SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 000-12699
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2606438
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 OCEAN PARK BOULEVARD, SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
(310) 255-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
The number of shares of the registrant's Common Stock outstanding as of
February 12, 1999 was 22,497,192.
ACTIVISION, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 31, 1998
and March 31, 1998 3
Condensed Consolidated Statements of Operations for the quarters
and nine months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements for the
quarter and nine months ended December 31, 1998 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURE 18
2
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands except share data)
December 31, 1998 March 31, 1998
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 51,490 $ 73,378
Accounts receivable, net of allowances of
$18,611 and $12,122, respectively 154,099 69,812
Inventories, net 37,250 14,920
Prepaid royalties and capitalized software costs 38,244 12,444
Prepaid expenses and other current assets 8,285 1,922
Deferred income taxes 2,944 3,852
--------------------- --------------------
Total current assets 292,312 176,328
Prepaid royalties and capitalized software costs 5,800 --
Property and equipment, net 11,206 10,628
Deferred income taxes 4,665 4,665
Other assets 5,708 2,313
Excess purchase price over identifiable assets
acquired, net 22,279 23,473
--------------------- --------------------
Total assets $ 341,970 $ 217,407
--------------------- --------------------
--------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to bank $ 12,303 $ 781
Accounts payable 109,411 40,150
Accrued expenses 39,460 14,860
--------------------- --------------------
Total current liabilities 161,174 55,791
Notes payable to bank, less current portion 872 1,235
Convertible subordinated notes 60,000 60,000
Other liabilities 43 88
--------------------- --------------------
Total liabilities 222,089 117,114
--------------------- --------------------
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 22,856,673 and 22,518,547 shares
issued and 22,356,673 and 22,018,547 outstanding,
respectively -- --
Additional paid-in capital 104,213 91,799
Retained earnings 20,802 13,680
Accumulated other comprehensive income 144 92
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------------------- --------------------
Total shareholders' equity 119,881 100,293
--------------------- --------------------
Total liabilities and shareholders' equity $ 341,970 $ 217,407
--------------------- --------------------
--------------------- --------------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
ACTIVISION, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands except per share data)
Quarter ended Nine Months ended
December 31, December 31,
------------------------- --------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
Net revenues $193,537 $122,141 $311,599 $201,670
Costs and expenses:
Cost of sales--product costs 107,693 59,528 182,752 101,653
Cost of sales--royalties and software
amortization 23,828 17,550 32,412 25,436
Product development 3,985 8,045 13,612 21,963
Sales and marketing 26,040 16,400 49,452 31,960
General and administrative 5,265 3,586 13,832 8,416
Amortization of intangible assets 398 404 1,190 1,159
Merger expenses -- 1,474 600 1,474
------------ ----------- ------------ ------------
Total costs and expenses 167,209 106,987 293,850 192,061
------------ ----------- ------------ ------------
Operating income 26,328 15,154 17,749 9,609
Interest expense, net (854) (232) (2,017) (377)
------------ ----------- ------------ ------------
Net income before income tax provision 25,474 14,922 15,732 9,232
Income tax provision 9,452 5,644 5,748 3,531
------------ ------------ ------------ ------------
Net income $ 16,022 $ 9,278 $ 9,984 $ 5,701
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Basic net income per share $ 0.72 $ 0.43 $ 0.45 $ 0.26
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Diluted net income per share $ 0.64 $ 0.41 $ 0.44 $ 0.25
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Number of shares used in computing basic net
income per share 22,188 21,481 22,051 21,196
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Number of shares used in computing diluted net
income per share 26,073 22,928 22,888 22,394
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
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 months ended December 31,
(in thousands)
--------------------------------
1998 1997
--------------- ---------------
Increase (Decrease) in Cash
Cash flows from operating activities:
Net income $ 9,984 $ 5,701
Adjustments to reconcile net income to net cash (used in)/provided
by operating activities:
Deferred income taxes 1,126 410
Depreciation and amortization 4,838 3,871
Change in assets and liabilities:
Accounts receivable (76,278) (52,934)
Inventories (16,185) (9,367)
Prepaid royalties and capitalized software costs (21,589) (1,291)
Other assets (5,928) (3,389)
Accounts payable 61,598 57,482
Accrued liabilities 14,187 14,416
Other liabilities (1,357) (5)
-------- --------
Net cash (used in)/provided by operating activities (29,604) 14,894
-------- --------
Cash flows from investing activities:
Cash paid by Combined Distribution (Holdings) Limited to acquire
CentreSoft Limited (net of cash acquired) - (1,043)
Adjustment for effect of poolings on prior periods - (1,641)
Cash acquired in pooling transactions 653 -
Cash used in purchase acquisitions - (246)
Capital expenditures (2,787) (6,197)
-------- --------
Net cash used in investing activities (2,134) (9,127)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to employee stock
option plan 3,478 3,961
Proceeds from issuance of common stock pursuant to employee stock
purchase plan 389 230
Note payable to bank, net (1,479) 1,371
Proceeds from borrowings on line-of-credit 10,006 8,800
Payments on line-of-credit (2,600) (8,800)
Proceeds from issuance of subordinated convertible notes - 60,000
Dividends paid - (1,258)
Other - 51
-------- --------
Net cash provided by financing activities 9,794 64,355
-------- --------
Effect of exchange rate changes on cash and cash equivalents 56 137
-------- --------
Net decrease in cash and cash equivalents (21,888) 70,259
Cash and cash equivalents at beginning of period 73,378 21,358
-------- --------
Cash and cash equivalents at end of period $ 51,490 $ 91,617
-------- --------
-------- --------
Non-cash activities:
Warrants issued to third party developers $ 3,368 $ -
Stock issued in exchange for licensing rights $ - $ 431
Tax benefit derived from stock option exercises $ 653 $ 521
Stock issued in purchase acquisition $ - $ 136
Preferred stock converted to common stock in pooling transaction $ - $ 1,286
Redeemable preferred stock converted to common stock in pooling
transaction $ - $ 214
Conversion of subordinated loan stock debentures to common stock
in pooling transaction $ - $ 3,216
Supplemental cash flow information:
Cash paid for income taxes $ 4,868 $ 2,607
Cash paid for interest $ 2,775 $ 696
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Activision, Inc. and its subsidiaries (the "Company"). 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, 1998 as
filed with the Securites and Exchange Commission.
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. PREPAID ROYALTIES AND CAPITALIZED SOFTWARE COSTS
Prepaid royalties include payments made to independent software developers
under development agreements and license fees paid to intellectual property
rights holders for use of their trademarks or copyrights. Intellectual
property rights which have alternative future uses are capitalized.
Capitalized software costs represent certain costs incurred for product
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 the Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed".
Software development costs and prepaid royalties are capitalized once
technological feasibility is established. Technological feasibility is
evaluated on a product by product basis. For products where proven game
engine technology exists, this may occur early in the development cycle.
Software development costs are expensed if and when they are deemed
unrecoverable. Amounts related to software development which are not
capitalized are charged immediately to product development expense.
The following criteria is used to evaluate recoverability of software
development costs: historical performance of comparable products; the
commercial acceptance of prior products released on a given game engine;
orders for the product prior to its release; estimated performance of a
sequel product based on the performance of the product on which the sequel
is based; and actual development costs of a product as compared to the
Company's budgeted amount.
Capitalized software development costs are amortized to cost of sales 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 commencing upon product
release at the contractual royalty rate based on actual net product sales,
or on the ratio of current revenues to total projected revenues, whichever
amortization amount is greater. For products that have been released,
management evaluates the future recoverability of capitalized amounts on a
quarterly basis.
As of December 31, 1998, prepaid royalties and unamortized capitalized
software costs totaled $44.0 million (including $5.8 million classified as
non-current) and $6.6 million, respectively. As of March 31, 1998, prepaid
royalties and unamortized capitalized software costs totaled $10.7 million
and $1.7 million, respectively. At March 31, 1998, all prepaid royalties
and unamortized capitalized software costs were classified as current.
3. REVENUE RECOGNITION
Product Sales
The Company recognizes revenues 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. Revenues from
product sales are reflected net of the allowance for returns and price
protection.
6
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998
Software Licenses
For those license agreements which provide the customers the right to
multiple copies in exchange for guaranteed amounts, revenues are recognized
at delivery of the product master or the first copy. Per copy royalties on
sales which exceed the guarantee are recognized as earned.
The American Institute of Certified Public Accountants Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), is effective
for all transactions entered into subsequent to March 31, 1998. The
adoption of SOP 97-2 did not have a material impact on the Company's
financial position, results of operations or liquidity. The American
Institute of Certified Public Accountants Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions" ("SOP 98-9"), is effective for all transactions
entered into subsequent to March 15, 1999. The Company believes the
adoption of SOP 98-9 will not have a material impact on the Company's
financial position, results of operations or liquidity.
4. COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", was adopted by the Company
as of April 1, 1998. SFAS 130 requires any changes in shareholders' equity
that do not result directly from transactions with shareholders be reported
separately in the financial statements, net of any tax effect, as other
comprehensive income. For the Company, other comprehensive income includes
only foreign currency translation adjustments. Total comprehensive income
for the quarter and nine months ended December 31, 1998 and 1997 is as
follows:
Quarter Ended December 31, Nine Months Ended December 31,
-------------------------- ------------------------------
1998 1997 1998 1997
-------- ------- -------- -------
(in thousands) (in thousands)
Net income $ 16,022 $ 9,278 $ 9,984 $ 5,701
Foreign currency translation
adjustments (net of tax) 51 374 138 137
-------- ------- -------- -------
Total comprehensive income $ 16,073 $ 9,652 $ 10,122 $ 5,838
-------- ------- -------- -------
-------- ------- -------- -------
5. COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed as net income divided by the
weighted-average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock-based compensation plans, including stock
options, warrants and other convertible securities using the treasury stock
method.
7
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998
The following table sets forth the computation of basic and diluted
earnings per share:
Quarter ended December 31, Nine months ended December 31,
-------------------------- ------------------------------
(in thousands) (in thousands)
1998 1997 1998 1997
-------- -------- -------- --------
NUMERATOR:
Net income $ 16,022 $ 9,278 $ 9,984 $ 5,701
Less dividends paid - (35) - (116)
-------- -------- -------- --------
Numerator for basic earnings per
share-income available to
common stockholders $ 16,022 $ 9,243 $ 9,984 $ 5,585
Effect of dilutive securities:
Interest add-back on
convertible debt (net of tax) 666 70 - 70
-------- -------- -------- --------
Numerator for diluted earnings
per share-income available to
common stockholders after
assumed conversions $ 16,688 $ 9,313 $ 9,984 $ 5,655
-------- -------- -------- --------
-------- -------- -------- --------
DENOMINATOR:
Denominator for basic earnings per
share-weighted average shares 22,188 21,482 22,051 21,196
Effect of dilutive securities:
Employee stock options 706 1,100 837 852
Convertible debentures 3,179 346 - 346
-------- -------- -------- --------
Dilutive common shares 3,885 1,446 837 1,198
-------- -------- -------- --------
Denominator for diluted
earnings per share-adjusted
weighted average shares and
assumed conversions 26,073 22,928 22,888 22,394
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings per share $ 0.72 $ 0.43 $ 0.45 $ 0.26
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share $ 0.64 $ 0.41 $ 0.44 $ 0.25
-------- -------- -------- --------
-------- -------- -------- --------
For the quarter and nine months ended December 31, 1998, options to
purchase 1,915,000 and 3,506,000 shares, respectively, of the Company's
common stock were outstanding but were not included in the computation of
diluted earnings per share because the options exercise prices were greater
than the average market price of the common shares during such periods. For
the nine months ended December 31, 1998, shares issuable upon the
conversion of convertible debentures and interest on such convertible
debentures were not included in the calculation as the effect would have
been antidilutive.
For the quarter and nine months ended December 31, 1997, options to
purchase 793,000 and 1,397,000 shares, respectively, of the Company's
common stock were outstanding but were not included in the computation of
diluted earnings per share because the options exercise prices were greater
than the average market price of the common shares during such periods.
8
ACTIVISION, INC.
Notes to Condensed Consolidated Financial Statements
For the Quarter Ended December 31, 1998
6. NEW ACCOUNTING PRONOUNCEMENT
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 1999. Although the
Company currently does not have derivative instruments, or hedge foreign
currency risk, the Company intends to monitor its risk in this regard and
investigate various ways to manage that risk. If and when the Company
decides to participate in hedging activities and/or purchase other
derivative financial instruments, SFAS 133 will be adopted.
9
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 software. The Company currently focuses its
publishing, development and distribution efforts on products designed for
personal computers ("PCs") as well as the Sony PlayStation and the Nintendo 64
console systems. In selecting titles for acquisition or development, the Company
pursues a combination of internally and externally developed titles, products
based on proven technology and those based on newer technology, and PC and
console products.
Activision distributes its products worldwide through its direct sales
force, through its distribution subsidiaries CentreSoft Ltd. ("CentreSoft"), CD
Contact Data GmbH ("CD Contact") and NBG EDV Handels und Verlags GmbH ("NBG"),
and through third party distributors and licensees.
The Company recognizes revenues 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. Revenues from product sales are
reflected after deducting the estimated allowance for returns and price
protection. With respect to license agreements which provide customers the right
to multiple copies in exchange for guaranteed amounts, revenues are recognized
upon delivery of the product master or the first copy. Per copy royalties on
sales which exceed the guarantee are recognized as earned. The American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), provides guidance on applying generally
accepted accounting principles in recognizing revenues on software transactions.
SOP 97-2 is effective for all transactions entered into subsequent to March 31,
1998. 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 Statement of Position 98-9, "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions" ("SOP 98-9"), was
issued and 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 acquire, manufacture
and distribute PC and console games. 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 and
Nintendo, who often require significant lead time to fulfill the Company's
orders.
Cost of sales - royalties and software amortization is related to 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 which 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 expenses, 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;
10
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.
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, activity, platform and channel:
QUARTER ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
---------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------- -------------------- ------------------- -------------------
(in thousands) (in thousands)
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
--------- -------- -------- ---------- -------- --------- -------- ---------
STATEMENTS OF OPERATIONS DATA:
Net revenues: $193,537 100.0% $122,141 100.0% $311,599 100.0% $201,670 100.0%
Costs and expenses:
Cost of sales - product costs 107,693 55.6% 59,528 48.8% 182,752 58.6% 101,653 50.4%
Cost of sales - royalties and
software amortization 23,828 12.3% 17,550 14.4% 32,412 10.4% 25,436 12.6%
Product development 3,985 2.1% 8,045 6.6% 13,612 4.4% 21,963 10.9%
Sales and marketing 26,040 13.5% 16,400 13.4% 49,452 15.9% 31,960 15.8%
General and administrative 5,265 2.7% 3,586 2.9% 13,832 4.4% 8,416 4.2%
Amortization of intangible
assets 398 0.2% 404 0.3% 1,190 0.4% 1,159 0.6%
Merger expenses - - 1,474 1.2% 600 0.2% 1,474 0.7%
--------- -------- -------- ---------- -------- --------- -------- ---------
Total costs and expenses 167,209 86.4% 106,987 87.6% 293,850 94.3% 192,061 95.2%
--------- -------- -------- ---------- -------- --------- -------- ---------
Operating income 26,328 13.6% 15,154 12.4% 17,749 5.7% 9,609 4.8%
Interest expense, net (854) (0.4%) (232) (0.2%) (2,017) (0.7%) (377) (0.2%)
--------- -------- -------- ---------- -------- --------- -------- ---------
Net income before provision for income
taxes 25,474 13.2% 14,922 12.2% 15,732 5.0% 9,232 4.6%
Income tax provision 9,452 4.9% 5,644 4.6% 5,748 1.8% 3,531 1.8%
--------- -------- -------- ---------- -------- --------- -------- ---------
Net income $ 16,022 8.3% $ 9,278 7.6% $ 9,984 3.2% $ 5,701 2.8%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------
NET REVENUES BY TERRITORY:
North America $ 69,472 35.9% $ 42,329 34.7% $106,623 34.2% $ 67,468 33.5%
International 124,065 64.1% 79,812 65.3% 204,976 65.8% 134,202 66.5%
--------- -------- -------- ---------- -------- --------- -------- ---------
Total net revenues $193,537 100.0% $122,141 100.0% $311,599 100.0% $201,670 100.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------
ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 47,242 48.7% $ 11,640 19.2% $ 71,014 49.2% $ 15,585 15.5%
PC 49,704 51.3% 49,037 80.8% 73,214 50.8% 85,212 84.5%
--------- -------- -------- ---------- -------- --------- -------- ---------
Total publishing net revenues $ 96,946 50.1% $ 60,677 49.7% $144,228 46.3% $100,797 50.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
Distribution:
Console $ 63,482 65.7% $ 37,400 60.8% $116,624 69.7% $ 60,195 59.7%
PC 33,109 34.3% 24,064 39.2% 50,747 30.3% 40,678 40.3%
--------- -------- -------- ---------- -------- --------- -------- ---------
Total distribution net revenues 96,591 49.9% 61,464 50.3% 167,371 53.7% 100,873 50.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
Total net revenues $193,537 100.0% $122,141 100.0% $311,599 100.0% $201,670 100.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------
NET REVENUES BY CHANNEL:
Retailer/Reseller $185,030 95.6% $ 114,321 93.6% $296,003 95.0% $181,568 90.0%
OEM, licensing, on-line and other 8,507 4.4% 7,820 6.4% 15,596 5.0% 20,102 10.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
Total net revenues $193,537 100.0% $ 122,141 100.0% $311,599 100.0% $201,670 100.0%
--------- -------- -------- ---------- -------- --------- -------- ---------
--------- -------- -------- ---------- -------- --------- -------- ---------
11
RESULTS OF OPERATIONS
The results of operations for the quarter and nine months ended
December 31, 1998 include results of operations for Head Games Publishing
Inc. ("Head Games") and CD Contact Data GmbH ("CD Contact"), two recently
acquired companies, which were treated as immaterial poolings. The results of
operations for the quarter and nine months ended December 31, 1997 have not
been restated to reflect such acquisitions. Net revenues for the quarter and
nine months ended December 31, 1998 included $8.0 million and $13.0 million,
respectively, from Head Games' operations, which have been included since
April 1, 1998. Net revenues for the quarter and nine months ended December
31, 1998 included $19.1 million and $31.6 million, respectively, from CD
Contact's operations, which have been included since July 1, 1998.
NET REVENUES
Net revenues for the quarter ended December 31, 1998 increased 58.5%
from the same period last year, from $122.1 million to $193.5 million. North
America and international net revenues for the quarter ended December 31, 1998
increased 64.7%, from $42.3 million to $69.5 million and 55.5%, from $79.8
million to $124.1 million, respectively. The increase in overall net revenues
was composed of a 125.9% increase in console net revenues, from $49.0 million to
$110.7 million, and a 13.3% increase in PC net revenues, from $73.1 million to
$82.8 million. Approximately $27.1 million, or 38.0%, of the increase in net
revenues in the current period was attributable to the immaterial poolings
discussed above.
Net revenues for the nine months ended December 31, 1998 increased
54.5% from the same period last year, from $201.7 million to $311.6 million.
North America and international net revenues for the nine months ended December
31, 1998 increased 57.9%, from $67.5 million to $106.6 million, and 52.8%, from
$134.2 million to $205.0 million, respectively. The increase in overall net
revenues was composed of a 147.5% increase in console net revenues, from $75.8
million to $187.6 million, offset by a 1.5% decrease in PC net revenues, from
$125.9 million to $124.0 million. Approximately $44.6 million, or 40.6%, of the
increase in net revenues for the nine month period ended December 31, 1998 was
attributable to the immaterial poolings discussed above.
Publishing console net revenues for the quarter and nine months
ended December 31, 1998 increased 306.9%, from $11.6 million to $47.2
million, and 355.1%, from $15.6 million to $71.0 million, respectively, over
the prior year. The increases in such periods were primarily attributable to
the initial release of Tenchu (Playstation), Vigilante 8 (Playstation),
Asteroids (Playstation), Apocalypse (Playstation), Nightmare Creatures
(Nintendo 64), and Activision Classics (Playstation). Publishing PC net
revenues for the quarter and nine months ended December 31, 1998 increased
1.4%, from $49.0 million to $49.7 million and decreased 14.1%, from $85.2 to
$73.2 million, respectively. The increase in publishing PC net revenues for
the quarter ending December 31, 1998 was primarily attributable to the
acquisition of Head Games, as discussed above. The decrease in publishing PC
net revenues for the nine month period was primarily attributable to the
initial release of Quake II (PC) in the prior comparable period, partially
offset by the acquisition of Head Games, as discussed above. PC initial
releases during the quarter ended December 31, 1998 included Sin, Asteroids
and Cabela's Big Game Hunter 2.
Distribution console net revenues for the quarter and nine months
ended December 31, 1998 increased 69.8%, from $37.4 million to $63.5 million,
and 93.7%, from $60.2 million to $116.6 million, respectively, over the prior
year. These increases were attributable to the general increase in the Sony
Playstation hardware and software markets as well as the effect of the
acquisition of CD Contact, as discussed above. Distribution PC net revenues
for the quarter and nine months ended December 31, 1998 increased 37.3%, from
$24.1 million to $33.1 million and 24.6%, from $40.7 million to $50.7
million, respectively. These increases were primarily attributable to the
acquisition of CD Contact, as discussed above.
COSTS AND EXPENSES
Cost of sales - product costs represented 55.6% and 48.8% of net
revenues for the quarters ended December 31, 1998 and 1997, respectively. Cost
of sales - product costs represented 58.6% and 50.4% of net revenues for the
nine months ended December 31, 1998 and 1997, respectively. The increase in cost
of sales product costs as a percentage of net revenues for both the 1998 quarter
and the nine month period was due to the increase in the sales mix of console
net revenues versus PC net revenues, as well as the decrease in the sales mix of
OEM, licensing and other net revenues versus retailer/reseller net revenues.
12
Cost of sales - royalties and software amortization expense represented
12.3% and 14.4% of net revenues for the quarters ended December 31, 1998 and
1997, respectively. Cost of sales - royalties and software amortization expense
represented 10.4% and 12.6% of net revenues for the nine months ended December
31, 1998 and 1997, respectively. The decrease in cost of sales - royalties and
software amortization expense as a percentage of net revenues for both the 1998
quarter and nine month period was due to changes in the Company's product mix.
More products with lower royalty rates were included in the 1998 product mix as
compared to the prior year, resulting in an overall lower royalty rate as a
percentage of net revenues.
Product development expenses for the quarter ended December 31, 1998
decreased 50.0% from the same period last year, from $8.0 million to $4.0
million. Product development expenses for the nine months ended December 31,
1998 decreased 38.2% from the same period last year, from $22.0 million to
$13.6 million. The decreases in the amount of product development expenses
for the quarter and nine months ended December 31, 1998 primarily were due to
an increase in the capitalizable development costs relating to sequel
products being developed on proven engine technologies which have been
capitalized in accordance with SFAS 86.
As a percentage of net revenues, total product creation costs (i.e.,
royalties and software amortization expense plus product development
expenses) decreased from 21.0% to 14.4% and from 23.5% to 14.8% during the
quarter and nine months ended December 31, 1998, respectively. Such decreases
were attributable to efficiencies gained in studio operations, as well as a
decrease in the effective royalty rate as discussed above, and an increase in
development costs capitalized under SFAS 86, as discussed above.
Sales and marketing expenses for the quarter ended December 31, 1998
increased 58.5% from the same period last year, from $16.4 million to $26.0
million. As a percentage of net revenues, sales and marketing expenses increased
slightly from 13.4% to 13.5%. Sales and marketing expenses for the nine months
ended December 31, 1998 increased 54.7% from the same period last year, from
$32.0 million to $49.5 million. As a percentage of net revenues, sales and
marketing expenses increased slightly from 15.8% to 15.9%. The increases in the
amount of sales and marketing expenses for the 1998 quarter and nine month
period primarily were due to a significant increase in television advertising
and an increase in the number of products scheduled to be released during the
current fiscal year. However, as a percentage of net revenues, such expenses
have remained fairly consistent.
General and administrative expenses for the quarter ended December
31, 1998 increased 47.2% from the same period last year, from $3.6 million to
$5.3 million. As a percentage of net revenues, general and administrative
expenses decreased from 2.9% to 2.7%. General and administrative expenses for
the nine months ended December 31, 1998 increased 64.3% from the same period
last year, from $8.4 million to $13.8 million. As a percentage of net
revenues, general and administrative expenses increased slightly from 4.2% to
4.4%. The period over period increase in the amount of general and
administrative expenses for the 1998 quarter and nine month period primarily
were due to an increase in worldwide administrative support needs and
headcount related expenses. The decrease as a percentage of net revenues
relates primarily to efficiencies gained in administrative operations.
OTHER INCOME (EXPENSE)
Net interest expense was $854,000 and $2,017,000 for the quarter and
nine months ended December 31, 1998, compared to net interest expense of
$232,000 and $377,000 for the same periods last year. These increases primarily
were the result of interest costs associated with the Company's convertible
subordinated notes issued in December 1997 and short term borrowings under bank
line of credit agreements.
PROVISION FOR INCOME TAXES
The income tax provision of approximately $9,452,000 and $5,748,000 for
the quarter and nine months ended December 31, 1998, respectively, reflects the
Company's estimated effective income tax rate of approximately 37% for the
fiscal year ending March 31, 1999. 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 deferred tax assets recognized.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $21.9 million,
from $73.4 million at March 31, 1998 to $51.5 million at December 31, 1998.
Approximately $29.6 million in cash and cash equivalents were used in
operating activities during the nine months ended December 31, 1998 compared
to approximately $14.9 million in cash and cash equivalents provided by
operating activities during the nine months ended December 31, 1997. This
change was primarily attributable to a substantial increase during the nine
months ended December 31, 1998 in prepaid royalties and capitalized software
costs incurred by the Company as a result of its execution of new license
agreements granting the Company long term rights to the intellectual property
of third parties, as well as the acquisition of publishing or distribution
rights to products being developed by third parties. Also contributing to the
change were increases in accounts receivable, inventory, accounts payable and
accrued liabilities resulting from the Company's overall growth during the
nine month period ended December 31, 1998.
In addition, approximately $2.1 million in cash and cash equivalents
were used in investing activities. Capital expenditures totaled approximately
$2.8 million during the nine months ended December 31, 1998.
Cash and cash equivalents provided by financing activities totaled
approximately $9.8 million for the nine months ended December 31, 1998, which
included approximately $3.5 million in proceeds from exercise of employee stock
options and net borrowings of $7.4 million under the Company's lines of credit.
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, subject
to premiums through December 31, 2003.
During the quarter ended December 31, 1998, the Company obtained a new
revolving credit and letter of credit facility ("the New Facility") from a new
bank that permits the Company to borrow funds and issue letters of credit
against domestic accounts receivable up to $25 million. The New Facility expires
in October 2000. As of December 31, 1998, the Company had an outstanding balance
of approximately $5.3 million on this line of credit. In January 1999, the
Company increased the New Facility to $40 million under substantially the same
terms and conditions.
The Company's CentreSoft subsidiary has a revolving credit facility
(the "Europe Facility") with its bank for approximately $11.5 million. The
Europe Facility can be used for working capital requirements and expires in June
2000. The Company had no borrowings under the Europe Facility as of December 31,
1998. The Company's newly acquired subsidiary, CD Contact, has facilities (the
"CD Contact Facilities") with its banks that permit borrowings up to
approximately $25 million. Borrowings under the CD Contact Facilities are due on
demand and totaled $6.5 million as of December 31, 1998.
The Company will use its working capital ($131.1 million at December
31, 1998), as well as the proceeds available from the New Facility, the Europe
Facility and the CD Contact Facilities, to finance the Company's operational
requirements for at least the next twelve months, 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 initiated a
comprehensive
14
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 will
test year 2000 compliance for the majority of the Company's systems.
All of the entertainment 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 are scheduled to be
released fully year 2000 compliant. 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 are being developed to address the most
material areas of exposure 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 currently is in development 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 currently being
developed by the Company will be adequate for handling these items.
The Company also is contacting 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 has 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.
The Company anticipates that year 2000 compliance testing on
substantially all of its critical systems will be completed, and corresponding
changes will be made, by mid-1999. The costs incurred by the Company to date
related to this testing and modification process are less than $100,000. The
Company expects that the total cost of its year 2000 compliance plan will not
exceed $200,000. 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 is being 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.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the "euro" as their common currency. The sovereign currencies of
the participating countries are scheduled to remain legal tender as
denominations of the euro between January 1, 1999 and January 1, 2002. Beginning
January 1, 2002, the participating countries will issue new euro-denominated
bills and coins for use in cash transactions. No later than July 1, 2002, the
participating countries will withdraw all bills and coins denominated in the
sovereign currencies, so that the sovereign currencies no longer will be legal
tender for any transactions, making conversion to the euro complete. The Company
has performed an internal analysis of the possible implications of the euro
conversion on the Company's business and financial condition, and has determined
that the impact of the conversion will be
15
immaterial to its overall operations. The Company's wholly owned subsidiaries
operating in participating countries represented 11.4% and 11.3% of the
Company's consolidated net revenues for the quarter and nine months ended
December 31, 1998, respectively.
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
The Company transacts business in many different foreign currencies and
may be exposed to financial market risk resulting from fluctuations in foreign
currency exchange rates, particularly the British Pound sterling. However, due
to the long-term stability of the pound, the Company has deemed it unnecessary
to hedge against foreign currency devaluation at the present time. The
volatility of the Pound (and all other applicable currencies) will be monitored
frequently throughout the coming year and the Company may require the use of
hedging programs, currency forward contracts, currency options and/or other
derivative financial instruments commonly utilized to reduce financial market
risks.
16
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in
the ordinary course of business including disputes arising over the
ownership of intellectual property rights and collection matters. In the
opinion of management, the outcome of such routine claims will not have
a material adverse effect on the Company's business, financial condition
or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
27.1 Fiscal 1999 Quarter and Year to Date Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On October 8, 1998, the Company filed a Current Report on Form 8-K
reporting the completion of the acquisition of CD Contact on
September 29, 1998. The transaction was accounted for as a
"pooling of interests".
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: February 12, 1999
ACTIVISION, INC.
/s/ Barry J. Plaga Chief Financial Officer February 12, 1999
- -------------------------
(Barry J. Plaga)
18
5
1,000
3-MOS 9-MOS
MAR-31-1999 MAR-31-1999
OCT-01-1998 APR-01-1998
DEC-31-1998 DEC-31-1998
51,490 51,490
0 0
172,710 172,710
(18,611) (18,611)
37,250 37,250
292,312 292,312
25,738 25,738
(14,532) (14,532)
341,970 341,970
161,174 161,174
60,000 60,000
0 0
0 0
0 0
119,881 119,881
341,970 341,970
193,537 311,599
193,537 311,599
131,521 215,164
167,209 293,850
0 0
0 0
1,208 3,627
25,474 15,732
9,452 5,748
16,022 9,984
0 0
0 0
0 0
16,022 9,984
.72 .45
.64 .44
