SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/X/[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998JUNE 30, 1999
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 000-126990-12699
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2606438
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 OCEAN PARK BOULEVARD, SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
(310) 255-2000
(Registrant's telephone number, including area code)
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 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/[ X ] No / /[ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court: Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock outstanding as of February 12,August
13, 1999 was 22,497,192.23,578,188.
ACTIVISION, INC.
INDEX
Page No.PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998June 30, 1999 (unaudited)
and March 31, 19981999 3
Condensed Consolidated Statements of Operations for the quarters
ended June 30, 1999 and nine months ended December 31, 1998 and 1997(unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine monthsquarters ended December 31,June 30, 1999 and 1998 and 1997(unaudited) 5
Notes to Condensed Consolidated Financial Statements for the
quarter and nine months ended December 31, 1998June 30, 1999 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
andAnd Results of Operations 1012
Item 3. Quantitative and Qualitative Disclosure ofDisclosures About Market Risk 1620
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 175. Shareholder Proposals 21
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 1821
SIGNATURES 22
2
PART I--FINANCIALI - FINANCIAL INFORMATION
ItemITEM 1. FINANCIAL STATEMENTS
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
December 31, 1998June 30, 1999 March 31, 1998
-------------------- --------------------1999
------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 51,49017,768 $ 73,37832,847
Accounts receivable, net of allowances of $18,611$23,765 and $12,122,$14,979,
respectively 154,099 69,81298,157 117,522
Inventories, net 37,250 14,92040,028 30,931
Prepaid royalties and capitalized software costs 38,244 12,444
Prepaid expenses and other current assets 8,285 1,92242,281 38,997
Deferred income taxes 2,944 3,852
--------------------- --------------------9,461 6,044
Other current assets 12,710 9,960
--------- ---------
Total current assets 292,312 176,328220,405 236,301
Prepaid royalties and capitalized software costs 5,800 --7,366 6,923
Property and equipment, net 11,206 10,62810,556 10,841
Deferred income taxes 4,665 4,6652,618 2,618
Intangible assets, net 54,585 21,647
Other assets 5,708 2,313
Excess purchase price over identifiable assets
acquired, net 22,279 23,473
--------------------- --------------------8,951 5,282
--------- ---------
Total assets $ 341,970304,481 $ 217,407
--------------------- --------------------
--------------------- --------------------283,612
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to bank $ 12,30315,006 $ 7815,992
Accounts payable 109,411 40,15031,527 43,853
Accrued expenses 39,460 14,860
--------------------- --------------------40,838 45,142
--------- ---------
Total current liabilities 161,174 55,79187,371 94,987
Notes payable to bank, less current portion 872 1,23520,856 1,143
Convertible subordinated notes 60,000 60,000
Other liabilities 43 88
--------------------- --------------------7 7
--------- ---------
Total liabilities 222,089 117,114
--------------------- --------------------168,234 156,137
--------- ---------
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized,
22,856,67323,815,031 and 22,518,54723,104,927 shares issued and 22,356,67323,315,031 and
22,018,54722,604,927 outstanding, respectively -- --
Additional paid-in capital 104,213 91,799123,438 109,251
Retained earnings 20,802 13,68021,654 26,012
Accumulated other comprehensive income 144 92(loss) (3,567) (2,510)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------------------- ----------------------------- ---------
Total shareholders' equity 119,881 100,293
--------------------- --------------------136,247 127,475
--------- ---------
Total liabilities and shareholders' equity $ 341,970304,481 $ 217,407
--------------------- --------------------
--------------------- --------------------283,612
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the quarters ended June 30,
(in thousands except loss per share data)
(Unaudited)
Quarter ended Nine Months ended
December 31, December 31,
------------------------- --------------------------1999 1998
1997 1998 1997
------------ ----------- ------------ -------------------- ---------
Restated
---------
Net revenues $193,537 $122,141 $311,599 $201,670$ 84,142 $ 61,531
Costs and expenses:
Cost of sales--productsales - product costs 107,693 59,528 182,752 101,65352,178 39,392
Cost of sales--royaltiessales - royalties and software amortization 23,828 17,550 32,412 25,43611,231 3,225
Product development 3,985 8,045 13,612 21,9634,181 5,693
Sales and marketing 26,040 16,400 49,452 31,96017,139 13,738
General and administrative 5,265 3,586 13,832 8,4164,702 4,549
Amortization of intangible assets 398 404 1,190 1,159469 396
Merger expenses -- 1,474 600 1,474
------------ ----------- ------------ ------------175
-------- --------
Total costs andoperating expenses 167,209 106,987 293,850 192,061
------------ ----------- ------------ ------------89,900 67,168
-------- --------
Operating income 26,328 15,154 17,749 9,609loss (5,758) (5,637)
Interest expense, net (854) (232) (2,017) (377)
------------ ----------- ------------ ------------
Net income(1,160) (401)
-------- --------
Loss before income tax provision 25,474 14,922 15,732 9,232benefit (6,918) (6,038)
Income tax provision 9,452 5,644 5,748 3,531
------------ ------------ ------------ ------------benefit (2,560) (2,294)
-------- --------
Net loss (4,358) (3,744)
Other comprehensive income (loss):
Foreign currency translation adjustment (1,057) (801)
-------- --------
Comprehensive loss $ 16,022(5,415) $ 9,278 $ 9,984 $ 5,701
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------(4,545)
-------- --------
-------- --------
Basic and diluted net incomeloss per share $ 0.72(0.19) $ 0.43 $ 0.45 $ 0.26
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted net income per share $ 0.64 $ 0.41 $ 0.44 $ 0.25
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------(0.17)
-------- --------
-------- --------
Number of shares used in computing basic and diluted net
incomeloss per share 22,188 21,481 22,051 21,196
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Number of shares used in computing diluted net
income per share 26,073 22,928 22,888 22,394
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------22,858 21,915
-------- --------
-------- --------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the quarters ended June 30,
(in thousands)
(UNAUDITED)
For the months ended December 31,
(in thousands)
--------------------------------1999 1998
1997
--------------- ----------------------- --------
Restated
--------
Increase (Decrease) in Cash
Cash flows from operating activities:
Net incomeloss $ 9,984(4,358) $ 5,701(3,744)
Adjustments to reconcile net incomeloss to net cash (used in)/provided
byused in operating
activities:
Deferred income taxes 1,126 4101,012 (2,585)
Depreciation and amortization 4,838 3,8711,912 1,350
Amortization of prepaid royalties and capitalized
software costs 7,905 1,682
Change in assets and liabilities:
Accounts receivable (76,278) (52,934)20,084 11,618
Inventories (16,185) (9,367)
Prepaid royalties and capitalized software costs (21,589) (1,291)(5,816) (3,643)
Other current assets (4,372) (761)
Other assets (5,928) (3,389)(770) (55)
Accounts payable 61,598 57,482(14,795) (6,426)
Accrued liabilities 14,187 14,416
Other liabilities (1,357) (5)(12,169) 1,120
-------- --------
Net cash (used in)/provided byused in operating activities (29,604) 14,894
-------- --------(11,367) (1,444)
Cash flows from investing activities:
Cash paid by Combined Distribution (Holdings) Limited to acquire
CentreSoft Limited (netused for purchase acquisitions, net of cash acquired) - (1,043)
Adjustment for effect of poolings on prior periods - (1,641)
Cash acquired in pooling transactions 653 -
Cash used in purchase acquisitions - (246)(20,523) --
Capital expenditures (2,787) (6,197)(572) (704)
Investment in prepaid royalties and capitalized
software costs (11,632) (8,878)
-------- --------
Net cash used in investing activities (2,134) (9,127)
-------- --------(32,727) (9,582)
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to employee
stock option plan 3,478 3,961
Proceeds from issuance of common stock pursuant to employee stock
purchase plan 389 2304,590 89
Note payable to bank, net (1,479) 1,371(5,674) (352)
Proceeds from borrowings on line-of-credit 10,006 8,800
Payments on line-of-credit (2,600) (8,800)
Proceeds from issuanceterm loan 25,000 --
Cash paid to secure line of subordinated convertible notes - 60,000
Dividends paid - (1,258)
Other - 51credit and term loan (3,355) --
Borrowing under line of credit agreement 16,472 --
Payment under line of credit agreement (7,071) --
-------- --------
Net cash provided by (used in) financing activities 9,794 64,355
-------- --------29,962 (263)
Effect of exchange rate changes on cash and cash equivalents 56 137(947) (722)
-------- --------
Net decrease in cash and cash equivalents (21,888) 70,259(15,079) (12,011)
Cash and cash equivalents at beginning of period 73,378 21,35832,847 74,241
-------- --------
Cash and cash equivalents at end of period $ 51,49017,768 $ 91,61762,230
-------- --------
-------- --------
Non-cash activities:
Warrants issued to third party developers $ 3,368 $ -
Stock issued in exchange for licensing rights $ - $ 431
Tax benefit derived from stock option exercises $ 653 $ 521
Stock issued in purchase acquisition $ - $ 136
Preferred stock converted to common stock in pooling transaction $ - $ 1,286
Redeemable preferred stock converted to common stock in pooling
transaction $ - $ 214
Conversion of subordinated loan stock debentures to common stock
in pooling transaction $ - $ 3,216
Supplemental cash flow information:
Cash paid for income taxes $ 4,868 $ 2,607
Cash paid for interest $ 2,775 $ 696
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998June 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Activision, Inc. and(together with its subsidiaries, (the "Company""Activision"
or "the Company"). The information furnished is unaudited and reflects all
adjustments which,that, in the opinion of management, are necessary to provide a
fair statement of the results for the interim periods presented. The
financial statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10-K for the
year ended March 31, 19981999, as filed with the SecuritesSecurities and Exchange
Commission.
The consolidated financial statements for the period ended June 30, 1998
have been retroactively restated to reflect the Company's acquisition of
CD Contact Data GmbH ("CD Contact") in September 1998, which was
previously accounted for as an immaterial pooling of interests. The
financial results for such acquired company and related cash flows had
therefore been included in the reported operations of the Company
beginning on the date of acquisition. Based on a reevaluation of this
and other prior merger 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 for the period ended June 30, 1998 reported in
this Quarterly Report on Form 10-Q to include the results of CD Contact
with the Company for all prior periods.
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform withto the current period's presentation. These
reclassifications had no impact on previously reported working capital or
results of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
Intangible assets, net of amortization, at June 30, 1999 and 1998, of $54.6
million and $21.7 million, respectively, includes goodwill and costs of
acquired licenses, brands and trade names which are amortized using the
straight-line method over their estimated useful lives, typically from
three to twenty years.
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was adopted as of April 1, 1999. This Statement
establishes standards for reporting and display of changes in shareholders'
equity that do not result directly from transactions with shareholders. The
Company has displayed comprehensive income (loss) and its components in the
Condensed Consolidated Statements of Operations for the quarters and fiscal
years ended June 30, 1999 and 1998.
3. ACQUISITIONS
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
$26.7 million. The aggregate purchase price of approximately $26.7
million consisted of $20.4 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 and the fair market values
of the acquired assets and liabilities were included in the Company's
financial statements from the date of acquisition.
6
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended June 30, 1999
(Unaudited)
Certain items affecting the purchase price allocation are preliminary. The
aggregate purchase price has preliminarily been allocated to the fair
values of the assets and liabilities acquired as follows (amounts in
thousands):
Tangible assets $ 6,096
Existing products 15,636
Excess purchase price over identifiable assets
acquired 10,411
Trade names 4,506
Liabilities (9,949)
--------
$ 26,700
--------
--------
The total amount allocated to existing products is being amortized over
periods ranging from three to ten years from the date of acquisition. The
amounts allocated to trade names and goodwill are being amortized over a
period of fifteen years from the date of acquisition.
The unaudited proforma combined results of operations for the three months
ended June 30, 1999 and 1998 below are presented as if the acquisition
occurred at the beginning of each such period. The proforma results are as
follows:
Three months ended June
---------------------------
1999 1998
---------- ---------
Total net revenues $ 86,705 $ 69,385
Net loss $ (9,230) $ (4,074)
Basic and diluted loss per share $ (0.40) $ (0.18)
ACQUISITION OF ELSINORE MULTIMEDIA
On June 29, 1999, the Company acquired Elsinore Multimedia ("Elsinore"), a
privately held interactive software development company, for approximately
$2.8 million. The aggregate purchase price of the $2.8 million consisted of
$2.7 million in cash payable to the former shareholders of Elsinore, and
other acquisition costs.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of Elsinore and the fair market
values of the acquired assets and liabilities were included in the
company's financial statements from the date of acquisition. The aggregate
purchase price preliminarily has been allocated to the assets and
liabilities acquired, consisting mostly of goodwill 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.
7
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended June 30, 1999
(Unaudited)
4. 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 whichthat have alternative future uses are capitalized.
Capitalized software costs represent certain costs incurred for product 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 the Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed". Software
development costs and prepaid royalties are capitalized once technological
feasibility is established. Technological feasibility is evaluated on a
product by productproduct-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.
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.
As of December 31, 1998,June 30, 1999, prepaid royalties and unamortized capitalized software
costs totaled $44.0$41.0 million (including $5.8$7.4 million classified as
non-current) and $6.6$8.6 million, respectively. As of March 31, 1998,1999, prepaid
royalties and unamortized capitalized software costs totaled $10.7$37.1 million
(including $6.9 million classified as non-current) and $8.8 million,
respectively. Amortization of prepaid royalties and capitalized software
costs was $7.9 million and $1.7 million for the quarter ended June 30, 1999
and 1998, respectively. At March 31, 1998, allWrite-offs of prepaid royalties and unamortized capitalized
software costs prior to product release were classified as current.
3.approximately $350,000 and
$315,000 for the quarters ended June 30, 1999 and 1998, respectively.
5. REVENUE RECOGNITION
The American Institute of Certified Public Accountant's (the "AICPA")
Statement of Position 97-2 "Software Revenue Recognition" (SOP 97-2) was
effective for all transactions entered into subsequent to March 31, 1998.
The adoption of SOP 97-2 did not have a material impact on the Company's
financial position, results of operations or liquidity.
Product SalesSales: The Company recognizes revenuesrevenue 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.
Revenues from
product sales are reflected netManagement of the allowance forCompany has the ability to estimate the amount of future
exchanges, returns, and
price
protection.
68
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998June 30, 1999
(Unaudited)
price protections. Revenue from product sales is reflected net of the
allowance for returns and price protection.
Software LicensesLicenses: For those license agreements whichthat provide the customers
the right to multiple copies in exchange for guaranteed amounts, revenues arerevenue is
recognized at delivery of the product master or the first copy. 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"), is effective6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities and supplemental cash flow information for all transactions entered into subsequent to March 31, 1998. The
adoption of SOP 97-2 did not have a material impact on the Company's
financial position, results of operations or liquidity. 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"), is effective for all transactions
entered into subsequent to March 15, 1999.fiscal
quarters ended June 30, 1999 and 1998 are as follows (amounts in
thousands):
June 30,
----------------------
1999 1998
------ ------
Non-cash activities:
Tax benefit attributable to stock option exercises $ 513 $ --
Warrants to acquire common stock issued in exchange for
licensing rights 3,113
Common stock issued in connection with purchase
acquisition 2,700 --
Options to acquire common stock issued in connection
with purchase acquisition 3,271 --
Supplemental cash flow information:
Cash paid for income taxes $ 762 $1,033
Cash paid for interest $4,304 $2,176
7. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA
The Company believes the
adoption of SOP 98-9 will not have a material impact on the Company's
financial position, results of operations or liquidity.
4. COMPREHENSIVE INCOMEadopted SFAS No. 130, "Reporting Comprehensive Income", was adopted by the Company131, "Disclosures about Segments of an
Enterprise and Related Information," as of April 1, 1998. SFAS 130 requires any changesNo. 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. Based
on its organizational structure, the Company operates in shareholders' equitytwo 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 addition, the Company's publishing segment
distributes titles that do not result directly from transactions with shareholders be reported
separatelyare developed and marketed by other third party
developers through its "affiliate label" program. 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 financial statements, net of any tax effect, as other
comprehensive income. ForUnited Kingdom, Germany, France, Australia and Japan. The Company's
products are sold internationally on a direct to retail basis, through
third party distribution and licensing arrangements, and through the
Company, other comprehensive income includes
only foreign currency translation adjustments. Total comprehensive income
forCompany's owned distribution subsidiaries located in the quarterUnited Kingdom,
the Benelux territories and nine months ended December 31, 1998 and 1997 is as
follows:
Quarter Ended December 31, Nine Months Ended December 31,
-------------------------- ------------------------------
1998 1997 1998 1997
-------- ------- -------- -------
(in thousands) (in thousands)
Net income $ 16,022 $ 9,278 $ 9,984 $ 5,701
Foreign currency translation
adjustments (net of tax) 51 374 138 137
-------- ------- -------- -------
Total comprehensive income $ 16,073 $ 9,652 $ 10,122 $ 5,838
-------- ------- -------- -------
-------- ------- -------- -------
5. COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net income divided by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation plans, including stock
options, warrants and other convertible securities using the treasury stock
method.
7Germany.
9
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31,June 30, 1999
(Unaudited)
The Company's distribution segment conducts operations in the United
Kingdom, the Benelux territories and Germany. This segment distributes
interactive entertainment software and hardware and provides logistical
services for a variety of publishers and manufacturers in these
territories. A small percentage of distribution sales are 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 in the
Company's annual report on Form 10-K. Revenue derived from sales between
segments is eliminated in consolidation.
Information on the reportable segments for the quarters ended June 30,
1999 and 1998 The following table sets forth the computation of basic and diluted
earnings per share:is as follows:
Quarter ended December 31, Nine months ended December 31,
-------------------------- ------------------------------
(in thousands) (in thousands)
1998 1997 1998 1997
-------- -------- -------- --------Ended June 30, 1999
-----------------------------------------------------------
Publishing Distribution Corporate Total
------------- --------------- ------------ -------------
NUMERATOR:
NetRevenues from external customers $48,120 $36,022 $ -- $84,142
Revenue from sales between segments $ 5,246 $ -- $ -- $ 5,246
Operating income (loss) $(4,525) $ 16,022(844) $ 9,278(389) $(5,758)
Quarter Ended June 30, 1998
-----------------------------------------------------------
Publishing Distribution Corporate Total
------------- --------------- ------------ -------------
Revenues from external customers $21,463 $40,068 $ 9,984-- $61,531
Revenue from sales between segments $ 5,701
Less dividends paid - (35) - (116)
-------- -------- -------- --------
Numerator for basic earnings per
share-income available to
common stockholders1,689 $ 16,022-- $ 9,243-- $ 9,9841,689
Operating income (loss) $(5,164) $ 5,585
Effect of dilutive securities:
Interest add-back on
convertible debt (net of tax) 666 70 - 70
-------- -------- -------- --------
Numerator for diluted earnings
per share-income available to
common stockholders after
assumed conversions(160) $ 16,688 $ 9,313 $ 9,984 $ 5,655
-------- -------- -------- --------
-------- -------- -------- --------
DENOMINATOR:
Denominator for basic earnings per
share-weighted average shares 22,188 21,482 22,051 21,196
Effect of dilutive securities:
Employee stock options 706 1,100 837 852
Convertible debentures 3,179 346 - 346
-------- -------- -------- --------
Dilutive common shares 3,885 1,446 837 1,198
-------- -------- -------- --------
Denominator for diluted
earnings per share-adjusted
weighted average shares and
assumed conversions 26,073 22,928 22,888 22,394
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share $ 0.72 $ 0.43 $ 0.45 $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share $ 0.64 $ 0.41 $ 0.44 $ 0.25
-------- -------- -------- --------
-------- -------- -------- --------(313) $(5,637)
ForOperating expenses in the quarterCorporate 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 quarters ended June 30, 1999 and nine months ended December 31, 1998 options to
purchase 1,915,000 and 3,506,000 shares, respectively,is
based on the location of the Company's
common stockselling entity. Revenues from external
customers by geographic region were outstanding but were not included in the computation of
diluted earnings per share because the options exercise prices were greater
than the average market price of the common shares during such periods. For
the nine months ended December 31, 1998, shares issuable upon the
conversion of convertible debentures and interest on such convertible
debentures were not included in the calculation as the effect would have
been antidilutive.
For the quarter and nine months ended December 31, 1997, options to
purchase 793,000 and 1,397,000 shares, respectively, of the Company's
common stock were outstanding but were not included in the computation of
diluted earnings per share because the options exercise prices were greater
than the average market price of the common shares during such periods.
8follows:
1999 1998
---------- ----------
United States $34,813 $15,909
Europe 47,145 42,780
Other 2,184 2,842
---------- ----------
Total $84,142 $61,531
---------- ----------
---------- ----------
10
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998
6. NEW ACCOUNTING PRONOUNCEMENT
June 30, 1999
(Unaudited)
Revenues by platform were as follows:
1999 1998
---------- -----------
Console $49,390 $38,415
PC 34,752 23,116
---------- -----------
Total $84,142 $61,531
---------- -----------
---------- -----------
8. COMPUTATION OF NET LOSS PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS No. 133, "Accounting for Derivative Instruments128" per
share,") requires companies to compute net income per share under two
different methods, basic and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effectivediluted per share data, for all fiscal
quartersperiods for
which an income statement is presented. Basic earnings per share is
computed by dividing net income by the weighted average number of common
shares outstanding for all fiscal years beginning afterperiods. Diluted earnings per share reflects the
potential dilution that could occur if the 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.
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.
At June 15, 1999. Although30, 1999, outstanding weighted average options to purchase
approximately 1,865,101 shares were not included in the Company currently doescomputation of
diluted earnings per share as a result of their antidilutive effect.
Similarly, at June 30, 1998, outstanding weighted average options to
purchase approximately 396,658 shares of common stock were not included in
the computation of diluted earnings per share as a result of their
antidilutive effect. Such stock options could have derivative instruments, or hedge foreign
currency risk,a dilutive effect in
future periods.
The following table sets forth the Company intends to monitor its risk in this regardcomputation of basic and investigate various ways to manage that risk. Ifdiluted net
loss per common share for the three months ended June 30, 1999 and when the Company
decides to participate in hedging activities and/or purchase other
derivative financial instruments, SFAS 133 will be adopted.
91998 (in
thousands, except per share information):
1999 1998
Numerator:
Net loss $(4,358) $(3,744)
-------- --------
Denominator:
Denominator for basic net loss per common share - weighted-average
shares outstanding 22,858 21,915
-------- --------
Denominator for diluted net loss per common share - adjusted
weighted-average shares for assumed conversions 22,858 21,915
-------- --------
-------- --------
Basic and diluted net loss per share $(0.19) $(0.17)
-------- --------
-------- --------
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS FORWARD LOOKINGFORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES DISCUSSED IN THE COMPANY'S ANNUAL 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
LOOKINGFORWARD-LOOKING STATEMENT DUE TO SUCH RISKS AND UNCERTAINTIES.
OVERVIEW
The Company is a leading international publisher, developer and distributor
of interactive entertainment software.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 and the Nintendo 64
console systems. In selecting titles for acquisition or development, theThe Company's products span a wide range of genres and target
markets.
The Company
pursues a combination of internally and externally developed titles, products
based on proven technology and those based on newer technology, and PC and
console products.
Activision distributes its products worldwide through its direct sales
force,forces, through its distribution subsidiaries, CentreSoft Ltd. ("CentreSoft"), CD
Contact Data GmbH ("CD Contact") and NBG EDV Handels und Verlags GmbH ("NBG"), and through third party
distributors and licensees.
The Company recognizes revenuesrevenue 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. With respect to license agreements whichthat provide customers the right
to multiple copies in exchange for guaranteed amounts, revenues arerevenue is recognized
upon delivery of the product master or the first copy. Per copy royalties on
sales whichthat exceed the guarantee are recognized as earned. The American
Institute of Certified Public AccountantsAICPA's Statement
of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), provides guidance
on applying generally accepted accounting principles in recognizing revenuesrevenue 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 American Institute of
Certified Public Accountants issued Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions"
("SOP 98-9"), was
issued andwhich 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 - productsales-product costs represents the cost to acquire,purchase, manufacture
and distribute PC and console games.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 Nintendo,Sega, who often require significant lead time to fulfill the
Company's orders.
Cost of sales - royaltiessales-royalties and software amortization is related torepresents 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.
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's release, prepaid royalties and
license fees are charged to royalty expense based on the contractual royalty
rate. The capitalized software costs are then amortized to cost of
sales - royaltiessales-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.
12
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, 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; 10
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'scompany's budgeted amount.
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, activity, platform and channel:
QUARTER ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
---------------------------------------- ----------------------------------------JUNE 30,
1999 1998
1997 1998 1997
------------------- -------------------- ------------------- -------------------
(in thousands) (in thousands)
% of Net % of Net------------------------ -------------------------
Restated
-------------------------
% of Net % of Net
Amount Revenues Amount Revenues
Amount Revenues Amount Revenues
--------- -------- -------- ---------- -------- --------- -------- ---------
STATEMENTS OF OPERATIONS DATA:Statement of Operations Data:
Net revenues: $193,537revenues $ 84,142 100.0% $122,141 100.0% $311,599 100.0% $201,670$ 61,531 100.0%
Costs and expenses:
Cost of sales - product costs 107,693 55.6% 59,528 48.8% 182,752 58.6% 101,653 50.4%52,178 62.0% 39,392 64.0%
Cost of sales - royalties and software
amortization 23,828 12.3% 17,550 14.4% 32,412 10.4% 25,436 12.6%11,231 13.3% 3,225 5.3%
Product development 3,985 2.1% 8,045 6.6% 13,612 4.4% 21,963 10.9%4,181 5.0% 5,693 9.3%
Sales and marketing 26,040 13.5% 16,400 13.4% 49,452 15.9% 31,960 15.8%17,139 20.4% 13,738 22.3%
General and administrative 5,265 2.7% 3,586 2.9% 13,832 4.4% 8,416 4.2%4,702 5.6% 4,549 7.4%
Amortization of intangible assets 398 0.2% 404 0.3% 1,190 0.4% 1,159469 0.5% 396 0.6%
Merger expenses - - 1,474 1.2% 600 0.2% 1,474 0.7%
----------- -- 175 0.3%
-------- ----- -------- ---------------
Total operating expenses 89,900 106.8% 67,168 109.2%
-------- -------------- -------- ---------
Total costs and expenses 167,209 86.4% 106,987 87.6% 293,850 94.3% 192,061 95.2%
--------- -------- -------- ---------- -------- --------- -------- --------------
Operating income 26,328 13.6% 15,154 12.4% 17,749 5.7% 9,609 4.8%loss (5,758) (6.8%) (5,637) (9.2%)
Interest expense, net (854) (0.4%(1,160) (1.4%) (232) (0.2%(401) (0.6%)
(2,017) (0.7%-------- ----- -------- -----
Loss before income tax benefit (6,918) (8.2%) (377) (0.2%(6,038) (9.8%)
--------- -------- -------- ---------- -------- --------- -------- ---------
Net income before provision for income
taxes 25,474 13.2% 14,922 12.2% 15,732 5.0% 9,232 4.6%
Income tax provision 9,452 4.9% 5,644 4.6% 5,748 1.8% 3,531 1.8%
---------benefit (2,560) (3.0%) (2,294) (3.7%)
-------- ----- -------- ---------------
Net loss $ (4,358) (5.2%) $ (3,744) (6.1%)
-------- -------------- -------- ---------
Net income $ 16,022 8.3% $ 9,278 7.6% $ 9,984 3.2% $ 5,701 2.8%
--------------
-------- ----- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- --------------
13
NET REVENUES BY TERRITORY:
North America $ 69,472 35.9% $ 42,329 34.7% $106,623 34.2% $ 67,468 33.5%
International 124,065 64.1% 79,812 65.3% 204,976 65.8% 134,202 66.5%
--------- -------- -------- ---------- -------- --------- -------- ---------United States $34,813 41.4% $15,909 25.9%
Europe 47,145 56.0% 42,780 69.5%
Other 2,184 2.6% 2,842 4.6%
------- ----- ------- -----
Total net revenues $193,537$84,142 100.0% $122,141$61,531 100.0%
$311,599 100.0% $201,670 100.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------------- ----- ------- -----
------- ----- ------- -----
NET REVENUES BY ACTIVITY/PLATFORM MIX:PLATFORM:
Publishing:
Console $ 47,242 48.7% $ 11,640 19.2% $ 71,014 49.2% $ 15,585 15.5%$31,676 59.4% $10,959 47.3%
PC 49,704 51.3% 49,037 80.8% 73,214 50.8% 85,212 84.5%
--------- -------- -------- ---------- -------- --------- -------- ---------21,690 40.6% 12,193 52.7%
------- ----- ------- -----
Total publishing net revenues $ 96,946 50.1% $ 60,677 49.7% $144,228 46.3% $100,797 50.0%
--------- -------- -------- ---------- -------- --------- -------- ---------$53,366 63.4% $23,152 37.6%
------- ----- ------- -----
Distribution:
Console $ 63,482 65.7% $ 37,400 60.8% $116,624 69.7% $ 60,195 59.7%$17,714 57.6% $27,456 71.5%
PC 33,109 34.3% 24,064 39.2% 50,747 30.3% 40,678 40.3%
--------- -------- -------- ---------- -------- --------- -------- ---------13,062 42.4% 10,923 28.5%
------- ----- ------- -----
Total distribution net revenues 96,591 49.9% 61,464 50.3% 167,371 53.7% 100,873 50.0%
--------- -------- -------- ---------- -------- --------- -------- ---------$30,776 36.6% $38,379 62.4%
------- ----- ------- -----
Total net revenues $193,537$84,142 100.0% $122,141$61,531 100.0%
$311,599 100.0% $201,670 100.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------------- ----- ------- -----
------- ----- ------- -----
NET REVENUES BY CHANNEL:
Retailer/Reseller $185,030 95.6% $ 114,321 93.6% $296,003 95.0% $181,568 90.0%$80,303 95.4% $57,137 92.9%
OEM, licensing, on-line and other 8,507 4.4% 7,820 6.4% 15,596 5.0% 20,102 10.0%
--------- -------- -------- ---------- -------- --------- -------- ---------3,839 4.6% 4,394 7.1%
------- ----- ------- -----
Total net revenues $193,537$84,142 100.0% $61,531 100.0%
------- ----- ------- -----
------- ----- ------- -----
OPERATING LOSS BY SEGMENT:
Publishing $ 4,525 78.6% $ 5,164 91.6%
Distribution 844 14.7% 160 2.8%
Other 389 6.7% 313 5.6%
------- ----- ------- -----
Total operating loss by segment $ 5,758 100.0% $ 122,1415,637 100.0%
$311,599 100.0% $201,670 100.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------------- ----- ------- -----
------- ----- ------- -----
1114
RESULTS OF OPERATIONS
The results of operations for the quarter and nine months ended
December 31, 1998 include results of operations for Head Games Publishing
Inc. ("Head Games") and CD Contact Data GmbH ("CD Contact"), two recently
acquired companies, which were treated as immaterial poolings. The results of
operations for the quarter and nine months ended December 31, 1997 have not
been restated to reflect such acquisitions. Net revenues for the quarter and
nine months ended December 31, 1998 included $8.0 million and $13.0 million,
respectively, from Head Games' operations, which have been included since
April 1, 1998. Net revenues for the quarter and nine months ended December
31, 1998 included $19.1 million and $31.6 million, respectively, from CD
Contact's operations, which have been included since July 1, 1998.
NET REVENUES
Net revenues for the quarter ended December 31, 1998June 30, 1999 increased 58.5%36.7% from
the same period last year, from $122.1$61.5 million to $193.5$84.1 million. North
AmericaThis increase
primarily was composed of a 118.9% increase in net revenues in the United States
from $15.9 million to $34.8 million and an 8.1% increase in international net
revenues for the quarter ended December 31, 1998
increased 64.7%, from $42.3$45.6 million to $69.5 million and 55.5%, from $79.8
million to $124.1 million, respectively.$49.3 million. The increase in overall net
revenues was composed of a 125.9%28.6% increase in console net revenues, from $49.0$38.4
million to $110.7$49.4 million, and a 13.3%50.6% increase in PC net revenues, from $73.1$23.1
million to $82.8$34.8 million.
Approximately $27.1 million, or 38.0%, of the increase inPublishing net revenues infor the currentquarter ended June 30, 1999
increased 130%, from $23.2 million to $53.4 million, over the same period
last year. This increase was attributable to the immaterial poolings
discussed above.
Netincreases in publishing console
and publishing PC net revenues. Publishing console net revenues for the
nine monthsquarter ended December 31, 1998June 30, 1999 increased 54.5%188.2% from the same period last year,
from $201.7$11.0 million to $311.6$31.7 million.
North America and international net revenues for the nine months ended December
31, 1998 increased 57.9%, from $67.5 million to $106.6 million, and 52.8%, from
$134.2 million to $205.0 million, respectively. The increase in overall net
revenuesprimarily was composed of a 147.5% increase in console net revenues, from $75.8
million to $187.6 million, offset by a 1.5% decrease in PC net revenues, from
$125.9 million to $124.0 million. Approximately $44.6 million, or 40.6%, of the
increase in net revenues for the nine month period ended December 31, 1998 was
attributable to the immaterial poolings discussed above.
Publishing console net revenues for the quarter and nine months
ended December 31, 1998 increased 306.9%, from $11.6 million to $47.2
million, and 355.1%, from $15.6 million to $71.0 million, respectively, over
the prior year. The increases in such periods were primarily attributable
to the initial release of TenchuA Bug's Life (N64), Quake 2 (N64), Tarzan (Gameboy)
and Tai Fu (Playstation), Vigilante 8 (Playstation),
Asteroids (Playstation), Apocalypse (Playstation), Nightmare Creatures
(Nintendo 64), and Activision Classics (Playstation). in international territories. Publishing PC net
revenues for the quarter and nine months ended December 31, 1998June 30, 1999 increased 1.4%,77.9% from $49.0the same
period last year from $12.2 million to $49.7 million and decreased 14.1%, from $85.2 to
$73.2 million, respectively.$21.7 million. The increase in publishing PC net revenues for
the quarter ending December 31, 1998primarily
was primarily attributable to the
acquisition of Head Games, as discussed above. The decrease in publishing PC
net revenues for the nine month period was primarily attributabledue to the initial release of Quake II (PC)2 (Macintosh), Kingpin (Windows 95)
and Heavy Gear 2 (Windows 95).
Distribution net revenues for the quarter ended June 30, 1999
decreased 19.8%, from $38.4 million to $30.8 million, over the same period
last year. This decrease was attributable to a decrease in the prior comparable period,distribution
console revenues, partially offset by the acquisition of Head Games, as discussed above.an increase in distribution PC
initial
releases during the quarter ended December 31, 1998 included Sin, Asteroids
and Cabela's Big Game Hunter 2.revenues. Distribution console net revenues for the quarter and nine months
ended December 31, 1998 increased 69.8%,June 30,
1999 decreased 35.6% from $37.4the same period last year, from $27.5 million to
$63.5 million,
and 93.7%, from $60.2 million$17.7 million. The decrease primarily was due to $116.6 million, respectively, overa lack of significant new
major releases by third party publishers during the prior
year. These increases were attributable to the general increase in the Sony
Playstation hardware and software markets as well as the effect of the
acquisition of CD Contact, as discussed above.quarter. Distribution PC
net revenues for the quarter and nine months ended December 31, 1998June 30, 1999 increased 37.3%,20.2% from $24.1the
same period last year, from $10.9 million to $33.1 million$13.1 million. This increase
primarily was due to an increase in PC titles released by third party
publishers during the quarter.
Net OEM, licensing, on-line and 24.6%,other revenues for the ended June
30, 1999 decreased 13.6% from $40.7the same period last year, from $4.4 million to
$50.7
million, respectively. These increases were$3.8 million. This decrease primarily attributablewas due to the acquisitionrelease of CD Contact, as discussed above.fewer titles
during the quarter that were compatible with OEM customers' products.
COSTS AND EXPENSES
Cost of sales - product costs represented 55.6%62.0% and 48.8%64.0% of net
revenues for the quarters ended December 31,June 30, 1999 and June 30, 1998, and 1997, respectively. Cost
of sales - product costs represented 58.6% and 50.4% of net revenues for the
nine months ended December 31, 1998 and 1997,
respectively. The increasedecrease in cost of sales - product costs as a percentage
of net revenues for both the 1998 quarter
and the nine month periodprimarily was due to the increasedecrease in the salesdistribution net
revenues mix, ofpartially offset by a higher console net revenues versusrevenue 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
net revenues, as well as the decrease in the sales mix of
OEM, licensing and other net revenues versus retailer/reseller net revenues.
12
products.
Cost of sales - royalties and software amortization expense
represented 12.3%13.3% and 14.4%5.3% of net revenues for the quarters ended December 31,June 30,
1999 and June 30, 1998, and
1997, respectively. Cost of sales - royalties and software amortization expense
represented 10.4% and 12.6% of net revenues for the nine months ended December
31, 1998 and 1997, respectively. The decreaseincrease in cost of sales -
royalties and software amortization expense as a percentage of net revenues for both the 1998
quarter and nine month periodprimarily was due to changes in the
Company's product mix.
Moremix, with an increase in the number of branded products
with lowerhigher royalty rates were included in the 1998 product mixobligations as compared to the prior year, resulting in an overall lower royalty rate as a
percentage of net revenues.last year.
Product development expenses for the quarter ended December 31, 1998June 30, 1999
decreased 50.0%26.3% from the same period last year, from $8.0$5.7 million to $4.0
million. Product development expenses for the nine months ended December 31,
1998 decreased 38.2% from the same period last year, from $22.0 million to
$13.6$4.2
million. The decreasesdecrease in the amount of product development expensesexpense
15
for the quarter and nine months ended December 31, 1998June 30, 1999 primarily werewas due to an increase in the
capitalizable development costs relating to sequel products being developed
on proven engine technologies which have been capitalized in accordance with
SFAS 86.Statement of Accounting Standards ("SFAS") No. 86, "Accounting for the Cost
of Computer Software to be Sold, Leased or Otherwise Marketed".
As a percentage of net revenues, total product creation costs (i.e.,
royalties and software amortization expenseexpenses plus product development
expenses) decreased from 21.0% to 14.4% and from 23.5% to 14.8% duringfor the quarter and nine months ended December 31, 1998, respectively. Such decreases
were attributableJune 30, 1999 increased to efficiencies gained18.3% from 14.6%
in studio operations, as well as a
decreasethe same period last year. The increase primarily was due to an increase
in the effective royalty rate as discussed above, and an increase in
development costscost, capitalized under SFAS
No. 86, both as discussed above.
Sales and marketing expenses for the quarter ended December 31, 1998June 30, 1999
increased 58.5%24.8% from the same period last year, from $16.4$13.7 million to $26.0$17.1
million. As a percentage of net revenues however, sales and marketing
expenses increased
slightlydecreased from 13.4%22.3% to 13.5%20.4%. Sales and marketing expenses for the nine months
ended December 31, 1998 increased 54.7% from the same period last year, from
$32.0 million to $49.5 million. As a percentage of net revenues,The increase in amount in sales and
marketing expenses increased slightly from 15.8% to 15.9%. The increases in the
amount of sales and marketing expenses for the 1998 quarter and nine month
period primarily werewas due to a significant increase in television advertising
and an increase in the number of products scheduled to betitles released
during the current fiscal year. However,quarter. The decrease in sales and marketing expenses as a
percentage of net revenues primarily is due to lower marketing expenses
required on branded properties such expenses
have remained fairly consistent.as Quake 2, A Bug's Life and Tarzan.
General and administrative expenses for the quarter ended December
31, 1998June 30, 1999
increased 47.2%4.5% from the same period last year, from $3.6$4.5 million to $5.3$4.7
million. As a percentage of net revenues, general and administrative expenses
decreased from 2.9%7.4% in the same period last year to 2.7%5.6%. GeneralThe decrease in
general and administrative expenses as a percentage of net revenues primarily
was due to the efficiencies gained in controlling fixed costs and the increase
in net revenues.
OPERATING LOSS
Operating loss for the nine monthsquarter ended December 31, 1998June 30, 1999 increased 64.3%3.6%
from the same period last year, from $8.4$5.6 million to $13.8$5.8 million. AsPublishing
operating loss for the quarter ended June 30, 1999 decreased 13.5% from the
same period last year, from $5.2 million to $4.5 million. The period over
period decrease in publishing operating loss primarily was due to decreases
in product development expenses, sales and marketing expenses and general and
administrative expenses as a percentage of net revenues, generaloffset by an
increase in cost of sales royalties and administrative expensessoftware amortization as a percentage
of net revenues. Distribution operating loss for the quarter ended June 30,
1999 increased slightly$0.6 million from 4.2%the same period last year, from $0.2 million
to 4.4%.$0.8million. The period over period increase in the amount of general and
administrative expenses for the 1998 quarter and nine month perioddistribution operating
loss primarily werewas due to a decrease in net distribution revenues and an
increase in worldwide administrative support needs and
headcount related expenses. The decreasedistribution operating expenses as a percentage of net revenues
relates primarily to efficiencies gained in administrative operations.
OTHER INCOME (EXPENSE)
Net interest expense was $854,000 and $2,017,000 for the quarter and
nine months ended December 31, 1998, compared to net interest expense of
$232,000 and $377,000 for the same periods last year. These increases primarily
were 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.revenues.
PROVISION FOR INCOME TAXES
The income tax provisionbenefit of approximately $9,452,000 and $5,748,000$2,560,000 for the quarter
and nine months ended December 31, 1998, respectively,June 30, 1999 reflects the Company's estimated benefit from the Company's
net loss using the estimated effective income tax rate of approximately 37%35% for the fiscal
year endingended March 31, 1999.2000. 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 the deferred tax assets recognized.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $21.9$15.0 million, from
$73.4$32.8 million at March 31, 19981999 to $51.5$17.8 million at December 31, 1998.June 30, 1999.
Approximately $29.6$11.4 million in cash and cash equivalents were
16
used in operating activities during the quarter ended June 30, 1999. This
decrease primarily was attributable to the Company's operating loss during
the most recent quarter coupled with increases in inventories and other
assets, and decreases in accounts payable and accrued liabilities offset
partially by a decrease in accounts receivable.
In addition, approximately $32.7 million in cash and cash equivalents
were used in operatinginvesting activities during the nine monthsquarter ended December 31, 1998June 30, 1999, as
compared with approximately $9.6 million during the same period in the prior
year. The increase in cash used for investing activities was primarily due to
the acquisition of Expert on June 22, 1999, for approximately $14.9$20.6 million
in cash, and cash equivalents provided by
operatingother acquisition costs related to the transaction. Cash used in
investing activities during the nine months ended December 31, 1997. This
change was primarily attributablealso increased due to a substantialan increase during the nine
months ended December 31, 1998 in prepaid royalties
and capitalized software costs incurred by the Company as a result of its
execution of new license and development agreements granting the Company long
term rights to the intellectual property of third parties, as well as the
acquisition of publishing orand distribution rights to products being developed
by third parties. Also contributing to the
change were increases in accounts receivable, inventory, accounts payable and
accrued liabilities resulting from the Company's overall growth during the
nine month period ended December 31, 1998.
In addition, approximately $2.1 million in cash and cash equivalents
were used in investing activities. Capital expenditures totaled approximately $2.8 million$572,000 during
the nine monthsquarter ended December 31, 1998.June 30, 1999.
Cash and cash equivalents provided by financing activities totaled approximately $9.8$30.0
million for the nine monthsquarter ended December 31, 1998, whichJune 30, 1999 versus $0.3 million used by
financing activities for the same period in the prior year. This increase
included approximately $3.5$25 million in proceeds from a term loan and approximately $4.6
million in proceeds from the exercise of employee stock options and
approximately $9.4 million of net borrowings under a line of $7.4 million under the Company's lines of credit.credit agreement.
In connection with the Company's purchases of 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. Furthermore,
Nintendo maintains a policy of not accepting returns of N64 hardware and
software cartridges. Because of these and other factors, the carrying of an
inventory of N64 hardware and software cartridges entails significant capital
and risk.
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.
During the quarter ended December 31, 1998,Until June 1999, the Company obtainedhad a new$40.0 million revolving credit and
letter of credit facility ("the New(the "Prior Facility") from a new
bank that permitsgroup of banks. The
Prior Facility provided the Company with the ability to borrow funds and
issue letters of credit against domesticeligible accounts receivable up to $25$40.0
million. The Prior Facility was scheduled to expire in October 2001. In June
1999, the $557,000 of borrowings outstanding under the Prior Facility were
repaid in full with proceeds from the Company's New Facility, as described
below.
In June 1999, the Company replaced the Prior Facility with a $125 million
revolving credit facility and term loan (the "New Facility") from a new group of
banks. The New Facility expires
in October 2000. As of December 31, 1998,provides the Company had an outstanding balancewith the ability to borrow up to
$100 million and issue letters of approximately $5.3credit up to $80 million on this linea revolving basis
against eligible accounts receivable and inventory. The $25 million term loan
portion of credit. In January 1999, the
Company increased the New Facility was used to $40acquire Expert and pay costs related to
such acquisition 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
17
published prime rate) plus 2.0%, or LIBOR plus 3.0%. The revolving portion of
the New Facility has a borrowing rate of the banks' base rate plus 1.75% or
LIBOR plus 2.75%. The Company pays a commitment fee of 1/2% based on the unused
portion of the line. The Company had a balance outstanding of $5.3 million under
substantially the same
terms and conditions.
Theline of credit portion of the New Facility at June 30, 1999.
In addition, the Company's CentreSoft subsidiary has a revolving credit
facility (the "Europe"UK Facility") with its bank in the United Kingdom for
approximately $11.5$11.2 million. The EuropeUK Facility can be used for working capital
requirements and expires in June 2000. The Company had no borrowings underoutstanding
against the Europe FacilityUK facility as of December 31,
1998. TheJune 30, 1999. In the Netherlands, the Company's newly acquired subsidiary,
CD Contact subsidiary has facilities (the
"CD Contact Facilities"a credit facility ("the Netherlands Facility") with its banksa
bank that permitpermits borrowings against eligible accounts receivable and inventory
up to approximately $25 million. Borrowings under the CD Contact FacilitiesNetherlands Facility are
due on demand and totaled $6.5$4.1 as of June 30, 1999. Letters of credit
outstanding under the Netherlands Facility totaled $6.9 million as of DecemberMarch 31,
1999.
In addition, the Company had a line of credit agreement (the "Asset Line")
with a bank that expired in September 1998. Approximately $617,000 and $848,000
were outstanding on this line as of June 30, 1999 and 1998, respectively.
Payments on the balance remaining are made on a quarterly basis concluding
September 30, 2000.
The Company will use its working capital ($131.1133.0 million at December
31, 1998)June 30, 1999),
as well as the proceeds available from the New Facility, the EuropeUK Facility and the
CD Contact Facilities,Netherlands Facility, to finance the Company's operational requirements for at
least the next twelve months, including acquisitions of inventory and equipment,
the funding of development, production, marketing and selling of new products,
and the acquisition of intellectual property rights for future products from
third parties.
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 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 initiatedcompleted a
comprehensive
14
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
testhave
tested year 2000 compliance for the majorityall 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 such products currently in development are being
tested as part of the normal quality assurance testing process and are scheduledexpected
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 are beinghave been developed to address the most
material areas of exposuresystems
critical 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 currently is in developmenthas 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 currently being
developed by the Company will be
adequate for handling these items.
18
The Company also is contactinghas 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.
The Company anticipates that yearYear 2000 compliance testing on substantially all of itsthe Company's
critical systems will be completed, and correspondingall changes willrequired to be made by mid-1999.as a result of such
testing have been completed. 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.$100,000, and
no substantial additional costs are currently foreseen. 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 is beinghas 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 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
1519
immaterial to its overall operations. The Company's wholly owned subsidiaries
operating in participating countries represented 11.4% and 11.3% of the
Company's consolidated net revenues for the quarter and nine months ended
December 31, 1998, respectively.
FACTORS AFFECTING FUTURE PERFORMANCE
In connection with the Private Securities Litigation Reform Act of 1995
(the "Litigation Reform Act"), the Company has disclosed certain cautionary
information to be used in connection with written materials (including this
Quarterly Report on Form 10-Q) 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. For
discussion that highlights some of the more important risks identified by
management, but which should not be assumed to be the only factors that could
affect future performance, see the Company's Annual Report on Form 10-K which is
incorporated herein by reference. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company transacts businessReference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in many different foreign currencies and
may be exposed to financialthe Registrant's Annual Report on Form 10-K
for the year ended March 31, 1999. There has been no significant change in
the nature or amount of market risk resulting from fluctuations in foreign
currency exchange rates, particularly the British Pound sterling. However, due
to the long-term stability of the pound, the Company has deemed it unnecessary
to hedge against foreign currency devaluation at the present time. The
volatility of the Pound (and all other applicable currencies) will be monitored
frequently throughout the comingsince year and the Company may require the use of
hedging programs, currency forward contracts, currency options and/or other
derivative financial instruments commonly utilized to reduce financial market
risks.
16end.
20
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The5. SHAREHOLDER PROPOSALS
Proposals of stockholders intended to be presented at the Annual
Meeting of Stockholders to be held in 2000 must be received by the Company is party to routine claims and suits brought against itat
its principal executive offices no later than April 1, 2000 for inclusion in
the ordinary courseCompany's proxy statement and form of business including disputes arising overproxy relating to that meeting. Any
stockholder proposal submitted outside the ownershipprocesses of intellectual property rightsRule 14a-8 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
presentation at the Annual Meeting of Stockholders to be held in 2000 will be
considered untimely for purposes of Rules 14a-4 and collection matters. In14a-5 under the opinion of management, the outcomeExchange
Act if notice of such routine claims will not have
a material adverse effect onshareholder proposal is received by the Company's business, financial condition
or results of operations.Company after
June 30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27.1 FiscalEXHIBITS
6.1. Employment agreement dated July 12, 1999 Quarterbetween the
Company and Year to Date Financial Data ScheduleMr. Michael Rowe.
6.2. Employment agreement dated July 12, 1999 between the
Company and Ms. Kathy Vrabek.
(b) Reports on FormREPORTS ON FORM 8-K
-------------------
On October 8, 1998,April 29, 1999, the Company filed a Current Report on Form
8-K reporting that the completionAgreement and Plan of Merger with Expert
Software, Inc. was amended on April 19, 1999 to extend the acquisitionoutside
date by which Activision may elect to pay cash consideration to the
holders of CD Contact on
September 29, 1998. The transaction was accounted for as a
"poolingshares of interests".
17Expert common stock from March 25, 1999 to April
20, 1999.
21
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: February 12,August 16, 1999
ACTIVISION, INC.
/s/ Barry J. Plaga Chief Financial Officer February 12,and August 16, 1999
- ------------------------------------------------------ Chief Accounting Officer
(Barry J. Plaga)
18
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