-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vd6Tha2odMyY4bz3DK/Evd+cYN1pdr2bNUWaNFVu7SbIQQR++uBdiQwZF+WimLCq dww+OJH9M1ekTBPqc9b+Lg== 0000950123-10-057366.txt : 20100611 0000950123-10-057366.hdr.sgml : 20100611 20100610193651 ACCESSION NUMBER: 0000950123-10-057366 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20100331 FILED AS OF DATE: 20100611 DATE AS OF CHANGE: 20100610 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAD CATZ INTERACTIVE INC CENTRAL INDEX KEY: 0001088162 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 874627953 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14944 FILM NUMBER: 10891384 BUSINESS ADDRESS: STREET 1: 141 ADELAIDE STREET WEST STREET 2: SUITE 400 CITY: TORONTO ONTARIO STATE: A6 ZIP: M5H 3L5 BUSINESS PHONE: 6196839830 MAIL ADDRESS: STREET 1: 141 ADELAIDE STREET WEST STREET 2: SUITE 400 CITY: TORONTO ONTARIO STATE: A6 ZIP: M5H 3L5 FORMER COMPANY: FORMER CONFORMED NAME: GAMES TRADER INC DATE OF NAME CHANGE: 19990608 10-K 1 a56441e10vk.htm FORM 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended March 31, 2010
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          .
 
Commission file number 001-14944
MAD CATZ INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
 
     
Canada   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
7480 Mission Valley Road, Suite 101
San Diego, California
(Address of principal executive offices)
  92108
(Zip Code)
     
 
Registrant’s telephone number, including area code:
(619) 683-9830
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Each Exchange on Which Registered
 
Common Stock, no par value   NYSE Amex
    Toronto Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller Reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act).  Yes o      No þ
 
The aggregate market value of the voting and non-voting common stock held by non-affiliates based on the closing sale price of common stock as reported on the American Stock Exchange on September 30, 2009, the last business day of the second fiscal quarter, was $21,488,434.
 
There were 55,098,549 shares of the registrant’s common stock issued and outstanding as of June 10, 2010.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Part II and Part III incorporates information by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant’s 2010 Annual Meeting of Shareholders.
 


 

 
MAD CATZ INTERACTIVE, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2010

TABLE OF CONTENTS
 
                 
        Page
 
PART I
  Item 1.     Business     2  
  Item 1A.     Risk Factors     9  
  Item 1B.     Unresolved Staff Comments     24  
  Item 2.     Properties     24  
  Item 3.     Legal Proceedings     25  
  Item 4.     Reserved     25  
 
PART II
  Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     26  
  Item 6.     Selected Financial Data     28  
  Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     29  
  Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     42  
  Item 8.     Financial Statements and Supplementary Data     43  
  Item 9.     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure     43  
  Item 9A.     Controls and Procedures     43  
  Item 9B.     Other Information     44  
 
PART III
  Item 10.     Directors, Executive Officers and Corporate Governance     45  
  Item 11.     Executive Compensation     45  
  Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     45  
  Item 13.     Certain Relationships and Related Transactions, and Director Independence     45  
  Item 14.     Principal Accounting Fees and Services     45  
 
PART IV
  Item 15.     Exhibits, Financial Statement Schedules     46  
 EX-2.1
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2


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FORWARD LOOKING STATEMENTS
 
This Annual Report on Form 10-K and the documents incorporated by reference herein, contain forward-looking statements and forward looking information as defined in applicable Canadian securities legislation (collectively “forward looking statements”), which are prospective and reflect management’s expectations regarding our business, operations, financial performance and business prospects and opportunities. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate,” “plan,” “estimate,” “expect” “believe” and “intend” and statements that an event or result “may,” “will,” “should,” “could” or “might” occur or be achieved and other similar expressions together with the negative of such expressions. These forward-looking statements reflect management’s current beliefs and expectations and are based on information currently available to management, as well as its analysis made in light of its experience, perception of trends, current conditions, expected developments and other factors and assumptions believed to be reasonable and relevant in the circumstances. These assumptions include, but are not limited to continuing demand by consumers for videogame systems and accessories, the continuance of normal trade relations between China and the United States, the ability to maintain or extend our existing licenses, the continued financial viability of our largest customers, the continuance of timely and adequate supply from third party manufacturers and suppliers, no significant fluctuations in the value of the U.S. dollar relative to other currencies and the continued satisfaction of our obligations under our existing Credit Facility and the Saitek Notes. Specifically, this document contains forward looking statements regarding, among other things, our focus and strategy for fiscal 2011, the expected life cycles of videogame console systems and accessories, anticipated price reductions to console systems and the impact on the market for our products, including the increased diversification of our product line and the possible expansion of our product offerings and operations through acquisitions, the expectation of additional competition if new companies enter the market, the increased difficulty in forecasting demand for specific products as we introduce and support additional products and enter additional markets, the possible use of financial hedging techniques, the belief that sufficient funds will be available to satisfy our operating needs for the next twelve months, the continuing volatility of our stock price, the continuance of significant seasonal fluctuations in our quarterly results of operations, our expectations regarding gross margins and the decline in certain expenses. Forward-looking statements are subject to significant risks, uncertainties, assumptions and other factors, any of which could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking statements. More detailed information about these risks, uncertainties, assumptions and other factors is provided under Item 1A “Risk Factors”. Investors should not place undue reliance on such forward-looking statements. Forward-looking statements are not guarantees of future performance or outcomes and actual results could differ materially from those expressed or implied by the forward-looking statements. We assume no obligation to update or alter such forward-looking statements whether as a result of new information, future events or otherwise except as required by law.
 
TRADEMARKS
 
Mad Catz, the Mad Catz logo, Joytech, the Joytech logo, Saitek, Tritton, the Tritton logo, Cyborg, Eclipse and GameShark are trademarks or registered trademarks of Mad Catz, Inc., its parent and/or affiliated companies.
 
CURRENCY
 
Unless otherwise indicated, all dollar references herein are in U.S. dollars.


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PART I
 
Item 1.   Business
 
In this annual report on Form 10-K, “Mad Catz Interactive, Inc.,” “Mad Catz,” the “Company,” “we,” “us” and “our” refer to Mad Catz Interactive, Inc. and all of our consolidated subsidiaries.
 
Mad Catz Interactive, Inc. was incorporated under the Canada Business Corporations Act on August 25, 1993.
 
In August 1999, we completed the acquisition of Mad Catz, Inc. (“MCI”), a corporation incorporated under the laws of Delaware that designs, markets, sells and distributes videogame accessories. MCI and its predecessor company have been involved in the videogame industry since approximately 1991.
 
Recent Acquisitions
 
In September 2007, we acquired certain assets of Joytech from Take-Two Interactive Software, Inc. The assets acquired included inventories, property and equipment and intangible assets such as trademarks, customer relationships and product lines.
 
In November 2007, we acquired all of the outstanding stock of Winkler Atlantic Holdings Limited (“WAHL”), a private holding company that owned five operating Saitek subsidiaries (“Saitek”). The five operating subsidiaries worked in concert to develop, manufacture, market, sell and distribute PC games accessories, PC input devices, multimedia audio products, chess and intelligent games. We acquired all of Saitek’s net tangible and intangible assets, including trademarks, tradenames, customer relationships and product lines.
 
In May 2010, we acquired all of the outstanding stock of Tritton Technologies Inc. (“Tritton”), a private corporation incorporated under the laws of Delaware. Tritton is in the business of designing, developing, manufacturing (through third parties in Asia), marketing and selling videogame and PC accessories, most notably gaming audio headsets. We acquired all of Tritton’s net tangible and intangible assets, including trade names, customer relationships and product lines.
 
Corporate Structure
 
     
    Jurisdiction of
Subsidiary
 
Incorporation
 
Mad Catz, Inc.
  Delaware
1328158 Ontario Inc.
  Ontario, Canada
Mad Catz Europe, Limited
  England and Wales
Mad Catz Interactive Asia Limited
  Hong Kong
Mad Catz Technological Development (Shenzhen) Co., Ltd
  People’s Republic of China
Winkler Atlantic Holdings Limited
  British Virgin Islands
Saitek Elektronik Vertriebs GmbH
  Germany
Saitek S.A.
  France
Tritton Technologies Inc.
  Delaware
FX Unlimited Inc.
  Delaware
Xencet USA, Inc.
  Delaware
Singapore Holdings Inc.
  Delaware
Mad Catz (Asia) Limited
  Hong Kong
 
Mad Catz, Inc. (“MCI”) is our corporate headquarters and also sells our products in the United States, participates in the design of our products and provides corporate services for all entities of the Company. 1328158 Ontario Inc. (“MCC”) sells our products in Canada under the name Mad Catz Canada. Mad Catz Europe, Limited (“MCE”) sells our products in Europe. Mad Catz Interactive Asia Limited (“MCIA”) is engaged in the engineering, design, contract manufacture and regional sales of our products. Mad Catz Technological Development (Shenzhen) Co., Ltd. (“MCTD”) is engaged in the engineering, design, quality assurance and quality control of our products.


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Winkler Atlantic Holdings Limited (“WAHL”) is the holding company for our Saitek operating subsidiaries located in Germany and France, Saitek Elektronik Vertriebs GmbH and Saitek S.A. Tritton Technologies Inc., (“Tritton”) sells videogame and PC accessories in the United States and elsewhere in the world. FX Unlimited Inc., Xencet USA, Inc., Singapore Holdings Inc., and Mad Catz (Asia) Limited are inactive companies that hold intellectual property related to our business.
 
Our common stock trades on the Toronto Stock Exchange and the NYSE Amex under the symbol “MCZ.” Our registered office is located at 181 Bay Street, Suite 2500, Toronto, Ontario, M5J 2T7, and our telephone number is (416) 360-8600. MCI, our primary operating subsidiary and our operational headquarters is located at 7480 Mission Valley Road, Suite 101, San Diego, California, 92108, and our telephone number is (619) 683-9830.
 
Overview
 
We design, manufacture (through third parties in Asia), market, sell and distribute accessories for all major videogame platforms, the personal computer (“PC”) and, to a lesser extent the iPod and other audio devices. Our accessories are marketed primarily under the Mad Catz, Saitek, Cyborg, Eclipse, Joytech, GameShark, Tritton and AirDrives brands; we also produce for selected customers a limited range of products which are marketed on a “private label” basis. Our products include videogame, PC and audio accessories, such as control pads, video cables, steering wheels, joysticks, memory cards, light guns, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. We also market videogame enhancement products and publish videogames.
 
Our Products
 
The typical life cycle of successful videogame and PC accessories is similar to the life cycle of the relevant platform, which generally ranges from two to ten years. Factors such as competition for access to retail shelf space, changing technology, consumer preferences and seasonality could result in shortening the life cycle for older products, increasing the importance of our ability to release new products on a timely basis. We must frequently introduce new products and revisions to existing products in order to generate new revenues and/or to replace declining revenues from older products. The complexity of new platform technologies has resulted in longer development cycles and the need to carefully monitor and manage the product development process.
 
In fiscal 2010, approximately 31% of our gross sales was derived from products designed for use with Microsoft’s videogame platforms. Microsoft’s Xbox 360 console launched in North America, Europe and Japan in late 2005. We have entered into a license agreement with Microsoft to produce wired and certain wireless accessories for the Xbox 360.
 
In fiscal 2010, approximately 19% of our gross sales was derived from products designed for use with Nintendo’s videogame platforms and handheld products. Nintendo’s Wii console launched in North America, Europe and Japan in late 2006. In fiscal 2010, approximately 13% of our gross sales was derived from the sale of products designed for use with the Wii console and approximately 2% of our gross sales was derived from the sale of products designed for use with the GameCube console, the predecessor of the Wii console. In fiscal 2010 we entered into an agreement with Nintendo of America, Inc. for rights to offer licensed accessories for the Wii, but did not release any such products in fiscal 2010. We offer unlicensed accessories for the Wii. In 2004, Nintendo launched the Nintendo DS, followed in 2006 by the Nintendo DS Lite, and in April 2009 by the DSi. Sales of products compatible with these DS systems accounted for approximately 4% of our gross sales in fiscal 2010.
 
In fiscal 2010, approximately 19% of our gross sales was derived from products designed for use with Sony’s videogame platforms and handheld products. Sony launched the PlayStation 3 in North America and Japan in late 2006 and in Europe in early 2007. Sony launched the PlayStation 2 in the United States in 2000. Sony launched the Sony PSP handheld videogame system, MP3 player and movie player in North America and Europe in 2005. In October 2009, Sony launched the PSP Go! In fiscal 2010, products designed for use with the PlayStation 2, which Sony continues to manufacture and market, accounted for approximately 2% of our gross sales. In fiscal 2010, products designed for use with the PlayStation 3 accounted for approximately 17% of our gross sales. In fiscal 2010 we signed an agreement with Sony Computer Entertainment of America Inc. for rights to offer licensed Rock Band videogame compatible wireless Fendertm American Precision Basstm replica, Fender Telecastertm replica and Fender


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full-size, wooden Stratocastertm guitar controllers for the PlayStation® 3 computer entertainment system. In addition to those products, we offer a full line of accessories for the PlayStation 3, which accessories are not licensed by Sony.
 
Videogame console prices typically are reduced as the products mature in the market place and as the launch of new consoles is anticipated. In the prior generation of videogame consoles, the PlayStation 2 and Xbox game consoles launched in the United States with a retail price of $299 and GameCube launched with a retail price of $199. After successive price decreases, the price of the PlayStation 2 system was lowered from $129 to $99 on April 1, 2009, while the Xbox and GameCube consoles have been discontinued. A similar pattern is beginning to emerge with the current generation of videogame consoles. In November 2005, Microsoft’s Xbox 360 launched in the United States in two configurations, the Core priced at $299 and the Premium priced at $399, followed up with the launch of the Elite in April 2007 at $480. After successive price decreases, as of May 2009, the Core, which was discontinued and replaced by the Arcade, retails at $199, the Premium at $299 and the Elite at $399. In September of 2009, Microsoft reduced the price of the Elite to $299. Sony’s PlayStation 3 was launched in the United States in November 2006 in two configurations, a 20 GB model priced at $499 and a 60 GB model priced at $599. In July 2007, Sony lowered the price of the 60 GB version to $499, eliminated the 20 GB version and introduced an 80 GB version priced at $599. In October 2007, Sony in effect took another price reduction by eliminating the 60 GB version and introducing a 40 GB version at $399, while at the same time reducing the price of the 80 GB version to $499. In November 2008 Sony introduced a 160 GB PlayStation 3 for $499, at which time they dropped the price of the 80 GB version to $399. In September 2009, Sony in effect dropped the price again with the launch of the PS3 Slim at $299. Nintendo launched its Wii in the United States in November of 2006 at the price of $250. In September 2009, Nintendo dropped the price to the current $199.99. Lower console prices usually result in higher unit sales of console systems. Management believes that the more price sensitive “late adopter” consumer that waits for these price reductions before purchasing a system is also more likely to purchase value-priced accessories. Management believes that in fiscal 2011 there may be price reductions on one or more of the videogame console systems, but none of Microsoft, Nintendo or Sony have announced any intention to do so, and there are no assurances any such price reductions will take place.
 
In fiscal 2010, approximately 22% of our gross sales was derived from personal computer gaming and other accessories which are marketed and sold under our Saitek, Cyborg and Eclipse brands. These products include: PC games controllers, comprised of joysticks, gamepads and steering wheels; PC input devices, comprised primarily of mice, keyboards and other less significant products such as web-cams and hubs; digital media speakers for both PCs and the iPod/MP3 market; and chess and intelligent games, which includes chess and bridge computers and related accessories.
 
The remaining approximate 9% of our fiscal 2010 gross sales was derived from products whose use is not specific to any particular hardware platform.
 
Mad Catz Strategy
 
During fiscal 2010, the Company’s key initiatives included: leveraging our global product development capabilities to increase the flow and timeliness of new products; seeking efficiencies to meaningfully lower our operating costs without impacting our ability to continue to grow our business; increasing market penetration of our PC products, particularly in North America; refining the market positioning of our brands to more effectively compete in all relevant categories and price-points; continuing our discipline in working capital management and product placement profitability; continuing to expand our portfolio of licensed properties; continuing our efforts to maintain compliance with environmental regulations in all of the jurisdictions in which we do business; identifying strategic opportunities for the expansion of products in adjacent and compatible categories, including transactions with companies for which products Mad Catz can leverage its global distribution capabilities; continuing to expand our range of AirDrives portable audio headset products and distribution for the AirDrives line; and continuing to pursue videogame publishing opportunities, with a particular emphasis on hardware-videogame bundles.
 
In fiscal 2011, we will focus on:
 
  •  continuing to increase the flow of premium products across our major brands: Mad Catz (casual gaming); Saitek (simulation); Cyborg (pro-gaming); Eclipse (home and office); Tritton (audio and PC);
 
• continuing our discipline in working capital management and product placement profitability;


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• integrating Tritton into our organization and expanding our audio business category;
 
• expanding our global sales reach, with particular focus on the Asia-Pacific region;
 
• expanding our outreach to targeted gaming community niches;
 
• continuing to license rights to offer accessories aligned with leading videogame titles;
 
  •  continuing to pursue videogame publishing and distribution opportunities, with a particular emphasis on hardware-videogame bundles; and
 
  •  continuing to identify strategic opportunities for the expansion of products in adjacent and compatible categories, including transactions with companies for which products Mad Catz can leverage its global distribution capabilities.
 
Intellectual Property Needed to Produce our Products
 
Historically, a majority of our revenue has come from videogame accessories that are reverse-engineered to work with videogame platforms sold by Sony, Nintendo and Microsoft. Some, but not all, of our products that are compatible with these videogame platforms have been produced under license agreements pursuant to which we received proprietary and other useful information, as well as the right to use first-party logos.
 
With the exception of certain Rock Band compatible products and other limited products, the majority of our current and historic product portfolio can be produced without a license from Sony. However, there is no guarantee that Sony will not alter their technologies to make unlicensed product offerings more difficult, cost prohibitive or impossible to produce. In the event that future Sony videogame platforms are developed or altered to become “closed systems” that cannot be reverse engineered, we would not be able to produce, manufacture and market accessories for those platforms without access to the applicable first-party proprietary information. Moreover, if Sony enters into license agreements with companies other than us for these “closed systems,” we would be placed at a substantial competitive disadvantage.
 
We have a peripheral license from Microsoft covering specific product categories, including wireless specialty controllers, wired control pads, steering wheels, arcade sticks, flight sticks and dance mats for the Xbox 360 console. The license excludes light guns, cheat cards, memory units, wireless standard control pads and hard drives. The license is scheduled to expire in March 2011 but is automatically renewable for successive one-year periods unless either party provides written notice of its intention to terminate the license at least 90 days prior to the end of the current term.
 
We have a license from Nintendo for the rights to produce and distribute certain peripherals for the Rock Band videogame for the Wii system, as well as other products. The license will expire in June 2011.
 
From time to time, we acquire intellectual property licenses to augment the commercial appeal of our core products. We must obtain a license agreement before exploiting such intellectual property.
 
Product Development and Support
 
We develop products using a group of concept design, production and technical professionals, in coordination with our marketing and finance departments, with responsibility for the entire development and production process including the supervision and coordination of internal and external resources. Our hardware products are typically conceived and designed by our internal teams in San Diego, California, Magor, Wales, Shenzhen, China and Hong Kong, China. For these products we own the industrial design, and in most cases the tools, dies and molds used for production. From time to time, we also acquire the rights to produce and distribute products that are, or will be, independently created by third parties.
 
In addition, we seek out and engage independent third-party developers to create videogames and videogame enhancement products on our behalf. Such products are sometimes owned by us, and usually we have unlimited rights to commercially exploit these products. In other circumstances, the third-party developer may retain ownership of the intellectual property and/or technology included in the product and reserve certain exploitation rights. We typically select these independent third-party developers based on their expertise in developing products


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in a specific category. Each of our third-party developers is under contract with us for specific products. From time to time, we also acquire the license rights to distribute videogames that are or will be independently created by third-party publishers. In such cases, the agreements with such publishers provide us with exclusive distribution rights for a specific period of time, often for specified platforms and territories.
 
In consideration for their services, the independent third-party developer usually receives a royalty, generally based on the net sales of the product that it has developed. Typically, the developer also receives an advance, which we recoup from the royalties otherwise payable to the developer. The advance generally is paid in “milestone” stages. The payment at each stage is tied to the completion and delivery of a detailed performance milestone. Working with an independent developer allows us to reduce our fixed development costs, share development risks with the third-party developer, take advantage of the third-party developer’s expertise in connection with certain categories of products or certain platforms, and gain access to proprietary development technologies.
 
Manufacturing
 
Our accessory products are manufactured to our specifications by outsourced factories located predominantly in and around Shenzhen, China. The use of outsourced manufacturing facilities is designed to take advantage of specific expertise and allow for flexibility and scalability to respond to seasonality and changing demands for our products. In some instances, packaging and final assembly is performed at our distribution facility in California or by outsourced suppliers in the United States or Europe.
 
Distribution
 
Our products are sold to many of the world’s largest retailers of interactive entertainment products primarily on a direct basis without the use of intermediaries or distributors. We also appoint distributors in certain territories to service retail accounts not dealt with on a direct basis. We maintain a direct sales force in the United States, Europe and China. Direct shipping programs with certain customers, whereby the customer receives and takes title of the products directly in Hong Kong, are managed by our Asian operation. We operate an approximately 101,000 square foot distribution center in Redlands, California, which services our North American customers. We also utilize two outsourced distribution centers and related logistics solutions for the European market, one in the United Kingdom and one in Germany. All freight is handled by outsourced transportation companies. We operate information systems, including electronic data interchange (EDI) and integrated warehouse management systems, to remain compliant with the requirements of our mass market retailers.
 
Principal Markets
 
The Company operates as one business segment, in the design, manufacture (through third parties in Asia), sales, marketing and distribution of videogame and PC accessories and videogames. In fiscal 2010, approximately 53% of our gross sales were generated by customers whose retail stores are located in the United States, 41% in Europe, 3% in Canada, and 3% in other countries, including Australia, Japan, Korea, New Zealand and Singapore. In fiscal 2009, approximately 58% of our gross sales were generated by customers whose retail stores are located in the United States, 37% in Europe, 2% in Canada, and 3% in other countries, including Australia, Japan, Korea, New Zealand and Singapore. In fiscal 2008, approximately 59% of our gross sales were generated by customers whose retail stores are located in the United States, 36% in Europe, 3% in Canada, and 2% in other countries, including Australia, Japan, Korea, New Zealand and Singapore.
 
Customers
 
Our products are sold by many of the largest videogame and consumer accessories retailers in the world including Amazon.com, Best Buy, GameStop, Meijer, Target and Wal-Mart in the United States; Future Shop and GameStop/EB Games in Canada and ASDA, Argos, Auchan, Carrefour, Curry’s, Dixons, Electronic Partner, Game, GameStation, GameStop, Media-Saturn, Micromania, PC World and ProMarkt, in Europe.
 
In each of fiscal 2010, 2009 and 2008, one of our customers, GameStop Inc., individually accounted for at least 10% of our gross sales, accounting for approximately 25%, 29% and 33% of our gross sales in fiscal 2010, 2009 and 2008, respectively, taking into account all of its US and non-US entities.


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Competitive Environment
 
The primary markets in which we sell our products are the United States and Europe, and to a lesser extent, Canada and Asia. These markets are highly competitive, and we expect that we may face increased competition if additional companies enter these markets. Historically, price has been a significant competitive factor for interactive videogame and PC accessories. We believe that the other principal competitive factors that historically have affected retailer and consumer choice include value, product features, ease of use and installation, realism in simulation, name brand recognition, product styling and whether the product is licensed. Additional competitive factors from the perspective of the major retailers include margins, service, support, merchandising and promotional support, reliable and timely delivery, track record and electronic data interchange capability. We seek to differentiate our products through superior product design, packaging, product innovation, licensing and branding.
 
Our principal competitors for videogame and PC accessories include first-party manufacturers Microsoft, Nintendo and Sony, and third-party manufacturers including Accessories 4 Technology, ALS, Bensussen Deutsch, Big Ben, Core Gamer, Datel, Genius, Griffin Technology, Intec, Hama GmbH & Co KG, Jöllenbeck GmbH, Katana Game Accessories, Inc., Logic3, Logitech, Naki, NYKO, Performance Designed Products LLC, Razer USA Ltd, SteelSeries ApS, Thrustmaster, Trust International B.V. and Vidis GmbH.
 
We believe that our products are targeted to a broad demographic group and that the major factors that will provide us with continued viability and competitive edge are licenses, low-cost products, quality, service, brands and retail relationships.
 
Employees
 
At March 31, 2010, we had 246 full-time employees in the following locations:
 
         
Location
     
 
United States
    73  
United Kingdom
    38  
Germany
    23  
France
    8  
Hong Kong
    33  
Spain
    1  
China
    70  
         
Total
    246  
         
 
Temporary employees are used in our distribution center in California, especially during the peak shipping months of October through December. Temporary employees during this period generally range between 10 and 20 hourly employees. Our ability to attract and retain qualified personnel is essential to our continued success. None of our employees are covered by a collective bargaining agreement, nor have we ever experienced any work stoppage and we believe that our employee relations are good.
 
Executive Officers of the Registrant
 
Our executive officers and their ages as of June 10, 2010, are as follows:
 
             
Name
 
Position
 
Age
 
Darren Richardson
  President, Chief Executive Officer and Director of Mad Catz Interactive, Inc. and MCI     49  
Stewart Halpern
  Chief Financial Officer of Mad Catz Interactive, Inc. and MCI     53  
Whitney Peterson
  Vice President Corporate Development and General Counsel of MCI     45  
Brian Andersen
  Chief Operating Officer of Mad Catz Interactive, Inc.     34  


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Darren Richardson has been our President and Chief Executive Officer since April 2004 and was elected to our Board of Directors in August 2005. Prior to his appointment as our President and Chief Executive Officer, Mr. Richardson served as our Executive Vice President since October 1997 and President and Chief Operating Officer of MCI since August 1999. Mr. Richardson also served in several senior management capacities with Games Trader, including Chief Operating Officer, and Vice President of Business Development, responsible for sales and marketing with a focus on new account development. He has a Master of Business Administration degree from Trinity College, Dublin and a Bachelor of Commerce degree from the University of Wollongong, Australia.
 
Stewart Halpern has been our Chief Financial Officer since January 2007. Prior to joining us, Mr. Halpern served as Head of Finance of Rockstar Games, a division of Take Two Interactive Software, Inc., a publicly-traded videogame publisher, since 2005. Prior to his service with Rockstar Games, from 2002 to 2005, Mr. Halpern was Managing Director, Entertainment Equity Research at RBC Capital Markets, where he covered the videogame and entertainment industries. In addition, Mr. Halpern has held sell-side equity research positions at Banc of America Securities and ING Barings Furman Selz LLC, and, previously served for eight years in the investment banking department at Credit Suisse First Boston. Mr. Halpern also served for three years as the Chief Financial Officer of Rush Communications. Mr. Halpern earned a Bachelor of Science in Administrative Sciences from Yale College. He also earned a Masters of Public and Private Management degree from Yale School of Management.
 
Whitney Peterson has been Vice President Corporate Development and General Counsel for MCI since July 1998. Prior to joining MCI, Mr. Peterson spent seven years working at the international law firm of Latham & Watkins, where he represented and consulted with numerous Fortune 500 companies. Mr. Peterson received his law degree from the J. Rueben Clark School of Law at Brigham Young University, where he graduated Magna Cum Laude. Mr. Peterson also served as an Articles Editor on the BYU Law Review in which he was published. Following law school, Mr. Peterson clerked for the Honorable Bruce S. Jenkins, Chief Judge of the Federal District Court in Utah.
 
Brian Andersen has been our Chief Operating Officer since 2009. Mr. Andersen join us in October 2002 in connection with our European expansion. Mr. Andersen has held a number of positions within our European operations since that time, including Category Manager until July 2003, Director of Operations from July 2003 until July 2005 and most recently European General Manager since July 2005. Prior to joining us, Mr. Andersen worked as European Stock Controller for Recoton Corp., the parent company of InterAct Accessories, and Financial Controller for Apost in Denmark, which has since been acquired by DHL International GmbH. Mr. Andersen has completed the International Business Studies at Koege Handelsskole, Denmark.
 
Available Information
 
We provide our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports free of charge under “Investor Relations” on our website at www.madcatz.com as soon as reasonably practicable after we electronically file this material with, or furnish this material to, the United States Securities and Exchange Commission (the “SEC”). The information contained on our website is not part of this Annual Report. You may also read and copy the documents to which we refer at the Public Reference Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at www.sec.gov .
 
We are required to file reports and other information with certain Canadian provincial securities commissions. You are invited to read and copy any reports, statements or other information, other than confidential filings, that we file with the provincial securities commissions. These filings are also electronically available from the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the SEC’s Electronic Document Gathering And Retrieval System, as well as on our website at www.madcatz.com under “Investor Relations.”


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Item 1A.   Risk Factors
 
You should consider each of the following factors, as well as the other information in this Annual Report, and in our other filings with the SEC, before deciding whether to invest in or continue to hold our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. If any of the following risks actually occur, our business and financial results could be harmed. In that case, the trading price of our common shares could decline. You should also refer to the other information set forth in this Annual Report, including our financial statements and the related notes.
 
Risks Concerning Our Customers and Products
 
A significant portion of our revenue is derived from a few large customers.
 
The vast majority of our sales are generated from a small number of customers. Our top customer, GameStop Inc., accounted for approximately 25% of our gross sales in fiscal 2010, 29% of our gross sales in fiscal 2009 and 33% of our gross sales in fiscal 2008. Our top ten customers accounted for approximately 61% of gross sales in fiscal 2010, 62% of gross sales in fiscal 2009, and 70% of gross sales in fiscal 2008.
 
We do not have long-term agreements with these or other significant customers and our agreements with these customers do not require them to purchase any specific number or amount of our products. As a result, agreements with respect to pricing, returns, cooperative advertising or special promotions, among other things, are subject to periodic negotiation with each customer. No assurance can be given that these or other customers will continue to do business with us or that they will maintain their historical levels of business. The loss of any of our significant customers could have a material adverse effect on our business, results of operations, financial condition and liquidity. In addition, the uncertainty of product orders can make it difficult to forecast our sales and allocate our resources in a manner consistent with actual sales, and our expense levels are based in part on our expectations of future sales. If our expectations regarding future sales are inaccurate, we may be unable to reduce costs in a timely manner to adjust for sales shortfalls.
 
Our operating results are exposed to changes in exchange rates.
 
We have net monetary asset and liability balances in foreign currencies other than the U.S. dollar, including the Pound Sterling, the Euro, the Canadian dollar, the Hong Kong dollar and the Chinese Yuan Renminbi (“CNY”). International sales primarily are generated by our subsidiaries in the United Kingdom, Germany and Canada, and are denominated typically in their local currency. The expenses incurred by these subsidiaries are also denominated in the local currency. As a result, our operating results are exposed to change in exchange rates between the U.S. dollar and the Pound Sterling, the Euro, the Canadian dollar, the Hong Kong dollar and the CNY. We do not currently hedge our foreign exchange risk, which historically has not been significant. We will continue to monitor our exposure to currency fluctuations, and, where appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, which may be significant from time to time.
 
One or more of our largest customers may directly import or manufacture private-label products that are identical or very similar to our products. This could cause a significant decline in our sales and profitability.
 
Videogame and PC accessories are widely available from manufacturers and other suppliers around the world. Each of our largest customers has substantially greater resources than we do, and has the ability to directly import or manufacture private-label videogame accessories from manufacturers and other suppliers, including from some of our own subcontract manufacturers and suppliers. Our customers may believe that higher profit margins can be achieved if they implement a direct import or private-label program, reducing sales of our products. As a consequence, our sales and profitability could decline significantly.


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A significant portion of our revenue is derived from a few core product categories.
 
We are dependent on a small number of core product categories to generate a significant proportion of our revenues. No assurance can be given that these or other products will continue to have consumer acceptance or that they will maintain their historical levels of sales. The loss of one or more of these products could have a material adverse effect on our business, results of operations, financial condition and liquidity.
 
Our financial results are dependent on timely introduction of new products, and any failure or delay in the introduction of new products to the marketplace may have a material adverse effect on our business, results of operations, financial condition and liquidity. Our product mix constantly changes.
 
We generate our revenues from a number of frequently updated and enhanced “active products.” We define active products as products that have maintained a minimum level of average gross sales per quarter. Each product may be configured and sold in a number of different stock keeping units. We typically introduce new products and discontinue a similar number of products each year to maintain an optimal number of active products that we believe best supports our customers and the market. If we do not introduce new products in a timely and efficient manner and in accordance with our operating plans, our results of operations, financial condition and liquidity could be negatively and materially affected.
 
There are numerous steps required to develop a product from conception to commercial introduction and to ensure timely shipment to retail customers, including designing, sourcing and testing the electronic components, receiving approval of hardware and other third-party licensors, factory availability and manufacturing and designing the graphics and packaging. Any difficulties or delays in the product development process will likely result in delays in the contemplated product introduction schedule. It is common in new product introductions or product updates to encounter technical and other difficulties affecting manufacturing efficiency and, at times, the ability to manufacture the product at all. Although these difficulties can be corrected or improved over time with continued manufacturing experience and engineering efforts, if one or more aspects necessary for the introduction of products are not completed as scheduled, or if technical difficulties take longer than anticipated to overcome, the product introductions will be delayed, or in some cases may be terminated. No assurances can be given that products will be introduced in a timely fashion, and if new products are delayed, our sales and revenue growth may be limited or impaired.
 
Some of our products have been only recently introduced and although they may experience strong initial market acceptance, no assurance can be given that any initial acceptance will result in future sales. As a general matter, we expect that sales of these products will decline over the product’s life cycle. We cannot predict the length of the life cycle for any particular product. In order to control costs, and take advantage of the limited shelf space provided to us, we must periodically discontinue some of our product offerings. Our long-term operating results will therefore depend largely upon our continued ability to conceive, develop and introduce new appealing products at competitive prices.
 
We depend upon third parties to develop products and videogames.
 
Our business is dependent upon the continued development of new and enhanced videogame platforms and videogames by first-party manufacturers, such as Sony, Microsoft and Nintendo, and videogames by publishers, including but not limited to, Activision, Electronic Arts, Ubisoft, Take-Two Interactive Software and THQ. Our business could suffer if any of these parties fail to develop new or enhanced videogame platforms or popular game and entertainment titles for current or future generation platforms. If a platform is withdrawn from the market or fails to sell, we may be forced to liquidate our inventories or accept returns resulting in significant losses.
 
New game platforms and development for multiple consoles create additional technical and business model uncertainties that could impact our business.
 
A significant portion of our revenues are derived from the sale of videogame accessories for use with proprietary videogame platforms, such as the Nintendo Wii, DS and DSi; the Microsoft Xbox 360; the Sony PlayStation 3. The success of our products is significantly affected by commercial acceptance of such videogame platforms and the life cycle of older platforms. In addition, we anticipate that the research and development


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expenses incurred to develop compatible accessories for new and updated videogame platforms may impact our profitability.
 
If first-party manufacturers choose to design PC or console-based systems that do not operate with third-party accessories and are successful in implementing technological barriers that prevent us from developing, manufacturing, marketing and distributing products for these new game platforms, our ability to continue our current business would be severely limited and our business, financial condition, results of operations and liquidity would be harmed.
 
Changes to current game platforms or introductions of new game platforms may result in our products becoming inoperable or less desirable on some game platforms and/or for some games, which would reduce sales of our products and adversely affect our business, results of operations, financial condition and liquidity.
 
A significant proportion of our revenues are derived from products that are reverse engineered. First-party manufacturers continually update their game platforms to enhance features and to correct problems in the operating systems and reduce costs. These manufacturers also expend significant resources to create new game platforms. During the development of such product updates and new game platforms, manufacturers may implement changes to the design of the new game platforms that render our products inoperable and/or less desirable for playing certain games. If our products become inoperable on one or more game platform, or if platform system enhancements make our products less desirable, our sales may be significantly reduced. Moreover, we may have excess inventories of products that do not operate properly with new game platforms, which would limit our growth and harm our business, results of operations, financial condition and liquidity.
 
We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our business, operating results and financial condition.
 
Our operations and some of our products are regulated under various federal, state, local and international environmental laws. In addition, regulatory bodies in many of the jurisdictions in which we operate propose, enact and amend environmental laws and regulations on a regular basis. The laws and regulations applying to our business include those governing the discharge of pollutants into the air and water, the management, disposal and labeling of, and exposure to, hazardous substances and wastes and the cleanup of contaminated sites. We are required to incur additional costs to comply with such regulations and may incur fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws. Liability under environmental laws can be joint and several and without regard to comparative fault. The ultimate costs under environmental laws and the timing of these costs are difficult to predict. Although we cannot predict the ultimate impact of any new laws and regulations, they will likely result in additional costs or decreased revenue, and could require that we redesign or change how we manufacture our products, any of which could have a material adverse effect on our business. To the extent that our competitors choose not to abide by these environmental laws and regulations, we will be at a cost disadvantage, thereby hindering our ability to effectively compete in the marketplace.
 
Errors or defects contained in our products, failure to comply with applicable safety standards or a product recall could result in delayed shipments or rejection of our products, damage to our reputation and expose us to regulatory or other legal action.
 
Any defects or errors in the operation of our products may result in delays in their introduction. In addition, errors or defects may be uncovered after commercial shipments have begun, which could result in the rejection of our products by our customers, damage to our reputation, lost sales, diverted development resources and increased customer service and support costs and warranty claims, any of which could harm our business. Adults and children could sustain injuries from our products, and we may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. We may also be unable to obtain adequate liability insurance in the future. Because we are a small company, a product recall would be particularly harmful to us because we have limited financial and administrative resources to effectively manage a product recall and it would detract management’s attention from implementing our core


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business strategies. A significant product defect or product recall could materially and adversely affect our brand image, causing a decline in our sales, and could reduce or deplete our financial resources.
 
If we do not accurately forecast demand for particular products, we could incur additional costs or experience manufacturing delays, which would reduce our gross margins or cause us to lose sales.
 
Demand for our products depends on many factors such as consumer preferences and the introduction or adoption of game platforms and related content, and can be difficult to forecast. Demand for our products may remain stagnant or decrease. We expect that it will become more difficult to forecast demand for specific products as we introduce and support additional products, enter additional markets and as competition in our markets intensifies. If we misjudge the demand for our products, we could face the following problems in our operations, each of which could harm our operating results:
 
  •  If our forecasts of demand are too high, we may accumulate excess inventories of products, which could lead to markdown allowances or write-offs affecting some or all of such excess inventories. We may also have to adjust the prices of our existing products to reduce such excess inventories.
 
  •  If demand for specific products increases beyond what we forecast, our suppliers and third-party manufacturers may not be able to increase production rapidly enough to meet the demand. Our failure to meet market demand would lead to missed opportunities to increase our base of users, damage our relationships with retailers and harm our business.
 
  •  Rapid increases in production levels to meet unanticipated demand could result in increased manufacturing errors, as well as higher component, manufacturing and shipping costs, including increased air freight, all of which could reduce our profit margins and harm our relationships with retailers and consumers.
 
Our pricing and product return policies and other promotional activities may negatively impact our sales and profitability and harm our business, results of operations, financial condition and liquidity.
 
Many of our products are value-priced or feature-enhanced versions of products offered by first-party manufacturers. Sales of products that compete with a similar first-party product generally comprise nearly half of our gross sales. In the event a first-party manufacturer or other competitor reduces its prices, we could be forced to respond by lowering our prices to remain competitive. If we are forced to lower prices, we may be required to “price protect” the products that remain unsold in our customers’ inventories at the time of the price reduction. Price protection results in us issuing a credit to our customers in the amount of the price reduction for each unsold unit in the customer’s inventory. Our price protection policies, which are customary in the videogame industry, can have a major impact on our sales and profitability if we are forced to reduce the price of products for which a large inventory exists. It is also likely that we will experience additional price competition, which may lead to price protection, as we continue to introduce new and enhanced products.
 
To the extent we introduce new versions of products or change our product sales mix, the rate of product returns may also increase above historical levels. Although we establish allowances for anticipated product returns and believe our existing policies have resulted in allowances that are adequate, there can be no assurance that such product return obligations will not exceed our allowances in the future, which would have a material adverse effect on our future operating results and financial condition.
 
We may not be able to comply with the terms of our license agreements, which may result in the loss of one or more of the licenses.
 
We have entered into license and royalty agreements with various parties in which we pay fees in exchange for rights to use product inventions or trademarked names, shapes and likenesses in our products. The agreements often include minimum fee guarantees based on a reasonable expectation of the product sales to be generated throughout the life of the agreement. We cannot assure that we will be able to meet these expectations and may be obligated to pay unearned fees as a result. Some of our license agreements also contain stringent requirements regarding the use of the licensor’s trademarks. Our license and royalty agreements are for fixed terms. We cannot assure that we will


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be able to comply with all of the requirements contained in our licenses or that we will be able to maintain or extend the rights to our existing licenses.
 
Some of our license agreements with videogame console developers have expired or may expire within the next fiscal year, which could limit our product offerings and significantly reduce our revenues.
 
Historically, a majority of our revenues have come from the sale of videogame accessories for use with videogame consoles sold by first-party manufacturers. Some of these products have been produced under license agreements with these first-party manufacturers. Some of these licenses are necessary in order for us to actually produce and sell the products (“license dependent products”), while other licenses have some perceived or actual marketing or sales benefit, but do not dictate whether we can produce the product (“marketing licenses”). Some of these license agreements have expired and others may expire, which could limit our product offerings and significantly reduce our revenues.
 
In March 2009, we amended our license agreement with Microsoft Corporation under which we have the right to manufacture (through third party manufacturers), market and sell certain peripheral products for the Xbox 360 videogame console (“Xbox 360 Agreement”). The products produced pursuant to the Xbox 360 Agreement are license-dependent products. The term of the Xbox 360 Agreement is two years, with automatic renewals for successive one-year periods unless either party provides written notice of its intention to terminate the license at least 90 days prior to the end of the current term. Should the Xbox 360 Agreement expire, be terminated for cause, or fail to be renewed, our product offerings may be limited thereby significantly reducing our revenues.
 
The collectibility of our receivables depends on the continued viability and financial stability of our retailers and distributors.
 
Due to the concentration of our sales to large high-volume customers, we maintain significant accounts receivable balances with these customers. As of March 31, 2010 and March 31, 2009, our 10 largest accounts receivable balances accounted for approximately 71% and 76% of total accounts receivable, respectively. We generally do not require any collateral from our customers to secure payment of these accounts receivable. However, we do seek to control credit risk through ongoing credit evaluations of our customers’ financial condition and by purchasing credit insurance on European retail accounts receivable balances. If any of our major customers were to default in the payment of their obligations to us, our business, financial condition, operating results and cash flows could be adversely affected.
 
Risks Concerning Our Suppliers
 
The manufacture and supply of our products is dependent upon a limited number of third parties, and our success is dependent upon the ability of these parties to manufacture and supply us with sufficient quantities of our products and on the continued viability and financial stability of these third-party suppliers.
 
We rely on a limited number of manufacturers and suppliers for our products. There can be no assurance that these manufacturers and suppliers will be able to manufacture or supply us with sufficient quantities of products to ensure consumer availability. In addition, these parties may not be able to obtain the raw materials, energy or oil supply required to manufacture sufficient quantities of our products. Moreover, there can be no assurance that such manufacturers and suppliers will not refuse to supply us with products, and independently market their own competing products in the future, or will not otherwise discontinue their relationships with or support of our Company. Our failure to maintain our existing manufacturing and supplier relationships, or to establish new relationships in the future, could have a material adverse effect on our business, results of operations, financial condition and liquidity. If our suppliers are unable or unwilling for any reason to supply us with a sufficient quantity of our products, our business, revenues, results of operations, financial condition and liquidity would be materially adversely affected. We obtain our GameShark videogame enhancement products from third-party suppliers, for which an alternative source may not be available. If any of our key suppliers became financially unstable, our access to these products might be jeopardized, thereby adversely affecting our business, cash flow, financial condition and operational results.


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Production levels that do not match demand for our products could result in lost sales or a reduction in our gross margins.
 
The videogame and PC accessories industry is characterized by rapid technological change, frequent new product introductions, short-term customer commitments and rapid changes in demand. We determine production levels based on forecasts of the demand for our products. Actual demand for our products is difficult to forecast. If the actual demand for our products does not match the manufacture of our products, a number of problems could occur, including the loss of potential sales if production cannot be increased to match demand, and additional expenditures necessary to accelerate the production of some products, resulting in lower gross margins. Additionally, if customers find alternative sources of supply to meet their needs, our revenues, results of operations and financial condition could be adversely affected.
 
Any disruption of shipping and product delivery operations globally could harm our business.
 
We rely on contract ocean carriers to ship virtually all of our products from China to our primary distribution centers in the United States, Germany and the United Kingdom. Customers that take delivery of our products in China rely on a variety of carriers to ship those products to their distribution centers and retail outlets. We also rely on a number of sources of ground transportation to deliver our products from our primary distribution centers in the United States, the United Kingdom and Germany to our retail customers’ and distributors’ distribution centers and retail outlets. Any disruption or delay in the importation of our products, in the operation of our distribution centers or in the delivery of our products from our primary distribution centers to our retail customers’ and distributors’ distribution centers and retail outlets for any reason, including labor strikes or other labor disputes, terrorism, international incidents or lack of available shipping containers or vehicles, could significantly harm our business and reputation.
 
Risks of Doing Business Internationally
 
Any loss of China’s Normal Trade Relations “NTR” with the United States, or any changes in tariffs or trade policies, could increase our manufacturing expenses and make it more difficult for us to manufacture our products in China, if at all.
 
The majority of our products are manufactured in China and exported from Hong Kong and China to the United States and worldwide. Our products sold in the United States are currently not subject to United States import duties. However, as a result of opposition to policies of the Chinese government and China’s growing trade surpluses with the United States, there has been, and in the future may be, opposition to the extension of NTR status for China. The loss of NTR status for China, changes in current tariff structures, or adoption in the United States of other trade policies adverse to China could increase our manufacturing expenses and make it more difficult for us to manufacture our products in China, if at all.
 
Our manufacturing relationships in China may be adversely affected by changes in the political, economic and legal environment in China.
 
We maintain offices in Hong Kong and in China. The success of our operations in Hong Kong and China is highly dependent on the Chinese government’s continued support of economic reform programs that encourage private investment, and particularly foreign private investment. A change in these policies by the Chinese government could adversely affect us by, among other things, imposing confiscatory taxation, restricting currency conversion, imports and sources of supplies, prohibiting us from manufacturing our products in China, or restricting our ability to ship products from China into Hong Kong, or to ship finished products out of Hong Kong, or otherwise shutting down our offices in Hong Kong and China. Although the Chinese government has chosen economic reform policies to date, no assurance can be given that it will continue to pursue such policies or that such policies will not be significantly altered, especially in the event of a change in leadership or other social or political disruption.
 
Our sources of manufacturing and distribution capabilities could be adversely affected by ongoing tensions between the Chinese and Taiwanese governments. The Chinese government has threatened military action against Taiwan unless Taiwan adopts a plan for unifying with China. As of yet, Taiwan has not indicated that it intends to propose or adopt a reunification plan. Any military action on the part of China could lead to sanctions or military


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action by the United States and/or European countries, which could materially affect our sales to those countries and our operations in China.
 
There are also uncertainties regarding the interpretation and enforcement of laws, rules and policies in China. The Chinese legal system is based on written statutes, and prior court decisions have limited precedential value. In addition, many laws and regulations are relatively new; and the Chinese legal system is still evolving, resulting in sporadic and inconsistent enforcement and interpretation. The Chinese judiciary is relatively inexperienced in enforcing the laws that exist, leading to additional uncertainty as to the outcome of any litigation. Even where adequate laws exist in China, it may be impossible to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a judgment by a court in a different jurisdiction.
 
The Chinese tax system is subject to substantial uncertainties and has been subject to recently enacted changes, the interpretation and enforcement of which are also uncertain. There can be no assurance that changes in Chinese tax laws or their interpretation or their application will not subject us to substantial Chinese taxes in the future.
 
There are numerous risks associated with our international operations, any number of which could harm our business.
 
We have offices and sales throughout the world. Our registered office and a sales office are in Canada. Our operational headquarters is in San Diego, California. We also have offices in the United Kingdom, France, Germany, Spain, China and Hong Kong. Approximately 55% of our gross sales in fiscal year 2010 were generated by customers whose retail locations are in North America, and a substantial majority of our products are manufactured by third parties in Hong Kong and China. The geographical distances between our operations create a number of logistical and communications challenges. These challenges include managing operations across multiple time zones, directing the manufacture and delivery of products across long distances, coordinating procurement of components and raw materials and their delivery to multiple locations, and coordinating the activities and decisions of the management team, which is based in a number of different countries.
 
In addition, there are other risks inherent in international operations, which could result in disruption or termination of supply of our products available for sale. These risks include:
 
  •  unexpected changes in regulatory requirements, taxes, trade laws and tariffs;
 
  •  political instability and the potential reversal of current favorable policies encouraging foreign investment or foreign trade by host countries;
 
  •  differences in labor laws, labor unrest and difficulties in staffing and managing international operations;
 
  •  longer payment cycles;
 
  •  fluctuations in currency exchange rates;
 
  •  potential adverse tax consequences;
 
  •  limitations on imports or exports of components or assembled products, or other travel restrictions;
 
  •  differing intellectual property rights and protections;
 
  •  delays from doing business with customs brokers and governmental agencies; and
 
  •  higher costs of operations.
 
These factors could materially and adversely affect our business, operating results, and financial condition.


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Intellectual Property Risks
 
We may be faced with legal challenges related to our products, including that our products infringe third parties’ intellectual property rights. These challenges could cause us to incur significant litigation or licensing expenses or could prohibit us from producing or marketing some or all of our products entirely.
 
Although we do not believe that our products infringe the proprietary rights of any third parties, there can be no assurance that infringement or other legal claims will not be asserted against us or that any such claims will not materially adversely affect our business, financial condition, or results of operations. Regardless of their validity or success, such claims may result in costly litigation, divert management’s time and attention, cause product shipment delays or require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, or at all. If licensing arrangements are required but unavailable, we may be prohibited from marketing and distributing these products. In addition, we could also incur substantial costs to redesign our products to comply with legal orders or contractual arrangements. Any of these costs or outcomes could adversely affect our business, results of operations, financial condition and liquidity.
 
Our intellectual property rights may not prevent our competitors from using our technologies or similar technologies to develop competing products, which could weaken our competitive position and harm our financial results.
 
Our success depends in part on the use of proprietary technologies. We rely, and plan to continue to rely, on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. We have entered into confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure agreements with selected parties with whom we conduct business to limit access to and disclosure of our proprietary information. These contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent misappropriation of that intellectual property or deter independent third-party development of similar technologies. Monitoring the unauthorized use of proprietary technology and trademarks is costly, and any dispute or other litigation, regardless of outcome, may be costly and time consuming and may divert our management and key personnel from our business operations. The steps taken by us may not prevent unauthorized use of our proprietary technology or trademarks. Many features of our products are not protected by patents; and as a consequence, we may not have the legal right to prevent others from reverse engineering or otherwise copying and using these features in competitive products. If we fail to protect or to enforce our intellectual property rights successfully, our competitive position could suffer, which could adversely affect our financial results.
 
If our products are copied or “knocked-off,” our sales of these products may be materially reduced and our profitability may be negatively affected.
 
Occasionally in the videogame and PC accessories industry, successful products are “knocked-off” or copied by competitors. While we strive to protect our intellectual property, we cannot guarantee that knock-offs will not occur or that they will not have a significant effect on our business. The costs incurred in protecting our intellectual property rights could be significant, and there is no assurance that we will be able to successfully protect our rights.
 
Financing Risks
 
The amount of our outstanding debt may prevent us from taking actions we would otherwise consider in our best interest.
 
On November 20, 2007, in connection with the acquisition of our Saitek operations, we issued convertible notes with an aggregate principal amount of $14,500,000 (the “Saitek Notes”). On June 24, 2009, the terms of the Saitek Notes were amended to extend the maturity of the Saitek Notes to March 31, 2019 with annual principal and interest payments of $2,400,000 due beginning March 31, 2011 until the Saitek Notes are retired and quarterly cash payments for partial interest in the amount of approximately $45,000. As amended, the Saitek Notes bear interest at 7.5% through March 31, 2014 and 9.0% thereafter. The quarterly cash payments payable to date as well as an interest payment of $500,000 due on October 31, 2009, and an interest payment of $596,035 due on March 31, 2010


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have been paid. The debt represented by the conversion of and the limitations contained in the Saitek Notes could have material consequences on our business, including:
 
  •  it may be difficult to generate sufficient capital to satisfy our obligations under the Saitek Notes and our outstanding credit facility;
 
  •  cash required to repay borrowings under our credit facility and the Saitek Notes, should such Saitek Notes not be converted into equity, may limit our ability to make necessary or desirable capital investments in our business and to take advantage of significant business opportunities, including acquisitions or divestitures;
 
  •  the amounts outstanding under the Saitek Notes and our credit facility may make it more difficult to obtain other debt financing in the future;
 
  •  shares issued upon conversion of the Saitek Notes would represent a large share of our outstanding common stock and would result in substantial dilution of the percentage of ownership of the Company’s stockholders;
 
  •  the debt obligations represented by the Saitek Notes could make us more vulnerable to general adverse economic and industry conditions; and
 
  •  we could be at a competitive disadvantage to competitors with less debt.
 
We depend upon the availability of capital under our credit facility to finance our operations. Any additional financing that we may need may not be available on favorable terms, or at all.
 
In addition to cash flow generated from sales of our products, we finance our operations with a Credit Facility (the “Credit Facility”) provided by Wachovia Capital Finance Corporation (Central) (“Wachovia”), an unrelated party. On June 23, 2009, we extended the Credit Facility until October 31, 2012. If we are unable to comply with the restrictive and financial covenants contained in the Credit Facility, Wachovia may declare the outstanding borrowings under the facility immediately due and payable. In such an event, our liquidity will be materially adversely affected, which could in turn have a material adverse impact on our future financial position and results of operations. We would be required to obtain additional financing from other sources. We cannot predict whether or on what terms additional financing might be available. If we are required to seek additional financing and are unable to obtain it, we may have to change our business and capital expenditure plans, which would have a materially adverse effect on our future results of operations.
 
The Credit Facility contains financial and other covenants that we are obligated to maintain. If we violate any of these covenants, we will be in default under the Credit Facility. If a default occurs and is not timely cured or waived by Wachovia, Wachovia could seek remedies against us, including: (1) penalty rates of interest, (2) immediate repayment of the debt or (3) foreclosure on assets securing the Credit Facility. No assurance can be given that we will maintain compliance with these covenants in the future. The Credit Facility is asset based and can only be drawn down in an amount to which eligible collateral exists and can be negatively impacted by extended collection of accounts receivable, unexpectedly high product returns and slow moving inventory, among other factors. As of March 31, 2010, we were in compliance with all covenants.
 
If we need to obtain additional funds for any reason, including as a result of the termination of the Credit Facility or the acceleration of amounts due thereunder, increased working capital requirements, possible acquisitions or otherwise, there can be no assurance that alternative financing can be obtained on substantially similar or acceptable terms, or at all. Our failure to promptly obtain alternate financing could limit our ability to implement our business plan and have an immediate, severe and adverse impact on our business, results of operations, financial condition and liquidity. In the event that no alternative financing is available, we would be forced to drastically curtail operations, or dispose of assets, or cease operations altogether.
 
Funding for our future growth may depend upon obtaining new financing, which may be difficult to obtain given prevalent economic conditions and the general credit crisis.
 
To accommodate our expected future growth, we may need funding in addition to cash provided from current operations and continued availability under our Credit Facility provided by Wachovia. Our ability to obtain additional financing may be constrained by current economic conditions affecting global financial markets.


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Specifically, the recent credit crisis and other related trends affecting the banking industry have caused significant operating losses and bankruptcies throughout the banking industry. Many lenders and institutional investors have ceased funding even the most credit-worthy borrowers. If we are unable to obtain additional financing, we may be unable to take advantage of opportunities with potential business partners or new products, to finance our existing operations or to otherwise expand our business as planned.
 
Accounts receivable represent a large portion of our assets, a large portion of which are owed by a few customers. If these accounts receivable are not paid, we could suffer a significant decline in cash flow and liquidity which, in turn, could limit our ability to pay liabilities and purchase an adequate amount of inventory.
 
Our accounts receivable represented 28%, 28%, and 16% of our total assets as of March 31, 2010, 2009 and 2008, respectively. As a result of the substantial amount and concentration of our accounts receivable, if any of our major customers fails to timely pay us amounts owed, we could suffer a significant decline in cash flow and liquidity which could negatively affect our ability to make payments under our Credit Facility and which, in turn, could adversely affect our ability to borrow funds, to purchase inventory, to sustain or expand our current sales volume. Accordingly, if any of our major customers fails to timely pay us amounts owed, our sales and profitability may decline.
 
Increases in interest rates may increase our interest expense and adversely affect our profitability and cash flow and our ability to service indebtedness.
 
We depend, in a significant part, on borrowings under the Credit Facility to finance our operations. At March 31, 2010, the outstanding balance under the Credit Facility was $3.8 million. The interest rate applicable to the Credit Facility varies based on the U.S. prime rate plus 2.00% or, at our option, LIBOR plus 3.5% with a LIBOR floor of 1.5%. The variable rate debt outstanding under the Credit Facility had a weighted average annual interest rate of approximately 5.0% for the year ended March 31, 2010. Increases in the interest rate under the Credit Facility will increase our interest expense, which could harm our profitability and cash flow.
 
We have a substantial amount of goodwill on our balance sheet that may have the effect of decreasing our earnings or increasing our losses in the event that we are required to recognize an impairment charge to goodwill.
 
As of March 31, 2010, $8.5 million of goodwill is recorded on our balance sheet, which represents the excess of the total purchase price of our acquisitions over the fair value of the net assets acquired. At March 31, 2010, goodwill represented 16.4% of our total assets.
 
We perform an annual impairment review at the reporting unit level during the fourth quarter of each fiscal year or more frequently if we believe indicators of impairment are present. Authoritative guidance requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We determined that we have one reporting unit and we assess fair value based on a review of our market capitalization as well as a discounted cash flow model, for which the key assumptions include revenue growth, gross profit margins, operating expense trends and our weighted average cost of capital. Given the volatility of our stock price and market capitalization, which fluctuates significantly throughout the year, we do not believe that our market capitalization is necessarily the best indicator of the fair value of our Company at any moment in time. However, we have determined that market capitalization over a sustained period, when considered with other factors may be an appropriate indicator of fair value. Further, to the extent the carrying amount of our reporting unit


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exceeds its market capitalization over a sustained period, an impairment may exist and require us to test for impairment. During our 2009 fiscal year, we determined that a triggering event had occurred in the quarter ended December 31, 2008 and recorded a goodwill impairment charge of $27.9 million. We completed our annual assessment of impairment as of March 31, 2010, which did not indicate any impairment of goodwill at such date. No assurance can be given that we will not be required to record additional goodwill impairments in future periods.
 
General Risk Factors
 
Acquired companies can be difficult to integrate, disrupt our business and adversely affect our operating results. The benefits we anticipate may not be realized in the manner anticipated.
 
We have made past acquisitions, such as our recent acquisition of Tritton, and may make future acquisitions with the expectation that these acquisitions would result in various benefits including, among other things, enhanced revenue and profits, greater market presence and development, particularly in Europe, and enhancements to our product portfolio and customer base. We may not realize these benefits, as rapidly as, or to the extent, anticipated by our management. There can be no assurance that we will be able to identify, acquire or profitably manage additional businesses or successfully integrate any acquired businesses, products or technologies into our Company without substantial expenses, delays or other operational or financial problems. Acquisitions involve a number of risks, some or all which could have a material adverse effect on our acquired businesses, products or technologies. Furthermore, there can be no assurance that any acquired business, product, or technology will be profitable or achieve anticipated revenues and income. Our failure to manage our acquisition strategy successfully could have a material adverse effect on our business, results of operations and financial condition. In addition, operations and costs incurred in connection with the integration of acquired companies with our other operating subsidiaries also could have an adverse effect on our business, financial condition and operating results. If these risks materialize, our stock price could be materially adversely affected.
 
Acquisitions involve numerous risks, including:
 
  •  difficulties in integrating operations, technologies, services and personnel of the acquired companies;
 
  •  potential loss of customers of the acquired companies;
 
  •  diversion of financial and management resources from existing operations;
 
  •  potential loss of key employees of the acquired companies;
 
  •  integrating personnel with diverse business and cultural backgrounds;
 
  •  preserving the development, distribution, marketing and other important relationships of the acquired companies;
 
  •  assumption of liabilities of the acquired companies; and
 
  •  inability to generate sufficient revenue and cost savings to offset acquisition costs.
 
Our acquisitions may also cause us to:
 
  •  incur additional debt;
 
  •  make large and immediate one-time write-offs and restructuring and other related expenses;
 
  •  become subject to intellectual property or other disputes; and
 
  •  create goodwill or other intangible assets that could result in significant impairment charges and/or amortization expense in the future.
 
As a result, if we fail to properly evaluate, execute and integrate acquisitions, our business and prospects may be seriously harmed.


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We must stay at the forefront of technology and any inability to do so would have a material adverse effect on our results of operations, financial condition and liquidity.
 
The videogame and PC accessories industry is characterized by rapid technological advances, evolving industry standards, frequent new product introductions and enhancements and changing customer requirements. Much of the development of our new product offerings is dependent upon our ability to reverse engineer first-party products as they are introduced by the manufacturers; and the introduction of products that prevent or delay our ability to effectively develop products through reverse engineering could prevent us from developing new products, which would harm our business operations, financial condition, results of operations and liquidity. The introduction of products embodying or based upon new technologies and the emergence of new industry standards could render our existing inventory of products obsolete, incompatible with new consoles and unmarketable. We believe that any future success will depend upon our ability to reverse engineer new videogame systems, introduce new products that keep pace with technological developments, respond to evolving end-user requirements and achieve market acceptance. If we cannot reverse engineer the next generation videogame platforms or fail to develop and introduce new enhancements or new products for existing platforms, or if changes to existing videogame platforms render our products out of date or obsolete, or if our intended customers do not accept these products, our business would be materially harmed.
 
Current economic, political and market conditions may adversely affect our revenue growth and operating results.
 
Our revenue and profitability are affected by global business and economic conditions, including the current crisis in the credit markets, particularly in the United States and Europe. Downturns in the global economy could have a significant impact on demand for our products. In a poor economic environment such as we are operating in today, there is a greater likelihood that more of our customers could become delinquent on their obligations to us or go bankrupt, which, in turn, could result in a higher level of charge-offs and provision for credit losses, all of which would adversely affect our earnings. Uncertainty created by the long-term effects of volatile oil prices, the global economic slowdown, continuation of the global credit crisis, the war in the Middle East, terrorist activities, potential pandemics, natural disasters and related uncertainties and risks and other geopolitical issues may impact the purchasing decisions of current or potential customers. Because of these factors, we believe the level of demand for our products and services, and projections of future revenue and operating results, will continue to be difficult to predict. If economic conditions in the United States and other key markets deteriorate further or do not show improvement, we may experience material adverse impacts to our business and operating results.
 
Natural disasters or other events outside of our control may damage our facilities or the facilities of third parties on which we depend for the manufacture and distribution of our products.
 
Our North American distribution center and operational headquarters are located in California near major earthquake faults that have experienced earthquakes in the past. All of our facilities may be subject to a variety of natural or man-made disasters. An earthquake or other event outside our control, such as power shortages, floods, fires, monsoons, other severe weather conditions, terrorism or other similar events, could disrupt our operations or damage or destroy our facilities. Any of these disruptions could impair the manufacture or distribution of products, damage inventory, interrupt critical functions or otherwise affect our business negatively, harming our business operations and future financial condition, results of operations or liquidity. In addition, if the facilities of our third-party product manufacturers are affected by similar activities beyond our control, our ability to obtain sufficient manufactured products could suffer or be impaired.
 
Our operations are vulnerable because we have limited redundancy and backup systems. Any failure of our data information systems could negatively impact our financial results.
 
Our internal order, inventory and product data management system is an electronic system through which we manage customer orders and product pricing, shipment, returns, among other matters. The continued and uninterrupted performance of our information systems is critical to our day-to-day business operations. Despite our precautions, unanticipated interruptions in our computer and telecommunications systems have, in the past, caused problems or stoppages in this electronic system. These interruptions, and resulting problems, could occur in


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the future. We have extremely limited ability and personnel to process purchase orders and manage product pricing and other matters in any manner other than through this electronic system. Any interruption or delay in the operation of this electronic system could cause a significant decline in our sales and profitability.
 
Our business is seasonal and our financial results vary from period to period.
 
The videogame and PC accessories industry is highly seasonal and our operating results vary substantially from period to period. We generate a substantial portion of our sales during the holiday season. The high level of seasonality causes us to take significant risks in the purchase of inventory for the holiday season. There can be no guarantee that our customers or we will sell all of our inventories. Excess inventory at year-end may result in financial losses from obsolescence, reserves, returns and markdowns.
 
Moreover, if expenses remain relatively fixed, but our revenues are less than anticipated in any quarter, our operating results would be adversely affected for that quarter. In addition, incurring unexpected expenses could adversely affect operating results for the period in which such expenses are incurred. Failure to achieve periodic revenue, earnings and other operating and financial results as anticipated by brokerage firms or industry analysts could result in an immediate and adverse effect on the market price of our common shares. We may not discover, or be able to confirm, revenue or earnings shortfalls until the end of a quarter, which could result in a greater immediate and adverse effect on the share price.
 
We are constantly looking for opportunities to grow our business and diversify our product line. If we fail to successfully manage the expansion of our business, our sales may not increase commensurately with our capital investments, which would cause our profitability to decline.
 
The industry in which we compete is highly competitive. As a result, we look for opportunities to grow our business, including through the expansion of our product offerings. We plan to continue the diversification of our product line. Our new product offerings, including our complete lines of products for each of the next generation gaming systems, have required and will continue to require significant resources and management’s close attention. In offering new products, our resources are likely to be strained because we have less experience in the new product categories. Our failure to successfully manage our planned product expansion could result in our sales not increasing commensurately with our capital investments, causing a decline in our profitability.
 
Possible increase in value to Chinese currency vis-à-vis U.S. currency could have a material impact on the cost of our products.
 
Since 2007, the CNY has traded against the U.S. dollar in the inter-bank spot foreign exchange market in a 0.5% trading band rather than being pegged to the U.S. Dollar as it was prior to 2005 or trading in the 0.3% range applicable between 2005 and 2007. The administrative rules governing the floating band of the CNY trading prices against non-US dollar currencies in the inter-bank spot foreign exchange market and the spread between the CNY/U.S. dollar selling and buying prices quoted by the foreign exchange-designated banks remain unchanged.
 
The Chinese government may decide to change or abandon this policy at its sole discretion at any time in the future. The recent appreciation of the CNY against the U.S. dollar and any additional appreciation in the exchange rate of the CNY against the U.S. dollar will increase our factory and production costs, including labor and certain raw materials that could have a material impact on the cost of our products and our results of operations.
 
Failure to attract, retain and motivate skilled personnel would have a material adverse effect on our results of operations, financial condition or liquidity.
 
Our ability to achieve our revenue and operating performance objectives will depend in large part on our ability to attract and retain qualified and highly skilled sales, marketing, operations, logistics, management, engineering and finance personnel. We compete for our personnel with other companies, and competition for such personnel is intense and is expected to remain so for the foreseeable future, particularly for those with relevant technical expertise. Failure to retain and expand our key employee population could adversely affect our business and operating results.


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We are heavily dependent upon our senior management team. The continued availability of this team will be a major contributing factor to our future growth. In the event that any member of senior management becomes unavailable for any reason, we could be materially and adversely affected. We do not maintain key-man life insurance on our senior management.
 
Competition for market acceptance and retail shelf space and pricing competition affects our revenue and profitability.
 
The videogame and PC accessory market is highly competitive and the barriers to entry are low. Only a small percentage of products introduced in the market achieve any degree of sustained market acceptance. If our products are not successful, our operations and profitability will be negatively impacted. Competition in the videogame accessory industry is based primarily upon:
 
  •  the availability of significant financial resources;
 
  •  the quality of products;
 
  •  reviews received for products from independent reviewers;
 
  •  access to retail shelf space;
 
  •  the success of the game console for which the products were developed;
 
  •  the price at which the products are sold; and
 
  •  the number of other competing products for the system for which the products were developed.
 
Some of our competitors, particularly the first-party manufacturers, enjoy competitive advantages over us, such as longer operating histories, larger technical staffs, more established and larger sales and marketing organizations, significantly greater financial and other resources, ability to respond more quickly to new or emerging technologies and changes in customer requirements or ability to establish or strengthen cooperative relationships with retailers, distributors and other marketers.
 
Increased competition from these and other sources could require us to respond to competitive pressures by establishing pricing, marketing and other programs or seeking out additional acquisitions that may be less favorable than what we could otherwise establish or obtain, and thus could have a material adverse effect on our business, financial condition and results of operations. No assurance can be given that we will be able to compete effectively in our markets.
 
Any future terrorist attacks and other acts of violence or war may affect the demand for videogame and PC accessories, which may negatively affect our operations and financial results.
 
The continued threat of terrorism within the United States, Europe and the Middle East and the military action and heightened security measures in response to such threat may cause significant disruption to commerce throughout the world. To the extent that such disruptions result in delays or cancellations of customer orders, a general decrease in the demand for videogame accessories, or our inability to effectively market our products, our business and results of operations could be materially and adversely affected. We are unable to predict whether the threat of terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have a long-term material adverse effect on our business, results of operations, financial condition and liquidity.
 
Volatility in the mass-market and consumer electronic retail sectors could have a material adverse effect on our sales.
 
We sell our products through a network of domestic and international mass-market and consumer electronics retailers, as well as some distributors, and our success depends on the continued viability and financial stability of these customers. The retail industry has historically been characterized by significant volatility, including periods of widespread financial difficulties and consolidations, and the emergence of alternative distribution channels. While we attempt to minimize the risks associated with this industry volatility, there is always a risk that one or more of our


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customers will experience economic difficulties or be acquired by competitors. If any of our customers cease doing business, it could have a material adverse effect on our sales and could significantly harm our business, financial condition and operating results.
 
Risk Factors Related to Our Internal Controls
 
If we fail to maintain an adequate system of internal controls, we may not be able to accurately report our financial results, which could cause current and potential shareholders to lose confidence in our financial reporting and in turn affect the trading price of our common stock.
 
Section 404 of the Sarbanes-Oxley Act and the related regulations require the management of public companies in the United States to evaluate and report on the companies’ systems of internal control over financial reporting. In addition, our independent registered public accountants will be required to attest to and report on our management’s evaluation beginning with our 2011 fiscal year. We have and will continue to incur significant expenses and management resources to comply with the requirements of Section 404 on an ongoing basis. We cannot be certain that the measures we have taken to assess, document, improve and validate through testing the adequacy of our internal control process over financial reporting will ensure that we maintain such adequate controls over our financial reporting process in the future. Failure to implement required new controls could cause us to fail to meet reporting obligations, which in turn could cause current and potential shareholders to lose confidence in our financial reporting. Inferior internal controls or the determination that our internal control over financial reporting is not effective might cause investors to lose confidence in our reported financial information, which could cause volatility in the market price of our shares.
 
Risk Factors Related to Our Shares
 
Penny stock rules may negatively impact the liquidity of our common stock.
 
Our common stock is subject to rules promulgated by the United States Securities and Exchange Commission (the “SEC”) relating to “penny stocks,” which apply to certain companies whose shares trade at less than $5.00 per share and which do not meet certain other financial requirements specified by the SEC. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell our common stock and may affect the secondary market for our common stock. These rules could also have a detrimental effect upon our ability to raise funds through an offering of our common stock.
 
Volatility of share price and absence of dividends.
 
The market price of our common stock has been and is likely to be highly volatile. Many factors could have a significant adverse impact on the market price of our common stock, including:
 
  •  our or our competitors’ announcements of technological innovations or new products by us or our competitors;
 
  •  governmental regulatory actions;
 
  •  developments with our strategic alliances and collaborators;
 
  •  developments concerning our proprietary rights or the proprietary rights of our competitors (including litigation);
 
  •  period-to-period fluctuations in our operating results;
 
  •  changes in estimates of our performance by securities analysts;
 
  •  market conditions for consumer technology stocks in general; and
 
  •  other factors not within our control.


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We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future.
 
There can be no assurance that the holders or purchasers of our common stock will be able to resell their shares at prices equal to or greater than their cost.
 
The market price of our common stock could be subject to significant fluctuations in response to quarterly variations in our operating results, announcements of technological innovations through new products by us or our competitors, changes in financial estimates by securities analysts or other events or factors, many of which are beyond our control. In addition, the stock markets have experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of many companies whose businesses are dependent on technology and that often have been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock. There can be no assurance that the holders or purchasers of our common stock will be able to resell their shares at prices equal to or greater than their cost.
 
Investors may not be able to secure foreign enforcement of civil liabilities against management.
 
The enforcement by investors of civil liabilities under the federal securities laws of the United States may be adversely affected by the fact that we are organized under the laws of Canada, that some of our officers and directors are residents of a foreign country and that all, or a substantial portion, of such persons’ assets are located outside of the United States. As a result, it may be difficult for holders of our common stock to affect service of process on such persons within the United States or to realize in the United States upon judgments rendered against them.
 
Item 1B.   Unresolved Staff Comments
 
Not applicable.
 
Item 2.   Properties
 
MCI leases 16,000 square feet of office space for its headquarters at 7480 Mission Valley Road, Ste. 101, San Diego, California, 92108-4406. The lease is scheduled to expire on September 30, 2013.
 
MCI leases a 101,000 square foot warehouse located at 490 Nevada Street, Redlands, California, 92373. The lease is scheduled to expire on June 30, 2015.
 
MCE leases business premises located at 1-2 Shenley Pavilions, Shenley Wood, Milton Keynes, Buckinghamshire MK5 6LB. The lease is scheduled to expire on November 30, 2012.
 
MCE leases business premises in the United Kingdom located at Wales 1 Business Park, Building 104, Newport Road, Magor, NP26 3DG UK. The lease is scheduled to expire on October 31, 2012.
 
MCIA leases business premises located at 138 ShaTin Rural Committee Road, Unit 1717-21, 17th Floor, Grand Central Plaza, Tower 2, ShaTin, New Territories, Hong Kong. The lease is scheduled to expire on September 30, 2011.
 
MCTD leases business premises located at Building A, Dong Fang Ya Yuan, 2nd Xixiang Baomin Road, Baoan District, Shenzhen, Guangdong Province, China. The lease is scheduled to expire on April 30, 2012.
 
Saitek Elektronik Vertriebs GmbH leases business premises located at Landsberger Str. 400, 81241 München, Germany. The lease is scheduled to expire on March 31, 2011.
 
Saitek SA leases business premises located at 21 Rue d’Hauteville Bte B 75010 Paris, France. The lease is scheduled to expire on June 23, 2011.
 
Management believes that our leased facilities are adequate for the near term, with the exception of the potential to modestly increase our square footage at the MCI facility in conjunction with the Tritton acquisition. At present management is unaware of any environmental issues affecting any of our premises.


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Item 3.   Legal Proceedings
 
On or about January 23, 2009, Michele Graham, a former employee of MCI, filed an action in the Superior Court of California in the County of San Diego, styled, Michele Graham v. Mad Catz, Inc., Case No. 37-2009-00081888 CU-WT-CTL. Ms. Graham claimed she was improperly terminated based on her age. Ms. Graham requested $73,500 in special damages and $5.56 million in punitive damages. This matter was settled favorably to the Company in November 2009 for an immaterial amount. All amounts related to this settlement have been paid and the Company has been reimbursed by the insurance carrier as of March 31, 2010.
 
We may at times be involved in litigation in the ordinary course of business. We will also, from time to time, when appropriate in management’s estimation, record reserves in our financial statements for pending litigation. Litigation is expensive and is subject to inherent uncertainties, and an adverse result in any such matters could adversely impact our operating results or financial condition. Additionally, any litigation to which we may become subject could also require significant involvement of our senior management and may divert management’s attention from our business and operations. Although claims, suits, investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty, we believe that the resolution of any current pending matters will not have a material adverse effect on our business, financial condition, results of operations or liquidity.
 
Item 4.   (Reserved)


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock commenced trading on the Toronto Stock Exchange (“TSX”) in December 1995 and on NYSE Amex (“AMEX”) in the United States in September 1999. Since September 2001, our common stock has traded on the AMEX and the TSX under the symbol “MCZ”. The following table sets forth, for the fiscal quarters indicated, the high and low market prices for the Company’s common stock on the AMEX and TSX:
 
                                 
    American Stock Exchange
    Toronto Stock Exchange
 
    (U.S. $)     (Canadian $)  
    High     Low     High     Low  
 
Fiscal 2010
                               
Fourth Quarter
  $ 0.57     $ 0.33     $ 0.59     $ 0.36  
Third Quarter
    0.54       0.32       0.55       0.33  
Second Quarter
    0.50       0.24       0.50       0.27  
First Quarter
    0.47       0.22       0.50       0.20  
Fiscal 2009
                               
Fourth Quarter
  $ 0.45     $ 0.15     $ 0.50     $ 0.20  
Third Quarter
    0.61       0.25       0.62       0.25  
Second Quarter
    0.80       0.45       0.85       0.48  
First Quarter
    0.81       0.55       0.85       0.55  
 
Holders
 
The closing sales price of our common stock on the NYSE Amex was $0.40 on June 07, 2010, and there were approximately 224 shareholders of record of our common stock as of that date.
 
Dividends
 
We have never declared or paid any dividends and do not expect to pay any dividends in the foreseeable future.


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Issuer Purchases of Equity Securities
 
Neither our Company nor any affiliated purchaser repurchased any of our equity securities during fiscal 2010.
 
The graph below compares the cumulative total shareholder return on the Common Stock of the Company from March 31, 2005 through and including March 31, 2010 with the cumulative total return on the S&P/TSX Composite Total Return Index, the NYSE AMEX Composite Index and the stocks included in the Morningstar database under the Standard Industrial Code 3944 (Games & Toys, except Bicycles). The graph assumes the investment of $100 in the Company’s Common Stock and in each of the indexes on March 31, 2005 and reinvestment of all dividends. Unless otherwise specified, all dates refer to the last day of each year presented. The stock price information shown on the graph below is not necessarily indicative of future price performance.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG MAD CATZ INTERACTIVE, INC., THE NYSE AMEX COMPOSITE INDEX,
THE S&P/TSX COMPOSITE INDEX AND SIC CODE 3944 — GAMES & TOYS, EXCEPT BICYCLES
 
(PERFORMANCE GRAPH)
 
  * $100 invested on 3/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending March 31.
 
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
 
ASSUMES $100 INVESTED ON MAR. 31, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING MAR. 31, 2010
 
                                                 
    Fiscal Year Ended  
    3/31/2005     3/31/2006     3/31/2007     3/31/2008     3/31/2009     3/31/2010  
Mad Catz Interactive, Inc. 
  $ 100.00     $ 34.57     $ 51.23     $ 38.27     $ 19.17     $ 29.63  
                                                 
SIC Code Index
    100.00       141.38       162.85       180.78       103.34       164.18  
                                                 
AMEX Market Index
    100.00       128.43       143.10       148.83       100.57       142.96  
                                                 
S&P/TSX Composite Total Return
    100.00       108.92       135.64       122.93       90.62       143.3  
                                                 
 
Companies included in the Standard Industrial Code 3944 peer group include: Action Products International, Inc.; Elixir Gaming Technologies, Inc.; Galaxy Gaming, Inc.; GameTech International, Inc.; Gaming Partners; Hasbro, Inc.; Jakks Pacific, Inc.; LeapFrog Enterprises, Inc.; Majic Wheels Corp.; Mad Catz Interactive, Inc.; RC2 Corporation; Toyshare, Inc.; and Toyzap.com, Inc.


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Item 6.   Selected Financial Data
 
The summary of financial information set forth below is derived from and should be read in conjunction with the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results of operations to be expected in the future.
 
                                         
    Years Ended March 31,  
    2010     2009     2008     2007     2006  
    (In thousands of U.S. dollars, except share and per share data)  
 
Consolidated Statements of Operations Data:
                                       
Net sales
  $ 119,012     $ 112,563     $ 87,737     $ 99,797     $ 100,945  
Cost of sales
    82,616       80,558       58,841       74,703       88,147  
                                         
                                         
Gross profit
    36,396       32,005       28,896       25,094       12,798  
Operating expenses:
                                       
Sales and marketing
    11,452       13,216       10,304       8,923       12,252  
General and administrative
    12,343       14,968       11,004       8,244       7,915  
Research and development
    2,657       1,076       1,516       1,406       1,605  
Goodwill impairment
          27,887                    
Amortization
    1,758       2,344       987              
                                         
Total operating expenses
    28,210       59,491       23,811       18,573       21,772  
                                         
                                         
Operating income (loss)
    8,186       (27,486 )     5,085       6,521       (8,974 )
Interest expense, net
    (2,235 )     (2,094 )     (1,156 )     (1,109 )     (1,395 )
Foreign exchange gain (loss), net
    (270 )     (462 )     1,703       256       (765 )
Other income
    252       361       280       262       307  
                                         
                                         
Income (loss) before income taxes
    5,933       (29,681 )     5,912       5,930       (10,827 )
Income tax (expense) benefit
    (1,470 )     (2,933 )     (2,744 )     (2,225 )     4,174  
                                         
Net income (loss)
  $ 4,463     $ (32,614 )   $ 3,168     $ 3,705     $ (6,653 )
                                         
Net income (loss) per share — basic
  $ 0.08     $ (0.59 )   $ 0.06     $ 0.07     $ (0.12 )
                                         
Net income (loss) per share — diluted
  $ 0.08     $ (0.59 )   $ 0.06     $ 0.07     $ (0.12 )
                                         
Shares used in calculation:
                                       
Basic
    55,098,549       55,088,960       54,843,688       54,244,383       54,244,383  
Diluted
    55,103,237       55,088,960       55,314,438       55,036,591       54,244,383  
Consolidated Selected Balance Sheet Data:
                                       
Cash
  $ 2,245     $ 2,890     $ 5,230     $ 2,350     $ 1,607  
Working capital
    10,053       4,697       8,789       14,351       6,089  
Goodwill and intangible assets, net
    11,294       13,585       44,024       19,331       24,997  
Total assets
    51,549       55,601       91,321       55,218       68,735  
Bank loan
    3,829       13,272       11,470       1,345       8,581  
Convertible notes payable including interest
    16,096       16,051       14,901              
Total shareholders’ equity
    11,334       6,417       41,315       37,227       36,852  


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This section contains forward-looking statements involving risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors including those set out in Part I General Information, Item 1A Risk Factors elsewhere in this Annual Report. The following discussion should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this Annual Report.
 
Overview
 
Our Business
 
We are a leading provider of videogame accessories, PC game accessories, PC input devices, multimedia audio products, chess and intelligent games and videogames primarily marketed under the Mad Catz, Saitek, Cyborg, Eclipse, GameShark, Tritton and Joytech brands. We also produce for selected customers a limited range of products which are marketed on a “private label” basis. We design, manufacture (through third parties in Asia), sell, market and distribute accessories for all major videogame platforms, the PC and, to a lesser extent the iPod and other audio devices. Our products include control pads, steering wheels, joysticks, memory cards, video cables, light guns, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. We also market videogame enhancement products and publish videogames.
 
On May 28, 2010, we acquired all of the outstanding stock of Tritton Technologies Inc. In 2007, we acquired certain assets of Joytech from Take-Two Interactive Software, Inc. (NASDAQ: TTWO) and all of the outstanding stock of a private holding company that owns Saitek, a leading provider of PC game accessories, PC input devices, multimedia audio products, chess and intelligent games.
 
Seasonality and Fluctuation of Sales
 
We generate a substantial percentage of our net sales in the last three months of every calendar year, our fiscal third quarter. Our quarterly results of operations can be expected to fluctuate significantly in the future, as a result of many factors, including: seasonal influences on our sales; unpredictable consumer preferences and spending trends; the introduction of new videogame platforms; the need to increase inventories in advance of our primary selling season; and timing of introductions of new products. See further discussion and sales by quarter under “Net Sales” below.
 
Foreign Currency
 
Approximately 47% of our annual sales are transacted outside the United States. The majority of our international business is presently conducted in currencies other than the U.S. dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. To date we have not hedged against foreign currency exposure and we cannot predict the effect foreign currency fluctuations will have on us in the future.
 
Critical Accounting Policies
 
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenue and expenses during the reporting periods. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations but also because application and interpretation of these policies requires both judgment and estimates


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of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.
 
Revenue Recognition
 
We recognize revenue when each of the following have occurred (1) there is persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order, (2) the products are delivered, which generally occurs when the products are shipped and risk of loss has been transferred to the customer, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed reasonably assured. Our payment arrangements with customers typically provide net 30 and 60-day terms. All of our arrangements are single element arrangements and there are no undelivered elements after the point of shipment.
 
Customer Marketing Programs
 
Where applicable, we record allowances for customer marketing programs, including certain rights of return, price protection, volume-based cash incentives and cooperative advertising. The estimated cost of these programs is accrued as a reduction to revenue or as an operating expense in the period we sell the product or commit to the program. Such amounts are estimated, based on historical experience and contractual terms, and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors and are recorded as either operating expenses or a reduction of sales in accordance with authoritative guidance.
 
We grant limited rights of return for certain products. Estimates of expected future product returns are based on analyses of historical returns and information regarding inventory levels and the demand and acceptance of our products by the end consumer.
 
Consistent with industry standards and practices, on a product-by-product basis by customer, we allow price protection credits to be issued to retailers in the event of a subsequent price reduction. In general, price protection refers to the circumstances when we elect to decrease the price of a product and issue credits to our customers to protect the customers from lower profit margins on their then current inventory of the product. The decision to effect price reductions is influenced by retailer inventory levels, product lifecycle stage, market acceptance, competitive environment and new product introductions. Credits are issued based upon the number of units that customers have on hand at the date of the price reduction. Upon approval of a price protection program, reserves for the estimated amounts to be reimbursed to qualifying customers are established. Reserves are estimated based on analyses of qualified inventories on hand with retailers and distributors.
 
We enter into cooperative advertising arrangements with many of our customers allowing customers to receive a credit for various advertising programs. The amounts of the credits are based on specific dollar-value programs or a percentage of sales, depending on the terms of the program negotiated with the individual customer. The objective of these programs is to encourage advertising and promotional events to increase sales of our products. Accruals for the estimated costs of these advertising programs are recorded based on the specific negotiations with individual customers in the period in which the revenue is recognized. We regularly evaluate the adequacy of these cooperative advertising program accruals.
 
We also offer volume rebates to several of our customers and record reserves for such rebates as a reduction of revenue at the time revenue is recognized. Estimates of required reserves are determined based on programs negotiated with the specific customers.
 
Future market conditions and product transitions may require us to take action to increase customer programs and incentive offerings that could result in incremental reductions to revenue or increased operating expenses at the time the incentive is offered.
 
Allowance for Doubtful Accounts
 
We sell our products in the United States and internationally primarily through retailers. We generally do not require any collateral from our customers. However, we seek to control our credit risk through ongoing credit evaluations of our customers’ financial condition and by purchasing credit insurance on European accounts receivable balances.


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We regularly evaluate the collectability of our accounts receivable, and we maintain an allowance for doubtful accounts which we believe is adequate. The allowance is based on management’s assessment of the collectability of specific customer accounts, including their credit worthiness and financial condition, as well as historical experience with bad debts, receivables aging and current economic trends.
 
Our customer base is highly concentrated and a deterioration of a significant customer’s financial condition, or a decline in the general economic conditions could cause actual write-offs to be materially different from the estimated allowance. As of March 31, 2010, one customer, represented 30% of total accounts receivable. Customers comprising the ten highest outstanding trade receivable balances accounted for approximately 71% of total accounts receivables as of March 31, 2010. If any of these customer’s receivable balances should be deemed uncollectible, we would have to make adjustments to our allowance for doubtful accounts, which could have a significant adverse effect on our financial condition and results of operations in the period the adjustments are made.
 
Inventory Valuation
 
We value inventories at the lower of cost or market value. If the estimated market value is determined to be less than the recorded cost of the inventory, a provision is made to reduce the carrying amount of the inventory item. Determination of the market value may be complex, and therefore, requires management to make assumptions and to apply a high degree of judgment. In order for management to make the appropriate determination of market value, the following items are commonly considered: inventory turnover statistics, inventory quantities on hand in our facilities and customer inventories, unfilled customer order quantities, forecasted consumer demand, current retail prices, competitive pricing, seasonality factors, consumer trends and performance of similar products or accessories. Subsequent changes in facts or circumstances do not result in the reversal of previously recorded reserves.
 
We have not made any significant changes in the methodology or assumptions used to establish our inventory reserves as reported during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a significant change in the future methodology or assumptions we use to calculate our inventory reserves. However, if our estimates regarding market value are inaccurate, or changes in consumer demand affect specific products in an unforeseen manner, we may be exposed to additional increases in our inventory reserves that could be material.
 
Valuation of Goodwill
 
We perform an annual impairment review at the reporting unit level during the fourth quarter of each fiscal year or more frequently if we believe indicators of impairment are present. Authoritative guidance requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. We recorded an impairment charge of $27.9 million during the year ended March 31, 2009. Significant judgments are required to estimate the fair value of our reporting unit and we assess its fair value based on a review of our market capitalization and control premium, as well as a discounted cash flow model, for which the key assumptions include revenue growth, gross profit margins, operating expense trends and our weighted average cost of capital.
 
Share-Based Payments
 
We measure stock-based compensation cost at the grant date, based on the fair value of the award, and recognize it as expense over the employee’s requisite service period.


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The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. The expected life of the options is based on a number of factors, including historical exercise experience, the vesting term of the award, the expected volatility of our stock and an employee’s expected length of service. The expected volatility is estimated based on the historical volatility (using daily pricing) of our stock. The expected term considers the contractual term of the option as well as historical exercise and forfeiture behavior of our employees. The risk-free interest rate is determined on a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the stock options. In accordance with authoritative guidance, we reduce the calculated Black-Scholes value by applying a forfeiture rate, based upon historical pre-vesting option cancellations. Estimated forfeitures are reassessed at each balance sheet date and may change based on new facts and circumstances.
 
Valuation of Deferred Income Taxes
 
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies, including reversals of deferred tax liabilities, in assessing the need for a valuation allowance. If we were to determine that we will not realize all or part of our deferred tax assets in the future, we would make an adjustment to the carrying value of the deferred tax asset, which would be reflected as income tax expense. Conversely, if we were to determine that we will realize a deferred tax asset, which currently has a valuation allowance, we would reverse the valuation allowance which would be reflected as an income tax benefit or as an adjustment to stockholders’ equity, for tax assets related to stock options, or goodwill, for tax assets related to acquired businesses.
 
In determining taxable income for financial statement reporting purposes, we must make certain estimates and judgments. These estimates and judgments are applied in the calculation of certain tax liabilities and in the determination of the recoverability of deferred tax assets, which arise from temporary differences between the recognition of assets and liabilities for tax and financial statement reporting purposes. In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our uncertain tax positions in each jurisdiction where we operate. These estimates involve complex issues and require us to make judgments about the likely application of the tax law to our situation, as well as with respect to other matters, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns and the outcomes of disputes with tax authorities. The ultimate resolution of these issues may take extended periods of time due to examinations by tax authorities and statutes of limitations. In addition, changes in our business, including acquisitions, changes in our international corporate structure, changes in the geographic location of business functions or assets, changes in the geographic mix and amount of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate.
 
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax rules and the potential for future adjustment of our uncertain tax positions by the Internal Revenue Service or other taxing jurisdiction. If our estimates of these taxes are greater or less than actual results, an additional tax benefit or charge will result.


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RESULTS OF OPERATIONS
 
Fiscal Year Ended March 31, 2010 Compared to Fiscal Year Ended March 31, 2009
 
Net Sales
 
From a geographical perspective, our net sales for the fiscal years ended March 31, 2010 and 2009 were as follows (in thousands):
 
                                                 
    Year Ended
    Year Ended
             
    March 31, 2010     March 31, 2009     $
    %
 
    Net Sales     % of Total     Net Sales     % of Total     Change     Change  
 
United States
  $ 63,223       53 %   $ 65,003       58 %   $ (1,780 )     (2.7 )%
Europe
    49,005       41 %     41,442       37 %     7,563       18.2 %
Canada
    3,109       3 %     1,974       2 %     1,135       57.5 %
Other countries
    3,675       3 %     4,144       3 %     (469 )     (11.3 )%
                                                 
Consolidated net sales
  $ 119,012       100 %   $ 112,563       100 %   $ 6,449       5.7 %
                                                 
 
Net sales in fiscal 2010 increased 5.7% from fiscal 2009. Net sales in the United States decreased $1.8 million over the prior year, which was primarily attributable to a decline in sales of products sold for use on the Wii platform, as the prior-year period benefitted from strong sales of Wii Fit accessories, with no significant new product placements for the Wii platform in the current period and an overall softness in the videogame market, which led to the price cuts in videogame console hardware which occurred late in the quarter ended September 30, 2009. The decline in Wii product sales was partly offset by increases in sales of products for the PlayStation 3 and Xbox 360 platforms. Net sales in Europe increased $7.6 million, which is largely attributable to the success of new products launched for Xbox 360 during this fiscal year. Net sales in Canada increased by $1.1 million, largely attributable to new placements at existing customers and the addition of new customers due to the success of new products launched for PlayStation 3 and Xbox 360 platforms.
 
Our sales by quarter were as follows (in thousands):
 
                                 
    Year Ended
    Year Ended
 
    March 31, 2010     March 31, 2009  
    Net Sales     % of Total     Net Sales     % of Total  
 
1st quarter
  $ 22,378       19 %   $ 23,226       21 %
2nd quarter
    21,603       18 %     25,750       23 %
3rd quarter
    48,763       41 %     40,817       36 %
4th quarter
    26,268       22 %     22,770       20 %
                                 
Total
  $ 119,012       100 %   $ 112,563       100 %
                                 
 
In fiscal 2010, neither first nor second quarter sales were significantly benefitted by products launched in those quarters, third quarter sales included the launch of a line of products for use with Call of Duty: Modern Warfare 2 games on the Xbox 360 and Playstation 3 and fourth quarter sales included the launch of the Fight Pad and Fight Stick for use with the Super Street Fighter IV games. In fiscal 2009, first quarter sales included the launch of the Wii Fit silicone cover, second quarter sales included the launch of the Rock Band Fender Precision bass replica for the Xbox 360, third quarter sales included the launch of the universal Rock Band 2 Double Cymbal expansion pack and fourth quarter sales included the launch of the Fight Pad, Fight Stick and Tournament Edition Fight Stick for use with the Street Fighter IV games.


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Our sales by platform are as follows:
 
                 
    Year Ended March 31,  
    2010     2009  
 
Xbox 360
    31 %     19 %
PC
    22 %     29 %
PlayStation 3
    17 %     8 %
Wii
    13 %     16 %
Handheld Consoles
    4 %     10 %
PlayStation 2
    2 %     3 %
GameCube
    2 %     2 %
All others
    9 %     13 %
                 
Total
    100 %     100 %
                 
 
Our sales by product category are as follows:
 
                 
    Year Ended March 31,  
    2010     2009  
 
Controllers
    28 %     23 %
Specialty controllers
    24 %     16 %
Accessories
    24 %     46 %
Audio
    15 %     7 %
PC
    8 %     6 %
Games(a)
    1 %     1 %
All others
    0 %     1 %
                 
Total
    100 %     100 %
                 
 
 
(a) Games category includes GameShark videogame enhancement products in addition to videogames with related accessories.
 
Gross Profit
 
Gross profit is defined as net sales less cost of sales. Cost of sales consists of product costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center costs, including depreciation and other overhead costs.
 
The following table presents net sales, cost of sales and gross profit for fiscal years ended March 31, 2010 and 2009 (in thousands):
 
                                                 
    Year Ended March 31,              
    2010     2009              
          % of
          % of
    $
    %
 
    Amount     Net Sales     Amount     Net Sales     Change     Change  
 
Net sales
  $ 119,012       100.0 %   $ 112,563       100.0 %   $ 6,449       5.7 %
Cost of sales
    82,616       69.4 %     80,558       71.6 %     2,058       2.6 %
                                                 
Gross profit
  $ 36,396       30.6 %   $ 32,005       28.4 %   $ 4,391       13.7 %
                                                 
 
Gross profit in fiscal 2010 increased 13.7% from fiscal 2009, and gross profit as a percentage of net sales increased to 30.6% in fiscal 2010 from 28.4% in fiscal 2009. The increase in gross profit margin was predominately due to leverage gained from the fixed components of overhead in Asia and the distribution centers. An additional contributor was a decrease in freight expense as a percentage of sales, mainly related to less use of air freight. These


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increases in gross profit margin were partially offset by a number of factors, none of which was individually significant.
 
Operating Expenses
 
Operating expenses for fiscal years ended March 31, 2010 and 2009 were as follows (in thousands):
 
                                                 
    March 31,
    % of
    March 31,
    % of
    $
    %
 
    2010     Net Sales     2009     Net Sales     Change     Change  
 
Sales and marketing
  $ 11,452       9.6 %   $ 13,216       11.7 %   $ (1,764 )     (13.3 )%
General and administrative
    12,343       10.4 %     14,968       13.3 %     (2,625 )     (17.5 )%
Research and development
    2,657       2.2 %     1,076       1.0 %     1,581       146.9 %
Goodwill impairment
          %     27,887       24.8       (27,887 )     (100.0 )%
Amortization of intangibles
    1,758       1.5 %     2,344       2.1 %     (586 )     (25.0 )%
                                                 
Total operating expenses
  $ 28,210       23.7 %   $ 59,491       52.9 %   $ (31,281 )     (52.6 )%
                                                 
 
Sales and Marketing Expenses.  Sales and marketing expenses consist primarily of payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising and costs of operating our GameShark.com website. The decrease in sales and marketing expense of $1.8 million is primarily due to cost reductions implemented during fiscal year 2010, which also resulted in a decrease in sales and marketing expense as a percentage of net sales. We expect sales and marketing expenses as a percentage of net sales in fiscal 2011 to increase modestly as we make planned investments in expanding our global sales and online capabilities.
 
General and Administrative.  General and administrative expenses include salaries and benefits for our executive and administrative personnel, facilities costs and professional services, such as legal and accounting, and bad debt expense. The decrease in general and administrative expenses of $2.6 million is primarily due to reduced bad debt expense, principally related to the Circuit City bankruptcy, which accounted for $0.7 million of the decrease and lower accounting fees which accounted for $0.6 million of the decrease. We expect general and administrative expenses as a percentage of net sales in fiscal 2011 to decline.
 
Research and Development.  Research and development expenses include the costs of developing and enhancing new and existing products in addition to the costs of developing games. The increase in research and development expenses is primarily due to expanded research and development activities related to our accessories and peripherals products; we had no videogames under development during the period. We expect research and development expenses as a percentage of net sales in fiscal 2011 to remain approximately the same as that of fiscal 2010.
 
Goodwill Impairment.  Given a prolonged decline in the market capitalization of the Company noted through the third quarter of fiscal year 2009, which is the Company’s strongest quarter given its seasonality, a goodwill impairment test was performed, at which time it was determined an impairment did exist. Accordingly, the Company performed the step two analysis and recorded an impairment charge of $27.9 million during the year ended March 31, 2009. The annual impairment test performed at March 31, 2010 indicated no further impairment existed as of that date.
 
Amortization of Intangibles.  Amortization of intangibles decreased as certain intangibles relating to the Joytech and Saitek acquisitions have been fully amortized.


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Interest Expense, net, Foreign Exchange Loss and Other Income
 
Interest expense, foreign exchange gain (loss) and other income for fiscal years ended March 31, 2010 and 2009 was as follows (in thousands):
 
                                                 
    March 31,
    % of
    March 31,
    % of
    $
    %
 
    2010     Net Sales     2009     Net Sales     Change     Change  
 
Interest expense, net
  $ (2,235 )     1.8 %   $ (2,094 )     1.9 %   $ (141 )     6.8 %
Foreign exchange loss
  $ (270 )     0.2 %   $ (462 )     0.4 %   $ 192       (41.6 )%
Other income
  $ 252       0.2 %   $ 361       0.3 %   $ (109 )     (30.2 )%
 
Interest expense, net is materially consistent year over year. The decrease in foreign exchange loss in fiscal 2010 compared to fiscal 2009 resulted primarily from less fluctuation between the British pound and the Euro against the U.S. dollar during the 2010 period. Other income primarily consisted of advertising income from our GameShark.com website and the decrease in other income is primarily related to lower Gameshark advertising revenues.
 
Provision for Income Taxes
 
Income tax expense for fiscal years ended March 31, 2010 and 2009 was as follows (in thousands):
 
                     
March 31,
  Effective
  March 31,
  Effective
  $
  %
2010
 
Tax Rate
 
2009
 
Tax Rate
 
Change
 
Change
 
$1,470
  24.8%   $2,933   (9.9)%   $(1,463)   (49.9)%
 
The Company’s effective tax rate is a blended rate for different jurisdictions in which the Company operates. Our effective tax rate fluctuates depending on the composition of our taxable income between the various jurisdictions in which we do business, including our U.S. operating company, and our Canadian and French entities for which we provide full valuation allowances against their losses. The increase in effective tax rate in fiscal 2010 versus fiscal 2009 is primarily a result of the impact of the non-deductible goodwill impairment charge and the recognition of a valuation allowance on our U.S. deferred tax assets in fiscal 2009.
 
Fiscal Year Ended March 31, 2009 Compared to Fiscal Year Ended March 31, 2008
 
Net Sales
 
From a geographical perspective, our net sales for the fiscal years ended March 31, 2009 and 2008 were as follows (in thousands):
 
                                                 
    Year Ended
    Year Ended
             
    March 31, 2009     March 31, 2008     $
    %
 
    Net Sales     % of Total     Net Sales     % of Total     Change     Change  
 
United States
  $ 65,003       58 %   $ 52,129       59 %   $ 12,874       24.7 %
Europe
    41,442       37 %     31,257       36 %     10,185       32.6 %
Canada
    1,974       2 %     2,806       3 %     (832 )     (29.7 )%
Other countries
    4,144       3 %     1,545       2 %     2,599       168.2 %
                                                 
Consolidated net sales
  $ 112,563       100 %   $ 87,737       100 %   $ 24,826       28.3 %
                                                 
 
Net sales in fiscal 2009 increased 28.3% from fiscal 2008. Net sales in the United States increased $12.9 million over the prior year primarily due to a full year of sales related to the Saitek acquisition being included in the fiscal 2009 results and the release of new products. Due to the cyclical nature of the gaming console industry we believe that the sales of current generation accessories will continue to increase compared to the prior generation products as current generation consoles reach full adoption and more demand is driven by the release of current generation games. In fiscal year 2009 we did not have a license to manufacture wireless control pads for the Xbox 360 or controllers for Nintendo’s Wii, the leading console gaming platforms. As a result of this circumstance, sales of control pads decreased both in absolute dollars and as a percentage of sales. In the United States sales of products for the PlayStation 2 and Xbox have declined in fiscal 2009 compared to fiscal 2008, partially offset by an


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increase in sales of products for the Xbox 360, PlayStation 3 and the Wii. Net sales in Europe increased $10.2 million primarily due to a full year of sales related to the acquisition of Saitek being included in the fiscal 2009 results. Sales also increased due to the continued expansion of market penetration of our console videogame peripherals products.
 
Net sales in Canada declined by $0.8 million primarily due to a decline in core product sales (primarily non-licensed control pads) to existing customers, as well as the Company’s elimination of low margin and unprofitable product placements.
 
Net sales to other countries increased by $2.6 million, primarily due to a full year of sales related to the acquisition of Saitek being included in the fiscal 2009 results.
 
Our sales by quarter were as follows (in thousands):
 
                                 
    Year Ended
    Year Ended
 
    March 31, 2009     March 31, 2008  
    Net Sales     % of Total     Net Sales     % of Total  
 
1st quarter
  $ 23,226       21 %   $ 14,631       17 %
2nd quarter
    25,750       23 %     16,876       19 %
3rd quarter
    40,817       36 %     34,316       39 %
4th quarter
    22,770       20 %     21,914       25 %
                                 
Total
  $ 112,563       100 %   $ 87,737       100 %
                                 
 
In fiscal 2009, first quarter sales included the launch of the Wii Fit silicone cover, second quarter sales included the launch of the Rock Band Fender Precision bass replica for the Xbox 360, third quarter sales included the launch of the universal Rock Band 2 Double Cymbal expansion pack and fourth quarter sales included the launch of the Fight Pad, Fight Stick and Tournament Edition Fight Stick for use with the Street Fighter IV games. In fiscal 2008, first quarter sales included the launch of the Bluetooth headset for the PlayStation 3, second quarter sales included Halo 3 licensed products, third quarter sales included the launch of our racing wheel for the PlayStation 3, as well as licensed products for Assassin’s Creed and Mass Effect and the fourth quarter sales did not include any material new product launches.
 
Our sales by product group are as follows:
 
                 
    Year Ended March 31,  
    2009     2008  
 
PC
    31 %     15 %
Xbox 360
    19 %     17 %
Handheld Consoles(a)
    17 %     18 %
Wii
    15 %     6 %
PlayStation 3
    8 %     13 %
PlayStation 2
    3 %     12 %
GameCube
    2 %     7 %
Xbox
    1 %     4 %
All others
    4 %     8 %
                 
Total
    100 %     100 %
                 
 
 
(a) Handheld consoles include Sony PSP and Nintendo Game Boy Advance, Game Boy Advance SP, DS, DS Lite and Micro.


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Our sales by product category are as follows:
 
                 
    Year Ended March 31,  
    2009     2008  
 
Personal computer products
    31 %     15 %
Accessories
    29 %     17 %
Control pads
    23 %     30 %
Bundles
    7 %     14 %
Games(b)
    1 %     4 %
Steering wheels
    1 %     3 %
Memory
    1 %     3 %
All others
    7 %     14 %
                 
Total
    100 %     100 %
                 
 
(b) Games category includes GameShark videogame enhancement products in addition to videogames with related accessories.
 
Gross Profit
 
Gross profit is defined as net sales less cost of sales. Cost of sales consists of product costs, cost of licenses and royalties, cost of freight-in and freight-out and distribution center costs, including depreciation and other overhead costs.
 
The following table presents net sales, cost of sales and gross profit for fiscal years ended March 31, 2009 and 2008 (in thousands):
 
                                                 
    Year Ended March 31,              
    2009     2008              
          % of
          % of
    $
    %
 
    Amount     Net Sales     Amount     Net Sales     Change     Change  
 
Net sales
  $ 112,563       100.0 %   $ 87,737       100.0 %   $ 24,826       28.3 %
Cost of sales
    80,558       71.6 %     58,841       67.1 %     21,717       36.9 %
                                                 
Gross profit
  $ 32,005       28.4 %   $ 28,896       32.9 %   $ 3,109       10.8 %
                                                 
 
Gross profit in fiscal 2009 increased 10.8% from fiscal 2008, and gross profit as a percentage of net sales decreased to 28.4% in fiscal 2009 from 32.9% in fiscal 2008. The decrease in gross profit margin was predominately due the increased value of the U.S. dollar which decreased gross profit margin by approximately 4.4 percentage points. The remaining decrease in gross profit margin is attributable to a variety of small factors.
 
Operating Expenses
 
Operating expenses for fiscal years ended March 31, 2009 and 2008 were as follows (in thousands):
 
                                                 
    March 31,
    % of
    March 31,
    % of
    $
    %
 
    2009     Net Sales     2008     Net Sales     Change     Change  
 
Sales and marketing
  $ 13,216       11.7 %   $ 10,304       11.8 %   $ 2,912       28.3 %
General and administrative
    14,968       13.3 %     11,004       12.5 %     3,964       36.0 %
Research and development
    1,076       1.0 %     1,516       1.7 %     (440 )     (29.0 )%
Goodwill impairment
    27,887       24.8 %                 27,887       100.0 %
Amortization of intangibles
    2,344       2.1 %     987       1.1 %     1,357       137.5 %
                                                 
Total operating expenses
  $ 59,491       52.9 %   $ 23,811       27.1 %   $ 35,680       149.8 %
                                                 


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Sales and Marketing Expenses.  Sales and marketing expenses consist primarily of payroll, commissions, participation at trade shows and travel costs for our worldwide sales and marketing staff, advertising and costs of operating our GameShark.com website. The increase in sales and marketing expense of $2.9 million is primarily due to a full year of expense related to the Saitek and Joytech operations being included in the fiscal 2009 results, which accounted for $2.9 million of the increase, and the fact that a significant portion of sales and marketing expense is variable to sales. Sales and marketing expenses as a percentage of net sales remained relatively flat from fiscal year 2008 to fiscal year 2009.
 
General and Administrative.  General and administrative expenses include salaries and benefits for our executive and administrative personnel, facilities costs and professional services, such as legal and accounting, and bad debt expense. The increase in general and administrative expenses of $4.0 million is primarily due to a full year of expense related to the Saitek operations being included in the fiscal 2009 results which accounted for $2.2 million of the increase, increased employee related expenses at our U.S. subsidiary which accounted for $0.7 million of the increase, higher accounting fees which accounted for $0.5 million of the increase and bad debt expense, principally related to the Circuit City bankruptcy, which accounted for $0.5 million of the increase.
 
Research and Development.  Research and development expenses include the costs of developing and enhancing new and existing products in addition to the costs of developing games. The decrease in research and development expenses is primarily due to decreased videogame development costs as we had no videogame game titles in development during the period.
 
Goodwill Impairment.  Given a prolonged decline in the market capitalization of the Company noted through the third quarter of fiscal year 2009, which is the Company’s strongest quarter given its seasonality, a goodwill impairment test was performed, at which time it was determined an impairment did exist. Accordingly, the Company performed the step two analysis and recorded an impairment charge of $27.9 million during the year ended March 31, 2009.
 
Amortization of Intangibles.  Amortization of intangibles increased due to a full year of amortization of the Joytech and Saitek intangibles being recorded in fiscal 2009.
 
Interest Expense, Foreign Exchange Gain and Other Income
 
Interest expense, foreign exchange gain (loss) and other income for fiscal years ended March 31, 2009 and 2008 was as follows (in thousands):
 
                                                 
    March 31,
    % of
    March 31,
    % of
    $
    %
 
    2009     Net Sales     2008     Net Sales     Change     Change  
 
Interest expense
  $ (2,094 )     1.9 %   $ (1,156 )     1.3 %   $ (938 )     (81.1 )%
Foreign exchange (loss) gain
  $ (462 )     0.4 %   $ 1,703       1.9 %   $ (2,165 )     (127.1 )%
Other income
  $ 361       0.3 %   $ 280       0.3 %   $ 81       28.9 %
 
Interest expense in fiscal 2009 increased from the prior year due to an increase in total debt outstanding attributable to financing the Saitek acquisition, partly offset by a decline in the line of credit interest rate during the period. The foreign exchange loss in fiscal 2009 compared to the fiscal 2008 gain resulted primarily from the loss in relative value between the British pound and the Euro against the U.S. dollar. Other income primarily consisted of advertising income from our GameShark.com website. Other income is materially consistent year to year.
 
Provision for Income Taxes
 
Income tax expense for fiscal years ended March 31, 2009 and 2008 was as follows (in thousands):
 
                                         
March 31,
  Effective
  March 31,
  Effective
  $
  %
2009
 
Tax Rate
 
2008
 
Tax Rate
 
Change
 
Change
 
$2,933
    (9.9 )%   $ 2,744       46.4 %   $ 189       6.9 %
 
The Company’s effective tax rate is a blended rate for different jurisdictions in which the Company operates. Our effective tax rate fluctuates depending on the composition of our taxable income between the various jurisdictions in which we do business, including our U.S. operating company, and our Canadian and French


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entities for which we provide full valuation allowances against their losses. The decrease in effective tax rate in fiscal 2009 versus fiscal 2008 is primarily a result of the impact of the non-deductible goodwill impairment charge and the recognition of a valuation allowance on our U.S. deferred tax assets in fiscal 2009.
 
Recent Accounting Pronouncements
 
In January 2010, the FASB issued amended standards that require additional fair value disclosures. These disclosure requirements are effective in two phases. Effective in the Company’s current fiscal year, the amended standards will require enhanced disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers between categories of the fair value measurement hierarchy. Effective in our fiscal year beginning April 1, 2011, the amended standards will require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). These amended standards are not expected to significantly impact the Company’s consolidated financial statements.
 
Liquidity and Capital Resources
 
Sources of Liquidity
 
Historically we have funded our operations primarily from cash generated from operations, a revolving line of credit (as discussed below) and proceeds from employee stock option exercises. At March 31, 2010, available cash was approximately $2.2 million compared to cash of approximately $2.9 million at March 31, 2009 and $5.2 million at March 31, 2008.
 
We maintain a Credit Facility (the “Credit Facility”) with Wachovia Capital Finance Corporation (Central) (“Wachovia”) under a revolving line of credit subject to the availability of eligible collateral (accounts receivable and inventories), which changes throughout the year. On June 23, 2009, we extended the term of the Credit Facility until October 31, 2012. The line of credit accrues interest on the daily outstanding balance at the U.S. prime rate plus 2.0% or, at the Company’s option, LIBOR plus 3.50% with a LIBOR floor of 1.50%. At March 31, 2010 the interest rate was 5.3%. The Company is also required to pay a monthly service fee of $2,000 and an unused line fee equal to 0.50% of the unused portion of the loan. Borrowings under the Credit Facility are secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. (“MCI”) and by a pledge of all of the capital stock of the Company’s subsidiaries and is guaranteed by the Company. See Note 7 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” elsewhere in this Form 10-K.
 
On November 20, 2007, we issued to the seller of Saitek $14,500,000 of convertible notes (“Saitek Notes”) as part of the consideration relating to that acquisition. On June 24, 2009, the terms of the Saitek Notes were amended to extend the maturity of the Saitek Notes to March 31, 2019 with annual principal and interest payments of $2,400,000 due beginning March 31, 2011 until the Saitek Notes are retired and quarterly cash payments for partial interest in the amount of approximately $45,000. As amended, the Saitek Notes bear interest at 7.5% through March 31, 2014 and 9.0% thereafter. The quarterly cash payments payable to date as well as an interest payment of $500,000 due on October 31, 2009, and an interest payment of $596,035 due on March 31, 2010 have been paid. We believe that we will be able to repay this debt through our earnings and capital availability without further modification. The Saitek Notes are convertible into Mad Catz common stock at the exercise price of $1.419 per share. See Note 8 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data” elsewhere in this Form 10-K.
 
Pursuant to the Saitek purchase agreement, a working capital adjustment in the amount of $847,000 was made to the purchase price based on the completion of the final balance sheet. The Company financed this amount with a note payable to The Winkler Atlantic Trust. The note was repaid in full as of March 31, 2010.
 
Net cash provided by (used in) operating activities was approximately $12.7 million, ($2.1) million and $6.2 million for the years ended March 31, 2010, 2009 and 2008, respectively. Net cash provided by operating activities in 2010 reflects net income for the year, decreases in accounts receivable, net of sales reserves and increases in accrued liabilities and income tax payable, partially offset by reductions in accounts payable. We will continue to focus on working capital efficiency, but there can be no assurance that income from operations will


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exceed working capital requirements and it is likely we will continue to rely on our credit facility to finance our working capital. Net cash used in operating activities in 2009 is mainly related to an increase in accounts receivable and decreases in accounts payable and accrued expenses offset by a decrease in inventories, all in the context of a loss from operations. Net cash provided by operating activities in 2008 reflects net income for the year and decreases in accounts receivable, net of sales reserves and inventories partially offset by decreases in accounts payable, accrued liabilities and prepaid expense and other current assets.
 
Net cash used in investing activities was approximately $2.7 million, $1.4 million and $14.0 million for the years ended March 31, 2010, 2009 and 2008, respectively. Net cash used in investing activities in 2010 and 2009 consisted of capital expenditures to support our operations. Net cash used in investing activities in 2008 was primarily due to the Saitek and Joytech acquisitions. Capital expenditures planned for 2011, excluding any potential acquisition, are approximately similar in total amount to that of fiscal 2010 and are discretionary in nature.
 
Net cash (used in) provided by financing activities was approximately ($10.7) million, $1.9 million and $10.3 million for the years ended March 31, 2010, 2009 and 2008, respectively. Net cash used in financing activities in 2010 consisted of net repayments under our line of credit. Net cash provided by financing activities in 2009 and 2008 consisted of net proceeds under our line of credit.
 
At March 31, 2010, the outstanding balance on our line of credit was $3.8 million and our weighted average annual interest rate during fiscal 2010 was 5.0%. We are required to meet a quarterly covenant based on the Company’s fixed charge coverage ratio. The Company was in compliance with this covenant as of March 31, 2010.
 
At March 31, 2010, the outstanding balance and accrued interest on the Saitek convertible notes payable was $16.0 million.
 
We believe that our available cash balances, anticipated cash flows from operations and available line of credit will be sufficient to satisfy our operating needs for at least the next twelve months. However, in the normal course of its business the Company seeks incremental business opportunities, including acquisitions, which if such opportunities come to fruition, may require additional capital. Additionally, we operate in a rapidly evolving and often unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we may not be required to raise additional funds through the sale of equity or debt securities or from additional credit facilities. Additional capital, if needed, may not be available on satisfactory terms, if at all. Furthermore, additional debt financing may contain more restrictive covenants than our existing debt.
 
Contractual Obligations and Commitments
 
The following summarizes our contractual payment obligations at March 31, 2010:
 
                                         
    Payments Due ($000’s)  
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
 
Bank loan (excludes interest — see Note 7 of Notes to Consolidated Financial Statements)
  $ 3,829     $ 3,829     $     $        
Convertible notes payable (excludes interest — see Note 8 of Notes to Consolidated Financial Statements)
    14,500             2,826       3,340       8,334  
Operating leases (see Note 12 of Notes to Consolidated Financial Statements)
    4,734       1,493       2,734       507        
Royalty & license guaranteed commitments (see Note 12 of Notes to Consolidated Financial Statements)
    442       302       140              
                                         
                                         
Total
  $ 23,505     $ 5,624     $ 5,700     $ 3,847     $ 8,334  
                                         
 
As of March 31, 2010 and 2009, we did not have any relationships with unconsolidated entities or financial parties, such as entities often referred to as structured finance or special purpose entities, which would have been


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established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market, or credit risk that could arise if we had engaged in such relationships.
 
EBITDA RECONCILIATION (Unaudited)
 
EBITDA, a non-GAAP financial measure, represents net income before interest, taxes, depreciation and amortization. Prior to the third quarter of fiscal 2009, we had not recorded any goodwill impairment charges. To address the goodwill impairment charge recorded in fiscal 2009, we modified the calculation to exclude this non-operating, non-cash charge and defined the result as “Adjusted EBITDA”. We believe this to be a more meaningful measurement of performance than the previously calculated EBITDA. Adjusted EBITDA is not intended to represent cash flows for the period, nor is it being presented as an alternative to operating or net income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. As defined, Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. We believe, however, that in addition to the performance measures found in our financial statements, Adjusted EBITDA is a useful financial performance measurement for assessing our Company’s operating performance. Our management uses Adjusted EBITDA as a measurement of operating performance in comparing our performance on a consistent basis over prior periods, as it removes from operating results the impact of our capital structure, including the interest expense resulting from our outstanding debt, and our asset base, including depreciation and amortization of our capital and intangible assets. In addition, Adjusted EBITDA is an important measure for our lender. We calculate Adjusted EBITDA as follows (in thousands):
 
                         
    Years Ended March 31,  
    2010     2009     2008  
    (In thousands of US dollars)  
 
Net income (loss)
  $ 4,463     $ (32,614 )   $ 3,168  
Adjustments:
                       
Interest expense, net
    2,235       2,094       1,156  
Income tax expense
    1,470       2,933       2,744  
Depreciation and amortization
    3,766       4,193       2,910  
                         
EBITDA
    11,934       (23,394 )     9,978  
Goodwill impairment
          27,887        
                         
Adjusted EBITDA
  $ 11,934     $ 4,493     $ 9,978  
                         
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
Market Risk
 
Market risk is the potential loss arising from changes in market rates and market prices. Our market risk exposure results primarily from fluctuations in foreign exchange rates and interest rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in foreign currency exchange rates and interest rates and the timing of transactions.
 
Foreign Currency Exchange Rate Risk
 
A majority of our international business is presently conducted in currencies other than the U.S. dollar and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the CNY, the Pound Sterling, the Euro and the Canadian dollar. Foreign currency transaction gains and losses arising from normal business operations are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which we conduct our business relative to the U.S. dollar will cause currency transaction gains and losses, which we have experienced in the past and continue to experience. Due to the difficulty in determining and obtaining predictable cash flow forecasts in our foreign operations based on the overall


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challenging economic environment and associated contract structures, we do not currently utilize any derivative financial instruments to hedge foreign currency risks. The volatility of the CNY, the Pound Sterling, the Euro and the Canadian dollar (and any other applicable currencies) will be monitored frequently throughout the coming year. If appropriate, we may enter into hedging transactions in order to mitigate our risk from foreign currency fluctuations. Due to the substantial volatility of currency exchange rates, among other factors, we cannot predict the effect of exchange rate fluctuations upon future operating results. There can be no assurances that we will not experience currency losses in the future. We estimate that an immediate 10% adverse change in foreign exchange rates not currently pegged to the U.S. dollar would decrease our reported net income by approximately $3.3 million for the year ended March 31, 2010.
 
Interest Rate Risk
 
We are exposed to interest rate risk on borrowings under the Credit Facility. Until June 30, 2009, funds advanced to us pursuant to the Credit Facility bore interest at the U.S. prime rate plus 0.75%. Beginning July 1, 2009, interest accrued at the U.S. prime rate plus 2.00% or, at the Company’s option, LIBOR plus 3.50% with a LIBOR floor of 1.50%. We do not hedge our exposures to interest rate risk. We estimate that an increase of 1.0% in the interest rate under our Credit Facility would decrease our reported net income by approximately $0.2 million for the year ended March 31, 2010.
 
Item 8.   Financial Statements and Supplementary Data
 
The Consolidated Financial Statements and Supplementary Data required by this Item, together with the reports of our independent registered public accounting firm, are set forth at the pages indicated on the Index to the Financial Statements on Page F-l included in Item 15 of this report.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. As required by Securities and Exchange Commission Rules 13a-15(b) we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (who is also the Chief Accounting Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Exchange Act, as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems


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determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2010. In making its assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on its evaluation, management has concluded that, as of March 31, 2010, the Company’s internal control over financial reporting was effective based on these criteria.
 
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm.
 
Changes in Internal Controls over Financial Reporting
 
There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect our internal controls over financial reporting, except for the implementation of new internal control features as discussed in Remediation of Significant Deficiencies. Our process for evaluating controls and procedures is continuous and encompasses constant improvement of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
 
Remediation of Significant Deficiencies
 
In 2009, we identified significant deficiencies in our internal control over financial reporting in fiscal 2009 related to (1) our reviews over sales reserve estimates and (2) information technology general controls. In fiscal 2010, we have designed and implemented new internal control procedures to remediate these significant deficiencies. We implemented new procedures regarding the approval process and review process over sales reserves in order to ensure reserves are properly accounted for. Additionally, we implemented new policies, procedures and controls in the areas of information security to address weaknesses that could potentially impact financial reporting.
 
Item 9B.   Other Information
 
None


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PART III
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
Certain information with respect to the executive officers of the Company is set forth in the section entitled “Executive Officers of the Registrant” in Part I of this Annual Report on Form 10-K.
 
The information required by this item with respect to the directors of the Company is incorporated herein by reference to the information under the caption “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in the Company’s Management Proxy Circular for the Company’s 2010 Annual Meeting of Shareholders (the “Proxy Statement”).
 
We have adopted and maintain a code of business conduct and ethics that all executive officers and management employees must review and abide by (including our principal executive officer and principal financial officer), which we refer to as our Code of Business Conduct and Ethics. The Code of Business Conduct and Ethics is available on our website at http://www.madcatz.com in the Investor Information section under the heading “Corporate Governance.”
 
Item 11.   Executive Compensation
 
The information required by Item 11 is incorporated herein by reference to the information in the Proxy Statement under the caption “Executive Compensation” specifically excluding the “Report of the Compensation Committee of the Board of Directors on Executive Compensation.”
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
The information required by Item 12 is incorporated herein by reference to the information in the Proxy Statement under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
 
Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
The information required by Item 13 is incorporated herein by reference to the information in the Proxy Statement under the caption “Certain Transactions.”
 
Item 14.   Principal Accounting Fees and Services
 
The information required by Item 14 is incorporated herein by reference to the information in the Proxy Statement under the caption “Principal Accountant Fees and Services.”


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PART IV
 
Item 15.   Exhibits, Financial Statement Schedules
 
(a) The following documents are filed as part of this report:
 
(1) Financial Statements
 
The consolidated financial statements of the Company are included herein as required under Item 8 of this report. See Index to Financial Statements on page F-1.
 
(2) Financial Statement Schedules
 
Schedules have been omitted because information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
 
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
 
The following exhibits are filed or incorporated by reference into this report.
 
         
  2 .1   Stock Purchase Agreement dated as of May 28, 2010, by and between Mad Catz Interactive, Inc., Mad Catz, Inc., Tritton Technologies Inc. and the Stockholders of Tritton Technologies Inc. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
  3 .1(1)   Articles of Incorporation and Amendments thereto.
  3 .2(2)   By-Laws of the Company, as amended to date.
  3 .3(3)   Amendment to By-Law No. 2.
  10 .1(4)   Guarantee dated September 25, 2000, by 1328158 Ontario Inc. in favor of Congress Financial Corporation (Canada).
  10 .2(4)   General Security Agreement dated September 25, 2000, by Mad Catz, Inc. and FX Unlimited, Inc. in favor of Congress Financial Corporation (Central).
  10 .3(4)   Guarantee dated September 25, 2000, by Mad Catz, Inc. in favor of Congress Financial Corporation (Central).
  10 .4(5)   Amended and Restated General Security Agreement dated as of November 30, 2001, by Mad Catz, Inc. and FX Unlimited, Inc. in favor of Congress Financial Corporation (Central).
  10 .5(5)*   Amended and Restated Incentive Stock Option Plan of Mad Catz Interactive, Inc.
  10 .6(5)*   Form of Incentive Stock Option Plan.
  10 .7(6)*   Employment Agreement dated May 18, 2000, by and between Mad Catz, Inc. and Darren Richardson.
  10 .8(7)*   Amendment to Employment Agreement dated April 1, 2004, by and between Mad Catz Interactive, Inc. and Darren Richardson. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
  10 .9(8)   Xenon Game Peripheral Licensing Certification Agreement dated May 12, 2005, by and between Mad Catz, Inc. and Microsoft Corporation. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
  10 .10(9)*   Employment Agreement dated January 16, 2007, by and between Mad Catz Interactive, Inc. and Stewart Halpern.
  10 .11(10)*   Mad Catz Interactive, Inc. Stock Option Plan — 2007
  10 .12(10)*   Stock Option Agreement under the Mad Catz Interactive, Inc. Stock Option Plan — 2007
  10 .13(11)   Consideration Loan Note Instrument dated November 20, 2007, by Mad Catz Interactive, Inc. in favor of the Noteholders named therein.
  10 .14(11)   First Amending Agreement dated as of November 20, 2007, by and between Mad Catz, Inc. and Wachovia Capital Finance Corporation (Central).


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  10 .15(11)   Pledge and Security Agreement dated November 20, 2007, by Winkler Atlantic Holdings Limited in favor of Wachovia Capital Finance Corporation (Central).
  10 .16(11)   Guarantee dated November 20, 2007, by Saitek Industries Limited in favor of Wachovia Capital Finance Corporation (Central).
  10 .17(11)   General Security Agreement dated November 20, 2007, by Saitek Industries Limited in favor of Wachovia Capital Finance Corporation (Central).
  10 .18(12)*   Amendment to Employment Agreement dated December 31, 2008, by and between Mad Catz Interactive, Inc. and Darren Richardson.
  10 .19(12)*   Amendment to Employment Agreement dated December 31, 2008, by and between Mad Catz Interactive, Inc. and Stewart Halpern.
  10 .20(12)*   Director Compensation Table
  10 .21(12)   Waiver and Amendment Letter Agreement dated March 18, 2009, by and between Mad Catz, Inc. and Wachovia Capital Finance Corporation (Central).
  10 .22(12)   Third Amended and Restated Loan Agreement dated as of June 23, 2009, by and between Mad Catz, Inc. and Wachovia Capital Finance Corporation (Central).
  10 .23(12)   General Security Agreement dated June 23, 2009, by Winkler Atlantic Holdings Limited in favor of and Wachovia Capital Finance Corporation (Central).
  10 .24(12)   Guarantee dated June 23, 2009, by Winkler Atlantic Holdings Limited in favor of Wachovia Capital Finance Corporation (Central).
  10 .25(12)   Negative Pledge Agreement dated June 23, 2009, by Saitek Elektronik Vertriebs Gmbh in favor of and Wachovia Capital Finance Corporation (Central).
  10 .26(12)   Guarantee dated June 23, 2009, by Saitek Elektronik Vertriebs Gmbh in favor of Wachovia Capital Finance Corporation (Central).
  10 .27(12)   First Amendment to Stock Pledge Agreement dated June 23, 2009, by and between Mad Catz, Inc. and Wachovia Capital Finance Corporation (Central).
  10 .28(12)   Amendment to Consideration Loan Note Instrument and Promissory Note dated June 24, 2009, by and between Mad Catz Interactive, Inc. and Guymont Services SA as trustee of The Winkler Atlantic Trust.
  10 .29(13)   Xbox 360 Accessory License Agreement effective March 23, 2009, by and between Mad Catz, Inc. and Microsoft Corporation. Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.
  21 .1   Subsidiaries of the Company.
  23 .1   Consent of KPMG LLP, Independent Registered Public Accounting Firm.
  31 .1   Certifications of Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31 .2   Certifications of Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32 .1   Certifications of Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. These certifications are being furnished solely to accompany this Annual Report on Form 10-K and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company.
  32 .2   Certifications of Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. These certifications are being furnished solely to accompany this Annual Report on Form 10-K and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company.
 
 
(1) This document was filed as an exhibit to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2001 and incorporated herein by reference.

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(2) This document was filed as an exhibit to the Registrant’s Registration Statement on Form 20-F, dated June 1, 1999, filed with the Securities and Exchange Commission on June 3, 1999 and incorporated herein by reference.
 
(3) This document was filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended September 30, 2007 and incorporated herein by reference.
 
(4) This document was filed as an exhibit to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2000 and incorporated herein by reference.
 
(5) This document was filed as an exhibit to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2002 and incorporated herein by reference.
 
(6) This document was filed as an exhibit to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2003 and incorporated herein by reference.
 
(7) This document was filed as an exhibit to the Registrant’s Annual Report on Form 20-F filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2004 and incorporated herein by reference.
 
(8) This document was filed as an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2005 and incorporated herein by reference.
 
(9) This document was filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended December 31, 2006 and incorporated herein by reference.
 
(10) This document was filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission for the fiscal year ended October 9, 2007 and incorporated herein by reference.
 
(11) This document was filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission for the fiscal year ended November 20, 2007 and incorporated herein by reference.
 
(12) This document was filed as an exhibit to the Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended March 31, 2009 and incorporated herein by reference.
 
(13) This document was filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended June 30, 2009 and incorporated herein by reference.
 
Denotes management contract or compensatory plan or arrangement.


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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
MAD CATZ INTERACTIVE, INC.
 
  By: 
/s/  Darren Richardson
Darren Richardson
President and Chief Executive Officer
 
Date: June 10, 2010
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Title
 
Date
 
         
/s/  Darren Richardson

Darren Richardson
  President and Chief Executive Officer (Principal Executive Officer)   June 10, 2010
         
/s/  Stewart Halpern

Stewart Halpern
  Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)   June 10, 2010
         
/s/  Thomas Brown

Thomas Brown
  Director   June 10, 2010
         
/s/  Robert Molyneux

Robert Molyneux
  Director   June 10, 2010
         
/s/  William Woodward

William Woodward
  Director   June 10, 2010


49


 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
Index to Consolidated Financial Statements
    F-1  
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  


F-1


Table of Contents

 
Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders
Mad Catz Interactive, Inc.:
 
We have audited the accompanying consolidated balance sheets of Mad Catz Interactive, Inc. and subsidiaries (the Company) as of March 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended March 31, 2010. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mad Catz Interactive, Inc. and subsidiaries as of March 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2010, in conformity with U.S. generally accepted accounting principles.
 
/s/  KPMG LLP

 
San Diego, California
June 10, 2010


F-2


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
March 31, 2010 and 2009
 
                 
    2010     2009  
    (In thousands of U.S. dollars, except share data)  
 
ASSETS
Current assets:
               
Cash
  $ 2,245     $ 2,890  
Accounts receivable, net of allowances of $4,848 and $5,926 at March 31, 2010 and 2009, respectively
    14,620       15,524  
Other receivables
    123       471  
Inventories
    16,975       17,774  
Deferred tax assets
    17       19  
Income tax receivable
    21       759  
Prepaid expenses and other current assets
    1,410       1,491  
                 
Total current assets
    35,411       38,928  
Deferred tax assets
    766       484  
Other assets
    626       362  
Property and equipment, net
    3,452       2,242  
Intangible assets, net
    2,828       5,118  
Goodwill
    8,466       8,467  
                 
Total assets
  $ 51,549     $ 55,601  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Bank loan
  $ 3,829     $ 13,272  
Accounts payable
    11,871       13,528  
Accrued liabilities
    7,988       5,929  
Note payable
          847  
Income taxes payable
    1,670       655  
                 
Total current liabilities
    25,358       34,231  
Other long-term liabilities
    357       453  
Convertible notes payable
    14,500       14,500  
                 
Total liabilities
    40,215       49,184  
Subsequent event (Note 16)
               
Shareholders’ equity:
               
Common stock, no par value, unlimited shares authorized; 55,098,549 shares issued and outstanding at March 31, 2010 and 2009
    48,865       48,255  
Accumulated other comprehensive income (loss)
    (55 )     101  
Accumulated deficit
    (37,476 )     (41,939 )
                 
Total shareholders’ equity
    11,334       6,417  
                 
Total liabilities and shareholders’ equity
  $ 51,549     $ 55,601  
                 
 
See accompanying notes to consolidated financial statements.


F-3


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Years Ended March 31, 2010, 2009 and 2008
 
                         
    2010     2009     2008  
    (In thousands of U.S. dollars, except
 
    share and per share data)  
 
Net sales
  $ 119,012     $ 112,563     $ 87,737  
Cost of sales
    82,616       80,558       58,841  
                         
Gross profit
    36,396       32,005       28,896  
Operating expenses:
                       
Sales and marketing
    11,452       13,216       10,304  
General and administrative
    12,343       14,968       11,004  
Research and development
    2,657       1,076       1,516  
Goodwill impairment
          27,887        
Amortization of intangible assets
    1,758       2,344       987  
                         
Total operating expenses
    28,210       59,491       23,811  
                         
Operating income (loss)
    8,186       (27,486 )     5,085  
Interest expense, net
    (2,235 )     (2,094 )     (1,156 )
Foreign exchange gain (loss), net
    (270 )     (462 )     1,703  
Other income
    252       361       280  
                         
Income (loss) before income taxes
    5,933       (29,681 )     5,912  
Income tax expense
    (1,470 )     (2,933 )     (2,744 )
                         
Net income (loss)
  $ 4,463     $ (32,614 )   $ 3,168  
                         
Net income (loss) per share:
                       
Basic
  $ 0.08     $ (0.59 )   $ 0.06  
                         
Diluted
  $ 0.08     $ (0.59 )   $ 0.06  
                         
Number of shares used in per share computations:
                       
Basic
    55,098,549       55,088,960       54,843,688  
                         
Diluted
    55,103,237       55,088,960       55,314,438  
                         
 
See accompanying notes to consolidated financial statements.


F-4


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Years Ended March 31, 2010, 2009 and 2008
 
                                         
                Accumulated
             
                Other
          Total
 
    Common Stock     Comprehensive
    Accumulated
    Shareholders’
 
    Shares     Amount     Income (Loss)     Deficit     Equity  
    (In thousands of U.S. dollars, except share data)  
 
Balance at March 31, 2007
    54,244,383       47,105       2,615       (12,493 )     37,227  
Stock option exercises
    729,166       345                   345  
Stock-based compensation
          267                   267  
Comprehensive income:
                                       
Net income
                      3,168       3,168  
Foreign currency translation adjustment
                308             308  
                                         
Total comprehensive income
                                    3,476  
                                         
Balance at March 31, 2008
    54,973,549     $ 47,717     $ 2,923     $ (9,325 )   $ 41,315  
Stock option exercises
    125,000       57                   57  
Stock-based compensation
          481                   481  
Comprehensive loss:
                                       
Net loss
                      (32,614 )     (32,614 )
Foreign currency translation adjustment
                (2,822 )           (2,822 )
                                         
Total comprehensive loss
                                    (35,436 )
                                         
Balance at March 31, 2009
    55,098,549     $ 48,255     $ 101     $ (41,939 )   $ 6,417  
Stock-based compensation
          610                   610  
Comprehensive loss:
                                       
Net income
                      4,463       4,463  
Foreign currency translation adjustment
                (156 )           (156 )
                                         
Total comprehensive income
                                    4,307  
                                         
Balance at March 31, 2010
    55,098,549     $ 48,865     $ (55 )   $ (37,476 )   $ 11,334  
                                         
 
See accompanying notes to consolidated financial statements.


F-5


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Years Ended March 31, 2010, 2009 and 2008
 
                         
    2010     2009     2008  
    (In thousands of U.S. dollars)  
 
Cash flows from operating activities:
                       
Net income (loss)
  $ 4,463     $ (32,614 )   $ 3,168  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
    3,766       4,193       2,910  
Amortization of deferred financing fees
    176       56       34  
Stock-based compensation
    610       481       267  
Goodwill impairment
          27,887        
Loss on disposal of assets
    89              
Provision (benefit) for deferred income taxes
    (550 )     2,657       1,489  
Changes in operating assets and liabilities, net of effects of Joytech and Saitek acquisitions in 2008:
                       
Accounts receivable
    864       (2,388 )     7,465  
Other receivables
    332       98       431  
Inventories
    763       2,401       146  
Prepaid expenses and other current assets
    77       (15 )     (472 )
Other assets
    53       (106 )     (147 )
Accounts payable
    (1,731 )     (3,127 )     (7,690 )
Accrued liabilities
    1,877       (1,443 )     (1,395 )
Income taxes receivable/payable
    1,933       (226 )     12  
                         
Net cash provided by (used in) operating activities
    12,722       (2,146 )     6,218  
                         
Cash flows from investing activities:
                       
Purchases of property and equipment
    (2,718 )     (1,403 )     (794 )
Cash paid for Joytech acquisition
                (2,983 )
Cash paid for Saitek acquisition
                (10,214 )
                         
Net cash used in investing activities
    (2,718 )     (1,403 )     (13,991 )
Cash flows from financing activities:
                       
Borrowings on bank loan
    99,907       97,708       89,077  
Repayments on bank loan
    (109,350 )     (95,906 )     (78,952 )
Payment of financing fees
    (496 )           (125 )
Payment of Saitek completion note
    (847 )            
Proceeds from exercise of stock options
          57       345  
                         
Net cash provided by (used in) financing activities
    (10,786 )     1,859       10,345  
                         
Effects of foreign exchange on cash
    137       (650 )     308  
                         
Net increase (decrease) in cash
    (645 )     (2,340 )     2,880  
Cash, beginning of year
    2,890       5,230       2,350  
                         
Cash, end of year
  $ 2,245     $ 2,890     $ 5,230  
                         
Supplemental cash flow information:
                       
Income taxes paid
  $ 1,007     $ 673     $ 1,340  
                         
Interest paid
  $ 2,243     $ 822     $ 809  
                         
Supplemental disclosures of noncash investing and financing activities:
                       
Convertible notes payable issued in conjunction with Saitek acquisition
  $     $     $ 14,500  
Note payable issued
          847        
Fair value of assets acquired in acquisitions:
                       
Accounts receivable and other assets
                13,506  
Inventories
                7,896  
Property and equipment
                899  
Deferred tax assets
          1,031       248  
Assumed liabilities
                (13,553 )
In process research and development
                 
Intangible assets
                8,132  
Goodwill
          98       18,221  
Restructuring and transaction costs
          282       2,910  
 
See accompanying notes to consolidated financial statements.


F-6


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
(In U.S. dollars)
 
(1)   Organization and Description of Business
 
The Company’s products are designed, manufactured (primarily through third parties), marketed and distributed for all major console based videogame systems. The Company’s products include videogame, PC and audio accessories, such as control pads, steering wheels, joysticks, memory cards, video cables, light guns, flight sticks, dance pads, microphones, car adapters, carry cases, mice, keyboards and headsets. The Company also markets GameShark videogame enhancement products and publishes videogames.
 
(2)   Summary of Significant Accounting Policies
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. On an ongoing basis, the Company evaluates its estimates, including those related to asset impairments, reserves for accounts receivable and inventory, contingencies and litigation, valuation and recognition of share-based payments and income taxes. Illiquid credit markets, volatile equity, foreign currency, and declines in customer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Actual results could differ from those estimates.
 
Concentration of Credit Risk
 
The Company’s credit risk is primarily concentrated in accounts receivable. The Company generally does not require collateral on accounts receivable because a majority of its customers are large, well capitalized, established retail entities with operations throughout the United States, Canada and Europe. The Company maintains an allowance for doubtful accounts. For the year ended March 31, 2010, sales to the largest customer constituted 25% of gross sales and represented 30% of accounts receivable at March 31, 2010. For the year ended March 31, 2009, sales to the largest customer constituted 29% of gross sales and represented 33% of accounts receivable at March 31, 2009. At March 31, 2010 and 2009, there were no other customers which accounted for greater than 10% of gross sales or represented greater than 10% of accounts receivable.
 
Fair Value of Financial Instruments
 
The carrying values of the Company’s financial instruments, including cash, accounts receivable, other receivables, accounts payable, accrued liabilities and income taxes receivable/payable approximate their fair values due to the short maturity of these instruments. The carrying value of the bank loan approximates its fair value as the interest rate and other terms are that which is currently available to the Company. The fair value of convertible notes cannot be reasonably estimated as the instrument’s interest rate is likely not comparable to rates currently offered for similar debt instruments of comparable maturity given the state of the current credit markets. These notes are between the Company and the seller of Saitek (see Note 8).


F-7


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Revenue Recognition
 
The Company recognizes revenue when (1) there is persuasive evidence that an arrangement with the customer exists, which is generally a customer purchase order, (2) the products are delivered, which occurs when the products are shipped and risk of loss has been transferred to the customer, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed reasonably assured. Our payment arrangements with customers typically provide net 30 and 60-day terms. All of our arrangements are single element arrangements and there are no undelivered elements after the point of shipment.
 
Amounts billed to customers for shipping and handling are included in net sales, and costs incurred related to shipping and handling is included in cost of sales.
 
Allowance for Doubtful Accounts and Other Allowances
 
Accounts receivable are recorded net of an allowance for doubtful accounts and other sales related allowances. When evaluating the adequacy of the allowance for doubtful accounts, the Company analyzes known uncollectible accounts, the aging of accounts receivable, historical bad debts, customer credit-worthiness and current economic trends.
 
The Company records allowances for customer marketing programs, including certain rights of return, price protection, volume-based cash incentives and cooperative advertising. The estimated cost of these programs is accrued as a reduction to revenue or as an operating expense in the period the Company sells the product or commits to the program. Such amounts are estimated, based on historical experience and contractual terms, and periodically adjusted based on historical and anticipated rates of returns, inventory levels and other factors and are recorded as either operating expenses or a reduction of sales in accordance with authoritative guidance.
 
Inventories
 
Raw materials, packaging materials and accessories are valued at the lower of cost, determined by the first-in, first-out method, or market. Finished goods are valued at the lower of cost or market, with cost being determined on an average cost basis using the first-in, first-out method. The Company regularly reviews inventory quantities on hand and in the retail channel, consumer demand and seasonality factors in order to recognize any loss of utility in the period incurred.
 
Property and Equipment
 
Property and equipment are stated at cost less accumulated depreciation and amortization. Property and equipment are depreciated or amortized using the straight-line method over the estimated useful lives of the assets as follows:
 
     
Molds
  3 years
Computer equipment and software
  3 years
Manufacturing and office equipment
  3 - 5 years
Furniture and fixtures
  5 years
Leasehold improvements
  Shorter of estimated useful life or remaining life of lease
 
Major improvements and betterments are capitalized.


F-8


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Intangible Assets
 
Intangible assets are stated at cost less accumulated amortization and are amortized over the estimated useful lives of the assets on a straight-line basis. The range of useful lives is one to 15 years.
 
         
    Useful Life
 
    (Years)  
 
Trademarks
    4 - 15  
Customer relationships
    3 - 6  
Product lines
    2 - 3  
Copyrights
    5  
Website
    4  
Other
    1 - 3  
 
Goodwill
 
The Company reviews its goodwill for impairment as of the end of each fiscal year or when an event or a change in facts and or circumstances indicates the fair value of a reporting unit may be below its carrying amount.
 
Authoritative guidance requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The Company determined that it has one reporting unit and assesses fair value based on a review of the Company’s market capitalization as well as a discounted cash flow model, for which the key assumptions include revenue growth, gross profit margins, operating expense trends and the Company’s weighted average cost of capital. Given the volatility of the Company’s stock price and market capitalization, which fluctuates significantly throughout the year, the Company does not believe that its market capitalization is necessarily the best indicator of the fair value of the Company at any moment in time. However, the Company has determined that market capitalization over a sustained period, when considered with other factors may be an appropriate indicator of fair value. Further, to the extent the carrying amount of the Company’s reporting unit exceeds its market capitalization over a sustained period, an impairment may exist and require the Company to test for impairment.
 
In 2009, the carrying amount of the Company’s reporting unit had exceeded its market capitalization over a sustained period, accordingly, the Company recorded a goodwill impairment charge of $27.9 million for the year ended March 31, 2009. The Company completed its annual assessment of impairment as of March 31, 2010, which did not indicate any impairment of goodwill at such date. No assurance can be given that the Company will not be required to record additional goodwill impairments in future periods.
 
Impairment of Long-Lived Assets
 
Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by


F-9


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet. During 2009, the Company determined that a triggering event had occurred and performed the required analysis, which indicated that no impairment existed. There were no triggering events during fiscal year 2010.
 
Royalties and Intellectual Property Licenses
 
Royalty and license expenses consist of royalties and license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology or other intellectual property or proprietary rights in the development or sale of our products. Royalty-based payments that are paid in advance are generally capitalized and expensed to cost of sales at the greater of the contractual or effective royalty rate based on net product sales.
 
Royalty payments to independent videogame developers and co-publishing affiliates are payments for the development of intellectual property related to the Company’s videogame titles. Payments made prior to the establishment of technological feasibility are expensed as research and development. Once technological feasibility has been established, payments made are capitalized and amortized upon release of the product. Additional royalty payments due after the general release of the product are typically expensed as cost of sales at the higher of the contractual or effective royalty rate based on net product sales.
 
Advertising and Research and Development
 
Advertising costs and research and development are expensed as incurred. Advertising costs amounted to $3,392,000, $3,796,000, and $3,184,000 in 2010, 2009 and 2008, respectively. Cooperative advertising with retailers is recorded when revenue is recognized and such amounts are included in sales and marketing expense if there is a separate identifiable benefit with a fair value. Otherwise, such costs are recognized as a reduction of sales. Research and development costs amounted to $2,657,000, $1,076,000 and $1,516,000 for the years ended March 31, 2010, 2009 and 2008, respectively.
 
Income Taxes
 
Income taxes are accounted for using the asset and liability method. Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts and tax basis of assets and liabilities and for tax loss carryforwards.
 
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. To the extent that it is not “more likely than not” that a deferred tax asset will be realized, a valuation allowance is provided. Significant management judgment is required in assessing the realizability of the Company’s deferred tax assets. In performing this assessment, management considers whether it is more likely than not that some portion or all of the assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income in each tax jurisdiction during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred liabilities, projected future taxable income, and tax planning strategies in making this assessment.
 
Foreign Currency Translation
 
For each of the Company’s foreign operating subsidiaries the functional currency is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using month-end exchange rates, and revenue


F-10


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
and expenses are translated into U.S. dollars using monthly average exchange rates. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders’ equity.
 
Foreign currency transaction gains and losses are a result of the effect of exchange rate changes on transactions denominated in currencies other than the functional currency.
 
Net Income (Loss) per Share
 
Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding, increased by potentially dilutive securities. Potentially dilutive securities are calculated using the treasury stock method and represent incremental shares issuable upon exercise of outstanding stock options. However, potentially dilutive securities are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive.
 
The following table sets forth the computation of diluted weighted average common and potential common shares outstanding for the years ended March 31, 2010, 2009 and 2008:
 
                         
    Years Ended March 31,  
    2010     2009     2008  
 
Basic weighted average common shares outstanding
    55,098,549       55,088,960       54,843,688  
Effect of dilutive securities — options
    4,688             470,750  
                         
Diluted weighted average common and potential common shares outstanding
    55,103,237       55,088,960       55,314,438  
                         
 
Weighted average stock options to purchase of 7,284,233, 5,565,653 and 2,229,223 shares for the years ended March 31, 2010, 2009 and 2008, respectively, were excluded from calculation because of their anti-dilutive effect. Weighted average shares of 10,217,744, 10,217,744 and 3,831,924 related to the convertible note payable were excluded from the calculation because of their anti-dilutive effect in fiscal years 2010, 2009 and 2008.
 
Stock-Based Compensation
 
The Company records compensation expense associated with share-based awards made to employees and directors based upon their grant date fair value. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is four years, except for grants to Board of Directors, which vest immediately.
 
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model, using the assumptions noted in Note 10 — Stock-Based Compensation. The expected life of the options is based on a number of factors, including historical exercise experience, the vesting term of the award, the expected volatility of the Company’s stock and an employee’s average length of service. The expected volatility is estimated based on the historical volatility (using daily pricing) of the Company’s stock. The risk-free interest rate is determined based on a constant U.S. Treasury security rate with a contractual life that approximates the expected term of the stock options. In accordance with authoritative guidance, the Company reduces the calculated stock-based compensation expense for estimated forfeitures by applying a forfeiture rate, based upon historical pre-vesting option cancelations. Estimated forfeitures will be reassessed at each balance sheet date and may change based on new facts and circumstances.
 
See Note 10 — Stock-Based Compensation for additional information regarding our stock-based compensation plans.


F-11


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Comprehensive Income (Loss)
 
Comprehensive income (loss) consists of net income (loss) and certain changes in equity that are excluded from net income (loss). Accumulated other comprehensive income represents net unrealized gains and losses from foreign currency translation adjustments.
 
Recently Adopted Accounting Pronouncements
 
In April 2008, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance for determining the useful life of intangible assets, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset to include an entity’s historical experience in renewing or extending similar arrangements, adjusted for entity-specific factors, even when there is likely to be “substantial cost or material modifications.” This guidance states that in the absence of historical experience an entity should use assumptions that market participants would make regarding renewals or extensions, adjusted for entity-specific factors. The guidance for determining the useful life of intangible assets will be applied prospectively to intangible assets acquired after the effective date of April 1, 2009. The Company adopted the provisions of this guidance beginning April 1, 2009, and the adoption did not have an impact on its unaudited condensed consolidated financial statements.
 
In November 2008, the FASB issued authoritative guidance for accounting for defensive intangible assets, which applies to defensive intangible assets, which are acquired intangible assets that the acquirer does not intend to actively use but intends to hold to prevent its competitors from obtaining access to them. As these assets are separately identifiable, the guidance requires an acquiring entity to account for defensive intangible assets as a separate unit of accounting which should be amortized to expense over the period the intangible asset will directly or indirectly affect the entity’s cash flows. Defensive intangible assets must be recognized at fair value in accordance with authoritative guidance. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company adopted the provisions of this guidance beginning April 1, 2009, and the adoption did not have an impact on its unaudited condensed consolidated financial statements.
 
In June 2008, the Emerging Issues Task Force (“EITF”) issued authoritative guidance for determining whether an instrument is indexed to an entity’s own stock, which addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. This guidance is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted. The Company adopted the provisions of this guidance beginning April 1, 2009, and the adoption did not have a material impact on its unaudited condensed consolidated financial statements.
 
In June 2009, the FASB issued guidance establishing the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The provisions of this guidance are effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification superseded all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the basis for conclusions on the change(s) in the Codification. The Company adopted this guidance beginning July 1, 2009 and accordingly, has removed references to legacy U.S. GAAP herein.
 
In December 2007, the FASB revised the authoritative guidance for business combinations, which establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the


F-12


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
acquiree, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance was effective for the Company’s fiscal 2010 and the adoption did not have an impact on the Company’s results of operations and financial position in fiscal 2010.
 
In May 2008, the FASB issued authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion, which applies to all convertible debt instruments that have a “net settlement feature,” which means that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash upon conversion. This guidance requires issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion to separately account for the liability and equity components in a manner reflective of the issuers’ nonconvertible debt borrowing rate. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company adopted the provisions of this guidance on April 1, 2009, but it did not have an impact on its unaudited condensed consolidated financial statements as the Company’s convertible debt instrument does not contain a net settlement feature.
 
In May 2009, the FASB issued authoritative guidance for subsequent events that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. In February 2010, the FASB amended this guidance under Accounting Standard Update (“ASU”) 2010-09, Amendments to Certain Recognition and Disclosure Requirements and the amended guidance removed the requirement for SEC filers to disclose the date through which an entity has evaluated subsequent events and was effective upon issuance.
 
In September 2006, the FASB issued authoritative guidance for fair value measurements, which defines fair value, establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value in the financial statements. In February 2008, the FASB issued authoritative guidance, which allows for the delay of the effective date of the authoritative guidance for fair value measurements for one year for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company adopted the provisions of the guidance for financial assets and liabilities as of April 1, 2008 with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities, which the Company adopted on April 1, 2009. This adoption did not have an impact on the Company’s unaudited condensed consolidated financial statements.
 
In April 2009, the FASB issued authoritative guidance on fair value determination, which provides guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased when compared with normal market activity for the asset or liability as well as guidance on identifying circumstances that indicate a transaction is not orderly. This guidance is effective for interim and annual periods ending after June 15, 2009. The Company adopted the provisions of this guidance on April 1, 2009 and the adoption did not have an impact on its unaudited condensed consolidated financial statements.
 
(3)   Acquisitions
 
Saitek
 
On November 20, 2007, the Company acquired all of the outstanding stock of Winkler Atlantic Holdings Limited (“WAHL”), a private holding company that owned Saitek, a provider of PC games accessories, PC input devices, multimedia audio products, chess and intelligent games for a total purchase price of $33.5 million. The Company acquired Saitek to further diversify its products and geographic distribution capabilities. The strategic combination broadened the product lines the Company offers, expanded the Company’s geographic presence and allows the Company to provide a more comprehensive product suite to its customers. The acquisition was recorded using the purchase method of accounting. Thus, the results of operations from Saitek are included in the Company’s consolidated financial statements from the date of acquisition.


F-13


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
Activities related to the Saitek acquisition restructuring plan are as follows for the year ended March 31, 2009 (in thousands):
 
                         
    Severance     Lease Exit     Total  
 
Balance at March 31, 2008
  $ 830     $ 80     $ 910  
Payments
    (786 )     (80 )     (866 )
Reversals
    (44 )           (44 )
                         
Balance at March 31, 2009
  $     $     $  
                         
 
(4)   Inventories
 
Inventories consist of the following (in thousands):
 
                 
    March 31,  
    2010     2009  
 
Raw materials
  $ 1,546     $ 949  
Finished goods
    15,429       16,825  
                 
Inventories
  $ 16,975     $ 17,774  
                 
 
(5)   Property and Equipment
 
Property and equipment consist of the following (in thousands):
 
                 
    March 31,  
    2010     2009  
 
Molds
  $ 6,400     $ 5,352  
Computer equipment and software
    2,734       2,382  
Manufacturing and office equipment
    1,013       854  
Furniture and fixtures
    383       338  
Leasehold improvements
    623       465  
                 
      11,153       9,391  
Less: Accumulated depreciation and amortization
    (7,701 )     (7,149 )
                 
Property and equipment, net
  $ 3,452     $ 2,242  
                 
 
Depreciation and amortization expense totaled $1,421,000, $1,262,000, and $1,250,000 for the years ended March 31, 2010, 2009 and 2008, respectively.


F-14


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
(6)   Intangible Assets and Goodwill
 
The Company’s acquired intangible assets are summarized as follows (in thousands):
 
                                     
                2010
    2009
     
          Accumulated
    Net Book
    Net Book
    Useful life
    Cost     Amortization     Value     Value     (Years)
 
Trademarks
  $ 5,472     $ 4,445     $ 1,027     $ 1,751     4 - 15
Customer relationships
    3,199       1,415       1,784       2,338     3 - 6
Product lines
    3,194       3,187       7       1,003     2 - 3
Other
    110       100       10       26     1 - 3
                                     
Intangible assets
  $ 11,975     $ 9,147     $ 2,828     $ 5,118      
                                     
 
Amortization of intangible assets was approximately $2,345,000, $2,931,000 and $1,660,000 in fiscal 2010, 2009 and 2008, respectively.
 
As of March 31, 2010, the future estimated amortization expense for these acquired intangible assets for the next five years and thereafter is expected to be as follows (in thousands):
 
         
    Future
 
    Amortization  
 
Year ending March 31, 2011
    667  
Year ending March 31, 2012
    602  
Year ending March 31, 2013
    595  
Year ending March 31, 2014
    395  
Year ending March 31, 2015
    83  
Thereafter
    486  
         
      2,828  
         
 
The changes in the carrying amount of goodwill for the years ended March 31, 2010 and 2009 are as follows:
 
         
Balance at March 31, 2008
    35,704  
Saitek purchase price adjustments:
       
Working capital adjustment
    847  
Adjustment to estimated transaction costs
    282  
Release of deferred tax asset valuation allowances upon merger of Saitek entities into Mad Catz entities
    (1,031 )
Translation adjustment
    552  
Impairment charge
    (27,887 )
         
Balance at March 31, 2009
  $ 8,467  
Translation adjustment
    (1 )
         
Balance at March 31, 2010
  $ 8,466  
         
Accumulated goodwill impairment losses at March 31, 2010
  $ (27,887 )
         
 
(7)   Bank Loan
 
The Company has a Credit Facility with Wachovia Capital Finance Corporation (Central) (“Wachovia”) to borrow funds under a revolving line of credit subject to the availability of eligible collateral (accounts receivable


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Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
and inventories), which changes throughout the year. At March 31, 2010, the amount outstanding under the line of credit was $3,829,000. On June 23, 2009, the Company extended the term of the Credit Facility until October 31, 2012. The line of credit accrues at the U.S. prime rate plus 2.00% or, at the Company’s option, LIBOR plus 3.50% with a LIBOR floor of 1.50%. At March 31, 2010 and 2009, the interest rate was 5.3% and 3.5%, respectively. The Company is also required to pay a monthly service fee of $2,000 and an unused line fee equal to 0.50% of the unused portion of the loan. Borrowings under the Credit Facility are secured by a first priority interest in the inventories, equipment, accounts receivable and investment properties of Mad Catz, Inc. (“MCI”) and by a pledge of all of the capital stock of the Company’s subsidiaries and is guaranteed by the Company. The Company is required to meet a quarterly financial covenant based on the Company’s trailing four quarter’s coverage of fixed charges. The Company was in compliance with the current fixed charge coverage ratio covenant as of March 31, 2010 and 2009.
 
(8)   Convertible Notes Payable
 
On November 20, 2007, in connection with the acquisition of our Saitek operations, the Company issued convertible notes with an aggregate principal amount of $14,500,000 (the “Saitek Notes”). On June 24, 2009, the terms of the Saitek Notes were amended to extend the maturity of the Saitek Notes to March 31, 2019 with an interest payment of $2,400,000 due March 31, 2011 and annual principal and interest payments of $2,400,000 due beginning March 31, 2012 until the Saitek Notes are retired and quarterly cash payments for partial interest in the amount of approximately $45,000. As amended, the Saitek Notes bear interest at 7.5% through March 31, 2014 and 9.0% thereafter. The quarterly cash payments payable to date as well as an interest payment of $500,000 due on October 31, 2009, and an interest payment of $596,035 due on March 31, 2010 have been paid. The Saitek Notes are convertible into Mad Catz Interactive, Inc. common stock at the exercise price of $1.419 per share. The conversion price represented a 15% premium to the average closing share price of the Company’s stock over the preceding 15 trading days prior to execution of the purchase agreement relating to the Saitek acquisition. If fully converted, the Notes would convert into approximately 10,217,744 shares of the Company’s common stock.
 
The Company’s debt at March 31, 2010 is scheduled to mature as follows:
 
         
Year ending March 31:
       
2011
  $  
2012
    1,262  
2013
    1,564  
2014
    1,684  
2015
    1,656  
Thereafter
    8,334  
         
    $ 14,500  
         
 
(9)   Saitek Completion Note
 
Pursuant to the Saitek purchase agreement, a working capital adjustment in the amount of $847,000 was made in fiscal 2009 to the purchase price based on the completion of the final balance sheet. The Company financed this amount with a note payable. The note is unsecured, was originally due August 1, 2011 including all accrued interest, and bears interest at 7% per annum compounded annually. As part of restructuring the Saitek Notes described above, the Company was required to repay this note in full, plus accrued interest, on March 31, 2010. There is no outstanding balance related to this note as of March 31, 2010.
 
(10)   Stock-Based Compensation
 
The Company’s Amended and Restated Incentive Stock Option Plan (the “Prior Plan”) allowed the Company to grant options to purchase common stock to employees, officers and directors. In October 2007, the shareholders


F-16


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
of the Company approved the Mad Catz Interactive, Inc., Stock Option Plan — 2007 (the “2007 Plan”). As a result, the 2007 Plan replaced the Prior Plan, and no grants will be made under the Prior Plan in the future. During fiscal years 2010, 2009 and 2008, no grants were issued from the Prior Plan. The Prior Plan allowed for a maximum of 6,000,000 shares of common stock to be issued pursuant to options granted. Options granted under the Prior Plan before fiscal year 2007 generally expired five years from the date of grant and generally vested over a period of two years with one-third vesting immediately. At March 31, 2010, a total of 1,917,500 options were outstanding and options to purchase 1,731,302 shares were exercisable under the Prior Plan.
 
The 2007 Plan allows the Company to grant options to purchase common stock to employees, officers and directors up to a maximum of 6,500,000 shares of common stock. Options granted under the 2007 Plan expire ten years from the date of grant and generally vest over a period of four years, with the first 25% vesting on the one-year anniversary of the grant date and the remainder vesting monthly over the remaining 36 months. At March 31, 2010, a total of 5,658,400 options were outstanding, options to purchase 2,321,571 shares were exercisable, and 841,600 shares were available for future grant under the 2007 Plan.
 
The Company’s options are denominated in U.S. dollars for options granted in fiscal years 2010, 2009 and 2008 and denominated in Canadian dollars for options granted prior to fiscal year 2008. For convenience, per share amounts stated below have been translated to U.S. dollars at the rate of exchange in effect at the balance sheet date. A summary of option activity for the years ended March 31, 2010, 2009 and 2008 is presented as follows:
 
                                                 
    2010     2009     2008  
          Weighted
          Weighted
          Weighted
 
          Average
          Average
          Average
 
          Exercise
          Exercise
          Exercise
 
    Options     Price     Options     Price     Options     Price  
 
Outstanding, beginning of year
    7,396,275     $ 0.58       3,835,334     $ 0.80       3,605,500     $ 0.54  
Granted
    725,000       0.33       3,925,000       0.46       1,425,000       1.18  
Exercised
                (125,000 )     0.46       (729,166 )     0.49  
Expired/canceled
    (545,375 )     0.87       (239,059 )     0.75       (466,000 )     0.97  
                                                 
Outstanding, end of year
    7,575,900     $ 0.58       7,396,275     $ 0.58       3,835,334     $ 0.80  
                                                 
Exercisable, end of year
    4,052,873     $ 0.63       2,535,002     $ 0.64       1,978,386     $ 0.66  
                                                 
Vested and expected to vest, end of year
    7,329,288     $ 0.58       7,055,986     $ 0.63       2,851,838     $ 0.78  
                                                 
 
As of March 31, 2010 the aggregate intrinsic value of options outstanding was $195,001 and the remaining contractual term of these options was 7.9 years; the aggregate intrinsic value of options exercisable was $54,814, and the remaining contractual term of these options was 7.5 years. As of March 31, 2010, the total unrecognized compensation cost related to unvested options was $1,236,000, which is expected to be recognized over a weighted-average period of 2.01 years.
 
The weighted average per share fair value of the options granted during the years ended March 31, 2010, 2009 and 2008 were $0.22, $0.46 and $0.65, respectively.
 
There were no options exercised during the year ended March 31, 2010.


F-17


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
The Company estimated the fair value of each stock option grant on the date of grant using the Black-Scholes model with the following assumptions for the years ended March 31, 2010, 2009 and 2008:
 
             
    2010   2009   2008
 
Assumptions:
           
Expected volatility
  85%   74% - 75%   74% - 75%
Risk-free interest rate
  2.47%   2.18% - 3.11%   4.37% - 4.78%
Forfeitures
  7%   5%   7%
Dividend yield
     
Expected term
  5 years   1 - 5 years   1 - 4 years
 
The Company’s net income for the years ended March 31, 2010, 2009 and 2008 has been reduced by stock-based compensation expense, net of taxes, of approximately $0.4 million, $0.3 million and $0.1 million, respectively.
 
(11)   Income Taxes
 
Domestic and foreign income (loss) before income taxes and details of income tax expense (benefit) are as follows (in thousands):
 
                         
    Years Ended March 31,  
    2010     2009     2008  
 
Income (loss) before income taxes:
                       
Domestic (U.S.)
  $ 777     $ (16,563 )   $ 3,987  
Foreign
    5,156       (13,118 )     1,925  
                         
                         
    $ 5,933     $ (29,681 )   $ 5,912  
                         
                         
Income tax expense (benefit):
                       
Current:
                       
Federal (U.S.)
  $ 7     $ (630 )   $ 511  
State (U.S.)
    204       56       27  
Foreign
    1,809       850       717  
                         
                         
Total current
    2,020       276       1,255  
                         
                         
                         
Deferred:
                       
Federal (U.S.)
          2,467       884  
State (U.S.)
          459       538  
Foreign
    (550 )     (269 )     67  
                         
                         
Total deferred
    (550 )     2,657       1,489  
                         
                         
Income tax expense
  $ 1,470     $ 2,933     $ 2,744  
                         
                         


F-18


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
The difference between reported income tax expense and the amount computed by multiplying income (loss) before income taxes by the Company’s applicable Canadian statutory tax rate of approximately 33%, 33% and 35% for the years ended March 31, 2010, 2009 and 2008, respectively, is reconciled as follows (in thousands):
 
                         
    Years Ended March 31,  
    2010     2009     2008  
 
Income tax expense (benefit) using the Company’s Canadian statutory tax rates
  $ 1,940     $ (9,906 )   $ 2,096  
Income taxed in jurisdictions other than Canada
    (823 )     1,468       (174 )
Goodwill impairment
          7,511        
Change in valuation allowance
    76       3,665       1,054  
Other
    277       195       (232 )
                         
    $ 1,470     $ 2,933     $ 2,744  
                         
 
The sources of significant temporary differences that give rise to the deferred tax assets and liabilities are as follows (in thousands):
 
                 
    March 31,  
    2010     2009  
 
Deferred tax assets:
               
Tax loss carryforwards
  $ 10,300     $ 10,509  
Difference between book and tax basis of inventories
    691       789  
Difference between book and tax basis of accounts receivables
    394       424  
Deferred fees not currently deductible
    100       86  
Accruals and reserves not currently deductible
    845       552  
Difference between book and tax basis of intangible assets, property & equipment
    1,090       814  
Unclaimed depreciation on property and equipment
    242       278  
Goodwill and intangibles
    500        
Unclaimed scientific research expenditures
    226       184  
Other
    152       205  
                 
                 
      14,540       13,841  
Less valuation allowance
    (13,236 )     (12,829 )
                 
                 
Net deferred tax assets
  $ 1,304     $ 1,012  
                 
                 
Deferred tax liabilities:
               
Federal liability on state tax loss
  $ 235     $ 231  
Prepaid liabilities
    139       24  
Goodwill and intangibles
    147       254  
                 
                 
Net deferred tax liabilities
  $ 521     $ 509  
                 
                 
Net deferred tax assets
  $ 783     $ 503  
                 
 
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in each tax jurisdiction during the periods in which temporary


F-19


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
differences in those jurisdictions become deductible. Management considers the scheduled reversal of deferred liabilities, projected future taxable income, and tax planning strategies in making this assessment.
 
With regards to the deferred tax assets of our Canadian entities, Mad Catz Interactive, Inc. (“MCII”), and MCC, the Company believes there is insufficient evidence to conclude that realization of the benefit is more likely than not and therefore the Company has provided a full valuation allowance against these assets. MCII is a corporate entity, which has no revenue or other income, and incurs corporate-related expenses. Taxable losses are incurred each year and MCII has a history of operating losses. MCC is a sales office, which has generated a minimal pretax book income in recent years, but has a history of losses in prior years, and is projected to generate minimal taxable income in future years. These circumstances are not anticipated to change and therefore the Company does not expect MCII or MCC to generate sufficient taxable income in the foreseeable future to enable either entity to utilize their tax loss carryforwards. MCI is the Company’s main operating entity and corporate headquarters and also owns the Mad Catz intellectual property. As MCI has a cumulative three year pretax book loss as of March 31, 2009, the Company believes there is insufficient evidence to conclude that realization of the deferred tax assets are more likely than not, and therefore continues to record a full valuation allowance against these assets. MCE, the United Kingdom sales office, has deferred tax assets from a prior acquisition that are not more likely than not realizable and therefore has recorded a partial valuation allowance against these assets. With regard to Hong Kong and Germany’s deferred tax assets, the Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, and therefore no valuation allowance has been provided for these assets. These entities have historically realized pretax book income and taxable income and are projected to continue to do so for the foreseeable future.
 
MCI has U.S. federal and California tax carryforwards of approximately $2.1 million, and $7.8 million, respectively, which may be carried forward to reduce future years’ taxable income. These losses begin to expire in 2023 and 2014 respectively. Saitek has foreign net operating loss carryforwards of approximately $15.1 million which may be carried forward indefinitely.
 
The Internal Revenue Code limits the future availability of net operating loss and tax credit carryforwards that arose prior to certain cumulative changes in a corporation’s ownership resulting in a change of our control. In 2007 when the Company purchased the Saitek group, we acquired federal and state net operating loss carryforwards of approximately $2.8 million and $3.6 million, respectively. This event triggered an ownership change for purposes of IRC Section 382. All of the federal and $3.6 million of the California net operating losses are subject to an annual limitation.
 
The total capital and non-capital income tax losses of MCII and MCC as of March 31, 2010 of $4.2 million, is based upon the total tax loss carry-forward amount in Canadian dollars of $14.9 million, translated into U.S. dollars at the March 31, 2010 exchange rate (1 Canadian dollar = 0.98151 U.S. dollar) and tax-effected at a 29% estimated rate. The gross tax loss carryforwards of Cdn.$14.9 million is made up of (i) MCII non-capital income tax losses of approximately Cdn.$11.2 million (U.S.$11 million), which expire from 2014 through 2030, (ii) MCII net capital tax losses of approximately Cdn.$3.2 million (U.S.$3.1 million), which are available indefinitely to offset taxable capital gains, and (iii) MCC non-capital income tax losses of approximately Cdn.$0.5 million (U.S.$0.5 million), which expire from 2014 through 2015. A full valuation allowance is provided against all these tax losses.
 
MCII does not record deferred income taxes on the undistributed earnings of its non-Canadian subsidiaries based upon the Company’s intention to permanently reinvest undistributed earnings. MCII may be subject to income and withholding taxes if earnings of the non-Canadian subsidiaries were distributed.
 
There were no unrecognized tax benefits at March 31, 2010 and 2009. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense.
 
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company is currently under audit in France for 2007, 2008, and 2009. Additionally, the Company received a tax inquiry from Hong Kong Inland Revenue for 2009.


F-20


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
The Company’s historical tax years are subject to examination by the Internal Revenue Service and various state jurisdictions for fiscal years ended March 31, 2007 to the present. With few exceptions, the Company is no longer subject to foreign examinations by tax authorities for fiscal years ended before March 31, 2006. Effectively, all of the Company’s foreign subsidiaries historical tax years are subject to examination by various foreign tax authorities due to the generation of net operating losses.
 
The Company does not foresee any material changes to unrecognized tax benefits within the next twelve months.
 
(12)   Commitments and Contingencies
 
Leases
 
The Company is obligated under certain non-cancelable operating leases, primarily for warehouses and office space. Rent expense for operating leases was approximately $1,519,000, $1,624,000 and $1,851,000 for the years ended March 31, 2010, 2009 and 2008, respectively. Annual future minimum rental payments required under operating leases as of March 31, 2010 are as follows (in thousands):
 
         
Year ending March 31:
       
2011
  $ 1,493  
2012
    1,257  
2013
    884  
2014
    593  
2015
    406  
Thereafter
    101  
         
    $ 4,734  
         
 
Royalty and License Agreements
 
The Company has license agreements to utilize existing design and utility technology with its products. The Company also has royalty agreements for use of licensed trademarks and celebrity endorsements. These agreements have royalty and license fees based on different percentages of certain types of sales or a predetermined amount per unit. Royalty and license expenses were $6,363,000, $4,198,000 and $2,086,000 for the years ended March 31, 2010, 2009 and 2008, respectively. Annual future minimum rental payments required under royalty and license agreements as of March 31, 2010 are as follows (in thousands):
 
         
Year ending March 31:
       
2011
  $ 302  
2012
    140  
         
    $ 442  
         
 
(13)   Employee Savings Plan
 
MCI has an employee savings plan that permits eligible participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The Company may make discretionary matches of employee contributions. During 2010, 2009 and 2008 the Company matched 50% of the first 8% of compensation that was contributed by each participating employee to the plan. The Company’s discretionary contributions to the plan were $154,000, $139,000 and $136,000 for the years ended March 31, 2010, 2009 and 2008, respectively.


F-21


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
(14)   Geographic and Product Line Data
 
The Company’s sales are attributed to the following geographic regions (in thousands):
 
                         
    2010     2009     2008  
 
Net sales:
                       
United States
  $ 63,223     $ 65,003     $ 52,129  
Europe
    49,005       41,442       31,257  
Canada
    3,109       1,974       2,806  
Other countries
    3,675       4,144       1,545  
                         
    $ 119,012     $ 112,563     $ 87,737  
                         
 
Revenue is attributed to geographic regions based on the location of the customer. During the years ended March 31, 2010, 2009 and 2008, one customer individually accounted for at least 10% of the Company’s gross sales in each year, and this customer accounted for 25%, 29% and 33% of the Company’s gross sales, respectively.
 
The Company’s property and equipment are attributed to the following geographic regions (in thousands):
 
                 
    2010     2009  
 
Property and equipment:
               
United States
  $ 787     $ 394  
Europe
    160       115  
Other countries
    2,505       1,317  
                 
    $ 3,452     $ 1,826  
                 
 
Our gross sales by product category are as follows:
 
                 
    Year Ended March 31,  
    2010     2009  
 
Controllers
  $ 36,476     $ 29,124  
Specialty Controllers
    31,557       20,723  
Accessories
    30,865       58,982  
Audio
    19,321       8,492  
PC
    10,167       7,399  
Games
    1,792       1,225  
All others
    746       2,124  
                 
Total
  $ 130,924     $ 128,069  
                 


F-22


Table of Contents

MAD CATZ INTERACTIVE, INC.
 
Notes to Consolidated Financial Statements — (Continued)
 
(15)   Quarterly Financial and Market Information (Unaudited)
 
                                 
    Quarter Ended  
    June 30     Sept. 30     Dec. 31     Mar 31  
    (Amounts in thousands, except per share data)  
 
Fiscal 2010 Consolidated:
                               
Net sales
  $ 22,378     $ 21,603     $ 48,763     $ 26,268  
Gross profit
    6,623       6,757       15,941       7,075  
Operating income (loss)
    (24 )     (178 )     7,644       744  
Net income (loss)
    (996 )     (971 )     5,592       838  
Net income (loss) per share — basic
    (0.02 )     (0.02 )     0.10       0.02  
Net income (loss) per share — diluted
    (0.02 )     (0.02 )     0.09       0.02  
Common stock price per share:
                               
High
    0.47       0.50       0.54       0.57  
Low
    0.22       0.24       0.32       0.33  
Fiscal 2009 Consolidated:
                               
Net sales
  $ 23,226     $ 25,750     $ 40,817     $ 22,770  
Gross profit
    8,194       7,723       10,548       5,540  
Operating income (loss)
    (884 )     (819 )     (26,419 )     636  
Net loss
    (777 )     (1,239 )     (26,909 )     (3,689 )
Net loss per share — basic
    (0.01 )     (0.02 )     (0.49 )     (0.07 )
Net loss per share — diluted
    (0.01 )     (0.02 )     (0.49 )     (0.07 )
Common stock price per share:
                               
High
    0.81       0.80       0.61       0.45  
Low
    0.55       0.45       0.25       0.15  
 
(16)   Subsequent Event
 
On May 28, 2010, the Company acquired all of the capital stock of Tritton Technologies Inc., a company in the business of developing, manufacturing, marketing and selling videogame and PC accessories, most notably gaming audio headsets, for total purchase price of up to approximately $10 million. Under the terms of the acquisition, the $10.1 million purchase consideration is subject to working capital adjustment and is comprised of approximately $1.5 million in cash from Mad Catz’ cash on hand, and up to $8.6 million in earnout consideration payable over the next five years based on future product sales.
 
The strategic combination is expected to broaden the product lines the Company offers and allow the Company to provide a more comprehensive product suite to its customers.
 
The Company has not yet commenced the purchase accounting for this transaction, including determining the fair value of the contingent earnout consideration, and accordingly, has not included further disclosures required for business combinations herein.


F-23

EX-2.1 2 a56441exv2w1.htm EX-2.1 exv2w1
Exhibit 2.1
Execution Version
NOTE: CERTAIN MATERIAL HAS BEEN OMITTED FROM THIS AGREEMENT PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 24b-2. THE LOCATIONS OF THESE OMISSIONS ARE INDICATED THROUGHOUT THE AGREEMENT BY THE FOLLOWING MARKINGS: [***].
STOCK PURCHASE AGREEMENT
by and among
MAD CATZ, INC.,
as “Buyer,”
MAD CATZ INTERACTIVE, INC.,
as “Parent”
(solely for purposes of Section 7.9),
TRITTON TECHNOLOGIES INC.,
as “Tritton,”
and
THE STOCKHOLDERS OF TRITTON IDENTIFIED
ON THE SIGNATURE PAGE HERETO,
as the “Sellers”
Dated: May 28, 2010

 


 

STOCK PURCHASE AGREEMENT
          This Stock Purchase Agreement (this “Agreement”) is entered into as of May 28, 2010, by and among Mad Catz, Inc., a Delaware corporation (“Buyer”), solely with respect to Section 7.9, Mad Catz Interactive, Inc., a corporation organized under the Business Corporation Law of Canada and parent company of Buyer (“Parent”), Tritton Technologies Inc., a Delaware corporation (“Tritton”), and the Stockholders of Tritton identified on the signature page hereto (collectively, the “Sellers”).
RECITALS
          A. The Sellers in the aggregate own all of the outstanding shares of capital stock of Tritton (the “Tritton Shares”).
          B. Buyer desires to purchase from the Sellers, and the Sellers desire to sell to Buyer, all of the Tritton Shares, subject to the terms and conditions of this Agreement.
          C. Concurrently with the execution of this Agreement, and as a condition and inducement to Tritton’s and the Sellers’ willingness to enter into this Agreement, certain Sellers have executed employment agreements with Buyer.
AGREEMENT
          NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and accuracy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS AND INTERPRETATION PROVISIONS
          As used in this Agreement, the following terms shall have the meanings provided below in this ARTICLE I:
     1.1 Affiliate. The term “Affiliate” means, when used with reference to a specified Person, (a) any Person who directly or indirectly controls, is controlled by or is under common control with the specified Person, (b) any Person who is an officer, partner or trustee of, or serves in a similar capacity with respect to, the specified Person, or for which the specified Person is an officer, partner or trustee or serves in a similar capacity, (c) any Person who, directly or indirectly, is the beneficial owner of ten percent (10%) or more of any class of equity securities of the specified Person, or of which the specified Person, directly or indirectly, is the owner of ten percent (10%) or more of any class of equity securities or (d) any member of the specified Person’s immediate family.
     1.2 April Working Capital. The term “April Working Capital” means the sum of Three Hundred Sixteen Thousand One Hundred Eighty Dollars ($316,180).
     1.3 Buyer Parties. The term “Buyer Parties” means the Buyer and each of its Affiliates, successors and assigns and persons acting as officers, directors, partners, managers, shareholders, members, employees and agents thereof.
     1.4 Change of Control. The term “Change of Control” means: (a) a transaction pursuant to which Buyer or one of its affiliates ceases to own or license the Tritton Products at such time; or (b) a merger, consolidation, stock purchase or similar business combination transaction as a result of which the

 


 

shares of capital stock of Buyer or Parent entitled to vote generally in the election of directors immediately prior to such transaction represent less than 50% of the total voting power of all shares of capital stock that are entitled to vote generally in the election of directors of the entity surviving or resulting from such transaction.
      1.5 Code. The term “Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder.
     1.6 Current Assets. The term “Current Assets” means the consolidated assets of Tritton that are reasonably expected to be realized in cash, or sold, or consumed within one year, as determined in accordance with GAAP.
     1.7 Current Liabilities. The term “Current Liabilities” means the consolidated liabilities of Tritton that are to be repaid within one year, as determined in accordance with GAAP, including without limitation any legal or advisor fees or other expenses incurred by Tritton in connection with the transactions contemplated by this Agreement.
     1.8 Damages. The term “Damages” means damages, Liabilities, losses (including, without limitation, diminution in value), obligations, deficiencies, claims, demands, Taxes, fines, penalties, costs and expenses of any kind or nature whatsoever (whether or not arising out of third-party claims), including, without limitation, interest, costs of mitigation, lost profits, losses resulting from any shutdown or curtailment of operations, attorneys’ fees and all amounts paid in investigation, defense or settlement of any of the foregoing.
     1.9 Employee Plans. The term “Employee Plans” means (a) any employee benefit plan within the meaning of ERISA Section 3(3), including, but not limited to, any multiple employer welfare arrangement (within the meaning of ERISA Section 3(4)), to which more than one unaffiliated employer contributes and any employee benefit plan (such as a foreign or excess benefit plan) which is not subject to ERISA maintained by Tritton or any of its ERISA Affiliates; and (b) any employment, consulting, severance or other similar contract, arrangement or policy, any stock option plan, bonus or incentive award plan, deferred compensation agreement, supplemental income arrangement, vacation plan, any employee benefit arrangement described in Code Section 501(c)(9), and any other employee benefit plan, agreement, and arrangement not described in (a) above maintained by Tritton or any of its ERISA Affiliates. In the case of an Employee Plan funded through a trust described in Code Section 501(a), each reference to such Employee Plan shall include a reference to such trust. An entity “maintains” an Employee Plan if such entity sponsors, contributes to, or provides (or has promised to provide) benefits under such Employee Plan, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under such Employee Plan, or if such Employee Plan provides benefits to or otherwise covers employees, former employees, directors or independent contractors of such entity, or their spouses, dependents, or beneficiaries.
     1.10 Encumbrances. The term “Encumbrances” means any claim, lien, pledge, option, charge, easement, security interest, mortgage, right-of-way, encumbrance, right of first refusal or first offer, restriction or other similar right or interest of any nature of any third party.
     1.11 ERISA. The term “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
     1.12 ERISA Affiliate. The term “ERISA Affiliate” means any entity which is (or at any relevant time was) a member of a “controlled group of corporations” with, under “common control” with, or a member of an “affiliated service group” with, Tritton, as defined in Section 414(b), (c), (m) or (o) of the Code, or under “common control” with Tritton within the meaning of Section 4001(b)(1) of ERISA.

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     1.13 GAAP. The term “GAAP” means U.S. Generally Accepted Accounting Principles, consistently applied.
     1.14 Intellectual Property. The term “Intellectual Property” means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, dismissals, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including without limitation all ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all software (including all source code, data and related documentation) to the extent developed by or exclusively for the businesses of Tritton, (g) all Internet domain names, URLs and any content therein, past or present, (h) all proprietary rights to all content of all past and present publications of the Sellers or Tritton, whether in print or electronic form, (i) all other proprietary rights and (j) all copies and tangible embodiments thereof (in whatever form or medium).
     1.15 Knowledge. The term “Knowledge” means, with respect to the Sellers, the actual knowledge of the Christopher Von Huben and any officer, director, employee or Affiliate of Tritton and the knowledge which such parties would have with reasonable due diligence.
     1.16 Liability. The term “Liability” means any liability, obligation, or commitment of any nature (absolute, accrued, contingent or otherwise) matured or unmatured.
     1.17 Material Adverse Effect. The term “Material Adverse Effect” means changes, developments or occurrences which, individually or in the aggregate, have materially adversely affected or could reasonably be expected to have a material adverse effect on the business, prospects, position (financial or otherwise) or results of operations of the entity concerned, taken as a whole with such entity’s consolidated subsidiaries.
     1.18 Net Sales. The term “Net Sales” means gross sales minus [***] consistent with Buyer’s current revenue recognition policy.
     1.19 Permit. The term “Permit” means any approval, consent, waiver, exemption, variance, franchise, certificate, order, permit, authorization or license of or from any federal, state, local or foreign government, governmental agency, board, tribunal, commission, court or other agency or body with regulatory or governmental authority, including, without limitation, any federal, state, local or foreign zoning, health, environmental protection, pollution, sanitation, safety, siting or building permit or license or authorization.
[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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     1.20 Person. The term “Person” means any individual, corporation, firm, limited liability company, partnership, association, trust, estate or other entity or organization.
     1.21 Proceeding. The term “Proceeding” means any claim, action, suit, inquiry, hearing, judicial or administrative proceeding, grievance, charge, complaint, demand, arbitration, review or investigation.
      1.22 Related Party. The term “Related Party” means any of the Sellers, any officer or director of Tritton, any Affiliate of any of the Sellers, Tritton or any of their respective officers or directors, or any business or entity in which any of the Sellers, Tritton, any of the officers or directors of Tritton or any Affiliate of any such Person has any direct or material indirect interest.
     1.23 Seller Disclosure Schedule. The term “Seller Disclosure Schedule” means a schedule delivered by the Sellers to Buyer on the date hereof, which sets forth exceptions to the representations and warranties contained in ARTICLE IV hereof and certain information called for by this Agreement.
     1.24 Seller Parties. The term “Seller Parties” means the Sellers and each of their Affiliates, successors and assigns and persons acting as officers, directors, partners, managers, shareholders, members, employees and agents thereof.
     1.25 Sellers’ Representative. The term “Sellers’ Representative” means Christopher Von Huben.
     1.26 Taxes. The term “Taxes” (including, with correlative meaning, the term “Tax”) means all taxes, charges, fees, levies, imposts, customs, duties, tariffs, export or import fees, or other assessments, however denominated, including, without limitation, all net income, gross income, gross receipts, sales, use, service, service use, ad valorem, transfer, franchise, profits, net worth, license, lease, withholding, social security, payroll, employment, excise, estimated, severance, stamp, recording, occupation, business, real and personal property, gift, windfall profits or other taxes, customs, duties, fees, assessments or charges of any kind whatsoever, whether computed on a separate, consolidated, unitary, combined or other basis, together with any interest, fines, penalties, additions to tax or other additional amounts imposed thereon or with respect thereto imposed by the Internal Revenue Service or any other federal, state or local taxing authority (whether domestic or foreign) including, without limitation, any state, county, local or foreign government or any subdivision or taxing agency thereof, including a United States possession.
     1.27 Tax Returns. The term “Tax Returns” means all reports, estimates, declarations of estimated tax, schedules, information statements and returns relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties.
     1.28 Transaction Bonus Payments. The term “Transaction Bonus Payments” means the payments to be made by Buyer out of the Purchase Price pursuant to Section 2.3 to the individuals and in the amounts set forth on Schedule 1.28.
     1.29 Tritton Disclosure Schedule. The term “Tritton Disclosure Schedule” means a schedule delivered by Tritton to Buyer on the date hereof, which sets forth exceptions to the representations and warranties contained in ARTICLE V hereof and certain information called for by this Agreement.
     1.30 Tritton Products. The term “Tritton Products” means (a) the products offered for sale by Tritton immediately prior to Closing as set forth on Exhibit A attached hereto, improvements and enhancements of such products, (b) all new audio products created following the Closing and (c) all non-audio products created following the Closing that the Sellers’ Representative and Buyer mutually agree in

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writing to include within the definition of Tritton Products, but excluding, in each case, any products currently sold, in design or development by Buyer or its Affiliates and enhancements, derivatives or improvements of such products currently sold, in design or development by Buyer or its Affiliates. For the avoidance of doubt, any Tritton Product that is rebranded as a product of Buyer or its Affiliates shall be included in the definition of Tritton Products following such rebranding.
     1.31 Working Capital. The term “Working Capital” means Current Assets less Current Liabilities.
     1.32 Working Capital Holdback Amount. The term “Working Capital Holdback Amount” means the sum of One Hundred Thousand Dollars ($100,000).
     1.33 Other Defined Terms. The following terms shall have the meanings given them in the Sections of this Agreement set forth below:
         
Term   Section
Agreement
  Preamble
Arbitrator
    2.6 (c)
Balance Sheet Date
    5.8 (a)
Buyer
  Preamble
Closing
    3.1
Closing Cash
    2.2
Closing Date
    3.1
Closing Working Capital
    2.2
Dispute Notice
    2.6 (a)
Earn-Out Consideration
    2.2
Earn-Out Period
    2.2
Earn-Out Schedule
    2.5
Environmental Claims
    8.2 (c)
Financial Statements
    5.8 (a)
Fraud Claims
    8.2 (a)
Fundamental Claims
    8.2 (e)
General Claims
    8.2 (f)
Leases
    5.13
Manufacturing Ownership Claims
    8.2 (d)
Material Contracts
    5.14
Net Sales Auditor
    2.5 (c)
Objection Notice
    2.5 (c)
Pre-Closing Partial Period
    7.7 (c)
Purchase Price
    2.2
Restricted Period
    7.6
Sellers
  Preamble
Tax Claims
    8.2 (b)
Tritton
  Preamble
Tritton Intellectual Property
    5.28 (a)
Tritton Shares
  Recitals
Von Huben Employment Agreement
    3.2 (c)
Working Capital Adjustment Amount
    2.2
     1.34 Interpretation Provisions. Any reference to “party” or “parties” shall be a reference to Buyer and the Sellers, individually or collectively, as the case may be. The words “hereof,” “herein” and

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“hereunder” and words of similar import when used in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement, and article, section, schedule and exhibit references are to this Agreement unless otherwise specified. The meaning of defined terms shall be equally applicable to the singular and plural forms of the defined terms. The term “or” is disjunctive but not necessarily exclusive. The terms “include” and “including,” however used, are not limiting and mean “including without limitation.” References to agreements and other documents shall be deemed to include all subsequent amendments and other modifications thereto. References to statutes shall include all regulations promulgated thereunder and references to statutes or regulations shall be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation. The captions and headings of this Agreement are for convenience of reference only and shall not affect the construction of this Agreement. The language used in this Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall under any circumstances be applied against any party. Representations, warranties, covenants, indemnities or obligations given or entered into by more than one party hereunder shall bind each of the parties thereto jointly and severally.
ARTICLE II.
PURCHASE AND SALE OF TRITTON SHARES
     2.1 Sale of Tritton Shares. On and subject to the terms of this Agreement, Buyer agrees to purchase from each of the Sellers, and each of the Sellers agrees to sell, convey, transfer, assign and deliver to Buyer, all of the Tritton Shares owned by such Seller for the consideration specified in Section 2.2.
     2.2 Consideration for Tritton Shares. As full and complete consideration for the sale, transfer, assignment, conveyance and delivery of the Tritton Shares by the Sellers to Buyer, and for all representations, warranties, covenants and obligations of the Sellers and Tritton in this Agreement, Buyer agrees to pay to the Sellers, collectively, (a) cash in an amount equal to One Million Four Hundred Fifty Thousand Dollars ($1,450,000) (the “Closing Cash”), and (b) cash in an amount determined in accordance with Section 2.4 (the “Earn-Out Consideration”). The Closing Cash and the Earn-Out Consideration are, collectively, the “Purchase Price.” The Purchase Price is premised upon the Working Capital of Tritton as of Closing (the “Closing Working Capital”) being equal to the April Working Capital, and the Purchase Price shall be adjusted up or down, as the case may be, by the amount, if any, by which the Closing Working Capital is greater than or less than the April Working Capital (the “Working Capital Adjustment Amount”). The Purchase Price shall be paid as provided in the remainder of this Article II.
     2.3 Payment of the Closing Cash. Subject to the satisfaction of all of the conditions set forth in this Agreement, at the Closing, Buyer shall deliver to the Sellers the Closing Cash less the Working Capital Holdback Amount and the aggregate amount of the Transaction Bonus Payments by wire transfer of immediately available funds to the account or accounts designated in writing by the Sellers at least two (2) business days prior to Closing. Concurrently with the payment of the Closing Cash, Buyer shall pay the Transaction Bonus Payments to the individuals and in the amounts set forth on Schedule 1.28.
     2.4 Earn-Out Consideration. For each of the 2011, 2012, 2013, 2014, and 2015 fiscal years of Buyer (ending March 31) (each, an “Earn-Out Period”), the Sellers shall be entitled to receive, collectively, from Buyer additional consideration equal to the percentage of the Net Sales of the Tritton Products set forth in the schedule below, up to the Maximum Earn-Out Consideration applicable to such fiscal year set forth therein:

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Fiscal Year   Applicable Percentage   Maximum Earn-Out Consideration
2011
  [***]%   $ 1,600,000  
2012
  [***]%   $ 1,600,000  
2013
  [***]%   $ 1,650,000  
2014
  [***]%   $ 1,900,000  
2015
  [***]%   $ 1,900,000  
     2.5 Payment of Earn-Out Consideration. Within forty-five (45) days after the end of each Earn-Out Period, Buyer shall (a) prepare and deliver to the Sellers a schedule (each, an “Earn-Out Schedule”) setting forth (i) the Net Sales of the Tritton Products for such Earn-Out Period, and (ii) the calculation of the Earn-Out Consideration payable in connection with such Earn-Out Period, and (b) pay to the Sellers the applicable Earn-Out Consideration by wire transfer of immediately available funds to the account or accounts designated pursuant to Section 2.3 above.
          (a) Buyer shall use commercially reasonable efforts to use sales and marketing efforts with respect to the Tritton brand and the Tritton Products that are consistent with its sales and marketing efforts with respect to its other similarly situated product brands. Buyer agrees that Buyer will not take any action with a primary intention of materially decreasing the likelihood that Buyer will have to make the Earn-Out Consideration payments.
          (b) Net Sales information will be available to the Seller’s Representatives from time to time through access to Buyer’s sales information systems. If the Sellers’ Representative is unable to obtain Net Sales information through access to Buyer’s sales information systems as a result of the termination of the Sellers’ Representative’s employment with Buyer at any time, then Buyer shall deliver to the Sellers’ Representative a report of the Net Sales of the Tritton Products on a fiscal quarterly and cumulative fiscal year basis beginning with the first fiscal quarter end following the termination of the Sellers’ Representative’s employment. Such report shall be delivered to the Sellers’ Representative within forty-five (45) days after the end of the applicable quarterly period. The Sellers’ Representative may provide such Net Sales information to any Seller at such Seller’s request up to one time per quarter if such Seller executes a non-disclosure and non-use agreement and acknowledgement of such Seller’s obligations under applicable securities laws with respect thereto, each in a form reasonably acceptable to Buyer.
          (c) Within ten (10) business days after receipt of the Earn-Out Schedule for each Earn-Out Period in which the Sellers’ Representative is unable to obtain Net Sales information through access to Buyer’s sales information systems as a result of the termination of the Sellers’ Representative’s employment with Buyer, the Sellers’ Representative shall give Buyer written notice of any objection to the calculation of Net Sales set forth in such Earn-Out Schedule, which notice shall specify the factual basis of such objection (the “Objection Notice”). If the Sellers’ Representative provides Buyer with an Objection Notice during such ten (10) business day period and Buyer and the Sellers’ Representative are unable to reconcile the objections set forth in such Objection Notice within twenty (20) business days after delivery thereof to Buyer, then the parties shall mutually select an independent accounting firm from
[***] INDICATES MATERIAL THAT HAS BEEN OMITTED AND FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN REQUESTED. ALL SUCH OMITTED MATERIAL HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

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among one of the four largest accounting firms in the United States or another nationally recognized accounting firm (the “Net Sales Auditor”) to perform an audit of the Net Sales during the applicable Earn-Out Period. If the parties are unable to mutually select the Net Sales Auditor, then each of the Sellers’ Representative and Buyer shall select an independent auditor and the two independent auditors shall mutually select the Net Sales Auditor. The Sellers’ Representative and Net Sales Auditor shall execute and deliver a confidentiality agreement in form and substance reasonably acceptable to Buyer in advance of any such audit. Buyer shall permit the Net Sales Auditor to enter Buyer’s premises upon reasonable advance notice and during Buyer’s normal business hours and in a manner that does not interfere with Buyer’s operation of its business in order to examine records pertaining to the calculation of Net Sales during the applicable Earn-Out Period, and the Net Sales Auditor’s determination of the calculation of Net Sales during the applicable Earn-Out Period shall be binding on the parties. Except as set forth in the following sentence, each party shall bear its own expenses incurred in connection with the resolution of any such dispute. The Sellers shall bear the fees and expenses of the Net Sales Auditor unless the Net Sales Auditor’s determination of the Net Sales during the applicable Earn-Out Period is greater than 110% of Buyer’s calculation of the Net Sales during the applicable Earn-Out Period, in which case Buyer shall bear the fees and expenses of the Net Sales Auditor.
          (d) In the event of a Change of Control, Buyer agrees to use its best efforts to cause the surviving or acquiring corporation in such Change of Control to assume Buyer’s remaining obligation to pay the Earn-Out Consideration.
     2.6 Working Capital Adjustment.(a) The parties have agreed to the April Working Capital and the basis for calculation thereof. Within sixty (60) days after the Closing, Buyer shall, in good faith and in a manner consistent with the calculation of the April Working Capital, prepare and deliver to the Sellers’ Representative a statement setting forth (a) the Closing Working Capital, and (b) the Working Capital Adjustment Amount, if any, and the basis for calculation thereof. If the Sellers’ Representative disagrees with Buyer’s computation of the Working Capital Adjustment Amount or any portion thereof, the Sellers’ Representative shall give Buyer a written notice (a “Dispute Notice”) explaining in reasonable detail the basis of such disagreement within ten (10) days after the Sellers’ Representative receipt of Buyer’s calculation of the Working Capital Adjustment Amount and such disagreement shall be resolved in accordance with Section 2.6(c) below. If the Sellers’ Representative agrees in writing with the Working Capital Adjustment Amount or if the Sellers’ Representative does not timely give Buyer a Dispute Notice, the Working Capital Adjustment Amount shall be final, binding and conclusive on the parties.
          (b) If the Closing Working Capital exceeds the April Working Capital, then Buyer shall pay to the Sellers the Working Capital Holdback Amount and the Working Capital Adjustment Amount. If the April Working Capital exceeds the Closing Working Capital by an amount equal to or less than the Working Capital Holdback Amount, then Buyer shall retain the portion of the Working Capital Holdback Amount equal to the Working Capital Adjustment Amount and shall pay to the Sellers that portion of the Working Capital Holdback Amount in excess of the Working Capital Adjustment Amount. If the April Working Capital exceeds the Closing Working Capital by an amount in excess of the Working Capital Holdback Amount, then Buyer shall retain the entire Working Capital Holdback Amount and the additional amount by which the April Working Capital exceeds the Closing Working Capital shall be deducted from the Earn-Out Consideration for the Fiscal Year 2011 Earn-Out Period, and subsequent Earn-Out Periods if necessary. Any payments required to be paid by Buyer under this Section 2.6 shall be paid to the Sellers by wire transfer of immediately available funds.
          (c) Buyer and the Sellers’ Representative shall use their commercially reasonable efforts for a period of ten (10) business days following a Dispute Notice to resolve any disagreement relating to the Working Capital Adjustment Amount. If Buyer and the Sellers’ Representative have been unable to resolve the disagreement by the end of such period, a mutually agreed upon independent public

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accounting firm (the “Arbitrator”) shall be retained to make a determination on the matter in dispute. If Buyer and the Sellers’ Representative cannot mutually agree upon an Arbitrator, Buyer and the Sellers’ Representative, collectively, shall each name an Arbitrator. If the two Arbitrators cannot agree on a value, they shall appoint a third, and the decision of a majority of the three Arbitrators shall be binding on all parties. The determination of the Arbitrator(s) with respect to the Working Capital Adjustment Amount shall be final, binding and conclusive on the parties and the appropriate payment shall be made by the parties in accordance with Section 2.6(a) based upon the final determination of the Arbitrator(s). The fees and expenses of the Arbitrator(s) shall be borne equally by Buyer and the Sellers.
     2.7 Tax Treatment. Any Earn-Out Consideration payments made pursuant to Section 2.5 and any indemnity payments made pursuant to ARTICLE VIII shall be deemed to be, and each of the Sellers and Buyer shall treat such payments as, an adjustment to the Purchase Price for federal, state, local and foreign income Tax purposes. The Earn-Out Consideration payments shall be treated as installment obligations for purposes of Section 453 of the Code. The Parties shall treat an applicable portion of the Earn-Out Consideration payments to the Sellers or any other recipient of consideration under this Agreement as imputed interest to the extent required pursuant to Sections 453, 483 or 1274 of the Code. The parties hereto acknowledge that the transaction contemplated by this Agreement shall constitute a taxable transaction for income tax purposes. The parties to this transaction acknowledge that they are relying solely upon their own tax advisors with regard to the tax consequences of the transaction contemplated by this Agreement.
ARTICLE III.
CLOSING
     3.1 Closing. The consummation of the transactions contemplated by this Agreement (the “Closing”) shall take place on the date hereof at the offices of Buyer, 7480 Mission Valley Road, Suite 101, San Diego, California 92108 unless another date or location is mutually agreed to in writing by Tritton, the Sellers and Buyer (the “Closing Date”).
     3.2 Sellers’ Deliveries at Closing. At the Closing, upon the terms and subject to the conditions set forth herein, the Sellers, and solely with respect to Section 3.2(c), which shall only apply to Christopher Von Huben, shall deliver to Buyer:
          (a) Certificates representing all of the outstanding Tritton Shares;
          (b) An Assignment Separate from Certificate duly executed by each of the Sellers in the form attached hereto as Exhibit B;
          (c) Christopher Von Huben shall have executed and delivered to Buyer an employment agreement in substantially the form attached hereto as Exhibit C (the “Von Huben Employment Agreement”);
          (d) Evidence of the requisite approval by the Board of Directors of the Tritton to the Tritton’s execution and delivery of, and performance of its obligations under, this Agreement;
          (e) A written resignation from each of the officers and directors of Tritton, effective as of the Closing;
          (f) One or more Assignments of Intellectual Property, in the form reasonably acceptable to Buyer and in recordable form to the extent necessary to assign Tritton’s Intellectual Property rights to Buyer;

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          (g) Tritton’s minute books, stock transfer records, corporate seal and other materials related to Tritton’s corporate administration;
          (h) a copy of the Certificate of Incorporation of Tritton, certified by the Secretary of State of the State of Delaware, and Certificates of Good Standing from the Secretaries of State of the States of Delaware and any other states listed in Section 5.1 of the Tritton Disclosure Schedule evidencing the good standing of Tritton in each such jurisdiction;
          (i) a copy of each of (A) the text of the resolutions adopted by the Board of Directors of Tritton authorizing the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby and (B) the Bylaws of Tritton, along with certificates executed on behalf of Tritton by its corporate secretary certifying to Buyer that such copies are true and complete copies of such resolutions and Bylaws, respectively, and that such resolutions and Bylaws were duly adopted and have not been amended or rescinded;
          (j) incumbency certificates executed on behalf of Tritton by its corporate secretary certifying the signature and office of each officer executing this Agreement and such other agreements contemplated by this Agreement as Buyer may request; and
          (k) All consents, approvals and waivers from third parties, including federal, state, local, foreign and other governmental authorities, necessary to consummate the transactions contemplated hereby shall have been obtained, except where the failure to have obtained or made any such consent, authorization, order, approval, filing or registration would not have, individually or in the aggregate, a Material Adverse Effect on the business of the Tritton following the Closing.
     3.3 Buyer Deliveries at Closing. At the Closing, upon the terms and subject to the conditions set forth herein, Buyer shall deliver to the Sellers:
          (a) The Closing Cash payable by wire transfer of immediately available funds to the accounts designated by the Sellers; and
          (b) A duly and validly executed original of the Von Huben Employment Agreement.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES REGARDING THE SELLERS
     Each of the Sellers hereby makes the representations and warranties set forth below to Buyer as of the date hereof, subject only to such exceptions as are specifically disclosed in writing in the applicable section of the Seller Disclosure Schedule, which is attached hereto and incorporated herein by this reference.
     4.1 Organization of Certain Sellers. Such Seller, if it is an entity other an individual, is duly organized and validly existing under the laws of the jurisdiction of its formation.
     4.2 Authorization of Transaction. Such Seller has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of such Seller, enforceable against such Seller in accordance with its terms and conditions. Such Seller is not required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement.

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     4.3 Non-Contravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which such Seller is subject or, if such Seller is an entity other than an individual, any provision of its organizational documents or (b) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which the Seller is a party or by which he or it is bound or to which any of his or its assets is subject.
     4.4 No Brokers. Such Seller has not entered into nor will it enter into any contract, agreement, arrangement or understanding with any Person which will result in an obligation of the Sellers, Tritton or Buyer to pay any finder’s fee, brokerage commission or similar payment in connection with the transactions contemplated hereby.
     4.5 Legal and Tax Advice. Such Seller has discussed this Agreement with counsel of its choosing, and has had the legal consequences of this Agreement and the transactions contemplated hereby explained by such counsel. Such Seller is not relying upon Buyer or any of its stockholders, members, directors, officers, attorneys, accountants, agents or representatives for purposes of interpreting the provisions of this Agreement or assessing the consequences hereof.
     4.6 Tritton Shares. Such Seller holds of record and owns beneficially the number of Tritton Shares set forth next to its name in Section 4.6 of the Seller Disclosure Schedule, free and clear of any restrictions on transfer (other than any restrictions under state and federal securities laws), Taxes, Encumbrances, options, warrants, purchase rights, contracts, commitments, equities, claims, and demands. Such Seller is not a party to any option, warrant, purchase right, or other contract or commitment or subject to any legal requirement that could require such Seller to sell, transfer, or otherwise dispose of any capital stock of Tritton (other than this Agreement) or to sell any assets of Tritton or to effect any merger, consolidation or other reorganization of Tritton or to enter into any agreement related thereto. Such Seller is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock of Tritton. All of the outstanding Tritton Shares held by such Seller were duly authorized, validly issued, fully paid and nonassessable and were issued in compliance with applicable preemptive rights and securities laws.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES REGARDING TRITTON
     The Sellers and Tritton hereby make the representations and warranties set forth below to Buyer as of the date hereof, subject only to such exceptions as are specifically disclosed in writing in the applicable section of Tritton Disclosure Schedule, which is attached hereto and incorporated herein by this reference.
     5.1 Due Organization. Tritton is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power and authority to own, lease and operate its properties and conduct its business as presently conducted and as proposed to be conducted. Tritton is duly qualified to do business as a foreign corporation or other entity and is in good standing in each jurisdiction in which such qualification is necessary under the applicable law as a result of the conduct of its business or the ownership of its properties. Each jurisdiction in which Tritton is qualified to do business as a foreign corporation or other entity is listed in Section 5.1 of the Tritton Disclosure Schedule.

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     5.2 Books and Records. True, complete and correct copies of Tritton’s Certificate of Incorporation and Bylaws have been furnished to Buyer. Such Certificate of Incorporation and Bylaws reflect all amendments made thereto at any time prior to the date of this Agreement. Tritton is not in default under or in violation of any provision of its Certificate of Incorporation or its Bylaws. True, complete and correct copies of the stock certificate books and the stock record books of Tritton have been furnished to Buyer.
     5.3 Capitalization of Tritton. The authorized capital stock of Tritton consists of Two Thousand (2,000) Tritton Shares, of which One Thousand Nine Hundred (1,900) Tritton Shares are duly issued and outstanding, fully paid and non-assessable. The Sellers are the only holders of any Tritton Shares. All of the outstanding Tritton Shares and other securities of Tritton are duly authorized, validly issued, fully paid and nonassessable and free of all Encumbrances, and were issued in compliance with applicable preemptive rights and securities laws. Tritton has not issued any securities, including, but not limited to, options, warrants or other securities convertible into or exercisable for shares of capital stock of Tritton or other securities of Tritton, nor has it repurchased, redeemed or otherwise acquired any of its outstanding shares of capital stock. Tritton is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock.
     5.4 Subsidiaries. Tritton has not at any time prior to the date hereof and currently does not own any stock, partnership interest, membership interest, joint venture interest or any other security or ownership interest issued by any other corporation, or by any partnership, limited liability company, organization or other entity.
     5.5 Authorization. Tritton has all necessary corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder. The execution and delivery of this Agreement by Tritton and the consummation by Tritton of the transactions contemplated hereby have been duly approved by the Board of Directors of Tritton. No other corporate proceedings on the part of Tritton are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by Tritton and is a legal, valid and binding obligation of Tritton, enforceable against Tritton in accordance with its terms, subject to general principles of equity and laws of general application relating to bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally, regardless of whether considered in a proceeding in equity or at law.
     5.6 Non-Contravention. The execution, delivery and performance of this Agreement by Tritton and the consummation by Tritton of the transactions contemplated hereby do not and will not, with or without the giving of notice or the lapse of time, or both, violate, conflict with, result in the breach of or a default under, or accelerate the performance required by or result in, individually or in the aggregate, any Material Adverse Effect under any of the terms, conditions or provisions of, the Certificate of Incorporation, Bylaws or other organizational documents of Tritton or any covenant, agreement, commitment or understanding (including any license or sub-license agreement, covenant not to compete, employment agreement or consulting agreement) to which Tritton is a party or by which any of their assets are bound, or any Permit, authorization, order, ruling, decree, judgment, injunction or arbitration award, or any law, rule, statute, regulation or stipulation, to which Tritton or any of their assets is subject, or result in the creation of any Encumbrance upon any of the properties or assets of Tritton.
     5.7 Consents and Approvals. No consent, approval or authorization of, or declaration, filing or registration with, any federal, state, local, foreign or other governmental or regulatory authority, or any other Person, is required to be made or obtained by Tritton in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby.

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     5.8 Financial Statements.
          (a) The unaudited financial statements of Tritton as of and for the years ended December 31, 2008 and 2009 and for the four (4) months ended April 30, 2010 (the “Balance Sheet Date”) are set forth in Exhibit D hereto (collectively, the “Financial Statements”). The Financial Statements (i) are complete, correct and accurate and are consistent with the books and records of Tritton, and (ii) fairly present the consolidated financial condition and results of operations of Tritton as of the dates and for the periods then ended and include no change in the application of accounting principles.
          (b) All projected operating results and other financial information relating to Tritton that have previously been supplied by Tritton to Buyer have been prepared in good faith on the basis of assumptions by Tritton which Tritton believes to be reasonable.
     5.9 No Undisclosed Liabilities. As of the Balance Sheet Date, Tritton had no Liabilities other than those which are adequately reflected or reserved against in the Financial Statements. Tritton has not taken any action which has resulted in a waiver or extension of the statute of limitations applicable to any of its Liabilities. Tritton has not, since the Balance Sheet Date, other than as set forth on Section 5.9 of the Tritton Disclosure Schedule, incurred any Liabilities except in the ordinary course of business, none of which will have, individually or in the aggregate, a Material Adverse Effect on Tritton.
     5.10 No Changes. Since the Balance Sheet Date, Tritton has conducted its business only in the ordinary course. Without limiting the generality of the foregoing sentence, except as set forth in Section 5.10 of the Tritton Disclosure Schedule, since the Balance Sheet Date there has not been:
          (a) any change in the financial condition, assets, liabilities, net worth or business of Tritton;
          (b) any damage, destruction or loss, whether or not covered by insurance, adversely affecting the properties in the aggregate or business of Tritton, or any deterioration in the operating condition of Tritton’s assets;
          (c) any Encumbrance on any of Tritton’s assets, tangible or intangible;
          (d) any strike, walkout, labor trouble or any other new or continued event, development or condition of similar character at Tritton;
          (e) any declaration, setting aside or payment of a dividend or other distribution in respect of any of the stock of Tritton, or any direct or indirect redemption, purchase or other acquisition of any stock of Tritton or any rights to purchase such stock or securities convertible into or exchangeable for such stock;
          (f) any increase in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any officer, director, employee, agent or stockholder of Tritton, or any increase in, or any addition to, other benefits (including without limitation any bonus, profit sharing, pension or other plan) to which any of Tritton’s officers, directors, employees, agents or stockholders may be entitled, or any payments to any pension, retirement, profit sharing, bonus or similar plan except payments in the ordinary course of business and consistent with past practice made pursuant to the employee benefit plans described in Section 5.18 of the Tritton Disclosure Schedule, or any other payment of any kind to or on behalf of any such officer, director, employee, agent or stockholder other than payment of base compensation and reimbursement or advance for reasonable business expenses in the ordinary course of business;

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          (g) any making or authorization of any capital expenditures in excess of $10,000 per month;
          (h) any cancellation or waiver of any right material to the operation of Tritton’s business;
          (i) any acceleration, termination, modification, cancellation or waiver of any agreement, contract, lease, license, instrument, indebtedness, claim or other arrangement;
          (j) any delay or postponement of the payment of accounts payable or other Liability, obligation or expense, nor has it accelerated or advanced the collection of receivables or the selling of accounts;
          (k) any sale, lease, transfer, assignment or other disposition of any assets (tangible or intangible) of Tritton;
          (l) any payment, discharge or satisfaction of any Liability by Tritton, other than the payment, discharge or satisfaction, in the ordinary course of business, of Liabilities shown or reflected on the Financial Statements;
          (m) any material adverse change or any threat of any material adverse change in Tritton’s relations with, or any loss or threat of loss of, any of Tritton’s customers, clients or suppliers, licensees and licensors;
          (n) any grant of any license or sublicense of any rights under or with respect to any of the Tritton Intellectual Property;
          (o) any write-offs as uncollectable of any notes or accounts receivable of Tritton or write-downs of the value of any assets by Tritton;
          (p) any change by Tritton in any method of accounting or keeping its books of account, accounting practices, investment practices, or claims, payment and processing practices or policies;
          (q) any creation, incurrence, assumption or guarantee by Tritton of any Liabilities, except in the ordinary course of business, or any creation, incurrence, assumption or guarantee by Tritton of any indebtedness for money borrowed (other than renewals on comparable terms of Liabilities reflected on the Financial Statements);
          (r) any payment, loan or advance of any amount to or in respect of, or any sale, transfer or lease of any properties or assets (whether real, personal or mixed, tangible or intangible) to, or entering into of any agreement, arrangement or transaction with, any Related Party except for compensation to the officers and employees of Tritton at rates not exceeding the rates of compensation disclosed to Buyer or as permitted in clause (f) of this Section 5.10;
          (s) any disposition of or failure to keep in effect any rights in, to or for the use of any patent, trademark, service mark, trade name or copyright, or any disclosure to any Person not an employee or Related Party (other than disclosures to Tritton, Buyer or those made in the ordinary course of business pursuant to an effective confidentiality agreement) or other disposal of any trade secret, process or know-how used by Tritton in its business;

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          (t) any transaction, agreement or event outside the ordinary course of Tritton’s business;
          (u) any amendment to the Certificate of Incorporation, Bylaws or other organizational documents of Tritton;
          (v) any event, incident, action, failure to act or transaction that has resulted in, individually or in the aggregate, a Material Adverse Effect of Tritton; or
          (w) any failure to maintain in full force and effect substantially the same level and types of insurance coverage as in effect on the Balance Sheet Date.
     5.11 Notes and Accounts Receivable. All of the accounts and notes receivable of Tritton fairly state amounts receivable for services actually provided or merchandise actually delivered (or, in the case of non-trade accounts or notes, represent amounts receivable in respect of other bona fide business transactions) and have arisen in the ordinary course of business. All such receivables are fully collectible in the normal and ordinary course of business.
     5.12 Title to and Condition of Assets.
          (a) Tritton does not own any real property. All tangible properties and assets owned or leased by Tritton are, except for changes in the ordinary course of business after the Balance Sheet Date, reflected in the Financial Statements. Tritton owns good and marketable fee, or valid leasehold, title to the real and personal property owned or leased by it, free and clear of all Encumbrances, except (i) as reflected in the Financial Statements, (ii) for Encumbrances created by the lessors thereof and (iii) for Encumbrances related to Taxes not yet due and payable by Tritton (none of which Encumbrances impairs the current use or diminishes the value of any material item of property to any material extent).
          (b) All of the equipment and tangible personal property owned or leased by Tritton is in good operating condition and repair and none of such assets is in need of maintenance or repairs except for ordinary, routine maintenance.
     5.13 Leases, Premises. Section 5.13 of the Tritton Disclosure Schedule lists all real property leases, subleases, amendments, options and other leasehold interests to which Tritton is a party (the “Leases”). All of the Leases are valid and binding, in full force and effect and enforceable against Tritton and the other parties thereto in accordance with their terms, subject to general principles of equity and laws of general application relating to bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally, regardless of whether considered in a Proceeding in equity or at law. No party is in default under any Lease, and no event exists which with notice or lapse of time or both would constitute a default or an event of default thereunder. Such leased properties are not subject to any Encumbrances, encroachments, zoning ordinances, administrative regulations or building or use restrictions which interfere with or impair the present and continued use thereof in the usual and normal conduct of the business of Tritton.
     5.14 Contracts and Commitments. Except as set forth in Section 5.14 of the Tritton Disclosure Schedule, Tritton is not party to any written or oral:
          (a) contract, agreement, commitment or personal property lease which requires Tritton to make payments thereunder in excess of $2,000;
          (b) note, loan or evidence of indebtedness on the part of Tritton of more than $2,000;

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          (c) contracts, agreements or commitments not otherwise described in (a) or (b) above which are not in the ordinary course of Tritton’s business or which materially affect Tritton’s business;
          (d) guarantee of any Liability or obligation;
          (e) assignment, license, indemnification or agreement with respect to any form of Tritton Intellectual Property;
          (f) contracts, agreements or commitments containing covenants limiting the freedom of Tritton to engage in any line of business or compete with any other Person;
          (g) contracts for the employment of any officer, individual, employee or other person or entity on a full-time, part-time, consulting or other basis, or other agreement providing severance benefits or relating to loans to officers, directors, employees or Affiliates;
          (h) partnership or joint venture agreements;
          (i) contracts, agreements or commitments which have an unexpired term in excess of twelve (12) months from the date hereof, other than those which can be terminated on not more than thirty (30) days notice without Liability to Tritton or Buyer;
          (j) contract or agreement which is incapable of being fulfilled or performed on time without undue or unusual expenditure of time, money or effort;
          (k) contract or agreement which provides for any payment or receipt of funds not accurately reflecting the value on an arm’s length basis of the services or goods in consideration of which that payment or receipt of funds has been made or is to be made; or
          (l) contract or agreement which involves or is likely to involve obligations, restrictions or liabilities whose nature or magnitude ought reasonably to be known by an intending Buyer of Tritton and its business.
     Neither Tritton nor any other party thereto is in default (nor does any circumstance exist which, with notice or the lapse of time or both, would result in such a default) under any agreement, contract, lease or commitment described in this Section 5.14 to which it is a party (the “Material Contracts”). Each of the Material Contracts is in full force and effect, is valid and binding and is enforceable against Tritton and each other party thereto in accordance with its terms, subject to general principles of equity and laws of general application relating to bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally, regardless of whether considered in a Proceeding in equity or at law. The Sellers have delivered or made available to Buyer true and correct copies of the Material Contracts. Copies of each personal property lease have been provided or made available to Buyer and Section 5.14 of the Tritton Disclosure Schedule sets forth a list of such leases. Each personal property lease listed in Section 5.14 of the Tritton Disclosure Schedule includes a description of the leased property, the monthly rent, the term of the lease and any options to purchase the leased property.
     5.15 Litigation, Proceedings and Applicable Law. There is no Proceeding pending or, to the Sellers’ Knowledge, threatened against Tritton. Tritton is not in default with respect to any judgment, order, writ, injunction or decree of any court, governmental agency, commission, board, bureau, agency or instrumentality. Tritton is not subject to outstanding order, ruling, decree, judgment or stipulation by or with any court, administrative agency, arbitration panel or other similar authority.

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     5.16 Compliance with Law. Tritton has complied and is now in compliance with all applicable federal, state, local and foreign laws, ordinances and regulations. No claims or complaints have been received by Tritton from any governmental authorities or other parties that Tritton is in violation of any such laws, ordinances and regulations and no such claims or complaints have been threatened and there is no reasonable basis for any such claims or complaints. Tritton has not received any notice from any governmental authorities of any pending Proceedings to take all or any part of the properties of Tritton (whether leased or owned) by condemnation or right of eminent domain and no such Proceedings are threatened. Section 5.16 of the Tritton Disclosure Schedule sets forth all Permits issued or required to be issued as of the date hereof to Tritton with respect to the ownership or lease of its properties and assets or the conduct of its business. Tritton has not failed to comply with, nor is it in violation of, any such Permit, and all such Permits are final and in full force and effect and are not subject to any appeals or further Proceedings or to any unsatisfied conditions (other than normal renewal procedures on comparable terms). No modification, suspension, rescission, relocation or cancellation of any such Permit, or any Proceeding with respect to any of the foregoing, is pending or threatened.
     5.17 Insurance. Tritton has provided Buyer with a record of insurance of Tritton setting forth a complete and accurate list of all casualty, business interruption, directors and officers liability, general liability, workers’ compensation and other types of insurance maintained by or for the benefit of Tritton, together with the names of the policyholder, carriers and insureds, additional insureds and loss payees, and the liability limits and expiration date for each such policy. Each such policy is in force, and no notice has been received by Tritton from any insurance carrier purporting to cancel or refuse renewal, reduce or dispute coverage under any such policy. All premiums or other payments due under all such policies have been paid in full. Such policies are sufficient to insure Tritton from all losses normally insured against by similar businesses. Tritton is not in default under any of such policies or binders, and Tritton has not failed to give any notice or to present any claim under any such policy or binder in a due and timely fashion. No policy aggregates, limits or maximums affecting the coverage available on Tritton’s insurance policies have been reached or exceeded for any policy years commencing on or after the date of incorporation of Tritton. Each such insurance policy shall continue to be in full force and effect upon the Closing. Such insurance policies constitute the only insurance policies which Tritton is required to maintain, by law or the terms of any contract or agreement.
     5.18 Employee Benefit Plans.
          (a) Schedule 5.18 of the Tritton Disclosure Schedule sets forth a true and complete list of each Employee Plan. With respect to each Employee Plan, Tritton has provided to Buyer (if applicable to such Employee Plan): (i) all documents embodying or governing such Employee Plan, and any funding medium for the Employee Plan (including, without limitation, trust agreements) as they may have been amended; (ii) the most recent IRS determination, opinion or approval letter with respect to such Employee Plan under Code Sections 401(a) and 501(a), and any applications for determination or approval subsequently filed with the IRS; (iii) the most recently filed IRS Form 5500 with all applicable schedules and accountants’ opinions attached thereto; (iv) the summary plan description for such Employee Plan (or other descriptions of such Employee Plan provided to employees) and all modification thereto; and (v) any insurance policy (including any fiduciary liability insurance policy) related to such Employee Plan.
          (b) Each Employee Plan maintained by Tritton and which has been intended to qualify under Section 401(a) of the Code is subject to a favorable determination letter from the IRS regarding its qualification thereunder. Each of the Employee Plans has been and is administered in accordance with its terms and with the requirements of applicable law, including, without limitation, ERISA and the Code.

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          (c) No Employee Plan has ever (i) been subject to Title IV of ERISA, (ii) been a multiemployer plan within the meaning of Section 3(37) or 4001(a)(3) of ERISA, or (iii) provided health care or other non-pension benefits to any employees after their employment is terminated (other than as required by Part 6 of Subtitle B of Title I of ERISA) or has ever promised to provide any such post-termination benefits.
          (d) Neither Tritton nor any ERISA Affiliate has any announced plan or legally binding commitments to create any additional Employee Plan which is intended to cover employees, former employees, directors or independent contractors of Triton or any of its ERISA Affiliates (or their spouses, dependents or beneficiaries) or to amend or modify any existing Employee Plan.
     5.19 Labor Matters.
          (a) Section 5.19 of the Tritton Disclosure Schedule contains a list of all of the employees of Tritton. Tritton is not a party to any labor agreement with respect to its employees with any labor organization, union, group or association and there are no employee unions (nor any other similar labor or employee organizations) under local statutes, custom or practice. In the last five years, Tritton has not experienced any attempt by organized labor or its representatives to make Tritton conform to demands of organized labor relating to its employees or to enter into a binding agreement with organized labor that would cover the employees of Tritton. There is no labor strike or labor disturbance pending or threatened against Tritton nor is any grievance currently being asserted, and Tritton has not experienced a work stoppage or other labor difficulty since the date of its incorporation. Tritton is in compliance with all applicable laws respecting employment practices, employee documentation, terms and conditions of employment and wages and hours and is not and has not engaged in any unfair labor practice. There is no unfair labor practice charge or complaint against Tritton pending before any domestic or foreign governmental agency arising out of Tritton’s activities, and there are no facts or information which would give rise thereto.
          (b) Tritton is currently and has in the past consistently been in full compliance with all relevant immigration-related laws and regulations, including but not limited to all applicable Department of Labor regulations relating to employment of H-1B workers, verification of employment eligibility and any other relevant provisions.
     5.20 Product Liability; Warranty. Tritton has committed no act, and there has been no omission, which may result in, and there has been no occurrence which may give rise to, any Liability of any kind for breach of warranty (whether covered by insurance or not) on the part of Tritton, with respect to products or services sold by Tritton. There are no existing or, to the Knowledge of the Sellers, threatened product or service Liability, warranty or other similar claims, or any facts upon which a material claim of such nature could be based, against Tritton for products or services which are defective or fail to meet any product or service warranties. No request has been made to Tritton to lower the previously agreed to price for the same products or services. The products and services sold by Tritton have been performed or produced, as the case may be, in conformity with all applicable contractual commitments and specifications and all express and implied warranties. The aggregate amount charged or expensed for warranty matters in the Financial Statements was sufficient to cover all losses under the warranties for services rendered or products sold by Tritton during the periods covered by such Financial Statements. No product manufactured or sold by or for Tritton has been the subject of any recall or other similar action, and no event has occurred, and no condition or circumstance exists, that might (with or without notice or lapse of time) directly or indirectly give rise to or serve as a basis for any such recall or other similar action relating to any such product.

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     5.21 Tax Matters.
          (a) Tritton has timely filed with the appropriate taxing authorities all Tax Returns in respect of Taxes required to be filed by it through the date hereof. All such Tax Returns were true, correct and complete in all respects and were prepared in substantial compliance with all applicable laws and regulations at the time of filing and remain true, correct and complete as of the date hereof. Tritton has not requested any extension of time within which to file Tax Returns in respect of any Taxes or is the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where Tritton does not file Tax Returns that Tritton is or may be subject to taxation by that jurisdiction. The Sellers have delivered to Buyer complete and accurate copies of federal, state and local Tax Returns of Tritton for the tax years 2008 and 2009.
          (b) All Taxes (whether or not shown on any Tax Return), in respect of periods beginning before the date hereof, have been paid or remitted to the appropriate governmental authorities, or an adequate reserve in the Financial Statements (excluding reserves for deferred Taxes to reflect timing differences between book and taxable income) has been established therefor, and Tritton (nor any affiliated group of corporations, within the meaning of Code Section 1504, of which Tritton is now or has been a member) has any liability for taxes in excess of the amounts so paid or reserves so established. There are no Taxes for which Tritton is or may become liable that will apply in a period or portion thereof beginning the day after the Closing Date and that are attributable to income earned or activities occurring on or before the Closing Date. All Taxes which Tritton is (or was) required by law to withhold or collect have been duly withheld or collected, and have been timely paid over to the proper authorities, to the extent due and payable. The transaction contemplated herein is not subject to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of law.
          (c) Tritton has not waived any statute of limitations in respect of Taxes or agreed to an extension of time with respect to the period for assessment or collection of Taxes. No deficiencies for Taxes have been claimed, proposed or assessed or threatened to be claimed, proposed or assessed by any taxing or other governmental authority with respect to Tritton (or any affiliated group of corporations, within the meaning of Code Section 1504, of which Tritton is now or has been a member). There are no pending or, to the best of Tritton’s Knowledge, threatened audits, investigations or claims for or relating to any liability in respect of Taxes of Tritton, and there are no matters under discussion with any governmental authorities with respect to Taxes that is likely to result in an additional amount of Taxes of Tritton. Tritton (nor any affiliated group of corporations, within the meaning of Code Section 1504, of which Tritton is now or has been a member) has been notified that any taxing authority intends to audit a Tax Return or request any information related to Tax matters for any other period. No power of attorney with respect to any Taxes for which Tritton may be liable is currently in force.
          (d) Tritton does not have net operating losses, tax credit carryovers or other tax attributes presently subject to limitation under Sections 382, 383 and 384 of the Code, Treasury Regulation Section 1.1502-15T or 21T or other similar foreign tax provisions. The amount of net operating losses, net capital losses, foreign tax credits, investment, and other tax credits of Tritton is set forth in Section 5.21(d) of the Tritton Disclosure Schedule.
          (e) Tritton has not been and is not a party to, or bound by, any tax sharing, tax allocation or similar agreement or requested or received any ruling from any taxing authority, or signed any binding agreement with any taxing authority (including, without limitation, any advance pricing agreement) that would impact the amount of Tax after the Closing Date.

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          (f) Tritton has not made any payments, is not obligated to make any payments, and is not a party to any agreement, contract, arrangement or plan that will obligate it to make any payments (i) that are not deductible under Section 280G of the Code with respect to the transactions contemplated hereby, or (ii) that are not fully deductible as a result of Section 162(m) of the Code (or any corresponding provision of state, local, or non-US Tax law) . Tritton has not agreed to make, nor will it be required to make as a result of any of the transactions contemplated hereby, any adjustment under Section 481 of the Code (or any similar provision of the Tax laws of any jurisdiction).
          (g) Tritton has not filed a consent under Section 341(f) of the Code (or any similar provision of state, local or foreign law) concerning collapsible corporations, and will not file such a consent.
          (h) No stockholder of Tritton is a “foreign person” as defined in Code Section 1445(f)(3). Tritton has not been a United States Real Property Holding Corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code and Buyer is not required to withhold tax on the purchase of stock of Tritton by reason of Code Section 1445.
          (i) Tritton (i) has not been a member of an affiliated group filing a consolidated federal income tax return and (ii) has no Liability for the Taxes of any Person (other than any Taxes of Tritton) under Treasury Regulation Section 1.1502-6 (or any similar state, local or foreign law), as a transferee or successor.
          (j) There are no liens for Taxes (other than for current taxes not yet due and payable) upon the assets of Tritton.
          (k) Tritton has not taken any position on its federal income Tax Returns that would require disclosure in order to avoid a substantial understatement penalty within the meaning of Section 6662 of the Code or similar provisions of foreign tax laws. Tritton has not entered into any transaction that lacks economic substance within the meaning of Section 7701(o) of the Code.
          (l) Tritton has furnished to Buyer (i) true, complete and correct copies of all audit reports, statements of deficiencies, closing or other agreements received by Tritton from Tax authorities related to Taxes, including, without limitation, all reports, statements, memoranda and opinions, whether formal or informal, regarding audits and examinations that have begun but have not been completed; (ii) a list of all elections in effect with respect to Taxes that will survive the Closing and (iii) a schedule that contains an accurate and complete description of any carryovers of Tax attributes.
          (m) Tritton has filed all reports and created and/or retained all records required under Code Section 6038A with respect to transactions with related parties.
          (n) Tritton has no Liability pursuant to Section 6901 of the Code or otherwise under applicable law by virtue of any transfer of an asset or assets to it, and Buyer will not be subject to such Liability as a result of any of the transactions contemplated thereby.
          (o) Tritton has not distributed stock of a “controlled corporation” (within the meaning of Section 355(a) of the Code) in a transaction subject to Code Section 355 within the past two years.

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          (p) Tritton (i) is not subject to any joint venture, partnership or other agreement or arrangement which is treated as a partnership for federal income tax purposes and (ii) does not own a single member limited liability company which is treated as a disregarded entity.
     5.22 Environmental Matters. Tritton has complied and is in compliance with all federal, state, local, municipal, foreign, international, multinational or other constitution, law, ordinance, established principle of common law, code, regulation, statute, or treaty of any governmental body concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, as such requirements are duly enacted and in effect on or prior to the Closing Date. The consummation of the transactions contemplated hereby will not create any Liabilities for which Buyer will be responsible under any law, rule or regulation of any governmental body concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, as such requirements are duly enacted and in effect on the Closing Date.
     5.23 Customers and Suppliers. Except as set forth in Section 5.23 of the Tritton Disclosure Schedule, no customer or supplier accounted for more than 10% of Tritton’s sales or purchases in Tritton’s last fiscal year or current fiscal year to date. Tritton is not involved in any claim with any of its top ten customers in terms of gross sales volume for its last fiscal year or current fiscal year to date and is not involved in any dispute with other customers which in the aggregate is reasonably likely to be deemed material. No customer or supplier material to the business of Tritton has terminated or altered, or notified Tritton of any intention to terminate or alter, its relationship with Tritton, and the Sellers have no Knowledge that a customer or supplier material to the business of Tritton will terminate or alter its relationship with Tritton. The invoices and bills of material from its suppliers related to Tritton products that have previously been supplied by Tritton to Buyer are true and correct in all respects. The invoices and purchase orders from its customers related to Tritton products that have previously been supplied by Tritton to Buyer are true and correct in all respects.
     5.24 Inventories. All inventories set forth on the Financial Statements consist of raw materials and supplies, manufactured and processed parts, work-in-process, finished goods, and packaging materials all of which are merchantable and fit for the purpose for which they were procured or manufactured, and none of which are returns, refurbished, slow-moving, obsolete, damaged, or defective. The inventories set forth on the Financial Statements consist of a quality and quantity which are usable and salable at normal profit margins and within customary time periods in the ordinary course. None of such inventories have been consigned to others. Except as set forth on Section 5.24 of the Tritton Disclosure Schedule, the amount and components of inventories set forth on the Financial Statements constitute sufficient but not excessive quantities and appropriate components of inventory for the operation of Tritton’s business in the ordinary course of business. Inventories now on hand (including inventory held by third party manufacturers and other supply chain providers) were purchased in the ordinary course of business of Tritton at a cost not exceeding market prices prevailing at the time of purchase.
     5.25 No Brokers. Tritton has not entered into nor will they enter into any contract, agreement, arrangement or understanding with any Person which will result in an obligation of Tritton or Buyer to pay any finder’s fee, brokerage commission or similar payment in connection with the transactions contemplated hereby.

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     5.26 Powers of Attorney. Section 5.26 of the Tritton Disclosure Schedule contains a complete and accurate list of all outstanding powers of attorney or similar authorizations given by Tritton.
     5.27 Transactions with Related Parties. Except as set forth on Section 5.27 of the Tritton Disclosure Schedule, Tritton has not entered into a transaction with any Related Party other than at arms’ length, and no Related Party (a) has borrowed money from or loaned money to Tritton which will not be repaid on or before the Closing Date, (b) has any contractual or other claim, express or implied, of any kind whatsoever against Tritton or (c) has been engaged, since the date of incorporation of Tritton, in any other transaction with Tritton.
     5.28 Intellectual Property.
          (a) Tritton owns or has the right to use all Intellectual Property necessary for the operation of its businesses as presently conducted and as proposed to be conducted, or is controlled or used, by and/or on behalf of Tritton (all intellectual property owned by Tritton is referred to herein as the “Tritton Intellectual Property”). Tritton has taken all necessary, commercially reasonable and prudent action(s) to perfect its ownership of, maintain, protect, and safeguard each item of Tritton Intellectual Property. Each item of Tritton Intellectual Property owned or used by Tritton immediately prior to the Closing will be owned or available for use by Tritton on identical terms and conditions at the Closing hereunder. Tritton has no contractual obligation to compensate any Person for the use of any Tritton Intellectual Property. Upon Closing, Tritton will maintain all of its right, title and interest in and to the Tritton Intellectual Property, including all rights, claims and damages regarding past infringements of the Tritton Intellectual Property by any third party (and Tritton’s right to seek enforcement of all such rights to prevent the infringement or misappropriation thereof), free and clear of all liens, claims and Encumbrances. True and correct copies of all Tritton Intellectual Property (including all pending applications and application related documents and materials) owned, controlled or used by or on behalf of Tritton or in which Tritton has any ownership interest or right to use, as amended prior to the Closing Date, have been provided or made available to Buyer. With respect to each item of Tritton Intellectual Property:
               (i) Tritton possesses all right, title, and interest in and to the item, free and clear of all Encumbrances;
               (ii) all necessary assignments, documents, information disclosure papers and certificates in connection with such Tritton Intellectual Property have been filed with the relevant patent, trademark, copyright, or other authorities in the United States or foreign jurisdictions, as applicable, for purposes of maintaining such Tritton Intellectual Property;
               (iii) the item is valid and subsisting, and all necessary annuities, filing, registration, maintenance, renewal fees in conjunction with such Tritton Intellectual Property have been paid;
               (iv) except as set forth on Section 5.28(a)(iv) of the Tritton Disclosure Schedule, there are no actions that must be taken within ninety (90) days of the Closing Date for the purposes of obtaining, maintaining, perfecting, preserving, or renewing any Tritton Intellectual Property;
               (v) in each case where Tritton has acquired any Tritton Intellectual Property from any Person, or jointly developed Tritton Intellectual Property with any Person, Tritton has obtained a valid, enforceable, and irrevocable transfer of all right, title, and interest to the such Tritton Intellectual Property;

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               (vi) the item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge;
               (vii) no allegation or Proceeding is pending or is threatened which challenges the legality, validity, enforceability, use, or ownership of the item;
               (viii) Tritton has not agreed to indemnify any Person for or against any infringement or misappropriation with respect to the item; and
               (ix) Tritton has not granted to any Person any license, option or other rights to use in any manner any Tritton Intellectual Property whether requiring the payment of royalties or not, with respect to the item.
          (b) Third Party Rights. Section 5.28(b) of the Tritton Disclosure Schedule identifies each item of Intellectual Property that any third party owns and that Tritton uses pursuant to license, sublicense, agreement, or permission. Tritton has delivered to Buyer correct and complete copies of all such licenses, sublicenses, agreements, and permissions, as amended prior to the Closing Date. Tritton does not interfere with, infringe upon, or misappropriate any Intellectual Property rights of third parties as a result of the past or continued operation of its business as presently conducted. With respect to each item of Intellectual Property required to be identified in Section 5.28(b) of the Tritton Disclosure Schedule:
               (i) the license, sublicense, agreement, or permission covering such item is legal, valid, binding, enforceable, and in full force and effect;
               (ii) Tritton and, to Tritton’s Knowledge, no other party to the license, sublicense, agreement, or permission covering such item is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification, or acceleration thereunder by Tritton, or to Tritton’s Knowledge, the other parties;
               (iii) Tritton and, to Tritton’s Knowledge, no other party to the license, sublicense, agreement, or permission covering such item has repudiated any provision thereof;
               (iv) with respect to each sublicense, to Tritton’s Knowledge, the representations and warranties set forth in subsections (i) through (iv) above are true and correct with respect to the underlying license;
               (v) no Person who has licensed Intellectual Property to Tritton has any ownership rights or license or permission to use any improvements made by Tritton in such Intellectual Property;
               (vi) to Tritton’s Knowledge, the underlying item of Intellectual Property is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge;
               (vii) no Proceeding is pending or, to Tritton’s Knowledge, is threatened which challenges the legality, validity, or enforceability of the underlying item of Intellectual Property; and
               (viii) Tritton has not granted any sublicense or similar right with respect to the license, sublicense, agreement, or permission covering such item.

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          (c) Enforceability, Validity, and Absence of Claims. To Tritton’s Knowledge, there are no facts or circumstances (including any information or fact that would constitute prior art) that would render any patent rights within Tritton Intellectual Property unpatentable, invalid, unenforceable or infringed, or would adversely effect any pending application for any patent rights within Tritton Intellectual Property. Tritton has not misrepresented, or failed to disclose and has no Knowledge of any misrepresentation or failure to disclose, any fact or circumstances in any application for any Tritton Intellectual Property that would constitute fraud or misrepresentation or breach of the duty of candor with respect to such application or that would otherwise affect the patentability, validity or enforceability of any Tritton Intellectual Property. Tritton has not interfered with, infringed upon or misappropriated in any material respect any Intellectual Property rights of any third party, and neither Tritton nor its directors, officers, employees or agents has ever received any written charge, complaint, claim, demand, or notice alleging such interference, infringement, misappropriation, or violation (including any claim that Tritton must license or refrain from the use, or offer of a license under, any Intellectual Property rights of any third party). To Tritton’s Knowledge, no third party has interfered with, infringed upon or misappropriated any Intellectual Property rights of Tritton. Tritton has not made any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that the third party must license or refrain from using, or offer of a license under, any Tritton Intellectual Property.)
     5.29 Identification of Depositories and Authorities. Section 5.29 of the Tritton Disclosure Schedule sets forth a complete and accurate list of the names and addresses of all banks, trust companies, savings and loan associations and other financial institutions in which Tritton has assets, deposits or safe deposit boxes and the signatories thereunder.
     5.30 Certain Business Practices. None of Tritton, any of the Sellers or any director, officer, agent or employee of Tritton has (a) used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses relating to political activity, or (b) made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns or violated any provision of the Foreign Corrupt Practices Act of 1977, as amended.
     5.31 Governmental Permits. Tritton owns, holds or possesses, in respect of its business, all Permits necessary to entitle it to own or lease, operate and use its properties and to carry on and conduct its business as currently conducted and as currently proposed to be conducted. Section 5.31 of the Tritton Disclosure Schedule sets forth a list and brief description of each such Permit held by Tritton. Tritton has fulfilled and performed its respective obligations under each such Permit and no event has occurred or condition or state of facts exists which constitutes or, after notice or lapse of time or both, would constitute a breach or default under any such Permit. No notice of cancellation, of default or of any dispute concerning any such Permit, or of any event, condition or state of facts described in the preceding sentence, has been received by Tritton. There is no Proceeding pending or threatened to revoke, modify or otherwise fail to renew any such Permit. Each Permit is valid, subsisting and in full force and effect and will be maintained by Tritton following consummation of the transactions contemplated by Agreement without (i) the occurrence of any breach, default or forfeiture of material rights thereunder or (ii) the consent, approval of, or the making of any filing with, any governmental body, regulatory commission or other party.
     5.32 Legal and Tax Advice. Tritton has had an opportunity to discuss this Agreement with counsel of its choosing, and had the legal consequences of this Agreement and the transactions contemplated hereby explained by such counsel. Tritton is not relying upon Buyer or any of its stockholders, members, directors, officers, attorneys, accountants, agents or representatives for purposes of interpreting the provisions of this Agreement or assessing the consequences hereof.

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     5.33 Accuracy of Information. All information which has been given by or on behalf of Tritton to Buyer (or to any employee, agent or advisor of Buyer) with respect to Tritton or its business or assets is true, complete and accurate in all material respects. The information in the Tritton Disclosure Schedule is accurate in all material respects.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES OF BUYER
     Buyer hereby makes the representations and warranties set forth below to the Sellers as of the date hereof.
     6.1 Due Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware, and has all requisite corporate power and authority to own, lease and operate its properties and conduct its business as it is presently being conducted.
     6.2 Authorization. Buyer has all necessary corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder. The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby have been duly approved by all requisite corporate action on the part of Buyer. No other corporate proceedings on the part of Buyer are necessary to authorize this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and is a legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, subject to general principles of equity and laws of general application relating to bankruptcy, insolvency, moratorium or similar laws affecting creditors’ rights generally, regardless of whether considered in a Proceeding in equity or at law.
     6.3 Non-Contravention. The execution, delivery and performance of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby do not, with or without the giving of notice or the lapse of time, or both, violate, conflict with, result in the breach of or a default under, or accelerate the performance required by or result in, individually or in the aggregate, any Material Adverse Effect of Buyer under any of the terms, conditions or provisions of, the charter or bylaws of Buyer or any covenant, agreement, commitment or understanding (including any license or sub-license agreement, covenant not to compete, employment agreement or consulting agreement) to which Buyer is a party, or any Permit, authorization, order, ruling, decree, judgment or arbitration award, or any law, rule, regulation or stipulation, to which Buyer is subject, or result in the creation of any Encumbrance upon any of the properties or assets of Buyer.
     6.4 Consents and Approvals. No consent, approval, authorization, declaration, filing or registration with any governmental or regulatory authority, or any other Person, is required to be made or obtained by Buyer in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby.
     6.5 Capital Resources. Buyer has on the date hereof sufficient capital resources to pay the Closing Cash and is not aware of any reason that Buyer will be unable to pay the Earn-Out Consideration when the same becomes due and payable.
     6.6 No Brokers. Buyer has not entered into nor will it enter into any contract, agreement, arrangement or understanding with any Person which will result in the obligation of the Sellers, Tritton or Buyer to pay any finder’s fee, brokerage commission or similar payment in connection with the transactions contemplated hereby.

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ARTICLE VII.
ADDITIONAL AGREEMENTS
     7.1 Further Assurances. Upon the terms and subject to the conditions contained herein, the parties agree, (a) to use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (b) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder and (c) to cooperate with each other in connection with the foregoing. Without limiting the foregoing, the parties agree to use their respective commercially reasonable efforts (i) to obtain all necessary waivers, consents and approvals from other parties to consummate the transactions contemplated by this Agreement, (ii) to obtain all necessary Permits as are required to be obtained under any laws, statutes, ordinances, rules or regulations, (iii) to defend all actions challenging this Agreement or the consummation of the transactions contemplated hereby, (iv) to lift or rescind any injunction or restraining order or other court order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, (v) to give all notices to, and make all registrations and filings with, third parties, including without limitation submissions of information requested by governmental authorities and (vi) to fulfill all conditions to this Agreement.
     7.2 Confidential Information.
          (a) Except as provided in Section 7.2(b), each party hereto agrees that this Agreement and every provision hereof shall be strictly confidential and shall not be disclosed to any other person other than: (i) with the written consent of the parties; (ii) if it is required by law; (iii) if it is made pursuant to existing contractual obligations; (iv) if it is required by any rule or regulation of any securities exchange or regulatory or governmental entity whether or not this has the force of law; or (v) in connection with any Proceeding, including but not limited to any Proceeding to enforce the terms of this Agreement.
          (b) Notwithstanding the foregoing but subject to Section 7.3, the confidentiality obligations set forth in Section 7.2(a) shall not prevent or restrict in any way Buyer from announcing the transactions contemplated by this Agreement (including the issuance of any press release or any public announcement or communication) or notifying third parties at any time following the Closing Date and introducing itself as successor to Tritton. Notwithstanding the forgoing, Buyer shall not disclose the amount of the Purchase Price or any other financial terms pertaining to this Agreement except for: (i) such disclosures as may be required to comply with applicable laws; (ii) disclosures of information which is or subsequently becomes known to the public through no fault of the Buyer; and (iii) in connection with any Proceeding, including but not limited to any Proceeding to enforce the terms of this Agreement.
          (c) From and for a period of five (5) years after the Closing Date, unless expressly consented to in writing by Buyer, the Sellers shall not directly or indirectly, use or disclose to any third person, any trade secret, financial data, customer list, pricing or marketing policies or plans or other proprietary or confidential information relating to Buyer, or Tritton, except for: (i) such disclosures as may be required to comply with applicable laws; (ii) disclosures of information which is or subsequently becomes known to the public through no fault of the Sellers; (iii) as may be required in order for Christopher Von Huben to fulfill his duties under the Employment Agreement; and (iv) in connection with any Proceeding, including but not limited to any Proceeding to enforce the terms of this Agreement businesses.

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     7.3 Public Statements and Press Releases. The parties will consult with each other prior to issuing any press release regarding the transactions contemplated hereby. In addition, each party will obtain prior consent from the other party before issuing any press release or public statement except if such disclosure is required by law or by the rules and regulations of any regulatory authority or stock exchange having jurisdiction. Notwithstanding the above, where a party requests consent from the other party of any press release or public statement and the other party has not responded to such request within two (2) business days, then the party proposing the press release or public statement will be entitled to proceed with its disclosure as if it had received consent from the other party.
     7.4 Employees and Offers of Employment. Except as set forth in this Section 7.4, Buyer shall have no obligation to offer employment to, or to employ, any employee of Tritton. Buyer shall make offers of at-will employment effective and contingent upon the Closing to the employees of Tritton listed on Exhibit E hereto. Any other offers of employment by Buyer to Tritton’s employees shall be at such salary or wage and benefit levels and on such other terms and conditions as Buyer shall in its sole discretion deem appropriate.
     7.5 Litigation Support. In the event and for so long as any party hereto is actively contesting or defending any Proceeding of third parties after the Closing in connection with (a) any transaction contemplated by this Agreement or (b) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction on the Closing Date involving the Sellers or Tritton, each of the other parties shall cooperate in the defense or contest, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the defense or contest, all at the sole cost and expense of the initiating party (unless such party is entitled to indemnification therefor under ARTICLE VIII); provided, however, that any party so requesting the cooperation of another party who is not an employee of Buyer shall compensate such other party for the reasonable value of their time to be provided as described in this Section 7.5.
     7.6 Additional Covenants Protecting the Interests of Buyer. Each of the Sellers agrees as follows:
          (a) That through the fourth anniversary of the Closing Date (the “Restricted Period”), none of the Sellers shall directly or indirectly, individually, together with, or through any other Person: (A) approach, solicit or accept business from, or otherwise engage in any business with any Person who is or has been a customer or client of Tritton, or a representative of such customer or client that has the effect of competing directly with Tritton or Buyer; (B) in any manner discourage any Person who is or has been a customer or client of Tritton from continuing its business relationship with Tritton; (C) approach, counsel or attempt to induce any employee or independent contractor of Tritton to leave their employment or engagement, or employ or engage or attempt to employ or engage any such Person; or (D) aid or counsel any other person to do any of the above.
          (b) That during the Restricted Period, none of the Sellers shall directly or indirectly, individually, together with, or through any other Person; (A) engage in; (B) own or control any interest in (except as a passive investor of less than 1% of the capital stock of a publicly held company); (C) act as a director, officer, manager, employee, trustee, agent, partner, joint venturer, participant, consultant of or be obligated to, or be connected in any advisory, business or ownership capacity with; (D) lend credit or money for the purpose of establishing or operating; or (E) allow their names or reputations to be used by any firm, corporation, partnership, trust or other business enterprise directly or indirectly engaged in, any business that is directly competitive with the business of Tritton in any geographic territory in which the business of Tritton has been conducted.

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Each of the Sellers has carefully considered the nature and extent of the restrictions set forth in this Agreement and agrees that the same are reasonable with respect to scope, duration, territory and otherwise. Each of the Sellers also expressly acknowledges that the restrictive covenants set forth in this Section 7.6 are reasonable and necessary in order to protect and maintain the proprietary interests, goodwill and other legitimate business interests of Buyer. Each of the Sellers further acknowledges that (i) it would be difficult to calculate the damages to Buyer from any breach of the obligations of the Sellers under this Section 7.6, (ii) injury to Buyer from any such breach would be irreparable and impossible to measure and (iii) the remedy at law for any breach or threatened breach of this Section 7.6 would therefore be an inadequate remedy and, accordingly, Buyer shall, in addition to all other available remedies, including, without limitation, seeking such damages as Buyer can show it has sustained by reason of such breach and/or the exercise of all other rights it has under this Agreement, be entitled to injunctive relief, specific performance and other equitable remedies without the necessity of showing actual damages or posting bond. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 7.6 is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed.
     7.7 Tax Matters.
          (a) The Sellers, on the one hand, and the Buyer, on the other hand, agree to give prompt notice to each other of any claim, or the commencement of any Proceeding (including a Tax audit) with respect to Taxes for which the Sellers may be responsible pursuant to the terms of this Agreement. The Sellers may, at their own expense, participate in and, upon providing written notice to the Buyer, assume the defense of any such Proceeding, provided that (i) the counsel to the Sellers is reasonably satisfactory to the Buyer, (ii) the Sellers shall thereafter consult with the Buyer upon request for such consultation from time to time with respect to such Proceeding, and (iii) the Sellers shall not, without the written consent of the Buyer, agree to any settlement with respect to any Tax if such settlement could adversely affect a Tax asset or the Tax liability of Buyer. If the Sellers assume such defense, the Buyer shall have the right (but not the duty) to participate in the defense thereof and to employ counsel, at their own expense, separate from the counsel employed by the Sellers. If the Sellers elect not to assume such defense, (i) the Buyer may pay, compromise or contest the Tax at issue, and (ii) the Sellers shall be responsible to pay the amount of the Tax directly or, if any Buyer pays such Tax, reimburse the payor of such Tax pursuant to the terms of this Agreement. The Sellers shall be jointly and severally liable for the reasonable fees and expenses of counsel and other experts and consultants employed by the Buyer for any period during which the Sellers have not assumed the defense thereof. Whether or not the Sellers choose to defend or prosecute any Proceeding, all of the parties to this Agreement shall cooperate in the defense or prosecution thereof.
          (b) The Sellers, on the one hand, and Buyer, on the other hand, agree to furnish or cause to be furnished to each other, upon request, as promptly as practicable, such information and assistance (including access to books and records) related to Tritton as is reasonably necessary for the preparation of any Tax Return, claim for refund or audit, and the prosecution or defense of any Proceeding relating to any proposed adjustment. The Sellers and Buyer further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).

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          (c) Buyer shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for Tritton for all Tax periods ending on the Closing Date which are filed after the Closing Date. Buyer shall permit Tritton to review and comment on each such Tax Returns described in the preceding sentence prior to filing. The Sellers shall be responsible to pay the amount of all Taxes for which the Sellers are responsible pursuant to the terms of this Agreement directly or, if Buyer pays such Tax, reimburse Buyer for such Tax within fifteen (15) days after the date on which such Taxes are paid. Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of Tritton for Tax periods which begin before the Closing Date and end after the Closing Date. The Sellers shall pay to Buyer within fifteen (15) days after the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to any period beginning before the Closing Date and ending after the Closing Date, but only with respect to the portion of such period up to and including the Closing Date (such portion, a “Pre-Closing Partial Period”). Any Taxes for a period including a Pre-Closing Partial Period shall be apportioned between such Pre-Closing Partial Period and the portion of such period beginning after the Closing Date, based, in the case of real and personal property Taxes, on a per diem basis and, in the case of other Taxes, on the actual activities, taxable income or taxable loss of Tritton during such Pre-Closing Partial Period and the remainder of such period. Notwithstanding the foregoing, the provisions of this Section 7.6(a) shall not impose any liability on the Sellers with respect to Taxes in excess of the Damages for which the Sellers have agreed to indemnify the Buyer Parties under Section 8.2.
     7.8 Contribution to Audit Expenses. If it is determined that an audit of Tritton’s financial statements is required under applicable auditing rules, then the cost of such audit, up to a maximum of $25,000 in the aggregate, will be deducted from the Earn-Out Consideration for the year in which such audit is conducted.
     7.9 Guaranty. Parent hereby agrees to pay, or cause Buyer to pay, when due, each payment of Purchase Price required pursuant to ARTICLE II above and any indemnification obligations of Buyer pursuant to ARTICLE VIII above.
     7.10 Lease. The Sellers agree to cause Sunset West Distributing, Inc. to enter into an agreement with Buyer following the Closing pursuant to which (a) Tritton will be responsible to pay only its pro rata share of Sunset West Distributing, Inc.’s rent payments under its lease agreement with Rancho Vista International, LP based on the square footage being used by Tritton following the Closing, (b) Tritton will be permitted to sublease the square footage being used by Tritton from time to time, (c) upon written notice by Tritton, Sunset West Distributing, Inc. will terminate such lease agreement with respect to the square footage subject to such notice as soon as permitted by such lease agreement and (d) Tritton will pay its pro rata share of any termination payment required to effect such termination based on the square footage being used by Tritton at the time of such termination.
     7.11 Tritton Disclosure Schedule. The Sellers agree to make such changes to the Tritton Disclosure Schedule following the Closing as are required by Buyer’s lender.
ARTICLE VIII.
SURVIVAL; INDEMNIFICATION
     8.1 Survival of Representations, Etc. All of the representations, warranties, covenants and agreements made in this Agreement or in any attachment, exhibit, the Tritton Disclosure Schedule, the Seller Disclosure Schedule, certificate, document or list delivered pursuant hereto shall survive the Closing hereunder (even if the other party knew or had reason to know of any misrepresentation or breach of warranty at the time of such Closing, unless the other party expressly waives in writing any such breach at or before the time of such Closing) and shall continue in full force and effect for a period of

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eighteen (18) months following the Closing Date, except that the representations and warranties set forth in Sections 4.1, 4.2, 4.6, 5.1, 5.3, 5.5 and 5.9 shall survive the Closing and continue in full force and effect forever thereafter and the representations and warranties set forth in Sections 5.18, 5.21 and 5.22 shall survive the Closing and continue in full force and effect until the expiration of the applicable statute of limitations (with extensions thereof). Each party hereto shall be entitled to rely upon the representations and warranties of the other party set forth in this Agreement. The termination of the representations and warranties provided herein shall not affect the rights of either party in respect of any Claim made by such party in a writing and received by the other party prior to the expiration of the applicable survival period provided herein.
     8.2 Indemnification by the Sellers. Each of the Sellers agrees subsequent to the Closing to indemnify and hold the Buyer Parties harmless from and against any Damages which may be sustained or suffered by any of them arising out of or based upon any of the following matters:
          (a) fraud, intentional misrepresentation or the cause or knowledge of a deliberate or willful breach of any representations, warranties or covenants of the Sellers under this Agreement or in any certificate, schedule or exhibit delivered pursuant hereto (collectively, “Fraud Claims”);
          (b) any liability of Tritton for Taxes arising from their respective activities, assets and all events and transactions on the Closing Date and any breach of the representations and warranties set forth in Sections 5.18 and 5.21 hereof and any covenant with respect to Taxes or tax related matters set forth herein or in any related agreement (collectively, “Tax Claims”);
          (c) any breach of the representations and warranties set forth in Section 5.22 hereof (“Environmental Claims”);
          (d) any claim by any Person that Tritton does not own all right, title and interest in the industrial design or tooling for its headphone products (excluding the in-line volume control unit, the in-line break away cable, the audio control box and flexible microphone cable pertaining to the AX Pro; the audio control box with respect to the Ax 720; the head rail assembly, extension arms and flexible microphone tubing relating to the AX 180), free and clear of any Encumbrances (“Manufacturing Ownership Claims”);
          (e) any breach of the representations and warranties set forth in Sections 4.1, 4.2, 4.6, 5.1, 5.3, 5.5 and 5.9 hereof (collectively, “Fundamental Claims”); and
          (f) other than Fraud Claims, Tax Claims, Environmental Claims, Manufacturing Ownership Claims and Fundamental Claims, any other breach of any representation, warranty or covenant of the Sellers under this Agreement or in any schedule or exhibit delivered pursuant hereto, or by reason of any Proceeding asserted or instituted growing out of any matter or thing constituting a breach of such representations, warranties or covenants (collectively, “General Claims”).
     8.3 Limitations on Indemnification by the Sellers. Anything contained in this Agreement to the contrary notwithstanding, the liability of the Sellers to provide any indemnification to any Buyer Party and the right of the Buyer Parties to indemnification under Section 8.2 (or otherwise) shall be subject to the following provisions:
          (a) No claims for indemnification shall be made under this Agreement against Sellers, and no indemnification shall be payable to any Buyer Party, with respect to General Claims after the date which is eighteen (18) months following the Closing.

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          (b) No claims for indemnification shall be made under this Agreement against Sellers, and no indemnification shall be payable to any Buyer Party, with respect to any Tax Claim or Environmental Claim after expiration of all applicable statutes of limitation taking into account any applicable extensions thereof.
          (c) Sellers shall not be liable under Section 8.2 for Damages arising from General Claims, unless the sum of all Damages arising from such claims exceeds $50,000, in which event the Buyer Parties shall be entitled to indemnification for the full amount of such Damages. The aggregate amount payable by the Sellers to all Buyer Parties for claims for indemnification with respect to General Claims will not exceed, in the aggregate, thirty-five percent (35%) of the Purchase Price. Indemnification claims under Section 8.2 shall be funded solely through set-off against the Earn-Out Consideration.
          (d) Sellers shall not be liable under Section 8.2 for Damages arising from Manufacturing Ownership Claims in excess of fifty percent (50%) of the Purchase Price. Claims for indemnification with respect to Manufacturing Ownership Claims shall not be subject to the other limitations set forth in this Section 8.3.
          (e) Claims for indemnification with respect to Fraud Claims, Tax Claims (except as set forth in Section 8.3(b)), Environmental Claims, Manufacturing Ownership Claims and Fundamental Claims shall not be subject to any of the limitations set forth in this Section 8.3.
     8.4 Indemnification by Buyer. Buyer agrees to indemnify and hold the Seller Parties harmless from and against any Damages which may be sustained or suffered by any of them arising out of or based upon any breach of any representation, warranty or covenant made by Buyer in this Agreement or in any certificate delivered by Buyer hereunder, or by reason of any Proceeding asserted or instituted growing out of any matter or thing constituting such a breach.
     8.5 Notice; Defense of Claims. An indemnified party shall make claims for indemnification hereunder by giving written notice thereof to the indemnifying party promptly on discovery and in any event within the period in which indemnification claims can be made hereunder. If indemnification is sought for a claim or liability asserted by a third party, the indemnified party shall also give written notice thereof to the indemnifying party promptly after it receives notice of the claim or liability being asserted, but the failure to do so shall not relieve the indemnifying party from any liability except to the extent that it is prejudiced by the failure or delay in giving such notice. Such notice shall summarize the basis for the claim for indemnification and any claim or liability being asserted by a third party. Within twenty (20) days after receiving such notice the indemnifying party shall give written notice to the indemnified party stating whether it disputes the claim for indemnification and whether it will defend against any third party claim or liability at its own cost and expense. If the indemnifying party fails to give notice that it disputes an indemnification claim within twenty (20) days after receipt of notice thereof, it shall be deemed to have accepted and agreed to the claim, which shall become immediately due and payable. The indemnifying party shall be entitled to direct the defense against a third party claim or liability with counsel selected by it (subject to the consent of the indemnified party, which consent shall not be unreasonably withheld) as long as the indemnifying party is conducting a good faith and diligent defense. The indemnified party shall at all times have the right to fully participate at its own expense in the defense of a third party claim or liability, directly or through counsel; provided, however, that if the named parties to the Proceeding include both the indemnifying party and the indemnified party and the indemnified party is advised that representation of both parties by the same counsel would be inappropriate under applicable standards of professional conduct, the indemnified party may engage separate counsel at the expense of the indemnifying party. If no such notice of intent to dispute and defend a third party claim or liability is given by the indemnifying party, or if such good faith and diligent defense is not being or ceases to be conducted by the indemnifying party, the indemnified party shall have the right, at the

31


 

expense of the indemnifying party, to undertake the defense of such claim or liability (with counsel selected by the indemnified party), and to compromise or settle it, with consent of the indemnifying party, which consent shall not be unreasonably withheld. If the third party claim or liability is one that by its nature cannot be defended solely by the indemnifying party, then the indemnified party shall make available such information and assistance as the indemnifying party may reasonably request and shall cooperate with the indemnifying party in such defense, at the expense of the indemnifying party.
ARTICLE IX.
MISCELLANEOUS
     9.1 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party without the prior written consent of the other party; provided, however, that Buyer may, without such consent, (a) assign all such rights as collateral security to any lender to Buyer or an Affiliate of Buyer, but such assignment shall not relieve Buyer of any liability hereunder and (b) assign all such rights to any Affiliate of Buyer or to any Person who acquires Buyer or substantially all of the assets of Buyer or survives any merger with Buyer. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other Person shall have any right, benefit or obligation under this Agreement as a third party beneficiary or otherwise.
     9.2 Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by facsimile, electronic or digital transmission method; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to:
          If to Buyer:
Mad Catz, Inc.
7480 Mission Valley Road, Suite 101
San Diego, CA 92108
Fax: (619) 683-9839
Attn: President
          with copies to:
Mad Catz, Inc.
7480 Mission Valley Road, Suite 101
San Diego, CA 92108
Fax: (619) 683-2813
Attn: Legal Department
and
Durham Jones & Pinegar, P.C.
192 East 200 North, 3rd Floor
St. George, Utah 84770
Fax: (435) 628-1610
Attn: Joshua E. Little, Esq.

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          If to Tritton:
Tritton Technologies Inc.
1350 Specialty Drive, Suite F
Vista, California 92081
Fax: (760) 599-1031
Attn: Christopher Von Huben
          If to the Sellers:
at the addresses listed on the signature
pages hereto
          with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
12235 El Camino Real, Suite 200
San Diego, California 92130
Fax: (858) 350-2399
Attn: Anthony G. Mauriello
     or to such other place and with such other copies as any party may designate as to itself by written notice to the others.
     9.3 Entire Agreement; Amendments and Waivers. This Agreement, together with all exhibits and schedules hereto (including the Disclosure Schedules) constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. This Agreement may not be amended except by an instrument in writing signed by or on behalf of each of the parties hereto. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.
     9.4 Service of Process; Consent to Jurisdiction.
          (a) Service of Process. Each of the parties hereto irrevocably consents to the service of any process, pleading, notices or other papers by the mailing of copies thereof by registered, certified or first class mail, postage prepaid, to such party at such party’s address set forth herein, or by any other method provided or permitted under California law.
          (b) Consent to Jurisdiction. Each party hereto irrevocably and unconditionally (i) agrees that any Proceeding arising out of this Agreement shall be brought in the United States District Court for the Southern District of California or, if such court does not have jurisdiction or does not accept jurisdiction, in any court of general jurisdiction in the County of San Diego, California; (ii) consents to the jurisdiction of any such court in any such Proceeding; and (iii) waives any objection which such party may have to the laying of venue of any such Proceeding in any such court.
     9.5 Multiple Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

33


 

     9.6 Headings. The headings of the Articles and Sections herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.
     9.7 Exhibits and Schedules. The Exhibits and Schedules attached to this Agreement are incorporated herein and shall be a part of this Agreement for all purposes.
     9.8 Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to principles of conflict of laws.
     9.9 Construction. Differences in language as between similar provisions covering similar matters may reflect differences in style rather than a different substantive intent and should be construed accordingly. The parties understand and agree that the terms and conditions of this Agreement have been mutually negotiated, prepared and drafted, and that if at any time the parties desire or are required to interpret or construe any such term or condition or any agreement or instrument subject hereto, no consideration shall be given to the issue of which party actually prepared, drafted or requested any term or condition hereof.
     9.10 Expenses. Except as otherwise specified in this Agreement, each party hereto shall pay its own out-of-pocket expenses, including, but not limited to, legal and accounting fees, incurred in connection with the negotiation, preparation and execution of this Agreement and all other agreements, documents and instruments contemplated hereby, or otherwise in connection with the preparation for carrying this Agreement into effect. The parties hereby acknowledge and agree that the out-of-pocket expenses of Tritton shall be borne by the Sellers.
     9.11 Invalidity. In the event that any one or more of the provisions contained in this Agreement or in any other document or instrument referred to herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such document or instrument.
     9.12 Cumulative Remedies. All rights and remedies of either party hereto are cumulative of each other and of every other right or remedy such party may otherwise have at law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies.
     9.13 Specific Performance. The parties agree that it would be difficult to measure damages which might result from a breach of this Agreement by the Sellers or Tritton and that money damages would be an inadequate remedy for such a breach. Accordingly, if there is a breach or proposed breach of any provision of this Agreement by the Sellers or Tritton, Buyer shall be entitled, in addition to any other remedies which it may have, to an injunction or other appropriate equitable relief to restrain such breach without having to show or prove actual damage to Buyer.
[Signature Page Follows]

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     IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.
                         
“BUYER”       “TRITTON”    
 
                       
MAD CATZ, INC.,       TRITTON TECHNOLOGIES INC.,    
a Delaware corporation       a Delaware corporation    
 
                       
By:   /s/ Darren Richardson       By:   /s/ Christopher Von Huben    
                     
    Name: Darren Richardson           Name: Christopher Von Huben    
    Its: President and Chief Executive Officer           Its: President and Chief Executive Officer    
 
                       
“PARENT”       “SELLERS”    
(solely with respect to Section 7.9)                    
 
                       
MAD CATZ INTERACTIVE, INC.,       /s/ Christopher Von Huben    
                 
a Canadian corporation       Christopher Von Huben    
            Address:   3526 Knollwood Dr.    
 
                  Carlsbad, CA 92010    
By:
  /s/ Darren Richardson                    
 
 
 
                   
 
  Name: Darren Richardson                    
    Its: President and Chief Executive Officer       /s/ Frank Sansone    
                 
            Frank Sansone        
            Address:   2933 Arboridge CT.    
 
                  Fullerton, CA 92835    
 
                       
            /s/ Dan Rafferty    
                 
            Dan Rafferty        
            Address:   5081 Ashberry Rd.    
 
                  Carlsbad, CA 92008    
 
                       
            /s/ Wes Stewart    
                 
            Wes Stewart        
            Address:   15 Via Soria    
 
                  San Clemente, CA 92673    
 
                       
            PXM Design, Inc. dba Project X Media    
 
                       
            /s/ Chris Martino    
                 
            Name: Chris Martino    
 
          Its:            
            Address:   P.O. Box 783    
 
                  Solana Beach, CA 92075    


 

TABLE OF CONTENTS
             
        Page  
ARTICLE I. DEFINITIONS AND INTERPRETATION PROVISIONS     1  
1.1
  Affiliate     1  
1.2
  April Working Capital     1  
1.3
  Buyer Parties     1  
1.4
  Change of Control     1  
1.5
  Code     2  
1.6
  Current Assets     2  
1.7
  Current Liabilities     2  
1.8
  Damages     2  
1.9
  Employee Plans     2  
1.10
  Encumbrances     2  
1.11
  ERISA     2  
1.12
  ERISA Affiliate     2  
1.13
  GAAP     3  
1.14
  Intellectual Property     3  
1.15
  Knowledge     3  
1.16
  Liability     3  
1.17
  Material Adverse Effect     3  
1.18
  Net Sales     3  
1.19
  Permit     3  
1.20
  Person     4  
1.21
  Proceeding     4  
1.22
  Related Party     4  
1.23
  Seller Disclosure Schedule     4  
1.24
  Seller Parties     4  
1.25
  Sellers’ Representative     4  
1.26
  Taxes     4  
1.27
  Tax Returns     4  
1.28
  Transaction Bonus Payments     4  
1.29
  Tritton Disclosure Schedule     4  
1.30
  Tritton Products     4  
1.31
  Working Capital     5  
1.32
  Working Capital Holdback Amount     5  
1.33
  Other Defined Terms     5  
1.34
  Interpretation Provisions     5  
 
           
ARTICLE II. PURCHASE AND SALE OF TRITTON SHARES     6  
2.1
  Sale of Tritton Shares     6  
2.2
  Consideration for Tritton Shares     6  
2.3
  Payment of the Closing Cash     6  
2.4
  Earn-Out Consideration     6  
2.5
  Payment of Earn-Out Consideration     7  
2.6
  Working Capital Adjustment     8  
2.7
  Tax Treatment     9  

i


 

             
        Page  
ARTICLE III. Closing     9  
3.1
  Closing     9  
3.2
  Sellers’ Deliveries at Closing     9  
3.3
  Buyer Deliveries at Closing     10  
 
           
ARTICLE IV. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLERS     10  
4.1
  Organization of Certain Sellers     10  
4.2
  Authorization of Transaction     10  
4.3
  Non-Contravention     11  
4.4
  No Brokers     11  
4.5
  Legal and Tax Advice     11  
4.6
  Tritton Shares     11  
 
           
ARTICLE V. REPRESENTATIONS AND WARRANTIES REGARDING TRITTON     11  
5.1
  Due Organization     11  
5.2
  Books and Records     12  
5.3
  Capitalization of Tritton     12  
5.4
  Subsidiaries     12  
5.5
  Authorization     12  
5.6
  Non-Contravention     12  
5.7
  Consents and Approvals     12  
5.8
  Financial Statements     13  
5.9
  No Undisclosed Liabilities     13  
5.10
  No Changes     13  
5.11
  Notes and Accounts Receivable     15  
5.12
  Title to and Condition of Assets     15  
5.13
  Leases, Premises     15  
5.14
  Contracts and Commitments     15  
5.15
  Litigation, Proceedings and Applicable Law     16  
5.16
  Compliance with Law     17  
5.17
  Insurance     17  
5.18
  Employee Benefit Plans     17  
5.19
  Labor Matters     18  
5.20
  Product Liability; Warranty     18  
5.21
  Tax Matters     19  
5.22
  Environmental Matters     21  
5.23
  Customers and Suppliers     21  
5.24
  Inventories     21  
5.25
  No Brokers     21  
5.26
  Powers of Attorney     22  
5.27
  Transactions with Related Parties     22  
5.28
  Intellectual Property     22  
5.29
  Identification of Depositories and Authorities     24  
5.30
  Certain Business Practices     24  
5.31
  Governmental Permits     24  
5.32
  Legal and Tax Advice     24  
5.33
  Accuracy of Information     25  

ii


 

             
        Page  
ARTICLE VI. REPRESENTATIONS AND WARRANTIES OF BUYER     25  
6.1
  Due Organization     25  
6.2
  Authorization     25  
6.3
  Non-Contravention     25  
6.4
  Consents and Approvals     25  
6.5
  Capital Resources     25  
6.6
  No Brokers     25  
 
           
ARTICLE VII. ADDITIONAL AGREEMENTS     26  
7.1
  Further Assurances     26  
7.2
  Confidential Information     26  
7.3
  Public Statements and Press Releases     27  
7.4
  Employees and Offers of Employment     27  
7.5
  Litigation Support     27  
7.6
  Additional Covenants Protecting the Interests of Buyer     27  
7.7
  Tax Matters     28  
7.8
  Contribution to Audit Expenses     29  
7.9
  Guaranty     29  
7.10
  Lease     29  
7.11
  Tritton Disclosure Schedule     29  
 
           
ARTICLE VIII. SURVIVAL; INDEMNIFICATION     29  
8.1
  Survival of Representations, Etc.     29  
8.2
  Indemnification by the Sellers     30  
8.3
  Limitations on Indemnification by the Sellers     30  
8.4
  Indemnification by Buyer     31  
8.5
  Notice; Defense of Claims     31  
 
           
ARTICLE IX. MISCELLANEOUS     32  
9.1
  Assignment     32  
9.2
  Notices     32  
9.3
  Entire Agreement; Amendments and Waivers     33  
9.4
  Service of Process; Consent to Jurisdiction     33  
9.5
  Multiple Counterparts     33  
9.6
  Headings     34  
9.7
  Exhibits and Schedules     34  
9.8
  Governing Law     34  
9.9
  Construction     34  
9.10
  Expenses     34  
9.11
  Invalidity     34  
9.12
  Cumulative Remedies     34  
9.13
  Specific Performance     34  

iii

EX-21.1 3 a56441exv21w1.htm EX-21.1 exv21w1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Mad Catz, Inc., a Delaware corporation
1328158 Ontario Inc., a corporation organized under the laws of Ontario, Canada
Mad Catz Europe, Limited, a company organized under the laws of England and Wales
Mad Catz Interactive Asia Limited, a company organized under the laws of Hong Kong
Mad Catz Technological Development (Shenzhen) Co., Ltd., a company organized under the laws of The Peoples Republic of China
FX Unlimited Inc., a Delaware corporation
Mad Catz (Asia) Limited, a company organized under the laws of Hong Kong
Xencet USA, Inc., a Delaware corporation
Singapore Holdings Inc., a Delaware corporation
Winkler Atlantic Holdings Limited, a company organized under the laws of the British Virgin Islands
Saitek Industries Ltd., a company organized under the laws of Hong Kong
Saitek Elektronik Vertriebs Gmbh, a company organized under the laws of Germany
Saitek SAS, a company organized under the laws of France
Tritton Technologies Inc. a Delaware corporation

 

EX-23.1 4 a56441exv23w1.htm EX-23.1 exv23w1
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Mad Catz Interactive, Inc.:
We consent to incorporation by reference in the registration statement No. 333-103798 on Form S-8 of Mad Catz Interactive, Inc. of our report dated June 10, 2010, relating to the consolidated balance sheets of Mad Catz Interactive, Inc. and subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended March 31, 2010, which report appears in the March 31, 2010 Annual Report on Form 10-K of Mad Catz Interactive, Inc.
     /s/  KPMG LLP
San Diego, California
June 10, 2010

 

EX-31.1 5 a56441exv31w1.htm EX-31.1 exv31w1
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Darren Richardson, certify that:
1.   I have reviewed this annual report on Form 10-K of Mad Catz Interactive, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: June 10, 2010
  /S/ Darren Richardson
 
Darren Richardson, President and Chief Executive Officer
   

 

EX-31.2 6 a56441exv31w2.htm EX-31.2 exv31w2
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stewart Halpern, certify that:
1.   I have reviewed this annual report on Form 10-K of Mad Catz Interactive, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c)   evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
Date: June 10, 2010
  /S/ Stewart Halpern
 
Stewart Halpern, Chief Financial Officer
   

 

EX-32.1 7 a56441exv32w1.htm EX-32.1 exv32w1
EXHIBIT 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     Pursuant to 18 U.S.C. §1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mad Catz Interactive, Inc. (the “ Company ”) hereby certifies, to such officer’s knowledge, that:
     (i) the accompanying Annual Report on Form 10-K of the Company for the period ended March 31, 2010 (the “ Report ”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: June 10, 2010
  /s/ Darren Richardson
 
Darren Richardson,
   
 
  President and Chief Executive Officer    
The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

EX-32.2 8 a56441exv32w2.htm EX-32.2 exv32w2
EXHIBIT 32.2
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     Pursuant to 18 U.S.C. §1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Mad Catz Interactive, Inc. (the “ Company ”) hereby certifies, to such officer’s knowledge, that:
     (i) the accompanying Annual Report on Form 10-K of the Company for the period ended March 31, 2010 (the “ Report ”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and
     (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
Date: June 10, 2010
  /s/ Stewart Halpern
 
   
 
  Stewart Halpern,    
 
  Chief Financial Officer    
The foregoing certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. §1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

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-----END PRIVACY-ENHANCED MESSAGE-----