<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 DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-12699
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-2606438
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 Ocean Park Boulevard, Santa Monica, CA 90405
(Address of principal executive offices) (Zip Code)
(310) 255-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
February 10, 2000 was 25,540,813.
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1999 (unaudited)
and March 31, 1999 3
Condensed Consolidated Statements of Operations for the three and nine months
ended December 31, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements for the
three and nine months ended December 31, 1999 (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(all amounts in thousands except per share data)
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
--------------------- ---------------------
Restated
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 51,734 $ 33,037
Accounts receivable, net of allowances of $27,401 and $14,979 ,
respectively 215,559 117,541
Inventories, net 42,973 30,931
Prepaid royalties and capitalized software costs 42,876 38,093
Deferred income taxes 521 6,383
Other current assets 19,382 9,965
--------------------- ---------------------
Total current assets 373,045 235,950
Prepaid royalties and capitalized software costs 7,525 6,923
Property and equipment, net 10,428 10,924
Deferred income taxes 2,618 2,618
Intangible assets, net 52,252 21,647
Other assets 9,100 5,283
--------------------- ---------------------
Total assets $ 454,968 $ 283,345
===================== =====================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of notes payable to bank $ 41,871 $ 5,992
Accounts payable 86,112 43,853
Accrued expenses 75,100 45,160
--------------------- ---------------------
Total current liabilities 203,083 95,005
Notes payable to bank, less current portion 16,308 1,143
Convertible subordinated notes 60,000 60,000
Other liabilities 2 6
--------------------- ---------------------
Total liabilities 279,393 156,154
--------------------- ---------------------
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares authorized,
25,660,097and 23,303,762 shares issued and 25,160,097 and
23,803,762 outstanding, respectively - -
Additional paid-in capital 139,725 109,251
Retained earnings 44,518 25,728
Accumulated other comprehensive income (loss) (3,390) (2,510)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
---------------------- ----------------------
Total shareholders' equity 175,575 127,191
--------------------- ---------------------
Total liabilities and shareholders' equity $ 454,968 $ 283,345
===================== =====================
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Nine Months ended December 31,
(Unaudited)
(all amounts in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
December 31, December 31,
------------------------------ ------------------------------
1999 1998 1999 1998
-------------- -------------- ------------- --------------
Restated Restated
-------------- --------------
<S> <C> <C> <C> <C>
Net revenues $ 268,862 $ 193,537 $ 468,367 $ 321,260
Costs and expenses:
Cost of sales - product costs 139,357 107,693 259,180 190,557
Cost of sales - royalties and software
amortization 39,733 23,828 61,213 31,577
Product development 6,235 4,440 16,576 14,747
Sales and marketing 35,879 26,040 73,045 50,577
General and administrative 8,046 5,265 19,335 14,395
Amortization of intangible assets 1,371 398 3,202 1,191
Merger expenses - - 150 600
-------------- ------------- -------------- --------------
Total operating expenses 230,621 167,664 432,701 303,644
-------------- ------------- -------------- --------------
Operating income 38,241 25,873 35,666 17,616
Interest expense, net (2,835) (854) (5,833) (2,079)
-------------- -------------- ------------- --------------
Income before income tax provision 35,406 25,019 29,833 15,537
Income tax provision 13,105 9,283 11,043 5,677
-------------- -------------- ------------- --------------
Net income $ 22,301 $ 15,736 $ 18,790 $ 9,860
============== ============== ============= ==============
Other comprehensive income (loss):
Foreign currency translation adjustment (1,645) 61 (880) 51
-------------- -------------- ------------- ---------------
Comprehensive income $ 20,656 $ 15,797 $ 17,910 $ 9,911
============== ============== ============= ===============
Basic net income per share $ 0.89 $ 0.69 $ 0.77 $ 0.43
Diluted net income per share $ 0.75 $ 0.61 $ 0.71 $ 0.42
Number of shares used in computing basic net
income per share 25,075 22,886 24,367 22,749
============== ============== ============= ===============
Number of shares used in computing diluted net
income per share 30,483 26,767 29,431 23,581
============== ============= ============= ===============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months ended December 31,
(Unaudited)
(all amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------------
1999 1998
--------------- ---------------
Restated
Increase (decrease) in cash
-----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,790 $ 9,860
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred income taxes 12,130 1,458
Depreciation and amortization 6,400 4,842
Amortization of prepaid royalties and capitalized
software costs 49,546 17,900
Change in assets and liabilities:
Accounts receivable (97,299) (75,667)
Inventories (8,761) (17,825)
Other current assets (7,241) (4,678)
Other assets (1,013) 782
Accounts payable 39,790 58,933
Accrued liabilities 22,479 24,163
Other liabilities (4) (44)
--------------- ---------------
Net cash provided by operating activities 34,817 19,724
Cash flows from investing activities:
Cash used for purchase acquisitions, net of cash acquired (20,523) -
Cash acquired in pooling transactions - 78
Capital expenditures (2,520) (2,908)
Investment in prepaid royalties and capitalized
software costs (54,931) (50,579)
--------------- ---------------
Net cash used in investing activities (77,974) (53,409)
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant
to employee stock option plan 14,916 3,478
Proceeds from employee stock purchase plan 419 389
Note payable to bank, net (5,449) (216)
Proceeds from term loan 25,000 -
Cash paid to secure line of credit and term loan (3,355) -
Borrowings under line of credit agreement 202,956 10,006
Payments under line of credit agreement (171,463) (2,600)
--------------- ---------------
Net cash provided by financing activities 63,024 11,057
Effect of exchange rate changes on cash (1,170) 52
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 18,697 (22,576)
Cash and cash equivalents at beginning of period 33,037 74,241
--------------- ---------------
Cash and cash equivalents at end of period $ 51,734 $ 51,665
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Nine Months ended December 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying condensed 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, 1999 as
filed with the Securities and Exchange Commission (the "SEC").
The consolidated financial statements for the period ended June 30, 1999
and all prior periods 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 condensed 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. SIGNIFICANT ACCOUNTING POLICIES
Intangible assets, net of amortization, at December 31, 1999 and March 31,
1999, of $52.3 million and $21.6 million, respectively, includes
goodwill and costs of acquired licenses, brands and trade names which
are amortized using the straight-line method over their estimated
useful lives, typically from three to twenty years.
Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, was adopted as of April 1, 1999.
This Statement establishes standards for the reporting and
display of changes in shareholders' equity that do not result
directly from transactions with shareholders. The Company has
displayed comprehensive income and its components in the condensed
consolidated statements of operations for the three and nine months
ended December 31, 1999 and 1998.
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 that 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 of Computer Software to be Sold, Leased, or
Otherwise Marketed". Software development costs and prepaid royalties
are capitalized once technological feasibility is established.
Technological feasibility is evaluated on a product-by-product basis.
For products where proven game engine technology exists, this may occur
early in the development cycle. Software development costs are expensed
if and when they are deemed unrecoverable. Amounts related to
software development, which are not capitalized, are charged
immediately to product development expense.
The following criteria is used to evaluate recoverability of
software development costs: historical performance of comparable
products; the commercial acceptance of prior products released on a
given game engine; orders for the product prior to its release;
estimated performance of a sequel product based on the performance of
the product on which the sequel is based; and actual development
costs of a product as compared to the Company's budgeted amount.
Capitalized software development costs are amortized to cost of
sales -royalties and software amortization on a straight-line
basis over the estimated product life (generally one year or less)
commencing upon product release, or on the ratio of current revenues to
total projected revenues, whichever amortization amount is greater.
Prepaid royalties are amortized to cost of sales - 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 December 31, 1999, prepaid royalties and unamortized
capitalized software costs totaled $38.0 million (including $7.5
million classified as non-current) and $12.4 million, respectively. As
of March 31, 1999, prepaid
6
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
royalties and unamortized capitalized software costs totaled $36.0
million (including $6.9 million classified as non-current) and
$9.0 million, respectively.
5. REVENUE RECOGNITION
The AICPA's Statement of Position 97-2 "Software Revenue
Recognition" (SOP 97-2"), provides guidance on applying generally
accepted accounting principles in recognizing revenue on software
transactions. SOP 97-2 is effective for all transactions entered into
subsequent to March 31, 1999. The Company has adopted SOP 97-2 and such
adoption did not have a material impact on the Company's financial
position, results of operations or liquidity. Effective December 15,
1998, the American Institute of Certified Public Accounts issued
Statement of Position 98-9, "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions" ("SOP
98-9"), which is effective for transactions entered into after March
15, 1999. SOP 98-9 deals with the determination of vendor
specific objective evidence of fair value in multiple element
arrangements, such as maintenance agreements sold in conjunction
with software packages. The Company does not believe this will have a
material impact on the Company's financial position, result of
operations or liquidity.
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 has the ability
to estimate the amount of future exchanges, returns, and price
protections. 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 of the product master or
the first copy. Per copy royalties on sales that exceed the guarantee
are recognized as earned.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities and supplemental cash flow information for the
nine months ended December 31, 1999 and 1998 are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Non-cash activities:
Conversion of note payable to common stock in connection with
pooling acquisition - $ 4,500
Warrants to acquire common stock issued in exchange for
licensing rights $ 6,482 $ 3,368
Common stock issued in connection with purchase acquisition $ 2,700 -
Options to acquire common stock issued in connection with
purchase acquisition $ 3,271 -
Tax benefit attributable to stock option exercises $ 2,686 $ 653
Supplemental cash flow information:
Cash paid for income taxes $ 4,775 $ 4,868
Cash paid for interest $ 9,133 $ 2,775
</TABLE>
7
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA
The Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," as of April 1, 1998. SFAS
No. 131 establishes standards for reporting information about an
enterprise's operating segments and related disclosures about its
products, geographic areas and major customers.
The Company publishes, develops and distributes interactive
entertainment and leisure products for a variety of game platforms,
including PCs, the Sony PlayStation console system and the Nintendo 64
console system. Based on its organizational structure, the Company
operates in two reportable segments: publishing and distribution.
The Company's publishing segment develops and publishes titles both
internally through the studios owned by the Company and externally
through third party developers. In addition, the Company's publishing
segment distributes titles that are developed and marketed by other
third party developers through its "affiliate label" program. 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, through third party distribution and licensing
arrangements, and through the Company's owned distribution subsidiaries
located in the United Kingdom, the Benelux territories and Germany.
The Company's distribution segment conducts operations in the United
Kingdom, the Benelux territories and Germany. This segment distributes
interactive entertainment software and hardware and provides logistical
services for a variety of publishers and manufacturers in these
territories. A small percentage of distribution sales are derived from
Activision-published titles.
The President and Chief Operating Officer allocates resources to each of
the 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.
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, 1999.
Revenue derived from sales between segments is eliminated in
consolidation.
Information on the reportable segments for the three and nine months
ended December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three months Ended December 31, 1999
--------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers $ 168,554 $ 100,308 $ 0 $ 268,862
Revenues from sales between segments 14,950 0 0 14,950
Operating income (loss) 33,681 5,850 (1,290) 38,241
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1999
--------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers $ 295,356 $ 173,011 $ 0 $ 468,367
Revenues from sales between segments 28,620 0 0 28,620
Operating income (loss) 34,682 4,094 (3,110) 35,666
</TABLE>
8
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended December 31, 1998
--------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers $ 84,863 $ 108,674 $ 0 $ 193,537
Revenues from sales between segments 12,083 0 0 12,083
Operating income (loss) 16,541 9,645 (313) 25,873
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended December 31, 1998
--------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Revenues from external customers $ 129,892 $ 191,368 $ 0 $ 321,260
Revenues from sales between segments 14,346 0 0 14,346
Operating income (loss) 9,207 9,950 (1,541) 17,616
</TABLE>
Operating expenses in the corporate column consist of amortization
of goodwill and merger expenses resulting from the Company's merger
with The Disc Company, Inc. on April 1, 1992, the Company's
acquisition of Expert Software on June 22, 1999 and the Company's
acquisition of Elsinore Multimedia on June 29, 1999.
Geographic information for the three and nine months ended December 31,
1999 and 1998 is based on the location of the selling entity. Revenues
from external customers by geographic region were as follows:
<TABLE>
<CAPTION>
Three months Ended December 31, Nine Months Ended December 31,
----------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
United States $ 144,133 $ 69,472 $ 237,291 $ 106,633
International 124,729 124,065 231,076 214,627
-------------- ------------- -------------- --------------
Total $ 268,862 $ 193,537 $ 468,367 $ 321,260
============== ============= ============== ==============
</TABLE>
Revenues by platform were as follows:
<TABLE>
<CAPTION>
Three months Ended December 31, Nine Months Ended December 31,
----------------------------------- -----------------------------------
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Console $ 193,921 $ 116,703 $ 329,469 $ 204,205
PC 74,941 76,834 138,898 117,055
-------------- ------------- -------------- --------------
Total $ 268,862 $ 193,537 $ 468,367 $ 321,260
============== ============= ============== ==============
</TABLE>
8. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128 ("SFAS 128"
per share,") requires companies to compute net earnings per share
under two different methods, basic and diluted earnings per share,
for all periods for which an income statement is presented. Basic
earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for all periods. Diluted
earnings per share reflects the potential dilution that could occur if
income were divided by the weighted average number of common and common
stock equivalent shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares and common stock equivalents from
outstanding stock options and warrants. Common stock equivalents
are calculated using the treasury stock method and represent
incremental shares issuable upon exercise of the Company's
outstanding options and warrants.
For the three months ended December 31, 1999, outstanding weighted
average options to purchase approximately 719,363 shares were not
included in the computation of diluted earnings per share as a result of
their antidilutive effect. For the nine months ended December 31, 1999,
outstanding weighted average options to purchase approximately 948,120
shares were not included in the computation of diluted earnings per
share as a result of their antidilutive effect. For the three and nine
months ended December 31, 1998, 1.9 million and 2.5 million shares,
respectively, of the Company's common stock were outstanding but were
not included in the
9
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
computation of diluted net income per share as a result of their
antidilutive effect. Such stock options could have a dilutive effect in
future periods. For the nine months ended December 31, 1998, the effect
of convertible subordinated notes was excluded as a result of its
antidilutive effect.
The following table sets forth the computation of basic and diluted
net income per common share for the three and nine months periods
ended December 31, 1999 and 1998 (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Numerator:
Net income $22,301 $15,736 $18,790 $9,860
Interest relating to dilutive convertible subordinated
notes (net of tax) 666 666 1,997 -
------- ------- ------- ------
Numerator for diluted earnings per share - income
available to common stockholders $22,967 $16,402 $20,787 $9,860
======= ======= ======= ======
Denominator:
Denominator for basic net (loss) per common share -
weighted average shares outstanding 25,075 22,886 24,367 22,749
Effect of dilutive securities:
Employee stock options 1,958 677 1,614 801
Warrants 271 25 271 31
Conversion of convertible subordinated notes 3,179 3,179 3,179 -
------- ------- ------- ------
Denominator for diluted net (loss) per common share -
adjusted weighted-average shares for assumed conversions 30,483 26,767 29,431 23,581
======= ======= ======= ======
Basic net income per share $0.89 $0.69 $0.77 $0.43
======= ======= ======= ======
Diluted net income per share $0.75 $0.61 $0.71 $0.42
======= ======= ======= ======
</TABLE>
9. COMMITMENTS
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, 2001, the Company must
pay a premium on such redeemed Notes.
As of December 31, 1998, the Company had a $40.0 million revolving
credit and letter of credit facility (the "Prior Facility") with a group
of banks. The Prior Facility provided the Company with the ability to
borrow funds and issue letters of credit against eligible accounts
receivable up to $40.0 million. The Prior Facility was scheduled to
expire in October 2001. As of December 31, 1998, the Company had no
outstanding letters of credit or borrowings against the Prior Facility.
In June 1999, the Company replaced the Prior Facility with a $125.0
million revolving credit facility and term loan (the "Facility") with
a new group of banks that provides the Company with the ability to
borrow up to $100.0
10
<PAGE>
ACTIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 Facility was used to acquire Expert
Software in June 1999 and to pay costs related to such acquisition and
the securing of the Facility. The term loan has a three-year term with
principal amortization on a straight-line quarterly basis beginning
December 31, 1999 and a borrowing rate based on the banks' base rate
(which is generally equivalent to the published prime rate) plus 2.0%
or LIBOR plus 3.0%. The revolving portion of the Facility has a
borrowing rate based on the banks' base rate plus 1.75% or LIBOR plus
2.75%. The Company pays a commitment fee of 1/2% based on the unused
portion of the Facility. At December 31, 1999, the Company had an
outstanding balance of $27.0 million on the revolving portion of
the Facility. Letters of credit outstanding against the Facility totaled
$20.9 million at December 31, 1999.
The Company's CentreSoft subsidiary has a revolving credit facility
(the "UK Facility") with a bank in the United Kingdom in the amount
of $21.0 million. The UK Facility can be used for working capital
requirements and expires in June 2000. The Company had no borrowings
outstanding against the UK Facility as of December 31, 1999 or March 31,
1999. Letters of credit outstanding against the UK Facility totaled $9.7
million at December 31, 1999.
The Company's NBG subsidiary has a revolving credit facility (the
"German Facility") with a bank in Germany in the amount of $2.0 million.
The German Facility can be used for working capital requirements and has
no expiration date. The Company had no borrowings outstanding against
the German Facility as of December 31, 1999 or March 31, 1999.
The Company's CD Contact subsidiary has a revolving credit facility
(the "Netherlands Facility") with a bank in the Netherlands that
permits borrowings against eligible accounts receivable and
inventory up to $25.0 million. Borrowings under the Netherlands
Facility are due on demand and totaled $4.5 million at December 31,
1999 and $6.0 million at March 31, 1999. Letters of credit outstanding
under the Netherlands Facility totaled $4.0 million at December 31,
1999 and $6.9 million at March 31, 1999. The Netherlands Facility
expires on March 31, 2001.
In addition, the Company had a line of credit agreement (the "Asset
Line") with a bank that expired in September 1998. As of December
31, 1999, $387 thousand was outstanding on this line.
Under the terms of a production financing arrangement, the Company
has a commitment to purchase a future Playstation 2 title from an
independent third party developer upon its completion for an
estimated $4.2 million. Failure by the developer to complete the
project within the contractual time frame or specifications alleviates
the Company's commitment.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis contains forward-looking statements
regarding future events or the future financial performance of the Company that
involve certain risks and uncertainties discussed in the Company's Annual Report
on Form 10-K under "Factors Affecting Future Performance." Actual events or the
actual future results of the Company may differ materially from any
forward-looking statement due to such risks and uncertainties.
OVERVIEW
The Company is a leading international publisher, developer and distributor of
interactive entertainment 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"), Nintendo 64
("N64"), Nintendo Gameboy Color ("Gameboy") and Sega Dreamcast ("Dreamcast")
console systems. 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. With respect to license agreements that provide customers the right
to multiple copies in exchange for guaranteed amounts, revenue is recognized
upon delivery of the product master or the first copy. Per copy royalties on
sales that exceed the guarantee are recognized as earned. The AICPA's Statement
of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), provides guidance
on applying generally accepted accounting principles in recognizing revenue on
software transactions. SOP 97-2 is effective for all transactions entered into
subsequent to March 31, 1999. The Company has adopted SOP 97-2 and such adoption
did not have a material impact on the Company's financial position, results of
operations or liquidity. Effective December 15, 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-9, "Modification of
SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions"
("SOP 98-9"), which is effective for transactions entered into after March 15,
1999. SOP 98-9 deals with the determination of vendor specific objective
evidence of fair value in multiple element arrangements, such as maintenance
agreements sold in conjunction with software packages. The Company does not
believe this will have a material impact on the Company's financial position,
results of operations or liquidity.
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. Various contracts are
maintained with developers, product owners or other royalty participants, which
state a royalty rate, territory and term of agreement, among other items. Upon a
product's release, prepaid royalties and license fees are charged to royalty
expense based on the contractual royalty rate. The capitalized software costs
are then amortized to cost of sales-royalties and software amortization on a
straight-line basis over the estimated product life commencing upon product
release or on the ratio of current revenues to total projected revenues,
whichever amortization amount is greater.
For products that have been released, management evaluates the future
recoverability of prepaid royalties and capitalized software costs on a
quarterly basis. Prior to a product's release, the Company charges to expense,
as part of product development costs, capitalized costs when, in management's
estimate, such amounts are not recoverable. The following criteria is used to
evaluate recoverability: historical performance of comparable products; the
commercial acceptance of prior products released on a given game engine; orders
for the product prior to its release; 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.
12
<PAGE>
The following table sets forth certain consolidated statements of operations
data for the periods indicated as a percentage of total net revenues and also
breaks down net revenues by territory, platform, channel and segment:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
----------------------------------------- ------------------------------------------
1999 1998 1999 1998
Restated Restated
-------------------- ------------------- -------------------- --------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
-------- ---------- -------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net revenues $268,862 100.0% $193,537 100.0%. $468,367 100.0% $321,260 100.0%
Costs and expenses:
Cost of sales - product costs 139,357 51.9% 107,693 55.6% 259,180 55.3% 190,557 59.3%
Cost of sales - royalties and
software amortization 39,733 14.8% 23,828 12.3% 61,213 13.1% 31,577 9.8%
Product development 6,235 2.3% 4,440 2.3% 16,576 3.5% 14,747 4.6%
Sales and marketing 35,879 13.3% 26,040 13.5% 73,045 15.6% 50,577 15.7%
General and administrative 8,046 3.0% 5,265 2.7% 19,335 4.2% 14,395 4.5%
Amortization of intangible assets 1,371 0.5% 398 0.2% 3,202 0.7% 1,191 0.4%
Merger expenses - - - - 150 - 600 0.2%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total costs and expenses 230,621 85.8% 167,664 86.6% 432,701 92.4% 303,644 94.5%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Operating income 38,241 14.2% 25,873 13.4% 35,666 7.6% 17,616 5.5%
Interest income (expense), net (2,835) (1.0%) (854) (0.4%) (5,833) (1.2%) (2,079) (0.7%)
-------- ---------- -------- --------- ---------- -------- -------- ----------
Income before income tax provision 35,406 13.2% 25,019 13.0% 29,833 6.4% 15,537 4.8%
Income tax provision 13,105 4.9% 9,283 4.9% 11,043 2.4% 5,677 1.8%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Net income $ 22,301 8.3% $ 15,736 8.1% $ 18,790 4.0% $ 9,860 3.0%
======== ========== ======== ========= ========== ======== ======== ==========
Net Revenues by Territory:
United States $144,133 53.6% $69,472 35.9% $ 237,291 50.7% $106,633 33.2%
International 124,729 46.4% 124,065 64.1% 231,076 49.3% 214,627 66.8%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total net revenues $268,862 100.0% $193,537 100.0% $ 468,367 100.0% $321,260 100.0%
======== ========== ======== ========= ========== ======== ======== ==========
Net Revenues by Activity/Platform Mix:
Publishing:
Console $132,427 72.2% $47,242 48.7% $ 225,993 69.8% $ 71,024 49.2%
PC 51,077 27.8% 49,704 51.3% 97,983 30.2% 73,214 50.8%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total publishing net revenues 183,504 68.3% 96,946 50.1% 323,976 69.2% 144,238 44.9%
Distribution:
Console 61,494 72.0% 69,461 71.9% 103,476 71.7% 133,181 75.2%
PC 23,864 28.0% 27,130 28.1% 40,915 28.3% 43,841 24.8%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total distribution net revenues 85,358 31.7% 96,591 49.9% 144,391 30.8% 177,022 55.1%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total net revenues $268,862 100.0% $193,537 100.0% $ 468,367 100.0% $321,260 100.0%
======== ========== ======== ========= ========== ======== ======== ==========
Net Revenues by Channel:
Retailer/Reseller $260,328 96.8% $185,810 96.0% $ 448,853 95.8% $307,401 95.7%
OEM, licensing, on-line and other 8,534 3.2% 7,727 4.0% 19,514 4.2% 13,859 4.3%
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total net revenues $268,862 100.0% $193,537 100.0% $ 468,367 100.0% $321,260 100.0%
======== ========== ======== ========= ========== ======== ======== ==========
Operating Income (Loss) by Segment:
Publishing $33,681 85.5% 16,541 63.9% 34,682 91.2% 9,207 52.3%
Distribution 5,850 15.3% 9,645 37.3% 4,094 11.4% 9,950 56.5%
Corporate (1,290) (0.8%) (313) (1.2%) (3,110) (2.6%) (1,541) (8.8%)
-------- ---------- -------- --------- ---------- -------- -------- ----------
Total operating income by segment 38,241 100.0% 25,873 100.0% 95,666 100.0% 17,616 100.0%
======== ========== ======== ========= ========== ======== ======== ==========
</TABLE>
13
<PAGE>
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three months ended December 31, 1999 increased 39.0%
from the same period last year, from $193.5 million to $268.9 million. The
increase was primarily due to a 66.2% increase in console net revenues from
$116.7 million to $193.9 million, partially offset by a 2.5% decrease in PC
net revenues from $76.8 million to $74.9 million. Domestic net revenues grew
107.3% from $69.5 million to $144.1 million. International net revenues
remained stable.
Net revenues for the nine months ended December 31, 1999 increased 45.8% from
the same period last year, from $321.3 million to $468.4 million. The
increase was due to a 61.4% increase in console net revenues from $204.2
million to $329.5 million and an 18.6% increase in PC net revenues from
$117.1 million to $138.9 million. Domestic net revenues grew 122.6% from
$106.6 million to $237.3 million. International net revenues grew 7.7% from
$214.6 million to $231.1 million.
Publishing net revenues for the three and nine months ended December 31, 1999
increased 89.4% from $96.9 million to $183.5 million and 124.7% from $144.2
million to $324.0 million, respectively. These increases primarily were due
to publishing console net revenues for the three and nine months ended
December 31, 1999 increasing 180.5% from $47.2 million to $132.4 million and
218.3% from $71.0 million to $226.0 million, respectively. The increases in
publishing console net revenues were attributable to the initial release in
the current periods of a larger number of titles that sold well in the
marketplace, including Blue Stinger (Dreamcast), Space Invaders and Toy
Story II (PSX and N64), Tarzan (Gameboy), A Bug's Life (N64) and Vigilante 8:
Second Offense, WuTang: Shaolin Style and Tony Hawk's Pro Skater (PSX).
Publishing PC net revenues for the three and nine months ended December 31,
1999 increased 2.8% from $49.7 million to $51.1 million and 33.9% from $73.2
million to $98.0 million, respectively. These increases primarily were due to
the initial release of Quake 3 Arena, Cabela's Big Game Hunter 3, Star Trek:
Hidden Evil and Interstate `82.
For the three months ended December 31, 1999, distribution net revenues
decreased 11.6% from $96.6 million to $85.4 million. Distribution net revenues
also decreased 18.4% for the nine months then ended from $177.0 million to
$144.4 million. The decrease for both the three month and nine month period was
mainly attributable to the pricing reductions initiated by leading retail chains
in the United Kingdom (UK), which in turn reduced market share for the
independent retail channel in the UK to which the Company's Centresoft
subsidiary is the sole authorized Playstation distributor.
Distribution console net revenues decreased by 11.5% during the three months
ended December 31, 1999 from $69.5 million to $61.5 million. Distribution
console net revenue decreased by 22.3% for the nine months then ended from
$133.2 million to $103.5 million. Distribution PC net revenues decreased
11.8% for the three months ended December 31, 1999 from $27.1 million to
$23.9 million. Distribution PC net revenues decreased 6.7% for the nine
months then ended from $43.8 million to $40.9 million. These decreases were
due to the lower overall sales experienced in the Distribution segment of the
Company.
Net OEM, licensing, on-line and other revenues for the three and nine months
ended December 31, 1999 increased 10.4% from $7.7 million to $8.5 million and
40.3% from $13.9 million to $19.5 million, respectively.
COSTS AND EXPENSES
Cost of sales - product costs represented 51.9% and 55.6% of net revenues for
the three months ended December 31, 1999 and 1998, respectively. Cost of sales -
product costs represented 55.3% and 59.3% of net revenues for the nine months
ended December 31, 1999 and 1998, respectively. The decrease in cost of sales -
product costs as a percentage of net revenues for both the three and nine months
ended December 31, 1999 was due to the decrease in distribution net revenue,
partially offset by a higher publishing console net revenue mix. Distribution
products have a higher per unit product cost than publishing products and
console products have a higher per unit product cost than PC products.
Cost of sales - royalty and software amortization expense represented 14.8% and
12.3% of net revenues for the three months ended December 31, 1999 and 1998,
respectively. Cost of sales - royalty and software amortization expense
represented 13.1% and 9.8% of net revenues for the nine months ended December
31, 1999 and 1998, respectively. The increase in cost of sales - royalty and
software amortization expense as a percentage of net revenues for both the
14
<PAGE>
three and nine months ended December 31, 1999 primarily was 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 last fiscal
year, and increases in amortization expenses relating to the release of a
greater number of products with capitalizable development costs.
Product development expenses for the three months ended December 31, 1999
increased 40.9% from the same period last year, from $4.4 million to $6.2
million. Product development expenses for the nine months ended December 31,
1999 increased 12.9% from the same period last year, from $14.7 million to
$16.6 million. These increases primarily were due to a decrease in
capitalizable development costs relating to sequel products being developed
on proven engine technologies which are capitalized in accordance with
Statement of Accounting Standards ("SFAS") No. 86, "Accounting for the Cost
of Computer Software to be Sold, Leased or Otherwise Marketed." As a
percentage of net revenues, total product creation costs (i.e., royalties and
software amortization expense plus product development expenses) increased
from 14.6% to 17.1% and from 14.4% to 16.6% for the three and nine months
ended December 31, 1999, respectively. Such increases primarily were
attributable to the increase in product development costs, as stated above.
Sales and marketing expenses for the three months ended December 31, 1999
increased 38.1% from the same period last year, from $26.0 million to $35.9
million, yet decreased slightly as a percentage of net revenues to 13.3% from
13.5%. Sales and marketing expenses for the nine months ended December 31, 1999
increased 44.3% from $50.6 million to $73.0 million, while as a percentage of
net revenues, they decreased slightly from 15.7% to 15.6%. The increases in the
amount of sales and marketing expenses for the three and nine month periods
primarily were due to an increase in the number of titles released during those
respective periods and an increase in television advertising during the three
months ended December 31, 1999. The slight decreases in sales and marketing
expenses as a percentage of net revenues during the three and nine months ended
December 31, 1999 primarily were due to lower marketing expenses required on
branded properties such as Toy Story 2 and Quake 3 Arena.
General and administrative expenses for the three months ended December 31, 1999
increased 50.9% from the same period last year, from $5.3 million to $8.0
million. As a percentage of net revenues, general and administrative expenses
for the three month period increased from 2.7% to 3.0%. General and
administrative expense for the nine months ended December 31, 1999 increased
34.0%, from $14.4 million to $19.3 million. As a percentage of net revenues,
general and administrative expenses for the nine month period decreased from
4.5% to 4.2%. The increases in the amount of general and administrative expenses
for the three and nine month periods primarily were due to an increase in
worldwide administrative support needs and headcount related expenses.
OPERATING INCOME (LOSS)
Operating income for the three months ended December 31, 1999 increased 47.5%
from the same period last year, from $25.9 million to $38.2 million. Operating
income for the nine months ended December 31, 1999 increased 102.8% from the
same period last year, from $17.6 million to $35.7 million.
Publishing operating income for the three months ended December 31, 1999
increased 104.2% to $33.7 million, compared to $16.5 million in the same
period last year. The period over period increase was due to an increase in
publishing net revenues. Distribution operating income for the three months
ended December 31, 1999 decreased 39.6% to $5.8 million, compared to $9.6
million in the same period last year. The period over period change primarily
was due to a decrease in distribution sales and the UK price reductions, as
noted earlier.
Publishing operating income for the nine months ended December 31, 1999
increased 277.2% to $34.7 million, compared to $9.2 million in the same
period last year. The period over period increase primarily was due to an
increase in publishing net revenues. Distribution operating income for the
nine months ended December 31, 1999 decreased 59.0% to $4.1 million, compared
to $10.0 million in the same period last year. The period over period change
primarily was due to a decrease in distribution sales and the UK price
reductions, as noted earlier.
PROVISION FOR INCOME TAXES
The income tax provision of approximately $13.1 million and $11.0 million for
the three and nine months ended December 31, 1999, respectively, reflects the
Company's estimated tax provision from the Company's net income for these
periods using the estimated effective income tax rate of 37% for the fiscal year
ended March 31, 2000. The realization of deferred tax assets primarily is
dependent on the generation of future taxable income. Management
15
<PAGE>
believes that it is more likely than not that the Company will generate taxable
income sufficient to realize the benefit of the deferred tax assets recognized.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $18.7 million, from $33.0
million at March 31, 1999 to $51.7 million at December 31, 1999. Approximately
$34.8 million in cash and cash equivalents were provided by operating activities
during the nine months ended December 31, 1999.
In addition, approximately $78.0 million in cash and cash equivalents were used
in investing activities during the nine months ended December 31, 1999, as
compared with approximately $53.4 million used during the same period last year.
The increase in cash used for investing activities is attributable to a large
extent to the acquisition of Expert Software in June 1999 for approximately
$20.5 million in cash and other acquisition costs related to the transaction.
Cash used in investing activities also increased due to an increase in prepaid
royalties and capitalized software costs incurred by the Company as a result of
its execution of new license and development agreements granting the Company
long term rights to intellectual property of third parties, as well as the
acquisition of publishing and distribution rights to products being developed by
third parties. Capital expenditures totaled $2.5 million during the nine months
ended December 31, 1999.
Cash and cash equivalents provided by financing activities totaled $63.0
million for the nine months ended December 31, 1999, compared to $11.1
million provided by financing activities for the same period last year. This
increase principally was due to the Company's receipt of $25 million in
proceeds from the term loan described below, $14.9 million in proceeds from
the exercise of employee stock options and $31.5 million of net borrowings
under the revolving credit facility described below.
In connection with the Company's purchases of N64 hardware and 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 for the purchase of these cartridges. Furthermore,
Nintendo maintains a policy of not accepting returns of N64 hardware and
software cartridges. Because of these and other factors, the carrying of an
inventory of N64 hardware and software cartridges entails significant capital
and risk.
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, 2001, the
Company must pay a premium on such redeemed Notes.
The Company has a $125.0 million revolving credit facility and term loan (the
"Facility") with a group of banks. The 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 Facility was used to acquire Expert
Software in June 1999 and to pay costs related to such acquisition and the
securing of the Facility. The term loan has a three-year term with principal
amortization on a straight-line quarterly basis beginning December 31, 1999 and
a borrowing rate based on the banks' base rate (which is generally equivalent to
the published prime rate) plus 2.0%, or LIBOR plus 3.0%. The revolving portion
of the Facility has a borrowing rate based on the banks' base rate plus 1.75% or
LIBOR plus 2.75%. The Company pays a commitment fee of 1/2% based on the unused
portion of the facility. The Company had a balance outstanding of $27.0 million
under the revolving portion of the Facility at December 31, 1999. Letters of
credit outstanding against the Facility totaled $20.9 million at December 31,
1999.
The Company's CentreSoft subsidiary has a revolving credit facility (the "UK
Facility") with its bank in the United Kingdom in the amount of approximately
$21.0 million. The UK Facility can be used for working capital requirements
and expires in June 2000. The Company had no borrowings outstanding against
the UK facility as of December 31, 1999 or March 31, 1999. Letters of credit
outstanding against the UK Facility approximately totaled $9.7 million at
December 31, 1999.
16
<PAGE>
The Company's NBG subsidiary has a revolving credit facility (the "German
Facility") with a bank in Germany in the amount of $2.0 million. The German
Facility can be used for working capital requirements and has no expiration
date. The Company had no borrowings outstanding against the German Facility as
of December 31, 1999 or March 31, 1999.
The Company's CD Contact subsidiary has a credit facility in the Netherlands,
("the Netherlands Facility") with a bank that permits borrowings against
eligible accounts receivable and inventory up to approximately $25 million.
Borrowings under the Netherlands Facility are due on demand and totaled $4.5 at
December 31, 1999 and $6.0 million at March 31, 1999. Letters of credit
outstanding under the Netherlands Facility totaled $4.0 million at December 31,
1999 and $6.9 million at March 31, 1999. The Netherlands Facility expires on
March 31, 2001.
In addition, the Company had a line of credit agreement (the "Asset Line")
with a bank that expired in September 1998. As of December 31, 1999, $387
thousand was outstanding on this line.
Under the terms of a production financing arrangement, the Company has a
commitment to purchase a future Playstation 2 title from an independent third
party developer upon its completion for an estimated $4.2 million. Failure by
the developer to complete the project within the contractual time frame or
specifications alleviates the Company's commitment.
The Company will use its working capital ($170 million at December 31, 1999),
as well as the proceeds available from the Facility, the UK Facility, the
Netherlands Facility and the German Facility, to finance the Company's
operational requirements, including acquisitions of inventory, equipment, the
funding of development, production, marketing and selling of new products,
and the acquisition of intellectual property rights for future products from
third parties.
The Company's management currently believes that inflation has not had a
material impact on continuing operations.
YEAR 2000
The Company in the transition to the year 2000 encountered no significant
problems. 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 affect critical systems or products sold to
customers. Adequate and customary contingency plans will be maintained to
address any unexpected failures.
FACTORS AFFECTING FUTURE PERFORMANCE
In connection with the Private Securities Litigation Reform Act of 1995 (the
"Litigation Reform Act"), the Company has disclosed certain cautionary
information to be used in connection with written materials (including this
Quarterly Report on Form 10-Q) and oral statements made by or on behalf of its
employees and representatives that may contain "forward-looking statements"
within the meaning of the Litigation Reform Act. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The listener or reader is cautioned that all
forward-looking statements are necessarily speculative and there are numerous
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements. For
discussion that highlights some of the more important risks identified by
management, but which should not be assumed to be the only factors that could
affect future performance, see the Company's Annual Report on Form 10-K which is
incorporated herein by reference. The reader or listener is cautioned that the
Company does not have a policy of updating or revising forward-looking
statements and thus he or she should not assume that silence by management over
time means that actual events are bearing out as estimated in such
forward-looking statements.
17
<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, 1999. 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
None.
(b) Reports on Form 8-K
On October 13, 1999, the Company filed a Current Report on Form
8-K reporting its acquisition of JCM Productions, Inc. dba
Neversoft Entertainment.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: February 14, 2000
ACTIVISION, INC.
/s/ Ron Doornink President and Chief Operating Officer February 14, 2000
- ----------------- -------------------------------------
(Ron Doornink) (Principal Financial Officer)
/s/ Jenniffer Koh Corporate Controller February 14, 2000
- ------------------ --------------------
(Jenniffer Koh) (Principal Accounting Officer)
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-2000 MAR-31-2000
<PERIOD-START> OCT-01-1999 APR-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 51,734 51,734
<SECURITIES> 0 0
<RECEIVABLES> 242,960 242,960
<ALLOWANCES> (27,401) (27,401)
<INVENTORY> 42,973 42,973
<CURRENT-ASSETS> 373,045 373,045
<PP&E> 32,375 32,375
<DEPRECIATION> (21,947) (21,947)
<TOTAL-ASSETS> 454,968 454,968
<CURRENT-LIABILITIES> 203,083 203,083
<BONDS> 60,000 60,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 175,575 175,575
<TOTAL-LIABILITY-AND-EQUITY> 454,968 454,968
<SALES> 268,862 468,367
<TOTAL-REVENUES> 268,862 468,367
<CGS> 179,090 320,393
<TOTAL-COSTS> 230,621 432,701
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,835 5,833
<INCOME-PRETAX> 35,406 29,833
<INCOME-TAX> 13,105 11,048
<INCOME-CONTINUING> 22,301 18,790
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 22,301 18,790
<EPS-BASIC> 0.89 0.77
<EPS-DILUTED> 0.75 0.71
</TABLE>
