SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
O R
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-12699
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-
2606438
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
11601 WILSHIRE BLVD., LOS ANGELES, CA 90025
(Address of principal executive offices) (Zip Code)
(310) 473-9200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court: Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock outstanding as of
August 8, 1996 was 13,875,765.
ACTIVISION, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1996 (unaudited)
and March 31, 1996 3
Condensed Consolidated Statements of
Operations for the quarters ended
June 30, 1996 and 1995 (unaudited) 4
Condensed Consolidated Statements of
Cash Flows for the quarters ended
June 30, 1996 and 1995 (unaudited) 5
Notes to Condensed Consolidated Financial
Statements for the quarter ended
June 30, 1996 (unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7-10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
June 30, March 31,
1996 1996
------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $22,814 $25,288
Accounts receivable, net of
allowances of $6,220 and
$7,005 respectively 13,726 19,909
Inventories, net 3,439 2,975
Prepaid software and license
royalties 5,566 3,652
Other assets 1,636 1,183
Deferred income taxes 2,757 1,500
--------- ----------
Total current assets 49,938 54,507
Property and equipment, net 3,974 3,326
Prepaid software and license
royalties 872 -
Other assets 198 200
Excess purchase price over
identifiable assets acquired, net 19,260 19,580
--------- ---------
Total assets $74,242 $77,613
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,942 $4,592
Accrued expenses 9,416 9,688
--------- ---------
Total current liabilities 12,358 14,280
Other liabilities 329 334
--------- ---------
Total liabilities 12,687 14,614
--------- ---------
Commitments and contingencies
Shareholders' equity:
Common stock, $.000001 par value,
100,000,000 shares authorized,
14,373,965 and 14,250,180 shares
issued and 13,873,965 and 13,750,180
outstanding , respectively - -
Additional paid-in capital 69,058 67,904
Retained earnings
(accumulated deficit) (1,923) 708
Cumulative foreign currency
translation (302) (335)
Less: Treasury stock, cost of
500,000 shares (5,278) (5,278)
---------- ----------
Total shareholders' equity 61,555 62,999
---------- ----------
Total liabilities and
shareholders' equity $74,242 $77,613
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the quarters ended June 30,
(in thousands except loss per share data)
(Unaudited)
1996 1995
---- ----
Net revenues $7,021 $3,319
Cost of goods sold 1,509 1,554
--------- ---------
Gross profit 5,512 1,765
--------- ---------
Operating expenses:
Product development 4,547 4,579
Sales and marketing 3,641 1,893
General and administrative 1,229 986
Amortization of intangible assets 321 321
--------- ---------
Total operating expenses 9,738 7,779
--------- ---------
Operating loss (4,226) (6,014)
Other income:
Interest, net 312 525
--------- ----------
Loss before income tax
provision (benefit) (3,914) (5,489)
Income tax provision (benefit) (1,283) 39
---------- ----------
Net loss $(2,631) $(5,528)
========== ==========
Net loss per common share $ (0.19) $ (0.39)
========== ==========
Number of shares used in computing
net loss per common share 13,812 14,184
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the quarters ended June 30,
(in thousands)
Increase (Decrease) in Cash
(UNAUDITED)
1996 1995
----------------------------
Net cash used in operating activities $(1,750) $(3,069)
--------- ---------
Cash flows from investing activities:
Capital expenditures (1,089) (638)
--------- ---------
Net cash used in investing
activities (1,089) (638)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance and exercise
of common stock options and warrants 332 -
--------- ---------
Net cash provided by
financing activities 332 -
--------- ---------
Effect of exchange rate changes on cash 33 (15)
--------- ---------
Net decrease in cash and cash equivalents(2,474) (3,722)
--------- ---------
Cash and cash equivalents at beginning
of period 25,288 37,355
--------- ---------
Cash and cash equivalents at end
of period $22,814 $33,633
========= =========
Non-cash investing activities:
Stock issued in exchange for
licensing rights $822 -
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1.BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Activision, Inc. and its subsidiaries. The information furnished
is unaudited and reflects all adjustments which, in the opinion of
management, are necessary to provide a fair statement of the results for the
interim periods presented. The financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended March 31, 1996.
Certain amounts in the condensed consolidated financial statements have been
reclassified to conform with the current period's presentation. These
reclassifications had no impact on previously reported working capital or
results of operations.
2.INVENTORIES
Inventories comprise (amounts in thousands):
June 30, March 31,
1996 1996
Finished goods $2,491 $2,099
Purchased parts and components 948 876
------ ------
$3,439 $2,975
====== ======
3.SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standard No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed," provides for
the capitalization of certain software development costs once technological
feasibility is established. The capitalized costs are then amortized on a
straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected revenues, whichever is greater. The
software development costs that have been capitalized to date have been
immaterial.
4.AMORTIZATION OF INTANGIBLE ASSETS
Effective April 1, 1992, the Disc Company, Inc. ("TDC"), a Delaware
corporation and a wholly-owned subsidiary of International Consumer
Technologies Corporation, was merged with and into the Company, with the
Company as the surviving corporation. The excess of the purchase price over
the estimated fair values of the net assets acquired was recorded as an
intangible asset in the amount of $24,417,000. This intangible asset is
being amortized on a straight-line basis over a 20 year period. Amortization
was approximately $305,000 for each of the quarters ended June 30, 1996 and
1995. The Company systematically evaluates current and expected cash flow
from operations on a non-discounted basis for the purpose of assessing the
recoverability of recorded intangible assets. Some of the factors considered
in this evaluation include operating results, business plans, budgets and
economic projections. Should such factors indicate that recoverability might
be impaired, the Company would appropriately adjust the recorded amount of
the intangible asset and/or the period over which the recorded intangible
asset is amortized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ITEM 2 ("MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS")
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
"CERTAIN CAUTIONARY INFORMATION" ON PAGES 4 TO 8 OF SUCH REPORT. 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 diversified international publisher of interactive
entertainment software. The Company develops and publishes entertainment
software for a variety of platforms, including both personal computer CD-ROM
desktop systems, such as the Windows 95 operating system, and videogame set-top
hardware systems, such as the Sony Playstation and Sega Saturn. The Company
distributes its products worldwide through its direct sales force and, to a
lesser extent, through third party distributors and licensees.
For purposes of the presentation set forth below, net revenues from and
cost of goods sold related to set-top systems consist of sales and costs
relating to all entertainment software products designed by the Company for
operation on a hardware device that is connected to a television set and
displayed on a television screen. Examples of set-top systems include Super
Nintendo Entertainment System ("SNES"), Sega Genesis ("SGS"), Sega Saturn
("Saturn"), Sony Playstation ("Playstation"), Atari Jaguar, CD-I and 3DO
Multiplayer ("3DO"). The Company designs products for operation on many of
these systems, and normally it is required to pay a license fee for the right to
create products for a particular system. Net revenues from and cost of goods
sold related to desktop systems consist of sales and costs relating to all
entertainment software products designed by the Company for operation through a
personal computer's operating system software and that is displayed on the
computer's monitor. Examples of computer operating systems include MS-DOS,
Windows and the Macintosh operating system. The Company generally is not
obligated to pay an operating system license fee for the right to produce
desktop products.
RESULTS OF OPERATIONS
Net Revenues
Net revenues for the quarter ended June 30, 1996 increased 112% from the
same period last year. This increase in net revenues was primarily due to an
increase in desktop net revenues and OEM net revenues during the quarter. The
increase in desktop net revenues during the current quarter was attributable to
continuing strong sales of "Mechwarrior 2" (DOS and Windows 95 CD), which was
released in July 1995, as well as the initial release of "Mechwarrior 2: Ghost
Bear's Legacy" (Windows 95 CD), "Netmech" (DOS CD), "Mechwarrior 2" (Mac CD),
"Zork Nemesis" (Mac CD) and "Elk Moon Murder" (DOS/Windows 95/Mac CD). The
decrease in set-top net revenues during the current quarter was due to the
Company's strategic change in its business emphasis from cartridge-based set-top
systems to CD-based desktop systems. The Company expects revenues from set-top
systems to grow as a result of an increase in new releases of CD based set-top
products for the Playstation and Saturn.
On-line, OEM, licensing and other net revenues increased during the
current quarter due to OEM and licensing revenues related to "Mechwarrior 2"
(Windows 95 CD/Power VR and S3 Virge enhanced versions), "Zork: Nemesis" and
"Spycraft: The Great Game."
Net revenues by territory were as follows (amounts in thousands):
Quarter Ended June 30,
---------------------------------------------------------
1996 1995
---------------------------------------------------------
% of Net % ofNet
Amount Revenues Amount Revenues %Change
------ -------- ------ -------- -------
North America $5,544 79% $2,183 66% 154%
Europe 723 10% 70 2% 933%
Japan 284 4% 839 25% -66%
Australia and
Pacific Rim 470 7% 227 7% 107%
---------------------------------------------------------
$7,021 100% $3,319 100% 112%
=========================================================
Net revenues by device/medium were as follows (amounts in thousands):
Quarter Ended June 30,
---------------------------------------------------------
1996 1995
---------------------------------------------------------
% of Net % of Net
Amount Revenues Amount Revenues %Change
------ --------- ------ -------- -------
Set-top $203 3% $685 21% -70%
Desktop 6,818 97% 2,634 79% 159%
---------------------------------------------------------
$7,021 100% $3,319 100% 112%
=========================================================
Net revenues by distribution channel were as follows (amounts in
thousands):
Quarter Ended June 30,
---------------------------------------------------------
1996 1995
---------------------------------------------------------
% of Net % of Net
Amount Revenues Amount Revenues %Change
------ -------- ------ -------- -------
Retailer/Reseller $2,614 37% $2,723 82% -4%
OEM 3,455 49% 69 2% 4,907%
On-line, licensing
and other 952 14% 527 16% 81%
--------------------------------------------------------
$7,021 100% $3,319 100% 112%
========================================================
Cost of Goods Sold
Cost of goods sold related to set-top, desktop and OEM revenues represent
the manufacturing and related costs of computer software and video games.
Manufacturers of the Company's computer software are located in the United
States and Europe and are readily available. Set-top cartridges and CDs are
manufactured by the respective video game console manufacturers, such as Sony,
Nintendo and Sega, who require significant lead time to fulfill the Company's
orders.
Also included in cost of goods sold is royalty expense related to amounts
due to developers, title owners or other royalty participants based on product
sales. Various contracts are maintained with developers, product title owners
or other royalty participants which state a royalty rate and term of agreement,
among other items. The decrease in cost of goods sold is a result of the
increase in the percentage of net revenues to CD-based products.
Gross Profit
For the quarter ended June 30, 1996, gross profit as a percentage of net
revenues was 78.5% compared to 53.2% for the quarter ended June 30, 1995. The
increase in gross profit as a percentage of net revenues was due to the increase
in the percentage of net revenues rlated to CD based products.
Operating Expenses
Quarter Ended June 30,
----------------------------------------------------
1996 1995
----------------------------------------------------
% of Net % of Net
Amount Revenues Amount Revenues
------ -------- ------ --------
Product development $4,547 64.7% $4,579 138.0%
Sales and marketing 3,641 51.9% 1,893 57.0%
General and
administrative 1,229 17.5% 986 29.7%
Amortization of excess
purchase price and
reorganization expenses 321 4.6% 321 9.7%
------ ------- ------ -------
Total operating expenses
$9,738 138.7% $7,779 234.4%
====== ======= ====== =======
The decrease in product development expenses for the quarter ended June 30,
1996 was due to the decrease in products in development containing live action
video. This decrease, however, was almost fully offset by an overall increase
in the number of products in development, an increase in production costs
associated with 3-D programming technology, continued investment in development
for new CD platforms and the higher average development costs of products for
these new platforms. Sales and marketing expenses also increased both in amount
and as a percentage of revenues as a result of a worldwide expansion of the
sales and marketing organization needed to manage the Company's increased
product release schedule later in the fiscal year. General and administrative
expenses increased due to an increase in head count related expenses as compared
to the same period in the prior year.
Other Income (Expense)
Interest income was $312,000 and $525,000 for the quarters ended June 30,
1996 and 1995, respectively. The decrease was due the decrease in cash and cash
equivalents during the current fiscal quarter as compared to the same period in
the prior year.
Income Tax Provision (Benefit)
The income tax benefit of $1,283,000 for the quarter ended June 30, 1996
reflects the Company's expected effective income tax rate for the fiscal year
ended March 31, 1997. The income tax benefit was recorded based on recent
operating history, as well as a current assessment that operations will generate
taxable income for the fiscal year. Income taxes for the quarter ended June 30,
1995 represents foreign taxes withheld, which may be available in the future as
tax credits against future tax liability.
Net Income (Loss)
For the reasons noted above, there was a decrease in the net loss recorded
for the quarter ended June 30, 1996 as compared to the net loss for the quarter
ended June 30, 1995. Net loss for the quarter ended June 30, 1996 was
$2,631,000 compared to a net loss of $5,528,000 for the same period of the prior
fiscal year.
SEASONALITY
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on many
factors, some of which are not under the Company's control. For example, net
revenues may be higher during the fourth calendar quarter as a result of
increased demand for consumer software during the year-end holiday buying
season. Net revenues in other quarters can vary significantly as a result of
the timing of new product introductions.
Products are generally shipped as orders are received, and consequently the
Company operates with little or no backlog. Net revenues in any quarter are
therefore substantially dependent on orders booked and shipped in that quarter.
The Company's expense levels are based in large part on the Company's product
development and marketing budgets. The majority of product development and
marketing costs are expensed as incurred, which is often before a product ever
is released. As the Company increases its development and marketing activities,
current expenses will increase and, if sales from previously released products
are below expectations, net income is likely to be disproportionately affected.
Due to all of the foregoing, revenues and operating results for any future
quarter are not predictable with any significant degree of accuracy.
Accordingly, the Company believes that period-to-period comparisons of operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $2.6 million from March 31, 1996 to
June 30, 1996 as a result of the funding of the Company's expanding operations
and additional capital expenditures. At June 30, 1996, net accounts receivable
and inventories were $17.2 million, a decrease of $5.7 million from $22.9
million as of March 31, 1996. The decrease is due primarily to a decrease in
the Company's product sales in the first quarter of this fiscal year as compared
to the quarter ended March 31, 1996.
As of June 30, 1996, total accounts payable and accrued liabilities were
approximately $12.4 million versus $14.3 million at March 31, 1996. The
decrease at June 30, 1996 is related to the decrease in cost of goods sold as
well as a decrease in operating expenses from $10.7 million for the quarter
ended March 31, 1996 as compared to $9.7 million for the quarter ended June 30,
1996.
During the quarter ended June 30, 1996, the Company invested approximately
$1.1 million in computer hardware and software purchases required to support
the Company's product development efforts and new management information
systems. During fiscal 1997, the Company expects to incur additional capital
expenditures relating to the development of its products and the general
operation of its business. The Company also plans on moving its Los Angeles
headquarters to a new facility by the end of fiscal 1997 and, although a new
site has not been finally identified, the Company may consider a site purchase
as opposed to a new lease.
The Company's principal source of liquidity is $22.8 million in cash and
cash equivalents. The Company uses its working capital to finance ongoing
operations, including acquisitions of inventory and equipment, to fund the
development, production, marketing and selling of new products, and to obtain
intellectual property rights for future products from third parties. Management
believes that the Company's existing capital resources are sufficient to meet
its current operational requirements for the foreseeable future.
The Company's management currently believes that inflation has not had a
material impact on continuing operations.
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: August 14, 1996
ACTIVISION, INC.
/S/Robert A. Kotick Chairman, Chief Executive August 14, 1996
(Robert A. Kotick) Officer (Principal Executive Officer),
President and Director
/S/Brian G. Kelly Chief Financial and Operating August 14, 1996
(Brian G. Kelly) Officer and Director
(Principal Financial Officer)
/S/Barry J. Plaga Chief Accounting Officer August 14, 1996
(Barry J. Plaga) (Principal Accounting Officer)
5
3-MOS
MAR-31-1997
JUN-30-1996
22,814
0
19,946
(6,220)
3,439
49,938
7,097
(3,123)
74,242
12,358
0
0
0
0
61,555
74,242
7,021
7,021
1,509
1,509
9,738
0
0
(3,914)
(1,283)
(2,631)
0
0
0
(2,631)
(.19)
(.19)
