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 June 30, 1997
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
incorporation or organization) Identification No.)
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 ] 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 August 12, 1997 was 14,462,934.
-1-
ACTIVISION, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
- - ------------------------------ --------
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of June
30,1997(unaudited)and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the quarters ended June 30, 1997
and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the quarters ended June 30, 1997 and
1996 (unaudited) 5
Notes to Condensed Consolidated Financial Statements
for the quarter ended June 30, 1997 (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-17
PART II. OTHER INFORMATION
- - ----------------------------
Item 6. Exhibits and Reports on Form 8-K18
SIGNATURES 19
</TABLE>
-2-
Part I - Financial Information
Item 1. Financial Statements
- - ----------------------------
<TABLE>
<CAPTION>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
June 30, March 31,
1997 1997
-----------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $14,426 $17,639
Accounts receivable, net of allowances
of $4,787 and $6,468 respectively 24,190 36,367
Inventories, net 3,675 4,520
Prepaid software and license royalties 8,711 6,559
Other assets 2,590 1,222
Deferred income taxes 4,611 1,493
-----------------------
Total current assets 58,203 67,800
Property and equipment, net 6,874 5,090
Deferred Income Taxes 4,212 4,212
Other assets 257 255
Excess purchase price over identifiable
assets acquired, net 18,383 18,313
-----------------------
Total assets $87,929 $95,670
=======================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $4,546 $7,054
Accrued expenses 6,054 7,808
-----------------------
Total current liabilities 10,600 14,862
Other liabilities - -
-----------------------
Total liabilities 10,600 14,862
-----------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.000001 par value,
50,000,000 shares authorized,
14,799,739 and 14,644,895 shares
issued and 14,299,739 and 14,144,895
outstanding , respectively - -
Additional paid-in capital 80,022 78,484
Retained earnings 2,727 7,815
Cumulative foreign currency translation (142) (213)
Less: Treasury stock, cost of
500,000 shares (5,278) (5,278)
-----------------------
Total shareholders' equity 77,329 80,808
-----------------------
Total liabilities and shareholders' equity$87,929 $95,670
=======================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
<TABLE>
<CAPTION>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the quarters ended June 30,
(in thousands except loss per share data)
(Unaudited)
1997 1996
-----------------
<S> <C> <C>
Net revenues $ 8,053 $ 7,021
Cost of goods sold 4,275 1,509
-----------------
Gross profit 3,778 5,512
-----------------
Operating expenses:
Product development 5,803 4,547
Sales and marketing 4,619 3,641
General and administrative 1,403 1,229
Amortization of intangible assets 306 321
-----------------
Total operating expenses 12,131 9,738
-----------------
Operating loss (8,353) (4,226)
Other income:
Interest, net 162 312
-----------------
Loss before income tax benefit (8,191) (3,914)
Income tax benefit (3,103) (1,283)
-----------------
Net loss $(5,088) $(2,631)
=================
Net loss per common share $ (0.36) $ (0.19)
=================
Number of shares used in computing
net loss per common share 14,222 13,812
================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
<TABLE>
<CAPTION>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the quarters ended June 30,
(in thousands)
Increase (Decrease) in Cash
(Unaudited)
1997 1996
-------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (5,088) (2,631)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (3,118) (1,257)
Depreciation and amortization 898 762
Change in assets and liabilities:
Accounts receivable 12,177 6,183
Inventories 845 (464)
Prepaid software and license royalties (2,152) (1,964)
Other current assets (1,368) (453)
Other assets (2) 1
Accounts payable (2,508) (1,650)
Accrued liabilities (1,754) (277)
-------------------
Net cash used in operating activities $(2,070) $(1,750)
-------------------
Cash flows from investing activities:
Purchase of Take Us! GmbH Marketing (246) -
Capital expenditures (2,356) (1,089)
-------------------
Net cash used in investing activities (2,602) (1,089)
-------------------
Cash flows from financing activities:
Proceeds from issuance and exercise of common
stock options and warrants 1,388 332
-------------------
Net cash provided by financing activities 1,388 332
-------------------
Effect of exchange rate changes on cash 71 33
-------------------
Net decrease in cash and cash equivalents (3,213) (2,474)
-------------------
Cash and cash equivalents at beginning
of period 17,639 25,288
-------------------
Cash and cash equivalents at end of period $14,426 $22,814
===================
Non-cash investing activities:
Stock issued in exchange for licensing rights - $ 822
===================
Stock issued in purchase of
Take Us! GmbH Marketing $ 136 -
===================
</TABLE>
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 Jun 30, 1997
(Unaudited)
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, 1997.
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
<TABLE>
<CAPTION>
Inventories comprise (amounts in thousands):
June 30, March 31,
1997 1996
----------------------
<S> <C> <C>
Finished goods $2,235 $3,358
Purchased parts and components 1,440 1,162
----------------------
$3,675 $4,520
======================
</TABLE>
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.
-6-
5.Amortization of Intangible Assets
The Company's merger with The Disc Company, Inc. effective
April 1, 1992 was accounted for by the purchase method of
accounting, resulting in an intangible asset of approximately
$24,417,000. This intangible asset is being amortized on a
straight-line basis over a 20 year period. Amortization for
each of the years ended March 31, 1997, 1996 and 1995 was
approximately $1,221,000. The company adopted the provisions
of SFAS No. 121, "Accounting for Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of," on April 1,
1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to undiscounted
cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. Adoption of this
Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
6. Subsequent Event - Acquisition of Raven Software Corporation
On August 5, 1997, the Company entered into an agreement to
acquire Raven Software Corporation in exchange for 1,040,000
shares of the Company's common stock. The transaction is
expected to close by the end of August 1997. This transaction
is expected to be accounted for as a pooling of interests.
-7-
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 discussed in the
Company's Annual Report on Form 10-K under "Certain Cautionary
Information" 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 PC systems, such as the
Windows 95 and Apple Macintosh operating systems, and videogame
console 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 console 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. 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 PC 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. The Company generally is not obligated to pay
an operating system license fee for the right to produce PC
products.
Results of Operations
Net Revenues
Net revenues for the quarter ended June 30, 1997 increased 14.7%
from the same period last year. The increase in net revenues was
primarily due to an increase in net revenues in Europe during the
quarter, partially offset by a decrease in net revenues in North
America. Europe net revenues increased during the quarter due to
the Company's expansion in this territory along with an increase
in the number of localized products for the territory over the same
period in the prior year. The decrease in North America net
revenues was attributable to an increase in the provision for sales
returns and mark-downs related to a slow-down in retail sell-through
of recently released PC and Sony Playstation titles.
-8-
<TABLE>
<CAPTION>
Net revenues by territory were as follows (amounts in thousands):
Quarter Ended June 30,
----------------------------------
1997 1996
----------------------------------
% of Net % of Net
Amount Revenues Amount Revenues %Change
-------------------------------------------
<S> <C> <C> <C> <C> <C>
North America $4,971 62% $5,473 78% -9%
Europe 1,865 23% 723 10% 158%
Japan 174 2% 284 4% -39%
Asia/Pacific 765 9% 470 7% 63%
Latin America 278 4% 71 1% 292%
-------------------------------------------
$8,053 100% $7,021 100% 15%
===========================================
</TABLE>
<TABLE>
<CAPTION>
Net revenues by device/medium were as follows (amounts in thousands):
Quarter Ended June 30,
----------------------------------
1997 1996
----------------------------------
% of Net % of Net
Amount Revenues Amount Revenues %Change
-------------------------------------------
<S> <C> <C> <C> <C> <C>
Console $ - 0% $ 53 1% NM%
PC 8,053 100% 6,968 99% 16%
--------------------------------------------
$8,053 100% $7,021 100% 15%
===========================================
</TABLE>
<TABLE>
<CAPTION>
Net revenues by distribution channel were as follows (amounts in
thousands):
Quarter Ended June 30,
-----------------------------------
1997 1996
-----------------------------------
% of Net % of Net
Amount Revenues Amount Revenues% Change
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Retailer/Reseller $3,579 44% $2,614 37% 37%
OEM 3,771 47% 3,455 49% 9%
On-line, licensing and other 703 9% 952 14% -26%
-------------------------------------------
$8,053 100% $7,021 100% 15%
============================================
</TABLE>
Cost of Goods Sold; Gross Profit
Cost of goods sold related to console, PC and OEM net revenues
represent the manufacturing and related costs of computer
software and console games. Manufacturers of the Company's
computer software are located in the United States and Europe and
are readily available. Console cartridges and CDs are
manufactured by the respective video game console manufacturers,
Sony, Sega and Nintendo, who often require significant lead time
to fulfill the Company's orders.
-9-
Also included in cost of goods sold is the royalty expense
related to amounts due to developers, product owners or other
royalty participants as a result of product sales. 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.
For the quarter ended June 30, 1997, gross profit as a percentage
of net revenues was 46.9% compared to 78.5% for the quarter ended
June 30, 1996. The decrease in gross profit as a percentage of
net revenues was primarily the result of an increase in the
provision for returns and an increase in the percentage of new
products released by the Company that were externally developed.
Future determination of gross profit as a percentage of net
revenues will be driven primarily by the mix of new PC and
console products released by the Company during the applicable
period, as well as the mix of internal versus external product
development, the latter in each case resulting in lower gross
profit margins.
<TABLE>
<CAPTION>
Operating Expenses
Quarter Ended June 30,
--------------------------------
1997 1996
% of Net % of Net
Amount Revenues Amount Revenues
--------------------------------
<S> <C> <C> <C> <C>
Product development $5,803 72.1% $4,547 64.8%
Sales and marketing 4,619 57.4% 3,641 51.9%
General and administrative 1,403 17.4% 1,229 17.5%
Amortization of excess purchase
price and reorganization expenses 306 3.8% 321 4.6%
--------------------------------
Total operating expenses $12,131 150.7% $9,738 138.8%
================================
</TABLE>
Product development expenses increased, both in amount and as a
percentage of net revenues, for the quarter ended June 30, 1997
due to an overall increase in production costs associated with 3-
D programming and console programming technology and artwork,
generally higher average development costs for products, an
increase in the number of products to be localized for foreign
territories and an increase in the overall number of products in
development. Sales and marketing expenses also increased both in
amount and as a percentage of revenues as a result of a worldwide
expansion of the professional product sales and marketing
infrastructure needed to manage the Company's increased product
release schedule. General and administrative expenses for the
quarter remained constant as a percentage of net revenues from
the same quarter in the prior year.
Other Income (Expense)
Interest income was $162,000 and $312,000 for the quarters ended
June 30, 1997 and 1996, respectively. The decrease was due to
the decrease in cash and cash equivalents during the current
fiscal quarter as compared to the same period in the prior year.
Income Tax Benefit
The income tax benefit of $3,103,000 and $1,283,000 for the
quarters ended June 30, 1997 and June 30, 1996, respectively,
reflects the Company's expected effective income tax rate for the
fiscal years ended March 31, 1998 and March 31, 1997. The income
tax benefit was recorded based on recent operating history as
well as a current assessment that operations will generate
taxable income for the fiscal year.
-10-
Net Loss
For the reasons noted above, there was an increase in the net
loss recorded for the quarter ended June 30, 1997 as compared to
the net loss for the quarter ended June 30, 1996. Net loss for
the quarter ended June 30, 1997 was $5,088,000 compared to a net
loss of $2,631,000 for the same period of the prior fiscal year.
Seasonality
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly
depending on many factors, some 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 for the applicable period. The
majority of product development and marketing costs are expensed
as incurred, which is often before a product ever is released.
As the Company increases its development and marketing
activities, current expenses will increase and, if sales from
recently 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
The Company's working capital decreased $5.3 million from March
31, 1997 to June 30, 1997 as a result of the funding of the
Company's expanding operations and capital expenditures. At June
30, 1997, net accounts receivable and inventories were $27.9
million, a decrease of $13.0 million from $40.9 million as of
March 31, 1997. The decrease is due primarily to a decrease in
the Company's product sales in the first quarter of this fiscal
year as compared to the quarter ended March 31, 1997.
As of June 30, 1997, total accounts payable and accrued
liabilities were approximately $10.6 million versus $14.9
million at March 31, 1997. The decrease at June 30, 1997 is
related to the decrease in cost of goods sold for the quarter
ended June 30, 1997 as compared to the quarter ended March 31,
1997.
During the quarter ended June 30, 1997, capital expenditures
totaled approximately $2.4 million, which was primarily comprised
of costs related to the Company moving its Los Angeles office to
a new facility in Santa Monica, California.
The Company's principal source of liquidity is $14.4 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.
-11-
The Company's management currently believes that inflation has
not had a material impact on continuing operations.
Subsequent Event - Acquisition of Raven Software Corporation
On August 5, 1997, the Company entered into an agreement to
acquire Raven Software Corporation in exchange for 1,040,000
shares of the Company's common stock. The transaction is
expected to close by the end of August 1997. This transaction is
expected to be accounted for as a pooling of interests.
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 recently 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.
-12-
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 $8.1
million for the quarter ended June 30, 1997, $28.9 million for
the quarter ended March 31, 1997, $31.4 million for the quarter
ended December 31, 1996, $19.2 million for the quarter ended
September 30, 1996 and $7.0 million for the quarter ended June
30, 1996. 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 also increased its acquisition of products developed
entirely by independent third party developers. The Company has
less control over the scheduling and the quality of work by
independent contractors and third party developers than that of
its own employees. A delay in the work performed by independent
contractors and third party developers or 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 and third party developers.
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.
-13-
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.
The Company's strategy also includes as a key component
developing and releasing products that have franchise value, such
that sequels, enhancements and add-on products can be released
over time, thereby extending the life of the property in the
market. While the focus on franchise properties, if successful,
results in extending product life cycles, it also results in the
Company depending on a limited number of titles for its revenues.
There can be no assurance that the Company's existing franchise
titles can continue to be exploited as successfully as in the
past. In addition, new products that the Company believes will
have potential value as franchise properties may not achieve
market acceptance and therefore may not be a basis for future
releases.
Industry Competition; Competition For Shelf Space. The
interactive entertainment 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 broad product lines and popular titles
typically have greater leverage with distributors and other
customers who may be willing to promote titles with less consumer
appeal in return for access to such 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"), Sega, Nintendo, Sony, CUC
International, Inc., Good Times Interactive, Inc. and Spectrum
Holobyte, Inc., among many others.
As competition increases, significant price competition,
increased production costs and reduced profit margins may result.
Prolonged price competition or reduced demand would have a
material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that
the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the
Company will not have a material adverse 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.
-14-
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 of new technologies, including
operating systems such as Microsoft's Windows 95, technologies
that support multi-player games, and new media formats such as on-
line delivery and digital video disks ("DVD"), could render the
Company's previously released products obsolete or unmarketable.
The development cycle for products utilizing new 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.
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.
Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be
expected to be a persistent problem. In selling its products,
the Company relies primarily on "shrink wrap" licenses that are
not signed by licensees and, therefore, may be unenforceable
under the laws of certain jurisdictions. Further, the Company
enters into transactions in countries where intellectual property
laws are not well developed or are poorly enforced. Legal
protections of the Company's rights may be ineffective in such
countries.
Dependence On Key Personnel. The Company's success depends to a
significant extent on the performance and continued service of
its senior management and certain key employees. Competition for
highly skilled employees with technical, management, marketing,
sales, product development and other specialized training is
intense, and there can be no assurance that the Company will be
successful in attracting and retaining such personnel.
Specifically, the Company may experience increased costs in order
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.
-15-
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 intermediary. 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 intermediary, 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 has obtained insolvency risk insurance to protect
against any bankruptcy filings that may be made by its customers,
such insurance contains a significant deductible as well as a co-
payment obligation, and the policy does not cover all instances
of non-payment. In addition, the Company maintains a reserve for
uncollectible receivables that it believes to be adequate, but
the actual reserve that is maintained may not be sufficient in
every circumstance. As a result of the foregoing, a payment
default by a significant customer could have a material adverse
effect on the Company's business, operating results and financial
condition.
The Company also is exposed to the risk of product returns from
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 28%, 23%, 25% and 38% of the Company's
total revenues in the fiscal years 1995, 1996 and 1997 and
quarter ended June 30, 1997, 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.
-16-
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.
-17-
Part II. - OTHER INFORMATION
Item 6.Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
None
-18-
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: August 14, 1997
ACTIVISION, INC.
/s/ Robert A. Kotick Chairman, Chief Executive August 14, 1997
- - ---------------------
(Robert A. Kotick) Officer (Principal Executive
Officer), and Director
/s/ Brian G. Kelly President, Chief Operating August 14, 1997
- - -------------------
(Brian G. Kelly) Officer and Director
/s/ Barry J. Plaga Chief Financial Officer August 14, 1997
- - -------------------
(Barry J. Plaga) (Principal Financial Officer)
-19-
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