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, 1995
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
13, 1996 was 13,748,763.
ACTIVISION, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as
of December 31, 1995 (unaudited) and
March 31, 1995 3
Condensed Consolidated Statements of
Operations for the quarters and nine
months ended December 31, 1995 and
1994 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the quarters and nine
months ended December 31, 1995 and
1994 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements for the quarter and nine months
ended December 31, 1995 (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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,
1995 1995
------------ -----------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 28,077 $ 37,355
Accounts receivable, less allowances
of $7,684 and $4,469, respectively 11,575 5,566
Inventories, net 2,670 1,972
Prepaid software and license royalties 3,378 1,082
Other current assets 866 342
--------- ----------
Total current assets 46,566 46,317
Property and equipment, net 2,964 1,643
Other assets 229 60
Excess purchase price over
identifiable assets acquired, net 19,901 20,863
---------- ----------
Total assets $ 69,660 $ 68,883
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,987 $ 2,516
Accrued expenses 6,744 3,153
Deferred revenue 1,740 -
---------- ----------
Total current liabilities 12,471 5,669
Other liabilities 495 510
---------- ----------
Total liabilities 12,966 6,179
----------- ----------
Commitments and contingencies
Shareholders' equity:
Common stock, $.000001 par value, 100,000,000
shares authorized, 14,227,846 and 14,183,594
shares issued and 13,727,846 and 14,183,594
outstanding, respectively - -
Additional paid-in capital 67,881 67,667
Accumulated deficit (5,638) (4,822)
Cumulative foreign currency translation (271) (141)
Less: treasury stock, cost of 500,000 shares (5,278) -
--------- ----------
Total shareholders' equity 56,694 62,704
--------- ----------
Total liabilities and shareholders' equity $ 69,660 $ 68,883
========== ==========
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 per share data)
(Unaudited)
Quarter ended Nine months ended
December 31, December 31,
-------------------------------------
1995 1994 1995 1994
-------------------------------------
Net revenues $ 17,578$ 26,185 $ 39,745$ 34,069
Cost of goods sold 7,131 16,256 15,428 19,580
--------------------------------------
Gross profit 10,447 9,929 24,317 14,489
-------------------------------------
Operating expenses:
Product development 4,163 2,247 12,807 5,315
Sales and marketing 3,200 5,566 9,290 8,187
General and administrative 1,190 871 3,332 2,288
Amortization of intangible assets 321 321 963 963
--------------------------------------
Total operating expenses 8,874 9,005 26,392 16,753
--------------------------------------
Operating income (loss) 1,573 924 (2,075) (2,264)
Other income:
Interest, net 409 414 1,343 1,151
----------------------------------------
Income (loss) before provision for
income taxes 1,982 1,338 (732) (1,113)
Provision for income taxes 34 34 83 88
-------------------------------------------------
- - -------
Net income (loss) $ 1,948 $ 1,304 $ (815)$ (1,201)
======== ======== ======== ========
Net income (loss) per share $ 0.13 $ 0.09 $ (0.06)$ (0.09)
======== ======== ======== ========
Number of shares used in computing
net income (loss) per common share 15,209 13,907 14,077 13,860
======== ======== ======== ========
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)
(Unaudited)
Increase (Decrease) in Cash
1995 1994
---------- ----------
Net cash used in operating activities $ (1,840) $ (12,460)
---------- ----------
Cash flows from investing activities:
Capital expenditures (2,244) (637)
Restricted cash - 1,500
---------- ----------
Net cash provided (used) by
investing activities (2,244) 863
---------- ----------
Cash flows from financing activities:
Payments under line of credit agreements - (4,695)
Borrowings under line of credit agreements - 4,695
Proceeds from exercise of common stock options 214 105
Purchase of treasury stock (5,278) -
----------- ----------
Net cash provided (used) by financing
activities (5,064) 105
----------- ----------
Effect of exchange rate changes on cash (130) (24)
----------- ----------
Net decrease in cash and cash equivalents (9,278) (11,516)
----------- ----------
Cash and cash equivalents at beginning of period 37,355 38,093
----------- ----------
Cash and cash equivalents at end of period $ 28,077 $ 26,577
========== ==========
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, 1995.
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 comprise (amounts in thousands):
December 31, March 31,
1995 1995
Finished goods $ 1,976 $ 1,769
Purchased parts and components 694 203
------- -------
$ 2,670 $ 1,972
====== ======
3. DEFERRED REVENUE
Revenue from licensing agreements which provide customers the right to
multiple copies in exchange for guaranteed amounts is recognized upon
delivery of the product master or the first copy; when per copy royalties
on sales exceed the minimum guaranteed quantities, revenue is recognized.
The Company defers recognition of revenue from licensing agreements until
the completion by the Company of its future obligations under such
agreements including, but not limited to, the achievement of technological
feasibility of the products or assets to be delivered under such
obligations and future collectibility. Deferred revenue of $1,740,000 as
of December 31, 1995 represents minimum guarantee payments received by the
Company in advance of future deliveries of products or product components
under such agreements.
4. AMORTIZATION OF INTANGIBLE ASSETS
Effective April 1, 1992, 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, 1995 and
1994 and $916,000 for each of the the nine month periods ended December 31,
1995 and 1994. 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.
5. EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share is computed using the weighted average
number of common and, when dilutive, common equivalent shares outstanding
during the period. For the quarter ended December 31, 1995, the weighted
average number of shares in the computation of earnings per share was
increased by approximately 1,239,000 of common equivalent shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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
desk-top systems, such as the Windows 95 operating system, and videogame set-top
hardware systems, such as the Sega Saturn and Sony Playstation. The Company
distributes its products worldwide through its direct sales force and, to a
lesser extent, through third party distributors and licensees.
RESULTS OF OPERATIONS
Net revenues for the quarter and nine months ended December 31, 1995
decreased 33% and increased 17%, respectively, from the same periods last year.
The increase in desk-top net revenues during the current quarter was primarily
due to continuing strong sales of "Mechwarrior 2" (DOS CD) which was released in
July 1995, as well as the initial release of "Mechwarrior 2" (Windows 95 CD),
five "Mighty Morphin Power Ranger" titles (Windows and Mac CD), "Mechwarrior 2
Expansion Pack: Ghost Bear's Legacy" (DOS CD) and "Earthworm Jim" (Windows 95
CD). The decrease in set-top net revenues during the current quarter was due to
the Company's strategic change in its business emphasis from cartridge-based
set-top system to CD-based desk-top systems. On-line, OEM, licensing and other
net revenues increased during the current quarter due to OEM and licensing
revenues related to "Mechwarrior 2", "Pitfall: The Mayan Adventure", "Shanghai:
Great Moments" and "Earthworm Jim".
<TABLE>
Net revenues by territory were as follows (amounts in thousands):
<CAPTION>
Quarter Ended December 31, Nine Months Ended December 31,
----------------------------------------------------------
1995 1994 1995 1994
-----------------------------------------------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North America $ 13,062 74.3% $18,751 71.6% $30,034 75.6% $24,847 72.9%
Europe 1,791 10.2% 6,562 25.0% 3,819 9.6% 7,174 21.1%
Japan 1,901 10.8% 249 1.0% 3,797 9.6% 1,085 3.2%
Australia and
Pacific Rim 824 4.7% 623 2.4% 2,095 5.2% 963 2.8%
--------------------------------------------------------------------
$ 17,578 100.0% $ 26,185 100.0% $ 39,745 100.0% $34,069 100.0%
====================================================================
</TABLE>
Net revenues by device/medium were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Quarter Ended December 31, Nine Months Ended December 31,
-----------------------------------------------------------
1995 1994 1995 1994
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Set-top $ 1,323 7.5% $23,308 89.0% $ 4,092 10.3% $ 24,607 72.2%
Desk-top 12,066 68.7% 1,487 5.7% 27,603 69.5% 5,205 15.3%
On-line, OEM, licensing
and other 4,189 23.8% 1,390 5.3% 8,050 20.2% 4,257 12.5%
--------------------------------------------------------------------
$ 17,578 100.0% $26,185 100.0% $39,745 100.0% $34,069 100.0%
======= ====== ======= ====== ====== ===== ======= =======
</TABLE>
For purposes of the foregoing presentation, net revenues from set-top
systems relate to sales of 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 Super
Nintendo Entertainment System ("SNES"), Sega Genesis ("SGS"), Sega Saturn
("Saturn"), Sony Playstation ("Playstation"), Atari Jaguar, CD-I and 3DO
Multiplayer ("3DO"). 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 desk-top systems
relate to sales of those 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 MS-DOS, Windows and the Macintosh operating system. The Company
generally is not obligated to pay an operating system license fee for the right
to produce desk-top products.
Included in on-line, OEM, licensing and other revenues is approximately
$750,000 related to the settlement and sale of certain product licensing rights
back to the original licensor.
<TABLE>
Net revenues by source were as follows (amounts in thousands):
<CAPTION>
Quarter Ended December 31 Nine Months Ended December 31,
-------------------------------------------------------
1995 1994 1995 1994
-------------------------------- -----------------------
% of Net % of Net % of Net % of Net
Amount Revenues AmountRevenues AmountRevenues AmountRevenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Activision Studios $ 15,815 90.0% $26,124 99.8% $37,091 93.3% $33,362 97.9%
Acquisitions and
Affiliated Labels 1,763 10.0% 61 0.2% 2,654 6.7% 707 2.1%
-----------------------------------------------------------
$ 17,578 100.0% $26,185 100.0% $39,745 100.0% $34,069 100.0%
======= ======= ======= ======= ======= ====== ======== =====
</TABLE>
Net revenues from Activision Studios relate to those entertainment software
products (both set-top and desk-top) designed, developed and produced through
the Company's Activision Studios division and that are owned by the Company.
Net revenues from Acquisitions and Affiliated Labels relate to those
entertainment software products developed by third parties for which the Company
obtains all or certain distribution rights. Such distribution rights may take
the form of a co-ownership arrangement or a license, and the Company's
obligation to incur marketing, promotion, sales and advertising expenses in
connection with the rights being acquired may vary from product to product.
Cost of Goods Sold
Cost of goods sold related to set-top, desk-top and OEM 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 cartridges and CDs are
manufactured by the respective video game console manufacturers, such as
Nintendo, Sega and Sony, 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. The decrease in cost of goods sold is a result of the shift
in the Company's strategy from cartridge-based set-top products to CD-based
desk-top products.
Gross Profit
For the quarter ended December 31, 1995, gross profit as a percentage of
net revenues was 59.4% compared to 37.9% for the quarter ended December 31,
1994. The majority of the Company's revenues in the quarter ended December 31,
1995 were derived from desk-top products that carry a higher gross profit than
set-top products. In contrast, revenues derived from set-top products
represented a greater portion of total net revenues in the quarter ended
December 31, 1994. The increase in gross profit also was due to the increase in
on-line, OEM, licensing and other revenues, which carry higher gross profit.
Gross profit increased as a percent of net revenues from 42.5% for the nine
months ended December 31, 1994 to 61.2% for the nine months ended December 31,
1995. The increase in gross margin over this period was primarily due to the
overall shift in the Company's product mix from cartridge-based set-top products
to CD-based desk-top products.
Operating Expenses
<TABLE>
<CAPTION>
Quarter Ended December 31, Nine Months Ended December 31,
----------------------------------------------------------
1995 1994 1995 1994
----------------------------------------------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Product development $4,163 23.7% $2,247 8.6% $12,807 32.2% $5,315 15.6%
Sales and marketing 3,200 18.2% 5,566 21.3% 9,290 23.4% 8,187 24.0%
General and
administrative 1,190 6.8% 871 3.3% 3,332 8.4% 2,288 6.7%
Amortization of
intangible assets 321 1.8% 321 1.2% 963 2.4% 963 2.8%
-------------------------------------------------------------
$ 8,874 50.5% $9,005 34.4% $26,392 66.4% $16,753 49.1%
======= ======= ====== ======= ======= ======== ====== ======
</TABLE>
Product development expenses increased due to the continued growth of the
Company's product development departments, the increased number of products in
product development and the increase in costs associated with enhanced
production content and new technologies incorporated into such products.
Approximately $3,507,000 and $8,249,000 of product development expenses for the
quarter and nine months ended December 31, 1995, respectively, relate to
products which will be released in subsequent periods. Sales and marketing
expenses decreased for the quarter as a result of a reduction in broadcast
advertising, although such reduction was partially offset by the growth of the
sales and marketing departments. General and administrative expenses increased
due to an increase in head count related expenses as compared to the same period
in the prior year.
Amortization of intangible assets represents the amortization of the excess
purchase price over identifiable assets acquired from the acquisition of Disc
Company, Inc. on April 1, 1992 and the amortization of capitalized
reorganization costs.
Other Income (Expense)
Interest income, net, was $409,000 and $1,343,000 for the quarter and nine
months ended December 31, 1995, respectively, compared to approximately $414,000
and $1,151,000 for the quarter and nine months ended December 31, 1994. The
decrease for the quarter ended December 31, 1995 was due to lower average cash
balances during the period as a result of the Company's purchases of its common
stock in the open market in December 1995, while the increase for the nine
months ended December 31, 1995 was due to the higher yields earned on cash and
cash equivalents.
Provision for Income Taxes
Income taxes represent foreign taxes withheld which may be available in the
future as tax credits against future tax liability. In addition, the Company
has significant net operating losses which may be carried forward against a
portion of future taxable income for both federal and state tax purposes.
SEASONALITY
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on a
variety of factors, many of which are not under the Company's control. For
example, net revenues may be higher during the fourth calendar quarter as a
result of increased demand for consumer software during the year-end holiday
buying season. Net revenues in other quarters can vary significantly as a
result of the timing of new product introductions.
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 expense levels are based in large part on the Company's product
development and marketing budgets. The majority of product development and
marketing costs are expensed as incurred, which is often before a product is
ever released. 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 operating results are not necessarily meaningful and
should not be relied upon as indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
On January 31, 1994, the Company completed a private placement of
approximately 5,000,000 shares of its common stock. The net proceeds from this
private placement, approximately $39.5 million, together with funds from
operations, have been the Company's primary source of liquidity for the fiscal
year ended March 31, 1995 and for the current fiscal year. At December 31,
1995, the Company had a balance of approximately $28.1 million of 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.
The Company's working capital decreased $6.6 million from March 31, 1995 to
December 31, 1995 as a result of the Company's purchases of its common stock in
the open market in the amount of $5.3 million, the funding of the Company's
expanding operations and additional capital expenditures. At December 31, 1995,
net accounts receivable and inventories were $14.2 million, an increase of $6.7
million from $7.5 million as of March 31, 1995. The increase is due primarily
to an increase in the Company's product sales in the third quarter of the
fiscal year as compared to the quarter ended March 31, 1995.
As of December 31, 1995, total accounts payable and accrued liabilities
were approximately $10.7 million versus $5.7 million at March 31, 1995. The
increase at December 31, 1995 is related to the the increase in cost of goods
sold as well as operating expenses related to the increase in the Company's
product sales in the third quarter of the current fiscal year.
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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 13, 1996
ACTIVISION, INC.
/S/Robert A. Kotick Chairman, Chief Executive February 13, 1996
(Robert A. Kotick) Officer (Principal Executive
Officer) and Director
/S/Brian G. Kelly Chief Operating and Financial February 13, 1996
(Brian G. Kelly) Officer and Director
(Principal Financial Officer)
/S/Barry J. Plaga Chief Accounting Officer February 13, 1996
(Barry J. Plaga) (Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000718877
<NAME> ACTIVISION, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 28,077
<SECURITIES> 0
<RECEIVABLES> 19,259
<ALLOWANCES> 7,684
<INVENTORY> 2,670
<CURRENT-ASSETS> 46,566
<PP&E> 5,212
<DEPRECIATION> (2,248)
<TOTAL-ASSETS> 69,660
<CURRENT-LIABILITIES> 12,471
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 56,694
<TOTAL-LIABILITY-AND-EQUITY> 69,660
<SALES> 17,578
<TOTAL-REVENUES> 17,578
<CGS> 7,131
<TOTAL-COSTS> 7,131
<OTHER-EXPENSES> 8,874
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,982
<INCOME-TAX> 34
<INCOME-CONTINUING> 1,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,948
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
