used in investing activities |
(2,662 | ) | (2,412 | ) | (250 | ) | ||||||
Cash provided by financing activities |
21,772 | 9,526 | 12,246 | |||||||||
Effects of foreign exchange on cash |
41 | 324 | (283 | ) | ||||||||
Net increase in cash |
$ | 7,676 | $ | 2,935 | 4,741 | |||||||
At December 31, 2010, available cash was approximately $9.9 million compared to cash
of approximately $2.2 million at March 31, 2010 and $5.8 million at December 31, 2009. Our primary
sources of liquidity include a revolving line of credit (as discussed below under Cash Flows from
Financing Activities), cash on hand at the beginning of the year and cash flows generated from
operations during the year.
Cash Flows from Operating Activities
Our cash flows from operating activities have typically included the collection of customer
receivables generated by the sale of our products, offset by payments to vendors for materials and
manufacture of our products. For the nine months ended December 31, 2010, cash used in operating
activities was $11.5 million compared to cash used of $4.5 million for the nine months ended
December 31, 2009. Cash used in operations for the nine months ended December 31, 2010 and 2009
primarily resulted from an increase of inventories due to the build-up in preparation for the peak
annual sales season, partially offset by the correlating increase in accounts payable. The
increase in cash usage during the fiscal year 2011 compared to the 2010 period is mainly due to a
higher peak season sales forecasted which required a greater inventory build-up.
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Due to the seasonality of our business, we typically experience a large build-up in
inventories beginning during our second fiscal quarter ending September 30, with corresponding
increases in accounts payable and our bank loan balance. These increases are in anticipation of the
holiday selling season, which occurs during our third fiscal quarter ending December 31. During
the third quarter our inventories decrease and accounts receivable increase as a result of the
annual holiday selling. A large percentage of our annual revenue is generated during our third
quarter. During our fourth quarter ending March 31, the sales cycle completes with decreases in
accounts receivable, inventory, accounts payable and bank loan and net increase in cash. We
forecast the expected demand for the holiday selling season months in advance to ensure adequate
quantities of inventory. Our sales personnel forecast holiday sales based on information that we
receive from our major customers as to expected product purchases for the holiday season, and we
also utilize mathematical modeling techniques to forecast demand based on recent point-of-sale
activity. If demand does not meet expectations, the result will be excess inventories, reduced
sales and the overall effect could result in a reduction to cash flows from operating activities
following payment of accounts payable.
Cash Flows from Investing Activities
Cash used in investing activities was $2.7 million during the nine months ended December 31,
2010 and $2.4 million during the nine months ended December 31, 2009. In the nine months ended
December 31, 2010, $1.2 million of the cash used in investing activities related to the purchase of
Tritton and the remainder consisted of capital expenditures to support our operations and were made
up primarily of purchases of production molds, and to a lesser extent, computers and machinery and
equipment. In the nine months ended December 31, 2009, all cash used in investing activities
related to capital expenditures.
Cash Flows from Financing Activities
Cash provided by financing activities was $21.8 million for the nine months ended December 31,
2010 compared to cash provided of $9.5 million for the nine months ended December 31, 2009. Cash
provided by financing activities during both periods was a result of increased borrowings under our
line of credit.
We maintain a Credit Facility with Wells Fargo Capital Finance, LLC, successor by merger to
Wachovia Capital Finance Corporation (Central) (Wells Fargo) to borrow up to $30 million under a
revolving line of credit subject to the availability of eligible collateral (accounts receivable
and inventories), which changes throughout the year. The line of credit accrues interest on the
daily outstanding balance at the U.S. prime rate plus 2.0% per annum. This facility expires on
October 31, 2012. At December 31, 2010, the interest rate was 5.25%. We are also required to pay a
monthly service fee of $2,000 and an unused line fee equal to 0.50% of the unused portion of the
loan. Borrowings under the Credit Facility are secured by a first priority interest in the
inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. and by a
pledge of all of the capital stock of the Companys subsidiaries and is guaranteed by the Company.
We are required to meet a quarterly covenant based on the Companys free cash flow. We were in
compliance with this covenant as of December 31, 2010.
On September 30, 2010, the Company entered into an Amending Agreement with Wells Fargo that
temporarily modified the maximum borrowing amount permitted under the Credit Facility from $30.0
million to $50.0 million through December 30, 2010, to $35.0 million through January 30, 2011 and
back to $30.0 million from and after January 31, 2011.
We believe that our available cash balances, anticipated cash flows from operations and
available line of credit will be sufficient to satisfy our operating needs for at least the next
twelve months. However, we operate in a rapidly evolving and often unpredictable business
environment that may change the timing or amount of expected future cash receipts and expenditures.
Accordingly, there can be no assurance that we may not be required to raise additional funds
through the sale of equity or debt securities or from additional credit facilities. Additional
capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, additional
debt financing may contain more restrictive covenants than our existing debt.
Contractual Obligations and Commitments
As a result of the Tritton acquisition on May 28, 2010, the Company is required to make
additional cash payments to former Tritton shareholders of up to an aggregate of $8.7 million based
on the achievement of certain specified performance measures. There have been no other material
changes to our contractual obligations from the information provided in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2010.
As of December 31, 2010 and March 31, 2010, we did not have any relationships with
unconsolidated entities or financial parties, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As
such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we
had engaged in such relationships.
14
Table of Contents
EBITDA
EBITDA, a non-GAAP financial measure, represents net income before interest, taxes,
depreciation and amortization. EBITDA is not intended to represent cash flows for the period, nor
is it being presented as an alternative to operating or net income as an indicator of operating
performance and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting principles. As defined,
EBITDA is not necessarily comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation. We believe, however, that in addition to
the performance measures found in our financial statements, EBITDA is a useful financial
performance measurement for assessing our Companys operating performance. Our management uses
EBITDA as a measurement of operating performance in comparing our performance on a consistent basis
over prior periods, as it removes from operating results the impact of our capital structure,
including the interest expense resulting from our outstanding debt, and our asset base, including
depreciation and amortization of our capital and intangible assets. In addition, EBITDA is an
important measure for our lender. We calculate EBITDA as follows (in thousands):
Three months ended | Nine months ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 9,696 | $ | 5,592 | $ | 9,448 | $ | 3,625 | ||||||||
Adjustments: |
||||||||||||||||
Interest expense |
1,046 | 645 | 2,284 | 1,637 | ||||||||||||
Income tax expense |
4,552 | 1,558 | 5,554 | 2,007 | ||||||||||||
Depreciation and amortization |
690 | 920 | 2,036 | 3,003 | ||||||||||||
EBITDA |
$ | 15,984 | $ | 8,715 | $ | 19,322 | $ | 10,272 | ||||||||
Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q are not historical fact and
constitute forward-looking statements within the meaning of Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended and constitute forward-looking information as defined
in applicable Canadian securities legislation (collectively forward-looking statements). These
forward-looking statements may address, among other things, our strategy for growth, business
development, market and competitive position, financial results, expected revenue, expense levels
in the future and the sufficiency of our existing assets to fund future operations and capital
spending needs. These statements relate to our expectations, hopes, beliefs, anticipations,
commitments, intentions and strategies regarding the future, and may be identified by the use of
words or phrases such as believe, expect, anticipate, should, plan, estimate, and
potential, among others. Specifically this document contains forward-looking statements
regarding, among other things, the continuance of seasonal fluctuations in the Companys sales,
inventories, receivables, payables and cash; the effect of currency exchange rate fluctuations; the
sufficiency of funds available to meet operational needs; and our expectations for fiscal 2011 in
respect of our gross profit margin, operating expenses and effective tax rates.
The forward-looking statements contained herein reflect managements current beliefs and
expectations and are based on information currently available to management, as well as its
analysis made in light of its experience, perception of trends, current conditions, expected
developments and other factors and assumptions believed to be reasonable and relevant in the
circumstances. These assumptions include, but are not limited to: continuing demand by consumers
for videogames and accessories, continued financial viability of our largest customers, continued
access to capital to finance our working capital requirements and the continuance of open trade
with China, where the preponderance of our products are manufactured.
Forward-looking statements are not guarantees of performance and are subject to important
factors and events that could cause our actual business, prospects and results of operations to
differ materially from the historical information contained in this Form 10-Q, and from those that
may be expressed or implied by the forward-looking statements. Readers are cautioned that actual
results could differ materially from the anticipated results or other expectations expressed in
these forward-looking statements for the reasons detailed in Part I Item 1A. Risk Factors of
our most recent Annual Report on Form 10-K, and in Part II Other Information Item 1A. We believe
that many of the risks detailed in our other SEC filings are part of doing business in the industry
in which we operate, and will likely be present in all periods reported. The fact that certain
risks are endemic to the industry does not lessen their significance. The forward-looking
statements contained in this report are made as of the date of this report and we assume no
obligation to update them or to update the reasons why actual results could differ from those
projected in such forward-looking statements, except as may be required by applicable law.
15
Table of Contents
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
For the third quarter of fiscal 2011, our management with the participation of our Chief
Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended (the Exchange Act)) as of December 31, 2010. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Accordingly, our disclosure controls
and procedures have been designed to provide reasonable assurance of achieving their objectives.
Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded
that as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level in ensuring that information required to be disclosed by us in the reports that we
file under the Exchange Act is recorded, processed, summarized and reported within the time period
specified in the rules and forms of the Securities and Exchange Commission.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter
ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting. Our process for evaluating controls and procedures
is continuous and encompasses constant improvement of the design and effectiveness of established
controls and procedures and the remediation of any deficiencies which may be identified during the
process.
16
Table of Contents
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company may be a party to legal proceedings, lawsuits and other claims
that arise in the ordinary course of the Companys business. Regardless of their merits, these
matters may force the Company to expend significant financial resources. The Company is not aware
of any material pending legal proceedings to which it or its subsidiaries is a party or of which
any of their property is subject, with the exception of the following:
Circuit City Stores, Inc., et al., Debtors, Alfred H. Siegel, as Trustee for Circuit City, Inc.,
Liquidating Trust v. Mad Catz, Inc. and Saitek Industries Limited, Mad Catz, Inc., dba Saitek
Industries Limited On or about December 23, 2010, Mad Catz, Inc. (MCI), along with approximately
500 other defendants who had rendered goods and services to Circuit City Stores, Inc. (Circuit
City) prior to its bankruptcy, was served with a legal complaint in the above entitled matter
(Complaint). The Complaint alleges that payments to MCI from Circuit City made within the 90 day
period prior to Circuit Citys bankruptcy filing (in the amount of $745,953.55) were voidable
preferences, and therefore should be returned to the Trustee. The Bankruptcy Trust also alleges
that it is entitled to certain offsets against MCIs bankruptcy claims against Circuit City. The
Bankruptcy Trust also filed a similar suit against Saitek Industries Limited to void alleged
preferential payments in the amount of $82,951.87. MCI has until February 9, 2011 to file its
answer.
MCI disputes the allegations of both complaints and believes the Trusts claims are baseless.
MCI intends to vigorously defend against all of the Trustees claims.
Item 1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended March 31, 2010.
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Item 6. Exhibits
31.1
|
Certification of Registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2
|
Certification of Registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1
|
Certification of Registrants Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. | |
32.2
|
Certification of Registrants Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. This certification is being furnished solely to accompany this Quarterly Report on Form 10-Q and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MAD CATZ INTERACTIVE, INC. |
||||
February 9, 2011 | /s/ Darren Richardson | |||
Darren Richardson | ||||
President and Chief Executive Officer | ||||
February 9, 2011 | /s/ Allyson Vanderford | |||
Allyson Vanderford | ||||
Interim Chief Financial Officer |
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