<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 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 November
9, 2000 was 24,431,582.
1
<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 September 30, 2000 (unaudited) and
March 31, 2000 3
Consolidated Statements of Operations for the three and six months
ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Cash Flows for the six months
ended September 30, 2000 and 1999 (unaudited) 5
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended September 30, 2000 (unaudited) 6
Notes to Consolidated Financial Statements for the three and six months
ended September 30, 2000 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 28
</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>
September 30, March 31,
2000 2000
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,204 $ 49,985
Accounts receivable, net of allowances of $31,945 and
$31,521 at September 30, 2000 and March 31, 2000,
respectively 136,868 108,108
Inventories 47,242 40,453
Prepaid royalties and capitalized software costs 35,232 31,655
Deferred income taxes 14,619 14,159
Other current assets 18,000 17,815
------------- -------------
Total current assets 277,165 262,175
Prepaid royalties and capitalized software costs 8,657 9,153
Property and equipment, net 11,419 10,815
Deferred income taxes 11,131 6,055
Goodwill, net 11,174 12,347
Other assets 9,981 9,192
------------- -------------
Total assets $ 329,527 $ 309,737
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 39,792 $ 16,260
Accounts payable 44,484 38,284
Accrued expenses 57,646 49,404
------------- -------------
Total current liabilities 141,922 103,948
Long-term debt, less current portion 7,657 13,778
Convertible subordinated notes 60,000 60,000
Other liabilities 27 2
------------- -------------
Total liabilities 209,606 177,728
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.000001 par value, 5,000,000 shares
authorized, no shares issued at September 30, 2000 and
March 31, 2000 - -
Common stock, $.000001 par value, 50,000,000 shares authorized,
27,180,545 and 26,488,260 shares issued and 24,296,566 and
25,988,260 shares outstanding at September 30, 2000 and
March 31, 2000, respectively - -
Additional paid-in capital 159,143 151,714
Retained earnings (deficit) (9,234) (8,361)
Accumulated other comprehensive loss (9,739) (6,066)
Less: Treasury stock, at cost, 2,883,979 shares
and 500,000 shares at September 30, 2000 and March 31,
2000, respectively (20,249) (5,278)
------------- -------------
Total shareholders' equity 119,921 132,009
------------- -------------
Total liabilities and shareholders' equity $ 329,527 $ 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 For the six months ended
September 30, September 30,
-------------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $144,363 $115,363 $228,921 $199,505
Costs and expenses:
Cost of sales - product costs 64,351 66,284 107,984 119,823
Cost of sales - royalties and software
amortization 24,819 11,610 38,465 21,480
Product development 11,107 5,819 18,531 10,342
Sales and marketing 23,909 18,194 41,779 33,443
General and administrative 10,641 9,931 19,124 16,992
-------- -------- -------- --------
Total costs and expenses 134,827 111,838 225,883 202,080
-------- -------- -------- --------
Income (loss) from operations 9,536 3,525 3,038 (2,575)
Interest expense, net (2,683) (1,838) (4,406) (2,997)
-------- -------- -------- --------
Income (loss) before income tax provision 6,853 1,687 (1,368) (5,572)
Income tax provision (benefit) 2,547 624 (495) (2,061)
-------- -------- -------- --------
Net income (loss) $ 4,306 $ 1,063 $ (873) $ (3,511)
======== ======== ======== ========
Basic earnings per share:
Net income (loss) $ 0.18 $ 0.04 $ (0.04) $ (0.15)
======== ======== ======== ========
Weighted average common shares
outstanding 23,835 24,502 24,388 24,103
======== ======== ======== ========
Diluted earnings per share:
Net income (loss) $ 0.17 $ 0.04 $ (0.04) $ (0.15)
======== ======== ======== ========
Weighted average common shares
outstanding 25,799 26,753 24,388 24,103
======== ======== ======== ========
</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 six months ended September 30,
--------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (873) $ (3,511)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Deferred income taxes (5,275) (2,496)
Depreciation and amortization 2,964 3,435
Amortization of prepaid royalties and capitalized
software costs 34,101 18,271
Expense related to common stock warrants 703 517
Tax benefit from exercise of stock options 1,445 2,370
Change in assets and liabilities (net of effects of
purchases and acquisitions):
Accounts receivable (28,760) (9,377)
Inventories (6,789) (6,593)
Other current assets (185) (2,985)
Other assets (1,492) (3,501)
Accounts payable 6,200 (6,591)
Accrued expenses 8,469 9,087
Other liabilities 24 -
----------- -----------
Net cash provided by (used in) operating activities 10,532 (1,374)
----------- -----------
Cash flows from investing activities:
Cash used in purchase acquisitions (net of cash acquired) - (20,523)
Investment in prepaid royalties and capitalized software costs (37,182) (31,625)
Capital expenditures (3,531) (2,330)
Proceeds from disposal of property and equipment 1,394 -
----------- -----------
Net cash used in investing activities (39,319) (54,478)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to
employee stock option plans 5,124 13,288
Proceeds from issuance of common stock pursuant to
employee stock purchase plan 327 419
Borrowing under line-of-credit agreements 234,296 51,815
Payment under line-of-credit agreements (211,055) (34,476)
Proceeds from term loan - 25,000
Payment on term loan (5,000) -
Other notes payable, net (458) (4,844)
Cash paid to acquire line of credit and term loan - (3,355)
Purchase of treasury stock (14,971) -
----------- -----------
Net cash provided by financing activities 8,263 47,847
----------- -----------
Effect of exchange rate changes on cash (4,257) 765
----------- -----------
Net decrease in cash and cash equivalents (24,781) (7,240)
Cash and cash equivalents at beginning of period 49,985 33,037
----------- -----------
Cash and cash equivalents at end of period $ 25,204 $ 25,797
=========== ===========
</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 six months ended September 30, 2000
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
----------------- Paid-In Earnings ---------------------
Shares Amount Capital (Deficit) Shares Amount
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 31, 2000 26,488 $ -- $151,714 $ (8,361) (500) $ (5,278)
Components of comprehensive income (loss):
Net loss -- -- -- (873) -- --
Foreign currency translation adjustment -- -- -- -- -- --
Total comprehensive loss
Acquisition of treasury stock -- -- -- -- (2,384) (14,971)
Issuance of common stock pursuant to employee stock
purchase plan 35 -- 327 -- -- --
Issuance of common stock pursuant to employee stock
option plans 658 -- 5,124 -- -- --
Tax benefit attributable to employee stock option plans -- -- 1,445 -- -- --
Tax benefit derived from net operating loss carryforward
utilization -- -- 533 -- -- --
---------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 27,181 $ -- $159,143 $ (9,234) (2,884) $(20,249)
===============================================================
<CAPTION>
Accumulated
Other
Comprehensive Shareholders'
Income Equity
(Loss)
-----------------------------
<S> <C> <C>
BALANCE, MARCH 31, 2000 $ (6,066) $ 132,009
Components of comprehensive income (loss):
Net loss -- (873)
Foreign currency translation adjustment (3,673) (3,673)
-------------
Total comprehensive loss (4,546)
-------------
Acquisition of treasury stock -- (14,971)
Issuance of common stock pursuant to employee stock
purchase plan -- 327
Issuance of common stock pursuant to employee stock
option plans -- 5,124
Tax benefit attributable to employee stock option plans -- 1,445
Tax benefit derived from net operating loss carryforward
utilization -- 533
-----------------------------
BALANCE, SEPTEMBER 30, 2000 $ (9,739) $ 119,921
=============================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 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").
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 net income (loss),
shareholders' equity or cash flows.
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.
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
7
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 30, 2000
(Unaudited)
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 September 30, 2000, prepaid royalties and unamortized capitalized
software costs totaled $36.7 million (including $8.7 million classified as
non-current) and $7.2 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 that 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.
5. INTEREST EXPENSE, NET
Interest expense, net is comprised of the following (amounts in thousands):
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
------------------------------------------- -------------------------------------
2000 1999 2000 1999
---------------------- -------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Interest expense $ (2,913) $ (2,064) $ (5,103) $ (3,410)
Interest income 230 226 697 413
---------------------- -------------------- ------------------ ------------------
Net interest income (expense) $ (2,683) $ (1,838) $ (4,406) $ (2,997)
====================== ==================== ================== ==================
</TABLE>
8
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 30, 2000
(Unaudited)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities and supplemental cash flow
information is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Six months ended September 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 -
Stock and options issued to effect business
combination - 5,971
Supplemental cash flow information:
Cash paid for income taxes $ 2,723 $ 788
============ =============
Cash paid for interest $ 3,174 $ 5,238
============ =============
</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 and PlayStation 2 console systems, 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.
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.
9
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 30, 2000
(Unaudited)
Information on the reportable segments for the three and six months ended
September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended September 30, 2000
-------------------------------------------------
Publishing Distribution Total
---------- ------------ ----------
<S> <C> <C> <C>
Total segment revenues $ 121,630 $ 22,733 $ 144,363
Revenue from sales between segments (10,715) 10,715 -
---------- ---------- ----------
Revenues from external customers $ 110,915 $ 33,448 $ 144,363
========== ========== ==========
Operating income (loss) $ 10,461 $ (925) $ 9,536
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended September 30, 2000
-------------------------------------------------
Publishing Distribution Total
---------- ------------ ----------
<S> <C> <C> <C>
Total segment revenues $ 182,629 $ 46,292 $ 228,921
Revenue from sales between segments (16,576) 16,576 -
---------- ---------- ----------
Revenues from external customers $ 166,053 $ 62,868 $ 228,921
========== ========== ==========
Operating income (loss) $ 4,554 $ (1,516) $ 3,038
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1999
-------------------------------------------------
Publishing Distribution Total
---------- ------------ ----------
<S> <C> <C> <C>
Total segment revenues $ 87,106 $ 28,257 $ 115,363
Revenue from sales between segments (8,417) 8,417 -
---------- ---------- ----------
Revenues from external customers $ 78,689 $ 36,674 $ 115,363
========== ========== ==========
Operating income $ 3,406 $ 119 $ 3,525
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six months ended September 30, 1999
-------------------------------------------------
Publishing Distribution Total
---------- ------------ ----------
<S> <C> <C> <C>
Total segment revenues $ 140,472 $ 59,033 $ 199,505
Revenue from sales between segments (13,663) 13,663 -
---------- ---------- ----------
Revenues from external customers $ 126,809 $ 72,696 $ 199,505
========== ========== ==========
Operating loss $ (2,541) $ (34) $ (2,575)
========== ========== ==========
</TABLE>
10
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 30, 2000
(Unaudited)
Geographic information for the three months and six months ended September
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 September 30, Six months ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
United States $ 92,308 $ 59,173 $138,303 $ 94,601
Europe 48,039 53,616 85,409 100,765
Other 4,016 2,574 5,209 4,139
-------- -------- -------- --------
Total $144,363 $115,363 $228,921 $199,505
======== ======== ======== ========
</TABLE>
Revenues by platform were as follows:
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Console $115,159 $ 82,721 $161,804 $134,772
PC 29,204 32,642 67,117 64,733
-------- -------- -------- --------
Total $144,363 $115,363 $228,921 $199,505
======== ======== ======== ========
</TABLE>
11
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 30, 2000
(Unaudited)
8. COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings (loss) per share (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
------------------------- -----------------------------
2000 1999 2000 1999
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
NUMERATOR
Numerator for basic and diluted earnings per
share-income (loss) available to common
shareholders $ 4,306 $ 1,063 $ (873) $ (3,511)
========= ======= ========= =========
DENOMINATOR
Denominator for basic earnings per share-
weighted average common shares outstanding 23,835 24,502 24,388 24,103
========= ======= ========= =========
Effect of dilutive securities:
Employee stock options 1,891 1,983 - -
Warrants 73 268 - -
--------- ------- --------- ---------
Denominator for diluted earnings per
share-weighted average common shares
outstanding plus assumed conversions 25,799 26,753 24,388 24,103
========= ======= ========= =========
Basic earnings (loss) per share $ 0.18 $ 0.04 $ (0.04) $ (0.15)
========= ======= ========= =========
Diluted earnings (loss) per share $ 0.17 $ 0.04 $ (0.04) $ (0.15)
========= ======= ========= =========
</TABLE>
Options to purchase 2.8 million and 14.9 million shares of common stock at
exercise prices ranging from $11.05 to $23.04 and from $0.75 to $23.04,
respectively, were outstanding for the three months and six months ended
September 30, 2000, respectively, but were not included in the calculations
of diluted earnings (loss) per share because their effect would be
antidilutive. Options to purchase 113,745 and 10.6 million shares of common
stock at exercise prices ranging from $14.57 to $23.04 and from $0.51 to
$23.04, respectively, were outstanding for the three months and six months
ended September 30, 1999, respectively, but were not included in the
calculations of diluted earnings (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
earnings (loss) per share because their effect would be antidilutive.
12
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 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 on outstanding borrowings of
approximately 10.1% and 9.8% for the three months and six months ended
September 30, 2000, respectively) 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. The Company was in compliance with these
covenants as of September 30, 2000. As of September 30, 2000, $15.0 million
was outstanding under the term loan portion of the U.S. Facility and $25.3
million was outstanding under the revolving portion of the U.S. Facility.
As of September 30, 2000, $40.6 million of letters of credit were
outstanding against the revolving portion of the U.S. Facility.
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") 26 million ($10.4 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 September 30, 2000), is
collateralized by GBP 3.0 million ($4.4 million) letters of credit issued
by the Company's CentreSoft subsidiary and matures August 2003. As of
September 30, 2000, letters of credit outstanding under the Netherlands
Facility were approximately NLG 278,000 ($111,000) and borrowings
outstanding were NLG 8.8 million ($3.5 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 ($10.2 million) of
revolving loans and GBP 3.0 million ($4.4 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 September 30, 2000. No
borrowings were outstanding against the UK facility as of September 30,
2000. Letters of credit of GBP 3.0 million ($4.4 million) were outstanding
against the UK Facility as of September 30, 2000, issued on behalf of the
Company's CD Contact subsidiary as described above. The German Facility
provides for revolving loans up to Deutsche Mark ("DM") 4 million ($1.8
million), bears interest at 5.9%, is collateralized by a cash deposit of
approximately GBP 650,000 ($951,000) made by the Company's CentreSoft
subsidiary and has no expiration date. No borrowings were outstanding
against the German Facility as of September 30, 2000.
13
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 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 September 30, 2000 is approximately $39.8 million and is
scheduled to be distributed as follows (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
2001 $ 15,105
2002 9,199
2003 6,198
2004 3,000
2005 2,125
Thereafter 4,125
------------
Total $ 39,752
============
</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.
The federal income tax return for fiscal 1997 is currently under
examination. While the ultimate results of such examination cannot be
predicted with certainty, the Company's management believes that the
examination will not have a material adverse effect on its consolidated
financial condition or results of operations.
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. During the quarter ended June 30,
2000, the Company 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
14
<PAGE>
ACTIVISION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended September 30, 2000
(Unaudited)
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.
12. NEW ACCOUNTING PRONOUNCEMENTS
In July 2000, the Emerging Issues Task Force reached a consensus on issue
No. 00-15 ("EITF 00-15"), "Classification in the Statement of Cash Flows of
the Income Tax Benefit Realized by a Company upon Employee Exercise of a
Nonqualified Stock Option." The EITF concluded that income tax benefits
realized upon an employee's exercise of a nonqualified stock option should
be classified as an operating cash flow. Accordingly, the Company
reclassified tax benefits resulting from the exercise of stock options on
its Consolidated Statements of Cash Flows.
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. The Company does not expect
the adoption of SAB 101 to have a material impact on its financial position
or results of operations.
15
<PAGE>
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 ("PS2"), 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 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.
16
<PAGE>
The following table sets forth certain consolidated statements of operations
data for the periods indicated as a percentage of total net revenues and also
breaks down net revenues by territory, channel, platform and segment:
<TABLE>
<CAPTION>
Three months ended September 30, Six months ended September 30,
------------------------------------------- ------------------------------------------
(In thousands) (In thousands)
------------------------------------------- ------------------------------------------
2000 1999 2000 1999
-------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $144,363 100.0% $115,363 100.0% $228,921 100.0% $199,505 100.0%
Costs and expenses:
Cost of sales -
product costs 64,351 44.6% 66,284 57.4% 107,984 47.2% 119,823 60.0%
Cost of sales -
royalties and
software amortization 24,819 17.2% 11,610 10.1% 38,465 16.8% 21,480 10.8%
Product development 11,107 7.7% 5,819 5.0% 18,531 8.1% 10,342 5.2%
Sales and marketing 23,909 16.5% 18,194 15.8% 41,779 18.3% 33,443 16.8%
General and
administrative 10,641 7.4% 9,931 8.6% 19,124 8.3% 16,992 8.5%
Total costs and --------- --------- ---------- --------- ---------- --------- --------- --------
expenses 134,827 93.4% 111,838 96.9% 225,883 98.7% 202,080 101.3%
--------- --------- ---------- --------- ---------- --------- --------- --------
Income (loss) from operations 9,536 6.6% 3,525 3.1% 3,038 1.3% (2,575) (1.3%)
Interest expense, net (2,683) (1.9%) (1,838) (1.6%) (4,406) (1.9%) (2,997) (1.5%)
--------- --------- ---------- --------- ---------- --------- --------- --------
Income (loss) before income
tax provision 6,853 4.7% 1,687 1.5% (1,368) (0.6%) (5,572) (2.8%)
Income tax provision
(benefit) 2,547 1.7% 624 0.5% (495) (0.2%) (2,061) (1.0%)
--------- --------- ---------- --------- ---------- --------- --------- --------
Net income (loss) $ 4,306 3.0% $ 1,063 1.0% $ (873) (0.4%) $ (3,511) (1.8%)
========= ========= ========== ========= ========== ========= ========= ========
NET REVENUES BY TERRITORY:
United States $ 92,308 63.9% $ 59,173 51.3% $138,303 60.4% $ 94,601 47.4%
Europe 48,039 33.3% 53,616 46.5% 85,409 37.3% 100,765 50.5%
Other 4,016 2.8% 2,574 2.2% 5,209 2.3% 4,139 2.1%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total net revenues $144,363 100.0% $115,363 100.0% $228,921 100.0% $199,505 100.0%
========= ========= ========== ========= ========== ========= ========= ========
NET REVENUES BY CHANNEL:
Retailer/Reseller $140,207 97.1% $108,322 93.9% $220,855 96.5% $187,680 94.1%
OEM, Licensing, on-line
and other 4,156 2.9% 7,041 6.1% 8,066 3.5% 11,825 5.9%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total net revenues $144,363 100.0% $115,363 100.0% $228,921 100.0% $199,505 100.0%
========= ========= ========== ========= ========== ========= ========= ========
ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 99,057 81.4% $ 61,890 71.1% $129,100 70.7% $ 93,405 66.5%
PC 22,573 18.6% 25,216 28.9% 53,529 29.3% 47,067 33.5%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total publishing net
revenues 121,630 84.3% 87,106 75.5% 182,629 79.8% 140,472 70.4%
--------- --------- ---------- --------- ---------- --------- --------- --------
Distribution:
Console 16,102 70.8% 20,831 73.7% 32,704 70.6% 41,367 70.1%
PC 6,631 29.2% 7,426 26.3% 13,588 29.4% 17,666 29.9%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total distribution
net revenues 22,733 15.7% 28,257 24.5% 46,292 20.2% 59,033 29.6%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total net revenues $144,363 100.0% $115,363 100.0% $228,921 100.0% $199,505 100.0%
========= ========= ========== ========= ========== ========= ========= ========
17
<PAGE>
OPERATING INCOME (LOSS) BY
SEGMENT:
Publishing $ 10,461 109.7% $ 3,406 96.6% $ 4,554 149.9% $ (2,541) 98.7%
Distribution (925) (9.7%) 119 3.4% (1,516) (49.9%) (34) 1.3%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total operating
income (loss) $ 9,536 100.0% $ 3,525 100.0% $ 3,038 100% $ (2,575) 100.0%
========= ========= ========== ========= ========== ========= ========= ========
</TABLE>
18
<PAGE>
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUES
Net revenues for the three months and six months ended September 30, 2000
increased 25% and 15%, respectively, over the same period last year, from $115.4
million to $144.4 million for the three month period and from $199.5 million to
$228.9 million for the six month period. Publishing net revenues increased 40%
and 30% for the three months and six months ended September 30, 2000,
respectively, over the same period last year, from $87.1 million to $121.6
million for the three month period and from $140.5 to $182.6 for the six month
period. These increases in publishing net revenues were partially offset by a
decrease in net revenues from the Company's distribution business. Distribution
net revenues for the three months and six months ended September 30, 2000
decreased 20% and 22%, respectively, from the same period last year, from $28.3
million to $22.7 million for the three month period and from $59.0 million to
$46.3 million for the six month period.
The increase in publishing net revenues for the three months ended September 30,
2000 over the same period last year, was primarily driven by a 60% increase in
publishing console net revenues, from $61.9 million to $99.1 million. This
increase was attributable to several new launches during the second quarter of
fiscal 2001, including Tony Hawk's Pro Skater 2 (PSX), Spiderman (PSX and
Nintendo Color Gameboy), X-Men Mutant Academy (PSX), Tenchu II (PSX) and Star
Trek Invasion (PSX). The launch of Tony Hawk's Pro Skater 2 for the PSX was one
of the Company's largest launches in its history with over 1.0 million units
shipped. This increase in publishing console net revenues for the quarter was
slightly offset by a 10% decrease in publishing PC net revenues for the three
months ended September 30, 2000 from the same period last year, from $25.2
million to $22.6 million. This decrease is primarily due to fewer PC titles
being released in the three months ended September 30, 2000, compared to the
same period last year.
For the six months ended September 30, 2000, the increase in publishing net
revenues was primarily driven by a 38% increase in publishing console net
revenues over the same period last year, from $93.4 million to $129.1 million.
This increase was primarily due to the new launches for the PSX and other
console systems during the second quarter of fiscal 2001 as described above.
Additionally, for the six months ended September 30, 2000, publishing PC net
revenues increased 14% over the same period last year, from $47.1 million to
$53.5 million. This increase was primarily attributable to several new PC
launches in the first quarter of fiscal 2001 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. This increase in publishing PC net
revenues for the quarter ended June 30, 2000 was slightly offset by the decrease
in publishing PC net revenues in the quarter ended September 30, 2000 from the
same period last year as described above.
The decrease in distribution net revenues for the three months ended September
30, 2000 from the same period last year mainly was attributable to the continued
weakness in the European console market. The decrease in distribution net
revenues for the six months ended September 30, 2000 from the same period last
year mainly was attributable to the decrease in the number of PC titles released
in fiscal 2001.
Domestic net revenues increased 56% and 46% for three months and six months
ended September 30, 2000, respectively, over the same period last year, from
$59.2 million to $92.3 million for the three month period and from $94.6 million
to $138.3 million for the six month period. These increases were driven by the
increases in the Company's publishing console net revenues and, to a lesser
degree, its publishing PC net revenues.
International net revenues decreased 7% and 14% for the three months and six
months ended September 30, 2000, respectively, over the same period last year,
from $56.2 million to $52.1 million for the three month period and from $104.9
million to $90.6 million for the six month period. These decreases are due
primarily to the decrease in net revenues from the Company's distribution
business.
19
<PAGE>
COSTS AND EXPENSES
Cost of sales - product costs represented 44.6% and 57.4% of net revenues for
the three months ended September 30, 2000 and 1999, respectively. Cost of sales
- product costs represented 47.2% and 60.0% of net revenues for the six months
ended September 30, 2000 and 1999, respectively. These decreases in cost of
sales - product costs as a percentage of net revenues for the three months and
six months ended September 30, 2000 from the same period last year were due to
product mix. During the second quarter of fiscal 2001, virtually all titles
shipped were Activision titles. In the same period last year, the Company
shipped a significant number of lower margin, third-party titles. Additionally,
the decreases as percentage of net revenues are due to the overall increase in
publishing net revenues versus distribution net revenues as a percentage of
total net revenues. Publishing revenues generate a higher gross margin per unit
compared to distribution revenues.
Cost of sales - royalty and software amortization expense represented 17.2% and
10.1% of net revenues for the three months ended September 30, 2000 and 1999,
respectively. Cost of sales - royalty and software amortization expense
represented 16.8% and 10.8% of net revenues for the six months ended September
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 same periods
in the prior fiscal year.
Product development expenses of $11.1 million and $5.8 million represented 7.7%
and 5.0% of net revenues for the three months ended September 30, 2000 and 1999,
respectively. Product development expenses of $18.5 million and $10.3 million
represented 8.1% and 5.2% of net revenues for the six months ended September 30,
2000 and 1999, respectively. These increases in product development expenses as
a percentage of net revenues were due to an increase in the number of titles
being developed during the three months and six months ended September 30, 2000
for current and next-generation platforms, including PS2.
Sales and marketing expenses for the three months ended September 30, 2000 and
1999 were $23.9 million (16.5% of net revenues) and $18.2 million (15.8% of net
revenues), respectively. Sales and marketing expenses for the six months ended
September 30, 2000 and 1999 were $41.8 million (18.3% of net revenues) and $33.4
million (16.8% of net revenues), respectively. The increase in the amount of
sales and marketing and the increase as a percentage of net revenues were 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 increase in
Activision titles released during fiscal 2001. In fiscal 2000, the Company had a
significant number of lower margin, third-party titles.
General and administrative expenses for the three months ended September 30,
2000 and 1999 were $10.6 million (7.4% of net revenues) and $9.9 million (8.6%
of net revenues), respectively. General and administrative expenses for the six
months ended September 30, 2000 and 1999 were $19.1 million (8.3% of net
revenues) and $17.0 million (8.5% of net revenues), respectively. These changes
in general and administrative expenses were due to an increase in headcount
related expenses for worldwide administrative support, partially offset by a
decrease in goodwill amortization. Goodwill amortization in fiscal 2001
decreased compared to fiscal 2000 due to the significant write-off in the fourth
quarter of fiscal 2000 of goodwill relating to Expert as described in the
Company's Annual Report on Form 10-K for the year ended March 31, 2000.
OPERATING INCOME (LOSS)
Operating income for the three months ended September 30, 2000 and 1999 was $9.5
million and $3.5 million, respectively. Operating income (loss) for the six
months ended September 30, 2000 and 1999 was $3.0 million and ($2.6 million),
respectively.
The increase in operating income for the three months ended September 30, 2000
over the same period last year was primarily due to an increase in publishing
operating income from $3.4 million to $10.5 million, partially offset by a
decline in distribution operating income from $119,000 to an operating loss of
($925,000). The increase in operating income for the six months ended September
30, 2000 over the same period last year was primarily due to an increase in
publishing operating income, from an operating loss of ($2.5 million) to
operating income of $4.6 million, partially offset by an increase in the
distribution operating loss, from ($34,000) to ($1.5 million).
20
<PAGE>
Publishing operating income increases were primarily the result of increased net
revenues and a change in the Company's product mix. In fiscal 2001, the Company
shipped significantly more Activision titles. In the prior year, the Company
shipped a significant number of lower margin, third-party titles. Distribution
operating income decreases were primarily due to reduced net revenues from the
continued weakness in the European console market and the decrease in the number
of PC titles released during fiscal 2001 as previously discussed.
OTHER INCOME (EXPENSE)
Interest expense, net of interest income, increased to $2.7 million and $4.4
million for the three months and six months ended September 30, 2000,
respectively, from $1.8 million and $3.0 million for the three months and six
months ended September 30, 1999, respectively. These increases were due to
increased working capital needs, which resulted in increased average borrowings
associated with the Company's $125 million term loan and revolving credit
facility obtained in June 1999. The increases were also the result of higher
interest rates experienced in fiscal 2001.
PROVISION FOR INCOME TAXES
The income tax provision (benefit) of $2.5 million and ($495,000) for the three
months and six months ended September 30, 2000, respectively, reflect 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 $24.8 million, from $50.0
million at March 31, 2000 to $25.2 million at September 30, 2000. The decrease
in cash during the six months ended September 30, 2000 resulted from $39.3
million of cash used in investing activities, partially offset by $10.5 million
provided by operating activities and $8.3 million provided by financing
activities. The cash provided by operating activities primarily was the result
of changes in accounts payable, accrued liabilities, accounts receivable and
inventories 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 $37.2 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 provided by financing activities is the
result of approximately $5.5 million of cash proceeds from the issuance of
common stock pursuant to employee stock option plans and the employee stock
purchase plan, as well as net increased borrowings of approximately $23.2
million under the revolving portion of the U.S. Facility. These amounts were
partially offset by $15.0 million of cash used by the Company to purchase its
common stock under its repurchase program and $5.0 million of cash used to pay
down its term loan.
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 September 30, 2000, the Company had $4.9 million of
Nintendo N64 hardware and software cartridge inventory on hand, which
represented approximately 10.3% 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
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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.
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 on outstanding borrowings of approximately
10.1% and 9.8% for the three months and six months ended September 30, 2000,
respectively) 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. The Company was in compliance
with these covenants as of September 30, 2000. As of September 30, 2000, $15.0
million was outstanding under the term loan portion of the U.S. Facility and
$25.3 million was outstanding under the revolving portion of the U.S. Facility.
As of September 30, 2000, $40.6 million of letters of credit were outstanding
against the revolving portion of the U.S. Facility.
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")
26 million ($10.4 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
September 30, 2000), is collateralized by GBP 3.0 million ($4.4 million) letters
of credit issued by the Company's CentreSoft subsidiary and matures August 2003.
As of September 30, 2000, letters of credit outstanding under the Netherlands
Facility were approximately NLG 278,000 ($111,000) and borrowings outstanding
were NLG 8.8 million ($3.5 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 ($10.2 million) of revolving loans and GBP 3.0 million ($4.4
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
September 30, 2000. No borrowings were outstanding against the UK facility as of
September 30, 2000. Letters of credit of GBP 3.0 million ($4.4 million) were
outstanding against the UK Facility as of September 30, 2000, issued on behalf
of the Company's CD Contact subsidiary as described above. The German Facility
provides for revolving loans up to Deutsche Mark ("DM") 4 million ($1.8
million), bears interest at 5.9%, is collateralized by a cash deposit of
approximately GBP 650,000 ($951,000) made by the Company's CentreSoft subsidiary
and has no expiration date. No borrowings were outstanding against the German
Facility as of September 30, 2000.
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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 September
30, 2000 is approximately $39.8 million and is scheduled to be distributed as
follows (amounts in thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
2001 $ 15,105
2002 9,199
2003 6,198
2004 3,000
2005 2,125
Thereafter 4,125
------------
Total $ 39,752
============
</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.
In the quarter ended June 30, 2000, the Company repurchased 2.3 million shares
of its common stock for approximately $15.0 million.
The Company believes that it has sufficient working capital ($135.2 million at
September 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.
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 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 for the
year ended March 31, 2000 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
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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
In July 2000, the Emerging Issues Task Force reached a consensus on issue No.
00-15 ("EITF 00-15"), "Classification in the Statement of Cash Flows of the
Income Tax Benefit Realized by a Company upon Employee Exercise of a
Nonqualified Stock Option." The EITF concluded that income tax benefits realized
upon an employee's exercise of a nonqualified stock option should be classified
as an operating cash flow. Accordingly, the Company reclassified tax benefits
resulting from the exercise of stock options on its Consolidated Statements of
Cash Flows.
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. The Company
does not expect the adoption of SAB 101 to have a material impact on its
financial position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from fluctuations in market rates and
prices. The Company's market risk exposures primarily include fluctuations in
interest rates and foreign currency exchange rates. The Company's market risk
sensitive instruments are classified as "other than trading." The Company's
exposure to market risk as discussed below includes "forward-looking statements"
and represents an estimate of possible changes in fair value or future earnings
that would occur assuming hypothetical future movements in interest rates or
foreign currency exchange rates. The Company's views on market risk are not
necessarily indicative of actual results that may occur and do not represent the
maximum possible gains and losses that may occur, since actual gains and losses
will differ from those estimated, based upon actual fluctuations in foreign
currency exchange rates, interest rates and the timing of transactions.
INTEREST RATE RISK
The Company has a number of variable rate and fixed rate debt obligations,
denominated both in U.S. dollars and various foreign currencies as detailed in
Note 9 to the Consolidated Financial Statements appearing elsewhere in this
Quarterly Report. The Company manages interest rate risk by monitoring its ratio
of fixed and variable rate debt obligations in view of changing market
conditions. Additionally, in the future, the Company may consider the use of
interest rate swap agreements to further manage potential interest rate risk.
As of September 30, 2000, the carrying value of the Company's variable rate debt
was $43.8 million, which includes the U.S. Facility ($40.3 million) and the
Netherlands Facility ($3.5 million). A hypothetical 1% increase in the
applicable interest rates of the Company's variable rate debt would increase
annual interest expense by approximately $438,000 as September 30, 2000.
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<PAGE>
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company transacts business in many different foreign currencies and may be
exposed to financial market risk resulting from fluctuations in foreign currency
exchange rates, particularly GBP. The volatility of GBP (and all other
applicable currencies) will be monitored frequently throughout the coming year.
While the Company has not traditionally engaged in foreign currency hedging, the
Company may in the future use hedging programs, currency forward contracts,
currency options and/or other derivative financial instruments commonly utilized
to reduce financial market risks if it is determined that such hedging
activities are appropriate to reduce risk.
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<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in
the ordinary course of business including disputes arising over the
ownership of intellectual property rights and collection matters. In the
opinion of management, the outcome of such routine claims will not have
a material adverse effect on the Company's business, financial condition
or results of operations.
The federal income tax return for fiscal 1997 is currently under
examination. While the ultimate results of such examination cannot be
predicted with certainty, the Company's management believes that the
examination will not have a material adverse effect on its consolidated
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 2000 Annual Meeting of the Stockholders on
September 28, 2000 in Beverly Hills, California. Two items were
submitted to a vote of the stockholders: (1) the election of six
directors to hold office for one year terms and until their respective
successors are elected and have qualified and (2) the approval of an
amendment to the Company's Employee Stock Purchase Plan to increase the
number of shares of the Company's common stock reserved for issuance
thereunder.
All six director nominees were recommended by the Board of Directors and
all were elected. Set forth below are the results of the voting for each
director.
<TABLE>
<CAPTION>
For Withheld
---------- ---------
<S> <C> <C>
Harold A. Brown 18,393,158 722,065
Barbara S. Isgur 19,090,923 694,100
Brian G. Kelly 19,096,995 688,028
Robert A. Kotick 19,097,618 687,905
Steven T. Mayer 19,091,329 693,694
Robert J. Morgado 19,017,782 767,241
</TABLE>
The amendment to the Company's Employee Stock Purchase Plan was
approved. Set forth below are the results of the voting.
For Against Abstain
---------- ------- -------
19,043,546 696,591 44,886
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of June 9, 2000 among
Activision, Inc., Activision Holdings, Inc. and ATVI Merger
Sub, Inc. (incorporated by reference to Exhibit 2.4 of the
Company's Form 8-K filed June 16, 2000).
3.1 Amended and Restated Certificate of Incorporation of
Activision Holdings, dated June 1, 2000 (incorporated by
reference to Exhibit 2.5 of the Company's Form 8-K, filed on
June 16, 2000).
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<PAGE>
3.2 Amended and Restated Bylaws of Activision Holdings
(incorporated by reference to Exhibit 2.6 of the
Company's Form 8-K, filed on June 16, 2000).
3.3 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Activision Holdings dated as of June 9,
2000 (incorporated by reference to Exhibit 2.7 of the
Company's Form 8-K, filed on June 16, 2000).
4.1 Rights agreement dated as of April 18, 2000, between the
Company and Continental Stock Transfer & Trust Company, which
includes as exhibits the form of Right Certificates as Exhibit
A, the Summary of Rights to Purchase Series A Junior Preferred
Stock as Exhibit B and the form of Certificate of Designation
of Series A Junior Preferred Stock of the Company as Exhibit
C, (incorporated by reference to the Company's Registration
Statement on Form 8-A, Registration No. 001-15839, filed April
19, 2000).
10.1 Amended and restated employment agreement dated as of
May 22, 2000 between the Company and Robert A. Kotick.
10.2 Stock option agreement dated May 22, 2000 between the Company
and Robert A. Kotick.
10.3 Amended and restated employment agreement dated as of May 22,
2000 between the Company and Brian G. Kelly.
10.4 Stock option agreement dated May 22, 2000 between the Company
and Brian G. Kelly.
27.1 Financial data schedule for the six months ended September 30,
2000.
(b) Reports on Form 8-K
The Company has filed no reports on Form 8-K during the quarterly
period ended September 30, 2000.
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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: November 13, 2000
ACTIVISION, INC.
/s/ William J. Chardavoyne Chief Financial Officer and November 13, 2000
------------------------------ Chief Accounting Officer
(William J. Chardavoyne)
28
