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, 1999
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)
3100 OCEAN PARK BOULEVARD, SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
(310) 255-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court: Yes [ X ] No [ ]
The number of shares of the registrant's Common Stock outstanding as of November
11, 1999 was 25,032,316.
1
ACTIVISION, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited)
and March 31, 1999 3
Condensed Consolidated Statements of Operations for the three and six months
ended September 30, 1999 and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1999 and 1998 (unaudited) 5
Notes to Condensed Consolidated Financial Statements for the
three and six months ended September 30, 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 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(all amounts in thousands except share data)
September 30, 1999 March 31, 1999
------------------ --------------
Restated
--------
ASSETS
Current assets:
Cash and cash equivalents $ 25,797 $ 33,037
Accounts receivable, net of allowances of $21,333 and
$14,979, respectively 127,637 117,541
Inventories, net 40,805 30,931
Prepaid royalties and capitalized software costs 47,993 38,093
Deferred income taxes 11,145 6,383
Other current assets 14,831 9,965
--------- ---------
Total current assets 268,208 235,950
Prepaid royalties and capitalized software costs 10,377 6,923
Property and equipment, net 11,438 10,924
Deferred income taxes 2,618 2,618
Intangible assets, net 53,727 21,647
Other assets 8,795 5,283
--------- ---------
Total assets $ 355,163 $ 283,345
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to bank $ 25,339 $ 5,992
Accounts payable 39,731 43,853
Accrued expenses 61,194 45,160
--------- ---------
Total current liabilities 126,264 95,005
Notes payable to bank, less current portion 19,291 1,143
Convertible subordinated notes 60,000 60,000
Other liabilities 2 6
--------- ---------
Total liabilities 205,557 156,154
--------- ---------
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 25,490,105 and 23,303,762 shares issued
and 24,990,105 and 23,803,762 outstanding, respectively -- --
Additional paid-in capital 134,412 109,251
Retained earnings 22,217 25,728
Accumulated other comprehensive income (loss) (1,745) (2,510)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------- ---------
Total shareholders' equity 149,606 127,191
--------- ---------
Total liabilities and shareholders' equity $ 355,163 $ 283,345
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three and Six Months ended September 30,
(Unaudited)
(all amounts in thousands except loss per share data)
Three Months Ended Six Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Restated Restated
-------- --------
Net revenues $ 115,363 $ 66,182 $ 199,505 $ 127,723
Costs and expenses:
Cost of sales - product costs 66,284 43,473 119,823 82,864
Cost of sales - royalties and software
amortization 11,610 4,999 21,480 7,749
Product development 5,819 4,246 10,342 10,307
Sales and marketing 20,020 10,798 37,158 24,537
General and administrative 6,593 4,580 11,296 9,130
Amortization of intangible assets 1,362 396 1,831 793
Merger expenses 150 425 150 600
--------- --------- --------- ---------
Total operating expenses 111,838 68,917 202,080 135,980
--------- --------- --------- ---------
Operating income (loss) 3,525 (2,735) (2,575) (8,257)
Interest expense, net (1,838) (824) (2,997) (1,225)
--------- --------- --------- ---------
Income (loss) before income tax provision (benefit) 1,687 (3,559) (5,572) (9,482)
Income tax provision (benefit) 624 (1,354) (2,061) (3,606)
--------- --------- --------- ---------
Net income (loss) $ 1,063 $ (2,205) $ (3,511) $ (5,876)
========= ========= ========= =========
Other comprehensive income (loss):
Foreign currency translation adjustment 1,822 788 765 (10)
--------- --------- --------- ---------
Comprehensive income (loss) $ 2,885 $ (1,417) $ (2,746) $ (5,886)
========= ========= ========= =========
Basic and diluted net income (loss) per share $ 0.04 $ (0.10) $ (0.15) $ (0.26)
========= ========= ========= =========
Number of shares used in computing basic net
income (loss) per share 24,502 22,669 24,103 22,648
========= ========= ========= =========
Number of shares used in computing diluted net
income (loss) per share 26,753 22,669 24,103 22,648
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months ended September 30,
(UNAUDITED)
(all amounts in thousands)
1999 1998
---- ----
Restated
---------------------------
Increase (decrease) in cash
---------------------------
Cash flows from operating activities:
Net loss $ (3,511) $ (5,876)
Adjustments to reconcile net loss to net cash used in
operating activities:
Deferred income taxes (2,496) (3,437)
Depreciation and amortization 3,435 2,825
Amortization of prepaid royalties and capitalized
software costs 18,271 4,511
Change in assets and liabilities:
Accounts receivable (9,377) 11,797
Inventories (6,593) (6,178)
Other current assets (2,468) (5,209)
Other assets (3,501) 2,178
Accounts payable (6,591) (7,161)
Accrued liabilities 11,457 813
Other liabilities -- (1,310)
-------- --------
Net cash used in operating activities (1,374) (7,047)
Cash flows from investing activities:
Cash used for purchase acquisitions, net of cash acquired (20,523) --
Cash acquired in pooling transactions -- 732
Capital expenditures (2,330) (2,858)
Investment in prepaid royalties and capitalized
software costs (31,625) (27,261)
-------- --------
Net cash used in investing activities (54,478) (29,387)
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant
to employee stock option plan 13,288 434
Proceeds from employee stock purchase plan 419 389
Note payable to bank, net (4,844) 3,913
Proceeds from term loan 25,000 --
Cash paid to secure line of credit and term loan (3,355) --
Borrowings under line of credit agreement 51,815 --
Payments under line of credit agreement (34,476) --
-------- --------
Net cash provided by financing activities 47,847 4,736
Effect of exchange rate changes on cash 765 (10)
-------- --------
Net decrease in cash and cash equivalents (7,240) (31,708)
Cash and cash equivalents at beginning of period 33,037 73,378
-------- --------
Cash and cash equivalents at end of period $ 25,797 $ 41,670
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended September 30, 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, and the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999 as previously 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 September 30, 1999 and March
31, 1999 of $53.7 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 (loss) and its
components in the condensed consolidated statements of operations for the
three and six months ended September 30, 1999 and 1998.
3. ACQUISITION OF NEVERSOFT
On September 30, 1999, the Company acquired Neversoft, a privately held
console software developer, in exchange for 698,835 shares of the Company's
common stock. The acquisition was accounted for as a pooling of interests.
4. 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.
6
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended September 30, 1999
(Unaudited)
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 September 30, 1999, prepaid royalties and unamortized capitalized
software costs totaled $46.3 million (including $10.4 million classified as
non-current) and $12.1 million, respectively. As of March 31, 1999, prepaid
royalties and unamortized capitalized software costs totaled $36.0 million
(including $6.9 million classified as non-current) and $9.0 million,
respectively. Amortization of prepaid royalties and capitalized software
costs was $21.5 million and $7.7 million for the six months ended September
30, 1999 and 1998, respectively. Write-offs of prepaid royalties and
capitalized software costs prior to product release were approximately
$675,000 and $415,000 for the three months ended September 30, 1999 and
1998, 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.
7
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended September 30, 1999
(Unaudited)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities and supplemental cash flow information for the six
months ended September 30, 1999 and 1998 are as follows (amounts in thousands):
September 30,
-------------
1999 1998
---- ----
Non-cash activities:
Warrants to acquire common stock issued in exchange for
licensing rights $3,113 $ 43
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 $2,370
Supplemental cash flow information:
Cash paid for income taxes $ 788 $ 522
Cash paid for interest $5,238 $2,532
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.
8
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended September 30, 1999
(Unaudited)
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 six months ended
September 30, 1999 and 1998 is as follows:
Three Months Ended September 30, 1999
----------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- -----
Revenues from external customers $ 78,689 $ 36,674 -- $115,363
Revenue from sales between segments $ 8,417 -- -- $ 8,417
Operating income (loss) $ 5,375 $ (418) $ (1,432) $ 3,525
Six Months Ended September 30, 1999
----------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- -----
Revenues from external customers $ 126,809 $ 72,696 -- $199,505
Revenue from sales between segments $ 13,663 -- -- $ 13,663
Operating income (loss) $ 507 $ (1,261) $ (1,821) $ (2,575)
Three Months Ended September 30, 1998
----------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- -----
Revenues from external customers $ 23,556 $ 42,626 -- $ 66,182
Revenue from sales between segments $ 574 -- -- $ 574
Operating income (loss) $ (2,183) $ 352 $ (904) $ (2,735)
Six Months Ended September 30, 1998
----------------------------------------------------------
Publishing Distribution Corporate Total
---------- ------------ --------- -----
Revenues from external customers $ 45,029 $ 82,694 -- $127,723
Revenue from sales between segments $ 2,263 -- -- $ 2,263
Operating income (loss) $ (7,232) $ 192 $ (1,217) $ (8,257)
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 six months ended September 30,
1999 and 1998 is based on the location of the selling entity. Revenues from
external customers by geographic region were as follows:
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
United States $ 58,345 $ 21,242 $ 93,158 $ 37,161
International 57,018 44,940 106,347 90,562
-------- -------- -------- --------
Total $115,363 $ 66,182 $199,505 $127,723
======== ======== ======== ========
Revenues by platform were as follows:
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Console $ 79,823 $ 44,531 $129,051 $ 82,956
PC 35,540 21,651 70,454 44,767
-------- -------- -------- --------
Total $115,363 $ 66,182 $199,505 $127,723
======== ======== ======== ========
9
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended September 30, 1999
(Unaudited)
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 (loss) by the weighted average number of
common shares outstanding for all periods. Diluted earnings per share
reflects the potential dilution that could occur if the 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 (loss) 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 September 30, 1999, outstanding weighted average
options to purchase approximately 113,745 shares were not included in the
computation of diluted earnings per share as a result of their antidilutive
effect. Such stock options could have a dilutive effect in future periods.
Due to losses recorded for the three months ended September 30, 1998 and
the six months periods ended September 30, 1999 and 1998, no conversions
were assumed in the computation of diluted net income (loss) per share for
such periods.
The following table sets forth the computation of basic and diluted net
income (loss) per common share for the three months and six months periods
ended September 30, 1999 and 1998 (in thousands, except per share data):
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Net income (loss) $ 1,063 $ (2,205) $ (3,511) $ (5,876)
Denominator:
Denominator for basic net (loss) per common share - weighted
average shares outstanding 24,502 22,669 24,103 22,648
Effect of dilutive securities:
Employee stock options 1,983 -- -- --
Warrants 268 -- -- --
-------- -------- -------- --------
Denominator for diluted net (loss) per common share - adjusted
weighted-average shares for assumed conversions 26,753 22,669 24,103 22,648
Basic and diluted net income (loss) per share $ 0.04 $ (0.10) $ (0.15) $ (0.26)
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.
10
ACITIVISION, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
For the Six Months Ended September 30, 1999
(Unaudited)
As of September 30, 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 fund 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
September 30, 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 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
million and issue letters of credit up to $80 million on a revolving basis
against eligible accounts receivable and inventory. The $25 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 September 30, 1999, the
Company had an outstanding balance of $10.6 million on the revolving
portion of the Facility. Letters of credit outstanding against the Facility
totaled $11.8 million at September 30, 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
approximately $11.2 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 September 30, 1999 or
1998.
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
approximately $25 million. Borrowings under the Netherlands Facility are
due on demand and totaled $6.7 at September 30, 1999. Letters of credit
outstanding under the Netherlands Facility totaled $6.3 million at
September 30, 1999. The Netherlands Facility became available in October
1998 and 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. Approximately $499,000 and
$569,000 were outstanding on this line as of September 30, 1999 and 1998,
respectively.
11
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, Nintendo 64 and Sega
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, 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
The following table sets forth certain consolidated statements of operations
data for the periods indicated as a percentage of total net revenues and also
breaks down net revenues by territory, platform and channel:
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------
1999 1998
----------------------------- -------------------------------
% of Net % of Net
Amount Revenues Amount Revenues
------ -------- ------ --------
STATEMENTS OF OPERATIONS DATA:
Net revenues: $ 115,363 100.0% $ 66,182 100.0%
Costs and expenses:
Cost of sales - product costs 66,284 57.5% 43,473 65.7%
Cost of sales - royalties and software
amortization 11,610 10.1% 4,999 7.6%
Product development 5,819 5.0% 4,246 6.4%
Sales and marketing 20,020 17.3% 10,798 16.3%
General and administrative 6,593 5.7% 4,580 6.9%
Amortization of intangible assets 1,362 1.2% 396 0.6%
Merger expenses 150 0.1% 425 0.6%
--------- ----- --------- -----
Total costs and expenses 111,838 96.9% 68,917 104.1%
--------- ----- --------- -----
Operating income (loss) 3,525 3.1% (2,735) (4.1%)
Interest income (expense), net (1,838) (1.6%) (824) (1.3%)
--------- ----- --------- -----
Income (loss) before income tax benefit 1,687 1.5% (3,559) (5.4%)
Income tax provision (benefit) 624 0.5% (1,354) (2.1%)
--------- ----- --------- -----
Net income (loss) $ 1,063 1.0% $ (2,205) (3.3%)
========= ===== ========= =====
NET REVENUES BY TERRITORY:
United States $ 58,345 50.6% 21,242 32.1%
International 57,018 49.4% 44,940 67.9%
--------- ----- --------- -----
Total net revenues $ 115,363 100.0% $ 66,182 100.0%
========= ===== ========= =====
NET REVENUES BY ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 61,890 71.1% $ 12,813 53.1%
PC 25,216 28.9% 11,317 46.9%
--------- ----- --------- -----
Total publishing net revenues $ 87,106 75.5% $ 24,130 36.5%
--------- ----- --------- -----
Distribution:
Console $ 17,933 63.5% $ 31,718 75.4%
PC 10,324 36.5% 10,334 24.6%
--------- ----- --------- -----
Total distribution net revenues $ 28,257 24.5% $ 42,052 63.5%
--------- ----- --------- -----
Total net revenues $ 115,363 100.0% $ 66,182 100.0%
========= ===== ========= =====
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 108,322 93.9% $ 63,487 95.9%
OEM, licensing, on-line and other 7,041 6.1% 2,695 4.1%
--------- ----- --------- -----
Total net revenues $ 115,363 100.0% $ 66,182 100.0%
========= ===== ========= =====
OPERATING INCOME (LOSS) BY SEGMENT:
Publishing $ 5,375 152.5% $ (2,183) (79.8%)
Distribution (418) (11.9%) 352 12.9%
Other (1,432) (40.6%) (904) (33.1%)
--------- ----- --------- -----
Total operating income (loss) by segment $ 3,525 100.0% $ (2,735) (100.0%
========= ===== ========= =====
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- ---------------------------------
% of Net % of Net
Amount Revenues Amount Revenues
------ -------- ------ --------
STATEMENTS OF OPERATIONS DATA:
Net revenues: $ 199,505 100.0% $ 127,723 100.0%
Costs and expenses:
Cost of sales - product costs 119,823 60.1% 82,864 64.9%
Cost of sales - royalties and
software amortization 21,480 10.8% 7,749 6.1%
Product development 10,342 5.2% 10,307 8.1%
Sales and marketing 37,158 18.6% 24,537 19.2%
General and administrative 11,296 5.7% 9,130 7.1%
Amortization of intangible assets 1,831 0.9% 793 0.6%
Merger expenses 150 -- 600 0.5%
--------- ----- --------- -----
Total costs and expenses 202,080 101.3% 135,980 106.5%
--------- ----- --------- -----
Operating income (loss) (2,575) (1.3%) (8,257) (6.5%)
Interest income (expense), net (2,997) (1.5%) (1,225) (1.0%)
--------- ----- --------- -----
Income (loss) before income tax benefit (5,572) (2.8%) (9,482) (7.4%)
Income tax provision (benefit) (2,061) (1.0%) (3,606) (2.8%)
--------- ----- --------- -----
Net income (loss) $ (3,511) (1.7%) $ (5,876) 4.6%
========= ===== ========= =====
NET REVENUES BY TERRITORY:
United States $ 93,158 46.7% $ 37,161 29.1%
International 106,347 53.3% 90,562 70.9%
--------- ----- --------- -----
Total net revenues $ 199,505 100.0% $ 127,723 100.0%
========= ===== ========= =====
NET REVENUES BY ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 93,405 66.5% $ 23,782 50.3%
PC 47,067 33.5% 23,510 49.7%
--------- ----- --------- -----
Total publishing net revenues $ 140,472 70.4% $ 47,292 37.0%
--------- ----- --------- -----
Distribution:
Console $ 35,646 60.4% $ 59,174 73.6%
PC 23,387 39.6% 21,257 26.4%
--------- ----- --------- -----
Total distribution net revenues $ 59,033 29.6% $ 80,431 63.0%
--------- ----- --------- -----
Total net revenues $ 199,505 100.0% $ 127,723 100.0%
========= ===== ========= =====
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 187,680 94.1% $ 120,634 94.4%
OEM, licensing, on-line and other 11,825 5.9% 7,089 5.6%
--------- ----- --------- -----
Total net revenues $ 199,505 100.0% $ 127,723 100.0%
========= ===== ========= =====
OPERATING INCOME (LOSS) BY SEGMENT:
Publishing $ 507 19.7% $ (7,232) (87.6%)
Distribution (1,261) (49.0%) 192 2.3%
Other (1,821) (70.7%) (1,217) (14.7%)
--------- ----- --------- -----
Total operating income (loss) by segment $ (2,575) (100.0%) $ (8,257) (100.0%)
========= ===== ========= =====
13
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the three months ended September 30, 1999 increased 74.3% from
the same period last year, from $66.2 million to $115.4 million. This increase
primarily was composed of a 175% increase in net revenues in the United States
from $21.2 million to $58.3 million and a 26.9% increase in international net
revenues from $44.9 million to $57.0 million. The increase in overall net
revenues was composed of a 79.3% increase in console net revenues from $44.5
million to $79.8 million and a 63.6% increase in PC net revenues from $21.7
million to $35.5 million.
Net revenues for the six months ended September 30, 1999 increased 56.2% from
the same period last year, from $127.7 million to $199.5 million. This increase
primarily was composed of a 150.5% increase in net revenues in the United States
from $37.2 million to $93.2 million and a 17.3% increase in international net
revenues from $90.6 million to $106.3 million. The increase in overall net
revenues for the six months ended September 30, 1999 was composed of a 55.5%
increase in console net revenues from $83.0 million to $129.1 million and a
57.4% increase in PC net revenues from $44.8 million to $70.5 million.
Publishing net revenues for the three and six months ended September 30, 1999
increased 261.4% from $24.1 million to $87.1 million and 197.0% from $47.3
million to $140.5 million, respectively. These increases were primarily due to
the increases in publishing console net revenues and publishing PC net revenues
over the same periods last year. Publishing console net revenues for the three
and six months ended September 30, 1999, increased 383.6% from $12.8 million to
$61.9 million and 292.4% from $23.8 million to $93.4 million, respectively.
These increases primarily were attributable to the initial release of Tony Hawk
Pro Skater (PSX), Space Invaders (PSX), A Bug's Life (N64), Quake 2 (PSX and
N64), Blue Stinger (Dreamcast), Tarzan (Gameboy), as well as Star Wars Episode
I: Phantom Menace (PSX) and Tai Fu (PSX) in international territories.
Publishing PC net revenues for the three and six months ended September 30,
1999, increased 123% from $11.3 million to $25.2 million and 100% from $23.5
million to $47.1 million, respectively. These increases primarily were due to
the initial release of Kingpin (Windows), Quake 2 (Mac), Heavy Gear 2 (Windows),
Cabela's Big Game Hunter 3 (Windows) and Space Invaders (Windows).
Distribution net revenues for the three and six months ended September 30, 1999
decreased 32.8% from $42.1 million to $28.3 million and 26.6% from $80.4 million
to $59.0 million, respectively. These decreases were primarily attributable to a
decrease in distribution console revenues for the three and six months ended
September 30, 1999. Distribution console net revenues for the three and six
months ended September 30,1999, decreased 43.5% from $31.7 million to $17.9
million and 39.9% from $59.2 million to $35.6 million, respectively. These
decreases were primarily due to a lack of significant major releases by third
party publishers and increased competition among leading United Kingdom retail
chains resulting in a reduced market share for the independent retailers during
the six months ended September 30, 1999. Distribution PC net revenues for the
three months ended September 30,1999 remained constant at $10.3 million as
compared to the same period last year. Distribution PC net revenues for the six
months ended September 30, 1999 increased 9.9% from $21.3 million to $23.4
million. This increase primarily was due to an increase in PC titles released by
third party publishers during the three months ended June 30, 1999.
Net OEM, licensing, on-line and other revenues for the three months and six
months ended September 30, 1999 increased 159.3% from $2.7 million to $7.0
million and 66.2% from $7.1 million to $11.8 million, respectively. These
increases primarily were due to an increase in the release of titles compatible
with OEM customers' products.
COSTS AND EXPENSES
Cost of sales - product costs represented 57.5% and 65.7% of net revenues for
the three months ended September 30, 1999 and 1998, respectively. Cost of sales
- - product costs represented 60.1% and 64.9% of net revenues for the six months
ended September 30, 1999 and 1998, respectively. The decrease in cost of sales -
product costs as a percentage of net revenues for both the three and six months
ended September 30, 1999 was due to the decrease in distribution net revenue
mix, 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 10.1% and
7.6% of net revenues for the three months ended September 30, 1999 and 1998,
respectively. Cost of sales - royalty and software amortization expense
14
represented 10.8% and 6.1% of net revenues for the six months ended September
30, 1999 and 1998, respectively. The increase in cost of sales - royalty and
software amortization expense as a percentage of net revenues for both the three
and six month period 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 year.
Product development expenses for the three months ended September 30, 1999
increased 38.1% from the same period last year, from $4.2 million to $5.8
million. This increase primarily was 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". Product development expenses of $10.3
million for the six months ended September 30, 1999 remained constant from the
same period last year.
As a percentage of net revenues, total product creation costs (i.e., royalties
and software amortization expense plus product development expenses), increased
from 14.0% to 15.1% and from 14.2% to 16.0% for the three and six months ended
September 30, 1999, respectively. Such increases primarily were attributable to
the increase in the effective royalty rate and the increase in product
development costs, as discussed above.
Sales and marketing expenses for the three months ended September 30, 1999
increased 85.2% from the same period last year, from $10.8 million to $20.0
million. As a percentage of net revenues, sales and marketing expense increased
from 16.3% to 17.3 %. Sales and marketing expense for the six months ended
September 30, 1999 increased 51.8% from $24.5 million to $37.2 million. As a
percentage of net revenues, sales and marketing expense decreased from 19.2% to
18.6%. The increases in the amount of sales and marketing expenses for the three
and six month periods primarily were due to an increase in the number of titles
released during the three and six month periods ended September 30, 1999 and an
increase in television advertising during the three months ended September 30,
1999. The decrease in sales and marketing expense as a percentage of net
revenues during the six months ended September 30, 1999 was primarily due to
lower marketing expense required on branded properties such as Quake 2, A Bug's
Life, Tarzan, Star Wars Episode I: Phantom Menace and Space Invaders.
General and administrative expense for the three months ended September 30, 1999
increased 43.5% from the same period last year, from $4.6 million to $6.6
million. As a percentage of net revenues, general and administrative expenses
for the three months decreased from 6.9% to 5.7%. General and administrative
expense for the six months ended September 30, 1999 increased 24.2% from $9.1
million to $11.3 million. As a percentage of net revenues, general and
administrative expenses for the six-month period decreased from 7.1% to 5.7%.
The increases in the amount of general and administrative expenses for the 1999
three and six month period primarily were due to an increase in worldwide
administrative support needs and headcount related expenses. The decreases in
general and administrative expenses as a percentage of net revenues for the 1999
three and six month period primarily were due to the efficiencies gained in
controlling fixed costs and the increases in net revenues.
OPERATING INCOME (LOSS)
Operating income for the three months ended September 30, 1999 was $3.5 million,
compared to an operating loss of $2.7 million in the same period last year.
Operating loss for the six months ended September 30, 1999 decreased 68.7% from
the same period last year, from $8.3 million to $2.6 million.
Publishing operating income for the three months ended September 30, 1999
increased to $5.4 million, compared to a loss of $2.2 million in the same period
last year. The period over period increase in publishing operating income
primarily was due to an increase in publishing net revenues and decreases in
cost of sales - product sales, product development expenses and general and
administrative expenses as a percentage of publishing net revenues, offset
partially by increases in cost of sales - royalties and software amortization
and sales and marketing expenses as a percentage of net revenues. Distribution
operating loss for the three months ended September 30, 1999 was $0.4 million,
compared to operating income of $0.4 million in the same period last year. The
period over period change primarily was due to a decrease in distribution sales,
offset partially by a decrease in distribution manufacturing and distribution
costs, sales and marketing expenses and general and administrative expenses as a
percentage of net distribution revenues.
Publishing operating income for the six months ended September 30, 1999 was $0.5
million, compared to a loss of $7.2 million in the same period last year. The
period over period change primarily was due to an increase in publishing net
revenues and decreases in cost of sales - product sales, product development
expenses, sales and
15
marketing expenses and general and administrative expenses as a percentage of
publishing net revenues, offset partially by increases in cost of sales -
royalties and software amortization as a percentage of net revenues.
Distribution operating loss for the six months ended September 30, 1999 was $1.3
million, compared to operating income of $0.2 million in the same period last
year. The period over period change primarily was due to a decrease in
distribution sales, offset partially by a decrease in distribution manufacturing
and distribution costs and general and administrative expenses as a percentage
of net distribution revenues.
PROVISION FOR INCOME TAXES
The income tax provision of approximately $624,000 and income tax benefit of
approximately $2.1 million for the three and six months ended September 30,
1999, respectively, reflects the Company's estimated tax benefit from the
Company's net income and loss 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 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 decreased $7.2 million, from $33.0
million at March 31, 1999 to $25.8 million at September 30, 1999. Approximately
$1.4 million in cash and cash equivalents were used in operating activities
during the six months ended September 30, 1999. This decrease primarily was
attributable to the Company's operating loss during the six month period coupled
with increases in accounts receivable, inventories and other assets, offset
partially by an increase in current liabilities.
In addition, approximately $54.5 million in cash and cash equivalents were used
in investing activities during the six months ended September 30, 1999, as
compared with approximately $29.4 million during the same period last year. The
increase in cash used for investing activities primarily was due to the
acquisition of Expert on June 22, 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 approximately $2.3 million during the six months
ended September 30, 1999.
Cash and cash equivalents provided by financing activities totaled $47.8 million
for the six months ended September 30, 1999 versus $4.7 million provided by
financing activities for the same period last year. This increase was primarily
due to $25 million in proceeds from a term loan, approximately $13.3 million in
proceeds from the exercise of employee stock options and approximately $17.3
million of net borrowings under a line of credit agreement.
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 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 million and issue letters of credit up to $80
million on a revolving basis against eligible accounts receivable and inventory.
The $25 million term loan portion of
16
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 $10.6 million under the revolving portion of the
Facility at September 30, 1999. Letters of credit outstanding against the New
Facility totaled $11.8 million at September 30, 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
$11.2 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 September 30, 1999 or 1998.
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 $6.7 at
September 30, 1999. Letters of credit outstanding under the Netherlands Facility
totaled $6.3 million at September 30, 1999. The Netherlands Facility became
available in October 1998 and 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. Approximately $499,000 and $569,000 were
outstanding on this line as of September 30, 1999 and 1998, respectively.
The Company will use its working capital ($141.9 million at September 30, 1999),
as well as the proceeds available from the Facility, the UK Facility and the
Netherlands Facility, to finance the Company's operational requirements,
including acquisitions of inventory and 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
Like many other software companies, the year 2000 computer issue creates risk
for the Company. If internal computer and embedded systems do not correctly
recognize date information when the year changes to 2000, there could be an
adverse impact on the Company's operations. The Company has completed a
comprehensive plan to prepare its internal computer and embedded systems for the
year 2000 and is currently implementing changes to alleviate any year 2000
incapabilities. As part of such plan, the Company has purchased software
programs that have been independently developed by third parties, which have
tested year 2000 compliance for all of the Company's systems.
All of the entertainment and leisure software products currently being shipped
by the Company have been tested for year 2000 compliance and have passed these
tests. In addition, all such products currently in development are being tested
as part of the normal quality assurance testing process and the Company expects
them to be fully year 2000 compliant when released. Notwithstanding the
foregoing, the year 2000 computer issue could still affect the ability of
consumers to use the PC products sold by the Company. For example, if the
computer system on which a consumer uses the Company's products is not year 2000
compliant, such noncompliance could affect the consumer's ability to use such
products.
Contingency plans currently have been developed to address the systems critical
to the Company, such as adding network operating systems to back-up the
Company's current network server and developing back-up plans for
telecommunications with external offices and customers. In addition, a staffing
plan has been developed to manually handle orders should there be a failure of
electronic data interchange connections with its customers and suppliers.
Management believes that the items mentioned above constitute the greatest risk
of exposure to the Company and that the plans developed by the Company will be
adequate for handling these items.
17
The Company has contacted critical suppliers of products and services to
determine that the suppliers' operations and the products and services they
provide are year 2000 compliant. To assist suppliers (particularly trading
partners using electronic data interchange) in evaluating their year 2000
issues, the Company developed a questionnaire, which indicates the ability of
each supplier to address year 2000 incompatibilities. All critical suppliers and
trading partners of the Company have responded to the questionnaire and
confirmed the expectation that they will continue providing services and
products through the change to 2000.
Year 2000 compliance testing on substantially all of the Company's critical
systems and all changes required to be made as a result of such testing have
been completed. The costs incurred by the Company to date related to this
testing and modification process are less than $100,000, and no substantial
additional costs currently are foreseen. The total estimated cost does not
include potential costs related to any systems used by the Company's customers,
any third party claims, or the costs incurred by the Company when it replaces
internal software and hardware in the normal course of its business. The overall
cost of the Company's year 2000 compliance plan is a minor portion of the
Company's total information technology budget and is not expected to materially
delay the implementation of any other unrelated projects that are planned to be
undertaken by the Company. In some instances, the installation schedule of new
software and hardware in the normal course of business has been accelerated to
also afford a solution to year 2000 compatibility issues. The total cost
estimate for the Company's year 2000 compliance plan is based on management's
current assessment of the projects comprising the plan and is subject to change
as the projects progress.
Based on currently available information, management does not believe that the
year 2000 issues discussed above related to the Company's internal systems or
its products sold to customers will have a material adverse impact on the
Company's financial condition or results of operations; however, the specific
extent to which the Company may be affected by such matters is not certain. In
addition, there can be no assurance that the failure by a supplier or another
third party to ensure year 2000 compatibility would not have a material adverse
effect on the Company.
FACTORS AFFECTING FUTURE PERFORMANCE
In connection with the Private Securities Litigation Reform Act of 1995 (the
"Litigation Reform Act"), the Company has disclosed certain cautionary
information to be used in connection with written materials (including this
Quarterly Report on Form 10-Q) and oral statements made by or on behalf of its
employees and representatives that may contain "forward-looking statements"
within the meaning of the Litigation Reform Act. Such statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The listener or reader is cautioned that all
forward-looking statements are necessarily speculative and there are numerous
risks and uncertainties that could cause actual events or results to differ
materially from those referred to in such forward-looking statements. For
discussion that highlights some of the more important risks identified by
management, but which should not be assumed to be the only factors that could
affect future performance, see the Company's Annual Report on Form 10-K which is
incorporated herein by reference. The reader or listener is cautioned that the
Company does not have a policy of updating or revising forward-looking
statements and thus he or she should not assume that silence by management over
time means that actual events are bearing out as estimated in such
forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures
About Market Risk, in the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1999. There has been no significant change in the nature or
amount of market risk since year end.
18
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of the Stockholders on
September 23, 1999 in Beverly Hills, California. One item was submitted
to a vote of the stockholders: the election of six directors to hold
office for one year terms and until their respective successors are
elected and have qualified. All six nominees were recommended by the
Board of Directors and all were elected. Set forth below are the results
of the voting for each director.
For Withheld
--- --------
Harold A. Brown 17,376,334 333,149
Barbara S. Isgur 17,651,225 58,258
Brian G. Kelly 17,653,258 56,225
Robert A. Kotick 17,653,432 56,051
Steven T. Mayer 17,654,034 55,449
Robert J. Morgado 17,651,222 58,261
ITEM 5. OTHER INFORMATION
On November 4, 1999, the Company announced that Barry Plaga, Executive
Vice President and Chief Financial Officer, would be leaving the Company
for personal reasons. Mr. Plaga's departure is effective as of November
5, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
6.1 Amendment to Employment Agreement between Ron Doornink and the
Company, dated April 30, 1999.
(b) Reports on Form 8-K
On July 12, 1999, the Company filed a Current Report on Form 8-K
reporting its acquisition of Elsinore Multimedia, Inc.
19
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, 1999
ACTIVISION, INC.
/s/ RASMUS VAN DER COLFF Vice President of Finance November 13, 1999
- ------------------------ (Principal Financial Officer)
(Rasmus van der Colff)
20
EXHIBIT 6.1
April 30, 1999
Mr. Ron Doornink
25 Oakbrook
Coto de Caza, California 92679
Re: Your Employment Agreement with Activision, Inc.
dated October 19, 1998 (the "Employment Agreement")
---------------------------------------------------
Dear Ron:
This letter confirms our agreement to amend the terms of the Employment
Agreement in accordance with the provisions set forth below. Capitalized
terms not defined in this letter shall have the meanings ascribed to them in
the Employment Agreement.
The specific amendments to the Employment Agreement are as follows:
1. Paragraph 1 of the Employment Agreement is deleted in its entirety
and is replaced with the following:
"1. TERM
(a) The initial term of your employment under this agreement
shall commence on October 27, 1998 and expire on March 31,
2001, unless earlier terminated as provided below (the
"initial period").
(b) Employer shall have the irrevocable option to extend the
term of this agreement beyond the initial period for one
(1) additional successive two (2) year period.
(c) The option granted to Employer in Paragraph 1(b) of this
agreement may be exercised by Employer by written notice
given to you at least ninety (90) days prior to the
expiration of the initial period."
2. Paragraph 2(a) of the Employment Agreement is deleted in its entirety
and is replaced with the following:
"(a) In full consideration for all rights and services
provided by you under this agreement, you shall receive a base
salary at the annual rate of $280,000 during the portion of the
initial period commencing on October 27, 1998 and ending on
March 31, 1999. You also shall receive an annual base salary
of $315,000 during the portion of the initial period commencing
on April 1, 1999 and ending on March 31, 2000, and an annual
base salary of $346,500 during the portion of the initial
period commencing on April 1, 2000 and ending on March 31,
2001. If Employer exercises its option pursuant to Paragraph
1(b), then you shall receive an annual base salary of $381,150
during the first year of the option period and an annual base
salary of $419,265 during the second year of the option period."
3. The word "60%" in the second line of Paragraph 2(d) of the Employment
Agreement is deleted and is replaced with the word "75%."
4. The third sentence of Paragraph 2(e) of the Employment Agreement is
deleted in its entirety and is replaced with the following:
Page 1
"The options will vest as follows: 25,000 of such options
will be immediately vested and exercisable; 83,334 of such
options will vest on October 27, 1999; 58,333 of such options
will vest on October 27, 2000; and 33,333 of such options will
vest on October 27, 2001."
5. Paragraph 2(f) of the Employment Agreement is amended by adding the
following provisions to the end of the sentence currently constituting
such Paragraph:
"Without limiting the generality of the foregoing, you are
also being granted, under Employer's 1999 Incentive Plan,
options to purchase 250,000 shares of Employer's common stock.
The options will be issued on April 30, 1999 and will have an
exercise price of $10.56 per share. The options will vest as
follows: 62,500 of such options will vest on March 31, 2000;
62,500 of such options will vest on March 31, 2001; 62,500 of
such options will vest on March 31, 2002; and 62,500 of such
options will vest on March 31, 2003. The foregoing options
will be governed in all other respects by Employer's 1999
Incentive Plan."
6. Paragraph 8 of the Employment Agreement is amended by adding the
following sentence to the end of such Paragraph:
"In connection with the foregoing, you hereby agree to
permanently relocate to the West Los Angeles area by no later
than July 1, 2000."
Except as specifically set forth above, the Employment Agreement shall remain
unmodified and in full force and effect.
If the foregoing accurately reflects your understanding of the provisions of
your Employment Agreement that are being amended pursuant to this letter,
please so indicate by signing in the space provided below.
Very truly yours,
Brian Kelly
Co-Chairman
ACCEPTED AND AGREED TO:
______________________________
Ron Doornink
Page 2
5
1,000
3-MOS 6-MOS
MAR-31-2000 MAR-31-2000
JUL-01-1999 APR-01-1999
SEP-30-1999 SEP-30-1999
25,797 25,797
0 0
148,970 148,970
(21,333) (21,333)
40,805 40,805
268,208 268,208
32,729 32,729
(21,291) (21,291)
355,163 355,163
126,264 126,264
60,000 60,000
0 0
0 0
0 0
149,606 149,606
355,163 355,163
115,363 199,505
115,363 199,505
77,894 141,303
111,838 202,080
0 0
0 0
(1,838) (2,997)
1,687 (5,572)
624 (2,061)
1,063 (3,511)
0 0
0 0
0 0
1,063 (3,511)
0.04 (0.15)
0.04 (0.15)
