SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark one)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 19992000

                                       OR

[  ] 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 0-12699

                                ACTIVISION, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                 94-260643895-4803544
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

 3100 OCEAN PARK BLVD., SANTA MONICA, CA                    90405
(Address of principal executive offices)                 (Zip Code)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 255-2000

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                   Common Stock, par value $.000001 per share
                   ------------------------------------------
                                (Title of Class)

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  X  No
                                       -----  --------    ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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. [ ]

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on June 25, 199919, 2000 was $295,741,675.$138,494,069.

The number of shares of the registrant's Common Stock outstanding as of June 25,
199919,
2000 was 22,982,248.23,682,010.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K, with respect to the 19992000 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Annual Report.


                                       1



                                      INDEX

Page No.PAGE NO. -------- PART I. Item 1. Business ............................................................................................................................................... 3 Item 2. Properties ........................................................................... 14................................................................ 17 Item 3. Legal Proceedings .................................................................... 14......................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders .................................. 14....................... 17 PART II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................ 15..... 18 Item 6. Selected Consolidated Financial Data ................................................. 17...................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................ 18............................................. 22 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 26Risk................. 31 Item 8. Consolidated Financial Statements and Supplementary Data ............................. 27.................. 32 PART III. Item 10. Directors and Executive Officers of the Registrant ................................... 28........................ 33 Item 11. Executive Compensation ............................................................... 28.................................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management ....................... 28............ 33 Item 13. Certain Relationships and Related Transactions ....................................... 28............................ 33 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 29.......... 34 SIGNATURES ............................................................................................... 32.................................................................................... 38
2 PART I ItemITEM 1. BUSINESS (a) GENERAL Activision, Inc. (together with its subsidiaries, "Activision" or the "Company") is a leading international publisher, developer and distributor of interactive entertainment and leisure products. The Company was originally incorporated in California in 1979. In December 1992, the Company reincorporated in Delaware. In June 2000, the Company reorganized into a holding company organizational structure as described below. The Company's products span a wide range of genres (including action, adventure, extreme sports, strategy and simulation) and target markets (including game enthusiasts, mass market consumers, value buyers and children). In addition to its genre and market diversity, the Company publishes, develops and distributes products for a variety of game platforms and operating systems, including personal computers ("PCs"), the Sony Playstation, Sega Dreamcast and Nintendo N64 console systemsystems and the Nintendo 64 console system.Gameboy Color handheld device. Financial data for all periods presented reflect the retroactive effect of the merger, accounted for as a pooling of interests, with JCM Productions, Inc. dba Neversoft Entertainment ("Neversoft"), which was consummated on September 30, 1999. The Company completed the acquisition of Raven Software Corporationadditionally acquired Elsinore Multimedia, Inc. ("Raven") on July 13, 1997, NBG EDV Handels- und Verlags GmbH ("NBG") on November 26, 1997, S.B.F. Services, Limited dba Head Games Publishing ("Head Games"Elsinore") on June 30, 1998,29, 1999 and CD Contact Data GmbHExpert Software, Inc. ("CD Contact"Expert") on September 29, 1998. EachJune 22, 1999. The acquisitions of the above transactions originally had beenElsinore and Expert were accounted for byusing the Company as an immaterial poolingpurchase method of interests. The financial results for each such acquired company and related cash flows had therefore been included in the reported operations of the Company beginning only on the date of acquisition. Based on a reevaluation of these transactions, includingaccounting. Accordingly, the results of operations of each entity, statements by the SecuritiesElsinore and Exchange Commission (the "SEC") on materiality of pooling transactions and requirements to evaluate the impact on each line itemExpert have been included in the financial statementsCompany's consolidated results of operations from the respective dates of acquisition. See the Consolidated Financial Statements and the impact on the Company's trends, the Company has restated all financial information reportedNotes thereto included in Item 8 of this Annual Report on Form 10-K for all periods priorcertain financial information required by Item 1. In the fourth quarter of the Company's fiscal year ended March 31, 2000, the Company adopted and began the implementation of a strategic restructuring plan. The plan and its components are described in Item 7 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." (b) HOLDING COMPANY ORGANIZATIONAL STRUCTURE Effective June 9, 2000, Activision reorganized into a holding company form of organizational structure, whereby Activision Holdings, Inc., a Delaware corporation ("Activision Holdings"), became the holding company for Activision and its subsidiaries. The new holding company organizational structure will allow Activision to manage its entire organization more effectively and broadens the alternatives for future financings. The holding company organizational structure was effected by a merger conducted pursuant to Section 251 (g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company structure without a vote of the stockholders of the constituent corporations. In the merger, ATVI Merger Sub, Inc., a Delaware corporation, organized for the purpose of implementing the holding company organizational structure,(the "Merger Sub"), merged with and into Activision with Activision as the surviving corporation (the "Surviving Corporation"). Prior to the consummationmerger, Activision Holdings was a direct, wholly-owned subsidiary of Activision and Merger Sub was a direct, wholly owned subsidiary of Activision Holdings. Pursuant to the merger, (i) each transactionissued and outstanding share of common stock of Activision (including treasury shares) was converted into one share of common stock of Activision Holdings, (ii) each issued and outstanding share of Merger Sub was converted into one share of the Surviving Corporation's common stock, and Merger Sub's corporate existence ceased, and (iii) all of the issued and outstanding shares of Activision Holdings owned by Activision were automatically canceled and retired. As a result of the merger, Activision became a direct, wholly owned subsidiary of Activision Holdings. Immediately following the merger, Activision changed its name to include"Activision Publishing, Inc." and Activision Holdings changed its name to "Activision, Inc." The holding company's common stock will continue to trade on The Nasdaq National Market under the symbol ATVI. 3 The conversion of shares of Activision's common stock in the merger occurred without an exchange of certificates. Accordingly, certificates formerly representing shares of outstanding common stock of Activision are deemed to represent the same number of shares of common stock of Activision Holdings. The change to the holding company structure was tax free for federal income tax purposes for stockholders. These transactions had no impact on the Company's consolidated financial position, results of operations and cash flows of such acquired companies. (b)statements. (c) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company has two reportable segments: publishing CD-based and cartridge based interactive entertainment and leisure software;software, and distributing interactive entertainment and leisure products. Publishing relates to the development (both internally and externally), marketing and sale of products owned or controlled by the Company, either directly, by license or through its affiliate label program.program with third party publishers. Distribution refers to the shipping and sale by the Company's European distribution subsidiaries of other publishers' software and related products to the marketplace. See the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report on Form 10-K for certain financial information required by Item 1. (c)(d) NARRATIVE DESCRIPTION OF BUSINESS FACTORS AFFECTING FUTURE PERFORMANCE In connection with the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"), the Company is hereby disclosing certain cautionary information to be used in connection with written materials (including this Annual Report on Form 10-K) and oral statements made by or on behalf of its employees and representatives that may contain "forward-looking statements" within the meaning of the Litigation Reform Act. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The listener or reader is cautioned that all forward-looking statements are necessarily speculative and there are numerous risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. The discussion below highlights some of the more important risks identified by management, but should not be assumed to be the only factors that could affect future performance. The reader or listener is cautioned that the Company does not have a policy of updating or revising forward-looking statements and thus he or she should not assume that silence by management over time means that actual events are bearing out as estimated in such forward-looking statements. FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS UNCERTAIN; SEASONALITY. The Company's quarterly operating results have varied significantly in the past and will likely vary significantly in the future depending on numerous factors, several of which are not under the Company's control. Such factors include, but are not limited to, demand for products published or distributed by the Company, the size and rate of growth of the interactive entertainment and leisure markets, development and promotional expenses relating to the introduction of new products, changes in computingoperating systems and platforms, product returns, the timing of orders from major customers, delays in shipment, the level of price competition, the timing of 3 product introductions by the Company and its competitors, product life cycles, product defects and other quality problems, the level of the Company's international revenues, and personnel changes. Products are generally shipped as orders are received, and consequently, the Company operates with little or no backlog. Net revenues in any quarter are, therefore, substantially dependent on orders booked and shipped in that quarter. The Company's expenses are based in part on the Company's product development, acquisition and marketing budgets. Many of the costs incurred by the Company to produce and sell its products are expensed as such costs are incurred, which often isoccurs before a product is released. In addition, a significant portion of the Company's expenses are fixed. As the Company increases its production, acquisition and sales activities, current expenses will increase and, if sales from previously released products are below expectations, net income is likely to be disproportionately affected. Due to all of the foregoing, revenues and operating results for any future quarter are not predictable with any significant degree of accuracy. Accordingly, the Company believes that period-to-period 4 comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. The Company's business has experienced and is expected to continue to experience significant seasonality, in part due to consumer buying patterns. Net revenues typically are significantly higher during the fourth calendar quarter, primarily due to the increased demand for consumer software during the year-end holiday buying season. Net revenues and net income in other quarters are generally lower and vary significantly as a result of new product introductions and other factors. For example,On average in the Company'spast three fiscal years, the Company has earned approximately 15% of its net revenues in its last five quarters were $68.1 million for the quarter ended March 31, 1998, $61.5 million forending June 30th, 20% in the quarter ended June 30, 1998, $66.2 million forending September 30th, 45% in the quarter ended September 30, 1998, $193.5 million forending December 31st and 20% in the quarter ended December 31, 1998 and $115.2 million for the quarter endedending March 31, 1999. The Company's net income (loss) for the last five quarters was $689,000 for the quarter ended March 31, 1998, $(3.7) million for the quarter ended June 30, 1998, $(2.2) million for the quarter ended September 30, 1998, $16.0 million for the quarter ended December 31, 1998 and $5.2 million for the quarter ended March 31, 1999.31st. The Company expects its net revenues and operating results to continue to reflect significant seasonality. DEPENDENCE ON NEW PRODUCT DEVELOPMENT; PRODUCT DELAYS. The Company's future success depends in part on the timely introduction of successful new products to replace declining revenues from older products. If, for any reason, revenues from new products were to fail to replace declining revenues from older products, the Company's business, operating results and financial condition would be materially and adversely affected. In addition, the Company believes that the competitive factors in the marketplace for premium-priced interactive products create the need for higher quality, distinctive products that incorporate increasingly complex technology and sophisticated graphics, sound and other effects and the need to support product releases with increased marketing, resulting in longer development periods and higher development, acquisition and marketing costs. The lack of market acceptance or significant delay in the introduction of, or the presence of a defect in, one or more premium-priced products could have a material adverse effect on the Company's business, operating results and financial condition, particularly in view of the seasonality of the Company's business. Further, because a large portion of a product's revenue generally is associated with initial shipments, the delay of a product introduction expected near the end of a fiscal quarter may have a material adverse effect on operating results for that quarter. The Company has, in the past, experienced significant delays in the introduction of certain new products. The timing and success of interactive entertainment software products remain unpredictable due to the complexity of product development, including the uncertainty associated with technological developments. Although the Company has implemented substantial development controls, there likely will be delays in developing and introducing new products in the future. There can be no assurance that new products will be introduced on schedule, or at all, or that they will achieve market acceptance or generate significant revenues. RELIANCE ON THIRD PARTY DEVELOPERS AND INDEPENDENT CONTRACTORS. The percentage of products published by the Company that are developed by independent third party developers has increased significantly over the last several fiscal years. From time to time, theThe Company also utilizes independent contractors for certainmany aspects of product developmentproducts that are developed internally by the Company and production.its subsidiaries. The Company has less control over the scheduling and the quality of work by independent contractors and third party developers than that of its own employees. A delay in the work performed by independent contractors and third party developers or poor quality of such work may result in product delays. Although the Company intends to continue to rely in part onreleasing products that are developed primarily by its own employees and employees of its subsidiaries, the Company's ability to grow its business and its future operating results will depend, in significant part, on the Company's continued ability to initiate and maintain relationships with skilled independent contractors and third party developers. There can be no assurance that the Company will be able to initiate and maintain such relationships. 4 relationships successfully in the future. UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES. The market for interactive entertainment software platforms and leisure systems and interactive software products has been characterized by shifts in consumer preferences and short product life cycles. Consumer preferences for entertainment and leisure software products are difficult to predict and few such products achieve sustained market acceptance. There can be no assurance that new products introduced by the Company will achieve any significant degree of market acceptance, that such acceptance will be sustained for any significant period, or that product life cycles will be sufficient to permit the Company to recoup product acquisition, development, marketing and other associated costs. In addition, if market acceptance is not achieved, the Company could be forced to accept substantial product returns to maintain its relationships with retailers and its access to distribution channels. Failure of new 5 products to achieve or sustain market acceptance or product returns in excess of the Company's expectations would have a material adverse effect on the Company's business, operating results and financial condition. PRODUCT CONCENTRATION; DEPENDENCE ON HIT PRODUCTS. The Company derives a significant portion of its revenues from a relatively small number of products released each year, and manyyear. Many of these products have substantial development, production orand acquisition costs and marketing budgets. DuringIn fiscal 1998, one product2000 the Company had two products which each accounted for approximately 10.2%10% of the Company's consolidated net revenues. All other products were individually less thanIn fiscal 1998, the Company had one product which accounted for approximately 10% of the Company's consolidated net revenues. DuringIn fiscal 1999, no single product accounted for greater than 10% of the Company's consolidated net revenues. However, theThe Company anticipates that a relatively limited number of products will continue, in the aggregate, to produce a disproportionate amount of revenues. Due to this dependence on a limited number of products, the failure of one or more of these products to achieve anticipated results may have a material adverse effect on the Company's business, operating results and financial results.condition. The Company's strategy also includes as a key component publishing titles that have franchise value, such that sequels, conversions, enhancements and add-on products can be released over time, thereby extending the life of the property in the market. While the focus on franchise properties, if successful, results in extending product life cycles, it also results in the Company depending on a limited number of titles for its revenues. There can be no assurance that the Company's existing franchise titles can continue to be exploited as successfully as in the past. In addition, new products that the Company believes will have potential value as franchise properties may not achieve market acceptance and therefore may not be a basis for future releases. INDUSTRY COMPETITION; COMPETITION FOR SHELF SPACE. The interactive entertainment and leisure industries areindustry is intensely competitive. Competition in these industries is principally based on product quality and features, the compatibility of products with popular platforms, company or product line brand name recognition, access to distribution channels, marketing effectiveness, reliability and ease of use, price and technical support. Significant financial resources also have become a competitive factor in these industries,this industry, principally due to the substantial cost of product development and marketing that is required to support best-selling titles. In addition, competitors with broad product lines and popular titles typically have greater leverage with distributors and other customers who may be willing to promote titles with less consumer appeal in return for access to such competitor's most popular titles. The Company's competitors range from small companies with limited resources to large companies with substantially greater financial, technical and marketing resources than those of the Company. The Company's competitors currently include Electronic Arts, LucasArts, Microsoft, Sony, Sega, Nintendo, Sony, Havas, Infogrames, Hasbro, GT InteractiveTHQ, Midway and Eidos, among many others. The interactive entertainment software industry is undergoing significant consolidation which allows the Company's largest competitors to exercise control over a growing number of product lines and increasing concentration of development, financial and technical resources. As the Company's competitors grow stronger and competition increases, significant price competition,pressure, increased production costs and reduced profit margins may result. Prolonged price competition or reduced demand would have a material adverse effect on the Company's business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on its business, operating results and financial condition. Retailers typically have a limited amount of shelf space, and there is intense competition among interactive entertainment and leisure software producers for adequate levels of shelf space and promotional support from retailers. As the number of interactive entertainment and leisure products increase, the competition for shelf space has intensified, resulting in greater leverage for retailers and distributors in negotiating terms of sale, including price discounts and product return policies. The Company's products constitute a relatively small percentage of a retailer's sales volume, and there can be no assurance that retailers will continue to purchase the Company's products or promote the Company's products with adequate levels of shelf space and promotional support. DEPENDENCE ON DISTRIBUTORS AND RETAILERS; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT Returns. CertainRETURNS. The Company depends on access to retailers and distributors in order to market and sell its products. The loss 6 of, or significant reduction in sales attributable to, any of the Company's principal distributors or retailers could materially adversely affect the Company's business, operating results and financial condition. An increasing focus by companies on inventory management and the maintenance of minimum inventory on-hand levels could affect the buying patterns of our principal distributors and retailers, thereby, resulting in less predictable purchasing patterns. Significant changes in the buying patterns of the Company's major customers could impact the Company's ability to accurately forecast sales and, resultantly, the necessary production to fill such sales, which could have a material adverse effect on the financial condition and results of operations of the Company. Further, certain mass market retailers have established exclusive buying relationships under which such retailers will buy consumer software only from one intermediary. In such instances, the price or other terms on which the Company sells to such retailers may be adversely effectedaffected by the terms imposed by such intermediary, or the Company may be unable to sell to such retailers on terms which the Company deems acceptable. The loss 5 of, or significant reduction in sales attributable to, any of the Company's principal distributors or retailers could materially adversely effect the Company's business, operating results and financial condition. Retailers in the computer and software industry have from time to time experienced significant fluctuations in their businesses and there have been a number of business failures among these entities. The insolvency or business failure of any significant retailer or other wholesale purchaser of the Company's products could have a material adverse effect on the Company's business, operating results and financial condition. Sales are typically made on credit, with terms that vary depending upon the customer and the nature of the product. The Company does not hold collateral to secure payment. Although the Company has obtained insolvency risk insurance to protect against any bankruptcy, insolvency, or liquidation that may occur to its customers, such insurance contains a significant deductible as well as a co-payment obligation, and the policy does not cover all instances of non-payment. In addition, while the Company maintains a reserve for uncollectible receivables that it believes to be adequate, but the actual reserve which is maintained may not be sufficient in every circumstance. As a result of the foregoing, a payment default by a significant customer could have a material adverse effect on the Company's business, operating results and financial condition. The Company also is exposed to the risk of product returns from retailers and other wholesale purchasers. Although the Company provides reserves for returns that it believes are adequate, and although the Company's agreements with certain of its customers place certain limits on product returns, the Company could be forced to accept substantial product returns to maintain its relationships with retailers and its access to distribution channels. Product returns that exceed the Company's reserves could have a material adverse effect on the Company's business, operating results and financial condition. CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The consumer software industry is undergoing rapid changes, including evolving industry standards, frequent new platform introductions and changes in consumer requirements and preferences. The introduction of new technologies, including new console systems such as Sega's Dreamcastthe Sony PlayStation 2, Microsoft X-Box and Sony's PlayStation 2,Nintendo Dolphin technologies that support multi-player on-line games, and new media formats and methods of consumer delivery such as on-line delivery, and digital video disks ("DVD"), could render the Company's previously released products obsolete or unmarketable. The development cycle for products utilizing new console platforms, computer operating systems and console systems, microprocessors or formats may be significantly longer and more expensive than the Company's current development cycle for products on existing platforms, operating systems, microprocessors and formats and may require the Company to invest resources in products that may not become profitable. There can be no assurance that the mix of the Company's future product offerings will keep pace with technological changes or satisfy evolving consumer preferences, or that the Company will be successful in developing and marketing products for any future operating system or format. Failure to develop and introduce new products and product enhancements in a timely fashion could result in significant product returns and inventory obsolescence and could have a material adverse effect on the Company's business, operating results and financial condition. RISKS ASSOCIATED WITH LEVERAGE. As of March 31, 1999,2000, the Company had outstanding $60,000,000$60.0 million of subordinated convertible notes due 2005. In June 1999, the Company obtained a term loan and revolving credit facility composed of $25a $25.0 million of term loansloan and up to $100$100.0 million of revolving credit loans and letters of credit. The proceeds of the term loan, which is due in June 2002, were used to complete the acquisition of Expert Software, Inc. and to pay expenses associated with the acquisition and the financing transaction. The revolving credit facility will beis used for working capital and general corporate purposes. As of March 31, 2000, there was $20.0 million outstanding under the term loan and $2.5 million outstanding under the revolving credit facility. 7 The term loan and the revolving credit facility are securedcollateralized by a pledge of substantially all of the assetassets of the Company and of its US subsidiaries. The facility contains various financial and other covenants that the Company and its subsidiaries must comply with. If the Company were to default under the terms of the credit facility, either as a result of a failure to pay principal or interest when due or as a result of a breach of a financial or other covenant, the lenders could stop providing funds and letters of credit to the Company and could declare an event of default and foreclose on the collateral. This could also result in an acceleration of the subordinated notes. A default by the Company under the revolving credit and term loan facility would materially adversely effectaffect the Company's business and could result in the Company declaring bankruptcy. YEAR 2000. Like many other software companies,On June 8, 2000, the year 2000 computer issue creates risk forCompany amended certain of the Company. If internal computercovenants of its term loan and embedded systems do not correctly recognize date information whenrevolving credit facility. The amended term loan and credit facility permits the year changesCompany to 2000, there could be an adverse impact onpurchase up to $15.0 million in shares of its common stock as well as its convertible subordinated notes in accordance with the Company's operations. The Company has initiated a comprehensivestock repurchase program (described in Note 15 to the consolidated financial statements), the distribution of "Rights" under the Company's shareholders' rights plan (described in Note 15 to prepare its internal computer and embedded systems for the year 2000 and is currently implementing changes to alleviate year 2000 incapabilities. As part of such plan,consolidated financial statements), as well as the Company has purchased software programs that have been independently developed by third parties which will test year 2000 compliance for the majorityreorganization of the Company's systems. All of the entertainment and leisure software products currently being shipped by the Company have been tested for year 2000 compliance and have passed these tests. In addition, all products currently in development are being tested as part of the normal quality assurance testing process and are scheduled to be released fully year 2000 compliant. The year 2000 computer issue could, however, still affect the ability of consumers to use the PC products sold by the Company. For example, if the computer system on whichorganizational structure into a consumer uses the Company's products is not year 2000 compliant, such noncompliance could affect the consumer's ability to use the products. The Company has developed ontingency plans to address the most material areas of exposure to the Company, such as adding network operating systems to back-up the Company's current network server and developing back-up plans for telecommunications with external offices and customers. In addition, the Company has put in place a staffing plan to handle orders manually should there be a failure of electronic data interchange connections with its customers and suppliers. Management believes that the items mentioned above constitute the greatest risk of exposure to the Company and that the plans developed by the Company will be adequate for handling these items. The Company also has contacted critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 compliant. To assist suppliers (particularly trading partners using electronic data interchange) in evaluating their year 2000 issues, the Company has developed a questionnaire designed to asses the ability of each supplier to address year 2000 6 incompatibilities. All critical suppliers and trading partners of the Company have responded to the questionnaire and confirmed the expectation that they will continue providing services and products through the change to 2000. Year 2000 compliance testing on substantially all of the Company's critical systems have been completed, and corresponding changes are anticipated to be made by July 1999. The costs incurred by the Company to date related to this testing and modification process are less than $100,000. The Company expects that the total cost of its year 2000 compliance plan will not exceed $200,000. The total estimated cost does not include potential costs related to any systems used by the Company's customers, any third party claims, or the costs incurred by the Company when it replaces internal software and hardware in the normal course of its business. The overall cost of the Company's year 2000 compliance plan is a minor portion of the Company's total information technology budget and is not expected to materially delay the implementation of any other unrelated projects that are planned to be undertaken by the Company. In some instances, the installation schedule of new software and hardware in the normal course of business has been accelerated to afford a solution to year 2000 compatibility issues. The total cost estimate for the Company's year 2000 compliance plan is based on management's current assessment of the projects comprising the plan and is subject to change as the projects progress. Based on currently available information, management does not believe that the year 2000 issues discussed above related to the Company's internal systems or its products sold to customers will have a material adverse impact on the Company's financial condition or results of operations; however, the specific extent to which the Company may be affected by such matters is not certain. In addition, there can be no assurance that the failure by a supplier or another third party to ensure year 2000 compatibility would not have a material adverse effect on the Company. EURO CONVERSION. On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the "euro" as their common currency. The sovereign currencies of the participating countries are scheduled to remain legal tender as denominations of the euro between January 1, 1999 and January 1, 2002. Beginning January 1, 2002, the participating countries will issue new euro-denominated bills and coins for use in cash transactions. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in the sovereign currencies, so that the sovereign currencies no longer will be legal tender for any transactions, making conversion to the euro complete. The Company has performed an internal analysis of the possible implications of the euro conversion on the Company's business and financial condition, and has determined that the impact of the conversion will be immaterial to its overall operations. The Company's wholly owned subsidiaries operating in participating countries represented 24.1% and 22.1% of the Company's consolidated net revenues for the fiscal year ended March 31, 1999 and 1998, respectively.holding company form. LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; RISK OF LITIGATION. The Company holds copyrights on the products, manuals, advertising and other materials owned by it and maintains trademark rights in the CompanyACTIVISION name, the ACTIVISION logo, and the names of the products owned by the Company. The Company regards its software as proprietary and relies primarily on a combination of trademark, copyright and trade secret laws, employee and third-party nondisclosure agreements, and other methods to protect its proprietary rights. Unauthorized copying is common within the software industry, and if a significant amount of unauthorized copying of the Company's products were to occur, the Company's business, operating results and financial condition could be adversely effected. ThereHowever, there can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. As is common in the industry, from time to time the Company receives notices from third parties claiming infringement of intellectual property rights of such parties. The Company investigates these claims and responds as it deems appropriate. Any claims or litigation, with or without merit, could be costly and could result in a diversion of management's attention, which could have a material adverse effect on the Company's business, operating results and financial condition. Adverse determinations in such claims or litigation could also have a material adverse effect on the Company's business, operating results and financial condition. Unauthorized copying and other forms of piracy are common within the software industry, and if a significant amount of unauthorized copying of the Company's products were to occur, the Company's business, operating results and financial condition would be adversely effected. Policing unauthorized use of the Company's products is difficult, and while the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In selling its products, the Company relies primarily on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. Further, the Company enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of the Company's rights may be ineffective in such countries. DEPENDENCE ON KEY PERSONNEL; COMPETITION WITH INTERNET COMPANIES FOR KEY PERSONNEL. The Company's success depends to a significant extent on the performance and continued service of its senior management and certain key employees. Competition for highly skilled employees with technical, management, marketing, sales, product development and other specialized training is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Specifically, the Company may experience increased costs in order 7 to attract and retain skilled employees. Although the Company enters into term employment agreements with most of its skilled employees and management personnel, there can be no assurance that such employees will not leave the Company or compete against the Company. The Company's failure to attract or retain qualified employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company faces intense competition for talent from highly valued Internet companies. Competition for employees in the interactive software business continues to be intense. Recently, the most intense competition for recruiting and retaining key employees is from Internet companies. The high market valuations, large equity positions for key executives and creative talent and fast stock price appreciation of these companies make their compensation packages attractive to those who already are working in more mature companies. This situation could create difficulty for the Company to compete for the attraction and retention of executive and key creative talent. 8 RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS: CURRENCY FLUCTUATIONS. International sales and licensing accounted for 65%71%, 71%66% and 66%51% of the Company's total revenues in the fiscal years 1997, 1998, 1999 and 1999,2000, respectively. The Company intends to continue to expand its direct and indirect sales, marketing and localization activities worldwide. This expansion will require significant management time and attention and financial resources in order to develop adequate international sales and support channels. There can be no assurance, however, that theThe Company willmay not be able to maintain or increase international market demand for its products. International sales are subject to inherent risks, including the impact of possible recessionary environments in economies outside the United States, currency fluctuations, the costs of transferring and localizing products for foreign markets, longer receivable collection periods and greater difficulty in accounts receivable collection, unexpected changes in regulatory requirements, difficulties and costs of staffing and managing foreign operations, and political and economic instability. There can be no assurance that theThe Company willmay not be able to sustain or increase international revenues or thatand the foregoing factors will notmay have a material adverse effect on the Company's future international revenues and, consequently, on the Company's business, operating results and financial condition. The Company currently does not engage in currency hedging activities. Although exposure to currency fluctuations to date has been insignificant, fluctuations in currency exchange rates may in the future have a material adverse impact on revenues from international sales and licensing and thus the Company's business, operating results and financial condition. RISK OF DEFECTS. ProductsInteractive software products such as those offered by the Company frequently contain errors or defects. Despite extensive product testing, in the past the Company has released products with defects and has discovered errors in certain of its product offerings after their introduction. In particular, the PC hardware environment is characterized by a wide variety of non-standard peripherals (such as sound cards and graphics cards) and hardware configurations that make pre-release testing for programming or compatibility errors very difficult and time-consuming. Despite testing by the Company, new products or releases may contain errors after commencement of commercial shipments, resulting in a loss of or delay in market acceptance, which could have a material adverse effect on the Company's business, operating results and financial condition. RISKS ASSOCIATED WITH ACQUISITIONS. TheAs the Company is in the process of integratingexecutes acquisitions, it must integrate the operations of its recently acquired subsidiaries Head Games, CD Contact and Expert Software, Inc. ("Expert") with its previously existing operations. This process, as well as the process of managing two significant new operations, requires substantial management time and effort and diverts the attention of management from other matters. In addition, there is a risk of loss of key employees, customers and vendors of the recently acquired operations as well as existing operations as this process is implemented. The Company may not be successful in integrating these operations. Consistent with the Company's strategy of enhancing its distribution and product development capabilities, the Company intends to continue to pursue acquisitions of companies, intellectual property rights and other assets that can be purchased or licensed on acceptable terms and which the Company believes can be operated or exploited profitably. Some of these transactions could be material in size and scope. While the Company will continually be searching for appropriate acquisition opportunities, the Company may not be successful in identifying suitable acquisitions. If any potential acquisition opportunities are identified, the Company may not be able to consummate such acquisitions and if any such acquisition does occur, it may not be successful in enhancingenhance the Company's business or be accretive to the Company's earnings. As the interactive entertainment and leisure businesses continueindustry continues to consolidate, the Company faces significant competition in seeking acquisitions and may in the future face increased competition for acquisition opportunities. This may inhibit the Company's ability to complete suitable transactions. Future acquisitions could also divert substantial management time, could result in short term reductions in earnings or special transaction or other charges and may be difficult to integrate with existing operations or assets. The Company may, in the future, issue additional shares of common stock in connection with one or more acquisitions, which may dilute its existing shareholders. The Company's shareholders will not have an opportunity, with respect to most of itsthe Company's future acquisitions, to review the financial statements of the entity being acquired or to evaluate the benefits of the intellectual property rights being purchased or licensed, or to vote on the acquisitions. RISK OF DISTRIBUTION COMPANIES' VENDOR DEFECTIONS; VENDOR CONCENTRATION. The Company's CD Contact, subsidiaryNBG and CenterSoft subsidiaryCentreSoft subsidiaries perform softwareinteractive entertainment distribution services in the Benelux territoryterritories, Germany and in the United Kingdom, respectively, and, via export, in other European 9 territories for a variety of entertainment software publishers, many of which are competitors of the Company. These services are 8 generally performed under limited term contracts, some of which provide for cancellation in the event of a change of control. While the Company expects to use reasonable efforts to retain these vendors, the Company may not be successful in this regard. The cancellation or non-renewal of one or more of these contracts could have a material adverse effect on the Company's business, operating results and financial condition. ThreeTwo of CD Contact's third party vendors accounted for 50%, 11%12% and 11%, respectively, of CD Contact's net revenues in fiscal year 1999.2000. The net revenues from each of these vendors represents 6%,represented 1% and 1%, respectively, of consolidated net revenues of the Company. TwoCompany for this period. Three of CentreSoft's third party vendors accounted for 30%25%, 14%, and 11%10%, respectively, of CentreSoft's net revenues in fiscal year 1999.2000. The net revenues from these vendors represented 11%5%, 3% and 4%2%, respectively, of consolidated net revenues of the Company.Company for this period. Two of NBG's third party vendors accounted for 11% and 10%, respectively, of NBG's net revenues in fiscal year 2000. The net revenues from these vendors each represented 1% of consolidated net revenues of the Company for this period. All other third party vendors contributed less than 10% individually to the respective subsidiary's net revenues. RISKS ASSOCIATED WITH FLUCTUATIONS IN STOCK VALUE. Due to analysts' expectations of continued growth and other factors, any shortfall in earnings could have an immediate and significant adverse effect on the trading price of the Company's common stock in any given period. As a result of the factors discussed in this report and other factors that may arise in the future, the market price of the Company's common stock historically has been, and may continue to be subject to significant fluctuations over a short period of time. These fluctuations may be due to factors specific to the Company, to changes in analysts' earnings estimates, or to factors affecting the computer, software, entertainment, media or electronics industries or the securities markets in general. STRATEGY The Company's objective is to be a worldwide leader in the development, publishing and distribution of quality interactive entertainment and leisure products that deliver, at each point of the value spectrum, a highly satisfying experience. The Company's strategy includes the following elements: CREATE AND MAINTAIN A BALANCED AND DIVERSIFIED PORTFOLIO OF OPERATIONS. The Company has assembled a large diversified portfolio of development, publishing and distribution operations and relationships which are complementary and, at the same time, reduce the Company's risk of concentration on any one developer, brand, platform, customer or market. The Company has focused historically on the development and publishing of premium games whichproducts that provide the most sophisticated game play and entertainment experience at the top price point. While the Company will continue to take advantage of its expertise in this area, it has recently diversifiedcontinued to diversify its business operations and product and audience mix, and plans on continuing such diversification inmix. In addition to establishing, primarily through acquisitions, the future. For example, the Company acquired several separate companies in the last two years in order to establish theEuropean distribution business. Additionally,business, the Company believes that as a result of its recent acquisition of Expert Software Inc., along with the Company's acquisition in June 1998 of Head Games, positions the Companyactivities, it has positioned itself as a leading publisher of "value" products for the PC, which are characterized by less sophisticated game play and lower price points. Further, the Company publishes and distributes titles that runoperate on a variety of platforms (PC, Sony PlayStation, Sega Dreamcast and Nintendo 64)N64 and Gameboy). This diversification significantly reduceshelps to reduce the risk of downturn or underperformance in any of the Company's individual operations. CREATE AND MAINTAIN STRONG BRANDS. The Company focuses its development and publishing activities principally on titles that are, or have the potential to become, franchise properties with sustainable consumer appeal and brand recognition. These titles can thereby serve as the basis for sequels, prequels, mission packs, and other add-ons and related new titles that can be released over an extended period of time. The Company believes that the publishing and distribution of products based in large part on franchise properties enhances revenue predictability and the probability of high unit volume sales and operating profits. In addition, the Company has entered into a series of strategic partnerships with the owners of intellectual property pursuant to which the Company has acquired the rights to publish titles based on franchises such as STAR TREK, various Disney films such as TOY STORY 2, A BUG'S LIFE and TARZAN,Marvel Comic's properties such as SPIDERMAN, X-MEN and SPIDERMAN.BLADE. The Company also has capitalized on the success of its TONY HAWK PRO SKATER products to sign long term agreements with superstars of extreme sports such as Mat Hoffman in BMX pro biking, Kelly Slater in pro surfing and Shaun Palmer in snow boarding. FOCUS ON ON-TIME DELIVERY. The success of the Company's publishing business is dependent, in significant part, on its ability to develop games that will generate high unit volume sales that can be completed in accordance with planned budgets and schedules. In order to increase its ability to achieve this 10 objective, the Company's publishing units have implemented a formal control process for the development of the Company's products. This process includes three key elements: (i) in-depth reviews are conducted for each project at five intervals during the development process by a team that includes several of the Company's highest ranking operating managers; (ii) each project is led by a small team which is heavily incentivizedgiven incentives to deliver a high-quality product, on-schedule and within budget; and (iii) day-to-day progress is monitored by a dedicated process manager in order to insure that issues, if any, are promptly identified and addressed in a timely manner. LEVERAGE INFRASTRUCTURE AND ORGANIZATION. The Company is continually striving to reduce its risk and increase its operating leverage and efficiency through the variabilization of expenses.efficiency. For example, the Company has significantly increased its product making capabilities by allocating a larger portion of its product development investments to experienced independent development companies. These companies generally are small firms focused on a particular product type of game, run and owned by individuals who are willing to take development risk by accepting payments based on the completion of fixed performance milestones in exchange for a royalty on the revenue stream of the game after the Company recoups its development costs. The Company also has also broadly instituted objective-based reward programs that provide incentives to management and staff to produce results that meet the Company's financial objectives. GROW THROUGH CONTINUED STRATEGIC ACQUISITIONS. The interactive entertainment and leisure industries areindustry is consolidating, and the Company believes that success in these industriesthis industry will be driven in part 9 by the ability to take advantage of scale. Specifically, smaller companies are more capital constrained, enjoy less predictability of revenues and cashflow, lack product diversity and must spread fixed costs over a smaller revenue base. Several industry leaders are emerging that combine the entrepreneurial and creative spirit of the industriesindustry with professional management, the ability to access the capital markets and the ability to maintain favorable relationships with strategic developers, property owners and retailers. Through sevennine completed acquisitions since 1997, the Company believes that it has successfully diversified its operations, its channels of distribution, its development talent pool and its library of titles, and has emerged as one of the industry's leaders. PRODUCTS The Company currently ishistorically has been best known for its action, adventure, strategy and simulation products, althoughproducts. With the successful introduction of its TONY HAWK PRO SKATER product, the Company also has become one of the industry leaders in the extreme sport category. The Company also distributes products in other categories such as sports, leisure and role playing. The Company may in the future expand its product offerings into new categories. The Company's current and upcoming releases are based on intellectual property and other character or story rights licensed from third parties, as well as a combination of characters, worlds and concepts derived from the Company's extensive library of titles, and original characters and concepts owned and created by the Company, and intellectual property or other character or story rights licensed from third parties.Company. In publishing products based on licensed intellectual property rights, the Company generally seeks to capitalize on the name recognition, marketing efforts and goodwill associated with the underlying property. In the past year, the Company has entered into a series of long term or multi-product agreements with the owners of intellectual property that is well known throughout the world. In addition to the strategic relationships established by the Company with Disney Interactive for several animated film properties, and with Viacom Consumer Products for STAR TREK and with LucasArts Entertainment for STAR WARS and INDIANA JONES, the Company also has entered into an exclusive distribution agreementlong term license agreements with LucasArts Entertainment which gives theCabela's for its BIG GAME HUNTER series of products, Marvel Comics for such properties as SPIDERMAN, X-MEN and BLADE, and such superstars of extreme sports as Tony Hawk, Mat Hoffman, Kelly Slater and Shaun Palmer. The Company the right during themay not be able to seek out and sustain new long term relationships of the agreement to distribute all past and future LucasArts PC and PlayStation productssimilar caliber in the United Kingdom and over 40 other international countries, including titles based on STAR WARS: EPISODE ONE and INDIANA JONES.future. In addition to its own internally developed products, the Company publishes and distributes software products for other independent developers and publishers such as id Software, Sony, Sega, Nihilistic Software, Ritual Entertainment and Kalisto Entertainment.Heuristic Park. As the Company seeks to associate the "ACTIVISION" mark only with the highest quality interactive entertainment products, the Company attempts to be selective in acquiring publishing and distribution rights from third party developers. Such products typically are marketed under the Company's name as well as the name of the original developer. The Company believes that these efforts enable the Company to leverage its investment in worldwide sales and marketing and add a new source of products while balancing the risks inherent in internal product development and production. This activity also allows 11 the Company to enter new product genres more quickly and provide consumers with a wider variety of products. In addition, during the last year, theThe Company enteredhas established itself as a leader in the "value priced" software publishing business through its acquisition of Head Games Publishing in June 1998 and of Expert Software Inc. in June 1999.with such products as Cabela's BIG GAME HUNTER series. Products published by the Company in this category are generally developed by third parties, often under contract with the Company, and are marketed under the Activision Value and Head Games and Expert Software names. PRODUCT DEVELOPMENT AND SUPPORT The Company uses both internal and external resources to develop products. The Company also acquires rights to products through publishing and distribution arrangements with other interactive entertainment and leisure companies. INTERNAL DEVELOPMENT The Company's internal development and production groups are located at the Company's headquartersoperational bases in Santa Monica, California, Minnesota, Wisconsin, Florida, the United Kingdom and at the Company's Raven Software subsidiary located in Madison, Wisconsin.Japan. Activision internally develops and produces titles using a model in which a core group of creative, production and technical professionals on staff at the Company, in cooperation with the Company's marketing and finance departments, have overall responsibility for the entire development and production process and for the supervision and coordination of internal and external resources. This team assembles the necessary creative elements to complete a title, using where appropriate outside programmers, artists, animators, musicians and songwriters, sound effects and special effects experts, and sound and video studios. The Company believes that this model allows the Company to supplement internal expertise with top quality external resources on an as needed basis. The Company has adopted and implemented a rigorous procedure for the selection, development, production and quality assurance of its internally produced entertainment software titles. The process involves one or more pre-development, development and production phases, each of which includes a number of specific performance milestones. This procedure is designed to enable the Company to manage and control production and development budgets and timetables, to identify and address production and 10 technical issues at the earliest opportunity, and to coordinate marketing and quality control strategies throughout the production and development phases, all in an environment that fosters creativity. Checks and balances are intended to be provided through the structured interaction of the project team with the Company's creative, technical, marketing and quality assurance/customer support personnel, as well as the legal, accounting and finance departments. EXTERNAL DEVELOPMENT The Company licenses or acquires software products from independent developers for publishing or distribution by the Company. Acquired titles generally are marketed under the Company's name as well as the name of the original developer. The agreements with developers provide the Company with exclusive publishing and/or distribution rights for a specific period of time for specified platforms and territories. These agreements often grant to the Company the right to publish and/or distribute sequels, conversions, enhancements and add-ons to the product originally being developed and produced by the developer. In consideration for its services, the developer receives a royalty based on net sales of the product that it has developed. Typically, the developer also receives a nonrefundable advance which is recoupable by the Company from the royalties otherwise required to be paid to the developer. The royalty generally is paid in stages, with the payment of each stage tied to the completion of a detailed performance milestone. The Company acquires titles from developers during various phases of the development and production processes for such titles. To the extent the Company acquires rights early in the development process, the Company generally will cause the independent developer to comply with the requirements of the pre-development, development and production processes applicable to titles internally produced by Activision. The Company will assign a game producer to each title who will serve as the principal liaison to the independent developer and help insure that performance milestones are timely met. The Company 12 generally has the right to cease making payments to an independent developer if the developer fails to complete its performance milestones in a timely fashion. The Company may make, from time to time, an investment and hold a minority equity interest in the third party developer in order to create a closer relationship between the Company and the developer. In this regard, the Company recently acquired a minority equity interest in each of Pandemic Studios, Savage Entertainment and Hammerhead Studios in connection with several new entertainment software products to be developed by each of these developers for the Company.Company, which the Company believes helps to create a closer relationship between the Company and the developer. In addition to the Company's minority interest in each of Pandemic Studios, Savage Entertainment, Raster Productions and Hammerhead Studios, the Company also acquired a minority equity interest in Gray Matter Studios in connection with the development of a product known as RETURN TO CASTLE WOLFENSTEIN. There can be no assurance that the Company will realize long term benefits from anysuch type of these investments or that it will continue to carry such investments at its current value. PRODUCT SUPPORT The Company provides various forms of product support to both its internally and externally developed titles. The Company's quality assurance personnel are involved throughout the development and production processes for each title published by the Company. All such products are subjected to extensive testing before release in order to insure compatibility with the widest possible array of hardware configurations and to minimize the number of bugs and other defects found in the products. To support its products after release, the Company provides on-line support to its customers on a 24-hour basis as well as operator help lines during regular business hours. The customer support group tracks customer inquiries and this data is used to help improve the development and production processes. PUBLISHING AND DISTRIBUTION ACTIVITIES MARKETING The Company's marketing efforts include on-line activities (such as the creation of World Wide Web pages to promote specific Company titles), public relations, print and broadcast advertising, coordinated in-store and industry promotions including merchandising and point of purchase displays, participation in cooperative advertising programs, direct response vehicles, and product sampling through demonstration software distributed through the Internet or on compact discs. In addition, the Company's products contain software that enables customers to "electronically register" their purchases with the Company via modem. Through this process, the Company captures electronic mail addresses for its customers as well as a variety of additional market research data. The Company believes that certain of its franchise properties have loyal and devoted audiences who purchase the Company's sequels as a result of dedication to the property and satisfaction from previous product purchases. Marketing of these sequels is therefore directed both toward the established market as well as broader audiences. In marketing titles based on licensed properties, the Company believes that it derives marketing synergies and related benefits from the marketing and promotional activities of the property owners. In marketing titles owned by third party developers, the Company believes that it derives 11 marketing synergies and related benefits from the previously established reputation of and goodwill associated with the developer and/or properties owned by the developer. 13 SALES AND DISTRIBUTION DOMESTIC SALES AND DISTRIBUTION. The Company's products are available for sale or rental in thousands of retail outlets domestically. The Company's domestic customers include Best Buy, CompUSA, Computer City, Electronic Boutique, Babbages, WalMart, K-Mart, Target and Toys "R" Us. During fiscal 2000 or fiscal 1999, no single domestic customer accounted for more than 10% of consolidated net revenues. In the United States, the Company's products are sold primarily on a direct basis to major computer and software retailing organizations, mass market retailers, consumer electronic stores and discount warehouses and mail order companies. The Company believes that a direct relationship with retail accounts results in more effective inventory management, merchandising and communications than would be possible through indirect relationships. The Company has implemented electronic data interchange ("EDI") linkage with many of its retailers to facilitate the placing and shipmentshipping of orders. The Company seeks to continue to increase the number of retail outlets reached directly through its internal sales force. To a lesser extent, theThe Company sells its products throughutilizes wholesale distributors such as Ingram Micro and Merisel.to service independent channels. INTERNATIONAL SALES AND DISTRIBUTION. The Company conducts its international publishing and distribution activities through offices in the United Kingdom, Germany, France, Australia, Canada, the Netherlands, Belgium and Japan. The Company seeks to maximize its worldwide revenues and profits by releasing high quality foreign language localizations concurrently with the English language releases, whenever practicable, and by continuing to expand the number of direct selling relationships it maintains with key retailers in major territories. As part of the restructuring plan adopted in March 2000, described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company is in the process of realigning its direct distribution system and restructuring its worldwide distributor relationships, significantly reducing the number of distributors. In November 1997, the Company commenced its European distribution operations through the acquisitions of NBG in Germany and CentreSoft in the United Kingdom. CentreSoft is Sony's exclusive distributor of PlayStation products to the independent channel in the United Kingdom and employs approximately 150165 people, including one of the largest entertainment software sales and marketing organizations in that country. In September 1998, the Company acquired CD Contact, a company specializing in the localization and marketing of entertainment software products in the Benelux territories. The assets and personnel of CD Contact currently are being combinedhave been integrated with the Company's other distribution operations to form the core of Activision's international distribution operations and a base for further expansion into European territories. The Company will emphasize the expansion of CentreSoft's, NBG's and CD Contact's channel relations and intends to leverage the management expertise of these companies into other territories.operations. AFFILIATE LABELS. In addition to its own products, the Company distributes interactive entertainment products that are developed and marketed by other third party publishers through its "affiliate label" programs. The distribution of other publishers' products allows the Company to maximize the efficiencies of its sales force and provides the Company with the ability to better insure adequate shelf presence at retail stores for all of the products that it distributes. It also mitigates the risk associated with a particular title or titles published by Activision failing to achieve expectations. Services provided by the Company under its affiliate label program include order solicitation, in-store marketing, logistics and order fulfillment, and sales channel management. Themanagement, as well as other accounting and general administrative functions. During the fiscal year 2000, the Company's affiliate label partners includeincluded LucasArts, as described above, Psygnosis, with respect to all of its PC and PlayStation products in North America, and Fox Interactive, with respectInterplay, Codemasters, 989 Studios and Encore Entertainment. Each affiliate label relationship is unique and may pertain only to all Fox Sports branded interactive productsdistribution in certain geographic territory such as the United States or Europe Africa and Asia, excluding Japan.may be further limited only to the specifically named titles or titles operating on specific platforms. OEM SALES AND DISTRIBUTION. The Company seeks to enhance the distribution of its products through licensing arrangements with original equipment manufacturers ("OEMs"). Under these arrangements, one or more of the Company's titles are "bundled" with hardware or peripheral devices sold and distributed by the OEM so that the purchaser of the hardware or device obtains the Company's software as part of the purchase or on a discounted basis. Although it is customary for the Company to receive a lower per unit price on sales through OEM bundle arrangements, the OEM customer makes a high unit volume commitment to the Company with little associated marketing costs. In addition, the Company from time to time receives substantial advance payments from the OEM customer. The Company also believes that such arrangements can substantially expand the distribution of its titles to a broader audience. Recent OEM partners include Gateway Computers, Franklin Computers, Logitech, Dell Computers and Diamond Multimedia, Gateway, Philips, Epson14 Multimedia. The Company also enters into OEM transactions through third party software aggregators who resell the Company products to OEM customers. The OEM market has been undergoing radical changes due to the declining prices of personal computers and Toshiba. 12 hardware accessories and the reluctance of hardware manufacturers to produce large inventories. There can be no assurances that the Company will be able to find new or maintain productive relationship with its existing OEM customers. The Company's own OEM subsidiary, TDC, has been negatively impacted by the changes in the OEM market, as further described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." LICENSING AND MERCHANDISING The Company believes that a number of its products have the potential to be exploited in ancillary markets and media, such as product merchandising and traditional entertainment media. The Company seeks opportunities for the exploitation of these ancillary rights directly and through third party agents. Potential opportunities include the publication of strategy guides for selected titles, the adaptation of titles into comic books, novels, television series or motion pictures, and the licensing of product merchandising rights. The Company also has been licensing to third party developers on a selective basis some of its products for development and publishing on platforms, which the Company determines not to be economically viable to exploit with regard to that particular product. In addition, the Company has established "900" telephone numbers through a third party telephone bureau as hint lines for certain of its titles and has realized revenues from the calls made to these numbers. The Company believes that these types of licensing activities and other forms of ancillary exploitation can provide additional sources of revenue and increase the visibility of the title, thereby leading to additional unit sales and greater potential for additional sequels. There can be no assurance that the Company will be successful in exploiting its properties in ancillary markets or media. Similarly, themedia or will continue to license its products for conversion to platforms it does not exploit directly. INTERNET The Company believes that there are opportunities for further exploitation of its titles through the Internet, on-line services, such as America Online and the Microsoft Network, and through recently createddedicated Internet on-line gaming services such as Heat and WON.services. The Company has established "900" telephone numbers as hint lines for certain of its titles, and has realized revenues from the calls made to these numbers. The Company also is actively exploring the establishment of on-line game playing opportunities, on-line hint sites and Internet services as a method for realizing additional revenues from its products. There can be no assurance that the Company will be successful in exploiting these opportunities. The Company has been operating its on-line store under a third party fulfillment arrangement with Digital River, where customers can order a wide array of Activision titles. HARDWARE LICENSES The Company's console products currently are being developed or published primarily for the Sony PlayStation and PlayStation 2, Sega Dreamcast and Nintendo 64.N64 and Gameboy. In order to maintain general access to the console systems marketplace, the Company has obtained licenses for the PlayStation, Nintendo 64, Nintendo Game Boy and other console systems.each of these platforms. Each license allows the Company to create one or more products for the applicable system, subject to certain approval rights as to quality which are reserved by each licensor. Each license also requires that the Company pay the licensor a per unit license fee from product sales.for each unit manufactured. In contrast, the Company currently is not required to obtain any license for the development and production of PC-CD products. Accordingly, the Company's per unit manufacturing cost for PC-CD products is less than the per unit manufacturing cost for console products. MANUFACTURING The Company prepares a set of master program copies, documentation and packaging materials for its products for each respective hardware platform on which the product will be released. Except with respect to products for use on the Sony, Sega and Nintendo systems, the Company's disk duplication, packaging, printing, manufacturing, warehousing, assembly and shipping are performed by third party subcontractors. In the case of products for the Sony, Sega and Nintendo systems, in order to maintain protection over their hardware technologies, such hardware producers generally specify and/or control the manufacturing and assembly of finished products. The Company delivers the master materials to the licensor or its approved replicator which then manufactures finished goods and delivers them to the Company for distribution under the Company's label. At the time the Company's product unit orders are filled by the 15 manufacturer, the Company becomes responsible for the costs of manufacturing and the applicable per unit royalty on such units, even if the units do not ultimately sell. To date, the Company has not experienced any material difficulties or delays in the manufacture and assembly of its products or material returns due to product defects. COMPETITION The interactive entertainment and leisure industries areindustry is intensely competitive and areis in the process of substantial consolidation. The availability of significant financial resources has become a major competitive factor in these industriesthis industry primarily as a result of the increasing development, acquisition, production and marketing budgets required to publish quality titles. In addition, competitors with large product lines and popular titles typically have greater leverage with distributors and other customers who may be willing to promote titles with less consumer appeal in return for access to such competitor's most popular titles. See "Factors Affecting Future Performance". The Company seeks to compete by publishing high quality titles and by supporting these titles with substantial marketing efforts; by focusing on properties with sustainable consumer appeal; by working to strengthen its relationships with retailers and other resellers and otherwise expanding its channels of distribution; and by pursuing opportunities for strategic acquisitions. See "Strategy." 13 EMPLOYEES As of March 31, 1999,2000, the Company had 634775 employees, including 207268 in product development, 7191 in North American publishing, 5567 in corporate finance, operations and administration, 6790 in international publishing, and 234259 in European distribution activities. As of March 31, 1999,2000, approximately 120170 of the Company's full-time employees were subject to term employment agreements with the Company. These agreements generally commit such employees to employment terms of between one and three years from the commencement of their respective agreements. Most of the employees subject to such agreements are senior executives of the Company or members of the product development, sales or marketing divisions. These individuals perform services to the Company as executives, directors, producers, associate producers, computer programmers, game designers, sales directors and marketing product managers. The execution by the Company of employment agreements with such employees, in the Company's experience, significantly reduces the Company's turnover during the development and production of its entertainment software products and allows the Company to plan more effectively for future development activities. None of the Company's employees are subject to a collective bargaining agreement, and the Company has experienced no labor-related work stoppages. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 67 of Notes to Consolidated Financial Statements included in Item 8. Item16 ITEM 2. PROPERTIES The Company's principal corporate, administrative, and product development offices are located in approximately 98,000 square feet of leased space in a building located at 3100 Ocean Park Boulevard, Santa Monica, California 90405. The following is a listing of the principal offices maintained by the Company at June 25, 1999:19, 2000:
Location of Principal Facilities Square Feet Lease Expiration Date --------------------------------------------------------------------------- ----------------- -------------------------------------------------------------- Santa Monica, California 98,000 April 30, 2007 Birmingham, United Kingdom 82,000 March 25, 2011 -Woodland Hills, California 10,000 April 20, 2005 Miami, Florida 7,000 June 1, 2012 Burglengenfeld, Germany 35,000 Owned Coral Gables, Florida 12,994 August 29, 2000 Berchem, Belgium 10,659 April 1, 2001 London, United Kingdom 10,625 July 23, 2005 Venlo, the Netherlands 7,778 February 15, 2000 Madison, Wisconsin 6,66013,300 December 31, 2000 Sydney, Australia 3,400 Month-to-Month2004 Eden Prairie, Minnesota 3,1939,800 September 30, 2005 Dallas, Texas 2,300 February 28, 2003 Eemnes, The Netherlands 2,000 January 1, 2001 Munich, Germany 4,311 November 30,Bentonville, Arkansas 250 February 28, 2001 New York, New York 1,200500 April 30, 2001 Coral Gables, Florida 20,000 August 29, 2000 Middlesex, United Kingdom 10,600 July 23, 2005 Birmingham, United Kingdom 81,000 May 20, 2011 - May 31, 2012 Birmingham, United Kingdom 43,300 Month to Month Antwerpen, Belgium 3,200 May 1, 2002 Eemnes, The Netherlands 1,900 January 1, 2001 Argenteuil, France 1,800 December 15, 2006 Sydney, Australia 3,400 September 30, 2000 Ismaning, Germany 4,200 November 30, 2001 Burglengenfeld, Germany 39,000 Owned Tokyo, Japan 531 August530 July 31, 20002001
ItemITEM 3. LEGAL PROCEEDINGS The Company is party to routine claims and suits brought against it in the ordinary course of business including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. ItemITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 1417 PART II ItemITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the NASDAQ National Market under the symbol "ATVI." The following table sets forth for the periods indicated the high and low reported closing sale prices for the Company's Common Stock.common stock. As of June 19, 2000, there were approximately 5,000 holders of record of the Company's common stock.
High Low ----------- ----------- Fiscal 1998 ------------- First Quarter ended June 30, 1997 $ 14.75 $ 9.87 Second Quarter ended September 30, 1997 $ 15.50 $ 11.00 Third Quarter ended December 31, 1997 $ 18.62 $ 13.00 Fourth Quarter ended March 31, 1998 $ 17.87 $ 9.50 Fiscal 1999 ----------------------------- First Quarter ended June 30, 1998 $ 11.62 $ 9.37$11.62 $9.37 Second Quarter ended September 30, 1998 $ 13.75 $ 9.37 Third Quarter ended December 31, 1998 $ 14.87 $ 8.75 Fourth Quarter ended March 31, 1999 $ 13.81 $ 9.75 Fiscal 2000 ---------------------------- First Quarter ended June 30, 1999 $14.56 $10.31 Second Quarter ended September 30, 1999 17.75 12.63 Third Quarter ended December 31, 1999 17.50 13.94 Fourth Quarter ended March 31, 2000 17.69 12.06 Fiscal 2001 -------------- First Quarter through June 25, 1999 $ 14.25 $ 10.1219, 2000 $11.13 $6.13
On June 25, 1999,19, 2000, the reported last sales price for the Company's Common Stock was $13.69. As of March 31, 1999, the Company had approximately 5,000 stockholders of record, excluding banks, brokers and depository companies that are the stockholders of record for the account of beneficial owners.$6.25. DIVIDENDS The Company paid no cash dividends in 2000 or 1999 and does not intend to pay any cash dividends at any time in the foreseeable future. The Company expects that earnings will be retained for the continued growth and development of the Company's business. In addition, the Company's bank credit facility currently prohibits the Company from paying dividends on its common stock. Future dividends, if any, will depend upon the Company's earnings, financial condition, cash requirements, future prospects and other factors deemed relevant by the Company's Board of Directors. SALES OF UNREGISTERED EQUITY SECURITIES In July 1998,May 1999, the Company granted warrants to purchase 250,000100,000 shares of the Company's common stock at an exercise price of $11.63 per share to Disney Enterprises,Cabela's, Inc. ("Disney"Cabela's") in connection with, and as partial consideration for, a license agreement betweenthat allows the Company and Disney's affiliate, Disney Interactive.to utilize the Cabela's name in conjunction with certain Activision products. The warrants have an exercise price of $12.70 per share,a seven year term and vest in full on July 2, 1999 and expire on July 2, 2008. In September 1998, the Company granted warrants to purchase 750,000 sharesannual increments of the Company's common stock to Viacom Consumer Products, Inc. ("Viacom") in connection with a license agreement. 500,000 of the warrants have an exercise price of $10.27 per share, vest ratably over five years, beginning on the date of issuance, and expire on September 16, 2008. The warrant to purchase the remaining 250,000 shares also expires on September 16, 2008. These 250,000 warrants are exercisable ratably over five years beginning September 16, 2003 and have an exercise price equal to the average closing price of the Company's common stock on the NASDAQ National Market for the thirty days immediately preceding September 16, 2003.approximately 14.25%. In June 1998,1999, the Company issued a total of 1,000,000204,448 shares of the Company'sits common stock in connection with the acquisition of Head Games. The Company also granted options to purchase 295,000 shares of common stock to certain employees and consultants and at the time of the acquisition.Elsinore Multimedia, Inc. In September 1998,1999, the Company issued a total of 1,900,000698,835 shares of the Company'sits common stock in connection with the acquisition of CD Contact. On March 23,JCM Productions, Inc. dba Neversoft Entertainment. 18 In December 1999, options to purchase 1,000,000the Company issued 77,031 shares of the Company'sits common stock were granted to each of Robert A. Kotick, the Company's Co-Chairman and Chief Executive Officer, and Brian G. Kelly, the Company's Co-Chairman. The options were granted in connection with employment agreements between the Company and each of Mr. Kotick and Mr. Kelly, dated January 12, 1999. The options vesta 40% equity investment in five equal 15 annual installments beginning on the date of issuance, have an exercise price of $10.50 per share, and expire on January 12, 2009.Gray Matter Studios, formerly known as Video Games West, Inc. None of the shares, warrants, options or shares into which the warrants or options are exercisable were registered under the Securities Act of 1933, as amended (the "Securities Act"), by reason of the exemption under Section 4(2) of the Securities Act. The Company subsequently registered the shares as well as the shares issuable to the former shareholders of Head Games upon the exercise of options, issued in connection with the Head GamesElsinore Multimedia, Inc., JCM Productions, Inc. dba Neversoft Entertainment and CD ContactGray Matter Studios transactions for resale by the holders thereof. 16REPURCHASE PLAN As of May 9, 2000, the Board of Directors authorized the Company to purchase up to $15.0 million in shares of its common stock as well as its convertible subordinated notes. The shares and notes could be purchased from time to time through the open market or in privately negotiated transactions. The amount of shares and notes purchased and the timing of purchases were based on a number of factors, including the market price of the shares and notes, market conditions, and such other factors as the Company's management deemed appropriate. The Company has financed the purchase of shares with available cash. As of June 19, 2000, the Company has purchased 2.3 million shares of its common stock for approximately $15.0 million. SHAREHOLDERS' RIGHTS PLAN On April 18, 2000, the Company's Board of Directors approved a shareholders rights plan (the "Rights Plan"). Under the Rights Plan, each common stockholder at the close of business on April 19, 2000 will receive a dividend of one right for each share of common stock held. Each right represents the right to purchase one one-hundredth (1/100) of a share of the Company's Series A Junior Preferred Stock at an exercise price of $40.00. Initially, the rights are represented by the Company's common stock certificates and are neither exercisable nor traded separately from the Company's common stock. The rights will only become exercisable if a person or group acquires 15% or more of the common stock of the Company, or announces or commences a tender or exchange offer which would result in the bidder's beneficial ownership of 15% or more of the Company's common stock. In the event that any person or group acquires 15% or more of the Company's outstanding common stock each holder of a right (other than such person or members of such group) will thereafter have the right to receive upon exercise of such right, in lieu of shares of Series A Junior Preferred Stock, the number of shares of common stock of the Company having a value equal to two times the then current exercise price of the right. If the Company is acquired in a merger or other business combination transaction after a person has acquired 15% or more the Company's common stock, each holder of a right will thereafter have the right to receive upon exercise of such right a number of the acquiring company's common shares having a market value equal to two times the then current exercise price of the right. For persons who, as of the close of business on April 18, 2000, beneficially own 15% or more of the common stock of the Company, the Rights Plan "grandfathers" their current level of ownership, so long as they do not purchase additional shares in excess of certain limitations. The Company may redeem the rights for $.01 per right at any time until the first public announcement of the acquisition of beneficial ownership of 15% of the Company's common stock. At any time after a person has acquired 15% or more (but before any person has acquired more than 50%) of the Company's common stock, the Company may exchange all or part of the rights for shares of common stock at an exchange ratio of one share of common stock per right. The rights expire on April 18, 2010. 19 ItemITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table summarizes certain selected consolidated financial data, which should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. Selected Consolidated Financial Data as of and for each the fiscal years in the four year period ended March 31, 1998 have been retroactively restated to reflect the effect of pooling of interests transactions as discussed in Item 1 of this Report. The selected consolidated financial data presented below as of and for each of the fiscal years in the five-year period ended March 31, 19992000 are derived from the audited consolidated financial statements of the Company. The Consolidated Balance Sheets as of March 31, 19992000 and 19981999 and the Consolidated Statements of Operations and Statements of Cash Flows for each of the fiscal years in the three-year period ended March 31, 1999,2000, and the report thereon, are included elsewhere in this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA) Fiscal Years ended March
FISCAL YEARS ENDED MARCH 31, ------------------------------------------------------------------------ Restated ------------------------------------------------------------------------------------------------------------------ RESTATED (1) ----------------------------------------------- 2000 1999 1998 1997 1996 1995 -------- -------- -------- -------- ----------------- ---------- ----------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Net revenues $436,485 $312,058 $189,239 $ 86,591 $57,750$572,205 $436,526 $312,906 $190,446 $87,561 Cost of sales - product costs 319,422 260,041 176,188 103,124 34,034 31,731 Cost of sales - royalties and software amortization 37,82591,238 36,990 29,840 13,108 7,333 1,794 Operating incomeIncome (loss) 27,245 9,486 11,531 3,233 (3,275)from operations (30,325) 26,667 9,218 11,497 3,264 Income (loss) before income taxes 24,215 8,374 11,612 4,841 (1,776)tax provision (38,736) 23,636 8,106 11,578 4,872 Net income (loss) 15,254 5,139 7,631 5,895 (1,875) Preferred dividends paid and/or accumulated - (116) (151) - -(34,088) 14,891 4,970 7,583 5,908 Basic net incomeearnings (loss) per common share $ 0.69 $ 0.24 $ 0.37 $ 0.34 $ (0.11)(1.38) 0.65 0.22 0.36 0.33 Diluted net incomeearnings (loss) per share (1.38) 0.62 0.21 0.35 0.31 Basic weighted average common share $ 0.66 $ 0.23 $ 0.36 $ 0.32 $ (0.11) Weightedshares outstanding 24,691 22,861 22,038 20,961 17,931 Diluted weighted average number ofcommon shares used in computing basic net income (loss) per common share (1) 22,162 21,339 20,262 17,232 17,404 Weighted average number of shares used in computing diluted net income (loss) per common share (1) 23,233 22,210 20,951 18,294 17,404outstanding 24,691 23,932 22,909 21,650 18,993 SELECTED OPERATING DATA: EBITDA (2) $ 56,665 $ 42,760 $ 23,878 $ 13,727 $(1,333)15,541 33,155 14,564 15,690 5,974 CASH (USED IN) PROVIDED BY: Operating activities $ 18,078 $ 31,180 $ 4,956 $ 3,807 $ (393)77,389 18,190 31,670 4,984 3,817 Investing activities $(64,331) (43,371) (19,588) (11,455) (61)(99,547) (64,331) (43,814) (19,617) (11,515) Financing activities 42,028 7,220 62,862 11,981 (4,378) 1,055
As of MarchAS OF MARCH 31, ------------------------------------------------------------------------ Restated ------------------------------------------------------------------------------------------------------------------ RESTATED ----------------------------------------------- 2000 1999 1998 1997 1996 1995 -------- -------- -------- -------- ----------------- ---------- ----------- ---------- ---------- BALANCE SHEET DATA: Working capital $141,314 $115,773 $ 51,997 $39,871 $39,606$160,149 $136,355 $115,782 $52,142 $40,067 Cash and cash equivalents 32,847 74,241 23,320 25,792 38,013 Intangible assets49,985 33,037 74,319 23,352 25,827 Goodwill 12,347 21,647 23,473 23,756 19,583 20,865 Total assets 283,612 229,280 131,952 84,442 71,672309,737 283,345 229,366 132,203 84,737 Long-term debt 61,150 61,78073,778 61,143 61,192 5,907 1,222 986 Redeemable and convertible preferred stock - - - 1,500 - - Shareholders' equity 127,475 97,397 81,634 62,439 61,693132,009 127,190 97,475 80,321 62,674
(1) The CompanyConsolidated financial information for fiscal years 1999 - 1996 has presented basicbeen restated retroactively for the effects of the September 1999 acquisition of Neversoft, accounted for as a pooling of interests. Consolidated financial information for fiscal years 1998 - 1996 has been restated retroactively for the effects of the acquisitions of S.B.F. Services, Limited dba Head Games Publishing and diluted net income (loss) per shareCD Contact Data GmbH, in June 1998 and September 1998, respectively, accounted for all periodsas pooling of interests. Consolidated financial information for fiscal years 1997 and 1996 has been restated retroactively for the effects of the acquisitions of 20 Raven Software Corporation, NBG EDV Handels - und Verlags GmbH and Combined Distribution (Holdings) Limited in accordance with StatementNovember 1997, August 1997 and November 1997, respectively, accounted for as pooling of Financial Accounting Standards No. 128 "Earnings per Share."interests. (2) EBITDA represents income (loss) before interest, income taxes and, depreciation and amortization.amortization on property and equipment and goodwill. The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered a substitute for net income, as an indicator of the Company's operating performance, or cash flow or as a measure of liquidity. 1721 ItemITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS FORWARD LOOKING STATEMENTS REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES DISCUSSED IN THIS CURRENT REPORT ON FORM 10-K UNDER "FACTORS AFFECTING FUTURE PERFORMANCE." ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND UNCERTAINTIES. OVERVIEW The Company is a leading international publisher, developer and distributor of interactive entertainment and leisure products. The Company currently focuses its publishing, development and distribution efforts on products designed for personal computers ("PCs") as well as the Sony PlayStation ("PSX") and thePlayStation 2, Sega Dreamcast ("Dreamcast") and Nintendo 64N64 ("N64") console systems.systems and Nintendo Gameboy handheld game devices. The Company's products span a wide range of genres and target markets. ActivisionThe Company distributes its products worldwide through its direct sales forces, through its distribution subsidiaries, and through its third party distributors and licensees. In addition, in September 1998 the Company acquired CD Contact, significantly increasing its European distribution capabilities. The Company's financial information as of and for the yearyears ended March 31, 1999 and 1998 and 1997, havehas been restated to reflect the effect of pooling of interests transactions as discussed in Item 1 and Item 6 of this Report. The Company recognizes revenue from the sale of its products upon shipment. Subject to certain limitations, the Company permits customers to obtain exchanges and returns within certain specified periods and provides price protection on certain unsold merchandise. RevenuesRevenue from product sales areis reflected after deducting the estimated allowance for returns and price protection. Management of the Company estimates the amount of future returns, and price protection based upon historical results and current known circumstances. With respect to license agreements whichthat provide customers the right to multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery of the product master or the first copy.delivery. Per copy royalties on sales whichthat exceed the guarantee are recognized as earned. The American Institute of Certified Public Accountants Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 was effective for all transactions entered into subsequent to March 31, 1998. The Company has adopted SOP 97-2 and such adoption did not have a material impact on the Company's financial position, results of operations or liquidity. Effective December 15, 1998, the American Institute of Certified Public Accountants Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions" ("SOP 98-9"), was issued and is effective for transactions entered into after March 15, 1999. SOP 98-9 deals with the determination of vendor specific objective evidence of fair value in multiple element arrangements such as maintenance agreements sold in conjunction with software packages. The Company does not believe this will have a material impact on the Company's financial position, results of operations or liquidity. Cost of sales-product costs represents the cost to purchase, manufacture and distribute PC and console product units. Manufacturers of the Company's PC software are located worldwide and are readily available. Console CDs and cartridges are manufactured by the respective video game console manufacturers, Sony, Nintendo and Sega or its agents, who often require significant lead time to fulfill the Company's orders. Cost of sales-royalties and software amortization represents amounts due developers, product owners and other royalty participants as a result of product sales, as well as amortization of capitalized software development costs. The costs incurred by the Company to develop products are accounted for in accordance with accounting standards whichthat provide for the capitalization of certain software development costs once technological feasibility is established and such costs are determined to be recoverable. VariousAdditionally, various contracts are maintained with developers, product owners or other royalty participants, which state a royalty rate, territory and term of agreement, among other items. Upon a product'sCommencing upon product release, prepaid royalties are amortized to cost of sales-royalties and license fees are charged to royalty expense based onsoftware amortization at the contractual royalty rate. Therate based on actual net product sales, or on the ratio of current revenues to total projected revenues, whichever is greater and capitalized software costs are then amortized to cost of sales-royalties and software amortization on a straight-line basis over the estimated product life commencing upon product release or on the ratio of current revenues to total projected revenues, whichever amortization amount is greater. For products that have been released, management evaluates the future recoverability of prepaid royalties and capitalized software costs on a quarterly basis. Prior to a product's release, the Company expenses,charges to expense, as part of product development costs, capitalized costs when, in management's estimate, such amounts are not recoverable. The following criteria is used to evaluate recoverability: historical performance of comparable products; the commercial acceptance of prior products released on a given game engine; orders for the product prior to its release; estimated performance of a sequel product based on the performance of the product on which the sequel is based; and actual development costs of a product as compared to the Company's budgeted amount. 1822 The following table sets forth certain consolidated statements of operations data for the periods indicated as a percentage of total net revenues and also breaks down net revenues by territory, platform and channel:
Fiscal Years Endedyears ended March 31, -------------------------------------------------------------------------------------------------------------------------------------------- (In thousands) -------------------------------------------------------------------------------------------------------------------------------------------- Restated ------------------------------------------------ 2000 1999 1998 1997 ------------------- ------------------- ------------------ Restated Restated ------------------- ---------------------------------------- ----------------------- ----------------------- STATEMENT OF OPERATIONS DATA: Net revenues: $436,485revenues $ 572,205 100.0% $312,058$ 436,526 100.0% $189,239$ 312,906 100.0% Costs and expenses: Cost of sales - product costs 319,422 55.8% 260,041 59.6% 176,188 56.5% 103,124 54.5%56.3% Cost of sales - royalties and software amortization 37,825 8.7%91,238 15.9% 36,990 8.5% 29,840 9.6% 13,108 6.9%9.5% Product development 21,422 4.9% 27,393 8.8% 20,470 10.8%26,275 4.6% 22,875 5.2% 28,285 9.0% Sales and marketing 66,41993,878 16.4% 66,420 15.2% 47,714 15.3% 31,178 16.5% General and administrative 21,348 4.9% 18,401 5.9% 8,284 4.4%30,099 5.3% 21,948 5.0% 20,099 6.4% Amortization of intangible assets 41,618 7.3% 1,585 0.4% 1,562 0.5% 1,505 0.8% Merger expenses 600 0.1% 1,474 0.4% 39 - -------- ------ -------- ------ -------- ---------------- ---------- ----------- ---------- ----------- ---------- Total costs and expenses 409,240 93.8% 302,572602,530 105.3% 409,859 93.9% 303,688 97.0% 177,708 93.9% -------- ------ -------- ------ -------- ---------------- ---------- ----------- ---------- ----------- ---------- Income (loss) from operations 27,245 6.2% 9,486(30,325) (5.3%) 26,667 6.1% 9,218 3.0% 11,531 6.1% Interest income (expense), net (3,030)(8,411) (1.5%) (3,031) (0.7%) (1,112) (0.3%(0.4%) 81 - -------- ------ -------- ------ -------- ------ Net---------- ---------- ----------- ---------- ----------- ---------- Income (loss) before income beforetax provision for income taxes 24,215 5.5% 8,374 2.7% 11,612 6.1%(38,736) (6.8%) 23,636 5.4% 8,106 2.6% Income tax provision 8,961(benefit) (4,648) (0.8%) 8,745 2.0% 3,235 1.1% 3,981 2.1% -------- ------ -------- ------ -------- ------3,136 1.0% ---------- ---------- ----------- ---------- ----------- ---------- Net income (loss) $(34,088) (6.0%) $ 15,254 3.5%14,891 3.4% $ 5,1394,970 1.6% $ 7,631 4.0% ======== ====== ======== ====== ======== ================= ========== =========== ========== =========== ========== NET REVENUES BY TERRITORY: United States $149,664$ 279,165 48.8% $ 149,705 34.3% $ 89,936 28.8% $ 65,695 34.7%90,784 29.0% Europe 277,524 48.5% 278,032 63.7% 208,817 66.9% 113,456 60.0%66.7% Other 15,516 2.7% 8,789 2.0% 13,305 4.3% 10,088 5.3% -------- ------ -------- ------ -------- ---------------- ---------- ----------- ---------- ----------- ---------- Total net revenues $436,485$ 572,205 100.0% $312,058$ 436,526 100.0% $189,239$ 312,906 100.0% ======== ====== ======== ====== ======== ================= ========== =========== ========== =========== ========== NET REVENUES BY CHANNEL: Retailer/Reseller $417,447$ 545,482 95.3% $ 417,490 95.6% $286,953$ 287,801 92.0% $168,190 88.9% OEM, Licensing, on-line and other 19,03826,723 4.7% 19,036 4.4% 25,105 8.0% 21,049 11.1% -------- ------ -------- ------ -------- ---------------- ---------- ----------- ---------- ----------- ---------- Total net revenues $436,485$ 572,205 100.0% $312,058$ 436,526 100.0% $189,239$ 312,906 100.0% ======== ====== ======== ====== ======== ================= ========== =========== ========== =========== ========== ACTIVITY/PLATFORM MIX: Publishing: Console $111,621 54.3% $ 26,302 19.8%281,204 49.1% $ 18,182 20.7%111,662 25.6% $ 27,150 8.7% PC 115,487 20.2% 93,880 45.7%21.5% 106,524 80.2% 69,812 79.3% -------- ------ -------- ------ -------- ------34.0% ---------- ---------- ----------- ---------- ----------- ---------- Total publishing net revenues $205,501$ 396,691 69.3% $205,542 47.1% $132,826 42.6% $ 87,994 46.5% -------- ------ -------- ------ -------- ------133,674 42.7% ---------- ---------- ----------- ---------- ----------- ---------- Distribution: Console $156,584 67.8% $105,588 58.9% $ 50,298 49.7%129,688 22.7% $ 156,584 35.9% $ 105,588 33.8% PC 45,826 8.0% 74,400 32.2%17.0% 73,644 41.1% 50,947 50.3% -------- ------ -------- ------ -------- ------23.5% ---------- ---------- ----------- ---------- ----------- ---------- Total distribution net revenues $230,984$ 175,514 30.7% $ 230,984 52.9% $179,232 57.4% 101,245 53.5% -------- ------ -------- ------ -------- ------$ 179,232 57.3% ---------- ---------- ----------- ---------- ----------- ---------- Total net revenues $436,485$ 572,205 100.0% $312,058$ 436,526 100.0% $189,239$ 312,906 100.0% ======== ====== ======== ====== ======== ================= ========== ========== =========== =========== ==========
1923 RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 19982000 AND 1999 Net loss for fiscal year 2000 was $34.1 million or $1.38 per diluted share, as compared to net income of $14.9 million or $0.62 per diluted share in fiscal year 1999. The 2000 results were negatively impacted by a strategic restructuring charge totaling $70.2 million, approximately $61.8 million net of tax, or $2.50 per diluted share. STRATEGIC RESTRUCTURING PLAN In the fourth quarter of fiscal 2000, the Company finalized a strategic restructuring plan to accelerate the development and sale of interactive entertainment and leisure products for the next-generation consoles and the Internet. Costs associated with this plan amounted to $70.2 million, approximately $61.8 million net of taxes, and were recorded in the consolidated statement of operations in the fourth quarter of fiscal year 2000 and classified as follows: Net revenues $11.7 Cost of sales - royalties and software amortization 11.9 Product development 4.2 General and administrative 5.2 Amortization of intangible assets 37.2 ---- $70.2 =====
The component of the charge included in amortization of intangible assets represents a write down of intangibles including goodwill, relating to Expert Software, Inc. ("Expert"), one of the Company's value publishing subsidiaries, totaling $26.3 million. The Company is consolidating Expert into Head Games, forming one integrated business unit. As part of this consolidation, the Company is discontinuing substantially all of Expert's product lines, terminating substantially all of Expert's employees and phasing out the use of the Expert name. In addition, a $10.9 million write down of goodwill relating to TDC, an OEM business unit, was recorded. In the past year, the OEM market has gone through radical changes due to price declines of PCs and hardware accessories. The sum of the undiscounted future cash flow of these assets was not sufficient to cover the carrying value of these assets and as such was written down to fair market value. The component of the charge included in net revenues and general and administrative expense represents costs associated with the planned termination of a substantial number of third party distributor relationships in connection with the Company's realignment of its worldwide publishing business to leverage its existing sales and marketing organizations and improve the control and management of its products. These actions have resulted in an increase in the allowance for sales returns of $11.7 million and the allowance for doubtful accounts of $3.4 million. The plan also includes a severance charge of $1.2 million for employee redundancies. The plan is expected to be completed by the fourth quarter of fiscal 2001. The components of the charge included in cost of sales - royalties and software amortization and product development represent costs to write down certain assets associated with exiting certain product lines and re-evaluating other product lines which resulted in reduced expectations. NET REVENUES Net revenues for the year ended March 31, 2000 increased 31.1% from the same period last year, from $436.5 million to $572.2 million. The increase was due to a 53.2% increase in console net revenues from $268.2 million to $410.9 million, slightly offset by a 4.1% decrease in PC net revenues from $168.3 million to $161.3 million. Domestic net revenues grew 86.5% from $149.7 million to $279.2 million. International net revenues remained fairly constant, increasing 2.2% from $286.8 million to $293.0 million. Publishing net revenues for the year ended March 31, 2000 increased 93.0% from $205.5 million to $396.7 million. This increase primarily was due to publishing console net revenues increasing 151.8% from $111.7 million to $281.2 million. The increase in publishing console net revenues was attributable to the release in fiscal 2000 of a larger number of titles that sold well in the marketplace, including Blue Stinger (Dreamcast), Space Invaders (PlayStation, N64 and Gameboy Color) and Toy Story II (PlayStation and N64), Tarzan (N64 and Gameboy), A Bug's Life (N64), Vigilante 8: Second Offense (PlayStation, N64 and Gameboy), WuTang: Shaolin Style (PlayStation) and 24 Tony Hawk's Pro Skater (PlayStation, N64 and Gameboy). Publishing PC net revenues for the year ended March 31, 2000 increased 23.0% from $93.9 million to $115.5 million. This increase primarily was due to the release of Quake 3 Arena, Cabela's Big Game Hunter III, Star Trek: Hidden Evil, Armada and Soldier of Fortune. For the year ended March 31, 2000, distribution net revenues decreased 24.0% from prior fiscal year from $231.0 million to $175.5 million. The decrease was mainly attributable to the pricing reductions initiated by leading retail chains in the United Kingdom (the "UK"), which in turn reduced market share for the independent retail channel in the UK to which the Company's CentreSoft subsidiary is the sole authorized Sony PlayStation distributor, as well as the unfavorable impact of foreign currency translation rates. Net OEM licensing, on-line and other revenues for the fiscal year ended March 31, 2000 increased 40.4% from $19.0 million to $26.7 million. The increase was primarily due to an increase in licensing revenues, partially offset by a decrease in OEM revenues. Licensing revenues increased due to an increase in the number of licensing arrangements entered into by the Company during fiscal 2000. OEM revenues decreased due to the radical changes being experienced in the OEM market resulting from declining prices of personal computers and hardware accessories and the reluctance of hardware manufacturers to produce large inventories. COSTS AND EXPENSES Cost of sales - product costs represented 55.8% and 59.6% of net revenues for the year ended March 31, 2000 and 1999, respectively. The decrease in cost of sales - product costs as a percentage of net revenues for the year ended March 31, 2000 was due to the decrease in distribution net revenue, partially offset by a higher publishing console net revenue mix. Distribution products have a higher per unit product cost than publishing products, and console products have a higher per unit product cost than PC products. Cost of sales - royalty and software amortization expense represented 15.9% and 8.5% of net revenues for the year ended March 31, 2000 and 1999, respectively. The increase in cost of sales - royalty and software amortization expense as a percentage of net revenues was primarily due to changes in the Company's product mix, with an increase in the number of branded products with higher royalty obligations as compared to the prior fiscal year and increases in amortization expenses relating to the release of a greater number of products with capitalizable development costs. The increase also partially resulted from $11.9 million of write-offs recorded in the fourth quarter of fiscal 2000 relating to the Company's restructuring plan as previously described. Product development expenses for the year ended March 31, 2000 increased 14.9% from the same period last year from $22.9 million to $26.3 million. The increase was primarily due to a $4.2 million charge to product development costs relating to the Company's restructuring plan as previously described. As a percentage of net revenues, total product creation costs (i.e., royalties and software amortization expense plus product development expenses) increased from 13.7% to 20.5% for the year ended March 31, 2000. Such increases were attributable to the increases in product development costs, as described above. Sales and marketing expenses for the year ended March 31, 2000 increased 41.3% from the same period last year, from $66.4 million to $93.9 million, but remained relatively constant as a percentage of net revenues at 16.4% and 15.2% at March 31, 2000 and 1999, respectively. The increase in the amount of sales and marketing expenses primarily was due to an increase in the number of titles released and an increase in television advertising during the final quarter of fiscal 2000 to support the Company's premium titles. General and administrative expenses for the year ended March 31, 2000 increased 37.1% from the prior fiscal year, from $21.9 million to $30.1 million. As a percentage of net revenues, general and administrative expenses remained relatively constant at approximately 5%. The increase in the amount of general and administrative expenses was due to an increase in worldwide administrative support needs and headcount related expenses and charges incurred in conjunction with the Company's restructuring plan previously described. Amortization of intangibles increased substantially from $1.6 million in fiscal 1999 to $41.6 million in fiscal 2000. This was due to the write-off of goodwill acquired in purchase acquisitions. 25 OPERATING INCOME (LOSS) Operating income (loss) for the year ended March 31, 2000, was $(30.3) million, compared to $26.7 million in fiscal 1999. Publishing operating income (loss) for the year ended March 31, 2000 decreased 382.3% to $(35.0) million, compared to $12.4 million in the prior fiscal year. The decrease reflects the charges incurred in conjunction with the Company's restructuring plan as previously described, which predominantly impacted the Company's publishing segment. Distribution operating income for the year ended March 31, 2000 decreased 66.9% to $4.7 million, compared to $14.3 million in the prior fiscal year. The period over period change primarily was due to a decrease in distribution sales and the UK price reductions, as noted earlier. OTHER INCOME (EXPENSE) Interest expense, net of interest income, increased to $8.4 million for the year ended March 31, 2000, from $3.0 million for the year ended March 31, 1999. This increase primarily was the result of interest costs associated with the Company's $125 million term loan and revolving credit facility obtained in June 1999. PROVISION FOR INCOME TAXES The income tax benefit of $4.6 million for the year ended March 31, 2000 reflects the Company's effective income tax rate of approximately 12%. The significant items generating the variance between the Company's effective rate and its statutory rate of 34% are nondeductible goodwill amortization and an increase in the Company's deferred tax asset valuation allowance, partially offset by research and development tax credits. The realization of deferred tax assets primarily is dependent on the generation of future taxable income. Management believes that it is more likely than not that the Company will generate taxable income sufficient to realize the benefit of net deferred tax assets recognized. RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1999 AND 1998 NET REVENUES Net revenues for the fiscal year ended March 31, 1999 increased 39.9%39.5%, from $312.1$312.9 million to $436.5 million, over the prior year. The United States and international net revenues increased 66.5%64.9%, from $89.9$90.8 million to $149.7 million, and 29.1%, from $222.1 million to $286.8 million, respectively, over the prior year. The increase in overall net revenues was composed of a 103.3%102.1% increase in console net revenues, from $131.9$132.7 million to $268.2 million, andpartially offset by a 6.6% decrease in PC net revenues, from $180.2 million to $168.3 million, respectively, over the prior year. Publishing net revenues for the year ended March 31, 1999 increased 54.7%53.8%, from $132.8$133.7 million to $205.5 million, over the prior year. Distribution net revenues for the year ended March 31, 1999 increased 28.9%, from $179.2 million to $231.0 million, over the prior year. These increases were primarily attributable to the increases in publishing and distribution console net revenues. Publishing console net revenues for the year ended March 31, 1999 increased 324.3%311.3%, from $26.3$27.2 million to $111.6$111.7 million, over the prior year. This increase was primarily attributable to the initial release of Tenchu (PlayStation), Apocalypse (PlayStation), Vigilante 8 (PlayStation and N64), Asteroids (PlayStation), Nightmare Creatures (PlayStation and N64) and Activision Classics (PlayStation). Publishing PC net revenues for the year ended March 31, 1999 decreased 11.8%11.9%, from $106.5 million to $93.9 million, over the prior year. This decrease was primarily due to the release of Quake II (Windows 95) in the prior year. Publishing PC initial releases during the year ended March 31, 1999 included Civilization: Call to Power, Cabela's Big Game Hunter, Cabela's Big Game Hunter 2, Asteroids and Sin. Distribution console net revenues increased 48.3%, from $105.6 million to $156.6 million, over the prior year. This increase was primarily attributable to an increase in the number of products released for PlayStation and Nintendo N64 and an increase in the Playstation and N64 hardware installed base. Distribution PC net revenues increased 1.1%1.0%, from $73.6 million to $74.4 million, over the prior year. Distribution PC net revenues remained relatively constant during this period as the number of new PC titles released by the publishers utilizing the Company's distribution services in each year were approximately the same. 26 Net OEM, licensing, on-line and other revenues for the fiscal year ended March 31, 1999 decreased 24.3%24.2% to $19.0 million from $25$25.1 million in the prior year. This decrease was due to the release of fewer PC titles during the fiscal year that were compatible with OEM customers' products. COSTS AND EXPENSES Cost of sales - product costs represented 59.6% and 56.5%56.3% of net revenues for the years ended March 31, 1999 and 1998, respectively. The increase in cost of sales - product costs as a percentage of net revenues was due to the increase in the sales mix related to console products. Console products have a higher per unit product cost than PC products. Cost of sales - royalties and software amortization expense represented 8.7%8.5% and 9.6%9.5% of net revenues for the years ended March 31, 1999 and 1998, respectively. The decrease in cost of sales - royalties and software amortization expense as a percentage of net revenues was due to changes in the Company's product mix, with an increase in products with lower royalty obligations as compared to the prior year. Product development expenses for the year ended March 31, 1999 decreased 21.9%19.1% from the prior year, from $27.4$28.3 million to $21.4$22.9 million. The decrease in the amount of product development expenses for the year ended March 31, 1999 was primarily due to an increase in capitalizable development costs relating to sequel products being developed on proven engine technologies which have been capitalized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or otherwise Marketed" ("SFAS 86"). As a percentage of net revenues, total product creation costs (i.e., royalties and software amortization expenses plus product development expenses) for the year ended March 31, 1999, decreased to 13.6%13.7% from 18.4%18.5% in the prior year. This decrease was attributable to decrease in the effective royalty rate, as discussed above, and an increase in development costs capitalized under SFAS 86, also as discussed above. 20 Sales and marketing expenses for the year ended March 31, 1999 increased 39.2% from the same period last year, from $47.7 million to $66.4 million. As a percentage of net revenues, sales and marketing expenses decreased slightly from 15.3% to 15.2%.remained constant. The increase in the amount of sales and marketing expenses for the year ended March 31, 1999 was primarily due to a significant increase in television advertising and an increase in the number of products released during the current year. However, as a percentage of net revenues, such expenses have remained relatively constant. General and administrative expense for the year ended March 31, 1999 increased 15.8%9.2% from the same period last year, from $18.4$20.1 million to $21.3$21.9 million. As a percentage of net revenues, general and administrative expenses decreased from 5.9%6.4% to 4.9%5.0%. The period over period increase in the amount of general and administrative expenses primarily was due to an increase in worldwide administrative support needs and headcount related expenses. The decrease as a percentage of net revenues relates primarily to efficiencies gained in controlling fixed costs and the increase in net revenues. OTHER INCOME (EXPENSE) Interest expense, net of interest income, increased to $3.0 million for the year ended March 31, 1999, from $1.1 million for the year ended March 31, 1998. This increase primarily was the result of interest costs associated with the Company's convertible subordinated notes issued in December 1997 and short term borrowings under bank line of credit agreements which had a greater average outstanding balance in the fiscal year ended March 31, 1999. PROVISION FOR INCOME TAXES The income tax provision of $9.0$8.7 million for the year ended March 31, 1999, reflects the Company's effective income tax rate of approximately 37%37.0%. The significant items generating the variance between the Company's effective rate and its statutory rate of 34% are nondeductible goodwill amortization and an increase in the Company's deferred tax asset valuation allowance, partially offset by research and development tax credits. The realization of deferred tax assets primarily is dependent on the generation of future taxable income. Management believes that it is more likely than not that the company will generate taxable income sufficient to realize the benefit of deferred tax assets recognized. RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1997 AND 1998 NET REVENUES Net revenues for the year ended March 31, 1998 increased 65.0%, from $189.2 million to $312.1 million over the prior year. Net revenues in the United States and internationally increased 36.8%, from $65.7 million to $89.9 million and 79.8%, from $123.5 million to $222.1 million, respectively, over the prior year. The increase in overall net revenues was comprised of a 92.6% increase in console net revenues, from $68.5 million to $131.9 million, and a 49.2% increase in PC net revenues, from $120.8 million to $180.2 million, respectively, over the prior year. Publishing net revenues for the year ended March 31, 1998 increased 50.9%, from $88.0 million to $132.8 million, over the prior year. Distribution net revenues for the year ended March 31, 1998 increased 77.1%, from $101.2 million to $179.2 million, over the prior year. These increases primarily were attributable to the increases in publishing PC net revenues and distribution console net revenues. Publishing console net revenues for the year ended March 31, 1998 increased 44.5%, from $18.2 million to $26.3 million, over the prior year. This increase primarily was attributable to the initial release of Pitfall 3D (PlayStation), Nightmare Creatures (PlayStation) and Car and Driver's Grand Tour Racing (PlayStation.) Publishing PC net revenues for the year ended March 31, 1998 increased 52.6%, from $69.8 million to $106.5 million, over the prior year. This increase was primarily due to the release of Quake II (Windows 95), Dark Reign: The Future of War (Windows 95), Hexen II (Windows 95), Battlezone (Windows 95) and Heavy Gear (Windows 95). Distribution console net revenues increased 109.9%, from $50.3 million to $105.6 million, over the prior year. This increase was primarily attributable to an increase in the number of products released for PlayStation and N64 and an increase in the PlayStation and N64 hardware installed base. Distribution PC net revenues increased 44.6%, from $50.9 million to $73.6 million, over the prior year. Additionally, distribution net revenues increased over the prior fiscal year due to the fact that CentreSoft, which began operations in June 1996, contributed only ten months of revenue for the year ended March 31, 1997, as opposed to twelve months for the year ended March 31, 1998. 2127 Net OEM, licensing, on-line and other revenue, increased 19.5% to $25.1 million from $21.0 million over the prior year. This increase was due to an increase in the number of titles made available during the year to OEMs, including enhanced 3-D versions of various products. COSTS AND EXPENSES Cost of sales - product costs represented 56.5% and 54.5% of net revenues for the years ended March 31, 1998 and 1997, respectively. The increase in cost of sales - product costs as a percentage of net revenues was due to the increase in the sales mix of console net revenues versus PC net revenues. Cost of sales - royalties and software amortization expense represented 9.6% and 6.9% of net revenues for the years ended March 31, 1998 and 1997, respectively. The increase in cost of sales - royalties and software amortization expense as a percentage of net revenues was due to changes in the Company's product mix and primarily was due to royalties related to Quake II. Product development expenses for the year ended March 31, 1998 increased 33.7% from the prior year, from $20.5 million to $27.4 million. As a percentage of net revenues, product development expenses decreased from 10.8% to 8.8%. The increase in the amount of product development expenses for the year ended March 31, 1998 was primarily due to the increased number of new products in development and the increased costs associated with the enhanced content and new technologies incorporated into such products. In addition, product development expense as a percentage of net revenues decreased primarily as a result of an increase in net revenues and an increase in costs capitalized in accordance with SFAS No. 86. As a percentage of net revenues, total product creation costs (i.e., royalties and software amortization expense plus product development expense) for the year ended March 31, 1998, increased to 18.4% from 17.7% in the prior year. This increase was attributable to increase in the effective royalty rate, as discussed above. Sales and marketing expenses for the year ended March 31, 1998 increased 52.9% from the period year, from $31.2 million to $47.7 million. As a percentage of net revenues, sales and marketing expenses decreased slightly from 16.5% to 15.3%. The increase in the amount of sales and marketing expenses for the year ended March 31, 1998 was primarily due to increased marketing and promotional activities necessary to release new titles in an increasingly competitive environment and the Company's expansion of it's European sales and marketing infrastructure. However, as a percentage of net revenues, such expense has remained fairly consistent. General and administrative expense for the year ended March 31, 1998 increased 121.7% from the same period last year, from $8.3 million to $18.4 million. As a percentage of net revenues, general and administrative expenses increased from 4.4% to 5.9%. The period over period increase in the amount and as a percentage of net revenues of general and administrative expenses for the year ended March 31, 1998 primarily was due to an increase in worldwide administrative support needs and headcount related expenses. OTHER INCOME (EXPENSE) Interest expense, net of interest income, increased to $1.1 million for the year ended March 31, 1998, from net interest income of $81,000 for the year ended March 31, 1997. This increase primarily was the result of interest costs associated with the Company's convertible subordinated notes issued in December 1997 and short term borrowings under bank line of credit agreements. PROVISION FOR INCOME TAXES The income tax provision of $3.2 million for the year ended March 31, 1998, reflects the Company's estimated effective income tax rate of approximately 38.6%. The realization of deferred tax assets primarily is dependent on the generation of future taxable income. Management believes that it is more likely than not that the company will generate taxable income sufficient to realize the benefit of deferred tax assets recognized. QUARTERLY OPERATING RESULTS The Company's quarterly operating results have in the past varied significantly and will likely vary significantly in the future, depending on numerous factors, several of which are not under the Company's control. See Item 1. Business1 "Business - "CertainCertain Cautionary Information.Information" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Restructuring." Accordingly, the Company believes that period-to-period comparisons of its operating results are not necessarily meaningful and should not be relied upon as indications of future performance. 22 The following table is a comparative breakdown of the Company's quarterly results for the immediately preceding eight quarters (amounts in thousands, except per share data):
Quarter ended ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Restated ------------------------------------------------------------------------------------------------------------- March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, 2000 (1) 1999 1999 1999 1999 1998 1998 1998 1998 1997 1997 1997 ----------------------------- -------- --------- --------------------------- --------- -------- --------- -------- Net revenues $115,235$103,838 $268,862 $115,363 $84,142 $115,266 $193,537 $66,182 $61,531 $68,123 $139,587 $65,788 $38,560$61,541 Operating income (loss) 9,337 26,328 (2,783) (5,637) 1,536 13,742 3,591 (9,383)(65,990) 38,241 3,525 (6,101) 9,053 25,873 (2,735) (5,524) Net income (loss) 5,210 16,022 (2,234) (3,744) 689 8,334 2,041 (5,925) Net income(52,877) 22,301 1,063 (4,575) 5,032 15,736 (2,206) (3,671) Basic earnings (loss) per basic share $ 0.23 $ 0.72 $(2.07) 0.89 0.04 (0.19) 0.22 0.69 (0.10) $ (0.17) $ 0.03 $ 0.39 $ 0.09 $ (0.28) Net income(0.16) Diluted earnings (loss) per diluted share $ 0.22 $ 0.64 $(2.07) 0.75 0.04 (0.19) 0.21 0.61 (0.10) $ (0.17) $ 0.03 $ 0.36 $ 0.09 $ (0.28)(0.16)
(1) See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations Restructuring." LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents decreased $41.4increased $17.0 million, from $74.2$33.0 million at March 31, 1999 to $50.0 million at March 31, 2000. This was in comparison to a $41.3 million decrease in cash flows in fiscal year 1999 from $74.3 million at March 31, 1998 to $32.8$33.0 million at March 31, 1999. Approximately $18.1 millionThis increase in cash in fiscal year 2000 resulted from $77.4 million and cash equivalents was provided by operating activities during the year ended March 31, 1999 versus $31.1$42.0 million provided by operating activities and financing activities, respectively, offset by $99.5 million utilized in investing activities. The increase in cash flows provided by operating activities from fiscal 1998. This change was1999 to fiscal 2000 primarily attributableis due to the increases during the year endeddecreases in accounts receivable trade from March 31, 1999 to March 31, 2000. The increase in accounts receivable, other current assets, inventories, and a decreasecash flows provided by financing activities from fiscal 1999 to fiscal 2000 primarily is due to $22.5 million in accounts payable resultingproceeds from the Company's overall growth during theissuance of common stock pursuant to employee stock option plans and employee stock purchase plans in fiscal year ended March 31, 1999 partially offset by an2000 and $25.0 million in proceeds from the issuance of the term loan portion of the $125 million U.S. bank credit facility obtained in June 1999. The increase in accrued expenses. Cash and cash equivalentsflows used in investing activities was approximately $64.3 million during the year ended March 31,from fiscal 1999 versus $43.3 million used in investing activities during the year ended March 31, 1998. The increase in cash used in investing activities wasto fiscal 2000 primarily is due to $20.5 million of cash expended in connection with the significant increaseacquisition of Expert in June 1999. Additionally, in fiscal 2000, investments in prepaid royalties and capitalized software costs incurred byincreased $14.0 million from $60.5 million in fiscal 1999 to $74.5 million in fiscal 2000 in connection with the Company as a result of its execution of new license agreements granting the Company long termlong-term rights to the intellectual property of third parties, as well as the acquisition of publishing or distribution rights to products being developed by third parties. Capital expenditures totaled approximately $3.8Comparatively, in fiscal year 1999, only $18.2 million for the year ended March 31, 1999 versus $9.3and $7.2 million in the prior year. The decrease in capital expenditures was due to the cost relating to the Company moving its Los Angeles office to a new facility in Santa Monica, California in the prior year. Cash and cash equivalents provided by cash flows from operating activities and financing activities, totaled $7.2 million for the year ended March 31, 1999 versus $62.9 millionrespectively, partially offsetting cash used in the prior year. The decrease was due to the issuanceinvesting activities of $60 million of convertible subordinated debt in December 1997.$64.3 million. In connection with the Company's purchases of Nintendo N64 hardware and software cartridges for distribution in North America and Europe, Nintendo requires the Company to provide irrevocable letters of credit prior to accepting purchase orders from the Company for the purchase of these cartridges.Company. Furthermore, Nintendo maintains a policy of not accepting returns of Nintendo N64 hardware and software cartridges. Because of these and other factors, the carrying of an inventory of Nintendo N64 hardware and software cartridges entails significant capital and risk. As of March 31, 1999,2000, the Company had a $40.0$5.5 million revolving creditof N64 hardware and lettersoftware cartridge inventory on hand, which represented approximately 14% of credit facility (the "Prior Facility") with a group of banks. The Prior Facility currently providesall inventory. In December 1997, the Company withcompleted the abilityprivate placement of $60.0 million principal amount of 6 3/4% convertible subordinated notes due 2005 (the "Notes"). The Notes are convertible, in whole or in part, at the option of the holder at any time after December 22, 1997 (the date of original issuance) and prior to borrow funds and issue lettersthe close of credit against eligible accounts receivable up to $40.0 million. The Prior Facility was scheduled to expire in October 2001. Asbusiness on the business day immediately preceding the maturity date, unless previously redeemed or repurchased, into common stock, 28 $.000001 par value, of March 31, 1999, the Company, had $22.4 millionat a conversion price of $18.875 per share, (equivalent to a conversion rate of 52.9801 shares per $1,000 principal amount of Notes), subject to adjustment in letterscertain circumstances. The Notes are redeemable, in whole or in part, at the option of credit outstanding and no borrowings against the Prior Facility (there were no outstanding letters of credit or borrowings against the Prior Facility in the fiscal year ended March 31, 1998). In addition, the Company had a $2 million line of credit agreement (the "Asset Line") with a bank that expired in September 1998. Approximately $1.1 million and $1.2 million was outstandingat any time on this line as of Marchor after January 10, 2001. If redemption occurs prior to December 31, 1999 and 1998, respectively. In June 1999,2003, the Company replaced the Prior Facility withmust pay a $125premium on such redeemed Notes. The Company has a $125.0 million revolving credit facility and term loan (the "New Facility") with a new group of banks that(the "U.S. Facility"). The U.S. Facility provides the Company with the ability to borrow up to $100$100.0 million and issue letters of credit up to $80 million on a revolving basis against eligible accounts receivable and inventory. (See Note 13, "Subsequent Events" in the footnotes to the Consolidated Financial Statements.) The $25$25.0 million term loan portion of the NewU.S. Facility was used to acquirefund the acquisition of Expert Software, Inc. in June 1999 and to pay costs related to such acquisition and the securing of the NewU.S. Facility. The term loan has a three year term with principal amortization on a straight linestraight-line quarterly basis beginning December 31, 1999 and a borrowing rate ofbased on the banks' base rate (which is generally equivalent to the published prime rate) plus 2.0%,2% or the LIBOR rate 3.0%plus 3%. The revolving portion of the NewU.S Facility has a borrowing rate ofbased on the banks' base rate plus 1.75% or the LIBOR plus 2.75% (weighted average interest rate of 2.75%.approximately 9.50% for the year ending March 31, 2000) and matures June 2002. The Company pays a commitment fee of 1/2% based on the unused portion of the revolving line. In addition,The U.S. Facility is collateralized by substantially all of the assets of the Company and its U.S. subsidiaries. The U.S. Facility contains various covenants which limit the ability of the Company to incur additional indebtedness, pay dividends or make other distributions, create certain liens, sell assets, or enter into certain mergers or acquisitions. The Company was in compliance with these covenants as of March 31, 2000. The Company is also required to maintain specified financial ratios related to net worth and fixed charges. As of March 31, 2000, $20.0 million was outstanding under the term loan portion of the U.S. Facility and $2.5 million was outstanding under the revolving portion of the U.S. Facility. No letters of credit were outstanding against the revolving portion of the U.S. Facility at March 31, 2000. On June 8, 2000, the Company amended certain of the covenants of its U.S. Facility. The amended term loan and credit facility allows for the purchase by the Company of up to $15.0 million in shares of its common stock as well as its convertible subordinated notes in accordance with the Company's CentreSoft subsidiarystock repurchase program (described in Note 15 to the consolidated financial statements), the distribution of "Rights" under the Company's shareholders' rights plan (described in Note 15 to the consolidated financial statements), as well as the reorganization of the Company's organizational structure into a holding company form. The Company has a revolving credit facility through its CD Contact subsidiary in the Netherlands (the "UK"Netherlands Facility"). The Netherlands Facility permits revolving credit loans and letters of credit up to Netherlands Guilder ("NLG") 45 million ($19.4 million) at March 31, 2000, based upon eligible accounts receivable and inventory balances. The Netherlands Facility is due on demand, bears interest at a Eurocurrency rate plus 1.25% (weighted average interest rate of 5.5% of March 31, 2000) and matures March 2001. Letters of credit outstanding against the Netherlands Facility at March 31, 2000 were NLG 3.8 million ($1.6 million). The Company had $3.5 million of borrowings outstanding under the Netherlands Facility at March 31, 2000. The Company also has revolving credit facilities with its bankCentreSoft subsidiary located in the United Kingdom, for approximately $11.2 million.(the "UK Facility") and its NBG subsidiary located in Germany, (the "German Facility"). The UK Facility can be used for working capital requirements and expiresprovides for British Pounds ("GBP") 7 million ($11.2 million) of revolving loans and GBP 6 million ($9.6 million) of letters of credit, bears interest at LIBOR plus 2%, is collateralized by substantially all of the assets of the subsidiary and matures in JuneJuly 2000. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. The Company had nowas in compliance with these covenants as of March 31, 2000. No borrowings were outstanding against the UK facility at March 31, 2000. Letters of credit of GBP 6.0 million ($9.6 million) were outstanding against the UK Facility at March 31, 2000. The German Facility can be used for working capital requirements and provides for revolving loans up to Deutsche Marks ("DM") 4 million ($1.9 million), bears interest at 6.25%, is collateralized by a cash deposit of approximately GBP 650,000 ($1.0 million) made by the Company's CentreSoft subsidiary and has no expiration date. No borrowings were outstanding against the German Facility as of March 31, 1999.2000. In the Netherlands,normal course of business, the Company's CD Contact subsidiary hasCompany enters into contractual arrangements with third parties for the development of products. Under these agreements, the Company commits to provide specified payments to a credit facility ("developer, contingent upon the Netherlands Facility") with a bank that permits borrowings against eligible accounts receivable and inventory up to approximately $25 million. Borrowings under the Netherlands Facilitydeveloper's achievement of contractually specified milestones. Assuming all contractually specified milestones are due on demand and totaled $6.0achieved, for contracts in place as of March 31, 1999. Letters2000, the total future minimum contract commitment is approximately $42.9 million, of credit outstandingwhich $35.0 million, $6.6 million and $1.3 million is scheduled to be paid in fiscal 2001, 2002 and 2003, respectively. Additionally, under the Netherlands Facility totaled $6.9 million asterms of March 31, 1999.a production financing arrangement, the Company has a commitment to purchase two future PlayStation 2 titles from independent 29 third party developers upon their completion for an estimated $8.4 million. Failure by the developers to complete the project within the contractual time frame or specifications alleviates the Company's commitment. The Company historically has financed its acquisitions through the issuance of shares of its common stock. The Company will usecontinue to evaluate potential acquisition candidates as to the benefit they bring to the Company and as to the ability of the Company to make such acquisitions and maintain compliance with its bank facilities. In May 2000, the Board of Directors authorized the Company to purchase up to $15.0 million in shares of its common stock as well as its convertible subordinated notes. The shares and notes could be purchased in the open market or in privately negotiated transactions at such times and in such amounts as management deemed appropriate, depending on market conditions and other factors. As of June 19, 2000, the Company has repurchased 2.3 million shares of its common stock for approximately $15.0 million. The Company believes that it has sufficient working capital ($141.3160.1 million at March 31, 1999)2000), as well as the proceeds available from the NewU.S. Facility, the UK Facility, the Netherlands Facility and the NetherlandsGerman Facility, to finance the Company's operational 23 requirements for at least the next twelve months, including acquisitions of inventory and equipment, the funding of the development, production, marketing and sellingsale of new products, the acquisition of Expert, and the acquisition of intellectual property rights for future products from third parties.parties and the repurchase of common stock and notes under the Company's repurchase plan. INFLATION The Company's management currently believes that inflation has not had a material impact on continuing operations. YEAR 2000 Like many other software companies,The Company encountered no significant problems in its critical systems or products sold to customers in the transition to the year 2000 computer issue creates risk for the Company. If internal computer and embedded systems do not correctly recognize date information when the year changes to 2000, there could be an adverse impact on the Company's operations. The Company has initiated a comprehensive plan to prepare its internal computer and embedded systems for the year 2000 and is currently implementing changes to alleviate any year 2000 incapabilities. As part of such plan, the Company has purchased software programs that have been independently developed by third parties which will test year 2000 compliance for the majority of the Company's systems.2000. All of the entertainment and leisure software products currently being shipped by the Company have been tested for year 2000 compliance and have passed these tests. In addition, all such products currently in development are being tested as part of the normal quality assurance testing process and are scheduled to be released fully year 2000 compliant. Notwithstanding the foregoing, the year 2000 computer issue could still affect the ability of consumers to use the PC products sold by the Company. For example, if the computer system on which a consumer uses the Company's products is not year 2000 compliant, such noncompliance could affect the consumer's ability to use such products. Contingency plans currently have been developed to address the most material areas of exposure to the Company, such as adding network operating systems to back-up the Company's current network server and developing back-up plans for telecommunications with external offices and customers. In addition, a staffing plan has been developed to manually handle orders should there be a failure of electronic data interchange connections with its customers and suppliers. Management believes that the items mentioned above constitute the greatest risk of exposure to the Company and that the plans developed by the Company will be adequate for handling these items. The Company has contacted critical suppliers of products and services to determine that the suppliers' operations and the products and services they provide are year 2000 compliant. To assist suppliers (particularly trading partners using electronic data interchange) in evaluating their year 2000 issues, the Company has developed a questionnaire which indicates the ability of each supplier to address year 2000 incompatibilities. All critical suppliers and trading partners of the Company have responded to the questionnaire and confirmed the expectation that they will continue providing services and products through the change to 2000. Year 2000 compliance testing on substantially all of the Company's critical systems have been completed, and corresponding changes are expected to be made by July 1999. The costs incurred by the Company to date related to this testing and modification process are less than $100,000. The Company expects that the total cost of its year 2000 compliance plan will not exceed $200,000. The total estimated cost does not include potential costs related to any systems used by the Company's customers, any third party claims, or the costs incurred by the Company when it replaces internal software and hardware in the normal course of its business. The overall cost of the Company's year 2000 compliance plan is a minor portion of the Company's total information technology budget and is not expected to materially delay the implementation of any other unrelated projects that are planned to be undertaken by the Company. In some instances, the installation schedule of new software and hardware in the normal course of business has been accelerated to also afford a solution to year 2000 compatibility issues. The total cost estimate for the Company's year 2000 compliance plan is based on management's current assessment of the projects comprising the plan and is subject to change as the projects progress. Based on currently available information, management does not believe that the year 2000 issues discussed above related to the Company's internal systems or its products sold to customers will have a material adverse impact on the Company's financial condition or results of operations; however, the specific extent to which the Company may be affected by such matters is not certain. In addition, there can beare functioning normally, and no assurance that the failure by a supplier or another third party to ensure year 2000 compatibility would notproblems have a material adverse effect on the Company.been reported by any of its trading partners. The Company will continue to monitor its systems for any latent issues, but expects no significant year 2000 issues to arise. The Company continues to maintain contingency plans that management believes are adequate and customary to address any unexpected year 2000 problems. EURO CONVERSION On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the "euro" as their common currency. The sovereign currencies of the participating countries are scheduled to remain legal tender as denominations of the euro between January 1, 1999 and January 1, 2002. Beginning January 1, 2002, the participating countries will issue new euro-denominated bills and coins for use in cash transactions. No later than July 1, 2002, the participating countries will withdraw all bills and coins denominated in the sovereign currencies, so that the sovereign currencies no longer will be legal tender for any transactions, making conversion to the euro complete. The Company has performed an internal analysis of the possible implications of the euro conversion on the 24 Company's business and financial condition, and has determined that the impact of the conversion will be immaterial to its overall operations. The Company's wholly owned subsidiaries operating in participating countries represented 24.1%12% and 22.1%19% of the Company's consolidated net revenues for the years ended March 31, 19992000 and 1998,1999, respectively. RECENTLY ISSUED ACCOUNTING STANDARDS SFASStatement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company does not currently participate in hedging activities or own derivative instruments but plans to adopt SFAS No. 133 beginning April 1, 2001. 2530 ItemITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the potential loss arising from fluctuations in market rates and prices. The Company's market risk exposures primarily include fluctuations in interest rates and foreign currency exchange rates. The Company's market risk sensitive instruments are classified as "other than trading." The Company's exposure to market risk as discussed below includes "forward-looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates or foreign currency exchange rates. The Company's 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, interest rates and the timing of transactions. INTEREST RATE RISK The Company has a number of variable rate and fixed rate debt obligations, denominated both in U.S. dollars and various foreign currencies as detailed in Note 10 to the Consolidated Financial Statements appearing elsewhere in this Annual Report. The Company manages interest rate risk by monitoring its ratio of fixed and variable rate debt obligations in view of changing market conditions. Additionally, in the future, the Company may consider the use of interest rate swap agreements to further manage potential interest rate risk. As of March 31, 2000, the carrying value of the Company's variable rate debt was $26.0 million, which includes the U.S. Facility ($22.5 million) and the Netherlands Facility ($3.5 million). As of March 31, 1999, the carrying value of the Company's variable rate debt was $5.5 million, which was composed entirely of the Netherlands Facility. A hypothetical 1% increase in the applicable interest rates of the Company's variable rate debt would increase annual interest expense by approximately $260,000 and $55,000, as March 31, 2000 and 1999, respectively. The Company additionally has 6 3/4% convertible subordinated notes (the "Notes") that have a carrying value of $60.0 million and a fair value of $51.6 million as of March 31, 2000. The fair value of the Notes was determined based on quoted market prices. A hypothetical 1% increase in market rate of the Notes would decrease their fair value by approximately $516,000. FOREIGN CURRENCY EXCHANGE RATE RISK The Company transacts business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound sterling.GBP. The volatility of the poundGBP (and all other applicable currencies) will be monitored frequently throughout the coming year and. While the Company has not traditionally engaged in foreign currency hedging, the Company may in the future use hedging programs, currency forward contracts, currency options and/or other derivative financial instruments commonly utilized to reduce financial market risks. In June 1999, the Company obtained a $125 million revolving credit facility and term loan (the "New Facility") with a group of banks. The interest rate appliedrisks if it is determined that such hedging activities are appropriate to any debt outstanding under the New Facility is based on the published prime rate or LIBOR rate and is, therefore subject to a certain amount of risk arising from fluctuations in these rates. 26reduce risk. 31 ItemITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PagePAGE ---- Independent Auditors' Report F-1 Consolidated Balance Sheets as of March 31, 19992000 and 19981999 F-2 Consolidated Statements of Operations for the Years endedEnded March 31, 2000, 1999 1998 and 19971998 F-3 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended March 31, 2000, 1999 1998 and 19971998 F-4 Consolidated Statements of Cash Flows for the Years Ended March 31, 2000, 1999 1998 and 19971998 F-5 Notes to Consolidated Financial Statements F-6 Schedule II-Valuation and Qualifying Accounts and Reserves as of March 31, 2000, 1999 and 1998 and 1997 F-22F-29 Item 14. Exhibit Index F-23F-30
All other schedules of the Registrant are omitted because of the absence of conditions under which they are required or because the required information is included elsewhere in the financial statements or in the notes thereto. 2732 PART III ItemITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for its 19992000 Annual Meeting of Shareholders, entitled "Election of Directors" and "Executive Officers and Key Employees" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. ItemITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for its 19992000 Annual Meeting of Shareholders, entitled "Executive Compensation" and "Indebtedness of Management" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. ItemITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for its 19992000 Annual Meeting of Shareholders, entitled "Security Ownership of Certain Beneficial Owners and Management" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. ItemITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for its 19992000 Annual Meeting of Shareholders, entitled "Certain Relationships and Related Transactions" to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K. 2833 PART IV ItemITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS See Item 8. - Consolidated Financial Statements and Supplementary Data Index for Financial Statements and Schedule on page 2532 herein. 2. FINANCIAL STATEMENT SCHEDULE The following financial statement schedule of Activision, Inc. for the years ended March 31, 2000, 1999 1998 and 19971998 is filed as part of this report and should be read in conjunction with the Consolidated Financial Statements of Activision, Inc. Schedule II -- Valuation and Qualifying Accounts and Reserves Other financial statement schedules are omitted because the information called for is not required or is shown either in the Consolidated Financial Statements or the notes thereto. 3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
Exhibit Number Exhibit ------------- ------- 3.1 Amended2.1 Agreement and Restated ArticlesPlan of IncorporationMerger dated as of June 9, 2000 among Activision, Inc., dated October 15, 1992 (incorporated by reference to Exhibit 4.5 of Amendment No. 1 to the Company's Form S-8, Registration No. 33-48411 filed on June 1, 1993). 3.2 Bylaws of Activision Holdings, Inc. and ATVI Merger Sub, Inc. (incorporated by reference to Exhibit 4.62.4 of the Company's Form 8-K filed June 16, 2000). 3.1 Amended and Restated Certificate of Incorporation of Activision Holdings, dated June 1, 2000 (incorporated by reference to Exhibit 2.5 of the Company's Form 8-K, filed on June 16, 2000). 3.2 Amended and Restated Bylaws of Activision Holdings (incorporated by reference to Exhibit 2.6 of the Company's Form 8-K, filed on June 16, 2000). 3.3 Certificate of Amendment No. 1of Amended and Restated Certificate of Incorporation of Activision Holdings dated as of June 9, 2000 (incorporated by reference to Exhibit 2.7 of the Company's Form 8-K, filed on June 16, 2000). 4.1 Rights Agreement dated as of April 18, 2000, between the Company and Continental Stock Transfer & Trust Company, which includes as exhibits the form of Right Certificates as Exhibit A, the Summary of Rights to Purchase Series A Junior Preferred Stock as Exhibit B and the form of Certificate of Designation of Series A Junior Preferred Stock of the Company as Exhibit C, (incorporated by reference to the Company's Registration Statement on Form S-8,8-A, Registration No. 33-48411001-15839, filed on June 1, 1993)April 19, 2000). 10.1 Mediagenic 1991 Stock Option and Stock Award Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 33-63638, filed on December 8, 1995). 10.2 Mediagenic 1991 Director Warrant Plan, as amended (incorporated by reference to Exhibit 28.2 to the Company's 34 Registration Statement on Form S-8, Registration No. 33-63638, filed on June 1, 1993). 10.3 Activision, Inc. Employee Stock Purchase Plan, as amended, (incorporated by reference to Exhibit 4.1 of the Company's Form S-8, Registration No. 333-36272 filed on September 25, 1996)May 4, 2000). 10.4 Activision, Inc. 1998 Incentive Plan (incorporated by reference to Appendix I of the Company's 1998 Proxy Statement). 10.5 Activision, Inc. 1999 Incentive Plan 10.6 Lease Agreement dated as of December 20, 1996, between the Company and Barclay Curci Investment Company (incorporated by reference to Exhibit 10.14 of the Company's Form 10-Q for the quarter ended December 31, 1996). 10.610.7 Share Exchange Agreement dated November 23, 1997, among the Company and the holders of all of the issued and outstanding capital stock of Combined Distribution (Holdings), Inc. Limited (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed December 5, 1997). 10.710.8 Purchase Agreement dated as of December 16, 1997, among the Company and Credit Suisse First Boston Corporation, Piper Jaffray, Inc. and UBS Securities LLC (the "Initial Purchasers") (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed December 23, 1997). 10.810.9 Registration Rights Agreement dated as of December 16, 1997, among the Company and the Initial Purchasers (incorporated 29 by reference to Exhibit 10.2 of the Company's Form 8-K filed December 23, 1997). 10.910.10 Indenture dated as of December 22, 1997, between the Company and State Street Bank and Trust Company of California, N.A., as Trustee (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed December 23, 1997). 10.1010.11 Employment agreement dated January 12, 1999 between the Company and Robert A. Kotick. 10.11Kotick (incorporated by reference to Exhibit 10.10 of the Company's Form 10-K for the year ending March 31, 1999). 10.12 Employment agreement dated October 19, 1998 between the Company and Ronald Doornink (incorporated by reference to Exhibit 10.12 of the Company's Form 10-K for the year ending March 31, 1999). 10.13 Employment agreement dated March 4, 1999 between the Company and Lawrence Goldberg (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the year ending March 31, 1999). 10.14 Employment agreement dated April 1, 1998 between the Company and Mitchell Lasky (incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ending March 31, 1999). 35 10.15 Employment agreement dated April 1, 1998 between the Company and Ronald Scott (incorporated by reference to Exhibit 10.16 of the Company's Form 10-K for the year ending March 31, 1999). 10.16 Service Agreement dated November 24, 1997 between Combined Distribution (Holdings) Limited and Richard Andrew Steele (incorporated by reference to Exhibit 10.17 of the Company's Form 10-K for the year ending March 31, 1999). 10.17 Employment agreement dated January 12, 1999 between the Company and Brian G. Kelly. 10.12 Employment agreement dated October 19, 1998 betweenKelly (incorporated by reference to Exhibit 10.11 of the Company and Ronald Doornink. 10.13 Employment agreement datedCompany's Form 10-K for the year ending March 4, 1999 between the Company and Lawrence Goldberg. 10.14 Employment agreement dated March 4, 1999 between the Company and Barry J. Plaga. 10.15 Employment agreement dated April 1, 1998 between the Company and Mitchell Lasky. 10.16 Employment agreement dated April 1, 1998 between the Company and Ronald Scott. 10.17 Service Agreement dated November 24, 1997 between the Combined Distribution (Holdings) Limited and Richard Andrew Steele.31, 1999). 10.18 Employment Agreement dated September 1, 1997 between the Company and Robert Dewar. 10.19 Articles of Merger dated June 30, 1998 between S.B.F. Acquisition Corp., a wholly owned subsidiary of the Company, and S.B.F. Services, Limited dba Head Games Publishing (incorporated by reference to Exhibit 2.1 of the Company's Form 8-K, filed on July 2, 1998). 10.2010.19 Share Exchange Agreement dated September 29, 1998 by and between the Company and Mr. Frank d'Oleire, Mrs. Christa d'Oleire, Ms. Fiona d'Oleire, Ms. Alexa d'Oleire acting as Dr. d'Oleire Beteiligungsgesellschaft bR, Mr. Martinus J.C. Bubbert, and Mr. Dennis W. Buis (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, filed on October 8, 1998). 10.2110.20 Amended and Restated Agreement and Plan of Merger dated April 19, 1999 by and among the Company, Expert Acquisition Corp. and Expert Software, Inc. (incorporated by reference to Exhibit 2.1 of the Form 8-K of Expert Software, Inc., filed April 29, 1999). 10.2210.21 Credit Agreement dated as of June 21, 1999 among the Company, Head Games Publishing, Inc., Expert Software, Inc., various lenders,financial institutions, PNC Bank, National Association, as issuing bank, administrative agent and collateral agent for such financial institutions, and Credit Suisse First Boston, as syndication agent (incorporated by reference to Exhibit 10.22 of the Company's Form 10-K for the year ending March 31, 1999). 10.22 Share Exchange Agreement dated as of June 29, 1999, among the Company, Jill G. Mark and Robert N. Herrick (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 333-85385, filed August 17, 1999). 10.23 Agreement and Plan of Reorganization dated as of September 30, 1999, among the Company, Neversoft Entertainment, Inc., JCM Productions, Inc., Joel Jewett, Michael West and Christopher Ward (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 333-94509, filed January 12, 2000). 10.24 Employment agreement dated July 12, 1999, between the Company and Mr. Michael Rowe (incorporated by reference to 36 Exhibit 6.1 of the Company's Form 10-Q for the quarter ending June 30, 1999). 10.25 Employment agreement dated July 12, 1999, between the Company and Ms. Kathy Vrabek (incorporated by reference to Exhibit 6.2 of the Company's Form 10-Q for the quarter ending June 30, 1999). 10.26 Amendment to Employment Agreement between Mr. Ronald Doornink and the Company, dated April 30 1999 (incorporated by reference to Exhibit 6.1 of the Company's Form 10-Q for the quarter ending December 31, 1999). 10.27 Employment agreement dated April 7, 2000, between the Company and Mr. Michael Pole. 10.28 First Amendment effective as of June 8, 2000 to the Credit Agreement dated June 21, 1999 among the Company, Head Games Publishing, Inc., Expert Software, Inc., various financial institutions, PNC Bank, National Association as issuing bank, administrative agent and collateral agent for such lenders and Credit Suisse First Boston, as syndication agent. 21.21.1 Principal subsidiaries of the Company. 23.23.1 Independent Auditors' Consent. 30 27.1 Fiscal 19961998 Year to Date financialFinancial Data Schedule. 27.2 Fiscal 19971999 Year to Date Financial Data Schedule. 27.3 Fiscal 1998 Year to Date Financial Data Schedule. 27.4 Fiscal 19992000 Year to Date Financial Data Schedule.
(b) 1. Reports on Form 8-K. There have been no reports on Form 8-K that have been filed by the Company during the last quarter of the fiscal year ending March 31, 2000. The following reports on Form 8-K have been filed by the Company during the lastfirst quarter of the fiscal year endedending March 31, 1999:2001: 1.1 The Company filed a Form 8-K dated March 10, 1999, containing items 5 and 7. 31on April 19, 2000, reporting under "Item 5. Other Events" the announcement of the Company's stockholders' rights plan. 1.2 The Company filed a Form 8-K on June 16, 2000 reporting under "Item 5. Other Events" the announcement of the organizational restructuring of the Company into a holding company format organizational structure. 37 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. Date: June 28, 19992000 ACTIVISION, INC. By: /s/ ROBERT A. KOTICK ------------------------------------------------------------ (Robert A. Kotick) Chairman and Chief Executive Officer 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. By: /s/ ROBERT A. KOTICK Chairman, Chief Executive Officer June 28, 1999 -----------------------------2000 --------------------------------- (Principal Executive Officer) and Director (Robert A. Kotick) Director By: /s/ BRIAN G. KELLY Co-Chairman and Director June 28, 1999 -----------------------------2000 --------------------------------- (Brian G. Kelly) By: /s/ BARRYWILLIAM J. PLAGACHARDAVOYNE Chief Financial Officer and June 28, 1999 -----------------------------2000 --------------------------------- and Chief Accounting Officer (Barry(William J. Plaga)Chardavoyne) By: /s/ HAROLD A. BROWN Director June 28, 1999 -----------------------------2000 --------------------------------- (Harold A. Brown) By: /s/ BARBARA S. ISGUR Director June 28, 1999 -----------------------------2000 --------------------------------- (Barbara S. Isgur) By: /s/ STEVEN T. MAYER Director June 28, 1999 -----------------------------2000 --------------------------------- (Steven T. Mayer) By: /s/ ROBERT J. MORGADO Director June 28, 1999 -----------------------------2000 --------------------------------- (Robert J. Morgado)
3238 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders: We have audited the accompanying consolidated balance sheets of ACTIVISION, INC. and subsidiaries as of March 31, 19992000 and 19981999 and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended March 31, 1999.2000. In connection with our audit of the consolidated financial statements, we also have audited financial statement schedule II for each of the years in the three-year period ended March 31, 1999.2000. 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 and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACTIVISION, INC. and subsidiaries as of March 31, 19992000 and 1998,1999, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 1999,2000, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule for each of the years in the three-year period ended March 31, 1999,2000, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Los Angeles, California May 3, 19995, 2000, except as to Note 14, which is as of June 9, 2000 F-1 PART I. FINANCIAL INFORMATION. Item I. Financial Statements. ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, March 31, 2000 1999 1998 --------- --------------------- ------------ Restated --------------------- ASSETS Current assets: Cash and cash equivalents $ 32,84749,985 $ 74,24133,037 Accounts receivable, net of allowances of $31,521 and $14,979 at March 31, 2000 and $15,582,1999, respectively 117,522 73,926108,108 117,541 Inventories net40,453 30,931 19,425 Prepaid royalties and capitalized software costs 38,997 12,44431,655 33,503 Deferred income taxes 6,044 3,85214,159 6,383 Other current assets 9,960 1,988 --------- ---------19,737 9,965 ------------ ------------ Total current assets 236,301 185,876264,097 231,360 Prepaid royalties and capitalized software costs 6,923 -9,153 11,513 Property and equipment, net 10,841 11,94410,815 10,924 Deferred income taxes 6,055 2,618 4,665 Excess purchase price over identifiable assets acquired,Goodwill, net 12,347 21,647 23,473 Other assets 5,282 3,322 --------- ---------7,270 5,283 ------------ ------------ Total assets $ 283,612309,737 $ 229,280 ========= =========283,345 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of notes payable to banklong-term debt $ 16,260 $ 5,992 $ 4,292 Accounts payable 38,284 43,853 50,473 Accrued expenses 45,142 15,338 --------- ---------49,404 45,160 ------------ ------------ Total current liabilities 94,987 70,103 Notes payable to bank,103,948 95,005 Long-term debt, less current portion 13,778 1,143 1,692 Convertible subordinated notes 60,000 60,000 Other liabilities 2 7 88 --------- --------------------- ------------ Total liabilities 156,137 131,883 --------- ---------177,728 156,155 ------------ ------------ Commitments and contingencies Shareholders' equity: Preferred stock, $.000001 par value, 5,000,000 shares - - authorized, no shares issued at March 31, 2000 and 1999 Common stock, $.000001 par value, 50,000,000 shares authorized, 23,104,92726,488,260 and 22,408,41523,803,762 shares issued and 22,604,92725,988,260 and 21,908,41523,303,762 outstanding respectivelyat March 31, 2000 - - and 1999, respectively Additional paid-in capital 151,714 109,251 91,825 Retained earnings 26,012 10,758(deficit) (8,361) 25,727 Accumulated other comprehensive income (loss)loss (6,066) (2,510) 92 Less: Treasury stock, cost of 500,000 shares (5,278) (5,278) --------- --------------------- ------------ Total shareholders' equity 127,475 97,397 --------- ---------132,009 127,190 ------------ ------------ Total liabilities and shareholders' equity $ 283,612309,737 $ 229,280 ========= =========283,345 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-2 ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in(In thousands, except per share data)
For the years ended March 31, ---------------------------------------------------------------------------------------------------- Restated ------------------------------ 2000 1999 1998 1997 ------------- ------------------- --------------- Restated Restated ------------------- --------------------------- ------------ ------------ Net revenues $ 436,485572,205 $ 312,058436,526 $ 189,239312,906 Costs and expenses: Cost of sales - product costs 319,422 260,041 176,188 103,124 Cost of sales - royalties and software amortization 37,82591,238 36,990 29,840 13,108 Product development 21,422 27,393 20,47026,275 22,875 28,285 Sales and marketing 66,41993,878 66,420 47,714 31,178 General and administrative 21,348 18,401 8,28430,099 21,948 20,099 Amortization of intangible assets 41,618 1,585 1,562 1,505 Merger expenses 600 1,474 39 ------------- ------------------- --------------------------- ------------ ------------ Total costs and expenses 409,240 302,572 177,708 ------------- ------------------- ---------------602,530 409,859 303,688 ------------ ------------ ------------ Income (loss) from operations 27,245 9,486 11,531(30,325) 26,667 9,218 Interest income (expense), net (3,030)(8,411) (3,031) (1,112) 81 ------------- ------------------- --------------------------- ------------ ------------ Income (loss) before income tax provision 24,215 8,374 11,612(38,736) 23,636 8,106 Income tax provision 8,961 3,235 3,981 ------------- ------------------- ---------------(benefit) (4,648) 8,745 3,136 ------------ ------------ ------------ Net income (loss) $ 15,254(34,088) $ 5,13914,891 $ 7,631 ============= =================== ===============4,970 ============ ============ ============ Basic netearnings (loss) per share: Net income (loss) $ (1.38) $ 0.65 $ 0.22 ============ ============ ============ Weighted average common shares outstanding 24,691 22,861 22,038 ============ ============ ============ Diluted earnings (loss) per shareshare: Net income (loss) $ 0.69(1.38) $ 0.240.62 $ 0.37 ============= =================== =============== Diluted net income per share $ 0.66 $ 0.23 $ 0.36 ============= =================== =============== Number of0.21 ============ ============ ============ Weighted average common shares used in computing basic net income per share 22,162 21,339 20,262 ============= =================== =============== Number of shares used in computing diluted net income per share 23,233 22,210 20,951 ============= =================== ===============outstanding 24,691 23,932 22,909 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended March 31, 2000, 1999 and 1998
Common Stock Additional ------------------- Paid-in Retained ------------------------ Paid-In Earnings (In thousands) Shares Amount Capital Earnings ---------------------------------------------------(Deficit) - ------------------------------------------------------------------------------------------------------------------- BALANCE, MARCH 31, 1996 18,4711997 22,033 $ - $ 67,99079,147 $ 26,610 Components of comprehensive income:income Net income for the year - - - 7,631 Foreign currency translation adjustment - - - - Total comprehensive income - - - - Issuance of common stock 63 - 848 - Issuance of common stock pursuant to employee stock option plan 313 - 2,209 - Issuance of common stock pursuant to employee stock purchase plan 19 - 179 - Tax benefit attributable to employee stock option plan - - 736 - Tax benefit derived from net operating loss carryforward utilization - - 6,634 - Issuance of stock on formation of CentreSoft 2,468 - 268 - Conversion of notes payable to common stock - - 283 - Dividends declared - - - (1,270) --------------------------------------------------- BALANCE MARCH 31, 1997 21,334 - $ 79,147 $ 6,363 Components of comprehensive income: Net income for the year - - - 5,1394,970 Foreign currency translation adjustment - - - - Total comprehensive income - - - - Issuance of common stock and common stock warrants 82 - 1,214 - Issuance of common stock pursuant to employee stock option planplans 599 - 4,756 - Issuance of common stock pursuant to employee stock - purchase plan 64 - 582 - Tax benefit attributable to employee stock option planplans - - 1,247 - Adjustment for change in year-end of pooled subsidiary - - - (639) Conversion of Redeemable Preferred Stock 87 - 1,286 - Conversion of Convertible Preferred Stock 15 - 214 - Conversion of Subordinated Loan Stock Debentures 217 - 3,216 - Issuance of stock to affect business combination 10 - 163 11 Dividends declared - - - (116) ------------------------------------------------------------ --------- --------- --------- BALANCE, MARCH 31, 1998 22,40823,107 - $ 91,825 $ 10,75810,836 Components of comprehensive income:income Net income for the year - - - 15,25414,891 Foreign currency translation adjustment - - - - Total comprehensive income - - - - Issuance of common stock and common stock warrants - - 3,368 - Issuance of common stock pursuant to employee stock option planplans 605 - 5,271 - Issuance of common stock pursuant to employee stock purchase plan 92 - 798 - Tax benefit attributable to employee stock option planplans - - 1,059 - Tax benefit derived from net operating loss carryforward utilization - - 2,430 - Conversion of notes payable to common stock - - 4,500 - ------------------------------------------------------------ --------- --------- --------- BALANCE, MARCH 31, 1999 $23,105 $23,804 - $ 109,251 $ 26,012 =================================================== Accumulated Treasury Stock Other ------------------------- Comprehensive Shareholders' Shares Amount Income (loss) Equity --------------------------------------------------------- BALANCE MARCH 31, 1996 (500) $ (5,278) $ (335) $ 62,37925,727 Components of comprehensive income: Net incomeloss for the year - - - 7,631(34,088) Foreign currency translation adjustment - - 177 177 ---------------- - Total comprehensive income - - - 7,808 ---------------loss Issuance of common stock and common stock warrants - - 8,529 - 848 Issuance of common stock pursuant to employee stock option planplans 2,331 - 21,718 - - 2,209 Issuance of common stock pursuant to employee stock purchase plan 72 - 762 - - 179 Tax benefit attributable to employee stock option planplans - - 3,017 - 736 Tax benefit derived from net operating loss carryforward utilization - - 1,266 - 6,634 Issuance of stock on formation of CentreSoft - - - 268 Conversion of notes payable toAcquisitions and investments made with common stock and common stock options 281 - 7,171 - --------- --------- --------- --------- BALANCE, MARCH 31, 2000 26,488 $ - 283 Dividends declared$ 151,714 $ (8,361) ========= ========= ========= ========= Accumulated Treasury Stock Other ---------------------- Comprehensive Shareholders' (In thousands) Shares Amount Income (loss) Equity - - - (1,270) ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ BALANCE, MARCH 31, 1997 (500) $ (5,278) $ (158) $ 80,07480,321 Components of comprehensive income:income Net income for the year - - - 5,1394,970 Foreign currency translation adjustment - - 250 250 ------------------------ Total comprehensive income - - - 5,389 ---------------5,220 --------- Issuance of common stock and common stock warrants - - - 1,214 Issuance of common stock pursuant to employee stock option planplans - - - 4,756 Issuance of common stock pursuant to employee stock purchase plan - - - 582 Tax benefit attributable to employee stock option planplans - - - 1,247 Adjustment for change in year-end of pooled subsidiary - - - (639) Conversion of Redeemable Preferred Stock - - - 1,286 Conversion of Convertible Preferred Stock - - - 214 Conversion of Subordinated Loan Stock Debentures - - - 3,216 Issuance of stock to affect business combination - - - 174 Dividends declared - - - (116) ----------------------------------------------------------------- --------- --------- --------- BALANCE, MARCH 31, 1998 (500) $ (5,278) $ 92 $ 97,39797,475 Components of comprehensive income:income Net income for the year - - - 15,25414,891 Foreign currency translation adjustment - - (2,602) (2,602) ------------------------ Total comprehensive income - - - 12,652 ---------------12,289 --------- Issuance of common stock and common stock warrants - - - 3,368 Issuance of common stock pursuant to employee stock option planplans - - - 5,271 Issuance of common stock pursuant to employee stock purchase plan - - - 798 Tax benefit attributable to employee stock option planplans - - - 1,059 Tax benefit derived from net operating loss carryforward utilization - - - 2,430 Conversion of notes payable to common stock - - - 4,500 ----------------------------------------------------------------- --------- --------- --------- BALANCE, MARCH 31, 1999 $(500) (5,278) (2,510) 127,190 Components of comprehensive income: Net loss for the year - - - (34,088) Foreign currency translation adjustment - - (3,556) (3,556) --------- Total comprehensive loss (37,644) --------- Issuance of common stock and common stock warrants - - - 8,529 Issuance of common stock pursuant to employee stock option plans - - - 21,718 Issuance of common stock pursuant to employee stock purchase plan - - - 762 Tax benefit attributable to employee stock option plans - - - 3,017 Tax benefit derived from net operating loss carryforward utilization - - - 1,266 Acquisitions and investments made with common stock and common stock options - - - 7,171 --------- --------- --------- --------- BALANCE, MARCH 31, 2000 (500) $ (5,278) $ (2,510)(6,066) $ 127,475 ========================================================132,009 ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. F-4 ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in(In thousands)
For the years ended March 31, ------------------------------------------------ Restated ----------------------------------------------------------- 2000 1999 1998 1997 ---------- ---------- ---------------------- ------------ ------------ Cash flows from operating activities: Net income (loss) $ 15,254(34,088) $ 5,13914,891 $ 7,6314,970 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Deferred income taxes 3,344(4,311) 3,806 (1,327) 2,929 Adjustment for change in fiscal year-end for pooled subsidiaries - - (639) - Depreciation and amortization 45,866 6,488 5,315 4,1675,346 Amortization of prepaid royalties and capitalized software costs 78,714 27,055 29,167 9,045 Expense related to common stock warrants -5,769 388 200 - Loss on disposal of fixed assets - - 34 Change in assets and liabilities (net of effects of purchases and acquisitions): Accounts receivable (43,596) (25,079) (13,244)9,900 (43,686) (24,896) Inventories (7,342) (11,506) (6,798) (5,169) Other current assets (7,972)(7,124) (8,360) 458 (1,137) Other assets 1,408817 1,498 168 (600) Accounts payable (8,038) (6,620) 25,410 5,688 Accrued expenses (2,770) 34,304 (308) (5,652) Deferred revenue - - 1,301 Other liabilities (4) (68) (81) (83) (37) ---------- ---------- ---------------------- ------------ ------------ Net cash provided by operating activities 18,078 31,180 4,956 ---------- ---------- ----------77,389 18,190 31,670 ------------ ------------ ------------ Cash flows from investing activities: Cash paid by Combined Distribution (Holdings) Ltd. to acquire CentreSoft (net of cash acquired) - - (812) (3,878) Capital expenditures (3,800) (8,872) (4,580) Cash used in purchase acquisitions (net of cash acquired) (20,523) - (246) - Investment in prepaid royalties and capitalized software costs (74,506) (60,531) (33,213) (11,130)(33,656) Capital expenditures (4,518) (3,800) (8,872) Other - - (228) - ---------- ---------- ---------------------- ------------ ------------ Net cash used in investing activities (99,547) (64,331) (43,371) (19,588) ---------- ---------- ----------(43,814) ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock - - 282 Proceeds from issuance of common stock upon exercise of warrants - - 2,209 Issuance of common stock pursuant to employee stock option plans 21,718 5,271 4,756 - IssuanceProceeds from issuance of common stock pursuant to employee stock purchase plan 762 798 582 179 Proceeds from issuance of subordinated loan stock debentures - - 3,216 Proceeds from issuance of convertible preferred stock - - 214 Proceeds from issuance of redeemable preferred stock - - 1,286 Dividends paid (Combined Distribution (Holdings) Ltd.) - - (1,256) (130) Borrowing under line-of-credit agreement 361,161 5,300 8,800 1,600 Payment under line-of-credit agreement (355,156) (5,300) (8,800) Proceeds from term loan 25,000 - Note payable to bank, net 1,151 886 3,123- Proceeds from issuance of subordinated convertible notes - - 57,900 Notes payable, net (8,102) 1,151 886 Cash paid to secure line of credit and term loan (3,355) - - Other - - (6) 2 ---------- ---------- ---------------------- ------------ ------------ Net cash provided by financing activities 42,028 7,220 62,862 11,981 ---------- ---------- ---------------------- ------------ ------------ Effect of exchange rate changes on cash (2,922) (2,361) 250 179 ---------- ---------- ---------------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents (41,394) 50,921 (2,472) ---------- ---------- ----------16,948 (41,282) 50,968 Cash and cash equivalents at beginning of period 74,241 23,320 25,792 ---------- ---------- ----------33,037 74,319 23,351 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 32,84749,985 $ 74,24133,037 $ 23,320 ========== ========== ==========74,319 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 ACTIVISION, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Activision, Inc. (together with its subsidiaries, "Activision"("Activision" or the "Company") is a leading international publisher, developer and distributor of interactive entertainment and leisure products. The Company was incorporated in California in 1979. In December 1992, the Company reincorporated in Delaware. The Company's products span a wide range of genres (including action, adventure, extreme sports, strategy and simulation) and target markets (including game enthusiasts, mass market consumers, value buyers and children). In addition to its genre and market diversity, the Company publishes, develops and distributes products for a variety of game platforms and operating systems, including personal computers ("PCs"), the Sony Playstation, console systemSega Dreamcast and the Nintendo 64N64 console system.systems and the Nintendo Gameboy Color handheld device. The Company maintains operations in the U.S., Canada, the United Kingdom, France, Germany, Japan, Australia, Belgium and the Netherlands. For fiscal year 2000, international operations contributed approximately 51% of net revenues. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Activision, Inc., a Delaware corporation, and its wholly-owned subsidiaries (the "Company" or "Activision"). All intercompany accounts and transactions have been eliminated in consolidation. BASIS OF PRESENTATION TheseThe consolidated financial statements have been retroactively restated to reflect the poolingpoolings of interests of the Company with Raven Software CorporationJCM Productions, Inc. dba Neversoft Entertainment ("Raven"Neversoft"), NBG EDV Handels- und Verlags GmbH ("NBG"), in September 1999, S.B.F. Services, Limited dba Head Games Publishing ("Head Games") andin June 1998, CD Contact Data GmbH ("CD Contact"). Each of the above transactions originally had been accounted for by the Company as an immaterial pooling of interests. The financial results for each such acquired company in September 1998, Raven Software Corporation ("Raven") in November 1997, NBG EDV Handels - und Verlags GmbH ("NBG") in August 1997 and related cash flows had therefore been includedCombined Distribution (Holdings) Limited ("Centresoft") in the reported operations of the Company beginning on the date of acquisition. Based on a reevaluation of these transactions, including the results of operations of each entity, statements by the Securities and Exchange Commission ("the SEC") on materiality of pooling transactions and requirements to evaluate the impact on each line item in the financial statements and the impact on the Company's trends, the Company has restated all financial information reported in this Annual Report on Form 10-K for all periods prior to the consummation of each transaction to include the financial position, results of operations and cash flows of such acquired companies.November 1997. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, money markets and short-term investments with original maturities of not more than 90 days. The Company's cash and cash equivalents were comprised of the following at March 31, 2000 and 1999 (amounts in thousands):
March 31, ----------------------------- 2000 1999 ------------ ------------ Cash $ 32,637 $ 28,833 Money market funds 17,348 315 Short-term debt instruments - 3,889 ------------ ------------ $ 49,985 $ 33,037 ============ ============
CONCENTRATION OF CREDIT RISK Financial instruments which potentially subject the Company to concentration of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments with financial institutions. At various times during the fiscal years ended March 31, 2000 and 1999, 1998 and 1997, the F-6 Company had deposits in excess of the $100,000 Federal Deposit Insurance Corporation ("FDIC") limit at these financial institutions. At March 31, 1999, the Company had approximately $3.9 million invested in short-term commercial paper and short-term United States government backed securities. The Company's customer base includes retail outlets and distributors including consumer electronics and computer specialty stores, discount chains, video rental stores and toy stores in the United States and countries worldwide. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. The Company generally does not require collateral or other security from its customers. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of financial instruments have been determined by the Company using available market information and valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: The carrying amounts of these instruments approximate fair value due to their short-term nature. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES: The carrying amounts of the Company's variable rate debt approximate fair value because the interest rates are based on floating rates identified by reference to market rates. The fair value of the Company's fixed rate debt is based on quoted market prices, where available, or discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements as of the balance sheet date. The carrying amount and cash equivalents, accounts receivable, accounts payable,fair value of the Company's long-term debt and accrued liabilities approximate their carrying values due to the relatively short maturitiesconvertible subordinated notes, was $90.0 million and $81.6 million, respectively, as of these instruments. Trade receivables are primarily due from retailers and original equipment manufacturers ("OEMs"). F-6 March 31, 2000. PREPAID ROYALTIES AND CAPITALIZED SOFTWARE COSTS Prepaid royalties include payments made to independent software developers under development agreements and license fees paid to intellectual property rights holders for use of their trademarks or copyrights. Intellectual property rights which have alternative future uses are capitalized. Capitalized software costs represent costs incurred for development that are not recoupable against future royalties. The Company accounts for prepaid royalties relating to development agreements and capitalized software costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed".Marketed." Software development costs and prepaid royalties are capitalized once technological feasibility is established. Technological feasibility is evaluated on a product by product basis. For products where proven game engine technology exists, this may occur early in the development cycle. Software development costs are expensed if and when they are deemed unrecoverable. Amounts related to software development which are not capitalized are charged immediately to product development expense. The following criteria is used to evaluate recoverability of software development costs: historical performance of comparable products; the commercial acceptance of prior products released on a given game engine; orders for the product prior to its release; estimated performance of a sequel product based on the performance of the product on which the sequel is based; and actual development costs of a product as compared to the Company's budgeted amount. CapitalizedCommencing upon product release capitalized software development costs are amortized to cost of sales - royalties and software amortization on a straight-line basis over the estimated product life (generally one year or less) commencing upon product release,, or on the ratio of current revenues to total projected revenues, whichever amortization amount is greater. Prepaid royalties are amortized to cost of sales - royalties and software amortization commencing upon the product release at the contractual royalty rate based on actual net product sales, or on the ratio of current revenues to total projected revenues, whichever amortization amount is greater. For products that have been released, management evaluates the future recoverability of capitalized amounts on a quarterly basis. F-7 As of March 31, 2000, prepaid royalties and unamortized capitalized software costs totaled $29.2 million (including $9.2 million classified as non-current) and $11.6 million, respectively. As of March 31, 1999, prepaid royalties and unamortized capitalized software costs totaled $37.1$36.2 million (including $6.9$11.5 million classified as non-current) and $8.8 million, respectively. As of March 31, 1998, prepaid royalties and unamortized capitalized software costs totaled $10.7 million and $1.7 million, respectively. At March 31, 1998, all prepaid royalties and unamortized capitalized software costs were classified as current. Amortization of prepaid royalties and capitalized software costs was $78.7 million, $27.1 million $29.2 million and $9.0$29.2 million for the years ended March 31, 2000, 1999 1998 and 1997,1998, respectively. Write-offs of prepaid royalties and capitalized software costs prior to product release were $6.3 million, $2.4 million $363,000 and $588,000$363,000 for the years ended March 31, 2000, 1999 1998 and 1997,1998, respectively. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market. REVENUE RECOGNITION The American Institute of Certified Public Accountant's (the "AICPA")Accountants (AICPA) Statement of Position 97-2 "Software Revenue Recognition" (SOP 97-2) was("SOP 97-2"), provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 is effective for all transactions entered into subsequent to March 31, 1998.1999. The Company has adopted SOP 97-2 and such adoption did not have a material impact on the Company's financial position, results of operations or liquidity. Effective December 15, 1998, the AICPA issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions" ("SOP 98-9"), which is effective for transactions entered into after March 15, 1999. SOP 98-9 deals with the determination of vendor specific objective evidence of fair value in multiple element arrangements, such as maintenance agreements sold in conjunction with software packages. The adoption of SOP 97-298-9 did not have a material impact on the Company's financial position, results of operations or liquidity. Product Sales: The Company recognizes revenue from the sale of its products upon shipment. Subject to certain limitations, the Company permits customers to obtain exchanges or return products within certain specified periods and provides price protection on certain unsold merchandise. Management of the Company has the ability to estimateestimates the amount of future exchanges, returns, and price protections.protections based upon historical results and current known circumstances. Revenue from product sales is reflected net of the allowance for returns and price protection. Software Licenses: For those license agreements which provide the customers the right to multiple copies in exchange for guaranteed amounts, revenue is recognized at delivery of the product master or the first copy.delivery. Per copy royalties on sales which exceed the guarantee are recognized as earned. ADVERTISING EXPENSES The Company expenses advertising and the related costs as incurred. Advertising expenses for the years ended March 31, 2000, 1999 1998 and 19971998 were approximately $15,572,000 $6,336,000$18.6 million $15.6 million and $3,285,000,$6.3 million, respectively, and are included in sales and marketing expense in the consolidated statements of operations. F-7 EXCESS PURCHASE PRICE OVER IDENTIFIABLE ASSETS ACQUIRED, NETGOODWILL AND LONG-LIVED ASSETS TheCost in excess cost overof the fair value of net assets of companies acquired, goodwill, is being amortized on a straight-line basis over aperiods ranging from 5 to 20 year period.years. As of March 31, 19992000 and 1998,1999, accumulated amortization amounted to $9,069,000$50.8 million and $7,904,000,$9.1 million, respectively. The Company adopted the provisionsaccounts for impairment of long-lived assets, including goodwill, in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of,Of." on April 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles, including goodwill, be 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 the asset to undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount exceeds the fair value of the assets. AdoptionIn conjunction with its strategic restructuring plan as detailed in Note 3, in the fourth quarter of this Statement did not havefiscal 2000, the Company recorded a material impact on the Company's financial position, resultscharge for impairment of operations, or liquidity.goodwill of $37.2 million. See Note 3 for further discussion. F-8 INTEREST INCOME (EXPENSE) Interest income (expense), net is comprised of the following, (amounts in thousands):
March 31, ------------------------------------------------ 2000 1999 1998 1997 ---------- ---------- ---------- Restated Restated ---------- ---------------------- ------------ ------------ Interest expense $(4,973) $(2,223) $ (843)(9,375) $ (4,974) $ (2,223) Interest income 964 1,943 1,111 924 ---------- ---------- ---------------------- ------------ ------------ Net interest income (expense) $(3,030) $(1,112) $ 81 ========== ========== ==========(8,411) $ (3,031) $ (1,112) ============ ============ ============
INCOME TAXES The Company accounts for income taxes using Statement of Financial Accounting Standards No. 109 (SFAS("SFAS No. 109)109"), "Accounting for Income Taxes." Under SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit 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. FOREIGN CURRENCY TRANSLATION TheAll assets and liabilities of the Company's foreign subsidiaries maintain their accounting recordsare translated into U.S. dollars at the exchange rate in their local currency. The currencies are then converted to United States dollars andeffect at the effectend of the foreign currencyperiod, and revenue and expenses are translated at weighted average exchange rates during the period. The resulting translation isadjustments are reflected as a component of shareholders' equity in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation."equity. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EARNINGS PER COMMON SHARE Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for all periods. Diluted earnings per share reflects the potential dilution that could occur if net income were divided by the weighted average number of common and common stock equivalent shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common stock equivalents from outstanding stock options and warrants and convertible debt. Common stock equivalents are calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company's outstanding options and warrants. However, potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which the Company records a net loss. STOCK BASED COMPENSATION Prior to April 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting"Accounting for Stock Issued to Employees,Employees" ("APB No. 25"), and related interpretations. As such, compensation expense would be recorded on the date of the grant only if the current market price of the underlying stock exceeded the option exercise price. On April 1, 1996 the Company adopted SFAS No. 123, Accounting"Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period, the fair value of all stock-based awards on the date of the grant. F-9 Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. F-8 RECLASSIFICATIONS Certain amounts in the consolidated financial statements have been reclassified to conform with the current year's presentation. These reclassifications had no effect on net income (loss), shareholders' equity or cash flows. 2. ACQUISITIONS FISCAL 2000 TRANSACTIONS ACQUISITION OF NEVERSOFT On September 30, 1999, the Company acquired Neversoft, a privately held console software developer, in exchange for 698,835 shares of the Company's common stock. The acquisition was accounted for as a pooling of interests. Accordingly, the Company has restated the financial statements for all periods prior to the closing of the transaction. The following table represents the results of operations of the previously separate companies for the period before the combination was consummated which are included in fiscal year 2000 combined net income (loss).
Fiscal Year 2000 ---------------------------------------------------------- Activision Neversoft Total Six Months Ended Six Months Ended Six Months Ended Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1999 ----------------- ---------------- ---------------- Revenues $ 199,505 $ - $ 199,505 Net income (loss) $ (3,028) $ (484) $ (3,512)
ACQUISITION OF ELSINORE MULTIMEDIA On June 29,1999, the Company acquired Elsinore Multimedia, Inc. ("Elsinore"), a privately held interactive software development company, in exchange for 204,448 shares of the Company's common stock. The acquisition was accounted for using the purchase method of accounting. Accordingly, the results of operations of Elsinore have been included in the Company's consolidated financial statements from the date of acquisition. The aggregate purchase price has been allocated to the assets and liabilities acquired, consisting mostly of goodwill of $3.0 million, that is being amortized over a five year period. Proforma statements of operations reflecting the acquisition of Elsinore are not shown, as they would not differ materially from reported results. ACQUISITION OF EXPERT SOFTWARE On June 22, 1999, the Company acquired all of the outstanding capital stock of Expert Software, Inc. ("Expert"), a publicly held developer and publisher of value-line interactive leisure products, for approximately $24.7 million. The aggregate purchase price of approximately $24.7 million consisted of $20.3 million in cash payable to the former shareholders of Expert, the valuation of employee stock options in the amount of $3.3 million, and other acquisition costs. The acquisition was accounted for using the purchase method of accounting. Accordingly, the results of operations of Expert have been included in the Company's consolidated financial statements from the date of acquisition. F-10 The aggregate purchase price was allocated to the fair values of the assets and liabilities acquired as follows (amounts in thousands): Tangible assets $ 4,743 Existing products 1,123 Goodwill 28,335 Liabilities (9,532) ------------ $ 24,669 ============
However, as more fully described in Note 3, in the fourth quarter of fiscal 2000, the Company implemented a strategic restructuring plan to accelerate the development of games for the next-generation consoles and the Internet. In conjunction with that plan, the Company consolidated Expert and its Head Games subsidiary, forming one integrated business unit in the value software category. As part of this consolidation, the Company discontinued several of Expert's product lines and terminated substantially all of Expert's employees. In addition, the Company will phase-out the use of the Expert name. As a result of these initiatives, the Company incurred a nonrecurring charge of $26.3 million resulting from the write-down of intangibles acquired, including goodwill. FISCAL 1999 TRANSACTIONS As stated below, the acquisitionThe acquisitions of Head Games and CD Contact were originally treated as immaterial poolings of interest.interests. However, after reviewing the results of operations of the entities, including the materiality and impact on the the Company's trends, the Company has restated the financial statements for all periods prior to the closing of each respective transaction. ACQUISITION OF HEAD GAMES On June 30, 1998, the Company acquired Head Games in exchange for 1,000,000 shares of the Company's common stock. The acquisition of Head Games was initially accounted for as an immateriala pooling of interests; accordingly, periods prior to April 1, 1998 were not retroactively restated for this transaction. However with this Annual Report on Form 10-K, all prior periods have been retroactively restated to reflect the effect of the Head Games acquisition in all periods presented.interests. ACQUISITION OF CD CONTACT On September 29, 1998, the Company acquired CD Contact in exchange for 1,900,000 shares of the Company's common stock. In addition,stock and the assumption of $9.1 million in outstanding debt was acquired in connection with thepayable to CD Contact acquisition.Contact's former shareholders. The debt is evidenced by notes payable which are due on demand and bear interest at approximately 8% per annum. The acquisition of CD Contact was initially accounted for as an immateriala pooling of interests; accordingly, periods prior to July 1, 1998 were not retroactively restated for this transaction. However with this Annual Report on Form 10-K, all prior periods have been retroactively restated to reflect the effect of the CD Contact acquisition in all periods presented.interests. The following table represents the results of operations of the previously separate companies for the periodperiods before the combination wascombinations were consummated that are included in the current combined net income of the Company:
Fiscal Year 1999 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Head Games CD Contact Activision 3Three Months 6Six Months Neversoft Total Year Ended Ended June 30, Ended Sept. 30, Year Ended Year Ended March 31, 1999 June 30, 1998 September 30,1998 March 31, 1998 March 31, 1999 ------------------------ --------------------- ---------------------- ------------------------------------ -------------- -------------- -------------- -------------- Revenues $412,225$ 412,225 $ 2,195 $ 22,065 $436,485$ 41 $ 436,526 Net income (loss) $ 14,194 $ 394 $ 666 $ 15,254(363) $ 14,891
Results for Head Games from July 1, 1998, subsequent to its acquisition by the Company and for CD Contact from October 1, 1998, subsequent to its acquisition by the Company, are included in the Activision year ended March 31, 1999 column above.F-11 FISCAL 1998 TRANSACTIONS As discussed below, theThe acquisitions of NBG and Raven were originally accounted for as immaterial poolings of interest.interests. However, based on statements byafter reviewing the SEC regarding materiality and the requirement to evaluate the impact on each line itemresults of operations of the Company's financial statemententities, including the materiality and the impact on the Company's trends, the Company has restated the financial statements for all periods prior to the closing of each respective transaction. ACQUISITION OF NBG On November 26, 1997, the Company acquired NBG in exchange for 281,206 shares of the Company's common stock. The acquisition of NBG was initially accounted for as an immateriala pooling on interests. The following table represents the results of interests; accordingly, periods prior to October 1, 1997 were not retroactively restated for this transaction. However, with this Annual Report on Form 10-K, all prior periods have been retroactively restated to reflect the effectoperations of the NBG acquisitionpreviously separate companies for the periods before the combinations were consummated that are included in all periods presented.the current combined net income of the Company:
Fiscal Year 1998 ----------------------------------------------------------------------------------------------------------- Activision as Previously NBG Head Games CD Contact Total Reported Six Months Year Year Neversoft Year Year Ended Ended Ended Ended Year Ended Ended March 31, 1998 Sept. 30, 1997 March 31, 1998 March 31, 1998 March 31, 1998 March 31, 1998 -------------- -------------- -------------- -------------- -------------- -------------- Revenues $ 259,926 $ 7,081 $ 3,715 $ 41,336 $ 848 $ 312,906 Net income (loss) $ 5,827 $ (106) $ (70) $ (512) $ (169) $ 4,970
ACQUISITION OF RAVEN SOFTWARE CORPORATION On August 26, 1997, the Company acquired Raven in exchange for 1,040,000 shares of the Company's common stock. The acquisition of Raven was initially accounted for as an immateriala pooling of interests; accordingly, periods prior to April 1, 1997 were not retroactively restated for this transaction. However, with this Annual Report on Form 10-K, all prior periods have been retroactively restated to reflect the effect of the Raven acquisition in all periods presented.
Fiscal Year 1998 ----------------------------------------------------------------------------------------------- Activision as Previously NBG Head Games CD Contact Total Reported 6 Months Year Year Restated Year Year Ended Ended Ended Ended Ended March 31, 1998 Sept. 30, 1997 March 31, 1998 March 31, 1998 March 31, 1998 --------------------- ---------------- ----------------- --------------- ------------------ Revenues $259,926 $ 7,081 $ 3,715 $ 41,336 $312,058 Net income (loss) $ 5,827 $ (106) $ (70) $ (512) $ 5,139
F-9
Fiscal Year 1997 ---------------------------------------------------------------------------------------------------- Activision as Previously Raven NBG Head Games CD Contact Total Reported Year Year Year Year Year Year Ended Ended Ended Ended Ended Ended March 31, 1997 March 31, 1997 March 31, 1997 March 31, 1997 March 31, 1997 March 31, 1997 ----------------- --------------- -------------- -------------- ---------------- --------------- Revenues $154,644 $ 428 $ 19,628 $ 1,083 $ 13,456 $189,239 Net income (loss) $ 9,226 $ (419) $ 179 $ (1,510) $ 155 $ 7,631
Acquisition of Centresoftinterests. ACQUISITION OF CENTRESOFT On November 26, 1997, the Company acquired CentresoftCentreSoft Limited ("CentreSoft") in exchange for 2,787,043 shares and 50,325 options to acquire shares of the Company's common stock. The acquisition of CentresoftCentreSoft was accounted for in accordance with the pooling of interests method of accounting and, accordingly, the Company's consolidated financial statements were retroactively adjusted as ifrestated to reflect the effect of the Centresoft acquisition for all periods presented. 3. STRATEGIC RESTRUCTURING PLAN In the fourth quarter of fiscal 2000, the Company finalized a strategic restructuring plan to accelerate the development and sale of interactive entertainment and leisure products for the next-generation consoles and the Company had operated as one since June 28, 1996 (inception of Centresoft). 3. INVENTORIES Inventories at March 31, 1999, 1998 and 1997 are statedInternet. Costs associated with this plan amounted to $70.2 million, approximately $61.8 million net of taxes, and were recorded in the consolidated statement of operations in the fourth quarter of fiscal year 2000 and classified as follows: Net revenues $11.7 Cost of sales - royalties and software amortization 11.9 Product development 4.2 General and administrative 5.2 Amortization of intangible assets 37.2 ---- $70.2 =====
The component of the charge included in amortization of intangible assets represents a write down of intangibles including goodwill, relating to Expert Software, Inc. ("Expert"), one of the Company's value publishing F-12 subsidiaries, totaling $26.3 million. The Company is consolidating Expert into Head Games, forming one integrated business unit. As part of this consolidation, the Company is discontinuing substantially all of Expert's product lines, terminating substantially all of Expert's employees and phasing out the use of the Expert name. In addition, a $10.9 million write down of goodwill relating to TDC, an adjustmentOEM business unit, was recorded. In the past year, the OEM market has gone through radical changes due to net realizableprice declines of PCs and hardware accessories. The sum of the undiscounted future cash flow of these assets was not sufficient to cover the carrying value of approximately $1,493,000, $828,000these assets and $471,000, respectively.as such was written down to fair market value. The provisionscomponent of the charge included in net revenues and general and administrative expense represents costs associated with the planned termination of a substantial number of its third party distributor relationships in connection with the Company's realignment of its worldwide publishing business to adjustleverage its existing sales and marketing organizations and improve the control and management of its products. These actions have resulted in an increase in the allowance for sales returns of $11.7 million and the allowance for doubtful accounts of $3.4 million. The plan also includes a severance charge of $1.2 million for employee redundancies. The plan is expected to be completed by the fourth quarter of fiscal 2001. The components of the charge included in cost of sales - royalties and software amortization and product development represent costs to write down certain assets associated with exiting certain product lines and re-evaluating other product lines which resulted in reduced expectations. 4. INVENTORIES The Company's inventories to net realizable value forconsist of the years ended March 31, 1999, 1998 and 1997 were approximately $828,000, $1,082,000 and $478,000, respectively. Inventories, net of reserves, consisted offollowing (amounts in thousands):
March 31, ----------------------------- 2000 1999 March 31, 1998 ------------------ --------------------- Restated --------------------------------- ------------ Purchased parts and components $ 2,3262,857 $ 1,4092,326 Finished goods 37,596 28,605 18,016 ------------------ --------------------- $30,931 $19,425 ================== =====================------------ ------------ $ 40,453 $ 30,931 ============ ============
4.5. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the shorter of the estimated useful lives or the lease term: buildings, 30 years; computer equipment, office furniture and other equipment, 3 years; leasehold improvements, through the life of the lease. When assets are retired or disposed, the cost and accumulated depreciation thereon are removed and any resultant gains or losses are recognized in current operations. Property and equipment stated at cost, was as follows (amounts in thousands):
March 31, ------------------------------ 2000 1999 March 31, 1998 ------------------ --------------------- Restated --------------------------------- ------------ Land $ 581526 $ 581582 Buildings 2,468 759 801 Computer equipment 18,067 15,57618,670 18,123 Office furniture and other equipment 3,522 3,4805,800 3,523 Leasehold improvements 3,229 3,189 2,974 ------------------ --------------------------------- ------------ Total cost of property and equipment 26,118 23,41230,693 26,176 Less accumulated depreciation (15,277) (11,468) ------------------ --------------------- Net cost of property(19,878) (15,252) ------------ ------------ Property and equipment, net $ 10,84110,815 $ 11,944 ================== =====================10,924 ============ ============
F-13 Depreciation expense for the years ended March 31, 2000, 1999 and 1998 was $4.2 million, $4.9 million and 1997 was $4,903,000, $3,753,000 and $2,662,000,$3.8 million, respectively. F-10 5.6. ACCRUED EXPENSES Accrued expenses were as followscomprised of the following (amounts in thousands):
March 31, ----------------------------- 2000 1999 March 31, 1998 ----------------- ----------------- Restated ----------------------------- ------------ Accrued royalties payable $11,249 $ 5,99613,300 $ 11,249 Affiliated label payable 4,033 11,999 - Accrued selling and marketing costs 10,493 3,082 2,937 Income tax payable 4,934 5,068 1,360 Accrued interest expense 1,013 1,1251,013 Accrued bonus and vacation pay 5,514 4,473 1,210 Other 8,258 2,710 ----------------- ----------------- $45,142 $15,338 ================= =================10,117 8,276 ------------ ------------ Total $ 49,404 $ 45,160 ============ ============
6.7. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," ("SFAS No. 131") as of April 1, 1998. SFAS No. 131 establishes standards for reporting information about an enterprise's operating segments and related disclosures about its products, geographic areas and major customers. The Company publishes, develops and distributes interactive entertainment and leisure products for a variety of game platforms, including PCs, the Sony PlayStation console system, and the Nintendo 64 console system and the Sega Dreamcast console system. Based on its organizational structure, the Company operates in two reportable segments: publishing and distribution. The Company's publishing segment develops and publishes titles both internally through the studios owned by the Company and externally through third party developers. In the United States, the Company's products are sold primarily on a direct basis to major computer and software retailing organizations, mass market retailers, consumer electronic stores, discount warehouses and mail order companies. The Company conducts its international publishing activities through offices in the United Kingdom, Germany, France, Australia and Japan. The Company's products are sold internationally on a direct to retail basis and through third party distribution and licensing arrangements and through the Company's ownedwholly-owned distribution subsidiaries located in the United Kingdom, the Benelux territoriesNetherlands and Germany. The Company's distribution segment, located in the United Kingdom, the Benelux territoriesNetherlands and Germany, distributes interactive entertainment software and hardware and provides logistical services for a variety of publishers and manufacturers. A small percentage of distribution sales is derived from Activision-published titles. The President and Chief Operating Officer allocates resources to each of these segments using information on their respective revenues and operating profits before interest and taxes. The President and Chief Operating Officer has been identified as the Chief Operating Decision Maker as defined by SFAS No. 131. The President and Chief Operating Officer does not evaluate individual segments based on assets or depreciation. The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies. Revenue derived from sales between segments is eliminated in consolidation. F-14 Information on the reportable segments for the three years ended March 31, 19992000 is as follows:
Fiscal Year Endedended March 31, 1999 --------------------------------------------------------------2000 ---------------------------------------------- Publishing Distribution Corporate Total ------------- --------------- ------------- ---------------------------- Revenues from external customers $186,299 $250,186Total segment revenues $ - $436,485396,691 $ 175,514 $ 572,205 Revenue from sales between segments (40,255) 40,255 - ------------- ------------- ------------- Revenues from external customers $ 19,202356,436 $ -215,769 $ - $ 19,202572,205 ============= ============= ============= Operating income (loss) $ 17,784(35,049) $ 10,6854,724 $ (1,224) $ 27,245(30,325) ============= ============= =============
F-11
Fiscal Year Endedended March 31, 1998 --------------------------------------------------------------1999 ---------------------------------------------- Publishing Distribution Corporate Total ------------- --------------- ------------- ---------------------------- Revenues from external customers $125,067 $186,991Total segment revenues $ - $312,058205,542 $ 230,984 $ 436,526 Revenue from sales between segments $ 7,759 $(19,202) 19,202 - $ - $ 7,759 Operating income (loss) $ 5,836 $ 4,842 $ (1,192) $ 9,486
Fiscal Year Ended March 31, 1997 -------------------------------------------------------------- Publishing Distribution Corporate Total ------------- --------------- ------------- --------------- ------------- Revenues from external customers $ 87,994 $101,245186,340 $ - $189,239250,186 $ 436,526 ============= ============= ============= Operating income (loss) $ 12,398 $ 14,269 $ 26,667 ============= ============= =============
Year ended March 31, 1998 ---------------------------------------------- Publishing Distribution Total ------------- ------------- ------------- Total segment revenues $ 133,674 $ 179,232 $ 312,906 Revenue from sales between segments (7,759) 7,759 - ------------- ------------- ------------- Revenues from external customers $ -125,915 $ -186,991 $ - $ -312,906 ============= ============= ============= Operating income (loss) $ 10,0774,376 $ 2,7214,842 $ (1,267) $ 11,5319,218 ============= ============= =============
Operating expenses in the Corporate column consist entirely of amortization of goodwill resulting from the Company's merger with the Disc Company Inc., on April 1, 1992. Geographic information for the three years ended March 31, 19992000 is based on the location of the selling entity. Revenues from external customers by geographic region were as follows:
Fiscal Year Endedended March 31, -------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 ----------------- ----------------- -------------------------- ------------ ------------ United States $149,664 $ 89,936279,165 $ 65,695149,705 $ 90,784 Europe 277,524 278,032 208,817 113,456 Other 15,516 8,789 13,305 10,088 ----------------- ----------------- -------------------------- ------------ ------------ Total $436,485 $312,058 $189,239 ================= ================= ==============$ 572,205 $ 436,526 $ 312,906 ============ ============ ============
F-15 Revenues by platform were as follows:
Year ended March 31, ---------------------------------------------- 2000 1999 1998 1997 ----------------- ----------------- -------------- Restated Restated------------ ------------ ------------ Console $268,205 $131,890 $ 68,480410,892 $ 268,246 $ 132,738 PC 161,313 168,280 180,168 120,759 ----------------- ----------------- -------------------------- ------------ ------------ Total $436,485 $312,058 $189,239 ================= ================= ==============$ 572,205 $ 436,526 $ 312,906 ============ ============ ============
F-12 7.8. COMPUTATION OF NET INCOMEEARNINGS PER SHARE The following table sets forth the computations of basic and diluted net incomeearnings (loss) per share:share, (amounts in thousands, except per share data):
(amounts in thousands, except per share data)Year ended March 31, ----------------------------------------------- 2000 1999 1998 1997 --------------- --------------- --------------- Restated -------------------------------------------- ------------ ------------ NUMERATOR Net income (loss) $ 15,254(34,088) $ 5,13914,891 $ 7,6314,970 Preferred stock dividends - - (116) (151) --------------- --------------- --------------------------- ------------ ------------ Numerator for basic and diluted net incomeearnings per share-income available to common stockholders $ 15,254(34,088) $ 5,02314,891 $ 7,480 =============== =============== ===============4,854 shareholders ============ ============ ============ DENOMINATOR Denominator for basic net incomeearnings per share-weightedshare- weighted average common shares outstanding 22,162 21,339 20,26224,691 22,861 22,038 Effect of dilutive securities: Employee stock options - 942 801 689 Warrants to purchase common stock - 129 70 - --------------- --------------- --------------------------- ------------ ------------ Potential dilutive common shares - 1,071 871 689 --------------- --------------- --------------------------- ------------ ------------ Denominator for diluted net incomeearnings per share-adjusted weightedshare-weighted average common shares andoutstanding plus assumed conversions 23,233 22,210 20,951 =============== =============== ===============24,691 23,932 22,909 ============ ============ ============ Basic net incomeearnings (loss) per share $ 0.69(1.38) $ 0.240.65 $ 0.37 =============== =============== ===============0.22 ============ ============ ============ Diluted net incomeearnings (loss) per share $ 0.66(1.38) $ 0.230.62 $ 0.36 =============== =============== ===============0.21 ============ ============ ============
Options to purchase 2,188,175,10,332,000, 2,188,000 and 1,978,000 and 2,838,000 shares of common stock were outstanding for the years ended March 31, 2000, 1999 1998 and 1997,1998, respectively, but were not included in the calculations of diluted net incomeearnings (loss) per share because their effect would be antidilutive. Convertible subordinated notes and convertible preferred stock were not included in the calculations of diluted net incomeearnings per share because their effect would be antidilutive. F-13F-16 8.9. INCOME TAXES Domestic and foreign income (loss) before income taxes and details of the income tax provision (benefit) are as follows (amounts in thousands):
Year ended March 31, ------------------------------------------------------- Restated ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ---------------- ------------------- ---------------------------- ------------ ------------ Income (loss) before income taxes: Domestic $ 6,524(37,115) $ (2,215)5,945 $ 2,838(2,483) Foreign (1,621) 17,691 10,589 8,774 ---------------- ------------------- ---------------------------- ------------ ------------ $ 24,215(38,736) $ 8,37423,636 $ 11,612 ================ =================== ================8,106 ============ ============ ============ Income tax expense (benefit): Current: Federal $ (383) $ 37 $ 1,133 $ (745) State 337 124 14 31 Foreign 2,610 5,456 3,653 1,530 ---------------- ------------------- ---------------------------- ------------ ------------ Total current 2,564 5,617 4,800 816 ---------------- ------------------- ---------------------------- ------------ ------------ Deferred: Federal (202) (2,580) (2,961)(10,047) (418) (2,679) State (1,448) 57 (232) (1,244) ---------------- ------------------- ---------------------------- ------------ ------------ Total deferred (145) (2,812) (4,205) ---------------- ------------------- ----------------(11,495) (361) (2,911) ------------ ------------ ------------ Add back benefit credited to additional paid-in capital: Tax benefit related to stock option exercises 3,017 1,059 1,247 736 Tax benefit related to utilization of pre- bankruptcy net operating loss carryforwards 1,266 2,430 - 6,634 ---------------- ------------------- ---------------------------- ------------ ------------ 4,283 3,489 1,247 7,370 ---------------- ------------------- ---------------------------- ------------ ------------ $ 8,961(4,648) $ 3,2358,745 $ 3,981 ================ =================== ================3,136 ============ ============ ============
F-17 The items accounting for the difference between income taxes computed at the U.S. federal statutory income tax rate and the income tax provision for each of the years are as follows:
Year ended March 31, ------------------------------------------------------- Restated --------------------------------------------------------------------------------------- 2000 1999 1998 1997 --------------- -------------------- ---------------------------- ------------ ------------ Federal income tax provision (benefit) at statutory rate (34.0%) 34.0% 34.0% 35.0% State taxes, net of federal benefit (4.5%) 1.3% (1.2%) 2.6% Nondeductible amortization 18.6% 1.7% 4.4% 3.0% Nondeductible merger fees 0.4% 0.8% 3.6% - Research and development credits (8.6%) (5.4%) (5.3%) (6.4%) Incremental effect of foreign tax rates 2.8% (0.9%) 0.7% (3.1%) Increase (reduction) of valuation allowance 13.8% 5.1% - 3.1% Other (0.5%) 0.4% 2.4% 0.1% --------------- -------------------- ----------------2.5% ------------ ------------ ------------ (12.0%) 37.0% 38.6% 34.3% =============== ==================== ================38.7% ============ ============ ============
F-14 Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities for accounting purposes and the amounts used for income tax purposes. The components of the net deferred tax asset and liability wereare as follows (amounts in thousands):
March 31, ------------------------------ 2000 1999 March 31, 1998 ---------------------------------------------- Restated ------------------------------- ------------ Deferred asset: Allowance for bad debts $ 9421,019 $ 358942 Allowance for sales returns 5,151 144 2,458Inventory reserve 799 172 Vacation & bonus reserve 763 404 Royalty reserve 774 1,649 - Miscellaneous 1,591 1,304Other 1,585 1,298 Tax credit carryforwards 12,062 6,726 3,320 Net operating loss carryforwards 12,828 10,534 9,184 ------------------ -------------------Amortization & depreciation 7,055 56 ------------ ------------ Deferred asset 21,586 16,62442,036 21,925 Valuation allowance (13,041) (6,916) (8,107) ------------------ ------------------------------- ------------ Net deferred asset 14,670 8,517 ------------------ -------------------28,995 15,009 ------------ ------------ Deferred liability: Deferred compensation 110 - Capitalized research expenses 7,864 5,512 - State taxes 917 386 Deferred compensation - ------------------ -------------------110 ------------ ------------ Deferred liability 8,781 6,008 - ------------------ ------------------------------- ------------ Net deferred asset $ 8,66220,214 $ 8,517 ================== ===================9,001 ============ ============
In accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued by the AICPA, benefits from loss carryforwards arising prior to the Company's reorganization are recorded as additional paid-in capital. During the year ended March 31, 1999, $2.42000, $1.3 million was recorded as additional paid-in capital. F-18 As of such benefitMarch 31, 2000, the Company's available net operating loss carryforward of $31.8 million and $8.0 million for federal and state purposes, respectively, is subject to certain limitations as defined under Section 382 of the Internal Revenue Code. The net operating loss carryforwards expire from 2002 to 2019. The Company has tax credit carryforwards of $8.1 million and $4.0 million for federal and state purposes, respectively, which expire from 2004 to 2019. At March 31, 2000, the Company's deferred income tax asset for tax credit carryforwards and net operating loss carryforwards was recognized throughreduced by a reduction in the valuation allowance. The reduction in the valuation allowance during the years ended March 31, 1999 was determined based on the Company's assessment of the realizability of its deferred tax assets,$13.0 million. Of such valuation allowance, $3.2 million relates to SOP 90-7 which, assessment was based on recent operating history, and the Company's expectation that operationsif realized, will continue to generate taxable income,be recorded as well as other factors.additional paid-in capital. Realization of the deferred tax assets is dependent upon the continued generation of sufficient taxable income prior to expiration of tax credits and loss carryforwards. Although realization is not assured, management believes it is more likely than not that the net carrying value of the deferred tax asset of $8.7 million will be realized. The amount of deferred tax assets considered realizable, however, could be reduced in the future if estimates of future taxable income are reduced. Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $15.7 million at March 31, 2000. Deferred income taxes on these earnings have not been provided as these amounts are considered to be permanent in duration. 10. LONG-TERM DEBT BANK LINES OF CREDIT AND OTHER DEBT The Company's available net operating loss carryforward for federal tax reporting purposes approximates $31.0long-term debt consists of the following (amounts in thousands):
March 31, ------------------------------ 2000 1999 ------------ ------------ U.S. Facility $ 22,496 $ - The Netherlands Facility 3,509 5,513 Mortgage notes payable and other 4,033 1,622 ------------ ------------ 30,038 7,135 Less current portion (16,260) (5,992) ------------ ------------ Long-term debt, less current portion $ 13,778 $ 1,143 ============ ============
In June 1999, the Company obtained a $125.0 million revolving credit facility and term loan (the "U.S. Facility") with a group of banks. The U.S. Facility provides the Company with the ability to borrow up to $100.0 million and is subjectissue letters of credit up to certain limitations as defined under Section 382$80 million on a revolving basis against eligible accounts receivable and inventory. The $25.0 million term loan portion of the Internal Revenue Code.U.S. Facility was used to acquire Expert Software, Inc. in June 1999 and to pay costs related to such acquisition and the securing of the U.S. Facility. The term loan has a three year term with principal amortization on a straight-line quarterly basis beginning December 31, 1999 and a borrowing rate based on the banks' base rate (which is generally equivalent to the published prime rate) plus 2% or LIBOR plus 3%. The revolving portion of the U.S Facility has a borrowing rate based on the banks' base rate plus 1.75% or LIBOR plus 2.75% (weighted average interest rate of approximately 9.50% for the year ended March 31, 2000) and matures June 2002. The Company pays a commitment fee of 1/2% on the unused portion of the revolving line. The U.S. Facility is collateralized by substantially all of the assets of the Company and its U.S. subsidiaries. The U.S. Facility contains various covenants that limit the ability of the Company to incur additional indebtedness, pay dividends or make other distributions, create certain liens, sell assets, or enter into certain mergers or acquisitions. The Company is also required to maintain specified financial ratios related to net operating loss carryforwards expire from 2006worth and fixed charges. As of March 31, 2000, the Company was in compliance with these covenants. As of March 31, 2000, $20.0 million was outstanding under the term loan portion of the F-19 U.S. Facility and $2.5 million was outstanding under the revolving portion of the U.S. Facility. No letters of credit were outstanding against the revolving portion of the U.S. Facility at March 31, 2000. On June 8, 2000, the Company amended certain of the covenants of its U.S. Facility. The amended U.S. Facility permits the Company to 2013.purchase up to $15.0 million in shares of its common stock as well as its convertible subordinated notes in accordance with the Company's stock repurchase program (described in Note 15), the distribution of "Rights" under the Company's shareholders' rights plan (described in Note 15), as well as the reorganization of the Company's organizational structure into a holding company form. The Company has taxa revolving credit carryforwardsfacility through its CD Contact subsidiary in the Netherlands (the "Netherlands Facility"). The Netherlands Facility permits revolving credit loans and letters of $4.6credit up to Netherlands Guilders ("NLG") 45 million ($19.4 million) and NLG 30 million ($13.0 million) at March 31, 2000 and 1999, respectively, based upon eligible accounts receivable and inventory balances. The Netherlands Facility is due on demand, bears interest at a Eurocurrency rate plus 1.25% (weighted average interest rate of 5.5% as of March 31, 2000) and matures March 2001. Letters of credit outstanding under the Netherlands Facility were NLG 3.8 million ($1.6 million) and NLG 17.9 million ($6.9 million) and borrowings outstanding under the Netherlands Facility were $3.5 million and $2.2$5.5 million at March 31, 2000 and 1999, respectively. The Company also has revolving credit facilities with its Centresoft subsidiary located in the United Kingdom (the "UK Facility") and its NBG subsidiary located in Germany (the "German Facility"). The UK Facility provides for federalBritish Pounds ("GBP") 7.0 million ($11.2 million) of revolving loans and state purposes,GBP 6.0 million ($9.6 million) of letters of credit, bears interest at LIBOR plus 2%, is collateralized by substantially all of the assets of the subsidiary and matures in July 2000. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of March 31, 2000, the Company was in compliance with these covenants. No borrowings were outstanding against the UK facility at March 31, 2000 or 1999. Letters of credit of GBP 6.0 million ($9.6 million) were outstanding against the UK Facility at March 31, 2000 and 1999. As of March 31, 2000, the German Facility provides for revolving loans up to Deutsche Marks ("DM") 4 million ($1.9 million), bears interest at 6.25%, is collateralized by a cash deposit of approximately GBP 650,000 ($1.0 million) made by the Company's CentreSoft subsidiary and has no expiration date. No borrowings were outstanding against the German Facility as of March 31, 2000 and 1999. Mortgage notes payable relate to the land, office and warehouse facilities of the Company's German and Netherlands subsidiaries. The notes bear interest at 5.45% and 5.35%, respectively, which expire from 2006 to 2013. 9. COMMITMENTS, CONTINGENCIES AND DEBT BANK LINE OF CREDITand are collateralized by the related assets. The Netherlands mortgage note payable is due in quarterly installments of NLG 25,000 ($11,725) and matures January 2019. The German mortgage note payable is due in bi-annual installments of DM 145,000 ($70,615) beginning June 2002 and matures December 2019. As of March 31, 1999, the Company had a $40.0 million revolving credit and letter of credit facility (the "Prior Facility") with a group of banks. The Prior Facility currently providesprovided the Company with the ability to borrow funds and issue letters of credit against eligible accounts receivable up to $40.0 million. The Prior Facility was scheduled to expire in October 2001. As of March 31, 1999, the Company had $22.4 million in letters of credit outstanding and no borrowings against the Prior Facility (there were no outstanding letters of credit or borrowings against theFacility. The Prior Facility in the fiscal year ended March 31, 1998). In addition, the Company had a $2 million line of credit agreement (the "Asset Line") with a bank that expired in September 1998. Approximately $1.1 million and $1.2 million was outstanding on this line as of March 31, 1999 and 1998, respectively. In addition, the Company's CentreSoft subsidiary has a revolving credit facility (the "UK Facility") with its bank in the United Kingdom for approximately $11.2 million. The UK Facility can be used for working capital requirements and expiresterminated in June 2000. The Company had no borrowings outstanding against1999 in conjunction with the UK facilityacquisition of the U.S. Facility. Annual maturities of long-term debt are as of March 31, 1999. In the Netherlands, the Company's CD Contact subsidiary has a credit facility ("the Netherlands Facility") with a bank that permits borrowings against eligible accounts receivable and inventory up to approximately $25 million. Borrowings under the Netherlands Facility are due on demand and totaled $6.0 as of March 31, 1999. Letters of credit outstanding under the Netherlands facility totaled $6.9 million as of March 31, 1999. F-15follows: 2001 $16,260 2002 10,190 2003 190 2004 190 2005 190 Thereafter 3,018 ------- Total $30,038 =======
F-20 PRIVATE PLACEMENT OF CONVERTIBLE SUBORDINATED NOTES In December 1997, the Company completed the private placement of $60.0 million principal amount of 6 3/4% convertible subordinated notes due 2005 (the "Notes"). The Notes are convertible, in whole or in part, at the option of the holder at any time after December 22, 1997 (the date of original issuance) and prior to the close of business on the business day immediately preceding the maturity date, unless previously redeemed or repurchased, into common stock, $.000001 par value, of the Company, at a conversion price of $18.875 per share, (equivalent to a conversion rate of 52.9801 shares per $1,000 principal amount of Notes), subject to adjustment in certain circumstances. The Notes are redeemable, in whole or in part, at the option of the Company at any time on or after January 10, 2001, subject to premiums through December 31, 2003. 11. COMMITMENTS AND CONTINGENCIES DEVELOPER CONTRACTS In the normal course of business, the Company enters into contractual arrangements with third parties for the development of products. Under these agreements, the Company commits to provide specified payments to a developer, contingent upon the developer's achievement of contractually specified milestones. Assuming all contractually specified milestones are achieved, for contracts in place as of March 31, 2000, the total future minimum contract commitment is approximately $42.9 million, of which $35.0 million, $6.6 million and $1.3 million is scheduled to be paid in fiscal 2001, 2002 and 2003, respectively. Additionally, under the terms of a production financing arrangement, the Company has a commitment to purchase two future PlayStation 2 titles from independent third party developers upon their completion for an estimated $8.4 million. Failure by the developers to complete the project within the contractual time frame or specifications alleviates the Company's commitment. LEASE OBLIGATIONS The Company leases certain of its facilities under non-cancelable operating lease agreements. Total future minimum lease commitments as of March 31, 19992000 are as follows (amounts in thousands):
Year ending March 31, 20002001 $ 3,760 20013,950 2002 3,670 2003 3,608 2002 3,281 2003 3,139 2004 3,1233,594 2005 3,378 Thereafter $11,4508,789 ------------ Total $ 26,989 ============
Rent expense under these leases for the years ended March 31, 2000, 1999 1998 and 19971998 was approximately $3,900,000, $3,219,000$4.4 million, $4.4 million and $2,279,000,$3.3 million, respectively. LEGAL PROCEEDINGS The Company is party to routine claims and suits brought against it in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. 10.F-21 12. STOCKHOLDERS' EQUITY AND COMPENSATION PLANS OPTION PLANS The Company has twosponsors three stock option plans for the benefit of officers, employees, consultants and others. The Activision 1991 Stock Option and Stock Award Plan, as amended, (the "1991 Plan") permits the granting of "Awards" in the form of non-qualified stock options, incentive stock options ("ISOs"), stock appreciation rights ("SARs"), restricted stock awards, deferred stock awards and other Common-Stock-basedcommon stock-based awards. The total number of shares of Common Stockcommon stock available for distribution under the 1991 Plan is 7,666,667.7,566,667. The 1991 Plan requires available shares to consist in whole or in part of authorized and unissued shares foror treasury shares. There were 156,500approximately 449,000 shares remaining available for grant under the 1991 Plan as of March 31, 1999.2000. On September 23, 1998, the stockholders of the Company approved the Activision 1998 Incentive Plan (the "1998 Plan"). The 1998 Plan permits the granting of "Awards" in the form of non-qualified stock options, ISOs, restricted stock awards, deferred stock awards and other common stock-based awards to officers, employees, consultants and others. The total number of shares of Common Stockcommon stock available for distribution under the 1998 Plan is 3,000,000. The 1998 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. There were 1,087,435approximately 250,000 shares remaining shares available for grant under the Incentive1998 Plan as of March 31, 1999.2000. On, April 26, 1999, the Board of Directors approved the Activision 1999 Incentive Plan (the "1999 Plan"). The 1999 Plan permits the granting of "Awards" in the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred share awards and other common stock-based awards. The total number of shares of common stock available for distribution under the 1999 Plan is 5,000,000. The 1999 Plan requires available shares to consist in whole or in part of authorized and unissued shares or treasury shares. As of March 31, 2000, there were approximately 3,386,000 shares remaining available for grant under the 1999 Plan. The exercise price for stock optionsAwards issued under the 1991 Plan, 1998 Plan and 19981999 Plan (collectively, the "Plans") is determined at the discretion of the Board of Directors (or the Compensation Committee of the Board of Directors), and for ISOs, is not to be less than the fair market value of the Company's common stock at the date of grant, or in the case of non-qualified options, must exceed or be equal to 85% of the fair market value at the date of grant. Options typically become exercisable in equal installments over a period not to exceed five years and must be exercised within 10 years of the date of grant. However, certain options granted to executives vest immediately. Historically, stock options have been granted with exercise prices equal to or greater than the fair market value at the date of grant. F-16 ActivityDIRECTOR WARRANT PLAN The Director Warrant Plan, which expired on December 19, 1996, provided for the automatic granting of warrants ("Director Warrants") to purchase 16,667 shares of common stock to each director of the Plans duringCompany who was not an officer or employee of the last three fiscal years was as follows (amounts in thousands, except weighted average exercise price amounts):
1999 1998 1997 ---------------------- ---------------------- --------------------- Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg (000) Ex Price (000) Ex Price (000) Ex Price ------- --------- ------- --------- ------- --------- Outstanding at beginning of year 6,218 $ 11.47 5,228 $ 11.69 3,725 $ 11.37 Granted 3,538 $ 10.27 2,776 $ 12.14 1,997 $ 11.28 Exercised (605) $ 8.68 (599) $ 8.35 (313) $ 7.05 Forfeited (1,202) $ 15.33 (1,187) $ 14.45 (181) $ 9.24 ------- --------- ------- --------- ------- --------- Outstanding at end of year 7,949 $ 10.54 6,218 $ 11.47 5,228 $ 11.69 ======= ========= ======= ========= ======= ========= Exercisable at end of year 3,754 10.00 2,532 $ 9.78 3,292 $ 12.62
Company or any of its subsidiaries. Director Warrants granted under the Director Warrant Plan vest 25% on the first anniversary of the date of grant, and 12.5% each six months thereafter. The expiration of the Plan had no effect on the outstanding Warrants. As of March 31, 2000, there were no shares of common stock available for distribution under the Director Warrant Plan. The range of exercise prices for optionsDirector Warrants outstanding as of March 31, 19992000 was $.75 to $17.75.$8.50. The range of exercise prices for optionsDirector Warrants is wide due to increases and decreases in the Company's stock price over the period of the grants. For the year ended March 31, 1999, 3,320,000 options were granted at an exercise price equal to the fair market value on the date of grant and 218,000 options were granted at an exercise price greater than fair market value on the date of grant. The following tables summarize information about stock options outstanding asAs of March 31, 1999:
Outstanding Options Exercisable Options ------------------------------------------- -------------------------- Remaining Wtd Avg Contractual Shares Life Wtd Avg Shares Wtd Avg (000) (in years) Exercise Price (000) Exercise Price ------- ------------- -------------- ------- -------------- Range of exercise prices: $0.75 to $9.44 1,366 6.67 $ 6.91 815 $ 5.52 $9.46 to $9.87 1,741 8.45 $ 9.69 1,268 $ 9.71 $10.00 to $10.50 1,429 8.88 $10.27 463 $10.30 $10.56 to $11.06 1,324 8.78 $10.77 341 $10.77 $11.12 to $13.56 1,300 7.60 $12.62 530 $13.03 $13.62 to $17.00 788 7.98 $15.37 336 $15.98 $17.75 to $17.75 1 6.49 $17.75 1 $17.75
These options will expire if not exercised at specific dates ranging from January 2000, to April 2009. Prices for options exercised during33,300 of the three year period ended March 31, 1999 ranged from $.75 to $15.75.outstanding and vested Director Warrants have a weighted average remaining contractual life of 1.78 years and a weighted average exercise price of $.75; 20,000 of the outstanding and vested Director Warrants have a weighted average remaining contractual life of 4.82 years and a weighted average exercise price of $6.50; and 20,000 of the outstanding and vested Director Warrants have a weighted average remaining contractual life of 4.82 years and a weighted average exercise price of $8.50. F-22 EMPLOYEE STOCK PURCHASE PLAN The Company has an employee stock purchase plan for all eligible employees (the "Purchase Plan"). Under the Purchase Plan, shares of the Company's common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first or last day of each six-month period (the "Offering Period"). Employees may purchase shares having a value not exceeding 10% of their gross compensation during an Offering Period. Employees purchased 39,002 and 42,093 shares at a price of $9.24 per share$10.68 and 45,868 shares at a price of $8.92$9.24 per share during the Purchase Plan's offering period ended September 30, 1999 and 1998, respectively, and March 31, 1999, respectively. As33,440 and 45,868 shares at a price of March 31, 1999, 29,939 shares were reserved for future issuance under$10.25 and $8.92 per share during the Purchase Plan. EMPLOYEE RETIREMENT PLAN The Company has a retirement plan covering substantially all of its eligible employees. The retirement plan is qualified in accordance with Section 401(k) of the Internal Revenue Code. Under the plan, employees may defer up to 15% of their pre-tax salary, but not more than statutory limits. The Company contributes 5% of each dollar contributed by a participant. The Company's matching contributions to the plan were $40,000, $40,000 and $25,000 during the yearsPlan's offering period ended March 31, 2000 and 1999, 1998 and 1997, respectively. DIRECTOR WARRANT PLAN The Director Warrant Plan, which expired on December 19, 1996, provided for the automatic granting of warrants ("Director Warrants") to purchase 16,667 shares of the Common Stock to each director of the Company who was not an officer or employee of the Company or any of its subsidiaries. Director Warrants granted under the Director F-17 Warrant Plan vest 25% on the first anniversary of the date of grant, and 12.5% each six months thereafter. The expiration of the Plan had no effect on the outstanding Warrants. As of March 31, 1999, there were no shares of Common Stock available for distribution under the Director Warrant Plan. Director Warrant activity was as follows (amounts in thousands, except weighted average exercise price amounts):
1999 1998 1997 --------------------- --------------------- --------------------- Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg (000) Ex Price (000) Ex Price (000) Ex Price -------- --------- -------- --------- -------- --------- Outstanding at beginning and end of year 73 $4.43 73 $4.43 73 $4.43 ======== ========= ======== ========= ======== ========= Exercisable at end of year 73 $4.43 73 $4.43 73 $4.43 ======== ========= ======== ========= ======== =========
The range of exercise prices for Director Warrants outstanding as of March 31, 1999 was $.75 to 8.50. The range of exercise prices for Director Warrants is wide due to increases and decreases in the Company's stock price over the period of the grants. As of March 31, 1999, 33,300 of the outstanding and vested Director Warrants have a weighted average remaining contractual life of 2.78 years and a weighted average exercise price of $.75; 20,000 of the outstanding and vested Director Warrants have a weighted average remaining contractual life of 5.82 years and a weighted average exercise price of $6.50; and 20,000 of the outstanding and vested Director Warrants have a weighted average remaining contractual life of 5.82 years and a weighted average exercise price of $8.50. OTHER EMPLOYEE OPTIONS AND WARRANTS On March 23, 1999, 1,000,000 options to purchase common stock were issued to each of Robert A. Kotick, the Company's Chairman and Chief Executive Officer, and Brian G. Kelly, the Company's Co-Chairman. The options were granted in connection with employment agreements between the Company and each of Mr. Kotick and Mr. Kelly dated January 12, 1999. The options vest in five equal annual installments beginning on the date of issuance, have an exercise price of $10.50 per share, and expire on January 12, 2009. On December 11, 1998,At March 31, 2000, 2,000,000 and 800,000 shares were outstanding and exercisable, respectively. The Company also issues stock options in conjunction with acquisition transactions. For the Company grantedyear ended March 31, 2000, approximately 174,000 and 148,000 options were outstanding and exercisable, respectively, relating to purchase 80,000 sharesoptions issued in conjunction with the acquisitions of the Company's common stock to four of its outside directors. The options have an exercise price of $11.50, vest in five equal annual installments beginning a year from the date of issuance,Head Games and expire on December 11, 2008. On June 4, 1998, the Company granted options to purchase 60,000 shares of the Company's common stock to four of its outside directors. The options have an exercise price of $9.50, vest in two equal annual installments beginning a year from the date of issuance, and expire on June 4, 2008.Expert. During the fiscal year ended March 31, 1998,1997, the Company issued warrants to purchase 40,000 shares of the Company's common stock, with a weighted averageat exercise price of $12.88prices ranging from $6.59 to $6.91 to two of its outside directors in connection with their election to the Board. Such warrants have vesting terms identical to the Directors Warrants and expire within 10 years. As of March 31, 1999, 19,3382000, 40,000 and 29,000 shares with weighted average exercise prices of such$12.85 and $12.88 were outstanding and exercisable, respectively. Activity of all employee and director options and warrants during the last three fiscal years was as follows (amounts in thousands, except weighted average exercise price amounts):
2000 1999 1998 ----------------------- ----------------------- ----------------------- Wtd Avg Ex Wtd Avg Ex Wtd Avg Ex Shares Price Shares Price Shares Price ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at beginning of year 9,949 $10.54 6,218 $11.47 5,228 $11.69 Granted 3,767 11.52 5,538 10.27 2,776 12.14 Exercised (2,331) 9.15 (605) 8.68 (599) 8.35 Forfeited (1,053) 11.91 (1,202) 15.33 (1,187) 14.45 ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at end of year 10,332 $11.07 9,949 $10.54 6,218 $11.47 =========== =========== =========== =========== =========== =========== Exercisable at end of year 4,715 $10.25 4,154 $10.00 2,532 $9.78 =========== =========== =========== =========== =========== ===========
For the year ended March 31 2000, 2,501,000 options with a weighted average exercise price of $12.88 were vestedgranted at an exercise price equal to the fair market value on the date of grant and exercisable.705,000 options with a weighted average exercise price of $10.71 were granted at an exercise price greater than fair market value on the date of grant. Additionally, in conjunction with the acquisition of Expert, 561,000 options with a weighted average exercise price of $6.48 were granted at an exercise price less than market value on the date of grant. Options granted to Expert were outside any of the Plans. F-23 The following tables summarize information about all employee and director stock options and warrants outstanding as of March 31, 2000:
Outstanding Options Exercisable Options ------------------------------------------------- -------------------------------- Remaining Wtd Avg Contractual Life Wtd Avg Wtd Avg Shares (in years) Exercise Price Shares Exercise Price --------------- ---------------- ---------------- --------------- ---------------- Range of exercise prices: $0.75 to $5.00 195 3.49 $3.31 195 $3.31 $5.01 to $10.00 2,552 7.25 9.08 1,930 8.92 $10.01 to $15.00 6,733 8.51 11.38 2,285 11.12 $15.01 to $20.00 849 8.04 16.27 302 16.45 $20.01 to $23.04 3 9.23 23.04 3 23.04
NON-EMPLOYEE WARRANTS During the fiscal year ended March 31, 1999, the Company issued the following warrants to purchase an aggregate of 1,000,000 shares of common stock in connection with software license agreements:
Exercise Expiration Warrants Shares Price Vesting Schedule Date -------- ---------- -------- ---------------------------------------------- ------------- ------------ ------------ ---------------------------------------------------------------------- #1 500,000 $ 10.27 Vest ratably over 5 years beginning on date of grant. 9/16/08 grant. #2 250,000 (a) Vest ratably over 5 years beginning on 9/16/03. 9/16/08 #3 250,000 $ 12.70 Vest in full on 7/2/99. 7/2/08 ---------- -------------------- ------------ Total 1,000,000 ======================
(a) Exercise price iswill be equal to the average closing price of the Company's common stock on the NASDAQ National Market for the thirty30 trading days preceding September 16, 2003. In May 1999, the Company granted warrants to purchase 100,000 shares of the Company's common stock at an exercise price of $11.63 per share to Cabela's, Inc. ("Cabela's") in connection with, and as partial consideration for, a license agreement that allows the Company to utilize the Cabela's name in conjunction with certain Activision products. The warrants have a seven year term and vest in annual increments of approximately 14.25%. The fair value of the warrants was determined using the Black-Scholes pricing model, assuming a risk-free rate of 4.77%, a volatility factor of .6666% and expected terms as noted in the above table.above. In accordance with the Financial Accounting Standards Board's Emerging Issues Task Force Issue No. 96-18 "Accounting for Equity Instruments that are Issued To Other Than Employees for Acquiring or in Connection With Selling Goods or Services" (EITF 96-18), the Company measures the fair value of the securities on the measurement date. The measurement date is the earlier of the date on which the other party's performance is completed or the date of a performance commitment, as defined. The fair value of each warrant is capitalized and amortized to royalty expense when the related product is released and the related revenue is recognized. During fiscal year 2000 and 1999, $387,620$5.8 million and $0.4 million, respectively, was amortized and included in royalty expense relating to warrants. No amortization was recognized in 1998. PRO FORMA INFORMATION The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its employee stock options. Under APB No. 25, if the exercise price of the Company's employee F-24 stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized in the Company's financial statements. F-18 Pro forma information regarding net income (loss) and net income (loss)earnings per share is required by SFAS No. 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Purchase Plan and Director Warrant Plan and other employee option grants, collectively called "options") granted during fiscal 2000, 1999 1998 and 19971998 under the fair value method of that statement. The fair value of options granted in the years ended March 31, 2000, 1999 1998 and 19971998 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Incentive PlanOption Plans and Other Employee Options Purchase Plan Director Warrant Plan ---------------------- ----------------------- ------------------------------------------------ --------------------------- ------------------------- 2000 1999 1998 19972000 1999 1998 19972000 1999 1998 1997 ----- ----- ----- ----- ----- ----- ----- ----- ------------- -------- -------- -------- -------- -------- -------- -------- -------- Expected life (in years) 1 1.5 3.0 2.2 0.5 0.5 0.5 1 0.5 - - Risk free interest rate 6.15% 4.77% 5.62% 6.45%6.15% 4.77% 5.62% 6.45%6.15% 4.77% - - Volatility .66 .63 .60 .66 .71 .60 .66 -67% 66% 63% 67% 66% 71% 67% 66% - Dividend yield - - - - - - - - -
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of its options. For options granted during fiscal 2000, the per share weighted average fair value of options with exercise prices equal to market value on date of grant, exercise prices greater than market value and exercise prices less than market value were $5.91, $2.64 and $8.00, respectively. The weighted average estimated fair value of Plan sharesoptions and warrants granted to employees and directors during the years ended March 31, 1999 1998 and 19971998 was $11.12 $13.47 and $12.72$13.47 per share, respectively. The per share weighted average estimated fair value of Employee Stock Purchase Plan shares granted during the yearyears ended March 31, 2000, 1999 and 1998 were $3.35, $2.85 and $2.65, respectively. No Director Warrants were granted during the year ended March 31, 1999. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (amounts in thousands except for net income (loss) per share information):
Year ended March 31, -------------------------------------------------------------------------------- 2000 1999 1998 1997 ---------- ---------- --------- Restated Restated ---------- --------- Pro forma net income (loss) $ 1,111 $ (2,253) $ 633$(45,355) $748 $(2,422) Pro forma basic net income (loss)earnings per share $ 0.05 $ (0.11) $ 0.03(1.84) 0.01 (0.13) Pro forma diluted net income (loss)earnings per share $ 0.05 $ (0.11) $ 0.03(1.84) 0.01 (0.13)
The effects on pro forma disclosures of applying SFAS No. 123 are not likely to be representative of the effects on pro forma disclosures of future years. Because SFAS No. 123EMPLOYEE RETIREMENT PLAN The Company has a retirement plan covering substantially all of its eligible employees. The retirement plan is applicable onlyqualified in accordance with Section 401(k) of the Internal Revenue Code. Under the plan, employees may defer up to options granted15% of their pre-tax salary, but not more than statutory limits. The Company contributes 5% of each dollar contributed by a participant. The Company's matching contributions to the plan were $46,000, $40,000 and $25,000 during fiscal 1996 through 1999, the pro forma effect will not be fully reflected until the fiscal yearyears ended March 31, 2000. F-192000, 1999 and 1998, respectively. F-25 11.12. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash investing and financing activities and supplemental cash flow information for the fiscal years ended March 31, 1999, 1998 and 1997 is as follows (amounts in thousands):
For the yearsYears ended March 31, -------------------------------------- Restated -------------------------------------------------------------------- 2000 1999 1998 1997 ------ ------ ------------------ ------------ ------------ Non-cash investing and financing activities: Stock and warrants to acquire common stock issued in exchange for licensing rights $3,368 $1,214 $ 8228,529 $ 3,368 $ 1,214 Tax benefit derived from net operating loss carryforward utilization 1,266 2,430 - 6,634 utilization Tax benefit attributable to stock option exercises 3,017 1,059 1,247 736 Subordinated loan stock debentures converted to common stock in pooling transaction - - 3,216 - Redeemable preferred stock converted to common stock - 1,286 - in pooling transaction - - 1,286 Convertible preferred stock converted to common stock - 214 - in pooling transaction - - 214 Stock issued to effect business combination 7,171 - 136174 Assumption of debt to effect business combination - 9,100 - Conversion of notes payable to common stock - 4,500 - 259 Supplemental cash flow information: Cash paid for income taxes $2,814 $2,174 $ 4736,333 $ 2,814 $ 2,174 ============ ============ ============ Cash paid for interest $ 10,519 $ 5,513 $ 675 -============ ============ ============
F-20F-26 12.13. QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
Quarter Ended --------------------------------------------------------------------------------------------------------- Year (Amounts in thousands, except per share data) June 30 Sept 30 Dec 31 Mar 31 (1) Ended ------- ------- -------- -------- ------------------ ---------- ----------- ------------ ------------ Fiscal 19992000 (quarter ended June 30 restated): Net revenues $61,531 $66,182 $193,537 $115,235 $436,485$ 84,142 $ 115,363 $ 268,862 $ 103,838 $ 572,205 Operating income (loss) (5,637) (2,783) 26,328 9,337 27,245(6,101) 3,525 38,241 (65,990) (30,325) Net income (loss) (3,744) (2,234) 16,022 5,210 15,254(4,575) 1,063 22,301 (52,877) (34,088) Basic incomeearnings (loss) per share $ (0.17) $ (0.10) $ 0.72 $ 0.23 $ 0.69(0.19) 0.04 0.89 (2.07) (1.38) Diluted net incomeearnings (loss) per share $ (0.17) $ (0.10) $ 0.64 $ 0.22 $ 0.66(0.19) 0.04 0.75 (2.07) (1.38) Common stock price per share High $ 11.62 $ 13.75 $ 14.87 $ 13.81 $ 14.8714.56 17.75 17.50 17.69 17.75 Low $ 9.37 $ 9.37 $ 8.75 $ 9.75 $ 8.7510.31 12.63 13.94 12.06 10.31 Fiscal 19981999 (restated): Net revenues $38,560 $65,788 $139,587 $ 68,123 $312,05861,541 $ 66,182 $ 193,537 $ 115,266 $ 436,526 Operating income (loss) (9,383) 3,591 13,742 1,536 9,486(5,524) (2,735) 25,873 9,053 26,667 Net income (loss) (5,925) 2,041 8,334 689 5,139(3,671) (2,206) 15,736 5,032 14,891 Basic incomeearnings (loss) per share $ (0.28) $ 0.09 $ 0.39 $ 0.03 $ 0.24(0.16) (0.10) 0.69 0.22 0.65 Diluted net incomeearnings (loss) per share $ (0.28) $ 0.09 $ 0.36 $ 0.03 $ 0.23(0.16) (0.10) 0.61 0.21 0.62 Common stock price per share High $ 14.75 $ 15.50 $ 18.62 $ 17.87 $ 18.6211.62 13.75 14.87 13.81 14.87 Low $ 9.87 $ 11.00 $ 13.00 $ 9.50 $ 9.509.37 9.37 8.75 9.75 8.75
13.(1) In the fourth quarter of fiscal 2000, the Company initiated a strategic restructuring which resulted in additional costs of $70.2 million reflected in the consolidated statement of operations in the fourth quarter. See Note 3, "Strategic Restructuring Plan." 14. ORGANIZATIONAL STRUCTURE Effective June 9, 2000, Activision reorganized into a holding company form of organizational structure, whereby Activision Holdings, Inc., a Delaware corporation ("Activision Holdings"), became the holding company for Activision and its subsidiaries. The new holding company organizational structure will allow Activision to manage its entire organization more effectively and broadens the alternatives for future financings. The holding company organizational structure was effected by a merger conducted pursuant to Section 251 (g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company structure without a vote of the stockholders of the constituent corporations. In the merger, ATVI Merger Sub, Inc., a Delaware corporation, organized for the purpose of implementing the holding company organizational structure,(the "Merger Sub"), merged with and into Activision with Activision as the surviving corporation (the "Surviving Corporation"). Prior to the merger, Activision Holdings was a direct, wholly-owned subsidiary of Activision and Merger Sub was a direct, wholly owned subsidiary of Activision Holdings. Pursuant to the merger, (i) each issued and outstanding share of common stock of Activision (including treasury shares) was converted into one share of common stock of Activision Holdings, (ii) each issued and outstanding share of Merger Sub was converted into one share of the Surviving Corporation's common stock, and Merger Sub's corporate existence ceased, and (iii) all of the issued and outstanding shares of Activision Holdings owned by Activision were automatically canceled and retired. As a result of the merger, Activision became a direct, wholly owned subsidiary of Activision Holdings. Immediately following the merger, Activision changed its name to "Activision Publishing, Inc." and Activision Holdings changed its name to "Activision, Inc." The holding company's common stock will continue to trade on The Nasdaq National Market under the symbol ATVI. F-27 The conversion of shares of Activision's common stock in the merger occurred without an exchange of certificates. Accordingly, certificates formerly representing shares of outstanding common stock of Activision are deemed to represent the same number of shares of common stock of Activision Holdings. The change to the holding company structure was tax free for federal income tax purposes for stockholders. These transactions had no impact on the Company's consolidated financial statements. 15. SUBSEQUENT EVENTS -- UNAUDITED BANK LINE OF CREDIT On June 22, 1999,REPURCHASE PLAN As of May 9, 2000, the Board of Directors authorized the Company replacedto purchase up to $15.0 million in shares of its common stock as well as its convertible subordinated notes. The shares and notes could be purchased from time to time through the Prior Facilityopen market or in privately negotiated transactions. The amount of shares and notes purchased and the timing of purchases was based on a number of factors, including the market price of the shares and shares, market conditions, and such other factors as the Company's management deemed appropriate. The Company has financed the purchase of shares with a $125 million revolving credit facility and term loan (the "New Facility") with a new groupavailable cash. As of banks that providesJune 19, 2000, the Company withhas repurchased 2.3 million shares of its common stock for approximately $15.0 million. SHAREHOLDERS' RIGHTS PLAN On April 18, 2000, the abilityCompany's Board of Directors approved a shareholders rights plan (the "Rights Plan"). Under the Rights Plan, each common stockholder at the close of business on April 19, 2000, will receive a dividend of one right for each share of common stock held. Each right represents the right to borrow up to $100 million and issue letterspurchase one one-hundredth (1/100) of credit up to $80 million against eligible accounts receivable and inventory. The $25 million term loan portiona share of the NewCompany's Series A Junior Preferred Stock at an exercise price of $40.00. Initially, the rights are represented by the Company's common stock certificates and are neither exercisable nor traded separately from the Company's common stock. The rights will only become exercisable if a person or group acquires 15% or more of the common stock of the Company, or announces or commences a tender or exchange offer which would result in the bidder's beneficial ownership of 15% or more of the Company's common stock. In the event that any person or group acquires 15% or more of the Company's outstanding common stock each holder of a right (other than such person or members of such group) will thereafter have the right to receive upon exercise of such right, in lieu of shares of Series A Junior Preferred Stock, the number of shares of common stock of the Company having a value equal to two times the then current exercise price of the right. If the Company is acquired in a merger or other business combination transaction after a person has acquired 15% or more the Company's common stock, each holder of a right will thereafter have the right to receive upon exercise of such right a number of the acquiring company's common shares having a market value equal to two times the then current exercise price of the right. For persons who, as of the close of business on April 18, 2000, beneficially own 15% or more of the common stock of the Company, the Rights Plan "grandfathers" their current level of ownership, so long as they do not purchase additional shares in excess of certain limitations. The Company may redeem the rights for $.01 per right at any time until the first public announcement of the acquisition of beneficial ownership of 15% of the Company's common stock. At any time after a person has acquired 15% or more (but before any person has acquired more than 50%) of the Company's common stock, the Company may exchange all or part of the rights for shares of common stock at an exchange ratio of one share of common stock per right. The rights expire on April 18, 2010. As discussed in Note 10, the Company obtained an amendment to its U.S. Facility was usedrelating to acquire Expert and pay costs related to such acquisitionthe Rights Plan and the securing of the new facility. The term loan has a three year term with principal amortization on a straight line quarterly basis beginning December 31, 1999 and a borrowing rate of the banks' base rate (which is generally equivalent to the published prime rate) plus 2.0%, or the LIBOR rate plus 3.0%. The revolving portion of the New Facility has a borrowing rate of the banks' base rate plus 1.75%, or the LIBOR rate plus 2.75%. The Company pays a commitment fee of 1/2% based on the unused portion of the line. ACQUISITION OF EXPERT SOFTWARE On March 3, 1999, the Company announced that it had entered into a merger agreement with Expert Software ("Expert"), a developer and distributor and value-line interactive leisure products, for $2.65 per share of outstanding Expert commonCompany's stock or total consideration of approximately $20.4 million. On June 21, 1999, Expert's shareholders approved the merger at a special meeting of shareholders and on June 22, 1999, the merger was consummated. Proceeds from the term loan portion of the New Facility were used to pay the merger consideration. The acquisition of Expert will be accounted for using the purchase method of accounting. F-21repurchase plan. F-28 SCHEDULE II ACTIVISION, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (amounts in(In thousands)
Col.COL. A Col.COL. B Col.COL. C Col.COL. D Col.COL. E ------ ------ ------ ------ ------ Balance at Beginning of Deductions Balance at End Description Period Additions (Describe)Additions(A) Deductions (B) of Period - ------------------------------------------------------------------------------------------------------------------------------------------------------------------ ----------------- ----------------- ----------------- ----------------- Year ended March 31, 19992000 Allowance for sales returns, price protection and doubtful accounts $15,582 $53,773 $54,376(A) $14,979 Inventory valuation $ 828 $ 828 $ 163(B) $ 1,49314,979 97,362 80,820 31,521 Deferred tax valuation allowance $6,916 6,125 - 13,041 Year ended March 31, 1999 (Restated) Allowance for sales returns, price protection and doubtful accounts 15,582 53,773 54,376 14,979 Deferred tax valuation allowance 8,107 $ 1,239 $ 2,430 $ 6,916 Year ended March 31, 1998 (Restated) Allowance for sales returns, price protection and doubtful accounts $ 7,674 $39,437 $31,529(A) $15,582 Inventory valuation $ 471 $ 1,082 $ 725(B) $ 82839,437 31,529 15,582 Deferred tax valuation allowance $ 8,107 - - $ 8,107 Year ended March 31, 1997 (Restated) Allowance for sales returns, price protection and doubtful $ 7,005 $18,878 $18,209(A) $ 7,674 accounts Inventory valuation $ 145 $ 478 $ 152(B) $ 471 Deferred tax valuation allowance $14,305 $ 436 $ 6,634 $ 8,107
(A) ActualIncludes increases in allowance for sales returns, price protection and doubtful accounts due to normal reserving terms and allowance accounts acquired in conjunction with acquisitions. (B) Includes actual write-offs of uncollectible accounts receivable or sales returns and price protection. (B) Actual write-offsprotection, recoveries of obsolete inventory, scrappreviously written off receivables and reduction in carrying value of certain portions of inventory. F-22foreign currency translation adjustments. F-29 EXHIBIT INDEX ITEM 14(a). EXHIBITS.
Exhibit Sequential Page Number Exhibit Number ------------- ------- ------ 3.1 Amended2.1 Agreement and Restated ArticlesPlan of IncorporationMerger dated as of June 9, 2000 among Activision, Inc., dated October 15, 1992 (incorporated by reference to Exhibit 4.5 of Amendment No. 1 to the Company's Form S-8, Registration No. 33-48411 filed on June 1, 1993). 3.2 Bylaws of Activision Holdings, Inc. and ATVI Merger Sub, Inc. (incorporated by reference to Exhibit 4.62.4 of the Company's Form 8-K filed June 16, 2000). 3.1 Amended and Restated Certificate of Incorporation of Activision Holdings, dated June 1, 2000 (incorporated by reference to Exhibit 2.5 of the Company's Form 8-K, filed on June 16, 2000). 3.2 Amended and Restated Bylaws of Activision Holdings (incorporated by reference to Exhibit 2.6 of the Company's Form 8-K, filed on June 16, 2000). 3.3 Certificate of Amendment No. 1of Amended and Restated Certificate of Incorporation of Activision Holdings dated as of June 9, 2000 (incorporated by reference to Exhibit 2.7 of the Company's Form 8-K, filed on June 16, 2000). 4.1 Rights Agreement dated as of April 18, 2000, between the Company and Continental Stock Transfer & Trust Company, which includes as exhibits the form of Right Certificates as Exhibit A, the Summary of Rights to Purchase Series A Junior Preferred Stock as Exhibit B and the form of Certificate of Designation of Series A Junior Preferred Stock of the Company as Exhibit C, (incorporated by reference to the Company's Registration Statement on Form S-8,8-A, Registration No. 33-48411001-15839, filed on June 1, 1993)April 19, 2000). 10.1 Mediagenic 1991 Stock Option and Stock Award Plan, as amended (incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8, Registration No. 33-63638, filed on December 8, 1995). 10.2 Mediagenic 1991 Director Warrant Plan, as amended (incorporated by reference to Exhibit 28.2 to the Company's Registration Statement on Form S-8, Registration No. 33-63638, filed on June 1, 1993). 10.3 Activision, Inc. Employee Stock Purchase Plan, as amended, (incorporated by reference to Exhibit 4.1 of the Company's Form S-8, Registration No. 333-36272 filed on September 25, 1996.May 4, 2000). 10.4 Activision, Inc. 1998 Incentive Plan (incorporated by reference to Appendix I of the Company's 1998 Proxy Statement). 10.5 Activision, Inc. 1999 Incentive Plan 10.6 Lease Agreement dated as of December 20, 1996, between the Company and Barclay Curci Investment Company (incorporated by reference to Exhibit 10.14 of the Company's Form 10-Q for the quarter ended December 31, 1996). 10.6F-30 10.7 Share Exchange Agreement dated November 23, 1997, among the Company and the holders of all of the issued and outstanding capital stock of Combined Distribution (Holdings), Inc. Limited (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed December 5, 1997). 10.710.8 Purchase Agreement dated as of December 16, 1997, among the Company and Credit Suisse First Boston Corporation, Piper Jaffray, Inc. and UBS Securities LLC (the "Initial Purchasers") (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed December 23, 1997). 10.810.9 Registration Rights Agreement dated as of December 16, 1997, among the Company and the Initial Purchasers (incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed December 23, 1997). 10.910.10 Indenture dated as of December 22, 1997, between the Company and State Street Bank and Trust Company of California, N.A., as Trustee (incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed December 23, 1997). 10.1010.11 Employment agreement dated January 12, 1999 between the Company and Robert A. Kotick. 10.11 Employment agreement dated January 12, 1999 betweenKotick (incorporated by reference to Exhibit 10.10 of the Company and Brian G. Kelly.Company's Form 10-K for the year ending March 31, 1999). 10.12 Employment agreement dated October 19, 1998 between the Company and Ronald Doornink. F-23 Doornink (incorporated by reference to Exhibit 10.12 of the Company's Form 10-K for the year ending March 31, 1999). 10.13 Employment agreement dated March 4, 1999 between the Company and Lawrence Goldberg.Goldberg (incorporated by reference to Exhibit 10.13 of the Company's Form 10-K for the year ending March 31, 1999). 10.14 Employment agreement dated March 4, 1999April 1, 1998 between the Company and Barry J. Plaga.Mitchell Lasky (incorporated by reference to Exhibit 10.15 of the Company's Form 10-K for the year ending March 31, 1999). 10.15 Employment agreement dated April 1, 1998 between the Company and Mitchell Lasky.Ronald Scott (incorporated by reference to Exhibit 10.16 Employment agreement dated April 1, 1998 betweenof the Company and Ronald Scott. 10.17Company's Form 10-K for the year ending March 31, 1999). 10.16 Service Agreement dated November 24, 1997 between Combined Distribution (Holdings) Limited and Richard Andrew Steele. 10.18Steele (incorporated by reference to Exhibit 10.17 of the Company's Form 10-K for the year ending March 31, 1999). 10.17 Employment Agreementagreement dated September 1, 1997January 12, 1999 between the Company and Robert Dewar. 10.19Brian G. Kelly (incorporated by reference to Exhibit 10.11 of the Company's Form 10-K for the year ending March 31, 1999). 10.18 Articles of Merger dated June 30, 1998 between S.B.F. Acquisition Corp., a wholly owned subsidiary of the Company, and S.B.F. F-31 Services, Limited dba Head Games Publishing (incorporated by reference to Exhibit 2.1 of the Company's Form 8-K, filed on July 2, 1998). 10.2010.19 Share Exchange Agreement dated September 29, 1998 by and between the Company and Mr. Frank d'Oleire, Mrs. Christa d'Oleire, Ms. Fiona d'Oleire, Ms. Alexa d'Oleire acting as Dr. d'Oleire Beteiligungsgesellschaft bR, Mr. Martinus J.C. Bubbert, and Mr. Dennis W. Buis (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, filed on October 8, 1998). 10.2110.20 Amended and Restated Agreement and Plan of Merger dated April 19, 1999 by and among the Company, Expert Acquisition Corp. and Expert Software, Inc. (incorporated by reference to Exhibit 2.1 of the Form 8-K of Expert Software, Inc., filed April 29, 1999). 10.2210.21 Credit Agreement dated as of June 21, 1999 among the Company, Head Games Publishing, Inc., Expert Software, Inc., various lenders,financial institutions, PNC Bank, National Association, as issuing bank, administrative agent and collateral agent for such financial institutions, and Credit Suisse First Boston, as syndication agent (incorporated by reference to Exhibit 10.22 of the Company's Form 10-K for the year ending March 31, 1999). 10.22 Share Exchange Agreement dated as of June 29, 1999, among the Company, Jill G. Mark and Robert N. Herrick (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 333-85385, filed August 17, 1999). 10.23 Agreement and Plan of Reorganization dated as of September 30, 1999, among the Company, Neversoft Entertainment, Inc., JCM Productions, Inc., Joel Jewett, Michael West and Christopher Ward (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-3, Registration No. 333-94509, filed January 12, 2000). 10.24 Employment agreement dated July 12, 1999, between the Company and Mr. Michael Rowe (incorporated by reference to Exhibit 6.1 of the Company's Form 10-Q for the quarter ending June 30, 1999). 10.25 Employment agreement dated July 12, 1999, between the Company and Ms. Kathy Vrabek (incorporated by reference to Exhibit 6.2 of the Company's Form 10-Q for the quarter ending June 30, 1999). 10.26 Amendment to Employment Agreement between Mr. Ronald Doornink and the Company, dated April 30 1999 (incorporated by reference to Exhibit 6.1 of the Company's Form 10-Q for the quarter ending December 31, 1999). 10.27 Employment agreement dated April 7, 2000, between the Company and Mr. Michael Pole. 10.28 First Amendment effective as of June 8, 2000 to the Credit Agreement dated June 21, 1999 among the Company, Head Games Publishing, Inc., Expert Software, Inc., various financial institutions, PNC Bank, National Association as issuing bank, administrative agent and collateral agent for such lenders and Credit Suisse First Boston, as syndication agent. 21.F-32 21.1 Principal subsidiaries of the Company. 23.23.1 Independent Auditors' Consent. 27.1 Fiscal 19961998 Year to Date financialFinancial Data Schedule. 27.2 Fiscal 19971999 Year to Date Financial Data Schedule. 27.3 Fiscal 19982000 Year to Date Financial Data Schedule. 27.4 Fiscal 1999 Year to Date Financial Data Schedule.(b) Reports on Form 8-K. There have been no reports on Form 8-K that have been filed by the Company during the last quarter of the fiscal year ending March 31, 2000. The following reports on Form 8-K have been filed by the Company during the first quarter of the fiscal year ending March 31, 2001: 1.1 The Company filed a Form 8-K on April 19, 2000, reporting under "Item 5. Other Events" the announcement of the Company's stockholders' rights plan. 1.2 The Company filed a Form 8-K on June 16, 2000 reporting under "Item 5. Other Events" the announcement of the organizational restructuring of the Company into a holding company format organizational structure.
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K have been filed by the Company during the last quarter of the fiscal year ended March 31, 1999: 1.1 Form 8-K dated March 10, 1999, containing items 5 and 7. F-24F-33