Jensen Wayne knows a great video game when he sees one…
1
9
9
9
A N N U A L
R E
P O R T
A B O U T AC T I V I S I O N :
Every day, the employees of Activision work hard to provide audiences around the world with compelling
interactive entertainment. The company is recognized as a leading publisher, developer and distributor of quality,
innovative software and is affiliated with some of the most important brands in entertainment, including Disney/Pixar’s
Toy Story 2 and A Bug’s Life, Disney’s Tarzan, LucasArt’s Star Wars: Episode 1 The Phantom Menace; Marvel
Comic’s X-MEN and Spider-Man and Paramount’s Star Trek. Headquartered in Santa Monica, California, Activision
employs more than xx people worldwide.
F I N A N C I A L H I G H L I G H T S :
Thousands of Dollars Except Per Share Amounts
Net Sales
Operating Income
Net Earnings
Per Common Share:
Basic Net Earnings
Diluted Net Earnings
1999
$436,485
$27,245
$15,254
0.69
0.66
1998
$312,058
9,486
5,139
0.24
0.23
% Change
40%
187%
197%
188%
187%
Value of $1,000 invested
in Activision Stock in 1992
Net Revenues
(millions of dollars)
Net Earnings
(millions of dollars)
Diluted Net Earnings
(per common share)
$33,851
436.5
15.3
312.1
189.2
7.6
5.9
5.1
$0.66
$0.36
$0.32
$0.23
86.6
57.8
(1.9)
($0.11)
$1,000
9 2
9 9
9 5 9 6 9 7 9 8 9 9
9 5 9 6 9 7 9 8 9 9
9 5 9 6 9 7 9 8 9 9
…and Tony Hawk Pro Skater is one great game. Jensen Wayne is an eighth
grader from Woodland Hills, California. He remembers his first Activision game. “My dad bought me Pitfall for the
Super Nintendo. He said he played Pitfall on an Atari when he was dating my mom. He said Activision games were
awesome even then. He laughed because I didn’t know what an Atari was.”
For twenty years, children like Jensen Wayne and parents, like Jim Wayne, Jensen’s dad, have enjoyed the many games
that have made Activision one of the world’s most successful video game companies.
Delivering outstanding interactive entertainment to our audiences around the world has enabled us to once again
deliver outstanding financial results for our stockholders.
TO O U R S H A R E OW N E R S , E M P L OY E E S A N D PA RT N E R S ,
Activision had another good year.
— Revenues rose 40% to $436.5 million.
— Earnings increased 197% to $15.3 million.
— Earnings per share grew 187% to $0.66.
— Since 1996, revenues have grown at a compounded annual growth rate of 71%.
— Since 1996, earnings per share have grown at compounded annual growth rate of 27%.
— Since 1996, shareholders’ equity increased 104% to $127.5 million.
With a 187% increase in earnings and a 31% increase in net worth, we should be doing cartwheels.
However, we will continue to celebrate standing upright until we achieve our goal of increasing our
operating margins and our return on capital so that they are the highest in our industry.
At the beginning of last year, we outlined several key financial and strategic objectives for fiscal 1999.
We are happy to report that we accomplished many of these goals. Among the most important:
(cid:127) Increase our earnings by at least 35% and our revenues by 40% - 45%;
(cid:127) Enhance our publishing unit’s portfolio of brands and technology assets;
(cid:127) Increase the number of territories serviced by our distribution unit;
(cid:127) Expand and enhance our management team; and
(cid:127) Initiate a company-wide program to bolster operating margins and return on capital.
We achieved our revenue and earnings growth objectives. Revenues grew 40% while earnings grew 187%.
Since 1996, our earnings per share compounded annual growth rate is in excess of 27%.
P U B L I S H I N G
Our publishing business performed better than ever. We released 27 premium games, a 23%
increase over the prior year. The publishing business delivered a 55% year-over-year increase
in net revenues from $133 million to $206 million.
Sixty-one percent of our revenues were derived from sales of console-based video games, the
fastest growing segment of the interactive entertainment market. We are now a leading
provider of games for both the PlayStation and Nintendo 64 game consoles. We are also
re-entering the Game Boy software business with titles for the new Game Boy Color system.
Our acquisition of Head Games Publishing and our recently completed acquisitions of Expert
Software and Elsinore Multimedia provided us with a leadership position in the rapidly
growing mass-market PC software sector. Activision was ranked the sixth largest PC
entertainment software publisher in the United States from January 1999 through May 1999
according to PC Data, a leading market research firm.
Much of our publishing success can be attributed to our increasing focus on brands with proven
audience interest. We recognized that brands are among the most important assets that a
company can own or control, and we forged a number of strategic partnerships that have
enhanced our portfolio of franchises.
In July 1998, we signed a multi-title publishing agreement with Disney Interactive to publish
console games on multiple platforms based on Disney properties, including games based on
“A Bug’s Life,” “Tarzan,” “Toy Story 2” and “The Lion King.”
In September 1998, we entered into an exclusive 10-year pact with Viacom Consumer Products
to publish and develop interactive titles based on the Star Trek family of franchises. We intend
to create multiplayer online-only games which will appeal to both Trekkies and novices alike.
We also concluded a licensing agreement with Marvel Comics to create and publish games
based on the X-MEN and Spider-Man franchises. According to Marvel, over 15 million Spider-
Man comics are sold each year and the comic strip is syndicated in more than 500 newspapers
time,
worldwide. X-MEN
according to Marvel, selling approximately 30 million comic books each year.
the most successful comic book property of all
is
We continued to build on historically successful franchises with updates of such well known
classics as Asteroids (1998) and Space Invaders (1999). These titles show how valuable even
twenty year-old properties can be when coupled with inspired product development talent.
We established a number of new brands in fiscal 1999 including Tenchu, Vigilante 8, Call to
Power and Big Game Hunter. And, we initiated new titles which we expect to release in the
coming fiscal year, including Tony Hawk Pro Skater, Wu-Tang Shaolin Style and Vampire: The
Masquerade, which we believe will provide lasting brand value for many years to come.
During the fiscal year, we also launched an affiliate label program, under which Activision
sells and distributes interactive software developed by a select number of quality publishers.
In September 1998, we announced an exclusive agreement with LucasArts Entertainment
covering the United Kingdom and 45 additional countries. The agreement includes all past and
future LucasArts products for the PC and PlayStation platforms, including several new Star
Wars Episode 1 titles and two Indiana Jones titles. The high-quality product flow and broad
consumer awareness of the LucasArts line further established Activision as a leading
international presence.
In January 1999, the company executed an exclusive distribution agreement with Psygnosis, a
wholly owned subsidiary of Sony Computer Entertainment, to sell and distribute all of
Psygnosis’ PlayStation game console and PC CD-ROM titles in North America. Psygnosis is
one of Europe’s leading software developers with many successful titles including Lemmings,
Formula One, Wipeout and Destruction Derby.
We achieved success in both domestic and international publishing this past year even
without many hits based on proven franchise properties. This demonstrates that an
extraordinary group of managers with clear financial objectives, a rewards system well aligned
with these objectives, and a balanced portfolio of operating assets can achieve impressive and
predictable financial results. In fiscal 2000, we intend to leverage all of these competitive
advantages with an extraordinary slate of titles based on market-proven franchises and
technologies to deliver our most impressive publishing results to date.
D I S T R I BU T I O N
Our distribution business produced a 29% year-over-year gain in net revenues from $179
million to $231 million.
Our acquisitions in fiscal 1998 of CentreSoft Ltd. and NBG immediately established
Activision as one of Europe’s leading distributors of interactive entertainment products.
This last fiscal year, we further expanded our powerful network with the acquisition of
CD Contact Data, a leading distributor of interactive entertainment products in The
Netherlands and Belgium.
Efficient operations and solid customer and supplier relationships have been the bedrock of our
success. We believe that our distribution business will continue to derive future benefits from
the positive fundamentals of our industry and continue to provide us with high returns on our
invested capital.
We are bringing some of the most recognized
brands to audiences around the world…
Ronald Doornink
President and
Chief Operating Officer
Robert A. Kotick
Chairman and
Chief Executive Officer
Brian G. Kelly
Co-Chairman
M A N AG E M E N T
Activision’s continued success is the result of a dedicated, focused management team
combined with the efforts of a world-class employee base. We have coupled our talented team
with a compensation system that clarifies responsibilities and rewards success. Providing
opportunities for our employees to develop and excel is a key continuing objective of our company.
With this in mind, we have recently made several important management additions.
Our most significant corporate change was the addition of our new President and Chief
Operating Officer, Ron Doornink. Ron joined the company from Con-Agra, where he served
as President of the Snack Food Division. He previously spent 13 years with the Procter &
Gamble Company.
Michael Rowe recently joined Activision as Executive Vice President of Human Resources.
Our company will benefit from Mike’s experiences at Pepsico and The Walt Disney
Company’s Consumer Products Division.
In connection with our focus on building global brands, Kathy Vrabeck, a veteran consumer
marketer from Pillsbury and Quaker Oats, has joined the company as our new Executive Vice
President of Global Brand Management.
These extremely talented and accomplished individuals further bolster Activision’s
management team, which is among the very best in our industry. In addition to bringing a wealth
of valuable experience and insight to the company, they, along with our worldwide employee
base, add depth and quality to our organization that should serve us well as we continue to grow.
and changing the way people spend their leisure time.
B O L S T E R I N G O P E R AT I N G M A R G I N S A N D R E T U R N O N C A P I TA L
Activision’s continuing challenge is to provide our shareowners with a higher return than
alternative investment opportunities. Inspired by the Six Sigma Programs employed by
companies like General Electric, Allied Signal and Motorola, we have initiated a company-
wide initiative known as SPEED.
SPEED’s goals are to:
(cid:127) Increase our operating margins and return on capital to industry leading percentages
by fiscal 2001;
(cid:127) Measurably improve our operating units systems and processes; and
(cid:127) Measurably enhance the quality and consistency of our customers’ experiences
with our products and services.
Through SPEED we expect to achieve:
S TA B I L I T Y in our financial results through our diverse portfolio of high-quality
operating assets;
P R E D I C TA B I L I T Y through the consistent delivery of high-quality interactive
entertainment based on market-proven franchises and technologies;
E F F I C I E N C Y through the constant refinement of our global business practices
and systems;
E QU I T Y enhancement through continued investment in world-class franchises,
technology and people; and
D E V E L O P M E N T of our personnel through our focus on a learning- and
result-oriented culture.
SPEED should allow us to grow earnings and net worth per share at rates greater than our com-
petitors for many years to come.
To ensure that we achieve these objectives, We continue to focus on merger and acquisition
opportunities and large scale strategic initiatives, including Activision’s long-term
participation in Internet-based interactive entertainment and commerce. Perhaps most
importantly, we continue to manage the rigorous evaluation of the deployment of capital
throughout our operating units.
Nine years ago, we assumed control of Activision. The market for video games was in its
infancy. Nintendo had recently introduced an 8-bit video game system that was rapidly be
coming one of the most popular consumer electronics products of all time.
In fiscal 1991, the year we acquired our shares, Activision lost $26.8 million on $28.8
million revenues and was teetering on the brink of liquidation. Why, you might ask, did we
choose to invest so much money, time and energy in a patient that seemed terminal?
At the time, we had modest confidence in our own abilities to restructure and manage a world-
class video game company. We did, however, have a great deal of confidence in the
fundamentals of the interactive entertainment industry. We felt certain that industry
opportunities would provide a forgiving enough environment for us to achieve some fairly
ambitious goals.
Our goal was, and remains, to build the leading interactive entertainment company while
providing our investors with the largest possible annual increases in tangible net worth
per share.
We operate in an industry that has experienced significant, sustained growth over the last ten
years, and we believe it will continue to grow at rates greater than many other industries well
into the future. The fundamentals of our industry and the potential for increasing rates of return
continue to become more attractive. We believe that the rapid proliferation of
microprocessor controlled devices, whether dedicated video game systems, personal
computers, personal digital assistants or next-generation set top television converters, will
continue to expand the demand for interactive entertainment.
The key drivers of growth are as follows:
(cid:127) Today, there are more devices than ever before that are capable of delivering
interactive entertainment experiences.
(cid:127) The audience for interactive products is expanding to include additional
demographic segments.
(cid:127) Games have become a staple of household leisure time.
(cid:127) The barriers to entry in our industry remain high.
(cid:127) Manufacturing costs continue to decline.
(cid:127) In a few years, the Internet will provide opportunities for us to broaden our audience
and reduce marketing and distribution expenses.
We have been interested in participating in our industry’s growth, and financing that growth,
only to the extent that the incremental returns on our invested capital remain attractive. We
strongly believe they do.
Our role is to manage carefully our capital so as to provide superior returns. These returns
should be commensurate with the risks associated with our investment of that capital, which
we assure you are greater than the risk of investing in US Treasury Bonds.
To enhance our deployment of capital skills, we attended the Berkshire Hathaway annual
meeting in Omaha, Nebraska. This “Investor’s Woodstock” is a unique opportunity to hear
Warren Buffett and Charles Munger expound on the discipline of investing and provide a great
deal of insight about capital deployment, the economy and the nutritional value of Dairy
Queen’s The Dilly Bar® (Berkshire owns Dairy Queen).
We are ardent disciples of the business philosophies practiced by Mr. Buffett and Mr. Munger.
After the Berkshire annual meeting, we felt that our own stakeholders might benefit from
hearing how we have incorporated some of these philosophies into the operation of Activision.
We will point out that Berkshire Hathaway does not own shares in any technology companies.
In fact, Warren Buffett remarked in his essay entitled Intelligent Investing, “Fresh ideas, new
products, innovative processes and the like cause our country’s standard of living to rise. As
investors, however, our reaction to a fermenting industry is much like our attitude towards
space exploration: We applaud the endeavor but prefer to skip the ride.”
Not only is Activision going for the ride, we are driving the bus. Our streets, however, are well
paved. We don’t veer off the road too often. Before even considering a detour, we spend a lot
of time reviewing the roads traveled before us by experienced drivers. Bucking male instinct,
we always stop to ask for directions, and operate our vehicle with maximum safety and
efficiency. So far, we have fairly consistently managed to arrive at our destinations on time,
safely and with few driver errors.
To ensure we keep our eyes on the road, and in keeping with Berkshire’s “owner-related
business principles,” we have established the following Activision guiding principles:
(cid:127) Our long-term financial goal remains increasing per share net worth at average annual
rates greater than those achieved by most major American corporations.
(cid:127) We will continue to evaluate all opportunities with the utmost concern for the return
generated on invested capital and the reduction of risks associated with our investment
of your capital.
(cid:127) We will remain focused on proven brands and technologies whose historical market
performance are practical guides for future planning.
(cid:127) Our operating units will continue to be managed by handpicked professionals, whose
primary compensation is derived from their individual ability to achieve operating
contribution targets and high returns on capital.
(cid:127) Our net worth, as well as the net worth of all of our senior executives, is concentrated
in Activision stock, and we will continue to make decisions with an owner orientation.
Activision’s future is paved with greater opportunities than ever before. However exhilarating
our current and future prospects may be, our growth will always be defined carefully. Prudence
and discipline will continue to govern our ambitions, just as they have for the last nine years,
to ensure our success for the years to come.
We would like to thank our shareowners and dedicated employees who are turning our vision
into reality, and of course, our customers and partners whose ongoing support provides the
foundation for our success.
Sincerely,
Robert A. Kotick
Chairman and Chief Executive Officer
Brian G. Kelly
Co-Chairman
TOY S TO RY 2
Players relive the fun
and excitement of the
Disney/Pixar feature
film as the resourceful
hero Buzz Lightyear.
Spinning, springing,
bouncing and
somersaulting through
the air, players must
rescue Woody from a
greedy toy collector.
A BU G ’ S L I F E
The blockbuster movie lands on the Nintendo 64 to
offer players a bug’s eye view of the world as they res-
cue a home colony of ants from a merciless attack by
the seed-grubbing grasshoppers.
TA R Z A N
The jungle comes alive on the
Game Boy Color as players swim
with crocodiles, swing on vines and
tree surf to save a family of apes
from an evil hunter.
S TA R WA R S :
E P I S O D E I
T H E P H A N TO M
M E N AC E
Players step into an
epic saga and use the
Force to overcome
challenges at every
turn as they plunge
deeper into this story
of a galaxy in crisis.
S TA R WA R S : E P I S O D E I R AC E R
Players climb on, strap in, and experience the pure adrenaline-
pumping excitement of the Pod racing sequence from Star Wars:
Episode I The Phantom Menace.
I N D I A N A J O N E S A N D T H E I N F E R N A L M AC H I N E
Indiana Jones breaks into a new dimension as players embark on a thrilling race
around the globe to thwart the Russian government’s deadly plans to unleash a
deadly force on the West.
S P I D E R - M A N
The world’s most
celebrated crime fighter
uses his web-slinging
powers to tackle sinister
super villains and save
the world.
The approaching end of the millennium
marks the beginning of the evil
Apocalypse’s return. Players must fight
a series of brutal battles to free their
allies from his grasp so they may once
again combat evil together as –
the X - M E N .
S TA R T R E K : I N S U R R E C T I O N
The epic action-adventure sequel to the latest Star Trek motion picture, Insurrection
draws players into a fast-paced action tale of stealth and exploration as they engage
alien forces to save the Federation.
S TA R T R E K : A R M A DA
The Borg have returned and players must command the
fleets of the Federation in an epic battle for survival.
S TA R T R E K : VOYAG E R — E L I T E F O R C E
When a marauding species captures the U.S.S. Voyager, only
one member of the newly formed elite security force, The
Hazard Team, can save the crew, the ship and the galaxy itself.
V I G I L A N T E 8 :
S E C O N D O F F E N S E
Back in 1975 the
Coyote Gang was
soundly defeated by the
Vigilantes. Now, four
decades later, their evil
leader wants to take a
blast to the past to
rewrite some history.
QUA K E I I I A R E N A
Hardwired action is for the taking in relentless
single-player and multiplayer gaming via the Internet.
S PAC E I N VA D E R S
Attention all earthlings! Relentless alien hordes have
been identified in a vicinity near you. Be aware—
the classic arcade update has proven to be even more
dangerously addictive than ever before.
Financial Results
SELECTED CONSOLIDATED FINANCIAL DATA
Amounts in Thousands, except per share data
1999
1998
1997
1996
1995
Fiscal Years ended March 31,
Restated (1)
Statement of Operations Data:
Net revenues
Cost of sales – product costs
Cost of sales – royalties and software amortization
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Preferred dividends paid and/or accumulated
Basic net income (loss) per common share
Diluted net income (loss) per common share
Weighted average number of shares used in
computing basic net income (loss) per
common share (2)
Weighted average number of shares used in
computing diluted net income (loss) per
common share (2)
Selected Operating Data:
EBITDA (3)
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Balance Sheet Data:
Working capital
Cash and cash equivalents
Intangible assets
Total assets
Long-term debt
Redeemable and convertible preferred stock
Shareholders’ equity
$ 436,485
260,041
37,825
27,245
24,215
15,254
-
$ 0.69
$ 0.66
$ 312,058
176,188
29,840
9,486
8,374
5,139
(116)
$ 0.24
$ 0.23
$ 189,239
103,124
13,108
11,531
11,612
7,631
(151)
$ 0.37
$ 0.36
$ 86,591
34,034
7,333
3,233
4,841
5,895
-
$ 0.34
$ 0.32
$ 57,750
31,731
1,794
(3,275)
(1,776)
(1,875)
-
$ (0.11)
$ (0.11)
22,162
21,339
20,262
17,232
17,404
23,233
22,210
20,951
18,294
17,404
$ 56,665
$ 42,760
$ 23,878
$ 13,727
$ (1,333)
$ 18,078
$ (64,331)
7,220
$ 31,180
(43,317)
62,862
$ 4,956
(19,588)
11,981
$ 3,807
(11,455)
(4,378)
$ (393)
(61)
1,055
As of March 31,
Restated (1)
1999
1998
1997
1996
1995
$ 141,314
32,847
21,647
283,612
61,150
-
127,475
$ 115,773
74,241
23,473
229,280
61,780
-
97,397
$ 51,997
23,320
23,756
131,952
5,907
1,500
81,634
$ 39,871
25,792
19,583
84,442
1,222
-
62,439
$ 39,606
38,013
20,865
71,672
986
-
61,693
(1) The Company completed the acquisition of Raven Software Corporation (“Raven”) on July 13, 1997, NBG EDV Handels- und Verlags GmbH (“NBG”) on November 26, 1997,
S.B.F. Services, Limited dba Head Games Publishing (“Head Games”) on June 30, 1998, and CD Contact Data GmbH (“CD Contact”) on September 29, 1998. Each of the
above transactions originally had been accounted for by the Company as an immaterial pooling of interests. The financial results for each such acquired company and related
cash flows had therefore been included in the reported operations of the Company beginning only on the date of acquisition. Based on a reevaluation of these transactions,
including the results of operations of each entity, statements by the Securities and Exchange Commission (the “SEC”) on materiality of pooling transactions and requirements to
evaluate the impact on each line item in the financial statements and the impact on the Company’s trends, the Company has restated all financial information reported for all
periods prior to the consummation of each transaction to include the financial position, results of operations and cash flows of such acquired companies.
(2) The Company has presented basic and diluted net income (loss) per share for all periods in accordance with Statement of Financial Accounting Standards No. 128
“Earnings per Share.”
(3) EBITDA represents income (loss) before interest, income taxes, depreciation and amortization. The Company believes that EBITDA provides useful information regarding the
Company’s ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting
principles and should not be considered a substitute for net income, as an indicator of the Company’s operating performance or cash flow, as a measure of liquidity.
1
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is a leading international publisher, developer
and distributor of interactive entertainment and leisure prod-
ucts. The Company currently focuses its publishing, devel-
opment and distribution efforts on products designed for per-
sonal computers (“PCs”) as well as the Sony PlayStation and
the Nintendo 64 console systems. The Company’s products
span a wide range of genres and target markets.
Activision distributes its products worldwide through its
direct sales forces, through its distribution subsidiaries, and
through its third party distributors and licensees. In addition,
in September 1998 the Company acquired CD Contact, sig-
nificantly increasing its European distribution capabilities.
The Company’s financial information as of and for the year
ended March 31, 1999, 1998 and 1997, have been restated to
reflect the effect of pooling of interests transactions.
The Company recognizes revenue from the sale of its prod-
ucts upon shipment. Subject to certain limitations,
the
Company permits customers to obtain exchanges and returns
within certain specified periods and provides price protection
on certain unsold merchandise. Revenues from product sales
are reflected after deducting the estimated allowance for
returns and price protection. With respect to license agree-
ments, 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 rec-
ognized as earned. The American Institute of Certified Public
Accountants Statement of Position 97-2, “Software Revenue
Recognition” (“SOP 97-2”), provides guidance on applying
generally accepted accounting principles in recognizing rev-
enue on software transactions. SOP 97-2 was effective for all
transactions entered into subsequent to March 31, 1998. The
Company has adopted SOP 97-2 and such adoption did not
have a material impact on the Company’s financial position,
results of operations or liquidity. Effective December 15,
1998, the American Institute of Certified Public Accountants
Statement of Position 98-9, “Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions” (“SOP 98-9”), was issued and is effective for
transactions entered into after March 15, 1999. SOP 98-9
deals with the determination of vendor specific objective evi-
dence of fair value in multiple element arrangements such as
maintenance agreements sold in conjunction with software
packages. The Company does not believe this will have a
material impact on the Company’s financial position, results
of operations or liquidity.
Cost of sales-product costs represents the cost to purchase,
manufacture and distribute PC and console product units.
Manufacturers of the Company's PC software are located
worldwide and are readily available. Console CDs and car-
tridges are manufactured by the respective video game con-
sole manufacturers, Sony, Nintendo and Sega, who often
require significant lead time to fulfill the Company's orders.
Cost of sales-royalties and software amortization represents
amounts due developers, product owners and other royalty
participants as a result of product sales, as well as amortiza-
tion of capitalized software development costs. The costs
incurred by the Company to develop products are accounted
for in accordance with accounting standards which provide
for the capitalization of certain software development costs
once technological feasibility is established and such costs
are determined to be recoverable. Various contracts are main-
tained with developers, product owners or other royalty par-
ticipants which state a royalty rate, territory and term of
agreement, among other items. Upon a product’s release,
prepaid royalties and license fees are charged to royalty
expense based on the contractual royalty rate. The capital-
ized software costs are then amortized to cost of sales-royal-
ties and software amortization on a straight-line basis over
the estimated product life commencing upon product release
or on the ratio of current revenues to total projected revenues,
whichever amortization amount is greater.
For products that have been released, management evaluates
the future recoverability of prepaid royalties and capitalized
software costs on a quarterly basis. Prior to a product’s
release, the Company expenses, as part of product develop-
ment costs, capitalized costs when, in management’s esti-
mate, such amounts are not recoverable. The following crite-
ria is used to evaluate recoverability: historical performance
of comparable products; the commercial acceptance of prior
products released on a given game engine; orders for the
product prior to its release; estimated performance of a
sequel product based on the performance of the product on
which the sequel is based; and actual development costs of a
product as compared to the Company’s budgeted amount.
The following table sets forth certain consolidated state-
ments of operations data for the periods indicated as a per-
centage of total net revenues and also breaks down net rev-
enues by territory, platform and channel:
2
Fiscal Year Ended March 31
(In Thousands)
1999
1998
Restated
1997
Restated
Statement of Operations Data:
Net revenues:
Costs and expenses:
$436,485
100.0%
$312,058
100.0%
$189,239
100.0%
Cost of sales – product costs
Cost of sales – royalties and software amortization
Product development
Sales and marketing
General and administrative
Amortization of intangible assets
Merger expenses
260,041
37,825
21,422
66,419
21,348
1,585
600
59.6%
8.7%
4.9%
15.2%
4.9%
0.4%
0.1%
176,188
29,840
27,393
47,714
18,401
1,562
1,474
56.5%
9.6%
8.8%
15.3%
5.9%
0.5%
0.4%
103,124
13,108
20,470
31,178
8,284
1,505
39
54.5%
6.9%
10.8%
16.5%
4.4%
0.8%
-
Total costs and expenses
409,240
93.8%
302,572
97.0%
177,708
93.9%
Income from operations
Interest income (expense), net
27,245
(3,030)
6.2%
(0.7%)
9,486
(1,112)
3.0%
(0.3%)
Net income before provision for income taxes
Income tax provision
24,215
8,961
5.5%
2.0%
8,374
3,235
2.7%
1.1%
11,531
81
11,612
3,981
6.1%
-
6.1%
2.1%
Net income
$ 15,254
3.5%
$ 5,139
1.6%
$ 7,631
4.0%
Net Revenues By Territory:
United States
Europe
Other
Total net revenues
Net Revenues By Channel:
Retailer/Reseller
OEM, Licensing, on-line and other
Total net revenues
Activity/Platform Mix:
Publishing:
Console
PC
$149,664
278,032
8,789
34.3%
63.7%
2.0%
$ 89,936
208,817
13,305
28.8%
66.9%
4.3%
$ 65,695
113,456
10,088
34.7%
60.0%
5.3%
$436,485 $100.0%
$312,058
100.0%
$189,239
100.0%
$417,447
19,038
95.6%
4.4%
$286,953
25,105
92.0%
8.0%
$168,190
21,049
88.9%
11.1%
$436,485
100.0%
$312,058
100.0%
$189,239
100.0%
$111,621
93,880
54.3%
45.7%
$ 26,302
106,524
19.8%
80.2%
$ 18,182
69,812
20.7%
79.3%
Total publishing net revenues
$205,501
47.1%
$132,826
42.6%
$ 87,994
46.5%
Distribution:
Console
PC
$156,584
74,400
67.8%
32.2%
$105,588
73,644
58.9%
41.1%
$ 50,298
50,947
49.7%
50.3%
Total distribution net revenues
$230,984
52.9%
$179,232
57.4%
101,245
53.5%
Total net revenues
$436,485
100.0%
$312,058
100.0%
$189,239
100.0%
3
RESULTS OF OPERATIONS – FISCAL YEARS
ENDED MARCH 31, 1998 AND 1999
Net Revenues
Net revenues for the fiscal year ended March 31, 1999
increased 39.9%, from $312.1 million to $436.5 million,
over the prior year. The United States and international net
revenues increased 66.5%, from $89.9 million to $149.7 mil-
lion, and 29.1%, from $222.1 million to $286.8 million,
respectively, over the prior year. The increase in overall net
revenues was composed of a 103.3% increase in console net
revenues, from $131.9 million to $268.2 million, and a 6.6%
decrease in PC net revenues, from $180.2 million to $168.3
million, respectively, over the prior year.
Publishing net revenues for the year ended March 31, 1999
increased 54.7%, from $132.8 million to $205.5 million,
over the prior year. Distribution net revenues for the year
ended March 31, 1999 increased 28.9%, from $179.2 million
to $231.0 million, over the prior year. These increases were
primarily attributable to the increases in publishing and dis-
tribution console net revenues.
Publishing console net revenues for the year ended March
31, 1999 increased 324.3%, from $26.3 million to $111.6
million, over the prior year. This increase was primarily
attributable to the initial release of Tenchu (PlayStation),
Apocalypse (PlayStation), Vigilante 8 (PlayStation and
N64), Asteroids (PlayStation), Nightmare Creatures
(PlayStation and N64) and Activision Classics (PlayStation).
Publishing PC net revenues for the year ended March 31,
1999 decreased 11.8%, from $106.5 million to $93.9 million,
over the prior year. This decrease was primarily due to the
release of Quake II (Windows 95) in the prior year.
Publishing PC initial releases during the year ended March
31, 1999 included Civilization: Call to Power, Cabela's Big
Game Hunter, Cabela's Big Game Hunter 2, Asteroids and
Sin.
Distribution console net revenues increased 48.3%, from
$105.6 million to $156.6 million, over the prior year. This
increase was primarily attributable to an increase in the num-
ber of products released for PlayStation and Nintendo N64
and an increase in the Playstation and N64 hardware
installed base. Distribution PC net revenues increased 1.1%,
from $73.6 million to $74.4 million, over the prior year.
Distribution PC net revenues remained relatively constant
during this period as the number of new PC titles released by
the publishers utilizing the Company’s distribution services
in each year were approximately the same.
Net OEM, licensing, on-line and other revenues for the fiscal
year ended March 31, 1999 decreased 24.3% to $19.0 mil-
lion from $25 million in the prior year. This decrease was
due to the release of fewer PC titles during the fiscal year that
were compatible with OEM customers’ products.
Costs and Expenses
Cost of sales - product costs represented 59.6% and 56.5% of
net revenues for the years ended March 31, 1999 and 1998,
respectively. The increase in cost of sales - product costs as
a percentage of net revenues was due to the increase in the
sales mix related to console products. Console products have
a higher per unit product cost than PC products.
Cost of sales - royalties and software amortization expense
represented 8.7% and 9.6% of net revenues for the years
ended March 31, 1999 and 1998, respectively. The decrease
in cost of sales - royalties and software amortization expense
as a percentage of net revenues was due to changes in the
Company's product mix, with an increase in products with
lower royalty obligations as compared to the prior year.
Product development expenses for the year ended March 31,
1999 decreased 21.9% from the prior year, from $27.4 mil-
lion to $21.4 million. The decrease in the amount of product
development expenses for the year ended March 31, 1999
was primarily due to an increase in capitalizable develop-
ment costs relating to sequel products being developed on
proven engine technologies which have been capitalized in
accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or otherwise
Marketed”.
As a percentage of net revenues, total product creation costs
(i.e., royalties and software amortization expenses plus prod-
uct development expenses) for the year ended March 31,
1999, decreased to 13.6% from 18.4% in the prior year. This
decrease was attributable to a decrease in the effective royalty
rate, as discussed above, and an increase in development
costs capitalized under SFAS 86, also as discussed above.
Sales and marketing expenses for the year ended March 31,
1999 increased 39.2% from the same period last year, from
$47.7 million to $66.4 million. As a percentage of net rev-
enues, sales and marketing expenses decreased slightly from
15.3% to 15.2%. The increase in the amount of sales and
marketing expenses for the year ended March 31, 1999 was
primarily due to a significant increase in television advertis-
ing and an increase in the number of products released dur-
ing the current year. However, as a percentage of net rev-
enues, such expenses have remained relatively constant.
4
General and administrative expense for the year ended
March 31, 1999 increased 15.8% from the same period last
year, from $18.4 million to $21.3 million. As a percentage
of net revenues, general and administrative expenses
decreased from 5.9% to 4.9%. The period over period
increase in the amount of general and administrative expens-
es primarily was due to an increase in worldwide adminis-
trative support needs and headcount related expenses. The
decrease as a percentage of net revenues relates primarily to
efficiencies gained in controlling fixed costs and the increase
in net revenues.
Interest Income (Expense)
Interest expense, net of interest income, increased to $3.0
million for the year ended March 31, 1999, from $1.1 million
for the year ended March 31, 1998. This increase primarily
was the result of interest costs associated with the
Company’s convertible subordinated notes issued in
December 1997 and short term borrowings under bank line
of credit agreements which had a greater average outstanding
balance in the fiscal year ended March 31, 1999.
Provision for Income Taxes
The income tax provision of $9.0 million for the year ended
March 31, 1999, reflects the Company’s effective income tax
rate of approximately 37%. The realization of deferred tax
assets primarily is dependent on the generation of future tax-
able income. Management believes that it is more likely than
not that the company will generate taxable income sufficient
to realize the benefit of deferred tax assets recognized.
RESULTS OF OPERATIONS – FISCAL YEARS
ENDED MARCH 31, 1997 AND 1998
Net Revenues
Net revenues for the year ended March 31, 1998 increased
65.0%, from $189.2 million to $312.1 million over the prior
year. Net revenues in the United States and internationally
increased 36.8%, from $65.7 million to $89.9 million and
79.8%, from $123.5 million to $222.1 million, respectively,
over the prior year. The increase in overall net revenues was
comprised of a 92.6% increase in console net revenues, from
$68.5 million to $131.9 million, and a 49.2% increase in PC
net revenues, from $120.8 million to $180.2 million, respec-
tively, over the prior year.
Publishing net revenues for the year ended March 31, 1998
increased 50.9%, from $88.0 million to $132.8 million, over
the prior year. Distribution net revenues for the year ended
March 31, 1998 increased 77.1%, from $101.2 million to
$179.2 million, over the prior year. These increases primari-
ly were attributable to the increases in publishing PC net rev-
enues and distribution console net revenues.
Publishing console net revenues for the year ended March
31, 1998 increased 44.5%, from $18.2 million to $26.3 mil-
lion, over the prior year. This increase primarily was attribut-
able to the initial release of Pitfall 3D (PlayStation),
Nightmare Creatures (PlayStation) and Car and Driver's
Grand Tour Racing (PlayStation.) Publishing PC net rev-
enues for the year ended March 31, 1998 increased 52.6%,
from $69.8 million to $106.5 million, over the prior year.
This increase was primarily due to the release of Quake II
(Windows 95), Dark Reign: The Future of War (Windows
95), Hexen II (Windows 95), Battlezone (Windows 95) and
Heavy Gear (Windows 95).
Distribution console net revenues increased 109.9%, from
$50.3 million to $105.6 million, over the prior year. This
increase was primarily attributable to an increase in the num-
ber of products released for PlayStation and N64 and an
increase in the PlayStation and N64 hardware installed base.
Distribution PC net revenues increased 44.6%, from $50.9
million to $73.6 million, over the prior year. Additionally,
distribution net revenues increased over the prior fiscal year
due to the fact that CentreSoft, which began operations in
June 1996, contributed only ten months of revenue for the
year ended March 31, 1997, as opposed to twelve months for
the year ended March 31, 1998.
Net OEM, licensing, on-line and other revenue, increased
19.5% to $25.1 million from $21.0 million over the prior
year. This increase was due to an increase in the number of
titles made available during the year to OEMs, including
enhanced 3-D versions of various products.
Costs and Expenses
Cost of sales - product costs represented 56.5% and 54.5% of
net revenues for the years ended March 31, 1998 and 1997,
respectively. The increase in cost of sales - product costs as
a percentage of net revenues was due to the increase in the
sales mix of console net revenues versus PC net revenues.
Cost of sales - royalties and software amortization expense
represented 9.6% and 6.9% of net revenues for the years
ended March 31, 1998 and 1997, respectively. The increase
in cost of sales - royalties and software amortization expense
as a percentage of net revenues was due to changes in the
Company's product mix and primarily was due to royalties
related to Quake II.
5
Product development expenses for the year ended March 31,
1998 increased 33.7% from the prior year, from $20.5 mil-
lion to $27.4 million. As a percentage of net revenues, prod-
uct development expenses decreased from 10.8% to 8.8%.
The increase in the amount of product development expens-
es for the year ended March 31, 1998 was primarily 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. In addi-
tion, product development expense as a percentage of net
revenues decreased primarily as a result of an increase in net
revenues and an increase in costs capitalized in accordance
with SFAS No. 86.
As a percentage of net revenues, total product creation costs
(i.e., royalties and software amortization expense plus prod-
uct development expense) for the year ended March 31,
1998, increased to 18.4% from 17.7% in the prior year. This
increase was attributable to increase in the effective royalty
rate, as discussed above.
Sales and marketing expenses for the year ended March 31,
1998 increased 52.9% from the period year, from $31.2 mil-
lion to $47.7 million. As a percentage of net revenues, sales
and marketing expenses decreased slightly from 16.5% to
15.3%. The increase in the amount of sales and marketing
expenses for the year ended March 31, 1998 was primarily
due to increased marketing and promotional activities neces-
sary to release new titles in an increasingly competitive envi-
ronment and the Company's expansion of it's European sales
and marketing infrastructure. However, as a percentage of
net revenues, such expense has remained fairly consistent.
General and administrative expense for the year ended
March 31, 1998 increased 121.7% from the same period last
year, from $8.3 million to $18.4 million. As a percentage of
net revenues, general and administrative expenses increased
from 4.4% to 5.9%. The period over period increase in the
amount and as a percentage of net revenues of general and
administrative expenses for the year ended March 31, 1998
primarily was due to an increase in worldwide administrative
support needs and headcount related expenses.
Interest Income (Expense)
Interest expense, net of interest income, increased to $1.1
million for the year ended March 31, 1998, from net interest
income of $81,000 for the year ended March 31, 1997. This
increase primarily was the result of interest costs associated
with the Company’s convertible subordinated notes issued in
December 1997 and short-term borrowings under bank line
of credit agreements.
Provision for Income Taxes
The income tax provision of $3.2 million for the year ended
March 31, 1998, reflects the Company’s estimated effective
income tax rate of approximately 38.6%. The realization of
deferred tax assets primarily is dependent on the generation
of future taxable income. Management believes that it is
more likely than not that the company will generate taxable
income sufficient to realize the benefit of deferred tax assets
recognized.
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past
varied significantly and will likely vary significantly in the
future, depending on numerous factors, several of which are
not under the Company’s control. See Item 1. Forward
Looking Statements. 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
Restated
March 31, Dec. 31,
1999
1998
Sept. 30,
1998
June 30, March 31,
1998
1998
Dec. 31,
1997
Sept. 30,
1997
June 30,
1997
Net revenues
Operating income (loss)
Net income (loss)
Net income (loss) per
basic share
Net income (loss) per
diluted share
$115,235
9,337
5,210
$193,537
26,328
16,022
$ 66,182
(2,783)
(2,234)
$ 61,531
(5,637)
(3,744)
$68,123
1,536
689
$139,587
13,742
8,334
$ 65,788
3,591
2,041
$38,560
(9,383)
(5,925)
$ 0.23
$ 0.72
$ (0.10)
$ (0.17)
$ 0.03
$ 0.39
$ 0.09
$ (0.28)
$ 0.22
$ 0.64
$ (0.10)
$ (0.17)
$ 0.03
$ 0.36
$ 0.09
$ (0.28)
6
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased $41.4
million, from $74.2 million at March 31, 1998 to $32.8 mil-
lion at March 31, 1999. Approximately $18.1 million in cash
and cash equivalents was provided by operating activities
during the year ended March 31, 1999 versus $31.1 million
provided by operating activities in fiscal 1998. This change
was primarily attributable to the increases during the year
ended March 31, 1999 in accounts receivable, other current
assets, inventories, and a decrease in accounts payable result-
ing from the Company’s overall growth during the fiscal year
ended March 31, 1999 partially offset by an increase in
accrued expenses.
Cash and cash equivalents used in investing activities was
approximately $64.3 million during the year ended March
31, 1999 versus $43.3 million used in investing activities
during the year ended March 31, 1998. The increase in cash
used in investing activities was due to the significant increase
in prepaid royalties and capitalized software costs incurred
by the Company as a result of its execution of new license
agreements granting the Company long term rights to the
intellectual property of third parties, as well as the acquisi-
tion of publishing or distribution rights to products being
developed by third parties. Capital expenditures totaled
approximately $3.8 million for the year ended March 31,
1999 versus $9.3 million in the prior year. The decrease in
capital expenditures was due to the cost relating to the
Company moving its Los Angeles office to a new facility in
Santa Monica, California in the prior year.
Cash and cash equivalents provided by financing activities
totaled $7.2 million for the year ended March 31, 1999 ver-
sus $62.9 million in the prior year. The decrease was due to
the issuance of $60 million of convertible subordinated debt
in December 1997.
In connection with the Company’s purchases of N64 hard-
ware and software cartridges for distribution in North
America and Europe, Nintendo requires the Company to pro-
vide irrevocable letters of credit prior to accepting purchase
orders from the Company for the purchase of these car-
tridges. Furthermore, Nintendo maintains a policy of not
accepting returns of N64 hardware and software cartridges.
Because of these and other factors, the carrying of an inven-
tory of N64 hardware and software cartridges entails signifi-
cant capital and risk.
As of March 31, 1999, the Company had a $40.0 million
revolving credit and letter of credit facility (the “Prior
Facility”) with a group of banks. The Prior Facility current-
ly provided the Company with the ability to borrow funds
and issue letters of credit against eligible accounts receivable
up to $40.0 million. The Prior Facility was scheduled to
expire in October 2001. As of March 31, 1999, the Company
had $22.4 million in letters of credit outstanding and no bor-
rowings against the Prior Facility (there were no outstanding
letters of credit or borrowings against Prior Facility in the fis-
cal year ended March 31, 1998). In addition, the Company
had a $2 million line of credit agreement (the “Asset Line”)
with a bank that expired in September 1998. Approximately
$1.1 million and $1.2 million was outstanding on this line as
of March 31, 1999 and 1998, respectively.
In June 1999, the Company replaced the Prior Facility with a
$125 million revolving credit facility and term loan (the
“New Facility”) with a new group of banks that provides the
Company with the ability to borrow up to $100 million and
issue letters of credit up to $80 million against eligible
accounts receivable and inventory.
(See Note 13,
“Subsequent Events” in the footnotes to the Consolidated
Financial Statements.) The $25 million term loan portion of
the New Facility was used to acquire Expert and pay costs
related to such acquisition and the securing of the New
Facility. The term loan has a three year term with principal
amortization on a straight line quarterly basis beginning
December 31, 1999 and a borrowing rate of the banks’ base
rate (which is generally equivalent to the published prime
rate) plus 2.0%, or LIBOR plus 3.0%. The revolving portion
of the New Facility has a borrowing rate of the banks’ base
rate plus 1.75%, or LIBOR plus 2.75%. The Company pays
a commitment fee of 1/2% based on the unused portion of
the line.
In addition,
the Company’s CentreSoft subsidiary has a
revolving credit facility (the “UK Facility”) with its bank in
the United Kingdom for approximately $11.2 million. The
UK Facility can be used for working capital requirements
and expires in June 2000. The Company had no borrowings
outstanding against the UK facility as of March 31, 1999. In
the Netherlands, the Company’s CD Contact subsidiary has a
credit facility (“the Netherlands Facility”) with a bank that
permits borrowings against eligible accounts receivable and
inventory up to approximately $25 million. Borrowings
under the Netherlands Facility are due on demand and totaled
$6.0 million as of March 31, 1999. Letters of credit out-
standing under the Netherlands Facility totaled $6.9 million
as of March 31, 1999.
The Company will use its working capital ($141.3 million at
March 31, 1999), as well as the proceeds available from the
New Facility, the UK Facility and the Netherlands Facility, to
7
finance the Company’s operational requirements for at least
the next twelve months, including acquisitions of inventory
and equipment, the funding of development, production,
marketing and selling of new products, the acquisition of
Expert, and the acquisition of intellectual property rights for
future products from third parties.
The Company's management currently believes that inflation
has not had a material impact on continuing operations.
YEAR 2000
Like many other software companies, the year 2000 comput-
er issue creates risk for the Company. If internal computer
and embedded systems do not correctly recognize date infor-
mation when the year changes to 2000, there could be an
adverse impact on the Company’s operations. The Company
has initiated a comprehensive plan to prepare its internal
computer and embedded systems for the year 2000 and is
currently implementing changes to alleviate any year 2000
incapabilities. As part of such plan, the Company has pur-
chased software programs that have been independently
developed by third parties, which will test year 2000 compli-
ance for the majority of the Company’s systems.
All of the entertainment and leisure software products cur-
rently being shipped by the Company have been tested for
year 2000 compliance and have passed these tests. In addi-
tion, all such products currently in development are being
tested as part of the normal quality assurance testing process
and are scheduled to be released fully year 2000 compliant.
Notwithstanding the foregoing, the year 2000 computer issue
could still affect the ability of consumers to use the PC prod-
ucts sold by the Company. For example, if the computer sys-
tem on which a consumer uses the Company’s products is not
year 2000 compliant, such noncompliance could affect the
consumer’s ability to use such products.
Contingency plans currently have been developed to address
the most material areas of exposure to the Company, such as
adding network operating systems to back-up the Company’s
current network server and developing back-up plans for
telecommunications with external offices and customers. In
addition, a staffing plan has been developed to manually
handle orders should there be a failure of electronic data
interchange connections with its customers and suppliers.
Management believes that the items mentioned above consti-
tute the greatest risk of exposure to the Company and that the
plans developed by the Company will be adequate for han-
dling these items.
The Company has contacted critical suppliers of products
and services to determine that the suppliers’ operations and
the products and services they provide are year 2000 compli-
ant. To assist suppliers (particularly trading partners using
electronic data interchange) in evaluating their year 2000
issues, the Company has developed a questionnaire which
indicates the ability of each supplier to address year 2000
incompatibilities. All critical suppliers and trading partners
of the Company have responded to the questionnaire and
confirmed the expectation that they will continue providing
services and products through the change to 2000.
Year 2000 compliance testing on substantially all of the
Company’s critical systems have been completed and corre-
sponding changes have been made. The costs incurred by the
Company to date related to this testing and modification
process are less than $100,000. The total cost does not
include potential costs related to any systems used by the
Company’s customers, any third party claims, or the costs
incurred by the Company when it replaces internal software
and hardware in the normal course of its business. The over-
all cost of the Company’s year 2000 compliance plan is a
minor portion of the Company’s total information technolo-
gy budget and is not expected to materially delay the imple-
mentation of any other unrelated projects that are planned to
be undertaken by the Company. In some instances, the instal-
lation schedule of new software and hardware in the normal
course of business has been accelerated to also afford a solu-
tion to year 2000 compatibility issues. The total cost estimate
for the Company’s year 2000 compliance plan is based on
management’s current assessment of the projects comprising
the plan and is subject to change as the projects progress.
Based on currently available information, management does
not believe that the year 2000 issues discussed above related
to the Company’s internal systems or its products sold to cus-
tomers will have a material adverse impact on the
Company’s financial condition or results of operations; how-
ever, the specific extent to which the Company may be
affected by such matters is not certain. In addition, there can
be no assurance that the failure by a supplier or another third
party to ensure year 2000 compatibility would not have a
material adverse effect on the Company.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries
of the European Union adopted the “euro” as their common
currency. The sovereign currencies of the participating coun-
tries are scheduled to remain legal tender as denominations
of the euro between January 1, 1999 and January 1, 2002.
8
Beginning January 1, 2002, the participating countries will
issue new euro-denominated bills and coins for use in cash
transactions. No later than July 1, 2002, the participating
countries will withdraw all bills and coins denominated in
the sovereign currencies, so that the sovereign currencies no
longer will be legal tender for any transactions, making con-
version to the euro complete. The Company has performed
an internal analysis of the possible implications of the euro
conversion on the Company’s business and financial condi-
tion, and has determined that the impact of the conversion
will be immaterial to its overall operations. The Company’s
wholly owned subsidiaries operating in participating coun-
tries represented 24.1% and 22.1% of the Company’s con-
solidated net revenues for the years ended March 31, 1999
and 1998, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” is effective for all fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair
value. The Company does not currently participate in hedg-
ing activities or own derivative instruments but plans to adopt
SFAS No. 133 beginning April 1, 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company transacts business in many different foreign
currencies and may be exposed to financial market risk result-
ing from fluctuations in foreign currency exchange rates, par-
ticularly the British Pound sterling. The volatility of the
pound (and all other applicable currencies) will be monitored
frequently throughout the coming year and the Company may
use hedging programs, currency forward contracts, currency
options and/or other derivative financial instruments com-
monly utilized to reduce financial market risks.
In June 1999, the Company obtained the New Facility. The
interest rate applied to any debt outstanding under the New
Facility is based on the published prime rate or LIBOR and
is, therefore, subject to a certain amount of risk arising from
fluctuations in these rates.
9
INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance
sheets of ACTIVISION, INC. and subsidiaries as of March
31, 1999 and 1998 and the related consolidated statements of
operations, changes in shareholders’ equity and cash flows
for each of the years in the three-year period ended March
31, 1999. In connection with our audit of the consolidated
financial statements, we also have audited financial state-
ment schedule II for each of the years in the three-year peri-
od ended March 31, 1999. These consolidated financial state-
ments and financial statement schedule are the responsibility
of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements
and financial statement schedule 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 state-
ment presentation. We believe that our audits provide a rea-
sonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of ACTIVISION, INC. and subsidiaries as of March
31, 1999 and 1998, and the results of their operations and
their cash flows for each of the years in the three-year period
ended March 31, 1999, in conformity with generally accept-
ed accounting principles. Also in our opinion, the related
financial statement schedule for each of the years in the
three-year period ended March 31, 1999, when considered in
relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the infor-
mation set forth therein.
Los Angeles, California
May 3, 1999
10
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
In thousands, except per share data
Assets:
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowances of $14,979 and
$15,582, respectively
Inventories, net
Prepaid royalties and capitalized software costs
Deferred income taxes
Other current assets
Total current assets
Prepaid royalties and capitalized software costs
Property and equipment, net
Deferred income taxes
Excess purchase price over identifiable assets acquired, net
Other assets
March 31,
1999
March 31,
1998
Restated
$ 32,847
$ 74,241
117,522
30,931
38,997
6,044
9,960
236,301
6,923
10,841
2,618
21,647
5,282
73,926
19,425
12,444
3,852
1,988
185,876
-
11,944
4,665
23,473
3,322
Total assets
$ 283,612
$ 229,280
Liabilities and Shareholders’ Equity:
Current liabilities:
Current portion of notes payable to bank
Accounts payable
Accrued expenses
Total current liabilities
Notes payable to bank, less current portion
Convertible subordinated notes
Other liabilities
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, $.000001 par value, 50,000,000 shares
authorized, 23,104,927 and 22,408,415 shares issued and
22,604,927 and 21,908,415 outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Less: Treasury stock, cost of 500,000 shares
Total shareholders’ equity
$ 5,992
43,853
45,142
$ 4,292
50,473
15,338
94,987
1,143
60,000
7
156,137
-
109,251
26,012
(2,510)
(5,278)
127,475
70,103
1,692
60,000
88
131,883
-
91,825
10,758
92
(5,278)
97,397
Total liabilities and shareholders’ equity
$ 283,612
$ 229,280
The accompanying notes are an integral part of these consolidated financial statements.
11
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
In thousands, except per share data
1999
For the years ended March 31,
1998
Restated
1997
Restated
Net revenues
$ 436,485
$ 312,058
$ 189,239
Costs and expenses:
Cost of sales – product costs
Cost of sales – royalties and software amortization
Product development
Sales and marketing
General and administrative
Amortization of intangible assets
Merger expenses
Total costs and expenses
Income from operations
Interest income (expense), net
Income before income tax provision
Income tax provision
Net income
260,041
37,825
21,422
66,419
21,348
1,585
600
409,240
27,245
(3,030)
24,215
8,961
176,188
29,840
27,393
47,714
18,401
1,562
1,474
302,572
9,486
(1,112)
8,374
3,235
103,124
13,108
20,470
31,178
8,284
1,505
39
177,708
11,531
81
11,612
3,981
$ 15,254
$ 5,139
$ 7,631
Basic net income per share
$ 0.69
$ 0.24
$ 0.37
Diluted net income per share
$ 0.66
$ 0.23
$ 0.36
Number of shares used in computing basic net
income per share
22,162
21,339
20,262
Number of shares used in computing diluted net
income per share
23,233
22,210
20,951
The accompanying notes are an integral part of these consolidated financial statements.
12
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes
Adjustment for change in fiscal year-end for pooled subsidiaries
Depreciation and amortization
Amortization of prepaid royalties and capitalized software costs
Expense related to common stock warrants
Loss on disposal of fixed assets
Change in assets and liabilities (net of effects of purchases and acquisitions):
Accounts receivable
Inventories
Other current assets
Other assets
Accounts payable
Accrued expenses
Deferred revenue
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Cash paid by Combined Distribution (Holdings) Ltd. to acquire
CentreSoft (net of cash acquired)
Capital expenditures
Cash used in purchase acquisitions
Investment in prepaid royalties and capitalized software costs
Other
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of common stock
Proceeds from issuance of common stock upon exercise of warrants
Issuance of common stock pursuant to employee stock option plans
Issuance of common stock pursuant to employee stock purchase plan
Proceeds from issuance of subordinated loan stock debentures
Proceeds from issuance of convertible preferred stock
Proceeds from issuance of redeemable preferred stock
Dividends paid (Combined Distribution (Holdings) Ltd.)
Borrowing under line-of-credit agreement
Payment under line-of-credit agreement
Note payable to bank, net
Proceeds from issuance of subordinated convertible notes
Other
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
For the years ended March 31,
1999
1998
1997
Restated
$ 15,254
$ 5,139
$ 7,631
3,344
-
6,488
27,055
-
-
(43,596)
(11,506)
(7,972)
1,408
(6,620)
34,304
-
(81)
18,078
-
(3,800)
-
(60,531)
-
(64,331)
-
-
5,271
798
-
-
-
-
5,300
(5,300)
1,151
-
-
7,220
(2,361)
(41,394)
74,241
(1,327)
(639)
5,315
29,167
200
-
(25,079)
(6,798)
458
168
25,410
(308)
-
(83)
31,180
(812)
(8,872)
(246)
(33,213)
(228)
(43,371)
-
-
4,756
582
-
-
-
(1,256)
8,800
(8,800)
886
57,900
(6)
62,862
250
50,921
23,320
2,929
-
4,167
9,045
-
34
(13,244)
(5,169)
(1,137)
(600)
5,688
(5,652)
1,301
(37)
4,956
(3,878)
(4,580)
-
(11,130)
-
(19,588)
282
2,209
-
179
3,216
214
1,286
(130)
1,600
-
3,123
-
2
11,981
179
(2,472)
25,792
Cash and cash equivalents at end of period
$ 32,847
$ 74,241
$ 23,320
The accompanying notes are an integral part of these consolidated financial statements.
13
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY (DEFICIT)
Common Stock
Shares
Amount
$ 18,471
-
-
-
63
313
19
-
-
2,468
-
-
$ 21,334
In thousands
Balance, March 31, 1996
Components of comprehensive income:
Net income for the year
Foriegn currency translation adjustment
Total comprehensive income
Issuance of common stock
Issuance of common stock persuant to
employee stock option plan
Issuance of common stock persuant to
employee stock purchase plan
Tax benefit attributable to employee stock option plan
Tax benefit derived from net operating loss
carryforward utilazation
Issuance of stock on formation of CentreSoft
Conversin of notes payable to common stock
Dividends declared
Balance, March 31, 1997
Components of comprehensive income:
Net income for the year
Foriegn currency translation adjustment
Total comprehensive income
Issuance of common stock and
common stock warrants
Issuance of common stock persuant to
employee stock option plan
Issuance of common stock persuant to
employee stock purchase plan
Tax benefit attributable to employee stock option plan
Adjustment for change in year-end of pooled subsidiary
Conversion of Redeemable Preferred Stock
Conversion of Convertible Preferred Stock
Conversion of Subordinated Loan Stock Debentures
Issuance of stock to affect business combination
Dividends declared
Balance, March 31, 1998
Components of comprehensive income:
Net income for the year
Foriegn currency translation adjustment
$ 22,408
Total comprehensive income
Issuance of common stock and
common stock warrants
Issuance of common stock persuant to
employee stock option plan
Issuance of common stock persuant to
employee stock purchase plan
Tax benefit attributable to employee stock option plan
Tax benefit derived from net operating loss
carryforward utilazation
Conversin of notes payable to common stock
-
-
-
82
599
64
-
-
87
15
217
10
-
-
-
-
-
605
92
-
-
-
Balance, March 31, 1999
$ 23,105
Additional
Paid-In
Capital
$ 67,990
-
-
-
848
2,209
179
736
6,634
268
283
-
$ 79,147
-
-
-
1,214
4,756
582
1,247
-
1,286
214
3,216
163
-
Retained
Earnings
Treasury Stock
Shares
Amount
Accumulated
Other
Comprehensive
Income (loss)
Shareholders’
Equity
2
(500)
$ (5,278)
$ (335)
$ 62,379
7,631
-
-
-
-
-
-
-
-
-
(1,270)
6,363
5,139
-
-
-
-
-
-
(639)
-
-
-
11
(116)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
177
-
-
-
-
-
-
-
-
-
7,631
177
7,808
848
2,209
179
736
6,634
268
283
(1,270)
(500)
$ (5,278)
$ (158)
$ 80,074
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
250
-
-
-
-
-
-
-
-
-
-
-
5,139
250
5,389
1,214
4,756
582
1,247
(639)
1,286
214
3,216
174
(116)
$ 91,825
10,758
(500)
$ (5,278)
$ 92
$ 97,397
-
-
-
3,368
5,271
798
1,059
2,430
4,500
15,254
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,602)
-
-
-
-
-
-
-
15,254
(2,602)
12,652
3,368
5,271
798
1,059
2,430
4,500
$ 109,251
26,012
(500)
$ (5,278)
$ (2,510)
$ 127,475
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
The accompanying notes are an integral part of these consolidated financial statements.
14
ACTIVISION, INCORPORATED AND
SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1.SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business
Activision, Inc. (together with its subsidiaries, “Activision”
or the "Company") is a leading international publisher, devel-
oper and distributor of interactive entertainment and leisure
products. The Company was incorporated in California in
1979. In December 1992, the Company reincorporated in
Delaware.
The Company’s products span a wide range of genres
(including action, adventure, strategy and simulation) and
target markets (including game enthusiasts, value buyers and
children). In addition to its genre and market diversity, the
Company publishes, develops and distributes products for a
variety of game platforms, including personal computers
(“PCs”),
the Sony Playstation console system and the
Nintendo 64 console system.
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 consolida-
tion
Basis of Presentation
These consolidated financial statements have been retroac-
tively restated to reflect the pooling of interests of the
Company with Raven Software Corporation (“Raven”),
NBG EDV Handels- und Verlags GmbH (“NBG”), S.B.F.
Services, Limited dba Head Games Publishing (“Head
Games”) and CD Contact Data GmbH (“CD Contact”).
Each of the above transactions originally had been account-
ed for by the Company as an immaterial pooling of interests.
The financial results for each such acquired company and
related cash flows had therefore been included in the report-
ed operations of the Company beginning on the date of
acquisition. Based on a reevaluation of these transactions,
including the results of operations of each entity, statements
by the Securities and Exchange Commission (the “SEC”) on
materiality of pooling transactions and requirements to eval-
uate the impact on each line item in the financial statements
and the impact on the Company’s trends, the Company has
restated all financial information reported in the Company’s
Annual Report on Form 10-K for all periods prior to the con-
summation of each transaction to include the financial posi-
tion, results of operations and cash flows of such acquired
companies.
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 finan-
cial institutions. At various times during the fiscal years
ended March 31, 1999, 1998 and 1997, the Company had
deposits in excess of the $100,000 Federal Deposit Insurance
Corporation ("FDIC") limit at these financial institutions. At
March 31, 1999, the Company had approximately $3.9 mil-
lion invested in short-term commercial paper and short-term
United States government backed securities. The Company's
customer base includes retail outlets and distributors includ-
ing consumer electronics and computer specialty stores, dis-
count 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 gener-
ally does not require collateral or other security from its cus-
tomers.
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 prima-
rily due from retailers and original equipment manufacturers
(“OEMs”).
Prepaid Royalties and Capitalized Software Costs
Prepaid royalties include payments made to independent
software developers under development agreements and
license fees paid to intellectual property rights holders for
use of their trademarks or copyrights. Intellectual property
rights, which have alternative future uses, are capitalized.
Capitalized software costs represent costs incurred for devel-
opment that are not recoupable against future royalties.
The Company accounts for prepaid royalties relating to
15
development agreements and capitalized software costs in
accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise
Marketed”. Software development costs and prepaid royal-
ties are capitalized once technological feasibility is estab-
lished. Technological feasibility is evaluated on a product by
product basis. For products where proven game engine tech-
nology exists, this may occur early in the development cycle.
Software development costs are expensed if and when they
are deemed unrecoverable. Amounts related to software
development which are not capitalized are charged immedi-
ately to product development expense.
The following criteria is used to evaluate recoverability of
software development costs: historical performance of com-
parable products; the commercial acceptance of prior prod-
ucts released on a given game engine; orders for the product
prior to its release; estimated performance of a sequel prod-
uct based on the performance of the product on which the
sequel is based; and actual development costs of a product as
compared to the Company’s budgeted amount.
Capitalized software development costs are amortized to cost
of sales – royalties and software amortization on a straight-
line basis over the estimated product life (generally one year
or less) commencing upon product release, or on the ratio of
current revenues to total projected revenues, whichever
amortization amount is greater. Prepaid royalties are amor-
tized to cost of sales – royalties and software amortization
commencing upon the product release at the contractual roy-
alty rate based on actual net product sales, or on the ratio of
current revenues to total projected revenues, whichever
amortization amount is greater. For products that have been
released, management evaluates the future recoverability of
capitalized amounts on a quarterly basis.
As of March 31, 1999, prepaid royalties and unamortized
capitalized software costs totaled $37.1 million (including
$6.9 million classified as non-current) and $8.8 million,
respectively. As of March 31, 1998, prepaid royalties and
unamortized capitalized software costs totaled $10.7 million
and $1.7 million, respectively. At March 31, 1998, all pre-
paid royalties and unamortized capitalized software costs
were classified as current. Amortization of prepaid royalties
and capitalized software costs was $27.1 million, $29.2 mil-
lion and $9.0 million for the years ended March 31, 1999,
1998 and 1997, respectively. Write-offs of prepaid royalties
and capitalized software costs prior to product release were
$2.4 million, $363,000 and $588,000 for the years ended
March 31, 1999, 1998 and 1997, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out)
or market.
Revenue Recognition
The American Institute of Certified Public Accountant’s (the
“AICPA”) Statement of Position 97-2 “Software Revenue
Recognition” (SOP 97-2) was effective for all transactions
entered into subsequent to March 31, 1998. The adoption of
SOP 97-2 did not have a material impact on the Company’s
financial position, results of operations or liquidity.
Product Sales: The Company recognizes revenue from the
sale of its products upon shipment. Subject to certain limita-
tions, the Company permits customers to obtain exchanges
or return products within certain specified periods, and pro-
vides price protection on certain unsold merchandise.
Management of the Company has the ability to estimate the
amount of future exchanges, returns, and price protections.
Revenue from product sales is reflected net of the allowance
for returns and price protection.
Software Licenses: For those license agreements which pro-
vide 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, 1999, 1998 and 1997 were approximately $15,572,000
$6,336,000 and $3,285,000, respectively, and are included in
sales and marketing expense in the consolidated statements
of operations.
Excess Purchase Price Over Identifiable Assets
Acquired, Net and Long-Lived Assets
The excess cost over net assets acquired is being amortized
on a straight-line basis over a 20 year period. As of March
31, 1999 and 1998, accumulated amortization amounted to
$9,069,000 and $7,904,000, 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 or changes in cir-
cumstances 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
16
the asset to undiscounted cash flows expected to be generat-
ed 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 oper-
ations, or liquidity.
Interest Income (Expense)
Interest income (expense), net is comprised of (amounts in
thousands):
Interest expense
Interest income
1999
$(4,973)
1,943
1998
Restated
$(2,223)
1,111
1997
Restated
$ (843)
924
Net interest income (expense)
$(3,030)
$(1,112)
$ 81
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 oper-
ating 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 tem-
porary 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 account-
ing records in their local currency. The currencies are then
converted to United States dollars and the effect of the for-
eign currency translation is reflected as a component of
shareholders’ equity in accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency
Translation."
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires manage-
ment 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.
Stock Based Compensation
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 provi-
sions 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
1999 Transactions
As stated below, the acquisition of Head Games and CD
Contact were originally treated as immaterial poolings of
interest. However, after reviewing the results of operations
of the entities, including the materiality and impact on the
Company’s trends, the Company has restated the financial
statements for all periods prior to the closing of each respec-
tive transaction.
Acquisition of Head Games
On June 30, 1998, the Company acquired Head Games in
exchange for 1,000,000 shares of the Company’s common
stock. The acquisition of Head Games was initially account-
ed for as an immaterial pooling of interests; accordingly,
periods prior to April 1, 1998 were not retroactively restated
for this transaction. However with the Company’s Annual
17
Report on Form 10-K, all prior periods have been retroac-
tively restated to reflect the effect of the Head Games acqui-
sition in all periods presented.
Acquisition of CD Contact
On September 29, 1998, the Company acquired CD Contact in
exchange for 1,900,000 shares of the Company’s common
stock. In addition, $9.1 million in outstanding debt was
acquired in connection with the CD Contact acquisition. The
debt is evidenced by notes payable which are due on demand
and bear interest at approximately 8% per annum. The acqui-
sition of CD Contact was initially accounted for as an imma-
terial pooling of interests; accordingly, periods prior to July 1,
1998 were not retroactively restated for this transaction.
However with the Comapny’s Annual Report on Form 10-K,
all prior periods have been retroactively restated to reflect the
effect of the CD Contact acquisition in all periods presented.
The following table represents the results of operations of the
previously separate companies for the period before the com-
bination was consummated which are included in the current
combined net income of the Company:
Fiscal Year 1999
Head Games
3 Months
Ended
June 30,
1998
CD Contact
6 Months
Ended
September 30,
1998
Activision
Year Ended
March 31,
1998
Revenues
Net Income
$412,225
$ 14,194
$2,195
$ 394
$22,065
$ 666
Total
Year Ended
March 31,
1999
$436,485
$ 15,254
Results for Head Games from July 1, 1998, subsequent to its
acquisition by the Company and for CD Contact from
October 1, 1998, subsequent to its acquisition by the
Company, are included in the Activision year ended March
31, 1999 column above.
1998 Transactions
As discussed below, the acquisitions of NBG and Raven
were originally accounted for as immaterial poolings of
interest. However, based on statements by the SEC regard-
ing materiality and the requirement to evaluate the impact on
each line item of the Company’s financial statements and the
impact on the Company’s trends, the Company has restated
the financial statements for periods prior to the closing of
each respective transaction.
18
Acquisition of NBG
On November 26, 1997, the Company acquired NBG in
exchange for 281,206 shares of the Company’s common
stock. The acquisition of NBG was initially accounted for as
an immaterial pooling of interests; accordingly, periods prior
to October 1, 1997 were not retroactively restated for this
transaction. However, with the Company’s Annual Report
on Form 10-K, all prior periods have been retroactively
restated to reflect the effect of the NBG acquisition in all
periods presented.
Acquisition of Raven Software Corporation
the Company acquired Raven in
On August 26, 1997,
exchange for 1,040,000 shares of the Company’s common
stock. The acquisition of Raven was initially accounted for
as an immaterial pooling of interests; accordingly, periods
prior to April 1, 1997 were not retroactively restated for this
transaction. However, with the Company’s Annual Report
on Form 10-K, all prior periods have been retroactively
restated to reflect the effect of the Raven acquisition in all
periods presented.
Activision
as Previously
Reported
Year Ended
March 31,
1998
Fiscal Year 1998
Head
NBG
6 Months
Ended
Year
Ended
Sept. 30, March 31,
1998
Games CD Contact
Year
Ended
March 31,
1998
1997
Total
Restated
Year
Ended
March 31,
1998
Revenues
Net income (loss)
$259,926
$ 5,827
$7,081
$(106)
$3,715
$ (70)
$41,336
$ (512)
$312,058
$ 5,139
Fiscal Year 1997
Total
Activision
Contact Restated
as Previously
Year
Reported
Year Ended
Ended
March 31, March 31, March 31, March 31, March 31, March 31,
1997
NBG
6 Months
Ended
Head
Games
Year
Ended
Raven
Year
Ended
Year
Ended
1997
1997
1997
1997
1997
CD
Revenues
Net income (loss)
$154,644
$ 9,226
$ 428
$(419)
$19,628
$ 179
$ 1,083
$(1,510) $ 155
$13,456 $189,239
$ 7,631
Acquisition of CentreSoft
On November 26, 1997, the Company acquired CentreSoft in
exchange for 2,787,043 shares and 50,325 options to acquire
shares of the Company’s common stock. The acquisition of
CentreSoft was accounted for in accordance with the pooling
of interests method of accounting and accordingly,
the
Company’s consolidated financial statements were retroac-
tively adjusted as if CentreSoft and the Company had oper-
ated as one since June 28, 1996 (inception of CentreSoft).
3.INVENTORIES
Inventories at March 31, 1999, 1998 and 1997 are stated net of
an adjustment to net realizable value of approximately
$1,493,000, $828,000 and $471,000, respectively. The provi-
sions to adjust inventories to net realizable value for the years
ended March 31, 1999, 1998 and 1997 were approximately
$828,000, $1,082,000 and $478,000, respectively. Inventories,
net of reserves, consisted of (amounts in thousands):
Purchased parts and components
Finished goods
March 31, 1999
March 31, 1998
$ 2,326
28,605
$ 30,931
Restated
$ 1,409
18,016
$ 19,425
4.PROPERTY AND EQUIPMENT
Property and equipment 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: buildings, 30 years; computer equipment, office furni-
ture and other equipment, 3 years; leasehold improvements,
through the life of the lease. Property and equipment, stated
at cost, was as follows (amounts in thousands):
March 31, 1999
March 31, 1998
Land
Buildings
Computer equipment
Office furniture and other equipment
Leasehold improvements
Total cost of property
and equipment
Less accumulated depreciation
Net cost of property
and equipment
$ 581
759
18,067
3,522
3,189
26,118
(15,277)
Restated
$ 581
801
15,576
3,480
2,974
23,412
(11,468)
$ 10,841
$ 11,944
Depreciation expense for the years ended March 31, 1999,
1998 and 1997 was $4,903,000, $3,753,000 and $2,662,000,
respectively.
5.ACCRUED EXPENSES
Accrued expenses were as follows (amounts in thousands):
March 31, 1999
March 31, 1998
Accrued royalties payable
Affiliated label payable
Accrued selling and
marketing costs
Income tax payable
Accrued interest expense
Accrued bonus and vacation pay
Other
$ 11,249
11,999
3,082
5,068
1,013
4,473
8,258
Restated
$ 5,996
-
2,937
1,360
1,125
1,210
2,710
$ 45,142
$ 15,338
6.OPERATIONS BY REPORTABLE SEGMENTS
AND GEOGRAPHIC AREA
The Company adopted SFAS No. 131, “Disclosure about
Segments of an Enterprise and Related Information,” as of
April 1, 1998. SFAS No. 131 establishes standards for
reporting information about an enterprise’s operating seg-
ments and related disclosures about its products, geographic
areas and major customers.
The Company publishes, develops and distributes interactive
entertainment and leisure products for a variety of game plat-
forms, including PCs, the Sony PlayStation console system
and the Nintendo 64 console system. Based on its organiza-
tional structure, the Company operates in two reportable seg-
ments: publishing and distribution.
The Company’s publishing segment develops and publishes
titles both internally through the studios owned by the
Company and externally, through third party developers. In
the United States, the Company’s products are sold primari-
ly on a direct basis to major computer and software retailing
organizations, mass market retailers, consumer electronic
stores, discount warehouses and mail order companies. The
Company conducts its international publishing activities
through offices in the United Kingdom, Germany, France,
Australia and Japan. The Company’s products are sold inter-
nationally on a direct to retail basis, through third party dis-
tribution and licensing arrangements, and through the
Company’s owned distribution subsidiaries located in the
United Kingdom, the Benelux territories and Germany.
The Company’s distribution segment, located in the United
Kingdom, the Benelux territories and Germany, distributes
interactive entertainment software and hardware and pro-
vides logistical services for a variety of publishers and man-
ufacturers. A small percentage of distribution sales is
derived from Activision-published titles.
19
The President and Chief Operating Officer allocates
resources to each of these segments using information on
their respective revenues and operating profits before interest
and taxes. The President and Chief Operating Officer has
been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131.
The President and Chief Operating Officer does not evaluate
individual segments based on assets or depreciation.
The accounting policies of these segments are the same as
those described in the Summary of Significant Accounting
Policies. Revenue derived from sales between segments is
eliminated in consolidation.
Information on the reportable segments for the three years
ended March 31, 1999 is as follows:
Fiscal Year Ended March 31, 1999
Publishing Distribution
Corporate
Total
Revenues from external customers
$186,299
Revenue from sales between segments $ 19,202
$ 17,784
Operating income (loss)
$250,186
$
-
$ 10,685
$ -
$ -
$ (1,224)
$436,485
$ 19,202
$ 27,245
Fiscal Year Ended March 31, 1998
Publishing Distribution
Corporate
Total
Revenues from external customers
$125,067
Revenue from sales between segments $ 7,759
$ 5,836
Operating income (loss)
$186,991
-
$
4,842
$
$ -
$ -
$ (1,192)
$312,058
7,759
$
9,486
$
Fiscal Year Ended March 31, 1997
Publishing Distribution
Corporate
Total
Revenues from external customers
Revenue from sales between segments $
Operating income (loss)
$ 87,994
-
$ 10,077
$101,245
-
$
2,721
$
$ -
$ -
$ (1,267)
$189,239
$
-
$ 11,531
Operating expenses in the Corporate column consist entirely
of amortization of goodwill resulting from the Company’s
merger with the Disc Company, Inc. on April 1, 1992.
Geographic information for the three years ended March 31,
1999 is based on the location of the selling entity. Revenues
from external customers by geographic region were as follows:
United States
Europe
Other
Total
Fiscal Year Ended March 31, 1999
1998
1999
1997
$ 149,664
278,032
8,789
$ 89,936
208,817
13,305
$ 65,695
113,456
10,088
$ 436,485
$ 312,058
$ 189,239
Revenues by platform were as follows:
Console
PC
Total
1999
1998
Restated
1997
Restated
$ 268,205
168,280
$ 131,890
180,168
$ 68,480
120,759
$ 436,485
$ 312,058
$ 189,239
7. COMPUTATION OF NET INCOME PER SHARE
The following table sets forth the computations of basic and
diluted net income per share:
Numerator
Net income
Preferred stock dividends
Numerator for basic and diluted
net income per share-income
available to common stockholders
Denominator
Denominator for basic net income
per share-weighted average shares
outstanding
(amounts in thousands, except per share data)
1999
1998
1997
Restated
$ 15,254
-
$ 5,139
(116)
$ 7,631
(151)
$ 15,254
$ 5,023
$ 7,480
22,162
21,339
20,262
Effect of dilutive securities:
Employee stock options
Warrants to purchase common stock
Potential dilutive common shares
942
129
1,071
801
70
871
689
-
689
Denominator for diluted net income
per share-adjusted weighted average
shares and assumed conversions
23,233
22,210
20,951
Basic net income per share
$ 0.69
$ 0.24
$ 0.37
Diluted net income per share
$ 0.66
$ 0.23
$ 0.36
Options to purchase 2,188,175, 1,978,000 and 2,838,000
shares of common stock were outstanding for the years
ended March 31, 1999, 1998 and 1997, respectively, but
were not included in the calculations of diluted net income
per share because their effect would be antidilutive.
20
Convertible subordinated notes and convertible preferred
stock were not included in the calculations of diluted net
income per share because their effect would be antidilutive.
The components of the net deferred tax asset and liability
were as follows (amounts in thousands):
March 31, 1999
March 31, 1998
8. INCOME TAXES
Domestic and foreign income (loss) before income taxes and
details of the income tax provision (benefit) are as follows
(amounts in thousands):
Income (loss) before income taxes:
Domestic
Foreign
Income tax expense (benefit):
Current:
Federal
State
Foreign
Total current
Deferred:
Federal
State
Total deferred
Add back benefit credited to
additional paid-in capital:
Tax benefit related to stock
option exercises
Tax benefit related to utilization
of pre-bankruptcy net operating
loss carryforwards
Fiscal Year Ended March 31,
1998
1997
1999
$ 6,524
17,691
$ (2,215)
10,589
$ 2,838
8,774
$ 24,215
$ 8,374
$ 11,612
$ 37
124
5,456
5,617
(202)
57
(145)
1,059
2,430
3,489
$ 1,133
14
3,653
4,800
(2,580)
(232)
(2,812)
1,247
-
1,247
$ (745)
31
1,530
816
(2,961)
(1,244)
(4,205)
736
6,634
7,370
$ 8,961
$ 3,235
$ 3,981
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:
Federal income tax provision at statutory rate
State taxes, net of federal benefit
Nondeductible amortization
Nondeductible merger fees
Research and development credits
Incremental effect of foreign tax rates
Increase (reduction) of valuation allowance
Other
Year ended March 31,
Restated
1999
1998
1997
34.0%
1.3%
1.7%
0.8%
(5.4%)
(0.9%)
5.1%
0.4%
34.0%
(1.2%)
4.4%
3.6%
(5.3%)
0.7%
-
2.4%
35.0%
2.6%
3.0%
-
(6.4%)
(3.1%)
3.1%
0.1%
37.0%
38.6%
34.3%
Deferred asset:
Allowance for bad debts
Allowance for sales returns
Royalty reserve
Miscellaneous
Tax credit carryforwards
Net operating loss carryforwards
Deferred asset
Valuation allowance
Net deferred asset
Deferred liability:
Deferred compensation
Capitalized research expenses
State taxes
Deferred liability
Net deferred asset
$ 942
144
1,649
1,591
6,726
10,534
21,586
(6,916)
14,670
110
5,512
386
6,008
Restated
$ 358
2,458
-
1,304
3,320
9,184
16,624
(8,107)
8,517
-
-
-
-
$ 8,662
$ 8,517
In accordance with Statement of Position 90-7, “Financial
Reporting by Entities in Reorganization Under the
Bankruptcy Code,” issued by the AICPA, benefits from loss
carryforwards arising prior to the Company’s reorganization
are recorded as additional paid-in capital. During the year
ended March 31, 1999, $2.4 million of such benefit was rec-
ognized through a reduction in the valuation allowance. The
reduction in the valuation allowance during the years ended
March 31, 1999 was determined based on the Company’s
assessment of the realizability of its deferred tax assets,
which assessment was 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 $8.7 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 Company’s available net operating loss carryforward for
federal tax reporting purposes approximates $31.0 million
and is subject to certain limitations as defined under Section
382 of the Internal Revenue Code. The net operating loss car-
ryforwards expire from 2006 to 2013. The Company has tax
credit carryforwards of $4.6 million and $2.2 million for fed-
21
eral and state purposes, respectively, which expire from 2006
to 2013.
9.COMMITMENTS, CONTINGENCIES AND DEBT
Bank Line of Credit
As of March 31, 1999, the Company had a $40.0 million
revolving credit and letter of credit facility (the “Prior
Facility”) with a group of banks. The Prior Facility currently
provides the Company with the ability to borrow funds and
issue letters of credit against eligible accounts receivable up
to $40.0 million. The Prior Facility was scheduled to expire
in October 2001. As of March 31, 1999, the Company had
$22.4 million in letters of credit outstanding and no borrow-
ings against the Prior Facility (there were no outstanding let-
ters of credit or borrower against the Prior Facility in the fis-
cal year ended March 31, 1998). In addition, the Company
had a $2 million line of credit agreement (the “Asset Line”)
with a bank that expired in September 1998. Approximately
$1.1 million and $1.2 million was outstanding on this line as
of March 31, 1999 and 1998, respectively.
In addition,
the Company’s CentreSoft subsidiary has a
revolving credit facility (the “UK Facility”) with its bank in
the United Kingdom for approximately $11.2 million. The
UK Facility can be used for working capital requirements
and expires in June 2000. The Company had no borrowings
outstanding against the UK facility as of March 31, 1999. In
the Netherlands, the Company’s CD Contact subsidiary has a
credit facility (“the Netherlands Facility”) with a bank that
permits borrowings against eligible accounts receivable and
inventory up to approximately $25 million. Borrowings
under the Netherlands Facility are due on demand and totaled
$6.0 as of March 31, 1999. Letters of credit outstanding
under the Netherlands facility totaled $6.9 million as of
March 31, 1999.
Private Placement of Convertible
Subordinated Notes
In December 1997, the Company completed the private
placement of $60.0 million principal amount of 6 3/4% con-
vertible subordinated notes due 2005 (the “Notes”). The
Notes are convertible, in whole or in part, at the option of the
holder at any time after December 22, 1997 (the date of orig-
inal issuance) and prior to the close of business on the busi-
ness day immediately preceding the maturity date, unless
previously redeemed or repurchased, into common stock,
$.000001 par value, of the Company, at a conversion price of
$18.875 per share, (equivalent to a conversion rate of
52.9801 shares per $1,000 principal amount of Notes), sub-
ject to adjustment in certain circumstances. The Notes are
redeemable, in whole or in part, at the option of the Company
at any time on or after January 10, 2001, subject to premiums
through December 31, 2003.
Lease Obligations
The Company leases certain of its facilities under non-can-
celable operating lease agreements. Total future minimum
lease commitments as of March 31, 1999 are as follows
(amounts in thousands):
Year ending March 31,
2000
2001
2002
2003
2004
Thereafter
$ 3,760
3,608
3,281
3,139
3,123
$11,450
Rent expense for the years ended March 31, 1999, 1998 and
1997 was approximately $3,900,000, $3,219,000 and
$2,279,000, respectively.
Legal Proceedings
The Company is party to routine claims and suits brought
against it in the ordinary course of business, including dis-
putes 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 condi-
tion, results of operations or liquidity.
10.STOCKHOLDERS’ EQUITY AND
COMPENSATION PLANS
Option Plans
The Company has two stock option plans for the benefit of
officers, employees, consultants and others.
The Activision 1991 Stock Option and Stock Award Plan, as
amended, (the “1991 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. The total number of shares of Common Stock avail-
able for distribution under the 1991 Plan is 7,666,667. The
1991 Plan requires available shares to consist in whole or in
part of authorized and unissued shares for treasury shares.
There were 156,500 shares remaining available for grant
under the 1991 Plan as of March 31, 1999.
22
On September 23, 1998, the stockholders of the Company
approved the Activision 1998 Incentive Plan (the “1998
Plan”). The 1998 Plan permits the granting of non-qualified
stock options, ISOs, restricted stock awards, deferred stock
awards and other common stock-based awards to officers,
employees, consultants and others. The total number of
shares of Common Stock available for distribution under the
1998 Plan is 3,000,000. The 1998 Plan requires available
shares to consist in whole or in part of authorized and unis-
sued shares or treasury shares. There were 1,087,435 remain-
ing shares available for grant under the Incentive Plan as of
March 31, 1999.
The exercise price for stock options issued under the 1991
Plan and 1998 Plan (collectively, the “Plans”) is determined
at the discretion of the Board of Directors (or the
Compensation Committee of the Board of Directors), and for
ISOs, is not to be less than the fair market value of the
Company’s common stock 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.
Activity of the Plans during the last three fiscal years was as
follows (amounts in thousands, except weighted average
exercise price amounts):
1999
Shares Wtd Avg
(000) Ex Price
1998
Shares Wtd Avg
Ex Price
(000)
1997
Shares Wtd Avg
Ex Price
(000)
$ 11.47
$ 10.27
5,228
2,776
$ 11.69
$ 12.14
3,725
1,997
$ 11.37
$ 11.28
6,218
3,538
.
7,949
$ 10.54
6,218
$ 11.47
5,228
$ 11.69
3,754
$ 10.00
2,532
$ 9.78
3,292
$ 12.62
Outstanding at
beginning of year
Granted
Exercised
Outstanding at end
of year
Exercisable at
end of year
The range of exercise prices for options outstanding as of
March 31, 1999 was $.75 to $17.75. The range of exercise
prices for options is wide due to increases and decreases in
the Company’s stock price over the period of the grants. For
the year ended March 31, 1999, 3,320,000 options were
granted at an exercise price equal to the fair market value on
the date of grant and 218,000 options were granted at an exer-
cise price greater than fair market value on the date of grant.
The following tables summarize information about stock
options outstanding as of March 31, 1999:
Outstanding Options
Exercisable Options
Remaining
Wtd Avg
Contractual
Life
(in years)
Wtd Avg
Ex Price
Shares Wtd Avg
Ex Price
(000)
6.67
8.45
8.88
8.78
7.60
7.98
6.49
$ 6.91
$ 9.69
$10.27
$10.77
$12.62
$15.37
$17.75
815
1,268
463
341
530
336
1
$ 5.52
$ 9.71
$10.30
$10.77
$13.03
$15.98
$17.75
Shares
(000)
1,366
1,741
1,429
1,324
1,300
788
1
Range of exercise prices:
$0.75 to $9.44
$9.46 to $9.87
$10.00 to $10.50
$10.56 to $11.06
$11.12 to $13.56
$13.62 to $17.00
$17.75 to $17.75
These options will expire if not exercised at specific dates
ranging from January 2000 to April 2009. Prices for options
exercised during the three-year period ended March 31, 1999
ranged from $.75 to $15.75.
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 com-
pensation during an Offering Period. Employees purchased
42,093 shares at a price of $9.24 per share and 45,868 shares
at a price of $8.92 per share during the Purchase Plan’s offer-
ing period ended September 30, 1998 and March 31, 1999,
respectively. As of March 31, 1999; 29,939 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 contributed by a par-
ticipant. The Company’s matching contributions to the plan
were $40,000, $40,000 and $25,000 during the years ended
March 31, 1999, 1998 and 1997, respectively.
23
Director Warrant Plan
The Director Warrant Plan, which expired on December 19,
1996, provided for the automatic granting of warrants
("Director Warrants") to purchase 16,667 shares of the
Common Stock to each director of the Company who was
not an officer or employee of the Company or any of its sub-
sidiaries. 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 expiration
of the Plan had no effect on the outstanding Warrants. As of
March 31, 1999, there were no shares of Common Stock
available for distribution under the Director Warrant Plan.
Director Warrant activity was as follows (amounts in thou-
sands, except weighted average exercise price amounts)
1999
Shares Wtd Avg
(000) Ex Price
1998
Shares Wtd Avg
Ex Price
(000)
1997
Shares Wtd Avg
Ex Price
(000)
Outstanding at beginning
and end of year
Exercisable at end
of year
73
73
$4.43
$4.43
73
73
$4.43
$4.43
73
73
$4.43
$4.43
The range of exercise prices for Director Warrants outstand-
ing as of March 31, 1999 was $.75 to 8.50. The range of exer-
cise prices for Director Warrants is wide due to increases and
decreases in the Company’s stock price over the period of the
grants. As of March 31, 1999, 33,300 of the outstanding and
vested Director Warrants have a weighted average remaining
contractual life of 2.78 years and a weighted average exercise
price of $.75; 20,000 of the outstanding and vested Director
Warrants have a weighted average remaining contractual life
of 5.82 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 5.82
years and a weighted average exercise price of $8.50.
Other Options and Warrants
On March 23, 1999, 1,000,000 options to purchase common
stock were issued to each of Robert A. Kotick,
the
Company’s Chairman and Chief Executive Officer, and
Brian G. Kelly, the Company’s Co-Chairman. The options
were granted in connection with employment agreements
between the Company and each of Mr. Kotick and Mr. Kelly
dated January 12, 1999. The options vest in five equal annu-
al installments beginning on the date of issuance, have an
exercise price of $10.50 per share, and expire on January 12,
2009.
On December 11, 1998, the Company granted options to pur-
chase 80,000 shares of the Company’s common stock to four
of its outside directors. The options have an exercise price of
$11.50, vest in five equal annual installments beginning a
year from the date of issuance, and expire on December 11,
2008.
On June 4, 1998, the Company granted options to purchase
60,000 shares of the Company’s common stock to four of its
outside directors. The options have an exercise price of
$9,50, vest in two equal annual installments beginning a year
from the date of issuance, and expire on June 4, 2008.
During the fiscal year ended March 31, 1998, the Company
issued warrants to purchase 40,000 shares of the Company’s
common stock, with a weighted average exercise price of
$12.88 to two of its outside directors in connection with their
election to the Board. Such warrants have vesting terms iden-
tical to the Directors Warrants and expire within 10 years. As
of March 31, 1999, 19,338 of such warrants were vested and
exercisable.
During the fiscal year ended March 31, 1999, the Company
issued the following warrants to purchase 1,000,000 shares of
common stock in connection with software license agreements:
(a) Exercise price is equal to the average closing price of the
Warrants Shares Exercise Price Vesting Schedule
Expiration Date
#1
#2
#3
500,000
$ 10.27 Vest ratably over 5 years beginning
250,000
250,000
on date of grant.
(a) Vest ratably over 5 years beginning
on 9/16/03.
$ 12.70 Vest in full on 7/2/99.
9/16/08
9/16/08
7/2/08
Total
1,000,000
Company’s common stock on the NASDAQ National Market
for the thirty trading days preceding September 16, 2003.
The fair value of the warrants was determined using the
Black-Scholes pricing model, assuming a risk-free rate of
4.77%, a volatility factor of .66 and expected terms as noted
in the above table. In accordance with the Financial
Accounting Standards Board’s Emerging Issues Task Force
Issue No. 96-18 “Accounting for Equity Instruments that are
Issued To Other Than Employees for Acquiring or in
Connection With Selling Goods or Services” (EITF 96-18),
the Company measures the fair value of the securities on the
measurement date. The measurement date is the earlier of the
date on which the other party’s performance is completed or
the date of a performance commitment, as defined. The fair
value of each warrant is capitalized and amortized to royalty
expense when the related product is released and the related
revenue is recognized. During 1999, $387,620 was amor-
24
tized and included in royalty expense relating to warrants.
No amortization was recognized in 1998.
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 (loss) and net
income (loss) 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
1999, 1998 and 1997 under the fair value method of that
statement. The fair value of options granted in the years
ended March 31, 1999, 1998 and 1997 reported below has
been estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average
assumptions:
The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options that have
Incentive Plan
Purchase Plan
Director Warrant Plan
1999 1998 1997
1999 1998 1997
1999 1998 1997
1.5
Expected life (in years)
0.5
Risk free interest rate 4.77% 5.62% 6.45% 4.77%5.62% 6.45% 4.77%
.66
Volatility
-
Dividend yield
.60
-
.71
-
.66
-
.60
-
.63
-
.66
-
2.2
0.5
0.5
0.5
3.0
-
-
-
-
-
-
-
-
no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjec-
tive assumptions, including the expected stock price volatili-
ty. Because the Company’s options have characteristics sig-
nificantly 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 sin-
gle measure of the fair value of its options. The weighted
average estimated fair value of Plan shares granted during the
years ended March 31, 1999, 1998 and 1997 was $11.12,
$13.47 and $12.72 per share, respectively. The weighted
average estimated fair value of Employee Stock Purchase
Plan shares granted during the year ended March 31, 1999
and 1998 were $2.85 and $2.65, respectively. No Director
Warrants were granted during the year ended March 31,
1999.
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 fol-
lows (amounts in thousands except for net income (loss) per
share information):
The effects on pro forma disclosures of applying SFAS No.
Year ended March 31,
1999
1998
1997
Restated
Restated
Pro forma net income (loss)
Pro forma basic net income (loss) per share
Pro forma diluted net income (loss) per share
$1,111
$ 0.05
$ 0.05
$ (2,253)
$ (0.11)
$ (0.11)
$ 633
$ 0.03
$ 0.03
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 through
1999, the pro forma effect will not be fully reflected until the
fiscal year ended March 31, 2000.
11.SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash activities and supplemental cash flow information
for the fiscal years ended March 31, 1999, 1998 and 1997 is
as follows (amounts in thousands):
Non-cash activities:
Stock and warrants to acquire common stock issued in
exchange for licensing rights
Tax benefit derived from net operating loss carryforward
utilization
Tax benefit attributable to stock option exercises
Subordinated loan stock debentures converted to common
stock in pooling transaction
Redeemable preferred stock converted to common stock
in pooling transaction
Convertible preferred stock converted to common stock
in pooling transaction
Stock issued to effect business combination
Conversion of notes payable to common stock
Supplemental cash flow information:
Cash paid for income taxes
Cash paid for interest
Year ended March 31,
Restated
1999
1998
1997
$ 3,368
$ 1,214
$ 822
2,430
1,059
-
-
-
-
4,500
-
1,247
3,216
1,286
214
136
-
6,634
736
-
-
-
-
259
$ 2,814
5,513
$ 2,174
675
$ 473
-
25
Acquisition of Expert Software
On March 3, 1999, the Company announced that it had
entered into a merger agreement with Expert Software
(“Expert”), a developer and distributor and value-line inter-
active leisure products, for $2.65 per share of outstanding
Expert common stock, or total consideration of approximate-
ly $20.4 million. On June 21, 1999, Expert’s shareholders
approved the merger at a special meeting of shareholders and
on June 22, 1999, the merger was consummated. Proceeds
from the term loan portion of the New Facility were used to
pay the merger consideration. The acquisition of Expert will
be accounted for using the purchase method of accounting.
12.QUARTERLY FINANCIAL AND MARKET
INFORMATION (UNAUDITED)
Quarter Ended
(Amounts in thousands, except per share data)
June 30
Sept 30
Dec 31
Mar 31
Year
Ended
Fiscal 1999 (quarter ended June 30 restated):
Net revenues
Operating income (loss)
Net income (loss)
Basic income (loss)
per share
Diluted net income (loss)
per share
$ 61,531
(5,637)
(3,744)
$ 66,182
(2,783)
(2,234)
$193,537
26,328
16,022
$115,235 $436,485
27,245
15,254
9,337
5,210
$ (0.17)
$ (0.10)
$ 0.72
$ 0.23
$ 0.69
$ (0.17)
$ (0.10)
$ 0.64
$ 0.22
$ 0.66
Common stock price per share
High
Low
$ 11.62
$ 9.37
$ 13.75
$ 9.37
$ 14.87
$ 8.75
$ 13.81
$ 9.75
$ 14.87
$ 8.75
Fiscal 1998 (restated):
Net revenues
Operating income (loss)
Net income (loss)
Basic income (loss)
per share
Diluted net income (loss)
per share
$ 38,560
(9,383)
(5,925)
$ 65,788
3,591
2,041
$139,587
13,742
8,334
$ 68,123 $312,058
9,486
5,139
1,536
689
$ (0.28)
$ 0.09
$ 0.39
$ 0.03
$ 0.24
$ (0.28)
$ 0.09
$ 0.36
$ 0.03
$ 0.23
Common stock price per share
High
Low
$ 14.75
$ 9.87
$ 15.50
$ 11.00
$ 18.62
$ 13.00
$ 17.87
$ 9.50
$ 18.62
$ 9.50
13. SUBSEQUENT EVENTS -- UNAUDITED
Bank Line of Credit
On June 22, 1999, the Company replaced the Prior Facility
with a $125 million revolving credit facility and term loan
(the “New Facility”) with a new group of banks that provides
the Company with the ability to borrow up to $100 million
and issue letters of credit up to $80 million against eligible
accounts receivable and inventory. The $25 million term loan
portion of the New Facility was used to acquire Expert and
pay costs related to such acquisition and the securing of the
new facility. The term loan has a three year term with princi-
pal amortization on a straight line quarterly basis beginning
December 31, 1999 and a borrowing rate of the banks’ base
rate (which is generally equivalent to the published prime
rate) plus 2.0%, or LIBOR plus 3.0%. The revolving portion
of the New Facility has a borrowing rate of the banks’ base
rate plus 1.75%, or LIBOR plus 2.75%. The Company pays
a commitment fee of 1/2 % based on the unused portion of
the line.
26
MARKET FOR COMPANY’S COMMON STOCK
The Company’s Common Stock is quoted on the NASDAQ
National Market under the symbol “ATVI.” The following table
sets forth for the periods indicated the high and low reported
closing sale prices for the Company’s Common Stock.
High
Low
Fiscal 1998
First Quarter ended
June 30, 1997.................................. $14.75
Second Quarter ended
September 30, 1997........................ $15.50
Third Quarter ended
December 31, 1997......................... $18.62
Fourth Quarter ended
March 31, 1998............................... $17.87
Fiscal 1999
First Quarter ended
June 30, 1998.................................. $11.62
Second Quarter ended
September 30, 1998........................ $13.75
Third Quarter ended
December 31, 1998......................... $14.87
Fourth Quarter ended
March 31, 1999............................... $13.81
$ 9.87
$11.00
$13.00
$ 9.50
$ 9.37
$ 9.37
$ 8.75
$ 9.75
Fiscal 2000
First Quarter through
June 30, 1999.................................. $14.25
$10.12
The Company paid no cash dividends in fiscal 1999 and does
not intend to pay any cash dividends at any time in the fore-
seeable future. The Company expects that earnings will be
retained for the continued growth and development of the
Company’s business. Future dividends, if any, will depend
upon the Company’s earnings, financial condition, cash
requirements, future prospects and other factors deemed rel-
evant by the Company’s Board of Directors.
27
Officers
C O R P O R AT E
Robert A. Kotick
Brian G. Kelly
Chairman and Chief Executive Officer
Co-Chairman
Ronald Doornink
President and Chief Operating Officer
Robert J. Dewar
Executive Vice President, International Publishing
Lawrence Goldberg
Executive Vice President and General Counsel
Mitchell H. Lasky
Executive Vice President, Worldwide Studios
Barry J. Plaga
Michael J. Rowe
Ronald L. Scott
Executive Vice President and Chief Financial Officer
Executive Vice President, Human Resources
Executive Vice President, North American Publishing
Richard A. Steele
Executive Vice President, Distribution
Kathy P. Vrabeck
Executive Vice President, Global Brand Management
B OA R D O F D I R E C TO R S
Robert A. Kotick
Chairman and Chief Executive Officer, Activision, Inc.
Brian G. Kelly
Barbara S. Isgur
Steven T. Mayer
Co-Chairman
Former Senior Vice President, Stratagem
Former Chairman, Digital F/X, Inc.
Robert J. Morgado
Chairman, Maroley Media Group
Harold Brown
Partner, Gang, Tyre, Ramer & Brown, Inc.
T R A N S F E R AG E N T
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
(212) 509-4000
AU D I TO R
KPMG, LLP
Los Angeles, California
BA N K
PNC Bank
Pasadena, California 91101
C O R P O R AT E C O U N S E L
Robinson Silverman Pearce Aronsohn & Berman, LLP
New York, New York
C O R P O R AT E H E A D QUA RT E R S
Activision, Inc.
3100 Ocean Park Boulevard
Santa Monica, California 90405
(310) 255-2000
N O RT H A M E R I C A N O F F I C E S
Coral Gables, Florida
Eden Prairie, Minnesota
Hollywood, Florida
Madison, Wisconsin
New York, New York
I N T E R N AT I O N A L O F F I C E S
Argenteuil, France
Berchem, Belgium
Birmingham, United Kingdom
Burglengenfeld, Germany
Eemnes, The Netherlands
Epping, Australia
Ismaning, Germany
Middlesex, United Kingdom
Tokyo, Japan
Venlo, The Netherlands
F O RWA R D L O O K I N G S TAT E M E N T S
The statements contained in this report that are not historical facts are "forward-looking
statements." The company cautions readers of this report that a number of important factors
could cause Activision's actual future results to differ materially from those expressed in any
such forward-looking statements. These important factors, and other factors that could affect
Activision, are described in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999, which was filed with the United States Securities and Exchange
Commission. Readers of this report are referred to such filings.
WO R L D W I D E W E B S I T E
http://www.activision.com
E - M A I L
IR@activision.com
A N N UA L R E P O RT O N F O R M 1 0 - K
The company’s annual report and Form 10-K for the year ended March 31, 1999 are avail-
able to shareholders without charge upon request from our corporate offices.
S H A R E H O L D E R M E E T I N G
September 23, 1999
The Peninsula Hotel
9882 South Santa Monica Blvd.
Beverly Hills, California 90212
(310) 551-2888