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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 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 12, 1998 was $178,766,095.
The number of shares of the registrant's Common Stock outstanding as of June
12, 1998 was 19,016,775.
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 1998 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Annual Report.
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INDEX
Page No.
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PART I.
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 . . . . . . . . . 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 17
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 8. Consolidated Financial Statements and Supplementary
Data . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . 24
PART III.
Item 10. Directors and Executive Officers of the Registrant . . 25
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . 25
Item 13. Certain Relationships and Related Transactions . . . . 25
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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PART I
Item 1. BUSINESS
(a) GENERAL
Activision, Inc. (together with its subsidiaries, the "Company")
is a leading international publisher, developer and distributor of
interactive entertainment software. The Company was incorporated in
California in 1979. In December 1992, the Company reincorporated in
Delaware.
The Company currently focuses its development, publishing and
distribution efforts on products designed for personal computers
("PCs"), the Sony PlayStation console system and the Nintendo 64
console system. In selecting titles for acquisition or development,
the Company currently pursues a combination of internally and
externally developed titles, products based on proven technology and
those based on newer technology, and PC and console products.
Financial information as of and for the year ended March 31, 1997
and for the six month period ended September 30, 1997, have been
restated to reflect the acquisition of Combined Distribution
(Holdings) Limited, ("CentreSoft") accounted for as a pooling of
interests. See Note 2: "Acquisitions," in Notes to Consolidated
Financial Statements.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one industry: publishing and distributing
CD-based and cartridge based 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
FACTORS AFFECTING FUTURE PERFORMANCE
In connection with the Private Securities Litigation Reform Act
of 1995 (the "Litigation Reform Act"), the Company is hereby
disclosing certain cautionary information to be used in connection
with written materials (including this 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 varied significantly in the past and will likely vary
significantly in the future 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. Many of the costs incurred by
the Company to produce and sell its products are expensed as such
costs are incurred, which is often long before a product is released.
In addition, a large portion of the Company's expenses are fixed. As
the Company increases its production and sales activities, current
expenses will increase and, if sales from previously released products
are below expectations, net income is likely to be disproportionately
affected. See Note 1 of Notes to Consolidated Financial Statements
included in Item 8.
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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 and net income 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 $57.6 million for the quarter
ended March 31, 1997, $26.5 million for the quarter ended June 30,
1997, $53.0 million for the quarter ended September 30, 1997, $122.1
million for the quarter ended December 31, 1997 and $58.2 million for
the quarter ended March 31, 1998. The Company's net income (loss) for
the last five quarters were $5.1 million for the quarter ended March
31, 1997, $(5.4) million for the quarter ended June 30, 1997, $1.8
million for the quarter ended September 30, 1997, $9.3 million for the
quarter ended December 31, 1997 and $126,000 for the quarter ended
March 31, 1998. 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 in part 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.
RELIANCE ON THIRD PARTY DEVELOPERS AND INDEPENDENT CONTRACTORS.
The percentage of products published by the Company that are developed
by independent third party developers has increased over the last
several fiscal years. From time to time, the Company also utilizes
independent contractors for certain aspects of product development and
production. The Company has less control over the scheduling and the
quality of work by independent contractors and third party developers
than that of its own employees. A delay in the work performed by
independent contractors and third party developers or poor quality of
such work may result in product delays. Although the Company intends
to continue to rely in part on products that are developed primarily
by its own employees, the Company's ability to grow its business and
its future operating results will depend, in significant 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.
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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
relatively small number of high quality entertainment software
products released each year, and many of these products have
substantial production or acquisition costs and marketing budgets.
During fiscal 1997, two titles accounted for approximately 23% and
16%, respectively, of the Company's consolidated net revenues. During
fiscal 1998, one other title accounted for approximately 12% of the
Company's consolidated net revenues. The Company anticipates that a
limited number of products will continue to produce a disproportionate
amount of revenues. Due to this dependence on a limited number of
products, the failure of one or more of the Company's principal new
releases to achieve anticipated results may have a material adverse
effect on the Company's business, operating results and financial
results.
The Company's strategy also includes as a key component
developing and releasing products that have franchise value, such that
sequels, enhancements and add-on products can be released over time,
thereby extending the life of the property in the market. While the
focus on franchise properties, if successful, results in extending
product life cycles, it also results in the Company depending on a
limited number of titles for its revenues. There can be no assurance
that the Company's existing franchise titles can continue to be
exploited as successfully as in the past. In addition, new products
that the Company believes will have potential value as franchise
properties may not achieve market acceptance and therefore may not be
a basis for future releases.
INDUSTRY COMPETITION; COMPETITION FOR SHELF SPACE. The
interactive entertainment software industry is intensely competitive.
Competition in the industry is principally based on product quality
and features, the compatibility of products with popular platforms,
company or product line brand name recognition, access to distribution
channels, marketing effectiveness, reliability and ease of use, price
and technical support. Significant financial resources also have
become a competitive factor in the entertainment software industry,
principally due to the substantial cost of product development and
marketing that is 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, LucasArts,
Microsoft, Sega, Nintendo, Sony, GT Interactive, Broderbund,
Interplay, Virgin, Cendant and Eidos, 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.
DEPENDENCE ON DISTRIBUTORS AND RETAILERS; 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.
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 retailer or other
wholesale purchaser 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, insolvency, or liquidation that may occur to its
customers, such insurance contains a significant deductible as well as
a co-payment obligation, and the
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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
retailers and other wholesale purchasers. 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.
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
98, 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.
Like many other software companies, the year 2000 computer issue
creates risk for the Company. If internal systems do not correctly
recognize date information when the year changes to 2000, there could
be an adverse impact on the Company's operations. The Company has
initiated a comprehensive plan to prepare its computer systems for the
year 2000 and is currently implementing changes to alleviate any year
2000 incapability. The Company is also contacting critical suppliers
of product and service to determine that the supplier's operations and
the products and services they provide are year 2000 capable. There
can be no assurance that another company's failure to ensure year 2000
capability would not have an adverse effect on the Company.
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 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 enters into term employment
agreements with many of its skilled employees and certain other key
personnel, there can be no assurance that such
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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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS: CURRENCY
FLUCTUATIONS. International sales and licensing accounted for 23%,
58% and 67% of the Company's total revenues in the fiscal years 1996,
1997 and 1998, respectively. The Company intends to continue to
expand its direct and indirect sales, marketing and localization
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 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.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company intends to
integrate the operations of its recently acquired CentreSoft and NBG
EDV Handels und Verlags GmbH ("NBG") subsidiaries with its previously
existing European operations. This process, as well as the process of
managing two significant new international operations, will require
substantial management time and effort and could divert the attention
of management from other matters. In addition, there is a risk of loss
of key employees, customers and vendors of the recently acquired
operations as well as existing operations as this process is
implemented. There is no assurance that the Company will be
successful in integrating these operations or that, if the operations
are combined, that there will not be adverse effects on its business.
Consistent with its strategy to enhance distribution and product
development capabilities, the Company intends to continue to pursue
acquisitions of companies and intellectual property rights and other
assets that can be purchased or licensed on acceptable terms and which
the Company believes can be operated or exploited profitably. Some of
these transactions could be material in size and scope. While the
Company will continually be searching for appropriate acquisition
opportunities, there can be no assurance that the Company will be
successful in identifying suitable acquisitions. If any potential
acquisition opportunities are identified, there can be no assurance
that the Company will consummate such acquisitions or if any such
acquisition does occur, that it will be successful in enhancing the
Company's business or be accretive to the Company's earnings. As the
entertainment software business continues to consolidate, the Company
faces significant competition in seeking acquisitions and may in the
future face increased competition for acquisition opportunities, which
may inhibit its ability to complete suitable transactions. Future
acquisitions could also divert substantial management time, could
result in short term reductions in earnings or special transaction or
other charges and may be difficult to integrate with existing
operations or assets.
The Company may, in the future, issue additional shares of Common
Stock in connection with one or more acquisitions, which may dilute
its shareholders. Additionally, with respect to most of its future
acquisitions, the Company's shareholders may not have an opportunity
to review the financial statements of the entity being acquired or to
evaluate the benefits of the intellectual property rights being
purchased or licensed, or to vote on such acquisitions.
RISK OF CENTRESOFT VENDOR DEFECTIONS; VENDOR CONCENTRATION. The
Company's recently acquired CentreSoft subsidiary performs software
distribution services in the United Kingdom and, via export, in other
European territories for a variety of entertainment software
publishers, many of which are competitors of the Company. These
services are generally performed under limited term contracts, some of
which
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provide for cancellation in the event of a change of control. While
the Company expects to use reasonable efforts to retain these vendors,
there can be no assurance that the Company will be successful in this
regard. The cancellation or non-renewal of one or more of these
contracts could have a material adverse effect on the Company's
business, operating results and financial condition. Three of
CentreSoft's vendors accounted for 38%, 12% and 11%, respectively, of
CentreSoft's net revenues in fiscal year 1998. The net revenues from
these vendors represents 18%, 6% and 5%, respectively, of consolidated
net revenues of the Company.
STRATEGY
The Company's objective is to be a worldwide leader in the
publishing and development of exceptional and innovative interactive
entertainment software that appeals to existing and new audiences and
incorporates sophisticated graphics, sound and video, and compelling
story lines and game experiences. The Company's strategy includes the
following elements:
PUBLISH HIGH QUALITY TITLES. The Company seeks to differentiate
its titles through the highest quality production values and superior
game play, supported by comprehensive trade and consumer marketing
programs coordinated with product releases. Accordingly, the Company
must support the development, production, acquisition and marketing of
its titles with the resources necessary to create best selling
products. In order to reduce the financial risks associated with the
higher development and marketing budgets required to support this
strategy, the Company pursues a combination of internally and
externally developed titles; between products based on proven
technology and newer technology; and between PC and console products.
FOCUS ON FRANCHISE PROPERTIES. The Company focuses its
publishing and developing activities principally on titles that are,
or have the potential to become, franchise properties with sustainable
consumer appeal and brand recognition. These titles can thereby serve
as the basis for sequels, prequels, mission packs and other add-ons
and related new titles that can be released over an extended period of
time. The Company believes that the publishing and distribution of
products based in large part on franchise properties will enhance
revenue predictability. The Company currently is publishing products
based on several franchise properties, including QUAKE, HEXEN, ZORK,
PITFALL and SHANGHAI. The Company also has rights to several other
properties that it believes will have franchise value, including HEAVY
GEAR, DARK REIGN, BATTLEZONE, HERETIC, NIGHTMARE CREATURES, ASTEROIDS
and JACK NICKLAUS GOLF.
EXPAND DIRECT DISTRIBUTION CAPABILITIES. In North America, the
Company's products are sold primarily on a direct basis to major
computer and software retailing organizations, consumer electronic
stores and discount warehouses. In international territories, the
Company's products are sold both direct to retail and through third
party distribution and licensing arrangements. In order to maximize
the revenues to be generated by each of its products, the Company is
expanding its worldwide direct distribution capabilities. The Company
believes that a dedicated internal sales force and direct distribution
to retailers provide significant competitive advantages, including the
ability to compete more effectively for shelf space, to create
additional point-of-sale promotional opportunities, to more properly
manage inventory levels, and to increase margins by eliminating third
party distributors. Consistent with this strategy, the Company has
concluded several acquisitions in recent months in an effort to
bolster its direct distribution capabilities in international markets.
CONTINUE TO GROW ORIGINAL EQUIPMENT MANUFACTURERS ("OEM")
REVENUES. The Company also generates significant revenue throughout
the world as a result of arrangements with OEMs, in which the
Company's titles are sold together with hardware or peripheral devices
manufactured by the OEM. The Company believes that OEM bundle
arrangements expand the distribution of its titles to a broader and
more diverse audience, and it intends to continue aggressively
pursuing these arrangements.
ENHANCE PRODUCT FLOW. In order to expand the Company's library
of titles, intellectual property rights and talent base, the Company
is actively engaged in the exploration of acquisition opportunities in
the software development business. Consistent with this strategy, in
August 1997 the Company acquired Raven Software Corporation ("Raven"),
an entertainment software developer based in Madison, Wisconsin, that
has created numerous best selling titles, including HERETIC, HEXEN:
BEYOND HERETIC and HEXEN II. In addition, in order to create a closer
relationship with independent developers, the Company from time to
time makes investments and acquires minority equity interests in
independent developers at the same time as it acquires publishing
rights to the developers' products.
PRODUCTS
The Company currently is best known for its action, adventure
and action/simulation products, although the Company recently has
expanded the line of products it distributes into new categories such
as role playing, strategy, flight simulation and racing. The Company
expects to continue such expansion efforts into new product
categories.
8
<PAGE>
Several of the Company's current and upcoming releases are based
on characters, worlds and concepts derived from the Company's
extensive library of titles. For example, the Company is now or will
soon be publishing new titles that are based on original best selling
titles such as PITFALL!, SHANGHAI, HERETIC and HEXEN. Other new
Company titles are based on original characters and concepts owned and
created by the Company. In addition to developing its own characters
and concepts, the Company selectively licenses intellectual property
or other character or story rights from third parties for the purpose
of publishing titles based on such rights. For example, the Company
recently obtained a long term license to be the exclusive 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 a license. The Company also recently
obtained long-term rights to publish interactive entertainment
software products based on the ASTEROIDS and BATTLEZONE video games.
In addition, the Company has obtained licenses to properties that
previously have been marketed and sold in other entertainment media
such as magazines, comic books and card or board games. These
properties include X-Men, Soldier of Fortune, Legend of the Five Rings
and Vampire. In publishing 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.
In addition to its own internally developed products, the Company
publishes and distributes software products for other independent
developers and publishers such as id Software, Ritual Entertainment,
Parsoft Interactive, Kalisto Entertainment and Nihilistic Software.
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. Such products typically 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 worldwide sales and marketing and add a
new source of products while balancing the risks inherent in internal
product development and production. This activity also allows the
Company to enter new product genres more quickly and provide consumers
with a wider variety of products.
PRODUCT DEVELOPMENT AND ACQUISITION
The Company uses both internal and external resources to develop
products. The Company also acquires rights to products through
publishing and distribution arrangements and the acquisition of other
software companies.
ACTIVISION STUDIOS
Activision Studios, the Company's development and production
group is located at the Company's headquarters in Santa Monica,
California. Activision Studios' creative development and production
staff selects and develops new products, adapts existing products for
additional hardware platforms and peripheral devices, and manages the
external development of certain products or their components by
independent contractors.
Activision Studios develops and produces titles using a model in
which a core group of creative, production and technical professionals
on staff at the Company, in cooperation with the Company's marketing
and finance departments, have overall responsibility for the entire
development and production process and for the supervision and
coordination of internal and external resources. Each project team is
led by a game producer and game director and includes one or more
associate producers, game designers, production coordinators and a
quality assurance manager, all of whom are on the Company's staff.
This team assembles the necessary creative elements to complete a
title, using where appropriate outside programmers, 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 procedure for
the selection, development, production and quality assurance of its
internally produced entertainment software titles. The process
involves one or more pre-development, development and production
phases, each of which includes a number of specific 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.
9
<PAGE>
ACTIVISION EXTERNAL STUDIOS
The Company's External Studios division licenses or acquires
certain software products from independent developers for publishing
or distribution by the Company. Through its acquisition of Raven, the
division also develops and produces products that are owned directly
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 the Company with exclusive publishing
and distribution rights for a specific period of time for specified
platforms and territories. These agreements often grant to the
Company the right to publish sequels, enhancements and add-ons to the
product originally being developed and produced by the developer. In
consideration for its services, the developer receives a royalty based
on sales of the product that it has developed. Typically, the
developer also receives a nonrefundable advance which is recoupable by
the Company from the royalties otherwise required to be paid to the
developer. The royalty generally is paid in stages, with the payment
of each stage tied to the completion of a detailed performance
milestone.
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 External Studios division
generally will assign a game producer to each title who will serve as
the principal liaison to the independent developer and help insure
that performance milestones are timely met. The Company generally has
the right to cease making payments to an independent developer if such
developer fails to complete its performance milestones in a timely
fashion.
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 this
regard, the Company recently acquired a minority equity interest in
each of Redline Games and Pandemic Studios in connection with several
new entertainment software products to be developed by each of such
developers for the Company. There can be no assurance that the
Company will realize long term benefits from either of these
investments or that it will continue to carry such investments at its
current value.
PRODUCT SUPPORT
The Company provides various forms of product support to both its
internally and externally developed titles. The Company's quality
assurance personnel are involved throughout the development and
production processes for each title published by the Company. All
such products are subjected to extensive testing before release in
order to insure compatibility with the widest possible array of
hardware configurations and to minimize the number of bugs and other
defects found in the products. To support its products after release,
the Company provides on-line support to its customers on a 24-hour
basis as well as operator help lines during regular business hours.
The customer support group tracks customer inquiries and this data is
used to help improve the development and production processes.
PUBLISHING AND DISTRIBUTION 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 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 believes that certain of its franchise properties
(such as the PITFALL! and SHANGHAI 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.
10
<PAGE>
SALES AND DISTRIBUTION
DOMESTIC SALES AND DISTRIBUTION. The Company's products are
available for sale or rental in thousands of retail outlets
domestically 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, WalMart,
K-Mart, Target and Toys "R" Us. During fiscal 1998, no single
customer accounted for more than 10% of consolidated net revenues. In
North America, the Company's products are sold primarily on a direct
basis to major computer and software retailing organizations, consumer
electronic stores and discount warehouses and mail order companies.
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 many of its 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 its
international publishing activities through offices in England,
Germany, France, Australia and Japan, as well as through a Latin
American sales office located in Miami, Florida. The Company seeks to
maximize its worldwide revenues and profits by releasing high quality
foreign language localizations concurrently with the English language
releases, whenever practicable, and by continuing to expand the number
of direct selling relationships it maintains with key retailers in
major territories.
In June 1997, the Company acquired Take Us! Marketing &
Consulting GmbH, a German company specializing in the localization and
marketing of entertainment software products in German-speaking
territories. In November 1997, the Company acquired NBG, an
independent publisher, wholesaler and distributor of entertainment
software in Germany.
Also in November 1997, the Company acquired CentreSoft, a leading
independent distributor of entertainment software in the United
Kingdom, and Sony's exclusive distributor of Playstation products to
the independent retail channel in that country. The company employs
approximately 150 people, including one of the largest entertainment
software sales and marketing organizations in the United Kingdom.
The assets and personnel of CentreSoft and NBG are currently
being combined to form the core of Activision's international
distribution operations and a base for further expansion into European
territories. The Company will emphasize the expansion of CentreSoft's
and NBG's outstanding channel relations, and it intends to leverage
its management expertise into other territories.
OEM SALES AND DISTRIBUTION. The Company seeks to enhance the
distribution of its products through licensing arrangements with
original equipment manufacturers ("OEMs"). 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 with little 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 and Toshiba.
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. The
Company seeks opportunities for the exploitation of these ancillary
rights directly and through third party agents. Potential
opportunities include the publication of strategy guides for selected
titles, the adaptation of titles into comic books, novels, television
series 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 Heat 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,
11
<PAGE>
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 the Sony PlayStation and Nintendo 64. In order to
maintain general access to the console systems marketplace, the
Company has obtained licenses for the PlayStation, Nintendo 64,
Nintendo Game Boy and other console 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-CD products.
Accordingly, the Company's per unit manufacturing cost for PC-CD
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 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 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.
COMPETITION
The interactive entertainment industry is intensely competitive
and is in the process of substantial consolidation. The availability
of significant financial resources has become a major competitive
factor in the industry, primarily as a result of the increasing
development, acquisition, production and marketing budgets required to
publish quality titles. In addition, competitors with large 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. See "Risk Factors - Industry Competition;
Competition for Shelf Space."
The Company seeks to compete by publishing high quality titles
and by supporting these titles with substantial marketing efforts; by
focusing on properties with sustainable consumer appeal; by working to
strengthen its relationships with retailers and other resellers and
otherwise expanding its channels of distribution; and by pursuing
opportunities for strategic acquisitions. See " - Strategy."
EMPLOYEES
As of March 31, 1998, the Company had 667 employees, including
237 in Activision Studios, 65 in Activision External Studios, 58 in
North American publishing, 74 in corporate finance, operations and
administration, 33 in international publishing, and 200 employed in
European distribution activities.
As of March 31, 1998, 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, Activision External
Studios or the Company's sales or marketing divisions. Such
individuals perform services to the Company as executives, directors,
producers, associate producers, computer programmers, game designers,
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.
12
<PAGE>
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 8 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 June 1, 1998:
<TABLE>
<CAPTION>
Location of
Principal Facilities Square Feet Lease Expiration Date
-------------------------- ----------- -----------------------------
<S> <C> <C>
Santa Monica, California 98,000 April 30, 2007
Birmingham, United Kingdom 82,000 March 25, 2011 - June 1, 2012
Burglengenfeld, Germany 35,000 Owned
London, United Kingdom 10,625 July 23, 2005
Madison, Wisconsin 6,660 December 31, 2000
Sydney, Australia 3,400 Month-to-Month
Gutersloh, Germany 610 June 30, 1998
Tokyo, Japan 450 July 31, 1999
</TABLE>
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
----------- -----------
Fiscal 1997
- ----------------
<S> <S> <C> <C>
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 ended June 30, 1997 $14.75 $ 9.87
Second Quarter ended September 30, 1997 $15.25 $11.00
Third Quarter ended December 31, 1997 $18.63 $13.00
Fourth Quarter ended March 31, 1998 $17.87 $ 9.50
Fiscal 1999
- --------------
First Quarter through June 10, 1998 $11.62 $ 9.50
</TABLE>
On June 12, 1998, the reported last sales price for the Common Stock
was $10.13. As of March 31, 1998, 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's wholly owned subsidiary, CentreSoft, paid cash dividends
of $130,000 during fiscal 1997, and $1.3 million in dividends during 1998.
All of these dividends were paid by CentreSoft prior to its acquisition by
the Company. The Company does not intend to pay any further 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, 1998, the Company granted
warrants to purchase 300,000 shares of Common Stock to id Software in
connection with software license agreements. 150,000 of the warrants have
an exercise price of $10.38 per share, are immediately exercisable, and
expire on May 20, 2007. The remaining 150,000 warrants have an exercise
price of $10.50, are immediately exercisable, and expire March 31, 2008.
Neither the warrants, nor the shares of common stock for which they
are exercisable were registered under the Securities Act of 1933, as
amended (the "Securities Act"), by reason of Section 4(2) of the Securities
Act. The Company's subsequently registered such shares for resale by id
Software.
In November 1997, the Company issued a total of 3,068,249 shares of
Common Stock in connection with the acquisition of CentreSoft and NBG. The
shares were not registered under the Securities Act on issuance by reason
of the exemption under Section 4(2) of the Securities Act. The Company has
subsequently registered such shares under the Securities Act for resale by
the former shareholders of CentreSoft and NBG.
14
<PAGE>
In December 1997, the Company completed the private placement of $60.0
million principal amount of 6 3/4% Convertible Subordinated Notes due 2005
(the "Notes"). The Notes are convertible, in whole or in part, at an
option of the holder at any time after December 22, 1997 (the date of
original issuance) and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed or
repurchased, into common stock, $.000001 par value, of the Company, at a
conversion price of $18.875 per share, (equivalent to a conversion rate of
52.9801 shares per $1,000 principal amount of Notes), subject to adjustment
in certain circumstances. The Notes are redeemable, in whole or in part,
at the option of the Company at any time on or after January 10, 2001,
subject to premiums through December 31, 2003. Issuance costs totaled
$2.1 million.
15
<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, 1998 are derived from the audited consolidated financial statements of
the Company. The Consolidated Balance Sheets as of March 31, 1998 and 1997
and the Consolidated Statements of Operations and Statements of Cash Flows
for each of the fiscal years in the three-year period ended March 31, 1998,
and the report thereon, are included elsewhere in this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Fiscal Years ended March 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues $259,926 $154,644 $ 61,393 $ 40,669 $ 26,604
Cost of goods sold 163,123 87,121 21,749 21,293 15,311
Gross profit 96,803 67,523 39,644 19,376 11,293
Operating income (loss) 10,129 13,808 2,532 (2,957) (2,031)
Income (loss) before income taxes 9,435 14,041 4,239 (1,365) (1,853)
Net income (loss) 5,827 9,226 5,530 (1,520) (1,987)
Dividends paid and/or accumulated (116) (1,270) - - (3,296)
Basic net income (loss) per common share $ 0.31 $ 0.52 $ 0.36 $ (0.10) $ (0.78)
Diluted net income (loss) per common share $ 0.30 $ 0.50 $ 0.34 $ (0.10) $ (0.78)
Weighted average number of shares used in computing
basic net income (loss) per common share (1) (4) 18,439 17,362 15,332 15,265 6,753
Weighted average number of shares used in computing
diluted net income (loss) per common share (1) (4) 19,310 18,051 16,271 15,265 6,753
SELECTED OPERATING DATA:
EBITDA (2) $ 15,341 $ 17,926 $ 5,178 $ (1,015) $ (366)
CASH (USED IN) PROVIDED BY:
Operating activities $ (1,388) $ (4,824) $ (3,768) $ (1,220) $ (3,080)
Investing activities (9,234) (8,127) (3,045) 244 (2,375)
Financing activities 62,392 8,844 5,041 190 41,971
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents $ 73,378 $ 21,358 $ 25,288 $ 37,355 $ 38,093
Working capital 120,537 51,838 40,227 40,648 41,218
Intangible assets 23,473 23,749 19,580 20,863 22,146
Total assets 217,407 119,754 77,613 68,883 68,677
Long-term debt 60,000 - - - -
Redeemable and convertible preferred stock - 1,500 - - -
Shareholders' equity 100,293 81,980 62,999 62,704 63,985
</TABLE>
(1) The Company has presented basic and diluted net income (loss) per
share for all periods in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share."
(2) EBITDA represents income (loss) before interest, income taxes,
depreciation and amortization. The Company believes that EBITDA
provides useful information regarding the Company's ability to service
its debt; however, EBITDA does not represent cash flow from operations
as defined by generally accepted accounting principles and should not
be considered a substitute for net income, as an indicator of the
Company's operating performance or cash flow, as a measure of
liquidity.
(3) Selected Consolidated Financial Data as of and for the year ended
March 31, 1997 has been restated to reflect the acquisition of
CentreSoft. In addition, weighted average shares outstanding have
been restated for periods prior to April 1, 1996 to reflect shares
issued in pooling transactions. See Note 2 of Notes to Consolidated
Financial Statements.
(4) Reflects the Company's 1-for-3 reverse stock split effective October
20, 1993. Accordingly, previously reported net income (loss) per
common share has been retroactively restated.
16
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS FORWARD LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES DISCUSSED IN THIS CURRENT REPORT ON FORM
10-K UNDER "FACTORS AFFECTING FUTURE PERFORMANCE." ACTUAL EVENTS OR THE ACTUAL
FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY FROM ANY FORWARD LOOKING
STATEMENT DUE TO SUCH RISKS AND UNCERTAINTIES.
OVERVIEW
The Company is a leading international publisher, developer and distributor
of interactive entertainment software. The Company currently focuses its
publishing, development and distribution efforts on products designed for PCs as
well as the Sony PlayStation and the Nintendo 64 console systems. In selecting
titles for acquisition or development, the Company pursues a combination of
internally and externally developed titles, products based on proven technology
and those based on newer technology, and PC and console products.
Activision distributes its products worldwide through its direct sales
force and through third party distributors and licensees. In addition, in
November 1997 the Company acquired CentreSoft and NBG, significantly increasing
its worldwide distribution. Financial information as of and for the year ended
March 31, 1997 has been restated to reflect the CentreSoft acquisition as a
pooling of interests.
The Company recognizes revenue from the sale of its products upon
shipment. Subject to certain limitations, the Company permits customers to
obtain exchanges and return products within certain specified periods and
provides price protection on certain unsold merchandise. Revenue from
product sales is reflected after deducting the allowance for returns and
price protection. With respect to license agreements which provide customers
the right to multiple copies in exchange for guaranteed amounts, revenue is
recognized upon delivery of the product master or the first copy. Per copy
royalties on sales which exceed the guarantee are recognized as earned. The
AICPA's Statement of Position 97-2 ("SOP 97-2"), "Software Revenue
Recognition" provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. SOP 97-2 will be
effective for all transactions entered into subsequent to March 31, 1998.
The Company is currently in compliance with SOP 97-2 requirements.
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 worldwide and are
readily available. Console CDs and cartridges are manufactured by the
respective video game console manufacturers, Sony 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 and
amortization of capitalized software costs. Various contracts are maintained
with developers, product owners or other royalty participants which state a
royalty rate, territory and term of agreement, among other items. Upon a
product's release, prepaid royalties and license fees are charged to cost of
goods sold based on the contractual royalty rate.
Product development costs are accounted for in accordance with accounting
standards which provide for the capitalization of certain software development
costs once technological feasibility is established. The capitalized costs are
then amortized to cost of goods sold on a straight-line basis over the estimated
product life or on the ratio of current revenues to total projected revenues,
whichever amortization amount is greater.
For products that have been released, management evaluates the future
recoverability of prepaid royalties and capitalized software costs on a
quarterly basis. Prior to a product's release, the Company expenses, as part of
product development costs, capitalized costs when, in management's estimate,
such amounts are not recoverable. Management primarily uses the following
criteria in evaluating recoverability: historical performance of comparable
products; the commercial acceptance of prior products released on a given game
engine; estimated performance of a sequel product based on the performance of
the product on which the sequel is based; and actual development costs of a
product as compared to the Company's budgeted amount.
As a result of the acquisition of CentreSoft by CentreSoft's management in
June 1996 and the commencement of CentreSoft's operations at that time, results
of operations for the fiscal year ended March 31, 1997 versus the fiscal year
ended March 31, 1996 are not indicative of the comparative results for the
Company combined with CentreSoft for the two periods.
17
<PAGE>
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total net revenues
and also breaks down net revenues by territory, platform and channel:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $259,926 100.0% $154,644 100.0% $61,393 100.0%
Cost of goods sold 163,123 62.8% 87,121 56.3% 21,749 35.4%
---------- --------- ---------- --------- --------- ---------
Gross profit 96,803 37.2% 67,523 43.7% 39,644 64.6%
---------- --------- ---------- --------- --------- ---------
Operating expenses:
Product development 28,393 10.9% 18,195 11.8% 17,505 28.5%
Sales and marketing 43,738 16.8% 26,297 17.0% 13,920 22.7%
General and administrative 11,507 4.4% 7,718 5.0% 4,404 7.2%
Amortization of intangible assets 1,562 0.6% 1,505 1.0% 1,283 2.1%
Merger Expenses 1,474 0.6% - - - -
---------- --------- ---------- --------- --------- ---------
Total operating expenses 86,674 33.3% 53,715 34.8% 37,112 60.5%
---------- --------- ---------- --------- --------- ---------
Operating income 10,129 3.9% 13,808 8.9% 2,532 4.1%
Other income (expense):
Interest income (expense), net (694) (0.3%) 233 0.2% 1,707 2.8%
---------- --------- ---------- --------- --------- ---------
Income before income taxes 9,435 3.6% 14,041 9.1% 4,239 6.9%
Income tax provision (benefit) 3,608 1.4% 4,815 3.1% (1,291) (2.1)%
---------- --------- ---------- --------- --------- ---------
Net income $5,827 2.2% $9,226 6.0% $5,530 9.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
NET REVENUES BY TERRITORY:
North America $86,221 33.2% $64,184 41.5% $47,033 76.6%
Europe 160,400 61.7% 80,372 51.9% 6,501 10.6%
Japan 4,435 1.7% 4,504 2.9% 4,768 7.8%
Australia and Pacific Rim 6,581 2.5% 4,719 3.1% 2,948 4.8%
Latin America 2,289 0.9% 865 0.6% 143 0.2%
---------- --------- ---------- --------- --------- ---------
Total net revenues $259,926 100.0% $154,644 100.0% $61,393 100.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
NET REVENUES BY PLATFORM:
Console $103,718 39.9% $ 56,900 36.8% $ 5,161 8.4%
PC 156,208 60.1% 97,744 63.2% 56,232 91.6%
---------- --------- ---------- --------- --------- ---------
Total net revenues $259,926 100.0% $154,644 100.0% $61,393 100.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
NET REVENUES BY CHANNEL:
Retailer/Reseller $235,935 90.8% $133,595 86.4% $46,192 75.2%
OEM, Licensing, on-line and other 23,991 9.2% 21,049 13.6% 15,201 24.8%
---------- --------- ---------- --------- --------- ---------
Total net revenues $259,926 100.0% $154,644 100.0% $61,393 100.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
NET REVENUES BY ACTIVITY:
Publishing $129,111 49.7% $ 86,483 55.9% $ 61,393 100.0%
Distribution 130,815 50.3% 68,161 44.1% - 0.0%
---------- --------- ---------- --------- --------- ---------
Total net revenues $259,926 100.0% $154,644 100.0% $61,393 100.0%
---------- --------- ---------- --------- --------- ---------
---------- --------- ---------- --------- --------- ---------
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1997 AND 1998
NET REVENUES
Net revenues for the fiscal year ended March 31, 1998 increased 68.1% from
$154.6 million to $259.9 million from the same period last year. This increase
was attributable to a 34.3% increase in net revenues in North America from $64.2
million to $86.2 million, a 99.5% increase in net revenues in Europe from $80.4
million to $160.4 million, and a 40.4% increase in net revenues in the
Australia and Pacific Rim territory from $4.7 million to $6.6 million.
Console net revenues increased 82.2% over the prior year to $103.7 million
as a result of the initial release of PITFALL 3D (PlayStation), NIGHTMARE
CREATURES (PlayStation) and CAR & DRIVER'S GRAND TOUR RACING (PlayStation) as
well as an increase in console related distribution net revenues. PC net
revenues increased by 59.9% over the prior year to $156.2 million primarily as a
result of the initial release of QUAKE II (Windows 95), DARK REIGN: THE FUTURE
OF WAR (Windows 95), HEXEN II (Windows 95), BATTLEZONE (Windows 95) and HEAVY
GEAR (Windows 95). North America, Europe and Australia net revenues increased as
a result of the increase in PC and console revenues. Net OEM, licensing,
on-line and other revenues increased 14.3% over the prior year to $24.0 million.
The increase was due to an increase in the number of titles made available to
OEMS, including 3-D versions of various products.
Net revenues also increased over the prior fiscal year due to the fact that
CentreSoft, which began operations in June 1996, contributed only 10 months of
revenue for the year ended March 31, 1997, as opposed to twelve months for the
year ended March 31, 1998.
COST OF GOODS SOLD; GROSS PROFIT
Gross profit as a percentage of net revenues decreased to 37.2% for the
fiscal year ended March 31, 1998, from 43.7% for fiscal 1997. The decrease in
gross profit as a percentage of net revenues is due to the increase in net
revenues derived from distribution arrangements as opposed to publishing
arrangements, the increase in the sales mix of console net revenues versus PC
net revenues and the increase in the number of externally developed versus
internally developed 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, the
mix of revenues related to publishing arrangements versus distribution
arrangements during the applicable period, as well as the mix of internally
versus externally developed product releases during the applicable period,
the latter in each case resulting in lower gross profit margins.
OPERATING EXPENSES
Product development expenses for the year ended March 31, 1998 increased
56.0% from the same period last year from $18.2 million to $28.4 million. As
a percentage of net revenue, product development expenses decreased from
11.8% to 10.9%. The increase in product development expenses was due to the
increased number of new products in development and the increased costs
associated with the enhanced content and new technologies incorporated into
such products. In addition, product development expenses as a percentage of
net revenues decreased primarily as a result of an increase in net revenues
from distribution arrangements.
Sales and marketing expenses for the year ended March 31, 1998 increased
66.2% from the same period last year, from $26.3 million to $43.7 million. As a
percentage of net revenues, sales and marketing expenses decreased from 17.0% to
16.8%. The increase in sales and marketing expenses was 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 for the year ended March 31, 1998
increased 49.4% from the same period last year, from $7.7 million to $11.5
million. These expenses decreased as a percentage of net revenue from 5.0% to
4.4%. The increase in general and administrative expenses was primarily due to
an increase in worldwide administrative support needs and headcount related
expenses.
Merger expenses of $1.4 million were incurred during the year ended March
31, 1998 in connection with the Company's acquisitions. See Note 2 of Notes to
Consolidated Financial Statements.
OTHER INCOME (EXPENSE)
Net interest expense was $694,000 for the fiscal year ended March 31, 1998,
compared to net interest income of $233,000 for the same period last year. The
decrease was primarily as a result of lower average cash and cash equivalent
balances and the issuance of the convertible subordinated notes in December
1997. See "Liquidity and Capital Resources."
19
<PAGE>
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 38.2% for the fiscal year ended March
31, 1998 as compared to 34.3% for the fiscal year ended March 31, 1997. The
increase was primarily attributable to the territorial mix of taxable income
as well as the tax effect of non-deductible merger expenses.
RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1996 AND 1997
NET REVENUES
Net revenues for the fiscal year ended March 31, 1997 increased 151.8% from
$61.4 million to $154.6 million from the same period last year. This increase
was attributable to a 36.6% increase in net revenues in North America from $47.0
million to $64.2 million, an 1,136.9% increase in net revenues in Europe from
$6.5 million to $80.4 million and a 62.1% increase in net revenues in the
Australia and Pacific Rim territory from $2.9 million to $4.7 million. The
increase in net revenues in Europe was attributable to the CentreSoft
acquisition; CentreSoft began operations in June 1996 and, therefore, results of
operations and net revenues for fiscal 1996, which are not effected by the
CentreSoft acquisition, are not indicative of comparable results for fiscal
1997.
Console net revenues increased 1,015.7% over the prior year to $56.9
million as a result of the CentreSoft acquisition and 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 73.8% over the prior year to $97.7 million
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) and the CentreSoft acquisition. North
America, Europe and Australia net revenues increased as a result of the
increases in PC and console revenues.
OEM net revenues increased 29.9% over the prior year to $13.9 million
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).
COST OF GOODS SOLD; GROSS PROFIT
Gross profit as a percentage of net revenues decreased to 43.7% for the
fiscal year ended March 31, 1997, from 64.6% for fiscal 1996. The decrease in
gross profit as a percentage of net revenues is due to the increase in the sales
mix of console net revenues versus PC net revenues and the increase in net
revenues from distribution arrangements as opposed to publishing arrangements
which resulted from the CentreSoft acquisition. Future determination of gross
profit as a percentage of net revenues will be driven primarily by the mix of
new PC and console products released by the Company during the applicable
period, the mix of revenues related to publishing arrangements versus
distribution arrangements 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
Product development expenses for the year ended March 31, 1997 increased
4.0% from the same period last year from $17.5 million to $18.2 million. As a
percentage of revenues, product development expenses decreased from 28.5% to
11.8%. The increase in product development expenses was due to the increased
number of new products in development and the increased costs associated with
the enhanced 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. 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
generally are expensed as incurred prior to the product's release and therefore
are reflected in operating expenses; the costs of acquired products in the form
of advances against royalties generally are 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 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 expenses for year ended March 31, 1997 increased 89.2%
from the same period last year, from $13.9 million to $26.3 million from the
same period last year and decreased as a percentage of net revenues from 22.7%
to 17.0%. The increase in sales and marketing expenses was due to increased
marketing expenses 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. The decrease in sales
and marketing as a percentage of net revenues was the result of the CentreSoft
acquisition, whereby distributed products have less associated sales and
marketing expenses than published products.
20
<PAGE>
General and administrative expenses for the year ended March 31, 1997
increased 75.0% from the same period last year, from $4.4 million to $7.7
million. These expenses decreased as a percentage of net revenues from 7.2% to
5.0%. The increase in general and administrative expenses was primarily due to
the CentreSoft acquisition.
OTHER INCOME (EXPENSE)
Interest income, net decreased to $233,000 for the fiscal year ended March
31, 1997, from $1,707,000 for the fiscal year ended March 31, 1996, as a result
of interest expense incurred on CentreSoft debt prior to its acquisition by the
Company, as well as the result of lower average cash and cash equivalent
balances.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.3% 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.
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied
significantly and will likely vary significantly in the future, 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 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
1998 1997 1997 1997 1997 1996 1996 1996
----------- ------------ ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $58,256 $122,141 $53,015 $26,514 $57,586 $60,480 $29,557 $ 7,021
Gross profit 22,222 45,063 23,280 6,238 22,027 24,295 15,689 5,512
Operating income (loss) 520 15,154 3,107 (8,652) 7,609 8,288 2,137 (4,226)
Net income (loss) 126 9,278 1,837 (5,414) 5,116 5,320 1,421 (2,631)
Net income (loss) per basic
share $ 0.01 $ 0.50 $ 0.10 $ (0.30) $ 0.29 $ 0.30 $ 0.08 $ (0.17)
Net income (loss) per diluted
share $ 0.01 $ 0.47 $ 0.09 $ (0.30) $ 0.27 $ 0.29 $ 0.07 $ (0.17)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $52.0 million from $21.4
million at March 31, 1997 to $73.4 million at March 31, 1998. Approximately
$1.4 million in cash and cash equivalents was used in operating activities
during the year ended March 31,1998. Such operating uses of cash are primarily
the result of increases in accounts receivable, inventories and prepaid
royalties and capitalized software costs. Such increases are offset partially
by increases in accounts payable and accrued liabilities.
In addition, approximately $9.2 million in cash and cash equivalents were
used in investing activities. Capital expenditures totaled approximately $8.3
million, which were primarily composed of costs relating to the Company moving
its Los Angeles office to a new facility in Santa Monica, California.
Sources of cash from financing activities totaled $62.4 million for the
year ended March 31, 1998 which included $4.8 million in proceeds from exercise
of employee stock options. In addition, on December 22, 1997, the Company
completed a private placement of $60 million in convertible subordinated notes
("Convertible Notes"). The Convertible Notes have a 6.75% coupon, are due in
January 2005 and are convertible, at any time prior to maturity, into
21
<PAGE>
shares of the Company's Common Stock at $18.875 per share. Net proceeds from
the issuance of the Convertible Notes was approximately $57.9 million. The
Company intends to use such net proceeds to fund product development, to acquire
third party publishing and distribution rights, to expand the Company's direct
sales and marketing capabilities and for general corporate purposes. In
addition, the Company may, when and if the opportunity arises, use an
unspecified portion of the net proceeds to acquire businesses, products or
technologies that it believes are of strategic importance. Pending such uses,
the Company intends to invest the net proceeds in short-term money market and
other market rate, investment-grade instruments.
The Company has a $10 million revolving credit and letter of credit
facility (the "Facility") with its bank (the "Bank"). The Facility provides the
Company the ability to borrow funds and issue letters of credit against eligible
domestic accounts receivable up to $10 million. The Facility expires in
September 1998. In addition, the Company has a $2 million line of credit
agreement (the "Asset Line") with the Bank; drawings under the Asset Line are
structured with 36 month repayment terms and the Asset Line of credit expires in
September 1998. Borrowings under the Asset Line totaled $1.4 million as of
March 31,1998 with an effective borrowing rate of 8.3%.
In Europe, the Company has a revolving credit facility (the "Europe
Facility") with its bank for approximately $8.5 million. The Europe Facility
can be used for working capital requirements, and expires in June 2000. The
Company had no borrowings under the Europe Facility as of March 31, 1998.
The Company will use its working capital ($120.5 million at March 31, 1998)
to finance ongoing operations, including acquisitions of inventory and
equipment, to fund the development, production, marketing and selling of new
products, and to obtain intellectual property rights for future products from
third parties. Management believes that the Company's existing cash and cash
equivalents, together with the proceeds available from the Facility, Asset Line
and the Europe Facility, will be sufficient to meet the Company's operational
requirements for at least the next twelve months.
The Company's management currently believes that inflation has not had a
material impact on continuing operations.
Like many other software companies, the year 2000 computer issue creates
risk for the Company. If internal systems do not correctly recognize date
information when the year changes to 2000, there could be an adverse impact on
the Company's operations. The Company has initiated a comprehensive plan to
prepare its computer systems for the year 2000 and is currently implementing
changes to alleviate any year 2000 incapability. The Company is also contacting
critical suppliers of products and service to determine that the supplier's
operations and the products and services they provide are year 2000 capable.
There can be no assurance that another company's failure to ensure year 2000
capability would not have an adverse effect on the Company. Costs associated
with this issue are not expected to be material.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," is effective for financial statements issued for periods ended after
December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion
("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities
that could share in the earnings of the Company, similar to fully diluted EPS
under APB No. 15. The Statement requires dual presentation of basic and diluted
EPS by entities with complex capital structures. The Company adopted SFAS No.
128 for the financial statements for the fiscal year ended March 31, 1998 and
has presented Basic EPS and Diluted EPS for all periods presented.
SFAS No. 130, "Reporting Comprehensive Income," is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company will adopt SFAS No. 130 effective April
1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 establishes standards for the way that public business enterprises
report financial and descriptive information about reportable operating segments
in annual financial statements and interim financial reports issued to
stockholders. SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to report
information about major customers. The Company will adopt SFAS No. 131
effective April 1, 1998.
The AICPA recently issued Statement of Position 97-2, "Software Revenue
Recognition," (SOP 97-2) effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company will adopt
22
<PAGE>
SOP 97-2 for transactions occurring on or after April 1, 1998. The Company is
in compliance with the provisions thereof.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company transacts business in many different foreign currencies and may
be exposed to financial market risk resulting from fluctuations in foreign
currency exchange rates, particularly the British Pound sterling. However, due
to the long-term stability of the pound, the Company has deemed it unnecessary
to hedge against foreign currency devaluation at the present time. The
volatility of the Pound (and all other applicable currencies) will be monitored
frequently throughout the coming year and the Company may require the use of
hedging programs, currency forward contracts, currency options and/or other
derivative financial instruments commonly utilized to reduce financial market
risks.
23
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report F-1
Consolidated Balance Sheets as of March 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years ended
March 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended March 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
Schedule II-Valuation and Qualifying Accounts and Reserves
as of March 31, 1998, 1997 and 1996 F-21
</TABLE>
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.
24
<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 its 1998
Annual Meeting of Shareholders, 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 its 1998
Annual Meeting of Shareholders, 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 its 1998
Annual Meeting of Shareholders, 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 its 1998
Annual Meeting of Shareholders, 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.
25
<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 25 herein.
2. FINANCIAL STATEMENT SCHEDULE The following financial
statement schedule of Activision, Inc. for the years ended
March 31, 1998, 1997 and 1996 is filed as part of this
report and should be read in conjunction with the
Consolidated Financial Statements of Activision, Inc.
Schedule II -- Valuation and Qualifying Accounts and
Reserves Other financial statement schedules are omitted
because the information called for is not required or is
shown either in the Consolidated Financial Statements or the
notes thereto.
3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
------ -------
<S> <C>
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).
10.1 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).
10.2 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).
10.3 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.)
10.4 Articles of Merger, with the Plan of Merger annexed
thereto, between the Company and Raven Software
Corporation, as filed with the Department of Financial
Institutions of the State of Wisconsin on August 26,
1997 (incorporated by reference to Exhibit 2.1 of the
Company's Form 8-K filed September 5, 1997).
10.5 Share Exchange Agreement dated November 23, 1997,
among the Company and the holders of all of the
issued and outstanding capital stock of Combined
Distribution (Holdings) , Inc. (incorporated by
reference to Exhibit 10.1 of the Company's Form
8-K filed December 5, 1997).
10.6 Purchase Agreement dated as of December 16, 1997,
among the Company and Credit Suisse First Boston
Corporation, Piper Jaffray, Inc. and UBS
Securities LLC (the "Initial Purchasers")
(incorporated by reference to Exhibit 10.1 of the
Company's Form 8-K filed December 23, 1997).
10.7 Registration Rights Agreement dated as of December
16, 1997, among the Company and the Initial
Purchasers (incorporated by reference to Exhibit
10.2 of the Company's Form 8-K filed December 23,
1997).
26
<PAGE>
10.8 Indenture dated as of December 22, 1997, between
the Company and State Street Bank and Trust
Company of California, N.A., as Trustee
(incorporated by reference to Exhibit 10.3 of the
Company's Form 8-K filed December 23, 1997).
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. Independent Auditor Consent.
27.1 Fiscal 1995 Year to Date Financial Data Schedule.
27.2 Fiscal 1996 Year to Date Financial Data Schedule.
27.3 Fiscal 1997 Quarters and Year to Date Financial
Data Schedule.
27.4 Fiscal 1998 Quarters and Year to Date Financial
Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K have been
filed by the Company during the last quarter of the fiscal year ended
March 31, 1998:
1. Form 8-K dated January 6, 1998, containing items 5 and
7.
27
<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 15, 1998
ACTIVISION, INC.
By: /s/ ROBERT A. KOTICK
---------------------------------
(Robert A. Kotick)
Chairman
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>
<S> <C> <C>
By: /s/ ROBERT A. KOTICK Chairman, Chief Executive Officer June 15, 1998
--------------------------------- (Principal Executive Officer) and Director
(Robert A. Kotick)
By: /s/ BRIAN G. KELLY President, Chief Operating June 15, 1998
--------------------------------- Officer and Director
(Brian G. Kelly)
By: /s/ BARRY J. PLAGA Chief Financial Officer June 15, 1998
---------------------------------
(Barry J. Plaga)
By: /s/ HAROLD A. BROWN Director June 15, 1998
---------------------------------
(Harold A. Brown)
By: /s/ BARBARA S. ISGUR Director June 15, 1998
---------------------------------
(Barbara S. Isgur)
By: /s/ STEVEN T. MAYER Director June 15, 1998
---------------------------------
(Steven T. Mayer)
By: /s/ ROBERT J. MORGADO Director June 15, 1998
---------------------------------
(Robert J. Morgado)
</TABLE>
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of ACTIVISION,
INC. and subsidiaries as of March 31, 1998 and 1997 and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended March 31,
1998. In connection with our audits of the consolidated financial statements,
we also have audited financial statement schedule II for each of the years in
the three-year period ended March 31, 1998. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 financial position
of ACTIVISION, INC. and subsidiaries as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the
related financial statement schedule for each of the years in the three-year
period ended March 31, 1998, when considered in relation to the basic
consolidated 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 12, 1998
F-1
<PAGE>
PART I. FINANCIAL INFORMATION.
Item I. Financial Statements.
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------------- --------------
<S> <C> <C>
Restated
--------------
ASSETS
Current assets:
Cash and cash equivalents $ 73,378 $ 21,358
Accounts receivable, net of allowances of $12,122 and
$7,674, respectively 69,812 46,633
Inventories, net 14,920 8,283
Prepaid royalties and capitalized software costs 12,444 6,559
Other current assets 1,922 1,222
Deferred income taxes 3,852 1,493
--------------- --------------
Total current assets 176,328 85,548
Property and equipment, net 10,628 5,990
Deferred income taxes 4,665 4,212
Other assets 2,313 255
Excess purchase price over identifiable assets acquired, net 23,473 23,749
--------------- --------------
Total assets $ 217,407 $ 119,754
--------------- --------------
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to bank $ 781 $ 1,600
Current portion of subordinated loan stock debenture - 683
Accounts payable 40,150 19,291
Accrued expenses 14,860 12,136
--------------- --------------
Total current liabilities 55,791 33,710
Notes payable to bank, less current portion 1,235 -
Convertible subordinated notes 60,000 -
Subordinated loan stock debentures - 2,533
Other liabilities 88 31
--------------- --------------
Total liabilities 117,114 36,274
--------------- --------------
Commitments and contingencies
Redeemable preferred stock - 1,286
Convertible preferred stock - 214
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 19,508,415 and 17,113,007 shares issued
and 19,008,415 and 16,613,077 outstanding, respectively - -
Additional paid-in capital 91,799 78,752
Retained earnings 13,680 8,664
Cumulative foreign currency translation 92 (158)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------------- --------------
Total shareholders' equity 100,293 81,980
--------------- --------------
Total liabilities and shareholders' equity $ 217,407 $ 119,754
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the years ended March 31,
-------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Restated
-------------------
<S> <C> <C> <C>
Net revenues $ 259,926 $ 154,644 $ 61,393
Cost of goods sold 163,123 87,121 21,749
------------------- ------------------- -------------------
Gross profit 96,803 67,523 39,644
------------------- ------------------- -------------------
Operating expenses:
Product development 28,393 18,195 17,505
Sales and marketing 43,738 26,297 13,920
General and administrative 11,507 7,718 4,404
Amortization of intangible assets 1,562 1,505 1,283
Merger expenses 1,474 - -
------------------- ------------------- -------------------
Total operating expenses 86,674 53,715 37,112
------------------- ------------------- -------------------
Income from operations 10,129 13,808 2,532
Other income (expense), net (694) 233 1,707
------------------- ------------------- -------------------
Income before income taxes 9,435 14,041 4,239
Income tax provision (benefit) 3,608 4,815 (1,291)
------------------- ------------------- -------------------
Net income $ 5,827 $ 9,226 $ 5,530
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Basic net income per share $ 0.31 $ 0.52 $ 0.36
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Diluted net income per share $ 0.30 $ 0.50 $ 0.34
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Number of shares used in computing basic net
income per share 18,439 17,362 15,332
------------------- ------------------- -------------------
------------------- ------------------- -------------------
Number of shares used in computing diluted net
income per share 19,310 18,051 16,271
------------------- ------------------- -------------------
------------------- ------------------- -------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------------------------- Paid-In Earnings
Shares Amount Capital (Deficit)
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance March 31, 1995 14,183 - $ 67,667 $ (4,822)
Issuance of common stock pursuant to employee 50 - 224 -
stock purchase plan
Issuance of common stock pursuant to directors 17 - 13 -
stock purchase plan
Purchase of treasury stock - - - -
Net income for the year - - - 5,530
Foreign currency translation adjustment - - - -
-------------------------------------------------------------------------------
Balance March 31, 1996 14,250 - $ 67,904 $ 708
Issuance of common stock 63 - 822 -
Issuance of common stock pursuant to employee 313 - 2,209 -
stock option plan
Issuance of common stock pursuant to employee 19 - 179 -
stock purchase plan
Tax benefit attributable to employee - - 736 -
stock option plan
Tax benefit derived from net operating loss - - 6,634 -
carryforward utilization
Issuance of stock on formation of CentreSoft 2,468 - 268 -
Net income for the year - - - 9,226
Foreign currency translation adjustment - - - -
Dividends declared - - - (1,270)
-------------------------------------------------------------------------------
Balance March 31, 1997 17,113 - $ 78,752 $ 8,664
Issuance of common stock and common 82 - 1,214 -
stock warrants
Issuance of common stock pursuant to employee 599 - 4,756 -
stock option plan
Issuance of common stock pursuant to employee 64 - 582 -
stock purchase plan
Tax benefit attributable to employee - - 1,247 -
stock option plan
Issuance of stock to affect business combinations 1,331 - 532 (56)
Adjustment for change in year-end of pooled
subsidiary - - - (639)
Conversion of Redeemable Preferred Stock 87 - 1,286 -
Conversion of Subordinated Loan Stock Debentures 217 - 3,216 -
Conversion of Convertible Preferred Stock 15 - 214 -
Net income for the year - - - 5,827
Foreign currency translation adjustment - - - -
Dividends declared - - - (116)
-------------------------------------------------------------------------------
Balance March 31, 1998 19,508 $ - $ 91,799 $ 13,680
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Foreign Treasury Stock
Currency ------------------------------------ Shareholders'
Adjustment Shares Amount Equity
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance March 31, 1995 $ (141) - - $ 62,704
Issuance of common stock pursuant to employee - - - 224
stock purchase plan
Issuance of common stock pursuant to directors - - - 13
stock purchase plan
Purchase of treasury stock - 500 $ (5,278) (5,278)
Net income for the year - - - 5,530
Foreign currency translation adjustment (194) - - (194)
-----------------------------------------------------------------------------
Balance March 31, 1996 $ (335) 500 $ (5,278) $ 62,999
Issuance of common stock - - - 822
Issuance of common stock pursuant to employee - - - 2,209
stock option plan
Issuance of common stock pursuant to employee - - - 179
stock purchase plan
Tax benefit attributable to employee - - - 736
stock option plan
Tax benefit derived from net operating loss - - - 6,634
carryforward utilization
Issuance of stock on formation of CentreSoft - - - 268
Net income for the year - - - 9,226
Foreign currency translation adjustment 177 - - 177
Dividends declared - - - (1,270)
-----------------------------------------------------------------------------
Balance March 31, 1997 $ (158) 500 $ (5,278) $ 81,980
Issuance of common stock and common - - - 1,214
stock warrants
Issuance of common stock pursuant to employee - - - 4,756
stock option plan
Issuance of common stock pursuant to employee - - - 582
stock purchase plan
Tax benefit attributable to employee - - - 1,247
stock option plan
Issuance of stock to affect business combinations - - - 476
Adjustment for change in year-end of pooled -
subsidiary - - - (639)
Conversion of Redeemable Preferred Stock - - - 1,286
Conversion of Subordinated Loan Stock Debentures - - - 3,216
Conversion of Convertible Preferred Stock - - - 214
Net income for the year - - - 5,827
Foreign currency translation adjustment 250 - - 250
Dividends declared - - - (116)
-----------------------------------------------------------------------------
Balance March 31, 1998 $ 92 500 $ (5,278) $ 100,293
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the years ended March 31,
--------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Restated
--------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,827 $ 9,226 $ 5,530
Adjustments to reconcile net income to net cash used in operating
activities:
Deferred income taxes (1,563) 3,165 (1,500)
Adjustment for change in fiscal year-end for pooled subsidiaries (639) - -
Depreciation and amortization 5,212 4,118 2,646
Expense related to common stock warrants 200 - -
Loss on disposal of fixed assets - 34 -
Change in assets and liabilities (net of effects of purchases and
acquisitions):
Accounts receivable (23,179) (14,249) (14,343)
Inventories (6,637) (2,415) (1,003)
Prepaid royalties and capitalized software costs (4,871) (2,085) (2,570)
Other current assets (700) (39) (841)
Other assets 178 (55) (140)
Accounts payable 20,859 3,368 2,076
Accrued expenses 3,868 (5,558) 6,535
Other liabilities 57 (334) (176)
-------------- -------------- --------------
Net cash used in operating activities (1,388) (4,824) (3,786)
-------------- -------------- --------------
Cash flows from investing activities:
Cash paid by Combined Distribution (Holdings) Ltd. to acquire
CentreSoft (net of cash acquired) (812) (3,878) -
Capital expenditures (8,288) (4,249) (3,045)
Cash used in purchase acquisitions (246) - -
Adjustment for effect of poolings 340 - -
Other (228) - -
-------------- -------------- --------------
Net cash used in investing activities (9,234) (8,127) (3,045)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock - 268 -
Proceeds from issuance of common stock upon exercise of warrants - 2,209 237
Issuance of common stock pursuant to employee stock option
plan 4,756 - -
Issuance of common stock pursuant to employee stock purchase plan 582 179 -
Proceeds from issuance of subordinated loan stock debentures - 3,216 -
Proceeds from issuance of convertible preferred stock - 214 -
Proceeds from issuance of redeemable preferred stock - 1,286 -
Dividends paid (Combined Distribution (Holdings) Ltd.) (1,256) (130) -
Borrowing under line-of-credit agreement 8,800 1,600 -
Payment under line-of-credit agreement (8,800) - -
Note payable to bank, net 416 - -
Proceeds from issuance of subordinated convertible notes 57,900 - -
Purchase of treasury stock - - (5,278)
Other (6) 2 -
-------------- -------------- --------------
Net cash provided by (used in) financing activities 62,392 8,844 (5,041)
-------------- -------------- --------------
Effect of exchange rate changes on cash 250 177 (195)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 52,020 (3,930) (12,067)
-------------- -------------- --------------
Cash and cash equivalents at beginning of period 21,358 25,288 37,355
-------------- -------------- --------------
Cash and cash equivalents at end of period $ 73,378 $ 21,358 $ 25,288
-------------- -------------- --------------
-------------- -------------- --------------
Non-cash activities:
Stock and warrants to acquire common stock issued in exchange
for licensing rights $ 1,214 $ 822 $ -
Tax benefit derived from net operating loss carryforward utilization - 6,634 -
Tax benefit attributable to stock option exercises 1,247 736 -
Stock issued to affect business combinations 136 - -
Subordinated loan stock debentures converted to common stock in
pooling transaction 3,216 - -
Redeemable preferred stock converted to common stock in pooling 1,286 - -
transaction
Convertible preferred stock converted to common stock in pooling 214 - -
transaction
Supplemental cash flow information:
Cash paid for income taxes $ 2,174 $ 473 $ 124
Cash paid for interest 675 - 20
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is a leading international publisher, developer and
distributor of interactive entertainment software. The Company
currently focuses its publishing and development efforts on products
designed for personal computers ("PCs") as well as the Sony
PlayStation and Nintendo 64 console systems. In selecting titles for
acquisition or development, the Company currently pursues a
combination of internally and externally developed titles, products
based on proven technology and those based on new technology, and PC
and console products.
The Company distributes its products worldwide primarily through its
direct sales force, its distribution subsidiaries in Europe, 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.
BASIS OF PRESENTATION
These consolidated financial statements reflect the pooling of
interests of the Company with Combined Distribution (Holdings) Limited
("CentreSoft") from June 28, 1996 (the inception of CentreSoft) (see
Note 2 "Acquisitions"). As further described in Note 2, certain
acquisitions (which occurred after March 31, 1997) have not been
retroactively reflected in the historical financial statements of the
Company for years ending on or before March 31, 1997, except for
weighted averages shares outstanding and earnings per share data, as
the impact would be immaterial.
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 financial institutions. At various
times during the fiscal years ended March 31, 1998, 1997 and 1996, the
Company had deposits in excess of the $100,000 Federal Deposit
Insurance Corporation ("FDIC") limit at these financial institutions.
At March 31, 1998, the Company had approximately $48.3 million
invested in short-term commercial paper and 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
original equipment manufacturers ("OEMs").
PREPAID ROYALTIES AND CAPITALIZED SOFTWARE COSTS
Prepaid royalties primarily represent payments made to independent
software developers under development agreements. Also included in
prepaid royalties are license fees paid to intellectual property
rights holders for use of their trademarks or copyrights.
Intellectual property rights which have alternative future uses are
capitalized. Capitalized software costs represent costs incurred for
development that are not recoupable against future royalties.
The Company accounts for prepaid royalties relating to development
agreements and capitalized software costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," (SFAS No. 86). In accordance with SFAS No. 86, the
Company capitalizes software development costs and prepaid
royalties once technological feasibility is established. Prior to
the capitalization of any amounts, the Company evaluates
recoverability based on the criteria discussed below. Amounts
related
F-6
<PAGE>
to product development which are not capitalized are charged to
product development expense. The Company evaluates technological
feasibility on a product by product basis. For products where proven
game engine technology exists, this may occur early in the development
cycle.
Capitalized software development costs are amortized to cost of goods
sold on a straight-line basis over the estimated product life
(generally one year or less) commencing upon product release, or on
the ratio of current revenues to total projected revenues, whichever
amortization amount is greater. Prepaid royalties are expensed to
cost of goods sold at the contractual royalty rate based on actual net
product sales, or on the ratio of current revenues to total projected
revenues, whichever amortization amount is greater.
For products that have been released, management evaluates the future
recoverability of capitalized amounts on a quarterly basis. Prior to
a product's release, the Company expenses, as part of product
development costs, capitalized costs when, in management's estimate,
such amounts are not recoverable. Management primarily uses the
following criteria in evaluating recoverability: historical
performance of comparable products; the commercial acceptance of prior
products released on a given game engine; estimated performance of a
sequel product based on the performance of the product on which the
sequel is based; and actual development costs of a product as compared
to the Company's budgeted amount.
As of March 31, 1998, prepaid royalties and unamortized capitalized
software costs totaled $10,730,000 and $1,714,000, respectively. As of
March 31, 1997, prepaid royalties and unamortized capitalized software
costs totaled $6,230,000 and $329,000, respectively. Amortization of
prepaid royalties and capitalized software costs was $24,944,000,
$9,057,000 and $3,451,000 for the years ended March 31, 1998, 1997 and
1996, respectively. Write-offs of prepaid royalties and capitalized
software costs prior to product release were $363,000, $588,000 and
$816,000 for the years ended March 31, 1998, 1997 and 1996,
respectively.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market.
REVENUE RECOGNITION
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 or return products 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.
The AICPA's Statement of Position 97-2 "Software Revenue Recognition"
(SOP 97-2) will be effective for all transactions entered into
subsequent to March 31, 1998. The Company does not believe the
adoption of SOP 97-2 will have a material impact on its financial
position, results of operations or liquidity.
ADVERTISING EXPENSES
The Company expenses advertising and the related costs as incurred.
Advertising expenses for the years ended March 31, 1998, 1997 and 1996
were approximately $6,336,000, $3,285,000 and $1,940,000,
respectively, and are included in sales and marketing expense in the
consolidated statements of operations.
EXCESS PURCHASE PRICE OVER IDENTIFIABLE ASSETS ACQUIRED, NET
The excess cost over net assets acquired is being amortized on a
straight-line basis over a 20 year period. As of March 31, 1998 and
1997, accumulated amortization amounted to $7,904,000 and $6,342,000,
respectively. The Company adopted the provisions of SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of," on April 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of the asset to undiscounted cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount exceeds the fair value of the assets.
Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
F-7
<PAGE>
OTHER INCOME (EXPENSE)
Other income (expense), net is comprised of:
<TABLE>
<CAPTION>
Amounts in thousands
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Interest expense $ (1,805) $ (691) $ (21)
Interest income 1,111 924 1,728
-------- ------- --------
$ (694) $ 233 $ 1,707
-------- ------- --------
-------- ------- --------
</TABLE>
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 PER COMMON SHARE
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," is effective for financial statements issued for
periods ending after December 15, 1997. SFAS No. 128 replaces
Accounting Principles Board Opinion ("APB") No. 15 and simplifies the
computation of earnings per share ("EPS") by replacing the
presentation of primary EPS with a presentation of basic EPS. Basic
EPS includes no dilution and is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution from securities that could share in the earnings of the
Company, similar to fully diluted EPS under APB No. 15. The Statement
requires dual presentation of basic and diluted EPS by entities with
complex capital structures. The Company adopted SFAS No. 128 for the
consolidated financial statements for the year ended March 31, 1998
and in accordance with SFAS No. 128, all prior periods have been
restated to adopt this standard. See Note 9 - "Computation of Net
Income Per Share."
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 BASED COMPENSATION
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 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.
F-8
<PAGE>
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation.
2. ACQUISITIONS
ACQUISITION OF CENTRESOFT AND NBG
On November 26, 1997, the Company completed its acquisition of
CentreSoft by the issuance of 2,787,043 shares of the Company's common
stock in exchange for all the outstanding Ordinary Shares, "A"
Ordinary Shares, "B" Ordinary Shares, redeemable preferred stock,
convertible preferred stock and secured loan stock debentures of
CentreSoft. In addition, the Company issued options to acquire 50,325
shares of the Company's common stock which were in exchange for
outstanding CentreSoft stock options. The acquisition of CentreSoft
was accounted for in accordance with the pooling of interests method
of accounting and, accordingly, the accompanying consolidated
financial statements have been retroactively adjusted as if CentreSoft
and the Company had operated as one since June 28, 1996 (inception of
CentreSoft).
CentreSoft previously used the fiscal year ended April 30 for its
financial reporting. Accordingly, the consolidated balance sheet as
of March 31, 1997 contained herein includes the financial position of
CentreSoft as of April 30, 1997, and the consolidated statement of
operations for the year ended March 31, 1997 contained herein include
the results of operations of CentreSoft for the period from June 28,
1996 (inception) to April 30, 1997. The month ended April 30, 1997 is
also included in the results of operations for the year ended
March 31, 1998 and for the year ended March 31, 1997. CentreSoft's
net revenues and net loss for the month ended April 30, 1997 were
approximately $8.0 million and $639,000, respectively.
Also on November 26, 1997, the Company completed its acquisition of
NBG EDV Handels und Verlags GmbH ("NBG") by the issuance of 281,206
shares of the Company's common stock in exchange for all outstanding
common stock of NBG. An additional 11,117 shares of common stock were
issued in exchange for all the outstanding capital stock of NBG USA,
Inc. In addition, as part of the transaction, the Company acquired
the real property (including land and buildings) used by NBG that was
owned by the two equity owners of NBG, in exchange for assumption of
certain debt secured by a mortgage on the property. The transaction
was accounted for as an immaterial pooling; accordingly, the Company's
operating results were not restated for periods prior to October 1,
1997 and the assets acquired and liabilities assumed were recorded at
their historical values. However, weighted average shares outstanding
and earnings per share data were retroactively restated for the effect
of the NBG acquisition for all periods presented.
All costs related to the acquisitions of CentreSoft and NBG have been
reflected in the Company's consolidated financial statements for the
period ended March 31, 1998. Such non-recurring costs were
approximately $1.4 million and were comprised primarily of consulting,
legal and accounting costs.
ACQUISITION OF TAKE US! MARKETING GMBH
On June 13, 1997, the Company completed its acquisition of Take Us!
Marketing GmbH ("Take Us!") in exchange for $246,000 in cash and
10,000 shares of the Company's common stock with a value of $136,000.
The acquisition of Take Us! was accounted for by the purchase method
of accounting. The purchase price of $382,000 exceeded the fair value
of net assets acquired of $151,000 resulting in an intangible asset of
approximately $231,000.
ACQUISITION OF RAVEN SOFTWARE CORPORATION
On August 26, 1997, the Company completed its acquisition of Raven
Software Corporation ("Raven") in exchange for 1,040,000 shares of the
Company's common stock. This transaction was accounted for as an
immaterial pooling; accordingly, periods prior to April 1, 1997 were
not restated retroactively for this transaction. However, weighted
average shares outstanding and earnings per share data were
retroactively restated for the affect of the Raven acquisition for all
periods presented.
3. PRIVATE PLACEMENT OF CONVERTIBLE SUBORDINATED NOTES
In December 1997, the Company completed the private placement of $60.0
million principal amount of 6 3/4% convertible subordinated notes due
2005 (the "Notes"). The Notes are convertible, in whole or in part,
at the option of the holder at any time after December 22, 1997 (the
date of original issuance) and prior to the close of business on the
business day immediately preceding the maturity date, unless
previously redeemed or
F-9
<PAGE>
repurchased, into common stock, $.000001 par value, of the Company, at
a conversion price of $18.875 per share, (equivalent to a conversion
rate of 52.9801 shares per $1,000 principal amount of Notes), subject
to adjustment in certain circumstances. The Notes are redeemable, in
whole or in part, at the option of the Company at any time on or after
January 10, 2001, subject to premiums through December 31, 2003.
Issuance costs totaled $2.1 million.
4. MANAGEMENT BUYOUT OF CENTRESOFT
On June 28, 1996 CentreSoft's management completed a buyout of
CentreSoft ("Management Buyout"). In the Management Buyout,
CentreSoft acquired all the outstanding ordinary shares of CentreSoft
Limited ("CentreSoft") for approximately $7,428,000 in cash from
Centregold plc, a subsidiary of Eidos plc ("Eidos"). The acquisition
agreement provided for a contingent payment of a maximum of
approximately $812,000 to Eidos if CentreSoft is later sold at above a
certain price, resulting in a total purchase price of approximately
$8,240,000. This contingent payment has been recorded by the Company
as a result of the Company's subsequent acquisition of CentreSoft in
November 1997. The Management Buyout was accounted for by the purchase
method of accounting. The excess of the purchase price over the
estimated fair values of the net assets acquired was recorded as an
intangible asset in the amount of $6,486,000. This intangible asset
is being amortized on a straight-line basis over a 20 year period.
Amortization was approximately $324,000 and $238,000 for the years
ended March 31, 1998 and 1997, respectively.
The assets and liabilities of CentreSoft acquired on June 28, 1996
were as follows (amounts in thousands):
<TABLE>
<CAPTION>
BOOK VALUE
&
FAIR VALUE
--------------
<S> <C>
Assets:
Cash and cash equivalents $ 3,550
Accounts receivables, net 12,474
Inventories 2,892
Fixed assets 1,061
--------------
Total assets 19,977
--------------
Liabilities:
Accounts payable 11,331
Accrued liabilities 6,892
--------------
Total liabilities 18,223
--------------
Net assets 1,754
Cost in excess of net assets acquired 6,486
--------------
Consideration (including net costs of
$767) satisfied by cash $ 8,240
--------------
--------------
</TABLE>
To effect the Management Buyout, CentreSoft received proceeds from the
issuance of secured subordinated loan stock debentures, redeemable
preferred stock, convertible preferred stock, "A" ordinary shares, "B"
ordinary shares and ordinary shares.
SECURED SUBORDINATED LOAN STOCK DEBENTURES
Proceeds from the issuance of the Secured Subordinated Loan Stock
Debentures ("Debentures") totaled $3,216,000. The Debentures bore
interest at the rate of 15% per annum. In connection with the
acquisition of CentreSoft by the Company on November 26, 1997, the
Debentures were exchanged for 217,405 shares of the Company's common
stock.
REDEEMABLE PREFERRED STOCK
Proceeds from the issuance of the 800,000 shares of Redeemable
Preferred Stock with a stated par value of $0.16 per share totaled
$1,286,000. The Preferred Stock was entitled to a cumulative dividend
of $0.19 per share per annum. In connection with the acquisition of
CentreSoft by the Company the Preferred Stock was exchanged for 86,962
shares of the Company's common stock.
CONVERTIBLE PREFERRED STOCK
Proceeds from the issuance of 133,333 shares of Convertible Preferred
Stock with a stated par value of $1.61 per share totaled $214,000.
The Convertible Preferred Stock was entitled to a dividend of 12% per
annum.
F-10
<PAGE>
The Convertible Preferred Stock was convertible into Ordinary Shares
on a one-for-one basis in the event the Company had not redeemed the
Redeemable Preferred Stock or Convertible Preferred Stock by the
period ending six months after the final redemption date of January
31, 2001. In connection with the acquisition of CentreSoft by the
Company, on November 26, 1997, the Convertible Preferred Stock was
exchanged for 14,494 shares of the Company's common stock.
"A" ORDINARY SHARES, "B" ORDINARY SHARES AND ORDINARY SHARES
CentreSoft had three classes of ordinary shares outstanding,
consisting of "A" Ordinary Shares, "B" Ordinary Shares and Ordinary
Shares. Each class had a stated par value of $0.02 per share.
Proceeds from the issuance of the 47,059 shares of "A" Ordinary
Shares, 19,608 shares of "B" Ordinary Shares and 100,000 shares of
Ordinary Shares was $76,000, $31,000 and $161,000, respectively.
Subject to payment of the dividends on the Redeemable Preferred Stock
and the Convertible Preferred Stock (including any arrears or
accruals), the holders of the "A" Ordinary Shares and "B" Ordinary
Shares received a fixed cumulative net dividend of $0.16 per share per
annum ("Ordinary Dividend") and a cumulative preferential dividend
which, when added to the Ordinary Dividend, equaled the higher of 20%
of the net profits (as defined in CentreSoft's Articles of
Association) and the dividends declared on any other class of share
capital of CentreSoft for the relevant financial year. The balance of
any profits declared by the Board to be distributed by way of
dividends for a financial year are to be distributed pro rata among
the holders of the "B" Ordinary Shares, the "A" Ordinary Shares and
the Ordinary Shares.
In connection with the acquisition of CentreSoft by the Company on
November 26, 1997, the "A" Ordinary Shares, "B" Ordinary Shares and
Ordinary Shares were exchanged for 781,608, 25,661 and 1,660,913
shares of the Company's common stock, respectively.
DIVIDENDS
In accordance with the terms of the Redeemable Preferred Stock,
Convertible Preferred Stock, the "A" Ordinary shares, the "B" Ordinary
shares and the Ordinary shares, CentreSoft declared dividends on
September 30 and December 31, 1996 and March 31 and June 27, 1997
totaling as follows (amounts in thousands):
<TABLE>
<S> <C>
Redeemable Preferred Stock, $0.19 per share $ 130
Convertible Preferred Stock, 12% per annum 21
"A" Ordinary Shares 6
"B" Ordinary Shares 4
Ordinary Shares 268
Participating "A" and "B" Ordinary Shares,
$12.60 per share 841
---------
$1,270
---------
---------
</TABLE>
In connection with the acquisition of CentreSoft by the Company,
dividends were only declared and paid on the Redeemable Preferred
Stock, Convertible Preferred Stock, "A" Ordinary shares and the "B"
Ordinary shares through the date of the Company's acquisition of
CentreSoft due to the exchange of these securities for common stock of
the Company.
5. INVENTORIES
Inventories at March 31, 1998 and 1997 reflect an adjustment to net
realizable value of approximately $828,000 and $471,000, respectively.
The provisions for net realizable value for the years ended March 31,
1998, 1997 and 1996 were approximately $1,082,000, $478,000 and
$532,000, respectively. Inventories, net of reserves, consisted of
(amounts in thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
---------------- ----------------
<S> <C> <C>
Purchased parts and components $ 1,409 $ 1,162
Finished goods 13,511 7,121
---------------- ----------------
$ 14,920 $ 8,283
---------------- ----------------
---------------- ----------------
</TABLE>
Included in finished goods at March 31, 1998 and 1997 are expected
inventory returns at a net realizable value of $1,276,000 and
$837,000, respectively.
F-11
<PAGE>
6. PROPERTY AND EQUIPMENT
Property and equipment 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: building, 30
years; computer equipment, office furniture and other equipment, 3
years; leasehold improvements, through the life of the lease.
Property and equipment, stated at cost, was as follows (amounts in
thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
---------------- ----------------
<S> <C> <C>
Land $ 581 -
Building 113 -
Computer equipment 15,461 $ 11,561
Office furniture and other 2,967 887
equipment
Leasehold improvements 2,974 1,584
---------------- ----------------
22,096 14,032
Less accumulated depreciation
and amortization (11,468) (8,042)
---------------- ----------------
$ 10,628 $ 5,990
---------------- ----------------
---------------- ----------------
</TABLE>
Depreciation expense for the years ended March 31, 1998, 1997 and 1996
was $3,836,000, $2,613,000 and $1,362,000, respectively.
7. ACCRUED EXPENSES
Accrued expenses were as follows (amounts in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
----------- ----------
<S> <C> <C>
Accrued royalties $ 5,996 $ 4,173
Accrued selling and marketing costs 2,937 1,680
Dividends payable - 1,144
Income tax payable 1,360 329
Accrued interest expense 1,125 -
Other 3,442 4,810
----------- ----------
$ 14,860 $ 12,136
----------- ----------
----------- ----------
</TABLE>
F-12
<PAGE>
8. OPERATIONS BY GEOGRAPHIC AREA
The following table summarizes the geographic operations of the Company
(amounts in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Net revenues:
North America $ 86,221 $ 64,184 $ 47,033
Europe 160,400 80,372 6,501
Japan 4,435 4,504 4,768
Australia and Pacific Rim 6,581 4,719 2,948
Latin America 2,289 865 143
---------- --------- ----------
Total net revenues $ 259,926 $ 154,644 $ 61,393
---------- --------- ----------
---------- --------- ----------
Operating income:
North America $ 1,480 $ 9,137 $ 873
Europe 7,726 4,271 189
Japan 273 (395) 1,190
Australia and Pacific Rim 125 832 280
Latin America 525 (37) -
---------- --------- ----------
Total operating income $ 10,129 $ 13,808 $ 2,532
---------- --------- ----------
---------- --------- ----------
<CAPTION>
March 31, March 31, March 31,
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Assets:
North America $ 161,202 $ 81,833 $ 73,377
Foreign (principally Europe) 56,205 37,921 4,236
---------- --------- ----------
Total assets $ 217,407 $ 119,754 $ 77,613
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-13
<PAGE>
9. COMPUTATION OF NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted
net income per share:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NUMERATOR
Net income $ 5,827 $ 9,226 $ 5,530
Preferred stock dividends (116) (151) -
---------- ---------- ----------
Numerator for basic and diluted net
income per share-income available to
common stockholders $ 5,711 $ 9,075 $ 5,530
DENOMINATOR
Denominator for basic net income per share-
weighted average shares outstanding 18,439 17,362 15,332
Effect of dilutive securities:
Employee stock options 801 689 939
Warrants to purchase common stock 70 - -
---------- ---------- ----------
Potential dilutive common shares 871 689 939
---------- ---------- ----------
Denominator for diluted net income per
share-adjusted weighted average shares
and assumed conversions 19,310 18,051 16,271
---------- ---------- ----------
---------- ---------- ----------
Basic net income per share $ 0.31 $ 0.52 $ 0.36
---------- ---------- ----------
---------- ---------- ----------
Diluted net income per share $ 0.30 $ 0.50 $ 0.34
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Weighted average options to purchase 1,978,000, 2,838,000 and 1,738,000
shares of common stock were outstanding for the years ended March 31,
1998, 1997 and 1996, respectively, but were not included in the
calculations of diluted earnings per share because their effect would be
antidilutive. Convertible subordinated notes and convertible preferred
stock were not included in the calculations of diluted earnings per
share because their effect would be antidilutive.
F-14
<PAGE>
10. INCOME TAXES
Domestic and foreign income (loss) before income taxes and details of the
income tax provision (benefit) are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic $ (2,103) $ 5,896 $ 3,681
Foreign 11,538 8,145 558
---------- ---------- ----------
$ 9,435 $ 14,041 $ 4,239
---------- ---------- ----------
---------- ---------- ----------
Income tax expense (benefit)
Current:
Federal $ 1,175 $ 383 $ 106
State 14 31 25
Foreign 3,984 1,236 78
---------- ---------- ----------
Total current 5,173 1,650 209
---------- ---------- ----------
Deferred:
Federal (2,580) (2,961) (1,369)
State (232) (1,244) (131)
---------- ---------- ----------
Total deferred (2,812) (4,205) (1,500)
---------- ---------- ----------
Add back benefit credited to
additional paid-in capital:
Tax benefit related to stock
option exercises 1,247 736 -
Tax benefit related to
utilization of pre-bankruptcy
net operating loss carryforwards - 6,634 -
---------- ---------- ----------
1,247 7,370 -
---------- ---------- ----------
$ 3,608 $ 4,815 $ (1,291)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Federal income tax provision at statutory rate 34.0% 35.0% 34.0%
State taxes, net of federal benefit (1.2%) 2.6% -
Benefit of net operating loss carryforward - - (25.7%)
Nondeductible amortization 4.4% 3.0% 10.3%
Nondeductible merger fees 3.6% - -
Future (current) deductible reserves - - (4.9%)
Research and development credits (5.3%) (6.4%) (8.7%)
Incremental effect of foreign tax rates 0.7% (3.1%) (0.5%)
Increase (reduction) of valuation allowance - 3.1% (35.4%)
Other 2.0% 0.1% 0.4%
-------- ------- -------
38.2% 34.3% (30.5%)
-------- ------- -------
-------- ------- -------
</TABLE>
F-15
<PAGE>
The components of the net deferred tax asset and liability were as follows
(amounts in thousands):
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Deferred asset:
Allowance for bad debts $ 358 $ 272
Allowance for sales returns 3,241 441
Miscellaneous 521 99
Tax credit carryforwards 3,320 2,553
Net operating loss carryforwards 9,184 10,447
-------------- --------------
Deferred tax asset 16,624 13,812
Valuation allowance (8,107) (8,107)
-------------- --------------
Net deferred tax asset $ 8,517 $ 5,705
-------------- --------------
-------------- --------------
</TABLE>
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 was recognized through a reduction in the valuation allowance. No
further reduction was recognized in fiscal 1998. 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, which assessment was 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 $8.5 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 Company's available net operating loss carryforward for federal tax
reporting purposes approximates $25.8 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. The Company
has tax credit carryforwards of approximately $2.4 million and $900,000
for federal and state purposes, respectively.
11. COMMITMENTS AND CONTINGENCIES
BANK LINE OF CREDIT
As of March 31, 1998, the Company has a $10.0 million revolving credit and
letter of credit facility (the "Facility") with its bank (the "Bank"). The
Facility currently provides the Company with the ability to borrow funds
and issue letters of credit against eligible domestic accounts receivable
up to $10.0 million. The Facility expires in September 1998. In addition,
the Company has entered into a $2.0 million line of credit agreement (the
"Asset Line") with the Bank. Drawings under the Asset Line are structured
with 36 month repayment terms and the Asset Line expires in September 1998.
Borrowings under the Asset Line totaled $1.2 million as of March 31, 1998
with an effective borrowing rate of 8.3%.
In addition, the Company has a revolving credit facility (the "Europe
Facility") with its bank in Europe for approximately $8.5 million. The
Europe Facility can be used for working capital requirements and expires in
June 2000. The Company had no borrowings outstanding against the Europe
facility as of March 31, 1998.
LEASE OBLIGATIONS
The Company leases certain of its facilities under non-cancelable operating
lease agreements. Total future minimum lease commitments as of March 31,
1998 are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
1998 $2,873
1999 2,576
2000 2,671
2001 2,675
2002 2,675
Thereafter 15,250
--------
28,720
--------
--------
</TABLE>
F-16
<PAGE>
Rent expense for the years ended March 31, 1998, 1997 and 1996 was
approximately $3,219,000, $2,279,000 and $1,348,000, respectively.
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.
12. STOCKHOLDERS' EQUITY
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. As of
March 31, 1998, the total number of shares of Common Stock available for
distribution under the Stock Option Plan was 7,666,667. The plan requires
available shares to consist in whole or in part of authorized and unissued
shares or treasury shares. There were 258,480 remaining shares available
for grant under the Stock Option Plan as of March 31, 1998.
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 of the Company's common stock 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>
1998 1997 1996
-------------------- --------------------- ---------------------
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 5,228 $ 11.69 3,725 $ 11.37 1,190 $ 5.20
Granted 2,776 $ 12.14 1,997 $ 11.28 2,805 $ 13.61
Exercised (599) $ 8.35 (313) $ 7.05 (50) $ 4.54
Forfeited (1,187) $ 14.45 (181) $ 9.24 (220) $ 6.07
Expired - - - - - -
------- ---------- ------- ---------- ------- ---------
Outstanding at end of year 6,218 $ 11.47 5,228 $ 11.69 3,725 $ 11.37
------- ---------- ------- ---------- ------- ---------
------- ---------- ------- ---------- ------- ---------
Exercisable at end of year 2,532 $ 9.78 3,292 $ 12.62 334 $ 4.55
</TABLE>
The range of exercise prices for options outstanding as of March 31, 1998
was $.75 to $21.18. The range of exercise prices for options is wide due
to increases and decreases in the Company's stock price over the period of
the grants. For the year ended March 31, 1998, 2,019,000 options were
granted at an exercise price equal to the fair market value on the date of
grant, and 757,000 options were granted at an exercise price greater than
fair market value on the date of grant.
F-17
<PAGE>
The following tables summarize information about options outstanding at
March 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------
Remaining
Weighted
Avg
Shares Contractual Wtd Avg
(000) Life Exercise
(in years) Price
----------- ------------ ------------
<S> <C> <C> <C>
Range of exercise prices:
$.75 to $6.00 767 6.25 $4.82
$6.12 to $9.50 771 8.34 $8.59
$9.75 to $9.87 687 8.86 $9.85
$10.00 to $10.87 1,161 8.89 $10.64
$10.88 to $13.00 943 8.63 $12.32
$13.13 to $14.37 637 7.99 $13.62
$14.50 to $21.18 1,252 8.05 $18.01
----------- ------------ ------------
Total 6,218 8.30 $11.47
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Exercisable Options
-----------------------------
Shares Wtd Avg
(000) Exercise Price
------------ --------------
<S> <C> <C>
Range of exercise prices:
$.75 to $6.00 538 $4.54
$6.12 to $9.50 251 $7.89
$9.75 to $9.87 624 $9.86
$10.00 to $10.87 442 $10.44
$10.88 to $13.00 174 $11.88
$13.13 to $14.37 291 $13.55
$14.50 to $21.18 212 $16.57
------------ --------------
Total 2,532 $9.78
------------ --------------
------------ --------------
</TABLE>
These options will expire if not exercised at specific dates ranging from
January 2002 to March 2008. Prices for options exercised during the three
year period ended March 31, 1998 ranged from $1.50 to $15.75.
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.
Employees purchased 24,600 shares at a price of $9.35 per share and 38,500
shares at a price of $9.14 per share during the Purchase Plan's offering
period ended September 30, 1997 and March 31, 1998, respectively. As of
March 31, 1998, 117,900 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 contributed by a
participant. The Company's matching contributions to the plan were
$40,000, $25,000 and $10,000 during the years ended March 31, 1998, 1997
and 1996, respectively.
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. 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. As of March 31, 1998, there were no shares of Common Stock
available for distribution under the Director Warrant Plan.
F-18
<PAGE>
Director Warrant activity was as follows (amounts in thousands, except
weighted average exercise price amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- ---------------------
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 73 $4.43 50 $0.75
Granted - - - - 60 7.50
Exercised - - - - (17) 0.75
Forfeited - - - - (20) 7.50
Expired - - - - - -
------- ---------- ------- ---------- ------- ---------
Outstanding at end of year 73 $4.43 73 $4.43 73 $4.43
------- ---------- ------- ---------- ------- ---------
------- ---------- ------- ---------- ------- ---------
Exercisable at end of year 73 $4.43 73 $4.43 39 $2.47
</TABLE>
The range of exercise prices for Director Warrants outstanding as of March
31, 1998 was $.75 to 8.50. The range of exercise prices for director
warrants is wide due to increases and decreases in the Company's stock
price over the period of the grants. As of March 31, 1998, 33,300 of the
outstanding and vested Director Warrants have a weighted average remaining
contractual life of 3.78 years and a weighted average exercise price of
$.75; 20,000 of the outstanding and vested Director Warrants have a
weighted average remaining contractual life of 6.82 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
6.82 years and a weighted average exercise price of $8.50.
OTHER WARRANTS
During the fiscal year ended March 31, 1997, the Company granted 40,000
warrants to purchase Common Stock with a weighted average exercise price
of $12.02 to two of its outside directors in connection with their election
to the Board. Such warrants have vesting terms identical to the Director
Warrants and expire within 10 years. As of March 31, 1998, 10,125 of such
warrants were vested and exercisable.
During the fiscal year ended March 31, 1998, the Company granted warrants
to purchase 300,000 shares of Common Stock to an outside developer in
connection with software license agreements. Of the warrants, 150,000 have
an exercise price of $10.38 per share, are immediately exercisable, and
expire on May 20, 2007. The remaining 150,000 warrants have an exercise
price of $10.50, are immediately exercisable, and expire March 31, 2008.
The Company has accounted for the fair value of the warrants.
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 (loss) and net income (loss) 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, 1997 and 1998
under the fair value method of that statement. The fair value of options
granted in the years ended March 31, 1998, 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:
F-19
<PAGE>
<TABLE>
<CAPTION>
Stock Option Plan Purchase Plan Director Warrant Plan
--------------------- ---------------------- -----------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Expected life (in years) 3.0 2.2 3.7 0.5 0.5 - - - 2.0
Risk free interest rate 5.62% 6.45% 6.45% 5.62% 6.45% - - - 6.45%
Volatility .63 .60 .60 .71 .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 traded 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, 1998, 1997 and 1996
was $4.49, $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, 1998 and 1997 were $2.65 and $2.89, respectively. The
weighted average estimated fair value of Director Warrants granted during
the year ended March 31, 1997 was $2.27. No Director Warrants were
granted during the year ended March 31, 1998.
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
net income (loss) per share information):
<TABLE>
<CAPTION>
Year ended March 31,
------------------------
1998 1997 1996
------ ------- ------
<S> <C> <C> <C>
Pro forma net income (loss) $ (52) $ 5,947 $2,302
Pro forma basic net income per share $ 0.00 $ 0.33 $ 0.15
Pro forma diluted net income per share $ 0.00 $ 0.32 $ 0.14
</TABLE>
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 through 1998, the pro forma effect will not be fully
reflected until the fiscal year ended March 31, 2000.
13. 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 1998:
Net revenues $ 26,514 $ 53,015 $ 122,141 $ 58,286 $ 259,926
Operating income (loss) (8,652) 3,107 15,154 520 10,129
Net income (loss) (5,414) 1,837 9,278 126 5,827
Basic income (loss) per share (0.30) 0.10 0.50 0.01 0.31
Diluted net income (loss) per share (0.30) 0.09 0.47 0.01 0.30
Common stock price per share
High $ 14.75 $ 15.25 $ 18.63 $ 17.87 $ 18.63
Low 9.87 11.00 13.00 9.50 9.50
Fiscal 1997:
Net revenues $ 7,021 $ 29,557 $ 60,480 $ 57,586 $ 154,644
Operating income (loss) (4,226) 2,137 8,288 7,609 13,808
Net income (loss) (2,631) 1,421 5,320 5,116 9,226
Basic income (loss) per share (0.17) 0.08 0.30 0.29 0.52
Diluted net income (loss) per share (0.17) 0.07 0.29 0.27 0.50
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
</TABLE>
F-20
<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
Beginning of Deductions Balance at End of
Description Period Additions (Describe) Period
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended March 31, 1998
Allowance for sales returns,
price protection and doubtful $ 7,674 $ 35,977 $ 31,529 (A) $ 12,122
accounts
Inventory valuation $ 471 $ 1,082 $ 725 (B) $ 828
Deferred tax valuation allowance $ 8,107 - - $ 8,107
Year ended March 31, 1997
Allowance for sales returns,
price protection and doubtful $ 7,005 $ 18,878 $ 18,209 (A) $ 7,674
accounts
Inventory valuation $ 145 $ 478 $ 152 (B) $ 471
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 (A) $ 7,005
accounts
Inventory valuation $ 357 $ 532 $ 744 (B) $ 145
Deferred tax valuation allowance $ 16,500 $ (695) $ 1,500 $ 14,305
</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-21
<PAGE>
EXHIBIT INDEX
ITEM 14(a). EXHIBITS.
<TABLE>
<CAPTION>
Exhibit Sequential Page
Number Exhibit Number
------ ------- ------
<S> <C> <C>
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).
10.1 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).
10.2 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).
10.3 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.)
10.4 Articles of Merger, with the Plan of Merger annexed thereto,
between the Company and Raven Software Corporation, as filed
with the Department of Financial Institutions of the State
of Wisconsin on August 26, 1997 (incorporated by reference
to Exhibit 2.1 of the Company's Form 8-K filed September 5,
1997).
10.5 Share Exchange Agreement dated November 23, 1997, among the
Company and the holders of all of the issued and outstanding
capital stock of Combined Distribution (Holdings) , Inc.
(incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed December 5, 1997).
10.6 Purchase Agreement dated as of December 16, 1997, among the
Company and Credit Suisse First Boston Corporation, Piper
Jaffray, Inc. and UBS Securities LLC (the "Initial
Purchasers") (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K filed December 23, 1997).
10.7 Registration Rights Agreement dated as of December 16, 1997,
among the Company and the Initial Purchasers (incorporated
by reference to Exhibit 10.2 of the Company's Form 8-K filed
December 23, 1997).
10.8 Indenture dated as of December 22, 1997, between the Company
and State Street Bank and Trust Company of California, N.A.,
as Trustee (incorporated by reference to Exhibit 10.3 of the
Company's Form 8-K filed December 23, 1997).
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. Independent Auditor Consent.
27.1 Fiscal 1995 Year to Date Financial Data Schedule.
27.2 Fiscal 1996 Year to Date Financial Data Schedule.
27.3 Fiscal 1997 Quarters and Year to Date Financial
Data Schedule.
27.4 Fiscal 1998 Quarters and Year to Date Financial
Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K. The following reports on Form 8-K have been
filed by the Company during the last quarter of the fiscal year ended
March 31, 1998:
1. Form 8-K dated January 6, 1998, containing items 5 and 7.
F-22
<PAGE>
EXHIBIT 21
PRINCIPAL SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State or Other Jurisdiction
of Incorporation or
Name of subsidiary Organization
- ---------------------------------------- ------------------------------
<S> <C>
Activision Australia Pty Ltd. Australia
Activision GmbH Germany
Activision Illinois, Inc. Illinois
Activision Japan Co., Ltd. Japan
Activision Latin America, Inc. Florida
Activision New York, Inc. New York
Activision Productions, Inc. Delaware
Activision Texas, Inc. Texas
Activision (U.K.) Ltd. United Kingdom
CentreSoft Limited United Kingdom
CentreSoft France SARL France
Combined Distribution (Holdings) Ltd. United Kingdom
The Disc Company International, Inc. U.S. Virgin Islands
Jotaphoenicis Beteilgungs GmbH Germany
Kappaphoenicis Beteilsgungs GmbH Germany
NBG EDV Handels und Verlags GmbH Germany
NBG USA Minnesota
PDQ Limited United Kingdom
Raven Software Corporation Wisconsin
Take Us! Marketing and Consulting GmbH Germany
Target Software Vertriebs GmbH Germany
TDC Group, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the registration statements
(Nos. 33-48411, 33-63638, 33-91074, 333-06130, 333-12621, 333-06054 and
33-40727) on Form S-8 and (Nos. 33-68144, 33-75878, 333-30303, 333-36949,
333-43961 and 333-46425) on Form S-3 of Activision, Inc. of our report dated
May 12, 1998, relating to the consolidated balance sheets of ACTIVISION, INC.
and subsidiaries as of March 31, 1998 and 1997 and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows for
each of the years in the three-year period ended March 31, 1998, and the
related financial statement schedule for each of the years in the three-year
period ended March 31, 1998, which report appears in the March 31, 1998
annual report on Form 10-K of ACTIVISION, INC.
KPMG PEAT MARWICK LLP
Los Angeles, California
June 11, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> APR-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 37,355
<SECURITIES> 0
<RECEIVABLES> 10,035
<ALLOWANCES> 4,469
<INVENTORY> 1,972
<CURRENT-ASSETS> 46,317
<PP&E> 2,985
<DEPRECIATION> (1,342)
<TOTAL-ASSETS> 68,883
<CURRENT-LIABILITIES> 5,669
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 62,704
<TOTAL-LIABILITY-AND-EQUITY> 68,883
<SALES> 40,669
<TOTAL-REVENUES> 40,669
<CGS> 21,293
<TOTAL-COSTS> 21,293
<OTHER-EXPENSES> 22,333
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,592)
<INCOME-PRETAX> (1,365)
<INCOME-TAX> 155
<INCOME-CONTINUING> (1,520)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,520)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 25,288
<SECURITIES> 0
<RECEIVABLES> 26,377
<ALLOWANCES> 6,468
<INVENTORY> 2,975
<CURRENT-ASSETS> 54,507
<PP&E> 6,008
<DEPRECIATION> 2,682
<TOTAL-ASSETS> 77,613
<CURRENT-LIABILITIES> 14,614
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 62,999
<TOTAL-LIABILITY-AND-EQUITY> 77,613
<SALES> 61,393
<TOTAL-REVENUES> 61,393
<CGS> 21,749
<TOTAL-COSTS> 21,749
<OTHER-EXPENSES> 37,112
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,707)
<INCOME-PRETAX> 4,239
<INCOME-TAX> 1,291
<INCOME-CONTINUING> 5,530
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,530
<EPS-PRIMARY> .36
<EPS-DILUTED> .34
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1997 MAR-31-1997 MAR-31-1997
<PERIOD-START> APR-01-1996 APR-01-1996 APR-01-1996 APR-01-1996
<PERIOD-END> MAR-31-1997 JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 21,358 22,814 17,348 23,936
<SECURITIES> 0 0 0 0
<RECEIVABLES> 54,307 19,946 42,266 47,640
<ALLOWANCES> 7,674 6,220 6,939 9,774
<INVENTORY> 8,283 3,439 7,469 10,185
<CURRENT-ASSETS> 85,548 49,938 70,078 90,554
<PP&E> 14,032 3,974 5,112 5,133
<DEPRECIATION> (8,042) (3,124) (6,524) (7,462)
<TOTAL-ASSETS> 119,754 74,242 100,853 120,398
<CURRENT-LIABILITIES> 33,710 12,358 32,731 45,617
<BONDS> 0 0 0 0
0 0 0 0
0 0 1,500 1,500
<COMMON> 0 0 0 0
<OTHER-SE> 81,980 61,555 63,588 69,679
<TOTAL-LIABILITY-AND-EQUITY> 119,754 74,242 100,853 120,398
<SALES> 154,644 7,021 36,578 97,058
<TOTAL-REVENUES> 154,644 7,021 36,578 97,058
<CGS> 87,121 1,509 15,377 51,562
<TOTAL-COSTS> 87,121 1,509 15,377 51,562
<OTHER-EXPENSES> 53,715 9,738 23,290 39,297
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (233) (312) (309) (284)
<INCOME-PRETAX> 14,041 (3,914) (1,774) 6,483
<INCOME-TAX> 4,815 (1,283) (564) (2,373)
<INCOME-CONTINUING> 9,226 (2,631) (1,210) 4,110
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 9,226 (2,631) (1,210) 4,110
<EPS-PRIMARY> .53 (.17) .08 .24
<EPS-DILUTED> .50 (.17) .08 .23
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998 MAR-31-1998 MAR-31-1998
<PERIOD-START> APR-01-1997 APR-01-1997 APR-01-1997 APR-01-1997
<PERIOD-END> MAR-31-1998 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 73,378 15,894 10,286 91,617
<SECURITIES> 0 0 0 0
<RECEIVABLES> 81,934 39,030 57,988 113,342
<ALLOWANCES> 12,122 6,194 7,153 13,911
<INVENTORY> 14,920 8,888 11,330 17,588
<CURRENT-ASSETS> 176,326 73,369 87,806 220,508
<PP&E> 22,096 17,046 19,904 21,515
<DEPRECIATION> (11,468) (8,795) (9,378) (10,599)
<TOTAL-ASSETS> 217,405 110,463 126,442 262,353
<CURRENT-LIABILITIES> 55,791 28,880 40,435 103,673
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 0 0 0 0
<OTHER-SE> 100,293 77,522 81,370 97,388
<TOTAL-LIABILITY-AND-EQUITY> 217,407 110,463 126,442 262,353
<SALES> 259,926 26,514 79,529 201,670
<TOTAL-REVENUES> 259,926 26,514 79,529 201,670
<CGS> 163,123 20,276 50,011 127,089
<TOTAL-COSTS> 163,123 20,276 50,011 127,089
<OTHER-EXPENSES> 86,674 14,890 35,063 64,972
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> (694) (32) 145 377
<INCOME-PRETAX> 9,435 (8,684) (5,690) 9,232
<INCOME-TAX> 3,608 (3,271) (2,113) 3,531
<INCOME-CONTINUING> 5,827 (5,414) (3,577) 5,701
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 5,827 (5,414) (3,577) 5,701
<EPS-PRIMARY> .31 (.30) .18 .31
<EPS-DILUTED> .30 (.30) .18 .30
</TABLE>
