<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 JUNE 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 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 BOULEVARD, SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
(310) 255-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court: Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
August 14, 1998 was 20,157,261.
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ACTIVISION, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and March 31, 1998 3
Condensed Consolidated Statements of Operations for the quarters
ended June 30, 1998 and 1997 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
quarters ended June 30, 1998 and 1997 (unaudited) 5
Notes to Condensed Consolidated Financial Statements for the
quarter ended June 30, 1998 (unaudited) 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II. OTHER INFORMATION
Item 5. Shareholder Proposals 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,444 $ 73,378
Accounts receivable, net of allowances of
$11,987 and $12,122, respectively 54,879 69,812
Inventories, net 17,057 14,920
Prepaid royalties and capitalized software costs 19,640 12,444
Other current assets 2,749 1,922
Deferred income taxes 6,437 3,852
--------- --------
Total current assets 161,206 176,328
Property and equipment, net 10,301 10,628
Deferred income taxes 4,665 4,665
Other assets 2,546 2,313
Excess purchase price over identifiable assets
acquired, net 22,998 23,473
--------- --------
Total assets $ 201,716 $ 217,407
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to bank $ 557 $ 781
Accounts payable 29,283 40,150
Accrued expenses 16,459 14,860
--------- --------
Total current liabilities 46,299 55,791
Notes payable to bank, less current portion 1,107 1,235
Convertible subordinated notes 60,000 60,000
Other liabilities 87 88
--------- --------
Total liabilities 107,493 117,114
--------- --------
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares authorized,
20,521,365 and 17,113,007 shares issued and 20,021,365 and
16,613,077 outstanding, respectively - -
Additional paid-in capital 91,914 91,799
Retained earnings 8,296 13,680
Accumulated other comprehensive income (loss) (709) 92
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------- --------
Total shareholders' equity 94,223 100,293
--------- --------
Total liabilities and shareholders' equity $ 201,716 $ 217,407
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the quarters ended June 30,
(in thousands except loss per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net revenues $ 51,880 $ 26,514
Cost of goods sold 34,811 20,276
--------- ---------
Gross profit 17,069 6,238
--------- ---------
Operating expenses:
Product development 5,693 6,368
Sales and marketing 12,614 6,019
General and administrative 3,987 2,128
Amortization of intangible assets 396 375
Merger expenses 175 -
--------- ---------
Total operating expenses 22,865 14,890
--------- ---------
Operating loss (5,796) (8,652)
Other income (expense):
Interest, net (339) (32)
--------- ---------
Loss before income tax benefit (6,135) (8,684)
Income tax benefit 2,331 3,270
--------- ---------
Net loss $ (3,804) $ (5,414)
--------- ---------
--------- ---------
Basic and diluted net loss per share $ (0.19) $ (0.29)
--------- ---------
--------- ---------
Number of shares used in computing basic and diluted net
loss per share 20,015 19,011
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the quarters ended June 30,
(in thousands)
Increase (Decrease) in Cash
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,804) $ (5,414)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes (3,020) (3,571)
Depreciation and amortization 1,348 1,189
Change in assets and liabilities:
Accounts receivable 15,201 13,797
Inventories (2,002) (605)
Prepaid software and license royalties (7,196) (2,434)
Other current assets (827) (1,706)
Other assets (233) (12)
Accounts payable (11,311) (1,955)
Accrued liabilities 84 (1,275)
Other liabilities (1) (3)
--------- ---------
Net cash used in operating activities (11,761) (1,989)
Cash flows from investing activities:
Cash acquired in pooling transaction 394 -
Cash used in purchase acquisitions - (246)
Capital expenditures (579) (3,055)
Other - (161)
--------- ---------
Net cash used in investing activities (185) (3,462)
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to employee stock option plan 86 1,414
Note payable to bank, net (352) (1,600)
Dividends paid - (36)
--------- ---------
Net cash used in financing activities (266) (222)
--------- ---------
Effect of exchange rate changes on cash (722) 209
--------- ---------
Net decrease in cash and cash equivalents (12,934) (5,464)
Cash and cash equivalents at beginning of period 73,378 21,358
--------- ---------
Cash and cash equivalents at end of period $ 60,444 $ 15,894
--------- ---------
--------- ---------
Non-cash activities:
Stock issued in purchase acquisition $ - $ 136
Supplemental cash flow information:
Cash paid for income taxes $ 997 $ 3,252
Cash paid for interest $ 2,114 $ 210
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended June 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. ACQUISITION
On June 30, 1998, the Company acquired S.B.F. Services, Limited, dba
Head Games Publishing ("Head Games") in exchange for 1,000,000 shares of
the Company's common stock. The acquisition of Head Games was accounted
for as an immaterial pooling of interests; accordingly, periods prior to
April 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 Head Games
acquisition.
3. 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 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
6
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ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended June 30, 1998
(Unaudited)
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 June 30, 1998, prepaid royalties and unamortized capitalized
software costs totaled $15,716,000 and $3,924,000, respectively. As of
March 31, 1998, prepaid royalties and unamortized capitalized software
costs totaled $10,730,000 and $1,730,000, respectively. Amortization of
prepaid royalties and capitalized software costs was $2,056,000 and
$755,000 for the quarter ended June 30, 1998 and 1997, respectively.
Write-offs of prepaid royalties and capitalized software costs prior to
product release were $394,000 and $0 for the quarters ended June 30, 1998
and 1997, respectively.
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. 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, 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 AICPA's 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
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, was adopted as of April 1, 1998. This Statement
requires reporting of changes in shareholders' equity that do not result
directly from transactions with shareholders. An analysis of these
changes follows:
<TABLE>
<CAPTION>
Quarter ended
--------------------------------
June 30, June 30,
1998 1997
--------------- ---------------
(in thousands)
<S> <C> <C>
Net loss $ (3,804) $ (5,414)
Foreign currency translation adjustments (722) 209
---------- ----------
Comprehensive net loss $ (4,526) $ (5,205)
---------- ----------
---------- ----------
</TABLE>
6. COMPUTATION OF NET LOSS PER SHARE
Weighted average options to purchase 396,658 and 681,958 shares of
common stock were outstanding for the quarters ended June 30, 1998 and
1997, respectively, but were not included in the calculations of diluted
net loss per share because their effect would be antidilutive.
Convertible subordinated notes were also not included in the
calculations of diluted net loss per share because their effect would be
antidilutive.
7
<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 and NBG, and through
third party distributors and licensees.
The Company recognizes revenue 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. 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 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 goods sold related to console, PC and original equipment
manufacturer ("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
8
<PAGE>
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.
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>
QUARTER ENDED JUNE 30,
------------------------------------------------------------
1998 1997
------------------------------ --------------------------
% of Net % of Net
Amount Revenues Amount Revenues
------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 51,880 100.0% $ 26,514 100.0%
Cost of goods sold 34,811 67.1% 20,276 76.5%
--------- ------------ --------- --------
Gross profit 17,069 32.9% 6,238 23.5%
--------- ------------ --------- --------
Operating expenses:
Product development 5,693 11.0% 6,130 23.1%
Sales and marketing 12,614 24.3% 5,574 21.0%
General and administrative 3,987 7.7% 2,811 10.6%
Amortization of intangible assets 396 0.8% 375 1.4%
Merger expenses 175 0.3% - -
--------- ------------ --------- --------
Total operating expenses 22,865 44.1% 14,890 56.1%
--------- ------------ --------- --------
Operating loss (5,796) (11.2%) (8,652) (32.6%)
Other income (expense):
Interest income (expense), net (339) (0.6%) (32) (0.1%)
--------- ------------ --------- --------
Loss before income taxes (6,135) (11.8%) (8,684) (32.7%)
Income tax benefit 2,331 4.5% 3,270 12.3%
--------- ------------ --------- --------
Net loss $ (3,804) (7.3%) $ (5,414) (20.4%)
--------- ------------ --------- --------
--------- ------------ --------- --------
NET REVENUES BY TERRITORY:
North America $ 15,909 30.7% $ 4,975 18.8%
Europe 33,129 63.9% 20,322 76.6%
Japan 1,305 2.5% 174 0.7%
Australia/Pacific Rim 1,067 2.0% 765 2.9%
Latin America 470 0.9% 278 1.0%
--------- ------------ --------- --------
Total net revenues $ 51,880 100.0% $ 26,514 100.0%
--------- ------------ --------- --------
--------- ------------ --------- --------
NET REVENUES BY PLATFORM:
Console $ 32,383 62.4% $ 10,705 40.4%
PC 19,497 37.6% 15,809 59.6%
--------- ------------ --------- --------
Total net revenues $ 51,880 100.0% $ 26,514 100.0%
--------- ------------ --------- --------
--------- ------------ --------- --------
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 47,486 91.5% $ 21,541 81.2%
OEM, licensing, on-line and other 4,394 8.5% 4,973 18.8%
--------- ------------ --------- --------
Total net revenues $ 51,880 100.0% $ 26,514 100.0%
--------- ------------ --------- --------
--------- ------------ --------- --------
NET REVENUES BY ACTIVITY:
Publishing $ 23,152 44.6% $ 8,057 30.4%
Distribution 28,728 55.4% 18,457 69.6%
--------- ------------ --------- --------
Total net revenues $ 51,880 100.0% $ 26,514 100.0%
--------- ------------ --------- --------
--------- ------------ --------- --------
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the quarter ended June 30, 1998 increased 95.8% from
the same period last year from $26.5 million to $51.9 million. This increase
primarily was composed of a 218.0% increase in net revenues in North America
from $5.0 million to $15.9 million and a 63.0% increase in net revenues in
Europe from $20.3 million to $33.1 million. North America, Europe, Japan,
Australia/Pacific Rim, and Latin America net revenues increased as a result
of the increase in console and PC revenues. The results of operations for
the quarter ended June 30, 1998 included results of operations for NBG EDV
Handels und Verlags GmbH ("NBG") and S.B.F. Services, Limited, dba Head Games
Publishing ("Head Games"), two recently acquired companies, which were
treated as immaterial poolings. The results of operations for the quarter
ended June 30, 1997 have not been restated to reflect such acquisitions. Net
revenues for the quarter ended June 30, 1998 included $3.5 million from NBG's
operations, and $2.2 million from Head Games' operations.
Console net revenues increased 202.8% over the prior year to $32.4
million as a result of the initial release of VIGILANTE 8 (PlayStation) as
well as an increase in console related distribution net revenues. PC net
revenues increased by 23.4% over the prior year to $19.5 million, primarily
as a result of the initial release of QUAKE II MISSION PACK (Windows 95) and
continued sales of Quake II (Windows 95).
OEM, licensing, on-line and other net revenues decreased 12.0% from the
prior year to $4.4 million. The decrease was due to a decrease in OEM net
revenues during the period, which was partially offset by an increase in
licensing net revenues.
Net revenues for the quarter ended June 30, 1998 decreased 11.0% from
the quarter ended March 31, 1998 from $58.3 million to $51.9 million due to a
greater number of initial releases in the quarter ended March 31, 1998, such
as Pitfall 3D (Playstation), Battlezone (Windows 95), Dark Reign Mission Pack
(Windows 95) and Hexen II Mission Pack (Windows 95).
COST OF GOODS SOLD; GROSS PROFIT
Gross profit as a percentage of net revenues increased to 32.9% for the
quarter ended June 30, 1998, from 23.5% for the quarter ended June 30, 1997.
The increase in gross profit as a percentage of net revenues primarily is due
to an increase in net revenues derived from publishing arrangements as
opposed to distribution arrangements, as well as a higher than expected
provision for returns in the prior year's fiscal quarter. Future
determinations of gross profit as a percentage of net revenues will be driven
primarily by the mix of new PC and console products released by the Company
during the applicable period as well as the mix of revenues related to
publishing arrangements versus distribution arrangements during the
applicable period, the latter in each case resulting in lower gross profit
margins.
OPERATING EXPENSES
Product development expenses for the quarter ended June 30, 1998
decreased 6.6% from the same period last year, from $6.1 million to $5.7
million. As a percentage of net revenues, product development expenses
decreased from 23.1% to 11.0%. The decrease in product development expenses
primarily was due to an increase in software development costs which were
capitalized in the current quarter.
Sales and marketing expenses for the quarter ended June 30, 1998
increased 125.0% from the same period last year, from $5.6 million to $12.6
million. As a percentage of net revenues, sales and marketing expenses
increased from 21.0% to 24.3%. The increase in sales and marketing expenses
10
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primarily was 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.
General and administrative expenses for the quarter ended June 30, 1998
increased 42.9% from the same period last year, from $2.8 million to $4.0
million. As a percentage of net revenue, general and administrative expenses
decreased from 10.6% in the same period last year to 7.7%. The increase in
general and administrative expenses primarily was due to an increase in
worldwide administrative support needs and headcount related expenses. The
decrease in general and administrative expenses as a percentage of revenue
primarily was due to the 95.8% increase in net revenues.
Merger expenses of $175,000 were incurred during the quarter ended June
30, 1998 in connection with the Company's acquisition of Head Games (see
Note 3 of Notes to Condensed Consolidated Financial Statements).
OTHER INCOME (EXPENSE)
Net interest expense was $339,000 for the quarter ended June 30, 1998,
compared to net interest expense of $32,000 for the same period last year.
This increase primarily was the result of interest costs associated with the
Company's convertible subordinated notes issued in December 1997.
PROVISION FOR INCOME TAXES
The Company's effective tax benefit rate was 38.0% for the quarter ended
June 30, 1998 as compared to 37.7% for the quarter ended June 30, 1997. The
slight increase primarily was attributable to the territorial mix of taxable
income as well as the tax effect of non-deductible merger expenses. The
realization of deferred tax assets is dependent on the generation of future
taxable income. Management believes that it is likely 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 $13.0 million from
$73.4 million at March 31, 1998 to $60.4 million at June 30, 1998.
Approximately $11.8 million in cash and cash equivalents were used in
operating activities during the quarter ended June 30, 1998. Such operating
uses of cash resulted from the Company's operating loss during the most
recent quarter coupled with increases in inventories, prepaid royalties and
capitalized software costs, and a decrease in accounts payable. Such
increases were offset partially by a decrease in accounts receivable.
In addition, approximately $185,000 in cash and cash equivalents were
used in investing activities. Capital expenditures totaled approximately
$579,000 during the quarter ended June 30, 1998.
Cash and cash equivalents used in financing activities totaled $266,000
for the quarter ended June 30, 1998, which included $86,000 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.
11
<PAGE>
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 and the Company is in discussions with a number of
banks regarding the negotiation of a new facility. There can be no assurance
that the Company will be able to obtain a new facility on terms and
conditions that are satisfactory to it.
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 June 30, 1998.
The Company will use its working capital ($114.9 million at June 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 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
also is contacting critical suppliers of products and services 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended March 31, 1998.
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PART II. - OTHER INFORMATION
Item 5. SHAREHOLDER PROPOSALS
Any shareholder proposal submitted outside the processes of Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), for presentation at the Company's 1999 Annual
Meeting will be considered untimely for purposes of Rule 14a-4
and 14a-5 under the Exchange Act if notice of such shareholder
proposal is received by the Company after June 23, 1999.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
On July 1, 1998, the Company filed a Current Report on Form 8-K
reporting the completion of the acquisition of S.B.F. Services
Ltd., dba Head Games Publishing on June 30, 1998. The
transaction was accounted for as a pooling of interests.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: August 14, 1998
ACTIVISION, INC.
/s/ Barry J. Plaga Chief Financial Officer August 14, 1998
- --------------------
(Barry J. Plaga)
14
