The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and Notes thereto and other
financial information included elsewhere in this Report.
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net revenues........................ $48,262 $55,412 $38,147 $23,332 $13,864
Cost of revenues.................... 16,899 17,897 14,186 8,367 5,323
------- ------- ------- ------- -------
Gross profit........................ 31,363 37,515 23,961 14,965 8,541
------- ------- ------- ------- -------
Operating expenses:
Research and development.......... 12,652 8,416 6,008 3,299 2,440
Acquisition-related charge........ -- 2,232 -- -- --
Sales and marketing............... 16,517 12,843 8,813 5,407 2,591
General and administrative........ 6,747 5,504 4,184 3,225 2,669
------- ------- ------- ------- -------
Total operating expenses............ 35,916 28,995 19,005 11,931 7,700
------- ------- ------- ------- -------
Income (loss) from operations....... (4,553) 8,520 4,956 3,034 841
Interest income..................... 1,640 1,493 226 114 197
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes..... (2,913) 10,013 5,182 3,148 1,038
Provision (benefit) for income
taxes.............................. (1,238) 3,825 1,879 1,021 368
------- ------- ------- ------- -------
Income (loss) from continuing
operations......................... (1,675) 6,188 3,303 2,127 670
------- ------- ------- ------- -------
Discontinued operations:
Loss from discontinued operations
(net of income tax benefit of
$251 in fiscal 1994 and $203 in
fiscal 1993)..................... -- -- -- (376) (600)
Gain on disposal of discontinued
operations (net of income tax
expense of $173 in fiscal 1995).. -- -- 303 -- --
------- ------- ------- ------- -------
Net income (loss)................... $(1,675) $ 6,188 $ 3,606 $ 1,751 $ 70
======= ======= ======= ======= =======
Per share amounts:
Income (loss) from continuing
operations....................... $ (.15) $ .56 $ .37 $ .25 $ .08
======= ======= ======= ======= =======
Net income (loss) per share....... $ (.15) $ .56 $ .40 $ .20 $ .01
======= ======= ======= ======= =======
Shares used in per share
calculations....................... 11,180 11,051 8,915 8,621 8,061
======= ======= ======= ======= =======
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net revenues
1997 DECREASE 1996 INCREASE 1995
------- -------- ------- -------- -------
(IN THOUSANDS)
Net revenues.......................... $48,262 12.9% $55,412 45.3% $38,147
Net revenues include revenues from sales of software products, less
allowances for returns and promotional discounts. Net revenues also include
licensing revenues and royalty advances, provided the Company has completed
all significant performance obligations under the terms of the license
agreement and any amounts paid are nonrefundable. Licensing revenues are
derived from licenses to third parties to develop the Company's products for
use on particular hardware platforms or for certain geographical territories,
and from OEM arrangements.
Although SimCity 2000 remained the Company's best-selling group of products,
the Company experienced decreased revenues from these products from fiscal
1996 to fiscal 1997. SimCity 2000 was initially released for the DOS format in
October 1993. SimCity, SimCity 2000 and related add-on products accounted for
46% of net revenues in fiscal 1997, as compared to 52% in fiscal 1996. During
fiscal 1997, the Company diversified its product offering with titles such as
SimCopter, SimGolf, SimPark and Full Tilt II. However, the Company's two most
significant releases, SimCopter and SimGolf were shipped in mid-November--
relatively late in the holiday buying season. In addition, the Company
originally had planned to release the follow-on product to SimCity 2000 in
March 1997, but subsequently deferred the introduction until fiscal 1998. The
delayed release of these products, as well as others, coupled with a difficult
retail environment and intense competition for retail shelf space resulted in
a significant shortfall in anticipated revenues for fiscal 1997.
The increase in net revenues from fiscal 1995 to fiscal 1996 was due
primarily to demand for the Company's products, especially the Sim family of
products. Maxis' top three selling products for fiscal 1996 were SimCity 2000,
SimTower and SimIsle. SimCity, SimCity 2000 and related add-on products
accounted for 52% of fiscal 1996 net revenues. During fiscal 1995, the same
family of products accounted for 59% of net revenues. SimTown was the
Company's best-selling product in its learning line, a segment that grew to
18% of net revenues in fiscal 1996, from 11% in fiscal 1995. During fiscal
1996, the Company's product releases included SimCity 2000 Special Edition,
SimIsle, SimTower for Windows, SimTown for Windows and Full Tilt! Pinball, as
well as several affiliate partner products.
International revenues, including foreign licensing, comprised 33% of total
net revenues in fiscal 1997, as compared to 20% in fiscal 1996. The increase
was driven primarily by the March 1997 release of Kick Off '97 in Europe.
During fiscal 1996, international expansion also contributed to overall
revenue growth with international sales reaching 20% of net revenues in fiscal
1996, an increase from 15% of net revenues in fiscal 1995. Major territories
contributing to the Company's international growth were Japan and Europe.
During fiscal 1998, the Company expects that international revenues will
increase in absolute dollars. A portion of the Company's international sales
are denominated in foreign currencies and, accordingly, the Company is subject
to foreign currency exchange risk.
Affiliate partner sales were 7%, 10%, and 11% of net revenues in fiscal
1997, 1996 and 1995, respectively. The Company recently evaluated the market
for its affiliate products and recognized that many affiliates do not have the
necessary resources to support their product lines in light of the increasing
competition for retail space. Consequently, the Company decided to
significantly scale down its affiliate label program, and therefore expects a
significantly reduced revenue contribution from affiliate products in fiscal
1998.
The Company's cost of revenues includes all costs of media, manuals,
duplication, packaging materials, assembly and freight. In addition, royalties
are included in cost of revenues. The Company's gross profit is affected by the
mix of sales among products that are developed or licensed by Maxis and
affiliate partner products that are developed by third parties and distributed
by the Company. Gross profit and operating expenses are significantly lower for
affiliate partner products because the Company's services are generally limited
to sales, distribution and related functions.
The decrease in gross profit percentage from fiscal 1996 to fiscal 1997 was
due to several factors. During fiscal 1997, the Company derived a higher
percentage of net revenues from game console products, due primarily to sales
of SimCity 2000 for the PlayStation. The percentage of revenues from game
consoles was 13% in fiscal 1997, as compared to 3% in fiscal 1996. Cost of
goods sold generally is higher for game console products than for PC-based
Maxis products. Also, during the third quarter of fiscal 1997, the Company
commenced shipments in Germany under a new distribution arrangement. The
arrangement requires payment of fixed selling/distribution fees and customer
discounts, generally resulting in lower gross margins. In addition, the Company
experienced lower average selling prices because of an increase in the
percentage of revenues from sales of Maxis' lower-priced Collector's Series
products and lower average selling prices for some of its older products.
Finally, the Company included sales premiums in its initial shipments of four
Sim-branded titles released in the third quarter of 1997, thereby increasing
the cost of goods sold for these products.
The increase in gross profit percentage from fiscal 1995 to fiscal 1996 was
primarily due to a greater mix of products with lower royalty rates.
The Company's gross profit percentage has fluctuated significantly on a
quarterly basis. During fiscal 1997, the gross profit percentage ranged from
55.5% in the second fiscal quarter to 73.9% in the fourth fiscal quarter.
Quarterly gross profit is affected by the mix of sales among products that are
developed or licensed by Maxis and affiliate partner products that are
developed by third parties and distributed by the Company, as well as other
factors. During fiscal 1998, the Company expects gross profit to continue to
fluctuate on a quarterly basis and further expects significantly lower gross
profit in the first and second fiscal quarters relative to the third and fourth
fiscal quarters, due primarily to the expected timing of certain Maxis-
published product releases.
Operating expenses
1997 INCREASE 1996 INCREASE 1995
------- -------- ------- -------- ------
(DOLLARS IN THOUSANDS)
Research and development............ $12,652 50.3% $ 8,416 40.1% $6,008
Percentage of net revenues.......... 26.2% 15.2% 15.7%
Acquisition-related charge.......... -- n/a $ 2,232 100% --
Percentage of net revenues.......... -- 4.0% --
Sales and marketing................. $16,517 28.6% $12,843 45.7% $8,813
Percentage of net revenues.......... 34.2% 23.2% 23.1%
General and administrative.......... $ 6,747 22.6% $ 5,504 31.5% $4,184
Percentage of net revenues.......... 14.0% 9.9% 11.0%
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel and
equipment costs required to conduct the Company's development efforts and to
fund third party software development costs. Third party software
13
development costs include advanced product development payments, which are
expensed as paid. The Company believes that significant investments in research
and development are required to remain competitive and has therefore
consistently increased the absolute amount of spending for research and
development. Research and development expense as a percentage of net revenue
increased from fiscal 1996 to fiscal 1997 due primarily to added expenses
incurred for the development of new products and additional personnel and
related costs, as well as relatively lower net revenues in fiscal 1997. Also,
operating costs related to Cinematronics LLC were included in the Company's
results of operations for all of fiscal 1997. There were no such costs prior to
fiscal 1997 because the Company acquired Cinematronics LLC in March 1996.
Research and development expenses as a percentage of net revenues for fiscal
1996 as compared to fiscal 1995 remained relatively unchanged. During fiscal
1998, the Company intends to continue its investment in research and
development and therefore expects these expenses to increase in absolute
dollars.
Research and development expenditures are charged to operations as incurred.
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon completion
of a working model. Costs incurred by the Company between completion of the
working model and the point at which the product is ready for general release
have been insignificant.
ACQUISITION OF CINEMATRONICS LLC
In March 1996 the Company acquired for cash Cinematronics LLC, an independent
developer of entertainment software based in Austin, Texas. The business
combination was recorded as a purchase for accounting purposes. In connection
therewith, the Company recorded a nonrecurring acquisition-related charge of
approximately $2.2 million for acquired in-process technology.
SALES AND MARKETING
Sales and marketing expenses, which include customer support services,
increased significantly in absolute dollars primarily due to expansion of the
Company's domestic and European sales and marketing organizations. Also, during
the first quarter of fiscal 1997, the Company opened a sales, marketing and
development office in Tokyo, Japan. There were no comparable costs prior to
fiscal 1997. In addition, the Company increased expenditures for product
advertising, trade shows and marketing programs with customers. Sales and
marketing expenses as a percentage of net revenue increased from fiscal 1996 to
fiscal 1997 due to relatively lower net revenues in fiscal 1997. From fiscal
1995 to fiscal 1996, sales and marketing expenses as a percentage of revenues
remained relatively unchanged.
Competition for retail shelf space is extremely competitive, as well as
increasingly costly. Therefore, in order to continue to distinguish the Company
and its products in the marketplace, the Company expects to continue aggressive
marketing and sales programs. Consequently, the Company expects marketing and
sales expenses to continue to increase in absolute dollars.
GENERAL AND ADMINISTRATIVE
General and administrative expenses have increased in absolute dollars each
year primarily due to increased staffing and related costs necessary to support
the Company's operations. General and administrative expenses as a percentage
of net revenues increased from fiscal 1996 to fiscal 1997 due to relatively
lower net revenues in fiscal 1997. In addition, the Company incurred bad debt
expenses related to the bankruptcies of two of its large customers in fiscal
1997. Excluding the bankruptcy-related charges and costs associated with the
Merger, the Company expects the level of general and administrative expenses to
increase slightly in absolute dollars in fiscal 1998, as compared to fiscal
1997.
14
Interest income
1997 INCREASE 1996 INCREASE 1995
------ -------- ------ -------- ----
(DOLLARS IN THOUSANDS)
Interest Income......................... $1,640 9.8% $1,493 560.6% $226
Percentage of Net Revenues.............. 3.4% 2.7% 0.6%
Interest income increased in absolute dollars and as a percentage of net
revenues due to higher average invested cash balances and relatively lower net
revenues in fiscal 1997. The significant increase in interest income from
fiscal 1995 to fiscal 1996 was due to cash received in the Company's June 1995
initial public offering.
Provision (benefit) for income taxes
1997 CHANGE 1996 INCREASE 1995
------- ------ ------ -------- ------
(DOLLARS IN THOUSANDS)
Provision (Benefit) for Income
Taxes............................... $(1,238) 132.4% $3,825 103.6% $1,879
Effective Income Tax Rate............ (42)% 38% 36%
The year-to-year fluctuations in the provision for income taxes and the
effective income tax rate reflect the Company's income growth in 1996 and
adjustments to the valuation allowance for deferred tax assets in 1995. The
effective annual income tax benefit rate of 42% in fiscal 1997 is due to the
high level of tax-exempt interest income relative to pretax income. In fiscal
year 1998, the Company expects its effective annual income tax rate to be
approximately 38%. See Note 5 to Consolidated Financial Statements.
DISCONTINUED OPERATIONS
During fiscal 1994, the Company discontinued certain unprofitable operations
related to the development of software for commercial purposes that had been
initiated in fiscal 1993. In connection with the discontinuance of these
activities, the Company incurred net losses of $600,000 and $376,000 for fiscal
1993 and fiscal 1994, respectively, and a net gain on disposal of the related
assets of $303,000 in fiscal 1995. See Note 9 to Consolidated Financial
Statements.
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (SFAS No. 128), which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of common stock equivalents will be excluded. The impact is
expected to result in an increase in primary earnings per share of $0.03 for
the fiscal year ended March 31, 1996. There is no impact expected for the
fiscal years ended March 31, 1997 and 1995. The impact of SFAS No. 128 on the
calculation of fully diluted earnings per share for these years is not expected
to be material.
LIQUIDITY AND CAPITAL RESOURCES
On June 1, 1995, the Company consummated an initial public offering of
3,450,000 shares of common stock, of which 2,450,000 were sold by the Company.
The Company raised approximately $35,500,000 net of expenses. As of March 31,
1997, the Company's principal sources of liquidity included cash and short-term
investments of $38.0 million and longer-term investments totaling approximately
$10.3 million, generally maturing one to two years from purchase. The Company's
cash and investments are available to meet seasonal working capital
requirements. Seasonally higher revenues during the year-end holiday buying
season generally result in increased accounts receivable and working capital
during the fourth calendar quarter.
15
The Company uses its working capital to finance ongoing operations, fund the
development and introduction of new products and acquire capital equipment.
The Company's operating activities used cash of $0.6 million in fiscal 1997
and provided cash of $8.1 million and $5.2 million in fiscal 1996 and 1995,
respectively.
In June 1995, the Company entered into a seven-year lease, commencing in
September 1995, for new office space to house its corporate headquarters. The
lease agreement and related amendments provide for monthly payments beginning
at $75,000 and escalating to $96,000 during the term of the lease. The Company
may shorten the term of the lease to five years and six months in exchange for
a one-time payment equal to three months' rent. During fiscal 1998, the
Company expects to incur approximately $1.3 million in capital expenditures.
From time to time, the Company evaluates acquisitions of businesses, products
or technologies that complement the business of Maxis, such as the acquisition
of Cinematronics LLC. The Company has no present understandings, commitments
or agreements with respect to any material acquisitions of other businesses,
products or technologies. Any such transactions, if consummated, may use a
portion of the Company's working capital or require the issuance of equity.
The Company believes that existing working capital and cash from operations
will satisfy its liquidity and capital requirements for at least the next
year.
RISK FACTORS AFFECTING FUTURE EARNINGS AND STOCK PRICE
Preceding sections of this Report contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934, including, but not limited to, statements
regarding the Company's potential for future success, the revenue potential of
international markets and game consoles, gross profit and net income on a
quarterly basis, the level of affiliated product revenues, research and
development expenses, sales and marketing expenses, general and administrative
expenses, the anticipated effective income tax rate, future capital
expenditures and the Company's ability to satisfy its liquidity and working
capital requirements of the next year. Actual results could differ materially
from those projected in the forward-looking statements as a result of the risk
factors set forth below and elsewhere in this Report .
The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results due to a variety of factors,
including the size and rate of growth of the consumer software market, market
acceptance of the Company's products and those of its competitors, development
and promotional expenses relating to the introduction of new products or new
versions of existing products, seasonality, projected and actual changes in
computing platforms, the timing and success of product introductions, product
returns, changes in pricing policies by the Company or its competitors, the
accuracy of retailers' forecasts of consumer demand, the timing of orders from
major customers and order cancellations.
The Company's operating results also may fluctuate significantly due to
changes in product plans or delays in completing and shipping products. For
example, in July 1996 the Company discontinued the development of The
Mindwarp, an action game scheduled to ship during fiscal 1997. In connection
with this decision, the Company closed its Utah development office. In mid-
November 1996, the Company released SimCopter approximately one month later
than originally planned. Due to the importance of the holiday buying season,
the delay in shipping SimCopter resulted in a significant shortfall in the
Company's anticipated revenues for the quarter and fiscal year. Such risks
apply to all of the Company's products under development.
SimCity, its successor Sim City 2000 and related add-on products represented
46% of net revenues of Maxis for fiscal 1997 and 52% of net revenues for
fiscal 1996. Maxis originally planned to release, the follow on product to
SimCity 2000, in March 1997, but has deferred the introduction until fiscal
1998. Failure to ship SimCity 3000 for the calendar 1997 holiday season would
have a material adverse effect on the operating results of Maxis during the
current fiscal year and, in particular, the third fiscal quarter.
16
Sales to a limited number of distributors and retailers have constituted and
are anticipated to continue to constitute a substantial majority of the
Company's net revenues. The loss of, or significant reduction in, sales
attributable to any of the Company's principal distributors or retailers could
materially adversely affect the Company's business, operating results and
financial condition. Distribution and retailing businesses in the computer
industry from time to time have experienced significant fluctuations in their
businesses and there have been a number of business failures among such
entities. For example, NeoStar, a retailer with over 650 retail stores, filed
for Chapter 11 bankruptcy in September 1996. In connection with this event,
the Company incurred expenses for bad debt of $1,031,000 in fiscal 1997.
Although the Company performs periodic credit evaluations of its customers,
the insolvency or business failure of any significant distributor or retailer
of the Company's products could have a material adverse effect on the
Company's business, operating results and financial condition.
The consumer software business is highly seasonal. Net revenues typically
are significantly higher during the third fiscal quarter, due primarily to the
increased demand for consumer software during the calendar year-end holiday
buying season. Net revenues in other quarters generally are lower and vary
significantly as a result of new product introductions and other factors. The
Company expects its net revenues and operating results to continue to reflect
significant seasonality. There can be no assurance that the Company will
achieve consistent profitability on a quarterly or annual basis.
The Company's success depends on the timely introduction of successful new
products to replace declining revenues from older products. In response to
competitive pressures Maxis may take certain pricing and/or marketing actions.
The Company has in the past, and will likely in the future, reduce the price
of older products and offer promotions to extend the life cycle of its
products. Such actions could materially adversely affect the Company's
business, operating results and financial condition. The Company may be
required to pay fees in advance or to guarantee royalties, which may be
substantial, to obtain licenses to intellectual properties from third parties
before products incorporating such properties have been introduced or have
achieved market acceptance.
Products generally are shipped as orders are received, and accordingly the
Company operates with little backlog. The Company's expense levels are based,
in part, on its expectations regarding future sales and, as a result,
operating results would be disproportionately adversely affected by a decrease
in sales or a failure to meet the Company's sales expectations. Defective
products may result in higher customer support costs and product returns.
The Company's gross profit is affected by the mix of sales among products
that are developed or licensed by the Company and products that are developed
by third party affiliate partners and distributed by the Company. Gross profit
and operating expenses are significantly lower on affiliate partner products
because the Company's services with respect to such products generally are
limited to sales, distribution and related functions. The Company evaluated
the market for affiliate products and, effective in fiscal 1998, decided to
scale down its affiliate program. The Company consequently terminated all but
one of its affiliate partners. While the Company is contractually obligated to
distribute products for terminated affiliates until December 31, 1997, certain
affiliates may elect to discontinue their business with Maxis sooner. Because
of this change in its affiliate program, the Company expects a substantially
reduced amount of net revenues from affiliate products in fiscal 1998.
The market price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results as well as other factors, such as announcements of new products by the
Company or its competitors and changes in financial estimates by securities
analysts or other events. The extreme volatility of the stock market has
particularly affected the market prices of equity securities of many high
technology companies and prices have often been disproportionate to the
operating performance of such companies. Broad market fluctuations, as well as
economic conditions in general and in the software industry in particular, may
adversely affect the market price of the Company's Common Stock.
17
The announcement of the Merger of Maxis with Electronic Arts may increase the
likelihood of a number of changes to Maxis' business, any of which could have a
material adverse effect. Such changes include, but are not limited to: loss of
key management, development or other personnel; deterioration of customer
relationships; returns of product in excess of normal returns; reduction or
cessation of orders for products, or cancellation of agreements by distributors
of the Maxis product line, certain of which have already communicated their
intention to take all or some of such actions; confusion of potential buyers of
Maxis products; and delays in product development and diminution of the Sim
brand. If the Merger were not completed for any reason, Maxis could be
materially adversely affected by such changes, and restoring the Maxis business
to its pre-announcement value could require a substantial period of time,
require significant expenditures or prove impossible. As a result of the
factors described above, the failure to consummate the Merger for any reason
could have a material adverse effect on the Company's business, operating
results, financial condition and stock trading price.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Maxis, Inc.
We have audited the accompanying consolidated balance sheets of Maxis, Inc.
at March 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Maxis, Inc. at March 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Walnut Creek, California
May 5, 1997, except for Note
14 as to which the date is
June 4, 1997
19
MAXIS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31,
----------------
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents.................................. $16,387 $20,102
Marketable securities...................................... 21,658 22,788
Accounts receivable, less allowances for returns and
doubtful accounts of $7,782 in 1997 and $5,607 in 1996.... 7,888 6,991
Inventories................................................ 2,026 1,543
Income taxes refundable.................................... 1,134 227
Deferred income taxes...................................... 2,249 2,808
Other current assets....................................... 715 872
------- -------
Total current assets......................................... 52,057 55,331
Long-term marketable securities.............................. 10,278 6,119
Furniture and equipment, net................................. 4,630 3,243
Deferred income taxes........................................ 1,991 2,023
Other assets................................................. 373 584
------- -------
Total assets................................................. $69,329 $67,300
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,890 $ 1,607
Payable to affiliate partners.............................. 537 631
Royalties payable.......................................... 1,214 1,373
Accrued compensation....................................... 1,471 1,685
Accrued advertising........................................ 1,480 1,538
Other accrued liabilities.................................. 3,692 2,585
Accrued rent............................................... 514 647
------- -------
Total current liabilities.................................... 10,798 10,066
------- -------
Commitments
Stockholders' equity:
Common stock, $.0001 par value; authorized shares,
40,000,000; issued and outstanding, 11,250,438 in 1997 and
10,989,906 in 1996........................................ 53,271 50,514
Notes receivable from stockholders......................... (161) (269)
Deferred compensation...................................... (32) (139)
Retained earnings.......................................... 5,453 7,128
------- -------
Total stockholders' equity................................... 58,531 57,234
------- -------
Total liabilities and stockholders' equity................... $69,329 $67,300
======= =======
See accompanying notes.
20
MAXIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
------------------------
1997 1996 1995
------- ------- -------
Net revenues.......................................... $48,262 $55,412 $38,147
Cost of revenues...................................... 16,899 17,897 14,186
------- ------- -------
Gross profit.......................................... 31,363 37,515 23,961
------- ------- -------
Operating expenses:
Research and development............................ 12,652 8,416 6,008
Acquisition-related charge.......................... -- 2,232 --
Sales and marketing................................. 16,517 12,843 8,813
General and administrative.......................... 6,747 5,504 4,184
------- ------- -------
Total operating expenses.............................. 35,916 28,995 19,005
------- ------- -------
Income (loss) from operations......................... (4,553) 8,520 4,956
Interest income....................................... 1,640 1,493 226
------- ------- -------
Income (loss) from continuing operations before income
taxes................................................ (2,913) 10,013 5,182
Provision (benefit) for income taxes.................. (1,238) 3,825 1,879
------- ------- -------
Income (loss) from continuing operations.............. (1,675) 6,188 3,303
Discontinued operations:
Gain on disposal of discontinued operations (net of
income tax expense of $173)........................ -- -- 303
------- ------- -------
Net income (loss)..................................... $(1,675) $ 6,188 $ 3,606
======= ======= =======
Per share amounts:
Income (loss) from continuing operations............ $ (.15) $ .56 $ .37
======= ======= =======
Net income (loss) per share......................... $ (.15) $ .56 $ .40
======= ======= =======
Shares used in per share calculations................. 11,180 11,051 8,915
======= ======= =======
See accompanying notes.
21
MAXIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS)
NOTES
COMMON STOCK RECEIVABLE RETAINED TOTAL
--------------- FROM EARNINGS DEFERRED STOCKHOLDERS'
SHARES AMOUNT STOCKHOLDERS (DEFICIT) COMPENSATION EQUITY
------ ------- ------------ --------- ------------ -------------
Balances at March 31,
1994................... 5,806 $ 944 $(118) $(2,065) $ -- $(1,239)
Common stock options
exercised............. 115 89 -- -- -- 89
Issuance of common
stock for notes
receivable............ 410 303 (303) -- -- --
Repurchase of common
stock................. (21) (10) 6 -- -- (4)
Deferred compensation
resulting from grant
of options............ -- 940 -- -- (940) --
Amortization of
deferred
compensation.......... -- -- -- -- 450 450
Net income............. -- -- -- 3,606 -- 3,606
Accretion of preferred
stock................. -- -- -- (514) -- (514)
------ ------- ----- ------- ----- -------
Balances at March 31,
1995................... 6,310 2,266 (415) 1,027 (490) 2,388
Accretion of preferred
stock................. -- -- -- (87) -- (87)
Conversion of preferred
stock into common
stock................. 2,094 11,449 -- -- -- 11,449
Issuance of common
stock in initial
public offering, net
of issuance costs..... 2,450 35,508 -- -- -- 35,508
Common stock issued
under stock option and
stock purchase plans.. 153 406 -- -- -- 406
Tax benefits resulting
from employee stock
transactions.......... -- 897 -- -- -- 897
Repurchases of common
stock................. (17) (12) -- -- -- (12)
Repayment of notes
receivable............ -- -- 146 -- -- 146
Net income............. -- -- -- 6,188 -- 6,188
Amortization of
deferred
compensation.......... -- -- -- -- 351 351
------ ------- ----- ------- ----- -------
Balances at March 31,
1996................... 10,990 50,514 (269) 7,128 (139) 57,234
Common stock issued
under stock option and
stock purchase plans.. 280 807 -- -- -- 807
Tax benefits resulting
from employee stock
transactions.......... -- 1,968 -- -- -- 1,968
Repurchases of common
stock................. (20) (11) -- -- -- (11)
Repayment of notes
receivable............ -- (7) 108 -- -- 101
Net loss............... -- -- -- (1,675) -- (1,675)
Amortization of
deferred
compensation.......... -- -- -- -- 107 107
------ ------- ----- ------- ----- -------
Balances at March 31,
1997................... 11,250 $53,271 $(161) $ 5,453 $ (32) $58,531
====== ======= ===== ======= ===== =======
See accompanying notes.
22
MAXIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
1997 1996 1995
------- -------- -------
OPERATING ACTIVITIES
Net Income (loss)................................. $(1,675) $ 6,188 $ 3,606
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for returns and doubtful accounts..... 2,175 2,696 930
Depreciation.................................... 1,525 991 572
Acquisition-related charge...................... -- 2,232 --
Deferred income taxes........................... 591 (1,950) (1,765)
Gain on disposal of discontinued operations..... -- -- (303)
Amortization of deferred compensation........... 107 351 450
Changes in operating assets and liabilities:
Accounts receivable............................. (3,072) (5,914) 1,558
Inventories..................................... (483) 148 (582)
Income taxes refundable......................... (907) (354) (908)
Other current assets............................ 157 (509) (275)
Other assets.................................... 211 (576) 244
Accounts payable................................ 283 189 905
Payable to affiliate partners................... (94) 445 (311)
Royalties payable............................... (159) 162 92
Accrued compensation............................ (214) 514 551
Accrued advertising............................. (58) 839 327
Other accrued liabilities....................... 974 2,653 107
------- -------- -------
Net cash provided by (used in) operating
activities....................................... (639) 8,105 5,198
INVESTING ACTIVITIES
Purchases of held-to-maturity securities.......... (23,627) (24,989) (7,280)
Maturities of held-to-maturity securities......... 20,598 5,183 7,162
Purchases of available-for-sale securities........ -- (9,000) (3,424)
Maturities of available-for-sale securities....... -- 5,944 1,481
Additions to furniture and equipment.............. (2,912) (2,354) (1,560)
Net cash paid for acquisition..................... -- (2,342) --
------- -------- -------
Net cash used in investing activities............. (5,941) (27,558) (3,621)
FINANCING ACTIVITIES
Repayment of notes receivable from shareholders... 101 146 --
Proceeds from issuance of common stock............ -- 35,508 --
Proceeds from issuance of ESPP stock.............. 599 302 --
Repurchase of common stock........................ (11) (12) (4)
Proceeds from exercise of options................. 208 104 89
Tax benefit from exercise of stock options........ 1,968 897 --
------- -------- -------
Net cash provided by financing activities......... 2,865 36,945 85
Net increase (decrease) in cash and cash
equivalents...................................... (3,715) 17,492 1,662
Cash and cash equivalents at beginning of year.... 20,102 2,610 948
------- -------- -------
Cash and cash equivalents at end of year.......... $16,387 $ 20,102 $ 2,610
======= ======== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Accretion of preferred stock.................... $ -- $ 87 $ 514
Conversion of preferred stock to common stock... $ -- $ 11,449 $ --
Issuance of common stock for notes receivable... $ -- $ -- $ 303
Repurchase of common stock in exchange for
reduction of notes receivable.................. $ -- $ -- $ (6)
Forgiveness of note receivable from
stockholder.................................... $ (8) $ -- $ --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income tax payments............................. $ 434 $ 5,232 $ 4,809
See accompanying notes.
23
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. MAXIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
COMPANY
Maxis, Inc. ("Maxis" or the "Company"), a Delaware corporation, develops,
publishes and markets entertainment software for personal computers and 32-bit
game consoles. The Company currently sells its software products, including
affiliate partner products, in North America through software distributors,
major computer and software retailing organizations, consumer electronics
stores, discount warehouse stores and mail order companies. Internationally,
the Company sells its products through a combination of distribution, direct
retail and licensing arrangements.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
The Company translates the accounts of its foreign subsidiaries using the
local foreign currency as the functional currency. The assets and liabilities
of foreign subsidiaries are translated into U.S. dollars using current
exchange rates. Gains and losses from this translation have not been material.
Foreign currency transaction gains and losses, which have not been material,
are included in the consolidated statements of operations.
REVENUE RECOGNITION
Product sales
Revenue from product sales is recognized upon shipment of product to the
customer, net of appropriate allowances for returns, provided that no
significant vendor obligations remain and collection is deemed probable. Costs
associated with certain post-sales customer obligations are accrued.
Software licenses
Software license revenue and royalty advances are recognized as revenue at
the time the Company has completed all significant performance obligations
under the terms of the license agreement and any amounts paid are
nonrefundable. Amounts received prior to revenue recognition are recorded as
deferred revenue. Continuing royalties received under the terms of licensing
agreements are recognized as revenue when the amount of royalties is
determinable. Revenue from software license agreements totaled $4,569,000,
$5,479,000 and $2,643,000 for the fiscal years ended March 31, 1997, 1996 and
1995, respectively.
MAJOR CUSTOMERS
Net revenues from sales to one customer accounted for 10% of net revenues
for the fiscal year ended March 31, 1997. Net revenues from sales to three
major customers accounted for 12%, 11%, and 10% of net revenues for the fiscal
year ended March 31, 1996. Net revenues from sales to one customer accounted
for 19% of net revenues for the fiscal year ended March 31, 1995.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid short-term cash
investments with original maturities of three months or less.
24
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARKETABLE SECURITIES
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of its debt and equity securities at the time of
purchase and reevaluates such designation as of each balance sheet date. Debt
securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Debt
securities classified as held-to-maturity are carried at amortized cost, which
is adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in interest income. Debt securities,
not classified as held-to-maturity, are classified as available-for-sale and
are carried at amounts which approximate fair value. Realized gains and losses
during fiscal 1997 and 1996 on available-for-sale securities were not
material.
ACCOUNTS RECEIVABLE
The Company's accounts receivable are principally from distributors and
retailers of the Company's products. Accounts receivable are recorded net of
allowances for potential credit losses ($1,794,000 and $564,000 at March 31,
1997 and 1996, respectively) and sales returns ($5,988,000 and $5,043,000 at
March 31, 1997 and 1996, respectively). The Company performs periodic credit
evaluations of its customers and generally does not require collateral. Actual
credit losses and sales returns may differ from the Company's estimates, and
such differences could be material to the financial statements.
INVENTORIES
Inventories are valued at the lower of standard cost, which approximates
cost, determined using the first-in, first-out method, or market. The Company
evaluates the quantities on hand relative to current selling prices and
historical and forecasted sales volume. Based on these evaluations, provisions
are made to write inventories down to net realizable value.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets which
range from three to seven years.
CAPITALIZED SOFTWARE COSTS
Financial accounting standards provide for the capitalization of certain
software development costs after technological feasibility of the software is
established. No such costs have been capitalized because the impact on the
financial statements would be immaterial.
ROYALTIES EXPENSE
Royalties are recognized as cost of revenues based on actual net product
sales or software license revenue. Royalty costs, which are included in cost
of revenues, were $2,058,000, $3,291,000 and $2,304,000 in fiscal 1997, 1996
and 1995, respectively. Royalties paid to a director and stockholder of the
Company, who is the developer of some of Maxis' software products, totaled
$214,000, $243,000 and $323,000 in fiscal 1997, 1996 and 1995, respectively.
INCOME TAXES
The Company accounts for income taxes using the liability method required by
statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes reflect the net tax
25
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
PER SHARE DATA
Per share data is based on the weighted average number of common shares and
dilutive common stock equivalents outstanding for the period. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 83,
options to purchase common stock (using the treasury stock method) granted by
the Company during the 12 months immediately preceding the initial public
offering date have been included in the calculation of weighted average number
of common shares outstanding as if the underlying shares were outstanding for
the year ended March 31, 1995.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and in the year ended March 31, 1997, has adopted the "disclosure
only" alternative described in Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123).
RECENTLY ISSUED ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share (SFAS No. 128), which is required to be adopted
for the Company's fiscal year ended March 31, 1998. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of common stock
equivalents will be excluded. The impact is expected to result in an increase
in primary earnings per share of $0.03 for the fiscal year ended March 31,
1996. There is no impact expected for the fiscal years ended March 31, 1997
and 1995. The impact of SFAS No. 128 on the calculation of fully diluted
earnings per share for these years is not expected to be material.
26
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. MARKETABLE SECURITIES
At March 31, 1997, the Company's held-to-maturity and available-for-sale
debt securities consist of the following (in thousands):
Such debt securities have been recorded as cash and cash equivalents
($7,237,000), short-term marketable securities ($21,658,000) and long-term
marketable securities ($10,278,000). The contractual maturities of held-to-
maturity and available-for-sale debt securities at March 31, 1997, are all two
years or less. For all periods presented, realized gains and losses on
available-for-sale securities were not material.
3. INVENTORIES
Inventories consist primarily of software media, manuals and related
packaging materials as follows (in thousands):
MARCH 31,
-------------
1997 1996
------ ------
Raw materials and work-in process............................. $1,008 $ 356
Finished goods................................................ 1,018 1,187
------ ------
$2,026 $1,543
====== ======
4. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows (in thousands):
YEARS ENDED MARCH 31,
-------------------------
1997 1996 1995
------- ------- -------
Current:
Federal......................................... $(2,373) $ 4,006 $ 2,753
State........................................... 189 1,347 876
Foreign......................................... 355 422 188
------- ------- -------
Total current..................................... (1,829) 5,775 3,817
Deferred:
Federal......................................... 967 (1,540) (964)
State........................................... (376) (410) (296)
Effect of valuation allowance adjustment........ -- -- (505)
------- ------- -------
Total deferred.................................... 591 (1,950) (1,765)
------- ------- -------
Total current and deferred provision (benefit).... $(1,238) $ 3,825 $ 2,052
======= ======= =======
The reconciliation of income taxes attributable to income (loss) from
continuing operations computed at the U.S. federal statutory tax rates to the
effective tax rate of the provision (benefit) for income taxes is as follows:
YEARS ENDED MARCH 31,
----------------------------
1997 1996 1995
------- ------- -------
Tax at U.S. statutory rates................... (35)% 35% 34%
State income taxes............................ (4) 6 7
Tax exempt interest........................... (17) (4) --
Foreign taxes................................. 13 -- --
Other......................................... 1 1 4
Effect of valuation allowance adjustment...... -- -- (9)
------- ------- -------
(42)% 38% 36%
======= ======= =======
Significant components of the Company's deferred tax assets are as follows
(in thousands):
MARCH 31,
--------------
1997 1996
------ ------
Reserve for returns and doubtful accounts..................... $2,307 $2,386
Expenses not currently deductible for income tax purposes..... 740 981
Depreciation.................................................. 748 1,022
Other......................................................... (41) 442
Net operating loss carryforward............................... 486 --
------ ------
Total deferred tax assets..................................... $4,240 $4,831
====== ======
The Company has state net operating loss carryforward of $5,225,000 which
expire in the year 2002.
28
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
In April 1995, the Company was reincorporated in the State of Delaware. As
part of this reincorporation, each outstanding share of the former California
corporation no par common stock was converted to one share of Delaware
corporation $.0001 par value common stock and each share of the former
California corporation no par preferred stock was converted to two shares of
the Delaware corporation $.0001 par value preferred stock. All preferred
shares and per share information has been restated to reflect the effect of
the conversion.
On June 1, 1995, the Company consummated an initial public offering of
3,450,000 shares of common stock that raised approximately $35.5 million, net
of expenses. Of the 3,450,000 shares of common stock, 2,450,000 shares were
sold by the Company and 1,000,000 shares were sold by selling stockholders.
1993 STOCK OPTION PLAN
In June 1993, the Company established a stock option plan ("1993 Plan")
under which incentive and nonqualified stock options may be granted to
employees, directors and consultants of the Company to purchase up to
1,854,000 shares of common stock. The options may be granted at an exercise
price not less than 85% of the fair market value of the common stock at the
date of grant. The fair market value of the common stock was determined by the
Board of Directors. All options currently outstanding are immediately
exercisable upon grant and generally vest over various periods as determined
by the Board of Directors at the time of grant. The Company retains the right
to repurchase (at the original purchase price) nonvested shares held at the
time of termination of employment. At March 31, 1997, 97,000 shares were
subject to the Company's right of repurchase. In June 1995, the 1993 Plan was
superseded by the 1995 stock option plan. At that time, the remaining 354,000
options available for grant under the 1993 Plan were canceled.
1995 STOCK OPTION PLAN
In May of 1995, the Company established a stock option plan ("1995 Plan")
which provides for grants of options to employees and consultants of the
Company and its subsidiaries to purchase up to 1,775,000 shares of common
stock. With respect to incentive stock options granted under the 1995 Plan,
the exercise price must be at least equal to the fair market value per share
of common stock at the grant date. Options under the 1995 Plan generally vest
and become exercisable at a rate of 25% of the shares subject to option on the
first anniversary of the commencement of vesting and 25% of the shares each
year thereafter.
29
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Changes in options outstanding during fiscal 1995, 1996 and 1997 for the
combined plans were as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
--------- --------
Outstanding at March 31, 1994............................ 12,000 $ 0.64
Options granted........................................ 1,072,000 1.00
Options exercised...................................... (525,000) 0.75
Options canceled....................................... (11,000) 0.70
---------
Outstanding at March 31, 1995............................ 548,000 1.21
Options granted........................................ 272,000 26.80
Options exercised...................................... (131,000) 0.80
Options canceled....................................... (26,000) 11.10
---------
Outstanding at March 31, 1996............................ 663,000 11.31
Options granted........................................ 790,000 14.57
Options exercised...................................... (230,000) 0.90
Options canceled....................................... (179,000) 11.80
Outstanding at March 31, 1997............................ 1,044,000 15.99
=========
Options vested and exercisable at March 31, 1997......... 165,000
=========
Options available for grant at March 31, 1997............ 852,000
=========
The weighted average fair value of options granted during fiscal 1997 and
1996 is $8.44 and $15.32 per share, respectively.
The following table summarizes information with regard to stock options
outstanding at March 31, 1997:
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used from grants in 1997 and 1996:
1997 1996
----- -----
Expected volatility.......................................... .6068 .6068
Risk-free interest rate...................................... 6.41% 5.93%
Expected life of options in years............................ 5 5
Expected dividend yield...................................... -- --
30
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS No. 123, net
income (loss) and earnings (loss) per share would have been reduced
(increased) to the pro forma amounts indicated in the table below (in
thousands except per share amounts):
YEARS ENDED MARCH 31.
-----------------------
1997 1996
----------- ----------
Net income (loss)--as reported.................... $ (1,675) $ 6,188
Net income (loss)--pro forma...................... $ (2,848) $ 5,747
Net income (loss) per share--as reported.......... $ (0.15) $ 0.56
Net income (loss) per share--pro forma............ $ (0.25) $ 0.52
Because SFAS 123 is applicable only to options granted subsequent to March
31, 1995, the resulting pro forma compensation cost may not be representative
of that expected in future years.
During fiscal 1995, included in options granted and exercised are options
granted to the Company's senior management team to purchase 410,000 shares of
common stock at prices from $0.73 to $0.80 per share. These options were
exercised and common stock was issued in exchange for notes receivable. The
notes receivable are for terms from two to nine years, bearing interest at
rates ranging from 6.24% to 8.01% with interest payable semiannually and
principal due at maturity.
During fiscal 1995, the Company issued options to purchase 1,072,000 shares
of common stock. The Company recorded deferred compensation of $940,000 for
financial reporting purposes with respect to such option grants to reflect the
difference between the exercise price and deemed fair value, for financial
statement presentation purposes, of the Company's common shares. Amortization
of deferred compensation for the fiscal years ended March 31, 1997 and 1996,
totaled $107,000 and $351,000, respectively.
7. 1995 EMPLOYEE STOCK PURCHASE PLAN
In May 1995 the Company established an employee stock purchase plan ("ESPP")
and has reserved an aggregate of 200,000 shares of common stock. The ESPP is
intended to qualify under Section 423 of the Code and permits eligible
employees of the Company to purchase common stock through payroll deductions
of up to 10% of their compensation provided that no employee may purchase more
than $25,000 worth of stock in any calendar year. The ESPP is implemented with
six-month purchase periods as components of 24-month offering periods, the
first such purchase period commenced upon the date of the offering and ended
on the last market trading day on December 29, 1995. The price of common stock
purchased under the ESPP is 85% of the lower of the fair market value of the
common stock on the first day of each offering period or last day of each
purchase period. The ESPP will expire in the year 2005. In fiscal 1997, a
total of 50,000 shares were issued under the plan at prices ranging from
$10.41 to $16.79 per share. At March 31, 1997, a total of 128,000 shares were
available for issuance under the plan.
8. EMPLOYEE RETIREMENT AND BENEFIT PLAN
The Company has a defined contribution retirement plan covering
substantially all employees which operates under Section 401(k) of the
Internal Revenue Code. Eligible employees may contribute amounts to the plan
subject to certain limitations. The Company matches contributions by plan
participants up to 5% of the participant's pretax compensation. Retirement
plan expense for fiscal 1997, 1996 and 1995 was $520,000, $321,000 and
$209,000, respectively.
31
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. DISCONTINUED OPERATIONS
In September 1994, the Company received full payment of the note receivable
from the management of the Division at which date the divestiture was
accounted for as discontinued operations. The results of operations of the
Division for the fiscal year ended March 31, 1995, were accounted for as
discontinued operations in the accompanying consolidated statements of income.
The sale resulted in a gain, net of applicable income taxes, of $303,000.
10. COMMITMENTS
In June 1995 the Company entered into a seven-year lease for new office
space to house its principal corporate headquarters. The lease agreement and
related amendments provide for monthly payments beginning at $75,000,
escalating to $96,000 during the term of the lease. The lease is noncancelable
for the first five years and six months with the option, at the Company's
election, to shorten the term of the lease for a one-time payment equal to
three months rent.
Future minimum lease payments under the Company's operating leases for the
periods ending March 31, pursuant to leases outstanding as of March 31, 1997,
are due as follows (in thousands):
Rent expense under all leases was $ 1,272,000, $1,021,000 and $486,000 for
fiscal 1997, 1996 and 1995, respectively.
11. INFORMATION BY GEOGRAPHIC AREA
Information regarding the Company's operations, including its foreign
subsidiaries and export sales, by geographic area is as follows (in
thousands):
YEARS ENDED MARCH 31,
-----------------------
1997 1996 1995
------- ------- -------
Net revenues:
North America..................................... $32,705 $43,564 $32,614
Europe............................................ 9,972 7,197 4,135
Asia / Pacific and other.......................... 5,585 4,651 1,398
------- ------- -------
$48,262 $55,412 $38,147
======= ======= =======
12. BUSINESS COMBINATION
In March 1996, the Company acquired for cash Cinematronics LLC, an
independent developer of entertainment software, with headquarters in Austin,
Texas. The acquisition was accounted for under the purchase method. This
purchase resulted in a nonrecurring acquisition related charge of $2,232,000
for acquired in-process technology. During fiscal 1996, the operations of
Cinematronics LLC were not material to the Company.
32
MAXIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
--------------------------------------------
JUNE SEPTEMBER DECEMBER MARCH
30 30 31 31 YEAR
------- --------- -------- ------- -------
(IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
Fiscal year 1997:
Net revenues.................... $ 8,108 $ 8,004 $19,768 $12,382 $48,262
Gross profit.................... 5,128 4,441 12,642 9,152 31,363
Net income (loss)............... (1,416) (2,496) 2,025 212 (1,675)
Net income (loss) per share..... (0.13) (0.22) 0.18 0.02 (0.15)
Fiscal year 1996:
Net revenues.................... $11,332 $11,779 $20,111 $12,190 $55,412
Gross profit.................... 7,742 8,536 12,912 8,325 37,515
Net income (loss)............... 1,132 1,722 3,541 (207) 6,188
Net income (loss) per share..... 0.12 0.15 0.31 (0.02) 0.56
14. SUBSEQUENT EVENT
On June 4, 1997, the Company entered into an Agreement and Plan of
Reorganization (the "Agreement") with Electronic Arts Inc., a Delaware
corporation ("Electronic Arts"), a publicly-held company that creates, markets
and distributes interactive entertainment software for a variety of hardware
platforms, pursuant to which Maxis will become a wholly-owned subsidiary of
Electronic Arts (the "Merger"). Under the terms of the Agreement, each share
of the Company's Common Stock will be converted into the right to receive
0.3644 of a share of Electronic Arts Common Stock. Each outstanding option to
purchase the Company's Common Stock will be converted into an option to
purchase Electronic Arts Common Stock at an adjusted exercise price.
Consummation of the Merger is conditioned upon the affirmative vote of the
Company's stockholders, among other conditions. The Board of Directors of the
Company has unanimously approved the Agreement and transactions contemplated
thereby. A special meeting of the Company's stockholders will be held to
consider and vote upon the proposed Agreement and other related matters.
33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The names of the Company's directors and executive officers and certain
information about them are set forth below. There are no family relationships
among any directors or executive officers of the Company.
NAME AGE POSITION
---- --- --------
Jeffrey B. Braun.................... 41 Chairman of the Board of Directors
Chief Executive Officer, President
Samuel L. Poole..................... 49 and Director
Valentine Garcia.................... 51 Vice President, Operations
Vice President and Chief Financial
Fred M. Gerson...................... 46 Officer
Deborah L. Gross.................... 45 Vice President, Human Resources
Robin D. Harper..................... 45 Vice President, Marketing
Douglas B. Litke.................... 47 Vice President, Business Development
Robert Roden........................ 45 Vice President of Business Affairs
and General Counsel
Paul Zuzelo......................... 47 Vice President, Product Development
Eric C.W. Dunn...................... 39 Director
Charles H. Gaylord, Jr. ............ 52 Director
William H. Janeway.................. 54 Director
Dr. Henry Kressel................... 63 Director
Avram C. Miller..................... 52 Director
William R. Wright................... 37 Director
JEFFREY B. BRAUN is a co-founder of the Company and served as Chief
Executive Officer of the Company from November 1993 to August 1996. From 1987
to November 1993, Mr. Braun served as President of the Company and from
September 1990 to the present, he has served as Chairman of the Board. Mr.
Braun has over 14 years of experience in the software industry.
SAMUEL L. POOLE has served as President of the Company since November 1993,
as Chief Executive Officer since August 1996 and as a Director since April
1994. Mr. Poole joined the Company in August 1992 as Vice President, Sales.
From January 1991 to August 1992, he was employed by Disney Software, Inc. as
Director of Sales. From January 1989 to January 1991, Mr. Poole was employed
at Cinemaware Corporation, a software publisher, as Vice President of
Marketing and Sales. From 1984 to 1989, he served as President of
IntelliCreations, Inc., a software publisher. Mr. Poole holds an M.B.A. degree
from Kent State University and a B.A. degree from Thiel College.
VALENTINE GARCIA joined the Company in August 1992 as Manager of
Manufacturing and was promoted to Vice President of Operations in October
1995. From November 1990 to August 1992, Mr. Garcia was Manager of Engineering
and Quality for Mindscape, a software company, (formerly The Software
Toolworks) and has managed procurement, contracts and operations for several
other organizations, including Unisys Corporation, a computer company, and
Xerox Magnetics, a computer peripheral company. Mr. Garcia received his B.S.
in Engineering from the University of Santa Clara.
FRED M. GERSON joined the Company as Vice President and Chief Financial
Officer in November 1994. Mr. Gerson served as Vice President and Chief
Financial Officer at Farallon Computing, Inc., a networking company, from
November 1992 to November 1994, and at TCSI Corporation, a software company,
from February 1992 to November 1992. Mr. Gerson is a Certified Public
Accountant and holds an M.B.A. degree from New York University and a B.A.
degree from Brooklyn College.
DEBORAH L. GROSS has served as Vice President, Human Resources of the
Company since December 1993. Ms. Gross served as Director, Human Resources
from June 1990 until December 1993. Ms. Gross joined the Company in January
1990 as Accounting Manager. From 1980 to 1990, Ms. Gross held various
positions at The Western Union Telegraph Company and Atlantis, a freight
brokerage company. Ms. Gross holds a B.A. degree from St. Mary's College.
34
ROBIN D. HARPER joined the Company as Vice President, Marketing in March
1991. From 1979 to February 1991, she was employed by Foote, Cone and Belding
Communications, an advertising agency, most recently as Vice President,
Management Supervisor. She holds an M.B.A. degree from the University of
Chicago and a B.A. degree from Lawrence University.
DOUGLAS B. LITKE joined the Company as Vice President, Business Development
in March 1994. From 1989 to February 1994, he was employed by MicroProse
Software, Inc., a software publisher, most recently as Vice President of
Sales. From 1984 to 1989, Mr. Litke held various positions at
IntelliCreations, Inc. and Firebird Licensees, Inc., both software publishers.
He holds a B.A. degree from the University of California at Berkeley.
ROBERT RODEN joined the Company as Vice President of Business Affairs and
General Counsel in August 1996. From September 1991 until August 1996, Mr.
Roden served in similar positions for LucasArts Entertainment Company. Prior
to September 1991, Mr. Roden was in private practice at the law firm of
Howard, Rice, Nemerovski, Canady, Roberton & Falk. Mr. Roden holds a
bachelor's degree, a master of public health degree, and a law degree, all
from the University of California at Los Angeles.
PAUL ZUZELO joined Maxis as Vice President of Product Development in
December 1996. From July 1995 to November 1996, Mr. Zuzelo was Executive
Producer and Head of Product Development for IBM Multimedia Studios. From 1993
to 1995, Mr. Zuzelo worked at Electronic Arts first as Director and General
Manager of Studio Services and then later as Director of Business and
Operations for their High Score Division. Mr. Zuzelo has also held other
management positions including Vice President of Product Development at
Mediagenic for their Presentations Tools Division from 1985 to 1989. Mr.
Zuzelo received his Bachelor of Arts in Mathematics and Physics from Cornell
University and a M.A. in mathematics from University of California, San Diego.
ERIC C.W. DUNN was appointed to the Company's Board of Directors in March
1996. Mr. Dunn is the Senior Vice President and Chief Technology Officer of
Intuit and was the primary architect of the Quicken family of products. He
served as Intuit's Chief Financial Officer from the time he joined Intuit in
September 1986 through the end of 1993. Before joining Intuit, Mr. Dunn spent
three years as a consultant with Bain & Company, a corporate strategy
consulting firm. From 1979 to 1981, Mr. Dunn worked as an analyst at IBM.
CHARLES H. GAYLORD, JR. has served as a Director of the Company since April
1994. Mr. Gaylord is currently working as an independent technology investor.
From December 1993 until September 1994, Mr. Gaylord was Executive Vice
President for Intuit, Inc. and Chairman of the Board of Chipsoft, Inc. From
1990 until the acquisition of Chipsoft by Intuit in December 1993, he was
employed by Chipsoft, initially as President and Chief Executive Officer. For
the preceding seventeen years, he held various positions at Transworld Oil
International Group of Companies, including serving as President of Transworld
Oil America, Inc., a privately-held oil trading and marketing company.
WILLIAM H. JANEWAY has served as a Director of the Company since June 1992.
Since 1988, Mr. Janeway has served as a Managing Director and Head of the
Venture Capital High Technology Team of E.M. Warburg, Pincus and Co., LLC, and
its predecessor. Mr. Janeway serves as a director of Zilog, Inc., Vanstar
Corporation, VERITAS Software Corporation, BEA Systems, Inc., Industri-
Matematik International Corp., Ecsoft Group PLC and several privately held
companies.
DR. HENRY KRESSEL has served as a Director of the Company since June 1992.
Since 1985, Dr. Kressel has served as a Managing Director of E.M. Warburg,
Pincus and Co., LLC, and its predecessor. Dr. Kressel serves as a director of
Level One Communications, Inc., Zilog, Inc., TresCom International, NOVA
Corp., IA Corporation and several privately held companies.
35
AVRAM C. MILLER has served as a Director of the Company since April 1995.
Since 1984, Mr. Miller has held various positions at Intel Corporation, a
semiconductor manufacturer, most recently as Vice President, Corporate
Business Development.
WILLIAM R. WRIGHT is a co-founder of the Company, has served as Chief
Technical Designer since the Company began business in 1987 and as a Director
of the Company since September 1990. Mr. Wright is the designer of SimCity,
SimCity 2000, SimEarth and SimAnt.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a registered class
of the Company's equity securities, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission ("SEC") and Nasdaq.
Executive officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on its review of the copies of such forms
received by it, or written representations from certain reporting persons, the
Company believes that during fiscal 1997 all filing requirements applicable to
its executive officers and directors and greater than 10% stockholders were
complied with, except that amended Form 4s were filed on behalf of Jeffrey
Braun, Robin D. Harper and Will Wright to correct previously filed forms.
36
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company during
each of the last three fiscal years ended March 31, 1997, to the Chief
Executive Officer, the former Chief Executive Officer and the four other most
highly compensated executive officers of the Company during fiscal 1997 (the
"Named Executive Officers"):
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
AWARDS
OTHER SECURITIES
FISCAL ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION(2)
--------------------------- ------ -------- -------- ------------ ------------ ---------------
Jeffrey B. Braun........ 1997 $225,000 -- -- -- 8,834
Former CEO 1996 225,000 75,600 -- -- 7,733
1995 225,000 36,017 -- -- 11,758
Samuel L. Poole......... 1997 $190,800 $22,896 5,405(3) 80,000 10,486
CEO/President 1996 180,000 50,400 3,906(3) -- 10,414
1995 150,000 24,011 5,019(3) -- 12,871
Fred M. Gerson.......... 1997 159,000 14,310 -- 16,000 10,602
Vice President, Chief 1996 150,000 47,925 -- -- 10,621
Financial Officer 1995 59,135(4) 7,789(4) -- 120,000 3,233
Robin D. Harper......... 1997 130,000 10,998 -- 14,000 4,118
Vice President, 1996 115,560 37,753 -- -- 9,355
Marketing 1995 108,000 17,288 -- 40,000 10,699
Douglas B. Litke........ 1997 121,000 8,712 -- 14,000 10,427
Vice President, 1996 111,300 49,195 -- -- 10,442
Business Development 1995 105,000 29,408 26,672(5) 80,000 5,519
M. Ileana Seander(6).... 1997 124,960 -- -- 14,000 7,532
Former Vice President, 1996 110,000 39,545 -- -- 5,081
Sales 1995 88,573 28,528 -- 80,000 3,507
(1) Represents bonus paid in fiscal year 1998 for fiscal 1997 achievements.
(2) Represents matching contributions under Maxis' 401(k) Plan and the full
dollar value of life, medical, dental, vision, and long-term disability
insurance premiums paid by the Company.
(3) Represents automobile reimbursement.
(4) Fred M. Gerson joined the Company in November 1994, five months prior to
the beginning of the 1996 fiscal year.
(5) Represents relocation reimbursement.
(6) Ms. Seander left Maxis after Fiscal Year End.
37
OPTION/SAR GRANTS IN FISCAL 1997
The following table sets forth further information regarding the individual
grants of stock options pursuant to Maxis' stock option plans during fiscal
1997 to each of the Named Executive Officers.
GRANT DATE
INDIVIDUAL GRANTS VALUE
------------------------------- ---------------------
NUMBER
OF
SECURITIES % OF TOTAL
UNDER- OPTIONS/
LYING SARS
OPTIONS/ GRANTED TO EXERCISE GRANT
SARS EMPLOYEES OR BASE DATE
GRANTED IN FISCAL PRICE EXPIRATION PRESENT
NAME (#)(1) YEAR(1) ($/SH)(2) DATE(3) VALUE $(4)
---- ---------- ---------- --------- ---------- ----------
Jeffrey B. Braun.......... -- -- -- -- --
Samuel L. Poole........... 80,000 10.4% $11.25 9/13/06 $522,560
Fred M. Gerson............ 16,000 2.1% 11.25 9/13/06 104,512
Robin D. Harper........... 14,000 1.8% 11.25 9/13/06 91,448
Douglas B. Litke.......... 14,000 1.8% 11.25 9/13/06 91,448
M. Ileana Seander......... 14,000 1.8% 11.25 9/13/06 91,448
(1) The Company granted options to purchase 789,606 shares of Common Stock
during fiscal 1997, of which 769,606 were granted to employees.
(2) The exercise price may be paid in cash, check, promissory note or shares of
the Company's Common Stock, through a cashless exercise procedure involving
same-day sale of the purchased shares or by any combination of such
methods.
(3) Options may terminate before their expiration date if the optionee's status
as an employee or consultant is terminated or upon optionee's death.
(4) The Black-Scholes option pricing model was used assuming a dividend yield
of 0, a risk-free interest rate of 6.60%, an expected stock price
volatility factor based upon historical experience of 61%, and an expected
option life based upon an average of seven months of Maxis actual history
and five years historical experience of two other software companies
similar to the Company. The attribution of values with the Black-Scholes
model to stock option grants requires adoption of certain assumptions, as
described above. While the assumptions are believed to be reasonable, the
reader is cautioned not to infer a forecast of earnings or dividends either
from the model's use or from the values adopted for the model's
assumptions. Any future values realized will ultimately depend upon the
excess of the stock price over the exercise price on the date the option is
exercised.
38
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning option holdings for
the fiscal year ended March 31, 1997 with respect to each of the Named
Executive Officers. None of such options were "in-the-money" at fiscal year
end. No options were exercised by any Named Executive Officer during fiscal
1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
--------------------------- ---------------------------
EXERCISABLE NON-EXERCISABLE EXERCISABLE NON-EXERCISABLE
----------- --------------- ----------- ---------------
Jeffrey B. Braun........ -- -- -- --
Samuel L. Poole......... -- 80,000 -- $0.00
Fred M. Gerson.......... -- 16,000 -- 0.00
Douglas B. Litke........ -- 14,000 -- 0.00
Robin D. Harper......... -- 14,000 -- 0.00
M. Ileana Seander....... -- 14,000 -- 0.00
COMPENSATION OF DIRECTORS
Other than reimbursement for certain expenses incurred in connection with
attendance at board and committee meetings, the directors of Maxis did not
receive any cash compensation for services provided as directors during fiscal
1997. Effective April 1, 1997, the Company began compensating outside
directors at a rate of $2,000 per Board meeting attended and $1,000 per Board
conference call attended, with the total compensation not to exceed $20,000.
Outside directors may be granted nonstatutory stock options from time to time
at the discretion of the Board of Directors. Currently, there are three
outside directors of Maxis.
EMPLOYMENT CONTRACTS, TERMINATION AND CHANGE OF CONTROL ARRANGEMENTS
Messrs. Braun and Wright have employment agreements with the Company. The
agreements fix their base compensation, provide for their participation in
such employee benefit plans as the Company may adopt from time to time for its
management and supervisory personnel generally, and, in certain circumstances,
allow for severance payments of up to six months' salary. The agreements are
automatically renewed annually unless terminated by either party on 90 days'
notice. The agreements also contain confidentiality, proprietary rights and
dispute resolution provisions. In connection with the Merger, each of the
employment agreements have been amended, effective upon the consummation of
the Merger (the "Effective Time of the Merger"). The amendments to the
employment agreements to provide that Messrs. Braun and Wright's titles,
duties, base compensation and bonus compensation will be determined in good
faith by Electronic Arts and Mr. Braun or Mr. Wright, as the case may be, and
to provide that the employment agreements will terminate upon the first
anniversary of the Effective Time of the Merger, except for the provisions
relating to severance payments.
The 1995 Stock Plan and the 1993 Stock Option Plan (collectively, the
"Option Plans") provide that in the event of a merger of the Company with or
into another corporation, the Board of Directors (or a Committee appointed by
the Board of Directors) may provide for accelerated vesting of all options or
stock purchase rights issued pursuant to the Option Plans. Except as set forth
below, the Company's Board of Directors has not provided for accelerated
vesting of any options or stock purchase rights in connection with the Merger.
The 1995 Employee Stock Purchase Plan (the "Stock Purchase Plan") provides
that in the event of a merger of the Company with or into another corporation,
the Board of Directors may shorten the Offering Periods then in progress by
setting a new Exercise Date (as those terms are defined in the Stock Purchase
Plan) and can, after prior notification, automatically exercise all options
held by the participants in the Stock Purchase Plan who fail to withdraw from
an Offering Period. In connection with the Merger, the Company will set the
last trading
39
date prior to the Effective Time of the Merger as a new Exercise Date and
automatically exercise all options held by the participants in the Stock
Purchase Plan who fail to withdraw from any Offering Period.
In October 1995, agreements with its executive officers providing for the
acceleration of unvested stock options (i) immediately preceding a change of
control, if such options are not assumed, (ii) immediately preceding a change
of control in the event an officer does not or will not receive upon exercise
of the officer's stock purchase rights under any stock option agreement the
same identical securities and/or other consideration as is received by all
other stockholders in any merger, consolidation, sale, exchange or similar
transaction occurring upon or after such change of control, (iii) immediately
preceding any involuntary termination following a change of control or (iv)
six months following a change of control, provided the officer has remained an
employee of Maxis. An affirmative vote by the Company's stockholders in favor
of the Merger is considered a change of control for purposes of these
agreements, however, neither such vote nor consummation of the Merger, in and
of themselves, will cause any such acceleration.
In August 1996, the Company entered into agreements with its non-employee
directors providing for the acceleration of options and restricted stock upon
any change of control transaction occurring after August 12, 1998.
Samuel L. Poole, the Company's President and Chief Executive Officer, and
Fred M. Gerson, its Chief Financial Officer, have entered into retention
arrangements that provide for a payment of cash in an amount equal to one
year's annual total cash compensation on the six-month anniversary of a change
of control of the Company, if the employee is still employed by the Company
prior to those times (and such payments will accelerate if the employee is
terminated by the Company prior to such times for any reason other than
cause). The early payment will not be made if such employee voluntarily
terminates his employment for any reason other than a "constructive
termination" by the Company.
Certain other executive officers of the Company have entered into retention
arrangements that provide for a payment of cash equal to either three, four
and one-half or six month's salary in the event that they remain with the
Company until three months, four and one-half months or six months,
respectively, after a change of control of the Company If such employee is
terminated by the Company, other than for cause, such employee shall also be
entitled to a severance payment upon such employee's termination with the
Company for the period equal to three, four and one-half or six months, as the
case may be, after such termination. Neither the one time cash payment nor the
severance payments will be made if such employee voluntarily terminates his
employment for any reason other than a "constructive termination" by the
Company.
40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
Common Stock as of May 31, 1997, with respect to (i) each person who is known
by the Company to own beneficially more than 5% of the outstanding shares of
the Company's Common Stock, (ii) each director of the Company, (iii) each of
the Named Executive Officers and (iv) all directors and executive officers of
the Company as a group.
SHARES APPROXIMATE
BENEFICIALLY PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED
------------------------------------ ------------ -----------
Jeffrey B. Braun (1).................................. 3,209,600 28.5%
2121 N. California Blvd., Suite 600
Walnut Creek, CA 94596
Warburg, Pincus Investors, L.P. (2)................... 1,593,750 14.2
466 Lexington Avenue
New York, NY 10017
William H. Janeway (3)................................ 1,593,750 14.2
Dr. Henry Kressel (3)................................. 1,593,750 14.2
William R. Wright (4)................................. 1,293,400 11.5
2121 N. California Blvd., Suite 600
Walnut Creek, CA 94596
FMR Corp. (5)......................................... 840,000 7.5
82 Devonshire Street
Boston, MA 02109
Samuel L. Poole (6)................................... 228,668 2.0
Avram C. Miller (7)................................... 24,000 *
Charles H. Gaylord Jr. (8)............................ 20,000 *
Eric C.W. Dunn (9).................................... 5,000 *
OTHER OFFICERS
Fred M. Gerson (10) .................................. 122,348 1.1
Robin D. Harper (11).................................. 45,582 *
Douglas B. Litke (12)................................. 58,431 *
M. Ileana Seander..................................... 24,375 *
All Directors and Executive Officers as a Group (16 6,707,013 59.3
Persons) (13)........................................
* Less than one percent.
(1) Shares held of record by a trust for the benefit of Mr. Braun.
(2) The sole general partner of Warburg, Pincus, Investors, L.P. ("Investors")
is Warburg, Pincus & Co., a New York general partnership ("WP"). E.M.
Warburg, Pincus & Co., LLC, a New York limited liability company ("EMW
LLC"), manages Investors. The members of EMW LLC are substantially the
same as the partners of WP. Lionel I. Pincus is the managing partner of WP
and the managing member of EMW LLC and may be deemed to control both WP
and EMW LLC. WP, as the sole general partner of Investors, has a 20%
interest in the profits of Investors. William H. Janeway and Henry
Kressel, directors of Maxis, are Managing Directors and members of EMW LLC
and general partners of WP. As such, Messrs. Janeway and Kressel may be
deemed to have an indirect pecuniary interest (within the meaning of Rule
16a-1 under the Exchange Act) in an indeterminate portion of the shares
beneficially owned by Investors and WP. All of the shares indicated as
owned by Messrs. Janeway and Kressel are owned directly by Investors and
are included because of Messrs. Janeway and Kressel's affiliation with
Investors. Messrs. Janeway and Kressel disclaim "beneficial ownership" of
these shares within the meaning of Rule 13d-3 under the Exchange Act.
41
(3) All of the shares indicated as owned by Mr. Janeway and Dr. Kressel are
owned directly by Warburg and are included because of their affiliation
with Warburg. Mr. Janeway and Dr. Kressel disclaim "beneficial
ownership" of these shares within the meaning of Rule 13d-3 under the
Exchange Act.
(4) Includes 1,193,400 shares held of record by a trust for the benefit of
Mr. Wright and his family. Also includes 100,000 shares held by a trust
for the benefit of a child of Mr. Wright, as to which trust Mr. Wright
is not a trustee, and as to which shares Mr. Wright disclaims beneficial
ownership.
(5) Based on a Schedule 13G dated February 14, 1997 and a Report on Form 13F
filed by FMR Corp. ("FMR") with the Commission. FMR, a parent holding
company, has sole voting power with respect to 23,400 shares and sole
dispositive power with respect to all shares indicated.
(6) Includes 1,400 shares held by the children and grandchildren of Mr.
Poole, as to which shares Mr. Poole disclaims beneficial ownership.
(7) Includes 20,000 shares subject to stock option exercisable within 60
days of May 31, 1997.
(8) Shares held of record by a trust for the benefit of Mr. Gaylord.
(9) Represents shares subject to stock option exercisable within 60 days of
May 31, 1997.
(10) Includes 664 shares held by the children of Mr. Gerson, as to which
shares Mr. Gerson disclaims beneficial ownership.
(11) Includes 45,000 shares held of record by a trust for the benefit of Ms.
Harper and her family.
(12) Includes 57,500 shares held of record by a trust for the benefit of Mr.
Litke and his spouse.
(13) Includes 69,500 shares subject to a stock option exercisable within 60
days of May 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1994, the Company loaned $87,000 to Fred M. Gerson, an executive
officer of the Company, in connection with the exercise of a nonqualified
stock option to purchase 120,000 shares of Common Stock at $.725 per share,
with interest payable at a rate of 6.24%, compounded annually, and for a term
of three (3) years. The foregoing loan is secured by the Common Stock
purchased by Mr. Gerson. As of March 31, 1996, the total outstanding balance
on Mr. Gerson's note was $89,262. As of March 31, 1997, the total outstanding
balance was $89,246. The loan is currently in good standing with the Company.
The Company and William R. Wright, a Director and Co-founder of the Company,
are parties to three Software Development License Agreements dated November
25, 1991 relating to the development of SimAnt, SimEarth, SimCity and SimCity
Terrain Editor. Mr. Wright has received royalties from the Company in the
aggregate amount of $213,575 from March 31, 1996 through March 31, 1997, for
fiscal year 1997, pursuant to these agreements.
The Company believes that the transactions set forth above were made on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. These transactions were, and all future
transactions, between the Company and its officers, directors, principal
stockholders and their affiliates will be, approved by a majority of the Board
of Directors, including a majority of the independent and disinterested
outside directors on the Board of Directors, and will continue to be on terms
no less favorable to the Company than could be obtained from unaffiliated
third parties.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this Report:
1. Financial Statements.
Consolidated Balance Sheets--March 31, 1997 and 1996
Consolidated Statements of Operations--Years Ended March 31, 1997, 1996 and
1995
Consolidated Statements of Stockholders' Equity (Deficit)--Years Ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows--Years Ended March 31, 1997, 1996 and
1995
Notes to Consolidated Financial Statements
Independent Auditors' Report
2. Financial Statement Schedules. The following financial statement schedule
of Maxis, Inc. for the fiscal years ended March 31, 1997, 1996 and 1995 is
filed as part of this Report and should be read in conjunction with the
Consolidated Financial Statements of Maxis.
SCHEDULES PAGE
--------- ----
II Valuation and Qualifying Accounts.... 47
Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or Notes thereto.
3. Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
3.1 Certificate of Incorporation of the Company, as amended.(1)
3.2 Bylaws of the Company.(1)
4.1 Form of the Company's Common Stock Certificate.(1)
4.2 Shareholders' Rights Agreement dated June 2, 1992 among the Company,
the investors and the founders named therein.(1)
4.3 Amendment dated March 31, 1995 to the Shareholders' Rights
Agreement.(1)
10.1 Form of Indemnification Agreement entered into by the Company with
each of its directors and executive officers.(1)
10.2 1993 Stock Option Plan and related agreements.(1)
10.3 1995 Stock Plan and related agreements.(1)
10.4 1995 Employee Stock Purchase Plan and related agreements.(1)
10.5 Form of Common Stock Purchase Agreement dated May 1992 between the
Company and certain executive officers.(1)
10.6 Form of Promissory Note executed by certain directors and executive
officers.(1)
10.7 Software Development License Agreement dated November 25, 1991 between
the Company and William R. Wright relating to the development of
SimCity for the Macintosh.(1)
43
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
10.8 Software Development License Agreement dated November 25, 1991 between
the Company and William R. Wright relating to the development of
SimEarth for the Macintosh.(1)
10.9 Software Development License Agreement dated November 25, 1991 between
the Company and William R. Wright relating to the development of
SimAnt for the Macintosh.(1)
10.10 Employment Agreement dated June 1, 1992 as amended July 26, 1994,
between the Company and Jeffrey B. Braun.(1)
10.11 Employment Agreement dated June 1, 1992 as amended July 26, 1994,
between the Company and William R. Wright.(1)
10.12 Lease dated June 2, 1995 by and between C-C California Plaza
Partnership, a California General Partnership (Lessor), and Company
(Lessee), regarding office space located at 2121 North California
Boulevard, Walnut Creek, California.(2)
10.13 Loan Agreement dated September 1, 1995, between Maxis, Inc. (Borrower)
and Union Bank (Lender). (3)
10.14 Form of Option Acceleration Agreement signed by certain optionees.(4)
11.1 Statement of Computation of Per Share Earnings (Loss).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Auditors.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-89210), as amended, declared effective on May 24, 1995.
(2) Incorporated by reference to the Company's Reports on Form 10-Q for the
quarter ended June 30, 1995.
(3) Incorporated by reference to the Company's Report on Form 10-Q for the
fiscal quarter ended September 30, 1995.
(4) Incorporated by reference to the Company's Report on Form 10-Q for the
fiscal quarter ended December 31, 1995.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1997.
(C) EXHIBITS
See item 14(a)3 above.
(D) FINANCIAL STATEMENT SCHEDULES
See item 14(a)2 above
44
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, THE CITY OF
WALNUT CREEK, STATE OF CALIFORNIA, ON THIS 20TH DAY OF JUNE, 1997.
MAXIS, INC.
By: /s/ Samuel L. Poole
----------------------------------
Samuel L. Poole
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Samuel L. Poole and Fred M. Gerson and
each of them acting individually, as such person's true and lawful attorneys-
in-fact and agents, each with full power of substitution, for such person, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this report on Form 10-K, and to file with same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as such person might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his or her substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirement of the Securities and Exchange Act of 1934, this
Report on Form 10-K 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/ Jeffrey B. Braun Chairman of the Board of June 20, 1997
____________________________________ Directors
Jeffrey B. Braun
/s/ Samuel L. Poole Chief Executive Officer June 20, 1997
____________________________________ (Principal Executive
Samuel L. Poole Officer) and Director
/s/ Fred M. Gerson Vice President and Chief June 20, 1997
____________________________________ Financial Officer
Fred M. Gerson (Principal Financial and
Accounting Officer)
/s/ Eric Dunn Director June 20, 1997
____________________________________
Eric Dunn
/s/ Charles H. Gaylord Director June 20, 1997
____________________________________
Charles H. Gaylord
45
SIGNATURE TITLE DATE
--------- ----- ----
/s/ William H. Janeway Director June 20, 1997
____________________________________
William H. Janeway
/s/ Dr. Henry Kressel Director June 20, 1997
____________________________________
Dr. Henry Kressel
/s/ Avram Miller Director June 20, 1997
____________________________________
Avram Miller
/s/ William R. Wright Director June 20, 1997
____________________________________
William R. Wright
46
SCHEDULE II
MAXIS, INC.
VALUATION OF QUALIFYING ACCOUNTS
DESCRIPTION
Allowance for product returns:
ADDITIONS-
PROVISION
BEGINNING FOR DEDUCTIONS- ENDING
YEAR ENDED BALANCE RETURNS RETURNS BALANCE
---------- --------- ---------- ----------- ---------
March 31, 1995................. 1,718,000 6,047,000 (5,293,000) 2,472,000
March 31, 1996................. 2,472,000 7,615,000 (5,044,000) 5,043,000
March 31, 1997................. 5,043,000 7,843,000 (6,898,000) 5,988,000
Allowance for doubtful accounts:
ADDITIONS-
PROVISION DEDUCTIONS-
BEGINNING FOR DOUBTFUL RETURNS ENDING
YEAR ENDED BALANCE ACCOUNTS WRITTEN OFF BALANCE
---------- --------- ------------ ----------- ---------
March 31, 1995............... 284,000 295,000 (140,000) 439,000
March 31, 1996............... 439,000 379,000 (254,000) 564,000
March 31, 1997............... 564,000 1,708,000 (478,000) 1,794,000
47
EXHIBIT 11.1
MAXIS, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL YEARS ENDED
MARCH 31,
-----------------------
1997 1996 1995
------- ------- ------
Net income (loss)...................................... $(1,675) $ 6,188 $3,606
======= ======= ======
Computations of weighted average common and common
equivalent shares outstanding:
Weighted average common shares outstanding........... 11,180 8,390 5,804
Common equivalent shares from stock options issued
during the twelve-month period prior to the
Company's initial public offering................... -- -- 993
Common equivalent shares attributable to:
Redeemable preferred stock (if-converted method)..... -- 2,094 2,109
Stock options (treasury stock method)................ -- 567 9
------- ------- ------
Shares used in computing net income (loss) per share... 11,180 11,051 8,915
======= ======= ======
Net income (loss) per share............................ $ (0.15) $ 0.56 $ 0.40
======= ======= ======
EXHIBIT 21.1
MAXIS, INC.
SUBSIDIARIES OF THE COMPANY
JURISDICTION OF
SUBSIDIARY NAME INCORPORATION
--------------- --------------
Maxis Limited United Kingdom
Maxis K.K. Japan
Maxis South LLC (formerly Cinematronics LLC) Texas
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8/S-3 No. 33-97764) pertaining to the 1995 Employee Stock Purchase
Plan, 1993 Stock Option Plan and 1995 Stock Plan of our report dated May 5,
1997, except for Note 14 as to which the date is June 4, 1997, with respect to
the consolidated financial statements and financial statement schedule of
Maxis, Inc. included in this Annual Report (Form 10-K) for the year ended
March 31, 1997.
Our audits also included the financial statement schedule of Maxis, Inc.
listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
-------------------------------------
Ernst & Young LLP
Walnut Creek, California
June 18, 1997
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