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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 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 Identification No.)
incorporation or organization)
3100 OCEAN PARK BLVD., SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 255-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.000001 PER SHARE
------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on June 10, 1997 was $161,294,682.
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 June 10,
1997 was 14,193,620.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K, with respect to the Annual Meeting of
Shareholders to be held on September 24, 1997 are incorporated by reference into
Part III of this Annual Report.
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INDEX
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PAGE NO.
PART I.
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Item 1. Business ............................................................................ 3
Item 2. Properties .......................................................................... 13
Item 3. Legal Proceedings ................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ................................. 13
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 14
Item 6. Selected Consolidated Financial Data ................................................ 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................ 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .......................... 21
Item 8. Consolidated Financial Statements and Supplementary Data ............................ 22
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................................... 22
PART III.
Item 10. Directors and Executive Officers of the Registrant .................................. 23
Item 11. Executive Compensation .............................................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 23
Item 13. Certain Relationships and Related Transactions ...................................... 23
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 24
SIGNATURES ......................................................................................... 26
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PART I
Item 1. BUSINESS
(a) GENERAL
Activision, Inc. (together with its subsidiaries, the "Company")
is a diversified international publisher and developer of interactive
entertainment software in a wide variety of formats. The Company was
incorporated in California in 1979. In December 1992, the Company
reincorporated in Delaware.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry segment: publishing CD-based
and, to a lesser extent, cartridge and floppy disk entertainment
software. See the Consolidated Financial Statements and Notes thereto
included in Item 8 of this Annual Report on Form 10-K for certain
financial information required by Item 1.
(c) NARRATIVE DESCRIPTION OF BUSINESS
INDUSTRY BACKGROUND
The interactive entertainment software market is composed of two
markets: the PC systems market -- software created for use on
personal computers ("PCs"), including PCs utilizing the MS-DOS and
Windows operating systems as well as Apple Macintosh computers; and
the console systems market -- software created for dedicated game
consoles that use the television as a display, including the Sony
PlayStation, Sega Saturn and Nintendo N64 entertainment systems.
PC SYSTEMS. According to Access Media International ("AMI"),
35.5% of U.S. households had at least one multimedia PC ("MPC") at the
end of 1996. AMI is projecting this installed base to grow to 37.5%
by the end of 1997. This increase in PC ownership appears to be
spurred by lower-cost Pentium-based MPCs which incorporate
higher-speed CD-ROM drives, modems and increasingly sophisticated
graphics capabilities, as well as by the continued growth and interest
in the Internet. AMI reports that MPC shipments to the home reached
8.4 million units in 1996 and are expected to increase to 9.6 million
units in 1997, bringing the total installed base of MPC units to 27.7
million by the end of 1997. The improved functionality and ease-of-
use provided by Windows 95, the continued production of compelling
entertainment and education applications, and increasingly favorable
price to performance ratios for PCs also appear to be major
contributing factors to the increased growth in this industry.
As a result of all these factors, demand appears to be growing
for MPC-based entertainment software, as evidenced by increases in the
sale of entertainment software titles. According to AMI, North
American sales of PC entertainment software grew from $750 million in
1995 to $900 million in 1996. AMI further expects 1997 sales to
increase to $1.1 billion. The Company believes that the continued
future growth of the PC interactive entertainment software market will
be dependent upon the development of increasingly sophisticated
software incorporating advanced graphics and sound, compelling story
lines and rewarding game play.
CONSOLE SYSTEMS. The console systems market currently is
finishing the transition from 16-bit systems to 32 and 64-bit systems
("next generation systems"). Next generation systems have experienced
healthy growth following their introduction in 1995 and have begun to
establish significant installed bases. Sony's PlayStation has been
particularly strong, establishing an installed base of approximately 3
million units in North America at the end of 1996, according to AMI.
The Company currently believes that the PlayStation will continue to
enjoy major growth through 1997.
According to AMI, the U.S. installed base of all next generation
systems at the end of 1996 was approximately 5.8 million units and
will reach approximately 13.7 million units by the end of 1997. AMI
projects further growth in the installed base of next generation
systems to approximately 21.4 million units by the end of 1998. The
Company believes that these systems will continue to be successful as
hardware manufacturers recently have lowered prices to a level that
will allow for mass market penetration. The Company believes that the
specific level of future success also will be dependent on the ability
of developers consistently to supply increasingly sophisticated
software for the consumer.
DISTRIBUTION. The Company believes that the distribution
channels for entertainment software have expanded in the last several
years. During the 1980s, console entertainment software was sold
primarily through mass merchants and toy stores, while PC
entertainment software typically was sold through specialty software
stores. The distribution of PC software is now expanding into
traditional console channels such as
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mass merchants, specialty retailers and warehouse stores, and console
software has begun to penetrate specialty software stores and other
traditional PC outlets. Although the number of distribution channels
for entertainment software has increased overall, an abundance of new
software titles has forced retailers to be highly selective when
allocating shelf space. Competition for shelf space has intensified
as retailers, especially mass merchants, continue to carry only a
limited number of products that are expected to sell in high volumes.
In addition, in the last year a few specialty retailers have either
ceased business or consolidated their operations, resulting in even
greater competition for shelf space.
To be successful in this more competitive distribution
environment, companies must demonstrate to retailers that their
products have broad appeal and can become best sellers. In order to
achieve broad appeal, companies must utilize the enhanced capabilities
of MPCs and next generation systems to create sophisticated products
with high production values and appealing game play. Since this
approach results in higher development budgets, companies that can
institute disciplined development processes to lower cost overruns and
innovative marketing campaigns that increase consumer awareness should
be in the best position to maximize their return on product
investments.
CERTAIN CAUTIONARY INFORMATION
In connection with the Private Securities Litigation Reform Act
of 1995 (the "Litigation Reform Act"), the Company is hereby
disclosing certain cautionary information to be used in connection
with written materials (including this Annual Report on Form 10-K) and
oral statements made by or on behalf of its employees and
representatives that may contain "forward-looking statements" within
the meaning of the Litigation Reform Act. Such statements consist of
any statement other than a recitation of historical fact and can be
identified by the use of forward-looking terminology such as "may,"
"expect," "anticipate," "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology. The
listener or reader is cautioned that all forward-looking statements
are necessarily speculative and there are numerous risks and
uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements.
The discussion below highlights some of the more important risks
identified by management, but should not be assumed to be the only
factors that could affect future performance. The reader or listener
is cautioned that the Company does not have a policy of updating or
revising forward-looking statements and thus he or she should not
assume that silence by management over time means that actual events
are bearing out as estimated in such forward-looking statements.
FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS
UNCERTAIN; SEASONALITY. The Company's quarterly operating results
have in the past varied significantly and will likely in the future
vary significantly depending on numerous factors, several 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 computing
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 part on the Company's product
development and marketing budgets. Product development and marketing
costs generally 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 typically are 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 $21.6 million for the quarter ended March 31, 1996, $7.0
million for the quarter ended June 30, 1996, $19.2 million for the
quarter ended September 30, 1996, $31.4 million for the quarter ended
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December 31, 1996 and $28.9 million for the quarter ended March 31,
1997. 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, acquisition and marketing costs. The lack of market
acceptance or significant delay in the introduction of, or the
presence of a defect in, one or more products could have a material
adverse effect on the Company's business, operating results and
financial condition, particularly in view of the seasonality of the
Company's business. Further, because a large portion of a product's
revenue generally is associated with initial shipments, the delay of a
product introduction expected near the end of a fiscal quarter may
have a material adverse effect on operating results for that quarter.
The Company has, in the past, experienced significant delays in
the introduction of certain new products. The timing and success of
interactive entertainment products remain unpredictable due to the
complexity of product development, including the uncertainty
associated with technological developments. Although the Company has
implemented substantial development controls, there likely will be
delays in developing and introducing new products in the future.
There can be no assurance that new products will be introduced on
schedule, or at all, or that they will achieve market acceptance or
generate significant revenues.
From time to time, the Company utilizes independent contractors
for certain aspects of product development and production. The
Company also has 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. Although the Company intends to continue to rely in
part on internal product development, the Company's business and
future operating results also will depend, in part, 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.
PRODUCT CONCENTRATION; DEPENDENCE ON HIT PRODUCTS. A key aspect
of the Company's strategy is to focus its development and acquisition
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 or
acquisition costs and marketing budgets. Due to this dependence on a
limited number of products, the Company may be adversely effected if
one or more principal entertainment software products fail to achieve
anticipated results. During fiscal 1996 and 1997, one title accounted
for approximately 49% and 23%, respectively, of the Company's
consolidated net revenues. In addition, during fiscal 1997, one other
title accounted for approximately 16% of the Company's consolidated
net revenues.
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.
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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 required to support best-selling titles. In
addition, competitors with broad product lines and popular titles
typically have greater leverage with distributors and other customers
who may be willing to promote titles with less consumer appeal in
return for access to such competitor's most popular titles.
The Company's competitors range from small companies with limited
resources to large companies with substantially greater financial,
technical and marketing resources than those of the Company. The
Company's competitors currently include Electronic Arts, Inc., Lucas
Arts Entertainment Company, Microsoft Corporation ("Microsoft"), Sega,
Nintendo, Sony, Sierra On-Line, 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 effect 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 increase,
the competition for shelf space has intensified, resulting in greater
leverage for retailers and distributors in negotiating terms of sale,
including price discounts and product return policies. The Company's
products constitute a relatively small percentage of a retailer's
sales volume, and there can be no assurance that retailers will
continue to purchase the Company's products or promote the Company's
products with adequate levels of shelf space and promotional support.
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The consumer
software industry is undergoing rapid changes, including evolving
industry standards, frequent new platform introductions and changes in
consumer requirements and preferences. The introduction of new
technologies, including 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 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 effected. 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
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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 or
retain qualified employees could have a material adverse effect 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 intermediary. In such instances, the
price or other terms on which the Company sells to such retailers may
be adversely effected 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 effect 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 which is maintained
may not be sufficient in every circumstance. As a result of the
foregoing, a payment default by a significant customer could have a
material adverse effect on the Company's business, operating results
and financial condition.
The Company also is exposed to the risk of product returns from
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
sales and licensing accounted for 28%, 23% and 26% of the Company's
total revenues in the fiscal years 1995, 1996 and 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.
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 PC
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 testing by
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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.
STRATEGY
The Company's objective is to be a worldwide leader in the
development and delivery of exceptional and innovative interactive
entertainment software designed for a range of platforms, appealing to
existing and new audiences for entertainment software products, and
incorporating sophisticated graphics, sound and video, and compelling
story lines and game experiences. The Company's strategy includes the
following elements:
PUBLISH BEST-SELLING TITLES. The Company believes that
competitive factors in the interactive entertainment software
marketplace create the need for very high quality, distinctive
products that provide superior gaming experiences. Accordingly, the
Company intends to focus its publishing efforts on a select number of
major new titles each year. Several of these titles will be based on
existing franchises, while others will be based on new concepts. The
Company intends to support the development, production, acquisition
and marketing of these titles with the resources necessary to create
best selling products. In order to reduce the financial risks
associated with the higher budgets required for this strategy, the
Company may from time to time pre-sell various rights, including
ancillary rights and rights with respect to hardware platforms which
the Company does not intend to support itself, in selected
geographical territories.
LEVERAGE AND ENHANCE FRANCHISE PROPERTIES. The Company seeks to
develop and acquire distribution rights to product franchises that
have sustainable consumer appeal and brand recognition. Through its
long history in personal computer and video gaming, the Company has
accumulated an extensive backlist of titles, some of which were
best-sellers when originally released. The Company has converted
certain of these popular titles into franchise product lines,
including its ZORK, SHANGHAI and PITFALL series. For example, the
Company has released six additional versions of ZORK since the
introduction in 1982 of the original ZORK title, including RETURN TO
ZORK, which has shipped over one million copies since its introduction
in 1993, and the recently released ZORK NEMESIS. The Company intends
to create additional franchises from its library and from new,
original concepts.
ENFORCE DISCIPLINED PRODUCT DEVELOPMENT AND PRODUCTION PROCESSES.
The Company has implemented product development and production
processes that are designed to limit cost and schedule overruns within
an environment that fosters creativity. Such processes often enable
the Company to identify and address the majority of the technical and
creative risks before the Company commences production of the title.
The Company also has implemented a series of defined, measurable
milestones throughout development and production in order to help
increase its ability to maintain control over these processes. The
Company develops and produces products using a studio model, in which
a core group of creative, production, technical, marketing and
financial professionals at the Company have overall responsibility for
the entire development and production processes and for the
supervision and coordination of internal and external resources. The
Company believes that this studio model allows the Company to
supplement internal expertise with top quality external resources on
an as needed basis.
ACQUIRE PUBLISHING RIGHTS TO ADDITIONAL PRODUCTS CREATED BY
ESTABLISHED OUTSIDE DEVELOPERS. In order to continue to grow its
business and leverage its existing marketing and sales
infrastructures, the Company has significantly increased its
acquisition of publishing and distribution rights to entertainment
software products that are developed and produced by independent third
party developers. The Company's strategy is to develop relationships
with a limited number of third party developers that have proven track
records within the industry and that produce products in game genres
in which the Company's studio may not have comparable expertise. For
example, the Company has entered into a series of agreements with id
Software, Inc., ("id") a premier developer of first-person perspective
shooting games, pursuant to which the Company has been granted the
right to publish id's products entitled QUAKE MISSION PACK NO. 1:
SCOURGE OF ARMAGON, QUAKE MISSION PACK NO. 2: DISSOLUTION OF ETERNITY,
HEXEN II and QUAKE II.
FOCUS ON CD BASED SYSTEMS. The Company seeks to capitalize on
the popularity of platforms as they are adopted by consumers. The
Company's current primary focus is on CD-based products to be used
with MPCs and/or Sony PlayStation consoles. During the fiscal year
ended March 31, 1997, approximately 80% of the Company's revenues were
from CD-based products to be used with MPCs and approximately 20% of
the Company's revenues were from Sony PlayStation products.
DEVELOP AND UTILIZE PROPRIETARY TECHNOLOGIES. The Company has
developed proprietary development tools which enable its producers,
directors, artists and programmers to achieve visual and creative
effects that differentiate the Company's products. For example, the
Company's MECHWARRIOR 2 and MECHWARRIOR 2: MERCENARIES products
utilized specialized real-time 3-D texture mapping and sophisticated
artificial intelligence. ZORK NEMESIS utilized technology allowing
for 360 degree movement within an
8
<PAGE>
environment. All of these tools were developed by the Company's
technology teams. The Company intends to continue to develop and
utilize proprietary technologies to create products that provide
innovative interactive experiences.
EXPAND DISTRIBUTION CHANNELS. The Company's strategy is to
continue to expand its independent, direct distribution of its
products. Through its internal sales force, the Company sells its
software products directly to major computer and software retailing
organizations, consumer electronic stores, discount warehouses and
mail order companies in North America. For the fiscal year ended
March 31, 1997, 75% of the Company's North America publishing revenues
were direct to these retail organizations. The Company believes that
a direct relationship with retail accounts results in more effective
inventory management, merchandising and communications than would be
possible through indirect relationships. The Company seeks to
continue to increase the number of retail outlets reached directly
through its sales force and also is enhancing its current distribution
relationships by expanding real-time ordering and invoicing links to
its major distribution partners. In addition, the Company intends to
pursue further direct international sales and distribution activities.
PRODUCTS
The Company is best known for its action, adventure and
action/simulation products. However, the Company recently has
expanded the line of products it distributes into new categories such
as flight simulation, role playing and strategy products, and it
expects to continue such expansion efforts.
The Company's platform strategy is to capitalize on the
popularity of hardware platforms as they are adopted by consumers.
Several of the Company's products are released in multiple formats for
use on more than one MPC or console systems. The Company has
developed interactive entertainment software for a variety of
platforms since its founding in 1979. Throughout the 1980s, the
Company developed over 100 titles for the Apple Macintosh, MS-DOS
compatible, Amiga and Commodore platforms as well as the Atari 2600
and Sega and Nintendo 8-bit and 16-bit console systems. The majority
of the Company's current titles are being developed for MPCs using the
Windows 95 operating system. The majority of the Company's current
console titles are being developed for the Sony PlayStation.
One of the Company's objectives is to create or acquire product
franchises owned and controlled by the Company which have sustainable
consumer appeal and brand recognition. The Company believes it has
created or acquired certain product franchises by expanding upon the
success of an original best selling title through the release of
sequels, enhancements and add-on packs. The Company will attempt to
create and acquire additional product franchises by introducing new
titles based on original characters and concepts.
From time to time, the Company will selectively license from
third parties intellectual property or other character or story rights
for the purpose of developing titles based on such rights. For
example, the Company recently obtained a long term license to be the
exclusive developer and publisher of interactive entertainment
software products based on the HEAVY GEAR role playing games created
by an independent board game creator. Activision's HEAVY GEAR
products are intended to replace the BATTLETECH/MECHWARRIOR 2 product
line which was developed and published by the Company under license.
In developing products based on licensed intellectual property rights,
the Company generally seeks to capitalize on the name recognition,
marketing efforts and goodwill associated with the underlying
property.
The Company also selectively enters into arrangements with
celebrities in order to enhance the gaming experience of certain of
its products. For example, the Company currently is developing a
product for the Sony PlayStation entitled APOCALYPSE, in which
well-known film actor Bruce Willis is expected to act as the player's
"virtual" partner in their battle against the Four Horsemen of the
Apocalypse.
In addition to its own internally developed products, the Company
publishes and distributes software products for other independent
developers. As the Company seeks to associate the "ACTIVISION" mark
only with the highest quality interactive entertainment products, the
Company attempts to be selective in acquiring publishing and
distribution rights from third party developers. All of such products
are marketed under the Company's name as well as the name of the
original developer. The Company believes that these efforts enable
the Company to leverage its investment in its marketing and sales
forces and add a new source of products without incurring all of the
risks inherent in original product development and production. This
activity also allows the Company to enter new product genres and
provide consumers with a wider variety of products.
9
<PAGE>
PRODUCT DEVELOPMENT AND ACQUISITION
ACTIVISION STUDIOS
Activision Studios, the Company's development and production
group, generally is responsible for the selection, design, development
and production of the interactive entertainment software products
owned by the Company. Activision Studios also provides quality
assurance and customer support services for almost all products
published or distributed by the Company. The Company's creative
development and production staff selects and develops new products,
adapts existing products for additional hardware platforms and manages
the external development of products or their components by
independent contractors.
PRODUCTION. The Company develops and produces products using a
studio model, in which a core group of creative, production,
technical, marketing and financial professionals on staff at the
Company have overall responsibility for the entire development and
production process and for the supervision and coordination of
internal and external resources. Each project team, which is led by a
game producer and game director and includes one or more associate
producers, game designers, production coordinators, a creative
executive, a technology executive and a quality assurance manager, all
of whom are on the Company's staff, assembles the necessary creative
elements, using where appropriate outside programmers, graphic and
other artists, animators, musicians and songwriters, sound effects and
special effects experts, and sound and video studios. The Company
believes that this model allows the Company to supplement internal
expertise with top quality external resources on an as needed basis.
The Company has adopted and implemented a rigorous internal
procedure for the selection, development, production and quality
assurance of its entertainment software titles. The process involves
one or more pre-development phases, development phases and production
phases, each of which includes various measurable performance
milestones. This procedure is designed to enable the Company to
manage and control production and development budgets and timetables,
to identify and address production and technical issues at the
earliest opportunity, and to coordinate marketing and quality control
strategies throughout the production and development phases, all in an
environment that fosters creativity. Checks and balances are intended
to be provided through the structured interaction of the project team
with the Company's creative, technical, marketing and quality
assurance/customer support personnel, as well as the legal, accounting
and finance departments.
QUALITY ASSURANCE AND CUSTOMER SUPPORT. The Company's quality
assurance personnel are involved throughout the development and
production processes for each title, and products are subjected to
extensive testing before release. To support its products after
release, the Company provides on-line support on a 24-hour basis and
operator help lines during regular business hours. The customer
support group tracks customer inquiries and this data is used to
improve the development and production processes.
ACTIVISION BUSINESS DEVELOPMENT
The Company's Business Development division licenses or acquires
software products from independent developers for publishing or
distribution by the Company. Acquired titles are marketed under the
Company's name as well as the name of the original developer. The
agreements with affiliated developers provide for the grant to the
Company of exclusive publishing and distribution rights for a specific
period of time for specified platforms and territories.
The Company acquires titles from affiliated developers during
various phases of the development and production processes for such
titles. To the extent the Company acquires rights early in the
development process, the Company generally will cause the independent
developer to comply with the requirements of the pre-development,
development and production processes applicable to titles internally
produced by Activision Studios. The Business Development division
will assign to a title a game producer who will serve as the principal
liaison to the independent developer to help insure that performance
milestones are met timely. The Company generally has the right to
cease making payments to an independent developer if such developer
fails to timely complete its performance milestones.
In connection with its acquisition of product publishing and
distribution, the Company may make an investment and hold a minority
equity interest in the third party developer in order to create a
closer relationship between the Company and the developer. In fiscal
1997, the Company acquired a minority interest in Titanic
Entertainment, Inc. in connection with the acquisition by the Company
of the entertainment software product entitled NETSTORM, which
currently is being developed by Titanic. There can be no assurance
that the Company will realize long term benefits from this investment
or that it will continue to carry such investment at its current
value.
10
<PAGE>
PUBLISHING ACTIVITIES
MARKETING
The Company's marketing efforts include on-line activities (such
as the creation of World Wide Web pages to promote specific Company
titles), public relations, print and broadcast advertising,
coordinated in-store and industry promotions including merchandising
and point of purchase displays, participation in cooperative
advertising programs, direct response vehicles, and product sampling
through demonstration software distributed through the Internet or on
compact discs. In addition, the Company's recent products contain
software that enables customers to "electronically register" their
purchases with the Company via modem. Through this process, the
Company captures electronic mail addresses for its customers as well
as a variety of additional market research data. The Company intends
to increase its on-line marketing activities using these electronic
mail addresses for direct response promotions, and making its titles
and upgrades available for sale through on-line services when
appropriate.
The Company believes that certain of its franchise properties
(such as the ZORK series) have loyal and devoted audiences who
purchase the Company's sequels as a result of dedication to the
property and satisfaction from previous product purchases. Marketing
of these sequels is therefore directed both toward the established
market as well as broader audiences. In marketing titles based on
licensed properties, the Company believes that it derives marketing
synergies and related benefits from the marketing and promotional
activities of the property owners. In marketing affiliated label
titles, the Company believes that it derives marketing synergies and
related benefits from the previously established reputation of the
independent developer and the properties owned by it.
SALES AND DISTRIBUTION
DOMESTIC SALES AND DISTRIBUTION. The Company's products are
domestically available for sale or rental in thousands of retail
outlets ranging from consumer electronics and computer specialty
stores to department stores, discount chains, video rental stores and
toy stores. The Company's customers in these categories include Best
Buy, CompUSA, Computer City, Electronic Boutique, Babbages, etc.,
WalMart, K-Mart, Target and Toys "R" Us. During fiscal 1997, no
single customer accounted for more than 10% of consolidated net
revenues. The majority of the Company's North American sales are made
directly to the retailers. The Company believes that a direct
relationship with retail accounts results in more effective inventory
management, merchandising and communications than would be possible
through indirect relationships. The Company has implemented
electronic data interchange ("EDI") linkage with several retailers to
facilitate the placing and shipment of orders. The Company seeks to
continue to increase the number of retail outlets reached directly
through its internal sales force. To a lesser extent, the Company
sells its products through wholesale distributors, such as Ingram
Micro, Handelman and Merisel.
INTERNATIONAL SALES AND DISTRIBUTION. The Company conducts a
substantial portion of its international sales, licensing and
distribution activities through its offices in Japan, England and
Australia. At present, the Company's office in Australia handles the
Company's distribution and marketing efforts in Australia, New
Zealand, Singapore, and certain other Asian and South Pacific Rim
markets. Through its office in Japan, the Company facilitates the
licensing and distribution of its products in the Japanese and certain
other Asian markets. The licensing and distribution of the Company's
products in Europe is performed through the Company's London office.
The Company recently established a sales office in Miami to oversee
the Company's distribution and marketing efforts in Latin America. The
Company seeks to broaden the distribution of its products in
international markets by translating and localizing certain of its
products into foreign languages. The Company currently intends to
increase its staff in Europe in order to increase the percentage of
its European sales that can be made directly to retailers. In
furtherance of these objectives, the Company recently acquired Take
Us! Marketing & Consulting GmbH, an eight-person company located in
Germany which specializes in marketing and translation activities for
German-speaking territories. The Company also currently intends to
increase its staff in Japan so that new titles can be developed and
published directly by the Company for the Japanese market. To this
end, the Company may seek new development partners in Japan.
OEM SALES AND DISTRIBUTION. The Company seeks to enhance the
distribution of its products through licensing arrangements with
original equipment manufacturers ("OEM"s). Under these arrangements,
one or more of the Company's titles are "bundled" with hardware or
peripheral devices sold and distributed by the OEM so that the
purchaser of the hardware or device obtains the Company's software as
part of the purchase or on a discounted basis. Although it is
customary for the Company to receive a lower per unit price on sales
through OEM bundle arrangements, the OEM customer makes a high unit
volume commitment to the Company and there are no associated marketing
costs. In addition, the Company from time to time receives
substantial advance payments from the OEM customer. The Company also
believes that such arrangements can substantially expand the
distribution of its titles to a broader audience. Recent OEM partners
include Microsoft, IBM, Sony, Apple, NEC and Toshiba.
11
<PAGE>
LICENSING AND MERCHANDISING
The Company believes that a number of its products have the
potential to be exploited in ancillary markets and media, such as
product merchandising and traditional entertainment media. Directly
and through third party agents, the Company seeks opportunities for
the exploitation of these ancillary rights. Potential opportunities
include the publication of strategy guides for selected titles, the
adaptation of titles into comic books, novels, television or motion
pictures, and the licensing of product merchandising rights. The
Company believes that these types of licensing activities can provide
additional sources of revenue and increase the visibility of the
title, thereby leading to additional unit sales and greater potential
for additional sequels. There can be no assurance that the Company
will be successful in exploiting its properties in ancillary markets
or media.
Similarly, the Company believes that there are opportunities for
further exploitation of its titles through the Internet, on-line
services such as America Online and the Microsoft Network, and through
recently created on-line gaming services such as TEN, Dwango, and
MPath. The Company has established "900" telephone numbers as hint
lines for certain of its titles, and has realized revenues from the
calls made to these numbers. The Company also is actively exploring
the establishment of on-line game playing opportunities, on-line hint
sites, and Internet services as a method for realizing additional
revenues from its products. There can be no assurance that the
Company will be successful in exploiting these opportunities.
HARDWARE LICENSES
The Company's console products currently are being developed or
published for one or more systems owned by Sony or Sega. Each of the
console systems owned by these companies has unique and proprietary
configurations. In order to gain access to the console systems that
the Company currently is supporting, the Company has obtained licenses
for each of the PlayStation, Genesis, Sega CD, Saturn and SNES
systems. Each license allows the Company to create one or more
products for the applicable system, subject to certain approval rights
as to quality which are reserved by each licensor. Each license also
requires that the Company pay the licensor a per unit license fee from
product sales.
In contrast, the Company currently is not required to obtain any
license for the development and production of PC products.
Accordingly, the Company's per unit manufacturing cost for PC products
is less than the per unit manufacturing cost for console products.
MANUFACTURING
The Company prepares a set of master program copies,
documentation and packaging materials for its products for each
respective hardware platform on which the product will be released.
Except with respect to products for use on the Sony, Sega and Nintendo
systems, the Company's disk duplication, packaging, printing,
manufacturing, warehousing, assembly and shipping are performed by
third party subcontractors.
In the case of products for the Sony, Sega and Nintendo systems,
in order to maintain protection over their hardware technologies, such
hardware producers generally specify and/or control the manufacturing
and assembly of finished products. The Company delivers the master
materials to the licensor or its approved replicator which then
manufactures finished goods and delivers them to the Company for
distribution under the Company's label. At the time the Company's
product unit orders are filled by the manufacturer, the Company
becomes responsible for the costs of manufacturing and the applicable
per unit royalty on such units, even if the units do not ultimately
sell.
To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products
or material returns due to product defects.
EMPLOYEES
As of March 31, 1997, the Company had 366 employees, including
227 in Activision Studios and business development, 53 in North
American sales and marketing, 53 in finance, operations and
administration, and 33 in its offices in Japan, the United Kingdom and
Australia.
As of March 31, 1997, 98 of the Company's full-time employees
were subject to term employment agreements with the Company. These
agreements commit such employees to employment terms of between one
and three years from the commencement of their respective agreements.
Most of the employees subject to such agreements are senior executives
of the Company or members of Activision Studios or the Company's
business development, sales or marketing divisions, and such
individuals perform services to the Company as executives, directors,
producers, associate producers, computer programmers, game designers,
12
<PAGE>
sales directors and marketing product managers. The execution by the
Company of employment agreements with such employees, in the Company's
experience, significantly reduces the Company's turnover during the
development and production of its entertainment software products and
allows the Company to plan more effectively for future development
activities.
None of the Company's employees are subject to a collective
bargaining agreement, and the Company has experienced no labor-related
work stoppages.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of Notes to
Consolidated Financial Statements included in Item 8.
Item 2. PROPERTIES
The Company's principal corporate, administrative, and product
development offices are located in approximately 98,000 square feet of
leased space in a building located at 3100 Ocean Park Boulevard, Santa
Monica, California 90405. The lease in Santa Monica commenced on May
1, 1997. Prior to such date, the Company's principal corporate,
administrative and product development offices were located in
approximately 57,000 square feet of leased space located in Los
Angeles, California. The following is a listing of the principal
offices maintained by the Company at May 1, 1997:
Location of
Principal Facilities Square Feet Lease Expiration Date
------------------------------------ ---------------------
Santa Monica, California 98,000 April 30, 2007
London, United Kingdom 10,625 July 23, 2005
Tokyo, Japan 450 July 31, 1997
Sydney, Australia 400 Month-to-Month
Item 3. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against
it in the ordinary course of business including disputes arising over
the ownership of intellectual property rights and collection matters.
In the opinion of management, the outcome of such routine claims will
not have a material adverse effect on the Company's business,
financial condition, results of operations or liquidity.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the NASDAQ National
Market under the symbol "ATVI."
The following table sets forth for the periods indicated the high
and low reported closing sale prices for the Company's Common Stock.
<TABLE>
<CAPTION>
High Low
---------- ---------
<S> <C> <C>
Fiscal 1996
-------------
First Quarter ended June 30, 1995 $ 7.18 $ 5.75
Second Quarter ended September 30, 1995 $19.75 $ 6.75
Third Quarter ended December 31, 1995 $18.50 $ 8.13
Fourth Quarter ended March 31, 1996 $15.13 $ 8.63
Fiscal 1997
-------------
First Quarter ended June 30, 1996 $15.00 $ 11.63
Second Quarter ended September 30, 1996 $14.38 $ 9.50
Third Quarter ended December 31, 1996 $14.00 $ 10.56
Fourth Quarter ended March 31, 1997 $16.25 $ 10.00
Fiscal 1998
-------------
First Quarter through June 10, 1997 $14.50 $ 10.25
</TABLE>
On June 10, 1997, the reported last sales price for the Common
Stock was $13.875. As of March 31, 1997, the Company had
approximately 5,000 stockholders of record, excluding banks, brokers
and depository companies that are the stockholders of record for the
account of beneficial owners.
The Company has never paid cash dividends on its capital stock
and does not intend to pay cash dividends at any time in the
foreseeable future. The Company expects that earnings will be
retained for the continued growth and development of the Company's
business. Future dividends, if any, will depend upon the Company's
earnings, financial condition, cash requirements, future prospects and
other factors deemed relevant by the Company's Board of Directors.
During the period from December 11, 1995 to December 14, 1995,
the Company purchased in open market transactions 500,000 of its
shares of common stock, at prices ranging from $10.25 to $10.875,
aggregating approximately $5.3 million. These purchases were made
pursuant to the Company's announced share repurchase program. The
company may from time to time in the future make additional open
market purchases of its common stock.
During the fiscal year ended March 31, 1997, the Company granted
warrants to purchase Common Stock to two of its outside directors in
connection with their election to the Board. Neither these warrants
nor the shares of Common Stock for which they are exercisable have
been registered under the Securities Act of 1933, as amended (the
"Securities Act"), by reason of the exemption under Section 4(2) of
the Act. On November 1, 1996, the Company granted warrants to
purchase 16,667 shares to Harold Brown. The warrants have an exercise
price of $12.25 per share and become exercisable at the rate of 25% on
November 1, 1997 and 12.5% each six months thereafter. The Company
granted Mr. Brown warrants to purchase an additional 3,333 shares on
February 27, 1997, which warrants have an exercise price of $11.80 per
share and become exercisable at the rate of 20% per year, beginning on
February 27, 1998. On February 27, 1997, the Company granted to
Robert Morgado warrants to purchase 20,000 shares of Common Stock.
Warrants to purchase 16,667 of the shares have an exercise price of
$13.88 per share and become exercisable at the rate of 25% on February
27, 1998 and 12.5% each six months thereafter; the warrants to
purchase the remaining 3,333 shares have an exercise price of $11.80
per share and become exercisable at the rate of 20% per year,
beginning on February 27, 1998. All of he warrants granted to Messrs.
Brown and Morgado expire ten years after the date of grant.
14
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated
financial data, which should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and with
Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein. The selected
consolidated financial data presented below as of and for each of the
fiscal years in the five-year period ended March 31, 1997 are derived
from the audited consolidated financial statements of the Company.
The Consolidated Financial Statements as of March 31, 1997 and 1996
and for each of the fiscal years in the three-year period ended March
31, 1997, and the reports thereon, are included elsewhere in this Form
10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND EMPLOYEE DATA)
<TABLE>
<CAPTION>
Fiscal Years ended March 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $86,483 $61,393 $40,669 $26,604 $21,069
Gross profit 56,661 39,644 19,376 11,293 9,535
Operating income (loss) 9,807 2,532 (2,957) (2,031) (208)
Income (loss) before provision
for income taxes 10,731 4,239 (1,365) (1,853) (217)
Net income (loss) from continuing operations 7,107 5,530 (1,520) (1,987) (279)
Loss from discontinued operations - - - - (1,100)
Net income (loss) 7,107 5,530 (1,520) (1,987) (1,379)
Accumulated, unpaid preferred dividends - - - (3,296) (3,163)
Net income (loss) per common share from
continuing operations (1) $0.49 $0.37 $(0.11) $(0.97) $(1.01)
Net income (loss) per common share (1) 0.49 0.37 (0.11) (0.97) (1.33)
Weighted average number of shares used in
computing net income (loss) per common
share (1) 14,619 14,950 13,944 5,432 3,412
OTHER OPERATING DATA:
Average number of employees 342 234 93 62 60
Net revenues per employee (in thousands) $253 $262 $437 $429 $351
As of March 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $ 17,639 $25,288 $37,355 $38,093 $1,851
Working capital 52,938 40,227 40,648 41,218 5,261
Intangible assets 18, 313 19,580 20,863 22,146 23,429
Total assets 95,670 77,613 68,883 68,677 34,580
Redeemable preferred stock (2) - - - - 25,200
Preferred shareholders' equity (3) - - - - 4,603
Common shareholders' equity 80,808 62,999 62,704 63,985 (792)
</TABLE>
(1) Reflects the Company's 1-for-3 reverse stock split effective October 20,
1993. Accordingly, previously reported net income (loss) per share and
common share amount have been retroactively restated.
(2) Does not include accrued dividends of $3,163 as of March 31, 1993.
(3) Represents $5,000 of gross proceeds received from the sale of Series AA
Preferred Stock, less offering expenses and the amount allocated to
warrants sold at the time.
15
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1997 AND 1996
NET REVENUES
Net revenues by territory were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-------------------------------------------------------
1997 1996
----------------------- --------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
North America $65,049 75.2% $47,176 76.8% 38.0%
Europe 12,211 14.1% 6,501 10.6% 87.8%
Japan 4,504 5.2% 4,768 7.8% -5.5%
Australia and Pacific Rim 4,719 5.5% 2,948 4.8% 60.1%
---------- --------- -------- --------- ---------
$86,483 100.0% $61,393 100.0% 40.9%
---------- --------- -------- --------- ---------
---------- --------- -------- --------- ---------
Net revenues by platform were as follows (amounts in thousands):
Fiscal Years Ended March 31,
-------------------------------------------------------
1997 1996
----------------------- --------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
-------- -------- ------- -------- --------
Console $17,367 20.1% $5,161 8.4% 236.5%
PC 69,116 79.9% 56,232 91.6% 22.9%
$86,483 100.0% $61,393 100.0% 40.9%
---------- --------- -------- --------- ---------
---------- --------- -------- --------- ---------
Net revenues by distribution channel were as follows (amounts in thousands):
Fiscal Years Ended March 31,
-------------------------------------------------------
1997 1996
----------------------- --------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
-------- -------- ------- -------- --------
Retailer/reseller $68,478 79.2% $46,192 75.2% 48.2%
OEM 13,935 16.1% 10,728 17.5% 29.9%
On-line, licensing and other 4,070 4.7% 4,473 7.3% -9.0%
---------- --------- -------- --------- ---------
$86,483 100.0% $61,393 100.0% 40.9%
---------- --------- -------- --------- ---------
---------- --------- -------- --------- ---------
</TABLE>
Total net revenues and retailer/reseller net revenues for the fiscal year
ended March 31, 1997 increased 40.9% and 48.2%, respectively, over the prior
year, primarily as a result of an increase in the number of new console and PC
title releases. Console net revenues increased 236.5% over the prior year as a
result of the initial release OF BLOOD OMEN: LEGACY OF KAIN (PlayStation),
MECHWARRIOR 2 (PlayStation and Saturn), POWER MOVE PRO WRESTLING (PlayStation)
and TIME COMMANDO (PlayStation). PC net revenues increased by 22.9% over the
prior year primarily as a result of the initial release of MECHWARRIOR 2:
MERCENARIES (Windows 95), INTERSTATE 76 (Windows 95), TIME COMMANDO (Windows
95), QUAKE MISSION PACK NO. 1: SCOURGE OF ARMAGON (MS-DOS/Windows 95), QUAKE
MISSION PACK NO. 2: DISSOLUTION OF ETERNITY (MS-DOS/Windows 95) and continued
sales of MECHWARRIOR 2 (Windows 95/Macintosh).
OEM net revenues increased 29.9% over the prior year primarily due to
revenues related to enhanced 3-D versions of MECHWARRIOR 2 (Windows 95) and
MECHWARRIOR 2: MERCENARIES (Windows 95/D3D). OEM net revenues also included net
revenues from INTERSTATE '76 (Windows 95), TIME COMMANDO (Windows 95) and DVD
versions of SPYCRAFT (Windows 95) and MUPPET TREASURE ISLAND (Windows 95).
16
<PAGE>
North America, Europe and Australia net revenues increased as a result of
the increase in PC and console revenues discussed above. The Company expects
revenues in each of these territories to increase in fiscal 1998, but at a more
moderate rate than fiscal 1997 growth. Japan net revenues decreased primarily
due to a decrease in licensing net revenues, which was partially offset by an
increase in direct publishing net revenues. The Company expects Japan revenues
to increase in fiscal 1998 due to an increase in the number of products to be
localized for this territory.
COST OF GOODS SOLD; GROSS PROFIT
Cost of goods sold related to console, PC and OEM net revenues represents
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 CDs and cartridges 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. Also included in cost of goods sold is the royalty expense related to
amounts due developers, product owners and 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.
Cost of goods sold as a percentage of net revenues decreased to 34.5% for
the fiscal year ended March 31, 1997 compared to 35.4% for fiscal 1996. As a
result, gross profit as a percentage of net revenues increased to 65.5% for the
fiscal year ended March 31, 1997, from 64.6% for fiscal 1996. The increase in
gross profit as a percentage of net revenues is the result of increased
efficiencies in the manufacturing and distribution processes, partially offset
by an increase in net revenues attributable to console products. Future
determinations 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.
OPERATING EXPENSES
<TABLE>
<CAPTION>
(Amounts in thousands)
Fiscal Years Ended March 31,
----------------------------------------------
1997 1996
--------------------- --------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Product development $18,195 21.0% $17,505 28.5% 3.9%
Sales and marketing 22,351 25.9% 13,920 22.7% 60.6%
General and administrative 5,041 5.8% 4,404 7.2% 14.4%
Amortization of intangible
assets 1,267 1.5% 1,283 2.1% -1.2%
----------- -------- --------- -------- --------
Total operating expenses $46,854 54.2% $37,112 60.5% 26.3%
----------- -------- --------- -------- --------
----------- -------- --------- -------- --------
</TABLE>
Total operating expenses for the 1997 fiscal year decreased as a percentage
of net revenues from the prior fiscal year as a result of the Company's ability
to increase net revenues without incurring comparable increases in product
development and general and administrative expenses. This decrease was
partially offset, however, by an increase in sales and marketing expenses as a
percentage of net revenues. Product development expenses in fiscal 1997
increased 3.9% from fiscal 1996 due to the continued growth of Activision
Studios, the increased number of new products in development, and the increased
costs associated with the enhanced production content and new technologies
incorporated into such products. The impact of these increases, however, was
partially offset by a decrease in the number of products in development that
contain live action video, which generally have higher production costs. In
addition, operating expenses as a percentage of net revenues decreased due in
part to the change in mix of internally developed and externally developed
products. The costs of internal product development are generally expensed as
incurred prior to the product's release and are therefore reflected in operating
expenses; the costs of acquired products are generally amortized against product
unit sales or revenues following the release of the product and are identified
as royalty expenses and are included in the cost of goods sold. During the 1997
fiscal year, products developed internally by Activision Studios accounted for a
smaller portion of the overall number of new products released by the Company as
compared to the 1996 fiscal year.
Sales and marketing costs in fiscal 1997 increased in amount and as a
percentage of net revenues from fiscal 1996 due to increased marketing and
promotional activities necessary to release new titles in an increasingly
competitive environment and the Company's expansion of its European and Japanese
sales and marketing infrastructures. General and administrative expenses
increased 14.4% during the 1997 fiscal year due to an increase in worldwide
administrative support needs and headcount related expenses.
17
<PAGE>
OTHER INCOME (EXPENSE)
Interest income decreased to $924,000 for the fiscal year ended March 31,
1997, from $1,707,000 for the fiscal year ended March 31, 1996, as a result of
lower average cash and cash equivalent balances. See "Liquidity and Capital
Resources."
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 33.8% for the fiscal year ended March
31, 1997. During the fiscal year ended March 31, 1996, the Company recognized a
tax benefit of $1.5 million due to a reduction in the Company's deferred tax
asset valuation allowance. The reduction reflected the remaining portion of the
Company's net operating loss carryforwards, the benefit from which could be
recognized in the Company's provision for income taxes. During the fiscal year
ended March 31, 1997, the Company recognized an additional $6.6 million
reduction to the Company's deferred tax asset valuation allowance, relating to
net operating loss carryforwards arising prior to the Company's reorganization,
which were credited to additional paid-in capital in shareholders' equity and
did not affect net income. The reductions in the valuation allowance during the
years ended March 31, 1997 and 1996 resulted principally from the Company's
assessment of the realizability of its deferred tax assets, based on recent
operating history, as well as an assessment that operations will continue to
generate taxable income. Realization of the deferred tax assets depends on the
continued generation of sufficient taxable income prior to expiration of tax
credits and loss carryforwards. Although realization is not assured, management
believes it is more likely than not that the deferred tax asset of $5.7 million
will be realized. The amount of deferred tax assets considered realizable,
however, could be reduced in the future if estimates of future taxable income
during the carryforward period are reduced. The provision for income taxes for
the year ended March 31, 1995 represents foreign taxes withheld.
RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1996 AND 1995
NET REVENUES
Net revenues by territory were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
----------------------------------------------------------
1996 1995
----------------------- ---------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
North America $47,176 76.8% $29,492 72.5% 60.0%
Europe 6,501 10.6% 7,574 18.6% -14.2%
Japan 4,768 7.8% 2,194 5.4% 117.3%
Australia and Pacific Rim 2,948 4.8% 1,409 3.5% 109.2%
--------- --------- --------- --------- ---------
$61,393 100.0% $40,669 100.0% 51.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net revenues by platform were as follows (amounts in thousands):
Fiscal Years Ended March 31,
-----------------------------------------------------------
1996 1995
----------------------- ---------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
------ -------- ------ -------- --------
Console $ 5,161 8.4% $26,069 64.1% -80.2%
PC 56,232 91.6% 14,600 35.9% 285.2%
--------- --------- --------- --------- ---------
$ 61,393 100.0% $40,669 100.0% 51.0%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
18
<PAGE>
Net revenues by distribution channel were as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended March 31,
-----------------------------------------------------------
1996 1995
----------------------- ---------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Retailer/reseller $ 46,192 75.2% $ 34,706 85.3% 33.1%
OEM 10,728 17.5% 2,637 6.5% 306.8%
On-line, licensing and other 4,473 7.3% 3,326 8.2% 34.5%
---------- --------- ---------- --------- ---------
$ 61,393 100.0% $ 40,669 100.0% 51.0%
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
</TABLE>
Net revenues for the fiscal year ended March 31, 1996 increased by 51% over
the prior year, primarily as a result of an increase in the release of new PC
titles. PC net revenues increased by 285% over the prior year as a result of
the initial release of MECHWARRIOR 2 (MS-DOS and Windows 95), MECHWARRIOR 2
EXPANSION PACK: GHOST BEAR'S LEGACY (MS-DOS), ZORK NEMESIS (MS-DOS/Windows
95), SPYCRAFT: THE GREAT GAME (MS-DOS/Windows 95 and Macintosh), PITFALL: THE
MAYAN ADVENTURE (Windows 95), EARTHWORM JIM (Windows 95) and five MIGHTY
MORPHIN POWER RANGER titles (MS-DOS and Mac). The decrease in console net
revenues during the fiscal year was due to the Company's strategic change in its
business emphasis from cartridge-based console systems to CD-based PC and
console systems.
On-line, OEM, licensing and other revenues increased over the prior year
due to the Company's increased commitment to generating additional OEM revenues
and the availability of several additional titles for the OEM market. OEM and
licensing revenues during the 1996 fiscal year primarily were derived from sales
and licenses of MECHWARRIOR 2 (MS-DOS, Windows 95 and an enhanced 3-D ATI
version), EARTHWORM JIM (Windows 95), PITFALL: THE MAYAN ADVENTURE (Windows
95) and SHANGHAI: GREAT MOMENTS (MS-DOS and Windows 95).
North America, Japan and Australia net revenues increased as a result of
the increase in PC, OEM and licensing revenues discussed above. The decrease in
Europe net revenues was attributable to a change from the publishing by the
Company of its products under an exclusive guaranteed distribution agreement in
fiscal 1995 to the publishing by the Company of its products directly to
retailers and resellers in fiscal 1996, combined with the change of the
Company's business emphasis from cartridge-based console systems to CD-based PC
systems.
COST OF GOODS SOLD
Cost of goods sold related to console, PC and OEM revenues represents 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. Console cartridges and CDs are
manufactured by the respective video game console manufacturers, 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, territory and term of
agreement, among other items. The increase in total cost of goods sold is
related to the increase in PC and OEM net revenues.
GROSS PROFIT
Gross profit as a percentage of net revenues increased to 64.6% for the
fiscal year ended March 31, 1996, from 47.6% for fiscal 1995, as a result of an
increase in PC CD-based net revenues. Net revenues from CD-based PC products
generally yield a higher gross profit margin than net revenues from console
products as a result of the lower costs of goods sold attributable to such PC
products. The increase in gross profit also was due to the increase in on-line,
OEM, licensing and other revenues, which also yield higher gross profit margins.
19
<PAGE>
OPERATING EXPENSES
<TABLE>
<CAPTION>
(Amounts in thousands)
Fiscal Years Ended March 31,
--------------------------------------------------------
1996 1995
----------------------- --------------------------
% of Net % of Net
Amount Revenues Amount Revenues % Change
------ -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
Product development $ 17,505 28.5% $ 7,274 17.9% 140.7%
Sales and marketing 13,920 22.7% 10,410 25.6% 33.7%
General and administrative 4,404 7.2% 3,366 8.3% 30.8%
Amortization of intangible
assets 1,283 2.1% 1,283 3.2% -
---------- --------- ---------- --------- ---------
Total operating expenses $ 37,112 60.5% $ 22,333 55.0% 66.2%
---------- --------- ---------- --------- ---------
---------- --------- ---------- --------- ---------
</TABLE>
Total operating expenses increased as a percentage of net revenues as a
result of a substantial increase in product development expenses. This increase
was partially offset, however, by a decrease in sales and marketing expenses and
general and administrative expenses as a percentage of net revenues. Product
development expenses increased both in amount and as a percentage of net
revenues due to the continued growth of the Company's product development
departments, the increased number of products in product development, and the
increased costs associated with enhanced production content and new technologies
incorporated into such products. Sales and marketing expenses increased in
actual amount, but not as a percentage of net revenues, as a result of the
marketing and promotional activity related to newly released titles. General
and administrative expenses increased in actual amount, but not as a percentage
of net revenues, due to an increase in headcount related expenses.
OTHER INCOME (EXPENSE)
Interest income increased to $1,707,000 for the fiscal year ended March 31,
1996, from $1,592,000 for the fiscal year ended March 31, 1995, as a result of
higher yields earned on cash and cash equivalents. See "Liquidity and Capital
Resources."
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on
numerous factors, several of which are not under the Company's control. See
Item 1. Business - "Certain Cautionary Information." 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 following table is a comparative breakdown of the Company's quarterly
results for the immediately preceding eight quarters (amounts in thousands,
except per share data):
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------------------------
March Dec. Sept. June March Dec. Sept. June
31, 31, 30, 30, 31, 31, 30, 30,
1997 1996 1996 1996 1996 1995 1995 1995
---- ---- ---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $28,926 $31,361 $19,175 $ 7,021 $21,648 $17,578 $18,848 $ 3,319
Gross profit 18,203 19,483 13,463 5,512 15,327 10,447 12,105 1,765
Operating income (loss) 6,054 6,210 1,769 (4,226) 4,607 1,573 2,366 (6,014)
Net income (loss) 4,282 4,120 1,336 (2,631) 6,345 1,948 2,765 (5,528)
Net income (loss) per share 0.29 0.28 0.09 (0.19) 0.43 0.13 0.18 (0.39)
</TABLE>
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 sources of liquidity for the fiscal
years ended March 31, 1997 and 1996. At March 31, 1997, the Company had
approximately $17.6 million of cash and cash equivalents.
20
<PAGE>
The Company uses its working capital to finance ongoing operations,
including the acquisition of inventory, the development, marketing and
distribution of new products, and the acquisition of products and intellectual
property rights from third parties.
Cash flows used in operating activities of $6.3 million primarily resulted
from the increase in accounts receivable of approximately $16.5 million to $36.4
million as of March 31, 1997. The increase in accounts receivable was due to
the overall increase in net revenues during the quarter and year ended March 31,
1997 as compared to the same periods in the prior fiscal year.
The Company's working capital increased approximately $12.7 million from
March 31, 1996 to $52.9 million as of March 31, 1997. The increase in working
capital primarily was attributable to the increase in accounts receivable and
prepaid software and license royalties.
Net cash used in investing activities primarily was attributable to capital
expenditures incurred by the Company as a result of the increase in headcount
and the number of products in development during the fiscal year. During fiscal
1998, the Company expects to incur additional capital expenditures relating to
the development of its products, the acquisition of new products and related
intellectual property rights, the general operation of its business and the
relocation of its Los Angeles headquarters to a new leased facility in Santa
Monica, California in May 1997.
Management currently believes that the Company's existing capital resources
are sufficient to meet its requirements for at least the next fiscal year.
Previous common stock and preferred stock private placements have provided, and
will continue to provide, the Company with resources to enable it to acquire
properties for development, engage in more extensive product development and
expand marketing activities, and increase working capital for operations.
Management also currently believes that inflation has not had, and will not
have in the foreseeable future, a material impact on continuing operations.
EFFECT OF RECENT ACCOUNTING CHANGES
In February 1997, the Financial Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 specifies new standards designated to improve
the earnings per share ("EPS") information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements and increasing the comparability of EPS data on an international
basis. Some of the changes made to simplify the EPS computational include: (a)
eliminating the presentation of primary EPS and replacing it with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS, (b) eliminating the modified treasury stock
method and the three percent materiality provision, and (c) revising the
contingent share provision and the supplemental EPS data requirements. SFAS No.
128 also makes a number of changes to existing disclosure requirements. SFAS No.
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has determined the
following impact of the implementation of SFAS No. 128:
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
--------------------------------------------
1997 1996 1995
---------- -------- ----------
<S> <C> <C> <C>
Earnings (loss) per share as originally reported $ 0.49 $ 0.37 $ (0.11)
Pro forma basic earnings per share 0.51 0.39 (0.11)
Pro forma diluted earnings per share 0.49 0.37 (0.11)
</TABLE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditor's Report F-1
Independent Auditor's Report F-2
Consolidated Balance Sheets as of March 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the Years ended
March 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended March 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
Schedule II-Valuation and Qualifying Accounts and Reserves
as of March 31, 1997, 1996 and 1995 F-17
All other schedules of the Registrant are omitted because of the
absence of conditions under which they are required or because the
required information is included elsewhere in the financial statements
or in the notes thereto.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company replaced Coopers & Lybrand, LLP ("Coopers & Lybrand")
as its principal accountants, effective January 17, 1997. The action
was recommended by the Audit Committee of the Board of Directors and
was approved by the Company's Board of Directors. Coopers & Lybrand's
reports on the Company's financial statements for the fiscal years
ended March 31, 1996 and 1995 did not contain an adverse opinion or a
disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During the two
fiscal years ended March 31, 1996 and 1995 and all interim periods
through January 17, 1997, (i) there were no disagreements with Coopers
& Lybrand on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Coopers &
Lybrand, would have caused Coopers & Lybrand to make a reference to
the subject matter of the disagreements in connection with its reports
in the financial statements for such years, and (ii) there were no
reportable events as described in Item 304 of Regulation S-K.
The Company engaged KPMG Peat Marwick, LLP ("Peat Marwick") as
the Company's principal accountants to audit the Company's financial
statements, effective January 17, 1997. The action was recommended by
the Audit Committee of the Board of Directors and was approved by the
Company's Board of Directors.
22
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on September 24, 1997,
entitled "Election of Directors" and "Executive Officers and Key
Employees" to be filed with the Securities and Exchange Commission
within 120 days after the end of the fiscal year covered by this Form
10-K.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on September 24, 1997,
entitled "Executive Compensation" and "Indebtedness of Management" to
be filed with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this Form 10-K.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on September 24, 1997,
entitled "Security Ownership of Certain Beneficial Owners and
Management" to be filed with the Securities and Exchange Commission
within 120 days after the end of the fiscal year covered by this Form
10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on September 24, 1997,
entitled "Certain Relationships and Related Transactions" to be filed
with the Securities and Exchange Commission within 120 days after the
end of the fiscal year covered by this Form 10-K.
23
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS See Item 8. - Consolidated Financial
Statements and Supplementary Data Index for Financial
Statements and Schedule on page 26 herein.
2. FINANCIAL STATEMENT SCHEDULES See Item 8. - Consolidated
Financial Statements and Supplementary Data Index for
Financial Statements and Schedule on page 26 herein.
3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
Exhibit
Number Exhibit
-------- -------
2.1 Plan of Reorganization of the Company, as
confirmed by the United States Bankruptcy Court
for the Northern District of California on
November 25, 1991 (incorporated by reference to
Exhibit 28.2 of the Company's Current Report on
Form 8-K dated October 4, 1991).
2.2 Plan and Agreement of Merger, dated March 30,
1992, among the Company, Disc Company, Inc. and
International Consumer Technologies Corporation
(incorporated by reference to Exhibit 28.1 of the
Company's Current Report on Form 8-K dated March
31, 1992).
2.3 Agreement and Plan of Merger between Activision,
Inc., a California corporation, and Activision,
Inc., a Delaware corporation, as filed with the
Secretary of State of the State of Delaware
(incorporated by reference to Exhibit 4.7 of
Amendment No. 1 to the Company's Form S-8,
Registration No. 33-48411 filed on June 1, 1993).
2.4 Plan and Agreement of Merger, dated October 28,
1994, among the Company, ACTV Acquisition, Inc.
and International Consumer Technologies
Corporation (incorporated by reference to Exhibit
2.4 of the Company's Quarterly Report on Form 10-Q
for the period ended December 31, 1994).
3.1 Amended and Restated Articles of Incorporation of
Activision, Inc., dated October 15, 1992
(incorporated by reference to Exhibit 4.5 of
Amendment No. 1 to the Company's Form S-8,
Registration No. 33-48411 filed on June 1, 1993).
3.2 Bylaws of Activision, Inc. (incorporated by
reference to Exhibit 4.6 of Amendment No. 1 to the
Company's Form S-8, Registration No. 33-48411
filed on June 1, 1993).
10.7 Mediagenic 1991 Stock Option and Stock Award Plan,
as amended (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on
Form S-8, Registration No. 33-63638, filed on
December 8, 1995).
10.8 Mediagenic 1991 Director Warrant Plan as amended
(incorporated by reference to Exhibit 28.2 to the
Company's Registration Statement on Form S-8,
Registration No. 33-63638, filed on June 1, 1993).
10.9 Purchase Agreement, dated as of January 24, 1994,
among the Company and each purchaser who is a
signatory thereto (incorporated by reference to
Exhibit 28.1 of the Company's Form 8-K filed
February 9, 1994).
10.10 Registration Rights Agreement, dated as of January
31, 1994, among the Company and each purchaser who
is a signatory thereto
24
<PAGE>
(incorporated by reference to Exhibit 28.2 of the
Company's Form 8-K filed February 9, 1994).
10.11 Share Exchange and Recapitalization Agreement,
dated as of January 14, 1994, among the Company,
International Consumer Technologies Corporation,
Steven Wynn, J.F. Shea Co., Inc. as Nominee 1993-6
and ESL Partners, L.P. (incorporated by reference
to Exhibit 28.3 of the Company's Form 8-K filed
February 9, 1994).
10.12 Registration Rights Agreement, dated as of January
31, 1994, among the Company, International
Consumer Technologies Corporation, Steven Wynn,
J.F. Shea Co., Inc. as Nominee 1993-6 and ESL
Partners, L.P. (incorporated by reference to
Exhibit 28.4 of the Company's Form 8-K filed
February 9, 1994).
10.14 Lease Agreement dated as of December 20, 1996,
between the Company and Barclay Curci Investment
Company (incorporated by reference to Exhibit
10.14 of the Company's Form 10-Q for the quarter
ended December 31, 1996).
11. Statement regarding computation of per share
earnings.
16. Letter from Coopers & Lybrand, LLP pursuant to
Item 304 (a) (3) of Regulation S-K (incorporated
by reference to exhibit 16 of the Company's Form
8-K filed January 17, 1997.)
21. Principal subsidiaries of the Company.
23.1 Independent Auditor Consents.
23.2 Independent Auditor Consents.
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
The Company filed a 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.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 13, 1997
ACTIVISION, INC.
By: /s/ ROBERT A. KOTICK
------------------------------
(Robert A. Kotick)
Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
By: /s/ ROBERT A. KOTICK Chairman, Chief Executive June 13, 1997
----------------------------- Officer (Principal Executive
(Robert A. Kotick) Officer), President and Director
By: /s/ HOWARD E. MARKS Executive Vice President June 13, 1997
--------------------------- and Director
(Howard E. Marks)
By: /s/ BRIAN G. KELLY Chief Financial and Operating June 13, 1997
--------------------------- Officer and Director
(Brian G. Kelly) (Principal Financial Officer)
By: /s/ BARRY J. PLAGA Chief Accounting Officer June 13, 1997
--------------------------- (Principal Accounting Officer)
(Barry J. Plaga)
By: /s/ HAROLD A. BROWN Director June 13, 1997
---------------------------
(Harold A. Brown)
By: /s/ BARBARA S. ISGUR Director June 13, 1997
---------------------------
(Barbara S. Isgur)
By: /s/ STEVEN T. MAYER Director June 13, 1997
---------------------------
(Steven T. Mayer)
By: /s/ ROBERT J. MORGADO Director June 13, 1997
---------------------------
(Robert J. Morgado)
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheet of ACTIVISION, INC.
and subsidiaries as of March 31, 1997 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the year then
ended. In connection with our audit of the consolidated financial statements,
we also have audited financial statement schedule II for the year ended March
31, 1997. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ACTIVISION, INC. and subsidiaries as of March 31, 1997, and the consolidated
results of their operations and their cash flows for the year the ended, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the related financial statement schedule for the year ended March 31,
1997, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK, LLP
Los Angeles, California
May 8, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of ACTIVISION, INC. and Subsidiaries.
We have audited the accompanying consolidated balance sheet of ACTIVISION, INC.
and subsidiaries as of March 31, 1996 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years ended
March 31, 1996 and 1995. In connection with our audits of the consolidated
financial statements, we have also audited the financial statement schedule
listed under item 14(a)2 of this Annual Report on 10K for each of the two years
in the period ended March 31, 1996. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ACTIVISION, INC. and subsidiaries as of March 31, 1996, and the consolidated
results of their operations and their cash flows for each of the two years then
ended, in conformity with generally accepted accounting principles. In
addition, in our opinion, the related financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
COOPERS & LYBRAND, LLP
Los Angeles, California
May 15, 1996, except for Note 9,
as to which the date is June 10, 1997.
F-2
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,639 $ 25,288
Accounts receivable, net of allowances of $6,468 and $7,005, respectively 36,367 19,909
Inventories, net 4,520 2,975
Prepaid software and license royalties 6,559 3,652
Prepaid expenses and other current assets 1,222 1,183
Deferred income taxes 1,493 1,500
--------------- --------------
Total current assets 67,800 54,507
Property and equipment, net 5,090 3,326
Deferred income taxes 4,212 -
Other assets 255 200
Excess purchase price over identifiable assets acquired, net 18,313 19,580
--------------- --------------
Total assets $ 95,670 $ 77,613
--------------- --------------
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,054 $ 4,592
Accrued expenses 7,808 9,688
--------------- --------------
Total current liabilities 14,862 14,280
Other liabilities - 334
--------------- --------------
Total liabilities 14,862 14,614
--------------- --------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 14,644,895 and 14,250,180 shares issued
and 14,144,895 and 13,750,180 outstanding, respectively - -
Additional paid-in capital 78,484 67,904
Retained earnings 7,815 708
Cumulative foreign currency translation (213) (335)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------------- --------------
Total shareholders' equity 80,808 62,999
--------------- --------------
Total liabilities and shareholders' equity $ 95,670 $ 77,613
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended March 31,
---------------------------------------
1997 1996 1995
--------- ---------- -----------
<S> <C> <C> <C>
Net revenues $ 86,483 $ 61,393 $ 40,669
Cost of goods sold 29,822 21,749 21,293
--------- ---------- -----------
Gross profit 56,661 39,644 19,376
--------- ---------- -----------
Operating expenses:
Product development 18,195 17,505 7,274
Sales and marketing 22,351 13,920 10,410
General and administrative 5,041 4,404 3,366
Amortization of intangible assets 1,267 1,283 1,283
--------- ---------- -----------
Total operating expenses 46,854 37,112 22,333
--------- ---------- -----------
Operating income (loss) 9,807 2,532 (2,957)
Other income:
Interest income 924 1,707 1,592
--------- ---------- -----------
Income (loss) before income taxes 10,731 4,239 (1,365)
Income tax provision (benefit) 3,624 (1,291) 155
--------- ---------- -----------
Net income (loss) $ 7,107 5,530 $ (1,520)
--------- ---------- -----------
--------- ---------- -----------
Net income (loss) per common share $ 0.49 $ 0.37 $ (0.11)
--------- ---------- -----------
--------- ---------- -----------
Number of shares used in computing
net income (loss) per common share 14,619 14,950 13,944
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Common Stock Warrants
------------ --------------------- Additional
Shares Amount Shares Amount Paid-in Capital
---------------------- ----------------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances March 31, 1994 13,849 - 267 $ 120 $ 67,356
Exercise of common stock warrants 267 - (267) (120) 200
Issuance of common stock pursuant to
employee stock option plan 59 - - - 99
Issuance of common stock pursuant to
directors stock warrant plan 8 - - - 12
Net loss for the year - - - - -
Foreign currency translation adjustment - - - - -
------ ------ ------ ------ ----------
Balances March 31, 1995 14,183 - - - $ 67,667
Issuance of common stock pursuant to
employee stock option plan 50 - - - 224
Issuance of common stock pursuant to
directors stock warrant plan 17 - - - 13
Purchase of treasury stock - - - - -
Net income for the year - - - - -
Foreign currency translation adjustment - - - - -
------ ------ ------ ------ ----------
Balances March 31, 1996 14,250 - - - $ 67,904
Issuance of common stock 63 - - 822
Issuance of common stock pursuant to
employee stock option plan 313 - - - 2,209
Issuance of common stock pursuant to
employee stock purchase plan 19 - - - 179
Tax benefit attributable to employee
stock option plan - - - - 736
Tax benefit derived from net operating
loss carryforward utilization - - - 6,634
Net income for the year - - - - -
Foreign currency translation adjustment - - - - -
------ ------ ------ ------ ----------
Balances March 31, 1997 14,645 $ - - $ - $ 78,484
------ ------ ------ ------ ----------
------ ------ ------ ------ ----------
<CAPTION>
Retained Cumulative Treasury Stock
Earnings Foreign Currency -------------- Shareholders'
(Deficit) Translation Shares Amount Equity
---------- ----------------- ---------------------- -------------
<S> <C> <C> <C> <C> <C>
Balances March 31, 1994 $ (3,302) $ (189) - - $ 63,985
Exercise of common stock warrants - - - - 80
Issuance of common stock pursuant to
employee stock option plan - - - - 99
Issuance of common stock pursuant to
directors stock warrant plan - - - - 12
Net loss for the year (1,520) - - - (1,520)
Foreign currency translation adjustment - 48 - - 48
--------- -------- ------- ---------- ----------
Balances March 31, 1995 $ (4,822) $ (141) - - $ 62,704
Issuance of common stock pursuant to
employee stock option plan - - - - 224
Issuance of common stock pursuant to
directors stock warrant plan - - - - 13
Purchase of treasury stock - - 500 (5,278) (5,278)
Net income for the year 5,530 - - - 5,530
Foreign currency translation adjustment - (194) - - (194)
--------- -------- ------- ---------- ----------
Balances March 31, 1996 $ 708 $ (335) 500 $ (5,278) $ 62,999
Issuance of common stock - - - - 822
Issuance of common stock pursuant to
employee stock option plan - - - - 2,209
Issuance of common stock pursuant to
employee stock purchase plan - - - - 179
Tax benefit attributable to employee
stock option plan - - - - 736
Tax benefit derived from net operating
loss carryforward utilization - - - - 6,634
Net income for the year 7,107 - - - 7,107
Foreign currency translation adjustment - 122 - - 122
--------- -------- ------- ---------- ----------
Balances March 31, 1997 $ 7,815 $ (213) 500 $ (5,278) $ 80,808
--------- -------- ------- ---------- ----------
--------- -------- ------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended March 31,
--------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,107 $ 5,530 $ (1,520)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Deferred income taxes 3,165 (1,500) -
Depreciation and amortization 3,335 2,646 1,942
Change in assets and liabilities:
Accounts receivable (16,458) (14,343) (3,641)
Inventories (1,545) (1,003) 551
Prepaid software and license
royalties (2,085) (2,570) (202)
Prepaid expenses and other
current assets (39) (841) 126
Other assets (55) (140) 37
Accounts payable 2,462 2,076 587
Accrued liabilities (1,880) 6,535 911
Other liabilities (334) (176) (11)
---------- ---------- ---------
Net cash used in operating activities (6,327) (3,786) (1,220)
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (3,832) (3,045) (1,256)
Restricted cash - - 1,500
---------- ---------- ---------
Net cash provided by (used in) investing
activities (3,832) (3,045) 244
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance and exercise of common
stock options and warrants 2,209 237 191
Proceeds from employee stock purchase plan 179 - -
Payments under line-of-credit agreements - - (4,695)
Borrowings under line-of-credit agreements - - 4,695
Other - - (1)
Purchase of treasury stock - (5,278) -
---------- ---------- ---------
Net cash provided by (used in) financing
activities 2,388 (5,041) 190
---------- ---------- ---------
Effect of exchange rate changes on cash 122 (195) 48
---------- ---------- ---------
Net decrease in cash and cash equivalents (7,649) (12,067) (738)
---------- ---------- ---------
Cash and cash equivalents at beginning of year 25,288 37,355 38,093
---------- ---------- ---------
Cash and cash equivalents at end of year $ 17,639 $ 25,288 $ 37,355
---------- ---------- ---------
---------- ---------- ---------
Non-cash investing activities:
Stock issued in exchange for licensing
rights $ 822 $ - $ -
Tax benefit derived from stock option
exercises 736 - -
Tax benefit derived from net operating
loss carryforward utilization 6,634 - -
Supplemental cash flow information:
Cash paid for income taxes $ 291 $ 124 $ 193
Cash paid for interest - 20 18
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
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 systems, including the Windows 95 operating system, and video game
console hardware systems such as the Sony Playstation ("Playstation") and
Sega Saturn ("Saturn"). The Company distributes its products worldwide
primarily through its direct sales force and, to a lesser extent through
third party distributors and licensees.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Activision,
Inc., a Delaware corporation, and its wholly-owned subsidiaries (the
Company.) All intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with
original maturities of not more than 90 days.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its temporary cash
investments with quality financial institutions. At various times during
the fiscal years ended March 31, 1997, 1996 and 1995, the Company had
deposits in excess of the $100,000 Federal Deposit Insurance Corporation
("FDIC") limit at these financial institutions. At March 31, 1997, the
Company had approximately $13.4 million invested in short-term United
States government backed securities. The Company's customer base includes
retail outlets and distributors including consumer electronics and computer
specialty stores, discount chains, video rental stores and toy stores in
the United States and countries worldwide. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses. The Company generally does not require collateral or other
security from its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate their
carrying values due to the relatively short maturities of these
instruments. Trade receivables are primarily due from retailers and OEM's.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards 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.
PREPAID SOFTWARE AND LICENSED PROPERTY ROYALTIES
Prepaid royalties represent prepayments made to independent software
developers under development agreements. Prepaid royalties are expensed at
the contractual royalty rate as cost of goods sold based on actual net
product sales. Management evaluates the future realization of prepaid
royalties quarterly, and charges to cost of goods sold any amounts that
management deems unlikely to be amortized at the contract royalty rate
through product sales.
REVENUE RECOGNITION
F-7
<PAGE>
Product Sales: The Company recognizes revenue from the sale of its
products upon shipment. Subject to certain limitations, the Company
permits customers to obtain exchanges within certain specified periods, and
provides price protection on certain unsold merchandise. Revenue from
product sales is reflected net of the allowance for returns and price
protection.
Software Licenses: For those license agreements which provide the
customers the right to multiple copies in exchange for guaranteed amounts,
revenue is recognized at delivery of the product master or the first copy.
Per copy royalties on sales which exceed the guarantee are recognized as
earned.
ADVERTISING EXPENSES
The Company expenses advertising and the related costs as incurred.
Advertising expenses for the years ended March 31, 1997, 1996 and 1995 were
approximately $3,144,000, $1,940,000 and $3,564,000, respectively, and are
included in sales and marketing expense in the statement of operations.
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 of 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.
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
Under SFAS No. 109 income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries maintain their accounting records in
their local currency. The currencies are then converted to United States
dollars and the effect of the foreign currency translation is reflected as
a component of shareholders' equity in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation."
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed using the weighted average
number of common and, when dilutive, common equivalent shares outstanding
during the period.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
STOCK OPTION PLAN
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
F-8
<PAGE>
interpretations. As such, compensation expense would be recorded on the
date of the grant only if the current market price of the underlying stock
exceeded the exercise price. On April 1, 1996 the Company adopted SFAS No.
123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of the grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation.
2. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at March 31, 1997 and 1996 reflect an adjustment to
net realizable value of approximately $135,000 and $145,000, respectively.
The provisions for net realizable value for the years ended March 31, 1997,
1996 and 1995 were approximately $142,000, $532,000 and $134,000,
respectively. Inventories, net of reserves consisted of (amounts in
thousands):
March 31, 1997 March 31, 1996
--------------- --------------
Purchased parts and components $ 1,162 $ 876
Finished goods 3,358 2,099
---------- ----------
$ 4,520 $ 2,975
---------- ----------
---------- ----------
Included in finished goods at March 31, 1997 and 1996 are expected
inventory returns at a net realizable value of $837,000 and $427,000,
respectively.
3. PROPERTY AND EQUIPMENT
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the shorter of the estimated useful lives or the lease term generally
ranging from three to ten years. Property and equipment, stated at cost,
was as follows (amounts in thousands):
March 31, 1997 March 31, 1996
-------------- --------------
Computer equipment $ 6,910 $ 4,360
Office furniture and other equipment 1,885 1,338
Leasehold improvements 1,029 310
--------- ---------
9,824 6,008
Less accumulated depreciation
and amortization (4,734) (2,682)
--------- ---------
$ 5,090 $ 3,326
--------- ---------
--------- ---------
Depreciation expense for the years ended March 31, 1997, 1996 and 1995 was
$2,068,000, $1,362,000 and $658,000, respectively.
F-9
<PAGE>
4. ACCRUED EXPENSES
Accrued expenses were as follows (amounts in thousands):
March 31, 1997 March 31, 1996
-------------- ---------------
Accrued royalties $ 4,173 $ 3,104
Accrued selling and marketing costs 1,680 1,759
Deferred revenue - 2,242
Other 1,955 2,583
-------- ---------
$ 7,808 $ 9,688
-------- ---------
-------- ---------
5. OPERATIONS BY GEOGRAPHIC AREA
The following table summarizes the geographic operations of the Company
(amounts in thousands):
Year ended March 31,
-------------------------------------
1997 1996 1995
---- ---- ----
Net revenues:
North America $ 65,049 $ 47,176 $ 29,492
Europe 12,211 6,501 7,574
Japan 4,504 4,768 2,194
Australia and Pacific 4,719 2,948 1,409
-------- -------- --------
Total net revenues $ 86,483 $ 61,393 $ 40,669
-------- -------- --------
-------- -------- --------
Operating income (loss):
North America $ 2,306 $(5,110) $(5,114)
Europe 3,466 2,547 77
Japan 2,022 3,814 1,655
Australia and Pacific 2,013 1,281 425
-------- -------- --------
Total operating income (loss) $ 9,807 $2,532 $(2,957)
-------- -------- --------
-------- -------- --------
At March 31, At March 31, At March 31
1997 1996 1995
---- ---- ----
Assets:
United States $ 81,833 $ 73,377 $ 68,226
Foreign 13,837 4,236 657
-------- -------- --------
Total assets $ 95,670 $ 77,613 $ 68,883
-------- -------- --------
-------- -------- --------
Operating income (loss) by geographic territory is reflected without any
allocation for product development and general and administrative expenses
to the geographic territories other than North America. These expenses are
incurred primarily in North America.
6. SIGNIFICANT CUSTOMERS
The Company had no sales to any one customer in excess of 10% of total net
revenues for the years ended March 31, 1997 and 1996. For the fiscal year
ended March 31, 1995, the Company had sales to one customer which
represented 14.9% of total net revenues.
F-10
<PAGE>
7. INCOME TAXES
Domestic and foreign income (loss) before income taxes and details of the
income tax provision (benefit) are as follows (amounts in thousands):
Year ended March 31,
------------------------------
1997 1996 1995
---- ---- ----
Income (loss) before income taxes:
Domestic $ 5,896 $ 3,681 $ (3,096)
Foreign 4,835 558 1,731
-------- -------- --------
$ 10,731 $ 4,239 $ (1,365)
-------- -------- --------
-------- -------- --------
Income tax provision:
Current:
Federal $ 383 $ 106 $ -
State 31 25 -
Foreign 45 78 155
-------- -------- --------
Total current 459 209 155
-------- -------- --------
Deferred:
Federal (2,961) (1,369) -
State (1,244) (131) -
-------- -------- --------
Total deferred (4,205) (1,500) -
-------- -------- --------
Add back benefit credited to additional
paid-in capital:
Tax benefit related to stock option
exercises 736 - -
Tax benefit related to utilization of
pre-bankruptcy net operating
loss carryforwards 6,634 - -
-------- -------- --------
7,370 - -
-------- -------- --------
$ 3,624 $ (1,291) $ 155
-------- -------- --------
-------- -------- --------
The items accounting for the difference between income taxes computed at
the U.S. federal statutory income tax rate and the income tax provision for
each of the years are as follows:
Year ended March 31,
------------------------
1997 1996 1995
---- ---- ----
Federal income tax provision at statutory rate 35.0% 34.0% (34.0%)
State taxes, net of federal benefit 3.4% - -
Benefit of net operating loss carryforward - (25.7%) -
Nondeductible amortization 3.9% 10.3% 30.4%
Future (current) deductible reserves - (4.9%) 39.3%
Research and development credits (8.4)% (8.7%) (41.9%)
Incremental effect of foreign tax rates (4.1)% (0.5%) 22.2%
Increase (reduction) of valuation allowance 4.0% (35.4%) -
Other - 0.4% (4.5)%
------ ------- -------
33.8% (30.5%) 11.5%
------ ------- -------
------ ------- -------
F-11
<PAGE>
The components of the net deferred tax asset and liability were as follows
(amounts in thousands):
March 31, 1997 March 31, 1996
-------------- --------------
Deferred asset:
Allowance for bad debts $ 272 $ 211
Allowance for sales returns 441 785
Miscellaneous 99 49
Tax credit carryforwards 2,553 1,450
Net operating loss carryforwards 10,447 13,310
--------- ---------
Deferred tax asset 13,812 15,805
Valuation allowance (8,107) (14,305)
--------- ---------
Net deferred tax asset 5,705 1,500
--------- ---------
--------- ---------
During the year ended March 31, 1996, the Company recognized a tax benefit
of $1.5 million through a reduction in the Company's deferred tax asset
valuation allowance. The reduction reflected the remaining portion of the
Company's net operating loss carryforwards, the benefit from which could be
recorded in the Company's provision for income taxes. In accordance with
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued by the American Institute
of Certified Public Accountants, benefits from loss carryforwards arising
prior to the Company's reorganization are recorded as additional paid-in
capital. During the year ended March 31, 1997, $6.6 million of such
benefit have been recognized through a reduction in the valuation
allowance. The reductions in the valuation allowance during the years
ended March 31, 1997 and 1996 were determined based on the Company's
assessment of the realizability of its deferred tax assets, based on recent
operating history, and the Company's expectation that operations will
continue to generate taxable income, as well as other factors. Realization
of the deferred tax assets is dependent upon the continued generation of
sufficient taxable income prior to expiration of tax credits and loss
carryforwards. Although realization is not assured, management believes it
is more likely than not that the deferred tax asset of $5.7 million will be
realized. The amount of deferred tax assets considered realizable,
however, could be reduced in the future if estimates of future taxable
income are reduced. The provision for Income taxes for the year ended
March 31, 1995 represents foreign taxes withheld.
The Company's available net operating loss carryforward for federal tax
reporting purposes approximates $28.3 million and is subject to certain
limitations as defined under Section 382 of the Internal Revenue Code. The
net operating loss carryforwards expire from 1999 to 2009. At March 31,
1997, the Company had a net operating loss carryforward for California tax
reporting purposes of approximately $10.7 million. The California net
operating loss carryforwards expire from 1998 to 2003.
8. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases its facilities under non-cancelable operating lease
agreements. Total future minimum lease commitments as of March 31, 1997
are as follows (amounts in thousands):
Year ending March 31,
1998 $ 2,379
1999 2,116
2000 2,218
2001 2,223
2002 2,223
Thereafter 11,070
----------
$ 22,229
----------
----------
Rent expense for the years ended March 31, 1997, 1996 and 1995 was
approximately $1,777,000, $1,348,000 and $811,000, respectively.
EMPLOYMENT AGREEMENTS
As of March 31, 1997, the Company has entered into employment agreements
with various personnel which have obligated the Company to make total
minimum payments of $3,102,000 and $67,000 during the years ending March
31, 1998 and 1999, respectively.
F-12
<PAGE>
LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in the
ordinary course of business including disputes arising over the ownership
of intellectual property rights and collection matters. In the opinion of
management, the outcome of such routine claims will not have a material
adverse effect on the Company's business, financial condition, results of
operations or liquidity.
9. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Company has a stock option plan (the "Stock Option Plan") for the
benefit of officers, employees, consultants and others. The Stock Option
Plan permits the granting of non-qualified stock options, incentive stock
options ("ISOs"), stock appreciation rights ("SARs"), restricted stock
awards, deferred stock awards and other Common Stock-based awards. The
total number of shares of Common Stock available for distribution under the
Stock Option Plan is 6,066,667. The plan requires available shares to
consist in whole or in part of authorized and unissued shares or treasury
shares. There were 326,000 remaining shares available for grant under the
Stock Option Plan as of March 31, 1997.
The stock option exercise price is determined at the discretion of the
Board of Directors, and for ISOs, is not to be less than the fair market
value at the date of grant, or in the case of non-qualified options, must
exceed or be equal to 85% of fair market value at date of grant. Options
typically become exercisable in equal installments over a period not to
exceed five years and must be exercised within 10 years of date of grant.
Historically, stock options have been granted with exercise prices equal to
or greater than the fair market value at the date of grant.
Stock Option Plan activity was as follows (amounts in thousands, except
weighted average exercise price amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
------- -------- -------- --------- -------- --------
Outstanding at beginning of year 3,725 $11.37 1,190 $ 5.20 398 $ 2.98
Granted 1,947 11.28 2,805 13.61 1,073 5.61
Exercised (313) 7.05 (50) 4.54 (59) 1.67
Forfeited (181) 9.24 (220) 6.07 (222) 4.13
Expired - - - - - -
------- -------- -------- --------- -------- --------
Outstanding at end of year 5,178 $11.69 3,725 $ 11.37 1,190 $ 5.20
------- -------- -------- --------- -------- --------
------- -------- -------- --------- -------- --------
Exercisable at end of year 3,242 $12.62 334 $ 4.55 176 $ 3.82
</TABLE>
The range of exercise prices for options outstanding as of March 31, 1997
was $1.50 to $21.18. The range of exercise prices for options is wide due
to increases in the Company's stock price over the period of the grants.
For the year ended March 31, 1997, 1,227,000 options were granted at an
exercise price equal to the fair market value on the date of grant, and
720,000 options were granted at an exercise price greater than fair market
value on the date of grant.
The following tables summarize information about options outstanding at
March 31, 1997:
Outstanding Options
-------------------------------------
Remaining
Weighted Avg
Contractual Wtd Avg
Shares Life Exercise
(000) (in years) Price
-------- ---------- --------
F-13
<PAGE>
Range of exercise prices:
$1.50 to $9.75 1,728 7.9 $ 6.53
$9.78 to $13.00 1,557 9.4 11.34
$13.13 to $21.18 1,893 8.3 16.69
-------- -------- --------
Total 5,178 8.5 $11.69
-------- -------- --------
-------- -------- --------
Exercisable Options
--------------------------
Wtd Avg
Shares Exercise
(000) Price
------- --------
Range of exercise prices:
$1.50 to $9.75 829 $ 5.92
$9.78 to $13.00 789 10.34
$13.13 to $21.18 1,624 17.16
------- --------
Total 3,242 $12.62
------- --------
------- --------
These options will expire if not exercised at specific dates ranging from
January 2002 to March 2007. Prices for options exercised during the three
year period ended March 31, 1997 ranged from $0.75 to $11.05.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan for all eligible employees
(the "Purchase Plan"). Under the Purchase Plan, shares of the Company's
common stock may be purchased at six-month intervals at 85% of the lower of
the fair market value on the first or last day of each six-month period
(the "Offering Period"). Employees may purchase shares having a value not
exceeding 10% of their gross compensation during an Offering Period.
During the Purchase Plan's first Offering Period ended March 31, 1997,
employees purchased 19,000 shares at a price of $9.56 per share. As of
March 31, 1997, 181,000 shares were reserved for future issuance under the
Purchase Plan.
EMPLOYEE RETIREMENT PLAN
The Company has a retirement plan covering substantially all of its
eligible employees. The retirement plan is qualified in accordance with
Section 401(k) of the Internal Revenue Code. Under the plan, employees may
defer up to 15% of their pre-tax salary, but not more than statutory
limits. The Company contributes 5% of each dollar a participant
contributes. The Company's matching contributions to the plan were $25,000
and $10,000 during the years ended March 31, 1997 and March 31, 1996; the
Company made no matching contributions in the year ended March 31, 1995.
DIRECTOR WARRANT PLAN
The Director Warrant Plan provides for the automatic granting of warrants
("Director Warrants") to purchase 16,667 shares of the Common Stock to each
director of the Company who is not an officer or employee of the Company or
any of its subsidiaries. The total number of shares of Common Stock
available for distribution under the Director Warrant Plan was 100,000.
Director Warrants granted under the Director Warrant Plan vest 25% on the
first anniversary of the date of grant, and 12.5% each six months
thereafter. The Director Warrant Plan expired on December 19, 1996. The
expiration had no effect on the outstanding Warrants.
Director Warrant activity was as follows (amounts in thousands, except
weighted average exercise price amounts):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------- ---------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
-------- --------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 73 $4.43 50 $ 0.75 67 $ 0.94
Granted - - 60 7.50 - -
Exercised - - (17) 0.75 (8) 1.50
Forfeited - - (20) 7.50 (9) 1.50
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Expired - - - - - -
------ ------ ------ -------- ------ --------
Outstanding at end of year 73 $4.43 73 $ 4.43 50 $ 0.75
------ ------ ------ -------- ------ --------
------ ------ ------ -------- ------ --------
Exercisable at end of year 73 $4.43 39 $ 2.47 38 $ 0.75
</TABLE>
During the fiscal year ended March 31, 1997, 40,000 Director Warrants were
granted to new directors outside of the Director Warrant Plan with an
average exercise price of $12.85 and vesting consistent with other
outstanding Director Warrants.
The range of exercise prices for director warrants outstanding as of March
31, 1997 was $0.75 to $8.50. The range of exercise prices for options is
wide due to increases in the Company's stock price over the period of the
grants. As of March 31, 1997, 33,000 of the outstanding and vested
director warrants have a weighted average remaining contractual life of 4.8
years and a weighted average exercise price of $0.75, 20,000 of the
outstanding and vested director warrants have a weighted average remaining
contractual life of 7.8 years and a weighted average exercise price of
$6.50 and 20,000 of the outstanding and vested director warrants have a
weighted average remaining contractual life of 7.8 years and a weighted
average exercise price of $8.50.
PRO FORMA INFORMATION
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employee stock options. Under
APB No. 25, if the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its employee stock options (including
shares issued under the Purchase Plan and Director Warrant Plan
collectively called "options") granted during fiscal 1996 and 1997 under
the fair value method of that statement. The fair value of options granted
in the years ended March 31, 1997 and 1996 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
Stock Option Plan Purchase Plan Director Warrant Plan
------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years) 2.2 3.7 0.5 - - 2.0
Risk free interest rate 6.45% 6.45% 6.45% - - 6.45%
Volatility .60 .60 .60 - - .60
Dividend yield - - - - - -
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of trade options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair value of
its options. The weighted average estimated fair value of Stock Option
Plan shares granted during the years ended March 31, 1997 and 1996 was
$4.04 and $3.74 per share, respectively. The weighted average estimated
fair value of Employee Purchase Plan shares granted during the year ended
March 31, 1997 was $2.89. The weighted average estimated fair value of
Director Warrants granted during the year ended March 31, 1997 was $2.27.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (amounts in thousands except for
earnings per share information):
Year ended March 31,
------------------------------
1997 1996
------------ -------------
Pro forma net income $ 3,828 $ 2,302
Pro forma earnings per share $ .26 $ .15
F-15
<PAGE>
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of
future years. Because SFAS No. 123 is applicable only to options granted
during fiscal 1996 and 1997, the pro forma effect will not be fully
reflected until the fiscal year ended March 31, 2000.
10. RELATED PARTY TRANSACTIONS
PROMISSORY NOTES RECEIVABLE
As of March 31, 1997, accounts receivable includes $177,000 in promissory
notes receivable from Robert A. Kotick, a director, officer and shareholder
of the Company. The promissory notes are dated December 28, 1994 and April
28, 1995, have maturity dates, as amended, of December 31, 1997 and bear
interest at 9.0% per annum.
MERGER WITH INTERNATIONAL CONSUMER TECHNOLOGIES CORPORATION (ICT)
Effective January 1, 1995, ICT was merged with and into a wholly owned
subsidiary of the Company, with ICT as the surviving corporation. ICT's
sole asset at the time of the merger was 5,429,600 shares of the Company's
Common Stock. As a result of the merger, the shares of the Company's Common
Stock previously held by ICT were distributed to the shareholders of ICT in
exchange for their shares of ICT common stock. No other assets or
liabilities were acquired or assumed by the Company as a result of the
merger.
11. QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------ Year
(Dollars in thousands, except per share data) June 30 Sept 30 Dec 31 Mar 31 Ended
------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C>
Fiscal 1997:
Net revenues $ 7,021 $ 19,175 $ 31,361 $ 28,926 $ 86,483
Operating income (loss) (4,226) 1,769 6,210 6,054 9,807
Net income (loss) (2,631) 1,336 4,120 4,282 7,107
Net income (loss) per common share (0.19) 0.09 0.28 0.29 0.49
Common stock price per share
High $ 15.00 $ 14.38 $ 14.00 $ 16.25 $ 16.25
Low 11.63 9.50 10.56 10.00 9.50
Fiscal 1996:
Net revenues $ 3,319 $ 18,848 $ 17,578 $ 21,648 61,393
Operating income (loss) (6,014) 2,366 1,573 4,607 2,532
Net income (loss) (5,528) 2,765 1,948 6,345 5,530
Net income (loss) per common share (0.39) 0.18 0.13 0.43 0.37
Common stock price per share
High $ 7.125 $ 19.75 $ 18.50 $ 15.125 $ 19.75
Low 5.75 6.75 8.125 8.625 5.75
</TABLE>
F-16
<PAGE>
SCHEDULE II
ACTIVISION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Balance at Balance at
Beginning Deductions End of
Description of Period Additions (Describe) Period
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1997:
Allowance for sales returns, price
protection and doubtful $ 7,005 $ 13,249 $13,768 (A) $ 6,468
accounts
Inventory valuation $ 145 $ 142 $ 152 (B) $ 135
Deferred tax valuation allowance $14,305 $ 436 $ 6,634 $ 8,107
Year ended March 31, 1996:
Allowance for sales returns, price
protection and doubtful $ 4,469 $ 12,402 $ 9,866 $ 7,005
accounts
Inventory valuation $ 357 $ 532 $ 744 (B) $ 145
Deferred tax valuation allowance $16,500 $ (695) $ 1,500 $14,305
Year ended March 31, 1995:
Allowance for sales returns, price
protection and doubtful $ 3,266 $ 3,795 $ 3,592 (A) $ 4,469
accounts
Inventory valuation $ 493 $ 134 $ 270 (B) $ 357
Deferred tax valuation allowance $15,531 $ 969 $ - $16,500
</TABLE>
(A) Actual write-offs of uncollectible accounts receivable or sales returns and
price protection.
(B) Actual write-offs of obsolete inventory, scrap and reduction in carrying
value of certain portions of inventory.
F-17
<PAGE>
EXHIBIT INDEX
Exhibit Sequential Page
Number Exhibit Number
------ ------- ------
2.1 Plan of Reorganization of the Company, as
confirmed by the United States Bankruptcy
Court for the Northern District of California
on November 25, 1991 (incorporated by reference
to Exhibit 28.2 of the Company's Current Report
on Form 8-K dated October 4, 1991).
2.2 Plan and Agreement of Merger, dated
March 30, 1992, among the Company, Disc Company,
Inc. and International Consumer Technologies
Corporation (incorporated by reference to
Exhibit 28.1 of the Company's Current Report on
Form 8-K dated March 31, 1992).
2.3 Agreement and Plan of Merger between Activision,
Inc., a California corporation, and Activision,
Inc., a Delaware corporation, as filed with the
Secretary of State of the State of Delaware
(incorporated by reference to Exhibit 4.7 of
Amendment No. 1 to the Company's Form S-8, Registration
No. 33-48411 filed on June 1, 1993).
2.4 Plan and Agreement of Merger, dated October 28, 1994,
among the Company, ACTV Acquisition, Inc. and
International Consumer Technologies Corporation
(incorporated by reference to Exhibit 2.4 of the
Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1994).
3.1 Amended and Restated Articles of Incorporation of
Activision, Inc., dated October 15, 1992 (incorporated
by reference to Exhibit 4.5 of Amendment No. 1 to
the Company's Form S-8, Registration No. 33-48411
filed on June 1, 1993).
3.2 Bylaws of Activision, Inc. (incorporated by
reference to Exhibit 4.6 of Amendment No. 1 to
the Company's Form S-8, Registration No. 33-48411
filed on June 1, 1993).
10.7 Mediagenic 1991 Stock Option and Stock Award Plan,
as amended (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement
on Form S-8, Registration No. 33-63638, filed on
December 8, 1995).
10.8 Mediagenic 1991 Director Warrant Plan as amended
(incorporated by reference to Exhibit 28.2 to
the Company's Registration Statement on Form S-8,
Registration No. 33-63638, filed on June 1, 1993).
10.9 Purchase Agreement, dated as of January 24, 1994,
among the Company and each purchaser who is a
signatory thereto (incorporated by reference to
Exhibit 28.1 of the Company's Form 8-K filed
February 9, 1994).
10.10 Registration Rights Agreement, dated as of
January 31, 1994, among the Company and each
purchaser who is a signatory thereto (incorporated
by reference to Exhibit 28.2 of the Company's
Form 8-K filed February 9, 1994).
10.11 Share Exchange and Recapitalization Agreement, dated
as of January 14, 1994, among the Company,
International Consumer Technologies Corporation,
Steven Wynn, J.F. Shea Co., Inc. as Nominee 1993-6
and ESL Partners, L.P. (incorporated by reference
to Exhibit 28.3 of the Company's Form 8-K filed
February 9, 1994).
10.12 Registration Rights Agreement, dated as of
January 31, 1994, among the Company, International
Consumer Technologies Corporation, Steven Wynn,
J.F. Shea Co., Inc. as Nominee 1993-6 and ESL
Partners, L.P. (incorporated by reference to
Exhibit 28.4 of the Company's Form 8-K filed
February 9, 1994).
<PAGE>
Exhibit Sequential Page
Number Exhibit Number
------ ------- ------
10.14 Lease Agreement dated as of December 20, 1996,
between the Company and Barclay Curci Investment
Company (incorporated by reference to
Exhibit 10.14 of the Company's Form 10-Q for
the quarter ended December 31, 1996).
11. Statement regarding computation of per share earnings. 46
16. Letter from Coopers & Lybrand, LLP pursuant to
Item 304 (a) (3) of Regulation S-K (incorporated by
reference to Exhibit 16 of the Company's Form 8-K
filed January 17, 1997.)
21. Principal subsidiaries of the Company. 47
23.1 Consent of Independent Accountants. 48
23.2 Consent of Independent Accountants. 49
27. Financial Data Schedule.
<PAGE>
EXHIBIT 11
ACTIVISION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended Year ended Year ended
March 31, 1997 March 31, 1996 March 31, 1995
-------------- -------------- --------------
<S> <C> <C> <C>
PRIMARY SHARES CALCULATION
Reconciliation of weighted average number of
shares outstanding to amount used in primary
earnings per share computation:
Weighted average shares outstanding 13,930 14,011 13,944
Add-shares issuable from assumed exercise of
options and warrants 689 939 -
-------- -------- --------
Weighted average number of shares outstanding
as adjusted 14,619 14,950 13,944
-------- -------- --------
-------- -------- --------
FULLY DILUTED SHARES CALCULATION
Reconciliation of weighted average number of
shares outstanding to amount used in fully
diluted earnings per share computation:
Weighted average shares outstanding 13,930 14,011 13,944
Add-shares issuable from assumed exercise
of options and warrants 689 939 -
-------- -------- --------
Weighted average number of shares
outstanding as adjusted 14,619 14,950 13,944
-------- -------- --------
-------- -------- --------
NET INCOME (LOSS) $ 7,107 $ 5,530 $ (1,520)
-------- -------- --------
-------- -------- --------
PRIMARY EARNINGS PER SHARE $ 0.49 $ 0.37 $ (0.11)
-------- -------- --------
-------- -------- --------
FULLY DILUTED EARNINGS PER SHARE (1) $ 0.49 $ 0.37 $ (0.11)
-------- -------- --------
-------- -------- --------
</TABLE>
(1) Net income (loss) per common share presented on the face of the income
statement represents primary earnings per share. Dual presentation of primary
and fully diluted earnings per share has not been made on the face of the
income statement because there are no differences. This exhibit is presented
because the common stock equivalents represent more than 3% of weighted average
common shares outstanding.
<PAGE>
EXHIBIT 21
PRINCIPAL SUBSIDIARIES OF THE REGISTRANT
State or Other Jurisdiction
of Incorporation or
Name of subsidiary Organization
- - --------------------------------- --------------------------------------
Activision Japan Co., Ltd. Japan
Activision (U.K.) Ltd. United Kingdom
Activision Europe SARL France
Activision Australia Pty Ltd. Australia
TDC Group, Inc. Delaware
Activision Productions, Inc. Delaware
Activision Texas, Inc. Delaware
Activision Illinois, Inc. Delaware
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration
statement (Nos. 33-48411, 33-63638, 33-91074, 333-06130, 333-12621 and
333-06054) on Form S-8 and (Nos. 33-68144 and 33-75878) on Form S-3 of
Activision, Inc. of our report dated May 18, 1997, relating to the
consolidated balance sheet of ACTIVISION, INC. and Subsidiaries as of
March 31, 1997 and the related consolidated statement of operations,
changes in shareholders equity, and cash flows for the year then
ended, and the related financial statement schedule for the year ended
March 31, 1997, which report appears in the March 31, 1997 annual
report on Form 10-K of ACTIVISION, INC.
KPMG Peat Marwick, LLP
Los Angeles, California
June 13, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Activision, Inc. on Forms S-8 (File Nos. 33-48411, 33-
63638, 33-91074, 333-06130, 333-12621 and 333-06054) and Forms S-3
(File Nos. 33-68144 and 33-75878) of our report dated May 15, 1996
except for Note 9, as to which the date is June 10, 1997, on our
audits of the consolidated financial statements and financial
statement schedules of Activision, Inc. and Subsidiaries as of March
31, 1996 and for the years ended March 31, 1996 and 1995, which report
is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND, LLP
Los Angeles, California
June 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 17,639
<SECURITIES> 0
<RECEIVABLES> 42,835
<ALLOWANCES> 6,468
<INVENTORY> 4,520
<CURRENT-ASSETS> 67,800
<PP&E> 9,824
<DEPRECIATION> 4,734
<TOTAL-ASSETS> 95,670
<CURRENT-LIABILITIES> 14,862
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 80,808
<TOTAL-LIABILITY-AND-EQUITY> 95,670
<SALES> 86,483
<TOTAL-REVENUES> 86,483
<CGS> 29,822
<TOTAL-COSTS> 29,822
<OTHER-EXPENSES> 46,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (924)
<INCOME-PRETAX> 10,731
<INCOME-TAX> 3,624
<INCOME-CONTINUING> 7,107
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,107
<EPS-PRIMARY> .49
<EPS-DILUTED> .49
</TABLE>
