corporate information
building the foundation for growth
2001
A n n u a l R e p o r t
we’re primed forgrowth
as Sony’s PlayStation(cid:2) 2, Microsoft’s Xbox(cid:3), and Nintendo’s
GameCube(cid:3) and Game Boy (cid:2) Advance usher in a new era of
video gaming. Internet connectivity, DVD capability and backward
compatibility will expand video gaming into a broader form of
mass-market entertainment. The new video game systems, along with
the impending introduction of various wireless technologies and a more
ubiquitous broadband infrastructure, can push household penetration
to new heights. Activision’s strong brands, deep management and
proven development capabilities position us to leverage these exciting
market opportunities.
Financial Highlights
(in thousands of dollars except per share data)
2001
2000
2000*
1999
1998
1997
Net Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620,183
572,205
583,930
436,526
312,906
190,446
Operating Income (Loss) . . . . . . . . . . . . . . . . . . . .
39,807
(30,325)
39,867
26,667
9,218
11,497
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . . . .
20,507
(34,088)
19,817
14,891
4,970
7,583
Earnings Per Common Share:
Basic Earnings (Loss) Per Share . . . . . . . . . . . . .
0.82
(1.38)
Diluted Earnings (Loss) Per Share . . . . . . . . . . .
0.75
(1.38)
0.80
0.74
0.65
0.62
0.22
0.21
0.36
0.35
$700
$525
$350
$175
$0
$25
$20
$15
$10
$5
$0
$0.75
$0.60
$0.45
$0.30
$0.15
$0
’97
’98
’99
’00*
’01
Diluted Earnings Per Share
(per common share)
’97
’98
’99
’00*
’01
Net Earnings
(in millions of dollars)
’97
’98
’99
’00*
’01
Net Revenues
(in millions of dollars)
*Excludes charges incurred in conjunction with the implementation of the Company’s strategic restructuring plan in the fourth quarter of fiscal 2000.
1
Activision, Inc.
to our shareholders:
Fiscal 2001 marked a year of record performance for
Activision. The Company’s net revenues grew to $620
million and net income rose to $21 million. Both net
LucasArts Entertainment
revenues and net income were the highest in our history.
We ended the fiscal year as the #2 independent
We currently have 55 games in planning and development
for Sony’s PlayStation 2, Microsoft’s Xbox(cid:3) video game
system and Nintendo’s GameCube(cid:3) and Game Boy(cid:2)
Advance. We expect our investments in next-generation
With the launch of the PlayStation 2 last fall, fiscal 2001
of the world’s most recognized brands coupled with the
marked the beginning of a new cycle.
financial flexibility to capitalize on the opportunities
Over the last five years, we witnessed the
afforded by the changes occurring within our industry.
transformation of the video game industry from an
We have better products, a greater number of strategic
products to fuel our revenue growth over the next few
enthusiast market to a well-established mass-market
partners, more satisfied customers, the most productive
U.S. video game publisher on console and hand-held
Marvel Entertainment
years and provide greater opportunities for operating
entertainment medium. The release of the next-generation
and dedicated employees and a stronger management than
platforms and we were the fastest growing major publisher
margin expansion.
console systems will continue expanding the audience for
we have ever had.
overall. The market value of the Company is beginning to
Viacom Consumer Products
Despite our increased investment in product
development, our financial position is stronger than ever.
reflect the intrinsic value we have created over the last
decade. This fiscal year, the Company’s stock price rose
As a result of our record performance in fiscal 2001, we
102%, versus a 60% decline in the Nasdaq Composite
The Walt Disney Company
ended the year with a significantly strengthened balance
Index for the same period.
sheet. Our cash balance increased by $75 million to $126
Our brand focused multi-platform strategy
million and we reduced our days sales outstanding from
continues to drive our success. We achieved record
94 days to 54 days.
financial results in a challenging software market, due to
We also significantly improved our capital
our prudent planning and platform and product strategies
structure. As of June 21, 2001, we completed the
that were well aligned with the market opportunities.
retirement of $60 million of Convertible Subordinated
FISCAL 2001 WAS A GREAT YEAR
FOR ACTIVISION
corporate information
Subordinated Notes elected to convert the Notes to
Notes. Substantially all of the holders of the Convertible
During the fiscal year, Activision increased its U.S. dollar
market share on the console and hand-held systems by 3.3
share points, despite a 2% decline in the overall U.S. video
game market. We accomplished this by releasing products
based on well-established brands for the PC, PlayStation(cid:2)
game console and PlayStation(cid:2) 2 computer entertainment
system, Nintendo(cid:2) 64, Sega Dreamcast(cid:3) and Nintendo
Game Boy(cid:2) Color. More than 75% of our publishing
revenue was derived from sales of games based on proven
common stock prior to the redemption date.
Additionally, we repaid in full the remaining
$8.5 million balance of our three-year $25 million term
loan and renegotiated our revolving credit facility with
a more favorable cost structure. Unencumbered by debt,
Activision now possesses greater financial flexibility as we
move into the growth cycle provided by the launch of the
new video game platforms.
REMARKABLE GROWTH AWAITS US
brand franchises, a key component of our business plan that
The launch of the next-generation gaming systems heralds
markedly increased the predictability of our operating results.
a new and exciting period in our industry. As we have seen
We gained market share across all of the gaming
with other platform introductions, the hardware cycles
platforms and achieved record financial performance while
comprise five-year increments. The first two years are
increasing our product development spending on games for
staging years, followed by three years of rapid growth.
the new generation console systems by $19 million dollars.
2001 Annual Report
2
video games. Many of the young people who grew up in
We remain steadfast in our commitment to operate
the 1980s and 1990s playing games are still playing today,
a professionally managed, highly disciplined Company —
and millions of new consumers enter the market each year.
a company that is prosperous and growing, as well as
DRIVING FUTURE GROWTH
Activision is poised to capitalize on the tremendous
opportunities ahead. For the past five years, we have
been focused on building the infrastructure and scale
necessary to be a leader in the interactive entertainment
business. In fiscal 2001, our goal was to increase our
product development resources and strengthen our financial
position to take advantage of the market opportunities
ahead. We now have a strong foundation for the
financially prudent and focused on profitability. We are
committed to delivering strong financial results while
providing growing audiences around the world with the
most compelling interactive entertainment experiences.
We would like to thank our employees for their hard
work and dedication and our customers and shareholders
for their continued commitment and support.
Sincerely,
Company’s continued success.
Our product slate for fiscal year
2002 will fully leverage the current- and
new-generation console platforms and
includes the highest percentage of games
based on proven brand franchises in the
Company’s history. With over $600 million
in revenue, we have achieved a scale that
should provide greater predictability in our
operating results and opportunities
for operating margin expansion.
Activision’s market position
has never been stronger. We have a
product portfolio based on some
Robert A. Kotick
Chairman &
Chief Executive Officer
Brian G. Kelly
Co-Chairman
Ronald Doornink
President &
Chief Operating Officer
3
Activision, Inc.
we’ve got the brands
A 20-year reputation for quality titles with great gameplay has
established Activision as a brand of choice among consumers.
Our research has shown that Activision ranks as one of the most
recognized names among interactive entertainment companies. Our
properties include established brands like Disney, Marvel, Star Trek,
Star Wars and Tony Hawk as well as emerging brands like
Mat Hoffman. Recognized brands provide us with
to our shareholders:
consistency and predictability in our financial results
and emerging brands offer us significant financial
potential for the future.
LucasArts Entertainment
Marvel
Marvel
Marvel Entertainment
Viacom Consumer Products
The Walt Disney Company
2001 Annual Report
4
corporate information
LEVERAGING BRANDS ACROSS
MULTIPLE PLATFORMS
All of Activision’s brands are selected and designed
to deliver compelling interactive entertainment
experiences to audiences around the world.
During the fiscal year, we achieved record
performance despite a market transition. Our results can
be attributed to our strategy of leveraging our brands
across multiple gaming platforms and the fact that 75%
of our revenues were derived from games based on proven
franchises. As a result of these strategies and our strong
product portfolio, Activision was the only U.S. publisher
to have top-ten games on all the established console and
hand-held platforms during calendar 2000.
The success of our brands is based on our insight
into consumer trends and behaviors. In fiscal 1999, we were
one of the first video game companies to recognize the
growing popularity of action sports. In 1999, we dominated
the action sports video game market with the success of
Tony Hawk’s Pro Skater. In September 2000, we launched
the sequel, Tony Hawk’s Pro Skater 2 which became the
#1 selling PlayStation game in dollars sales for the calendar
year. Last year, the Tony Hawk franchise accounted for
more than $150 million in publishing revenues worldwide.
The success of the Tony Hawk’s Pro Skater
franchise, as well as our recently released BMX biking
game Mat Hoffman’s Pro BMX, have established Activision
as the leader in this rapidly growing category with a 65%
market share.
In fiscal year 2002, Activision plans to develop
and release a dynamic slate of games across all platforms
including the PlayStation 2, PlayStation, Xbox, GameCube,
Game Boy Advance, Game Boy Color, Nintendo 64,
Dreamcast and PC. Our lineup includes Bloody Roar(cid:2) 3;
Bomberman(cid:2) Tournament; Doom(cid:3); Jackie
Chan Adventures(cid:2); Mat Hoffman’s Pro
BMX(cid:2); Pinobee(cid:2): Wings of Adventure;
Return to Castle Wolfenstein(cid:2); Shaun Palmer’s
Pro Snowboarder(cid:2); Spider-Man 2 Enter:
Electro(cid:2); Star Trek(cid:3): Armada II;
Star Trek(cid:3) Bridge Commander(cid:2);
Stuart Little(cid:2): The Journey
Home; Supercar Street Challenge(cid:2);
The Weakest Link(cid:2); Tomb Raider: Curse of
the Sword(cid:2); Tony Hawk’s Pro Skater(cid:2) 3; and
X-Men: Mutant Academy 2(cid:2).
5
Activision, Inc.
we’ve got game
With the launch of Sony’s PlayStation 2, calendar 2000 marked the
beginning of another transition phase for the industry. Calendar 2001
will benefit from the release of three additional gaming platforms —
Microsoft’s Xbox and Nintendo’s GameCube and Game Boy Advance.
By allowing consumers to play games with greater levels of realism
and detail, watch DVD movies, listen to CDs and access the Internet,
these new systems will increase the installed base of gamers to
unprecedented levels.
2001 Annual Report
6
PREPPED FOR NEXT-GENERATION CONSOLES
Activision’s strong brands with proven market performance
During fiscal 2002, we plan to increase the
and its multi-platform development strategy should
number of games based on branded properties and designed
continue to give the Company an advantage in the new
by proven development talent. We believe that established
console era. Our established brands provide us with the
brands and franchises with broad appeal are more critical
flexibility to investigate and develop new properties and
than ever before as new consumers are apt to buy games
game concepts without sacrificing the financial stability
based on branded rather than unbranded properties.
and predictability that is crucial to our investors.
Publishers with easily recognizable franchises should be
Past experience has shown us the importance
better positioned to take advantage of the mass-market
of having a strong slate of products for these new game
opportunities on the current hardware systems, as well
systems as the installed base increases. During fiscal 2001,
as to capitalize on the next-generation console systems.
we doubled our product development spending on games
These factors, coupled with our industry-leading
for the next-generation platforms. We believe that over the
development capabilities and worldwide distribution
next two years, our game slate will allow us to take full
network, will allow Activision to take full advantage
advantage of the accelerated market growth resulting from
of the future market opportunities presented by the
these new platform launches.
next-generation console systems.
7
Activision, Inc.
we’re connected
Emerging technologies are changing our lives. The infrastructure
for global communication is forming at a breakneck pace, driven by
the thirst to move information in real time over the Internet. With
microprocessors being incorporated into numerous electronic devices
from digital assistants to cellular telephones, the reach of interactive
entertainment is growing faster than ever. These new technologies will
provide consumers in different time zones, continents and cultures with
previously unimaginable game experiences. By continuing to leverage
our multi-platform strategy, Activision will be able to take advantage
of the growth and margin expansion opportunities afforded by these
new systems.
2001 Annual Report
88
Selected Consolidated Financial Data
The following table summarizes certain selected consolidated financial
data, which should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes thereto and with
Management’s Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere herein. The selected consoli-
dated financial data presented below as of and for each of the fiscal
years in the five-year period ended March 31, 2001 are derived from the
audited consolidated financial statements of the Company. The
Consolidated Balance Sheets as of March 31, 2001 and 2000 and the
Consolidated Statements of Operations and Statements of Cash Flows
for each of the fiscal years in the three-year period ended March 31, 2001,
and the reports thereon, are included elsewhere in this Annual Report.
Fiscal years ended March 31, (In thousands, except per share data)
2001
2000
1999
1998
1997
Restated (1)
STATEMENT OF OPERATIONS DATA:
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620,183
324,907
Cost of sales—product costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89,702
Cost of sales—royalties and software amortization. . . . . . . . . . . . .
39,807
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,544
Income (loss) before income tax provision . . . . . . . . . . . . . . . . . . .
20,507
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.82
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . .
0.75
24,865
Basic weighted average common shares outstanding . . . . . . . . . . . .
27,400
Diluted weighted average common shares outstanding . . . . . . . . . .
SELECTED OPERATING DATA:
$572,205
319,422
91,238
(30,325)
(38,736)
(34,088)
(1.38)
(1.38)
24,691
24,691
$436,526
260,041
36,990
26,667
23,636
14,891
0.65
0.62
22,861
23,932
$312,906
176,188
29,840
9,218
8,106
4,970
0.22
0.21
22,038
22,909
$190,446
103,124
13,108
11,497
11,578
7,583
0.36
0.35
20,961
21,650
EBITDA (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46,075
15,541
33,155
14,564
15,690
CASH (USED IN) PROVIDED BY:
Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147,529
(74,595)
2,547
77,389
(99,547)
42,028
18,190
(64,331)
7,220
As of March 31,
BALANCE SHEET DATA:
2001
2000
1999
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $182,980
125,550
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,316
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
359,957
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63,401
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable and convertible preferred stock . . . . . . . . . . . . . . . . . .
—
181,306
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$158,225
49,985
12,347
309,737
73,778
—
132,009
$136,355
33,037
21,647
283,345
61,143
—
127,190
31,670
(43,814)
62,862
Restated
1998
$115,782
74,319
23,473
229,366
61,192
—
97,475
4,984
(19,617)
11,981
1997
$ 52,142
23,352
23,756
132,203
5,907
1,500
80,321
(1) Consolidated financial information for fiscal years 1999–1996 has been restated retroactively for the effects of the September 1999 acquisition of Neversoft, accounted for as a pooling of interests. Consolidated financial
information for fiscal years 1998–1996 has been restated retroactively for the effects of the acquisitions of S.B.F. Services, Limited dba Head Games Publishing and CD Contact Data GmbH, in June 1998 and September
1998, respectively, accounted for as pooling of interests. Consolidated financial information for fiscal year 1997 has been restated retroactively for the effects of the acquisitions of Raven Software Corporation, NBG EDV
Handels—und Verlags GmbH and Combined Distribution (Holdings) Limited in November 1997, August 1997 and November 1997, respectively, accounted for as pooling of interests.
(2) EBITDA represents income (loss) before interest, income taxes and, depreciation and amortization on property and equipment and goodwill. 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 or as a measure of liquidity.
9
Activision, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The Company is a leading international publisher, developer and dis-
tributor of interactive entertainment and leisure products. The
Company currently focuses its publishing, development and distribution
efforts on products designed for personal computers (“PCs”) as well as
the Sony PlayStation (“PSX”) and PlayStation 2 (“PS2”) and
Nintendo N64 (“N64”) console systems and Nintendo Game Boy
hand-held game devices. The Company is also currently focusing on the
development of products for Microsoft Xbox (“Xbox”) and Nintendo
GameCube console systems and Nintendo Game Boy Advance hand-held
device. During January 2001, Sega Corp., the maker of the Sega
Dreamcast (“Dreamcast”) console system announced that it would quit
making the Dreamcast in March 2001. Net revenues from the Dreamcast
have historically represented only a small percentage of the Company’s
total net revenues. Accordingly, the Company believes that the departure
of the Dreamcast console system from the market will not have a mate-
rial impact upon its financial position or results of operations.
The Company distributes its products worldwide through its direct
sales forces, through its distribution subsidiaries, and through third
party distributors and licensees.
The Company’s financial information as of and for the year ended
March 31, 1999 has been restated to reflect the effect of pooling of
interests transactions as discussed elsewhere in this Annual Report.
The Company recognizes revenue from the sale of its products once
they are shipped and are available for general release to customers.
Subject to certain limitations, the Company permits customers to
obtain exchanges and returns within certain specified periods and pro-
vides price protection on certain unsold merchandise. Revenue from
product sales is reflected after deducting the estimated allowance for
returns and price protection. Management of the Company estimates
the amount of future returns and price protection based upon historical
results and current known circumstances. With respect to license agree-
ments that provide customers the right to multiple copies in exchange
for guaranteed amounts, revenue is recognized upon delivery. Per copy
royalties on sales that exceed the guarantee are recognized as earned.
Cost of sales-product costs represents the cost to purchase, manu-
facture and distribute PC and console product units. Manufacturers
of the Company’s PC software are located worldwide and are readily
available. Console CDs and cartridges are manufactured by the
respective video game console manufacturers, Sony, Nintendo and Sega
or its agents, who often require significant lead time to fulfill the
Company’s orders.
Cost of sales-royalties and software amortization represents
amounts due developers, product owners and other royalty participants
as a result of product sales, as well as amortization of capitalized soft-
ware development costs. The costs incurred by the Company to develop
products are accounted for in accordance with accounting standards
that provide for the capitalization of certain software development
costs once technological feasibility is established and such costs are
determined to be recoverable. Additionally, various contracts are main-
tained with developers, product owners or other royalty participants,
which state a royalty rate, territory and term of agreement, among other
items. Commencing upon product release, prepaid royalties and capital-
ized software costs are amortized to cost of sales—royalties and
software amortization based on the ratio of current revenues to total
projected revenues, generally resulting in an amortization period of one
year or less.
For products that have been released, management evaluates the
future recoverability of prepaid royalties and capitalized software costs
on a quarterly basis. Prior to a product’s release, the Company charges to
expense, as part of product development costs, capitalized costs when, in
management’s estimate, such amounts are not recoverable. The following
criteria is used to evaluate recoverability: historical performance of com-
parable products; the commercial acceptance of prior products released
on a given game engine; orders for the product prior to its release; esti-
mated performance of a sequel product based on the performance of the
product on which the sequel is based; and actual development costs of a
product as compared to the Company’s budgeted amount.
The following table sets forth certain consolidated statements of operations data for the periods indicated as a percentage of total net revenues
and also breaks down net revenues by territory and platform, as well as operating income by business segment:
Fiscal years ended March 31, (In thousands)
2001
2000
1999
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$620,183
100%
$572,205
100%
$436,526
100%
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
324,907
89,702
41,396
85,378
37,491
1,502
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
580,376
Income (loss) from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax provision . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,807
(7,263)
32,544
12,037
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$20,507
52%
14%
8%
14%
6%
0%
94%
6%
(1%)
5%
2%
3%
319,422
91,238
26,275
87,303
36,674
41,618
602,530
(30,325)
(8,411)
(38,736)
(4,648)
$(34,088)
56%
16%
5%
15%
6%
7%
105%
(5%)
(2%)
(7%)
(1%)
(6%)
260,041
36,990
22,875
66,420
21,948
1,585
409,859
26,667
(3,031)
23,636
8,745
$14,891
60%
9%
5%
15%
5%
0%
94%
6%
(1%)
5%
2%
3%
2001 Annual Report
10
Fiscal years ended March 31, (In thousands)
NET REVENUES BY TERRITORY:
2001
2000
1999
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$352,893
256,228
11,062
57%
41%
2%
$282,847
277,485
11,873
49%
49%
2%
$149,705
278,032
8,789
34%
64%
2%
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$620,183
100%
$572,205
100%
$436,526
100%
ACTIVITY/PLATFORM MIX:
Publishing:
Console . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$349,528
116,534
Total publishing net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
466,062
Distribution:
Console . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117,365
36,756
Total distribution net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
154,121
75%
25%
75%
76%
24%
25%
$281,204
115,487
396,691
129,073
46,441
175,514
71%
29%
69%
74%
26%
31%
$111,662
93,880
205,542
156,584
74,400
230,984
54%
46%
47%
68%
32%
53%
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$620,183
100%
$572,205
100%
$436,526
100%
OPERATING INCOME (LOSS)
Publishing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 35,687
4,120
Total operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 39,807
5%
1%
6%
$(35,049)
4,724
$(30,325)
(6%)
1%
(5%)
$ 12,398
14,269
$ 26,667
3%
3%
6%
RESULTS OF OPERATIONS—FISCAL YEARS ENDED
MARCH 31, 2001 AND 2000
Net income for fiscal year 2001 was $20.5 million or $0.75 per diluted
share, as compared to net loss of $34.1 million or $1.38 per diluted
share in fiscal year 2000. The 2000 results were negatively impacted by
a strategic restructuring charge totaling $70.2 million, approximately
$61.8 million net of tax, or $2.50 per diluted share. See the analysis of
the results of operations for the fiscal years ended March 31, 2000 and
1999 for a detailed discussion of the restructuring plan. During fiscal
2001, the Company completed those restructuring initiatives.
Net Revenues
Net revenues for the year ended March 31, 2001 increased 8% from the
same period last year, from $572.2 million to $620.2 million. This
increase was driven by the performance of the Company’s publishing
segment, partially offset by declines experienced in the Company’s dis-
tribution segment.
Publishing net revenues for the year ended March 31, 2001
increased 17% from $396.7 million to $466.1 million. This increase
primarily was due to publishing console net revenues increasing 24%
from $281.2 million to $349.5 million. The increase in publishing con-
sole net revenues was attributable to the release in fiscal 2001 of several
titles that sold very well in the marketplace, including Tony Hawk’s Pro
Skater 2 (PSX, Dreamcast and Game Boy), Spider-Man (PSX, N64 and
Game Boy), X-Men Mutant Academy (PSX and Game Boy), as well as
continuing strong sales of the original Tony Hawk’s Pro Skater (PSX and
N64). Publishing PC net revenues for the year ended March 31, 2001
remained relatively constant with the prior year, increasing 1% from
$115.5 million to $116.5 million.
For the year ended March 31, 2001, distribution net revenues
decreased 12% from prior fiscal year from $175.5 million to $154.1
million. The decrease was mainly attributable to the continued weakness
in the European console market as a result of the transition to next-
generation console systems. Based on previous new hardware launches,
the Company expects that its distribution business will benefit in future
periods from the introduction of PS2 and other next-generation con-
soles. In the fourth quarter of fiscal 2001, distribution had its best
results in eight quarters, reflecting the accelerating opportunities from
the introduction of new console systems.
Domestic net revenues grew 25.0% from $282.8 million to $352.9
million. International net revenues decreased by 8% from $289.4 million
to $267.3 million. The increase in domestic net revenues is reflective of
the increases in the Company’s publishing segment as described above
and the decrease in international net revenues is reflective of the
declines in the Company’s distribution segment as described above.
Costs and Expenses
Cost of sales—product costs represented 52% and 56% of net revenues
for the year ended March 31, 2001 and 2000, respectively. The decrease
in cost of sales—product costs as a percentage of net revenues for the
year ended March 31, 2001 was due to the decrease in distribution net
revenue, partially offset by a higher publishing console net revenue mix.
Distribution products have a higher per unit product cost than publish-
ing products, and console products have a higher per unit product cost
than PC products.
Cost of sales—royalty and software amortization expense repre-
sented 14% and 16% of net revenues for the year ended March 31,
2001 and 2000, respectively. The decrease in cost of sales—royalty and
software amortization expense as a percentage of net revenues is reflec-
tive of the $11.9 million of write-offs recorded in the fourth quarter of
fiscal 2000 relating to the Company’s restructuring plan as later
described in the analysis of the results of operations for the fiscal years
ended March 31, 2000 and 1999.
11
Activision, Inc.
Product development expenses of $41.4 million and $26.3 million
represented 8% and 5% of net revenues for the fiscal year ended March
31, 2001 and 2000, respectively. These increases in product develop-
ment expenses in dollars and as a percentage of net revenues reflect the
Company’s investment in the development of products for next-generation
console and hand-held devices, including PS2, Xbox, GameCube and
Game Boy Advance. The increases are also reflective of the increase in
the number of titles expected to be released in fiscal 2002, 52 titles,
compared to fiscal 2001, 35 titles. Of the 52 titles expected to be
released in fiscal 2002, 19 titles are for next-generation platforms,
which have higher development costs than existing-platform titles.
Sales and marketing expenses of $85.4 million and $87.3 million
represented 14% and 15% of net revenues for the fiscal year ended
March 31, 2001 and 2000, respectively. This decrease reflects the
Company’s ability to generate savings by building on the existing aware-
ness of our branded products and sequel titles sold during fiscal 2001.
General and administrative expenses for the year ended March 31,
2001 remained constant with the prior fiscal year, increasing 2% from
$36.7 million to $37.5 million. As a percentage of net revenues, fiscal
2001 general and administrative expenses also remained relatively con-
stant with the prior fiscal year at approximately 6%.
Amortization of intangibles decreased substantially from $41.6
million in fiscal 2000 to $1.5 million in fiscal 2001. This was due to
the write-off in fiscal 2000 of goodwill acquired in purchase acquisi-
tions in conjunction with the Company’s restructuring plan as subse-
quently described.
Operating Income (Loss)
Operating income (loss) for the year ended March 31, 2001, was $39.8
million, compared to $(30.3) million in fiscal 2000. This increase in
consolidated operating income is primarily the result of increased oper-
ating income in the Company’s publishing business.
Publishing operating income (loss) for the year ended March 31,
2001 increased to $35.7 million, compared to $(35.0) million in the
prior fiscal year. The increase reflects the charges incurred in fiscal 2000
in conjunction with the Company’s restructuring plan as subsequently
described, which predominantly impacted the Company’s publishing
segment. Distribution operating income for the year ended March 31,
2001 remained flat at $4.1 million, compared to $4.7 million in the
prior fiscal year.
Other Income (Expense)
Interest expense, net of interest income, decreased to $7.3 million for
the year ended March 31, 2001, from $8.4 million for the year ended
March 31, 2000. This decrease in interest expense was due to lower
average borrowings on the revolving portion of the Company’s $125.0
million term loan and revolving credit facility (the “U.S. Facility”)
during fiscal 2001 when compared to prior fiscal year, as well as
increased interest earned as a result of higher investable cash balances
throughout the year.
Provision for Income Taxes
The income tax provision of $12.0 million for the fiscal year ended
March 31, 2001, reflects the Company’s effective income tax rate of
approximately 37%. The significant items generating the variance
between the Company’s effective rate and its statutory rate of 35% are
state taxes and nondeductible goodwill amortization, partially offset by
a decrease in the Company’s deferred tax asset valuation allowance and
research and development tax credits. 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 net deferred tax assets recognized.
RESULTS OF OPERATIONS—FISCAL YEARS ENDED
MARCH 31, 2000 AND 1999
Net loss for fiscal year 2000 was $34.1 million or $1.38 per diluted
share, as compared to net income of $14.9 million or $0.62 per diluted
share in fiscal year 1999. The 2000 results were negatively impacted by
a strategic restructuring charge totaling $70.2 million, approximately
$61.8 million net of tax, or $2.50 per diluted share.
Strategic Restructuring Plan
In the fourth quarter of fiscal 2000, the Company finalized a strategic
restructuring plan to accelerate the development and sale of interactive
entertainment and leisure products for the next-generation consoles and
the Internet. Costs associated with this plan amounted to $70.2 mil-
lion, approximately $61.8 million net of taxes, and were recorded in the
consolidated statement of operations in the fourth quarter of fiscal year
2000 and classified as follows (amounts in millions):
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.7
11.9
Cost of sales—royalties and software amortization. . . . . . . . . . . . . . . .
4.2
Product development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.2
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70.2
The component of the charge included in amortization of intangi-
ble assets represented a write down of intangibles including goodwill,
relating to Expert Software, Inc. (“Expert”), one of the Company’s
value publishing subsidiaries, totaling $26.3 million. The Company
consolidated Expert into Head Games, forming one integrated business
unit. As part of this consolidation, the Company discontinued substan-
tially all of Expert’s product lines, terminated substantially all of
Expert’s employees and phased out the use of the Expert name. In addi-
tion, a $10.9 million write down of goodwill relating to TDC, an OEM
business unit, was recorded. During fiscal 1999, the OEM market went
through radical changes due to price declines of PCs and hardware
accessories. The sum of the undiscounted future cash flow of these
assets was not sufficient to cover the carrying value of these assets and
as such was written down to fair market value.
The component of the charge included in net revenues and general and
administrative expense represents costs associated with the planned termi-
nation of a substantial number of third party distributor relationships in
connection with the Company’s realignment of its worldwide publishing
business to leverage its existing sales and marketing organizations and
improve the control and management of its products. These actions
resulted in an increase in the allowance for sales returns of $11.7 million
and the allowance for doubtful accounts of $3.4 million. The plan also
included a severance charge of $1.2 million for employee redundancies.
2001 Annual Report
12
The components of the charge included in cost of sales—royalties
and software amortization and product development represent costs to
write down certain assets associated with exiting certain product lines and
re-evaluating other product lines which resulted in reduced expectations.
During fiscal 2001, the Company completed the restructuring ini-
tiatives associated with the fiscal 2000 restructuring plan without any
significant adjustments.
Net Revenues
Net revenues for the year ended March 31, 2000 increased 31% from the
same period last year, from $436.5 million to $572.2 million. The increase
was due to a 53% increase in console net revenues from $268.2 million to
$410.3 million, slightly offset by a 4% decrease in PC net revenues from
$168.3 million to $161.9 million. Domestic net revenues grew 89% from
$149.7 million to $282.8 million. International net revenues remained
fairly constant, increasing 1% from $286.8 million to $289.4 million.
Publishing net revenues for the year ended March 31, 2000
increased 93% from $205.5 million to $396.7 million. This increase pri-
marily was due to publishing console net revenues increasing 152% from
$111.7 million to $281.2 million. The increase in publishing console
net revenues was attributable to the release in fiscal 2000 of a larger
number of titles that sold well in the marketplace, including Blue Stinger
(Dreamcast), Space Invaders (PlayStation, N64 and Game Boy Color) and
Disney/Pixar’s Toy Story 2 (PlayStation and N64), Disney’s Tarzan (N64
and Game Boy), Disney/Pixar’s A Bug’s Life (N64), Vigilante 8: Second
Offense (PlayStation, N64 and Game Boy), WuTang: Shaolin Style
(PlayStation) and Tony Hawk’s Pro Skater (PlayStation, N64 and Game
Boy). Publishing PC net revenues for the year ended March 31, 2000
increased 23% from $93.9 million to $115.5 million. This increase pri-
marily was due to the release of QUAKE III Arena, Cabela’s Big Game Hunter
III, Star Trek: Hidden Evil, Star Trek: Armada and Soldier of Fortune.
For the year ended March 31, 2000, distribution net revenues
decreased 24% from prior fiscal year from $231.0 million to $175.5
million. The decrease was mainly attributable to the pricing reductions
initiated by leading retail chains in the United Kingdom (the “UK”),
which in turn reduced market share for the independent retail channel in
the UK to which the Company’s CentreSoft subsidiary is the sole
authorized Sony PlayStation distributor, as well as the unfavorable
impact of foreign currency translation rates.
Net OEM licensing, on-line and other revenues for the fiscal year
ended March 31, 2000 increased 40% from $19.0 million to $26.7 mil-
lion. The increase was primarily due to an increase in licensing revenues,
partially offset by a decrease in OEM revenues. Licensing revenues
increased due to an increase in the number of licensing arrangements
entered into by the Company during fiscal 2000. OEM revenues
decreased due to the radical changes being experienced in the OEM
market in fiscal 2000, which resulted from declining prices of personal
computers and hardware accessories and the reluctance of hardware
manufacturers to produce large inventories.
Costs and Expenses
Cost of sales—product costs represented 56% and 60% of net revenues
for the year ended March 31, 2000 and 1999, respectively. The decrease
in cost of sales—product costs as a percentage of net revenues for the
year ended March 31, 2000 was due to the decrease in distribution net
revenue, partially offset by a higher publishing console net revenue mix.
Distribution products have a higher per unit product cost than publish-
ing products, and console products have a higher per unit product cost
than PC products.
Cost of sales—royalty and software amortization expense
represented 16% and 9% of net revenues for the year ended March 31,
2000 and 1999, respectively. The increase in cost of sales—royalty and
software amortization expense as a percentage of net revenues was pri-
marily due to changes in the Company’s product mix, with an increase
in the number of branded products with higher royalty obligations as
compared to the prior fiscal year and increases in amortization expenses
relating to the release of a greater number of products with capitalizable
development costs. The increase also partially resulted from $11.9 mil-
lion of write-offs recorded in the fourth quarter of fiscal 2000 relating
to the Company’s restructuring plan as previously described.
Product development expenses for the year ended March 31, 2000
increased 15% from the same period last year from $22.9 million to
$26.3 million. The increase was primarily due to a $4.2 million charge
to product development costs relating to the Company’s restructuring
plan as previously described.
As a percentage of net revenues, total product creation costs (i.e.,
royalties and software amortization expense plus product development
expenses) increased from 14% to 21% for the year ended March 31,
2000. Such increases were attributable to the increases in product devel-
opment costs, as described above.
Sales and marketing expenses for the year ended March 31, 2000
increased 31% from the same period last year, from $66.4 million to
$87.3 million, but remained relatively constant as a percentage of net rev-
enues at 15% at March 31, 2000 and 1999. The increase in the amount
of sales and marketing expenses primarily was due to an increase in the
number of titles released and an increase in television advertising during
the final quarter of fiscal 2000 to support the Company’s premium titles.
General and administrative expenses for the year ended March 31,
2000 increased 67% from the prior fiscal year, from $21.9 million to
$36.7 million. As a percentage of net revenues, general and administra-
tive expenses remained relatively constant at approximately 5% to 6%.
The increase in the amount of general and administrative expenses was
due to an increase in worldwide administrative support needs and head-
count related expenses and charges incurred in conjunction with the
Company’s restructuring plan previously described.
Amortization of intangibles increased substantially from $1.6 mil-
lion in fiscal 1999 to $41.6 million in fiscal 2000. This was due to the
write-off of goodwill acquired in purchase acquisitions.
Operating Income (Loss)
Operating income (loss) for the year ended March 31, 2000, was
$(30.3) million, compared to $26.7 million in fiscal 1999.
Publishing operating income (loss) for the year ended March 31,
2000 decreased 382% to $(35.0) million, compared to $12.4 million in
the prior fiscal year. The decrease reflects the charges incurred in con-
junction with the Company’s restructuring plan as previously described,
which predominantly impacted the Company’s publishing segment.
Distribution operating income for the year ended March 31, 2000
decreased 67% to $4.7 million, compared to $14.3 million in the prior
fiscal year. The period over period change primarily was due to a decrease
in distribution sales and the UK price reductions, as noted earlier.
13
Activision, Inc.
Other Income (Expense)
Interest expense, net of interest income, increased to $8.4 million for
the year ended March 31, 2000, from $3.0 million for the year ended
March 31, 1999. This increase primarily was the result of interest costs
associated with the Company’s $125 million term loan and revolving
credit facility obtained in June 1999.
Provision for Income Taxes
The income tax benefit of $4.6 million for the year ended March 31,
2000 reflected the Company’s effective income tax rate of approxi-
mately 12%. The significant items that generated the variance between
the Company’s effective rate and its statutory rate of 34% were nonde-
ductible goodwill amortization and an increase in the Company’s
deferred tax asset valuation allowance, partially offset by research
and development tax credits. The realization of deferred tax assets pri-
marily 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 net
deferred tax assets recognized.
Quarterly Operating Results
The Company’s quarterly operating results have in the past varied sig-
nificantly and will likely vary significantly in the future, depending
on numerous factors, several of which are not under the Company’s
control. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Strategic Restructuring Plan.”
The Company’s business also has experienced and is expected to con-
tinue to experience significant seasonality, in part due to consumer buy-
ing patterns. Net revenues typically are significantly higher during the
fourth calendar quarter, primarily due to the increased demand for con-
sumer software during the year-end holiday buying season. Accordingly,
the Company believes that period-to-period comparisons of its operat-
ing 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
Net revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . .
March 31,
2001
$126,789
2,015
875
0.03
0.03
Dec. 31,
2000
$264,473
34,754
20,505
0.84
0.70
Sept. 30,
2000
$144,363
9,536
4,306
0.18
0.17
June 30,
2000
March 31,
2000 (1)
Dec. 31,
1999
Sept. 30,
1999
June 30,
1999 (2)
$84,558
(6,498)
(5,179)
(0.21)
(0.21)
$103,838
(65,990)
(52,877)
(2.07)
(2.07)
$268,862 $115,363
3,525
1,063
0.04
0.04
38,241
22,301
0.89
0.75
$84,142
(6,101)
(4,575)
(0.19)
(0.19)
(1) See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Strategic Restructuring Plan.”
(2) Restated for acquisition of Neversoft.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash and cash equivalents increased $75.6 million,
from $50.0 million at March 31, 2000 to $125.6 million at March 31,
2001. This was in comparison to a $17.0 million increase in cash flows
in fiscal year 2000 from $33.0 million at March 31, 1999 to $50.0
million at March 31, 2000. This increase in cash in fiscal year 2001
resulted from $81.6 million and $2.5 million provided by operating
activities and financing activities, respectively, offset by $8.6 million
utilized in investing activities. The cash provided by operating activities
primarily was the result of changes in accounts receivable and accounts
payable, driven by a seasonal change in working capital needs. The cash
used in investing activities primarily is the result of capital expenditures.
The cash provided by financing activities is primarily the result of
$33.6 million of cash proceeds from the issuance common stock pur-
suant to employee stock option plans, the employee stock purchase plan
and warrants. These inflows were partially offset by $16.1 in net cash
payments on borrowings, as well as $15.0 million of cash used by the
Company to purchase its common stock under its repurchase program.
In connection with the Company’s purchases of Nintendo N64
hardware and software cartridges for distribution in North America and
Europe, Nintendo requires the Company to provide irrevocable letters
of credit prior to accepting purchase orders from the Company.
Furthermore, Nintendo maintains a policy of not accepting returns of
Nintendo N64 hardware and software cartridges. Because of these and
other factors, the carrying of an inventory of Nintendo N64 hardware
and software cartridges entails significant capital and risk. As of March
31, 2001, the Company had $5.4 million of N64 hardware and soft-
ware cartridge inventory on hand, which represented approximately 12%
of all inventory.
In December 1997, the Company completed the private placement
of $60.0 million principal amount of 63⁄4% convertible subordinated
notes due 2005 (the “Notes”). The Notes are convertible, in whole or
in part, at the option of the holder at any time after December 22, 1997
(the date of original issuance) and prior to the close of business on the
business day immediately preceding the maturity date, unless previously
redeemed or repurchased, into common stock, $.000001 par value, of
the Company, at a conversion price of $18.875 per share, (equivalent to
a conversion rate of 52.9801 shares per $1,000 principal amount of
Notes), subject to adjustment in certain circumstances. The Notes are
redeemable, in whole or in part, at the option of the Company at any
time on or after January 10, 2001. If redemption occurs prior to
December 31, 2003, the Company must pay a premium on such
redeemed Notes. Subsequent to March 31, 2001, the Company called
for the redemption of the Notes. In connection with that call, as of June
20, 2001, holders have converted for common stock approximately
$60.0 million aggregate principal amount of their convertible subordi-
nated notes.
The Company has a $100.0 million revolving credit facility and a
$25.0 million term loan with a syndicate of banks (the “U.S. Facility”).
The revolving portion of the U.S. Facility provides the Company with
the ability to borrow up to $100.0 million and issue letters of credit up
to $80 million on a revolving basis against eligible accounts receivable
2001 Annual Report
14
and inventory. The $25.0 million term loan portion of the U.S. Facility
was used to fund the acquisition of Expert Software, Inc. in June 1999
and to pay costs related to such acquisition and the securing of the U.S.
Facility. The term loan has a three year term with principal amortization
on a straight-line quarterly basis beginning December 31, 1999 and a
borrowing rate based on the banks’ base rate (which is generally equiva-
lent to the published prime rate) plus 2% or LIBOR plus 3%. The
revolving portion of the U.S Facility has a borrowing rate based on the
banks’ base rate plus 1.75% or LIBOR plus 2.75% and matures June
2002. The U.S. Facility had a weighted average interest rate of approxi-
mately 9.70% for the year ending March 31, 2001. The Company pays
a commitment fee of 1⁄2% on the unused portion of the revolving line.
The U.S. Facility is collateralized by substantially all of the assets of the
Company and its U.S. subsidiaries. The U.S. Facility contains various
covenants which limit the ability of the Company to incur additional
indebtedness, pay dividends or make other distributions, create certain
liens, sell assets, or enter into certain mergers or acquisitions. The
Company is also required to maintain specified financial ratios related
to net worth and fixed charges. As of March 31, 2001, the Company
was in compliance with these covenants. As of March 31, 2001, approx-
imately $8.5 million was outstanding under the term loan portion of
the U.S. Facility. As of March 31, 2001, there were no borrowings out-
standing and $18.2 million letters of credit outstanding against the
revolving portion of the U.S. Facility.
In May 2001, the Company repaid the remaining $8.5 million bal-
ance of the term loan portion of the U.S. Facility. In conjunction with
the accelerated repayment of the term loan, the Company amended the
U.S. Facility effective May 7, 2001. The amended and restated U.S.
Facility eliminates the term loan, reduces the revolvers to $78.0 million,
reduces the interest rate to Prime plus 1.25% or LIBOR plus 2.25%,
eliminates certain covenants, increases the advance rates and reduces the
fee paid for maintenance of the facility.
The Company has a revolving credit facility through its CD
Contact subsidiary in the Netherlands (the “Netherlands Facility”).
The Netherlands Facility permits revolving credit loans and letters of
credit up to Netherlands Guilder (“NLG”) 26 million ($10 million) at
March 31, 2001, based upon eligible accounts receivable and inventory
balances. The Netherlands Facility is due on demand, bears interest at a
Eurocurrency rate plus 1.50% (weighted average interest rate of 7.40%
as of March 31, 2001) and matures August 2003. The Company had
$1.8 million of borrowings outstanding under the Netherlands Facility
at March 31, 2001. There were no letters of credit under the
Netherlands Facility as of March 31, 2001.
The Company also has revolving credit facilities with its CentreSoft
subsidiary located in the United Kingdom, (the “UK Facility”) and its
NBG subsidiary located in Germany, (the “German Facility”). The UK
Facility can be used for working capital requirements and provides for
British Pounds (“GBP”) 7 million ($10.0 million) of revolving loans
and GBP 3 million ($4.3 million) of letters of credit, bears interest at
LIBOR plus 2%, is collateralized by substantially all of the assets of the
subsidiary and matures in July 2001. The UK Facility also contains var-
ious covenants that require the subsidiary to maintain specified finan-
cial ratios related to, among others, fixed charges. The Company was in
compliance with these covenants as of March 31, 2001. No borrowings
were outstanding against the UK Facility at March 31, 2001. Letters of
credit of GBP 3.0 million ($4.3 million) were outstanding against the
UK Facility at March 31, 2001. The German Facility can be used for
working capital requirements and provides for revolving loans up to
Deutsche Marks (“DM”) 4 million ($1.8 million), bears interest at
7.0%, is collateralized by a cash deposit of approximately GBP 650,000
($928,000) made by the Company’s CentreSoft subsidiary and has no
expiration date. No borrowings were outstanding against the German
Facility as of March 31, 2001.
In the normal course of business, the Company enters into contrac-
tual arrangements with third parties for the development of products.
Under these agreements, the Company commits to provide specified
payments to a developer, contingent upon the developer’s achievement of
contractually specified milestones. Assuming all contractually specified
milestones are achieved, for contracts in place as of March 31, 2001, the
total future minimum contract commitment is approximately $62.1 mil-
lion, which is scheduled to be paid as follows (amounts in thousands):
Year ending March 31,
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,197
13,528
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,250
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,925
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,675
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,500
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$62,075
Additionally, as of March 31, 2001, under the terms of a produc-
tion financing arrangement, the Company has a commitment to pur-
chase two future PlayStation 2 titles from independent third party
developers for an estimated $5.7 million. Failure by the developers to
complete the project within the contractual time frame or specifications
alleviates the Company’s commitment.
The Company historically has financed its acquisitions through the
issuance of shares of its common stock. The Company will continue to
evaluate potential acquisition candidates as to the benefit they bring to
the Company and as to the ability of the Company to make such acqui-
sitions and maintain compliance with its bank facilities.
In May 2000, the Board of Directors authorized the Company to
purchase up to $15.0 million in shares of its common stock as well as
its convertible subordinated notes. The shares and notes could be pur-
chased in the open market or in privately negotiated transactions at such
times and in such amounts as management deemed appropriate, depend-
ing on market conditions and other factors. During fiscal 2001, the
Company repurchased 2.3 million shares of its common stock for
approximately $15.0 million.
The Company believes that it has sufficient working capital
($183.0 million at March 31, 2001), as well as proceeds available from
the U.S. Facility, the UK Facility, the Netherlands Facility and the
German Facility, to finance the Company’s operational requirements for
at least the next twelve months, including acquisitions of inventory and
equipment, the funding of the development, production, marketing and
sale of new products, the acquisition of intellectual property rights for
future products from third parties and the repurchase of common stock
and notes under the Company’s repurchase plan.
15
Activision, Inc.
INFLATION
The Company’s management currently believes that inflation has not
had a material impact on continuing operations.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the “euro” as their common currency. The
sovereign currencies of the participating countries are scheduled to
remain legal tender as denominations of the euro between January 1,
1999 and January 1, 2002. Beginning January 1, 2002, the participating
countries will issue new euro-denominated bills and coins for use in
cash transactions. No later than July 1, 2002, the participating coun-
tries will withdraw all bills and coins denominated in the sovereign cur-
rencies, so that the sovereign currencies no longer will be legal tender
for any transactions, making conversion to the euro complete. The
Company has performed an internal analysis of the possible implica-
tions of the euro conversion on the Company’s business and financial
condition, and has determined that the impact of the conversion will be
immaterial to its overall operations. The Company’s wholly owned sub-
sidiaries operating in participating countries represented 8% and 12% of
the Company’s consolidated net revenues for the years ended March 31,
2001 and 2000, respectively.
IMPLEMENTATION OF SAB 101
The Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial
Statements, in December 1999. The SAB summarizes certain of the
SEC staff ’s views in applying generally accepted accounting principles
to revenue recognition in financial statements. During the year ended
March 31, 2001, the Company performed a review of its revenue recog-
nition policies and determined that it is in compliance with SAB 101.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS No. 133”) as
subsequently amended by SFAS No. 137 and SFAS No. 138, is effec-
tive for all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instru-
ments 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 hedging activities or own derivative
instruments but plans to adopt SFAS No. 133 beginning April 1, 2001.
Management does not believe the adoption of SFAS No. 133 will have
a material impact on the financial position or results of operations of
the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market risk is the potential loss arising from fluctuations in market
rates and prices. The Company’s market risk exposures primarily
include fluctuations in interest rates and foreign currency exchange
rates. The Company’s market risk sensitive instruments are classified as
“other than trading.” The Company’s exposure to market risk as dis-
cussed below includes “forward-looking statements” and represents an
estimate of possible changes in fair value or future earnings that would
occur assuming hypothetical future movements in interest rates or for-
eign currency exchange rates. The Company’s views on market risk are
not necessarily indicative of actual results that may occur and do not
represent the maximum possible gains and losses that may occur, since
actual gains and losses will differ from those estimated, based upon
actual fluctuations in foreign currency exchange rates, interest rates and
the timing of transactions.
Interest Rate Risk
The Company has a number of variable rate and fixed rate debt obliga-
tions, denominated both in U.S. dollars and various foreign currencies
as detailed in Note 10 to the Consolidated Financial Statements
appearing elsewhere in this Annual Report. The Company manages
interest rate risk by monitoring its ratio of fixed and variable rate debt
obligations in view of changing market conditions. Additionally, in the
future, the Company may consider the use of interest rate swap agree-
ments to further manage potential interest rate risk.
As of March 31, 2001, the carrying value of the Company’s vari-
able rate debt was $10.3 million, which includes the U.S. Facility ($8.5
million) and the Netherlands Facility ($1.8 million). As of March 31,
2000, the carrying value of the Company’s variable rate debt was $26.0
million, which included the U.S. Facility ($22.5 million) and the
Netherlands Facility ($3.5 million). A hypothetical 1% increase in the
applicable interest rates of the Company’s variable rate debt would
increase annual interest expense by approximately $103,000 and
$260,000, as March 31, 2001 and 2000, respectively.
The Company additionally has 63⁄4% convertible subordinated notes
due 2005 (the “Notes”) that have a carrying value of $60.0 million as
of March 31, 2001 and 2000. The Notes have a fair value of $60.0 mil-
lion and $51.6 million as of March 31, 2001 and 2000, respectively.
The fair value of the Notes was determined based on quoted market
prices. A hypothetical 1% increase in market rates would decrease their
fair value by approximately $600,000 and $516,000 as of March 31,
2001 and 2000, respectively.
Subsequent to March 31, 2001, the Company’s holdings of market
risk sensitive instruments changed. Subsequent to March 31, 2001, the
Company called for the redemption of $60.0 million of the Notes. In
connection with that call, as of June 20, 2001, holders have converted
to common stock approximately $60.0 million aggregate principal
amount of their Notes. Additionally, in May 2001, the Company repaid
in full the remaining $8.5 million balance of the term loan portion of
the U.S. Facility.
Foreign Currency Exchange Rate Risk
The Company transacts business in many different foreign currencies
and may be exposed to financial market risk resulting from fluctuations
in foreign currency exchange rates, particularly GBP. The volatility of
GBP (and all other applicable currencies) will be monitored frequently
throughout the coming year. While the Company has not traditionally
engaged in foreign currency hedging, the Company may in the future
use hedging programs, currency forward contracts, currency options
and/or other derivative financial instruments commonly utilized to
reduce financial market risks if it is determined that such hedging activ-
ities are appropriate to reduce risk.
2001 Annual Report
16
To the Board of Directors and Shareholders:
In our opinion, the accompanying consolidated balance sheet as of
March 31, 2001 and the related consolidated statements of opera-
tions, changes in shareholders’ equity and cash flows present fairly, in
all material respects, the financial position of Activision, Inc. and its
subsidiaries (the “Company”) at March 31, 2001, and the results
of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the respon-
sibility of the Company ’s management; our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit of these statements in accordance with audit-
ing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
Report of Independent Accountants
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
Los Angeles, CA
May 9, 2001
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheet of
ACTIVISION, INC. and subsidiaries as of March 31, 2000 and the
related consolidated statements of operations, changes in shareholders’
equity and cash flows for each of the years in the two-year period ended
March 31, 2000. In connection with our audit of the consolidated finan-
cial statements, we also have audited financial statement schedule II for
each of the years in the two-year period ended March 31, 2000. These
consolidated financial statements 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 examin-
ing, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
Report of Independent Accountants
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, 2000, and the
results of their operations and their cash flows for each of the years in
the two-year period ended March 31, 2000, in conformity with gener-
ally accepted accounting principles. Also in our opinion, the related
financial statement schedule for each of the years in the two-year period
ended March 31, 2000, when considered in relation to the basic consol-
idated financial statements taken as a whole, presents fairly, in all mate-
rial respects, the information set forth therein.
KPMG LLP
Los Angeles, California
May 5, 2000,
except as to Note 16, which is as of June 9, 2000
17
Activision, Inc.
Consolidated Balance Sheets
March 31, (In thousands, except share data)
ASSETS
Current assets:
2001
2000
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125,550
73,802
Accounts receivable, net of allowances of $28,461 and $31,521 at March 31, 2001 and 2000, respectively. . . .
43,888
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,502
Prepaid royalties and capitalized software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,292
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,196
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid royalties and capitalized software costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
298,230
14,703
15,240
13,759
10,316
7,709
$ 49,985
108,108
40,453
31,655
14,159
17,815
262,175
9,153
10,815
6,055
12,347
9,192
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $359,957
$309,737
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,231
60,980
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44,039
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, less current portion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible subordinated notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115,250
3,401
60,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178,651
$ 16,260
38,286
49,404
103,950
13,778
60,000
177,728
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $.000001 par value, 5,000,000 shares authorized, no shares issued
at March 31, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $.000001 par value, 50,000,000 shares authorized, 30,166,455 and 26,488,260 shares
issued and 27,282,476 and 25,988,260 shares outstanding at March 31, 2001 and 2000, respectively . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Treasury stock, cost, 2,883,979 and 500,000 shares as of March 31, 2001 and 2000, respectively . . . . .
—
200,786
12,146
(11,377)
(20,249)
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181,306
—
151,714
(8,361)
(6,066)
(5,278)
132,009
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $359,957
$309,737
The accompanying notes are an integral part of these consolidated financial statements.
2001 Annual Report
18
Consolidated Statements of Operations
For the years ended March 31, (In thousands, except per share data)
2001
2000
1999
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620,183
Costs and expenses:
$572,205
$436,526
Cost of sales—product costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales—royalties and software amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Product development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
324,907
89,702
41,396
85,378
37,491
1,502
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
580,376
Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,807
(7,263)
32,544
12,037
319,422
91,238
26,275
87,303
36,674
41,618
602,530
(30,325)
(8,411)
(38,736)
(4,648)
260,041
36,990
22,875
66,420
21,948
1,585
409,859
26,667
(3,031)
23,636
8,745
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,507
$(34,088)
$ 14,891
Basic earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.82
$
(1.38)
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,865
24,691
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.75
$
(1.38)
$
$
0.65
22,861
0.62
Weighted average common shares outstanding—assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . .
27,400
24,691
23,932
The accompanying notes are an integral part of these consolidated financial statements.
19
Activision, Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended March 31, 2001, 2000 and 1999 (In thousands)
BALANCE, MARCH 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of comprehensive income:
Common Stock
Shares
Paid-In
Amount Capital
Additional Retained
Earnings
(Deficit) Shares
Treasury Stock
Accumulated
Other Compre-
hensive
Shareholders’
Amount
Income (Loss) Equity
23,107
$— $ 91,825 $10,836
(500) $ (5,278) $
92 $ 97,475
Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . .
— —
— —
— 14,891 —
— —
—
—
— (2,602)
— 14,891
(2,602)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock and common stock warrants . . . . . . . . . . . .
Issuance of common stock pursuant to employee stock
— —
3,368
— —
option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
605 —
5,271
— —
Issuance of common stock pursuant to employee stock
purchase plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit attributable to employee stock option plans . . . . . . . . . . . .
Tax benefit derived from net operating loss carryforward utilization . . .
Conversion of notes payable to common stock . . . . . . . . . . . . . . . . . . .
92 —
— —
— —
— —
798
1,059
2,430
4,500
— —
— —
— —
— —
12,289
3,368
5,271
798
1,059
2,430
4,500
—
—
—
—
—
—
—
—
—
—
—
—
BALANCE, MARCH 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of comprehensive income:
23,804 — 109,251
25,727
(500)
(5,278)
(2,510)
127,190
Net loss for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . .
— —
— —
— (34,088) —
— —
—
—
— (3,556)
— (34,088)
(3,556)
Total comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock and common stock warrants . . . . . . . . . . . .
Issuance of common stock pursuant to employee stock
— —
8,529
— —
option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,331 —
21,718
— —
Issuance of common stock pursuant to employee stock
purchase plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit attributable to employee stock option plans . . . . . . . . . . . .
Tax benefit derived from net operating loss carryforward utilization . . .
Acquisitions and investments made with common stock and
72 —
— —
— —
762
3,017
1,266
— —
— —
— —
common stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
281 —
7,171
— —
(37,644)
—
8,529
— 21,718
—
—
—
—
762
3,017
1,266
7,171
—
—
—
—
—
—
BALANCE, MARCH 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Components of comprehensive income:
26,488 — 151,714
(8,361) (500)
(5,278)
(6,066)
132,009
Net income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . .
— —
— —
— 20,507 —
— —
—
—
— (5,311)
— 20,507
(5,311)
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock and common stock warrants . . . . . . . . . . . .
Issuance of common stock pursuant to employee stock
100 —
1,050
— —
option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,499 —
31,693
— —
Issuance of common stock pursuant to employee stock
—
—
purchase plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit attributable to employee stock option plans . . . . . . . . . . . .
Tax benefit derived from net operating loss carryforward utilization . . .
Purchase of treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
79 —
— —
— —
— —
845
11,832
3,652
—
— —
— —
— —
— (2,384)
—
—
—
(14,971)
15,196
1,050
—
— 31,693
—
845
— 11,832
—
3,652
— (14,971)
BALANCE MARCH 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,166
$— $200,786 $12,146 (2,884) $(20,249) $(11,377) $181,306
The accompanying notes are an integral part of these consolidated financial statements.
2001 Annual Report
20
For the years ended March 31, (In thousands)
Cash flows from operating activities:
Consolidated Statements of Cash Flows
2001
2000
1999
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,507
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
$ (34,088)
$ 14,891
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prepaid royalties and capitalize software costs. . . . . . . . . . . . . . . . . . . . . . . .
Expense related to common stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit of stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in assets and liabilities (net of effects of purchases and acquisitions):
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid royalties and capitalized software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,597)
6,268
68,925
1,406
11,832
30,027
(5,283)
(65,964)
6,062
21,361
(6,979)
Net cash provided by (used in) operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81,565
Cash flows from investing activities:
Cash used in purchase acquisitions (net of cash acquired) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposal of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(9,780)
1,149
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,631)
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to employee stock option plans. . . . . . . . . .
Proceeds from issuance of common stock pursuant to employee stock purchase plan. . . . . . . . .
Proceeds from issuance of common stock pursuant to warrants . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowing under line-of-credit agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment under line-of-credit agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment on term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid to secure line of credit and term loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,693
845
1,050
577,590
(581,618)
(11,450)
—
(592)
—
(14,971)
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,547
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
84
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75,565
49,985
(4,311)
45,866
78,714
5,769
3,017
9,900
(7,342)
(74,506)
(6,307)
(8,038)
(5,791)
2,883
(20,523)
(4,518)
—
(25,041)
21,718
762
—
361,161
(355,156)
(1,645)
25,000
(6,457)
(3,355)
—
42,028
(2,922)
16,948
33,037
3,806
6,488
27,055
388
1,059
(43,686)
(11,506)
(60,531)
(6,862)
(6,620)
33,177
(42,341)
—
(3,800)
—
(3,800)
5,271
798
—
5,300
(5,300)
—
—
1,151
—
—
7,220
(2,361)
(41,282)
74,319
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 125,550
$ 49,985
$ 33,037
The accompanying notes are an integral part of these consolidated financial statements.
21
Activision, Inc.
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Business
Activision, Inc. (“Activision” or the “Company”) is a leading interna-
tional publisher, developer and distributor of interactive entertainment
and leisure products. The Company currently focuses its publishing,
development and distribution efforts on products designed for personal
computers (“PCs”) as well as the Sony PlayStation (“PSX”) and
PlayStation 2 (“PS2”) and Nintendo N64 (“N64”) console systems
and Nintendo Game Boy hand-held game devices. The Company is also
currently focusing on the development of products for the Microsoft
Xbox (“Xbox”) and Nintendo GameCube console systems and
Nintendo Game Boy Advance hand-held device. During January 2001,
Sega Corp., the maker of the Sega Dreamcast (“Dreamcast”) announced
that it would stop making the Dreamcast in March 2001. Net revenues
from the Dreamcast have historically represented only a small percent-
age of the Company’s total net revenues. Accordingly, the Company
believes that the departure of the Dreamcast console system from the
market will not have a material impact upon its financial position or
results of operations.
The Company maintains operations in the U.S., Canada, the
United Kingdom, France, Germany, Japan, Australia, Belgium and the
Netherlands. For fiscal year 2001, international operations contributed
approximately 43% of net revenues.
Principles of Consolidation
The consolidated financial statements include the accounts of Activision,
Inc., a Delaware corporation, and its wholly-owned subsidiaries (the
“Company” or “Activision”). All intercompany accounts and transactions
have been eliminated in consolidation.
Basis of Presentation
The consolidated financial statements have been retroactively restated to
reflect the poolings of interests of the Company with JCM Productions,
Inc. dba Neversoft Entertainment (“Neversoft”) in September 1999.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money markets and short-term
investments with original maturities of not more than 90 days.
The Company’s cash and cash equivalents were comprised of the
following at March 31, 2001 and 2000 (amounts in thousands):
March 31,
2001
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,018
62,532
Money market funds . . . . . . . . . . . . . . . . . . . . . . . .
$125,550
2000
$32,637
17,348
$49,985
Concentration of Credit Risk
Financial instruments which potentially subject the Company to con-
centration of credit risk consist principally of temporary cash invest-
ments and accounts receivable. The Company places its temporary cash
investments with financial institutions. At various times during the
fiscal years ended March 31, 2001 and 2000, the Company had
deposits in excess of the Federal Deposit Insurance Corporation
(“FDIC”) limit at these financial institutions. The Company’s cus-
tomer base includes retail outlets and distributors including consumer
electronics and computer specialty stores, discount chains, video rental
stores and toy stores in the United States and countries worldwide. The
Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses. The Company generally
does not require collateral or other security from its customers.
As of and for the year ending March 31, 2001, the Company’s pub-
lishing business had one customer that accounted for 10% of its con-
solidated net revenues and 15% of its consolidated accounts receivable,
net. For the years ending March 31, 2000 and 1999, no single customer
accounted for 10% or more of consolidated net revenues.
Fair Value of Financial Instruments
The estimated fair values of financial instruments have been determined
by the Company using available market information and valuation
methodologies described below. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein may not be indicative of the
amounts that the Company could realize in a current market exchange.
The use of different market assumptions or valuation methodologies
may have a material effect on the estimated fair value amounts.
Cash and cash equivalents, accounts receivable, accounts payable
and accrued liabilities: The carrying amounts of these instruments
approximate fair value due to their short-term nature.
Long-term debt and convertible subordinated notes: The carrying
amounts of the Company’s variable rate debt approximate fair value
because the interest rates are based on floating rates identified by refer-
ence to market rates. The fair value of the Company’s fixed rate debt is
based on quoted market prices, where available, or discounted future
cash flows based on the Company’s current incremental borrowing rates
for similar types of borrowing arrangements as of the balance sheet
date. The carrying amount and fair value of the Company’s long-term
debt and convertible subordinated notes, was $73.6 million and $60.0
million, respectively, as of March 31, 2001 and $90.0 million and
$81.6 million, respectively, as of March 31, 2000.
Prepaid Royalties and Capitalized
Software Costs
Prepaid royalties include payments made to independent software devel-
opers 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 capital-
ized. Capitalized software costs represent costs incurred for development
that are not recoupable against future royalties.
The Company accounts for prepaid royalties relating to develop-
ment agreements and capitalized software costs in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 86,
“Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed.” Software development costs and prepaid royalties
are capitalized once technological feasibility is established. Technological
feasibility is evaluated on a product by product basis. For products
where proven game engine technology exists, this may occur early in the
development cycle. Software development costs are expensed if and
when they are deemed unrecoverable. Amounts related to software devel-
opment which are not capitalized are charged immediately to product
development expense.
2001 Annual Report
22
The following criteria is used to evaluate recoverability of software
development costs: historical performance of comparable products; the
commercial acceptance of prior products released on a given game
engine; orders for the product prior to its release; estimated perform-
ance 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.
Commencing upon product release prepaid royalties and capitalized
software development costs are amortized to cost of sales—royalties
and software amortization on the ratio of current revenues to total pro-
jected revenues, generally resulting in an amortization period of one
year or less. For products that have been released, management evaluates
the future recoverability of capitalized amounts on a quarterly basis.
As of March 31, 2001, prepaid royalties and unamortized capitalized
software costs totaled $38.3 million (including $14.7 million classified as
non-current) and $3.9 million, respectively. As of March 31, 2000, pre-
paid royalties and unamortized capitalized software costs totaled $29.2
million (including $9.2 million classified as non-current) and $11.6
million, respectively. Amortization of prepaid royalties and capitalized
software costs was $68.9 million, $78.7 million and $27.1 million for
the years ended March 31, 2001, 2000 and 1999, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or market.
Revenue Recognition
Product Sales: The Company recognizes revenue from the sale of its
products once they are shipped and are available for general release to
customers. Subject to certain limitations, the Company permits cus-
tomers to obtain exchanges or return products within certain specified
periods and provides price protection on certain unsold merchandise.
Management of the Company estimates the amount of future returns,
and price protections based upon historical results and current known
circumstances. Revenue from product sales is reflected net of the
allowance for returns and price protection.
Software Licenses: For those license agreements which provide the
customers the right to multiple copies in exchange for guaranteed
amounts, revenue is recognized at delivery. 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, 2001, 2000 and
1999 were approximately $16.5 million, $18.6 million and $15.6 mil-
lion, respectively, and are included in sales and marketing expense in the
consolidated statements of operations.
Goodwill and Long-Lived Assets
Cost in excess of the fair value of net assets of companies acquired,
goodwill, is being amortized on a straight-line basis over periods ranging
from 5 to 20 years. As of March 31, 2001 and 2000, accumulated amor-
tization amounted to $51.9 million and $50.8 million, respectively. The
Company accounts for impairment of long-lived assets, including good-
will, in accordance with SFAS No. 121, “Accounting for Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of.” This
Statement requires that long-lived assets and certain identifiable intangi-
bles, including goodwill, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to undis-
counted cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is meas-
ured by the amount by which the carrying amount exceeds the fair value
of the assets. In conjunction with its strategic restructuring plan as
detailed in Note 3, in the fourth quarter of fiscal 2000, the Company
recorded a charge for impairment of goodwill of $37.2 million. See Note 3
for further discussion.
Interest Expense, net
Interest expense, net is comprised of the following, (amounts in
thousands):
March 31,
2001
2000
1999
Interest expense. . . . . . . . . . . . . . . $(9,399)
2,136
Interest income . . . . . . . . . . . . . . .
$(9,375)
964
$(4,974)
1,943
Net interest income (expense) . . . $(7,263)
$(8,411)
$(3,031)
Income Taxes
The Company accounts for income taxes using 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 attributa-
ble to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recov-
ered 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 functional currencies of the Company’s foreign subsidiaries are
their local currencies. All assets and liabilities of the Company’s foreign
subsidiaries are translated into U.S. dollars at the exchange rate in effect
at the end of the period, and revenue and expenses are translated at
weighted average exchange rates during the period. The resulting trans-
lation adjustments are reflected as a component of shareholders’ equity.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabili-
ties 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.
Earnings Per Common Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding for all periods.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares and common stock equiva-
lents from outstanding stock options and warrants and convertible debt.
Common stock equivalents are calculated using the treasury stock
23
Activision, Inc.
method and represent incremental shares issuable upon exercise of the
Company’s outstanding options and warrants and conversion of the
Company’s convertible debt. However, potential common shares are not
included in the denominator of the diluted earnings per share calcula-
tion when inclusion of such shares would be anti-dilutive, such as in a
period in which the Company records a net loss.
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
Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB
No. 25”), 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 option exercise price.
On April 1, 1996 the Company adopted SFAS No. 123, “Accounting
for Stock-Based Compensation,” which permits entities to recognize as
expense over the vesting period, the fair value of all stock-based awards
on the date of the grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB 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.
Warrants granted to non-employees are accounted for 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).
Related Parties
As of March 31, 2001 and 2000, the Company had $4.3 million and $2.7
million, respectively, of loans outstanding due from employees. The loans
bear interest at 6.75% and are primarily due from Company executives.
Implementation of SAB 101
The Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin (“SAB”) 101, Revenue Recognition in Financial
Statements, in December 1999. The SAB summarizes certain of the
SEC staff ’s views in applying generally accepted accounting principles
to revenue recognition in financial statements. During the year ended
March 31, 2001, the Company performed a review of its revenue recog-
nition policies and determined that it is in compliance with SAB 101.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” (“SFAS No. 133”) as
subsequently amended by SFAS No. 137 and SFAS No. 138, is effec-
tive for all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative instru-
ments 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 hedging activities or own derivative
instruments but plans to adopt SFAS No. 133 beginning April 1, 2001.
Management does not believe the adoption of SFAS No. 133 will have
a material impact on the financial position or results of operations of
the Company.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year’s presentation. These
reclassifications had no effect on net income (loss), shareholders’ equity
or net increase (decrease) in cash and cash equivalents.
2. ACQUISITIONS
FISCAL 2000 TRANSACTIONS
Acquisition of Neversoft
On September 30, 1999, the Company acquired Neversoft, a privately
held console software developer, in exchange for 698,835 shares of
the Company’s common stock. The acquisition was accounted for
as a pooling of interests. Accordingly, in fiscal 2000 the Company
restated the financial statements for all periods prior to the closing of
the transaction.
The following table represents the results of operations of the pre-
viously separate companies for the period before the combination was
consummated which are included in fiscal year 2000 combined net
income (loss) (amounts in thousands):
Fiscal Year 2000
Activision
Six Months Ended
Sept. 30, 1999
Neversoft
Total
Six Months Ended Six Months Ended
Sept. 30, 1999
Sept. 30, 1999
Revenues. . . . . . . . . .
Net income (loss). . .
$199,505
$ (3,028)
$ —
$(484)
$199,505
$ (3,512)
Acquisition of Elsinore Multimedia
On June 29, 1999, the Company acquired Elsinore Multimedia, Inc.
(“Elsinore”), a privately held interactive software development company,
in exchange for 204,448 shares of the Company’s common stock.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, the results of operations of Elsinore have been
included in the Company’s consolidated financial statements from the
date of acquisition. The aggregate purchase price has been allocated to
the assets and liabilities acquired, consisting mostly of goodwill of $3.0
million, that is being amortized over a five year period. Pro forma state-
ments of operations reflecting the acquisition of Elsinore are not
shown, as they would not differ materially from reported results.
Acquisition of Expert Software
On June 22, 1999, the Company acquired all of the outstanding capital
stock of Expert Software, Inc. (“Expert”), a publicly held developer and
publisher of value-line interactive leisure products, for approximately
$24.7 million. The aggregate purchase price of approximately $24.7
million consisted of $20.3 million in cash payable to the former share-
holders of Expert, the valuation of employee stock options in the
amount of $3.3 million, and other acquisition costs.
The acquisition was accounted for using the purchase method of
accounting. Accordingly, the results of operations of Expert have been
included in the Company’s consolidated financial statements from the
date of acquisition.
2001 Annual Report
24
The aggregate purchase price was allocated to the fair values of the
assets and liabilities acquired as follows (amounts in thousands):
Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,743
1,123
Existing products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,335
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,532)
Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$24,669
However, as more fully described in Note 3, in the fourth quarter of
fiscal 2000, the Company implemented a strategic restructuring plan to
accelerate the development of games for the next-generation consoles and
the Internet. In conjunction with that plan, the Company consolidated
Expert and its Head Games subsidiary, forming one integrated business
unit in the value software category. As part of this consolidation, the
Company discontinued several of Expert’s product lines and terminated
substantially all of Expert’s employees. In addition, the Company phased
out the use of the Expert name. As a result of these initiatives, in fiscal
2000, the Company incurred a nonrecurring charge of $26.3 million
resulting from the write-down of intangibles acquired, including goodwill.
FISCAL 1999 TRANSACTIONS
The acquisitions of Head Games and CD Contact were originally
treated as immaterial poolings of interests. However, after reviewing the
results of operations of the entities, including the materiality and
impact on the Company’s trends, in fiscal 1999 the Company restated
the financial statements for all periods prior to the closing of each
respective 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
was accounted for as a pooling of interests.
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 and
the assumption of $9.1 million in outstanding debt payable to CD
Contact’s former shareholders. The acquisition was accounted for as a
pooling of interests.
The following table represents the results of operations of the pre-
viously separate companies for the periods before the combinations
were consummated that are included in the fiscal 1999 combined net
income of the Company (amounts in thousands):
Activision
Year Ended
Head Games
Three Months
Ended
CD Contact
Six Months
Ended
Neversoft
Year Ended
Total
Year
Ended
Fiscal year 1999 March 31, 1999 June 30, 1998 Sept. 30, 1998 March 31, 1999 March 31, 1999
Revenues. . . $412,225
Net income
$2,195
$22,065
$ 41
$436,526
(loss) . . . $ 14,194
$ 394
$
666
$(363)
$ 14,891
3. STRATEGIC RESTRUCTURING PLAN
In the fourth quarter of fiscal 2000, the Company finalized a strategic
restructuring plan to accelerate the development and sale of interactive
entertainment and leisure products for the next-generation consoles and
the Internet. Costs associated with this plan amounted to $70.2 million,
approximately $61.8 million net of taxes, and were recorded in the
consolidated statement of operations in the fourth quarter of fiscal year
2000 and classified as follows (amounts in millions):
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.7
11.9
Cost of sales—royalties and software amortization. . . . . . . . . . . . . . . .
4.2
Product development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.2
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$70.2
The component of the charge included in amortization of intangi-
ble assets represented a write down of intangibles including goodwill,
relating to Expert Software, Inc. (“Expert”), one of the Company’s
value publishing subsidiaries, totaling $26.3 million. The Company
consolidated Expert into Head Games, forming one integrated business
unit. As part of this consolidation, the Company discontinued substan-
tially all of Expert’s product lines, terminated substantially all of
Expert’s employees and phased out the use of the Expert name. In addi-
tion, a $10.9 million write down of goodwill relating to TDC, an OEM
business unit, was recorded. In fiscal 2000, the OEM market went
through radical changes due to price declines of PCs and hardware
accessories. The sum of the undiscounted future cash flow of these
assets was not sufficient to cover the carrying value of these assets and
as such was written down to fair market value.
The component of the charge included in net revenues and general
and administrative expense represents costs associated with the planned
termination of a substantial number of its third party distributor
relationships in connection with the Company’s realignment of its
worldwide publishing business to leverage its existing sales and market-
ing organizations and improve the control and management of its
products. These actions resulted in an increase in the allowance for sales
returns of $11.7 million and the allowance for doubtful accounts of
$3.4 million. The plan also included a severance charge of $1.2 million
for employee redundancies.
The components of the charge included in cost of sales—royalties
and software amortization and product development represent costs to
write down certain assets associated with exiting certain product lines and
re-evaluating other product lines which resulted in reduced expectations.
During fiscal 2001, the Company completed the restructuring
initiatives associated with the fiscal 2000 restructuring plan without
any significant adjustments.
25
Activision, Inc.
4. INVENTORIES
7. OPERATIONS BY REPORTABLE SEGMENTS AND
The Company ’s inventories consist of the following (amounts in
thousands):
March 31,
Purchased parts and components . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . .
2001
$ 1,885
42,003
$43,888
2000
$ 2,857
37,596
$40,453
5. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortiza-
tion 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 furniture and other equipment, 3 years; leasehold
improvements, through the life of the lease. When assets are retired or
disposed of, the cost and accumulated depreciation thereon are removed
and any resultant gains or losses are recognized in current operations.
Property and equipment was as follows (amounts in thousands):
March 31,
2001
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . .
Office furniture and other equipment . . . . . . . .
Leasehold improvements. . . . . . . . . . . . . . . . . . .
214
4,004
21,512
5,585
3,713
Total cost of property and equipment . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . .
35,028
(19,788)
$
2000
526
2,468
18,670
5,800
3,229
30,693
(19,878)
Property and equipment, net . . . . . . . . . . . . . $ 15,240
$ 10,815
Depreciation expense for the years ended March 31, 2001, 2000
and 1999 was $4.8 million, $4.2 million and $4.9 million, respectively.
6. ACCRUED EXPENSES
Accrued expenses were comprised of the following (amounts in
thousands):
March 31,
Accrued royalties payable . . . . . . . . . . . . . . . . . .
Affiliated label payable . . . . . . . . . . . . . . . . . . . .
Accrued selling and marketing costs. . . . . . . . . .
Income tax payable . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest expense. . . . . . . . . . . . . . . . . . .
Accrued bonus and vacation pay. . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2001
$14,764
733
4,603
859
1,150
11,958
9,972
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44,039
2000
$13,300
4,033
10,493
4,934
1,013
5,514
10,117
$49,404
GEOGRAPHIC AREA
The Company publishes, develops and distributes interactive entertain-
ment and leisure products for a variety of game platforms, including
PCs, the Sony PlayStation and PlayStation 2 console systems, the
Nintendo 64 console system, the Nintendo Game Boy and the Sega
Dreamcast console system. The Company has also begun product devel-
opment for next-generation console systems and hand held devices,
including Microsoft’s Xbox and Nintendo’s GameCube and Game Boy
Advance. Based on its organizational structure, the Company operates in
two reportable segments: publishing and distribution.
The Company’s publishing segment publishes titles that are devel-
oped 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 primarily on a direct basis to major com-
puter and software retailing organizations, mass market retailers, con-
sumer electronic stores, discount warehouses and mail order companies.
The Company conducts its international publishing activities through
offices in the United Kingdom, Germany, France, Australia, Canada and
Japan. The Company’s products are sold internationally on a direct to
retail basis and through third party distribution and licensing arrange-
ments and through the Company’s wholly-owned distribution sub-
sidiaries located in the United Kingdom, the Netherlands and Germany.
The Company’s distribution segment, located in the United
Kingdom, the Netherlands and Germany, distributes interactive enter-
tainment software and hardware and provides logistical services for a
variety of publishers and manufacturers.
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, “Disclosure about Segments of an
Enterprise and Related Information,” (“SFAS No. 131”).
The President and Chief Operating Officer does not evaluate indi-
vidual 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.
2001 Annual Report
26
Information on the reportable segments for the three years ended
March 31, 2001 is as follows (amounts in thousands):
Year ended March 31, 2001
Publishing
Distribution
Total
Total segment revenues . . . . . . . . . . . $466,062
Revenue from sales
$154,121
$620,183
8. COMPUTATION OF EARNINGS PER SHARE
The following table sets forth the computations of basic and
diluted earnings (loss) per share, (amounts in thousands, except per
share data):
Year ended March 31,
2001
2000
1999
between segments . . . . . . . . . . . . .
(39,331)
39,331
—
Numerator
Revenues from external customers . . . $426,731
$193,452
$620,183
Operating income . . . . . . . . . . . . . . . $ 35,687
$ 4,120
$ 39,807
Total assets . . . . . . . . . . . . . . . . . . . . $271,488
$ 88,469
$359,957
Year ended March 31, 2000
Publishing
Distribution
Total
Total segment revenues. . . . . . . . . . . . $396,691
Revenue from sales
$175,514
$572,205
Numerator for basic and diluted
earnings per share—income
(loss) available to common
shareholders . . . . . . . . . . . . . . . .
Denominator
Denominator for basic earnings
per share—weighted average
common shares outstanding . . .
$20,507
$(34,088)
$14,891
24,865
24,691
22,861
between segments. . . . . . . . . . . . . .
(40,255)
40,255
—
Effect of dilutive securities:
Revenues from external customers . . . $356,436
$215,769
$572,205
Operating income (loss) . . . . . . . . . . $(35,049)
$ 4,724
$(30,325)
Employee stock options. . . . . . .
Warrants to purchase
2,354
common stock . . . . . . . . . . . .
181
Total assets. . . . . . . . . . . . . . . . . . . . . $230,961
$ 78,776
$309,737
Potential dilutive common shares. . .
2,535
—
—
—
942
129
1,071
Year ended March 31, 1999
Publishing
Distribution
Total
Total segment revenues. . . . . . . . . . . . $205,542
Revenue from sales
$230,984
$436,526
between segments. . . . . . . . . . . . . .
(19,202)
19,202
—
Revenues from external customers . . . $186,340
$250,186
$436,526
Operating income. . . . . . . . . . . . . . . . $ 12,398
$ 14,269
$ 26,667
Total assets. . . . . . . . . . . . . . . . . . . . . $185,567
$ 97,778
$283,345
Geographic information for the three years ended March 31, 2001
is based on the location of the selling entity. Revenues from external
customers by geographic region were as follows (amounts in thousands):
Year ended March 31,
2001
2000
1999
United States . . . . . . . . . . . . . . . . . . . $352,893
256,228
Europe . . . . . . . . . . . . . . . . . . . . . . . .
11,062
Other . . . . . . . . . . . . . . . . . . . . . . . . .
$282,847
277,485
11,873
$149,705
278,032
8,789
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $620,183
$572,205
$436,526
Revenues by platform were as follows (amounts in thousands):
Year ended March 31,
2001
2000
1999
Console . . . . . . . . . . . . . . . . . . . . . . . $466,893
153,290
PC . . . . . . . . . . . . . . . . . . . . . . . . . . .
$410,277
161,928
$268,246
168,280
Total. . . . . . . . . . . . . . . . . . . . . . . . . . $620,183
$572,205
$436,526
Denominator for diluted earnings per
share—weighted average common
shares outstanding plus assumed
conversions . . . . . . . . . . . . . . . .
27,400
24,691
23,932
Basic earnings (loss) per share . . . . . .
$ 0.82
$ (1.38)
$ 0.65
Diluted earnings (loss) per share. . . .
$ 0.75
$ (1.38)
$ 0.62
Options to purchase 2,338,841, 2,555,397 and 2,188,175 shares
of common stock were outstanding for the years ended March 31,
2001, 2000 and 1999, respectively, but were not included in the calcu-
lations of diluted earnings (loss) per share because their effect would be
anti-dilutive. Convertible subordinated notes were also not included in
the calculations of diluted earnings per share because their effect would
be anti-dilutive.
Subsequent to March 31, 2001, the Company called for the
redemption of its $60.0 million convertible subordinated notes due
2005. In connection with that call, holders have converted into common
stock approximately $60.0 million aggregate principal amount of their
convertible subordinated notes, resulting in the issuance of approxi-
mately 3,175,000 shares of common stock to such holders.
27
Activision, Inc.
9. INCOME TAXES
Domestic and foreign income (loss) before income taxes and details
of the income tax provision (benefit) are as follows (amounts in
thousands):
Year ended March 31,
2001
2000
1999
Income (loss) before income taxes:
Domestic . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . .
$24,276
8,268
$(37,115)
(1,621)
$ 5,945
17,691
$32,544
$(38,736)
$23,636
Income tax expense (benefit):
Current:
Federal . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . .
$
394
112
4,351
4,857
$
(383)
337
2,610
2,564
$
37
124
5,456
5,617
Deferred:
Federal . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . .
(5,610)
(1,761)
(479)
(10,047)
(1,448)
—
Total deferred . . . . . . . . . . . .
(7,850)
(11,495)
(418)
57
—
(361)
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 . . . . . . . . . . .
11,378
3,017
1,059
3,652
15,030
1,266
4,283
2,430
3,489
Income tax provision (benefit) . . . . .
$12,037
$ (4,648)
$ 8,745
The items accounting for the difference between income taxes com-
puted at the U.S. federal statutory income tax rate and the income tax
provision for each of the years are as follows:
Year ended March 31,
2001
2000
1999
Federal income tax provision (benefit)
(34.0%)
(4.5%)
18.6%
0.4%
(8.6%)
2.8%
13.8%
—
(0.5%)
(12.0%)
34.0%
1.3%
1.7%
0.8%
(5.4%)
(0.9%)
5.1%
—
0.4%
37.0%
at statutory rate. . . . . . . . . . . . . . . . . . 35.0%
3.3%
1.3%
State taxes, net of federal benefit . . . . . .
Nondeductible amortization . . . . . . . . . .
Nondeductible merger fees . . . . . . . . . . . —
Research and development credits . . . . . .
Incremental effect of foreign tax rates. . .
Increase of valuation allowance . . . . . . . .
Rate changes . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5.7%)
0.5%
4.0%
(1.5%)
0.1%
37.0%
2001 Annual Report
28
Deferred income taxes reflect the net tax effects of temporary dif-
ferences between the amounts of assets and liabilities for accounting
purposes and the amounts used for income tax purposes. The compo-
nents of the net deferred tax asset and liability are as follows (amounts
in thousands):
March 31,
Deferred asset:
2001
2000
Allowance for bad debts. . . . . . . . . . . . . . . . . . . . . $
Allowance for sales returns . . . . . . . . . . . . . . . . . .
Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . .
Vacation and bonus reserve . . . . . . . . . . . . . . . . . .
Royalty reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credit carryforwards . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards. . . . . . . . . . . . . .
Amortization and depreciation . . . . . . . . . . . . . . .
716
3,900
992
1,663
170
1,643
14,224
12,362
6,816
$ 1,019
5,151
799
763
774
1,585
12,062
12,828
7,055
Deferred asset . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . .
42,486
(9,895)
42,036
(13,041)
Net deferred asset . . . . . . . . . . . . . . . . . . . . . . .
32,591
28,995
Deferred liability:
Capitalized research expenses . . . . . . . . . . . . . .
State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred liability . . . . . . . . . . . . . . . . . . . . . . . .
3,087
1,453
4,540
7,864
917
8,781
Net deferred asset . . . . . . . . . . . . . . . . . . . . . . . $28,051
$ 20,214
In accordance with Statement of Position 90-7 (“SOP 90-7”),
“Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code,” issued by the AICPA, benefits from loss carryfor-
wards arising prior to the Company’s reorganization are recorded as
additional paid-in capital. During the year ended March 31, 2001, $3.7
million was recorded as additional paid-in capital.
As of March 31, 2001, the Company’s available federal net operat-
ing loss carryforward of $30.8 million is subject to certain limitations
as defined under Section 382 of the Internal Revenue Code. The net
operating loss carryforwards expire from 2006 to 2019. The
Company’s available state net operating loss carryforward of $8.0 mil-
lion is not subject to limitations under Section 382 of the Internal
Revenue Code. The Company has tax credit carryforwards of $9.4 mil-
lion and $4.8 million for federal and state purposes, respectively, which
expire from 2006 to 2021.
At March 31, 2001, the Company’s deferred income tax asset for
tax credit carryforwards and net operating loss carryforwards was
reduced by a valuation allowance of $9.9 million. Of such valuation
allowance, none relates to SOP 90-7 which, if realized, would be
recorded as additional paid-in capital. 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 net carrying value of the deferred tax asset 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.
Cumulative undistributed earnings of foreign subsidiaries for which
no deferred taxes have been provided approximated $22.8 million at
March 31, 2001. Deferred income taxes on these earnings have not been
provided as these amounts are considered to be permanent in duration.
10. LONG-TERM DEBT
Bank Lines of Credit and Other Debt
The Company’s long-term debt consists of the following (amounts
in thousands):
March 31,
2001
2000
U.S. Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,432
1,759
The Netherlands Facility . . . . . . . . . . . . . . . . . . . . . .
3,441
Mortgage notes payable and other . . . . . . . . . . . . . . .
$ 22,496
3,509
4,033
Less current portion . . . . . . . . . . . . . . . . . . . . . . . . .
13,632
(10,231)
30,038
(16,260)
Long-term debt, less current portion. . . . . . . . . . . . . $ 3,401
$ 13,778
In June 1999, the Company obtained a $100.0 million revolving
credit facility and a $25.0 million term loan (the “U.S. Facility”) with
a syndicate of banks. The revolving portion of the U.S. Facility provides
the Company with the ability to borrow up to $100.0 million and issue
letters of credit up to $80 million on a revolving basis against eligible
accounts receivable and inventory. The $25.0 million term loan portion
of the U.S. Facility was used to acquire Expert Software, Inc. in June
1999 and to pay costs related to such acquisition and the securing of
the U.S. Facility. The term loan has a three year term with principal
amortization on a straight-line quarterly basis beginning December 31,
1999 and a borrowing rate based on the banks’ base rate (which is gen-
erally equivalent to the published prime rate) plus 2% or LIBOR plus
3%. The revolving portion of the U.S. Facility has a borrowing rate
based on the banks’ base rate plus 1.75% or LIBOR plus 2.75% and
matures June 2002. The U.S. Facility had a weighted average interest
rate of approximately 9.70% and 9.50% for the year ended March 31,
2001 and 2000, respectively. The Company pays a commitment fee of
1⁄2% on the unused portion of the revolving line. The U.S. Facility is col-
lateralized by substantially all of the assets of the Company and its U.S.
subsidiaries. The U.S. Facility contains various covenants that limit the
ability of the Company to incur additional indebtedness, pay dividends
or make other distributions, create certain liens, sell assets, or enter into
certain mergers or acquisitions. The Company is also required to main-
tain specified financial ratios related to net worth and fixed charges.
As of March 31, 2001 and 2000, the Company was in compliance with
these covenants. As of March 31, 2001, approximately $8.5 million
was outstanding under the term loan portion of the U.S. Facility.
As of March 31, 2001, there were no borrowings outstanding and
$18.2 million of letters of credit outstanding against the revolving por-
tion of the U.S. Facility. As of March 31, 2000, $20.0 million was out-
standing under the term loan portion and $2.5 million was outstanding
under the revolving portion of the U.S. Facility.
The Company has a revolving credit facility through its CD
Contact subsidiary in the Netherlands (the “Netherlands Facility”).
The Netherlands Facility permits revolving credit loans and letters of
credit up to Netherlands Guilders (“NLG”) 26 million ($10.4 mil-
lion) as of March 31, 2001 and NLG 45 million ($19.4 million) as of
March 31, 2000, based upon eligible accounts receivable and inventory
balances. The Netherlands Facility is due on demand, bears interest at a
Eurocurrency rate plus 1.50% and 1.25% in fiscal 2001 and 2000,
respectively (weighted average interest rate of approximately 7.40% and
6.80% as of March 31, 2001 and 2000, respectively) and matures
August 2003. Borrowings outstanding under the Netherlands Facility
were $1.8 million and $3.5 million at March 31, 2001 and 2000,
respectively. Letters of credit outstanding under the Netherlands
Facility were NLG 3.8 million ($1.6 million) as of March 31, 2000.
There were no letters of credit outstanding under the Netherlands
Facility as of March 31, 2001.
The Company also has revolving credit facilities with its CentreSoft
subsidiary located in the United Kingdom (the “UK Facility”) and its
NBG subsidiary located in Germany (the “German Facility”). The UK
Facility provides for British Pounds (“GBP”) 7.0 million ($10.0 mil-
lion) of revolving loans and GBP 3.0 million ($4.3 million) of letters
of credit as of March 31, 2001 and GBP 7.0 million ($11.2 million) of
revolving loans and GBP 6.0 million ($9.6 million) of letters of credit
as of March 31, 2000. The UK Facility bears interest at LIBOR plus
2%, is collateralized by substantially all of the assets of the subsidiary
and matures in July 2001. The UK Facility also contains various
covenants that require the subsidiary to maintain specified financial
ratios related to, among others, fixed charges. As of March 31, 2001
and 2000, the Company was in compliance with these covenants. No
borrowings were outstanding against the UK Facility at March 31,
2001 or 2000. Letters of credit of GBP 3.0 million ($4.3 million) and
GBP 6.0 million ($9.6 million) were outstanding against the UK
Facility at March 31, 2001 and 2000, respectively. As of March 31,
2001 and 2000, the German Facility provides for revolving loans up to
Deutsche Marks (“DM”) 4 million ($1.8 million), bears interest at
7.0%, is collateralized by a cash deposit of approximately GBP 650,000
($928,000) made by the Company’s CentreSoft subsidiary and has no
expiration date. No borrowings were outstanding against the German
Facility as of March 31, 2001 and 2000.
Mortgage notes payable relate to the land, office and warehouse
facilities of the Company’s German and Netherlands subsidiaries. The
notes bear interest at 5.45% and 5.35%, respectively, and are collateral-
ized by the related assets. The Netherlands mortgage note payable is
due in quarterly installments of NLG 25,000 ($10,000) and matures
January 2019. The German mortgage note payable is due in bi-annual
installments of DM 145,000 ($65,500) beginning June 2002 and
matures December 2019.
29
Activision, Inc.
Annual maturities of long-term debt are as follows (amounts
in thousands):
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,231
235
171
171
171
2,653
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$13,632
Private Placement of Convertible
Subordinated Notes
In December 1997, the Company completed the private placement of
$60.0 million principal amount of 63⁄4% convertible subordinated notes
due 2005 (the “Notes”). The Notes are convertible, in whole or in part,
at the option of the holder at any time after December 22, 1997 (the
date of original issuance) and prior to the close of business on the 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), subject to adjustment in certain circumstances. The Notes are
redeemable, in whole or in part, at the option of the Company at any
time on or after January 10, 2001, subject to premiums through
December 31, 2003.
11. COMMITMENTS AND CONTINGENCIES
Developer Contracts
In the normal course of business, the Company enters into contractual
arrangements with third parties for the development of products. Under
these agreements, the Company commits to provide specified payments
to a developer, contingent upon the developer’s achievement of contrac-
tually specified milestones. Assuming all contractually specified
milestones are achieved, for contracts in place as of March 31, 2001,
the total future minimum contract commitment is approximately
$62.1 million, which is scheduled to be paid as follows (amount
in thousands):
Year ending March 31,
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$35,197
13,528
6,250
2,925
1,675
2,500
$62,075
Additionally, under the terms of a production financing arrange-
ment, the Company has a commitment to purchase two future
PlayStation 2 titles from independent third party developers for an esti-
mated $5.7 million. Failure by the developers to complete the project
within the contractual time frame or specifications alleviates the
Company’s commitment.
Lease Obligations
The Company leases certain of its facilities under non-cancelable oper-
ating lease agreements. Total future minimum lease commitments as of
March 31, 2001 are as follows (amounts in thousands):
Year ending March 31,
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,991
3,728
3,606
3,389
3,044
5,576
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,334
Facilities rent expense for the years ended March 31, 2001, 2000
and 1999 was approximately $4.7 million, $4.4 million and $4.4 mil-
lion, respectively.
Legal Proceedings
The Company is party to routine claims and suits brought against it in
the ordinary course of business, including disputes arising over the
ownership of intellectual property rights and collection matters. In the
opinion of management, the outcome of such routine claims will not
have a material adverse effect on the Company’s business, financial con-
dition, results of operations or liquidity.
12. STOCK COMPENSATION PLANS
Employee Options
The Company sponsors three stock option plans for the benefit of offi-
cers, employees, consultants and others.
The Activision 1991 Stock Option and Stock Award Plan, as
amended, (the “1991 Plan”) permits the granting of “Awards” in the
form 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 available for distribution under the 1991
Plan is 7,567,000. The 1991 Plan requires available shares to consist in
whole or in part of authorized and unissued shares or treasury shares.
There were approximately 229,000 shares remaining available for grant
under the 1991 Plan as of March 31, 2001.
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 “Awards” in the form of non-qualified
stock options, ISOs, SARs, restricted stock awards, deferred stock
awards and other common stock-based awards to directors, officers,
employees, consultants and others. The total number of shares of com-
mon 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 unissued shares or treasury shares. There were approxi-
mately 648,000 shares remaining available for grant under the 1998
Plan as of March 31, 2001.
On, April 26, 1999, the Board of Directors approved the Activision
1999 Incentive Plan (the “1999 Plan”). The 1999 Plan permits the
granting of “Awards” in the form of non-qualified stock options, ISOs,
SARs, restricted stock awards, deferred share awards and other common
stock-based awards to directors, officers, employees, consultants and
2001 Annual Report
30
others. The total number of shares of common stock available for dis-
tribution under the 1999 Plan is 5,000,000. The 1999 Plan requires
available shares to consist in whole or in part of authorized and unis-
sued shares or treasury shares. As of March 31, 2001, there were
approximately 262,000 shares remaining available for grant under the
1999 Plan.
The exercise price for Awards issued under the 1991 Plan, 1998
Plan and 1999 Plan (collectively, the “Plans”) is determined at the dis-
cretion of the Board of Directors (or the Compensation Committee of
the Board of Directors, which administers the Plans), 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 the fair market value at the date of grant.
Options typically become exercisable in installments over a period not
to exceed five years and must be exercised within 10 years of the date of
grant. However, certain options granted to executives vest immediately.
Historically, stock options have been granted with exercise prices equal
to or greater than the fair market value at the date of grant.
In connection with current and prior employment agreements
between the Company and Robert A. Kotick, the Company’s Chairman
and Chief Executive Officer, and Brian G. Kelly, the Company’s Co-
Chairman, Mr. Kotick and Mr. Kelly have been granted options to pur-
chase common stock. Relating to such grants, as of March 31, 2001,
4,269,000 and 3,186,000 shares with weighted average exercise prices
of $8.43 and $9.22 were outstanding and exercisable, respectively.
The Company also issues stock options in conjunction with acqui-
sition transactions. For the year ended March 31, 2001, approximately
13,000 and 1,000 options with weighted average exercise prices of
$9.74 and $6.76 were outstanding and exercisable, respectively, relating
to options issued in conjunction with the acquisitions of Head Games
and Expert.
Director Warrants
The Director Warrant Plan, which expired on December 19, 1996, pro-
vided for the automatic granting of warrants (“Director Warrants”) to
purchase 16,667 shares of common stock to each director of the
Company who was not an officer or employee of the Company or any of
its subsidiaries. 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 Director Warrants. As of March 31, 2001, there were
no shares of common stock available for distribution under the Director
Warrant Plan.
The range of exercise prices for Director Warrants outstanding as
of March 31, 2001 was $.75 to $8.50. The range of exercise 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,
2001, 28,700 of the outstanding and vested Director Warrants have a
weighted average remaining contractual life of 0.78 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
3.82 years and a weighted average exercise price of $6.50; and 20,000
of the outstanding and vested Director Warrants have a weighted aver-
age remaining contractual life of 3.82 years and a weighted average exer-
cise price of $8.50.
During the fiscal year ended March 31, 1997, the Company issued
warrants to purchase 40,000 shares of the Company’s common stock,
at exercise prices ranging from $11.80 to $13.88 to two of its outside
directors in connection with their election to the Board. Such warrants
have vesting terms identical to the Director Warrants and expire within
10 years. Relating to such warrants, as of March 31, 2001, 40,000 and
39,000 shares with weighted average exercise prices of $12.85 and
$12.89 were outstanding and exercisable, respectively.
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 pur-
chase shares having a value not exceeding 10% of their gross compensa-
tion during an Offering Period. Employees purchased 34,615 and
39,002 shares at a price of $9.46 and $10.68 per share during the
Purchase Plan’s offering period ended September 30, 2000 and 1999,
respectively, and 43,910 and 33,440 shares at a price of $11.79 and
$10.25 per share during the Purchase Plan’s offering period ended
March 31, 2001 and 2000, respectively.
Activity of Employee and Director Options
and Warrants
Activity of all employee and director options and warrants during the
last three fiscal years was as follows (amounts in thousands, except
weighted average exercise price amounts):
2001
2000
1999
Wtd Avg
Shares Ex Price
Shares
Wtd Avg
Ex Price
Wtd Avg
Shares Ex Price
Outstanding at beginning
of year . . . . . . . . . . . . . . 10,332
Granted . . . . . . . . . . . . .
6,767
(3,500)
Exercised . . . . . . . . . . . .
(1,655)
Forfeited. . . . . . . . . . . . .
$11.07
6.91
9.06
9.73
9,949
3,767
(2,331)
(1,053)
$10.54
11.52
9.15
11.91
6,218
5,538
(605)
(1,202)
$11.47
10.27
8.68
15.33
Outstanding at end
of year . . . . . . . . . . . . . . 11,944
$ 9.68
10,332
$11.07
9,949
$10.54
Exercisable at end
of year . . . . . . . . . . . . . .
6,544
$ 9.99
4,715
$10.25
4,154
$10.00
For the year ended March 31, 2001, 4,342,000 options with a
weighted average exercise price of $7.19 were granted at an exercise
price equal to the fair market value on the date of grant and 2,425,000
options with a weighted average exercise price of $6.43 were granted at
an exercise price greater than fair market value on the date of grant.
For the year ended March 31, 2000, 2,501,000 options with a
weighted average exercise price of $12.88 were granted at an exercise
price equal to the fair market value on the date of grant and 705,000
options with a weighted average exercise price of $10.71 were granted at
an exercise price greater than fair market value on the date of grant.
Additionally, in conjunction with the acquisition of Expert, 561,000
options with a weighted average exercise price of $6.48 were granted at
an exercise price less than market value on the date of grant. Options
granted to Expert were outside any of the Plans.
31
Activision, Inc.
For the year ended March 31, 1999, 5,320,000 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 exercise price greater than
fair market value on the date of grant.
The following tables summarize information about all employee
and director stock options and warrants outstanding as of March 31,
2001 (share amounts in thousands):
Outstanding Options
Exercisable Options
Remaining
Wtd Avg
Contractual
Life
(in years)
Shares
Wtd Avg
Wtd Avg
Exercise Price Shares Exercise Price
Range of
exercise prices:
$0.75 to $0.75 . . . . .
29
$3.00 to $6.00 . . . . . 1,336
$6.03 to $6.13 . . . . . 2,002
$6.16 to $9.44 . . . . . 1,306
$9.50 to $10.25 . . . . 1,608
$10.31 to $10.31 . . .
340
$10.38 to $10.50 . . . 1,999
$10.56 to $12.50 . . . 1,307
$12.63 to $14.50 . . . 1,306
711
$14.56 to $23.86 . . .
0.78
8.30
9.14
8.04
6.88
8.29
7.97
7.48
7.87
6.31
0.75
5.82
6.13
7.79
9.89
10.31
10.50
11.14
13.53
17.84
29
333
917
506
1,462
167
1,975
422
332
401
0.75
5.30
6.13
8.70
9.88
10.31
10.50
10.98
13.44
18.86
Non-Employee Warrants
In prior years, the Company has granted stock warrants to third parties
in connection with the development of software and the acquisition of
licensing rights for intellectual property. The warrants generally vest
upon grant and are exercisable over the term of the warrant. The exercise
price of third party warrants is generally greater than or equal to the fair
market value of the Company’s common stock at the date of grant.
No such grants were made during the fiscal year ending March 31,
2001. As of March 31, 2001, 1,316,000 third party warrants to pur-
chase common stock were outstanding with a weighted average exercise
price of $10.89 per share.
During the fiscal year ended March 31, 2000, the Company
granted warrants to a third party to purchase 100,000 shares of the
Company’s common stock at an exercise price of $11.63 per share in
connection with, and as partial consideration for, a license agreement
that allows the Company to utilize the third party’s name in conjunc-
tion with certain Activision products. The warrants vested upon grant,
have a seven year term and become exercisable ratably in annual install-
ments over the warrant term. As of March 31, 2000, 1,580,000 third
party warrants to purchase common stock were outstanding with a
weighted average exercise price of $11.02 per share.
During the fiscal year ended March 31, 1999, the Company issued
the following warrants to third parties to purchase an aggregate of
1,000,000 shares of common stock in connection with software license
agreements:
Warrants
Shares
Exercise
Price
Vesting Schedule
#1
500,000 $10.27 Vested upon date of grant;
#2
250,000
(a)
exercisable ratably over 5 years
beginning on date of grant.
Vested upon date of grant;
exercisable ratably over 5 years
beginning on 9/16/03.
#3
250,000 $12.70 Vested and exercisable upon date
of grant.
Total
1,000,000
Expiration
Date
9/16/08
9/16/08
7/2/08
(a) Exercise price will be equal to the average closing price of the Company’s common stock on the Nasdaq
National Market(cid:2) for the 30 trading days preceding September 16, 2003.
As of March 31, 1999, 1,480,000 third party warrants to purchase
common stock were outstanding with a weighted average exercise price
of $10.98 per share
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 above. The weighted average
estimated fair value of third party warrants granted during the years
ending March 31, 2000 and 1999 were $7.89 per share and $7.93 per
share, respectively. No warrants were granted during the fiscal year end-
ing March 31, 2001. In accordance EITF 96-18, the Company meas-
ures the fair value of the securities on the measurement date. The fair
value of each warrant is capitalized and amortized to royalty expense
when the related product is released and the related revenue is recog-
nized. During fiscal year 2001, 2000 and 1999, $1.4 million, $5.8 mil-
lion and $0.4 million, respectively, was amortized and included in
royalty expense relating to warrants.
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.
2001 Annual Report
32
Pro forma information regarding net income (loss) and earnings
per share is required by SFAS No. 123. This information is required to
be determined as if the Company had accounted for its employee stock
options (including shares issued under the Purchase Plan and Director
Warrant Plan and other employee option grants, collectively called
“options”) granted during fiscal 2001, 2000 and 1999 under the fair
value method of that statement. The fair value of options granted in the
years ended March 31, 2001, 2000 and 1999 reported below has been
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
Option Plans and Other
Employee Options
Purchase Plan
Director
Warrant Plan
2001
2000
1999
2001
2000
1999
2001
2000
1999
Expected life
(in years). . . . .
1
1
1.5
0.5
0.5
0.5
1
1
0.5
Risk free
interest rate . . . 4.09% 6.15% 4.77% 4.09% 6.15% 4.77% 4.09% 6.15% 4.77%
70% 67% 66% 70% 67% 66% 70% 67% 66%
Volatility . . . . . . .
Dividend yield . . . — — — — — — — — —
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restric-
tions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company’s options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially
affect the fair value estimate, in the opinion of management, the exist-
ing models do not necessarily provide a reliable single measure of the
fair value of its options. For options granted during fiscal 2001, the per
share weighted average fair value of options with exercise prices equal to
market value on date of grant and exercise prices greater than market
value were $3.12, and $1.34, respectively. For options granted during
fiscal 2000, the per share weighted average fair value of options with
exercise prices equal to market value on date of grant, exercise prices
greater than market value and exercise prices less than market value were
$5.91, $2.64 and $8.00, respectively. The weighted average estimated
fair value of options and warrants granted during the year ended March
31, 1999 was $11.12 per share. The per share weighted average esti-
mated fair value of Employee Stock Purchase Plan shares granted dur-
ing the years ended March 31, 2001, 2000 and 1999 were $3.48, $3.35
and $2.85, respectively.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options’ vesting period.
The Company’s pro forma information follows (amounts in thousands
except for per share information):
Year ended March 31,
2001
2000
Pro forma net income (loss) . . . . . . .
Pro forma basic earnings (loss)
per share. . . . . . . . . . . . . . . . . . . . .
Pro forma diluted earnings (loss)
per share. . . . . . . . . . . . . . . . . . . . .
$11,531
$(45,355)
0.46
0.42
(1.84)
(1.84)
1999
$748
0.01
0.01
The effects on pro forma disclosures of applying SFAS No. 123 are
not likely to be representative of the effects on pro forma disclosures of
future years.
Employee Retirement Plan
The Company has a retirement plan covering substantially all of its eli-
gible employees. The retirement plan is qualified in accordance with
Section 401(k) of the Internal Revenue Code. Under the plan, employ-
ees may defer up to 15% of their pre-tax salary, but not more than
statutory limits. The Company contributes 5% of each dollar con-
tributed by a participant. The Company’s matching contributions to
the plan were $62,000, $46,000 and $40,000 during the years ended
March 31, 2001, 2000 and 1999, respectively.
13. SHAREHOLDERS’ EQUITY
Repurchase Plan
As of May 9, 2000, the Board of Directors authorized the Company to
purchase up to $15.0 million in shares of its common stock as well as
its convertible subordinated notes. The shares and notes could be pur-
chased from time to time through the open market or in privately nego-
tiated transactions. The amount of shares and notes purchased and the
timing of purchases was based on a number of factors, including the
market price of the shares and notes, market conditions, and such other
factors as the Company’s management deemed appropriate. The
Company has financed the purchase of shares with available cash. As of
the quarter ending June 30, 2000, the Company had repurchased 2.3
million shares of its common stock for approximately $15.0 million.
Shareholders’ Rights Plan
On April 18, 2000, the Company’s Board of Directors approved a
shareholders’ rights plan (the “Rights Plan”). Under the Rights Plan,
each common stockholder at the close of business on April 19, 2000,
will receive a dividend of one right for each share of common stock held.
Each right represents the right to purchase one one-hundredth (1/100)
of a share of the Company’s Series A Junior Preferred Stock at an exer-
cise price of $40.00. Initially, the rights are represented by the
Company’s common stock certificates and are neither exercisable nor
traded separately from the Company’s common stock. The rights will
only become exercisable if a person or group acquires 15% or more of
the common stock of the Company, or announces or commences a ten-
der or exchange offer which would result in the bidder’s beneficial own-
ership of 15% or more of the Company’s common stock.
In the event that any person or group acquires 15% or more of the
Company’s outstanding common stock each holder of a right (other
than such person or members of such group) will thereafter have the
right to receive upon exercise of such right, in lieu of shares of Series A
Junior Preferred Stock, the number of shares of common stock of the
Company having a value equal to two times the then current exercise
price of the right. If the Company is acquired in a merger or other busi-
ness combination transaction after a person has acquired 15% or more
the Company’s common stock, each holder of a right will thereafter
have the right to receive upon exercise of such right a number of the
acquiring company’s common shares having a market value equal to two
times the then current exercise price of the right. For persons who, as of
the close of business on April 18, 2000, beneficially own 15% or more
33
Activision, Inc.
of the common stock of the Company, the Rights Plan “grandfathers”
their current level of ownership, so long as they do not purchase addi-
tional shares in excess of certain limitations.
The Company may redeem the rights for $.01 per right at any time
until the first public announcement of the acquisition of beneficial
ownership of 15% of the Company’s common stock. At any time after a
person has acquired 15% or more (but before any person has acquired
more than 50%) of the Company’s common stock, the Company may
exchange all or part of the rights for shares of common stock at an
exchange ratio of one share of common stock per right. The rights
expire on April 18, 2010.
14. SUPPLEMENTAL CASH FLOW INFORMATION
15. QUARTERLY FINANCIAL AND MARKET
INFORMATION—UNAUDITED
(Amounts in thousands,
except per share data)
Fiscal 2001:
Quarter Ended
June 30
Sept 30 Dec 31 Mar 31 (1)
Year
Ended
Net revenues . . . . . . . . . . $84,558
Operating income
$144,363 $264,473 $126,789 $620,183
(loss). . . . . . . . . . . . . .
Net income (loss). . . . . .
Basic earnings (loss)
(6,498)
(5,179)
9,536
4,306
34,754
20,505
2,015
875
39,807
20,507
per share . . . . . . . . . . .
(0.21)
0.18
0.84
0.03
Diluted earnings (loss)
per share . . . . . . . . . . .
(0.21)
0.17
0.70
0.03
0.82
0.75
Non-cash investing and financing activities and supplemental cash
Common stock price
flow information is as follows (amounts in thousands):
Years ended March 31,
2001
2000
1999
Non-cash investing and
financing activities:
Stock and warrants to acquire common
stock issued in exchange for
licensing rights. . . . . . . . . . . . . . . .
Tax benefit derived from net operating
loss carryforward utilization . . . . .
Stock issued to effect business
combination . . . . . . . . . . . . . . . . . .
Assumption of debt to effect business
combination . . . . . . . . . . . . . . . . . .
Conversion of notes payable to
common stock . . . . . . . . . . . . . . . .
Supplemental cash flow information:
Cash paid for income taxes . . . . . . . .
$ — $ 8,529
$3,368
3,652
1,266
2,430
—
—
—
7,171
—
—
—
9,100
4,500
$6,753
$ 6,333
$2,814
Cash paid for interest. . . . . . . . . . . . .
$5,720
$10,519
$5,513
per share
High . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . .
12.16
5.38
15.63
6.31
15.25
10.31
25.25
13.63
25.25
5.38
Fiscal 2000 (quarter ended June 30 restated):
Net revenues . . . . . . . . . . $84,142
Operating income
$115,363 $268,862 $103,838 $572,205
(loss). . . . . . . . . . . . . .
Net income (loss) . . . . . .
Basic earnings (loss)
(6,101)
(4,575)
3,525
1,063
38,241
22,301
(65,990)
(52,877)
(30,325)
(34,088)
per share . . . . . . . . . . .
(0.19)
0.04
0.89
(2.07)
(1.38)
Diluted earnings (loss)
per share . . . . . . . . . . .
(0.19)
0.04
0.75
(2.07)
(1.38)
Common stock price
per share
High . . . . . . . . . . . . . .
Low . . . . . . . . . . . . . . .
14.56
10.31
17.75
12.63
17.50
13.94
17.69
12.06
17.75
10.31
(1) In the fourth quarter of fiscal 2000, the Company initiated a strategic restructuring which resulted
in additional costs of $70.2 million reflected in the consolidated statement of operations in the fourth
quarter. See Note 3, “Strategic Restructuring Plan.”
2001 Annual Report
34
16. ORGANIZATIONAL STRUCTURE
17. SUBSEQUENT EVENTS—UNAUDITED
Subsequent to March 31, 2001, the Company called for the redemption
of its $60.0 million convertible subordinated notes due 2005. In con-
nection with that call, as of June 20, 2001, holders have converted into
common stock approximately $60.0 million aggregate principal amount
of their convertible subordinated notes.
In May 2001, the Company repaid in full the remaining $8.5 mil-
lion balance of the term loan portion of the U.S. Facility. In conjunc-
tion with the accelerated repayment of the term loan, the Company
amended the U.S. Facility effective May 7, 2001. The amended and
restated U.S. Facility eliminates the term loan, reduces the revolver to
$78.0 million, reduces the interest rate to Prime plus 1.25% or LIBOR
plus 2.25%, eliminates certain covenants, increases the advance rates and
reduces the fee paid for maintenance of the facility.
Effective June 9, 2000, Activision reorganized into a holding company
form of organizational structure, whereby Activision Holdings, Inc., a
Delaware corporation (“Activision Holdings”), became the holding
company for Activision and its subsidiaries. The new holding company
organizational structure will allow Activision to manage its entire organi-
zation more effectively and broadens the alternatives for future financings.
The holding company organizational structure was effected
by a merger conducted pursuant to Section 251(g) of the General
Corporation Law of the State of Delaware, which provides for the for-
mation of a holding company structure without a vote of the stockhold-
ers of the constituent corporations. In the merger, ATVI Merger Sub,
Inc., a Delaware corporation, organized for the purpose of implement-
ing the holding company organizational structure, (the “Merger Sub”),
merged with and into Activision with Activision as the surviving corpo-
ration (the “Surviving Corporation”). Prior to the merger, Activision
Holdings was a direct, wholly-owned subsidiary of Activision and
Merger Sub was a direct, wholly-owned subsidiary of Activision
Holdings. Pursuant to the merger, (i) each issued and outstanding share
of common stock of Activision (including treasury shares) was con-
verted into one share of common stock of Activision Holdings, (ii) each
issued and outstanding share of Merger Sub was converted into one
share of the Surviving Corporation’s common stock, and Merger Sub’s
corporate existence ceased, and (iii) all of the issued and outstanding
shares of Activision Holdings owned by Activision were automatically
canceled and retired. As a result of the merger, Activision became a
direct, wholly-owned subsidiary of Activision Holdings.
Immediately following the merger, Activision changed its name to
“Activision Publishing, Inc.” and Activision Holdings changed its name
to “Activision, Inc.” The holding company’s common stock will continue
to trade on the Nasdaq National Market(cid:2) under the symbol ATVI.
The conversion of shares of Activision’s common stock in the
merger occurred without an exchange of certificates. Accordingly, cer-
tificates formerly representing shares of outstanding common stock of
Activision are deemed to represent the same number of shares of com-
mon stock of Activision Holdings. The change to the holding company
structure was tax free for federal income tax purposes for stockholders.
These transactions had no impact on the Company’s consolidated
financial statements.
35
Activision, Inc.
Market for Registrant’s Common Equity and Related Stockholder Matters
The Company’s common stock is quoted on the Nasdaq National
Market(cid:2) under the symbol “ATVI.”
The following table sets forth for the periods indicated the high
and low reported sale prices for the Company’s common stock. As of
June 13, 2001, there were approximately 4,800 holders of record of the
Company’s common stock.
High
Low
Fiscal 2000
First Quarter ended June 30, 1999 . . . . . . . . . . . . . . . $14.56
17.75
Second Quarter ended September 30, 1999 . . . . . . . .
17.50
Third Quarter ended December 31, 1999 . . . . . . . . .
17.69
Fourth Quarter ended March 31, 2000. . . . . . . . . . . .
Fiscal 2001
First Quarter ended June 30, 2000 . . . . . . . . . . . . . . $12.16
15.63
Second Quarter ended September 30, 2000 . . . . . . .
15.25
Third Quarter ended December 31, 2000 . . . . . . . . .
25.25
Fourth Quarter ended March 31, 2001 . . . . . . . . . . .
$10.31
12.63
13.94
12.06
$ 5.38
6.31
10.31
13.63
Fiscal 2002
First Quarter through June 13, 2001 . . . . . . . . . . . . . $41.15
$20.88
On June 13, 2001, the reported last sales price for the Company’s
common stock was $40.93.
DIVIDENDS
The Company paid no cash dividends in 2001 or 2000 and does not
intend to pay any cash dividends at any time in the foreseeable future.
The Company expects that earnings will be retained for the continued
growth and development of the Company’s business. In addition, the
Company’s bank credit facility currently prohibits the Company from
paying dividends on its common stock. Future dividends, if any, will
depend upon the Company’s earnings, financial condition, cash require-
ments, future prospects and other factors deemed relevant by the
Company’s Board of Directors.
2001 Annual Report
36
corporate information
corporate information
corporate information
OFFICERS
TRANSFER AGENT
FORWARD-LOOKING
ROBERT A. KOTICK
Chairman and Chief Executive Officer
BRIAN G. KELLY
Co-Chairman
RONALD DOORNINK
President and Chief Operating Officer
WILLIAM CHARDAVOYNE
Executive Vice President and
Chief Financial Officer
LAWRENCE GOLDBERG
Executive Vice President, Worldwide Studios
DANIEL HAMMETT
Executive Vice President, Activision and
President, Activision Value Publishing
MICHAEL J. ROWE
Executive Vice President, Human Resources
Continental Stock Transfer
& Trust Company
2 Broadway
New York, New York 10004
(212) 509-4000
AUDITOR
PricewaterhouseCoopers
Los Angeles, California
BANK
PNC Bank
2 North Lake Avenue
Pasadena, California 91101
STATEMENTS
2001
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, 2001, which was filed with the
United States Securities and Exchange
Commission. Readers of this Annual Report
are referred to such filings.
CORPORATE COUNSEL
Robinson Silverman Pearce Aronsohn &
Berman LLP
New York, New York
RICHARD STEELE
CORPORATE HEADQUARTERS
Executive Vice President, Distribution
KATHY P. VRABECK
Executive Vice President, Global Publishing
and Brand Management
Activision, Inc.
3100 Ocean Park Boulevard
Santa Monica, California 90405
(310) 255-2000
BOARD OF DIRECTORS
OFFICES
ROBERT A. KOTICK
BRIAN G. KELLY
BARBARA S. ISGUR
STEVEN T. MAYER
ROBERT J. MORGADO
KENNETH L. HENDERSON
Bentonville, Arkansas
Dallas, Texas
Eden Prairie, Minnesota
Madison, Wisconsin
New York, New York
Woodland Hills, California
Bezons, France
Birmingham, United Kingdom
Burglengenfeld, Germany
Ismaning, Germany
Slough, United Kingdom
Sydney, Australia
Tokyo, Japan
Venlo, The Netherlands
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WORLD WIDE WEB SITE
http://www.activision.com
E-MAIL
IR@activision.com
ANNUAL MEETING
August 23, 2001
The Peninsula Hotel
9882 South Santa Monica Blvd.
Beverly Hills, California 90212
ANNUAL REPORT ON FORM 10-K
The Company’s Annual Report on Form
10-K for the year ended March 31, 2001
is available to shareholders without charge
upon request from our corporate offices.
SPIDER-MAN, X-MEN, WOLVERINE and the
distinctive likenesses thereof: (cid:4) & © 2001 Marvel
Characters, Inc. Used under license.
(cid:4) & © Paramount Pictures. All rights reserved.
Star Trek and related marks are trademarks of
Paramount Pictures.
102 Dalmations and original Toy Story elements
© Disney. All other elements © Disney/Pixar.
All rights reserved.
3100 Ocean Park Boulevard
Santa Monica, California 90405
telephone: (310) 255-2000
fax: (310) 255-2100
www.activision.com