<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 000-12699
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 BOULEVARD, SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
(310) 255-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
November 10, 1998 was 22,111,130.
<PAGE>
ACTIVISION, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and March 31, 1998 3
Condensed Consolidated Statements of Operations for the quarters
and six months ended September 30, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months
ended September 30, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements for the
three and six months ended September 30, 1998 (unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-16
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, 1998
(unaudited) March 31, 1998
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 41,568 $ 73,378
Accounts receivable, net of allowances of
$11,152 and $12,122, respectively 66,028 69,812
Inventories, net 27,243 14,920
Prepaid royalties and capitalized software costs 25,877 12,444
Prepaid expenses and other current assets 7,647 1,922
Deferred income taxes 8,313 3,852
------------- ---------------------
Total current assets 176,676 176,328
Prepaid royalties and capitalized software costs 8,800 -
Property and equipment, net 11,466 10,628
Deferred income taxes 4,665 4,665
Other assets 3,766 2,313
Excess purchase price over identifiable assets acquired,
net 22,760 23,473
------------- ---------------------
Total assets $ 228,133 $ 217,407
------------- ---------------------
------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to bank $ 9,665 $ 781
Accounts payable 40,657 40,150
Accrued expenses 19,447 14,860
------------- ---------------------
Total current liabilities 69,769 55,791
Notes payable to bank, less current portion 1,496 1,235
Convertible subordinated notes 60,000 60,000
Other liabilities 89 88
------------- ---------------------
Total liabilities 131,354 117,114
------------- ---------------------
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 22,518,547 and 19,508,415 shares issued
and 22,018,547 and 19,008,415 outstanding, respectively - -
Additional paid-in capital 97,194 91,799
Retained earnings 4,780 13,680
Accumulated other comprehensive income 83 92
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
------------- ---------------------
Total shareholders' equity 96,779 100,293
------------- ---------------------
Total liabilities and shareholders' equity $ 228,133 $ 217,407
------------- ---------------------
------------- ---------------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the quarters and six months ended September 30,
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended
September 30, Six Months ended September 30,
-------------------------- ------------------------------
1998 1997 1998 1997
------------ ----------- ------------- --------------
<S> <C> <C> <C> <C>
Net revenues $ 66,182 $ 53,015 $ 118,062 $ 79,529
Costs and expenses:
Cost of sales -- product costs 43,473 23,315 75,059 42,125
Cost of sales -- royalties and software
amortization 5,359 6,420 8,584 7,886
Product development 3,934 7,307 9,627 13,437
Sales and marketing 10,798 9,040 23,412 14,614
General and administrative 4,580 3,446 8,567 6,257
Amortization of intangible assets 396 380 792 755
Merger expenses 425 - 600 -
------------ ----------- ------------- --------------
Total costs and expenses 68,965 49,908 126,641 85,074
------------ ----------- ------------- --------------
Operating income (loss) (2,783) 3,107 (8,579) (5,545)
Other income (expense):
Interest, net (824) (112) (1,163) (144)
------------ ----------- ------------- --------------
Net income (loss) before income tax provision (3,607) 2,995 (9,742) (5,689)
Income tax (benefit) provision (1,373) 1,158 (3,704) (2,112)
------------ ----------- ------------- --------------
Net income (loss) $ (2,234) $ 1,837 $ (6,038) $ (3,577)
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
Basic net income (loss) per share $ (0.10) $ 0.09 $ (0.28) $ (0.17)
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
Diluted net income (loss) per share $ (0.10) $ 0.08 $ (0.28) $ (0.17)
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
Number of shares used in computing basic net income
(loss) per share 21,970 21,114 21,949 21,021
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
Number of shares used in computing diluted net
income (loss) per share 21,970 21,817 21,949 21,021
------------ ----------- ------------- --------------
------------ ----------- ------------- --------------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the six months ended September 30,
(in thousands)
(UNAUDITED)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1998 1997
--------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,038) $ (3,577)
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred income taxes (4,896) (2,718)
Depreciation and amortization 2,779 2,265
Change in assets and liabilities:
Accounts receivable 11,793 (4,338)
Inventories (6,178) (3,109)
Prepaid royalties and capitalized software costs (22,233) (2,236)
Other current assets (5,725) (1,410)
Other assets 2,377 9
Accounts payable (7,156) 6,737
Accrued liabilities 863 1,741
Other liabilities (1,311) 189
--------------- ------------------
Net cash used in operating activities (35,725) (6,447)
--------------- ------------------
Cash flows from investing activities:
Cash acquired in pooling transactions 654 -
Cash used in purchase acquisitions - (246)
Capital expenditures (1,469) (5,909)
--------------- ------------------
Net cash used in investing activities (815) (6,155)
--------------- ------------------
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to
employee stock option plan 434 2,721
Proceeds from employee stock purchase plan 389 230
Note payable to bank, net 3,913 (12)
Dividends paid - (1,223)
Other - 51
--------------- ------------------
Net cash provided by financing activities 4,736 1,767
--------------- ------------------
Effect of exchange rate changes on cash (6) (237)
--------------- ------------------
Net decrease in cash and cash equivalent (31,810) (11,072)
Cash and cash equivalents at beginning of period 73,378 21,358
--------------- ------------------
Cash and cash equivalents at end of period $ 41,568 $ 10,286
--------------- ------------------
--------------- ------------------
Non-cash activities:
Warrants issued to third party developers $ 43 $ -
Stock issued in exchange for licensing rights $ - $ 431
Tax benefit derived from stock option exercises $ - $ 521
Stock issued in purchase acquisition $ - $ 136
Supplemental cash flow information:
Cash paid for income taxes $ 522 $ 585
Cash paid for interest $ 2,532 $ 304
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended September 30, 1998
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Activision, Inc. and its subsidiaries (the "Company"). The
information furnished is unaudited and reflects all adjustments which, in
the opinion of management, are necessary to provide a fair statement of the
results for the interim periods presented. The financial statements should
be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1998.
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform with the current period's presentation. These
reclassifications had no impact on previously reported working capital or
results of operations.
2. ACQUISITIONS
On September 29, 1998, the Company acquired CD Contact Data GmbH ("CD
Contact") in exchange for 1,900,000 shares of the Company's common stock.
$9.1 million in outstanding debt was acquired in connection with the CD
Contact acquisition. The debt is evidenced by notes payable which are due
on demand and bear interest at approximately 8% per annum. The acquisition
of CD Contact was accounted for as an immaterial pooling of interests;
accordingly, periods prior to July 1, 1998 were not retroactively restated
for this transaction. However, weighted average shares outstanding and
earnings per share data have been retroactively restated for the effect of
the CD Contact acquisition.
3. PREPAID ROYALTIES AND CAPITALIZED SOFTWARE COSTS
Prepaid royalties include payments made to independent software developers
under development agreements and 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 certain costs incurred for product
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 the Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed".
Software development costs and prepaid royalties are capitalized once
technological feasibility is established. Technological feasibility is
evaluated on a product by product basis. For products where proven game
engine technology exists, this may occur early in the development cycle.
Software development costs are expensed if and when they are deemed
unrecoverable. Amounts related to software development which are not
capitalized are charged immediately to product development expense.
The following criteria is used to evaluate recoverability of software
development costs: historical performance of comparable products; the
commercial acceptance of prior products released on a given game engine;
orders for the product prior to its release; 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.
Capitalized software development costs are amortized to cost of sales 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 amortized to cost of sales commencing upon product
release 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.
6
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As of September 30, 1998, prepaid royalties and unamortized capitalized
software costs totaled $28.3 million (including $8.8 million classified as
non-current) and $6.4 million, respectively. As of March 31, 1998, prepaid
royalties and unamortized capitalized software costs totaled $10.7 million
and $1.7 million, respectively. At March 31, 1998, all prepaid royalties
and unamortized capitalized software costs were classified as current.
4. REVENUE RECOGNITION
PRODUCT SALES
The Company recognizes revenues from the sale of its products upon
shipment. Subject to certain limitations, the Company permits customers to
obtain exchanges or return products within certain specified periods, and
provides price protection on certain unsold merchandise. Revenues from
product sales are reflected net of the allowance for returns and price
protection.
SOFTWARE LICENSES
For those license agreements which provide the customers the right to
multiple copies in exchange for guaranteed amounts, revenues are recognized
at delivery of the product master or the first copy. Per copy royalties on
sales which exceed the guarantee are recognized as earned.
The American Institute of Certified Public Accountants Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), is effective
for all transactions entered into subsequent to March 31, 1998. The
adoption of SOP 97-2 did not have a material impact on the Company's
financial position, results of operations or liquidity.
5. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", was adopted by the Company
as of April 1, 1998. SFAS 130 requires any changes in shareholders' equity
that do not result directly from transactions with shareholders be reported
separately in the financial statements, net of any tax effect, as other
comprehensive income. For the Company, other comprehensive income includes
only foreign currency translation adjustments. Total comprehensive income
for the six months ended September 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------
September 30, September 30,
--------------- ---------------
1998 1997
--------------- ---------------
<S> <C> <C>
(in thousands)
Net (loss) $(6,038) $ (3,577)
Foreign currency translation adjustments (6) (237)
--------------- ---------------
Comprehensive net (loss) $(6,044) $ (3,814)
--------------- ---------------
--------------- ---------------
</TABLE>
6. COMPUTATION OF NET LOSS PER SHARE
Basic earnings per share ("EPS") is computed as net earnings divided by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from
7
<PAGE>
common shares issuable through stock-based compensation plans, including
stock options, warrants and other convertible securities using the
treasury stock method. Due to the net loss reported for the six months
ended September 30, 1998 and 1997, stock options and warrants of
8,028,164 and 4,471,587, respectively, were excluded from the
calculation of diluted EPS. 3.2 million shares of convertible stock were
also excluded in the calculation of diluted EPS for the six month period
ended September 30, 1998.
7. NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Although the
Company currently does not have derivative instruments, or hedge foreign
currency risk, the Company intends to monitor its risk in this regard and
investigate various ways to manage that risk. If and when the Company
decides to participate in hedging activities and/or purchase other
derivative financial instruments, SFAS 133 will be adopted.
8
<PAGE>
ITEM 2. 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 THE
COMPANY'S ANNUAL 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 personal computers ("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, through its distribution subsidiaries CentreSoft Ltd. ("CentreSoft"),
CD Contact Data GmbH ("CD Contact") and NBG EDV Handels und Verlags GmbH
("NBG"), and through third party distributors and licensees.
The Company recognizes revenues from the sale of its products upon
shipment. Subject to certain limitations, the Company permits customers to
obtain exchanges and returns within certain specified periods and provides
price protection on certain unsold merchandise. Revenues from product sales
are reflected after deducting the estimated allowance for returns and price
protection. With respect to license agreements which provide customers the
right to multiple copies in exchange for guaranteed amounts, revenues are
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
American Institute of Certified Public Accountants Statement of Position
97-2, "Software Revenue Recognition" ("SOP 97-2"), provides guidance on
applying generally accepted accounting principles in recognizing revenues on
software transactions. SOP 97-2 is effective for all transactions entered
into subsequent to March 31, 1998. The Company has adopted SOP 97-2 and such
adoption did not have a material impact on the Company's financial position,
results of operations or liquidity.
Cost of sales - product costs represents the cost to acquire,
manufacture and distribute PC and console games. Manufacturers of the
Company's PC 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.
Cost of sales - royalties and software amortization is related to
amounts due developers, product owners and other royalty participants as a
result of product sales, as well as amortization of capitalized software
development costs. The costs incurred by the Company to develop products are
accounted for in accordance with accounting standards which provide for the
capitalization of certain software development costs once technological
feasibility is established and such costs are determined to be recoverable.
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 royalty expense based on the contractual royalty
rate. The capitalized software costs are then amortized to cost of sales -
royalties and software amortization on a straight-line basis over the
estimated product life commencing upon product release 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. The following criteria is used to evaluate
recoverability: historical performance of comparable products; the commercial
acceptance of prior products released on a given game engine; orders for the
product prior to its release;
9
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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.
10
<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, activity, platform and channel:
<TABLE>
<CAPTION>
QUARTER ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------- --------------------------------------------
1998 1997 1998 1997
------------------- -------------------- -------------------- ---------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
--------- --------- --------- --------- --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues: $ 66,182 100.0% $ 53,015 100.0% $ 118,062 100.0% $ 79,529 100.0%
Costs and expenses:
Cost of sales - product costs 43,473 65.7% 23,315 44.0% 75,059 63.6% 42,125 53.0%
Cost of sales - royalties and
software amortization 5,359 8.1% 6,420 12.1% 8,584 7.3% 7,886 9.9%
Product development 3,934 5.9% 7,307 13.8% 9,627 8.1% 13,437 16.9%
Sales and marketing 10,798 16.3% 9,040 17.0% 23,412 19.8% 14,614 18.3%
General and administrative 4,580 6.9% 3,446 6.5% 8,567 7.3% 6,257 7.9%
Amortization of intangible
assets 396 0.6% 380 0.7% 792 0.6% 755 1.0%
Merger expenses 425 0.7% - - 600 0.5% - -
--------- --------- --------- --------- --------- ---------- -------- ---------
Total costs and expenses 68,965 104.2% 49,908 94.1% 126,641 107.3% 85,074 107.0%
--------- --------- --------- --------- --------- ---------- -------- ---------
Operating income (loss) (2,783) (4.2%) 3,107 5.9% (8,579) (7.3%) (5,545) (7.0%)
Interest income (expense), net (824) (1.2%) (112) (0.2%) (1,163) (1.0%) (144) (0.2%)
--------- --------- --------- --------- --------- ---------- -------- ---------
Income (loss) before provision
(benefit) for income taxes (3,607) (5.4%) 2,995 5.7% (9,742) (8.3%) (5,689) (7.2%)
Income tax provision (benefit) (1,373) (2.1%) 1,158 2.2% (3,704) (3.2%) (2,112) (2.7%)
--------- --------- --------- --------- --------- ---------- -------- ---------
Net income (loss) $ (2,234) (3.3%) $ 1,837 3.5% $ (6,038) (5.1%) $ (3,577) (4.5%)
--------- --------- --------- --------- --------- ---------- -------- ---------
--------- --------- --------- --------- --------- ---------- -------- ---------
NET REVENUES BY TERRITORY:
North America $ 21,242 32.1% $ 20,164 38.0% $ 37,151 31.5% $ 25,139 31.6%
International 44,940 67.9% 32,851 62.0% 80,911 68.5% 54,390 68.4%
--------- --------- --------- --------- --------- ---------- -------- ---------
Total net revenues $ 66,182 100.0% $ 53,015 100.0% $ 118,062 100.0% $ 79,529 100.0%
--------- --------- --------- --------- --------- ---------- -------- ---------
--------- --------- --------- --------- --------- ---------- -------- ---------
ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 12,813 53.1% $ 3,945 12.3% $ 23,772 50.3% $ 3,945 9.8%
PC 11,317 46.9% 28,118 87.7% 23,510 49.7% 36,175 90.2%
--------- --------- --------- --------- --------- ---------- -------- ---------
Total publishing net revenues $ 24,130 36.5% $ 32,063 60.5% $ 47,282 40.0% $ 40,120 50.4%
--------- --------- --------- --------- --------- ---------- -------- ---------
Distribution:
Console 31,718 75.4% 12,090 57.7% 53,142 75.1% 22,795 57.8%
PC 10,334 24.6% 8,862 42.3% 17,638 24.9% 16,614 42.2%
--------- --------- --------- --------- --------- ---------- -------- ---------
Total distribution net revenues 42,052 63.5% 20,952 39.5% 70,780 60.0% 39,409 49.6%
--------- --------- --------- --------- --------- ---------- -------- ---------
Total net revenues $ 66,182 100.0% $ 53,015 100.0% $ 118,062 100.0% $ 79,529 100.0%
--------- --------- --------- --------- --------- ---------- -------- ---------
--------- --------- --------- --------- --------- ---------- -------- ---------
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 63,487 95.9% $ 45,707 86.2% $ 110,973 94.0% $ 67,248 84.6%
OEM, licensing, on-line and other 2,695 4.1% 7,308 13.8% 7,089 6.0% 12,281 15.4%
--------- --------- --------- --------- --------- ---------- -------- ---------
Total net revenues $ 66,182 100.0% $ 53,015 100.0% $118,062 100.0% $ 79,529 100.0%
--------- --------- --------- --------- --------- ---------- -------- ---------
--------- --------- --------- --------- --------- ---------- -------- ---------
</TABLE>
11
<PAGE>
RESULTS OF OPERATIONS
The results of operations for the quarter and six months ended
September 30, 1998 include results of operations for NBG, Head Games
Publishing Inc. ("Head Games") and CD Contact, three recently acquired
companies, which were treated as immaterial poolings. The results of
operations for the quarter and six months ended September 30, 1997 have not
been restated to reflect such acquisitions. Net revenues for the quarter and
six months ended September 30, 1998 included $2.5 million and $5.9 million
from NBG's operations and $2.8 million and $5.0 million from Head Games'
operations, respectively. Net revenues for the quarter and six months ended
September 30, 1998 each included $12.4 million from CD Contact's operations.
NET REVENUES
Net revenues for the quarter ended September 30, 1998 increased
24.9% from the same period last year, from $53.0 million to $66.2 million.
The 5.0% increase in net revenues in North America, from $20.2 million to
$21.2 million, and the 36.8% increase in international net revenues, from
$32.9 million to $45.0 million, primarily were attributable to the effect of
the immaterial poolings discussed above.
Net revenues for the six months ended September 30, 1998 increased
48.6% from the same period last year, from $79.5 million to $118.1 million.
This increase was primarily due to a 48.2% increase in net revenues in North
America, from $25.1 million to $37.2 million, and a 48.7% increase in
international net revenues, from $54.4 million to $80.9 million. North
America and international net revenues for the six months ended September 30,
1998 increased as a result of the immaterial poolings discussed above and the
increase in console net revenues, partially offset by a decrease in
publishing PC net revenues.
Publishing console net revenues for the quarter and six months ended
September 30, 1998 increased 228.2%, from $3.9 million to $12.8 million and
510.3%, from $3.9 million to $23.8 million, respectively, over the prior
year. The increases in such periods were attributable to the initial releases
of Vigilante 8 (Playstation), Tenchu (Playstation), Fifth Element
(Playstation) and Activision Classics (Playstation). Publishing PC net
revenues for the quarter and six months ended September 30, 1998 decreased
59.8%, from $28.1 million to $11.3 million, and 35.1%, from $36.2 million to
$23.5 million, respectively, over the prior year. The decreases in such
periods were attributable to the initial releases of fewer new PC titles than
in the prior comparable periods.
Distribution console net revenues increased 162.0%, from $12.1
million to $31.7 million, and 132.9%, from $22.8 million to $53.1 million,
for the quarter and six months ended September 30, 1998, respectively.
Distribution PC net revenues increased 15.7%, from $8.9 million to $10.3
million, and 6.0%, from $16.6 million to $17.6 million, for the quarter and
six months ended September 30, 1998, respectively. These increases were
primarily attributable to the effect of the acquisitions of NBG and CD
Contact, as discussed above.
COSTS AND EXPENSES
Cost of sales - product costs represented 65.7% and 44.0% of net
revenues for the quarters ended September 30, 1998 and 1997, respectively.
Cost of sales - product costs represented 63.6% and 53.0% of net revenues for
the six months ended September 30, 1998 and 1997, respectively. The increase
in cost of sales product costs as a percentage of net revenues for both the
1998 quarter and the six month period was due to the increase in the sales
mix of distribution net revenues versus publishing net revenues, the increase
in console net revenues versus PC net revenues, as well as the decrease in
the sales mix of OEM, licensing and other net revenues versus
retailer/reseller net revenues.
Cost of sales - royalties and software amortization expense represented
8.1% and 12.1% of net revenues for the quarters ended September 30, 1998 and
1997, respectively. Cost of sales - royalties and software amortization expense
represented 7.3% and 9.9% of net revenues for the six months ended September 30,
1998 and 1997, respectively. The decrease in cost of sales - royalties and
software amortization expense as a percentage of
12
<PAGE>
net revenues for both the 1998 quarter and six months period was due to the
increase in the sales mix of distribution net revenues versus publishing net
revenues and a decrease in the effective royalty rate within the sales mix.
Product development expenses for the quarter ended September 30,
1998 decreased 46.6% from the same period last year, from $7.3 million to
$3.9 million. Product development expenses for the six months ended September
30, 1998 decreased 28.4% from the same period last year, from $13.4 million
to $9.6 million. The decreases in the amount of product development expenses
for the quarter and six months ended September 30, 1998 primarily were due to
an increase in the development costs of sequel products on proven engine
technologies which have been capitalized under SFAS 86.
As a percentage of net revenues, total product creation costs (i.e.,
royalties and software amortization expense plus product development
expenses), decreased from 25.9% to 14.0% and from 26.8% to 15.5% during the
quarter and six months ended September 30, 1998, respectively. Such decreases
were attributable to the increase in distribution net revenues as well as
efficiencies gained in studio operations.
Sales and marketing expenses for the quarter ended September 30,
1998 increased 20.0% from the same period last year, from $9.0 million to
$10.8 million. As a percentage of net revenues, sales and marketing expenses
decreased from 17.0% to 16.3%. Sales and marketing expenses for the six
months ended September 30, 1998 increased 60.3% from the same period last
year, from $14.6 million to $23.4 million. As a percentage of net revenues,
sales and marketing expenses increased from 18.3% to 19.8%. The increases in
the amount of sales and marketing expenses for the 1998 quarter and six month
period primarily were due to a significant increase in television advertising
and an increase in the number of products scheduled to be released during the
current fiscal year. In addition, sales and marketing expenses attributable
to CD Contact, which was acquired in September 1998, were only included in
the Company's sales and marketing expenses for the quarter ended September
30, 1998.
General and administrative expenses for the quarter ended September
30, 1998 increased 35.3% from the same period last year, from $3.4 million to
$4.6 million. As a percentage of net revenues, general and administrative
expenses increased from 6.5% to 6.9%. General and administrative expenses for
the six months ended September 30, 1998 increased 36.5% from the same period
last year, from $6.3 million to $8.6 million. As a percentage of net
revenues, general and administrative expenses decreased from 7.9% to 7.4%.
The period over period increase in the amount of general and administrative
expenses for the 1998 quarter and six month period primarily were due to an
increase in worldwide administrative support needs and headcount related
expenses.
OTHER INCOME (EXPENSE)
Net interest expense was $824,000 and $1,163,000 for the quarter and
six months ended September 30, 1998, compared to net interest expense of
$112,000 and $144,000 for the same periods last year. These increases
primarily were the result of interest costs associated with the Company's
convertible subordinated notes issued in December 1997.
PROVISION FOR INCOME TAXES
The income tax benefit of approximately $1,373,000 and $3,704,000
for the quarter and six months ended September 30, 1998, respectively,
reflects the Company's estimated effective income tax rate for the fiscal
year ending March 31, 1999. The realization of deferred tax assets primarily
is dependent on the generation of future taxable income. Management believes
that it is more likely than not that the Company will generate taxable income
sufficient to realize the benefit of deferred tax assets recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $31.8 million,
from $73.4 million at March 31, 1998 to $41.6 million at September 30, 1998.
Approximately $35.7 million in cash and cash equivalents were used in
operating activities during the six months ended September 30, 1998. Such
operating uses of cash resulted from the
13
<PAGE>
Company's operating loss during the most recent six month period coupled with
increases in inventories, prepaid royalties and capitalized software costs.
Such increases were offset partially by a decrease in accounts receivable.
In addition, approximately $815,000 in cash and cash equivalents
were used in investing activities. Capital expenditures totaled approximately
$1.5 million during the six months ended September 30, 1998.
Cash and cash equivalents provided by financing activities totaled
$4.7 million for the six months ended September 30, 1998, which included
$389,000 in proceeds from exercise of employee stock options.
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
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.
During the quarter ended September 30, 1998, the Company had a $10
million revolving credit and letter of credit facility with its bank. This
facility, which provided the Company the ability to borrow funds and issue
letters of credit against eligible domestic accounts receivable up to $10
million, expired in September 1998. In October 1998, the Company obtained a
new revolving credit and letter of credit facility ("the New Facility") from
a new bank that permits the Company to borrow funds and issue letters of
credit against domestic accounts receivable up to $25 million. The New
Facility expires in October 2000.
The Company's CentreSoft subsidiary has a revolving credit facility
(the "Europe Facility") with its bank for approximately $11.5 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
September 30, 1998. The Company's newly acquired subsidiary, CD Contact, has
facilities (the "CD Contact Facilities") with its banks that permit
borrowings up to approximately $21 million. Borrowings under the CD Contact
Facilities are due on demand and totaled $9.1 million as of September 30,
1998.
The Company will use its working capital ($106.9 million at
September 30, 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 New Facility, the Europe Facility and the CD Contact Facilities, 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.
YEAR 2000
Like many other software companies, the year 2000 computer issue
creates risk for the Company. If internal computer and embedded 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 internal computer and embedded
systems for the year 2000 and is currently implementing changes to alleviate
any year 2000 incapabilities. As part of such plan, the Company has purchased
software programs that have been independently developed by third parties
which will test year 2000 compliance for the majority of the Company's
systems.
All of the entertainment software products currently being shipped
by the Company have been tested for year 2000 compliance and have passed
these tests. In addition, all such products currently in development are being
14
<PAGE>
tested as part of the normal quality assurance testing process and are
scheduled to be released fully year 2000 compliant. Notwithstanding the
foregoing, the year 2000 computer issue could still affect the ability of
consumers to use the PC products sold by the Company. For example, if the
computer system on which a consumer uses the Company's products is not year
2000 compliant, such noncompliance could affect the consumer's ability to use
such products.
Contingency plans currently are being developed to address the most
material areas of exposure to the Company, such as adding network operating
systems to back-up the Company's current network server and developing
back-up plans for telecommunications with external offices and customers. In
addition, a staffing plan currently is in development to manually handle
orders should there be a failure of electronic data interchange connections
with its customers and suppliers. Management believes that the items
mentioned above constitute the greatest risk of exposure to the Company and
that the plans currently being developed by the Company will be adequate for
handling these items.
The Company also is contacting critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are year 2000 compliant. To assist suppliers
(particularly trading partners using electronic data interchange) in
evaluating their year 2000 issues, the Company has developed a questionnaire
which indicates the ability of each supplier to address year 2000
incompatibilities. The Company's suppliers and trading partners have been
asked to complete and return the questionnaires by December 1998. The Company
anticipates substantial compliance from all critical suppliers.
The Company anticipates that year 2000 compliance testing on
substantially all of its critical systems will be completed, and
corresponding changes will be made, by mid-1999. The costs incurred by the
Company to date related to this testing and modification process are less
than $100,000. The Company expects that the total cost of its year 2000
compliance plan will not exceed $200,000. This total cost estimate does not
include potential costs related to any systems used by the Company's
customers, any third party claims, or the costs incurred by the Company when
it replaces internal software and hardware in the normal course of its
business. The overall cost of the Company's year 2000 compliance plan is a
minor portion of the Company's total information technology budget and is not
expected to materially delay the implementation of any other unrelated
projects that are planned to be undertaken by the Company. In some instances,
the installation schedule of new software and hardware in the normal course
of business is being accelerated to also afford a solution to year 2000
compatibility issues. The total cost estimate for the Company's year 2000
compliance plan is based on management's current assessment of the projects
comprising the plan and is subject to change as the projects progress.
Based on currently available information, management does not
believe that the year 2000 issues discussed above related to the Company's
internal systems or its products sold to customers will have a material
adverse impact on the Company's financial condition or results of operations;
however, the specific extent to which the Company may be affected by such
matters is not certain. In addition, there can be no assurance that the
failure by a supplier or another third party to ensure year 2000
compatibility would not have a material adverse effect on the Company.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union are scheduled to adopt the "euro" as their common currency.
Following introduction of the euro, the sovereign currencies of the
participating countries are scheduled to remain legal tender as denominations
of the euro between January 1, 1999 and January 1, 2002. Beginning January 1,
2002, the participating countries will issue new euro-denominated bills and
coins for use in cash transactions. No later than July 1, 2002, the
participating countries will withdraw all bills and coins denominated in the
sovereign currencies, so that the sovereign currencies no longer will be
legal tender for any transactions, making conversion to the euro complete.
The Company has performed an internal analysis of the possible implications
of the upcoming euro conversion on the Company's business and financial
condition, and has determined that the impact of the conversion will be
immaterial to its overall operations. The Company's wholly owned subsidiaries
operating in participating countries represented 22.9% and 13.5% of the
Company's consolidated net revenues for the six months ended September 30,
1998 and 1997, respectively.
15
<PAGE>
FACTORS AFFECTING FUTURE PERFORMANCE
In connection with the Private Securities Litigation Reform Act of
1995 (the "Litigation Reform Act"), the Company has disclosed certain
cautionary information to be used in connection with written materials
(including this Quarterly Report on Form 10-Q) and oral statements made by or
on behalf of its employees and representatives that may contain
"forward-looking statements" within the meaning of the Litigation Reform Act.
Such statements consist of any statement other than a recitation of
historical fact and can be identified by the use of forward-looking
terminology such as "may," "expect," "anticipate," "estimate" or "continue"
or the negative thereof or other variations thereon or comparable
terminology. The listener or reader is cautioned that all forward-looking
statements are necessarily speculative and there are numerous risks and
uncertainties that could cause actual events or results to differ materially
from those referred to in such forward-looking statements. For discussion
that highlights some of the more important risks identified by management,
but which should not be assumed to be the only factors that could affect
future performance, see the Company's Annual Report on Form 10-K which is
incorporated herein by reference. 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.
16
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in
the ordinary course of business including disputes arising over the
ownership of intellectual property rights and collection matters. In the
opinion of management, the outcome of such routine claims will not have
a material adverse effect on the Company's business, financial condition
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1998 Annual Meeting of Stockholders on September
23, 1998 in Santa Monica, CA. Two items were submitted to a vote of the
stockholders:
1. The election of six directors to hold office for one year
terms and until their respective successors are elected
and have qualified. All six nominees were recommended by
the Board of Directors and all were elected. Set forth
below are the results of the voting for each director.
<TABLE>
<CAPTION>
FOR WITHHELD
-------------- --------------
<S> <C> <C>
Harold A. Brown 14,135,990 498,271
Barbara S. Isgur 14,138,219 496,042
Brian G. Kelly 14,136,891 497,370
Robert A. Kotick 14,165,200 469,062
Steven T. Mayer 14,136,494 497,767
Robert J. Morgado 14,164,747 469,514
</TABLE>
2. The adoption of the Company's 1998 Incentive Plan. This
proposal was adopted by a vote of 7,417,125 in favor,
6,991,105 against, and 34,066 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
During its fiscal quarter ended September 30, 1998, the Company
filed the following report on Form 8-K:
Form 8-K dated July 1, 1998, filed July 2, 1998, reporting
information under Item 5 and Item 7, with respect to the Company's
acquisition of Head Games Publishing, Inc.
17
<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: November 13, 1998
ACTIVISION, INC.
/s/ Barry J. Plaga Chief Financial Officer November 13, 1998
- ------------------
(Barry J. Plaga)
18
<TABLE> <S> <C>
<PAGE>
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<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> JUN-30-1998 MAR-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 41,568 41,568
<SECURITIES> 0 0
<RECEIVABLES> 77,180 77,180
<ALLOWANCES> 11,152 11,152
<INVENTORY> 27,243 27,243
<CURRENT-ASSETS> 176,676 176,676
<PP&E> 25,018 25,018
<DEPRECIATION> (13,552) (13,552)
<TOTAL-ASSETS> 228,133 228,133
<CURRENT-LIABILITIES> 69,769 69,769
<BONDS> 0 0
0 0
0 0
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<OTHER-SE> 96,779 96,779
<TOTAL-LIABILITY-AND-EQUITY> 228,133 228,133
<SALES> 66,182 118,062
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<CGS> 48,832 83,643
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<INTEREST-EXPENSE> (824) (1,163)
<INCOME-PRETAX> (3,607) (9,742)
<INCOME-TAX> (1,373) (3,704)
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<NET-INCOME> (2,234) (6,038)
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