<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, 2000
O R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-12699
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4803544
(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 August
8, 2000 was 23,634,544.
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and March 31, 2000 3
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 2000 and 1999 (unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended June 30, 2000 (unaudited) 6
Notes to Consolidated Financial Statements for the three months
ended June 30, 2000 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION.
Item I. Financial Statements.
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,589 $ 49,985
Accounts receivable, net of allowances of $26,108 and
$31,521 at June 30, 2000 and March 31, 2000, respectively 86,895 108,108
Inventories 42,888 40,453
Prepaid royalties and capitalized software costs 37,800 31,655
Deferred income taxes 14,884 14,159
Other current assets 17,785 19,737
--------------- ----------------
Total current assets 211,841 264,097
Prepaid royalties and capitalized software costs 8,557 9,153
Property and equipment, net 11,304 10,815
Deferred income taxes 11,006 6,055
Goodwill, net 11,705 12,347
Other assets 9,934 7,270
--------------- ----------------
Total assets $ 264,347 $ 309,737
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 19,860 $ 16,260
Accounts payable 22,116 38,284
Accrued expenses 42,218 49,404
--------------- ----------------
Total current liabilities 84,194 103,948
Long-term debt, less current portion 10,258 13,778
Convertible subordinated notes 60,000 60,000
Other liabilities 35 2
--------------- ----------------
Total liabilities 154,487 177,728
--------------- ----------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.000001 par value, 5,000,000 shares authorized, no
shares issued at June 30, 2000 and March 31, 2000 - -
Common stock, $.000001 par value, 50,000,000 shares
authorized, 26,491,510 and 26,488,260 shares issued and
23,607,531 and 25,988,260 outstanding at June 30, 2000 and
March 31, 2000, respectively - -
Additional paid-in capital 152,279 151,714
Retained earnings (deficit) (13,540) (8,361)
Accumulated other comprehensive loss (8,630) (6,066)
Less: Treasury stock, at cost, 2,883,979 shares
and 500,000 shares at June 30, 2000 and March 31, 2000, --------------- ----------------
respectively (20,249) (5,278)
Total shareholders' equity 109,860 132,009
--------------- ----------------
Total liabilities and shareholders' equity $ 264,347 $ 309,737
=============== ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
Restated
-------------------
2000 1999
------------------ -------------------
<S> <C> <C>
Net revenues $ 84,558 $ 84,142
Costs and expenses:
Cost of sales - product costs 43,633 53,542
Cost of sales - royalties and software
amortization 13,647 9,867
Product development 7,424 4,523
Sales and marketing 17,872 15,250
General and administrative 8,102 6,592
Amortization of intangible assets 378 469
-------------------- -------------------
Total costs and expenses 91,056 90,243
-------------------- -------------------
Loss from operations (6,498) (6,101)
Interest expense, net (1,723) (1,160)
-------------------- -------------------
Loss before income tax provision (8,221) (7,261)
Income tax provision (benefit) (3,042) (2,686)
-------------------- -------------------
Net loss $ (5,179) $ (4,575)
==================== ===================
Basic loss per share:
Net loss $ (0.21) $ (0.19)
==================== ===================
Weighted average common shares outstanding 24,688 23,557
==================== ===================
Diluted loss per share:
Net loss $ (0.21) $ (0.19)
==================== ===================
Weighted average common shares outstanding 24,688 23,557
==================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
Restated
--------
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,179) $ (4,575)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes (4,764) 1,192
Depreciation and amortization 1,480 1,912
Amortization of prepaid royalties and capitalized 12,546 8,190
software costs
Expense related to common stock warrants 352 47
Change in assets and liabilities (net of effects of
purchases and acquisitions):
Accounts receivable 21,213 20,090
Inventories (2,435) (5,816)
Other current assets 1,952 (4,407)
Other assets (3,016) (774)
Accounts payable (16,168) (14,795)
Accrued expenses (7,605) (12,137)
Other liabilities 32 -
---------------- ----------------
Net cash used in operating activities (1,592) (11,073)
---------------- ----------------
Cash flows from investing activities:
Cash used in purchase acquisitions (net of cash acquired) - (20,523)
Investment in prepaid royalties and capitalized software
costs (18,095) (11,917)
Capital expenditures (1,627) (583)
---------------- ----------------
Net cash used in investing activities (19,722) (33,023)
---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to
employee stock option plans 29 4,590
Borrowing under line-of-credit agreements 144,401 16,472
Payment under line-of-credit agreements (139,440) (7,071)
Proceeds from term loan - 25,000
Payment on term loan (4,632) -
Other notes payable, net (191) (5,674)
Cash paid to secure line of credit and term loan - (3,355)
Purchase of treasury stock (14,971) -
---------------- ----------------
Net cash provided by (used in) financing activities (14,804) 29,962
---------------- ----------------
Effect of exchange rate changes on cash (2,278) (947)
---------------- ----------------
Net decrease in cash and cash equivalents (38,396) (15,081)
Cash and cash equivalents at beginning of period 49,985 33,037
---------------- ----------------
Cash and cash equivalents at end of period $ 11,589 $ 17,956
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
For the three months ended June 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained
------------------------ Paid-In Earnings
Shares Amount Capital (Deficit)
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 2000 26,488 $ - $ 151,714 $ (8,361)
Components of comprehensive income (loss):
Net loss - - - (5,179)
Foreign currency translation adjustment - - - -
Total comprehensive loss
Acquisition of treasury stock - - - -
Issuance of common stock pursuant to employee stock
option plans 4 - 29 -
Tax benefit attributable to employee stock option plans - - 3 -
Tax benefit derived from net operating loss carryforward
utilization - - 533 -
-----------------------------------------------------
BALANCE, JUNE 30, 2000 26,492 $ - $ 152,279 $ (13,540)
=====================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Treasury Stock Other
-------------------------- Comprehensive Shareholders'
Shares Amount Income Equity
(Loss)
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 2000 (500) $ (5,278) $ (6,066) $ 132,009
Components of comprehensive income (loss):
Net loss - - - (5,179)
Foreign currency translation adjustment - - (2,564) (2,564)
--------------
Total comprehensive loss (7,743)
--------------
Acquisition of treasury stock (2,384) (14,971) - (14,971)
Issuance of common stock pursuant to employee stock
option plans - - - 29
Tax benefit attributable to employee stock option plans - - - 3
Tax benefit derived from net operating loss carryforward
utilization - - - 533
-------------------------------------------------------
BALANCE, JUNE 30, 2000 (2,884) $ (20,249) $ (8,630) $ 109,860
=======================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Activision, Inc. (together with its subsidiaries, "Activision" or "the
Company"). The information furnished is unaudited and reflects all
adjustments that, 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, 2000 as filed with the Securities and Exchange
Commission (the "SEC").
The consolidated financial statements for the period ended June 30, 1999
have been retroactively restated to reflect the Company's acquisition of
JCM Productions, Inc. dba Neversoft Entertainment ("Neversoft") on
September 30, 1999, which was accounted for as a pooling of interests.
Certain amounts in the consolidated financial statements have been
reclassified to conform to the current period's presentation. These
reclassifications had no impact on previously reported working capital
or results of operations.
2. ORGANIZATIONAL STRUCTURE
Effective June 9, 2000, Activision reorganized into a holding company form
of organizational structure, whereby Activision Holdings, Inc., a Delaware
corporation ("Activision Holdings"), became the holding company for
Activision and its subsidiaries. The new holding company organizational
structure will allow Activision to manage its entire organization more
effectively and broadens the alternatives for future financings.
The holding company organizational structure was effected by a merger
conducted pursuant to Section 251(g) of the General Corporation Law of the
State of Delaware, which provides for the formation of a holding company
structure without a vote of the stockholders of the constituent
corporations. In the merger, ATVI Merger Sub, Inc., a Delaware corporation,
organized for the purpose of implementing the holding company
organizational structure (the "Merger Sub"), merged with and into
Activision with Activision as the surviving corporation (the "Surviving
Corporation"). Prior to the merger, Activision Holdings was a direct,
wholly-owned subsidiary of Activision and Merger Sub was a direct, wholly
owned subsidiary of Activision Holdings. Pursuant to the merger, (i) each
issued and outstanding share of common stock of Activision (including
treasury shares) was converted into one share of common stock of Activision
Holdings, (ii) each issued and outstanding share of Merger Sub was
converted into one share of the Surviving Corporation's common stock, and
Merger Sub's corporate existence ceased, and (iii) all of the issued and
outstanding shares of Activision Holdings owned by Activision were
automatically canceled and retired. As a result of the merger, Activision
became a direct, wholly owned subsidiary of Activision Holdings.
Immediately following the merger, Activision changed its name to
"Activision Publishing, Inc." and Activision Holdings changed its name to
"Activision, Inc." The holding company's common stock will continue to
trade on The Nasdaq National Market under the symbol ATVI.
The conversion of shares of Activision's common stock in the merger
occurred without an exchange of certificates. Accordingly, certificates
formerly representing shares of outstanding common stock of Activision are
deemed to represent the same number of shares of common stock of Activision
Holdings. The change to the holding company structure was tax free for
federal income tax purposes for stockholders.
These transactions had no impact on the Company's consolidated financial
statements.
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 costs incurred for development that
are not recoupable against future royalties.
7
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
The Company accounts for prepaid royalties relating to development
agreements and capitalized software costs in accordance with 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 are 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.
Commencing upon product release, capitalized software development costs are
amortized to cost of sales - royalties and software amortization on a
straight-line basis over the estimated product life (generally one year or
less) or on the ratio of current revenues to total projected revenues,
whichever amortization amount is greater. Prepaid royalties are amortized
to cost of sales - royalties and software amortization commencing upon the
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.
As of June 30, 2000, prepaid royalties and unamortized capitalized software
costs totaled $32.6 million (including $8.6 million classified as
non-current) and $13.8 million, respectively. As of March 31, 2000, prepaid
royalties and unamortized capitalized software costs totaled $29.2 million
(including $9.2 million classified as non-current) and $11.6 million,
respectively.
4. 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.
Management of the Company estimates the amount of future returns and price
protections based upon historical results and current known circumstances.
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. Per copy royalties on sales which exceed the
guarantee are recognized as earned.
8
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
5. INTEREST INCOME (EXPENSE)
Interest expense, net is comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------
2000 1999
-----------------------------------------------------
<S> <C> <C>
Interest expense $ (2,190) $ (1,347)
Interest income 467 187
------------------------- -------------------------
Net interest income (expense) $ (1,723) $ (1,160)
========================= =========================
</TABLE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities and supplemental cash flow
information is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
-----------------------------------
<S> <C> <C>
Non-cash investing and financing activities:
Stock and warrants to acquire common stock
issued in exchange for licensing rights $ - $ 3,113
Tax benefit derived from net operating loss
carryforward utilization 533 -
Tax benefit attributable to stock option exercises 3 513
Stock and options issued to effect business
combination - 5,971
Supplemental cash flow information:
Cash paid for income taxes $ 2,187 $ 762
============= =============
Cash paid for interest $ 2,874 $ 4,304
============= =============
</TABLE>
7. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA
The Company publishes, develops and distributes interactive entertainment
and leisure products for a variety of game platforms, including PCs, the
Sony PlayStation console system, the Nintendo 64 console system, the
Nintendo Gameboy and the Sega Dreamcast console system. Based on its
organizational structure, the Company operates in two reportable segments:
publishing and distribution.
The Company's publishing segment publishes titles that are developed both
internally through the studios owned by the Company and externally through
third party developers. In the United States, the Company's products are
sold primarily on a direct basis to major computer and software retailing
organizations, mass market retailers, consumer electronic stores, discount
warehouses and mail order companies. The Company conducts its international
publishing activities through offices in the United Kingdom, Germany,
France, Australia and Japan. The Company's products are sold
internationally on a direct to retail basis and through third party
distribution and licensing arrangements and through the Company's
wholly-owned distribution subsidiaries located in the United Kingdom, the
Netherlands and Germany.
9
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
The Company's distribution segment, located in the United Kingdom, the
Netherlands and Germany, distributes interactive entertainment software and
hardware and provides logistical services for a variety of publishers and
manufacturers.
The President and Chief Operating Officer allocates resources to each of
these segments using information on their respective revenues and operating
profits before interest and taxes. The President and Chief Operating
Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," ("SFAS No. 131").
The President and Chief Operating Officer does not evaluate individual
segments based on assets or depreciation.
The accounting policies of these segments are the same as those described
in the Summary of Significant Accounting Policies in the Company's Annual
Report on Form 10-K for the year ended March 31, 2000. Revenue derived from
sales between segments is eliminated in consolidation.
Information on the reportable segments for the three months ended June 30,
2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, 2000
--------------------------------------------------------
Publishing Distribution Total
----------------- ------------------ -----------------
<S> <C> <C> <C>
Total segment revenues $ 60,999 $ 23,559 $ 84,558
Revenue from sales between segments (5,860) 5,860 -
----------------- ------------------ -----------------
Revenues from external customers $ 55,139 $ 29,419 $84,558
================= ================== =================
Operating income (loss) $ (5,907) $ (591) $(6,498)
================= ================== =================
</TABLE>
<TABLE>
<CAPTION>
Three months ended June 30, 1999
--------------------------------------------------------
Publishing Distribution Total
----------------- ------------------ -----------------
<S> <C> <C> <C>
Total segment revenues $ 53,366 $ 30,776 $ 84,142
Revenue from sales between segments (5,246) 5,246 -
----------------- ------------------ -----------------
Revenues from external customers $ 48,120 $ 36,022 $ 84,142
================= ================== =================
Operating income (loss) $ (5,947) $ (154) $ (6,101)
================= ================== =================
</TABLE>
Geographic information for the three months ended June 30, 2000 and 1999 is
based on the location of the selling entity. Revenues from external
customers by geographic region were as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------------------------
2000 1999
------------------------ -------------------------
<S> <C> <C>
United States $ 45,995 $ 35,428
Europe 37,370 47,146
Other 1,193 1,568
------------------------ -------------------------
Total $ 84,558 $ 84,142
======================== =========================
</TABLE>
10
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
Revenues by platform were as follows:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------------------------------
2000 1999
------------------------ -------------------------
<S> <C> <C>
Console $ 47,748 $ 52,212
PC 36,810 31,930
------------------------ -------------------------
Total $ 84,558 $ 84,142
======================== =========================
</TABLE>
8. COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted loss per
share (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
NUMERATOR
Numerator for basic and diluted earnings
per share-income available to common
shareholders $ (5,179) $ (4,575)
============== ===============
DENOMINATOR
Denominator for basic earnings per share-
weighted average common shares
outstanding 24,688 23,557
============== ===============
Denominator for diluted earnings per
share-weighted average common shares
outstanding plus assumed conversions 24,688 23,557
============== ===============
Basic loss per share $ (0.21) $ (0.19)
============== ===============
Diluted loss per share $ (0.21) $ (0.19)
============== ===============
</TABLE>
Options to purchase 13,575,542 shares of common stock at exercise prices
ranging from $0.75 to $23.04 and options to purchase 11,968,659 shares of
common stock at exercise prices ranging from $0.51 to $23.04 were
outstanding for the three months ended June 30, 2000 and 1999,
respectively, but were not included in the calculations of diluted loss per
share because their effect would be antidilutive. Shares issuable upon the
conversion of convertible subordinated notes were not included in the
calculations of diluted loss per share because their effect would be
antidilutive.
11
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
9. COMMITMENTS
BANK LINES OF CREDIT AND OTHER DEBT
In June 1999, the Company obtained a $125.0 million revolving credit
facility and term loan (the "U.S. Facility") with a group of banks ("the
lender"). The U.S. Facility provides the Company with the ability to
borrow up to $100.0 million and issue letters of credit up to $80.0
million on a revolving basis against eligible accounts receivable and
inventory. The $25.0 million term loan portion of the U.S. Facility was
used to acquire Expert Software, Inc. in June 1999 and to pay costs
related to such acquisition and the securing of the U.S. Facility. The
term loan has a three year term with principal amortization on a
straight-line quarterly basis which began December 31, 1999 and a
borrowing rate based on the banks' base rate (which is generally
equivalent to the published prime rate) plus 2% or LIBOR plus 3%. The
revolving portion of the U.S Facility has a borrowing rate based on the
banks' base rate plus 1.75% or LIBOR plus 2.75% (weighted average
interest rate of approximately 11.25% for the three months ended June
30, 2000) and matures June 2002. The Company pays a commitment fee of
1/2% on the unused portion of the revolving line. The U.S. Facility is
collateralized by substantially all of the assets of the Company and its
U.S. subsidiaries. The U.S. Facility contains various covenants that
limit the ability of the Company to incur additional indebtedness, pay
dividends or make other distributions, create certain liens, sell
assets, or enter into certain mergers or acquisitions. The Company is
also required to maintain specified financial ratios related to net
worth and fixed charges. As of June 30, 2000, the Company did not meet
the fixed charges coverage ratio covenant of its U.S. Facility. A waiver
was obtained from the lender on August 11, 2000. As of June 30, 2000,
$15.4 million was outstanding under the term loan portion of the U.S.
Facility and $6.0 million was outstanding under the revolving portion of
the U.S. Facility. No letters of credit were outstanding against the
revolving portion of the U.S. Facility at June 30, 2000.
On June 8, 2000, the Company amended certain of the covenants of its U.S.
Facility. The amended U.S. Facility permits the Company to purchase up to
$15.0 million in shares of its common stock as well as its convertible
subordinated notes in accordance with the Company's stock repurchase
program (described in Note 10), to distribute "Rights" under the Company's
shareholders' rights plan (described in Note 11), and to reorganize the
Company's organizational structure into a holding company form.
The Company has a revolving credit facility through its CD Contact
subsidiary in the Netherlands (the "Netherlands Facility"). The Netherlands
Facility permits revolving credit loans and letters of credit up to
Netherlands Guilders ("NLG") 45 million ($19.3 million), based upon
eligible accounts receivable and inventory balances. The Netherlands
Facility is due on demand, bears interest at a Eurocurrency rate plus 1.25%
(weighted average interest rate of 5.5% as of June 30, 2000), is
collateralized by GBP 6.0 million ($9.1 million) letters of credit issued
by the Company's CentreSoft subsidiary and matures March 2001. As of June
30, 2000, letters of credit outstanding under the Netherlands Facility were
approximately NLG 273,000 ($117,000) and borrowings outstanding were $4.9
million.
The Company also has revolving credit facilities with its CentreSoft
subsidiary located in the United Kingdom (the "UK Facility") and its NBG
subsidiary located in Germany (the "German Facility"). The UK Facility
provides for British Pounds ("GBP") 7.0 million ($10.6 million) of
revolving loans and GBP 6.0 million ($9.1 million) of letters of credit,
bears interest at LIBOR plus 2%, is collateralized by substantially all of
the assets of the subsidiary and matures July 2001. The UK Facility also
contains various covenants that require the subsidiary to maintain
specified financial ratios related to, among others, fixed charges. The
Company was in compliance with these covenants as of June 30, 2000. No
borrowings were outstanding against the UK facility at June 30, 2000.
Letters of credit of GBP 6.0 million ($9.1 million) were outstanding
against the UK Facility at June 30, 2000. The German Facility provides for
revolving loans up to Deutsche Mark ("DM") 4 million ($1.9 million), bears
interest at 6.25%, is collateralized by a cash deposit of approximately GBP
650,000 ($983,000) made by the Company's CentreSoft subsidiary and has no
expiration date. No borrowings were outstanding against the German Facility
as of June 30, 2000.
12
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
DEVELOPER CONTRACTS
In the normal course of business, the Company enters into contractual
arrangements with third parties for the development of products. Under
these agreements, the Company commits to provide specified payments to a
developer, contingent upon the developer's achievement of contractually
specified milestones. Assuming all contractually specified milestones are
achieved, the total future minimum contract commitment for contracts in
place as of June 30, 2000 is approximately $50.9 million and is scheduled
to be distributed as follows (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal
<S> <C>
2001 $ 29,160
2002 8,158
2003 4,300
2004 3,000
2005 2,125
Thereafter 4,125
-----------------------
Total $ 50,868
=======================
</TABLE>
Additionally, under the terms of a production financing arrangement, the
Company has a commitment to purchase three future PlayStation 2 titles
from independent third party developers upon their completion for an
estimated $12.2 million in the aggregate. Failure by the developers to
complete the project within the contractual time frame or specifications
alleviates the Company's commitment.
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.
13
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
10. REPURCHASE PLAN
As of May 9, 2000, the Board of Directors authorized the Company to
purchase up to $15.0 million in shares of its common stock as well as its
convertible subordinated notes. The shares and notes could be purchased
from time to time through the open market or in privately negotiated
transactions. The amount of shares and notes purchased and the timing of
purchases was based on a number of factors, including the market price of
the shares and notes, market conditions, and such other factors as the
Company's management deemed appropriate. The Company has financed the
purchase of shares with available cash. As of June 30, 2000, the Company
has repurchased 2.3 million shares of its common stock for approximately
$15.0 million.
11. SHAREHOLDERS' RIGHTS PLAN
On April 18, 2000, the Company's Board of Directors approved a shareholders
rights plan (the "Rights Plan"). Under the Rights Plan, each common
stockholder at the close of business on April 19, 2000 will receive a
dividend of one right for each share of common stock held. Each right
represents the right to purchase one one-hundredth (1/100) of a share of
the Company's Series A Junior Preferred Stock at an exercise price of
$40.00. Initially, the rights are represented by the Company's common stock
certificates and are neither exercisable nor traded separately from the
Company's common stock. The rights will only become exercisable if a person
or group acquires 15% or more of the common stock of the Company, or
announces or commences a tender or exchange offer which would result in the
bidder's beneficial ownership of 15% or more of the Company's common stock.
In the event that any person or group acquires 15% or more of the Company's
outstanding common stock, each holder of a right (other than such person or
members of such group) will thereafter have the right to receive, upon
exercise of such right, in lieu of shares of Series A Junior Preferred
Stock, the number of shares of common stock of the Company having a value
equal to two times the then current exercise price of the right. If the
Company is acquired in a merger or other business combination transaction
after a person has acquired 15% or more the Company's common stock, each
holder of a right will thereafter have the right to receive, upon exercise
of such right, a number of the acquiring company's common shares having a
market value equal to two times the then current exercise price of the
right. For persons who, as of the close of business on April 18, 2000,
beneficially own 15% or more of the common stock of the Company, the Rights
Plan "grandfathers" their current level of ownership, so long as they do
not purchase additional shares in excess of certain limitations.
The Company may redeem the rights for $.01 per right at any time until the
first public announcement of the acquisition of beneficial ownership of 15%
of the Company's common stock. At any time after a person has acquired 15%
or more (but before any person has acquired more than 50%) of the Company's
common stock, the Company may exchange all or part of the rights for shares
of common stock at an exchange ratio of one share of common stock per
right. The rights expire on April 18, 2010.
As discussed in Note 9, the Company obtained an amendment to its U.S.
Facility relating to the Rights Plan and the Company's repurchase plan.
14
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading international publisher, developer and distributor of
interactive entertainment and leisure products. The Company currently focuses
its publishing, development and distribution efforts on products designed for
personal computers ("PCs") as well as the Sony PlayStation ("PSX") and
PlayStation 2, Sega Dreamcast ("Dreamcast") and Nintendo N64 ("N64") console
systems and Nintendo Gameboy handheld game devices. The Company's products span
a wide range of genres and target markets.
The Company distributes its products worldwide through its direct sales forces,
through its distribution subsidiaries, and through third party distributors and
licensees.
The consolidated financial statements for the period ended June 30, 1999 have
been retroactively restated to reflect the Company's acquisition of JCM
Productions, Inc. dba Neversoft Entertainment ("Neversoft") on September 30,
1999, which was accounted for 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 returns within certain specified periods and provides price
protection on certain unsold merchandise. Revenue from product sales is
reflected after deducting the estimated allowance for returns and price
protection. Management of the Company estimates the amount of future returns and
price protection based upon historical results and current known circumstances.
With respect to license agreements that provide customers the right to multiple
copies in exchange for guaranteed amounts, revenue is recognized upon delivery.
Per copy royalties on sales that exceed the guarantee are recognized as earned.
Cost of sales-product costs represents the cost to purchase, manufacture and
distribute PC and console product units. 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, Nintendo and Sega or its agents, who often require significant lead time
to fulfill the Company's orders.
Cost of sales-royalties and software amortization represents 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 that provide for the capitalization of
certain software development costs once technological feasibility is established
and such costs are determined to be recoverable. Additionally, 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.
Commencing upon product release, prepaid royalties are amortized to cost of
sales - royalties and software amortization at the contractual royalty rate
based on actual net product sales or on the ratio of current revenues to total
projected revenues, whichever is greater, and capitalized software costs are
amortized to cost of sales-royalties and software amortization on a
straight-line basis over the estimated product life or on the ratio of current
revenues to total projected revenues, whichever 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 charges to expense,
as part of product development costs, capitalized costs when, in management's
estimate, such amounts are not recoverable. The following criteria are 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; 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.
15
<PAGE>
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three months ended June 30, 2000
(Unaudited)
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, channel, platform and segment:
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------------------------
(In thousands)
-----------------------------------------------
Restated
-----------------------
2000 1999
---------------------- -----------------------
<S> <C> <C> <C> <C>
Net revenues $ 84,558 100.0% $ 84,142 100.0%
Costs and expenses:
Cost of sales - product costs 43,633 51.6% 53,542 63.6%
Cost of sales - royalties and software
amortization 13,647 16.1% 9,867 11.7%
Product development 7,424 8.8% 4,523 5.4%
Sales and marketing 17,872 21.1% 15,250 18.1%
General and administrative 8,102 9.6% 6,592 7.8%
Amortization of intangible assets 378 0.5% 469 0.6%
---------- ---------- ----------- ----------
Total costs and expenses 91,056 107.7% 90,243 107.2%
---------- ---------- ----------- ----------
Loss from operations (6,498) (7.7%) (6,101) (7.2%)
Interest expense, net (1,723) (2.0%) (1,160) (1.4%)
---------- ---------- ----------- ----------
Loss before income tax provision (8,221) (9.7%) (7,261) (8.6%)
Income tax provision (benefit) (3,042) 3.6% (2,686) 3.2%
---------- ---------- ----------- ----------
Net loss $ (5,179) (6.1%) $ (4,575) (5.4%)
========== ========== =========== ==========
NET REVENUES BY TERRITORY:
United States $ 45,995 54.4% $ 35,428 42.1%
Europe 37,370 44.2% 47,146 56.0%
Other 1,193 1.4% 1,568 1.9%
---------- ---------- ----------- ----------
Total net revenues $ 84,558 100.0% $ 84,142 100.0%
========== ========== =========== ==========
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 81,801 96.7% $ 80,303 95.4%
OEM, Licensing, on-line and other 2,757 3.3% 3,839 4.6%
---------- ---------- ----------- ----------
Total net revenues $ 84,558 100.0% $ 84,142 100.0%
========== ========== =========== ==========
ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 31,259 37.0% $ 31,676 37.6%
PC 29,740 35.1% 21,690 25.8%
---------- ---------- ----------- ----------
Total publishing net revenues $ 60,999 72.1% $ 53,366 63.4%
---------- ---------- ----------- ----------
Distribution:
Console $ 16,489 19.5% $ 20,536 24.4%
PC 7,070 8.4% 10,240 12.2%
---------- ---------- ----------- ----------
Total distribution net revenues $ 23,559 27.9% $ 30,776 36.6%
---------- ---------- ----------- ----------
Total net revenues $ 84,558 100.0% $ 84,142 100.0%
========== ========== =========== ==========
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
OPERATING LOSS BY SEGMENT:
Publishing $ (5,907) 90.9% $ (5,947) 97.5%
Distribution (591) 9.1 (154) 2.5%
---------- ---------- ---------- -----------
Total operating loss $ (6,498) 100.0% $ (6,101) 100.0%
========== ========== ========== ===========
</TABLE>
17
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 AND 1999
NET REVENUES
Net revenues for the three months ended June 30, 2000 increased 0.5% from the
same period last year, from $84.1 million to $84.6 million. Publishing net
revenues increased 14.2% from $53.4 million to $61.0 million. This increase
was in large part offset by a 23.5% decline in distribution net revenues from
$30.8 million to $23.6 million. Domestic net revenues grew 29.8% from $35.4
million to $46.0 million driven by an increase in publishing net revenues.
International net revenues decreased 20.8% from $48.7 million to $38.6
million driven primarily by a decrease in distribution net revenues.
The increase in publishing net revenues for the three months ended June 30,
2000 was due to publishing PC net revenues increasing 37.1% from $21.7
million to $29.7 million. This increase was attributable to several new
launches during the quarter, including Vampire: The Masquerade Redemption and
Dark Reign 2, as well as continuing sales of Star Trek Armada, Soldier of
Fortune and Quake 3 Arena. Publishing console net revenues for the three
months ended June 30, 2000 and 1999 were $31.3 million to $31.7 million,
respectively. Publishing console net revenues for the three months ended June
30, 2000 included net revenues from the release of X-Men Mutant Academy for
the Nintendo Gameboy and Covert Ops for Playstation.
The decrease in distribution net revenues for the three months ended June 30,
2000, mainly was attributable to the continued weakness in the European
console market.
COSTS AND EXPENSES
Cost of sales - product costs represented 51.6% and 63.6% of net revenues for
the three months ended June 30, 2000 and 1999, respectively. The decrease in
cost of sales - product costs as a percentage of net revenues for the three
months ended June 30, 2000 was due to product mix. In the first quarter of
fiscal 2001, the publishing product release schedule included more PC titles
than console titles. PC products have a higher gross margin per unit compared
to console products. Additionally, there was an overall increase in
publishing net revenues versus distribution net revenues as a percentage of
total net revenues. Publishing generates a higher gross margin per unit than
distribution.
Cost of sales - royalty and software amortization expense represented 16.1%
and 11.7% of net revenues for the three months ended June 30, 2000 and 1999,
respectively. The increase in cost of sales - royalty and software
amortization expense as a percentage of net revenues was primarily due to
changes in the Company's product mix, with an increase in the number of
branded products with higher royalty obligations as compared to the prior
fiscal year.
Product development expenses of $7.4 million and $4.5 million represented
8.8% and 5.4% of net revenues for the three months ended June 30, 2000 and
1999, respectively. The increase in product development expenses as a
percentage of net revenues was due to an increase in the number of titles
being developed during the three months ended June 30, 2000 for current and
next-generation platforms.
Sales and marketing expenses for the three months ended June 30, 2000 and
1999 were $15.3 million (18.1% of net revenues) and $17.9 million (21.1% of
net revenues), respectively. The increase in the amount of sales and
marketing and the increase as a percentage of net revenues was due to an
increase in the number of titles released and the advertising necessary to
promote these titles. These increases are also the result of an increased
sales force as the Company is utilizing an increased direct to market sales
approach as opposed to the use of third party distributors.
General and administrative expenses for the three months ended June 30, 2000
and 1999 were $6.6 million (7.8% of net revenues) and $8.1 million (9.6% of
net revenues), respectively. These increases in general and administrative
expenses were due to an increase in headcount related expenses for worldwide
administrative support.
18
<PAGE>
OPERATING LOSS
Operating loss for the three months ended June 30, 2000, was ($6.5 million),
compared to ($6.1 million) for the three months ended June 30, 1999.
Publishing operating loss remained constant at ($5.9 million), for the three
months ended June 30, 2000 and 1999. Distribution operating loss for the three
months ended June 30, 2000 increased to ($591,000), compared to ($154,000) in
the year ago period. The period over period change primarily was due to the
continued weakness in the European console market, as noted earlier.
OTHER INCOME (EXPENSE)
Interest expense, net of interest income, increased to $1.7 million for the
three months ended June 30, 2000, from $1.2 million for the year ago period.
This was primarily the result of increased average borrowings associated with
the Company's $125 million term loan and revolving credit facility obtained in
June 1999 and higher interest rates experienced in the first quarter of fiscal
2001.
PROVISION FOR INCOME TAXES
The income tax benefit of $3.0 million for the three months ended June 30, 2000
reflects the Company's effective income tax rate of approximately 37%. The
significant items generating the variance between the Company's effective rate
and its statutory rate of 35% are state taxes and nondeductible goodwill
amortization, partially offset by a decrease in the Company's deferred tax asset
valuation allowance and research and development tax credits. 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 net deferred
tax assets recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $38.4 million, from $50.0
million at March 31, 2000 to $11.6 million at June 30, 2000. The decrease in
cash during the first quarter of fiscal 2001 resulted principally from $1.6
million, $19.7 million and $14.8 million of cash used in operating
activities, investing activities and financing activities, respectively. The
cash used in operating activities primarily was the result of changes in
accounts payable, accrued liabilities and accounts receivable driven by a
seasonal increase in working capital demands. The cash used in investing
activities primarily is the result of the Company's continued investment in
product development. Approximately $18.1 million was utilized in connection
with the acquisition of publishing or distribution rights to products being
developed by third parties, the execution of new license agreements granting
the Company long-term rights to intellectual property of third parties, as
well as the capitalization of product development costs relating to
internally developed products. The cash used in financing activities
primarily is reflective of the Company's $15.0 million purchase of its common
stock under its repurchase program.
In connection with the Company's purchases of Nintendo N64 software
cartridges for distribution in North America and Europe, Nintendo requires
the Company to provide irrevocable letters of credit prior to accepting
purchase orders from the Company. Furthermore, Nintendo maintains a policy of
not accepting returns of Nintendo N64 software cartridges. Because of these
and other factors, the carrying of an inventory of Nintendo N64 software
cartridges entails significant capital and risk. As of June 30, 2000, the
Company had $3.4 million of Nintendo N64 hardware and software cartridge
inventory on hand, which represented approximately 8.0% of all inventory.
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. If redemption occurs prior to December 31, 2003, the
Company must pay a premium on such redeemed Notes.
19
<PAGE>
The Company has a $125.0 million revolving credit facility and term loan (the
"U.S. Facility") with a group of banks ("the lender"). The U.S. Facility
provides the Company with the ability to borrow up to $100.0 million and issue
letters of credit up to $80.0 million on a revolving basis against eligible
accounts receivable and inventory. The $25.0 million term loan portion of the
U.S. Facility was used to fund the acquisition of Expert Software, Inc. in
June 1999 and to pay costs related to such acquisition and the securing of
the U.S. Facility. The term loan has a three year term with principal
amortization on a straight-line quarterly basis which began December 31, 1999
and a borrowing rate based on the banks' base rate (which is generally
equivalent to the published prime rate) plus 2% or LIBOR plus 3%. The
revolving portion of the U.S Facility has a borrowing rate based on the
banks' base rate plus 1.75% or LIBOR plus 2.75% (weighted average interest
rate of approximately 11.25% for the three months ending June 30, 2000) and
matures June 2002. The Company pays a commitment fee of 1/2% on the unused
portion of the revolving line. The U.S. Facility is collateralized by
substantially all of the assets of the Company and its U.S. subsidiaries. The
U.S. Facility contains various covenants which limit the ability of the
Company to incur additional indebtedness, pay dividends or make other
distributions, create certain liens, sell assets, or enter into certain
mergers or acquisitions. The Company is also required to maintain specified
financial ratios related to net worth and fixed charges. As of June 30, 2000,
the Company did not meet the fixed charges coverage ratio covenant of its
U.S. Facility. A waiver was obtained from the lender on August 11, 2000. As
of June 30, 2000, $15.4 million was outstanding under the term loan portion
of the U.S. Facility and $6.0 million was outstanding under the revolving
portion of the U.S. Facility. No letters of credit were outstanding against
the revolving portion of the U.S. Facility at June 30, 2000.
On June 8, 2000, the Company amended certain of the covenants of its U.S.
Facility. The amended term loan and credit facility allows for the purchase by
the Company of up to $15.0 million in shares of its common stock as well as its
convertible subordinated notes in accordance with the Company's stock repurchase
program (described in Note 10 to the consolidated financial statements), to
distribute "Rights" under the Company's shareholders' rights plan (described in
Note 11 to the consolidated financial statements), and to reorganize the
Company's organizational structure into a holding company form.
The Company has a revolving credit facility through its CD Contact subsidiary in
the Netherlands (the "Netherlands Facility"). The Netherlands Facility permits
revolving credit loans and letters of credit up to Netherlands Guilder ("NLG")
45 million ($19.3 million), based upon eligible accounts receivable and
inventory balances. The Netherlands Facility is due on demand, bears interest at
a Eurocurrency rate plus 1.25% (weighted average interest rate of 5.5% of June
30, 2000), is collateralized by GBP 6.0 million ($9.1 million) letters of credit
issued by the Company's CentreSoft subsidiary and matures March 2001. As of June
30, 2000, letters of credit outstanding against the Netherlands Facility were
approximately NLG 273,000 ($117,000), and borrowings outstanding were $4.9
million.
The Company also has revolving credit facilities with its CentreSoft subsidiary
located in the United Kingdom, (the "UK Facility") and its NBG subsidiary
located in Germany, (the "German Facility"). The UK Facility can be used for
working capital requirements and provides for British Pounds ("GBP") 7 million
($10.6 million) of revolving loans and GBP 6 million ($9.1 million) of letters
of credit, bears interest at LIBOR plus 2%, is collateralized by substantially
all of the assets of the subsidiary and matures July 2001. The UK Facility also
contains various covenants that require the subsidiary to maintain specified
financial ratios related to, among others, fixed charges. The Company was in
compliance with these covenants as of June 30, 2000. No borrowings were
outstanding against the UK facility at June 30, 2000. Letters of credit of GBP
6.0 million ($9.1 million) were outstanding against the UK Facility at June 30,
2000. The German Facility can be used for working capital requirements and
provides for revolving loans up to Deutsche Mark ("DM") 4 million ($1.9
million), bears interest at 6.25%, is collateralized by a cash deposit of
approximately GBP 650,000 ($983,000) made by the Company's CentreSoft subsidiary
and has no expiration date. No borrowings were outstanding against the German
Facility as of June 30, 2000.
20
<PAGE>
In the normal course of business, the Company enters into contractual
arrangements with third parties for the development of products. Under these
agreements, the Company commits to provide specified payments to a developer,
contingent upon the developer's achievement of contractually specified
milestones. Assuming all contractually specified milestones are achieved, the
total future minimum contract commitment for contracts in place as of June 30,
2000 is approximately $50.9 million and is scheduled to be distributed as
follows:
<TABLE>
<CAPTION>
Fiscal
<S> <C>
2001 $ 29,160
2002 8,158
2003 4,300
2004 3,000
2005 2,125
Thereafter 4,125
---------------
Total $ 50,868
==============
</TABLE>
Additionally, under the terms of a production financing arrangement, the
Company has a commitment to purchase three future PlayStation 2 titles from
independent third party developers upon their completion for an estimated
$12.2 million in the aggregate. Failure by the developers to complete the
project within the contractual time frame or specifications alleviates the
Company's commitment.
The Company historically has financed its acquisitions through the issuance of
shares of its common stock. The Company will continue to evaluate potential
acquisition candidates as to the benefit they bring to the Company and as to the
ability of the Company to make such acquisitions and maintain compliance with
its bank facilities.
In May 2000, the Board of Directors authorized the Company to purchase up to
$15.0 million in shares of its common stock as well as its convertible
subordinated notes. The shares and notes could be purchased in the open market
or in privately negotiated transactions at such times and in such amounts as
management deemed appropriate, depending on market conditions and other factors.
As of June 30, 2000, the Company has repurchased 2.3 million shares of its
common stock for approximately $15.0 million.
The Company believes that it has sufficient working capital ($127.6 million at
June 30, 2000), as well as proceeds available from the U.S. Facility, the UK
Facility, the Netherlands Facility and the German Facility, to finance the
Company's operational requirements for at least the next twelve months,
including acquisitions of inventory and equipment, the funding of the
development, production, marketing and sale of new products and the acquisition
of intellectual property rights for future products from third parties.
YEAR 2000
The Company encountered no significant problems in its critical systems or
products sold to customers in the transition to the year 2000. All of the
Company's internal systems are functioning normally and no year 2000 problems
have been reported by any of its trading partners. The Company will continue to
monitor its systems for any latent issues, but expects no significant year 2000
issues to arise. The Company continues to maintain contingency plans that
management believes are adequate and customary to address any unexpected year
2000 problems.
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
21
<PAGE>
materially from those referred to in such forward-looking statements. For a
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133") is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The Company does not currently participate in hedging activities
or own derivative instruments but plans to adopt SFAS No. 133 beginning April 1,
2001. The Company does not expect the adoption of SFAS No. 133 to have a
material impact on its financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Any change in the
Company's revenue recognition policy resulting from the implementation of SAB
101 would be reported as a change in accounting principle. In June 2000, the SEC
issued SAB 101B which delays the implementation date of SAB 101 until the fourth
fiscal quarter of fiscal years beginning after December 15, 1999.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" ("FIN 44"). FIN 44 clarifies certain issues related to accounting
for stock-based compensation, including (a) the definition of employee for
purposes of applying APB Opinion No. 25, "Accounting for Stock Issued to
Employees," (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequence of various modifications to
the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but covers certain specific events that occur either
after December 15, 1998 or January 12, 2000. To the extent that FIN 44 covers
events occurring during the period after December 15, 1998 or January 12, 2000,
but before the effective date of July 1, 2000, the effects of applying FIN 44
are recognized on a prospective basis from July 1, 2000. The Company is
evaluating the impact, if any, of FIN 44 on its financial position and results
of operations.
22
<PAGE>
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, 2000. There has been no significant change in the nature or
amount of market risk since year end.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Employment agreement dated as of April 1, 2000 between the
Company and Lawrence Goldberg.
10.2 Employment agreement dated as of July 18, 2000 between the
Company and William J. Chardavoyne.
27.1 Financial data schedule for the three months ended June 30, 2000.
27.2 Financial data schedule for the three months ended June 30, 1999.
(b) Reports on Form 8-K
The following reports on Form 8-K have been filed by the Company
during the first quarter of the fiscal year ending March 31, 2001:
1.1 The Company filed a Form 8-K on April 19, 2000, reporting
under "Item 5. Other Events" the announcement of the
Company's shareholders' rights plan.
1.2 The Company filed a Form 8-K on June 16, 2000 reporting
under "Item 5. Other Events" the announcement of the
organizational restructuring of the Company into a holding
company format organizational structure.
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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 11, 2000
ACTIVISION, INC.
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<S> <C> <C>
/s/ William J. Chardavoyne Chief Financial Officer and Chief Accounting Officer August 11, 2000
--------------------------- ----------------------------------------------------
(William J. Chardavoyne)
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