UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
March 31,
2011
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number
001-14944
MAD CATZ INTERACTIVE,
INC.
(Exact name of Registrant as
specified in its charter)
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Canada
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Not Applicable
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7480 Mission Valley Road, Suite 101
San Diego, California
(Address of principal
executive offices)
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92108
(Zip
Code)
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Registrants telephone number, including area code:
(619) 683-9830
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, no par value
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NYSE Amex
Toronto Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
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
(§ 232.405 of this chapter) 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 if disclosure of delinquent filers
pursuant to Item 405 of Regulations S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company þ
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Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates based on the closing sale price of
common stock as reported on the American Stock Exchange on
September 30, 2010, the last business day of the second
fiscal quarter, was $24,243,362.
There were 55,098,549 shares of the registrants
common stock issued and outstanding as of June 10, 2011.
DOCUMENTS
INCORPORATED BY REFERENCE
Part II and Part III incorporates information by
reference from the registrants definitive proxy statement
to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the
Registrants 2011 Annual Meeting of Shareholders.
MAD CATZ
INTERACTIVE, INC.
ANNUAL REPORT ON
FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2011
TABLE OF CONTENTS
FORWARD
LOOKING STATEMENTS
This Annual Report on
Form 10-K
and the documents incorporated by reference herein, contain
forward-looking statements and forward looking information as
defined in applicable Canadian securities legislation
(collectively forward looking statements), which are
prospective and reflect managements expectations regarding
our business, operations, financial performance and business
prospects and opportunities. Forward-looking statements are
often, but not always, identified by the use of words such as
seek, anticipate, plan,
estimate, expect believe and
intend and statements that an event or result
may, will, should,
could or might occur or be achieved and
other similar expressions together with the negative of such
expressions. These forward-looking statements 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 videogame systems and
accessories, the continuance of normal trade relations between
China and the United States, the ability to maintain or extend
our existing licenses, the continued financial viability of our
largest customers, the continuance of timely and adequate supply
from third party manufacturers and suppliers, no significant
fluctuations in the value of the U.S. dollar relative to
other currencies and the continued satisfaction of our
obligations under our existing Credit Facility. Specifically,
this document contains forward looking statements regarding,
among other things, our focus and strategy for fiscal 2012, the
expected life cycles of videogame console systems and
accessories, anticipated price reductions to console systems and
the impact on the market for our products, the increased
diversification of our product line and the possible expansion
of our product offerings and operations through acquisitions,
the impact that new and updated videogame platforms may have on
our research and development expenditures and on price
competition, the expectation of additional competition if new
companies enter the market, the increased difficulty in
forecasting demand for specific products as we introduce and
support additional products and enter additional markets, the
possible use of financial hedging techniques, the belief that
sufficient funds will be available to satisfy our operating
needs for the next twelve months, the continuing volatility of
our stock price, the continuance of significant seasonal
fluctuations in our quarterly results of operations, our
expectations regarding gross margins and the maintenance or
changes in certain expenses. Forward-looking statements are
subject to significant risks, uncertainties, assumptions and
other factors, any of which could cause actual results,
performance or achievements to differ materially from the
results discussed or implied in the forward-looking statements.
More detailed information about these risks, uncertainties,
assumptions and other factors is provided under Item 1A
Risk Factors. Investors should not place undue
reliance on such forward-looking statements. Forward-looking
statements are not guarantees of future performance or outcomes
and actual results could differ materially from those expressed
or implied by the forward-looking statements. We assume no
obligation to update or alter such forward-looking statements
whether as a result of new information, future events or
otherwise except as required by law.
TRADEMARKS
Mad Catz, the Mad Catz logo, Joytech, the Joytech logo, Saitek,
Tritton, the Tritton logo, Thunder Hawk Studios, Wings of Gold,
Combat Pilot, Cyborg, Eclipse and GameShark are trademarks or
registered trademarks of Mad Catz, Inc., its parent
and/or
affiliated companies.
CURRENCY
Unless otherwise indicated, all dollar references herein are in
U.S. dollars.
1
PART I
In this Annual Report on
Form 10-K,
Mad Catz Interactive, Inc., Mad Catz,
the Company, we, us and
our refer to Mad Catz Interactive, Inc. and all of
our consolidated subsidiaries.
Mad Catz Interactive, Inc. was incorporated under the Canada
Business Corporations Act on August 25, 1993.
In August 1999, we completed the acquisition of Mad Catz, Inc.
(MCI), a corporation incorporated under the laws of
Delaware that designs, markets, sells and distributes videogame
accessories. MCI and its predecessor company have been involved
in the videogame industry since approximately 1991.
Recent
Acquisitions
In May 2010, we acquired all of the outstanding stock of Tritton
Technologies Inc. (Tritton), a private corporation
incorporated under the laws of Delaware. Tritton is in the
business of designing, developing, manufacturing (through third
parties in Asia), marketing and selling videogame and PC
accessories, most notably gaming audio headsets. We acquired all
of Trittons net tangible and intangible assets, including
trade names, customer relationships and product lines.
On February 24, 2011, the Company acquired certain assets
of V Max Simulation Corporation (V Max), which
included mostly property, plant and equipment. V Max designs,
constructs, integrates, and operates flight simulation equipment
and develops flight simulation software. The acquisition
expanded the Companys product offerings in the flight
simulation market and further leveraged the Companys
assets, infrastructure and capabilities.
Corporate
Structure
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Jurisdiction of
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Subsidiary
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Incorporation
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Mad Catz, Inc.
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Delaware
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1328158 Ontario Inc.
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Ontario, Canada
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Mad Catz Europe, Limited
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England and Wales
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Mad Catz Interactive Asia Limited
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Hong Kong
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Mad Catz Technological Development (Shenzhen) Co., Ltd
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Peoples Republic of China
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Winkler Atlantic Holdings Limited
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British Virgin Islands
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Mad Catz GmbH
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Germany
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Saitek S.A.
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France
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Tritton Technologies Inc.
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Delaware
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FX Unlimited Inc.
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Delaware
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Xencet USA, Inc.
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Delaware
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Singapore Holdings Inc.
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Delaware
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Mad Catz (Asia) Limited
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Hong Kong
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Mad Catz Co., Ltd
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Japan
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Mad Catz, Inc. is our corporate headquarters and also sells our
products in the United States, participates in the design of our
products and provides corporate services for all of the
Companys subsidiaries. 1328158 Ontario Inc.
(MCC) sells our products in Canada under the name
Mad Catz Canada. Mad Catz Europe, Limited (MCE)
sells our products in Europe. Mad Catz Interactive Asia Limited
(MCIA) is engaged in the engineering, design,
contract manufacture and regional sales of our products. Mad
Catz Technological Development (Shenzhen) Co., Ltd.
(MCTD) is engaged in the engineering, design,
quality assurance and quality control of our products. Winkler
Atlantic Holdings Limited (WAHL) is the holding
company for our Saitek operating subsidiaries located in Germany
and France, Mad Catz GmbH and Saitek S.A, respectively. Tritton
Technologies Inc. (Tritton) sells videogame and PC
accessories in the United States and elsewhere in the world. FX
Unlimited Inc., Xencet USA, Inc., Singapore Holdings Inc., and
Mad Catz (Asia) Limited are inactive companies that hold
intellectual property related to our business.
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Our common stock trades on the Toronto Stock Exchange and the
NYSE Amex under the symbol MCZ. Our registered
office is located at 181 Bay Street, Suite 2500, Toronto,
Ontario, M5J 2T7, and our telephone number is
(416) 360-8600.
MCI, our primary operating subsidiary and our operational
headquarters is located at 7480 Mission Valley Road,
Suite 101, San Diego, California, 92108, and our
telephone number is
(619) 683-9830.
Overview
We design, manufacture (through third parties in Asia), market,
sell and distribute accessories for all major videogame
platforms, the personal computer (PC) and, to a
lesser extent the iPod and other audio devices. Our accessories
are marketed primarily under the Mad Catz, Saitek, Cyborg,
Eclipse, Joytech, GameShark, Tritton 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, video cables, steering wheels, joysticks, memory
cards, light guns, flight sticks, dance pads, microphones, car
adapters, carry cases, mice, keyboards and headsets. We also
market videogame enhancement products and publish videogames.
Our
Products
The typical life cycle of successful videogame and PC
accessories is similar to the life cycle of the relevant
platform, which generally ranges from two to ten years. Factors
such as competition for access to retail shelf space, changing
technology, consumer preferences and seasonality could result in
shortening the life cycle for older products and increasing the
importance of our ability to release new products on a timely
basis. We must frequently introduce new products and revisions
to existing products in order to generate new revenues
and/or to
replace declining revenues from older products. The complexity
of new platform technologies has resulted in longer development
cycles and the need to carefully monitor and manage the product
development process.
In fiscal 2011, approximately 31% of our gross sales were
derived from products designed for use with Microsofts
videogame platforms. Microsofts Xbox 360 console launched
in North America, Europe and Japan in late 2005. We have entered
into a license agreement with Microsoft to produce wired and
certain wireless accessories for the Xbox 360.
In fiscal 2011, approximately 17% of our gross sales were
derived from products designed for use with Nintendos
videogame platforms and handheld products. Nintendos Wii
console launched in North America, Europe and Japan in late
2006. In fiscal 2011, approximately 14% of our gross sales were
derived from the sale of products designed for use with the Wii
console and approximately 1% of our gross sales were derived
from the sale of products designed for use with the GameCube
console, the predecessor of the Wii console. In fiscal 2010 we
entered into an agreement with Nintendo of America, Inc. for
rights to offer licensed accessories for the Wii. We offer
unlicensed accessories for the Wii. In 2004, Nintendo launched
the Nintendo DS, followed in 2006 by the Nintendo DS Lite, and
in April 2009 by the DSi. Sales of products compatible with
these DS systems accounted for approximately 2% of our gross
sales in fiscal 2011.
In fiscal 2011, approximately 18% of our gross sales were
derived from products designed for use with Sonys
videogame platforms and handheld products. Sony launched the
PlayStation 3 in North America and Japan in late 2006 and in
Europe in early 2007. Sony launched the PlayStation 2 in the
United States in 2000. Sony launched the Sony PSP handheld
videogame system, MP3 player and movie player in North America
and Europe in 2005. In October 2009, Sony launched the PSP Go!
In fiscal 2011, products designed for use with the PlayStation
2, which Sony continues to manufacture and market, accounted for
approximately 1% of our gross sales. In fiscal 2011, products
designed for use with the PlayStation 3 accounted for
approximately 17% of our gross sales. In fiscal 2010 we signed
an agreement with Sony Computer Entertainment of America Inc.
for rights to offer licensed Rock Band videogame
compatible wireless
Fendertm
American Precision
Basstm
replica, Fender
Telecastertm
replica and Fender full-size, wooden
Stratocastertm
guitar controllers for the PlayStation 3 computer entertainment
system. In addition to those products, we offer a full line of
unlicensed accessories for the PlayStation 3.
Videogame console prices typically are reduced as the products
mature in the market place and as the launch of new consoles is
anticipated. In the prior generation of videogame consoles, the
PlayStation 2 and Xbox game consoles launched in the United
States with a retail price of $299 and GameCube launched with a
retail price of $199. After successive price decreases, the
price of the PlayStation 2 system was lowered from $129 to $99
on April 1, 2009, while
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the Xbox and GameCube consoles have been discontinued. A similar
pattern is beginning to emerge with the current generation of
videogame consoles. In November 2005, Microsofts Xbox 360
launched in the United States in two configurations, the Core
priced at $299 and the Premium priced at $399, followed up with
the launch of the Elite in April 2007 at $480. After successive
price decreases, as of May 2009, the Core, which was
discontinued and replaced by the Arcade, retails at $199, the
Premium at $299 and the Elite at $399. In September of 2009,
Microsoft reduced the price of the Elite to $299. In June 2010,
Microsoft announced a new, redesigned, slimmer model and
discontinued production of the Elite and Arcade models.
Remaining stock of the Elite and Arcade models were to be sold
for $249 and $149 respectively. The new slimmer model comes in
two versions, a 250 GB version at $299 and a 4 GB version for
$199. Sonys PlayStation 3 was launched in the United
States in November 2006 in two configurations, a 20 GB model
priced at $499 and a 60 GB model priced at $599. In July 2007,
Sony lowered the price of the 60 GB version to $499, eliminated
the 20 GB version and introduced an 80 GB version priced at
$599. In October 2007, Sony in effect took another price
reduction by eliminating the 60 GB version and introducing a 40
GB version at $399, while at the same time reducing the price of
the 80 GB version to $499. In November 2008 Sony introduced a
160 GB PlayStation 3 for $499, at which time they dropped the
price of the 80 GB version to $399. In September 2009, Sony in
effect dropped the price again with the launch of the PS3 Slim
at $299. In July 2010, Sony announced two new sizes of the PS3
Slim, 160 GB and 320 GB. They are now priced at $299 and $349,
respectively. Nintendo launched its Wii in the United States in
November of 2006 at the price of $250. In September 2009,
Nintendo dropped the price to $199. As of May 2011, Nintendo
dropped the price further and introduced a bundle at $149. Lower
console prices usually result in higher unit sales of console
systems. Management believes that the more price sensitive
late adopter consumer that waits for these price
reductions before purchasing a system is also more likely to
purchase value-priced accessories. Management believes that in
fiscal 2012 there may be price reductions on one or more of the
videogame console systems, but none of Microsoft, Nintendo or
Sony have announced any intention to do so, and there are no
assurances any such price reductions will take place.
In fiscal 2011, approximately 17% of our gross sales were
derived from personal computer gaming and other accessories
which are marketed and sold under our Saitek, Cyborg and Eclipse
brands. These products include: PC games controllers, comprised
of joysticks, gamepads and steering wheels; PC input devices,
comprised primarily of mice, keyboards and other less
significant products such as web-cams and hubs; digital media
speakers for both PCs and the iPod/MP3 market; and chess and
intelligent games, which includes chess and bridge computers and
related accessories.
The remaining approximate 17% of our fiscal 2011 gross
sales were derived from products whose use is not specific to
any particular hardware platform.
Mad
Catz Strategy
During fiscal 2011, the Companys key initiatives included:
leveraging our global product development capabilities to
increase the flow and timeliness of new products; seeking
efficiencies to meaningfully lower our operating costs without
impacting our ability to continue to grow our business;
increasing market penetration of our PC products, particularly
in North America; refining the market positioning of our brands
to more effectively compete in all relevant categories and
price-points; continuing our discipline in working capital
management and product placement profitability; continuing to
expand our portfolio of licensed properties; continuing our
efforts to maintain compliance with environmental regulations in
all of the jurisdictions in which we do business; identifying
strategic opportunities for the expansion of products in
adjacent and compatible categories, including transactions with
companies for which products Mad Catz can leverage its global
distribution capabilities; continuing to expand our range of
AirDrives portable audio headset products and distribution for
the AirDrives line; and continuing to pursue videogame
publishing opportunities, with a particular emphasis on
hardware-videogame bundles.
In fiscal 2012, we will focus on:
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continuing to increase the flow of premium products across our
major brands: Mad Catz (casual gaming); Saitek (simulation);
Cyborg (pro-gaming); Eclipse (home and office); and Tritton
(audio and PC);
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continuing our discipline in working capital management and
product placement profitability;
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integrating V Max into our organization ;
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expanding our audio business category;
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expanding our direct sales business through our online sites and
tradeshows;
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expanding our global sales reach, with particular focus on the
Asia-Pacific region;
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expanding our outreach to targeted gaming community niches;
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continuing to license rights to offer accessories aligned with
leading videogame titles;
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continuing to pursue videogame publishing and distribution
opportunities, with a particular emphasis on hardware-videogame
bundles; and
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continuing to identify strategic opportunities for the expansion
of products in adjacent and compatible categories, including
transactions with companies for which products Mad Catz can
leverage its global distribution capabilities.
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Intellectual
Property Needed to Produce our Products
Historically, a majority of our revenue has come from videogame
accessories that are reverse-engineered to work with videogame
platforms sold by Sony, Nintendo and Microsoft. Some, but not
all, of our products that are compatible with these videogame
platforms have been produced under license agreements pursuant
to which we received proprietary and other useful information,
as well as the right to use first-party logos.
With the exception of certain Rock Band compatible
products and other limited products, the majority of our current
and historic product portfolio can be produced without a license
from Sony. However, there is no guarantee that Sony will not
alter their technologies to make unlicensed product offerings
more difficult, cost prohibitive or impossible to produce. In
the event that future Sony videogame platforms are developed or
altered to become closed systems that cannot be
reverse engineered, we would not be able to produce, manufacture
and market accessories for those platforms without access to the
applicable first-party proprietary information. Moreover, if
Sony enters into license agreements with companies other than us
for these closed systems, we would be placed at a
substantial competitive disadvantage.
We have a peripheral license from Microsoft covering specific
product categories, including wireless specialty controllers,
wired control pads, steering wheels, arcade sticks, flight
sticks and dance mats for the Xbox 360 console. The license
excludes light guns, cheat cards, memory units, wireless
standard control pads and hard drives. The license is scheduled
to expire in March 2012 but is automatically renewable for
successive one-year periods unless either party provides written
notice of its intention to terminate the license at least
90 days prior to the end of the current term.
We have a license from Nintendo for the rights to produce and
distribute certain peripherals for the Rock Band
videogame for the Wii system, as well as other products. The
license will expire in June 2011. A renewal of this license is
currently being negotiated with Nintendo.
From time to time, we acquire intellectual property licenses to
augment the commercial appeal of our core products. We must
obtain a license agreement before exploiting such intellectual
property.
Product
Development and Support
We develop products using a group of concept design, production
and technical professionals, in coordination with our marketing
and finance departments, with responsibility for the entire
development and production process including the supervision and
coordination of internal and external resources. Our hardware
products are typically conceived and designed by our internal
teams in San Diego, California, Magor, Wales, Shenzhen,
China and Hong Kong, China. For these products we own the
industrial design, and in most cases the tools, dies and molds
used for production. From time to time, we also acquire the
rights to produce and distribute products that are, or will be,
independently created by third parties.
In addition, we seek out and engage independent third-party
developers to create videogames and videogame enhancement
products on our behalf. Such products are sometimes owned by us,
and usually we have unlimited rights to commercially exploit
these products. In other circumstances, the third-party
developer may retain ownership of the intellectual property
and/or
technology included in the product and reserve certain
exploitation rights. We typically select these independent
third-party developers based on their expertise in developing
products in a specific category. Each of our third-party
developers is under contract with us for specific products. From
time to time, we also acquire the license rights to distribute
videogames that are or will be independently created by third-
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party publishers. In such cases, the agreements with such
publishers provide us with exclusive distribution rights for a
specific period of time, often for specified platforms and
territories.
In consideration for their services, the independent third-party
developer usually receives a royalty, generally based on the net
sales of the product that it has developed. Typically, the
developer also receives an advance, which we recoup from the
royalties otherwise payable to the developer. The advance
generally is paid in milestone stages. The payment
at each stage is tied to the completion and delivery of a
detailed performance milestone. Working with an independent
developer allows us to reduce our fixed development costs, share
development risks with the third-party developer, take advantage
of the third-party developers expertise in connection with
certain categories of products or certain platforms, and gain
access to proprietary development technologies.
Manufacturing
Our products are manufactured to our specifications by
outsourced factories located predominantly in and around
Shenzhen, China. The use of outsourced manufacturing facilities
is designed to take advantage of specific expertise and allow
for flexibility and scalability to respond to seasonality and
changing demands for our products. In some instances, packaging
and final assembly is performed at our distribution facility in
California or by outsourced suppliers in the United States or
Europe.
Distribution
Our products are sold to many of the worlds largest
retailers of interactive entertainment products primarily on a
direct basis without the use of intermediaries or distributors.
We also appoint distributors in certain territories to service
retail accounts not dealt with on a direct basis. We maintain a
direct sales force in the United States, Europe and China.
Direct shipping programs with certain customers, whereby the
customer receives and takes title of the products directly in
Hong Kong, are managed by our Asian operation. We operate an
approximately 101,000 square foot distribution center in
Redlands, California, which services our North American
customers. We also utilize two outsourced distribution centers
and related logistics solutions for the European market, one in
the United Kingdom and one in Germany. All freight is handled by
outsourced transportation companies. We operate information
systems, including electronic data interchange (EDI) and
integrated warehouse management systems, to remain compliant
with the requirements of our mass market retailers.
Principal
Markets
The Company operates as one business segment, in the design,
manufacture (through third parties in Asia), sales, marketing
and distribution of videogame and PC accessories and videogames.
In fiscal 2011, approximately 59% of our gross sales were
generated by customers whose retail stores are located in the
United States, 36% in Europe, 3% in Canada, and 2% in other
countries, including Australia, Japan, Korea, New Zealand and
Singapore. In fiscal 2010, approximately 53% of our gross sales
were generated by customers whose retail stores are located in
the United States, 41% in Europe, 3% in Canada, and 3% in other
countries, including Australia, Japan, Korea, New Zealand
and Singapore. In fiscal 2009, approximately 58% of our gross
sales were generated by customers whose retail stores are
located in the United States, 37% in Europe, 2% in Canada, and
3% in other countries, including Australia, Japan, Korea, New
Zealand and Singapore.
Customers
Our products are sold by many of the largest videogame and
consumer accessories retailers in the world including
Amazon.com, Best Buy, GameStop, Meijer, Target and Wal-Mart in
the United States; Future Shop and GameStop/EB Games in Canada
and ASDA, Argos, Auchan, Carrefour, Currys, Dixons,
Electronic Partner, Game, GameStation, GameStop, Media-Saturn,
Micromania, PC World and ProMarkt, in Europe.
In each of fiscal 2011, 2010 and 2009, one of our customers,
GameStop Inc., individually accounted for at least 10% of our
gross sales, accounting for approximately 26%, 25% and 29% of
our gross sales in fiscal 2011, 2010 and 2009, respectively,
taking into account all of its U.S. and
non-U.S. entities.
Competitive
Environment
The primary markets in which we sell our products are the United
States and Europe, and to a lesser extent, Canada and Asia.
These markets are highly competitive, and we expect that we may
face increased competition if
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additional companies enter these markets. Historically, price
has been a significant competitive factor for interactive
videogame and PC accessories. We believe that the other
principal competitive factors that historically have affected
retailer and consumer choice include value, product features,
ease of use and installation, realism in simulation, name brand
recognition, product styling and whether the product is
licensed. Additional competitive factors from the perspective of
the major retailers include margins, service, support,
merchandising and promotional support, reliable and timely
delivery, track record and electronic data interchange
capability. We seek to differentiate our products through
superior product design, packaging, product innovation,
licensing and branding.
Our principal competitors for videogame and PC accessories
include first-party manufacturers Microsoft, Nintendo and Sony,
and third-party manufacturers including Accessories 4
Technology, ALS, Bensussen Deutsch, Big Ben, Core Gamer, Datel,
Genius, Griffin Technology, Intec, Hama GmbH & Co KG,
Jöllenbeck GmbH, Katana Game Accessories, Inc., Logic3,
Logitech, Naki, NYKO, Performance Designed Products LLC, Razer
USA Ltd, SteelSeries ApS, Thrustmaster, Trust International
B.V. and Vidis GmbH.
We believe that our products are targeted to a broad demographic
group and that the major factors that will provide us with
continued viability and competitive edge are licenses, low-cost
products, quality, service, brands and retail relationships.
Employees
At March 31, 2011, we had 257 full-time employees in
the following locations:
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|
|
|
Location
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|
|
|
|
United States
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|
|
83
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|
United Kingdom
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|
|
37
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|
Germany
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|
|
21
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|
France
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|
|
7
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|
Hong Kong
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|
|
33
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|
Spain
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|
|
1
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|
China
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|
|
75
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|
|
|
|
|
|
Total
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|
|
257
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|
|
|
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Temporary employees are used in our distribution center in
California, especially during the peak shipping months of
October through December. Temporary employees during this period
generally range between 10 and 20 hourly employees. Our
ability to attract and retain qualified personnel is essential
to our continued success. None of our employees are covered by a
collective bargaining agreement, nor have we ever experienced
any work stoppage and we believe that our employee relations are
good.
Executive
Officers of the Registrant
Our executive officers and their ages as of June 10, 2011
are as follows:
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Name
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Position
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|
Age
|
|
Darren Richardson
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|
President, Chief Executive Officer and Director of Mad Catz
Interactive, Inc. and MCI
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|
|
50
|
|
Allyson Evans
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Chief Financial Officer of Mad Catz Interactive, Inc. and MCI
|
|
|
42
|
|
Brian Andersen
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|
Chief Operating Officer of Mad Catz Interactive, Inc.
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|
|
35
|
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Whitney Peterson
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Vice President Corporate Development and General Counsel of MCI
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|
|
46
|
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Darren Richardson has been our President and Chief
Executive Officer since April 2004 and was elected to our Board
of Directors in August 2005. Prior to his appointment as our
President and Chief Executive Officer, Mr. Richardson
served as our Executive Vice President since October 1997 and
President and Chief Operating Officer of MCI since August 1999.
Mr. Richardson also served in several senior management
capacities with Games Trader, including Chief Operating Officer,
and Vice President of Business Development, responsible for
sales and
7
marketing with a focus on new account development. He has a
Master of Business Administration degree from Trinity College,
Dublin and a Bachelor of Commerce degree from the University of
Wollongong, Australia.
Allyson Evans has been our Chief Financial Officer since
September 2010. Ms. Evans joined the Company in December
2008 as Corporate Controller. Prior to joining the Company,
Ms. Vanderford was Senior Vice President of Finance at
Intralinks, Inc. from December 2006 through November 2008, and
Chief Financial Officer of Merisel Inc. from April 2005 through
May 2006. She also held various other finance-related positions
at Merisel, Inc. beginning in April 1998. From 1995 to 1998,
Ms. Evans was employed by the accounting firm of
Deloitte & Touche, LLP, where she held the positions
of staff accountant and senior accountant.
Brian Andersen has been our Chief Operating Officer since
June 2009. Mr. Andersen joined us in October 2002 in
connection with our European expansion. Mr. Andersen has
held a number of positions within our European operations since
that time, including Category Manager until July 2003, Director
of Operations from July 2003 until July 2005 and most recently
European General Manager since July 2005. Prior to joining us,
Mr. Andersen worked as European Stock Controller for
Recoton Corp., the parent company of InterAct Accessories, and
Financial Controller for Apost in Denmark, which has since been
acquired by DHL International GmbH. Mr. Andersen has
completed the International Business Studies at Koege
Handelsskole, Denmark.
Whitney Peterson has been Vice President Corporate
Development and General Counsel for MCI since July 1998. Prior
to joining MCI, Mr. Peterson spent seven years working at
the international law firm of Latham & Watkins, where
he represented and consulted with numerous Fortune
500 companies. Mr. Peterson received his law degree
from the J. Rueben Clark School of Law at Brigham Young
University, where he graduated Magna Cum Laude.
Mr. Peterson also served as an Articles Editor on the
BYU Law Review in which he was published. Following law school,
Mr. Peterson clerked for the Honorable Bruce S. Jenkins,
Chief Judge of the Federal District Court in Utah.
Available
Information
We provide our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports free of charge under
Investor Relations on our website at
www.madcatz.com as soon as reasonably practicable after
we electronically file this material with, or furnish this
material to, the United States Securities and Exchange
Commission (the SEC). The information contained on
our website is not part of this Annual Report. You may also read
and copy the documents to which we refer at the Public Reference
Room maintained by the SEC at 100 F Street, N.E.,
Washington, D.C. 20549 on official business days during the
hours of 10 a.m. to 3 p.m. The public may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
In addition, the SEC maintains a web site that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC at
www.sec.gov.
We are required to file reports and other information with
certain Canadian provincial securities commissions. You are
invited to read and copy any reports, statements or other
information, other than confidential filings, that we file with
the provincial securities commissions. These filings are also
electronically available from the Canadian System for Electronic
Document Analysis and Retrieval (SEDAR)
(http://www.sedar.com),
the Canadian equivalent of the SECs Electronic Document
Gathering And Retrieval System, as well as on our website at
www.madcatz.com under Investor Relations.
8
You should consider each of the following factors, as well as
the other information in this Annual Report, and in our other
filings with the SEC, before deciding whether to invest in or
continue to hold our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently
consider immaterial may also impair our business operations. If
any of the following risks actually occur, our business and
financial results could be harmed. In that case, the trading
price of our common shares could decline. You should also refer
to the other information set forth in this Annual Report,
including our financial statements and the related notes.
Risks
Concerning Our Customers and Products
A
significant portion of our revenue is derived from a few large
customers.
The vast majority of our sales are generated from a small number
of large customers. Our top customer, GameStop Inc., accounted
for approximately 26% of our gross sales in fiscal 2011, 25% of
our gross sales in fiscal 2010 and 29% of our gross sales in
fiscal 2009. Our top ten customers accounted for approximately
63% of gross sales in fiscal 2011, 61% of gross sales in fiscal
2010, and 62% of gross sales in fiscal 2009.
We do not have long-term agreements with these or other
significant customers and our agreements with these customers do
not require them to purchase any specific number or amount of
our products. As a result, agreements with respect to pricing,
returns, cooperative advertising or special promotions, among
other things, are subject to periodic negotiation with each
customer. No assurance can be given that these or other
customers will continue to do business with us or that they will
maintain their historical levels of business. The loss of any of
our significant customers could have a material adverse effect
on our business, results of operations, financial condition and
liquidity. In addition, the uncertainty of product orders can
make it difficult to forecast our sales and allocate our
resources in a manner consistent with actual sales, and our
expense levels are based in part on our expectations of future
sales. If our expectations regarding future sales are
inaccurate, we may be unable to reduce costs in a timely manner
to adjust for sales shortfalls.
Our
operating results are exposed to changes in exchange
rates.
We have net monetary asset and liability balances in foreign
currencies other than the U.S. dollar, including the Pound
Sterling, the Euro, the Canadian dollar, the Hong Kong dollar
and the Chinese Yuan Renminbi (CNY). International
sales primarily are generated by our subsidiaries in the United
Kingdom, Germany and Canada, and are denominated typically in
their local currency. The expenses incurred by these
subsidiaries are also denominated in the local currency. As a
result, our operating results are exposed to change in exchange
rates between the U.S. dollar and the Pound Sterling, the
Euro, the Canadian dollar, the Hong Kong dollar and the CNY. We
do not currently hedge our foreign exchange risk, which
historically has not been significant. We will continue to
monitor our exposure to currency fluctuations, and, where
appropriate, may use financial hedging techniques in the future
to minimize the effect of these fluctuations, which may be
significant from time to time.
One or
more of our largest customers may directly import or manufacture
private-label products that are identical or very similar to our
products. This could cause a significant decline in our sales
and profitability.
Videogame and PC accessories are widely available from
manufacturers and other suppliers around the world. Each of our
largest customers has substantially greater resources than we
do, and has the ability to directly import or manufacture
private-label videogame accessories from manufacturers and other
suppliers, including from some of our own subcontract
manufacturers and suppliers. Our customers may believe that
higher profit margins can be achieved if they implement a direct
import or private-label program, reducing sales of our products.
As a consequence, our sales and profitability could decline
significantly.
9
A
significant portion of our revenue is derived from a few core
product categories.
We are dependent on a small number of core product categories to
generate a significant proportion of our revenues. No assurance
can be given that these or other products will continue to have
consumer acceptance or that they will maintain their historical
levels of sales. The loss of one or more of these products could
have a material adverse effect on our business, results of
operations, financial condition and liquidity.
Our
financial results are dependent on timely introduction of new
products, and any failure or delay in the introduction of new
products to the marketplace may have a material adverse effect
on our business, results of operations, financial condition and
liquidity. Our product mix constantly changes.
We generate our revenues from a number of frequently updated and
enhanced active products. We define active products
as products that have maintained a minimum level of average
gross sales per quarter. Each product may be configured and sold
in a number of different stock keeping units. We typically
introduce new products and discontinue a similar number of
products each year to maintain an optimal number of active
products that we believe best supports our customers and the
market. If we do not introduce new products in a timely and
efficient manner and in accordance with our operating plans, our
results of operations, financial condition and liquidity could
be negatively and materially affected.
There are numerous steps required to develop a product from
conception to commercial introduction and to ensure timely
shipment to retail customers, including designing, sourcing and
testing the electronic components, receiving approval of
hardware and other third-party licensors, factory availability
and manufacturing and designing the graphics and packaging. Any
difficulties or delays in the product development process will
likely result in delays in the contemplated product introduction
schedule. It is common in new product introductions or product
updates to encounter technical and other difficulties affecting
manufacturing efficiency and, at times, the ability to
manufacture the product at all. Although these difficulties can
be corrected or improved over time with continued manufacturing
experience and engineering efforts, if one or more aspects
necessary for the introduction of products are not completed as
scheduled, or if technical difficulties take longer than
anticipated to overcome, the product introductions will be
delayed, or in some cases may be terminated. No assurances can
be given that products will be introduced in a timely fashion,
and if new products are delayed, our sales and revenue growth
may be limited or impaired.
Some of our products have been only recently introduced and
although they may experience strong initial market acceptance,
no assurance can be given that any initial acceptance will
result in future sales. As a general matter, we expect that
sales of these products will decline over the products
life cycle. We cannot predict the length of the life cycle for
any particular product. In order to control costs, and take
advantage of the limited shelf space provided to us, we must
periodically discontinue some of our product offerings. Our
long-term operating results will therefore depend largely upon
our continued ability to conceive, develop and introduce new
appealing products at competitive prices.
We
depend upon third parties to develop products and
videogames.
Our business is dependent upon the continued development of new
and enhanced videogame platforms and videogames by first-party
manufacturers, such as Sony, Microsoft and Nintendo, and
videogames by publishers, including but not limited to,
Activision, Electronic Arts, Ubisoft, Take-Two Interactive
Software and THQ. Our business could suffer if any of these
parties fail to develop new or enhanced videogame platforms or
popular game and entertainment titles for current or future
generation platforms. If a platform is withdrawn from the market
or fails to sell, we may be forced to liquidate our inventories
or accept returns resulting in significant losses.
New
game platforms and development for multiple consoles create
additional technical and business model uncertainties that could
impact our business.
A significant portion of our revenues are derived from the sale
of videogame accessories for use with proprietary videogame
platforms, such as the Nintendo Wii, DS and DSi; the Microsoft
Xbox 360; the Sony PlayStation 3. The success of our products is
significantly affected by commercial acceptance of such
videogame platforms and the life cycle of older platforms. In
addition, we anticipate that the research and development
10
expenses incurred to develop compatible accessories for new and
updated videogame platforms may impact our profitability.
If first-party manufacturers choose to design PC or
console-based systems that do not operate with third-party
accessories and are successful in implementing technological
barriers that prevent us from developing, manufacturing,
marketing and distributing products for these new game
platforms, our ability to continue our current business would be
severely limited and our business, financial condition, results
of operations and liquidity would be harmed.
Changes
to current game platforms or introductions of new game platforms
may result in our products becoming inoperable or less desirable
on some game platforms and/or for some games, which would reduce
sales of our products and adversely affect our business, results
of operations, financial condition and liquidity.
A significant proportion of our revenues are derived from
products that are reverse engineered. First-party manufacturers
continually update their game platforms to enhance features and
to correct problems in the operating systems and reduce costs.
These manufacturers also expend significant resources to create
new game platforms. During the development of such product
updates and new game platforms, manufacturers may implement
changes to the design of the new game platforms that render our
products inoperable
and/or less
desirable for playing certain games. If our products become
inoperable on one or more game platform, or if platform system
enhancements make our products less desirable, our sales may be
significantly reduced. Moreover, we may have excess inventories
of products that do not operate properly with new game
platforms, which would limit our growth and harm our business,
results of operations, financial condition and liquidity.
We are
subject to various environmental laws and regulations that could
impose substantial costs upon us and may adversely affect our
business, operating results and financial
condition.
Our operations and some of our products are regulated under
various federal, state, local and international environmental
laws. In addition, regulatory bodies in many of the
jurisdictions in which we operate propose, enact and amend
environmental laws and regulations on a regular basis. The laws
and regulations applying to our business include those governing
the discharge of pollutants into the air and water, the
management, disposal and labeling of, and exposure to, hazardous
substances and wastes and the cleanup of contaminated sites. We
are required to incur additional costs to comply with such
regulations and may incur fines and civil or criminal sanctions,
third-party property damage or personal injury claims, or could
be required to incur substantial investigation or remediation
costs, if we were to violate or become liable under
environmental laws. Liability under environmental laws can be
joint and several and without regard to comparative fault. The
ultimate costs under environmental laws and the timing of these
costs are difficult to predict. Although we cannot predict the
ultimate impact of any new laws and regulations, they will
likely result in additional costs or decreased revenue, and
could require that we redesign or change how we manufacture our
products, any of which could have a material adverse effect on
our business. To the extent that our competitors choose not to
abide by these environmental laws and regulations, we will be at
a cost disadvantage, thereby hindering our ability to
effectively compete in the marketplace.
Errors
or defects contained in our products, failure to comply with
applicable safety standards or a product recall could result in
delayed shipments or rejection of our products, damage to our
reputation and expose us to regulatory or other legal
action.
Any defects or errors in the operation of our products may
result in delays in their introduction. In addition, errors or
defects may be uncovered after commercial shipments have begun,
which could result in the rejection of our products by our
customers, damage to our reputation, lost sales, diverted
development resources and increased customer service and support
costs and warranty claims, any of which could harm our business.
Adults and children could sustain injuries from our products,
and we may be subject to claims or lawsuits resulting from such
injuries. There is a risk that these claims or liabilities may
exceed, or fall outside the scope of, our insurance coverage. We
may also be unable to obtain adequate liability insurance in the
future. Because we are a small company, a product recall would
be particularly harmful to us because we have limited financial
and administrative resources to effectively manage a product
recall and it would detract managements attention from
implementing our core
11
business strategies. A significant product defect or product
recall could materially and adversely affect our brand image,
causing a decline in our sales, and could reduce or deplete our
financial resources.
If we
do not accurately forecast demand for particular products, we
could incur additional costs or experience manufacturing delays,
which would reduce our gross margins or cause us to lose
sales.
Demand for our products depends on many factors such as consumer
preferences and the introduction or adoption of game platforms
and related content, and can be difficult to forecast. Demand
for our products may remain stagnant or decrease. We expect that
it will become more difficult to forecast demand for specific
products as we introduce and support additional products, enter
additional markets and as competition in our markets
intensifies. If we misjudge the demand for our products, we
could face the following problems in our operations, each of
which could harm our operating results:
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If our forecasts of demand are too high, we may accumulate
excess inventories of products, which could lead to markdown
allowances or write-offs affecting some or all of such excess
inventories. We may also have to adjust the prices of our
existing products to reduce such excess inventories.
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If demand for specific products increases beyond what we
forecast, our suppliers and third-party manufacturers may not be
able to increase production rapidly enough to meet the demand.
Our failure to meet market demand would lead to missed
opportunities to increase our base of users, damage our
relationships with retailers and harm our business.
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Rapid increases in production levels to meet unanticipated
demand could result in increased manufacturing errors, as well
as higher component, manufacturing and shipping costs, including
increased air freight, all of which could reduce our profit
margins and harm our relationships with retailers and consumers.
|
Our
pricing and product return policies and other promotional
activities may negatively impact our sales and profitability and
harm our business, results of operations, financial condition
and liquidity.
Many of our products are value-priced or feature-enhanced
versions of products offered by first-party manufacturers. Sales
of products that compete with a similar first-party product
generally comprise nearly half of our gross sales. In the event
a first-party manufacturer or other competitor reduces its
prices, we could be forced to respond by lowering our prices to
remain competitive. If we are forced to lower prices, we may be
required to price protect the products that remain
unsold in our customers inventories at the time of the
price reduction. Price protection results in us issuing a credit
to our customers in the amount of the price reduction for each
unsold unit in the customers inventory. Our price
protection policies, which are customary in the videogame
industry, can have a major impact on our sales and profitability
if we are forced to reduce the price of products for which a
large inventory exists. It is also likely that we will
experience additional price competition, which may lead to price
protection, as we continue to introduce new and enhanced
products.
To the extent we introduce new versions of products or change
our product sales mix, the rate of product returns may also
increase above historical levels. Although we establish
allowances for anticipated product returns and believe our
existing policies have resulted in allowances that are adequate,
there can be no assurance that such product return obligations
will not exceed our allowances in the future, which would have a
material adverse effect on our future operating results and
financial condition.
We may
not be able to comply with the terms of our license agreements,
which may result in the loss of one or more of the
licenses.
We have entered into license and royalty agreements with various
parties in which we pay fees in exchange for rights to use
product inventions or trademarked names, shapes and likenesses
in our products. The agreements often include minimum fee
guarantees based on a reasonable expectation of the product
sales to be generated throughout the life of the agreement. We
cannot assure that we will be able to meet these expectations
and may be obligated to pay unearned fees as a result. Some of
our license agreements also contain stringent requirements
regarding the use of the licensors trademarks. Our license
and royalty agreements are for fixed terms. We cannot assure
that we will
12
be able to comply with all of the requirements contained in our
licenses or that we will be able to maintain or extend the
rights to our existing licenses.
Some
of our license agreements with videogame console developers have
expired or may expire within the next fiscal year, which could
limit our product offerings and significantly reduce our
revenues.
Historically, a majority of our revenues have come from the sale
of videogame accessories for use with videogame consoles sold by
first-party manufacturers. Some of these products have been
produced under license agreements with these first-party
manufacturers. Some of these licenses are necessary in order for
us to actually produce and sell the products (license
dependent products), while other licenses have some
perceived or actual marketing or sales benefit, but do not
dictate whether we can produce the product (marketing
licenses). Some of these license agreements have expired
and others may expire, which could limit our product offerings
and significantly reduce our revenues.
In March 2009, we amended our license agreement with Microsoft
Corporation under which we have the right to manufacture
(through third party manufacturers), market and sell certain
peripheral products for the Xbox 360 videogame console
(Xbox 360 Agreement). The products produced pursuant
to the Xbox 360 Agreement are license-dependent products. The
term of the Xbox 360 Agreement is two years, with automatic
renewals for successive one-year periods unless either party
provides written notice of its intention to terminate the
license at least 90 days prior to the end of the current
term. On March 31, 2011 the agreement was automatically
renewed for one year, as neither party provided notice of an
intention to terminate the license. Should the Xbox 360
Agreement expire, be terminated for cause, or fail to be
renewed, our product offerings may be limited thereby
significantly reducing our revenues.
The
collectibility of our receivables depends on the continued
viability and financial stability of our retailers and
distributors.
Due to the concentration of our sales to large high-volume
customers, we maintain significant accounts receivable balances
with these customers. As of March 31, 2011 and
March 31, 2010, our 10 largest accounts receivable balances
accounted for approximately 74% and 71% of total accounts
receivable, respectively. We generally do not require any
collateral from our customers to secure payment of these
accounts receivable. However, we do seek to control credit risk
through ongoing credit evaluations of our customers
financial condition and by purchasing credit insurance on
European retail accounts receivable balances. If any of our
major customers were to default in the payment of their
obligations to us, our business, financial condition, operating
results and cash flows could be adversely affected.
Risks
Concerning Our Suppliers
The
manufacture and supply of our products are dependent upon a
limited number of third parties, and our success is dependent
upon the ability of these parties to manufacture and supply us
with sufficient quantities of our products and on the continued
viability and financial stability of these third-party
suppliers.
We rely on a limited number of manufacturers and suppliers for
our products. There can be no assurance that these manufacturers
and suppliers will be able to manufacture or supply us with
sufficient quantities of products to ensure consumer
availability. In addition, these parties may not be able to
obtain the raw materials, energy or oil supply required to
manufacture sufficient quantities of our products. Moreover,
there can be no assurance that such manufacturers and suppliers
will not refuse to supply us with products, and independently
market their own competing products in the future, or will not
otherwise discontinue their relationships with or support of our
Company. Our failure to maintain our existing manufacturing and
supplier relationships, or to establish new relationships in the
future, could have a material adverse effect on our business,
results of operations, financial condition and liquidity. If our
suppliers are unable or unwilling for any reason to supply us
with a sufficient quantity of our products, our business,
revenues, results of operations, financial condition and
liquidity would be materially adversely affected. We obtain our
GameShark videogame enhancement products from third-party
suppliers, for which an alternative source may not be available.
If any of our key suppliers became financially unstable, our
access
13
to these products might be jeopardized, thereby adversely
affecting our business, cash flow, financial condition and
operational results.
Any
disruption of shipping and product delivery operations globally
could harm our business.
We rely on contract ocean carriers to ship virtually all of our
products from China to our primary distribution centers in the
United States, Germany and the United Kingdom. Customers that
take delivery of our products in China rely on a variety of
carriers to ship those products to their distribution centers
and retail outlets. We also rely on a number of sources of
ground transportation to deliver our products from our primary
distribution centers in the United States, the United Kingdom
and Germany to our retail customers and distributors
distribution centers and retail outlets. Any disruption or delay
in the importation of our products, in the operation of our
distribution centers or in the delivery of our products from our
primary distribution centers to our retail customers and
distributors distribution centers and retail outlets for
any reason, including labor strikes or other labor disputes,
terrorism, international incidents or lack of available shipping
containers or vehicles, could significantly harm our business
and reputation.
Risks of
Doing Business Internationally
Any
loss of Chinas Normal Trade Relations NTR with
the United States, or any changes in tariffs or trade policies,
could increase our manufacturing expenses and make it more
difficult for us to manufacture our products in China, if at
all.
The majority of our products are manufactured in China and
exported from Hong Kong and China to the United States and
worldwide. Our products sold in the United States are currently
not subject to United States import duties. However, as a result
of opposition to policies of the Chinese government and
Chinas growing trade surpluses with the United States,
there has been, and in the future may be, opposition to the
extension of NTR status for China. The loss of NTR status for
China, changes in current tariff structures, or adoption in the
United States of other trade policies adverse to China could
increase our manufacturing expenses and make it more difficult
for us to manufacture our products in China, if at all.
Our
manufacturing relationships in China may be adversely affected
by changes in the political, economic and legal environment in
China.
We maintain offices in Hong Kong and in China. The success of
our operations in Hong Kong and China is highly dependent on the
Chinese governments continued support of economic policies
that encourage private investment, and particularly foreign
private investment. A change in these policies by the Chinese
government could adversely affect us by, among other things,
imposing confiscatory taxation, restricting currency conversion,
imports and sources of supplies, prohibiting us from
manufacturing our products in China, or restricting our ability
to ship products from China into Hong Kong, or to ship finished
products out of Hong Kong, or otherwise shutting down our
offices in Hong Kong and China. Although the Chinese government
has chosen economic reform policies to date, no assurance can be
given that it will continue to pursue such policies or that such
policies will not be significantly altered, especially in the
event of a change in leadership or other social or political
disruption.
Our sources of manufacturing and distribution capabilities could
be adversely affected by ongoing tensions between the Chinese
and Taiwanese governments. The Chinese government has threatened
military action against Taiwan unless Taiwan adopts a plan for
unifying with China. As of yet, Taiwan has not indicated that it
intends to propose or adopt a reunification plan. Any military
action on the part of China could lead to sanctions or military
action by the United States
and/or
European countries, which could materially affect our sales to
those countries and our operations in China.
There are also uncertainties regarding the interpretation and
enforcement of laws, rules and policies in China. The Chinese
legal system is based on written statutes, and prior court
decisions have limited precedential value. In addition, many
laws and regulations are relatively new; and the Chinese legal
system is still evolving, resulting in sporadic and inconsistent
enforcement and interpretation. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist,
leading to additional uncertainty as to the outcome of any
litigation. Even where
14
adequate laws exist in China, it may be impossible to obtain
swift and equitable enforcement of such laws, or to obtain
enforcement of a judgment by a court in a different jurisdiction.
The Chinese tax system is subject to substantial uncertainties
and has been subject to recently enacted changes, the
interpretation and enforcement of which are also uncertain.
There can be no assurance that changes in Chinese tax laws or
their interpretation or their application will not subject us to
substantial Chinese taxes in the future.
There
are numerous risks associated with our international operations,
any number of which could harm our business.
We have offices and sales throughout the world. Our registered
office and a sales office are in Canada. Our operational
headquarters is in San Diego, California. We also have
offices in the United Kingdom, France, Germany, Spain, China and
Hong Kong. Approximately 59% of our gross sales in fiscal year
2011 were generated by customers whose retail locations are in
North America, and a substantial majority of our products are
manufactured by third parties in Hong Kong and China. The
geographical distances between our operations create a number of
logistical and communications challenges. These challenges
include managing operations across multiple time zones,
directing the manufacture and delivery of products across long
distances, coordinating procurement of components and raw
materials and their delivery to multiple locations, and
coordinating the activities and decisions of the management
team, which is based in a number of different countries.
In addition, there are other risks inherent in international
operations, which could result in disruption or termination of
supply of our products available for sale. These risks include:
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unexpected changes in regulatory requirements, taxes, trade laws
and tariffs;
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political instability and the potential reversal of current
favorable policies encouraging foreign investment or foreign
trade by host countries;
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differences in labor laws, labor unrest and difficulties in
staffing and managing international operations;
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longer payment cycles;
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fluctuations in currency exchange rates;
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potential adverse tax consequences;
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limitations on imports or exports of components or assembled
products, or other travel restrictions;
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differing intellectual property rights and protections;
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delays from doing business with customs brokers and governmental
agencies; and
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higher costs of operations.
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These factors could materially and adversely affect our
business, operating results, and financial condition.
Intellectual
Property Risks
We may
be faced with legal challenges related to our products,
including that our products infringe third parties
intellectual property rights. These challenges could cause us to
incur significant litigation or licensing expenses or could
prohibit us from producing or marketing some or all of our
products entirely.
Although we do not believe that our products infringe the
proprietary rights of any third parties, there can be no
assurance that infringement or other legal claims will not be
asserted against us or that any such claims will not materially
adversely affect our business, financial condition, or results
of operations. Regardless of their validity or success, such
claims may result in costly litigation, divert managements
time and attention, cause product shipment delays or require us
to enter into royalty or licensing agreements, which may not be
available on terms acceptable to us, or at all. If licensing
arrangements are required but unavailable, we may be prohibited
from marketing and distributing these products. In addition, we
could also incur substantial costs to redesign our products to
comply with legal orders or contractual arrangements. Any of
these costs or outcomes could adversely affect our business,
results of operations, financial condition and liquidity.
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Our
intellectual property rights may not prevent our competitors
from using our technologies or similar technologies to develop
competing products, which could weaken our competitive position
and harm our financial results.
Our success depends in part on the use of proprietary
technologies. We rely, and plan to continue to rely, on a
combination of patents, copyrights, trademarks, trade secrets,
confidentiality provisions and licensing arrangements to
establish and protect our proprietary rights. We have entered
into confidentiality and invention assignment agreements with
our employees and contractors, and nondisclosure agreements with
selected parties with whom we conduct business to limit access
to and disclosure of our proprietary information. These
contractual arrangements and the other steps we have taken to
protect our intellectual property may not prevent
misappropriation of that intellectual property or deter
independent third-party development of similar technologies.
Monitoring the unauthorized use of proprietary technology and
trademarks is costly, and any dispute or other litigation,
regardless of outcome, may be costly and time consuming and may
divert our management and key personnel from our business
operations. The steps taken by us may not prevent unauthorized
use of our proprietary technology or trademarks. Many features
of our products are not protected by patents; and as a
consequence, we may not have the legal right to prevent others
from reverse engineering or otherwise copying and using these
features in competitive products. If we fail to protect or to
enforce our intellectual property rights successfully, our
competitive position could suffer, which could adversely affect
our financial results.
If our
products are copied or knocked-off, our sales of
these products may be materially reduced and our profitability
may be negatively affected.
Occasionally in the videogame and PC accessories industry,
successful products are knocked-off or copied by
competitors. While we strive to protect our intellectual
property, we cannot guarantee that knock-offs will not occur or
that they will not have a significant effect on our business.
The costs incurred in protecting our intellectual property
rights could be significant, and there is no assurance that we
will be able to successfully protect our rights.
Financing
Risks
We
depend upon the availability of capital under our credit
facility to finance our operations. Any additional financing
that we may need may not be available on favorable terms, or at
all.
In addition to cash flow generated from sales of our products,
we finance our operations with a Credit Facility (the
Credit Facility) provided by Wachovia Capital
Finance Corporation (Central) (Wachovia), an
unrelated party. On June 23, 2009, we extended the Credit
Facility until October 31, 2012. If we are unable to comply
with the restrictive and financial covenants contained in the
Credit Facility, Wachovia may declare the outstanding borrowings
under the facility immediately due and payable. In such an
event, our liquidity will be materially adversely affected,
which could in turn have a material adverse impact on our future
financial position and results of operations. We would be
required to obtain additional financing from other sources. We
cannot predict whether or on what terms additional financing
might be available. If we are required to seek additional
financing and are unable to obtain it, we may have to change our
business and capital expenditure plans, which would have a
materially adverse effect on our future results of operations.
In addition, the debt under our Credit Facility could make it
more difficult to obtain other debt financing in the future,
which could put us at a competitive disadvantage to competitors
with less debt.
The Credit Facility contains financial and other covenants that
we are obligated to maintain. If we violate any of these
covenants, we will be in default under the Credit Facility. If a
default occurs and is not timely cured or waived by Wachovia,
Wachovia could seek remedies against us, including:
(1) penalty rates of interest, (2) immediate repayment
of the debt or (3) foreclosure on assets securing the
Credit Facility. No assurance can be given that we will maintain
compliance with these covenants in the future. The Credit
Facility is asset based and can only be drawn down in an amount
to which eligible collateral exists and can be negatively
impacted by extended collection of accounts receivable,
unexpectedly high product returns and slow moving inventory,
among other factors. As of March 31, 2011, we were in
compliance with all covenants.
If we need to obtain additional funds for any reason, including
as a result of the termination of the Credit Facility or the
acceleration of amounts due thereunder, increased working
capital requirements, possible
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acquisitions or otherwise, there can be no assurance that
alternative financing can be obtained on substantially similar
or acceptable terms, or at all. Our failure to promptly obtain
alternate financing could limit our ability to implement our
business plan and have an immediate, severe and adverse impact
on our business, results of operations, financial condition and
liquidity. In the event that no alternative financing is
available, we would be forced to drastically curtail operations,
or dispose of assets, or cease operations altogether.
Funding
for our future growth may depend upon obtaining new financing,
which may be difficult to obtain given prevalent economic
conditions and the general credit crisis.
To accommodate our expected future growth, we may need funding
in addition to cash provided from current operations and
continued availability under our Credit Facility provided by
Wachovia. Our ability to obtain additional financing may be
constrained by current economic conditions affecting global
financial markets. Specifically, the recent credit crisis and
other related trends affecting the banking industry have caused
significant operating losses and bankruptcies throughout the
banking industry. Many lenders and institutional investors have
ceased funding even the most credit-worthy borrowers. If we are
unable to obtain additional financing, we may be unable to take
advantage of opportunities with potential business partners or
new products, to finance our existing operations or to otherwise
expand our business as planned.
Accounts
receivable represent a large portion of our assets, a large
portion of which are owed by a few customers. If these accounts
receivable are not paid, we could suffer a significant decline
in cash flow and liquidity which, in turn, could limit our
ability to pay liabilities and purchase an adequate amount of
inventory.
Our accounts receivable represented 26%, 28%, and 28% of our
total assets as of March 31, 2011, 2010 and 2009,
respectively. As a result of the substantial amount and
concentration of our accounts receivable, if any of our major
customers fails to timely pay us amounts owed, we could suffer a
significant decline in cash flow and liquidity which could
negatively affect our ability to make payments under our Credit
Facility and which, in turn, could adversely affect our ability
to borrow funds, to purchase inventory, to sustain or expand our
current sales volume. Accordingly, if any of our major customers
fails to timely pay us amounts owed, our sales and profitability
may decline.
Increases
in interest rates may increase our interest expense and
adversely affect our profitability and cash flow and our ability
to service indebtedness.
We depend, in a significant part, on borrowings under the Credit
Facility to finance our operations. At March 31, 2011, the
outstanding balance under the Credit Facility was
$5.4 million. The interest rate applicable to the Credit
Facility varies based on the U.S. prime rate plus 2.00% or,
at our option, LIBOR plus 3.5% with a LIBOR floor of 1.5%. The
variable rate debt outstanding under the Credit Facility had a
weighted average annual interest rate of approximately 5.3% for
the year ended March 31, 2011. Increases in the interest
rate under the Credit Facility will increase our interest
expense, which could harm our profitability and cash flow.
We
have a substantial amount of goodwill on our balance sheet that
may have the effect of decreasing our earnings or increasing our
losses in the event that we are required to recognize an
impairment charge to goodwill.
As of March 31, 2011, $10.5 million of goodwill is
recorded on our balance sheet, which represents the excess of
the total purchase price of our acquisitions over the fair value
of the net assets acquired. At March 31, 2011, goodwill
represented 13.9% of our total assets.
We perform an annual impairment review at the reporting unit
level during the fourth quarter of each fiscal year or more
frequently if we believe indicators of impairment are present.
Authoritative guidance requires that goodwill and certain
intangible assets be assessed for impairment using fair value
measurement techniques. Specifically, goodwill impairment is
determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the
reporting unit is
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considered not impaired and the second step of the impairment
test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill
impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test
compares the implied fair value of the reporting units
goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess. We determined that
we have one reporting unit and we assess fair value based on a
review of our market capitalization as well as a discounted cash
flow model, for which the key assumptions include revenue
growth, gross profit margins, operating expense trends and our
weighted average cost of capital. Given the volatility of our
stock price and market capitalization, which fluctuates
significantly throughout the year, we do not believe that our
market capitalization is necessarily the best indicator of the
fair value of our Company at any moment in time. However, we
have determined that market capitalization over a sustained
period, when considered with other factors may be an appropriate
indicator of fair value. Further, to the extent the carrying
amount of our reporting unit exceeds its market capitalization
over a sustained period, an impairment may exist and require us
to test for impairment. During our 2009 fiscal year, we
determined that a triggering event had occurred in the quarter
ended December 31, 2008 and recorded a goodwill impairment
charge of $27.9 million. We completed our annual assessment
of impairment as of March 31, 2011, which did not indicate
any impairment of goodwill at such date, as the fair value
exceeded the carrying value by 81%. No assurance can be given
that we will not be required to record additional goodwill
impairments in future periods.
General
Risk Factors
Acquired
companies can be difficult to integrate, disrupt our business
and adversely affect our operating results. The benefits we
anticipate may not be realized in the manner
anticipated.
We have made past acquisitions, such as our recent acquisitions
of Tritton and V Max, and may make future acquisitions with the
expectation that these acquisitions would result in various
benefits including, among other things, enhanced revenue and
profits, greater market presence and development, particularly
in Europe, and enhancements to our product portfolio and
customer base. We may not realize these benefits, as rapidly as,
or to the extent, anticipated by our management. There can be no
assurance that we will be able to identify, acquire or
profitably manage additional businesses or successfully
integrate any acquired businesses, products or technologies into
our Company without substantial expenses, delays or other
operational or financial problems. Acquisitions involve a number
of risks, some or all which could have a material adverse effect
on our acquired businesses, products or technologies.
Furthermore, there can be no assurance that any acquired
business, product, or technology will be profitable or achieve
anticipated revenues and income. Our failure to manage our
acquisition strategy successfully could have a material adverse
effect on our business, results of operations and financial
condition. In addition, operations and costs incurred in
connection with the integration of acquired companies with our
other operating subsidiaries also could have an adverse effect
on our business, financial condition and operating results. If
these risks materialize, our stock price could be materially
adversely affected.
Acquisitions involve numerous risks, including:
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difficulties in integrating operations, technologies, services
and personnel of the acquired companies;
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potential loss of customers of the acquired companies;
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diversion of financial and management resources from existing
operations;
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potential loss of key employees of the acquired companies;
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integrating personnel with diverse business and cultural
backgrounds;
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preserving the development, distribution, marketing and other
important relationships of the acquired companies;
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assumption of liabilities of the acquired companies; and
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inability to generate sufficient revenue and cost savings to
offset acquisition costs.
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Our acquisitions may also cause us to:
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incur additional debt;
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make large and immediate one-time write-offs and restructuring
and other related expenses;
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become subject to intellectual property or other
disputes; and
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create goodwill or other intangible assets that could result in
significant impairment charges
and/or
amortization expense in the future.
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As a result, if we fail to properly evaluate, execute and
integrate acquisitions, our business and prospects may be
seriously harmed.
We
must stay at the forefront of technology and any inability to do
so would have a material adverse effect on our results of
operations, financial condition and liquidity.
The videogame and PC accessories industry is characterized by
rapid technological advances, evolving industry standards,
frequent new product introductions and enhancements and changing
customer requirements. Much of the development of our new
product offerings is dependent upon our ability to reverse
engineer first-party products as they are introduced by the
manufacturers; and the introduction of products that prevent or
delay our ability to effectively develop products through
reverse engineering could prevent us from developing new
products, which would harm our business operations, financial
condition, results of operations and liquidity. The introduction
of products embodying or based upon new technologies and the
emergence of new industry standards could render our existing
inventory of products obsolete, incompatible with new consoles
and unmarketable. We believe that any future success will depend
upon our ability to reverse engineer new videogame systems,
introduce new products that keep pace with technological
developments, respond to evolving end-user requirements and
achieve market acceptance. If we cannot reverse engineer the
next generation videogame platforms or fail to develop and
introduce new enhancements or new products for existing
platforms, or if changes to existing videogame platforms render
our products out of date or obsolete, or if our intended
customers do not accept these products, our business would be
materially harmed.
Current
economic, political and market conditions may adversely affect
our revenue growth and operating results.
Our revenue and profitability are affected by global business
and economic conditions, including the current crisis in the
credit markets, particularly in the United States and Europe.
Downturns in the global economy could have a significant impact
on demand for our products. In a poor economic environment such
as we are operating in today, there is a greater likelihood that
more of our customers could become delinquent on their
obligations to us or go bankrupt, which, in turn, could result
in a higher level of charge-offs and provision for credit
losses, all of which would adversely affect our earnings.
Uncertainty created by the long-term effects of volatile oil
prices, the global economic slowdown, continuation of the global
credit crisis, the war in the Middle East, terrorist activities,
potential pandemics, natural disasters and related uncertainties
and risks and other geopolitical issues may impact the
purchasing decisions of current or potential customers. Because
of these factors, we believe the level of demand for our
products and services, and projections of future revenue and
operating results, will continue to be difficult to predict. If
economic conditions in the United States and other key markets
deteriorate further or do not show improvement, we may
experience material adverse impacts to our business and
operating results.
Natural
disasters or other events outside of our control may damage our
facilities or the facilities of third parties on which we depend
for the manufacture and distribution of our
products.
Our North American distribution center and operational
headquarters are located in California near major earthquake
faults that have experienced earthquakes in the past. All of our
facilities may be subject to a variety of natural or man-made
disasters. An earthquake or other event outside our control,
such as power shortages, floods, fires, monsoons, other severe
weather conditions, terrorism or other similar events, could
disrupt our operations or damage or destroy our facilities. Any
of these disruptions could impair the manufacture or
distribution of products, damage inventory, interrupt critical
functions or otherwise affect our business negatively, harming
our business operations and future financial condition, results
of operations or liquidity. In addition, if the facilities of
our third-
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party product manufacturers are affected by similar activities
beyond our control, our ability to obtain sufficient
manufactured products could suffer or be impaired.
Our
operations are vulnerable because we have limited redundancy and
backup systems. Any failure of our data information systems
could negatively impact our financial results.
Our internal order, inventory and product data management system
is an electronic system through which we manage customer orders
and product pricing, shipment, returns, among other matters. The
continued and uninterrupted performance of our information
systems is critical to our
day-to-day
business operations. Despite our precautions, unanticipated
interruptions in our computer and telecommunications systems
have, in the past, caused problems or stoppages in this
electronic system. These interruptions, and resulting problems,
could occur in the future. We have extremely limited ability and
personnel to process purchase orders and manage product pricing
and other matters in any manner other than through this
electronic system. Any interruption or delay in the operation of
this electronic system could cause a significant decline in our
sales and profitability.
Our
business is seasonal and our financial results vary from period
to period.
The videogame and PC accessories industry is highly seasonal and
our operating results vary substantially from period to period.
We generate a substantial portion of our sales during the
holiday season. The high level of seasonality causes us to take
significant risks in the purchase of inventory for the holiday
season. There can be no guarantee that our customers or we will
sell all of our inventories. Excess inventory at year-end may
result in financial losses from obsolescence, reserves, returns
and markdowns.
Moreover, if expenses remain relatively fixed, but our revenues
are less than anticipated in any quarter, our operating results
would be adversely affected for that quarter. In addition,
incurring unexpected expenses could adversely affect operating
results for the period in which such expenses are incurred.
Failure to achieve periodic revenue, earnings and other
operating and financial results as anticipated by brokerage
firms or industry analysts could result in an immediate and
adverse effect on the market price of our common shares. We may
not discover, or be able to confirm, revenue or earnings
shortfalls until the end of a quarter, which could result in a
greater immediate and adverse effect on the share price.
We are
constantly looking for opportunities to grow our business and
diversify our product line. If we fail to successfully manage
the expansion of our business, our sales may not increase
commensurately with our capital investments, which would cause
our profitability to decline.
The industry in which we compete is highly competitive. As a
result, we look for opportunities to grow our business,
including through the expansion of our product offerings. We
plan to continue the diversification of our product line. Our
new product offerings, including our complete lines of products
for each of the next generation gaming systems, have required
and will continue to require significant resources and
managements close attention. In offering new products, our
resources are likely to be strained because we have less
experience in the new product categories. Our failure to
successfully manage our planned product expansion could result
in our sales not increasing commensurately with our capital
investments, causing a decline in our profitability.
Possible
increase in value to Chinese currency vis-à-vis U.S.
currency could have a material impact on the cost of our
products.
Since 2007, the CNY has traded against the U.S. dollar in
the inter-bank spot foreign exchange market in a 0.5% trading
band rather than being pegged to the U.S. Dollar as it was
prior to 2005 or trading in the 0.3% range applicable between
2005 and 2007. The administrative rules governing the floating
band of the CNY trading prices against non-US dollar currencies
in the inter-bank spot foreign exchange market and the spread
between the
CNY/U.S. dollar
selling and buying prices quoted by the foreign
exchange-designated banks remain unchanged.
The Chinese government may decide to change or abandon this
policy at its sole discretion at any time in the future. The
recent appreciation of the CNY against the U.S. dollar and
any additional appreciation in the exchange rate of the CNY
against the U.S. dollar will increase our factory and
production costs, including labor and certain raw materials that
could have a material impact on the cost of our products and our
results of operations.
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Failure
to attract, retain and motivate skilled personnel would have a
material adverse effect on our results of operations, financial
condition or liquidity.
Our ability to achieve our revenue and operating performance
objectives will depend in large part on our ability to attract
and retain qualified and highly skilled sales, marketing,
operations, logistics, management, engineering and finance
personnel. We compete for our personnel with other companies,
and competition for such personnel is intense and is expected to
remain so for the foreseeable future, particularly for those
with relevant technical expertise. Failure to retain and expand
our key employee population could adversely affect our business
and operating results.
We are heavily dependent upon our senior management team. The
continued availability of this team will be a major contributing
factor to our future growth. In the event that any member of
senior management becomes unavailable for any reason, we could
be materially and adversely affected. We do not maintain key-man
life insurance on our senior management.
Competition
for market acceptance and retail shelf space and pricing
competition affects our revenue and profitability.
The videogame and PC accessory market is highly competitive and
the barriers to entry are low. Only a small percentage of
products introduced in the market achieve any degree of
sustained market acceptance. If our products are not successful,
our operations and profitability will be negatively impacted.
Competition in the videogame accessory industry is based
primarily upon:
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the availability of significant financial resources;
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the quality of products;
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reviews received for products from independent reviewers;
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access to retail shelf space;
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the success of the game console for which the products were
developed;
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the price at which the products are sold; and
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the number of other competing products for the system for which
the products were developed.
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Some of our competitors, particularly the first-party
manufacturers, enjoy competitive advantages over us, such as
longer operating histories, larger technical staffs, more
established and larger sales and marketing organizations,
significantly greater financial and other resources, ability to
respond more quickly to new or emerging technologies and changes
in customer requirements or ability to establish or strengthen
cooperative relationships with retailers, distributors and other
marketers.
Increased competition from these and other sources could require
us to respond to competitive pressures by establishing pricing,
marketing and other programs or seeking out additional
acquisitions that may be less favorable than what we could
otherwise establish or obtain, and thus could have a material
adverse effect on our business, financial condition and results
of operations. No assurance can be given that we will be able to
compete effectively in our markets.
Any
future terrorist attacks and other acts of violence or war may
affect the demand for videogame and PC accessories, which may
negatively affect our operations and financial
results.
The continued threat of terrorism within the United States,
Europe and the Middle East and the military action and
heightened security measures in response to such threat may
cause significant disruption to commerce throughout the world.
To the extent that such disruptions result in delays or
cancellations of customer orders, a general decrease in the
demand for videogame accessories, or our inability to
effectively market our products, our business and results of
operations could be materially and adversely affected. We are
unable to predict whether the threat of terrorism or the
responses thereto will result in any long-term commercial
disruptions or if such activities or responses will have a
long-term material adverse effect on our business, results of
operations, financial condition and liquidity.
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Volatility
in the mass-market and consumer electronic retail sectors could
have a material adverse effect on our sales.
We sell our products through a network of domestic and
international mass-market and consumer electronics retailers, as
well as some distributors, and our success depends on the
continued viability and financial stability of these customers.
The retail industry has historically been characterized by
significant volatility, including periods of widespread
financial difficulties and consolidations, and the emergence of
alternative distribution channels. While we attempt to minimize
the risks associated with this industry volatility, there is
always a risk that one or more of our customers will experience
economic difficulties or be acquired by competitors. If any of
our customers cease doing business, it could have a material
adverse effect on our sales and could significantly harm our
business, financial condition and operating results.
Risk
Factors Related to Our Internal Controls
If we fail to maintain an adequate system of internal
controls, we may not be able to accurately report our financial
results, which could cause current and potential shareholders to
lose confidence in our financial reporting and in turn affect
the trading price of our common stock.
Section 404 of the Sarbanes-Oxley Act and the related
regulations require the management of public companies in the
United States to evaluate and report on the companies
systems of internal control over financial reporting. In
addition, our independent registered public accountants will be
required to attest to and report on our managements
evaluation beginning with our 2012 fiscal year. We have and will
continue to incur significant expenses and management resources
to comply with the requirements of Section 404 on an
ongoing basis. We cannot be certain that the measures we have
taken to assess, document, improve and validate through testing
the adequacy of our internal control process over financial
reporting will ensure that we maintain such adequate controls
over our financial reporting process in the future. Failure to
implement required new controls could cause us to fail to meet
reporting obligations, which in turn could cause current and
potential shareholders to lose confidence in our financial
reporting. Inferior internal controls or the determination that
our internal control over financial reporting is not effective
might cause investors to lose confidence in our reported
financial information, which could cause volatility in the
market price of our shares.
Risk
Factors Related to Our Shares
Penny
stock rules may negatively impact the liquidity of our common
stock.
Our common stock is subject to rules promulgated by the United
States Securities and Exchange Commission (the SEC)
relating to penny stocks, which apply to certain
companies whose shares trade at less than $5.00 per share and
which do not meet certain other financial requirements specified
by the SEC. These rules require brokers who sell penny
stocks to persons other than established customers and
accredited investors to complete certain
documentation, make suitability inquiries of investors, and
provide investors with certain information concerning the risks
of trading in such penny stocks. These rules may discourage or
restrict the ability of brokers to sell our common stock and may
affect the secondary market for our common stock. These rules
could also have a detrimental effect upon our ability to raise
funds through an offering of our common stock.
Volatility
of share price and absence of dividends.
The market price of our common stock has been and is likely to
be highly volatile. Many factors could have a significant
adverse impact on the market price of our common stock,
including:
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our or our competitors announcements of technological
innovations or new products by us or our competitors;
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governmental regulatory actions;
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developments with our strategic alliances and collaborators;
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developments concerning our proprietary rights or the
proprietary rights of our competitors (including litigation);
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period-to-period
fluctuations in our operating results;
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changes in estimates of our performance by securities analysts;
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market conditions for consumer technology stocks in
general; and
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other factors not within our control.
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We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future.
There
can be no assurance that the holders or purchasers of our common
stock will be able to resell their shares at prices equal to or
greater than their cost.
The market price of our common stock could be subject to
significant fluctuations in response to quarterly variations in
our operating results, announcements of technological
innovations through new products by us or our competitors,
changes in financial estimates by securities analysts or other
events or factors, many of which are beyond our control. In
addition, the stock markets have experienced significant price
and volume fluctuations that have particularly affected the
market prices of equity securities of many companies whose
businesses are dependent on technology and that often have been
unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price
of our common stock. There can be no assurance that the holders
or purchasers of our common stock will be able to resell their
shares at prices equal to or greater than their cost.
Investors
may not be able to secure foreign enforcement of civil
liabilities against management.
The enforcement by investors of civil liabilities under the
federal securities laws of the United States may be adversely
affected by the fact that we are organized under the laws of
Canada, that some of our officers and directors are residents of
a foreign country and that all, or a substantial portion, of
such persons assets are located outside of the United
States. As a result, it may be difficult for holders of our
common stock to affect service of process on such persons within
the United States or to realize in the United States upon
judgments rendered against them.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
MCI leases 16,000 square feet of office space for its
headquarters at 7480 Mission Valley Road, Ste. 101,
San Diego, California,
92108-4406.
The lease is scheduled to expire on September 30, 2013.
MCI leases a 101,000 square foot warehouse located at 490
Nevada Street, Redlands, California, 92373. The lease is
scheduled to expire on June 30, 2015.
MCE leases business premises located at 1-2 Shenley Pavilions,
Shenley Wood, Milton Keynes, Buckinghamshire MK5 6LB. The lease
is scheduled to expire on September 30, 2012.
MCE leases business premises located at Wales 1 Business Park,
Building 104 and 102, Newport Road, Magor, NP26 3DG UK. The
lease is scheduled to expire on October 31, 2012.
MCIA leases business premises located at Miramar Tower (Units
2005-8 on
20/F, 132 Nathan Road, Tsimshatsui, Kowloon. The lease is
scheduled to expire on March 31, 2015.
MCTD leases business premises located at Building A, Dong Fang
Ya Yuan, 2nd Xixiang Baomin Road, Baoan District, Shenzhen,
Guangdong Province, China. The lease is scheduled to expire on
April 30, 2012.
Mad Catz GmbH leases business premises located at Landsberger
Str. 400, 81241 München, Germany. The lease is scheduled to
expire on March 31, 2014.
23
Saitek SAS and Mad Catz France lease business premises located
at 13, Rue Camille Desmoulins, 92441, Issy Les Moulineaux,
France. The lease is scheduled to expire on April 30, 2013.
Management believes that our leased facilities are adequate for
the near term, with the exception of the potential to modestly
increase our square footage at the MCI facility in conjunction
with the Tritton acquisition. At present management is unaware
of any environmental issues affecting any of our premises.
|
|
Item 3.
|
Legal
Proceedings
|
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. Ch. 11 Case
No. 08-35653
(KRH) (Bankr. E.D. Va. 2008 proceeding numbers
10-03763 and
10-03255. On
or about December 23, 2010, 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 complaint alleging 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. Mad Catz answered the complaint denying
all material allegations. The Court has asked MCI and Circuit
City to attempt to resolve the disputes through mediation. It is
anticipated that the mediation will take place sometime in late
July 2011. The Company disputes the allegations of both
complaints and believes the Trusts claims are baseless,
and intends to vigorously defend against all of the
Trustees claims.
Ogma LLC. v. Activision Blizzard, Inc., et al., Civ.
2:11-cv-75-TJW (E.D. Texas 2011) On March 3, 2011,
Ogma LLC (Ogma) filed an amended complaint against
MCI and approximately 18 other defendants alleging infringement
of United States patent number 6,150,947 (947
Patent) by MCIs remote for the Nintendo Wii video
game console. MCI has obtained an extension to file its answer
until June 24, 2011. On May 13, 2011, the
United States International Trade Commission
(ITC) issued a Notice of Investigation regarding the
matter. While the ITC investigation proceeds, MCI intends to
file a Motion to Stay the District Court proceedings. MCI has
obtained an extension to respond to the ITCs investigation
until June 17, 2011. MCI disputes the allegations of the
lawsuit and intends to vigorously defend itself.
We may at times be involved in litigation in the ordinary course
of business. We will also, from time to time, when appropriate
in managements estimation, record reserves in our
financial statements for pending litigation. Litigation is
expensive and is subject to inherent uncertainties, and an
adverse result in any such matters could adversely impact our
operating results or financial condition. Additionally, any
litigation to which we may become subject could also require
significant involvement of our senior management and may divert
managements attention from our business and operations.
Although claims, suits, investigations and proceedings are
inherently uncertain and their results cannot be predicted with
certainty, we believe that the resolution of any current pending
matters will not have a material adverse effect on our business,
financial condition, results of operations or liquidity.
24
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock commenced trading on the Toronto Stock Exchange
(TSX) in December 1995 and on NYSE Amex
(AMEX) in September 1999. Since September 2001, our
common stock has traded on the AMEX and the TSX under the symbol
MCZ. The following table sets forth, for the fiscal
quarters indicated, the high and low market prices for the
Companys common stock on the AMEX and TSX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NYSE Amex
|
|
Toronto Stock Exchange
|
|
|
(U.S. $)
|
|
(Canadian $)
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
2.19
|
|
|
$
|
0.84
|
|
|
$
|
2.11
|
|
|
$
|
0.83
|
|
Third Quarter
|
|
|
1.06
|
|
|
|
0.42
|
|
|
|
1.05
|
|
|
|
0.36
|
|
Second Quarter
|
|
|
0.53
|
|
|
|
0.39
|
|
|
|
0.54
|
|
|
|
0.41
|
|
First Quarter
|
|
|
0.49
|
|
|
|
0.36
|
|
|
|
0.50
|
|
|
|
0.34
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
0.57
|
|
|
$
|
0.33
|
|
|
$
|
0.59
|
|
|
$
|
0.36
|
|
Third Quarter
|
|
|
0.54
|
|
|
|
0.32
|
|
|
|
0.55
|
|
|
|
0.33
|
|
Second Quarter
|
|
|
0.50
|
|
|
|
0.24
|
|
|
|
0.50
|
|
|
|
0.27
|
|
First Quarter
|
|
|
0.47
|
|
|
|
0.22
|
|
|
|
0.50
|
|
|
|
0.20
|
|
Holders
The closing sales price of our common stock on the AMEX was
$1.72 on June 10, 2011, and there were approximately
224 shareholders of record of our common stock as of that
date.
Dividends
We have never declared or paid any dividends and do not expect
to pay any dividends in the foreseeable future.
25
Issuer
Purchases of Equity Securities
Neither our Company nor any affiliated purchaser repurchased any
of our equity securities during fiscal 2011.
The graph below compares the cumulative total shareholder return
on the Common Stock of the Company from March 31, 2006
through and including March 31, 2011 with the cumulative
total return on the S&P/TSX Composite Total Return Index,
the NYSE AMEX Composite Index and the stocks included in the
Morningstar database under the Standard Industrial Code 3944
(Games & Toys, except Bicycles). The graph assumes the
investment of $100 in the Companys Common Stock and in
each of the indexes on March 31, 2006 and reinvestment of
all dividends. Unless otherwise specified, all dates refer to
the last day of each year presented. The stock price information
shown on the graph below is not necessarily indicative of future
price performance.
ASSUMES $100
INVESTED ON MARCH 31, 2006
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDED MARCH 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
3/31/2006
|
|
|
3/31/2007
|
|
|
3/31/2008
|
|
|
3/31/2009
|
|
|
3/31/2010
|
|
|
3/31/2011
|
|
Mad Catz Interactive, Inc.
|
|
$
|
100.00
|
|
|
$
|
148.21
|
|
|
$
|
110.71
|
|
|
$
|
55.45
|
|
|
$
|
85.71
|
|
|
$
|
391.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIC Code Index
|
|
|
100.00
|
|
|
|
114.63
|
|
|
|
125.17
|
|
|
|
77.28
|
|
|
|
113.97
|
|
|
|
137.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMEX Market Index
|
|
|
100.00
|
|
|
|
111.42
|
|
|
|
115.88
|
|
|
|
78.31
|
|
|
|
111.32
|
|
|
|
134.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P/TSX Composite Total Return
|
|
|
100.00
|
|
|
|
127.82
|
|
|
|
124.19
|
|
|
|
94.85
|
|
|
|
148.17
|
|
|
|
183.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companies included in the Standard Industrial Code 3944 peer
group include: Action Products International, Inc.; Avisio,
Inc.; Conspiracy Entertainment Holdings.; Entertainment Gaming
Asia Inc.; Gaming Partners International Corp; Hasbro, Inc.;
Jakks Pacific, Inc.; LeapFrog Enterprises, Inc.; Mad Catz
Interactive, Inc.; Millennium Prime Inc.; Nocopi Technologies,
Inc.; Toyshare, Inc.; and Toyzap.com, Inc.
26
|
|
Item 6.
|
Selected
Financial Data
|
The summary of financial information set forth below is derived
from and should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Annual
Report on
Form 10-K.
Our historical results are not necessarily indicative of our
results of operations to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands of U.S. dollars, except share and per share
data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
183,974
|
|
|
$
|
119,012
|
|
|
$
|
112,563
|
|
|
$
|
87,737
|
|
|
$
|
99,797
|
|
Cost of sales
|
|
|
130,605
|
|
|
|
82,616
|
|
|
|
80,558
|
|
|
|
58,841
|
|
|
|
74,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53,369
|
|
|
|
36,396
|
|
|
|
32,005
|
|
|
|
28,896
|
|
|
|
25,094
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
14,316
|
|
|
|
11,452
|
|
|
|
13,216
|
|
|
|
10,304
|
|
|
|
8,923
|
|
General and administrative
|
|
|
13,794
|
|
|
|
12,118
|
|
|
|
14,968
|
|
|
|
11,004
|
|
|
|
8,244
|
|
Research and development
|
|
|
4,678
|
|
|
|
2,657
|
|
|
|
1,076
|
|
|
|
1,516
|
|
|
|
1,406
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
27,887
|
|
|
|
|
|
|
|
|
|
Acquisition related items
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
951
|
|
|
|
1,758
|
|
|
|
2,344
|
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,612
|
|
|
|
27,985
|
|
|
|
59,491
|
|
|
|
23,811
|
|
|
|
18,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
18,757
|
|
|
|
8,411
|
|
|
|
(27,486
|
)
|
|
|
5,085
|
|
|
|
6,521
|
|
Interest expense, net
|
|
|
(2,897
|
)
|
|
|
(2,460
|
)
|
|
|
(2,094
|
)
|
|
|
(1,156
|
)
|
|
|
(1,109
|
)
|
Foreign exchange gain (loss), net
|
|
|
1,195
|
|
|
|
(270
|
)
|
|
|
(462
|
)
|
|
|
1,703
|
|
|
|
256
|
|
Other income
|
|
|
247
|
|
|
|
252
|
|
|
|
361
|
|
|
|
280
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
17,302
|
|
|
|
5,933
|
|
|
|
(29,681
|
)
|
|
|
5,912
|
|
|
|
5,930
|
|
Income tax expense
|
|
|
(6,367
|
)
|
|
|
(1,470
|
)
|
|
|
(2,933
|
)
|
|
|
(2,744
|
)
|
|
|
(2,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,935
|
|
|
$
|
4,463
|
|
|
$
|
(32,614
|
)
|
|
$
|
3,168
|
|
|
$
|
3,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic
|
|
$
|
0.20
|
|
|
$
|
0.08
|
|
|
$
|
(0.59
|
)
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted
|
|
$
|
0.18
|
|
|
$
|
0.08
|
|
|
$
|
(0.59
|
)
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,429,673
|
|
|
|
55,098,549
|
|
|
|
55,088,960
|
|
|
|
54,843,688
|
|
|
|
54,244,383
|
|
Diluted
|
|
|
66,924,206
|
|
|
|
55,103,237
|
|
|
|
55,088,960
|
|
|
|
55,314,438
|
|
|
|
55,036,591
|
|
Consolidated Selected Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,734
|
|
|
$
|
2,245
|
|
|
$
|
2,890
|
|
|
$
|
5,230
|
|
|
$
|
2,350
|
|
Working capital
|
|
|
6,199
|
|
|
|
10,053
|
|
|
|
4,697
|
|
|
|
8,789
|
|
|
|
14,351
|
|
Goodwill and intangible assets, net
|
|
|
16,069
|
|
|
|
11,294
|
|
|
|
13,585
|
|
|
|
44,024
|
|
|
|
19,331
|
|
Total assets
|
|
|
75,534
|
|
|
|
51,549
|
|
|
|
55,601
|
|
|
|
91,321
|
|
|
|
55,218
|
|
Bank loan
|
|
|
5,408
|
|
|
|
3,829
|
|
|
|
13,272
|
|
|
|
11,470
|
|
|
|
1,345
|
|
Convertible notes payable including interest
|
|
|
14,828
|
|
|
|
16,096
|
|
|
|
16,051
|
|
|
|
14,901
|
|
|
|
|
|
Total shareholders equity
|
|
|
24,097
|
|
|
|
11,334
|
|
|
|
6,417
|
|
|
|
41,315
|
|
|
|
37,227
|
|
27
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This section contains forward-looking statements 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 in Part I General Information, Item 1A Risk
Factors elsewhere in this Annual Report. The following
discussion should be read in conjunction with our consolidated
financial statements and related notes contained elsewhere in
this Annual Report.
Overview
Our
Business
We are a leading provider of videogame accessories, PC game
accessories, PC input devices, multimedia audio products, chess
and intelligent games and videogames primarily marketed under
the Mad Catz, Saitek, Cyborg, Eclipse, GameShark, Tritton and
Joytech brands. We also produce for selected customers a limited
range of products which are marketed on a private
label basis. We design, manufacture (through third parties
in Asia), sell, market and distribute accessories for all major
videogame platforms, the PC and, to a lesser extent the iPod and
other audio devices. Our products include control pads, steering
wheels, joysticks, memory cards, video cables, light guns, dance
pads, microphones, car adapters, carry cases, mice, keyboards
and headsets. We also market videogame enhancement products and
publish videogames.
On February 24, 2011, the Company acquired certain assets
of V Max Simulation Corporation. On May 28, 2010, we
acquired all of the outstanding stock of Tritton Technologies
Inc.
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; the need to increase
inventories in advance of our primary selling season; and timing
of introductions of new products. See further discussion and
sales by quarter under Net Sales below.
Foreign
Currency
Approximately 41% of our annual sales are transacted outside the
United States. 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 substantial
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 and we cannot
predict the effect foreign currency fluctuations will have on us
in the future.
Critical
Accounting Policies
Our consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, contingent assets and liabilities, and revenue and
expenses during the reporting periods. The policies discussed
below are considered by management to be critical because they
are not only important to the portrayal of our financial
condition and results of operations but also because application
and interpretation of these policies requires both judgment and
estimates of matters that are inherently uncertain and unknown.
As a result, actual results may differ materially from our
estimates.
28
Revenue
Recognition
We recognize revenue when each of the following have occurred
(1) there is persuasive evidence that an arrangement with
our customer exists, which is generally a customer purchase
order, (2) the products are delivered, which generally
occurs when the products are shipped and risk of loss has been
transferred to the customer, (3) the selling price is fixed
or determinable and (4) collection of the customer
receivable is deemed reasonably assured. Our payment
arrangements with customers typically provide net 30 and
60-day
terms. All of our arrangements are single element arrangements
and there are no undelivered elements after the point of
shipment.
Customer
Marketing Programs
Where applicable, we record allowances for customer marketing
programs, including certain rights of return, price protection,
volume-based cash incentives and cooperative advertising. The
estimated cost of these programs is accrued as a reduction to
revenue or as an operating expense in the period we sell the
product or commit to the program. Such amounts are estimated,
based on historical experience and contractual terms, and
periodically adjusted based on historical and anticipated rates
of returns, inventory levels and other factors and are recorded
as either operating expenses or a reduction of sales in
accordance with authoritative guidance.
We grant limited rights of return for certain products.
Estimates of expected future product returns are based on
analyses of historical returns and information regarding
inventory levels and the demand and acceptance of our products
by the end consumer.
Consistent with industry standards and practices, on a
product-by-product
basis by customer, we allow price protection credits to be
issued to retailers in the event of a subsequent price
reduction. In general, price protection refers to the
circumstances when we elect to decrease the price of a product
and issue credits to our customers to protect the customers from
lower profit margins on their then current inventory of the
product. The decision to effect price reductions is influenced
by retailer inventory levels, product lifecycle stage, market
acceptance, competitive environment and new product
introductions. Credits are issued based upon the number of units
that customers have on hand at the date of the price reduction.
Upon approval of a price protection program, reserves for the
estimated amounts to be reimbursed to qualifying customers are
established. Reserves are estimated based on analyses of
qualified inventories on hand with retailers and distributors.
We enter into cooperative advertising arrangements with many of
our customers allowing customers to receive a credit for various
advertising programs. The amounts of the credits are based on
specific dollar-value programs or a percentage of sales,
depending on the terms of the program negotiated with the
individual customer. The objective of these programs is to
encourage advertising and promotional events to increase sales
of our products. Accruals for the estimated costs of these
advertising programs are recorded based on the specific
negotiations with individual customers in the period in which
the revenue is recognized. We regularly evaluate the adequacy of
these cooperative advertising program accruals.
We also offer volume rebates to several of our customers and
record reserves for such rebates as a reduction of revenue at
the time revenue is recognized. Estimates of required reserves
are determined based on programs negotiated with the specific
customers.
Future market conditions and product transitions may require us
to take action to increase customer programs and incentive
offerings that could result in incremental reductions to revenue
or increased operating expenses at the time the incentive is
offered.
Allowance
for Doubtful Accounts
We sell our products in the United States and internationally
primarily through retailers. We generally do not require any
collateral from our customers. However, we seek to control our
credit risk through ongoing credit evaluations of our
customers financial condition and by purchasing credit
insurance on European accounts receivable balances.
We regularly evaluate the collectibility of our accounts
receivable, and we maintain an allowance for doubtful accounts
which we believe is adequate. The allowance is based on
managements assessment of the collectibility of
29
specific customer accounts, including their credit worthiness
and financial condition, as well as historical experience with
bad debts, receivables aging and current economic trends.
Our customer base is highly concentrated and a deterioration of
a significant customers financial condition, or a decline
in the general economic conditions could cause actual write-offs
to be materially different from the estimated allowance. As of
March 31, 2011, one customer represented 27% of total
accounts receivable. Customers comprising the ten highest
outstanding trade receivable balances accounted for
approximately 74% of total accounts receivables as of
March 31, 2011. If any of these customers receivable
balances should be deemed uncollectible, we would have to make
adjustments to our allowance for doubtful accounts, which could
have a significant adverse effect on our financial condition and
results of operations in the period the adjustments are made.
Inventory
Valuation
We value inventories at the lower of cost or market value. If
the estimated market value is determined to be less than the
recorded cost of the inventory, a provision is made to reduce
the carrying amount of the inventory item. Determination of the
market value may be complex, and therefore, requires management
to make assumptions and to apply a high degree of judgment. In
order for management to make the appropriate determination of
market value, the following items are commonly considered:
inventory turnover statistics, inventory quantities on hand in
our facilities and customer inventories, unfilled customer order
quantities, forecasted consumer demand, current retail prices,
competitive pricing, seasonality factors, consumer trends and
performance of similar products or accessories. Subsequent
changes in facts or circumstances do not result in the reversal
of previously recorded reserves.
We have not made any significant changes in the methodology or
assumptions used to establish our inventory reserves as reported
during the past three fiscal years. We do not believe there is a
reasonable likelihood that there will be a significant change in
the future methodology or assumptions we use to calculate our
inventory reserves. However, if our estimates regarding market
value are inaccurate, or changes in consumer demand affect
specific products in an unforeseen manner, we may be exposed to
additional increases in our inventory reserves that could be
material.
Valuation
of Goodwill
We perform an annual impairment review at the reporting unit
level during the fourth quarter of each fiscal year or more
frequently if we believe indicators of impairment are present.
Authoritative guidance requires that goodwill and certain
intangible assets be assessed for impairment using fair value
measurement techniques. Specifically, goodwill impairment is
determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying amount, goodwill of the
reporting unit is considered not impaired and the second step of
the impairment test is unnecessary. If the carrying amount of a
reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of
impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill.
If the carrying amount of the reporting units goodwill
exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. We
recorded an impairment charge of $27.9 million during the
year ended March 31, 2009. There was no impairment charge
recorded during the year ended March 31, 2011, as the fair
value exceeded the carrying value by 81%. Significant judgments
are required to estimate the fair value of our reporting unit
and we assess its fair value based on a review of our market
capitalization and control premium, as well as a discounted cash
flow model, for which the key assumptions include revenue
growth, gross profit margins, operating expense trends and our
weighted average cost of capital.
Share-Based
Payments
We measure stock-based compensation cost at the grant date,
based on the fair value of the award, and recognize it as
expense over the employees requisite service period.
30
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option valuation model. The
expected life of the options is based on a number of factors,
including historical exercise experience, the vesting term of
the award, the expected volatility of our stock and an
employees expected length of service. The expected
volatility is estimated based on the historical volatility
(using daily pricing) of our stock. The expected term considers
the contractual term of the option as well as historical
exercise and forfeiture behavior of our employees. The risk-free
interest rate is determined on a constant U.S. Treasury
security rate with a contractual life that approximates the
expected term of the stock options. In accordance with
authoritative guidance, we reduce the calculated Black-Scholes
value by applying a forfeiture rate, based upon historical
pre-vesting option cancellations. Estimated forfeitures are
reassessed at each balance sheet date and may change based on
new facts and circumstances.
Valuation
of Deferred Income Taxes
We record valuation allowances to reduce our deferred tax assets
to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and
ongoing prudent and feasible tax planning strategies, including
reversals of deferred tax liabilities, in assessing the need for
a valuation allowance. If we were to determine that we will not
realize all or part of our deferred tax assets in the future, we
would make an adjustment to the carrying value of the deferred
tax asset, which would be reflected as income tax expense.
Conversely, if we were to determine that we will realize a
deferred tax asset, which currently has a valuation allowance,
we would reverse the valuation allowance which would be
reflected as an income tax benefit or as an adjustment to
stockholders equity, for tax assets related to stock
options. As a result of uncertainties regarding the realization
of the Companys net deferred tax assets due to the
uncertainty over future profitability as well as the fact that
the Company remains in a three year cumulative book pre-tax loss
position in the U.S., the Company has continued to record a
valuation allowance against its U.S. deferred tax assets.
The Company has worldwide gross deferred tax assets of
approximately $15.9 million as of March 31, 2011. The
Company will continue to evaluate the realizability of its net
deferred tax asset on an ongoing basis to identify whether any
significant changes in circumstances or assumptions have
occurred that could materially affect the realizability of
deferred tax assets and expects to release the valuation
allowance when it has sufficient positive evidence, including
but not limited to cumulative earnings in successive recent
periods, to overcome such negative evidence. Accordingly, it is
reasonably possible that all or a portion of the
U.S. valuation allowance could be released in the next
twelve months and the effect could be material to the
Companys financial statements.
In determining taxable income for financial statement reporting
purposes, we must make certain estimates and judgments. These
estimates and judgments are applied in the calculation of
certain tax liabilities and in the determination of the
recoverability of deferred tax assets, which arise from
temporary differences between the recognition of assets and
liabilities for tax and financial statement reporting purposes.
In the ordinary course of our business, there are many
transactions and calculations where the tax law and ultimate tax
determination is uncertain. As part of the process of preparing
our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which
we operate prior to the completion and filing of tax returns for
such periods. This process requires estimating both our
geographic mix of income and our uncertain tax positions in each
jurisdiction where we operate. These estimates involve complex
issues and require us to make judgments about the likely
application of the tax law to our situation, as well as with
respect to other matters, such as anticipating the positions
that we will take on tax returns prior to our actually preparing
the returns and the outcomes of disputes with tax authorities.
The ultimate resolution of these issues may take extended
periods of time due to examinations by tax authorities and
statutes of limitations. In addition, changes in our business,
including acquisitions, changes in our international corporate
structure, changes in the geographic location of business
functions or assets, changes in the geographic mix and amount of
income, as well as changes in our agreements with tax
authorities, valuation allowances, applicable accounting rules,
applicable tax laws and regulations, rulings and interpretations
thereof, developments in tax audit and other matters, and
variations in the estimated and actual level of annual pre-tax
income can affect the overall effective income tax rate.
In addition, the calculation of our tax liabilities involves
dealing with uncertainties in the application of complex tax
rules and the potential for future adjustment of our uncertain
tax positions by the Internal Revenue Service or other taxing
jurisdiction. If our estimates of these taxes are greater or
less than actual results, an additional tax benefit or charge
will result.
31
RESULTS
OF OPERATIONS
Fiscal
Year Ended March 31, 2011 Compared to Fiscal Year Ended
March 31, 2010
Net
Sales
From a geographical perspective, our net sales for the fiscal
years ended March 31, 2011 and 2010 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
$
|
|
|
%
|
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
Change
|
|
|
Change
|
|
|
United States
|
|
$
|
107,528
|
|
|
|
59
|
%
|
|
$
|
63,223
|
|
|
|
53
|
%
|
|
$
|
44,305
|
|
|
|
70
|
%
|
Europe
|
|
|
66,834
|
|
|
|
36
|
%
|
|
|
49,005
|
|
|
|
41
|
%
|
|
|
17,829
|
|
|
|
36
|
%
|
Canada
|
|
|
5,547
|
|
|
|
3
|
%
|
|
|
3,109
|
|
|
|
3
|
%
|
|
|
2,438
|
|
|
|
78
|
%
|
Other countries
|
|
|
4,065
|
|
|
|
2
|
%
|
|
|
3,675
|
|
|
|
3
|
%
|
|
|
390
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
183,974
|
|
|
|
100
|
%
|
|
$
|
119,012
|
|
|
|
100
|
%
|
|
$
|
64,962
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in fiscal year 2011 increased 55% from fiscal year
2010. Net sales in the United States increased
$44.3 million over the prior year, which was primarily
attributable to an increase in 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. This increase was partially offset by
decreases in sales of products for use with the Super Street
Fighter IV games, which launched in fiscal 2010.
Net sales in Europe increased $17.7 million, which is
largely 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.
Net sales in Canada increased $2.4 million, which is
largely attributable to sales of our accessories compatible with
the Rock Band 3 game.
Our sales by quarter were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
1st
quarter
|
|
$
|
19,911
|
|
|
|
11
|
%
|
|
$
|
22,378
|
|
|
|
19
|
%
|
2nd
quarter
|
|
|
37,409
|
|
|
|
20
|
%
|
|
|
21,603
|
|
|
|
18
|
%
|
3rd
quarter
|
|
|
92,957
|
|
|
|
51
|
%
|
|
|
48,763
|
|
|
|
41
|
%
|
4th
quarter
|
|
|
33,697
|
|
|
|
18
|
%
|
|
|
26,268
|
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,974
|
|
|
|
100
|
%
|
|
$
|
119,012
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2011, the first quarter benefited from the launch of
Tritton products, offset by declines in other product sales. In
the second and third quarters of fiscal 2011, accessories
compatible with the Rock Band 3 game and Cyborg-branded
products were launched. In fiscal 2010, neither first nor second
quarter sales were significantly benefitted by products launched
in those quarters. In fiscal 2010, third quarter sales included
the launch of a line of products for use with Call of Duty:
Modern Warfare 2 games on the Xbox 360 and Playstation 3 and
fourth quarter 2010 sales included the launch of the Fight Pad
and Fight Stick for use with the Super Street Fighter IV
games.
32
Our sales by platform are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Xbox 360
|
|
|
31
|
%
|
|
|
31
|
%
|
PlayStation 3
|
|
|
17
|
%
|
|
|
17
|
%
|
PC
|
|
|
15
|
%
|
|
|
22
|
%
|
Wii
|
|
|
14
|
%
|
|
|
13
|
%
|
Handheld Consoles
|
|
|
3
|
%
|
|
|
4
|
%
|
PlayStation 2
|
|
|
1
|
%
|
|
|
2
|
%
|
GameCube
|
|
|
1
|
%
|
|
|
2
|
%
|
All others
|
|
|
18
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Our sales by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Specialty controllers
|
|
|
28
|
%
|
|
|
24
|
%
|
Audio
|
|
|
27
|
%
|
|
|
15
|
%
|
Controllers
|
|
|
15
|
%
|
|
|
28
|
%
|
Accessories
|
|
|
12
|
%
|
|
|
24
|
%
|
Games and bundles(a)
|
|
|
11
|
%
|
|
|
1
|
%
|
PC
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Games category includes GameShark videogame enhancement products
in addition to videogames with the Rock Band videogame and
related accessories. |
Our sales by brand are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Mad Catz
|
|
|
61
|
%
|
|
|
69
|
%
|
Tritton
|
|
|
14
|
%
|
|
|
|
%
|
Cyborg
|
|
|
7
|
%
|
|
|
6
|
%
|
Saitek
|
|
|
6
|
%
|
|
|
12
|
%
|
Eclipse
|
|
|
3
|
%
|
|
|
6
|
%
|
All others
|
|
|
9
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
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 costs.
33
The following table presents net sales, cost of sales and gross
profit for fiscal years ended March 31, 2011 and 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net sales
|
|
$
|
183,974
|
|
|
|
100
|
%
|
|
$
|
119,012
|
|
|
|
100
|
%
|
|
$
|
64,962
|
|
|
|
55
|
%
|
Cost of sales
|
|
|
130,605
|
|
|
|
71
|
%
|
|
|
82,616
|
|
|
|
69
|
%
|
|
|
47,989
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
53,369
|
|
|
|
29
|
%
|
|
$
|
36,396
|
|
|
|
31
|
%
|
|
$
|
16,973
|
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit in fiscal 2011 increased 47% from fiscal 2010, and
gross profit as a percentage of net sales decreased to 29% in
fiscal 2011 from 31% in fiscal 2010. The decrease in gross
profit margin was predominately due to foreign exchange
fluctuations and to a lesser extent, lower margins related to
sales of our accessories compatible with the Rock Band 3
game, which accounted for approximately 1.3% and 0.7% of the
decrease, respectively. These decreases in gross profit margin
were partially offset by a number of factors, none of which was
individually significant.
Operating
Expenses
Operating expenses for fiscal years ended March 31, 2011
and 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
% of
|
|
|
March 31,
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
2011
|
|
|
Net Sales
|
|
|
2010
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|
|
Sales and marketing
|
|
$
|
14,316
|
|
|
|
8
|
%
|
|
$
|
11,452
|
|
|
|
10
|
%
|
|
$
|
2,864
|
|
|
|
25
|
%
|
General and administrative
|
|
|
13,794
|
|
|
|
7
|
%
|
|
|
12,118
|
|
|
|
10
|
%
|
|
|
1,676
|
|
|
|
14
|
%
|
Research and development
|
|
|
4,678
|
|
|
|
3
|
%
|
|
|
2,657
|
|
|
|
2
|
%
|
|
|
2,021
|
|
|
|
76
|
%
|
Acquisition related items
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
873
|
|
|
|
100
|
%
|
Amortization of intangibles
|
|
|
951
|
|
|
|
1
|
%
|
|
|
1,758
|
|
|
|
2
|
%
|
|
|
(807
|
)
|
|
|
(46
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
34,612
|
|
|
|
19
|
%
|
|
$
|
27,985
|
|
|
|
24
|
%
|
|
$
|
6,627
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of payroll, commissions,
participation at trade shows and travel costs for our worldwide
sales and marketing staff, advertising and costs of operating
our GameShark.com website. The increase in sales and marketing
expense of $2.9 million is primarily due to increased
marketing spending relating to trade shows during fiscal year
2011. The decrease in sales and marketing expense as a
percentage of net sales is mainly related to the fixed nature of
certain sales and marketing expenses and the increase in net
sales. We expect sales and marketing expenses as a percentage of
net sales in fiscal 2012 to remain approximately the same as
that of fiscal 2011.
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, and bad
debt expense. The increase in general and administrative
expenses of $1.7 million is primarily due to additional
bonuses earned in 2011 over the level earned in 2010. The
decrease in general and administrative expense as a percentage
of net sales is mainly related to the fixed nature of certain
general and administrative expenses. We expect general and
administrative expenses as a percentage of net sales in fiscal
2012 to slightly decrease.
Research and Development. Research and
development expenses include the costs of developing and
enhancing new and existing products in addition to the costs of
developing games. The increase in research and development
expenses is primarily due to expanded research and development
activities related to our accessories and peripherals products.
We expect research and development expenses in fiscal 2012 to
increase slightly, on an absolute dollar basis, over fiscal 2011.
Acquisition related items. Acquisition related
items relate to accounting for the Tritton acquisition, which
include non-recurring transaction costs and adjustments to the
contingent consideration valuation, which will continue to be
adjusted through fiscal 2015 when the amount will be fully paid.
34
Amortization of Intangibles. Amortization of
intangibles decreased as certain intangibles relating to the
Joytech and Saitek acquisitions were fully amortized in fiscal
2010. This decrease was partially offset by amortization related
to intangibles acquired in the Tritton acquisition.
Interest
Expense, net, Foreign Exchange Gain (Loss) and Other
Income
Interest expense, net, foreign exchange gain (loss) and other
income for fiscal years ended March 31, 2011 and 2010 was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
% of
|
|
March 31,
|
|
% of
|
|
$
|
|
%
|
|
|
2011
|
|
Net Sales
|
|
2010
|
|
Net Sales
|
|
Change
|
|
Change
|
|
Interest expense, net
|
|
$
|
(2,897
|
)
|
|
|
2
|
%
|
|
$
|
(2,460
|
)
|
|
|
2
|
%
|
|
$
|
437
|
|
|
|
18
|
%
|
Foreign exchange gain (loss)
|
|
$
|
1,195
|
|
|
|
1
|
%
|
|
$
|
(270
|
)
|
|
|
|
%
|
|
$
|
1,465
|
|
|
|
543
|
%
|
Other income
|
|
$
|
247
|
|
|
|
|
%
|
|
$
|
252
|
|
|
|
|
%
|
|
$
|
(5
|
)
|
|
|
(2
|
)%
|
Interest expense, net increased primarily due to higher
borrowings during the peak season, and to a lesser extent due to
higher average interest rates. The foreign exchange gain in
fiscal 2011 compared to the loss in fiscal 2010 resulted
primarily from increased fluctuations between the British pound
and the Euro against the U.S. and Hong Kong dollars during
the 2011 period. Other income primarily consists of advertising
income from our GameShark.com website and the decrease in other
income is primarily related to lower Gameshark.com advertising
revenues.
Provision
for Income Taxes
Income tax expense for fiscal years ended March 31, 2011
and 2010 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Effective
|
|
March 31,
|
|
Effective
|
|
$
|
|
%
|
2011
|
|
Tax Rate
|
|
2010
|
|
Tax Rate
|
|
Change
|
|
Change
|
|
$
|
6,367
|
|
|
|
36.8
|
%
|
|
$
|
1,470
|
|
|
|
24.8
|
%
|
|
$
|
4,897
|
|
|
|
333.1
|
%
|
The Companys effective tax rate is a blended rate for
different jurisdictions in which the Company operates. Our
effective tax rate fluctuates depending on the composition of
our taxable income between the various jurisdictions in which we
do business, including our U.S. operating company, and our
Canadian parent company for which we continue to provide a full
valuation allowance against its losses. The Company will
continue to evaluate the realizability of its U.S. net
deferred tax assets on an ongoing basis to identify whether any
significant changes in circumstances or assumptions have
occurred that could materially affect the realizability of
deferred tax assets and expects to release the valuation
allowance when it has sufficient positive evidence, including
but not limited to cumulative earnings in successive recent
periods, to overcome such negative evidence. Accordingly, it is
reasonably possible that all or a portion of the valuation
allowance could be released in the next twelve months and the
effect could be material to the Companys financial
statements. The increase in effective tax rate in fiscal 2011
versus fiscal 2010 is primarily a result of an increase in our
U.S. effective rate due to the utilization of net operating
losses in 2010, while there were minimal net operating losses
available for use in 2011.
35
Fiscal
Year Ended March 31, 2010 Compared to Fiscal Year Ended
March 31, 2009
Net
Sales
From a geographical perspective, our net sales for the fiscal
years ended March 31, 2010 and 2009 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
$
|
|
|
%
|
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
Change
|
|
|
Change
|
|
|
United States
|
|
$
|
63,223
|
|
|
|
53
|
%
|
|
$
|
65,003
|
|
|
|
58
|
%
|
|
$
|
(1,780
|
)
|
|
|
(3
|
)%
|
Europe
|
|
|
49,005
|
|
|
|
41
|
%
|
|
|
41,442
|
|
|
|
37
|
%
|
|
|
7,563
|
|
|
|
18
|
%
|
Canada
|
|
|
3,109
|
|
|
|
3
|
%
|
|
|
1,974
|
|
|
|
2
|
%
|
|
|
1,135
|
|
|
|
58
|
%
|
Other countries
|
|
|
3,675
|
|
|
|
3
|
%
|
|
|
4,144
|
|
|
|
3
|
%
|
|
|
(469
|
)
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
|
$
|
119,012
|
|
|
|
100
|
%
|
|
$
|
112,563
|
|
|
|
100
|
%
|
|
$
|
6,449
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales in fiscal 2010 increased 6% from fiscal 2009. Net
sales in the United States decreased $1.8 million over the
prior year, which was primarily attributable to a decline in
sales of products sold for use on the Wii platform, as the
prior-year period benefitted from strong sales of Wii Fit
accessories, with no significant new product placements for the
Wii platform in the current period and an overall softness in
the videogame market, which led to the price cuts in videogame
console hardware which occurred late in the quarter ended
September 30, 2009. The decline in Wii product sales was
partly offset by increases in sales of products for the
PlayStation 3 and Xbox 360 platforms. Net sales in Europe
increased $7.6 million, which is largely attributable to
the success of new products launched for Xbox 360 during this
fiscal year. Net sales in Canada increased by $1.1 million,
largely attributable to new placements at existing customers and
the addition of new customers due to the success of new products
launched for PlayStation 3 and Xbox 360 platforms.
Our sales by quarter were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
March 31, 2010
|
|
|
March 31, 2009
|
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
Net Sales
|
|
|
% of Total
|
|
|
1st
quarter
|
|
$
|
22,378
|
|
|
|
19
|
%
|
|
$
|
23,226
|
|
|
|
21
|
%
|
2nd
quarter
|
|
|
21,603
|
|
|
|
18
|
%
|
|
|
25,750
|
|
|
|
23
|
%
|
3rd
quarter
|
|
|
48,763
|
|
|
|
41
|
%
|
|
|
40,817
|
|
|
|
36
|
%
|
4th
quarter
|
|
|
26,268
|
|
|
|
22
|
%
|
|
|
22,770
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
119,012
|
|
|
|
100
|
%
|
|
$
|
112,563
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2010, neither first nor second quarter sales were
significantly benefitted by products launched in those quarters,
third quarter sales included the launch of a line of products
for use with Call of Duty: Modern Warfare 2 games on the
Xbox 360 and Playstation 3 and fourth quarter sales included the
launch of the Fight Pad and Fight Stick for use with the
Super Street Fighter IV games. In fiscal 2009, first
quarter sales included the launch of the Wii Fit silicone
cover, second quarter sales included the launch of the Rock
Band Fender Precision bass replica for the Xbox 360, third
quarter sales included the launch of the universal Rock Band
2 Double Cymbal expansion pack and fourth quarter sales
included the launch of the Fight Pad, Fight Stick and Tournament
Edition Fight Stick for use with the Street Fighter IV
games.
36
Our sales by platform are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Xbox 360
|
|
|
31
|
%
|
|
|
19
|
%
|
PC
|
|
|
22
|
%
|
|
|
29
|
%
|
PlayStation 3
|
|
|
17
|
%
|
|
|
8
|
%
|
Wii
|
|
|
13
|
%
|
|
|
16
|
%
|
Handheld Consoles
|
|
|
4
|
%
|
|
|
10
|
%
|
PlayStation 2
|
|
|
2
|
%
|
|
|
3
|
%
|
GameCube
|
|
|
2
|
%
|
|
|
2
|
%
|
All others
|
|
|
9
|
%
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Our sales by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Controllers
|
|
|
28
|
%
|
|
|
23
|
%
|
Specialty controllers
|
|
|
24
|
%
|
|
|
16
|
%
|
Accessories
|
|
|
24
|
%
|
|
|
46
|
%
|
Audio
|
|
|
15
|
%
|
|
|
7
|
%
|
PC
|
|
|
8
|
%
|
|
|
6
|
%
|
Games and bundles(a)
|
|
|
1
|
%
|
|
|
1
|
%
|
All others
|
|
|
0
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Games category includes GameShark videogame enhancement products
in addition to videogames with related accessories. |
Our sales by brand are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Mad Catz
|
|
|
69
|
%
|
|
|
63
|
%
|
Tritton
|
|
|
|
%
|
|
|
|
%
|
Cyborg
|
|
|
6
|
%
|
|
|
8
|
%
|
Saitek
|
|
|
12
|
%
|
|
|
13
|
%
|
Eclipse
|
|
|
6
|
%
|
|
|
9
|
%
|
All others
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
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 costs.
37
The following table presents net sales, cost of sales and gross
profit for fiscal years ended March 31, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Amount
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net sales
|
|
$
|
119,012
|
|
|
|
100
|
%
|
|
$
|
112,563
|
|
|
|
100
|
%
|
|
$
|
6,449
|
|
|
|
6
|
%
|
Cost of sales
|
|
|
82,616
|
|
|
|
69
|
%
|
|
|
80,558
|
|
|
|
72
|
%
|
|
|
2,058
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
36,396
|
|
|
|
31
|
%
|
|
$
|
32,005
|
|
|
|
28
|
%
|
|
$
|
4,391
|
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit in fiscal 2010 increased 14% from fiscal 2009, and
gross profit as a percentage of net sales increased to 31% in
fiscal 2010 from 28% in fiscal 2009. The increase in gross
profit margin was predominately due to leverage gained from the
fixed components of overhead in Asia and the distribution
centers. An additional contributor was a decrease in freight
expense as a percentage of sales, mainly related to less use of
air freight. These increases in gross profit margin were
partially offset by a number of factors, none of which was
individually significant.
Operating
Expenses
Operating expenses for fiscal years ended March 31, 2010
and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
% of
|
|
|
March 31,
|
|
|
% of
|
|
|
$
|
|
|
%
|
|
|
|
2010
|
|
|
Net Sales
|
|
|
2009
|
|
|
Net Sales
|
|
|
Change
|
|
|
Change
|
|
|
Sales and marketing
|
|
$
|
11,452
|
|
|
|
10
|
%
|
|
$
|
13,216
|
|
|
|
12
|
%
|
|
$
|
(1,764
|
)
|
|
|
(13
|
)%
|
General and administrative
|
|
|
12,118
|
|
|
|
10
|
%
|
|
|
14,968
|
|
|
|
13
|
%
|
|
|
(2,850
|
)
|
|
|
(19
|
)%
|
Research and development
|
|
|
2,657
|
|
|
|
2
|
%
|
|
|
1,076
|
|
|
|
1
|
%
|
|
|
1,581
|
|
|
|
147
|
%
|
Goodwill impairment
|
|
|
|
|
|
|
|
%
|
|
|
27,887
|
|
|
|
25
|
%
|
|
|
(27,887
|
)
|
|
|
(100
|
)%
|
Amortization of intangibles
|
|
|
1,758
|
|
|
|
2
|
%
|
|
|
2,344
|
|
|
|
2
|
%
|
|
|
(586
|
)
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
27,985
|
|
|
|
24
|
%
|
|
$
|
59,491
|
|
|
|
53
|
%
|
|
$
|
(31,506
|
)
|
|
|
(53
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing Expenses. Sales and
marketing expenses consist primarily of payroll, commissions,
participation at trade shows and travel costs for our worldwide
sales and marketing staff, advertising and costs of operating
our GameShark.com website. The decrease in sales and marketing
expense of $1.8 million is primarily due to cost reductions
implemented during fiscal year 2010, which also resulted in a
decrease in sales and marketing expense as a percentage of net
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, and bad
debt expense. The decrease in general and administrative
expenses of $2.9 million is primarily due to reduced bad
debt expense, principally related to the Circuit City
bankruptcy, which accounted for $0.7 million of the
decrease and lower accounting fees which accounted for
$0.6 million of the decrease.
Research and Development. Research and
development expenses include the costs of developing and
enhancing new and existing products in addition to the costs of
developing games. The increase in research and development
expenses is primarily due to expanded research and development
activities related to our accessories and peripherals products;
we had no videogames under development during the period.
Goodwill Impairment. Given a prolonged decline
in the market capitalization of the Company noted through the
third quarter of fiscal year 2009, which is the Companys
strongest quarter given its seasonality, a goodwill impairment
test was performed, at which time it was determined an
impairment did exist. Accordingly, the Company performed the
step two analysis and recorded an impairment charge of
$27.9 million during the year ended March 31, 2009.
The annual impairment test performed at March 31, 2010
indicated no further impairment existed as of that date, as the
fair value of the Companys reporting unit exceeded its
carrying value by 43%.
Amortization of Intangibles. Amortization of
intangibles decreased as certain intangibles relating to the
Joytech and Saitek acquisitions have been fully amortized.
38
Interest
Expense, net, Foreign Exchange Gain (Loss) and Other
Income
Interest expense, net, foreign exchange gain (loss) and other
income for fiscal years ended March 31, 2010 and 2009 was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
% of
|
|
March 31,
|
|
% of
|
|
$
|
|
%
|
|
|
2010
|
|
Net Sales
|
|
2009
|
|
Net Sales
|
|
Change
|
|
Change
|
|
Interest expense
|
|
$
|
(2,460
|
)
|
|
|
2
|
%
|
|
$
|
(2,094
|
)
|
|
|
2
|
%
|
|
$
|
(366
|
)
|
|
|
17
|
%
|
Foreign exchange (loss) gain
|
|
$
|
(270
|
)
|
|
|
|
%
|
|
$
|
(462
|
)
|
|
|
|
%
|
|
$
|
192
|
|
|
|
(42
|
)%
|
Other income
|
|
$
|
252
|
|
|
|
|
%
|
|
$
|
361
|
|
|
|
|
%
|
|
$
|
(109
|
)
|
|
|
(30
|
)%
|
Interest expense, net is materially consistent year over year.
The decrease in foreign exchange loss in fiscal 2010 compared to
fiscal 2009 resulted primarily from less fluctuation between the
British pound and the Euro against the U.S. dollar during
the 2010 period. Other income primarily consisted of advertising
income from our GameShark.com website and the decrease in other
income is primarily related to lower Gameshark.com advertising
revenues.
Provision
for Income Taxes
Income tax expense for fiscal years ended March 31, 2010
and 2009 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
Effective
|
|
March 31,
|
|
Effective
|
|
$
|
|
%
|
2010
|
|
Tax Rate
|
|
2009
|
|
Tax Rate
|
|
Change
|
|
Change
|
|
$
|
1,470
|
|
|
|
24.8
|
%
|
|
$
|
2,933
|
|
|
|
(9.9
|
)%
|
|
$
|
(1,463
|
)
|
|
|
(49.9
|
)%
|
The Companys effective tax rate is a blended rate for
different jurisdictions in which the Company operates. Our
effective tax rate fluctuates depending on the composition of
our taxable income between the various jurisdictions in which we
do business, including our U.S. operating company, and our
Canadian and French entities for which we provide full valuation
allowances against their losses. The increase in effective tax
rate in fiscal 2010 versus fiscal 2009 is primarily a result of
the impact of the non-deductible goodwill impairment charge and
the recognition of a valuation allowance on our
U.S. deferred tax assets in fiscal 2009.
Liquidity
and Capital Resources
Sources
of Liquidity
Our primary ongoing cash requirements are for product
development, operating activities, capital expenditures, debt
service, and acquisition opportunities that may arise. Our
primary sources of cash are generated from operations and
borrowings under our revolving credit facility (as discussed
below), and to a lesser extent, proceeds from employee stock
option exercises. At March 31, 2011, available cash was
approximately $3.7 million compared to cash of
approximately $2.2 million at March 31, 2010 and
$2.9 million at March 31, 2009.
We maintain a Credit Facility (the Credit Facility)
with Wachovia Capital Finance Corporation (Central)
(Wachovia) under a revolving line of credit subject
to the availability of eligible collateral (accounts receivable
and inventories), which changes throughout the year. The Credit
Facility expires on October 31, 2012. On September 30,
2010, the Company entered into an amended agreement 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.
The line of credit accrues interest on the daily outstanding
balance at the U.S. prime rate plus 2.0% or, at the
Companys option, LIBOR plus 3.50% with a LIBOR floor of
1.50%. At March 31, 2011, the interest rate was 5.3%. The
Company is 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.
(MCI) and by a pledge of all of the capital stock of
the Companys subsidiaries and is guaranteed by the
Company. See Note 7 to the consolidated financial
statements included in Item 8. Financial Statements
and Supplementary Data elsewhere in this
Form 10-K.
On November 20, 2007, we issued to the seller of Saitek
$14,500,000 of convertible notes (Saitek Notes) as
part of the consideration relating to that acquisition. On
June 24, 2009, the terms of the Saitek Notes were amended
39
to extend the maturity to March 31, 2019 with annual
principal and interest payments of $2,400,000 due beginning
March 31, 2011 until the Saitek Notes are retired, and
quarterly cash payments for partial interest in the amount of
approximately $45,000. As amended, the Saitek Notes bore
interest at 7.5% through March 31, 2014 and 9.0%
thereafter. The quarterly cash payments payable as of
March 31, 2011 as well as an interest payment of $500,000
due on October 31, 2009, an interest payment of $596,035
due on March 31, 2010, and an interest payment of
$2,400,000 due on March 31, 2011 have been paid as of
March 31, 2011. The Saitek Notes were convertible into Mad
Catz common stock at the exercise price of $1.419 per share. The
Saitek Notes and all accrued interest were repaid in full in May
2011. See Note 8 to the consolidated financial statements
included in Item 8. Financial Statements and
Supplementary Data elsewhere in this
Form 10-K.
Pursuant to the Saitek purchase agreement, a working capital
adjustment in the amount of $847,000 was made to the purchase
price based on the completion of the final balance sheet. The
Company financed this amount with a note payable to The Winkler
Atlantic Trust. The note was repaid in full as of March 31,
2010.
Net cash provided by (used in) operating activities was
approximately $3.3 million, $12.7 million and
$(2.1) million for the years ended March 31, 2011,
2010 and 2009, respectively. Net cash provided by operating
activities in 2011 reflects net income for the year, decreases
in accounts receivable, net of sales reserves and increases in
inventories, accrued liabilities and income tax payable,
partially offset by reductions in accounts payable. Net cash
provided by operating activities in 2010 reflects net income for
the year, decreases in accounts receivable, net of sales
reserves and increases in accrued liabilities and income tax
payable, partially offset by reductions in accounts payable. We
will continue to focus on working capital efficiency, but there
can be no assurance that income from operations will exceed
working capital requirements and it is likely we will continue
to rely on our credit facility to finance our working capital.
Net cash used in operating activities in 2009 is mainly related
to an increase in accounts receivable and decreases in accounts
payable and accrued expenses offset by a decrease in
inventories, all in the context of a loss from operations.
Net cash used in investing activities was approximately
$3.6 million, $2.7 million and $1.4 million for
the years ended March 31, 2011, 2010 and 2009,
respectively. Net cash used in investing activities in 2011 was
primarily due to the Tritton and V Max acquisitions and capital
expenditures to support our operations. Net cash used in
investing activities in 2010 and 2009 consisted of capital
expenditures to support our operations. Capital expenditures
planned for 2012, excluding any potential acquisition, are
expected to be similar in total amount to that of fiscal 2011
and are discretionary in nature.
Net cash (used in) provided by financing activities was
approximately $1.6 million, $(10.8) million and
$1.9 million for the years ended March 31, 2011, 2010
and 2009, respectively. Net cash provided by financing
activities in 2011 consisted of net proceeds under our line of
credit as well as proceeds from the exercise of stock options.
Net cash used in financing activities in 2010 consisted of net
repayments under our line of credit and repayment of the Saitek
completion note. Net cash provided by financing activities in
2009 consisted of net proceeds under our line of credit.
At March 31, 2011, the outstanding balance on our line of
credit was $5.4 million and our weighted average annual
interest rate during fiscal 2011 was 5.3%. We are required to
meet a quarterly covenant based on the Companys fixed
charge coverage ratio. The Company was in compliance with this
covenant as of March 31, 2011. At March 31, 2011, the
outstanding balance and accrued interest on the Saitek notes
payable was $14.8 million. The Saitek Notes and all accrued
interest were repaid in full in May 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, and in the longer term. However, in the normal
course of its business the Company seeks incremental business
opportunities, including acquisitions, which if such
opportunities come to fruition, may require additional capital.
Additionally, 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.
40
Contractual
Obligations and Commitments
The following summarizes our contractual payment obligations at
March 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due ($000s)
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Bank loan (see Note 7 of Notes to Consolidated Financial
Statements)
|
|
$
|
5,450
|
|
|
$
|
5,450
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Convertible notes payable (see Note 8 of Notes to
Consolidated Financial Statements)
|
|
|
14,828
|
|
|
|
14,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases (see Note 11 of Notes to Consolidated
Financial Statements)
|
|
|
4,644
|
|
|
|
1,545
|
|
|
|
2,998
|
|
|
|
101
|
|
|
|
|
|
Royalty & license guaranteed commitments (see
Note 11 of Notes to Consolidated Financial Statements)
|
|
|
824
|
|
|
|
714
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,746
|
|
|
$
|
22,537
|
|
|
$
|
3,108
|
|
|
$
|
101
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011 and 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.
NON-GAAP FINANCIAL
MEASURES
EBITDA, a non-GAAP financial measure, represents net income
before interest, taxes, depreciation and amortization. Prior to
the third quarter of fiscal 2009, we had not recorded any
goodwill impairment charges. To address the goodwill impairment
charge recorded in fiscal 2009, we modified the calculation to
exclude this non-operating, non-cash charge and defined the
result as Adjusted EBITDA. We believe this to be a
more meaningful measurement of performance than the previously
calculated EBITDA. Adjusted 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, Adjusted 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, Adjusted EBITDA is a useful financial
performance measurement for assessing our Companys
operating performance. Our management uses Adjusted 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
41
our asset base, including depreciation and amortization of our
capital and intangible assets. In addition, Adjusted EBITDA is
an important measure for our lender. We calculate Adjusted
EBITDA as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Net income (loss)
|
|
$
|
10,935
|
|
|
$
|
4,463
|
|
|
$
|
(32,614
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
2,897
|
|
|
|
2,460
|
|
|
|
2,094
|
|
Income tax expense
|
|
|
6,367
|
|
|
|
1,470
|
|
|
|
2,933
|
|
Depreciation and amortization
|
|
|
2,764
|
|
|
|
3,766
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
22,963
|
|
|
|
12,159
|
|
|
|
(23,394
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
27,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
22,963
|
|
|
$
|
12,159
|
|
|
$
|
4,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market
Risk
Market risk is the potential loss arising from changes in market
rates and market prices. Our market risk exposure results
primarily from fluctuations in foreign exchange rates and
interest rates. Our views on market risk are not necessarily
indicative of actual results that may occur and do not represent
the maximum possible gains and losses that may occur, since
actual gains and losses will differ from those estimated, based
upon actual fluctuations in foreign currency exchange rates and
interest rates and the timing of transactions.
Foreign
Currency Exchange Rate Risk
A majority of our international business is presently conducted
in currencies other than the U.S. dollar and may be exposed
to financial market risk resulting from fluctuations in foreign
currency exchange rates, particularly the CNY, the Pound
Sterling, the Euro and the Canadian 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 difficulty in determining and obtaining
predictable cash flow forecasts in our foreign operations based
on the overall challenging economic environment and associated
contract structures, we do not currently utilize any derivative
financial instruments to hedge foreign currency risks. The
volatility of the CNY, the Pound Sterling, the Euro and the
Canadian dollar (and any other applicable currencies) will be
monitored frequently throughout the coming year. If appropriate,
we may enter into hedging transactions in order to mitigate our
risk from foreign currency fluctuations. Due to the substantial
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. We estimate
that an immediate 10% adverse change in foreign exchange rates
not currently pegged to the U.S. dollar would decrease our
reported net income by approximately $5.9 million for the
year ended March 31, 2011.
Interest
Rate Risk
We are exposed to interest rate risk on borrowings under the
Credit Facility. Until June 30, 2009, funds advanced to us
pursuant to the Credit Facility bore interest at the
U.S. prime rate plus 0.75%. Beginning July 1, 2009,
interest accrued at the U.S. prime rate plus 2.00% or, at
the Companys option, LIBOR plus 3.50% with a LIBOR floor
of 1.50%. We do not hedge our exposures to interest rate risk.
We estimate that an increase of 1.0% in the interest rate under
our Credit Facility would decrease our reported net income by
approximately $0.2 million for the year ended
March 31, 2011.
42
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The Consolidated Financial Statements required by this Item,
together with the reports of our independent registered public
accounting firm, are set forth at the pages indicated on the
Index to the Financial Statements on
Page F-l
included in Item 15 of this report.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to
ensure that information required to be disclosed in the
Companys reports filed under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and that such information
is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes 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 necessarily is required to
apply its judgment in evaluating the cost benefit relationship
of possible controls and procedures. As required by Securities
and Exchange Commission
Rules 13a-15(b)
we carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer (who is also the Chief
Accounting Officer), of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures, as such term is defined under
Rule 13a-15(e)
promulgated under the Exchange Act, as of the end of the period
covered by this report. Based on the foregoing, our Chief
Executive Officer and the Chief Financial Officer concluded that
our disclosure controls and procedures were effective at the
reasonable assurance level.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Further,
because of changes in conditions, the effectiveness of internal
control may vary over time.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of March 31, 2011. In making its assessment, management
used the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on its
evaluation, management has concluded that, as of March 31,
2011, the Companys internal control over financial
reporting was effective based on these criteria.
This Annual Report does not include an attestation report of our
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by our independent registered public
accounting firm.
Changes
in Internal Controls over Financial Reporting
There has been no change in our internal controls over financial
reporting during our most recent fiscal quarter that has
materially affected, or is reasonably likely to materially
affect our internal controls 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 this process.
|
|
Item 9B.
|
Other
Information
|
None
43
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Certain information with respect to the executive officers of
the Company is set forth in the section entitled Executive
Officers of the Registrant in Part I of this Annual
Report on
Form 10-K.
The information required by this item with respect to the
directors of the Company is incorporated herein by reference to
the information under the caption Election of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance contained in the
Companys Management Proxy Circular for the Companys
2011 Annual Meeting of Shareholders (the Proxy
Statement).
We have adopted and maintain a code of business conduct and
ethics that all executive officers and management employees must
review and abide by (including our principal executive officer
and principal financial officer), which we refer to as our Code
of Business Conduct and Ethics. The Code of Business Conduct and
Ethics is available on our website, free of charge, at
http://www.madcatz.com
in the Investor Information section under the heading
Corporate Governance.
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 is incorporated herein
by reference to the information in the Proxy Statement under the
caption Executive Compensation specifically
excluding the Report of the Compensation Committee of the
Board of Directors on Executive Compensation.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 is incorporated herein
by reference to the information in the Proxy Statement under the
captions Security Ownership of Certain Beneficial Owners
and Management and Equity Compensation Plan
Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by Item 13 is incorporated herein
by reference to the information in the Proxy Statement under the
caption Certain Transactions.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by Item 14 is incorporated herein
by reference to the information in the Proxy Statement under the
caption Principal Accountant Fees and Services.
44
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
(a) The following documents are filed as part of this
report:
(1) Financial Statements
The consolidated financial statements of the Company are
included herein as required under Item 8 of this report.
See Index to Financial Statements on
page F-1.
(2) Financial Statement Schedules
Schedules have been omitted because information required to be
set forth therein is not applicable or is shown in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with
Item 601 of
Regulation S-K)
The following exhibits are filed or incorporated by reference
into this report.
|
|
|
|
|
|
2
|
.1(1)
|
|
Stock Purchase Agreement dated as of May 28, 2010, by and
between Mad Catz Interactive, Inc., Mad Catz, Inc., Tritton
Technologies Inc. and the Stockholders of Tritton Technologies
Inc. Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934.
|
|
3
|
.1(2)
|
|
Articles of Incorporation and Amendments thereto.
|
|
3
|
.2(3)
|
|
By-Laws of the Company, as amended to date.
|
|
3
|
.3(4)
|
|
Amendment to By-Law No. 2.
|
|
4
|
.1(5)
|
|
Form of Warrant, issued April 21, 2011.
|
|
10
|
.1(6)
|
|
Guarantee dated September 25, 2000, by 1328158 Ontario Inc.
in favor of Congress Financial Corporation (Canada).
|
|
10
|
.2(6)
|
|
General Security Agreement dated September 25, 2000, by Mad
Catz, Inc. and FX Unlimited, Inc. in favor of Congress Financial
Corporation (Central).
|
|
10
|
.3(6)
|
|
Guarantee dated September 25, 2000, by Mad Catz, Inc. in
favor of Congress Financial Corporation (Central).
|
|
10
|
.4(7)
|
|
Amended and Restated General Security Agreement dated as of
November 30, 2001, by Mad Catz, Inc. and FX Unlimited, Inc.
in favor of Congress Financial Corporation (Central).
|
|
10
|
.5(7)*
|
|
Amended and Restated Incentive Stock Option Plan of Mad Catz
Interactive, Inc.
|
|
10
|
.6(7)*
|
|
Form of Incentive Stock Option Plan.
|
|
10
|
.7(8)*
|
|
Employment Agreement dated May 18, 2000, by and between Mad
Catz, Inc. and Darren Richardson.
|
|
10
|
.8(9)*
|
|
Amendment to Employment Agreement dated April 1, 2004, by
and between Mad Catz Interactive, Inc. and Darren Richardson.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934.
|
|
10
|
.9(10)
|
|
Xenon Game Peripheral Licensing Certification Agreement dated
May 12, 2005, by and between Mad Catz, Inc. and
Microsoft Corporation. Portions of this exhibit (indicated by
asterisks) have been omitted pursuant to a request for
confidential treatment pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934.
|
|
10
|
.11(11)*
|
|
Mad Catz Interactive, Inc. Stock Option Plan 2007
|
|
10
|
.12(12)*
|
|
Stock Option Agreement under the Mad Catz Interactive, Inc.
Stock Option Plan 2007
|
|
10
|
.14(13)
|
|
First Amending Agreement dated as of November 20, 2007, by
and between Mad Catz, Inc. and Wachovia Capital Finance
Corporation (Central).
|
|
10
|
.15(13)
|
|
Pledge and Security Agreement dated November 20, 2007, by
Winkler Atlantic Holdings Limited in favor of Wachovia Capital
Finance Corporation (Central).
|
|
10
|
.16(13)
|
|
Guarantee dated November 20, 2007, by Saitek Industries
Limited in favor of Wachovia Capital Finance Corporation
(Central).
|
45
|
|
|
|
|
|
10
|
.17(13)
|
|
General Security Agreement dated November 20, 2007, by
Saitek Industries Limited in favor of Wachovia Capital Finance
Corporation (Central).
|
|
10
|
.18(14)*
|
|
Amendment to Employment Agreement dated December 31, 2008,
by and between Mad Catz Interactive, Inc. and Darren Richardson.
|
|
10
|
.20(14)*
|
|
Director Compensation Table
|
|
10
|
.21(14)
|
|
Waiver and Amendment Letter Agreement dated March 18, 2009,
by and between Mad Catz, Inc. and Wachovia Capital Finance
Corporation (Central).
|
|
10
|
.22(14)
|
|
Third Amended and Restated Loan Agreement dated as of
June 23, 2009, by and between Mad Catz, Inc. and Wachovia
Capital Finance Corporation (Central).
|
|
10
|
.23(14)
|
|
General Security Agreement dated June 23, 2009, by Winkler
Atlantic Holdings Limited in favor of and Wachovia Capital
Finance Corporation (Central).
|
|
10
|
.24(14)
|
|
Guarantee dated June 23, 2009, by Winkler Atlantic Holdings
Limited in favor of Wachovia Capital Finance Corporation
(Central).
|
|
10
|
.25(14)
|
|
Negative Pledge Agreement dated June 23, 2009, by Saitek
Elektronik Vertriebs Gmbh in favor of and Wachovia Capital
Finance Corporation (Central).
|
|
10
|
.26(14)
|
|
Guarantee dated June 23, 2009, by Saitek Elektronik
Vertriebs Gmbh in favor of Wachovia Capital Finance Corporation
(Central).
|
|
10
|
.27(14)
|
|
First Amendment to Stock Pledge Agreement dated June 23,
2009, by and between Mad Catz, Inc. and Wachovia Capital Finance
Corporation (Central).
|
|
10
|
.29(15)
|
|
Xbox 360 Accessory License Agreement effective March 23,
2009, by and between Mad Catz, Inc. and Microsoft Corporation.
Portions of this exhibit (indicated by asterisks) have been
omitted pursuant to a request for confidential treatment
pursuant to
Rule 24b-2
under the Securities Exchange Act of 1934.
|
|
10
|
.30(16)
|
|
First Amending Agreement, dated as of September 30, 2010,
between Mad Catz, Inc. and Wells Fargo Capital Finance, LLC,
successor by merger to Wachovia Capital Finance Corporation
(Central)
|
|
10
|
.31(5)
|
|
Securities Purchase Agreement, dated April 17, 2011
|
|
10
|
.32(5)
|
|
Form of Registration Rights Agreement, dated April 21, 2011
|
|
21
|
.1
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of KPMG LLP, Independent Registered Public Accounting
Firm.
|
|
31
|
.1
|
|
Certifications of Registrants Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certifications of Registrants Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certifications 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. These
certifications are being furnished solely to accompany this
Annual Report on
Form 10-K
and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any filing of the Company.
|
|
32
|
.2
|
|
Certifications 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. These
certifications are being furnished solely to accompany this
Annual Report on
Form 10-K
and are not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any filing of the Company.
|
|
|
|
(1) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 10-K
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2010 and incorporated herein by
reference. |
|
(2) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2001 and incorporated herein by
reference. |
|
(3) |
|
This document was filed as an exhibit to the Registrants
Registration Statement on Form 20-F, dated June 1, 1999,
filed with the Securities and Exchange Commission on
June 3, 1999 and incorporated herein by reference. |
46
|
|
|
(4) |
|
This document was filed as an exhibit to the Registrants
Quarterly Report on
Form 10-Q
filed with the Securities and Exchange Commission for the
quarterly period ended September 30, 2007 and incorporated
herein by reference. |
|
(5) |
|
This document was filed as an exhibit to the Registrants
Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
April 21, 2011 and incorporated herein by reference. |
|
(6) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2000 and incorporated herein by
reference. |
|
(7) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2002 and incorporated herein by
reference. |
|
(8) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2003 and incorporated herein by
reference. |
|
(9) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 20-F
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2004 and incorporated herein by
reference. |
|
(10) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 10-K
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2005 and incorporated herein by
reference. |
|
(11) |
|
This document was filed as an exhibit to the Registrants
Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
September 16, 2011 and incorporated herein by reference. |
|
(12) |
|
This document was filed as an exhibit to the Registrants
Current Report on
Form 8-K
filed with the Securities and Exchange Commission
October 9, 2007 and incorporated herein by reference. |
|
(13) |
|
This document was filed as an exhibit to the Registrants
Current Report on Form
8-K filed
with the Securities and Exchange Commission for the fiscal year
ended November 20, 2007 and incorporated herein by
reference. |
|
(14) |
|
This document was filed as an exhibit to the Registrants
Annual Report on
Form 10-K
filed with the Securities and Exchange Commission for the fiscal
year ended March 31, 2009 and incorporated herein by
reference. |
|
(15) |
|
This document was filed as an exhibit to the Registrants
Quarterly Report on
Form 10-Q
filed with the Securities and Exchange Commission for the
quarterly period ended June 30, 2009 and incorporated
herein by reference. |
|
(16) |
|
This document was filed as an exhibit to the Registrants
Current Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 6, 2010 and incorporated herein by reference. |
|
* |
|
Denotes management contract or compensatory plan or arrangement. |
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MAD CATZ INTERACTIVE, INC.
|
|
|
|
By:
|
/s/ Darren
Richardson
|
Darren Richardson
President and Chief Executive Officer
Date: June 14, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Darren
Richardson
Darren
Richardson
|
|
President and Chief Executive Officer (Principal Executive
Officer)
|
|
June 14, 2011
|
|
|
|
|
|
/s/ Allyson
Evans
Allyson
Evans
|
|
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
June 14, 2011
|
|
|
|
|
|
/s/ Thomas
Brown
Thomas
Brown
|
|
Director
|
|
June 14, 2011
|
|
|
|
|
|
/s/ Robert
Molyneux
Robert
Molyneux
|
|
Director
|
|
June 14, 2011
|
|
|
|
|
|
/s/ William
Woodward
William
Woodward
|
|
Director
|
|
June 14, 2011
|
48
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Mad Catz Interactive, Inc.:
We have audited the accompanying consolidated balance sheets of
Mad Catz Interactive, Inc. and subsidiaries (the Company) as of
March 31, 2011 and 2010, and the related consolidated
statements of operations, shareholders equity and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended March 31, 2011. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated 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 included consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. 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 Mad Catz Interactive, Inc. and subsidiaries as of
March 31, 2011 and 2010, and the results of their
operations and their cash flows for each of the years in the
three-year period ended March 31, 2011, in conformity with
U.S. generally accepted accounting principles.
San Diego, California
June 14, 2011
F-2
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(In thousands of U.S. dollars, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,734
|
|
|
$
|
2,245
|
|
Accounts receivable, net of allowances of $6,301 and $4,848 at
March 31, 2011 and 2010, respectively
|
|
|
19,846
|
|
|
|
14,620
|
|
Other receivables
|
|
|
329
|
|
|
|
123
|
|
Inventories
|
|
|
27,978
|
|
|
|
16,975
|
|
Deferred tax assets
|
|
|
85
|
|
|
|
17
|
|
Income tax receivable
|
|
|
|
|
|
|
21
|
|
Prepaid expenses and other current assets
|
|
|
2,343
|
|
|
|
1,410
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
54,315
|
|
|
|
35,411
|
|
Deferred tax assets
|
|
|
590
|
|
|
|
766
|
|
Other assets
|
|
|
639
|
|
|
|
626
|
|
Property and equipment, net
|
|
|
3,921
|
|
|
|
3,452
|
|
Intangible assets, net
|
|
|
5,606
|
|
|
|
2,828
|
|
Goodwill
|
|
|
10,463
|
|
|
|
8,466
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
75,534
|
|
|
$
|
51,549
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Bank loan
|
|
$
|
5,408
|
|
|
$
|
3,829
|
|
Accounts payable
|
|
|
13,700
|
|
|
|
11,871
|
|
Accrued liabilities
|
|
|
11,048
|
|
|
|
7,988
|
|
Convertible notes payable
|
|
|
14,500
|
|
|
|
|
|
Contingent consideration, current
|
|
|
1,542
|
|
|
|
|
|
Income taxes payable
|
|
|
1,918
|
|
|
|
1,670
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
48,116
|
|
|
|
25,358
|
|
Contingent consideration
|
|
|
2,897
|
|
|
|
|
|
Other long-term liabilities
|
|
|
424
|
|
|
|
357
|
|
Convertible notes payable
|
|
|
|
|
|
|
14,500
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
51,437
|
|
|
|
40,215
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock, no par value, unlimited shares authorized;
57,029,350 and 55,098,549 shares issued and outstanding at
March 31, 2011 and 2010
|
|
|
50,648
|
|
|
|
48,865
|
|
Accumulated other comprehensive loss
|
|
|
(10
|
)
|
|
|
(55
|
)
|
Accumulated deficit
|
|
|
(26,541
|
)
|
|
|
(37,476
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
24,097
|
|
|
|
11,334
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
75,534
|
|
|
$
|
51,549
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of U.S. dollars, except
|
|
|
|
share and per share data)
|
|
|
Net sales
|
|
$
|
183,974
|
|
|
$
|
119,012
|
|
|
$
|
112,563
|
|
Cost of sales
|
|
|
130,605
|
|
|
|
82,616
|
|
|
|
80,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
53,369
|
|
|
|
36,396
|
|
|
|
32,005
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
14,316
|
|
|
|
11,452
|
|
|
|
13,216
|
|
General and administrative
|
|
|
13,794
|
|
|
|
12,118
|
|
|
|
14,968
|
|
Research and development
|
|
|
4,678
|
|
|
|
2,657
|
|
|
|
1,076
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
27,887
|
|
Acquisition related items
|
|
|
873
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
951
|
|
|
|
1,758
|
|
|
|
2,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,612
|
|
|
|
27,985
|
|
|
|
59,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
18,757
|
|
|
|
8,411
|
|
|
|
(27,486
|
)
|
Interest expense, net
|
|
|
(2,897
|
)
|
|
|
(2,460
|
)
|
|
|
(2,094
|
)
|
Foreign exchange gain (loss), net
|
|
|
1,195
|
|
|
|
(270
|
)
|
|
|
(462
|
)
|
Other income
|
|
|
247
|
|
|
|
252
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
17,302
|
|
|
|
5,933
|
|
|
|
(29,681
|
)
|
Income tax expense
|
|
|
(6,367
|
)
|
|
|
(1,470
|
)
|
|
|
(2,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,935
|
|
|
$
|
4,463
|
|
|
$
|
(32,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.20
|
|
|
$
|
0.08
|
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.08
|
|
|
$
|
(0.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,429,673
|
|
|
|
55,098,549
|
|
|
|
55,088,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
66,924,206
|
|
|
|
55,103,237
|
|
|
|
55,088,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands of U.S. dollars, except share data)
|
|
|
Balance at March 31, 2008
|
|
|
54,973,549
|
|
|
$
|
47,717
|
|
|
$
|
2,923
|
|
|
$
|
(9,325
|
)
|
|
$
|
41,315
|
|
Stock option exercises
|
|
|
125,000
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
Stock-based compensation
|
|
|
|
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
481
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,614
|
)
|
|
|
(32,614
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(2,822
|
)
|
|
|
|
|
|
|
(2,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2009
|
|
|
55,098,549
|
|
|
$
|
48,255
|
|
|
$
|
101
|
|
|
$
|
(41,939
|
)
|
|
$
|
6,417
|
|
Stock-based compensation
|
|
|
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
610
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,463
|
|
|
|
4,463
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
(156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
55,098,549
|
|
|
$
|
48,865
|
|
|
$
|
(55
|
)
|
|
$
|
(37,476
|
)
|
|
$
|
11,334
|
|
Stock issued for acquisition
|
|
|
158,518
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
Stock option exercises
|
|
|
1,772,283
|
|
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
920
|
|
Stock-based compensation
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
603
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,935
|
|
|
|
10,935
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
|
57,029,350
|
|
|
$
|
50,648
|
|
|
$
|
(10
|
)
|
|
$
|
(26,541
|
)
|
|
$
|
24,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
MAD CATZ
INTERACTIVE, INC.
Years
Ended March 31, 2011, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands of U.S. dollars)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
10,935
|
|
|
$
|
4,463
|
|
|
$
|
(32,614
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,764
|
|
|
|
3,766
|
|
|
|
4,193
|
|
Amortization of deferred financing fees
|
|
|
249
|
|
|
|
176
|
|
|
|
56
|
|
Stock-based compensation
|
|
|
603
|
|
|
|
610
|
|
|
|
481
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
27,887
|
|
Loss on disposal of assets
|
|
|
6
|
|
|
|
89
|
|
|
|
|
|
Contingent consideration
|
|
|
710
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for deferred income taxes
|
|
|
290
|
|
|
|
59
|
|
|
|
2,657
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(4,781
|
)
|
|
|
864
|
|
|
|
(2,388
|
)
|
Other receivables
|
|
|
(209
|
)
|
|
|
332
|
|
|
|
98
|
|
Inventories
|
|
|
(8,462
|
)
|
|
|
763
|
|
|
|
2,401
|
|
Prepaid expenses and other current assets
|
|
|
(856
|
)
|
|
|
77
|
|
|
|
(15
|
)
|
Other assets
|
|
|
(88
|
)
|
|
|
53
|
|
|
|
(106
|
)
|
Accounts payable
|
|
|
(761
|
)
|
|
|
(1,731
|
)
|
|
|
(3,127
|
)
|
Accrued liabilities
|
|
|
2,818
|
|
|
|
1,877
|
|
|
|
(1,443
|
)
|
Income taxes receivable/payable
|
|
|
85
|
|
|
|
1,324
|
|
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
3,303
|
|
|
|
12,722
|
|
|
|
(2,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,056
|
)
|
|
|
(2,718
|
)
|
|
|
(1,403
|
)
|
Cash paid for Tritton acquisition, net of cash received
|
|
|
(1,189
|
)
|
|
|
|
|
|
|
|
|
Cash paid for V Max acquisition
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,623
|
)
|
|
|
(2,718
|
)
|
|
|
(1,403
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on bank loan
|
|
|
168,923
|
|
|
|
99,907
|
|
|
|
97,708
|
|
Repayments on bank loan
|
|
|
(167,344
|
)
|
|
|
(109,350
|
)
|
|
|
(95,906
|
)
|
Payment of financing fees
|
|
|
(100
|
)
|
|
|
(496
|
)
|
|
|
|
|
Payment of Saitek completion note
|
|
|
|
|
|
|
(847
|
)
|
|
|
|
|
Repayments on notes payable
|
|
|
(803
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
920
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,596
|
|
|
|
(10,786
|
)
|
|
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of foreign exchange on cash
|
|
|
213
|
|
|
|
137
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,489
|
|
|
|
(645
|
)
|
|
|
(2,340
|
)
|
Cash, beginning of year
|
|
|
2,245
|
|
|
|
2,890
|
|
|
|
5,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
3,734
|
|
|
$
|
2,245
|
|
|
$
|
2,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
6,497
|
|
|
$
|
1,007
|
|
|
$
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
3,750
|
|
|
$
|
2,243
|
|
|
$
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable issued
|
|
$
|
|
|
|
$
|
|
|
|
$
|
847
|
|
Restructuring and transaction costs
|
|
|
|
|
|
|
|
|
|
|
282
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired in acquisitions, net of cash
received
|
|
|
3,457
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
3,700
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,001
|
|
|
|
|
|
|
|
98
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
1,031
|
|
Liabilities assumed in acquisitions
|
|
|
(2,800
|
)
|
|
|
|
|
|
|
|
|
Notes payable assumed in acquisition
|
|
|
(803
|
)
|
|
|
|
|
|
|
|
|
Stock issued for acquisition
|
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
Contingent consideration liability, net of $472 working capital
adjustment
|
|
|
(3,728
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for acquisitions
|
|
$
|
1,567
|
|
|
$
|
|
|
|
$
|
1,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
MAD CATZ
INTERACTIVE, INC.
(In U.S.
dollars)
|
|
(1)
|
Organization
and Description of Business
|
The Companys products are designed, manufactured
(primarily through third parties), marketed and distributed for
all major console based videogame systems, the personal computer
(PC) and, to a lesser extent the iPod and other
audio devices. The Companys products include videogame, PC
and audio accessories, such as control pads, steering wheels,
joysticks, memory cards, video cables, light guns, flight
sticks, flight simulators, dance pads, microphones, car
adapters, carry cases, mice, keyboards and headsets. The Company
also markets GameShark videogame enhancement products and
publishes videogames.
|
|
(2)
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States 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 revenue and expenses during the year. On an
ongoing basis, the Company evaluates its estimates, including
those related to asset impairments, reserves for accounts
receivable and inventory, contingencies and litigation,
valuation and recognition of share-based payments and income
taxes. Illiquid credit markets, volatile equity, foreign
currency, 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.
Concentration
of Credit Risk
The Companys credit risk is primarily concentrated in
accounts receivable. The Company generally does not require
collateral on accounts receivable because a majority of its
customers are large, well capitalized, established retail
entities with operations throughout the United States, Canada
and Europe. The Company maintains an allowance for doubtful
accounts. For the year ended March 31, 2011, 2010 and 2009,
sales to the largest customer constituted 26%, 25% and 29%,
respectively, of gross sales. At March 31, 2011, one
customer represented 27% of accounts receivable and another
customer represented 12% of accounts receivable. At
March 31, 2010 and 2009, one customer represented 30% and
33%, respectively, of accounts receivable. At March 31,
2011, 2010 and 2009, there were no other customers which
accounted for greater than 10% of gross sales or represented
greater than 10% of accounts receivable.
Fair
Value of Financial Instruments and Fair Value
Measurements
The carrying values of the Companys financial instruments,
including cash, accounts receivable, other receivables, accounts
payable, accrued liabilities and income taxes receivable/payable
approximate their fair values due to the short maturity of these
instruments. The carrying value of the bank loan approximates
its fair value as the interest rate and other terms are that
which is currently available to the Company. The fair value of
convertible notes cannot be reasonably estimated as the
instruments interest rate is likely not comparable to
rates currently offered for similar debt instruments of
comparable maturity given the state of the current credit
markets. These notes are between the Company and the seller of
Saitek (see Note 8).
F-7
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
Fair value measurements are market-based measurements, not
entity-specific measurements. Therefore, fair value measurements
are determined based on the assumptions that market participants
would use in pricing the asset or liability. We follow a
three-level hierarchy to prioritize the inputs used in the
valuation techniques to derive fair values. The basis for fair
value measurements for each level within the hierarchy is
described below:
|
|
|
|
|
Level 1: Quoted prices in active markets
for identical assets or liabilities.
|
|
|
|
Level 2: Quoted prices for similar assets
or liabilities in active markets; quoted prices for identical or
similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are
observable in active markets.
|
|
|
|
Level 3: Valuations derived from
valuation techniques in which one or more significant inputs are
unobservable in active markets.
|
The following table provides a summary of the recognized assets
and liabilities that we measure at fair value on a recurring
basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
Basis of Fair Value Measurements
|
|
|
March 31, 2011
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration, net of working capital (Note 3)
|
|
$
|
(4,439
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4,439
|
)
|
The following table provides a rollforward of our level three
fair value measurements during the year ended March 31,
2011, which consist solely of our contingent consideration
liability (in thousands):
|
|
|
|
|
Balance at March 31, 2010
|
|
$
|
|
|
Tritton acquisition initial contingent consideration
balance
|
|
|
3,466
|
|
Changes in working capital adjustment
|
|
|
263
|
|
Increases during the year acquisition related expense
|
|
|
710
|
|
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
4,439
|
|
|
|
|
|
|
Revenue
Recognition
The Company recognizes revenue when (1) there is persuasive
evidence that an arrangement with the customer exists, which is
generally a customer purchase order, (2) the products are
delivered, which occurs when the products are shipped and risk
of loss has been transferred to the customer, (3) the
selling price is fixed or determinable and (4) collection
of the customer receivable is deemed reasonably assured. The
Companys payment arrangements with customers typically
provide net 30 and
60-day
terms. All of the Companys arrangements are single element
arrangements and there are no undelivered elements after the
point of shipment.
Amounts billed to customers for shipping and handling are
included in net sales, and costs incurred related to shipping
and handling is included in cost of sales.
Allowance
for Doubtful Accounts and Other Allowances
Accounts receivable are recorded net of an allowance for
doubtful accounts and other sales related allowances. When
evaluating the adequacy of the allowance for doubtful accounts,
the Company analyzes known uncollectible accounts, the aging of
accounts receivable, historical bad debts, customer
credit-worthiness and current economic trends. We perform
ongoing credit evaluations of our customers, and generally we do
not require collateral on our accounts receivable. We estimate
the need for allowances for potential credit losses based on
historical collection activity and the facts and circumstances
relevant to specific customers and we record a provision for
uncollectible accounts when collection is uncertain. To date, we
have not experienced significant credit related losses.
F-8
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
The Company records allowances for customer marketing programs,
including certain rights of return, price protection,
volume-based cash incentives and cooperative advertising. The
estimated cost of these programs is accrued as a reduction to
revenue or as an operating expense in the period the Company
sells the product or commits to the program. Such amounts are
estimated, based on historical experience and contractual terms,
and periodically adjusted based on historical and anticipated
rates of returns, inventory levels and other factors.
Inventories
Raw materials, packaging materials and accessories are valued at
the lower of cost, determined by the
first-in,
first-out method, or market. Finished goods are valued at the
lower of cost or market, with cost being determined on an
average cost basis using the
first-in,
first-out method. The Company regularly reviews inventory
quantities on hand and in the retail channel, consumer demand
and seasonality factors in order to recognize any loss of
utility in the period incurred.
Property
and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Property and equipment are
depreciated or amortized using the straight-line method over the
estimated useful lives of the assets as follows:
|
|
|
Molds
|
|
3 years
|
Computer equipment and software
|
|
3 years
|
Manufacturing and office equipment
|
|
3 - 5 years
|
Furniture and fixtures
|
|
5 years
|
Leasehold improvements
|
|
Shorter of estimated useful life or remaining life of lease
|
Major improvements and betterments are capitalized.
Intangible
Assets
Intangible assets are stated at cost less accumulated
amortization and are amortized over the estimated useful lives
of the assets on a straight-line basis. The range of useful
lives is 1 to 15 years.
|
|
|
|
|
|
|
Useful Life
|
|
|
(Years)
|
|
Trademarks
|
|
|
4 - 15
|
|
Customer relationships
|
|
|
3 - 6
|
|
Product lines
|
|
|
2 - 3
|
|
Copyrights
|
|
|
5
|
|
Website
|
|
|
4
|
|
Other
|
|
|
1 - 3
|
|
Goodwill
The Company reviews its goodwill for impairment as of the end of
each fiscal year or when an event or a change in facts and or
circumstances indicates the fair value of a reporting unit may
be below its carrying amount.
Authoritative guidance requires that goodwill and certain
intangible assets be assessed for impairment using fair value
measurement techniques. Specifically, goodwill impairment is
determined using a two-step process. The first step of the
goodwill impairment test is used to identify potential
impairment by comparing the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a
reporting unit exceeds its carrying
F-9
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
amount, goodwill of the reporting unit is considered not
impaired and the second step of the impairment test is
unnecessary. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test
is performed to measure the amount of impairment loss, if any.
The second step of the goodwill impairment test compares the
implied fair value of the reporting units goodwill with
the carrying amount of that goodwill. If the carrying amount of
the reporting units goodwill exceeds the implied fair
value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The Company determined that it has
one reporting unit and assesses fair value based on a review of
the Companys market capitalization as well as a discounted
cash flow model, for which the key assumptions include revenue
growth, gross profit margins, operating expense trends and the
Companys weighted average cost of capital. Given the
volatility of the Companys stock price and market
capitalization, which fluctuates significantly throughout the
year, the Company does not believe that its market
capitalization is necessarily the best indicator of the fair
value of the Company at any moment in time. However, the Company
has determined that market capitalization over a sustained
period, when considered with other factors may be an appropriate
indicator of fair value. Further, to the extent the carrying
amount of the Companys reporting unit exceeds its market
capitalization over a sustained period, an impairment may exist
and require the Company to test for impairment.
In 2009, the carrying amount of the Companys reporting
unit had exceeded its market capitalization over a sustained
period, accordingly, the Company recorded a goodwill impairment
charge of $27.9 million for the year ended March 31,
2009. The Company completed its annual assessment of impairment
as of March 31, 2011 and 2010, which did not indicate any
impairment of goodwill at such dates. At March 31, 2011 the
fair value exceeded the carrying value by 81%. No assurance can
be given that the Company will not be required to record
additional goodwill impairments in future periods.
Impairment
of Long-Lived Assets
Long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and would no longer be depreciated. The assets and liabilities
of a disposal group classified as held for sale would be
presented separately in the appropriate asset and liability
sections of the balance sheet. During 2009, the Company
determined that a triggering event had occurred and performed
the required analysis, which indicated that no impairment
existed. There were no triggering events during fiscal year 2011
and 2010.
Royalties
and Intellectual Property Licenses
Royalty and license expenses consist of royalties and license
fees paid to intellectual property rights holders for use of
their trademarks, copyrights, software, technology or other
intellectual property or proprietary rights in the development
or sale of the Companys products. Royalty-based payments
that are paid in advance are generally capitalized and expensed
to cost of sales at the greater of the contractual or effective
royalty rate based on net product sales.
Royalty payments to independent videogame developers and
co-publishing affiliates are payments for the development of
intellectual property related to the Companys videogame
titles. Payments made prior to the establishment of
technological feasibility are expensed as research and
development. Once technological feasibility has been
established, payments made are capitalized and amortized upon
release of the product. Additional royalty payments due after
the general release of the product are typically expensed as
cost of sales at the higher of the contractual or effective
royalty rate based on net product sales.
F-10
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
Advertising
and Research and Development
Advertising costs and research and development are expensed as
incurred. Advertising costs amounted to $4,405,000, $3,392,000,
and $3,796,000 in 2011, 2010 and 2009, respectively. Cooperative
advertising with retailers is recorded when revenue is
recognized and such amounts are included in sales and marketing
expense if there is a separate identifiable benefit with a fair
value. Otherwise, such costs are recognized as a reduction of
sales. Research and development costs amounted to $4,678,000,
$2,657,000 and $1,076,000 for the years ended March 31,
2011, 2010 and 2009, respectively.
Income
Taxes
Income taxes are accounted for using the asset and liability
method. Under the asset and liability method of accounting for
income taxes, deferred tax assets and liabilities are recognized
for future tax consequences attributable to differences between
the financial statement carrying amounts and tax basis of assets
and liabilities and for tax loss carryforwards.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that
includes the enactment date. To the extent that it is not
more likely than not that a deferred tax asset will
be realized, a valuation allowance is provided. Significant
management judgment is required in assessing the realizability
of the Companys deferred tax assets. In performing this
assessment, management considers whether it is more likely than
not that some portion or all of the assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon generation of future taxable income in each tax
jurisdiction during the periods in which the temporary
differences become deductible. Management considers the
scheduled reversal of deferred liabilities, projected future
taxable income, and tax planning strategies in making this
assessment.
Foreign
Currency Translation
For each of the Companys foreign operating subsidiaries
the functional currency is its local currency. Assets and
liabilities of foreign operations are translated into
U.S. dollars using month-end exchange rates, and revenue
and expenses are translated into U.S. dollars using monthly
average exchange rates. The effects of foreign currency
translation adjustments are included as a component of
accumulated other comprehensive income in shareholders
equity.
Foreign currency transaction gains and losses are a result of
the effect of exchange rate changes on transactions denominated
in currencies other than the functional currency.
Net
Income (Loss) per Share
Basic net income (loss) per share is computed by dividing the
net income (loss) for the period by the weighted average number
of common shares outstanding during the period. Diluted net
income (loss) per share is computed by dividing net income
(loss) for the period by the weighted average number of common
shares outstanding, increased by potentially dilutive
securities. Potentially dilutive securities are calculated using
the treasury stock method and represent incremental shares
issuable upon exercise of outstanding stock options. However,
potentially dilutive securities are not included in the
denominator of the diluted earnings per share calculation when
inclusion of such shares would be anti-dilutive.
F-11
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
The following table sets forth the computation of diluted
weighted average common and potential common shares outstanding
for the years ended March 31, 2011, 2010 and 2009 (in
thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
10,935
|
|
|
|
4,463
|
|
|
|
(32,614
|
)
|
Effect of convertible notes payable
|
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net earnings per share
|
|
|
12,167
|
|
|
|
4,463
|
|
|
|
(32,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used to compute basic EPS
|
|
|
55,429,673
|
|
|
|
55,098,549
|
|
|
|
55,088,960
|
|
Effect of convertible debt
|
|
|
10,217,744
|
|
|
|
|
|
|
|
|
|
Effect of dilutive share-based awards
|
|
|
1,276,789
|
|
|
|
4,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net earnings per share
|
|
|
66,924,206
|
|
|
|
55,103,237
|
|
|
|
55,088,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
0.20
|
|
|
|
0.08
|
|
|
|
(0.59
|
)
|
Diluted earnings per share
|
|
|
0.18
|
|
|
|
0.08
|
|
|
|
(0.59
|
)
|
Outstanding options to purchase an aggregate of 5,160,471,
7,284,233 and 5,565,653 shares for the years ended
March 31, 2011, 2010 and 2009, respectively, were excluded
from calculation because of their anti-dilutive effect. Weighted
average shares of 10,217,744, related to the convertible note
payable were excluded from the calculation because of their
anti-dilutive effect in fiscal years 2010 and 2009.
On May 5, 2011, the Company repaid all principal and
interest related to the $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. Repayment of the convertible loan notes
retired 10,217,744 weighted average shares that have been
included in the Companys calculation of fully diluted
earnings per share. The repayment was partially funded with the
net proceeds of a private placement financing, which closed on
April 21, 2011. Approximately 6,350,000 common shares were
issued in connection with the private placement, through which
the Company raised approximately $12.2 million, gross, with
warrants to purchase 2,541,000 additional common shares at an
exercise price of $2.56 per share.
Stock-Based
Compensation
The Company records compensation expense associated with
share-based awards made to employees and directors based upon
their grant date fair value. The Company recognizes these
compensation costs on a straight-line basis over the requisite
service period of the award, which is four years, except for
grants to Board of Directors, which vest immediately.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes option valuation model, using the
assumptions noted in Note 9 Stock-Based
Compensation. The expected life of the options is based on a
number of factors, including historical exercise experience, the
vesting term of the award, the expected volatility of the
Companys stock and an employees average length of
service. The expected volatility is estimated based on the
historical volatility (using daily pricing) of the
Companys stock. The risk-free interest rate is determined
based on a constant U.S. Treasury security rate with a
contractual life that approximates the expected term of the
stock options. In accordance with authoritative guidance, the
Company reduces the calculated stock-based compensation expense
for estimated forfeitures by applying a forfeiture rate, based
upon historical pre-vesting option cancelations. Estimated
forfeitures are reassessed at each balance sheet date and may
change based on new facts and circumstances.
F-12
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
See Note 9 Stock-Based Compensation for
additional information regarding the Companys stock-based
compensation plans.
Comprehensive
Income (Loss)
Comprehensive income (loss) consists of net income (loss) and
certain changes in equity that are excluded from net income
(loss). Accumulated other comprehensive income represents net
unrealized gains and losses from foreign currency translation
adjustments.
Tritton
Technologies Inc.
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
$1,400,000, subject to a working capital adjustment of $472,000.
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.
The purchase price allocation for the acquisition of Tritton set
forth below has been finalized and the Company finalized the
working capital adjustment to complete the purchase price
allocation subsequent to year end. 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
|
|
|
(472
|
)
|
Fair value of contingent consideration
|
|
|
4,200
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,078
|
|
|
|
|
|
|
The working capital adjustment, net of holdback, was adjusted
during the year ended March 31, 2011 to decrease the
adjustment from the previous estimate of $735,000 at
June 30, 2010 to the revised final amount of $472,000 based
on new information obtained that existed as of the acquisition
date. The working capital adjustment is recorded against the
contingent consideration liability, resulting in an increase in
the contingent consideration liability of $263,000 since the
date of acquisition through March 31, 2011. The $5,078,000
purchase price for Tritton exceeded the value of the acquired
tangible and identifiable intangible assets, and therefore the
Company allocated $1,514,000 to non tax deductible goodwill.
F-13
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
Recognized amounts of identifiable assets acquired and
liabilities assumed as of March 31, 2011 (in thousands)
|
|
|
|
|
Net working capital
|
|
$
|
(256
|
)
|
Property, plant and equipment and other assets
|
|
|
120
|
|
Goodwill
|
|
|
1,514
|
|
Other intangible assets
|
|
|
3,700
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
5,078
|
|
|
|
|
|
|
Fair-value measurements have been determined based on
assumptions that market participants would use in the pricing of
the asset or liability. The fair values of the acquired
identifiable intangible assets with definite lives are as
follows (in thousands):
|
|
|
|
|
Intangible assets acquired:
|
|
|
|
|
Customer relationships
|
|
$
|
900
|
|
Trademark and trade names
|
|
|
2,800
|
|
|
|
|
|
|
Total intangible assets acquired
|
|
$
|
3,700
|
|
|
|
|
|
|
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, over a five year period. 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%. The amount paid for contingent
consideration will be reduced by the amount of the final working
capital adjustment. As of March 31, 2011, the liability for
contingent consideration of $4,439,000 is presented net of the
final working capital adjustment and holdback of $472,000.
The estimated fair value of the contingent consideration
increased $710,000 since the date of acquisition through
March 31, 2011. The Company assesses the estimated fair
value of the contractual obligation to pay the contingent
consideration on a quarterly basis and any changes in estimated
fair value are 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%.
Transaction costs related to the acquisition totaled $163,000
during the twelve months ended March 31, 2011, and are
recorded in acquisition related items in the
accompanying consolidated statement of operations.
F-14
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
V Max
Simulation Corporation
On February 24, 2011, the Company acquired certain assets
of V Max Simulation Corporation (V Max), which
included mostly property, plant and equipment. V Max designs,
constructs, integrates, and operates flight simulation
equipment. Total consideration paid for the acquisition was
$638,000, consisting of $378,000 in cash and 158,518 shares
of the Companys common stock, valued at the closing price
of the Companys common stock on the day prior to the
closing date of the transaction. The Company financed the
acquisition through borrowings under the Companys working
capital facility. The acquisition expanded the Companys
product offerings in the flight simulation market and is
expected to further leverage the Companys assets,
infrastructure and capabilities. The $638,000 purchase price of
V Max exceeded the value of the acquired assets, and therefore
the Company allocated $487,000 to non tax deductible goodwill.
The Company recorded property and equipment of $151,000 and the
value of the intangibles was deemed insignificant.
Inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Raw materials
|
|
$
|
749
|
|
|
$
|
1,431
|
|
Semi finished goods
|
|
|
195
|
|
|
|
115
|
|
Finished goods
|
|
|
27,034
|
|
|
|
15,429
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
27,978
|
|
|
$
|
16,975
|
|
|
|
|
|
|
|
|
|
|
The amount of inventory pledged as collateral totaled
$21,261,000 at March 31, 2011.
|
|
(5)
|
Property
and Equipment
|
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Molds
|
|
$
|
6,162
|
|
|
$
|
6,400
|
|
Computer equipment and software
|
|
|
3,264
|
|
|
|
2,734
|
|
Manufacturing and office equipment
|
|
|
1,128
|
|
|
|
1,013
|
|
Furniture and fixtures
|
|
|
467
|
|
|
|
383
|
|
Leasehold improvements
|
|
|
789
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,810
|
|
|
|
11,153
|
|
Less: Accumulated depreciation and amortization
|
|
|
(7,889
|
)
|
|
|
(7,701
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
3,921
|
|
|
$
|
3,452
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense totaled $1,813,000,
$1,421,000, and $1,262,000 for the years ended March 31,
2011, 2010 and 2009, respectively.
F-15
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(6)
|
Intangible
Assets and Goodwill
|
The Companys acquired intangible assets are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011
|
|
|
March 31, 2010
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
Trademarks
|
|
$
|
8,269
|
|
|
$
|
4,772
|
|
|
$
|
3,497
|
|
|
$
|
5,472
|
|
|
$
|
4,445
|
|
|
$
|
1,027
|
|
Customer relationships
|
|
|
4,179
|
|
|
|
2,070
|
|
|
|
2,109
|
|
|
|
3,199
|
|
|
|
1,415
|
|
|
|
1,784
|
|
Product lines
|
|
|
3,217
|
|
|
|
3,217
|
|
|
|
|
|
|
|
3,194
|
|
|
|
3,187
|
|
|
|
7
|
|
Other
|
|
|
111
|
|
|
|
111
|
|
|
|
|
|
|
|
110
|
|
|
|
100
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
15,776
|
|
|
$
|
10,170
|
|
|
$
|
5,606
|
|
|
$
|
11,975
|
|
|
$
|
9,147
|
|
|
$
|
2,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets was approximately $951,000,
$2,345,000 and $2,931,000 in fiscal 2011, 2010 and 2009,
respectively.
As of March 31, 2011, the future estimated amortization
expense for these acquired intangible assets for the next five
years and thereafter is expected to be as follows (in thousands):
|
|
|
|
|
|
|
Future
|
|
|
|
Amortization
|
|
|
Year ending March 31, 2012
|
|
$
|
961
|
|
Year ending March 31, 2013
|
|
|
954
|
|
Year ending March 31, 2014
|
|
|
749
|
|
Year ending March 31, 2015
|
|
|
429
|
|
Year ending March 31, 2016
|
|
|
429
|
|
Thereafter
|
|
|
2,084
|
|
|
|
|
|
|
|
|
$
|
5,606
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill for the years
ended March 31, 2011 and 2010 are as follows:
|
|
|
|
|
Balance at March 31, 2009
|
|
$
|
8,467
|
|
Translation adjustment
|
|
|
(1
|
)
|
|
|
|
|
|
Balance at March 31, 2010
|
|
|
8,466
|
|
Increase due to Tritton acquisition
|
|
|
1,514
|
|
Increase due to V Max acquisition
|
|
|
487
|
|
Translation adjustment
|
|
|
(4
|
)
|
|
|
|
|
|
Balance at March 31, 2011
|
|
$
|
10,463
|
|
|
|
|
|
|
The accumulated goodwill impairment losses previously recognized
by the Company totaled $27,887,000 at March 31, 2011 and
2010.
The Company has a Credit Facility with Wachovia Capital Finance
Corporation (Central) (Wachovia) to borrow funds
under a revolving line of credit subject to the availability of
eligible collateral (accounts receivable and inventories), which
changes throughout the year. On June 23, 2009, the Company
extended the term of the Credit Facility until October 31,
2012. On September 30, 2010 the Company entered into an
amended agreement 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
F-16
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
agreement totaled $100,000. The line of credit accrues at the
U.S. prime rate plus 2.00% or, at the Companys
option, LIBOR plus 3.50% with a LIBOR floor of 1.50%. At
March 31, 2011 and 2010, the interest rate was 5.3%. The
Company is 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.
(MCI) and by a pledge of all of the capital stock of
the Companys subsidiaries and is guaranteed by the
Company. The Company is required to meet a quarterly financial
covenant based on the Companys trailing four
quarters coverage of fixed charges. The Company was in
compliance with the current fixed charge coverage ratio covenant
as of March 31, 2011 and 2010.
|
|
(8)
|
Convertible
Notes Payable
|
On November 20, 2007, in connection with the acquisition of
its Saitek operations, the Company issued convertible notes with
an aggregate principal amount of $14,500,000 (the Saitek
Notes). On June 24, 2009, the terms of the Saitek
Notes were amended to extend the maturity of the Saitek Notes to
March 31, 2019 with an interest payment of $2,400,000 due
March 31, 2011 and annual principal and interest payments
of $2,400,000 due beginning March 31, 2012 until the Saitek
Notes are retired, and quarterly cash payments for partial
interest in the amount of approximately $45,000. As amended, the
Saitek Notes bore interest at 7.5% through March 31, 2014
and would have accrued interest at 9.0% thereafter. Subsequent
to year end the Company paid the Saitek Notes in full plus all
accrued interest in May 2011.
The Saitek Notes were convertible into Mad Catz Interactive,
Inc. common stock at the exercise price of $1.419 per share. The
conversion price represented a 15% premium to the average
closing share price of the Companys stock over the
preceding 15 trading days prior to execution of the purchase
agreement relating to the Saitek acquisition. If fully
converted, the Notes would have converted into approximately
10,217,744 shares of the Companys common stock. See
also Note 15.
|
|
(9)
|
Stock-Based
Compensation
|
The Companys Amended and Restated Incentive Stock Option
Plan (the Prior Plan) allowed the Company to grant
options to purchase common stock to employees, officers and
directors. In October 2007, the shareholders of the Company
approved the Mad Catz Interactive, Inc., Stock Option
Plan 2007 (the 2007 Plan). As a result,
the 2007 Plan replaced the Prior Plan, and no grants will be
made under the Prior Plan in the future. During fiscal years
2011, 2010 and 2009, no grants were issued from the Prior Plan.
The Prior Plan allowed for a maximum of 6,000,000 shares of
common stock to be issued pursuant to options granted. Options
granted under the Prior Plan before fiscal year 2007 generally
expired five years from the date of grant and generally vested
over a period of two years with one-third vesting immediately.
At March 31, 2011, a total of 1,125,000 options were
outstanding and exercisable under the Prior Plan.
The 2007 Plan allows the Company to grant options to purchase
common stock to employees, officers and directors up to a
maximum of 7,300,000 shares of common stock. Options
granted under the 2007 Plan expire ten years from the date of
grant and generally vest over a period of four years, with the
first 25% vesting on the one-year anniversary of the grant date
and the remainder vesting monthly over the remaining
36 months. At March 31, 2011, a total of 5,312,259
options were outstanding, options to purchase
2,326,530 shares were exercisable, and 989,625 shares
were available for future grant under the 2007 Plan.
F-17
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
A summary of option activity for the years ended March 31,
2011, 2010 and 2009 is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Outstanding, beginning of year
|
|
|
7,575,900
|
|
|
$
|
0.58
|
|
|
|
7,396,275
|
|
|
$
|
0.58
|
|
|
|
3,835,334
|
|
|
$
|
0.80
|
|
Granted
|
|
|
1,475,000
|
|
|
|
0.61
|
|
|
|
725,000
|
|
|
|
0.33
|
|
|
|
3,925,000
|
|
|
|
0.46
|
|
Exercised
|
|
|
(1,772,283
|
)
|
|
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
(125,000
|
)
|
|
|
0.46
|
|
Expired/canceled
|
|
|
(841,358
|
)
|
|
|
0.73
|
|
|
|
(545,375
|
)
|
|
|
0.87
|
|
|
|
(239,059
|
)
|
|
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
6,437,259
|
|
|
$
|
0.58
|
|
|
|
7,575,900
|
|
|
$
|
0.58
|
|
|
|
7,396,275
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
3,451,530
|
|
|
$
|
0.63
|
|
|
|
4,052,873
|
|
|
$
|
0.63
|
|
|
|
2,535,002
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest, end of year
|
|
|
6,215,419
|
|
|
$
|
0.58
|
|
|
|
7,329,288
|
|
|
$
|
0.58
|
|
|
|
7,055,986
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2011, the aggregate intrinsic value of
options outstanding was $10,336,779 and the remaining
contractual term of these options was 7.6 years; the
aggregate intrinsic value of options exercisable was $5,384,802,
and the remaining contractual term of these options was
6.7 years. As of March 31, 2011, the total
unrecognized compensation cost related to unvested options was
$947,194, which is expected to be recognized over a
weighted-average period of 1.54 years.
The weighted average per share fair value of the options granted
during the years ended March 31, 2011, 2010 and 2009 were
$0.41, $0.22 and $0.46, respectively.
The Company estimated the fair value of each stock option grant
on the date of grant using the Black-Scholes model with the
following assumptions for the years ended March 31, 2011,
2010 and 2009:
|
|
|
|
|
|
|
|
|
2011
|
|
2010
|
|
2009
|
|
Assumptions:
|
|
|
|
|
|
|
Expected volatility
|
|
83% - 86%
|
|
85%
|
|
74% - 75%
|
Risk-free interest rate
|
|
1.88% - 2.47%
|
|
2.47%
|
|
2.18% - 3.11%
|
Dividend yield
|
|
|
|
|
|
|
Expected term
|
|
5 years
|
|
5 years
|
|
1 - 5 years
|
The Companys net income for the years ended March 31,
2011, 2010 and 2009 has been reduced by stock-based compensation
expense, net of taxes, of approximately $400,000 , $400,000 and
$300,000, respectively.
F-18
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
Domestic and foreign income (loss) before income taxes and
details of income tax expense (benefit) are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic (U.S.)
|
|
$
|
8,101
|
|
|
$
|
777
|
|
|
$
|
(16,563
|
)
|
Foreign
|
|
|
9,201
|
|
|
|
5,156
|
|
|
|
(13,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,302
|
|
|
$
|
5,933
|
|
|
$
|
(29,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal (U.S.)
|
|
$
|
3,143
|
|
|
$
|
7
|
|
|
$
|
(630
|
)
|
State (U.S.)
|
|
|
824
|
|
|
|
204
|
|
|
|
56
|
|
Foreign
|
|
|
2,110
|
|
|
|
1,200
|
|
|
|
850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
6,077
|
|
|
|
1,411
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal (U.S.)
|
|
|
|
|
|
|
|
|
|
|
2,467
|
|
State (U.S.)
|
|
|
|
|
|
|
|
|
|
|
459
|
|
Foreign
|
|
|
290
|
|
|
|
59
|
|
|
|
(269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
290
|
|
|
|
59
|
|
|
|
2,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
6,367
|
|
|
$
|
1,470
|
|
|
$
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between reported income tax expense (benefit) and
the amount computed by multiplying income (loss) before income
taxes by the Companys applicable Canadian statutory tax
rate of approximately 31%, 33% and 33% for the years ended
March 31, 2011, 2010 and 2009, respectively, is reconciled
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Income tax expense (benefit) using the Companys Canadian
statutory tax rates
|
|
$
|
5,385
|
|
|
$
|
1,940
|
|
|
$
|
(9,906
|
)
|
Income taxed in jurisdictions other than Canada
|
|
|
(477
|
)
|
|
|
(823
|
)
|
|
|
1,468
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
7,511
|
|
Change in valuation allowance
|
|
|
1,118
|
|
|
|
76
|
|
|
|
3,665
|
|
Other
|
|
|
341
|
|
|
|
277
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,367
|
|
|
$
|
1,470
|
|
|
$
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
The sources of significant temporary differences that give rise
to the deferred tax assets and liabilities are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax loss carryforwards
|
|
$
|
10,623
|
|
|
$
|
10,300
|
|
Difference between book and tax basis of inventories
|
|
|
1,015
|
|
|
|
691
|
|
Difference between book and tax basis of accounts receivables
|
|
|
671
|
|
|
|
394
|
|
Deferred fees not currently deductible
|
|
|
147
|
|
|
|
100
|
|
Accruals and reserves not currently deductible
|
|
|
609
|
|
|
|
845
|
|
Difference between book and tax basis of intangible assets,
property & equipment
|
|
|
1,058
|
|
|
|
1,090
|
|
Unclaimed depreciation on property and equipment
|
|
|
253
|
|
|
|
242
|
|
Goodwill and intangibles
|
|
|
1,154
|
|
|
|
500
|
|
Unclaimed scientific research expenditures
|
|
|
237
|
|
|
|
226
|
|
Other
|
|
|
158
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,925
|
|
|
|
14,540
|
|
Less valuation allowance
|
|
|
(13,150
|
)
|
|
|
(13,236
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,775
|
|
|
$
|
1,304
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Federal liability on state tax loss
|
|
$
|
232
|
|
|
$
|
235
|
|
Prepaid liabilities
|
|
|
165
|
|
|
|
139
|
|
Goodwill and intangibles
|
|
|
1,846
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
2,243
|
|
|
$
|
521
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
532
|
|
|
$
|
783
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income in each tax jurisdiction
during the periods in which temporary differences in those
jurisdictions become deductible. Management considers the
scheduled reversal of deferred liabilities, projected future
taxable income, and tax planning strategies in making this
assessment.
With regards to the deferred tax assets of the Companys
Canadian holding company, Mad Catz Interactive, Inc.
(MCII), the Company believes there is insufficient
evidence to conclude that realization of the benefit is more
likely than not and therefore the Company has provided a full
valuation allowance against these assets. MCII is a corporate
entity, which has no revenue or other income, and incurs
corporate-related expenses. Taxable losses are incurred each
year and MCII has a history of operating losses. These
circumstances are not anticipated to change and therefore the
Company does not expect MCII to generate sufficient taxable
income in the foreseeable future to enable the entity to utilize
its tax loss carryforwards. MCI is the Companys main
operating entity and corporate headquarters and also owns the
Mad Catz intellectual property. As MCI has a cumulative three
year pretax book loss as of March 31, 2011, the Company
believes there is not sufficient positive evidence to overcome
this significant piece of negative evidence in order to conclude
that realization of the deferred tax assets are more likely than
not, and therefore continues to record a full valuation
allowance against these assets. Mad Catz UK and Mad Catz France
both have deferred tax assets from a prior acquisition that are
not more likely than not realizable and therefore has recorded a
partial valuation allowance against these assets. MCC, the
Canadian sales office, has generated minimal
F-20
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
pretax book income in recent years, but has a history of losses
in prior years, and is projected to generate minimal taxable
income in future years. It is more likely than not that some of
its net operating losses will expire prior to utilization and
therefore has recorded a partial valuation allowance against
these assets. With regard to Mad Catz Hong Kong and Mad Catz
Germanys deferred tax assets, the Company believes that it
is more likely than not that the results of future operations
will generate sufficient taxable income to realize the deferred
tax assets, and therefore no valuation allowance has been
provided for these assets. These entities have historically
realized pretax book income and taxable income and are projected
to continue to do so for the foreseeable future. The Company
will continue to evaluate the realizability of its net deferred
tax asset on an ongoing basis to identify whether any
significant changes in circumstances or assumptions have
occurred that could materially affect the realizability of
deferred tax assets and expects to release the valuation
allowance when it has sufficient positive evidence, including
but not limited to cumulative earnings in successive recent
periods, to overcome such negative evidence. Accordingly, it is
reasonably possible that all or a portion of the
U.S. valuation allowance could be released in the next
twelve months and the effect could be material to the
Companys consolidated financial statements.
MCI has U.S. federal and California tax carryforwards of
approximately $1.8 million, and $7.7 million,
respectively, which may be carried forward to reduce future
years taxable income. These losses begin to expire in 2023
and 2014 respectively.
Saitek has foreign net operating loss carryforwards of
approximately $14.8 million which may be carried forward
indefinitely. The Internal Revenue Code (the Code)
limits the future availability of net operating loss and tax
credit carryforwards that arose prior to certain cumulative
changes in a corporations ownership resulting in a change
of control. In 2007 when the Company purchased the Saitek group,
it acquired federal and state net operating loss carryforwards
of approximately $2.8 million and $3.6 million,
respectively. This event triggered an ownership change for
purposes of Code Section 382. All of the federal and
$3.6 million of the California net operating losses are
subject to an annual limitation.
The total capital and non-capital income tax losses of MCII and
MCC as of March 31, 2011 of $5.0 million, is based
upon the total tax loss carry-forward amount in Canadian dollars
of $17.4 million, translated into U.S. dollars at the
March 31, 2011 exchange rate (1 Canadian dollar = 1.02828
U.S. dollar) and tax-effected at a 29% estimated rate. The
gross tax loss carryfowards of Cdn.$17.4 million is made up
of (i) MCII non-capital income tax losses of approximately
Cdn.$13.3 million (U.S.$13.6 million), which expire
from 2014 through 2031, (ii) MCII net capital tax losses of
approximately Cdn.$3.2 million (U.S.$3.2 million),
which are available indefinitely to offset taxable capital
gains, and (iii) MCC non-capital income tax losses of
approximately Cdn.$0.5 million (U.S.$0.5 million),
which expire from 2014 through 2015. A full valuation allowance
is provided against the MCII tax losses and a partial valuation
allowance is provided against the MCC tax losses.
MCII does not record deferred income taxes on the undistributed
earnings of its non-Canadian subsidiaries based upon the
Companys intention to permanently reinvest undistributed
earnings. MCII may be subject to income and withholding taxes if
earnings of the non-Canadian subsidiaries were distributed.
There were no unrecognized tax benefits at March 31, 2011
and 2010. The Companys policy is to recognize interest and
penalties related to unrecognized tax benefits in income tax
expense.
The Company is subject to taxation in the U.S. and various
states and foreign jurisdictions.
The Companys historical tax years are subject to
examination by the Internal Revenue Service and various state
jurisdictions for fiscal years ended March 31, 2008 to the
present. With few exceptions, the Company is no longer subject
to foreign examinations by tax authorities for fiscal years
ended before March 31, 2007. Effectively, all of the
Companys Saitek foreign subsidiaries historical tax years
are subject to examination by various foreign tax authorities
due to the generation of net operating losses.
The Company does not foresee any material changes to
unrecognized tax benefits within the next twelve months.
F-21
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(11)
|
Commitments
and Contingencies
|
Litigation
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. Ch. 11 Case
No. 08-35653
(KRH) (Bankr. E.D. Va. 2008 proceeding numbers
10-03763 and
10-03255. On
or about December 23, 2010, 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 complaint alleging 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. Mad Catz answered the complaint denying
all material allegations. The Court has asked MCI and Circuit
City to attempt to resolve the disputes through mediation. It is
anticipated that the mediation will take place sometime in late
July 2011. The Company disputes the allegations of both
complaints and believes the Trusts claims are baseless,
and intends to vigorously defend against all of the
Trustees claims.
While there can be no assurance of favorable outcomes, the
Company believes the claims made by other parties in the
foregoing matters are without merit and will vigorously defend
the actions. The Company has not recorded any accrual for
contingent liabilities associated with the legal proceedings
described above based on the Companys belief that
liabilities, while possible are not probable. The Company is
engaged in other legal actions not described above arising in
the ordinary course of its business, and while there can be no
assurance, believes that the ultimate outcome of these actions
will not have a material adverse effect on its operating
results, liquidity or financial position.
Leases
The Company is obligated under certain non-cancelable operating
leases, primarily for warehouses and office space. Rent expense
for operating leases was approximately $1,668,000, $1,519,000
and $1,624,000 for the years ended March 31, 2011, 2010 and
2009, respectively. Annual future minimum rental payments
required under operating leases as of March 31, 2011 are as
follows (in thousands):
|
|
|
|
|
Year ending March 31:
|
|
|
|
|
2012
|
|
$
|
1,545
|
|
2013
|
|
|
1,270
|
|
2014
|
|
|
1,047
|
|
2015
|
|
|
681
|
|
2016
|
|
|
101
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,644
|
|
|
|
|
|
|
Royalty
and License Agreements
The Company has license agreements to utilize existing design
and utility technology with its products. The Company also has
royalty agreements for use of licensed trademarks and celebrity
endorsements. These agreements have royalty and license fees
based on different percentages of certain types of sales or a
predetermined amount per unit. Royalty and license expenses were
$10,586,000, $6,363,000 and $4,198,000 for the years ended
March 31,
F-22
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
2011, 2010 and 2009, respectively. Annual future minimum
payments required under royalty and license agreements as of
March 31, 2011 are as follows (in thousands):
|
|
|
|
|
Year ending March 31:
|
|
|
|
|
2012
|
|
$
|
714
|
|
2013
|
|
|
110
|
|
|
|
|
|
|
|
|
$
|
824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
|
Employee
Savings Plan
|
MCI has an employee savings plan that permits eligible
participants to make contributions by salary reduction pursuant
to section 401(k) of the Internal Revenue Code. The Company
may make discretionary matches of employee contributions. During
2011, 2010 and 2009 the Company matched 50% of the first 8% of
compensation that was contributed by each participating employee
to the plan. The Companys discretionary contributions to
the plan were $169,000, $154,000 and $139,000 for the years
ended March 31, 2011, 2010 and 2009, respectively.
|
|
(13)
|
Geographic
and Product Line Data
|
The Companys sales are attributed to the following
geographic regions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
107,528
|
|
|
$
|
63,223
|
|
|
$
|
65,003
|
|
Europe
|
|
|
66,834
|
|
|
|
49,005
|
|
|
|
41,442
|
|
Canada
|
|
|
5,547
|
|
|
|
3,109
|
|
|
|
1,974
|
|
Other countries
|
|
|
4,065
|
|
|
|
3,675
|
|
|
|
4,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
183,974
|
|
|
$
|
119,012
|
|
|
$
|
112,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is attributed to geographic regions based on the
location of the customer.
The Companys property and equipment are attributed to the
following geographic regions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,074
|
|
|
$
|
787
|
|
Europe
|
|
|
161
|
|
|
|
160
|
|
Other countries
|
|
|
2,686
|
|
|
|
2,505
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,921
|
|
|
$
|
3,452
|
|
|
|
|
|
|
|
|
|
|
Gross sales by product category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended March 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Specialty Controllers
|
|
$
|
56,499
|
|
|
$
|
31,557
|
|
|
$
|
20,723
|
|
Audio
|
|
|
55,299
|
|
|
|
19,321
|
|
|
|
8,492
|
|
Controllers
|
|
|
30,873
|
|
|
|
36,476
|
|
|
|
29,124
|
|
Accessories
|
|
|
24,291
|
|
|
|
30,865
|
|
|
|
58,982
|
|
Games
|
|
|
23,436
|
|
|
|
1,792
|
|
|
|
1,225
|
|
PC
|
|
|
14,884
|
|
|
|
10,167
|
|
|
|
7,399
|
|
All others
|
|
|
102
|
|
|
|
746
|
|
|
|
2,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
205,384
|
|
|
$
|
130,924
|
|
|
$
|
128,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
MAD CATZ
INTERACTIVE, INC.
Notes to
Consolidated Financial
Statements (Continued)
|
|
(14)
|
Quarterly
Financial and Market Information
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
|
Mar 31
|
|
|
(Amounts in thousands, except per share data)
|
|
Fiscal 2011 Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
19,911
|
|
|
$
|
37,409
|
|
|
$
|
92,957
|
|
|
$
|
33,697
|
|
Gross profit
|
|
|
5,944
|
|
|
|
10,505
|
|
|
|
26,401
|
|
|
|
10,519
|
|
Operating income (loss)
|
|
|
(807
|
)
|
|
|
1,928
|
|
|
|
15,984
|
|
|
|
1,652
|
|
Net income (loss)
|
|
|
(1,375
|
)
|
|
|
1,128
|
|
|
|
9,696
|
|
|
|
1,486
|
|
Net income (loss) per share basic
|
|
|
(0.02
|
)
|
|
|
0.02
|
|
|
|
0.18
|
|
|
|
0.03
|
|
Net income (loss) per share diluted
|
|
|
(0.02
|
)
|
|
|
0.02
|
|
|
|
0.15
|
|
|
|
0.03
|
|
Common stock price per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
0.49
|
|
|
|
0.53
|
|
|
|
1.06
|
|
|
|
2.19
|
|
Low
|
|
|
0.36
|
|
|
|
0.39
|
|
|
|
0.42
|
|
|
|
0.84
|
|
Fiscal 2010 Consolidated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
22,378
|
|
|
$
|
21,603
|
|
|
$
|
48,763
|
|
|
$
|
26,268
|
|
Gross profit
|
|
|
6,623
|
|
|
|
6,757
|
|
|
|
15,941
|
|
|
|
7,075
|
|
Operating income (loss)
|
|
|
41
|
|
|
|
(128
|
)
|
|
|
7,711
|
|
|
|
787
|
|
Net loss
|
|
|
(996
|
)
|
|
|
(971
|
)
|
|
|
5,592
|
|
|
|
838
|
|
Net loss per share basic
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
0.10
|
|
|
|
0.02
|
|
Net loss per share diluted
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
0.09
|
|
|
|
0.02
|
|
Common stock price per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
0.47
|
|
|
|
0.50
|
|
|
|
0.54
|
|
|
|
0.57
|
|
Low
|
|
|
0.22
|
|
|
|
0.24
|
|
|
|
0.32
|
|
|
|
0.33
|
|
In April 2011, the Company entered into a Securities Purchase
Agreement (the Securities Purchase Agreement) with
certain accredited investors, pursuant to which the company
agreed to sell (a) an aggregate of 6,352,293 shares of
its common stock (the Shares) and (b) warrants
to purchase an aggregate of 2,540,918 shares of common
stock of the Company (Warrants and, together with
the Shares, the Securities). The Securities were
issued at a price equal to $1.92 for aggregate gross proceeds of
approximately $12,196,000. The Warrants will be exercisable
after the six month anniversary of the date of issuance at a per
share exercise price equal to $2.56, subject to certain
adjustments as specified in the Warrants, and will remain
exercisable until the fifth anniversary of the initial exercise
date.
On May 5, 2011, the Company repaid all principal and
interest related to the $14,500,000 Saitek notes. The repayment
was partially funded with the net proceeds of the private
financing, which occurred in April 2011.
The Company has evaluated any events or transactions occurring
after March 31, 2011, the balance sheet date, and noted
that there have been no other events or transactions which would
affect our consolidated financial statements for the year ended
March 31, 2011.
F-24