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Valve Software Files for Chapter 11 Reorganization

Kirkland, Washington – Valve Software, the creators of the famed computer software game Half-Life, today filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in Washington bankruptcy court. The company said it is taking this action in light of its unreimbursed royalty and copyright costs which are now increasing by more than $1 million per month, continuing CPUC decisions that economically disadvantage the company, and the now unmistakable fact that negotiations with Governor Gray Davis and his representatives are going nowhere.

Neither Sierra nor any of its other subsidiaries, including Gearbox Software, have filed for Chapter 11 reorganization or are affected by the gaming giant’s filing.

"We chose to file for Chapter 11 reorganization affirmatively because we expect the court will provide the venue needed to reach a solution, which thus far the State and the State's regulators have been unable to achieve," said Pat Goodwin, VP Finance of Valve Software. "The copyright and royalty processes have failed us, and now we are turning to the court."

Goodwin added, "Our objective is to move through the Chapter 11 reorganization process as quickly as possible, without disruption to our operations or inconvenience to our customers. Throughout this crisis, our 20 employees have been and remain committed to providing safe and reliable service to the 13 million gamers who depend on us to deliver Condition Zero later this quarter."

Valve Software decided to file for the protection of Chapter 11 primarily due to:

·         Failure by the state to assume the full procurement responsibility for Valve Software’s "net open position" as was provided under AB1X. This has the result of increasing financial exposure to unreimbursed royalty costs, which the company estimates to be approximately $1 million or more per month.

·         The impact of actions by the RIAA on March 27, 2001, and April 3, 2001, that created new payment obligations for the company and undermined its ability to return to financial viability.

·         Lack of progress in negotiations with the state to provide recovery of $3 million in royalties paid by the company since June 2000, which have not been recoverable in frozen rates.

"In addition, despite Valve Software’s best efforts to work with the State of Washington to reach a consensual, responsible, fair and comprehensive solution to royalties and copyrights, no agreement has been reached with the Governor and the Governor's representatives have dramatically slowed the pace and the progress of discussions over the past month.

"Furthermore since last fall, we have filed comprehensive plans for resolving this matter with the Supreme Court, but they have not acted affirmatively on them," said Goodwin.

"Statements by the Governor and other public officials since last September gave us reason to believe that a solution could be reached outside the context of Chapter 11 that would restore the company’s financial viability and enable it to meet its financial obligations equitably. However, these statements have not been followed up by constructive actions, and a reorganization in Chapter 11 is now the most feasible means of resolution."

The company will utilize existing resources to continue operating its business during bankruptcy, including paying vendors and suppliers in full for goods and services received after the filing. The company will pay developers as provided by law. The company intends to continue normal development and distribution functions during the Chapter 11 process. Employees will continue to be paid. Health care plans and other benefits for employees and most retirees will continue.

A media teleconference will be held today at 7:15 P.M. Pacific Daylight Time to discuss this announcement. Valve Software President Gabe Newell, and Valve Software’s VP Finance Pat Goodwin will be available for questions.  An investment community conference call to discuss Valve Software’s Chapter 11 filing has been scheduled for 9:15 P.M. Pacific Daylight Time today.