SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 1996
O R
[ ] 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 94-2606438
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11601 Wilshire Blvd., Los Angeles, CA 90025
(Address of principal executive offices) (Zip Code)
(310) 473-9200
(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 ] 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 14, 1997 was 14,078,060.
ACTIVISION, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1996 (unaudited) and March 31, 1996 3
Condensed Consolidated Statements of Operations for the quarters
and nine months ended December 31, 1996 and 1995 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1996 and 1995 (unaudited) 5
Notes to Condensed Consolidated Financial Statements for the
quarter and nine months ended December 31, 1996 (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
Exhibit Index 19
Part I - Financial Information
Item 1. Financial Statements
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
December 31, March 31,
1996 1996
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $17,336 $25,288
Accounts receivable,
net of allowances of $8,618
and $7,005 respectively 33,373 19,909
Inventories, net 3,275 2,975
Prepaid software and license royalties 6,788 3,652
Other current assets 1,500 1,183
Deferred income taxes 505 1,500
----------------- -----------------
Total current assets 62,777 54,507
Property and equipment, net 4,186 3,326
Other assets 260 200
Excess purchase price over
identifiable assets acquired, net 18,618 19,580
------------------ ------------------
Total assets $85,841 $77,613
========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $7,543 $4,592
Accrued expenses 10,130 9,688
----------------- -----------------
Total current liabilities 17,673 14,280
Other liabilities 319 334
----------------- ----------------
Total liabilities 17,992 14,614
----------------- -----------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.000001 par value,
50,000,000 and 100,000,000 shares
authorized, 14,475,450 and 14,250,180
shares issued and 13,975,450 and
13,750,180 outstanding , respectively - -
Additional paid-in capital 69,796 67,904
Retained earnings (accumulated deficit) 3,533 708
Cumulative foreign currency translation (202) (335)
Less: Treasury stock, cost of
500,000 shares (5,278) (5,278)
------------------ -----------------
Total shareholders' equity 67,849 62,999
------------------ -----------------
Total liabilities and shareholders'
equity $85,841 $77,613
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands except income (loss) per share data)
(Unaudited)
Quarter ended Nine months ended
December 31, December 31,
----------------------------- -----------------------------
1996 1995 1996 1995
-------------- -------------- --------------- -------------
Net revenues $ 31,361 $ 17,578 $ 57,557 $ 39,745
Cost of goods sold 11,878 7,131 19,099 15,428
-------------- -------------- -------------- --------------
Gross profit 19,483 10,447 38,458 24,317
-------------- -------------- -------------- --------------
Operating expenses:
Product development 4,707 4,163 13,861 12,807
Sales and marketing 6,883 3,200 15,930 9,290
General and administrative 1,362 1,190 3,951 3,332
Amortization of intangible assets 321 321 963 963
-------------- -------------- -------------- --------------
Total operating expenses 13,273 8,874 34,705 26,392
-------------- -------------- -------------- --------------
Operating income (loss) 6,210 1,573 3,753 (2,075)
Other income:
Interest, net 172 409 728 1,343
------------- -------------- -------------- --------------
Income (loss) before income tax provision 6,382 1,982 4,481 (732)
Income tax provision 2,262 34 1,656 83
-------------- -------------- -------------- --------------
Net income (loss) $ 4,120 $ 1,948 $ 2,825 $ (815)
=============== ============== ============== ==============
Net income (loss) per share $ 0.28 $ 0.13 $ 0.19 $ (0.06)
=============== ============== ============== ==============
Number of shares used in computing
net income (loss) per share 14,644 15,209 14,565 14,077
=============== ============== ============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the nine months ended December 31,
(in thousands)
Increase (Decrease) in Cash
(Unaudited)
1996 1995
------------- ------------
Net cash used in operating activities $ (6,746) $ (1,840)
------------- ------------
Cash flows from investing activities:
Capital expenditures (2,349) (2,244)
------------- ------------
Net cash used in investing activities (2,349) (2,244)
------------- ------------
Cash flows from financing activities:
Proceeds from issuance and exercise of common
stock options and warrants 1,010 214
Purchase of Treasury Stock - (5,278)
------------- ------------
Net cash provided (used) by financing activities 1,010 (5,064)
------------- ------------
Effect of exchange rate changes on cash 133 (130)
------------- ------------
Net decrease in cash and cash equivalents (7,952) (9,278)
------------- ------------
Cash and cash equivalents at beginning of period 25,288 37,355
------------- ------------
Cash and cash equivalents at end of period $ 17,336 $ 28,077
============= ============
Non-cash investing activities:
Stock issued in exchange for licensing rights $ 822 $ -
============= ============
Activision, Inc.
Notes to Condensed Consolidated Financial Statements
For the Quarter and Nine Months Ended December 31, 1996
(Unaudited)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1. Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Activision, Inc. and its subsidiaries. The information
furnished is unaudited and reflects all adjustments which, 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,
1996.
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform with the current period's presentation.
These reclassifications had no impact on previously reported working
capital or results of operations.
2. Inventories
Inventories, net comprise (amounts in thousands):
December 31, March 31,
1996 1996
Finished goods $ 2,307 $ 2,099
Purchased parts and components 968 876
--------- ---------
$ 3,275 $ 2,975
========= =========
3. Software Development Costs
Statement of Financial Accounting Standard No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
provides for the capitalization of certain software development costs
once technological feasibility is established. The capitalized costs
are then amortized on a straight-line basis over the estimated product
life, or on the ratio of current revenues to total projected revenues,
whichever is greater. The software development costs that have been
capitalized to date have been immaterial.
4. Revenue Recognition
Product Sales: The Company recognizes revenues from the sale of its
products upon shipment. Subject to certain limitations, the Company
permits customers to obtain exchanges within certain specified periods
and provides price protection on certain unsold merchandise. Revenues
from product sales are 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, revenues are recognized at delivery of the product master or
the first copy. Per copy royalties on sales which exceed the guarantee
are recognized as earned.
5. Amortization of Intangible Assets
Effective April 1, 1992, the Disc Company, Inc. ("TDC"), a Delaware
corporation and a wholly-owned subsidiary of International Consumer
Technologies Corporation, was merged with and into the Company, with the
Company as the surviving corporation. The excess of the purchase price
over the estimated fair values of the net assets acquired was recorded
as an intangible asset in the amount of $24,417,000. This intangible
asset is being amortized on a straight-line basis over a 20 year period.
Amortization was approximately $305,000 for each of the quarters ended
December 31, 1996 and 1995 and $915,000 for each of the nine month
periods ended December 31, 1996 and 1995. The Company systematically
evaluates current and expected cash flow from operations on a non-
discounted basis for the purpose of assessing the recoverability of
recorded intangible assets. Some of the factors considered in this
evaluation include operating results, business plans, budgets and
economic projections. Should such factors indicate that recoverability
might be impaired, the Company would appropriately adjust the recorded
amount of the intangible asset and/or the period over which the recorded
intangible asset is amortized.
6. Computation of Net Income (Loss) per Share
The net income (loss) per common share and common equivalent shares for
the quarter and nine month periods ended December 31, 1996 and 1995 have
been computed using the weighted average number of common shares and
common stock equivalent shares, unless anti-dilutive, outstanding for
each period as summarized below (amounts in thousands):
Quarter ended Nine months ended
December 31, December 31,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Weighted average common shares
outstanding during the period 13,941 13,969 13,877 14,077
Common stock equivalent shares 703 1,240 688 -
-------- -------- -------- --------
Shares used in net income (loss)
per share calculation 14,644 15,209 14,565 14,077
======== ======== ======== ========
Common stock equivalent shares consist of outstanding stock options and
director warrants.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q, including Item 2 ("Management's
Discussion and Analysis of Financial Condition and Results of Operations"),
contains forward looking statements regarding future events or the future
financial performance of the Company that involve certain risks and
uncertainties including those discussed below in "Factors Affecting Future
Performance" on pages 12 to 16, as well as under the heading, "Certain
Cautionary Information" in the Company's Annual Report on Form 10-K on
pages 4 to 8 of such Report. 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 diversified international publisher of interactive
entertainment software. The Company develops and publishes entertainment
software for a variety of platforms, including both personal computer CD-
ROM desktop systems, such as the Windows 95 operating system, and videogame
set-top hardware systems, such as the Sony PlayStation and Sega Saturn.
The Company distributes its products worldwide through its direct sales
force and, to a lesser extent, through third party distributors and
licensees.
For purposes of the presentation set forth below, net revenues from
and cost of goods sold related to set-top systems consist of sales and
costs relating to all entertainment software products designed by the
Company for operation on a hardware device that is connected to a
television set and displayed on a television screen. Examples of set-top
systems include Sony PlayStation ("PlayStation"), Sega Saturn ("Saturn"),
Super Nintendo Entertainment System ("SNES"), Sega Genesis ("SGS") and 3DO
Multiplayer. The Company designs products for operation on many of these
systems, and normally it is required to pay a license fee for the right to
create products for a particular system. Net revenues from and cost of
goods sold related to desktop systems consist of sales and costs relating
to all entertainment software products designed by the Company for
operation through a personal computer's operating system software and that
is displayed on the computer's monitor. Examples of computer operating
systems include Windows, MS-DOS and the Macintosh operating systems. The
Company generally is not obligated to pay an operating system license fee
for the right to produce desktop products.
Results of Operations
Net Revenues
Net revenues for the quarter and nine months ended December 31, 1996
increased $13,783,000 or 78.4% and $17,812,000 or 44.8%, respectively, from
the same periods last year. These increases in net revenues were due to
increases in set-top, desktop and OEM net revenues during the current
periods. The increase in set-top net revenues during the current quarter
was attributable to the initial release of "Blood Omen: Legacy of Kain"
(PlayStation), "Blast Chamber" (PlayStation) and "Power Move Pro Wrestling"
(PlayStation). The increase in desktop net revenues during the current
quarter was attributable to the initial release of "Hyperblade" (Windows 95
CD), "A-10 Cuba!" (Windows 95 CD) and continuing sales of "MechWarrior 2:
Mercenaries" (Windows 95 CD), "MechWarrior 2" (Windows 95/MS-DOS/Mac CD)
and "Zork Nemesis" (Windows 95/Mac CD).
Total OEM and licensing net revenues increased during the current
quarter and nine month period due to OEM and licensing revenues related to
enhanced 3-D versions of "MechWarrior 2" (Windows 95 CD/Matrox Mystique,
ATI, S3 Virge, Rave and Power VR), "Time Commando" (Windows 95 CD), "Zork
Nemesis" (Windows 95 CD) and "Spycraft: The Great Game" (Windows 95 CD).
Net revenues by territory were as follows (amounts in thousands):
Quarter Ended December 31, Nine Months Ended December 31,
-------------------------------- --------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- ---------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
North America $24,648 78.6% $13,062 74.3% $45,117 78.4% $30,034 75.6%
Europe 3,886 12.4% 1,791 10.2% 6,625 11.5% 3,819 9.6%
Japan 1,014 3.2% 1,901 10.8% 2,265 3.9% 3,797 9.6%
Australia and
Pacific Rim 1,813 5.8% 824 4.7% 3,550 6.2% 2,095 5.2%
------- ------ ------- ------ ------- ------ ------- ------
$31,361 100.0% $17,578 100.0% $57,557 100.0% $39,745 100.0%
======= ====== ======= ====== ======= ====== ======= ======
Net revenues by device/medium were as follows (amounts in thousands):
Quarter Ended December 31, Nine Months Ended December 31,
------------------------------- --------------------------------
1996 1995 1996 1995
--------------- -------------- -------------- ----------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Set-top $10,423 33.2% $1,323 7.5% $12,121 21.1% $4,092 10.3%
Desktop 20,938 66.8% 16,255 92.5% 45,436 78.9% 35,653 89.7%
------- ------ ------ ------ ------- ------ ------ ------
$31,361 100.0% $17,578 100.0% $57,557 100.0% $39,745 100.0%
======= ====== ======= ====== ======= ====== ======= ======
Net revenues by distribution channel were as follows (amounts in
thousands):
Quarter Ended December 31, Nine Months Ended December 31,
--------------------------------- ----------------------------------
1996 1995 1996 1995
--------------- --------------- --------------- -----------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Retailer/Reseller $25,850 82.4% $13,389 76.2% $44,311 77.0% $31,695 79.8%
OEM 4,849 15.5% 3,099 17.6% 11,184 19.4% 4,104 10.3%
On-line, licensing
and other 662 2.1% 1,090 6.2% 2,062 3.6% 3,946 9.9%
------- ------ ------- ------ ------- ------ ------- ------
$31,361 100.0% $17,578 100.0% $57,557 100.0% $39,745 100.0%
======= ====== ======= ====== ======= ====== ======= ======
Cost of Goods Sold
Cost of goods sold related to set-top, desktop and OEM net revenues
represent the manufacturing and related costs of computer software and
video games. Manufacturers of the Company's computer software are located
in the United States and Europe and are readily available. Set-top CDs and
cartridges are manufactured by the respective video game console
manufacturers, such as Sony, Nintendo and Sega, who require significant
lead time to fulfill the Company's orders.
Also included in cost of goods sold is royalty expense related to
amounts due to developers, title owners or other royalty participants based
on product sales. Various contracts are maintained with developers,
product title owners or other royalty participants which state a royalty
rate and term of agreement, among other items. Cost of goods sold as a
percentage of net revenues decreased to 37.9% for the quarter ended
December 31, 1996 compared to 40.6% for the quarter ended December 31,
1995. The nine month comparative figures also show a decrease in cost of
goods sold as a percentage of net revenues to 33.2% for the nine month
period ended December 31, 1996 compared to 38.8% for the nine month period
ended December 31, 1995. These decreases are the result of increased
efficiencies in the manufacturing and distribution process partially offset
by an increase of CD-based set-top products in the net revenues mix.
Variability in the cost of goods sold as a percentage of net revenues will
be driven primarily by the mix of desktop versus set-top products, as well
as the mix of internal versus external product development, the latter in
each case resulting in higher cost of goods sold.
Gross Profit
For the quarter ended December 31, 1996, gross profit as a percentage
of net revenues was 62.1% compared to 59.4% for the quarter ended December
31, 1995. Gross profit as a percentage of net revenues increased to 66.8%
for the nine months ended December 31, 1996 from 61.2% for the nine months
ended December 31, 1995. The increase in gross profit as a percentage of
net revenues during both the current quarter and nine month period was the
result of increased efficiencies in the manufacturing and distribution
process partially offset by an increase of CD-based set-top products in the
net revenues mix. Gross margin variability will be driven primarily by the
mix of desktop versus set-top products, as well as the mix of internal
versus external product development, the latter in each case resulting in
lower gross margins.
Operating Expenses
Quarter Ended December 31, Nine Months Ended December 31,
---------------------------------- ----------------------------------
1996 1995 1996 1995
---------------- ---------------- ---------------- ----------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
Product development $4,707 15.0% $4,163 23.7% $13,861 24.1% $12,807 32.2%
Sales and marketing 6,883 22.0% 3,200 18.2% 15,930 27.7% 9,290 23.4%
General and administrative 1,362 4.3% 1,190 6.8% 3,951 6.8% 3,332 8.4%
Amortization of
intangible assets 321 1.0% 321 1.8% 963 1.7% 963 2.4%
------ ------ ------ ------ ------- ------ ------ ------
$13,273 42.3% $8,874 50.5% $34,705 60.3% $26,392 66.4%
======= ====== ====== ====== ======= ====== ======= ======
Product development expenses increased in amount for the quarter and
nine months ended December 31, 1996 due to an overall increase in the
number of products in development, an increase in production costs
associated with 3-D programming technology and continued investment in
development for new CD-based set-top platforms. Sales and marketing
expenses increased both in amount and as a percentage of revenues as a
result of a worldwide expansion of the sales and marketing organization
needed to manage the Company's increased product release schedule. General
and administrative expenses increased in amount due to an increase in head
count related expenses as compared to the same periods in the prior year.
Other Income (Expense)
Interest income was approximately $172,000 and $728,000 for the
quarter and nine months ended December 31, 1996, respectively, compared to
approximately $409,000 and $1,343,000 for the quarter and nine months ended
December 31, 1995, respectively. The decreases were due to a decrease in
cash and cash equivalents during the current fiscal quarter and nine month
period as compared to the same periods in the prior year.
Income Tax Provision
The income tax provision of approximately $2,262,000 and $1,656,000
for the quarter and nine months ended December 31, 1996, respectively,
reflects the Company's expected effective income tax rate for the fiscal
year ending March 31, 1997. The Company did not record an income tax
provision benefit for the nine months ended December 31, 1995 due to the
fact that, as of such date, the Company had not yet generated taxable
income. Income taxes for the quarter and nine months ended December 31,
1995 represent foreign taxes withheld, which may be available in the future
as tax credits against future tax liability.
Net Income (Loss)
For the reasons noted above, net income increased to $4,120,000 for
the quarter ended December 31, 1996 from a net income of $1,948,000 for the
same period of the prior fiscal year. For the nine months ended December
31, 1996, net income increased to $2,825,000 from a net loss of $815,000
for the same period of the prior fiscal year.
Liquidity and Capital Resources
The Company's working capital increased $4.9 million from March 31,
1996 to December 31, 1996 primarily as a result of the increase in net
revenues and the resulting increase in accounts receivable. At December
31, 1996, net accounts receivable and inventories were $36.7 million, an
increase of $13.8 million from $22.9 million as of March 31, 1996. Prepaid
royalties increased as a result of an increase in third party intellectual
property and product right acquisitions.
As of December 31, 1996, total accounts payable and accrued
liabilities were approximately $17.7 million versus $14.3 million at March
31, 1996. The increase at December 31, 1996 is primarily due to the
increase in inventories and accrued expenses related to the increase in net
revenues during the quarter.
During the nine months ended December 31, 1996, the Company invested
approximately $2.3 million in computer hardware, software and information
systems required to support the Company's growth in product development and
distribution. During fiscal 1997, the Company expects to incur additional
capital expenditures relating to the development of its products and the
general operation of its business. In December 1996, the Company signed a
new long term lease for its headquarters and will be moving from its
current facility in Los Angeles to a nearby facility in Santa Monica,
California in the first quarter of fiscal 1998.
The Company's principal source of liquidity is $17.3 million in cash
and cash equivalents. The Company uses its working capital to finance
ongoing operations, including acquisitions of inventory and equipment, to
fund the development, production, marketing and selling of new products,
and to obtain intellectual property rights for future products from third
parties. Management believes that the Company's existing capital resources
are sufficient to meet its current operational requirements for the
foreseeable future.
The Company's management currently believes that inflation has not had
a material impact on continuing operations.
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 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. 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 in the past
varied significantly and will likely in the future vary significantly
depending on numerous factors, many of which are not under the Company's
control. Such factors include, but are not limited to, demand for the
Company's products and those of its competitors, the size and rate of
growth of the interactive entertainment software market, development and
promotional expenses relating to the introduction of new products, changes
in desktop and set-top platforms, product returns, the timing of orders
from major customers, delays in shipment, the level of price competition,
the timing of product introduction by the Company and its competitors,
product life cycles, software defects and other product 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 large part on the Company's
product development and marketing budgets. Product development and
marketing costs are expensed as incurred, which is often long before a
product ever is released. In addition, a large portion of the Company's
expenses are fixed. As the Company increases its development and marketing
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 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 are typically significantly higher during the
fourth calendar quarter, due primarily to the increased demand for consumer
software during the year-end holiday buying season. Net revenues in other
quarters are generally lower and vary significantly as a result of new
product introductions and other factors. For example, the Company's net
revenues in its last five quarters were $31.3 million for the quarter ended
December 31, 1996, $19.2 million for the quarter ended September 30, 1996,
$7.0 million for the quarter ended June 31, 1996, $21.6 million for the
quarter ended March 31, 1996 and $17.6 million for the quarter ended
December 31, 1995. 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 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
interactive entertainment software marketplace create the need for higher
quality, distinctive products that incorporate increasingly sophisticated
effects and the need to support product releases with increased marketing,
resulting in higher development and marketing costs. The lack of market
acceptance or the significant delay in the introduction of, or the presence
of a defect in, one or more new 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 is
generally associated with initial shipments, the delay of a product
introduction expected near the end of a fiscal quarter may have a material
adverse affect on the 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 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 will likely 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.
From time to time, the Company utilizes independent contractors for
certain aspects of product development and production. The Company has
less control over the scheduling and the quality of work by independent
contractors than that of its own employees. A delay in the work performed
by independent contractors or a lack of quality in such work may result in
product delays and poor product performance. Although the Company intends
to rely in significant part on internal product development, the Company's
business and future operating results also will depend, to a certain
extent, on the Company's continued ability to maintain relationships with
skilled independent contractors. There can be no assurance that the
Company will be able to maintain such relationships.
Uncertainty Of Market Acceptance; Short Product Life Cycles. The
market for entertainment systems and software has been characterized by
shifts in consumer preferences and short product life cycles. Consumer
preferences for entertainment software products are difficult to predict
and few entertainment software 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 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 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. A key aspect of
the Company's strategy is to focus its development efforts on selected,
high quality entertainment software products. The Company derives a
significant portion of its revenues from a select number of high quality
entertainment software products released each year, and many of these
products have substantial production and marketing budgets. Due to this
dependence on a limited number of products, the Company may be adversely
affected if one or more principal products fail to achieve anticipated
results.
Industry Competition; Competition For Shelf Space. The interactive
entertainment software industry is intensely competitive. Competition in
the industry 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
the entertainment software industry, principally due to the substantial
cost of product development and marketing that is needed for best-selling
titles. In addition, competitors with larger product lines and a greater
number of 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 competitors' 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, Inc., Lucas Arts
Entertainment Company, Microsoft Corporation ("Microsoft"), Sony, Sega,
Nintendo, CUC International, Inc., Good Times Interactive, Inc., Interplay,
Inc. and Maxis, Inc., among many others. In addition, the Company believes
that new competitors, including large divisions of major media and
communications companies such as The Walt Disney Company and Dreamworks
SKG, are entering or considering entering the market or are increasing
their focus on the entertainment software market, resulting in greater
competition for the Company.
As competition increases, significant price competition, increased
production costs and reduced profit margins may result. In addition,
competition from new technologies, such as on-line or networked games, may
reduce demand in markets in which the Company has traditionally competed.
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
affect on its business, operating results and financial condition.
Retailers typically have a limited amount of shelf space, and there is
intense competition among entertainment software producers for adequate
levels of shelf space and promotional support from retailers. As the
number of entertainment software products has increased, 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.
Changes In Technology And Industry Standards. The consumer software
industry is continuing to undergo rapid changes, including evolving
industry standards, frequent new platform introductions and changes in
consumer requirements and preferences. The introduction and adoption of
new technologies, including operating systems such as Microsoft's Windows
95 and multi-player gaming over the Internet, could render the Company's
previously released products obsolete or unmarketable. The development
cycle for products utilizing new operating systems, microprocessors or
formats may be significantly longer than the Company's current development
cycle for products on existing 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.
Limited Protection Of Intellectual Property And Proprietary Rights;
Risk Of Litigation. The Company holds copyrights on its products, manuals,
advertising and other materials and maintains trademark rights in the
Company's name, the Activision logo, and the names of 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 affected. 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. 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. 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.
Dependence On 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. In particular, the loss of the
services of Robert A. Kotick, Brian G. Kelly or Howard E. Marks could have
a material adverse effect on the Company. The Company maintains life
insurance policies only on Messrs. Kotick, Kelly and Marks. 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 to attract and retain skilled employees. Although
the Company generally enters into term employment agreements with its
skilled employees and other key 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 additional qualified employees or to
retain the services of key personnel could have a material adverse affect
on the Company's business, operating results and financial condition.
Dependence On Distributors; Risk Of Customer Business Failure; Product
Returns. Certain mass market retailers have established exclusive buying
relationships under which such retailers will buy consumer software only
from one or two intermediaries. In such instances, the price or other
terms on which the Company sells to such retailers may be adversely
affected by the terms imposed by such intermediaries, or the Company may be
unable to sell to such retailers on terms which the Company deems
acceptable. The loss of, or significant reduction in sales attributable
to, any of the Company's principal distributors or retailers could
materially adversely affect the Company's business, operating results and
financial condition. Distributors and retailers in the computer 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
distributor or retailer 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 maintains a
reserve for uncollectible receivables that it believes to be adequate, a
payment default by a significant customer could have a material adverse
affect on the Company's business, operating results and financial
condition.
The Company also is exposed to the risk of product returns from
distributors and retailers. 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.
Risks Associated With International Operations. International net
revenues accounted for 24%, 28%, 23% and 22% of the Company's total
revenues in the fiscal years 1994, 1995 and 1996 and nine months ended
December 31, 1996, respectively. The Company intends to continue to expand
its direct and indirect sales and marketing activities worldwide. Such
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 the Company
will 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, 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 the Company will be able to sustain or increase
international revenues or that the foregoing factors will not 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, there can be no assurance that fluctuations in currency
exchange rates in the future will not 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 Software Defects. 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 software errors in certain of its product offerings
after their introduction. In particular, the personal computer hardware
environment is characterized by a wide variety of non-standard peripherals
(such as sound cards and graphics cards) and configurations that make
pre-release testing for programming or compatibility errors very difficult
and time-consuming. There can be no assurance that, despite significant
testing by the Company, errors will not be found in new products or
releases 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.
Part II. - OTHER INFORMATION
Item 1. 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 or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.14 Lease Agreement dated as of December 20, 1996 between the
Company and Barclay-Curci Investment Company
(b) Reports on Form 8-K
The Company filed Form 8-K on January 17, 1997 reporting a change
in the Company's certifying accountant from Coopers & Lybrand LLP
to KPMG Peat Marwick LLP, effective January 17, 1997.
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 14, 1997
ACTIVISION, INC.
Chairman, Chief Executive February 14, 1997
(Robert A. Kotick) Officer (Principal Executive
Officer), President and Director
Chief Financial and Operating February 14, 1997
(Brian G. Kelly) Officer and Director
(Principal Financial Officer)
Chief Accounting Officer February 14, 1997
(Barry J. Plaga) (Principal Accounting Officer)
Exhibit Index
Exhibit No. Description Sequential Page No.
10.14 Lease Agreement between the 20
Company and Barclay-Curci
Investment Company