SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported)
January 6, 1998 (November 26, 1997)
ACTIVISION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 0-12699 94-2606438
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
3100 Ocean Park Blvd., Santa Monica, CA 90405
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (310) 255-2000
------------------
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS
As previously disclosed by Activision, Inc., a Delaware corporation (the
"Company") in prior fillings: During November 1997, the Company completed the
acquisition of Combined Distribution (Holdings) Limited, a privately held
company based in Birmingham, England, which is the parent company of CentreSoft
Limited and PDQ Limited ("CentreSoft"); and, also in November 1997, a
wholly-owned indirect German subsidiary of the Company acquired NBG EDV Handels-
und Verlags GmbH ("NBG"), a privately held software distributor and publisher
based in Burglengenfeld, Germany, and Target Software Vertriebs GmbH ("Target"),
a small affiliated software retailer.
The above mergers have been accounted for as poolings-of-interests. Generally
accepted accounting principles proscribe giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. The
Company has prepared restated supplemental consolidated financial statements
as of March 31, 1997 and 1996 and for each of the three years ended March 31,
1997, 1996 and 1995 reflecting the above-described transactions, and the
Company is filing them as Exhibit 99.1 to this Current Report on Form 8-K so
that the Company may incorporate by reference to this report, such financial
statements into any future registration statements filed by the Company with
the Securities Exchange Commission. Unaudited restated supplemental interim
consolidated financial statements as of June 30, 1997 and September 30, 1997
and for the three month periods ended June 30, 1997 and 1996 and for the
three month and the six month periods ended September 30, 1997 and 1996
reflecting the above-described transactions also have been included herein as
Exhibit 99.4.
The supplemental consolidated financial statements do not extend through the
date of consummation of the CentreSoft and NBG acquisitions. However, these
statements will become the historical consolidated financial statements of
the Company after financial statements covering the date of consummation of
the business combinations are issued.
In addition, the selected supplemental consolidated financial data and
management's discussion and analysis of financial condition and results of
operations of the Company have been prepared to give retroactive effect to the
above-described transactions and appear herein as Exhibits 99.2 and 99.3,
respectively. Management's discussion and analysis of financial condition and
results of operations of the Company for the periods presented in the
supplemental interim consolidated financial statements appears herein as part
of Exhibit 99.4.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(b) Exhibits
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Coopers & Lybrand LLP.
23.3 Consent of Grant Thornton.
27 Financial Data Schedule.
99.1 Supplemental Consolidated Financial Statements of Activision,
Inc. as of March 31, 1997 and 1996 and for each of the three
years ended March 31, 1997, 1996 and 1995 (as restated to
reflect the acquisitions of CentreSoft on November 26, 1997
and NBG on November 26, 1997).
99.2 Selected Supplemental Consolidated Financial Data of Activision,
Inc. (as restated to reflect the acquisitions of CentreSoft on
November 26, 1997 and NBG on November 26, 1997).
99.3 Supplemental Management's Discussion and Analysis of Financial
Condition and Results of Operations of Activision, Inc. (as
restated to reflect the acquisitions of CentreSoft on November
26, 1997 and NBG on November 26, 1997).
99.4 Supplemental Interim Consolidated Financial Statements of
Activision, Inc. as of June 30, 1997 and for the three month
periods ended June 30, 1997 and 1996 and as of September 30, 1997
and for the three month and the six month periods ended September
30, 1997 and 1996 (as restated to reflect the acquisitions of
CentreSoft on November 26, 1997 and NBG on November 26, 1997).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: January 6, 1998
ACTIVISION, INC.
By /s/ Barry J. Plaga
--------------------------------------
Name: Barry J. Plaga
Title: Senior Vice President and
Chief Financial Officer
Exhibit 23.1
The Board of Directors
ACTIVISION, INC.:
We consent to the incorporation by reference in the registration statements
(No. 33-68144, 33-75878, 333-30303 and 333-36949) on Form S-3 and (No.
33-48411, 33-63638, 33-91074, 333-06130, 333-12621, 333-06054 and 333-40727)
on Form S-8 of ACTIVISION, INC., of our report dated May 8, 1997, except as
to note 2 which is as of November 26, 1997 and note 15 which is as of
December 22, 1997, which report is based upon our audit and the report of
other auditors, with respect to the supplemental consolidated balance sheet
of ACTIVISION, INC. and subsidiaries as of March 31, 1997, and the related
supplemental consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year then ended which report appears in the Form
8-K of ACTIVISION, INC. dated January 6, 1998.
KPMG Peat Marwick LLP
Los Angeles, California
January 6, 1998
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Activision, Inc. on Forms S-8 (File Nos. 33-48411, 33-63638, 33-91704,
333-06130, 333-12621, 333-06054 and 333-40727) and Forms S-3 (File Nos.
33-68144, 33-75878, 333-30303 and 333-36949) of our report dated May 15, 1996
except for Note 12, as to which the date is June 10, 1997, on our audits of
the consolidated financial statements and financial statement schedule of
Activision, Inc. and Subsidiaries as of March 31, 1996 and for the years
ended March 31, 1996 and 1995, which report is included in this Form 8-K
Current Report dated January 6, 1998.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
January 6, 1998
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated August 7, 1997 (except for Note 16 as to
which the date is November 26, 1997) accompanying the financial statements of
Combined Distribution (Holdings) Limited and subsidiaries as of April 30,
1997 and for the period June 28, 1996 (inception) to April 30, 1997 included
in this Report on Form 8-K. We consent to the incorporation by reference of
said report in the Registration Statements of Activision, Inc. on Forms S-8
(File Nos. 33-48411, 33-63638, 33-91074, 333-06130, 333-12621, 333-06054 and
333-40727) and Forms S-3 (File Nos. 33-68144, 33-75878, 333-30303 and
333-36949).
GRANT THORNTON
Registered Auditors
Chartered Accountants
Central Milton Keynes,
England
January 6, 1998
5
1,000
YEAR
MAR-31-1997
MAR-31-1997
21,358
0
54,307
7,674
8,283
87,168
15,032
8,042
119,754
33,710
0
1,500
0
0
81,980
119,754
154,644
154,644
87,121
53,715
0
0
(233)
14,041
4,815
9,226
0
0
0
9,226
.50
.50
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
ACTIVISION, INC.:
We have audited the accompanying supplemental consolidated balance sheet of
ACTIVISION, INC. and subsidiaries as of March 31, 1997 and the related
supplemental consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended. In connection with our audit
of the supplemental consolidated financial statements, we also have audited
supplemental financial statement schedule II for the year ended March 31,
1997. These supplemental consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements and financial statement schedule based on our audit. We
did not audit the financial statements of Combined Distribution (Holdings)
Limited, a wholly-owned subsidiary, which statements reflect total assets
constituting 21 per cent and total revenues constituting 44 per cent of the
related consolidated totals. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for Combined Distribution (Holdings) Limited, is
based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The supplemental consolidated financial statements and financial statement
schedule give retroactive effect to the merger of ACTIVISION, INC. and
Combined Distribution (Holdings) Limited, on November 26, 1997, which has
been accounted for as a pooling of interests as described in Note 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation. However, they will become the
historical consolidated financial statements of ACTIVISION, INC. and
subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, based on our audit and the report of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACTIVISION, INC.
and subsidiaries as of March 31, 1997, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles applicable after financial statements are
issued for a period which includes the date of consummation of the business
combination. Also, in our opinion, the related supplemental financial
statement schedule for the year ended March 31, 1997, when considered in
relation to the basic supplemental consolidated financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
KPMG PEAT MARWICK LLP
Los Angeles, California
May 8, 1997 (except as to Note
2 which is as of November 26, 1997,
and Note 14, which is as of December 22, 1997)
1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of ACTIVISION, INC. and Subsidiaries
We have audited the accompanying consolidated balance sheet of ACTIVISION,
INC. and subsidiaries as of March 31, 1996 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the years ended March 31, 1996 and 1995. In connection with our audits of the
consolidated financial statements, we have also audited the financial
statement schedule for each of the two years in the period ended March 31,
1996. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ACTIVISION, INC. and subsidiaries as of March 31, 1996, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles. In addition, in our opinion, the related
financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects the information set forth therein.
We previously audited and reported on the consolidated balance sheet of
ACTIVISION, INC. and subsidiaries as of March 31, 1996 and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for the years ended March 31, 1996 and 1995, prior to ACTIVISION,
INC.'s pooling-of-interest with Raven Software Corporation on August 26, 1997
and NBG EDV Handels und Verlags GmbH on November 26, 1997. As described in
Note 14 to the supplemental consolidated financial statements, ACTIVISION,
INC.'s supplemental consolidated financial statements were not retroactively
restated for these transactions, except for weighted average shares
outstanding and earnings per share data which were retroactively restated for
the effect of the acquisitions for all periods presented which restatements
were not audited by us.
COOPERS & LYBRAND, LLP
Los Angeles, California
May 15, 1996, except for Note 12,
as to which the date is June 10, 1997.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors of Combined Distribution (Holdings) Limited and Subsidiaries.
We have audited the consolidated balance sheet of Combined Distribution
(Holdings) Limited (a United Kingdom Limited Company) and subsidiaries as of
April 30, 1997 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for the period from June 28, 1996
(inception) to April 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Combined Distribution (Holdings) Limited and subsidiaries as of April 30,
1997, and the consolidated results of their operations and their cash flows
for the ten months then ended in conformity with U.S. generally accepted
accounting principles.
GRANT THORNTON
Registered Auditors
Chartered Accountants
Central Milton Keynes
England
August 7, 1997
2
ACTIVISION, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
March 31, March 31,
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 21,358 $ 25,288
Accounts receivable, net of allowances of $7,674 and $7,005, respectively 46,633 19,909
Inventories, net 8,283 2,975
Prepaid software and license royalties 6,559 3,652
Prepaid expenses and other current assets 1,222 1,183
Deferred income taxes 1,493 1,500
--------- ---------
Total current assets 85,548 54,507
Property and equipment, net 5,990 3,326
Deferred income taxes 4,212 -
Other assets 255 200
Excess purchase price over identifiable assets acquired, net 23,749 19,580
--------- ---------
Total assets $ 119,754 $ 77,613
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 1,600 $ -
Current portion of subordinated loan stock debentures 683 -
Accounts payable 19,291 4,592
Accrued expenses 12,136 9,688
--------- ---------
Total current liabilities 33,710 14,280
Subordinated loan stock debentures 2,533 -
Other liabilities 31 334
--------- ---------
Total liabilities 36,274 14,614
--------- ---------
Commitments and contingencies
Redeemable preferred stock 1,286 -
Convertible preferred stock 214 -
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 17,113,077 and 14,250,180 shares issued
and 16,613,077 and 13,750,180 outstanding, respectively - -
Additional paid-in capital 78,752 67,904
Retained earnings 8,664 708
Cumulative foreign currency translation (158) (335)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
--------- ---------
Total shareholders' equity 81,980 62,999
--------- ---------
Total liabilities and shareholders' equity $ 119,754 $ 77,613
--------- ---------
--------- ---------
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
3
ACTIVISION, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
For the years ended March 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
Net revenues $ 154,644 $ 61,393 $ 40,669
Cost of goods sold 87,121 21,749 21,293
---------- ---------- ----------
Gross profit 67,523 39,644 19,376
---------- ---------- ----------
Operating expenses:
Product development 18,195 17,505 7,274
Sales and marketing 26,297 13,920 10,410
General and administrative 7,718 4,404 3,366
Amortization of intangible assets 1,505 1,283 1,283
---------- ---------- ----------
Total operating expenses 53,715 37,112 22,333
---------- ---------- ----------
Operating income (loss) 13,808 2,532 (2,957)
Other income:
Interest income 233 1,707 1,592
---------- ---------- ----------
Income (loss) before income taxes 14,041 4,239 (1,365)
Income tax provision (benefit) 4,815 (1,291) 155
---------- ---------- ----------
Net income (loss) $ 9,226 $ 5,530 $ (1,520)
---------- ---------- ----------
---------- ---------- ----------
Net income (loss) per common share $ 0.50 $ 0.34 $ (0.10)
---------- ---------- ----------
---------- ---------- ----------
Number of shares used in computing
net income (loss) per common share 18,051 16,271 15,265
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
4
ACTIVISION, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Common Stock Common Stock Warrants Additional Retained
------------ --------------------- Paid-in Earnings
Shares Amount Warrants Amount Capital (Deficit)
----------------------- ----------------------- --------- ---------
Balance March 31, 1994 13,849 $ - 267 $ 120 $ 67,356 $ (3,302)
Exercise of common stock warrants 267 - (267) (120) 200 -
Issuance of common stock pursuant to
employee stock purchase plan 59 - - - 99 -
Issuance of common stock pursuant to
directors stock purchase plan 8 - - - 12 -
Net loss for the year - - - - - (1,520)
Foreign currency translation adjustment - - - - - -
----------------------- ----------------------- --------- ---------
Balance March 31, 1995 14,183 $ - - $ - $ 67,667 $ (4,822)
Issuance of common stock pursuant to
employee stock purchase plan 50 - - - 224 -
Issuance of common stock pursuant to
directors stock purchase plan 17 - - - 13 -
Purchase of treasury stock - - - - - -
Net income for the year - - - - - 5,530
Foreign currency translation adjustment - - - - - -
----------------------- ----------------------- --------- ---------
Balance March 31, 1996 14,250 - - - $ 67,904 $ 708
Issuance of common stock 63 - - - 822 -
Issuance of common stock pursuant to
employee stock option plan 313 - - - 2,209 -
Issuance of common stock pursuant to
employee stock purchase plan 19 - - - 179 -
Tax benefit attributable to employee
stock option plan - - - - 736 -
Tax benefit derived from net operating
loss carryforward utilization - - - - 6,634 -
Issuance of common stock on
formation of CentreSoft 2,468 - - - 268 -
Net income for the year - - - - - 9,226
Foreign currency translation adjustment - - - - - -
Dividends declared - - - - - (1,270)
----------------------- ----------------------- --------- ---------
Balance March 31, 1997 17,113 $ - - $ - $ 78,752 $ 8,664
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Cumulative
Foreign Treasury Stock Share-
Currency -------------- holders'
Translation Shares Amount Equity
----------- ----------------------- ---------
Balance March 31, 1994 $ (189) - $ - $ 63,985
Exercise of common stock warrants - - - 80
Issuance of common stock pursuant to
employee stock purchase plan - - - 99
Issuance of common stock pursuant to
directors stock purchase plan - - - 12
Net loss for the year - - - (1,520)
Foreign currency translation adjustment 48 - - 48
----------- ----------------------- ---------
Balance March 31, 1995 $ (141) - $ - $ 62,704
Issuance of common stock pursuant to
employee stock purchase plan - - - 224
Issuance of common stock pursuant to
directors stock purchase plan - - - 13
Purchase of treasury stock - 500 (5,278) (5,278)
Net income for the year - - - 5,530
Foreign currency translation adjustment (194) - - (194)
----------- ----------------------- ---------
Balance March 31, 1996 $ (335) 500 $ (5,278) $ 62,999
Issuance of common stock - - - 822
Issuance of common stock pursuant to
employee stock option plan - - - 2,209
Issuance of common stock pursuant to
employee stock option plan - - - 179
Tax benefit attributable to employee
stock option plan - - - 736
Tax benefit derived from net operating
loss carryforward utilization - - - 6,634
Issuance of equity interests in
CentreSoft Management Buyout - - - 268
Net income for the year - - - 9,226
Foreign currency translation adjustment 177 - - 177
Dividends declared - - - (1,270)
----------- ----------------------- ---------
Balance March 31, 1997 $ (158) 500 $ (5,278) $ 81,980
----------- ---------- --------- ---------
----------- ---------- --------- ---------
5
ACTIVISION, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended March 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 9,226 $ 5,530 $ (1,520)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Deferred income taxes 3,165 (1,500) -
Depreciation and amortization 4,118 2,646 1,942
Gain on Disposal 34 - -
Change in assets and liabilities:
Accounts receivable (14,249) (14,343) (3,641)
Inventories (2,415) (1,003) 551
Prepaid software and license royalties (2,085) (2,570) (202)
Prepaid expenses and other current assets (39) (841) 126
Other assets (55) (140) 37
Accounts payable 3,368 2,076 587
Accrued expenses (5,558) 6,535 911
Other liabilities (334) (176) (11)
--------- --------- ---------
Net cash used in operating activities (4,824) (3,786) (1,220)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (4,249) (3,045) (1,256)
Restricted cash - - 1,500
Cash paid by Combined Distribution (Holdings)
Limited to acquire CentreSoft Limited
(net of cash acquired) (3,878) - -
--------- --------- ---------
Net cash provided by (used in) investing activities (8,127) (3,045) 244
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance and exercise of common
stock options and warrants 2,209 237 191
Proceeds from employee stock purchase plan 179 - -
Proceeds from issuance of common stock 268 - -
Proceeds from issuance of subordinated loan
stock debentures 3,216 - -
Proceeds from issuance of redeemable preferred stock 1,286 - -
Proceeds from issuance of convertible preferred stock 214 - -
Payments under line-of-credit agreements - - (4,695)
Borrowings under line-of-credit agreements 1,600 - 4,695
Other 2 - (1)
Purchase of treasury stock - (5,278) -
Dividends paid by Combined Distribution (Holdings)
Limited (130) - -
--------- --------- ---------
Net cash provided by (used in) financing activities 8,844 (5,041) 190
--------- --------- ---------
Effect of exchange rate changes on cash 177 (195) 48
--------- --------- ---------
Net decrease in cash and cash equivalents (3,930) (12,067) (738)
--------- --------- ---------
Cash and cash equivalents at beginning of year 25,288 37,355 38,093
--------- --------- ---------
Cash and cash equivalents at end of year $ 21,358 $ 25,288 $ 37,355
--------- --------- ---------
--------- --------- ---------
Non-cash investing activities:
Stock issued in exchange for licensing rights $ 822 $ - $ -
Tax benefit derived from stock option exercises 736 - -
Tax benefit derived from net operating loss
carryforward utilization 6,634 - -
Supplemental cash flow information:
Cash paid for income taxes $ 473 $ 124 $ 193
Cash paid for interest - 20 18
The accompanying notes are an integral part of these supplemental
consolidated financial statements.
6
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company is a diversified international publisher of interactive
entertainment software. The Company develops and publishes entertainment
software for a variety of platforms, including both personal computer
CD-ROM systems, including the Windows 95 operating system, and video game
console hardware systems such as the Sony Playstation ("Playstation") and
Sega Saturn ("Saturn"). The Company distributes its products worldwide
primarily through its direct sales force, its distribution subsidiaries
in Europe and, to a lesser extent through third party distributors and
licensees.
BASIS OF PRESENTATION
These supplemental consolidated financial statements reflect the pooling of
interests of Activision, Inc. with Combined Distribution (Holdings) Limited
("CentreSoft") (see Note 2 "Acquisitions"). The supplemental consolidated
financial statements do not extend through the date of consummation of the
CentreSoft and NBG acquisitions. However, these statements will become the
historical consolidated financial statements of the Company after financial
statements covering the date of consummation of the business combination
are issued.
As further described in Note 14, certain acquisitions (which occurred
after March 31, 1996) have not been retroactively reflected in the
historical financial statements of the Company for years ending on or
before March 31, 1996 which are presented herein as supplemental
consolidated financial statements, except for weighted averages shares
outstandings and earnings per share data.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Activision,
Inc., a Delaware corporation, and its wholly-owned subsidiaries (the
Company.) All intercompany accounts and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and short-term investments with
original maturities of not more than 90 days.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its temporary cash
investments with quality financial institutions. At various times during
the fiscal years ended March 31, 1997, 1996 and 1995, the Company had
deposits in excess of the $100,000 Federal Deposit Insurance Corporation
("FDIC") limit at these financial institutions. At March 31, 1997, the
Company had approximately $13.4 million invested in short-term United
States government backed securities. The Company's customer base includes
retail outlets and distributors including consumer electronics and computer
specialty stores, discount chains, video rental stores and toy stores in
the United States and countries worldwide. The Company performs ongoing
credit evaluations of its customers and maintains allowances for potential
credit losses. The Company generally does not require collateral or other
security from its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's cash and cash equivalents, accounts
receivable, accounts payable, and accrued liabilities approximate their
carrying values due to the relatively short maturities of these
instruments. Trade receivables are primarily due from retailers and OEMs.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
provides for the capitalization of certain software development costs once
technological feasibility is established. The capitalized costs are then
amortized on a straight-line basis over the estimated product life, or on
the ratio of current revenues to total projected revenues, whichever is
greater. The software development costs that have been capitalized to date
have been immaterial.
PREPAID SOFTWARE AND LICENSED PROPERTY ROYALTIES
Prepaid royalties represent prepayments made to independent software
developers under development agreements. Prepaid royalties are expensed at
the contractual royalty rate as cost of goods sold based on actual net
product sales. Management evaluates the future realization of prepaid
royalties quarterly, and charges to cost of goods sold any amounts that
management deems unlikely to be amortized at the contract royalty rate
through product sales.
7
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Product Sales: The Company recognizes revenue from the sale of its
products upon shipment. Subject to certain limitations, the Company
permits customers to obtain exchanges within certain specified periods, and
provides price protection on certain unsold merchandise. Revenue from
product sales is reflected net of the allowance for returns and price
protection.
Software Licenses: For those license agreements which 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 which exceed the guarantee are recognized as
earned.
ADVERTISING EXPENSES
The Company expenses advertising and the related costs as incurred.
Advertising expenses for the years ended March 31, 1997, 1996 and 1995 were
approximately $3,285,000, $1,940,000 and $3,564,000, respectively, and are
included in sales and marketing expense in the statement of operations.
AMORTIZATION OF INTANGIBLE ASSETS
The excess of cost over net assets acquired is being amortized over 20
years using the straight-line method. As of March 31, 1997 and 1996,
accumulated amortization amounted to $6,342,000 and $4,837,000,
respectively. The company adopted the provisions of SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of," on April 1, 1996. This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment
whenever events of changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of the
asset to undiscounted cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount exceeds
the fair value of the assets. Adoption of this Statement did not have a
material impact on the Company's financial position, results of operations,
or liquidity.
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
Under SFAS No. 109 income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries maintain their accounting records in
their local currency. The currencies are then converted to United States
dollars and the effect of the foreign currency translation is reflected as
a component of shareholders' equity in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation."
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is computed using the weighted average
number of common and, when dilutive, common equivalent shares outstanding
during the period.
The weighted average number of shares outstanding for all periods
presented has been adjusted to reflect the shares issued in conjunction
with the acquisitions of Raven Software Corporation and NBG EDV Handels und
Verlags GmbH. The weighted average shares outstanding for 1997 has also
been adjusted to reflect the shares issued in conjunction with acquisition
of Combined Distribution (Holdings) Ltd. from June 28, 1996 (inception of
Centresoft).
Net income utilized to compute earning per share in 1997 has been
reduced by dividends on redeemable preferred stock and convertible
preferred stock.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
8
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION PLAN
Prior to April 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would be recorded on the
date of the grant only if the current market price of the underlying stock
exceeded the exercise price. On April 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation, which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of the grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation.
2. ACQUISITIONS
On November 26, 1997, the Company completed its acquisition of CentreSoft
by the issuance of 2,787,043 shares of the Company's common stock in
exchange for all the outstanding Ordinary Shares, "A" Ordinary Shares,
"B" Ordinary shares, redeemable preferred stock, convertible preferred
stock and secured loan stock debentures of CentreSoft. In addition, the
Company issued options to acquire 50,325 shares of the Company's common
stock which was in exchange for outstanding CentreSoft stock options. The
acquisition of CentreSoft is being accounted for in accordance with the
pooling of interests method of accounting and, accordingly, the
accompanying supplemental consolidated financial statements have been
retroactively adjusted as if CentreSoft and the Company had operated as one
since June 28, 1996 (inception of CentreSoft). These supplemental
consolidated financial statements will become the primary historical
consolidated financial statements of the Company upon issuance of
financial statements covering the date of consummation of the
CentreSoft acquisition.
CentreSoft began operations on June 28, 1996 (See Note 3. Management
Buyout of CentreSoft), and, accordingly, there is no restatement of
periods prior to April 1, 1996.
The following represents net revenues and net income of the Company and
CentreSoft prior to restatement (amounts in thousands):
Year ended March 31,
---------------------------------------
1997 1996 1997
--------- --------- ---------
Net revenues:
The Company $ 86,483 $ 61,393 $ 40,669
CentreSoft 70,219 - -
Elimination of intercompany revenues (2,058) - -
--------- --------- ---------
$ 154,644 $ 61,393 $ 40,669
--------- --------- ---------
--------- --------- ---------
Net income:
The Company $ 7,107 $ 5,530 $ (1,520)
CentreSoft 2,119 - -
--------- --------- ---------
$ 9,226 $ 5,530 $ (1,520)
--------- --------- ---------
--------- --------- ---------
CentreSoft previously used the fiscal year ended April 30 for its financial
reporting. Accordingly, the supplemental consolidated balance sheet
contained herein includes the financial position of CentreSoft as of April
30, 1997, and the supplemental consolidated statement of operations for the
year ended March 31, 1997 contained herein includes the results of
operations of CentreSoft for the ten months ended April 30, 1997. The month
ended April 30, 1997 also will be included in the results of operations for
the year ended March 31, 1998 and for the interim periods include therein.
CentreSoft's net revenues and net income for the month ended April 30, 1997
were approximately $8.0 million and $639,000, respectively.
All costs related to the acquisition of CentreSoft have not been reflected
in the Company's supplemental consolidated financial statements but will be
reflected in the consolidated statement of operations for the quarter ended
December 31, 1997, the period in which
9
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
the acquisition was completed. Such costs are non-recurring and were
comprised primarily of consulting, legal and accounting costs and are
expected to approximate $1.4 million.
3. MANAGEMENT BUYOUT OF CENTRESOFT
On June 28, 1996, CentreSoft's management completed a buyout of
Centresoft ("Management Buyout"). In the Management Buyout, CentreSoft
acquired all the outstanding ordinary shares of CentreSoft Limited
("CentreSoft") for approximately $7,428,000 in cash from Centregold plc, a
subsidiary of Eidos plc ("Eidos"). The acquisition agreement provides for
a contingent payment of a maximum of approximately $812,000 to Eidos if
CentreSoft is later sold at above a certain price, resulting in a total
purchase price of approximately $8,240,000. This contingent payment has
been recorded by the Company as a result of the Company's acquisition of
CentreSoft in November 1997. The Management Buyout was accounted for by
CentreSoft by the purchase method of accounting. The excess of the
purchase price over the estimated fair values of the net assets acquired
was recorded by CentreSoft as an intangible asset in the amount
of $6,486,000. This intangible asset is being amortized on a straight-line
basis over a 20 year period. Amortization was approximately $238,000 for
the year ended March 31, 1997.
The assets and liabilities of CentreSoft acquired on June 28, 1996 were as
follows (amounts in thousands):
BOOK VALUE
&
FAIR VALUE
----------
Assets:
Cash and cash equivalents $ 3,550
Accounts receivables, net 12,474
Inventories 2,892
Fixed assets 1,061
---------
Total assets 19,977
---------
Liabilities:
Accounts payable 11,331
Accrued liabilities 6,892
---------
Total liabilities 18,223
---------
Net assets 1,754
Cost in excess of net assets acquired 6,486
---------
Consideration (including net costs of $767) satisfied by cash $8,240
---------
---------
In connection with the Management Buyout, CentreSoft received proceeds from
the issuance of secured subordinated loan stock debentures, redeemable
preferred stock, convertible preferred stock, "A" ordinary shares, "B"
ordinary shares and ordinary shares.
SECURED SUBORDINATED LOAN STOCK DEBENTURES
Proceeds from the issuance of the Secured Subordinated Loan Stock Debentures
("Debentures") totaled $3,216,000. The Debentures bear interest at the rate
of 15% per annum and repayment was required as follows (amounts in
thousands);
January 1998 $ 683
July 1998 683
January 1999 603
July 1999 603
January 2000 603
July 2000 41
--------
$ 3,216
--------
--------
The Debentures are debt instruments, secured by the assets of CentreSoft,
and are subordinated to CentreSoft's bank credit facility pursuant to a
written Inter-Creditor Deed. In addition, the Debentures cannot be repaid
without written consent from such bank. Holders of the Debentures are not
entitled to receive any voting rights, any share of profits or any
conversion rights into equity securities. In connection with the
acquisition of CentreSoft by the Company on November 26, 1997, the
Debentures were exchanged for 217,405 shares of the Company's common stock.
REDEEMABLE PREFERRED STOCK
Proceeds from the issuance of the 800,000 shares of Redeemable Preferred
Stock with a stated par value of $0.16 per share totaled $1,286,000. The
Preferred Stock was entitled to a cumulative dividend of $0.19 per share
per annum. The scheduled redemption dates were as follows (amounts in
thousands):
July 2000 $ 563
January 2001 723
---------
$ 1,286
---------
---------
In connection with the acquisition of CentreSoft by the Company on November
26, 1997, the Preferred Stock was exchanged for 86,962 shares of the
Company's common stock.
CONVERTIBLE PREFERRED STOCK
Proceeds from the issuance of 133,333 shares of Convertible Preferred Stock
with a stated par value of $1.61 per share totaled $214,000. The
Convertible Preferred Stock was entitled to a dividend of 12% per annum.
The Convertible Preferred Stock was convertible into Ordinary Shares on a
one-for-one basis in the event the Company had not redeemed the Redeemable
Preferred Stock or Convertible Preferred Stock by the period ending six
months after the final redemption date of January 31, 2001. The redemption
schedule for the Convertible Stock was as follows (amounts in thousands):
January 1998 $ 32
July 1998 32
January 1999 29
July 1999 29
January 2000 29
July 2000 29
January 2000 34
--------
$ 214
--------
--------
In connection with the acquisition of CentreSoft by the Company on November
26, 1997, the Convertible Preferred Stock were exchanged for 14,494 shares
of the Company's common stock.
"A" ORDINARY SHARES, "B" ORDINARY SHARES AND ORDINARY SHARES
CentreSoft had three classes of ordinary shares outstanding, consisting of
"A" Ordinary Shares, "B" Ordinary Shares and Ordinary Shares. Each class
had a stated par value of $0.02 per share. Proceeds from the issuance of
the 47,059 shares of "A" Ordinary Shares, 19,608 shares of "B" Ordinary
Shares and 100,000 shares of Ordinary Shares was $76,000, $31,000 and
$161,000, respectively.
Subject to payment of the dividends on the Redeemable Preferred Stock
and the Convertible Preferred Stock (including any arrears or accruals),
the holders of the "A" Ordinary Shares and "B" Ordinary Shares received
a fixed cumulative net dividend of $0.16 per share per annum ("Ordinary
Dividend") and a cumulative preferential dividend which, when added to
the Ordinary Dividend, equalled the higher of 20% of the net profits (as
defined in CentreSoft's Articles of Association) and the dividends
declared on any other class of share capital of CentreSoft for the
relevant financial year. The balance of any profits declared by the
Board to be distributed by way of dividends for a financial year are to
be distributed pro rata among the holders of the "B" Ordinary Shares,
the "A" Ordinary Shares and the Ordinary Shares.
In connection with the acquisition of CentreSoft by the Company on November
26, 1997, the "A" Ordinary Shares, "B" Ordinary Shares and Ordinary Shares
were exchanged for 781,608, 25,661 and 1,660,913 shares of the Company's
common stock, respectively.
DIVIDENDS
In accordance with the terms of the Redeemable Preferred Stock, Convertible
Preferred Stock, the "A" Ordinary shares, the "B" Ordinary shares and the
Ordinary shares, CentreSoft declared dividends on September 30 and December
31, 1996 and March 31 and June 27, 1997 totaling as follows (amounts in
thousands):
Redeemable Preferred Stock, $0.19 per share $ 130
Convertible Preferred Stock, 12% per annum 21
"A" Ordinary Shares 6
"B" Ordinary Shares 4
Ordinary Shares 268
Participating "A" and "B" Ordinary Shares, $12.60
per share 841
--------
$ 1,270
--------
--------
In connection with the acquisition of CentreSoft by the Company on November
26, 1997, dividends will only be declared and paid on the Redeemable
Preferred Stock, Convertible Preferred Stock, "A" Ordinary shares and the
"B" Ordinary shares through the date of the Company's acquisition of
CentreSoft due to the exchange of these securities for common stock of
the Company.
4. INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Inventories at March 31, 1997 and 1996 reflect an adjustment to
net realizable value of approximately $471,000 and $145,000, respectively.
The provisions for net realizable value for the years ended March 31, 1997,
1996 and 1995 were approximately $234,000, $532,000 and $134,000,
respectively. Inventories, net of reserves consisted of (amounts in
thousands):
March 31, 1997 March 31, 1996
-------------- --------------
Finished goods $ 7,121 $ 2,099
Purchased parts and components 1,162 876
--------- --------
$ 8,283 $ 2,975
--------- --------
--------- --------
Included in finished goods at March 31, 1997 and 1996 are expected
inventory returns at a net realizable value of $837,000 and $427,000,
respectively.
5. PROPERTY AND EQUIPMENT
Equipment, furniture and leasehold improvements are recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the shorter of the estimated useful lives or the lease term generally
ranging from three to ten years. Property and equipment, stated at cost,
was as follows (amounts in thousands):
March 31, 1997 March 31, 1996
-------------- --------------
Computer equipment $ 9,230 $ 4,360
Office furniture and other
equipment 3,204 1,338
Leasehold improvements 1,598 310
-------- --------
14,032 6,008
Less accumulated depreciation and
amortization (8,042) (2,682)
-------- --------
$ 5,990 $ 3,326
-------- --------
-------- --------
Depreciation expense for the years ended March 31, 1997, 1996 and 1995 was
$2,613,000, $1,362,000 and $658,000, respectively.
10
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
6. ACCRUED EXPENSES
Accrued expenses were as follows (amounts in thousands):
March 31, 1997 March 31, 1996
-------------- --------------
Accrued royalties $ 4,173 $ 3,104
Accrued selling and marketing costs 1,680 1,759
Deferred revenue - 2,242
Dividends payable 1,144 -
Income taxes payable 1,189 -
Other 3,950 2,583
--------- --------
$ 12,136 $ 9,688
--------- --------
--------- --------
7. OPERATIONS BY GEOGRAPHIC AREA
The following table summarizes the geographic operations of the Company
(amounts in thousands):
Year ended March 31,
---------------------------------------
1997 1996 1995
---- ---- ----
Net revenues:
North America $ 65,049 $ 47,176 $ 29,492
Europe 80,372 6,501 7,574
Japan 4,504 4,768 2,194
Australia and Pacific 4,719 2,948 1,409
--------- --------- ---------
Total net revenues $ 154,644 $ 61,393 $ 40,669
--------- --------- ---------
--------- --------- ---------
Operating income (loss):
North America $ 2,306 $ (5,110) $ (5,114)
Europe 7,467 2,547 77
Japan 2,022 3,814 1,655
Australia and Pacific 2,013 1,281 425
--------- --------- ---------
Total operating
income (loss) $ 13,808 $ 2,532 $ (2,957)
--------- --------- ---------
--------- --------- ---------
At March 31, At March 31, At March 31
1997 1996 1995
---- ---- ----
Assets:
United States $ 81,833 $ 73,377 $ 68,226
Foreign 39,541 4,236 657
--------- --------- ---------
Total assets $ 121,374 $ 77,613 $ 68,883
--------- --------- ---------
--------- --------- ---------
Operating income (loss) by geographic territory is reflected without any
allocation for product development and general and administrative expenses
to the geographic territories other than North America. These expenses are
incurred primarily in North America.
8. SIGNIFICANT CUSTOMERS
The Company had no sales to any one customer in excess of 10% of total net
revenues for the years ended March 31, 1997 and 1996. For the fiscal year
ended March 31, 1995, the Company had sales to one customer which
represented 14.9% of total net revenues.
11
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
Domestic and foreign income (loss) before income taxes and details of the
income tax provision (benefit) are as follows (amounts in thousands):
Year ended March 31,
--------------------------------------
1997 1996 1995
---- ---- ----
Income (loss) before income taxes:
Domestic $ 5,896 $ 3,681 $ (3,096)
Foreign 8,145 558 1,731
-------- -------- --------
$ 14,041 $ 4,239 $ (1,365)
-------- -------- --------
-------- -------- --------
Income tax provision:
Current:
Federal $ 383 $ 106 $ -
State 31 25 -
Foreign 1,236 78 155
-------- -------- --------
Total current 1,650 209 155
-------- -------- --------
Deferred:
Federal (2,961) (1,369) -
State (1,244) (131) -
-------- -------- --------
Total deferred (4,205) (1,500) -
-------- -------- --------
Add back benefit credited to additional
paid-in capital:
Tax benefit related to stock option exercises 736 - -
Tax benefit related to utilization of pre-bankruptcy
net operating loss carryforwards 6,634 - -
-------- -------- --------
7,370 - -
-------- -------- --------
$ 4,815 $ (1,291) $ 155
-------- -------- --------
-------- -------- --------
The items accounting for the difference between income taxes computed at
the U.S. federal statutory income tax rate and the income tax provision for
each of the years are as follows:
Year ended March 31,
-------------------------------------
1997 1996 1995
---- ---- ----
Federal income tax provision at statutory rate 35.0% 34.0% (34.0%)
State taxes, net of federal benefit 3.4% - -
Benefit of net operating loss carryforward - (25.7%) -
Nondeductible amortization 3.9% 10.3% 30.4%
Future (current) deductible reserves - (4.9%) 39.3%
Research and development credits (8.4)% (8.7%) (41.9%)
Incremental effect of foreign tax rates (4.1)% (0.5%) 22.2%
Increase (reduction) of valuation allowance 4.0% (35.4%) -
Other 0.5% 0.4% (4.5)%
------- ------- -------
34.3% (30.5%) 11.5%
------- ------- -------
------- ------- -------
12
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The components of the net deferred tax asset and liability were as follows
(amounts in thousands):
March 31, 1997 March 31, 1996
-------------- --------------
Deferred asset:
Allowance for bad debts $ 272 $ 211
Allowance for sales returns 441 785
Miscellaneous 99 49
Tax credit carryforwards 2,553 1,450
Net operating loss carryforwards 10,447 13,310
------- -------
Deferred tax asset 13,812 15,805
Valuation allowance (8,107) (14,305)
------- -------
Net deferred tax asset $ 5,705 $ 1,500
------- -------
------- -------
During the year ended March 31, 1996, the Company recognized a tax benefit
of $1.5 million through a reduction in the Company's deferred tax asset
valuation allowance. The reduction reflected the remaining portion of the
Company's net operating loss carryforwards, the benefit from which could be
recorded in the Company's provision for income taxes. In accordance with
Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," issued by the American Institute
of Certified Public Accountants, benefits from loss carryforwards arising
prior to the Company's reorganization are recorded as additional paid-in
capital. During the year ended March 31, 1997, $6.6 million of such
benefits have been recognized through a reduction in the valuation
allowance. The reductions in the valuation allowance during the years
ended March 31, 1997 and 1996 were determined based on the Company's
assessment of the realizability of its deferred tax assets, based on recent
operating history, and the Company's expectation that operations will
continue to generate taxable income, as well as other factors. Realization
of the deferred tax assets is dependent upon the continued generation of
sufficient taxable income prior to expiration of tax credits and loss
carryforwards. Although realization is not assured, management believes it
is more likely than not that the deferred tax asset of $5.7 million will be
realized. The amount of deferred tax assets considered realizable,
however, could be reduced in the future if estimates of future taxable
income are reduced. The provision for Income taxes for the year ended
March 31, 1995 represents foreign taxes withheld.
The Company's available net operating loss carryforward for federal tax
reporting purposes approximates $28.3 million and is subject to certain
limitations as defined under Section 382 of the Internal Revenue Code. The
net operating loss carryforwards expire from 1999 to 2009. At March 31,
1997, the Company had a net operating loss carryforward for California tax
reporting purposes of approximately $10.7 million. The California net
operating loss carryforwards expire from 1998 to 2003.
10. BANK LINE OF CREDIT
The Company has a revolving line of credit ("Credit Facility") with a bank,
which provides $4 million of revolving credit. The Credit Facility matures
on June 30, 2000. Interest is at LIBOR plus 2.5%, however, if certain
financial covenants are not met interest will be increased to LIBOR
plus 3.5%. The Company was not in violation of any financial covenants
and no amounts were outstanding on the line of credit as of March 31, 1997.
In addition, the Company has an overdraft facility with a bank, which
provides $4 million of overdraft protection. The overdraft facility is
payable on demand. As of March 31, 1997, the Company had drawn on this
facility $1.6 million.
11. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases its facilities under non-cancelable operating lease
agreements. Total future minimum lease commitments as of March 31, 1997
are as follows (amounts in thousands):
Year ending March 31,
1998 $ 2,873
1999 2,576
2000 2,671
2001 2,675
2002 2,675
Thereafter 15,250
---------
$ 28,720
---------
---------
Rent expense for the years ended March 31, 1997, 1996 and 1995 was
approximately $2,279,000, $1,348,000 and $811,000, respectively.
13
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYMENT AGREEMENTS
As of March 31, 1997, the Company has entered into employment agreements
with various personnel which have obligated the Company to make total
minimum payments of $3,102,000 and $67,000 during the years ending March
31, 1998 and 1999, respectively.
LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in the
ordinary course of business including disputes arising over the ownership
of intellectual property rights and collection matters. In the opinion of
management, the outcome of such routine claims will not have a material
adverse effect on the Company's business, financial condition, results of
operations or liquidity.
12. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLAN
The Company has a stock option plan (the "Stock Option Plan") for the
benefit of officers, employees, consultants and others. The Stock Option
Plan permits the granting of non-qualified stock options, incentive stock
options ("ISOs"), stock appreciation rights ("SARs"), restricted stock
awards, deferred stock awards and other Common Stock-based awards. As
of March 31, 1997 the total number of shares of Common Stock available
for distribution under the Stock Option Plan is 6,066,667. The plan
requires available shares to consist in whole or in part of authorized
and unissued shares or treasury shares. There were 276,000 remaining
shares available for grant under the Stock Option Plan as of
March 31, 1997.
The stock option exercise price is determined at the discretion of the
Board of Directors, and for ISOs, is not to be less than the fair market
value at the date of grant, or in the case of non-qualified options, must
exceed or be equal to 85% of fair market value at date of grant. Options
typically become exercisable in equal installments over a period not to
exceed five years and must be exercised within 10 years of date of grant.
Historically, stock options have been granted with exercise prices equal to
or greater than the fair market value at the date of grant.
Stock Option Plan activity was as follows (amounts in thousands, except
weighted average exercise price amounts):
1997 1996 1995
-------------------------------------------- --------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 3,725 $11.37 1,190 $ 5.20 398 $ 2.98
Granted 1,997 11.28 2,805 13.61 1,073 5.61
Exercised (313) 7.05 (50) 4.54 (59) 1.67
Forfeited (181) 9.24 (220) 6.07 (222) 4.13
Expired - - - - - -
-------- -------- -------- -------- -------- --------
Outstanding at end of year 5,228 $11.69 3,725 $ 11.37 1,190 $ 5.20
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Exercisable at end of year 3,292 $12.62 334 $ 4.55 176 $ 3.82
The range of exercise prices for options outstanding as of March 31,
1997 was $1.50 to $21.18. The range of exercise prices for options is
wide due to increases in the Company's stock price over the period of
the grants. For the year ended March 31, 1997, 1,277,000 options were
granted at an exercise price equal to the fair market value on the date
of grant, and 720,000 options were granted at an exercise price greater
than fair market value on the date of grant.
14
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarize information about options outstanding at
March 31, 1997:
Outstanding Options
------------------------------------
Remaining
Weighted Avg
Contractual Wtd Avg
Shares Life Exercise
(000) (in years) Price
------ ------------ --------
Range of exercise prices:
$1.50 to $9.75 1,778 7.9 $ 6.53
$9.78 to $13.00 1,557 9.4 11.34
$13.13 to $21.18 1,893 8.3 16.69
------ ------ ------
Total 5,228 8.5 $11.69
------ ------ ------
------ ------ ------
Exercisable Options
--------------------
Wtd Avg
Shares Exercise
(000) Price
------ --------
Range of exercise prices:
$1.50 to $9.75 879 $ 5.92
$9.78 to $13.00 789 10.34
$13.13 to $21.18 1,624 17.16
------ ------
Total 3,292 $12.62
------ ------
------ ------
These options will expire if not exercised at specific dates ranging from
January 2002 to March 2007. Prices for options exercised during the three
year period ended March 31, 1997 ranged from $0.75 to $11.05.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan for all eligible employees
(the "Purchase Plan"). Under the Purchase Plan, shares of the Company's
common stock may be purchased at six-month intervals at 85% of the lower of
the fair market value on the first or last day of each six-month period
(the "Offering Period"). Employees may purchase shares having a value not
exceeding 10% of their gross compensation during an Offering Period.
During the Purchase Plan's first Offering Period ended March 31, 1997,
employees purchased 19,000 shares at a price of $9.56 per share. As of
March 31, 1997, 181,000 shares were reserved for future issuance under the
Purchase Plan.
EMPLOYEE RETIREMENT PLAN
The Company has a retirement plan covering substantially all of its
eligible employees. The retirement plan is qualified in accordance with
Section 401(k) of the Internal Revenue Code. Under the plan, employees may
defer up to 15% of their pre-tax salary, but not more than statutory
limits. The Company contributes 5% of each dollar a participant
contributes. The Company's matching contributions to the plan were $25,000
and $10,000 during the years ended March 31, 1997 and March 31, 1996; the
Company made no matching contributions in the year ended March 31, 1995.
DIRECTOR WARRANT PLAN
The Director Warrant Plan provides for the automatic granting of warrants
("Director Warrants") to purchase 16,667 shares of the Common Stock to each
director of the Company who is not an officer or employee of the Company or
any of its subsidiaries. The total number of shares of Common Stock
available for distribution under the Director Warrant Plan was 100,000.
Director Warrants granted under the Director Warrant Plan vest 25% on the
first anniversary of the date of grant, and 12.5% each six months
thereafter. The Director Warrant Plan expired on December 19, 1996. The
expiration had no effect on the outstanding Warrants.
15
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Director Warrant activity was as follows (amounts in thousands, except
weighted average exercise price amounts):
1997 1996 1995
----------------------------------------------------- -----------------------
Shares Wtd Avg Shares Wtd Avg Shares Wtd Avg
(000) Ex Price (000) Ex Price (000) Ex Price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 73 $4.43 50 $ 0.75 67 $ 0.94
Granted - - 60 7.50 - -
Exercised - - (17) 0.75 (8) 1.50
Forfeited - - (20) 7.50 (9) 1.50
Expired - - - - - -
-------- -------- -------- -------- -------- --------
Outstanding at end of year 73 $4.43 73 $ 4.43 50 $ 0.75
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Exercisable at end of year 73 $4.43 39 $ 2.47 38 $ 0.75
During the fiscal year ended March 31, 1997, 40,000 Director Warrants were
granted to new directors outside of the Director Warrant Plan with an
average exercise price of $12.85 and vesting consistent with other
outstanding Director Warrants.
The range of exercise prices for director warrants outstanding as of March
31, 1997 was $0.75 to $8.50. The range of exercise prices for options is
wide due to increases in the Company's stock price over the period of the
grants. As of March 31, 1997, 33,000 of the outstanding and vested
director warrants have a weighted average remaining contractual life of 4.8
years and a weighted average exercise price of $0.75, 20,000 of the
outstanding and vested director warrants have a weighted average remaining
contractual life of 7.8 years and a weighted average exercise price of
$6.50 and 20,000 of the outstanding and vested director warrants have a
weighted average remaining contractual life of 7.8 years and a weighted
average exercise price of $8.50.
PRO FORMA INFORMATION
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employee stock options. Under
APB No. 25, if the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its employee stock options (including
shares issued under the Purchase Plan and Director Warrant Plan
collectively called "options") granted during fiscal 1996 and 1997 under
the fair value method of that statement. The fair value of options granted
in the years ended March 31, 1997 and 1996 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
Stock Option Plan Purchase Plan Director Warrant Plan
----------------------------------------------------- -----------------------
1997 1996 1997 1996 1997 1996
-------- -------- -------- -------- -------- --------
Expected life (in years) 2.2 3.7 0.5 - - 2.0
Risk free interest rate 6.45% 6.45% 6.45% - - 6.45%
Volatility .60 .60 .60 - - .60
Dividend yield - - - - - -
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing models
do not necessarily provide a reliable single measure of the fair value of
its options. The weighted average estimated fair value of Stock Option
Plan shares granted during the years ended March 31, 1997 and 1996 was
$4.04 and $3.74 per share, respectively. The weighted average estimated
fair value of Employee Purchase Plan shares granted during the year ended
March 31, 1997 was $2.89. The weighted average estimated fair value of
Director Warrants granted during the year ended March 31, 1997 was $2.27.
16
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (amounts in thousands except for
earnings per share information):
Year ended March 31,
-----------------------
1997 1996
-------- --------
Pro forma net income $ 5,947 $ 2,302
Pro forma earnings per share $ 0.33 $ 0.14
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of
future years. Because SFAS No. 123 is applicable only to options granted
during fiscal 1996 and 1997, the pro forma effect will not be fully
reflected until the fiscal year ended March 31, 2000.
13. RELATED PARTY TRANSACTIONS
PROMISSORY NOTES RECEIVABLE
As of March 31, 1997, accounts receivable includes $177,000 in promissory
notes receivable from Robert A. Kotick, a director, officer and shareholder
of the Company. The promissory notes are dated December 28, 1994 and April
28, 1995, have maturity dates, as amended, of December 31, 1997 and bear
interest at 9.0% per annum.
MERGER WITH INTERNATIONAL CONSUMER TECHNOLOGIES CORPORATION (ICT)
Effective January 1, 1995, ICT was merged with and into a wholly owned
subsidiary of the Company, with ICT as the surviving corporation. ICT's
sole asset at the time of the merger was 5,429,600 shares of the Company's
Common Stock. As a result of the merger, the shares of the Company's Common
Stock previously held by ICT were distributed to the shareholders of ICT in
exchange for their shares of ICT common stock. No other assets or
liabilities were acquired or assumed by the Company as a result of the
merger.
17
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS
ACQUISITION OF TAKE US! MARKETING GMBH
On June 13, 1997, the Company completed its acquisition of Take Us!
Marketing GmbH ("Take Us!") in exchange for $246,000 in cash and 10,000
shares of the Company's common stock with a value of $136,000. The
acquisition of Take Us! will be accounted for by the purchase method of
accounting. The purchase price of $382,000 exceeded the fair value of net
assets acquired of $151,000 resulting in an intangible asset of
approximately $231,000.
ACQUISITION OF RAVEN SOFTWARE CORPORATION
On August 26, 1997, the Company completed its acquisition of Raven Software
Corporation ("Raven") in exchange for 1,040,000 shares of the Company's
common stock. This transaction is being accounted for in accordance with
the pooling of interests method of accounting. In addition, Raven is being
accounted for as an immaterial pooling; accordingly, periods prior to April
1, 1997 were not restated retroactively for this transaction. However,
weighted average shares outstanding and earnings per share data were
retroactively restated for the effect of the Raven acquisition for all
periods presented.
ACQUISITION OF NBG EDV HANDELS UND VERLAGS GMBH
On November 26, 1997, the Company completed its acquisition of NBG EDV
Handels und Verlags GmbH ("NBG") in exchange for 281,206 shares of the
Company's common stock. This transaction is being accounted for in
accordance with the pooling of interests method of accounting. In
addition, NBG is being accounted for as an immaterial pooling; accordingly,
periods prior to October 1, 1997 will not be restated retroactively for
this transaction. However, weighted average shares outstanding and earnings
per share data were retroactively restated for the affect of the NBG
acquisition for all periods presented.
SUBORDINATED CONVERTIBLE DEBT PRIVATE PLACEMENT
On December 22, 1997, the Company completed a private placement of $60
million in convertible subordinated notes ("Convertible Notes"). The
Convertible Notes have a 6.75% stated annual interest rate, are due in
January 2005 and are convertible at any time prior to maturity into shares
of the Company's Common Stock at $18.875 per share. Net proceeds from the
issuance of the Convertible Notes was approximately $57.9 million. The
Company intends to use such net proceeds to repay outstanding balances
under its bank lines of credit, if any, to fund product development, to
acquire third party publishing and distribution rights, to expand the
Company's direct sales and marketing capabilities and for general corporate
purposes. In addition, the Company may, when and if the opportunity
arises, use an unspecified portion of the net proceeds to acquire
businesses, products or technologies that it believes are of strategic
importance. Pending such uses, the Company intends to invest the net
proceeds in short-term money market and other market rate, investment-grade
instruments.
18
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
15. QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
Quarter Ended
----------------------------------------------------- Year
(Dollars in thousands, except per share data) June 30 Sept 30 Dec 31 Mar 31 Ended
-------- -------- -------- -------- --------
Fiscal 1997:
Net revenues $ 7,021 $ 29,557 $ 60,480 $ 57,586 $154,644
Operating income (loss) (4,226) 2,137 8,288 7,609 13,808
Net income (loss) (2,631) 1,421 5,320 5,116 9,226
Net income (loss) per common share (0.17) 0.07 0.29 0.27 0.50
Common stock price per share
High $ 15.00 $ 14.38 $ 14.00 $ 16.25 $ 16.25
Low 11.63 9.50 10.56 10.00 9.50
Fiscal 1996:
Net revenues $ 3,319 $ 18,848 $ 17,578 $ 21,648 61,393
Operating income (loss) (6,014) 2,366 1,573 4,607 2,532
Net income (loss) (5,528) 2,765 1,948 6,345 5,530
Net income (loss) per common share (0.36) 0.17 0.12 0.39 0.34
Common stock price per share
High $ 7.125 $ 19.75 $ 18.50 $ 15.125 $ 19.75
Low 5.75 6.75 8.125 8.625 5.75
19
SCHEDULE II
ACTIVISION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in thousands)
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Balance at Balance at
Beginning Deductions End of
Description of Period Additions (Describe) Period
- -----------------------------------------------------------------------------------------
Year ended March 31, 1997:
Allowance for sales returns, price
protection and doubtful accounts $ 7,005 $18,878 $18,209 (A) $ 7,674
Inventory valuation $ 145 $ 478 $ 152 (B) $ 471
Deferred tax valuation allowance $14,305 $ 436 $ 6,634 $ 8,107
Year ended March 31, 1996:
Allowance for sales returns, price
protection and doubtful accounts $ 4,469 $12,402 $ 9,866 (A) $ 7,005
Inventory valuation $ 357 $ 532 $ 744 (B) $ 145
Deferred tax valuation allowance $16,500 $ (695) $ 1,500 $14,305
Year ended March 31, 1995:
Allowance for sales returns, price
protection and doubtful accounts $ 3,266 $ 3,795 $ 3,592 (A) $ 4,469
Inventory valuation $ 493 $ 134 $ 270 (B) $ 357
Deferred tax valuation allowance $15,531 $ 969 $ - $16,500
(A) Actual write-offs uncollectible accounts receivable or sales returns and
price protection.
(B) Actual write-offs of obsolete inventory, scrap and reduction in carrying
value of certain portions of inventory.
20
Exhibit 99.2
ACTIVISION, INC.
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following table summarizes certain selected consolidated financial
data, which should be read in conjunction with the Company's Supplemental
Consolidated Financial Statements and Notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere herein. The selected consolidated financial data
presented below as of and for each of the fiscal years in the five-year
period ended March 31, 1997 are derived from the audited supplemental
consolidated financial statements of the Company. The supplemental
consolidated financial statements as of March 31, 1997 and 1996 and for each
of the fiscal years in the three-year period ended March 31, 1997, and the
reports thereon, are included elsewhere in this Form 8-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED
MARCH 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Net revenues $154,644 $61,393 $40,669 $26,604 $21,069
Gross profit 67,523 39,644 19,376 11,293 9,535
Operating income (loss) 13,808 2,532 (2,957) (2,031) (208)
Income (loss) before provision
for income taxes 14,041 4,239 (1,365) (1,853) (217)
Net income (loss) from continuing operations 9,226 5,530 (1,520) (1,987) (279)
Loss from discontinued operations - - - - (1,100)
Net income (loss) 9,226 5,530 (1,520) (1,987) (1,379)
Accumulated, unpaid preferred dividends - - - (3,296) (3,163)
Net income (loss) per common share from
continuing operations (1) $0.50 $0.34 $(0.10) $(0.78) $(0.73)
Net income (loss) per common share (1) 0.50 0.34 (0.10) (0.78) (0.96)
Weighted average number of shares used in
computing net income (loss) per common
share (1) 18,051 16,271 15,265 6,753 4,733
AS OF MARCH 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents $21,358 $ 25,288 $ 37,355 $ 38,093 $ 1,851
Working capital 51,838 40,227 40,648 41,218 5,261
Intangible assets 23,749 19,580 20,863 22,146 23,429
Total assets 119,754 77,613 68,833 68,677 34,580
Redeemable and convertible preferred
stock (2) 1,500 - - - 25,200
Preferred shareholders' equity (3) - - - - 4,603
Shareholders' equity 81,980 62,999 62,704 63,985 (792)
(1) Reflects the Company's 1-for-3 reverse stock split effective October 20,
1993. Accordingly, previously reported net income (loss) per share and
common share have been retroactively restated.
(2) Does not include accrued dividends of $3,163 as of March 31, 1993.
(3) Represents $5,000 of gross proceeds received from the sale of Series AA
Preferred Stock, less offering expenses and the amount allocated to common
stock warrants issued sold at the time.
1
Exhibit 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED MARCH 31, 1997, 1996 AND 1995
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 BELOW IN THIS CURRENT
REPORT ON FORM 8-K UNDER "RISK FACTORS." 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 and development efforts on products designed for PCs and the Sony
PlayStation console system. In selecting titles for acquisition or development,
the Company pursues a balance between 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 and through third party distributors and licensees. In addition, in
November 1997 the Company acquired CentreSoft and NBG and significantly
increased its worldwide distribution capabilities. Financial information as
of and for the year ended March 31, 1997 has been restated to reflect the
CentreSoft acquisition as a pooling of interests.
The Company recognizes revenue from the sale of its products upon shipment.
Subject to certain limitations, the Company permits customers to obtain
exchanges within certain specified periods and provides price protection on
certain unsold merchandise. Revenue from product sales is reflected after
deducting the allowance for returns and price protection. With respect to
license agreements which 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 which exceed the
guarantee are recognized as earned.
Cost of goods sold related to console, PC and OEM net revenues represents
the manufacturing and related costs of computer software and console games.
Manufacturers of the Company's computer software are located worldwide and are
readily available. Console CDs and cartridges are manufactured by the
respective video game console manufacturers, Sony, Sega and Nintendo, who often
require significant lead time to fulfill the Company's orders. Also included in
cost of goods sold is the royalty expense related to amounts due developers,
product owners and other royalty participants as a result of product sales.
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. Royalties and license fees prepaid in advance of
a product's release are capitalized. Upon a product's release, prepaid
royalties and license fees are charged to cost of goods sold based on the
contractual royalty rate. Management evaluates the future realization of
prepaid royalties quarterly and charges to cost of goods sold any amounts that
management deems unlikely to be amortized at the contract royalty rate through
product sales.
Product development costs are accounted for in accordance with accounting
standards which provide for the capitalization of certain software development
costs once technological feasibility is established. The capitalized costs are
then amortized on a straight-line basis over the estimated product life or on
the ratio of current revenues to total projected revenues, whichever is greater.
The software development costs that have been capitalized to date have been
immaterial.
As a result of the CentreSoft Management Buyout occurring in June 1996 and
the commencement therefrom of CentreSoft's operations (See Note 3 to the
Supplemental Consolidated Financial Statements contained in Exhibit 99.1
contained herein), results of operations for the fiscal year ended March 31,
1997 and the quarter ended June 30, 1997 versus the fiscal year ended March 31,
1996 and the quarter ended June 30, 1996, respectively, are not indicative of
comparative combined results for the Company combined with CentreSoft for the
two periods.
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total snet revenues
and also breaks down net revenues by territory, platform and channel:
1
YEARS ENDED MARCH 31, 1997
-------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- -------------------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 154,644 100.0% $ 61,393 100.0% $ 40,669 100.0%
Cost of goods sold 87,121 56.3 21,749 35.4 21,293 52.4
------------- -------- ------------- -------- ------------- --------
Gross profit 67,523 43.7 39,644 64.6 19,376 47.6
------------- -------- ------------- -------- ------------- --------
Operating expenses:
Product development 18,195 11.8 17,505 28.5 7,274 17.9
Sales and marketing 26,297 17.0 13,920 22.7 10,410 25.6
General and administrative 7,718 5.0 4,404 7.2 3,366 8.3
Amortization of intangible
assets 1,505 1.0 1,283 2.1 1,283 3.1
------------- -------- ------------- -------- ------------- --------
Total operating expenses 53,715 34.8 37,112 60.5 22,333 54.9
------------- -------- ------------- -------- ------------- --------
Operating income (loss) 13,808 8.9 2,532 4.1 (2,957) (7.3)
Other income:
Interest income, net 233 0.2 1,707 2.8 1,592 3.9
------------- -------- ------------- -------- ------------- --------
Income (loss) before income taxes 14,041 9.1 4,239 6.9 (1,365) (3.4)
Income tax provision (benefit) 4,815 3.1 (1,291) (2.1) 155 0.4
------------- -------- ------------- -------- ------------- --------
Net income (loss) $ 9,226 6.0% $ 5,530 9.0% $ (1,520) (3.7)%
------------- -------- ------------- -------- ------------- --------
------------- -------- ------------- -------- ------------- --------
NET REVENUES BY TERRITORY:
North America $ 64,184 41.5% $ 47,033 76.6% $ 29,492 72.5%
Europe 80,372 51.9 6,501 10.6 7,574 18.6
Japan 4,504 2.9 4,768 7.8 2,194 5.4
Australia and Pacific Rim 4,719 3.1 2,948 4.8 1,409 3.5
Latin America 865 0.6 143 0.2 - -
------------- -------- ------------- -------- ------------- --------
Total net revenues $ 154,644 100.0% $ 61,393 100.0% $ 40,669 100.0%
------------- -------- ------------- -------- ------------- --------
------------- -------- ------------- -------- ------------- --------
NET REVENUES BY PLATFORM:
Console $ 56,900 36.8% $ 5,161 8.4% $ 26,069 64.1%
PC 97,744 63.2 56,232 91.6 14,600 35.9
------------- -------- ------------- -------- ------------- --------
Total net revenues $ 154,644 100.0% $ 61,393 100.0% $ 40,669 100.0%
------------- -------- ------------- -------- ------------- --------
------------- -------- ------------- -------- ------------- --------
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 133,595 86.4% $ 46,192 75.2% $ 34,706 85.3%
OEM 13,935 9.0 10,728 17.5 2,637 6.5
Licensing, on-line and other 7,114 4.6 4,473 7.3 3,326 8.2
------------- -------- ------------- -------- ------------- --------
Total net revenues $ 154,644 100.0% $ 61,393 100.0% $ 40,669 100.0%
------------- -------- ------------- -------- ------------- --------
------------- -------- ------------- -------- ------------- --------
RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1996 AND 1997
NET REVENUES
Net revenues for the fiscal year ended March 31, 1997 increased 151.8% from
$61.4 million to $154.6 million from the same period last year. This increase
was attributable to a 36.6% increase in net revenues in North America from $47.0
million to $64.2 million, a 1,136.9% increase in net revenues in Europe from
$6.5 million to $80.4 million, and a 62.1% increase in net revenues in the
Australia and Pacific Rim territory from $2.9 million to $4.7 million. The
increase in net revenues in Europe was attributable to the CentreSoft
acquisition. Console net revenues increased 994.2% over the prior year to $56.9
million as a result of the CentreSoft acquisition and the initial release of
BLOOD OMEN: LEGACY OF KAIN (PlayStation), MECHWARRIOR 2 (PlayStation and
Saturn), POWER MOVE PRO WRESTLING (PlayStation) and TIME COMMANDO (PlayStation).
PC net revenues increased by 73.8% over the prior year to $97.7 million
primarily as a result of the initial release of MECHWARRIOR 2: MERCENARIES
(Windows 95), INTERSTATE '76 (Windows 95), TIME COMMANDO (Windows 95), and QUAKE
MISSION PACK NO. 1: SCOURGE OF ARMAGON (MS-DOS/Windows 95) and QUAKE MISSION
PACK NO. 2: DISSOLUTION OF ETERNITY (MS-DOS/Windows 95), continued sales of
MECHWARRIOR 2 (Windows 95/Macintosh), and the CentreSoft acquisition. North
America, Europe and Australia net revenues increased as a result of the
increases in PC and console revenues. Retailer/Reseller net revenues increased
189.2% from $46.2 million to $133.6 million primarily as a result of the
CentreSoft aquisition.
2
OEM net revenues increased 29.9% over the prior year to $13.9 million
primarily due to revenues related to enhanced 3-D versions of MECHWARRIOR 2
(Windows 95) and MECHWARRIOR 2: MERCENARIES (Windows 95/D3D). OEM net revenues
also included net revenues from INTERSTATE '76 (Windows 95), TIME COMMANDO
(Windows 95) and DVD versions of SPYCRAFT (Windows 95) and MUPPET TREASURE
ISLAND (Windows 95).
COST OF GOODS SOLD; GROSS PROFIT
Gross profit as a percentage of net revenues decreased to 43.7% for the
fiscal year ended March 31, 1997, from 64.6% for fiscal 1996. The decrease in
gross profit as a percentage of net revenues is due to the increase in the
sales mix of console net revenues versus PC net revenues and the increase in
net revenues derived from distribution arrangements as opposed to publishing
arrangements. Future determination of gross profit as a percentage of net
revenues will be driven primarily by the mix of new PC and console products
released by the Company during the applicable period, the mix of revenues
related to publishing arrangements versus distribution arrangements during
the applicable period, as well as the mix of internal versus external product
development, the latter in each case resulting in lower gross profit margins.
OPERATING EXPENSES
Product development expense for the year ended March 31, 1997 increased
4.0% from the same period last year from $17.5 million to $18.2 million while as
a percentage of revenues, product development expense decreased from 28.5% to
11.8%. The increase in product development expense amount was due to the
increased number of new products in development and the increased costs
associated with the enhanced content and new technologies incorporated into such
products. The impact of these increases, however, was partially offset by a
decrease in the number of products in development that contain live action
video, which generally have higher production costs. In addition, operating
expenses as a percentage of net revenues decreased due in part to the change in
mix of internally developed and externally developed products and increased
revenues from distribution arrangements. The costs of internal product
development are generally expensed as incurred prior to the product's release
and are therefore reflected in operating expenses; the costs of acquired
products are generally amortized against product unit sales or revenues
following the release of the product and are identified as royalty expenses and
are included in the cost of goods sold. During the 1997 fiscal year, products
developed internally by Activision Studios accounted for a smaller portion of
the overall number of new products released by the Company as compared to
the 1996 fiscal year.
Sales and marketing expenses for year ended March 31, 1997 increased 89.2%
from the same period last year, from $13.9 million to $26.3 million. As a
percentage of net revenues, sales and marketing expenses decreased from 22.7%
to 17.0%. The increase in sales and marketing expenses was due to increased
marketing and promotional activities necessary to release new titles in an
increasingly competitive environment and the Company's expansion of its European
and Japanese sales and marketing infrastructures. The decrease in sales and
marketing as a percentage of net revenues was the result of the CentreSoft
acquisition, whereby distributed products have less associated sales and
marketing expenses than published products.
General and administrative expenses for the year ended March 31, 1997
increased 75.0% from the same period last year, from $4.4 million to $7.7
million and decreased as a percentage of net revenues from 7.2% to 5.0%. The
increase in general and administrative expenses amount was primarily due to the
CentreSoft acquisition.
OTHER INCOME (EXPENSE)
Interest income, net decreased to $233,000 for the fiscal year ended March
31, 1997, from $1,707,000 for the fiscal year ended March 31, 1996, as a result
of interest expense incurred on CentreSoft debt prior to its acquisition by the
Company, as well as the result of lower average cash and cash equivalent
balances.
PROVISION FOR INCOME TAXES
The Company's effective tax rate was 34.3% for the fiscal year ended March
31, 1997. During the fiscal year ended March 31, 1996, the Company recognized a
tax benefit of $1.5 million due to a reduction in the Company's deferred tax
asset valuation allowance. The reduction reflected the remaining portion of the
Company's net operating loss carryforwards, the benefit from which could be
recognized in the Company's provision for income taxes. During the fiscal year
ended March 31, 1997, the Company recognized an additional $6.6 million
reduction to the Company's deferred tax asset valuation allowance, relating to
net operating loss carryforwards arising prior to the Company's reorganization,
which were credited to additional paid-in capital in shareholders' equity and
did not affect net income. The reductions in the valuation allowance during the
years ended March 31, 1997 and 1996 resulted principally from the Company's
assessment of the realizability of its deferred tax assets, based on recent
operating history, as well as an assessment that operations will continue to
generate taxable income. Realization of the deferred tax assets depends on the
continued generation of sufficient taxable income prior to expiration of tax
credits and loss carryforwards. Although realization is not assured, management
believes it is more likely than not
3
that the deferred tax asset of $5.7 million will be realized. The amount of
deferred tax assets considered realizable, however, could be reduced in the
future if estimates of future taxable income during the carryforward period are
reduced. The provision for income taxes for the year ended March 31, 1995
represents foreign taxes withheld.
NET INCOME
For the reasons noted above, net income increased to $9.2 million for the
year ended March 31, 1997, from $5.5 million for the year ended March 31, 1996.
RESULTS OF OPERATIONS - FISCAL YEARS ENDED MARCH 31, 1995 AND 1996
NET REVENUES
Net revenues for the fiscal year ended March 31, 1996 increased 51.0% from
$40.7 million to $61.4 million from the same period in the prior year. This
increase was attributable to a 59.3% increase in net revenues in North America
from $29.5 million to $47.0 million, a 118.2% increase in net revenues in Japan
from $2.2 million to $4.8 million, a 107.1% increase in net revenues in the
Australia and Pacific Rim territory from $1.4 million to $2.9 million, and was
partially offset by a 14.5% decrease in net revenues in Europe from $7.6 million
to $6.5 million. The overall increase in net revenues for fiscal 1996 was
primarily the result of an increase in the release of new PC titles. PC net
revenues increased by 284.9% over the prior year as a result of the initial
release of MECHWARRIOR 2 (MS-DOS and Windows 95), MECHWARRIOR 2 EXPANSION PACK:
GHOST BEAR'S LEGACY (MS-DOS), ZORK NEMESIS (MS-DOS/Windows 95), SPYCRAFT: THE
GREAT GAME (MS-DOS/Windows 95 and Macintosh), PITFALL: THE MAYAN ADVENTURE
(Windows 95), EARTHWORM JIM (Windows 95) and five MIGHTY MORPHIN POWER RANGER
titles (MS-DOS and Mac). The 80.1% decrease in console net revenues during the
fiscal year was due to the Company's strategic change in its business emphasis
from cartridge-based console systems to CD-based PC and console systems.
On-line, OEM, licensing and other revenues increased over the prior year
due to the Company's increased commitment to generating additional OEM revenues
and the availability of several additional titles for the OEM market. OEM and
licensing revenues during the 1996 fiscal year primarily were derived from sales
and licenses of MECHWARRIOR 2 (MS-DOS, Windows 95 and an enhanced 3-D ATI
version), EARTHWORM JIM (Windows 95), PITFALL: THE MAYAN ADVENTURE (Windows
95) and SHANGHAI: GREAT MOMENTS (MS-DOS and Windows 95).
North America, Japan and Australia net revenues increased as a result of
the increase in PC, OEM and licensing revenues discussed above. The decrease in
Europe net revenues was attributable to a change from the publishing by the
Company of its products under an exclusive guaranteed distribution agreement in
fiscal 1995 to the publishing by the Company of its products directly to
retailers and resellers in fiscal 1996, combined with the change of the
Company's business emphasis from cartridge-based console systems to CD-based PC
systems.
COST OF GOODS SOLD; GROSS PROFIT
Gross profit as a percentage of net revenues increased to 64.6% for the
fiscal year ended March 31, 1996, from 47.6% for the fiscal year ended March 31,
1995, as a result of an increase in PC CD-based net revenues. Net revenues from
CD-based PC products generally yield a higher gross profit margin than net
revenues from console products as a result of the costs of goods sold
attributable to such PC products. The increase in gross profit also was due to
the increase in on-line, OEM, licensing and other revenues, which also yield
higher gross profit margins.
OPERATING EXPENSES
Total operating expenses for the 1996 fiscal year increased 66.4% from
$22.3 million to $37.1 million and increased as a percentage of net revenues
from 54.9% to 60.5%. Product development expenses increased 139.7% from $7.3
million to $17.5 million and increased as a percentage of revenues from 17.9% to
28.5%. Product development expenses increased both in amount and as a
percentage of net revenues due to the continued growth of the Company's product
development departments, the increased number of products in product
development, and the increased costs associated with enhanced production content
and new technologies incorporated into such products.
Sales and marketing expenses increased 33.7% from $10.4 million to $13.9
million, but decreased as a percentage of net revenues from 25.6% to 22.7%.
The increase in amount of sales and marketing expenses was the result of the
marketing and promotional activity related to newly released titles, while the
decrease in sales and marketing expenses as a percentage of revenues was due to
the increase in net revenues.
General and administrative expenses increased 29.4% from $3.4 million to
$4.4 million, but decreased as a percentage of net revenues from 8.3% to 7.2%.
The increase in the amount of general and administrative expenses was due to an
increase in headcount related expenses.
OTHER INCOME (EXPENSE)
Interest income increased to $1,707,000 for the fiscal year ended March 31,
1996, from $1,592,000 for the fiscal year ended March 31, 1995, as a result of
higher yields earned on cash and cash equivalents.
NET INCOME (LOSS)
For the reasons noted above, net income increased to $5.5 million for the
year ended March 31, 1996 from a net loss of $1.5 million for the year ended
March 31, 1995.
4
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on
numerous factors, several of which are not under the Company's control. See
"Risk Factors -- Fluctuations in Quarterly Results; Future Operating Results
Uncertain; Seasonality." Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance.
The following table is a comparative breakdown of the Company's quarterly
results for the immediately preceding eight quarters (amounts in thousands,
except per share data):
Quarter Ended
---------------------------------------------------------------------------
June. Sept. Dec. March June Sept. Dec. March
30, 30, 31, 31, 30, 30, 31, 31,
1995 1995 1995 1996 1996 1996 1996 1997
---- ---- ---- ---- ---- ---- ---- -----
Net revenues $3,319 $18,448 $17,578 $21,648 $ 7,021 $29,557 $60,480 $57,586
Gross profit 1,765 12,105 10,447 15,327 5,512 15,689 24,295 22,027
Operating income (loss) (6,014) 2,366 1,573 4,607 (4,226) 2,137 8,288 7,609
Net income (loss) (5,528) 2,765 1,948 6,345 (2,631) 1,421 5,320 5,116
Earnings (loss) per share $(0.36) $ 0.17 $ 0.12 $ 0.39 $ (0.17) $ 0.07 $ 0.29 $ 0.27
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $3.9 million from $25.3
million at March 31, 1996 to $21.4 million at March 31, 1997. Approximately
$4.8 million in cash and cash equivalents were used in operating activities
during the year ended March 31,1997. Such operating uses of cash were primarily
the result of increases in accounts receivable, inventories and prepaid software
and license royalties. Such increases were offset partially by an increase in
accounts payable.
In addition, approximately $8.1 million in cash and cash equivalents
were used in investing activities. Capital expenditures totaled
approximately $4.2 million. In addition, $3.9 million was used in the
CentreSoft management buyout, which occurred in June 1996, prior to
CentreSoft's acquisition by the Company.
Sources of cash from financing activities totaled $8.8 million for the year
ended March 31, 1997 which included $2.2 million in proceeds from exercise of
employee stock options and $1.6 million in borrowings on lines of credit.
In October 1997, the Company increased its revolving credit and letter of
credit facility (the "Facility") with its bank (the "Bank") from $5.0 million to
$12.5 million. The Facility provides the Company the ability to borrow funds
and issue letters of credit against eligible domestic accounts receivable up to
$12.5 million. The Facility expires in September 1998. In addition, in
September 1997, the Company entered into a $2.0 million line of credit agreement
(the "Asset Line") with the Bank; drawings under the Asset Line are structured
with 36 month repayment terms and the Asset Line of credit expires in September
1998. Borrowings under the Asset Line totaled $1.4 million as of September 30,
1997 with an effective lease borrowing rate of 8.3%.
In June 1996, CentreSoft entered into a revolving credit facility (the
"CentreSoft Facility") with its bank (the "CentreSoft Bank") for
approximately $8 million. The CentreSoft Facility can be used for
CentreSoft's working capital requirements. The CentreSoft Facility expires in
June 2000. Borrowings under the CentreSoft Facility totalled $1.6 million as
of March 31, 1997, with an effective borrowing rate of LIBOR + 3.5%.
5
The Company's principal source of liquidity was $21.4 million in cash and
cash equivalents. The Company uses its working capital to finance ongoing
operations, including acquisitions of inventory and equipment, to fund the
development, production, marketing and selling of new products, and to obtain
intellectual property rights for future products from third parties.
Management believes that the Company's existing cash, together with the net
proceeds of the Convertible Notes, and the proceeds available from the
Facility, Asset Line and the CentreSoft Facility, will be sufficient to meet
the Company's operational requirements for the forseeable future.
In December 22, 1997, the Company completed a private placement of $60
million in convertible subordinated notes ("Convertible Notes"). The
Convertible Notes have a 6.75% annual interest rate, are due in January 2005
and are convertible at any time prior to maturity into shares of the
Company's Common Stock at $18.875 per share. Net proceeds from the issuance
of the Convertible Notes was approximately $57.9 million. The Company intends
to use such net proceeds to repay outstanding balances under its bank lines
of credit, if any, to fund product development, to acquire third party
publishing and distribution rights, to expand the Company's direct sales and
marketing capabilities and for general corporate purposes. In addition, the
Company may, when and if the opportunity arises, use an unspecified portion
of the net proceeds to acquire businesses, products or technologies that it
believes are of strategic importance. Pending such uses, the Company intends
to invest the net proceeds in short-term money market and other market rate,
investment-grade instruments.
The Company's management currently believes that inflation has not had
a material impact on continuing operations.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion
("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities
that could share in the earnings of the Company, similar to fully diluted EPS
under APB No. 15. The Statement requires dual presentation of basic and diluted
EPS by entities with complex capital structures. The Company will adopt SFAS
No. 128 for the financial statements for the quarter ended December 31, 1997.
The Company has determined the following impact of the implementation of SFAS
No. 128:
Fiscal Year ended March 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
Earnings (loss) per share as reported $ 0.50 $ 0.34 $ (0.10)
Pro forma basic earnings per share 0.52 0.36 (0.10)
Pro forma diluted earnings per share 0.50 0.34 (0.10)
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's
provisions to conclude how it will present comprehensive income it its financial
statements, and has not yet determined the amounts to be disclosed. The Company
will adopt SFAS No. 130 effective April 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the new Statement's provisions to determine the additional
disclosures required in its financial statements, if any. The Company will
adopt SFAS No. 131 effect April 1, 1998.
RISK FACTORS
In connection with the Private Securities Litigation Reform Act of 1995
(the "Litigation Reform Act"), the Company is hereby disclosing certain
cautionary information to be used in connection with written materials
(including this Report on Form 8-K) 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. The discussion
below highlights some of the more important risks identified by management,
but should not be assumed to be the only factors that could affect future
performance. 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.
6
FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS UNCERTAIN;
SEASONALITY. The Company's quarterly operating results have varied
significantly in the past and will likely vary significantly in the future
depending on numerous factors, several of which are not under the Company's
control. Such factors include, but are not limited to, demand for the Company's
products and those of its competitors, the size and rate of growth of the
interactive entertainment software market, development and promotional expenses
relating to the introduction of new products, changes in computing platforms,
product returns, the timing of orders from major customers, delays in shipment,
the level of price competition, the timing of product introduction by the
Company and its competitors, product life cycles, software defects and other
product quality problems, the level of the Company's international revenues, and
personnel changes. Products are generally shipped as orders are received, and
consequently, the Company operates with little or no backlog. Net revenues in
any quarter are, therefore, substantially dependent on orders booked and shipped
in that quarter.
The Company's expenses are based in part on the Company's product
development and marketing budgets. Product development and marketing costs
generally are expensed as incurred, which is often long before a product ever
is released. In addition, a large portion of the Company's expenses are
fixed. As the Company increases its development and marketing activities,
current expenses will increase and, if sales from previously released
products are below expectations, net income is likely to be
disproportionately affected.
Due to all of the foregoing, revenues and operating results for any
future quarter are not predictable with any significant degree of accuracy.
Accordingly, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied
upon as indications of future performance.
The Company's business has experienced and is expected to continue to
experience significant seasonality, in part due to consumer buying patterns.
Net revenues and net income typically are significantly higher during the
fourth calendar quarter, due primarily to the increased demand for consumer
software during the year-end holiday buying season. Net revenues and net
income in other quarters are generally lower and vary significantly as a
result of new product introductions and other factors. For example, the
Company's net revenues in its last six quarters were $57.6 million for the
quarter ended March 31, 1997, $60.5 million for the quarter ended December 31,
1996, $29.6 million for the quarter ended September 30, 1996, $7.0 million for
the quarter ended June 30, 1996, $21.6 million for the quarter ended March 31,
1996 and $17.6 million for the quarter ended December 31, 1995. The Company's
net income (loss) for the last six quarters were $5.1 million for the quarter
ended March 31, 1997, $5.3 million for the quarter ended December 31, 1996,
$1.4 million for the quarter ended September 30, 1996, $(2.6 million) for the
quarter ended June 30, 1996, $6.3 million for the quarter ended March 31, 1996
and $1.9 million for the quarter ended December 31, 1995. The Company expects
its net revenue and operating results to continue to reflect significant
seasonality.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; PRODUCT DELAYS. The Company's
future success depends on the timely introduction of successful new products
to replace declining revenues from older products. If, for any reason,
revenues from new products were to fail to replace declining revenues from
older products, the Company's business, operating results and financial
condition would be materially and adversely affected. In addition, the
Company believes that the competitive factors in the interactive
entertainment software marketplace create the need for higher quality,
distinctive products that incorporate increasingly sophisticated effects and
the need to support product releases with increased marketing, resulting in
higher development, acquisition and marketing costs. The lack of market
acceptance or significant delay in the introduction of, or the presence of a
defect in, one or more products could have a material adverse effect on the
Company's business, operating results and financial condition, particularly
in view of the seasonality of the Company's business. Further, because a
large portion of a product's revenue generally is associated with initial
shipments, the delay of a product introduction expected near the end of a
fiscal quarter may have a material adverse effect on operating results for
that quarter.
The Company has, in the past, experienced significant delays in the
introduction of certain new products. The timing and success of interactive
entertainment products remain unpredictable due to the complexity of product
development, including the uncertainty associated with technological
developments. Although the Company has implemented substantial development
controls, there likely will be delays in developing and introducing new
products in the future. There can be no assurance that new products will be
introduced on schedule, or at all, or that they will achieve market
acceptance or generate significant revenues.
RELIANCE ON THIRD PARTY DEVELOPERS AND INDEPENDENT CONTRACTORS. The
percentage of products published by the Company that are developed by
independent third party developers has increased over the last several fiscal
years. From time to time, the Company also utilizes independent contractors
for certain aspects of internal product development and production. The
Company has less control over the scheduling and the quality of work by
third party developers and independent contractors than that of its own
employees. A delay in the work performed by third party developers and
independent contractors or poor quality of such work may result in product
delays. Although the Company intends to continue to rely in part on products
that are developed primarily by its own employees, the Company's ability to
grow its business and its future operating results will depend, in significant
7
part, on the Company's continued ability to maintain relationships with skilled
third party developers and independent contractors. There can be no assurance
that the Company will be able to maintain such relationships.
UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES. The market
for entertainment systems and software has been characterized by shifts in
consumer preferences and short product life cycles. Consumer preferences for
entertainment software products are difficult to predict and few
entertainment software products achieve sustained market acceptance. There
can be no assurance that new products introduced by the Company will achieve
any significant degree of market acceptance, that such acceptance will be
sustained for any significant period, or that product life cycles will be
sufficient to permit the Company to recoup development, marketing and other
associated costs. In addition, if market acceptance is not achieved, the
Company could be forced to accept substantial product returns to maintain its
relationships with retailers and its access to distribution channels.
Failure of new products to achieve or sustain market acceptance or product
returns in excess of the Company's expectations would have a material adverse
effect on the Company's business, operating results and financial condition.
PRODUCT CONCENTRATION; DEPENDENCE ON HIT PRODUCTS. A key aspect of the
Company's strategy is to focus its development and acquisition efforts on
selected, high quality entertainment software products. The Company derives a
significant portion of its revenues from a relatively small number of high
quality entertainment software products released each year, and many of these
products have substantial production or acquisition costs and marketing
budgets. During fiscal 1996 and 1997, one title accounted for approximately
49% and 13%, respectively, of the Company's consolidated net revenues. In
addition, during fiscal 1997, one other title accounted for approximately 9%
of the Company's consolidated net revenues. The Company anticipates that a
limited number of products will continue to produce a disproportionate amount
of revenues. Due to this dependence on a limited number of products, the
failure of one or more of the Company's principal new releases to achieve
anticipated results may have a material adverse effect on the Company's
business, operating results and financial condition.
The Company's strategy also includes as a key component developing and
releasing products that have franchise value, such that sequels, enhancements
and add-on products can be released over time, thereby extending the life of
the property in the market. While the focus on franchise properties, if
successful, results in extending product life cycles, it also results in the
Company depending on a limited number of titles for its revenues. There can
be no assurance that the Company's existing franchise titles can continue to
be exploited as successfully as in the past. In addition, new products that
the Company believes will have potential value as franchise properties may
not achieve market acceptance and therefore may not be a basis for future
releases.
INDUSTRY COMPETITION; COMPETITION FOR SHELF SPACE. The interactive
entertainment software industry is intensely competitive. Competition in the
industry is principally based on product quality and features, the
compatibility of products with popular platforms, company or product line
brand name recognition, access to distribution channels, marketing
effectiveness, reliability and ease of use, price and technical support.
Significant financial resources also have become a competitive factor in the
entertainment software industry, principally due to the substantial cost of
product development and marketing that is required to support best-selling
titles. In addition, competitors with broad product lines and popular titles
typically have greater leverage with distributors and other customers who may
be willing to promote titles with less consumer appeal in return for access
to such competitor's most popular titles.
The Company's competitors range from small companies with limited
resources to large companies with substantially greater financial, technical
and marketing resources than those of the Company. The Company's competitors
currently include Electronic Arts, Lucas Arts, Microsoft, Sega, Nintendo,
Sony, CUC, GT Interactive, Broderbund, Midway, Interplay, Virgin and Eidos,
among many others.
As competition increases, significant price competition, increased
production costs and reduced profit margins may result. Prolonged price
competition or reduced demand would have a material adverse effect on the
Company's business, operating results and financial condition. There can be
no assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by the
Company will not have a material adverse effect on its business, operating
results and financial condition.
Retailers typically have a limited amount of shelf space, and there is
intense competition among entertainment software producers for adequate
levels of shelf space and promotional support from retailers. As the number
of entertainment software products increase, the competition for shelf space
has intensified, resulting in greater leverage for retailers and distributors
in negotiating terms of sale, including price discounts and product return
policies. The Company's products constitute a relatively small percentage of
a retailer's sales volume, and there can be no assurance that retailers will
continue to purchase the Company's products or promote the Company's products
with adequate levels of shelf space and promotional support.
DEPENDENCE ON DISTRIBUTORS; RISK OF CUSTOMER BUSINESS FAILURE; PRODUCT
RETURNS. Certain mass market retailers have established exclusive buying
relationships under which such retailers will buy consumer software only
8
from one intermediary. In such instances, the price or other terms on which the
Company sells to such retailers may be adversely affected by the terms imposed
by such intermediary, or the Company may be unable to sell to such retailers on
terms which the Company deems acceptable. The loss of, or significant reduction
in sales attributable to, any of the Company's principal distributors or
retailers could materially adversely affect the Company's business, operating
results and financial condition.
Distributors and retailers in the computer industry have from time to
time experienced significant fluctuations in their businesses and there have
been a number of business failures among these entities. The insolvency or
business failure of any significant distributor or retailer of the Company's
products could have a material adverse effect on the Company's business,
operating results and financial condition. Sales are typically made on
credit, with terms that vary depending upon the customer and the nature of
the product. The Company does not hold collateral to secure payment.
Although the Company has obtained insolvency risk insurance to protect
against any bankruptcy, insolvency or liquidation that occur to its
customers, such insurance contains a significant deductible as well as a
co-payment obligation, and the policy does not cover all instances of
non-payment. In addition, the Company maintains a reserve for uncollectible
receivables that it believes to be adequate, but the actual reserve that is
maintained may not be sufficient in every circumstance. As a result of the
foregoing, a payment default by a significant customer could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company also is exposed to the risk of product returns from
distributors and retailers. Although the Company provides reserves for
returns that it believes are adequate, and although the Company's agreements
with certain of its customers place certain limits on product returns, the
Company could be forced to accept substantial product returns to maintain its
relationships with retailers and its access to distribution channels.
Product returns that exceed the Company's reserves could have a material
adverse effect on the Company's business, operating results and financial
condition.
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The consumer software
industry is undergoing rapid changes, including evolving industry standards,
frequent new platform introductions and changes in consumer requirements and
preferences. The introduction of new technologies, including operating
systems such as Microsoft's Windows 95, technologies that support
multi-player games, and new media formats such as on-line delivery and
digital video disks ("DVD"), could render the Company's previously released
products obsolete or unmarketable. The development cycle for products
utilizing new operating systems, microprocessors or formats may be
significantly longer than the Company's current development cycle for
products on existing operating systems, microprocessors and formats and may
require the Company to invest resources in products that may not become
profitable. There can be no assurance that the mix of the Company's future
product offerings will keep pace with technological changes or satisfy
evolving consumer preferences, or that the Company will be successful in
developing and marketing products for any future operating system or format.
Failure to develop and introduce new products and product enhancements in a
timely fashion could result in significant product returns and inventory
obsolescence and could have a material adverse effect on the Company's
business, operating results and financial condition.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS; RISK
OF LITIGATION. The Company holds copyrights on its products, manuals,
advertising and other materials and maintains trademark rights in the Company
name, the ACTIVISION logo, and the names of products owned by the Company.
The Company regards its software as proprietary and relies primarily on a
combination of trademark, copyright and trade secret laws, employee and
third-party nondisclosure agreements, and other methods to protect its
proprietary rights. Unauthorized copying is common within the software
industry, and if a significant amount of unauthorized copying of the
Company's products were to occur, the Company's business, operating results
and financial condition could be adversely affected. There can be no
assurance that third parties will not assert infringement claims against the
Company in the future with respect to current or future products. As is
common in the industry, from time to time the Company receives notices from
third parties claiming infringement of intellectual property rights of such
parties. The Company investigates these claims and responds as it deems
appropriate. Any claims or litigation, with or without merit, could be
costly and could result in a diversion of management's attention, which could
have a material adverse effect on the Company's business, operating results
and financial condition. Adverse determinations in such claims or litigation
could also have a material adverse effect on the Company's business,
operating results and financial condition.
Policing unauthorized use of the Company's products is difficult, and
while the Company is unable to determine the extent to which piracy of its
software products exists, software piracy can be expected to be a persistent
problem. In selling its products, the Company relies primarily on "shrink
wrap" licenses that are not signed by licensees and, therefore, may be
unenforceable under the laws of certain jurisdictions. Further, the Company
enters into transactions in countries where intellectual property laws are
not well developed or are poorly enforced. Legal protections of the
Company's rights may be ineffective in such countries.
9
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent on the performance and continued service of its senior
management and certain key employees. Competition for highly skilled
employees with technical, management, marketing, sales, product development
and other specialized training is intense, and there can be no assurance that
the Company will be successful in attracting and retaining such personnel.
Specifically, the Company may experience increased costs in order to attract
and retain skilled employees. Although the Company generally enters into term
employment agreements with its skilled employees and other key personnel,
there can be no assurance that such employees will not leave the Company or
compete against the Company. The Company's failure to attract or retain
qualified employees could have a material adverse effect on the Company's
business, operating results and financial condition.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS.
International sales and licensing accounted for 28%, 23% and 58% of the
Company's total revenues in the fiscal years 1995, 1996 and 1997, respectively.
The Company intends to continue to expand its direct and indirect sales,
marketing and localization activities worldwide. Such expansion will require
significant management time and attention and financial resources in order to
develop adequate international sales and support channels. There can be no
assurance, however, that the Company will be able to maintain or increase
international market demand for its products. International sales are
subject to inherent risks, including the impact of possible recessionary
environments in economies outside the United States, the costs of
transferring and localizing products for foreign markets, longer receivable
collection periods and greater difficulty in accounts receivable collection,
unexpected changes in regulatory requirements, difficulties and costs of
staffing and managing foreign operations, and political and economic
instability. There can be no assurance that the Company will be able to
sustain or increase international revenues or that the foregoing factors will
not have a material adverse effect on the Company's future international
revenues and, consequently, on the Company's business, operating results and
financial condition. The Company currently does not engage in currency
hedging activities. Although exposure to currency fluctuations to date has
been insignificant, there can be no assurance that fluctuations in currency
exchange rates in the future will not have a material adverse impact on
revenues from international sales and licensing and thus the Company's
business, operating results and financial condition.
RISK OF SOFTWARE DEFECTS. Software products such as those offered by
the Company frequently contain errors or defects. Despite extensive product
testing, in the past the Company has released products with defects and has
discovered software errors in certain of its product offerings after their
introduction. In particular, the PC hardware environment is characterized by
a wide variety of non-standard peripherals (such as sound cards and graphics
cards) and configurations that make pre-release testing for programming or
compatibility errors very difficult and time-consuming. There can be no
assurance that, despite testing by the Company, errors will not be found in
new products or releases after commencement of commercial shipments,
resulting in a loss of or delay in market acceptance, which could have a
material adverse effect on the Company's business, operating results and
financial condition.
RISK ASSOCIATED WITH ACQUISITIONS. The Company intends to integrate the
operations of its recently acquired CentreSoft and NBG subsidiaries with its
previously existing European operations. This process, as well as the
process of managing two significant new operations, will require substantial
management time and effort and could divert the attention of management from
other matters. In addition, there is a risk of loss of key employees,
customers and vendors of the newly acquired operations as well as existing
operations as this process is implemented. There is no assurance that the
Company will be successful in integrating these operations or that, if the
operations are combined, there will not be adverse effects on its business.
Consistent with its strategy to enhance distribution and product
development capabilities, the Company intends to continue to pursue
acquisitions of companies and intellectual propertly rights and other assets
that can be acquired on acceptable terms and which the Company believes can
be operated or exploited profitably. Some of these acquisitions could be
material in size and scope. While the Company will continually be searching
for appropriate acquisition opportunities, there can be no assurance that the
Company will be successful in identifying suitable acquisitions. If any
potential acquisition opportunities are identified, there can be no assurance
that the Company will consummate such acquisitions or if any such acquisition
does occur, that it will be successful in enhancing the Company's business or
be accretive to the Company's earnings. As the entertainment software
business continues to consolidate, the Company faces significant competition
in seeking acquisitions and may in the future face increased competition for
acquisition opportunities, which may inhibit its ability to complete suitable
transactions. Future acquisitions could also divert substantial management
time, could result in short term reductions in earnings or special
transaction or other charges and may be difficult to integrate with existing
operations or assets.
The Company may, in the future, issue additional shares of Common Stock
in connection with one or more acquisitions, which may dilute its
shareholders, including investors in the offering. Additionally, with
respect to most of its future acquisitions, the Company's shareholders may
not have an opportunity to review the financial statements of the entity
being acquired or to vote on such acquisitions.
RISK OF CENTRESOFT VENDOR DEFECTIONS; VENDOR CONCENTRATION. The
Company's recently acquired CentreSoft subsidiary performs software
distribution services in the United Kingdom and, via export, in other
European territories for a variety of entertainment software publishers, many
of which are competitors of the Company. These services are generally
performed under limited term contracts some of which provide for cancellation
in the event of a change of control. While the Company expects to use
reasonable efforts to retain these vendors, there can be no assurance that
the Company will be successful in this regard. The cancellation or
non-renewal of one or more of these contracts could have a material adverse
effect on the Company's business, operating results and financial condition.
Three of CentreSoft's vendors accounted for 17%, 6% and 5%, respectively, of
CentreSoft's net revenues in fiscal year 1997.
10
Exhibit 99.4
ACTIVISION, INC. AND SUBSIDIARIES
Supplemental Condensed Consolidated Balance Sheets
(in thousands except share data)
June 30, March 31,
1997 1997
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,894 $ 21,358
Accounts receivable, net of allowances of $6,194
and $7,674 respectively 32,836 46,633
Inventories, net 8,888 8,283
Prepaid software and license royalties 8,211 6,559
Other assets 2,928 1,222
Deferred income taxes 4,612 1,493
----------------- -----------------
Total current assets 73,369 85,548
Property and equipment, net 8,251 5,990
Deferred Income Taxes 4,665 4,212
Other assets 267 255
Excess purchase price over
identifiable assets acquired, net 23,911 23,749
----------------- -----------------
Total assets $ 110,463 $ 119,754
----------------- -----------------
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ - $ 1,600
Current portion of loan stock debentures 683 683
Accounts payable 17,336 19,291
Accrued expenses 10,861 12,136
----------------- -----------------
Total current liabilities 28,880 33,710
Loan stock debentures 2,533 2,533
Other liabilities 28 31
----------------- -----------------
Total liabilities 31,441 36,274
----------------- -----------------
Commitments and contingencies
Redeemable preferred stock 1,286 1,286
Convertible preferred stock 214 214
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 18,307,921 and 17,113,077 shares issued
and 17,807,921 and 16,613,077 outstanding , respectively - -
Additional paid-in capital 80,600 78,752
Retained earnings 2,149 8,664
Cumulative foreign currency translation 51 (158)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
----------------- -----------------
Total shareholders' equity 77,522 81,980
----------------- -----------------
Total liabilities and shareholders' equity $ 110,463 $ 119,754
----------------- -----------------
----------------- -----------------
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
1
ACTIVISION, INC. AND SUBSIDIARIES
Supplemental Condensed Consolidated Statements of Operations
For the quarters ended June 30,
(in thousands except loss per share data)
(Unaudited)
1997 1996
----------------- ----------------
Net revenues $ 26,514 $ 7,021
Cost of goods sold 20,276 1,509
----------------- ----------------
Gross profit 6,238 5,512
----------------- ----------------
Operating expenses:
Product development 6,368 4,547
Sales and marketing 6,019 3,641
General and administrative 2,128 1,229
Amortization of intangible assets 375 321
----------------- ----------------
Total operating expenses 14,890 9,738
----------------- ----------------
Operating loss (8,652) (4,226)
Other income (expense):
Interest, net (32) 312
----------------- ----------------
Loss before income tax benefit (8,684) (3,914)
Income tax benefit (3,270) (1,283)
----------------- -----------------
Net loss $ (5,414) $ (2,631)
----------------- -----------------
----------------- -----------------
Net loss per common share $ (0.30) $ (0.17)
----------------- -----------------
----------------- -----------------
Number of shares used in computing
net loss per common share 18,011 15,133
----------------- -----------------
----------------- -----------------
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
2
ACTIVISION, INC. AND SUBSIDIARIES
Supplemental Condensed Consolidated Statements of Cash Flows
For the quarters ended June 30,
(in thousands)
Increase (Decrease) in Cash
(UNAUDITED)
1997 1996
--------- ---------
Cash flows from operating activities:
Net loss $ (5,414) $ (2,631)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (3,571) (1,257)
Depreciation and amortization 1,189 762
Change in assets and liabilities:
Accounts receivable 13,797 6,183
Inventories (605) (464)
Prepaid software and license royalties (1,652) (1,964)
Other current assets (1,706) (453)
Other assets (12) 1
Accounts payable (1,955) (1,650)
Accrued liabilities (1,275) (277)
Other liabilities (3) -
--------- ---------
Net cash used in operating activities $ (1,207) $ (1,750)
--------- ---------
Cash flows from investing activities:
Purchase acquisition (246) -
Capital expenditures (3,055) (1,089)
Adjustment for effect of poolings on prior periods (782) -
Other (161) -
--------- ---------
Net cash used in investing activities (4,244) (1,089)
--------- ---------
Cash flows from financing activities:
Repayments of notes payable to bank (1,600) -
Proceeds from issuance and exercise of common
stock options and warrants 1,414 332
Dividends paid (36) -
--------- ---------
Net cash provided by financing activities (222) 332
--------- ---------
Effect of exchange rate changes on cash 209 33
--------- ---------
Net decrease in cash and cash equivalents (5,464) (2,474)
--------- ---------
Cash and cash equivalents at beginning of period 21,358 25,288
--------- ---------
Cash and cash equivalents at end of period $ 15,894 $ 22,814
--------- ---------
--------- ---------
NON-CASH INVESTING ACTIVITIES:
Stock issued in exchange for licensing rights - $ 822
--------- ---------
--------- ---------
Stock issued in purchase acquisition $ 136 -
--------- ---------
--------- ---------
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
3
ACTIVISION, INC.
Notes to Supplemental Condensed Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying supplemental condensed consolidated financial statements
include the accounts of Activision, Inc. and its subsidiaries. The
information furnished is unaudited and reflects all adjustments which, in
the opinion of management, are necessary to provide a fair statement of the
results for the interim periods presented. The financial statements should
be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1997 and
the Company's supplemental financial statements contained in Exhibit 99.1
herein.
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform with the current period's presentation. These
reclassifications had no impact on previously reported working capital or
results of operations.
2. INVENTORIES
Inventories comprise (amounts in thousands):
June 30, March 31,
1997 1997
--------- ---------
Finished goods $ 7,448 $ 7,121
Purchased parts and components 1,440 1,162
--------- ---------
$ 8,888 $ 8,283
--------- ---------
--------- ---------
4
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE QUARTERS ENDED JUNE 30, 1997 AND 1996
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 EXHIBIT 99.3 "SUPPLEMENTAL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" - "RISK FACTORS" CONTAINED IN THIS CURRENT REPORT ON FORM 8-K.
ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY
FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND UNCERTAINTIES.
IN ADDITION, AN OVERVIEW OF THE COMPANY AND ITS OPERATIONS ALSO IS DISCUSSED IN
EXHIBIT 99.3 "SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" CONTAINED IN THIS CURRENT
REPORT ON FORM 8-K.
The following table sets forth certain consolidated supplemental statements of
operations data for the periods indicated and sets forth a break down of net
revenues by territory, platform and channel:
QUARTERS ENDED JUNE 30,
----------------------------------------------------------
1997 1996
-------------------------- -------------------------
AS A % AS A %
OF NET OF NET
AMOUNT REVENUES AMOUNT REVENUES
------ -------- ------ --------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 26,514 100.0% $ 7,021 100.0%
Cost of goods sold 20,276 76.5 1,509 21.5
------------- -------- ------------- --------
Gross profit 6,238 23.5 5,512 78.5
------------- -------- ------------- --------
Operating expenses:
Product development 6,368 24.0 4,547 64.8
Sales and marketing 6,019 22.7 3,641 51.9
General and administrative 2,128 8.0 1,229 17.5
Amortization of intangible assets 375 1.4 321 4.6
------------- -------- ------------- --------
Total operating expenses 14,890 56.1 9,738 138.8
------------- -------- ------------- --------
Operating income (loss) (8,652) (32.6) (4,226) (60.2)
Other income:
Interest income (32) (0.1) 312 4.4
------------- -------- ------------- --------
Income (loss) before income taxes (8,684) (32.7) (3,914) (55.8)
Income tax provision (benefit) (3,270) (12.3) (1,283) (18.3)
------------- -------- ------------- --------
Net income (loss) $ (5,414) (20.4)% $ (2,631) (37.5)%
------------- -------- ------------- --------
------------- -------- ------------- --------
NET REVENUES BY TERRITORY:
North America $ 4,975 18.8% $ 5,473 78.0%
Europe 20,322 76.6 723 10.3
Japan 174 0.7 284 4.0
Australia and Pacific Rim 765 2.9 470 6.7
Latin America 278 1.0 71 1.0
------------- -------- ------------- --------
Total net revenues $ 26,514 100.0% $ 7,021 100.0%
------------- -------- ------------- --------
------------- -------- ------------- --------
NET REVENUES BY PLATFORM:
Console $ 10,705 40.4% $ 53 0.8%
PC 15,809 59.6 6,968 99.2
------------- -------- ------------- --------
Total net revenues $ 26,514 100.0% $ 7,021 100.0%
------------- -------- ------------- --------
------------- -------- ------------- --------
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 21,541 81.3% $ 2,614 37.2%
OEM 3,771 14.2 3,455 49.2
Licensing, on-line and other 1,202 4.5 952 13.6
------------- -------- ------------- --------
Total net revenues $ 26,514 100.0% $ 7,021 100.0%
------------- -------- ------------- --------
------------- -------- ------------- --------
6
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the quarter ended June 30, 1997 increased 278.6% from
$7.0 million to $26.5 million from the same period last year. Significant
product releases for the retailer/reseller channel during the quarter ended
June 30, 1997 included TWINSEN'S ODYSSEY (Windows 95) and Mercenaries
(Windows 95-3DFX version). The increase in net revenues was primarily due to
a 2800.0% increase in net revenues in Europe from $723,000 to $20.3 million.
Such increase was related to the acquisition of CentreSoft. North America
net revenues decreased 9.1% from $5.5 million to 5.0 million. Such decrease
was attributable to an increase in the provision for sales returns and
mark-downs related to a slow-down in retail sell-through of recently released
PC and Sony Playstation titles. Net revenues from distribution arrangements
in 1997 were $18.2 million or 69.6% of net revenues; net revenues from
distribution arrangements were not material in 1996. OEM net revenues
increased 8.6% from $3.5 million to $3.8 million, while licensing, on-line
and other net revenues increased 20.0% from $1.0 million to $1.2 million.
COST OF GOODS SOLD; GROSS PROFIT
For the quarter ended June 30, 1997, gross profit as a percentage of net
revenues was 23.5% compared to 78.5% for the quarter ended June 30, 1996.
The decrease in gross profit as a percentage of net revenues is due to the
increase in the sales mix of console net revenues versus PC net revenues and
the increase in net revenues derived from distribution arrangements as
opposed to publishing arrangements. Future determination of gross profit as a
percentage of net revenues will be driven primarily by the mix of new PC and
console products released by the Company during the applicable period, the
mix of revenues related to publishing arrangements versus distribution
arrangements during the applicable period, as well as the mix of internal
versus external product development, the latter in each case resulting in
lower gross profit margins.
OPERATING EXPENSES
Product development expenses for the quarter ended June 30, 1997
increased 42.2% from $4.5 million to $6.4 million. This increase was due to an
overall increase in production costs associated with 3-D programming and console
programming technology and artwork, generally higher average development costs
for products, an increase in the number of products to be localized for foreign
territories and an increase in the overall number of products in development.
Sales and marketing expenses increased 66.7% from the same period last year,
from $3.6 million to $6.0 million, but decreased as a percentage of net revenues
from 51.9% to 22.7%. The decrease in sales and marketing as a percentage of net
revenues was the result of the CentreSoft acquisition, whereby distributed
products have less associated sales and marketing expenses than published
products. General and administrative expenses increased 75.0% from the same
period last year from $1.2 million to $2.1 million as a result of the CentreSoft
acquisition and in increase in head-count related expenses but decreased as a
percentage of net revenues from 17.5% to 8.0% as a result of the increase in
net revenues.
OTHER INCOME (EXPENSE)
Interest income (expense) was $(32,000) and $312,000 for the quarters
ended June 30, 1997 and 1996, respectively. Interest expense for the quarter
ended June 30, 1997 was due to CentreSoft debt outstanding during the period,
which was subsequently exchanged for Common Stock of the Company as a result
of the CentreSoft acquisition. In addition, the decrease in interest income
was also attributable to a decrease in cash and cash equivalents during the
current fiscal quarter as compared to the same period in the prior year.
INCOME TAX BENEFIT
The income tax benefit of $3.3 million and $1.3 million for the quarters
ended June 30, 1997 and June 30, 1996, respectively, reflects the Company's
expected effective income tax rate for the fiscal years ended March 31, 1998 and
March 31, 1997.
7
NET LOSS
For the reasons noted above, there was an increase in the net loss recorded
for the quarter ended June 30, 1997 as compared to the net loss for the quarter
ended June 30, 1996. Net loss for the quarter ended June 30, 1997 was $5.4
million compared to a net loss of $2.6 million for the same period of the prior
fiscal year.
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on
numerous factors, several of which are not under the Company's control. See
"Risk Factors -- Fluctuations in Quarterly Results; Future Operating Results
Uncertain; Seasonality" contained in Exhibit 99.3 of this Current Report on
Form 8-K. Accordingly, the Company believes that period-to-period comparisons
of its operating results are not necessarily meaningful and should not be relied
upon as indications of future performance.
The following table is a comparative breakdown of the Company's quarterly
results for the immediately preceding eight quarters (amounts in thousands,
except per share data):
Quarter ended
--------------------------------------------------------------------------------------------------
Sept. Dec. March June Sept. Dec. March June
30, 31, 31, 30, 30, 31, 31, 30,
1995 1995 1996 1996 1996 1996 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
Net revenues $18,848 $17,578 $21,648 $ 7,021 $29,557 $60,480 $57,586 $26,514
Gross profit 12,105 10,447 15,327 5,512 15,689 24,295 22,027 6,238
Operating income (loss) 2,366 1,573 4,607 (4,226) 2,137 8,288 7,609 (8,652)
Net income (loss) 2,765 1,948 6,345 (2,631) 1,421 5,320 5,116 (5,414)
Earnings (loss) per share $0.17 $0.12 $0.39 $(0.17) $0.07 $0.29 $0.27 $(0.30)
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $5.5 million from
$21.4 million at March 31, 1997 to $15.9 million at June 30, 1997.
Approximately $1.2 million in cash and cash equivalents were used in operating
activities during the three month period from March 31, 1997 to June 30,
1997. Such operating uses of cash were primarily the result of decreases in
accounts payable and accrued expenses offset by a decrease in accounts
receivable.
In addition, approximately $4.2 million in cash and cash equivalents
were used in investing activities. Capital expenditures totaled approximately
$3.1 million, which was primarily comprised of costs related to the Company
moving its Los Angeles office to a new facility in Santa Monica, California.
Uses of cash in financing activities totaled $0.2 million for the three
months ended June 30, 1997 which included $1.4 million in proceeds from exercise
of employee stock options and $1.6 million in repayments of notes under the
CentreSoft bank lines.
In October 1997, the Company increased its revolving credit and letter of
credit facility (the "Facility") with its bank (the "Bank") from $5.0 million to
$12.5 million. The Facility provides the Company the ability to borrow funds
and issue letters of credit against eligible domestic accounts receivable up to
$12.5 million. The Facility expires in September 1998. The Facility is due on
demand and repayment may be required at the discretion of the Bank. In
addition, in September 1997, the Company entered into a $2.0 million line of
credit agreement (the "Asset Line") with the Bank; drawings under the Asset Line
are structured with 36 month repayment terms and the Asset Line of credit
expires in September 1998. Thee were no borrowings under the Asset Line as of
June 30, 1997.
In June 1996, CentreSoft entered into a revolving credit facility (the
"CentreSoft Facility") with its bank (the "CentreSoft Bank") for
approximately $8 million. The CentreSoft Facility can be used for
CentreSoft's working capital requirements. The CentreSoft Facility expires in
June 2000. There were no borrowings under the CentreSoft Facility as of June
30, 1997.
8
On December 22, 1997, the Company completed a private placement of $60
million in convertible subordinated notes ("Convertible Notes"). The
Convertible Notes have a 6.75% annual interest rate, are due in January 2005
and are convertible at any time prior to maturity into shares of the
Company's Common Stock at $18.875 per share. Net proceeds from the issuance
of the Convertible Notes was approximately $57.9 million. The Company intends
to use such net proceeds to repay outstanding balances under its bank lines
of credit, if any, to fund product development, to acquire third party
publishing and distribution rights, to expand the Company's direct sales and
marketing capabilities and for general corporate purposes. In addition, the
Company may, when and if the opportunity arises, use an unspecified portion
of the net proceeds to acquire businesses, products or technologies that it
believes are of strategic importance. Pending such uses, the Company intends
to invest the net proceeds in short-term money market and other market rate,
investment-grade instruments.
As of June 30, 1997, the Company's current principal source of liquidity
was $15.9 million in cash and cash equivalents. The Company uses its working
capital to finance ongoing operations, including acquisitions of inventory and
equipment, to fund the development, production, marketing and selling of new
products, and to obtain intellectual property rights for future products from
third parties. Management believes that the Company's existing cash, together
with the net proceeds from the Convertible Notes and the proceeds available from
the Facility, Asset Line and the CentreSoft Facility, will be sufficient to meet
the Company's operational requirements for the forseeable future.
The Company's management currently believes that inflation has not had a
material impact on continuing operations.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion
("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities
that could share in the earnings of the Company, similar to fully diluted EPS
under APB No. 15. The Statement requires dual presentation of basic and diluted
EPS by entities with complex capital structures. The Company will adopt SFAS
No. 128 for the financial statements for the quarter ended December 31, 1997.
The Company has determined the following impact of the implementation of SFAS
No. 128:
Quarter ended June 30,
----------------------
1997 1996
--------- ---------
Earnings (loss) per share as reported $ (0.30) $ (0.17)
Pro forma basic earnings per share (0.30) (0.17)
Pro forma diluted earnings per share (0.30) (0.17)
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's
provisions to conclude how it will present comprehensive income it its financial
statements, and has not yet determined the amounts to be disclosed. The Company
will adopt SFAS No. 130 effective April 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the new Statement's provisions to determine the additional
disclosures required in its financial statements, if any. The Company will
adopt SFAS No. 131 effective April 1, 1998.
9
ACTIVISION, INC. AND SUBSIDIARIES
Supplemental Condensed Consolidated Balance Sheets
(in thousands except share data)
September 30, March 31,
1997 1997
-------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 10,286 $ 21,358
Accounts receivable, net of allowances of $7,153
and $7,674 respectively 50,835 46,633
qInventories, net 11,330 8,283
Prepaid software and license royalties 8,444 6,559
Other current assets 2,632 1,222
Deferred income taxes 4,279 1,493
-------------- ------------
Total current assets $ 87,806 $ 85,548
Property and equipment, net 10,526 5,990
Deferred income taxes 4,665 4,212
Other assets 246 255
Excess purchase price over identifiable assets
acquired, net 23,199 23,749
-------------- ------------
Total assets $ 126,442 $ 119,754
-------------- ------------
-------------- ------------
LIABILITIES
Current liabilities:
Current portion of note payable to bank $ 627 $ 1,600
Current portion of subordinated loan stock debentures 1,367 683
Accounts payable 25,838 19,291
Accrued expenses 12,603 12,136
-------------- ------------
Total current liabilities 40,435 33,710
Note payable to bank 959 -
Subordinated loan stock debentures 1,849 2,533
Other liabilities 329 31
-------------- ------------
Total liabilities 43,572 36,274
-------------- ------------
Commitments and contingencies
Redeemable preferred stock 1,286 1,286
Convertible preferred stock 214 214
Shareholders' equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 18,558,123 and 17,113,077 shares issued
and 18,058,123 and 16,613,077 outstanding, respectively - -
Additional paid-in capital 83,101 78,752
Retained earnings 3,942 8,664
Cumulative foreign currency translation (395) (158)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
-------------- ------------
Total shareholders' equity 81,370 81,980
-------------- ------------
Total liabilities and shareholders' equity $ 126,442 $ 119,754
-------------- ------------
-------------- ------------
The accompanying notes are an integral part of these supplemental condensed
consolidated financial statements.
10
ACTIVISION, INC. AND SUBSIDIARIES
Supplemental Condensed Consolidated Statements of Operations
(in thousands except income (loss) per share data)
(Unaudited)
Quarter ended Six months ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
Net revenues $ 53,015 $ 29,557 $ 79,529 $ 36,578
Cost of goods sold 29,735 13,868 50,011 15,377
---------- ----------- ---------- ----------
Gross profit 23,280 15,689 29,518 21,201
---------- ----------- ---------- ----------
Operating expenses:
Product development 7,550 4,607 13,918 9,154
Sales and marketing 9,541 6,291 15,560 9,933
General and administrative 2,702 2,264 4,830 3,492
Amortization of intangible assets 380 390 755 711
---------- ----------- ---------- ----------
Total operating expenses 20,173 13,552 35,063 23,290
---------- ----------- ---------- ----------
Operating income (loss) 3,107 2,137 (5,545) (2,089)
Other income:
Interest, net (112) (3) (145) 309
Other - 6 - 6
---------- ----------- ---------- ----------
Income (loss) before income tax provision
(benefit) 2,995 2,140 (5,690) (1,774)
Income tax provision (benefit) 1,158 719 (2,113) (564)
---------- ----------- ---------- ----------
Net income (loss) $ 1,837 $ 1,421 $ (3,577) $ (1,210)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Net income (loss) per share $ 0.09 $ 0.07 $ (0.18) $ (0.08)
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
Number of shares used in computing
net income (loss) per share 18,917 18,391 18,121 16,399
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
11
ACTIVISION, INC. AND SUBSIDIARIES
Supplemental Condensed Consolidated Statements of Cash Flows
For the six months ended September 30,
(in thousands)
Increase (Decrease) in Cash
(UNAUDITED)
1997 1996
----------- -----------
Cash flows from operating activities:
Net loss $ (3,577) $ (1,210)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred income taxes (2,718) (582)
Depreciation and amortization 2,265 1,824
Change in assets and liabilities:
Accounts receivable (4,338) (3,064)
Inventories (3,109) (1,643)
Prepaid software and license royalties (1,454) (2,768)
Prepaid expenses and other current assets (1,410) (300)
Other assets 9 3
Accounts payable 6,737 2,943
Accrued liabilities 1,741 (3,623)
Other liabilities 189 (10)
----------- -----------
Net cash used in operating activities (5,665) (8,430)
----------- -----------
Cash flows from investing activities:
Capital expenditures (5,909) (1,846)
Purchase of Take Us! Marketing & Consulting GmbH (246) -
Cash paid for CentreSoft - (3,878)
Adjustment for effect of pooling on prior periods (782) -
----------- -----------
Net cash used in investing activities (6,937) (5,724)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock - 4,984
Proceeds from issuance and exercise of common
stock options and warrants 2,721 707
Proceeds from employee stock purchase plan 230 -
Proceeds from note payable to bank, net of payments (12) 486
Dividends paid (1,223) (49)
Other 51 -
----------- -----------
Net cash provided by financing activities 1,767 6,128
----------- -----------
Effect of exchange rate changes on cash (237) 86
----------- -----------
Net decrease in cash and cash equivalents (11,072) (7,940)
----------- -----------
Cash and cash equivalents at beginning of period 21,358 25,288
----------- -----------
Cash and cash equivalents at end of period $ 10,286 $ 17,348
----------- -----------
----------- -----------
Non-cash investing activities:
Stock issued in exchange for licensing rights $ 431 $ 822
Tax benefit derived from stock option exercises 521 -
Stock issued in purchase of Take Us! Marketing & Consulting
GmbH 136 -
Supplemental cash flow information:
Cash paid for income taxes $ 585 $ -
Cash paid for interest 304 263
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
12
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying supplemental condensed consolidated financial statements
include the accounts of Activision, Inc. and its subsidiaries. The
information furnished is unaudited and reflects all adjustments which, in
the opinion of management, are necessary to provide a fair statement of the
results for the interim periods presented. The financial statements should
be read in conjunction with the financial statements included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1997
and the supplemental consolidated financial statements contained in
Exhibit 99.1 herein.
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform with the current period's presentation. These
reclassifications had no impact on previously reported working capital or
results of operations.
2. INVENTORIES
Inventories, net comprise (amounts in thousands):
September 30, March 31,
1997 1997
------------- -----------
Finished goods $ 9,421 $ 7,121
Purchased parts and components 1,909 1,162
------------- -----------
$ 11,330 $ 8,283
------------- -----------
------------- -----------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE QUARTERS AND SIX MONTHS ENDED SEPTEMBER 30,
1997 AND 1996
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 EXHIBIT 99.3 "SUPPLEMENTAL
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" - "RISK FACTORS" CONTAINED IN THIS CURRENT REPORT ON FORM 8-K.
ACTUAL EVENTS OR THE ACTUAL FUTURE RESULTS OF THE COMPANY MAY DIFFER MATERIALLY
FROM ANY FORWARD LOOKING STATEMENT DUE TO SUCH RISKS AND UNCERTAINTIES.
IN ADDITION, AN OVERVIEW OF THE COMPANY AND ITS OPERATIONS ALSO IS DISCUSSED IN
EXHIBIT 99.3 "SUPPLEMENTAL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" CONTAINED IN THIS CURRENT
REPORT ON FORM 8-K.
The following tables set 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:
Quarter Ended September 30, Six Months Ended September 30,
--------------------------------------- --------------------------------------
1997 1996 1997 1996
------------------- ------------------- ------------------ -------------------
% of Net % of Net % of Net % of Net
Amount Revenues Amount Revenues Amount Revenues Amount Revenues
-------- --------- -------- ---------- ------- --------- -------- ---------
STATEMENTS OF OPERATIONS DATA:
Net revenues $53,015 100.0% $29,557 100.0% $79,529 100.0% $36,578 100.0%
Cost of goods sold 29,735 56.1% 13,868 46.9% 50,011 62.9% 15,377 42.0%
-------- --------- -------- ---------- ------- --------- -------- ---------
Gross profit 23,280 43.9% 15,689 53.1% 29,518 37.1% 21,201 58.0%
-------- --------- -------- ---------- ------- --------- -------- ---------
Operating expenses:
Product development $ 7,550 14.2% $ 4,607 15.6% $13,918 17.5% $ 9,154 25.0%
Sales and marketing 9,541 18.0% 6,291 21.3% 15,560 19.6% 9,933 27.2%
General and administrative 2,702 5.1% 2,264 7.1% 4,830 6.1% 3,492 9.5%
Amortization of intangible assets 380 0.7% 390 1.3% 755 0.9% 711 1.9%
-------- --------- -------- ---------- ------- --------- -------- ---------
Total operating expenses 20,173 38.0% 13,552 45.9% 35.063 44.1% 23,290 63.1%
-------- --------- -------- ---------- ------- --------- -------- ---------
Operating income (loss) 3,107 5.9% 2,137 7.2% (5,545) (7.0%) (2,089) (5.7%)
Interest income (expense), net (112) (0.2%) 3 0.0% (145) (0.2%) 315 0.9%
-------- --------- -------- ---------- ------- --------- -------- ---------
Income before income tax provision
(benefit) 2,995 5.6% 2,140 7.2% (5,690) -7.2% (1,774) -4.8%
Income tax provision (benefit) 1,158 2.2% 719 2.4% (2,113) (2.7%) (564) (1.5%)
-------- --------- -------- ---------- ------- --------- -------- ---------
Net income (loss) $ 1,837 3.5% $ 1,421 4.8% $(3,577) (4.5%) $(1,210) (3.3%)
-------- --------- -------- ---------- ------- --------- -------- ---------
-------- --------- -------- ---------- ------- --------- -------- ---------
NET REVENUES BY TERRITORY:
North America $ 20,164 38.0% $14,688 49.7% $25,139 31.6% $20,161 55.1%
Europe 28,915 54.5% 12,398 41.9% 49,237 61.9% 13,121 35.9%
Japan 421 0.8% 967 3.3% 595 0.7% 1,251 3.4%
Australia and Pacific Rim 2,634 5.0% 1,267 4.3% 3,399 4.3% 1,737 4.7%
Latin America 881 1.7% 237 0.8% 1,159 1.5% 308 0.9%
-------- --------- -------- ---------- ------- --------- -------- ---------
NET REVENUES BY PLATFORM: $ 53,015 100.0% $ 29,557 100.0% $79,529 100.0% $36,578 100.0%
-------- --------- -------- ---------- ------- --------- -------- ---------
-------- --------- -------- ---------- ------- --------- -------- ---------
Console $ 16,035 30.2% $ 2,270 7.7% $ 26,740 33.6% $ 2,323 6.4%
PC 36,980 69.8% 27,287 92.3% 52,789 66.4% 34,255 93.6%
-------- --------- -------- ---------- ------- --------- -------- ---------
NET REVENUES BY CHANNEL: $ 53,015 100.0% $ 29,557 100.0% $79,529 100.0% $36,578 100.0%
-------- --------- -------- ---------- ------- --------- -------- ---------
-------- --------- -------- ---------- ------- --------- -------- ---------
Retailer/Reseller $ 45,707 86.2% $26,544 82.6% $67,248 84.6% $28,843 78.9%
OEM 3,579 6.8% 2,799 14.6% 7,350 9.2% 6,292 17.2%
Licensing, on-line and other 3,729 7.0% 529 2.8% 4,931 6.2% 1,443 3.9%
-------- --------- -------- ---------- ------- --------- -------- ---------
$ 53,015 100.0% $ 29,557 100.0% $79,529 100.0% $36,578 100.0%
-------- --------- -------- ---------- ------- --------- -------- ---------
-------- --------- -------- ---------- ------- --------- -------- ---------
RESULTS OF OPERATIONS
NET REVENUES
Net revenues for the quarter ended September 30, 1997 increased 79.1% from
the same period last year, from $29.6 million to $53.0 million. This increase
was attributable to a 37.4% increase in net revenues in North America from $14.7
million to $20.2 million, a 133.1% increase in net revenues in Europe from $12.4
million to $28.9 million, and a 100.0% increase in net revenues in the
Australian and Pacific Rim territories from $1.3 million to $2.6 million.
14
Net revenues for the six months ended September 30, 1997 increased 117.2%
from the same period last year, from $36.6 million to $79.5 million. This
increase was attributable to a 24.9% increase in net revenues in North America
from $20.1 million to $25.1 million, a 275.6% increase in net revenues in Europe
from $13.1 million to $49.2 million and a 100.0% increase in net revenues in the
Australian and Pacific Rim territories from $1.7 million to $3.4 million.
The overall increase in net revenues and the increases in net revenues for
the quarter and six month periods were due to the initial release of HEXEN II
(Windows 95), DARK REIGN: THE FUTURE OF WAR (Windows 95), CAR & DRIVER'S GRAND
TOUR RACING 1998 (Playstation) and TWINSEN'S ODYSSEY (Windows 95). In addition,
net revenues increased due to the acquisition of CentreSoft which began
operations in June 1996. The overall increase in net revenues was partially
offset by an increase in the provision for sales returns and mark-downs for the
North American territory during the quarter ended June 30, 1997, which was
required as a result of a slow down in retail sell-through of then recently
released PC and Playstation titles.
COST OF GOODS SOLD; GROSS PROFIT
For the quarter ended September 30, 1997, gross profit as a percentage of
net revenues was 43.9% compared to 53.1% for the quarter ended September 30,
1996. The decrease in gross profit as a percentage of net revenues is due to
the increase in the sales mix of console net revenues from 7.7% of total net
revenues in the prior the prior fiscal quarter to 30.2% of total net revenues in
the current fiscal quarter. For the six months ended September 30, 1997, gross
profit as a percentage of net revenues was 37.1% versus 58.0% for the six months
ended September 30, 1996. The decrease in gross profit as a percentage of net
revenues is due to the increase in the sales mix of console net revenues from
6.4% of total net revenues in the prior six month period to 33.6% in the current
six month period along with an increase in net revenues from distribution
arrangements as opposed to publishing arrangements which resulted from the
CentreSoft acquisition. Future determination of gross profit as a percentage of
net revenues will be driven primarily by the mix of new PC and console products
released by the Company during the applicable period, the mix of revenues
related to publishing arrangements versus distribution arrangements during the
applicable period, as well as the mix of internal versus external product
development, the latter in each case resulting in lower gross profit margins.
OPERATING EXPENSES
Product development expenses for the quarter ended September 30, 1997
increased 65.2% from the same period last year, from $4.6 million to $7.6
million. As a percentage of net revenues, product development expenses for the
quarter decreased from 15.6% to 14.2%. Product development expenses for the six
months ended September 30, 1997 increased 51.1% from the same period last year,
from $9.2 million to $13.9 million. As a percentage of net revenues, product
development expense for the six month period decreased slightly from 25.0% to
17.5%. The increases for the quarter and six month periods in actual product
development expenses was due to an increase in the number of products in
development, the acquisition of Raven Software Corp., and the increase in costs
associated with enhanced content and new technologies incorporated into the
Company's recent products. In addition, the increase was partly attributable
to an increase in the number of products being localized for foreign
territories; in September 1997, the product DARK REIGN: THE FUTURE OF WAR was
simultaneously released in four localized versions including English, French,
German and Spanish.
Sales and marketing expenses for the quarter ended September 30, 1997
increased 50.8% from the same period last year, from $6.3 million to $9.5
million. As a percentage of net revenues, sales and marketing expenses for the
quarter decreased from 21.3% to 18.0%. Sales and marketing expenses for the six
months ended September 30, 1997 increased 57.6% from the same period last year,
from $9.9 million to $15.6 million. As a percentage of net revenues, sales and
marketing expenses for the six month period decreased from 27.2% to 19.6%. The
increases for the quarter and six month periods in actual sales and marketing
expenses was due to the increase in net revenues along with an increase in the
number of products to be released during the current fiscal year. The decrease
for the quarter and six month periods in sales and marketing expenses as a
percentage of net revenues, however, is due to the operating expense leverage
gained as a result of an increased revenue base.
General and administrative expenses for the quarter ended September 30,
1997 increased 17.4% from the same period last year, from $2.3 million to $2.7
million, but decreased as a percentage of net revenues from 7.7% to 5.1%.
General and administrative expenses for the six months ended September 30, 1997
increased 37.1% from the same period last year, from $3.5 million to $4.8
million, but decreased as a percentage of net revenues from 9.5% to 6.1%. The
period over period increase in actual general and administrative expenses for
both the quarter and six month periods was due to an increase in head count
related expenses, the expansion of facilities both in North America and
internationally, and the implementation of new management information systems.
INCOME TAX PROVISION (BENEFIT)
The income tax provision (benefit) of approximately $1.2 million and ($2.1
million) for the quarter and six months ended September 30, 1997, respectively,
reflects the Company's expected effective income tax rate for the fiscal year
ending March 31, 1998.
NET INCOME (LOSS)
For the reasons noted above, net income increased to $1.8 million for the
quarter ended September 30, 1997, from a net income of $1.4 million for the same
period in the prior fiscal year. For the six months ended September 30, 1997,
net loss increased to $3.6 million from a net loss of $1.2 million for the same
period in the prior fiscal year.
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied
significantly and will likely in the future vary significantly depending on
numerous factors, several of which are not under the Company's control. See
"Risk Factors -- Fluctuations in Quarterly Results; Future Operating Results
Uncertain; Seasonality." Accordingly, the
15
Company believes that period-to-period comparisons of its operating results are
not necessarily meaningful and should not be relied upon as indications of
future performance.
The following table is a comparative breakdown of the Company's quarterly
results for the immediately preceding eight quarters (amounts in thousands,
except per share data):
Quarter Ended
--------------------------------------------------------------------------------
Dec. March June Sept. Dec. March June Sept.
31, 30, 30, 30, 31, 31, 30, 30,
1995 1996 1996 1996 1996 1997 1997 1997
---- ---- ---- ---- ---- ---- ---- ----
Net revenues $17,578 $21,648 $ 7,021 $29,557 $60,480 $57,586 $26,514 $53,015
Gross profit 10,447 15,327 5,512 15,689 24,295 22,027 6,238 23,280
Operating income (loss) 1,573 4,607 (4,226) 2,137 8,288 7,609 (8,652) 3,107
Net income (loss) 1,948 6,345 (2,631) 1,421 5,320 5,116 (5,414) 1,837
Earnings (loss) per share $0.12 $0.39 $(0.17) $0.07 $0.29 $0.27 $(0.30) $0.09
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $11.1 million, from $21.4
million at March 31, 1997 to $10.3 million at September 30, 1997. Approximately
$5.7 million in cash and cash equivalents were used in operating activities
during the six month period from March 31, 1997 to September 30, 1997. Such
operating uses of cash were primarily the result of increases in accounts
receivable and inventories.
In addition, approximately $6.9 million in cash and cash equivalents were
used in investing activities. Capital expenditures totaled approximately $5.9
million, which primarily were comprised of costs related to the Company moving
its Los Angeles office to a new facility in Santa Monica, California.
Sources of cash from financing activities totaled $1.8 million for the six
months ended September 30, 1997, which included $2.7 million in proceeds from
exercise of employee stock options and $1.2 million in dividends paid.
In October 1997, the Company increased its revolving credit and letter of
credit facility (the "Facility") with its bank (the "Bank") from $5.0 million to
$12.5 million. The Facility provides the Company with the ability to borrow
funds and issue letters of credit against eligible domestic accounts receivable
up to $12.5 million. The Facility expires in September 1998. In addition, in
September 1997, the Company entered into a $2.0 million line of credit agreement
(the "Asset Line") with the Bank which is secured by various fixed assets of the
Company; drawings under the Asset Line are structured with 36 month repayment
terms and the Asset Line expires in September 1998. Borrowings under the Asset
Line totaled $1.4 million as of September 30, 1997, with an effective lease
borrowing rate of 8.3%.
In June 1996, CentreSoft entered into a revolving credit facility (the
"CentreSoft Facility") with its bank (the "CentreSoft Bank") for
approximately $8 million. The CentreSoft Facility can be used for
CentreSoft's working capital requirements. The CentreSoft Facility expires in
June 2000. Borrowings under the CentreSoft Facility totalled $1.6 million as
of March 31, 1997, with an effective borrowing rate of LIBOR + 3.5%.
On December 22, 1997, the Company completed a private placement of $60
million in convertible subordinated notes ("Convertible Notes"). The
Convertible Notes have a 6.75% annual interest rate, are due in January 2005
and are convertible at any time prior to maturity into shares of the
Company's Common Stock at $18.875 per share. Net proceeds from the issuance
of the Convertible Notes was approximately $57.9 million. The Company intends
to use such net proceeds to repay outstanding balances under its bank lines
of credit, if any, to fund product development, to acquire third party
publishing and distribution rights, to expand the Company's direct sales and
marketing capabilities and for general corporate purposes. In addition, the
Company may, when and if the opportunity arises, use an unspecified portion
of the net proceeds to acquire businesses, products or technologies that it
believes are of strategic importance. Pending such uses, the Company intends
to invest the net proceeds in short-term money market and other market rate,
investment-grade instruments.
16
As of September 30, 1997 the Company's current principal source of
liquidity was $10.3 million in cash and cash equivalents. The Company uses its
working capital to finance ongoing operations, including acquisitions of
inventory and equipment, to fund the development, production, marketing and
selling of new products, and to obtain intellectual property rights for future
products from third parties. Management believes that the Company's existing
cash, together with the proceeds available from the Convertible Notes, Facility,
the Asset Line and the CentreSoft Facility, will be sufficient to meet the
Company's operational requirements for the forseeable future.
The Company's management currently believes that inflation has not had a
material impact on continuing operations.
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 replaces Accounting Principles Board Opinion
("APB") No. 15 and simplifies the computation of earnings per share ("EPS") by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS includes no dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from securities
that could share in the earnings of the Company, similar to fully diluted EPS
under APB No. 15. The Statement requires dual presentation of basic and diluted
EPS by entities with complex capital structures. The Company will adopt SFAS
No. 128 for the financial statements for the year ended March 31, 1998.
Quarter ended Sept. 30, Six Months ended Sept. 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ------------ -----------
Earnings (loss) per share as reported $ 0.09 $ 0.07 $ (0.18) $ (0.08)
Pro forma basic earnings per share 0.10 0.08 (0.18) (0.08)
Pro forma diluted earnings per share 0.09 0.07 (0.18) (0.08)
SFAS No. 130, "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 established standards for
the reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Company is evaluating the Statement's
provisions to conclude how it will present comprehensive income it its financial
statements, and has not yet determined the amounts to be disclosed. The Company
will adopt SFAS No. 130 effective April 1, 1998.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for financial statements for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report financial and descriptive information about
reportable operating segments in annual financial statements and interim
financial reports issued to stockholders. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. The Company is
evaluating the new Statement's provisions to determine the additional
disclosures required in its financial statements, if any. The Company will
adopt SFAS No. 131 effective April 1, 1998.
The AICPA recently issued statement of Position 97-2, "Software Revenue
Recognition," effective for transactions entered into in fiscal years beginning
after December 15, 1997. While the Company is still evaluating the impact of
this statement, it believes that it is in substantial compliance with the
provisions thereof.
17
