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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-12699
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4803544
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3100 OCEAN PARK BLVD., SANTA MONICA, CA 90405
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 255-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $.000001 per share
------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on June 19, 2000 was $138,494,069.
The number of shares of the registrant's Common Stock outstanding as of June 19,
2000 was 23,682,010.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K, with respect to the 2000 Annual Meeting of
Shareholders, are incorporated by reference into Part III of this Annual Report.
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INDEX
PAGE NO.
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PART I.
Item 1. Business .................................................................. 3
Item 2. Properties ................................................................ 17
Item 3. Legal Proceedings ......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ....................... 17
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ..... 18
Item 6. Selected Consolidated Financial Data ...................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................. 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................. 31
Item 8. Consolidated Financial Statements and Supplementary Data .................. 32
PART III.
Item 10. Directors and Executive Officers of the Registrant ........................ 33
Item 11. Executive Compensation .................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management ............ 33
Item 13. Certain Relationships and Related Transactions ............................ 33
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 34
SIGNATURES .................................................................................... 38
2
PART I
ITEM 1. BUSINESS
(a) GENERAL
Activision, Inc. (together with its subsidiaries, "Activision"
or the "Company") is a leading international publisher, developer and
distributor of interactive entertainment and leisure products. The
Company was originally incorporated in California in 1979. In December
1992, the Company reincorporated in Delaware. In June 2000, the Company
reorganized into a holding company organizational structure as
described below.
The Company's products span a wide range of genres (including
action, adventure, extreme sports, strategy and simulation) and target
markets (including game enthusiasts, mass market consumers, value
buyers and children). In addition to its genre and market diversity,
the Company publishes, develops and distributes products for a variety
of game platforms and operating systems, including personal computers
("PCs"), the Sony Playstation, Sega Dreamcast and Nintendo N64 console
systems and the Nintendo Gameboy Color handheld device.
Financial data for all periods presented reflect the
retroactive effect of the merger, accounted for as a pooling of
interests, with JCM Productions, Inc. dba Neversoft Entertainment
("Neversoft"), which was consummated on September 30, 1999. The Company
additionally acquired Elsinore Multimedia, Inc. ("Elsinore") on June
29, 1999 and Expert Software, Inc. ("Expert") on June 22, 1999. The
acquisitions of Elsinore and Expert were accounted for using the
purchase method of accounting. Accordingly, the results of operations
of Elsinore and Expert have been included in the Company's consolidated
results of operations from the respective dates of acquisition. See the
Consolidated Financial Statements and Notes thereto included in Item 8
of this Annual Report on Form 10-K for certain financial information
required by Item 1. In the fourth quarter of the Company's fiscal year
ended March 31, 2000, the Company adopted and began the implementation
of a strategic restructuring plan. The plan and its components are
described in Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(b) HOLDING COMPANY ORGANIZATIONAL STRUCTURE
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 organization 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 formation of a
holding company structure without a vote of the stockholders of the
constituent corporations. In the merger, ATVI Merger Sub, Inc., a
Delaware corporation, organized for the purpose of implementing the
holding company organizational structure,(the "Merger Sub"), merged
with and into Activision with Activision as the surviving corporation
(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 converted 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 under the symbol ATVI.
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The conversion of shares of Activision's common stock in the
merger occurred without an exchange of certificates. Accordingly,
certificates formerly representing shares of outstanding common stock
of Activision are deemed to represent the same number of shares of
common 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.
(c) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two reportable segments: publishing CD-based
and cartridge based interactive entertainment and leisure software, and
distributing interactive entertainment and leisure products. Publishing
relates to the development (both internally and externally), marketing
and sale of products owned or controlled by the Company, either
directly, by license or through its affiliate label program with third
party publishers. Distribution refers to the shipping and sale by the
Company's European distribution subsidiaries of other publishers'
software and related products to the marketplace. See the Consolidated
Financial Statements and Notes thereto included in Item 8 of this
Annual Report on Form 10-K for certain financial information required
by Item 1.
(d) NARRATIVE DESCRIPTION OF BUSINESS
FACTORS AFFECTING FUTURE PERFORMANCE
In connection with the Private Securities Litigation Reform
Act of 1995 (the "Litigation Reform Act"), the Company is hereby
disclosing certain cautionary information to be used in connection with
written materials (including this Annual Report on Form 10-K) and oral
statements made by or on behalf of its employees and representatives
that may contain "forward-looking statements" within the meaning of the
Litigation Reform Act. Such statements consist of any statement other
than a recitation of historical fact and can be identified by the use
of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations
thereon or comparable terminology. The listener or reader is cautioned
that all forward-looking statements are necessarily speculative and
there are numerous risks and uncertainties that could cause actual
events or results to differ materially from those referred to in such
forward-looking statements. The discussion below highlights some of the
more important risks identified by management, but should not be
assumed to be the only factors that could affect future performance.
The reader or listener is cautioned that the Company does not have a
policy of updating or revising forward-looking statements and thus he
or she should not assume that silence by management over time means
that actual events are bearing out as estimated in such forward-looking
statements.
FLUCTUATIONS IN QUARTERLY RESULTS; FUTURE OPERATING RESULTS
UNCERTAIN; SEASONALITY. The Company's quarterly operating results have
varied significantly in the past and will likely vary significantly in
the future depending on numerous factors, several of which are not
under the Company's control. Such factors include, but are not limited
to, demand for products published or distributed by the Company, the
size and rate of growth of the interactive entertainment and leisure
markets, development and promotional expenses relating to the
introduction of new products, changes in operating systems and
platforms, product returns, the timing of orders from major customers,
delays in shipment, the level of price competition, the timing of
product introductions by the Company and its competitors, product life
cycles, product defects and other quality problems, the level of the
Company's international revenues, and personnel changes. Products are
generally shipped as orders are received, and consequently, the Company
operates with little or no backlog. Net revenues in any quarter are,
therefore, substantially dependent on orders booked and shipped in that
quarter.
The Company's expenses are based in part on the Company's
product development, acquisition and marketing budgets. Many of the
costs incurred by the Company to produce and sell its products are
expensed as such costs are incurred, which often occurs before a
product is released. In addition, a significant portion of the
Company's expenses are fixed. As the Company increases its production,
acquisition and sales activities, current expenses will increase and,
if sales from previously released products are below expectations, net
income is likely to be disproportionately affected.
Due to all of the foregoing, revenues and operating results
for any future quarter are not predictable with any significant degree
of accuracy. Accordingly, the Company believes that period-to-period
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comparisons of its operating results are not necessarily meaningful and
should not be relied upon as indications of future performance.
The Company's business has experienced and is expected to
continue to experience significant seasonality, in part due to consumer
buying patterns. Net revenues typically are significantly higher during
the fourth calendar quarter, primarily due to the increased demand for
consumer software during the year-end holiday buying season. Net
revenues and net income in other quarters are generally lower and vary
significantly as a result of new product introductions and other
factors. On average in the past three fiscal years, the Company has
earned approximately 15% of its net revenues in the quarter ending June
30th, 20% in the quarter ending September 30th, 45% in the quarter
ending December 31st and 20% in the quarter ending March 31st. The
Company expects its net revenues and operating results to continue to
reflect significant seasonality.
DEPENDENCE ON NEW PRODUCT DEVELOPMENT; PRODUCT DELAYS. The
Company's future success depends in part on the timely introduction of
successful new products to replace declining revenues from older
products. If, for any reason, revenues from new products were to fail
to replace declining revenues from older products, the Company's
business, operating results and financial condition would be materially
and adversely affected. In addition, the Company believes that the
competitive factors in the marketplace for premium-priced interactive
products create the need for higher quality, distinctive products that
incorporate increasingly complex technology and sophisticated graphics,
sound and other effects and the need to support product releases with
increased marketing, resulting in longer development periods and higher
development, acquisition and marketing costs. The lack of market
acceptance or significant delay in the introduction of, or the presence
of a defect in, one or more premium-priced products could have a
material adverse effect on the Company's business, operating results
and financial condition, particularly in view of the seasonality of the
Company's business. Further, because a large portion of a product's
revenue generally is associated with initial shipments, the delay of a
product introduction expected near the end of a fiscal quarter may have
a material adverse effect on operating results for that quarter.
The Company has, in the past, experienced significant delays
in the introduction of certain new products. The timing and success of
interactive entertainment software products remain unpredictable due to
the complexity of product development, including the uncertainty
associated with technological developments. Although the Company has
implemented substantial development controls, there likely will be
delays in developing and introducing new products in the future. There
can be no assurance that new products will be introduced on schedule,
or at all, or that they will achieve market acceptance or generate
significant revenues.
RELIANCE ON THIRD PARTY DEVELOPERS AND INDEPENDENT
CONTRACTORS. The percentage of products published by the Company that
are developed by independent third party developers has increased
significantly over the last several fiscal years. The Company also
utilizes independent contractors for many aspects of products that are
developed internally by the Company and its subsidiaries. The Company
has less control over the scheduling and the quality of work by
independent contractors and third party developers than that of its own
employees. A delay in the work performed by independent contractors and
third party developers or poor quality of such work may result in
product delays. Although the Company intends to continue releasing
products that are developed primarily by its own employees and
employees of its subsidiaries, the Company's ability to grow its
business and its future operating results will depend, in significant
part, on the Company's continued ability to initiate and maintain
relationships with skilled independent contractors and third party
developers. There can be no assurance that the Company will be able to
initiate and maintain such relationships successfully in the future.
UNCERTAINTY OF MARKET ACCEPTANCE; SHORT PRODUCT LIFE CYCLES.
The market for interactive entertainment software platforms and
software products has been characterized by shifts in consumer
preferences and short life cycles. Consumer preferences for
entertainment and leisure software products are difficult to predict
and few such products achieve sustained market acceptance. There can be
no assurance that new products introduced by the Company will achieve
any significant degree of market acceptance, that such acceptance will
be sustained for any significant period, or that product life cycles
will be sufficient to permit the Company to recoup product acquisition,
development, marketing and other associated costs. In addition, if
market acceptance is not achieved, the Company could be forced to
accept substantial product returns to maintain its relationships with
retailers and its access to distribution channels. Failure of new
5
products to achieve or sustain market acceptance or product returns in
excess of the Company's expectations would have a material adverse
effect on the Company's business, operating results and financial
condition.
PRODUCT CONCENTRATION; DEPENDENCE ON HIT PRODUCTS. The Company
derives a significant portion of its revenues from a relatively small
number of products released each year. Many of these products have
substantial development, production and acquisition costs and marketing
budgets. In fiscal 2000 the Company had two products which each
accounted for approximately 10% of consolidated net revenues. In fiscal
1998, the Company had one product which accounted for approximately 10%
of consolidated net revenues. In fiscal 1999, no single product
accounted for greater than 10% of consolidated net revenues. The
Company anticipates that a relatively limited number of products will
continue, in the aggregate, to produce a disproportionate amount of
revenues. Due to this dependence on a limited number of products, the
failure of one or more of these products to achieve anticipated results
may have a material adverse effect on the Company's business, operating
results and financial condition.
The Company's strategy also includes as a key component
publishing titles that have franchise value, such that sequels,
conversions, enhancements and add-on products can be released over
time, thereby extending the life of the property in the market. While
the focus on franchise properties, if successful, results in extending
product life cycles, it also results in the Company depending on a
limited number of titles for its revenues. There can be no assurance
that the Company's existing franchise titles can continue to be
exploited as successfully as in the past. In addition, new products
that the Company believes will have potential value as franchise
properties may not achieve market acceptance and therefore may not be a
basis for future releases.
INDUSTRY COMPETITION; COMPETITION FOR SHELF SPACE. The
interactive entertainment and leisure industry is intensely
competitive. Competition is principally based on product quality and
features, the compatibility of products with popular platforms, company
or product line brand name recognition, access to distribution
channels, marketing effectiveness, reliability and ease of use, price
and technical support. Significant financial resources also have become
a competitive factor in this industry, principally due to the
substantial cost of product development and marketing that is required
to support best-selling titles. In addition, competitors with broad
product lines and popular titles typically have greater leverage with
distributors and other customers who may be willing to promote titles
with less consumer appeal in return for access to such competitor's
most popular titles.
The Company's competitors range from small companies with
limited resources to large companies with substantially greater
financial, technical and marketing resources than those of the Company.
The Company's competitors currently include Electronic Arts, Microsoft,
Sony, Sega, Nintendo, Havas, Infogrames, Hasbro, THQ, Midway and Eidos,
among many others.
The interactive entertainment software industry is undergoing
significant consolidation which allows the Company's largest
competitors to exercise control over a growing number of product lines
and increasing concentration of development, financial and technical
resources. As the Company's competitors grow stronger and competition
increases, significant price pressure, increased production costs and
reduced profit margins may result. Prolonged price competition or
reduced demand would have a material adverse effect on the Company's
business, operating results and financial condition. There can be no
assurance that the Company will be able to compete successfully against
current or future competitors or that competitive pressures faced by
the Company will not have a material adverse effect on its business,
operating results and financial condition.
Retailers typically have a limited amount of shelf space, and
there is intense competition among interactive entertainment and
leisure software producers for adequate levels of shelf space and
promotional support from retailers. As the number of interactive
entertainment and leisure products increase, the competition for shelf
space has intensified, resulting in greater leverage for retailers and
distributors in negotiating terms of sale, including price discounts
and product return policies. The Company's products constitute a
relatively small percentage of a retailer's sales volume, and there can
be no assurance that retailers will continue to purchase the Company's
products or promote the Company's products with adequate levels of
shelf space and promotional support.
DEPENDENCE ON DISTRIBUTORS AND RETAILERS; RISK OF CUSTOMER
BUSINESS FAILURE; PRODUCT RETURNS. The Company depends on access to
retailers and distributors in order to market and sell its products.
The loss
6
of, or significant reduction in sales attributable to, any of the
Company's principal distributors or retailers could materially
adversely affect the Company's business, operating results and
financial condition. An increasing focus by companies on inventory
management and the maintenance of minimum inventory on-hand levels
could affect the buying patterns of our principal distributors and
retailers, thereby, resulting in less predictable purchasing patterns.
Significant changes in the buying patterns of the Company's major
customers could impact the Company's ability to accurately forecast
sales and, resultantly, the necessary production to fill such sales,
which could have a material adverse effect on the financial condition
and results of operations of the Company. Further, certain mass market
retailers have established exclusive buying relationships under which
such retailers will buy consumer software only from one intermediary.
In such instances, the price or other terms on which the Company sells
to such retailers may be adversely affected by the terms imposed by
such intermediary, or the Company may be unable to sell to such
retailers on terms which the Company deems acceptable.
Retailers in the computer and software industry have from time
to time experienced significant fluctuations in their businesses and
there have been a number of business failures among these entities. The
insolvency or business failure of any significant retailer or other
wholesale purchaser of the Company's products could have a material
adverse effect on the Company's business, operating results and
financial condition. Sales are typically made on credit, with terms
that vary depending upon the customer and the nature of the product.
The Company does not hold collateral to secure payment. Although the
Company has obtained insolvency risk insurance to protect against
bankruptcy, insolvency, or liquidation that may occur to its customers,
such insurance contains a significant deductible as well as a
co-payment obligation, and the policy does not cover all instances of
non-payment. In addition, while the Company maintains a reserve for
uncollectible receivables that it believes to be adequate, the actual
reserve which is maintained may not be sufficient in every
circumstance. As a result of the foregoing, a payment default by a
significant customer could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company also is exposed to the risk of product returns
from retailers and other wholesale purchasers. Although the Company
provides reserves for returns that it believes are adequate, and
although the Company's agreements with certain of its customers place
certain limits on product returns, the Company could be forced to
accept substantial product returns to maintain its relationships with
retailers and its access to distribution channels. Product returns that
exceed the Company's reserves could have a material adverse effect on
the Company's business, operating results and financial condition.
CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. The consumer
software industry is undergoing rapid changes, including evolving
industry standards, frequent new platform introductions and changes in
consumer requirements and preferences. The introduction of new
technologies, including new console systems such as the Sony
PlayStation 2, Microsoft X-Box and Nintendo Dolphin technologies that
support multi-player on-line games, and new media formats and methods
of consumer delivery such as on-line delivery, could render the
Company's previously released products obsolete or unmarketable. The
development cycle for products utilizing new console platforms,
computer operating systems and microprocessors or formats may be
significantly longer and more expensive than the Company's current
development cycle for products on existing platforms, operating
systems, microprocessors and formats and may require the Company to
invest resources in products that may not become profitable. There can
be no assurance that the mix of the Company's future product offerings
will keep pace with technological changes or satisfy evolving consumer
preferences, or that the Company will be successful in developing and
marketing products for any future operating system or format. Failure
to develop and introduce new products and product enhancements in a
timely fashion could result in significant product returns and
inventory obsolescence and could have a material adverse effect on the
Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH LEVERAGE. As of March 31, 2000, the
Company had outstanding $60.0 million of subordinated convertible notes
due 2005. In June 1999, the Company obtained a term loan and revolving
credit facility composed of a $25.0 million term loan and up to
$100.0 million of revolving credit loans and letters of credit. The
proceeds of the term loan, which is due in June 2002, were used to
complete the acquisition of Expert Software, Inc. and to pay expenses
associated with the acquisition and the financing transaction. The
revolving credit facility is used for working capital and general
corporate purposes. As of March 31, 2000, there was $20.0 million
outstanding under the term loan and $2.5 million outstanding under the
revolving credit facility.
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The term loan and the revolving credit facility are
collateralized by substantially all of the assets of the Company and of
its US subsidiaries. The facility contains various financial and other
covenants that the Company and its subsidiaries must comply with. If
the Company were to default under the terms of the credit facility,
either as a result of a failure to pay principal or interest when due
or as a result of a breach of a financial or other covenant, the
lenders could stop providing funds and letters of credit to the Company
and could declare an event of default and foreclose on the collateral.
This could also result in an acceleration of the subordinated notes. A
default by the Company under the revolving credit and term loan
facility would materially adversely affect the Company's business and
could result in the Company declaring bankruptcy.
On June 8, 2000, the Company amended certain of the covenants
of its term loan and revolving credit facility. The amended term loan
and credit facility permits the Company to purchase up to $15.0 million
in shares of its common stock as well as its convertible subordinated
notes in accordance with the Company's stock repurchase program
(described in Note 15 to the consolidated financial statements), the
distribution of "Rights" under the Company's shareholders' rights plan
(described in Note 15 to the consolidated financial statements), as
well as the reorganization of the Company's organizational structure
into a holding company form.
LIMITED PROTECTION OF INTELLECTUAL PROPERTY AND PROPRIETARY
RIGHTS; RISK OF LITIGATION. The Company holds copyrights on the
products, manuals, advertising and other materials owned by it and
maintains trademark rights in the ACTIVISION name, the ACTIVISION logo,
and the names of the products owned by the Company. The Company regards
its software as proprietary and relies primarily on a combination of
trademark, copyright and trade secret laws, employee and third-party
nondisclosure agreements, and other methods to protect its proprietary
rights. However, there can be no assurance that third parties will not
assert infringement claims against the Company in the future with
respect to current or future products. As is common in the industry,
from time to time the Company receives notices from third parties
claiming infringement of intellectual property rights of such parties.
The Company investigates these claims and responds as it deems
appropriate. Any claims or litigation, with or without merit, could be
costly and could result in a diversion of management's attention, which
could have a material adverse effect on the Company's business,
operating results and financial condition. Adverse determinations in
such claims or litigation could also have a material adverse effect on
the Company's business, operating results and financial condition.
Unauthorized copying and other forms of piracy are common
within the software industry, and if a significant amount of
unauthorized copying of the Company's products were to occur, the
Company's business, operating results and financial condition would be
adversely effected. Policing unauthorized use of the Company's products
is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In selling its products, the
Company relies primarily on "shrink wrap" licenses that are not signed
by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. Further, the Company enters into transactions in
countries where intellectual property laws are not well developed or
are poorly enforced. Legal protections of the Company's rights may be
ineffective in such countries.
DEPENDENCE ON KEY PERSONNEL; COMPETITION WITH INTERNET
COMPANIES FOR KEY PERSONNEL. The Company's success depends to a
significant extent on the performance and continued service of its
senior management and certain key employees. Competition for highly
skilled employees with technical, management, marketing, sales, product
development and other specialized training is intense, and there can be
no assurance that the Company will be successful in attracting and
retaining such personnel. Specifically, the Company may experience
increased costs in order to attract and retain skilled employees.
Although the Company enters into term employment agreements with most
of its skilled employees and management personnel, there can be no
assurance that such employees will not leave the Company or compete
against the Company. The Company's failure to attract or retain
qualified employees could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company faces intense competition for talent from highly
valued Internet companies. Competition for employees in the interactive
software business continues to be intense. Recently, the most intense
competition for recruiting and retaining key employees is from Internet
companies. The high market valuations, large equity positions for key
executives and creative talent and fast stock price appreciation of
these companies make their compensation packages attractive to those
who already are working in more mature companies. This situation could
create difficulty for the Company to compete for the attraction and
retention of executive and key creative talent.
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RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS: CURRENCY
FLUCTUATIONS. International sales and licensing accounted for 71%, 66%
and 51% of the Company's total revenues in the fiscal years 1998, 1999
and 2000, respectively. The Company intends to continue to expand its
direct and indirect sales, marketing and localization activities
worldwide. This expansion will require significant management time and
attention and financial resources in order to develop adequate
international sales and support channels. The Company may not be able
to maintain or increase international market demand for its products.
International sales are subject to inherent risks, including the impact
of possible recessionary environments in economies outside the United
States, currency fluctuations, the costs of transferring and localizing
products for foreign markets, longer receivable collection periods and
greater difficulty in accounts receivable collection, unexpected
changes in regulatory requirements, difficulties and costs of staffing
and managing foreign operations, and political and economic
instability. The Company may not be able to sustain or increase
international revenues and the foregoing factors may have a material
adverse effect on the Company's future international revenues and,
consequently, on the Company's business, operating results and
financial condition. The Company currently does not engage in currency
hedging activities. Although exposure to currency fluctuations to date
has been insignificant, fluctuations in currency exchange rates may in
the future have a material adverse impact on revenues from
international sales and licensing and thus the Company's business,
operating results and financial condition.
RISK OF DEFECTS. Interactive software products such as those
offered by the Company frequently contain errors or defects. Despite
extensive product testing, in the past the Company has released
products with defects and has discovered errors in certain of its
product offerings after their introduction. In particular, the PC
hardware environment is characterized by a wide variety of non-standard
peripherals (such as sound cards and graphics cards) and hardware
configurations that make pre-release testing for programming or
compatibility errors very difficult and time-consuming. Despite testing
by the Company, new products or releases may contain errors after
commencement of commercial shipments, resulting in a loss of or delay
in market acceptance, which could have a material adverse effect on the
Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS. As the Company executes
acquisitions, it must integrate the operations of its acquired
subsidiaries with its previously existing operations. This process, as
well as the process of managing new operations, requires substantial
management time and effort and diverts the attention of management from
other matters. In addition, there is a risk of loss of key employees,
customers and vendors of the recently acquired operations as well as
existing operations as this process is implemented. The Company may not
be successful in integrating these operations.
Consistent with the Company's strategy of enhancing its
distribution and product development capabilities, the Company intends
to continue to pursue acquisitions of companies, intellectual property
rights and other assets that can be purchased or licensed on acceptable
terms and which the Company believes can be operated or exploited
profitably. Some of these transactions could be material in size and
scope. While the Company will continually be searching for appropriate
acquisition opportunities, the Company may not be successful in
identifying suitable acquisitions. If any potential acquisition
opportunities are identified, the Company may not be able to consummate
such acquisitions and if any such acquisition does occur, it may not
enhance the Company's business or be accretive to the Company's
earnings. As the interactive entertainment and leisure industry
continues to consolidate, the Company faces significant competition in
seeking acquisitions and may in the future face increased competition
for acquisition opportunities. This may inhibit the Company's ability
to complete suitable transactions. Future acquisitions could also
divert substantial management time, could result in short term
reductions in earnings or special transaction or other charges and may
be difficult to integrate with existing operations or assets.
The Company may, in the future, issue additional shares of
common stock in connection with one or more acquisitions, which may
dilute its existing shareholders. The Company's shareholders will not
have an opportunity, with respect to most of the Company's future
acquisitions, to review the financial statements of the entity being
acquired or to evaluate the benefits of the intellectual property
rights being purchased or licensed, or to vote on the acquisitions.
RISK OF DISTRIBUTION COMPANIES' VENDOR DEFECTIONS; VENDOR
CONCENTRATION. The Company's CD Contact, NBG and CentreSoft
subsidiaries perform interactive entertainment distribution services in
the Benelux territories, Germany and in the United Kingdom,
respectively, and, via export, in other European
9
territories for a variety of entertainment software publishers, many
of which are competitors of the Company. These services are
generally performed under limited term contracts, some of which
provide for cancellation in the event of a change of control. While
the Company expects to use reasonable efforts to retain these
vendors, the Company may not be successful in this regard. The
cancellation or non-renewal of one or more of these contracts could
have a material adverse effect on the Company's business, operating
results and financial condition. Two of CD Contact's third party
vendors accounted for 12% and 11%, respectively, of CD Contact's net
revenues in fiscal year 2000. The net revenues from each of these
vendors represented 1% of consolidated net revenues of the Company
for this period. Three of CentreSoft's third party vendors accounted
for 25%, 14%, and 10%, respectively, of CentreSoft's net revenues in
fiscal year 2000. The net revenues from these vendors represented
5%, 3% and 2%, respectively, of consolidated net revenues of the
Company for this period. Two of NBG's third party vendors accounted
for 11% and 10%, respectively, of NBG's net revenues in fiscal year
2000. The net revenues from these vendors each represented 1% of
consolidated net revenues of the Company for this period. All other
third party vendors contributed less than 10% individually to the
respective subsidiary's net revenues.
RISKS ASSOCIATED WITH FLUCTUATIONS IN STOCK VALUE. Due to
analysts' expectations of continued growth and other factors, any
shortfall in earnings could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given
period. As a result of the factors discussed in this report and other
factors that may arise in the future, the market price of the Company's
common stock historically has been, and may continue to be subject to
significant fluctuations over a short period of time. These
fluctuations may be due to factors specific to the Company, to changes
in analysts' earnings estimates, or to factors affecting the computer,
software, entertainment, media or electronics industries or the
securities markets in general.
STRATEGY
The Company's objective is to be a worldwide leader in the
development, publishing and distribution of quality interactive
entertainment and leisure products that deliver, at each point of the
value spectrum, a highly satisfying experience. The Company's strategy
includes the following elements:
CREATE AND MAINTAIN A BALANCED AND DIVERSIFIED PORTFOLIO OF
OPERATIONS. The Company has assembled a large diversified portfolio of
development, publishing and distribution operations and relationships
which are complementary and, at the same time, reduce the Company's
risk of concentration on any one developer, brand, platform, customer
or market. The Company has focused historically on the development and
publishing of premium products that provide the most sophisticated game
play and entertainment experience at the top price point. While the
Company will continue to take advantage of its expertise in this area,
it has continued to diversify its business operations and product and
audience mix. In addition to establishing, primarily through
acquisitions, the European distribution business, the Company believes
that as a result of its acquisition activities, it has positioned
itself as a leading publisher of "value" products for the PC, which are
characterized by less sophisticated game play and lower price points.
Further, the Company publishes and distributes titles that operate on a
variety of platforms (PC, Sony PlayStation, Sega Dreamcast and Nintendo
N64 and Gameboy). This diversification helps to reduce the risk of
downturn or underperformance in any of the Company's individual
operations.
CREATE AND MAINTAIN STRONG BRANDS. The Company focuses its
development and publishing activities principally on titles that are,
or have the potential to become, franchise properties with sustainable
consumer appeal and brand recognition. These titles can thereby serve
as the basis for sequels, prequels, mission packs, other add-ons and
related new titles that can be released over an extended period of
time. The Company believes that the publishing and distribution of
products based in large part on franchise properties enhances revenue
predictability and the probability of high unit volume sales and
operating profits. In addition, the Company has entered into a series
of strategic partnerships with the owners of intellectual property
pursuant to which the Company has acquired the rights to publish titles
based on franchises such as STAR TREK, various Disney films such as TOY
STORY 2, and Marvel Comic's properties such as SPIDERMAN, X-MEN and
BLADE. The Company also has capitalized on the success of its TONY HAWK
PRO SKATER products to sign long term agreements with superstars of
extreme sports such as Mat Hoffman in BMX pro biking, Kelly Slater in
pro surfing and Shaun Palmer in snow boarding.
FOCUS ON ON-TIME DELIVERY. The success of the Company's
publishing business is dependent, in significant part, on its ability
to develop games that will generate high unit volume sales that can be
completed in accordance with planned budgets and schedules. In order to
increase its ability to achieve this
10
objective, the Company's publishing units have implemented a formal
control process for the development of the Company's products. This
process includes three key elements: (i) in-depth reviews are conducted
for each project at five intervals during the development process by a
team that includes several of the Company's highest ranking operating
managers; (ii) each project is led by a small team which is given
incentives to deliver a high-quality product, on-schedule and within
budget; and (iii) day-to-day progress is monitored by a dedicated
process manager in order to insure that issues, if any, are promptly
identified and addressed in a timely manner.
LEVERAGE INFRASTRUCTURE AND ORGANIZATION. The Company is
continually striving to reduce its risk and increase its operating
leverage and efficiency. For example, the Company has significantly
increased its product making capabilities by allocating a larger
portion of its product development investments to experienced
independent development companies. These companies generally are small
firms focused on a particular product type of game, run and owned by
individuals who are willing to take development risk by accepting
payments based on the completion of fixed performance milestones in
exchange for a royalty on the revenue stream of the game after the
Company recoups its development costs. The Company also has broadly
instituted objective-based reward programs that provide incentives to
management and staff to produce results that meet the Company's
financial objectives.
GROW THROUGH CONTINUED STRATEGIC ACQUISITIONS. The interactive
entertainment and leisure industry is consolidating, and the Company
believes that success in this industry will be driven in part by the
ability to take advantage of scale. Specifically, smaller companies are
more capital constrained, enjoy less predictability of revenues and
cashflow, lack product diversity and must spread fixed costs over a
smaller revenue base. Several industry leaders are emerging that
combine the entrepreneurial and creative spirit of the industry with
professional management, the ability to access the capital markets and
the ability to maintain favorable relationships with strategic
developers, property owners and retailers. Through nine completed
acquisitions since 1997, the Company believes that it has successfully
diversified its operations, its channels of distribution, its
development talent pool and its library of titles, and has emerged as
one of the industry's leaders.
PRODUCTS
The Company historically has been best known for its action,
adventure, strategy and simulation products. With the successful
introduction of its TONY HAWK PRO SKATER product, the Company also has
become one of the industry leaders in the extreme sport category. The
Company also distributes products in other categories such as leisure
and role playing. The Company may in the future expand its product
offerings into new categories.
The Company's current and upcoming releases are based on
intellectual property and other character or story rights licensed from
third parties, as well as a combination of characters, worlds and
concepts derived from the Company's extensive library of titles, and
original characters and concepts owned and created by the Company. In
publishing products based on licensed intellectual property rights, the
Company generally seeks to capitalize on the name recognition,
marketing efforts and goodwill associated with the underlying property.
In the past year, the Company has entered into a series of
long term or multi-product agreements with the owners of intellectual
property that is well known throughout the world. In addition to the
strategic relationships established by the Company with Disney
Interactive for several animated film properties, with Viacom Consumer
Products for STAR TREK and with LucasArts Entertainment for STAR WARS
and INDIANA JONES, the Company also has entered into long term license
agreements with Cabela's for its BIG GAME HUNTER series of products,
Marvel Comics for such properties as SPIDERMAN, X-MEN and BLADE, and
such superstars of extreme sports as Tony Hawk, Mat Hoffman, Kelly
Slater and Shaun Palmer. The Company may not be able to seek out and
sustain new long term relationships of similar caliber in the future.
In addition to its own internally developed products, the
Company publishes and distributes software products for other
independent developers and publishers such as id Software, Sony, Sega,
Nihilistic Software, and Heuristic Park. As the Company seeks to
associate the "ACTIVISION" mark only with the highest quality
interactive entertainment products, the Company attempts to be
selective in acquiring publishing and distribution rights from third
party developers. Such products typically are marketed under the
Company's name as well as the name of the original developer. The
Company believes that these efforts enable the Company to leverage its
investment in worldwide sales and marketing and add a new source of
products while balancing the risks inherent in internal product
development and production. This activity also allows
11
the Company to enter new product genres more quickly and provide
consumers with a wider variety of products.
The Company has established itself as a leader in the "value
priced" software publishing business with such products as Cabela's BIG
GAME HUNTER series. Products published by the Company in this category
are generally developed by third parties, often under contract with the
Company, and are marketed under the Activision Value and Head Games
names.
PRODUCT DEVELOPMENT AND SUPPORT
The Company uses both internal and external resources to
develop products. The Company also acquires rights to products through
publishing and distribution arrangements with other interactive
entertainment and leisure companies.
INTERNAL DEVELOPMENT
The Company's internal development and production groups are
located at the Company's operational bases in California, Minnesota,
Wisconsin, Florida, the United Kingdom and Japan.
Activision internally develops and produces titles using a
model in which a core group of creative, production and technical
professionals on staff at the Company, in cooperation with the
Company's marketing and finance departments, have overall
responsibility for the entire development and production process and
for the supervision and coordination of internal and external
resources. This team assembles the necessary creative elements to
complete a title, using where appropriate outside programmers, artists,
animators, musicians and songwriters, sound effects and special effects
experts, and sound and video studios. The Company believes that this
model allows the Company to supplement internal expertise with top
quality external resources on an as needed basis.
The Company has adopted and implemented a rigorous procedure
for the selection, development, production and quality assurance of its
internally produced entertainment software titles. The process involves
one or more pre-development, development and production phases, each of
which includes a number of specific performance milestones. This
procedure is designed to enable the Company to manage and control
production and development budgets and timetables, to identify and
address production and technical issues at the earliest opportunity,
and to coordinate marketing and quality control strategies throughout
the production and development phases, all in an environment that
fosters creativity. Checks and balances are intended to be provided
through the structured interaction of the project team with the
Company's creative, technical, marketing and quality assurance/customer
support personnel, as well as the legal, accounting and finance
departments.
EXTERNAL DEVELOPMENT
The Company licenses or acquires software products from
independent developers for publishing or distribution by the Company.
Acquired titles generally are marketed under the Company's name as well
as the name of the original developer. The agreements with developers
provide the Company with exclusive publishing and/or distribution
rights for a specific period of time for specified platforms and
territories. These agreements often grant to the Company the right to
publish and/or distribute sequels, conversions, enhancements and
add-ons to the product originally being developed and produced by the
developer. In consideration for its services, the developer receives a
royalty based on net sales of the product that it has developed.
Typically, the developer also receives a nonrefundable advance which is
recoupable by the Company from the royalties otherwise required to be
paid to the developer. The royalty generally is paid in stages, with
the payment of each stage tied to the completion of a detailed
performance milestone.
The Company acquires titles from developers during various
phases of the development and production processes for such titles. To
the extent the Company acquires rights early in the development
process, the Company generally will cause the independent developer to
comply with the requirements of the pre-development, development and
production processes applicable to titles internally produced by
Activision. The Company will assign a game producer to each title who
will serve as the principal liaison to the independent developer and
help insure that performance milestones are timely met. The Company
12
generally has the right to cease making payments to an independent
developer if the developer fails to complete its performance milestones
in a timely fashion.
The Company may make, from time to time, an investment and
hold a minority equity interest in the third party developer in
connection with entertainment software products to be developed by each
of these developers for the Company, which the Company believes helps
to create a closer relationship between the Company and the developer.
In addition to the Company's minority interest in each of Pandemic
Studios, Savage Entertainment, Raster Productions and Hammerhead
Studios, the Company also acquired a minority equity interest in Gray
Matter Studios in connection with the development of a product known as
RETURN TO CASTLE WOLFENSTEIN. There can be no assurance that the
Company will realize long term benefits from such type of investments
or that it will continue to carry such investments at its current
value.
PRODUCT SUPPORT
The Company provides various forms of product support to both
its internally and externally developed titles. The Company's quality
assurance personnel are involved throughout the development and
production processes for each title published by the Company. All such
products are subjected to extensive testing before release in order to
insure compatibility with the widest possible array of hardware
configurations and to minimize the number of bugs and other defects
found in the products. To support its products after release, the
Company provides on-line support to its customers on a 24-hour basis as
well as operator help lines during regular business hours. The customer
support group tracks customer inquiries and this data is used to help
improve the development and production processes.
PUBLISHING AND DISTRIBUTION ACTIVITIES
MARKETING
The Company's marketing efforts include on-line activities
(such as the creation of World Wide Web pages to promote specific
Company titles), public relations, print and broadcast advertising,
coordinated in-store and industry promotions including merchandising
and point of purchase displays, participation in cooperative
advertising programs, direct response vehicles, and product sampling
through demonstration software distributed through the Internet or on
compact discs. In addition, the Company's products contain software
that enables customers to "electronically register" their purchases
with the Company via modem. Through this process, the Company captures
electronic mail addresses for its customers as well as a variety of
additional market research data.
The Company believes that certain of its franchise properties
have loyal and devoted audiences who purchase the Company's sequels as
a result of dedication to the property and satisfaction from previous
product purchases. Marketing of these sequels is therefore directed
both toward the established market as well as broader audiences. In
marketing titles based on licensed properties, the Company believes
that it derives marketing synergies and related benefits from the
marketing and promotional activities of the property owners. In
marketing titles owned by third party developers, the Company believes
that it derives marketing synergies and related benefits from the
previously established reputation of and goodwill associated with the
developer and/or properties owned by the developer.
13
SALES AND DISTRIBUTION
DOMESTIC SALES AND DISTRIBUTION. The Company's products are
available for sale or rental in thousands of retail outlets
domestically. The Company's domestic customers include Best Buy,
CompUSA, Computer City, Electronic Boutique, Babbages, WalMart, K-Mart,
Target and Toys "R" Us. During fiscal 2000 or fiscal 1999, no single
domestic customer accounted for more than 10% of consolidated net
revenues.
In the United States, the Company's products are sold
primarily on a direct basis to major computer and software retailing
organizations, mass market retailers, consumer electronic stores and
discount warehouses and mail order companies. The Company believes that
a direct relationship with retail accounts results in more effective
inventory management, merchandising and communications than would be
possible through indirect relationships. The Company has implemented
electronic data interchange ("EDI") linkage with many of its retailers
to facilitate the placing and shipping of orders. The Company seeks to
continue to increase the number of retail outlets reached directly
through its internal sales force. The Company utilizes wholesale
distributors such as Ingram Micro to service independent channels.
INTERNATIONAL SALES AND DISTRIBUTION. The Company conducts its
international publishing and distribution activities through offices in
the United Kingdom, Germany, France, Australia, Canada, the
Netherlands, Belgium and Japan. The Company seeks to maximize its
worldwide revenues and profits by releasing high quality foreign
language localizations concurrently with the English language releases,
whenever practicable, and by continuing to expand the number of direct
selling relationships it maintains with key retailers in major
territories. As part of the restructuring plan adopted in March 2000,
described in Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company is in
the process of realigning its direct distribution system and
restructuring its worldwide distributor relationships, significantly
reducing the number of distributors.
In November 1997, the Company commenced its European
distribution operations through the acquisitions of NBG in Germany and
CentreSoft in the United Kingdom. CentreSoft is Sony's exclusive
distributor of PlayStation products to the independent channel in the
United Kingdom and employs approximately 165 people, including one of
the largest entertainment software sales and marketing organizations in
that country. In September 1998, the Company acquired CD Contact, a
company specializing in the localization and marketing of entertainment
software products in the Benelux territories. The assets and personnel
of CD Contact have been integrated with the Company's other
distribution operations to form the core of Activision's international
distribution operations.
AFFILIATE LABELS. In addition to its own products, the Company
distributes interactive entertainment products that are developed and
marketed by other third party publishers through its "affiliate label"
programs. The distribution of other publishers' products allows the
Company to maximize the efficiencies of its sales force and provides
the Company with the ability to better insure adequate shelf presence
at retail stores for all of the products that it distributes. It also
mitigates the risk associated with a particular title or titles
published by Activision failing to achieve expectations. Services
provided by the Company under its affiliate label program include order
solicitation, in-store marketing, logistics and order fulfillment,
sales channel management, as well as other accounting and general
administrative functions.
During the fiscal year 2000, the Company's affiliate label
partners included LucasArts, Psygnosis, Fox Interactive, Interplay,
Codemasters, 989 Studios and Encore Entertainment. Each affiliate label
relationship is unique and may pertain only to distribution in certain
geographic territory such as the United States or Europe and may be
further limited only to the specifically named titles or titles
operating on specific platforms.
OEM SALES AND DISTRIBUTION. The Company seeks to enhance the
distribution of its products through licensing arrangements with
original equipment manufacturers ("OEMs"). Under these arrangements,
one or more of the Company's titles are "bundled" with hardware or
peripheral devices sold and distributed by the OEM so that the
purchaser of the hardware or device obtains the Company's software as
part of the purchase or on a discounted basis. Although it is customary
for the Company to receive a lower per unit price on sales through OEM
bundle arrangements, the OEM customer makes a high unit volume
commitment to the Company with little associated marketing costs. The
Company also believes that such arrangements can substantially expand
the distribution of its titles to a broader audience. Recent OEM
partners include Gateway Computers, Franklin Computers, Logitech, Dell
Computers and Diamond
14
Multimedia. The Company also enters into OEM transactions through third
party software aggregators who resell the Company products to OEM
customers. The OEM market has been undergoing radical changes due to
the declining prices of personal computers and hardware accessories and
the reluctance of hardware manufacturers to produce large inventories.
There can be no assurances that the Company will be able to find new or
maintain productive relationship with its existing OEM customers. The
Company's own OEM subsidiary, TDC, has been negatively impacted by the
changes in the OEM market, as further described in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
LICENSING AND MERCHANDISING
The Company believes that a number of its products have the
potential to be exploited in ancillary markets and media, such as
product merchandising and traditional entertainment media. The Company
seeks opportunities for the exploitation of these ancillary rights
directly and through third party agents. Potential opportunities
include the publication of strategy guides for selected titles, the
adaptation of titles into comic books, novels, television series or
motion pictures, and the licensing of product merchandising rights. The
Company also has been licensing to third party developers on a
selective basis some of its products for development and publishing on
platforms, which the Company determines not to be economically viable
to exploit with regard to that particular product. In addition, the
Company has established "900" telephone numbers through a third party
telephone bureau as hint lines for certain of its titles and has
realized revenues from the calls made to these numbers. The Company
believes that these types of licensing activities and other forms of
ancillary exploitation can provide additional sources of revenue and
increase the visibility of the title, thereby leading to additional
unit sales and greater potential for additional sequels. There can be
no assurance that the Company will be successful in exploiting its
properties in ancillary markets or media or will continue to license
its products for conversion to platforms it does not exploit directly.
INTERNET
The Company believes that there are opportunities for further
exploitation of its titles through the Internet, on-line services, and
dedicated Internet on-line gaming services. The Company is actively
exploring the establishment of on-line game playing opportunities,
on-line hint sites and Internet services as a method for realizing
additional revenues from its products. There can be no assurance that
the Company will be successful in exploiting these opportunities. The
Company has been operating its on-line store under a third party
fulfillment arrangement with Digital River, where customers can order a
wide array of Activision titles.
HARDWARE LICENSES
The Company's console products currently are being developed
or published primarily for the Sony PlayStation and PlayStation 2, Sega
Dreamcast and Nintendo N64 and Gameboy. In order to maintain general
access to the console systems marketplace, the Company has obtained
licenses for each of these platforms. Each license allows the Company
to create one or more products for the applicable system, subject to
certain approval rights as to quality which are reserved by each
licensor. Each license also requires that the Company pay the licensor
a per unit license fee for each unit manufactured.
In contrast, the Company currently is not required to obtain
any license for the development and production of PC-CD products.
Accordingly, the Company's per unit manufacturing cost for PC-CD
products is less than the per unit manufacturing cost for console
products.
MANUFACTURING
The Company prepares a set of master program copies,
documentation and packaging materials for its products for each
respective hardware platform on which the product will be released.
Except with respect to products for use on the Sony, Sega and Nintendo
systems, the Company's disk duplication, packaging, printing,
manufacturing, warehousing, assembly and shipping are performed by
third party subcontractors.
In the case of products for the Sony, Sega and Nintendo
systems, in order to maintain protection over their hardware
technologies, such hardware producers generally specify and/or control
the manufacturing and assembly of finished products. The Company
delivers the master materials to the licensor or its approved
replicator which then manufactures finished goods and delivers them to
the Company for distribution under the Company's label. At the time the
Company's product unit orders are filled by the
15
manufacturer, the Company becomes responsible for the costs of
manufacturing and the applicable per unit royalty on such units, even
if the units do not ultimately sell.
To date, the Company has not experienced any material
difficulties or delays in the manufacture and assembly of its products
or material returns due to product defects.
COMPETITION
The interactive entertainment and leisure industry is
intensely competitive and is in the process of substantial
consolidation. The availability of significant financial resources has
become a major competitive factor in this industry primarily as a
result of the increasing development, acquisition, production and
marketing budgets required to publish quality titles. In addition,
competitors with large product lines and popular titles typically have
greater leverage with distributors and other customers who may be
willing to promote titles with less consumer appeal in return for
access to such competitor's most popular titles. See "Factors Affecting
Future Performance".
The Company seeks to compete by publishing high quality titles
and by supporting these titles with substantial marketing efforts; by
focusing on properties with sustainable consumer appeal; by working to
strengthen its relationships with retailers and other resellers and
otherwise expanding its channels of distribution; and by pursuing
opportunities for strategic acquisitions. See "Strategy."
EMPLOYEES
As of March 31, 2000, the Company had 775 employees, including
268 in product development, 91 in North American publishing, 67 in
corporate finance, operations and administration, 90 in international
publishing, and 259 in European distribution activities.
As of March 31, 2000, approximately 170 of the Company's
full-time employees were subject to term employment agreements with the
Company. These agreements generally commit such employees to employment
terms of between one and three years from the commencement of their
respective agreements. Most of the employees subject to such agreements
are executives of the Company or members of the product development,
sales or marketing divisions. These individuals perform services to the
Company as executives, directors, producers, associate producers,
computer programmers, game designers, sales directors and marketing
product managers. The execution by the Company of employment agreements
with such employees, in the Company's experience, significantly reduces
the Company's turnover during the development and production of its
entertainment software products and allows the Company to plan more
effectively for future development activities.
None of the Company's employees are subject to a collective
bargaining agreement, and the Company has experienced no labor-related
work stoppages.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 7 of Notes to
Consolidated Financial Statements included in Item 8.
16
ITEM 2. PROPERTIES
The Company's principal corporate, administrative, and product
development offices are located in approximately 98,000 square feet of
leased space in a building located at 3100 Ocean Park Boulevard, Santa
Monica, California 90405. The following is a listing of the principal
offices maintained by the Company at June 19, 2000:
Location of
Principal Facilities Square Feet Lease Expiration Date
------------------------------------- ----------------- --------------------------------
Santa Monica, California 98,000 April 30, 2007
Woodland Hills, California 10,000 April 20, 2005
Miami, Florida 7,000 June 29, 2005
Madison, Wisconsin 13,300 December 31, 2004
Eden Prairie, Minnesota 9,800 September 30, 2005
Dallas, Texas 2,300 February 28, 2003
Bentonville, Arkansas 250 February 28, 2001
New York, New York 500 April 30, 2001
Coral Gables, Florida 20,000 August 29, 2000
Middlesex, United Kingdom 10,600 July 23, 2005
Birmingham, United Kingdom 81,000 May 20, 2011 - May 31, 2012
Birmingham, United Kingdom 43,300 Month to Month
Antwerpen, Belgium 3,200 May 1, 2002
Eemnes, The Netherlands 1,900 January 1, 2001
Argenteuil, France 1,800 December 15, 2006
Sydney, Australia 3,400 September 30, 2000
Ismaning, Germany 4,200 November 30, 2001
Burglengenfeld, Germany 39,000 Owned
Tokyo, Japan 530 July 31, 2001
ITEM 3. LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought
against it in the ordinary course of business including disputes
arising over the ownership of intellectual property rights and
collection matters. In the opinion of management, the outcome of such
routine claims will not have a material adverse effect on the Company's
business, financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is quoted on the NASDAQ National
Market under the symbol "ATVI."
The following table sets forth for the periods indicated the
high and low reported closing sale prices for the Company's common
stock. As of June 19, 2000, there were approximately 5,000 holders of
record of the Company's common stock.
High Low
----------- -----------
Fiscal 1999
----------------
First Quarter ended June 30, 1998 $11.62 $9.37
Second Quarter ended September 30, 1998 13.75 9.37
Third Quarter ended December 31, 1998 14.87 8.75
Fourth Quarter ended March 31, 1999 13.81 9.75
Fiscal 2000
---------------
First Quarter ended June 30, 1999 $14.56 $10.31
Second Quarter ended September 30, 1999 17.75 12.63
Third Quarter ended December 31, 1999 17.50 13.94
Fourth Quarter ended March 31, 2000 17.69 12.06
Fiscal 2001
--------------
First Quarter through June 19, 2000 $11.13 $6.13
On June 19, 2000, the reported last sales price for the Company's
Common Stock was $6.25.
DIVIDENDS
The Company paid no cash dividends in 2000 or 1999 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
requirements, future prospects and other factors deemed relevant by the
Company's Board of Directors.
SALES OF UNREGISTERED EQUITY SECURITIES
In May 1999, the Company granted warrants to purchase 100,000
shares of the Company's common stock at an exercise price of $11.63 per
share to Cabela's, Inc. ("Cabela's") in connection with, and as partial
consideration for, a license agreement that allows the Company to
utilize the Cabela's name in conjunction with certain Activision
products. The warrants have a seven year term and vest in annual
increments of approximately 14.25%.
In June 1999, the Company issued 204,448 shares of its common
stock in connection with the acquisition of Elsinore Multimedia, Inc.
In September 1999, the Company issued 698,835 shares of its
common stock in connection with the acquisition of JCM Productions,
Inc. dba Neversoft Entertainment.
18
In December 1999, the Company issued 77,031 shares of its
common stock in connection with a 40% equity investment in Gray Matter
Studios, formerly known as Video Games West, Inc.
None of the shares, warrants, options or shares into which the
warrants or options are exercisable were registered under the
Securities Act of 1933, as amended (the "Securities Act"), by reason of
the exemption under Section 4(2) of the Securities Act. The Company
subsequently registered the shares issued in connection with the
Elsinore Multimedia, Inc., JCM Productions, Inc. dba Neversoft
Entertainment and Gray Matter Studios transactions for resale by the
holders thereof.
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 purchased from time to time through the open market or in
privately negotiated transactions. The amount of shares and notes
purchased and the timing of purchases were 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 June 19, 2000, the Company has purchased 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
exercise 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 tender or
exchange offer which would result in the bidder's beneficial ownership
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 business 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 of the common stock of the Company, the
Rights Plan "grandfathers" their current level of ownership, so long as
they do not purchase additional 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.
19
ITEM 6. 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 consolidated
financial data presented below as of and for each of the fiscal years
in the five-year period ended March 31, 2000 are derived from the
audited consolidated financial statements of the Company. The
Consolidated Balance Sheets as of March 31, 2000 and 1999 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, 2000,
and the report thereon, are included elsewhere in this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------------
RESTATED (1)
-----------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ----------- ---------- ----------
STATEMENT OF OPERATIONS DATA:
Net revenues $572,205 $436,526 $312,906 $190,446 $87,561
Cost of sales - product costs 319,422 260,041 176,188 103,124 34,034
Cost of sales - royalties and software
amortization 91,238 36,990 29,840 13,108 7,333
Income (loss) from operations (30,325) 26,667 9,218 11,497 3,264
Income (loss) before income tax provision (38,736) 23,636 8,106 11,578 4,872
Net income (loss) (34,088) 14,891 4,970 7,583 5,908
Basic earnings (loss) per share (1.38) 0.65 0.22 0.36 0.33
Diluted earnings (loss) per share (1.38) 0.62 0.21 0.35 0.31
Basic weighted average common shares
outstanding 24,691 22,861 22,038 20,961 17,931
Diluted weighted average common shares
outstanding 24,691 23,932 22,909 21,650 18,993
SELECTED OPERATING DATA:
EBITDA (2) 15,541 33,155 14,564 15,690 5,974
CASH (USED IN) PROVIDED BY:
Operating activities 77,389 18,190 31,670 4,984 3,817
Investing activities (99,547) (64,331) (43,814) (19,617) (11,515)
Financing activities 42,028 7,220 62,862 11,981 (4,378)
AS OF MARCH 31,
----------------------------------------------------------
RESTATED
-----------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ----------- ---------- ----------
BALANCE SHEET DATA:
Working capital $160,149 $136,355 $115,782 $52,142 $40,067
Cash and cash equivalents 49,985 33,037 74,319 23,352 25,827
Goodwill 12,347 21,647 23,473 23,756 19,583
Total assets 309,737 283,345 229,366 132,203 84,737
Long-term debt 73,778 61,143 61,192 5,907 1,222
Redeemable and convertible preferred stock - - - 1,500 -
Shareholders' equity 132,009 127,190 97,475 80,321 62,674
(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
years 1997 and 1996 has been restated retroactively for the effects of
the acquisitions of
20
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.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading international publisher, developer and distributor
of interactive entertainment and leisure 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, Sega Dreamcast ("Dreamcast") and Nintendo N64 ("N64") console
systems and Nintendo Gameboy handheld game devices. The Company's products span
a wide range of genres and target markets.
The Company distributes its products worldwide through its direct sales
forces, through its distribution subsidiaries, and through third party
distributors and licensees.
The Company's financial information as of and for the years ended March 31,
1999 and 1998 has been restated to reflect the effect of pooling of interests
transactions as discussed in Item 1 and Item 6 of this Report.
The Company recognizes revenue from the sale of its products upon shipment.
Subject to certain limitations, the Company permits customers to obtain
exchanges and returns within certain specified periods and provides price
protection on certain unsold merchandise. Revenue from product sales is
reflected after deducting the estimated allowance for returns and price
protection. 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 agreements 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, manufacture
and distribute PC and console product units. Manufacturers of the Company's PC
software are located worldwide and are readily available. Console CDs and
cartridges are manufactured by the respective video game console manufacturers,
Sony, Nintendo and Sega 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 software development costs. The
costs incurred by the Company to develop products are accounted for in
accordance with accounting standards that provide for the capitalization of
certain software development costs once technological feasibility is established
and such costs are determined to be recoverable. Additionally, various contracts
are maintained with developers, product owners or other royalty participants,
which state a royalty rate, territory and term of agreement, among other items.
Commencing upon product release, prepaid royalties are amortized to cost of
sales-royalties and software amortization at the contractual royalty rate based
on actual net product sales, or on the ratio of current revenues to total
projected revenues, whichever is greater and capitalized software costs are
amortized to cost of sales-royalties and software amortization on a
straight-line basis over the estimated product life or on the ratio of current
revenues to total projected revenues, whichever is greater.
For products that have been released, management evaluates the future
recoverability of prepaid royalties and capitalized software costs on a
quarterly basis. Prior to a product's release, the Company charges to expense,
as part of product development costs, capitalized costs when, in management's
estimate, such amounts are not recoverable. The following criteria is used to
evaluate recoverability: historical performance of comparable products; the
commercial acceptance of prior products released on a given game engine; orders
for the product prior to its release; estimated performance of a sequel product
based on the performance of the product on which the sequel is based; and actual
development costs of a product as compared to the Company's budgeted amount.
22
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total net revenues
and also breaks down net revenues by territory, platform and channel:
Fiscal years ended March 31,
------------------------------------------------------------------------
(In thousands)
------------------------------------------------------------------------
Restated
------------------------------------------------
2000 1999 1998
---------------------- ----------------------- -----------------------
Net revenues $ 572,205 100.0% $ 436,526 100.0% $ 312,906 100.0%
Costs and expenses:
Cost of sales - product costs 319,422 55.8% 260,041 59.6% 176,188 56.3%
Cost of sales - royalties and software
amortization 91,238 15.9% 36,990 8.5% 29,840 9.5%
Product development 26,275 4.6% 22,875 5.2% 28,285 9.0%
Sales and marketing 93,878 16.4% 66,420 15.2% 47,714 15.3%
General and administrative 30,099 5.3% 21,948 5.0% 20,099 6.4%
Amortization of intangible assets 41,618 7.3% 1,585 0.4% 1,562 0.5%
---------- ---------- ----------- ---------- ----------- ----------
Total costs and expenses 602,530 105.3% 409,859 93.9% 303,688 97.0%
---------- ---------- ----------- ---------- ----------- ----------
Income (loss) from operations (30,325) (5.3%) 26,667 6.1% 9,218 3.0%
Interest income (expense), net (8,411) (1.5%) (3,031) (0.7%) (1,112) (0.4%)
---------- ---------- ----------- ---------- ----------- ----------
Income (loss) before income tax
provision (38,736) (6.8%) 23,636 5.4% 8,106 2.6%
Income tax provision (benefit) (4,648) (0.8%) 8,745 2.0% 3,136 1.0%
---------- ---------- ----------- ---------- ----------- ----------
Net income (loss) $(34,088) (6.0%) $ 14,891 3.4% $ 4,970 1.6%
========== ========== =========== ========== =========== ==========
NET REVENUES BY TERRITORY:
United States $ 279,165 48.8% $ 149,705 34.3% $ 90,784 29.0%
Europe 277,524 48.5% 278,032 63.7% 208,817 66.7%
Other 15,516 2.7% 8,789 2.0% 13,305 4.3%
---------- ---------- ----------- ---------- ----------- ----------
Total net revenues $ 572,205 100.0% $ 436,526 100.0% $ 312,906 100.0%
========== ========== =========== ========== =========== ==========
NET REVENUES BY CHANNEL:
Retailer/Reseller $ 545,482 95.3% $ 417,490 95.6% $ 287,801 92.0%
OEM, Licensing, on-line and other 26,723 4.7% 19,036 4.4% 25,105 8.0%
---------- ---------- ----------- ---------- ----------- ----------
Total net revenues $ 572,205 100.0% $ 436,526 100.0% $ 312,906 100.0%
========== ========== =========== ========== =========== ==========
ACTIVITY/PLATFORM MIX:
Publishing:
Console $ 281,204 49.1% $ 111,662 25.6% $ 27,150 8.7%
PC 115,487 20.2% 93,880 21.5% 106,524 34.0%
---------- ---------- ----------- ---------- ----------- ----------
Total publishing net revenues $ 396,691 69.3% $205,542 47.1% $ 133,674 42.7%
---------- ---------- ----------- ---------- ----------- ----------
Distribution:
Console $ 129,688 22.7% $ 156,584 35.9% $ 105,588 33.8%
PC 45,826 8.0% 74,400 17.0% 73,644 23.5%
---------- ---------- ----------- ---------- ----------- ----------
Total distribution net revenues $ 175,514 30.7% $ 230,984 52.9% $ 179,232 57.3%
---------- ---------- ----------- ---------- ----------- ----------
Total net revenues $ 572,205 100.0% $ 436,526 100.0% $ 312,906 100.0%
========== ========== ========== =========== =========== ==========
23
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 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:
Net revenues $11.7
Cost of sales - royalties and software
amortization 11.9
Product development 4.2
General and administrative 5.2
Amortization of intangible assets 37.2
----
$70.2
=====
The component of the charge included in amortization of intangible
assets represents 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 is consolidating Expert into
Head Games, forming one integrated business unit. As part of this consolidation,
the Company is discontinuing substantially all of Expert's product lines,
terminating substantially all of Expert's employees and phasing out the use of
the Expert name. In addition, a $10.9 million write down of goodwill relating to
TDC, an OEM business unit, was recorded. In the past year, the OEM market has
gone 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 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 have 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 includes a severance charge of $1.2
million for employee redundancies. The plan is expected to be completed by the
fourth quarter of fiscal 2001.
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.
NET REVENUES
Net revenues for the year ended March 31, 2000 increased 31.1% from the
same period last year, from $436.5 million to $572.2 million. The increase was
due to a 53.2% increase in console net revenues from $268.2 million to $410.9
million, slightly offset by a 4.1% decrease in PC net revenues from $168.3
million to $161.3 million. Domestic net revenues grew 86.5% from $149.7 million
to $279.2 million. International net revenues remained fairly constant,
increasing 2.2% from $286.8 million to $293.0 million.
Publishing net revenues for the year ended March 31, 2000 increased
93.0% from $205.5 million to $396.7 million. This increase primarily was due to
publishing console net revenues increasing 151.8% 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 Gameboy Color) and Toy Story II (PlayStation and N64), Tarzan (N64 and
Gameboy), A Bug's Life (N64), Vigilante 8: Second Offense (PlayStation, N64 and
Gameboy), WuTang: Shaolin Style (PlayStation) and
24
Tony Hawk's Pro Skater (PlayStation, N64 and Gameboy). Publishing PC net
revenues for the year ended March 31, 2000 increased 23.0% from $93.9 million to
$115.5 million. This increase primarily was due to the release of Quake 3 Arena,
Cabela's Big Game Hunter III, Star Trek: Hidden Evil, Armada and Soldier of
Fortune.
For the year ended March 31, 2000, distribution net revenues decreased
24.0% 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 40.4% from $19.0 million to $26.7 million. 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 resulting 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 55.8% and 59.6% 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 publishing products, and
console products have a higher per unit product cost than PC products.
Cost of sales - royalty and software amortization expense represented
15.9% and 8.5% 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 primarily 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 million 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 14.9% 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 13.7% to 20.5% for the year ended March 31, 2000. Such increases
were attributable to the increases in product development costs, as described
above.
Sales and marketing expenses for the year ended March 31, 2000
increased 41.3% from the same period last year, from $66.4 million to $93.9
million, but remained relatively constant as a percentage of net revenues at
16.4% and 15.2% at March 31, 2000 and 1999, respectively. 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 37.1% from the prior fiscal year, from $21.9 million to $30.1 million.
As a percentage of net revenues, general and administrative expenses remained
relatively constant at approximately 5%. The increase in the amount of general
and administrative expenses was due to an increase in worldwide administrative
support needs and headcount related expenses and charges incurred in conjunction
with the Company's restructuring plan previously described.
Amortization of intangibles increased substantially from $1.6 million
in fiscal 1999 to $41.6 million in fiscal 2000. This was due to the write-off of
goodwill acquired in purchase acquisitions.
25
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 382.3% to $(35.0) million, compared to $12.4 million in the prior
fiscal year. The decrease reflects the charges incurred in conjunction 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 66.9% 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.
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 reflects the Company's effective income tax rate of approximately 12%. The
significant items generating the variance between the Company's effective rate
and its statutory rate of 34% are nondeductible 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 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, 1999 AND 1998
NET REVENUES
Net revenues for the fiscal year ended March 31, 1999 increased 39.5%,
from $312.9 million to $436.5 million, over the prior year. The United States
and international net revenues increased 64.9%, from $90.8 million to $149.7
million, and 29.1%, from $222.1 million to $286.8 million, respectively, over
the prior year. The increase in overall net revenues was composed of a 102.1%
increase in console net revenues, from $132.7 million to $268.2 million,
partially offset by a 6.6% decrease in PC net revenues, from $180.2 million to
$168.3 million, respectively, over the prior year.
Publishing net revenues for the year ended March 31, 1999 increased
53.8%, from $133.7 million to $205.5 million, over the prior year. Distribution
net revenues for the year ended March 31, 1999 increased 28.9%, from $179.2
million to $231.0 million, over the prior year. These increases were primarily
attributable to the increases in publishing and distribution console net
revenues.
Publishing console net revenues for the year ended March 31, 1999
increased 311.3%, from $27.2 million to $111.7 million, over the prior year.
This increase was primarily attributable to the initial release of Tenchu
(PlayStation), Apocalypse (PlayStation), Vigilante 8 (PlayStation and N64),
Asteroids (PlayStation), Nightmare Creatures (PlayStation and N64) and
Activision Classics (PlayStation). Publishing PC net revenues for the year ended
March 31, 1999 decreased 11.9%, from $106.5 million to $93.9 million, over the
prior year. This decrease was primarily due to the release of Quake II (Windows
95) in the prior year. Publishing PC initial releases during the year ended
March 31, 1999 included Civilization: Call to Power, Cabela's Big Game Hunter,
Cabela's Big Game Hunter 2, Asteroids and Sin.
Distribution console net revenues increased 48.3%, from $105.6 million
to $156.6 million, over the prior year. This increase was primarily attributable
to an increase in the number of products released for PlayStation and Nintendo
N64 and an increase in the Playstation and N64 hardware installed base.
Distribution PC net revenues increased 1.0%, from $73.6 million to $74.4
million, over the prior year. Distribution PC net revenues remained relatively
constant during this period as the number of new PC titles released by the
publishers utilizing the Company's distribution services in each year were
approximately the same.
26
Net OEM, licensing, on-line and other revenues for the fiscal year
ended March 31, 1999 decreased 24.2% to $19.0 million from $25.1 million in the
prior year. This decrease was due to the release of fewer PC titles during the
fiscal year that were compatible with OEM customers' products.
COSTS AND EXPENSES
Cost of sales - product costs represented 59.6% and 56.3% of net
revenues for the years ended March 31, 1999 and 1998, respectively. The increase
in cost of sales - product costs as a percentage of net revenues was due to the
increase in the sales mix related to console products. Console products have a
higher per unit product cost than PC products.
Cost of sales - royalties and software amortization expense represented
8.5% and 9.5% of net revenues for the years ended March 31, 1999 and 1998,
respectively. The decrease in cost of sales - royalties and software
amortization expense as a percentage of net revenues was due to changes in the
Company's product mix, with an increase in products with lower royalty
obligations as compared to the prior year.
Product development expenses for the year ended March 31, 1999
decreased 19.1% from the prior year, from $28.3 million to $22.9 million. The
decrease in the amount of product development expenses for the year ended March
31, 1999 was primarily due to an increase in capitalizable development costs
relating to sequel products being developed on proven engine technologies which
have been capitalized in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or otherwise Marketed" ("SFAS 86").
As a percentage of net revenues, total product creation costs (i.e.,
royalties and software amortization expenses plus product development expenses)
for the year ended March 31, 1999, decreased to 13.7% from 18.5% in the prior
year. This decrease was attributable to decrease in the effective royalty rate,
as discussed above, and an increase in development costs capitalized under SFAS
86, also as discussed above.
Sales and marketing expenses for the year ended March 31, 1999
increased 39.2% from the same period last year, from $47.7 million to $66.4
million. As a percentage of net revenues, sales and marketing expenses remained
constant. The increase in the amount of sales and marketing expenses for the
year ended March 31, 1999 was primarily due to a significant increase in
television advertising and an increase in the number of products released during
the current year.
General and administrative expense for the year ended March 31, 1999
increased 9.2% from the same period last year, from $20.1 million to $21.9
million. As a percentage of net revenues, general and administrative expenses
decreased from 6.4% to 5.0%. The period over period increase in the amount of
general and administrative expenses primarily was due to an increase in
worldwide administrative support needs and headcount related expenses. The
decrease as a percentage of net revenues relates primarily to efficiencies
gained in controlling fixed costs and the increase in net revenues.
OTHER INCOME (EXPENSE)
Interest expense, net of interest income, increased to $3.0 million for
the year ended March 31, 1999, from $1.1 million for the year ended March 31,
1998. This increase primarily was the result of interest costs associated with
the Company's convertible subordinated notes issued in December 1997 and short
term borrowings under bank line of credit agreements which had a greater average
outstanding balance in the fiscal year ended March 31, 1999.
PROVISION FOR INCOME TAXES
The income tax provision of $8.7 million for the year ended March 31,
1999, reflects the Company's effective income tax rate of approximately 37.0%.
The significant items generating the variance between the Company's effective
rate and its statutory rate of 34% are nondeductible 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 primarily is dependent on the generation of future taxable income.
Management believes that it is more likely than not that the company will
generate taxable income sufficient to realize the benefit of deferred tax assets
recognized.
27
QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past varied
significantly and will likely vary significantly in the future, depending on
numerous factors, several of which are not under the Company's control. See Item
1 "Business - Certain Cautionary Information" and Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Restructuring." Accordingly, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon as indications of future performance.
The following table is a comparative breakdown of the Company's quarterly
results for the immediately preceding eight quarters (amounts in thousands,
except per share data):
Quarter ended
------------------------------------------------------------------------------------
Restated
---------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30,
2000 (1) 1999 1999 1999 1999 1998 1998 1998
-------------------- -------- --------- ------------------- --------- ---------
Net revenues $103,838 $268,862 $115,363 $84,142 $115,266 $193,537 $66,182 $61,541
Operating income (loss) (65,990) 38,241 3,525 (6,101) 9,053 25,873 (2,735) (5,524)
Net income (loss) (52,877) 22,301 1,063 (4,575) 5,032 15,736 (2,206) (3,671)
Basic earnings (loss) per
share (2.07) 0.89 0.04 (0.19) 0.22 0.69 (0.10) (0.16)
Diluted earnings (loss) per
share (2.07) 0.75 0.04 (0.19) 0.21 0.61 (0.10) (0.16)
(1) See Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations Restructuring."
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased $17.0 million, from
$33.0 million at March 31, 1999 to $50.0 million at March 31, 2000. This was in
comparison to a $41.3 million decrease in cash flows in fiscal year 1999 from
$74.3 million at March 31, 1998 to $33.0 million at March 31, 1999. This
increase in cash in fiscal year 2000 resulted from $77.4 million and $42.0
million provided by operating activities and financing activities, respectively,
offset by $99.5 million utilized in investing activities. The increase in cash
flows provided by operating activities from fiscal 1999 to fiscal 2000 primarily
is due to decreases in accounts receivable trade from March 31, 1999 to March
31, 2000. The increase in cash flows provided by financing activities from
fiscal 1999 to fiscal 2000 primarily is due to $22.5 million in proceeds from
the issuance of common stock pursuant to employee stock option plans and
employee stock purchase plans in fiscal year 2000 and $25.0 million in proceeds
from the issuance of the term loan portion of the $125 million U.S. bank credit
facility obtained in June 1999. The increase in cash flows used in investing
activities from fiscal 1999 to fiscal 2000 primarily is due to $20.5 million of
cash expended in connection with the acquisition of Expert in June 1999.
Additionally, in fiscal 2000, investments in prepaid royalties and capitalized
software costs increased $14.0 million from $60.5 million in fiscal 1999 to
$74.5 million in fiscal 2000 in connection with the execution of new license
agreements granting the Company long-term rights to intellectual property of
third parties, as well as the acquisition of publishing or distribution rights
to products being developed by third parties. Comparatively, in fiscal year
1999, only $18.2 million and $7.2 million was provided by cash flows from
operating activities and financing activities, respectively, partially
offsetting cash used in investing activities of $64.3 million.
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, 2000, the Company had $5.5 million of N64 hardware and software
cartridge inventory on hand, which represented approximately 14% of all
inventory.
In December 1997, the Company completed the private placement of $60.0
million principal amount of 6 3/4% convertible subordinated notes due 2005 (the
"Notes"). The Notes are convertible, in whole or in part, at the option of the
holder at any time after December 22, 1997 (the date of original issuance) and
prior to the close of business on the business day immediately preceding the
maturity date, unless previously redeemed or repurchased, into common stock,
28
$.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.
The Company has a $125.0 million revolving credit facility and term loan
with a group of banks (the "U.S. Facility"). 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 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 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% (weighted average interest rate of approximately 9.50% for the year ending
March 31, 2000) and matures June 2002. 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 was in compliance with these covenants as of March 31,
2000. The Company is also required to maintain specified financial ratios
related to net worth and fixed charges. As of March 31, 2000, $20.0 million was
outstanding under the term loan portion of the U.S. Facility and $2.5 million
was outstanding under the revolving portion of the U.S. Facility. No letters of
credit were outstanding against the revolving portion of the U.S. Facility at
March 31, 2000.
On June 8, 2000, the Company amended certain of the covenants of its U.S.
Facility. The amended term loan and credit facility allows for the purchase by
the Company of up to $15.0 million in shares of its common stock as well as its
convertible subordinated notes in accordance with the Company's stock repurchase
program (described in Note 15 to the consolidated financial statements), the
distribution of "Rights" under the Company's shareholders' rights plan
(described in Note 15 to the consolidated financial statements), as well as the
reorganization of the Company's organizational structure into a holding company
form.
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") 45 million ($19.4 million) at 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 1.25% (weighted
average interest rate of 5.5% of March 31, 2000) and matures March 2001. Letters
of credit outstanding against the Netherlands Facility at March 31, 2000 were
NLG 3.8 million ($1.6 million). The Company had $3.5 million of borrowings
outstanding under the Netherlands Facility at March 31, 2000.
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 ($11.2 million) of revolving loans and GBP 6 million ($9.6
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 2000. The UK Facility also contains various covenants that
require the subsidiary to maintain specified financial ratios related to,
among others, fixed charges. The Company was in compliance with these
covenants as of March 31, 2000. No borrowings were outstanding against the UK
facility at March 31, 2000. Letters of credit of GBP 6.0 million ($9.6
million) were outstanding against the UK Facility at March 31, 2000. The
German Facility can be used for working capital requirements and provides for
revolving loans up to Deutsche Marks ("DM") 4 million ($1.9 million), bears
interest at 6.25%, is collateralized by a cash deposit of approximately GBP
650,000 ($1.0 million) made by the Company's CentreSoft subsidiary and has no
expiration date. No borrowings were outstanding against the German Facility
as of March 31, 2000.
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 contractually specified
milestones. Assuming all contractually specified milestones are achieved, for
contracts in place as of March 31, 2000, the total future minimum contract
commitment is approximately $42.9 million, of which $35.0 million, $6.6 million
and $1.3 million is scheduled to be paid in fiscal 2001, 2002 and 2003,
respectively. Additionally, under the terms of a production financing
arrangement, the Company has a commitment to purchase two future PlayStation 2
titles from independent
29
third party developers upon their completion for an estimated $8.4 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 acquisitions 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 purchased in the open
market or in privately negotiated transactions at such times and in such
amounts as management deemed appropriate, depending on market conditions and
other factors. As of June 19, 2000, the Company has repurchased 2.3 million
shares of its common stock for approximately $15.0 million.
The Company believes that it has sufficient working capital ($160.1 million
at March 31, 2000), 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.
INFLATION
The Company's management currently believes that inflation has not had a
material impact on continuing operations.
YEAR 2000
The Company encountered no significant problems in its critical systems or
products sold to customers in the transition to the year 2000. All of the
Company's internal systems are functioning normally, and no year 2000 problems
have been reported by any of its trading partners. The Company will continue to
monitor its systems for any latent issues, but expects no significant year 2000
issues to arise. The Company continues to maintain contingency plans that
management believes are adequate and customary to address any unexpected year
2000 problems.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union adopted the "euro" as their common currency. The sovereign currencies of
the participating countries are scheduled to remain legal tender as
denominations of the euro between January 1, 1999 and January 1, 2002. Beginning
January 1, 2002, the participating countries will issue new euro-denominated
bills and coins for use in cash transactions. No later than July 1, 2002, the
participating countries will withdraw all bills and coins denominated in the
sovereign currencies, so that the sovereign currencies no longer will be legal
tender for any transactions, making conversion to the euro complete. The Company
has performed an internal analysis of the possible implications of the euro
conversion on the Company's business and financial condition, and has determined
that the impact of the conversion will be immaterial to its overall operations.
The Company's wholly owned subsidiaries operating in participating countries
represented 12% and 19% of the Company's consolidated net revenues for the years
ended March 31, 2000 and 1999, respectively.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") is effective
for all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not currently participate in hedging
activities or own derivative instruments but plans to adopt SFAS No. 133
beginning April 1, 2001.
30
ITEM 7A. 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 discussed 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
foreign 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 obligations,
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 agreements to further manage potential interest rate risk.
As of March 31, 2000, the carrying value of the Company's variable rate
debt was $26.0 million, which includes the U.S. Facility ($22.5 million) and the
Netherlands Facility ($3.5 million). As of March 31, 1999, the carrying value of
the Company's variable rate debt was $5.5 million, which was composed entirely
of the Netherlands Facility. A hypothetical 1% increase in the applicable
interest rates of the Company's variable rate debt would increase annual
interest expense by approximately $260,000 and $55,000, as March 31, 2000 and
1999, respectively.
The Company additionally has 6 3/4% convertible subordinated notes (the
"Notes") that have a carrying value of $60.0 million and a fair value of $51.6
million as of March 31, 2000. The fair value of the Notes was determined based
on quoted market prices. A hypothetical 1% increase in market rate of the Notes
would decrease their fair value by approximately $516,000.
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
activities are appropriate to reduce risk.
31
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of March 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years Ended March 31, 2000, 1999
and 1998 F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended March 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended March
31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
Schedule II-Valuation and Qualifying Accounts and Reserves as of March 31,
2000, 1999 and 1998 F-29
Item 14. Exhibit Index F-30
All other schedules of the Registrant are omitted because of the
absence of conditions under which they are required or because the
required information is included elsewhere in the financial statements
or in the notes thereto.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders, entitled "Election of Directors" and
"Executive Officers and Key Employees" to be filed with the Securities
and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders, entitled "Executive Compensation" and
"Indebtedness of Management" to be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year
covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders, entitled "Security Ownership of Certain
Beneficial Owners and Management" to be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal year
covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for its 2000
Annual Meeting of Shareholders, entitled "Certain Relationships and
Related Transactions" to be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by
this Form 10-K.
33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS See Item 8. - Consolidated Financial
Statements and Supplementary Data Index for Financial
Statements and Schedule on page 32 herein.
2. FINANCIAL STATEMENT SCHEDULE The following financial
statement schedule of Activision, Inc. for the years ended
March 31, 2000, 1999 and 1998 is filed as part of this
report and should be read in conjunction with the
Consolidated Financial Statements of Activision, Inc.
Schedule II -- Valuation and Qualifying Accounts and
Reserves
Other financial statement schedules are omitted because
the information called for is not required or is shown
either in the Consolidated Financial Statements or the
notes thereto.
3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
Exhibit
Number Exhibit
------ -------
2.1 Agreement and Plan of Merger dated as of June 9, 2000 among
Activision, Inc., Activision Holdings, Inc. and ATVI Merger
Sub, Inc. (incorporated by reference to Exhibit 2.4 of the
Company's Form 8-K filed June 16, 2000).
3.1 Amended and Restated Certificate of Incorporation of
Activision Holdings, dated June 1, 2000 (incorporated by
reference to Exhibit 2.5 of the Company's Form 8-K, filed
on June 16, 2000).
3.2 Amended and Restated Bylaws of Activision Holdings
(incorporated by reference to Exhibit 2.6 of the Company's
Form 8-K, filed on June 16, 2000).
3.3 Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Activision Holdings dated
as of June 9, 2000 (incorporated by reference to Exhibit
2.7 of the Company's Form 8-K, filed on June 16, 2000).
4.1 Rights Agreement dated as of April 18, 2000, between the
Company and Continental Stock Transfer & Trust Company,
which includes as exhibits the form of Right Certificates
as Exhibit A, the Summary of Rights to Purchase Series A
Junior Preferred Stock as Exhibit B and the form of
Certificate of Designation of Series A Junior Preferred
Stock of the Company as Exhibit C, (incorporated by
reference to the Company's Registration Statement on Form
8-A, Registration No. 001-15839, filed April 19, 2000).
10.1 Mediagenic 1991 Stock Option and Stock Award Plan, as
amended (incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-8, Registration
No. 33-63638, filed on December 8, 1995).
10.2 Mediagenic 1991 Director Warrant Plan, as amended (incorporated
by reference to Exhibit 28.2 to the Company's
34
Registration Statement on Form S-8, Registration No. 33-63638,
filed on June 1, 1993).
10.3 Activision, Inc. Employee Stock Purchase Plan, as amended,
(incorporated by reference to Exhibit 4.1 of the Company's
Form S-8, Registration No. 333-36272 filed on May 4, 2000).
10.4 Activision, Inc. 1998 Incentive Plan (incorporated by
reference to Appendix I of the Company's 1998 Proxy
Statement).
10.5 Activision, Inc. 1999 Incentive Plan
10.6 Lease Agreement dated as of December 20, 1996, between the
Company and Barclay Curci Investment Company (incorporated
by reference to Exhibit 10.14 of the Company's Form 10-Q
for the quarter ended December 31, 1996).
10.7 Share Exchange Agreement dated November 23, 1997, among the
Company and the holders of all of the issued and
outstanding capital stock of Combined Distribution
(Holdings) Limited (incorporated by reference to Exhibit 10.1
of the Company's Form 8-K filed December 5, 1997).
10.8 Purchase Agreement dated as of December 16, 1997, among the
Company and Credit Suisse First Boston Corporation, Piper
Jaffray, Inc. and UBS Securities LLC (the "Initial
Purchasers") (incorporated by reference to Exhibit 10.1 of
the Company's Form 8-K filed December 23, 1997).
10.9 Registration Rights Agreement dated as of December 16,
1997, among the Company and the Initial Purchasers
(incorporated by reference to Exhibit 10.2 of the Company's
Form 8-K filed December 23, 1997).
10.10 Indenture dated as of December 22, 1997, between the
Company and State Street Bank and Trust Company of
California, N.A., as Trustee (incorporated by reference to
Exhibit 10.3 of the Company's Form 8-K filed December 23,
1997).
10.11 Employment agreement dated January 12, 1999 between the
Company and Robert A. Kotick (incorporated by reference to
Exhibit 10.10 of the Company's Form 10-K for the year
ending March 31, 1999).
10.12 Employment agreement dated October 19, 1998 between the
Company and Ronald Doornink (incorporated by reference to
Exhibit 10.12 of the Company's Form 10-K for the year
ending March 31, 1999).
10.13 Employment agreement dated March 4, 1999 between the
Company and Lawrence Goldberg (incorporated by reference to
Exhibit 10.13 of the Company's Form 10-K for the year
ending March 31, 1999).
10.14 Employment agreement dated April 1, 1998 between the
Company and Mitchell Lasky (incorporated by reference to
Exhibit 10.15 of the Company's Form 10-K for the year
ending March 31, 1999).
35
10.15 Employment agreement dated April 1, 1998 between the
Company and Ronald Scott (incorporated by reference to
Exhibit 10.16 of the Company's Form 10-K for the year
ending March 31, 1999).
10.16 Service Agreement dated November 24, 1997 between
Combined Distribution (Holdings) Limited and Richard Andrew
Steele (incorporated by reference to Exhibit 10.17 of the
Company's Form 10-K for the year ending March 31, 1999).
10.17 Employment agreement dated January 12, 1999 between the
Company and Brian G. Kelly (incorporated by reference to
Exhibit 10.11 of the Company's Form 10-K for the year
ending March 31, 1999).
10.18 Articles of Merger dated June 30, 1998 between S.B.F.
Acquisition Corp., a wholly owned subsidiary of the
Company, and S.B.F. Services, Limited dba Head Games
Publishing (incorporated by reference to Exhibit 2.1 of
the Company's Form 8-K, filed on July 2, 1998).
10.19 Share Exchange Agreement dated September 29, 1998 by and
between the Company and Mr. Frank d'Oleire, Mrs. Christa
d'Oleire, Ms. Fiona d'Oleire, Ms. Alexa d'Oleire acting as
Dr. d'Oleire Beteiligungsgesellschaft bR, Mr. Martinus J.C.
Bubbert, and Mr. Dennis W. Buis (incorporated by reference
to Exhibit 10.1 of the Company's Form 8-K, filed on October
8, 1998).
10.20 Amended and Restated Agreement and Plan of Merger dated
April 19, 1999 by and among the Company, Expert Acquisition
Corp. and Expert Software, Inc. (incorporated by reference
to Exhibit 2.1 of the Form 8-K of Expert Software, Inc.,
filed April 29, 1999).
10.21 Credit Agreement dated as of June 21, 1999 among the
Company, Head Games Publishing, Inc., Expert Software,
Inc., various financial institutions, PNC Bank, National
Association, as issuing bank, administrative agent and
collateral agent for such financial institutions, and
Credit Suisse First Boston, as syndication agent
(incorporated by reference to Exhibit 10.22 of the
Company's Form 10-K for the year ending March 31, 1999).
10.22 Share Exchange Agreement dated as of June 29, 1999, among
the Company, Jill G. Mark and Robert N. Herrick
(incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3, Registration No.
333-85385, filed August 17, 1999).
10.23 Agreement and Plan of Reorganization dated as of September
30, 1999, among the Company, Neversoft Entertainment, Inc.,
JCM Productions, Inc., Joel Jewett, Michael West and
Christopher Ward (incorporated by reference to Exhibit 4.1
of the Company's Registration Statement on Form S-3,
Registration No. 333-94509, filed January 12, 2000).
10.24 Employment agreement dated July 12, 1999, between the
Company and Mr. Michael Rowe (incorporated by reference to
36
Exhibit 6.1 of the Company's Form 10-Q for the quarter
ending June 30, 1999).
10.25 Employment agreement dated July 12, 1999, between the
Company and Ms. Kathy Vrabek (incorporated by reference to
Exhibit 6.2 of the Company's Form 10-Q for the quarter
ending June 30, 1999).
10.26 Amendment to Employment Agreement between Mr. Ronald
Doornink and the Company, dated April 30 1999 (incorporated
by reference to Exhibit 6.1 of the Company's Form 10-Q for
the quarter ending December 31, 1999).
10.27 Employment agreement dated April 7, 2000, between the
Company and Mr. Michael Pole.
10.28 First Amendment effective as of June 8, 2000 to the Credit
Agreement dated June 21, 1999 among the Company, Head Games
Publishing, Inc., Expert Software, Inc., various financial
institutions, PNC Bank, National Association as issuing
bank, administrative agent and collateral agent for such
lenders and Credit Suisse First Boston, as syndication
agent.
21.1 Principal subsidiaries of the Company.
23.1 Independent Auditors' Consent.
27.1 Fiscal 1998 Year to Date Financial Data Schedule.
27.2 Fiscal 1999 Year to Date Financial Data Schedule.
27.3 Fiscal 2000 Year to Date Financial Data Schedule.
(b) Reports on Form 8-K. There have been no reports on Form 8-K
that have been filed by the Company during the last quarter of
the fiscal year ending March 31, 2000. The following reports
on Form 8-K have been filed by the Company during the first
quarter of the fiscal year ending March 31, 2001:
1.1 The Company filed a Form 8-K on April 19, 2000,
reporting under "Item 5. Other Events" the
announcement of the Company's stockholders'
rights plan.
1.2 The Company filed a Form 8-K on June 16, 2000
reporting under "Item 5. Other Events" the
announcement of the organizational
restructuring of the Company into a holding
company format organizational structure.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 28, 2000
ACTIVISION, INC.
By: /s/ ROBERT A. KOTICK
---------------------------------
(Robert A. Kotick)
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ ROBERT A. KOTICK Chairman, Chief Executive Officer June 28, 2000
--------------------------------- (Principal Executive Officer) and Director
(Robert A. Kotick)
By: /s/ BRIAN G. KELLY Co-Chairman and Director June 28, 2000
---------------------------------
(Brian G. Kelly)
By: /s/ WILLIAM J. CHARDAVOYNE Chief Financial Officer June 28, 2000
--------------------------------- and Chief Accounting Officer
(William J. Chardavoyne)
By: /s/ HAROLD A. BROWN Director June 28, 2000
---------------------------------
(Harold A. Brown)
By: /s/ BARBARA S. ISGUR Director June 28, 2000
---------------------------------
(Barbara S. Isgur)
By: Director June 28, 2000
---------------------------------
(Steven T. Mayer)
By: Director June 28, 2000
---------------------------------
(Robert J. Morgado)
38
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheets of ACTIVISION, INC.
and subsidiaries as of March 31, 2000 and 1999 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the years in the three-year period ended March 31, 2000. In connection
with our audit of the consolidated financial statements, we also have audited
financial statement schedule II for each of the years in the three-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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACTIVISION, INC. and
subsidiaries as of March 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 2000, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedule for each of the years in
the three-year period ended March 31, 2000, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG LLP
Los Angeles, California
May 5, 2000,
except as to Note 14,
which is as of June 9, 2000
F-1
PART I. FINANCIAL INFORMATION.
Item I. Financial Statements.
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, March 31,
2000 1999
------------ ------------
Restated
------------
ASSETS
Current assets:
Cash and cash equivalents $ 49,985 $ 33,037
Accounts receivable, net of allowances of $31,521 and
$14,979 at March 31, 2000 and 1999, respectively 108,108 117,541
Inventories 40,453 30,931
Prepaid royalties and capitalized software costs 31,655 33,503
Deferred income taxes 14,159 6,383
Other current assets 19,737 9,965
------------ ------------
Total current assets 264,097 231,360
Prepaid royalties and capitalized software costs 9,153 11,513
Property and equipment, net 10,815 10,924
Deferred income taxes 6,055 2,618
Goodwill, net 12,347 21,647
Other assets 7,270 5,283
------------ ------------
Total assets $ 309,737 $ 283,345
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 16,260 $ 5,992
Accounts payable 38,284 43,853
Accrued expenses 49,404 45,160
------------ ------------
Total current liabilities 103,948 95,005
Long-term debt, less current portion 13,778 1,143
Convertible subordinated notes 60,000 60,000
Other liabilities 2 7
------------ ------------
Total liabilities 177,728 156,155
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.000001 par value, 5,000,000 shares - -
authorized, no shares issued at March 31, 2000 and 1999
Common stock, $.000001 par value, 50,000,000 shares
authorized, 26,488,260 and 23,803,762 shares issued and
25,988,260 and 23,303,762 outstanding at March 31, 2000 - -
and 1999, respectively
Additional paid-in capital 151,714 109,251
Retained earnings (deficit) (8,361) 25,727
Accumulated other comprehensive loss (6,066) (2,510)
Less: Treasury stock, cost of 500,000 shares (5,278) (5,278)
------------ ------------
Total shareholders' equity 132,009 127,190
------------ ------------
Total liabilities and shareholders' equity $ 309,737 $ 283,345
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended March 31,
------------------------------------------------
Restated
------------------------------
2000 1999 1998
------------ ------------ ------------
Net revenues $ 572,205 $ 436,526 $ 312,906
Costs and expenses:
Cost of sales - product costs 319,422 260,041 176,188
Cost of sales - royalties and software
amortization 91,238 36,990 29,840
Product development 26,275 22,875 28,285
Sales and marketing 93,878 66,420 47,714
General and administrative 30,099 21,948 20,099
Amortization of intangible assets 41,618 1,585 1,562
------------ ------------ ------------
Total costs and expenses 602,530 409,859 303,688
------------ ------------ ------------
Income (loss) from operations (30,325) 26,667 9,218
Interest income (expense), net (8,411) (3,031) (1,112)
------------ ------------ ------------
Income (loss) before income tax provision (38,736) 23,636 8,106
Income tax provision (benefit) (4,648) 8,745 3,136
------------ ------------ ------------
Net income (loss) $ (34,088) $ 14,891 $ 4,970
============ ============ ============
Basic earnings (loss) per share:
Net income (loss) $ (1.38) $ 0.65 $ 0.22
============ ============ ============
Weighted average common shares outstanding 24,691 22,861 22,038
============ ============ ============
Diluted earnings (loss) per share:
Net income (loss) $ (1.38) $ 0.62 $ 0.21
============ ============ ============
Weighted average common shares outstanding 24,691 23,932 22,909
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
For the years ended March 31, 2000, 1999 and 1998
Common Stock Additional Retained
------------------------ Paid-In Earnings
(In thousands) Shares Amount Capital (Deficit)
- -------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 22,033 $ - $ 79,147 $ 6,610
Components of comprehensive income
Net income for the year - - - 4,970
Foreign currency translation adjustment - - - -
Total comprehensive income - - - -
Issuance of common stock and common stock warrants 82 - 1,214 -
Issuance of common stock pursuant to employee stock
option plans 599 - 4,756 -
Issuance of common stock pursuant to employee stock -
purchase plan 64 582 -
Tax benefit attributable to employee stock option plans - - 1,247 -
Adjustment for change in year-end of pooled subsidiary - - - (639)
Conversion of Redeemable Preferred Stock 87 - 1,286 -
Conversion of Convertible Preferred Stock 15 - 214 -
Conversion of Subordinated Loan Stock Debentures 217 - 3,216 -
Issuance of stock to affect business combination 10 - 163 11
Dividends declared - - - (116)
--------- --------- --------- ---------
BALANCE, MARCH 31, 1998 23,107 - 91,825 10,836
Components of comprehensive income
Net income for the year - - - 14,891
Foreign currency translation adjustment - - - -
Total comprehensive income - - - -
Issuance of common stock and common stock warrants - - 3,368 -
Issuance of common stock pursuant to employee stock
option plans 605 - 5,271 -
Issuance of common stock pursuant to employee stock
purchase plan 92 - 798 -
Tax benefit attributable to employee stock option plans - - 1,059 -
Tax benefit derived from net operating loss carryforward
utilization - - 2,430 -
Conversion of notes payable to common stock - - 4,500 -
--------- --------- --------- ---------
BALANCE, MARCH 31, 1999 23,804 - 109,251 25,727
Components of comprehensive income:
Net loss for the year - - - (34,088)
Foreign currency translation adjustment - - - -
Total comprehensive loss
Issuance of common stock and common stock warrants - - 8,529 -
Issuance of common stock pursuant to employee stock
option plans 2,331 - 21,718 -
Issuance of common stock pursuant to employee stock
purchase plan 72 - 762 -
Tax benefit attributable to employee stock option plans - - 3,017 -
Tax benefit derived from net operating loss carryforward
utilization - - 1,266 -
Acquisitions and investments made with common stock and
common stock options 281 - 7,171 -
--------- --------- --------- ---------
BALANCE, MARCH 31, 2000 26,488 $ - $ 151,714 $ (8,361)
========= ========= ========= =========
Accumulated
Treasury Stock Other
---------------------- Comprehensive Shareholders'
(In thousands) Shares Amount Income (loss) Equity
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997 (500) $ (5,278) $ (158) $ 80,321
Components of comprehensive income
Net income for the year - - - 4,970
Foreign currency translation adjustment - - 250 250
---------
Total comprehensive income - - - 5,220
---------
Issuance of common stock and common stock warrants - - - 1,214
Issuance of common stock pursuant to employee stock
option plans - - - 4,756
Issuance of common stock pursuant to employee stock
purchase plan - - - 582
Tax benefit attributable to employee stock option plans - - - 1,247
Adjustment for change in year-end of pooled subsidiary - - - (639)
Conversion of Redeemable Preferred Stock - - - 1,286
Conversion of Convertible Preferred Stock - - - 214
Conversion of Subordinated Loan Stock Debentures - - - 3,216
Issuance of stock to affect business combination - - - 174
Dividends declared - - - (116)
--------- --------- --------- ---------
BALANCE, MARCH 31, 1998 (500) (5,278) 92 97,475
Components of comprehensive income
Net income for the year - - - 14,891
Foreign currency translation adjustment - - (2,602) (2,602)
---------
Total comprehensive income - - - 12,289
---------
Issuance of common stock and common stock warrants - - - 3,368
Issuance of common stock pursuant to employee stock
option plans - - - 5,271
Issuance of common stock pursuant to employee stock
purchase plan - - - 798
Tax benefit attributable to employee stock option plans - - - 1,059
Tax benefit derived from net operating loss carryforward
utilization - - - 2,430
Conversion of notes payable to common stock - - - 4,500
--------- --------- --------- ---------
BALANCE, MARCH 31, 1999 (500) (5,278) (2,510) 127,190
Components of comprehensive income:
Net loss for the year - - - (34,088)
Foreign currency translation adjustment - - (3,556) (3,556)
---------
Total comprehensive loss (37,644)
---------
Issuance of common stock and common stock warrants - - - 8,529
Issuance of common stock pursuant to employee stock
option plans - - - 21,718
Issuance of common stock pursuant to employee stock
purchase plan - - - 762
Tax benefit attributable to employee stock option plans - - - 3,017
Tax benefit derived from net operating loss carryforward
utilization - - - 1,266
Acquisitions and investments made with common stock and
common stock options - - - 7,171
--------- --------- --------- ---------
BALANCE, MARCH 31, 2000 (500) $ (5,278) $ (6,066) $ 132,009
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended March 31,
------------------------------------------------
Restated
------------------------------
2000 1999 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (34,088) $ 14,891 $ 4,970
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes (4,311) 3,806 (1,327)
Adjustment for change in fiscal year-end for pooled
subsidiaries - - (639)
Depreciation and amortization 45,866 6,488 5,346
Amortization of prepaid royalties and capitalized
software costs 78,714 27,055 29,167
Expense related to common stock warrants 5,769 388 200
Change in assets and liabilities (net of effects of purchases and
acquisitions):
Accounts receivable 9,900 (43,686) (24,896)
Inventories (7,342) (11,506) (6,798)
Other current assets (7,124) (8,360) 458
Other assets 817 1,498 168
Accounts payable (8,038) (6,620) 25,410
Accrued expenses (2,770) 34,304 (308)
Other liabilities (4) (68) (81)
------------ ------------ ------------
Net cash provided by operating activities 77,389 18,190 31,670
------------ ------------ ------------
Cash flows from investing activities:
Cash paid by Combined Distribution (Holdings) Ltd. to acquire
CentreSoft (net of cash acquired) - - (812)
Cash used in purchase acquisitions (net of cash acquired) (20,523) - (246)
Investment in prepaid royalties and capitalized software costs (74,506) (60,531) (33,656)
Capital expenditures (4,518) (3,800) (8,872)
Other - - (228)
------------ ------------ ------------
Net cash used in investing activities (99,547) (64,331) (43,814)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock pursuant to
employee stock option plans 21,718 5,271 4,756
Proceeds from issuance of common stock pursuant to
employee stock purchase plan 762 798 582
Dividends paid (Combined Distribution (Holdings) Ltd.) - - (1,256)
Borrowing under line-of-credit agreement 361,161 5,300 8,800
Payment under line-of-credit agreement (355,156) (5,300) (8,800)
Proceeds from term loan 25,000 - -
Proceeds from issuance of subordinated convertible notes - - 57,900
Notes payable, net (8,102) 1,151 886
Cash paid to secure line of credit and term loan (3,355) - -
Other - - (6)
------------ ------------ ------------
Net cash provided by financing activities 42,028 7,220 62,862
------------ ------------ ------------
Effect of exchange rate changes on cash (2,922) (2,361) 250
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 16,948 (41,282) 50,968
Cash and cash equivalents at beginning of period 33,037 74,319 23,351
------------ ------------ ------------
Cash and cash equivalents at end of period $ 49,985 $ 33,037 $ 74,319
============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
ACTIVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Activision, Inc. ("Activision" or the "Company") is a leading
international publisher, developer and distributor of interactive
entertainment and leisure products. The Company's products span a wide
range of genres (including action, adventure, extreme sports, strategy
and simulation) and target markets (including game enthusiasts, mass
market consumers, value buyers and children). In addition to its genre
and market diversity, the Company publishes, develops and distributes
products for a variety of game platforms and operating systems, including
personal computers ("PCs"), the Sony Playstation, Sega Dreamcast and the
Nintendo N64 console systems and the Nintendo Gameboy Color handheld
device.
The Company maintains operations in the U.S., Canada, the United Kingdom,
France, Germany, Japan, Australia, Belgium and the Netherlands. For
fiscal year 2000, international operations contributed approximately 51%
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, S.B.F.
Services, Limited dba Head Games Publishing ("Head Games") in June 1998,
CD Contact Data GmbH ("CD Contact") in September 1998, Raven Software
Corporation ("Raven") in November 1997, NBG EDV Handels - und Verlags
GmbH ("NBG") in August 1997 and Combined Distribution (Holdings) Limited
("Centresoft") in November 1997.
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, 2000 and 1999 (amounts in thousands):
March 31,
-----------------------------
2000 1999
------------ ------------
Cash $ 32,637 $ 28,833
Money market funds 17,348 315
Short-term debt instruments - 3,889
------------ ------------
$ 49,985 $ 33,037
============ ============
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its temporary
cash investments with financial institutions. At various times during the
fiscal years ended March 31, 2000 and 1999, the
F-6
Company had deposits in excess of the Federal Deposit Insurance
Corporation ("FDIC") limit at these financial institutions. The Company's
customer base includes retail outlets and distributors including consumer
electronics and computer specialty stores, discount chains, video rental
stores and toy stores in the United States and countries worldwide. The
Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses. The Company generally
does not require collateral or other security from its customers.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The 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 reference 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 $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
developers under development agreements and license fees paid to
intellectual property rights holders for use of their trademarks or
copyrights. Intellectual property rights which have alternative future
uses are capitalized. Capitalized software costs represent costs incurred
for development that are not recoupable against future royalties.
The Company accounts for prepaid royalties relating to development
agreements and capitalized software costs in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed." Software
development costs and prepaid royalties are capitalized once
technological feasibility is established. Technological feasibility is
evaluated on a product by product basis. For products where proven game
engine technology exists, this may occur early in the development cycle.
Software development costs are expensed if and when they are deemed
unrecoverable. Amounts related to software development which are not
capitalized are charged immediately to product development expense.
The following criteria is used to evaluate recoverability of software
development costs: historical performance of comparable products; the
commercial acceptance of prior products released on a given game engine;
orders for the product prior to its release; estimated performance of a
sequel product based on the performance of the product on which the
sequel is based; and actual development costs of a product as compared to
the Company's budgeted amount.
Commencing upon product release capitalized software development costs
are amortized to cost of sales royalties and software amortization on a
straight-line basis over the estimated product life (generally one year
or less), or on the ratio of current revenues to total projected
revenues, whichever amortization amount is greater. Prepaid royalties are
amortized to cost of sales - royalties and software amortization
commencing upon the product release at the contractual royalty rate based
on actual net product sales, or on the ratio of current revenues to total
projected revenues, whichever amortization amount is greater. For
products that have been released, management evaluates the future
recoverability of capitalized amounts on a quarterly basis.
F-7
As of March 31, 2000, prepaid royalties and unamortized capitalized
software costs totaled $29.2 million (including $9.2 million classified
as non-current) and $11.6 million, respectively. As of March 31, 1999,
prepaid royalties and unamortized capitalized software costs totaled
$36.2 million (including $11.5 million classified as non-current) and
$8.8 million, respectively. Amortization of prepaid royalties and
capitalized software costs was $78.7 million, $27.1 million and $29.2
million for the years ended March 31, 2000, 1999 and 1998, respectively.
Write-offs of prepaid royalties and capitalized software costs prior to
product release were $6.3 million, $2.4 million and $363,000 for the
years ended March 31, 2000, 1999 and 1998, respectively.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market.
REVENUE RECOGNITION
The American Institute of Certified Public Accountants (AICPA) Statement
of Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), provides
guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. SOP 97-2 is effective for
all transactions entered into subsequent to March 31, 1999. The Company
has adopted SOP 97-2 and such adoption did not have a material impact on
the Company's financial position, results of operations or liquidity.
Effective December 15, 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions" ("SOP 98-9"), which is effective for transactions
entered into after March 15, 1999. SOP 98-9 deals with the determination
of vendor specific objective evidence of fair value in multiple element
arrangements, such as maintenance agreements sold in conjunction with
software packages. The adoption of SOP 98-9 did not have a material
impact on the Company's financial position, results of operations or
liquidity.
Product Sales: The Company recognizes revenue from the sale of its
products upon shipment. Subject to certain limitations, the Company
permits customers to obtain exchanges or return products within certain
specified periods and provides price protection on certain unsold
merchandise. Management of the Company 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, 2000, 1999 and 1998
were approximately $18.6 million $15.6 million and $6.3 million,
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, 2000 and 1999, accumulated
amortization amounted to $50.8 million and $9.1 million, respectively.
The Company accounts for impairment of long-lived assets, including
goodwill, 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
intangibles, 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
undiscounted cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount exceeds the fair
value of the assets. 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.
F-8
INTEREST INCOME (EXPENSE)
Interest income (expense), net is comprised of the following, (amounts in
thousands):
March 31,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Interest expense $ (9,375) $ (4,974) $ (2,223)
Interest income 964 1,943 1,111
------------ ------------ ------------
Net interest income (expense) $ (8,411) $ (3,031) $ (1,112)
============ ============ ============
INCOME TAXES
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income
Taxes." Under SFAS No. 109, income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
FOREIGN CURRENCY TRANSLATION
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 translation 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 liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
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 reflects the potential dilution that could
occur if net income were divided by the weighted average number of common
and common stock equivalent shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common shares and common stock equivalents from
outstanding stock options and warrants and convertible debt. Common stock
equivalents are calculated using the treasury stock method and represent
incremental shares issuable upon exercise of the Company's outstanding
options and warrants. However, potential common shares are not included
in the denominator of the diluted earnings per share calculation 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.
F-9
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants
made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications had no effect on net income (loss), shareholders'
equity or cash flows.
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, the Company has restated the financial statements
for all periods prior to the closing of the transaction.
The following table represents the results of operations of the
previously separate companies for the period before the combination was
consummated which are included in fiscal year 2000 combined net income
(loss).
Fiscal Year 2000
----------------------------------------------------------
Activision Neversoft Total
Six Months Ended Six Months Ended Six Months Ended
Sept. 30, 1999 Sept. 30, 1999 Sept. 30, 1999
----------------- ---------------- ----------------
Revenues $ 199,505 $ - $ 199,505
Net income (loss) $ (3,028) $ (484) $ (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. Proforma
statements 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
shareholders 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.
F-10
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
Existing products 1,123
Goodwill 28,335
Liabilities (9,532)
------------
$ 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 will
phase-out the use of the Expert name. As a result of these initiatives,
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, the Company has 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 debt is evidenced by notes payable which are due on demand and bear
interest at approximately 8% per annum. The acquisition was accounted for
as a pooling of interests.
The following table represents the results of operations of the
previously separate companies for the periods before the combinations
were consummated that are included in the current combined net income of
the Company:
Fiscal Year 1999
--------------------------------------------------------------------------------------------------
Head Games CD Contact
Activision Three Months Six Months Neversoft Total
Year Ended Ended June 30, Ended Sept. 30, Year Ended Year Ended
March 31, 1999 1998 1998 March 31, 1998 March 31, 1999
-------------- -------------- -------------- -------------- --------------
Revenues $ 412,225 $ 2,195 $ 22,065 $ 41 $ 436,526
Net income
(loss) $ 14,194 $ 394 $ 666 $ (363) $ 14,891
F-11
FISCAL 1998 TRANSACTIONS
The acquisitions of NBG and Raven were originally accounted for 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, the Company has restated the financial
statements for all periods prior to the closing of each respective
transaction.
ACQUISITION OF NBG
On November 26, 1997, the Company acquired NBG in exchange for 281,206
shares of the Company's common stock. The acquisition was accounted for
as a pooling on interests.
The following table represents the results of operations of the
previously separate companies for the periods before the combinations
were consummated that are included in the current combined net income
of the Company:
Fiscal Year 1998
-----------------------------------------------------------------------------------------------------------
Activision
as Previously NBG Head Games CD Contact Total
Reported Six Months Year Year Neversoft Year
Year Ended Ended Ended Ended Year Ended Ended
March 31, 1998 Sept. 30, 1997 March 31, 1998 March 31, 1998 March 31, 1998 March 31, 1998
-------------- -------------- -------------- -------------- -------------- --------------
Revenues $ 259,926 $ 7,081 $ 3,715 $ 41,336 $ 848 $ 312,906
Net income
(loss) $ 5,827 $ (106) $ (70) $ (512) $ (169) $ 4,970
ACQUISITION OF RAVEN SOFTWARE CORPORATION
On August 26, 1997, the Company acquired Raven in exchange for 1,040,000
shares of the Company's common stock. The acquisition was accounted for
as a pooling on interests.
ACQUISITION OF CENTRESOFT
On November 26, 1997, the Company acquired CentreSoft Limited
("CentreSoft") in exchange for 2,787,043 shares and 50,325 options to
acquire shares of the Company's common stock. The acquisition of
CentreSoft was accounted for in accordance with the pooling of interests
method of accounting and, accordingly, the Company's consolidated
financial statements were retroactively restated to reflect the effect of
the Centresoft acquisition for all periods presented.
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:
Net revenues $11.7
Cost of sales - royalties and software
amortization 11.9
Product development 4.2
General and administrative 5.2
Amortization of intangible assets 37.2
----
$70.2
=====
The component of the charge included in amortization of intangible assets
represents a write down of intangibles including goodwill, relating to
Expert Software, Inc. ("Expert"), one of the Company's value publishing
F-12
subsidiaries, totaling $26.3 million. The Company is consolidating Expert
into Head Games, forming one integrated business unit. As part of this
consolidation, the Company is discontinuing substantially all of Expert's
product lines, terminating substantially all of Expert's employees and
phasing out the use of the Expert name. In addition, a $10.9 million
write down of goodwill relating to TDC, an OEM business unit, was
recorded. In the past year, the OEM market has gone 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
marketing organizations and improve the control and management of its
products. These actions have 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 includes a severance charge of $1.2 million
for employee redundancies. The plan is expected to be completed by the
fourth quarter of fiscal 2001.
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.
4. INVENTORIES
The Company's inventories consist of the following (amounts in
thousands):
March 31,
-----------------------------
2000 1999
------------ ------------
Purchased parts and components $ 2,857 $ 2,326
Finished goods 37,596 28,605
------------ ------------
$ 40,453 $ 30,931
============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method over the shorter
of the estimated useful lives or the lease term: buildings, 30 years;
computer equipment, office furniture and other equipment, 3 years;
leasehold improvements, through the life of the lease. When assets are
retired or disposed, 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,
------------------------------
2000 1999
------------ ------------
Land $ 526 $ 582
Buildings 2,468 759
Computer equipment 18,670 18,123
Office furniture and other equipment 5,800 3,523
Leasehold improvements 3,229 3,189
------------ ------------
Total cost of property and equipment 30,693 26,176
Less accumulated depreciation (19,878) (15,252)
------------ ------------
Property and equipment, net $ 10,815 $ 10,924
============ ============
F-13
Depreciation expense for the years ended March 31, 2000, 1999 and 1998
was $4.2 million, $4.9 million and $3.8 million, respectively.
6. ACCRUED EXPENSES
Accrued expenses were comprised of the following (amounts in thousands):
March 31,
-----------------------------
2000 1999
------------ ------------
Accrued royalties payable $ 13,300 $ 11,249
Affiliated label payable 4,033 11,999
Accrued selling and marketing costs 10,493 3,082
Income tax payable 4,934 5,068
Accrued interest expense 1,013 1,013
Accrued bonus and vacation pay 5,514 4,473
Other 10,117 8,276
------------ ------------
Total $ 49,404 $ 45,160
============ ============
7. OPERATIONS BY REPORTABLE SEGMENTS AND GEOGRAPHIC AREA
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," ("SFAS No. 131") as of April 1,
1998. SFAS No. 131 establishes standards for reporting information about
an enterprise's operating segments and related disclosures about its
products, geographic areas and major customers.
The Company publishes, develops and distributes interactive entertainment
and leisure products for a variety of game platforms, including PCs, the
Sony PlayStation console system, the Nintendo 64 console system and the
Sega Dreamcast console system. Based on its organizational structure, the
Company operates in two reportable segments: publishing and distribution.
The Company's publishing segment develops and publishes titles both
internally through the studios owned by the Company and externally
through third party developers. In the United States, the Company's
products are sold primarily on a direct basis to major computer and
software retailing organizations, mass market retailers, consumer
electronic stores, discount warehouses and mail order companies. The
Company conducts its international publishing activities through offices
in the United Kingdom, Germany, France, Australia and Japan. The
Company's products are sold internationally on a direct to retail basis
and through third party distribution and licensing arrangements and
through the Company's wholly-owned distribution subsidiaries 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 entertainment software
and hardware and provides logistical services for a variety of publishers
and manufacturers. A small percentage of distribution sales is derived
from Activision-published titles.
The President and Chief Operating Officer allocates resources to each of
these segments using information on their respective revenues and
operating profits before interest and taxes. The President and Chief
Operating Officer has been identified as the Chief Operating Decision
Maker as defined by SFAS No. 131.
The President and Chief Operating Officer does not evaluate individual
segments based on assets or depreciation.
The accounting policies of these segments are the same as those described
in the Summary of Significant Accounting Policies. Revenue derived from
sales between segments is eliminated in consolidation.
F-14
Information on the reportable segments for the three years ended March
31, 2000 is as follows:
Year ended March 31, 2000
----------------------------------------------
Publishing Distribution Total
------------- ------------- -------------
Total segment revenues $ 396,691 $ 175,514 $ 572,205
Revenue from sales between segments (40,255) 40,255 -
------------- ------------- -------------
Revenues from external customers $ 356,436 $ 215,769 $ 572,205
============= ============= =============
Operating income (loss) $ (35,049) $ 4,724 $ (30,325)
============= ============= =============
Year ended March 31, 1999
----------------------------------------------
Publishing Distribution Total
------------- ------------- -------------
Total segment revenues $ 205,542 $ 230,984 $ 436,526
Revenue from sales between segments (19,202) 19,202 -
------------- ------------- -------------
Revenues from external customers $ 186,340 $ 250,186 $ 436,526
============= ============= =============
Operating income (loss) $ 12,398 $ 14,269 $ 26,667
============= ============= =============
Year ended March 31, 1998
----------------------------------------------
Publishing Distribution Total
------------- ------------- -------------
Total segment revenues $ 133,674 $ 179,232 $ 312,906
Revenue from sales between segments (7,759) 7,759 -
------------- ------------- -------------
Revenues from external customers $ 125,915 $ 186,991 $ 312,906
============= ============= =============
Operating income (loss) $ 4,376 $ 4,842 $ 9,218
============= ============= =============
Geographic information for the three years ended March 31, 2000 is based
on the location of the selling entity. Revenues from external customers
by geographic region were as follows:
Year ended March 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
United States $ 279,165 $ 149,705 $ 90,784
Europe 277,524 278,032 208,817
Other 15,516 8,789 13,305
------------ ------------ ------------
Total $ 572,205 $ 436,526 $ 312,906
============ ============ ============
F-15
Revenues by platform were as follows:
Year ended March 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Console $ 410,892 $ 268,246 $ 132,738
PC 161,313 168,280 180,168
------------ ------------ ------------
Total $ 572,205 $ 436,526 $ 312,906
============ ============ ============
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,
-----------------------------------------------
2000 1999 1998
------------ ------------ ------------
NUMERATOR
Net income (loss) $ (34,088) $ 14,891 $ 4,970
Preferred stock dividends - - (116)
------------ ------------ ------------
Numerator for basic and diluted earnings
per share-income available to common $ (34,088) $ 14,891 $ 4,854
shareholders ============ ============ ============
DENOMINATOR
Denominator for basic earnings per share-
weighted average common shares
outstanding 24,691 22,861 22,038
Effect of dilutive securities:
Employee stock options - 942 801
Warrants to purchase common stock - 129 70
------------ ------------ ------------
Potential dilutive common shares - 1,071 871
------------ ------------ ------------
Denominator for diluted earnings per
share-weighted average common shares
outstanding plus assumed conversions 24,691 23,932 22,909
============ ============ ============
Basic earnings (loss) per share $ (1.38) $ 0.65 $ 0.22
============ ============ ============
Diluted earnings (loss) per share $ (1.38) $ 0.62 $ 0.21
============ ============ ============
Options to purchase 10,332,000, 2,188,000 and 1,978,000 shares of common
stock were outstanding for the years ended March 31, 2000, 1999 and 1998,
respectively, but were not included in the calculations of diluted
earnings (loss) per share because their effect would be antidilutive.
Convertible subordinated notes and convertible preferred stock were not
included in the calculations of diluted earnings per share because their
effect would be antidilutive.
F-16
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,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Income (loss) before income taxes:
Domestic $ (37,115) $ 5,945 $ (2,483)
Foreign (1,621) 17,691 10,589
------------ ------------ ------------
$ (38,736) $ 23,636 $ 8,106
============ ============ ============
Income tax expense (benefit):
Current:
Federal $ (383) $ 37 $ 1,133
State 337 124 14
Foreign 2,610 5,456 3,653
------------ ------------ ------------
Total current 2,564 5,617 4,800
------------ ------------ ------------
Deferred:
Federal (10,047) (418) (2,679)
State (1,448) 57 (232)
------------ ------------ ------------
Total deferred (11,495) (361) (2,911)
------------ ------------ ------------
Add back benefit credited to additional
paid-in capital:
Tax benefit related to stock option
exercises 3,017 1,059 1,247
Tax benefit related to utilization of pre-
bankruptcy net operating loss
carryforwards 1,266 2,430 -
------------ ------------ ------------
4,283 3,489 1,247
------------ ------------ ------------
$ (4,648) $ 8,745 $ 3,136
============ ============ ============
F-17
The items accounting for the difference between income taxes computed at
the U.S. federal statutory income tax rate and the income tax provision
for each of the years are as follows:
Year ended March 31,
--------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Federal income tax provision (benefit) at
statutory rate (34.0%) 34.0% 34.0%
State taxes, net of federal benefit (4.5%) 1.3% (1.2%)
Nondeductible amortization 18.6% 1.7% 4.4%
Nondeductible merger fees 0.4% 0.8% 3.6%
Research and development credits (8.6%) (5.4%) (5.3%)
Incremental effect of foreign tax rates 2.8% (0.9%) 0.7%
Increase (reduction) of valuation allowance 13.8% 5.1% -
Other (0.5%) 0.4% 2.5%
------------ ------------ ------------
(12.0%) 37.0% 38.7%
============ ============ ============
Deferred income taxes reflect the net tax effects of temporary
differences between the amounts of assets and liabilities for accounting
purposes and the amounts used for income tax purposes. The components of
the net deferred tax asset and liability are as follows (amounts in
thousands):
March 31,
------------------------------
2000 1999
------------ ------------
Deferred asset:
Allowance for bad debts $ 1,019 $ 942
Allowance for sales returns 5,151 144
Inventory reserve 799 172
Vacation & bonus reserve 763 404
Royalty reserve 774 1,649
Other 1,585 1,298
Tax credit carryforwards 12,062 6,726
Net operating loss carryforwards 12,828 10,534
Amortization & depreciation 7,055 56
------------ ------------
Deferred asset 42,036 21,925
Valuation allowance (13,041) (6,916)
------------ ------------
Net deferred asset 28,995 15,009
------------ ------------
Deferred liability:
Capitalized research expenses 7,864 5,512
State taxes 917 386
Deferred compensation - 110
------------ ------------
Deferred liability 8,781 6,008
------------ ------------
Net deferred asset $ 20,214 $ 9,001
============ ============
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 carryforwards arising prior to
the Company's reorganization are recorded as additional paid-in capital.
During the year ended March 31, 2000, $1.3 million was recorded as
additional paid-in capital.
F-18
As of March 31, 2000, the Company's available net operating loss
carryforward of $31.8 million and $8.0 million for federal and state
purposes, respectively, is subject to certain limitations as defined
under Section 382 of the Internal Revenue Code. The net operating loss
carryforwards expire from 2002 to 2019. The Company has tax credit
carryforwards of $8.1 million and $4.0 million for federal and state
purposes, respectively, which expire from 2004 to 2019.
At March 31, 2000, the Company's deferred income tax asset for tax credit
carryforwards and net operating loss carryforwards was reduced by a
valuation allowance of $13.0 million. Of such valuation allowance, $3.2
million relates to SOP 90-7 which, if realized, will 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 $15.7 million at March 31,
2000. 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,
------------------------------
2000 1999
------------ ------------
U.S. Facility $ 22,496 $ -
The Netherlands Facility 3,509 5,513
Mortgage notes payable and other 4,033 1,622
------------ ------------
30,038 7,135
Less current portion (16,260) (5,992)
------------ ------------
Long-term debt, less current portion $ 13,778 $ 1,143
============ ============
In June 1999, the Company obtained a $125.0 million revolving credit
facility and term loan (the "U.S. Facility") with a group of banks. 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 generally 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% (weighted average interest rate of approximately 9.50% for the
year ended March 31, 2000) and matures June 2002. 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 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 maintain specified financial ratios related
to net worth and fixed charges. As of March 31, 2000, the Company was in
compliance with these covenants. As of March 31, 2000, $20.0 million was
outstanding under the term loan portion of the
F-19
U.S. Facility and $2.5 million was outstanding under the revolving
portion of the U.S. Facility. No letters of credit were outstanding
against the revolving portion of the U.S. Facility at March 31, 2000.
On June 8, 2000, the Company amended certain of the covenants of its
U.S. Facility. The amended U.S. Facility permits the Company to purchase
up to $15.0 million in shares of its common stock as well as its
convertible subordinated notes in accordance with the Company's stock
repurchase program (described in Note 15), the distribution of "Rights"
under the Company's shareholders' rights plan (described in Note 15), as
well as the reorganization of the Company's organizational structure
into a holding company form.
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") 45 million ($19.4 million) and NLG 30
million ($13.0 million) at March 31, 2000 and 1999, respectively, based
upon eligible accounts receivable and inventory balances. The Netherlands
Facility is due on demand, bears interest at a Eurocurrency rate plus
1.25% (weighted average interest rate of 5.5% as of March 31, 2000) and
matures March 2001. Letters of credit outstanding under the Netherlands
Facility were NLG 3.8 million ($1.6 million) and NLG 17.9 million ($6.9
million) and borrowings outstanding under the Netherlands Facility were
$3.5 million and $5.5 million at March 31, 2000 and 1999, respectively.
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 ($11.2
million) of revolving loans and GBP 6.0 million ($9.6 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 2000. 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, 2000, the Company was
in compliance with these covenants. No borrowings were outstanding
against the UK facility at March 31, 2000 or 1999. Letters of credit
of GBP 6.0 million ($9.6 million) were outstanding against the UK
Facility at March 31, 2000 and 1999. As of March 31, 2000, the German
Facility provides for revolving loans up to Deutsche Marks ("DM") 4
million ($1.9 million), bears interest at 6.25%, is collateralized by
a cash deposit of approximately GBP 650,000 ($1.0 million) made by the
Company's CentreSoft subsidiary and has no expiration date. No
borrowings were outstanding against the German Facility as of March
31, 2000 and 1999.
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
collateralized by the related assets. The Netherlands mortgage note
payable is due in quarterly installments of NLG 25,000 ($11,725) and
matures January 2019. The German mortgage note payable is due in
bi-annual installments of DM 145,000 ($70,615) beginning June 2002 and
matures December 2019.
As of March 31, 1999, the Company had a $40.0 million revolving credit
and letter of credit facility (the "Prior Facility") with a group of
banks. The Prior Facility provided the Company with the ability to borrow
funds and issue letters of credit against eligible accounts receivable up
to $40.0 million. The Prior Facility was scheduled to expire in October
2001. As of March 31, 1999, the Company had $22.4 million in letters of
credit outstanding and no borrowings against the Prior Facility. The
Prior Facility was terminated in June 1999 in conjunction with the
acquisition of the U.S. Facility.
Annual maturities of long-term debt are as follows:
2001 $16,260
2002 10,190
2003 190
2004 190
2005 190
Thereafter 3,018
-------
Total $30,038
=======
F-20
PRIVATE PLACEMENT OF CONVERTIBLE SUBORDINATED NOTES
In December 1997, the Company completed the private placement of $60.0
million principal amount of 6 3/4% convertible subordinated notes due
2005 (the "Notes"). The Notes are convertible, in whole or in part, at
the option of the holder at any time after December 22, 1997 (the date of
original issuance) and prior to the close of business on the business day
immediately preceding the maturity date, unless previously redeemed or
repurchased, into common stock, $.000001 par value, of the Company, at a
conversion price of $18.875 per share, (equivalent to a conversion rate
of 52.9801 shares per $1,000 principal amount of Notes), subject to
adjustment in certain circumstances. The Notes are redeemable, in whole
or in part, at the option of the Company at any time on or after January
10, 2001, subject to premiums through December 31, 2003.
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 contractually
specified milestones. Assuming all contractually specified milestones are
achieved, for contracts in place as of March 31, 2000, the total future
minimum contract commitment is approximately $42.9 million, of which
$35.0 million, $6.6 million and $1.3 million is scheduled to be paid in
fiscal 2001, 2002 and 2003, respectively.
Additionally, under the terms of a production financing arrangement, the
Company has a commitment to purchase two future PlayStation 2 titles from
independent third party developers upon their completion for an estimated
$8.4 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
operating lease agreements. Total future minimum lease commitments as of
March 31, 2000 are as follows (amounts in thousands):
Year ending March 31,
2001 $ 3,950
2002 3,670
2003 3,608
2004 3,594
2005 3,378
Thereafter 8,789
------------
Total $ 26,989
============
Rent expense under these leases for the years ended March 31, 2000, 1999
and 1998 was approximately $4.4 million, $4.4 million and $3.3 million,
respectively.
LEGAL PROCEEDINGS
The Company is party to routine claims and suits brought against it in
the ordinary course of business, including disputes arising over the
ownership of intellectual property rights and collection matters. In the
opinion of management, the outcome of such routine claims will not have a
material adverse effect on the Company's business, financial condition,
results of operations or liquidity.
F-21
12. STOCKHOLDERS' EQUITY AND COMPENSATION PLANS
OPTION PLANS
The Company sponsors three stock option plans for the benefit of
officers, employees, consultants and others.
The Activision 1991 Stock Option and Stock Award Plan, as amended, (the
"1991 Plan") permits the granting of "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 7,566,667.
The 1991 Plan requires available shares to consist in whole or in part of
authorized and unissued shares or treasury shares. There were
approximately 449,000 shares remaining available for grant under the 1991
Plan as of March 31, 2000.
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, restricted stock awards, deferred stock awards and other common
stock-based awards to officers, employees, consultants and others. The
total number of shares of common stock available for distribution under
the 1998 Plan is 3,000,000. The 1998 Plan requires available shares to
consist in whole or in part of authorized and unissued shares or treasury
shares. There were approximately 250,000 shares remaining available for
grant under the 1998 Plan as of March 31, 2000.
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. The total number of shares of common stock available
for distribution under the 1999 Plan is 5,000,000. The 1999 Plan requires
available shares to consist in whole or in part of authorized and
unissued shares or treasury shares. As of March 31, 2000, there were
approximately 3,386,000 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 discretion of
the Board of Directors (or the Compensation Committee of the Board of
Directors), and for ISOs, is not to be less than the fair market value of
the Company's common stock at the date of grant, or in the case of
non-qualified options, must exceed or be equal to 85% of 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.
DIRECTOR WARRANT PLAN
The Director Warrant Plan, which expired on December 19, 1996, provided
for the automatic granting of warrants ("Director Warrants") to purchase
16,667 shares of 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
Warrants. As of March 31, 2000, 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, 2000 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, 2000, 33,300
of the outstanding and vested Director Warrants have a weighted average
remaining contractual life of 1.78 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 4.82 years and a
weighted average exercise price of $6.50; and 20,000 of the outstanding
and vested Director Warrants have a weighted average remaining
contractual life of 4.82 years and a weighted average exercise price of
$8.50.
F-22
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan for all eligible
employees (the "Purchase Plan"). Under the Purchase Plan, shares of the
Company's common stock may be purchased at six-month intervals at 85% of
the lower of the fair market value on the first or last day of each
six-month period (the "Offering Period"). Employees may purchase shares
having a value not exceeding 10% of their gross compensation during an
Offering Period. Employees purchased 39,002 and 42,093 shares at a price
of $10.68 and $9.24 per share during the Purchase Plan's offering period
ended September 30, 1999 and 1998, respectively, and 33,440 and 45,868
shares at a price of $10.25 and $8.92 per share during the Purchase
Plan's offering period ended March 31, 2000 and 1999, respectively.
OTHER EMPLOYEE OPTIONS
On March 23, 1999, 1,000,000 options to purchase common stock were issued
to each of Robert A. Kotick, the Company's Chairman and Chief Executive
Officer, and Brian G. Kelly, the Company's Co-Chairman. The options were
granted in connection with employment agreements between the Company and
each of Mr. Kotick and Mr. Kelly dated January 12, 1999. The options vest
in five equal annual installments beginning on the date of issuance, have
an exercise price of $10.50 per share, and expire on January 12, 2009. At
March 31, 2000, 2,000,000 and 800,000 shares were outstanding and
exercisable, respectively.
The Company also issues stock options in conjunction with acquisition
transactions. For the year ended March 31, 2000, approximately 174,000
and 148,000 options were outstanding and exercisable, respectively,
relating to options issued in conjunction with the acquisitions of Head
Games and Expert.
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 $6.59 to $6.91 to two of its outside directors in
connection with their election to the Board. Such warrants have vesting
terms identical to the Directors Warrants and expire within 10 years. As
of March 31, 2000, 40,000 and 29,000 shares with weighted average
exercise prices of $12.85 and $12.88 were outstanding and exercisable,
respectively.
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):
2000 1999 1998
----------------------- ----------------------- -----------------------
Wtd Avg Ex Wtd Avg Ex Wtd Avg Ex
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at beginning of year 9,949 $10.54 6,218 $11.47 5,228 $11.69
Granted 3,767 11.52 5,538 10.27 2,776 12.14
Exercised (2,331) 9.15 (605) 8.68 (599) 8.35
Forfeited (1,053) 11.91 (1,202) 15.33 (1,187) 14.45
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at end of year 10,332 $11.07 9,949 $10.54 6,218 $11.47
=========== =========== =========== =========== =========== ===========
Exercisable at end of year 4,715 $10.25 4,154 $10.00 2,532 $9.78
=========== =========== =========== =========== =========== ===========
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.
F-23
The following tables summarize information about all employee and
director stock options and warrants outstanding as of March 31, 2000:
Outstanding Options Exercisable Options
------------------------------------------------- --------------------------------
Remaining
Wtd Avg
Contractual
Life Wtd Avg Wtd Avg
Shares (in years) Exercise Price Shares Exercise Price
--------------- ---------------- ---------------- --------------- ----------------
Range of exercise prices:
$0.75 to $5.00 195 3.49 $3.31 195 $3.31
$5.01 to $10.00 2,552 7.25 9.08 1,930 8.92
$10.01 to $15.00 6,733 8.51 11.38 2,285 11.12
$15.01 to $20.00 849 8.04 16.27 302 16.45
$20.01 to $23.04 3 9.23 23.04 3 23.04
NON-EMPLOYEE WARRANTS
During the fiscal year ended March 31, 1999, the Company issued the
following warrants to purchase an aggregate of 1,000,000 shares of
common stock in connection with software license agreements:
Exercise Expiration
Warrants Shares Price Vesting Schedule Date
------------- ------------ ------------ ----------------------------------------------------------------------
#1 500,000 $ 10.27 Vest ratably over 5 years beginning on date of grant. 9/16/08
#2 250,000 (a) Vest ratably over 5 years beginning on 9/16/03. 9/16/08
#3 250,000 $ 12.70 Vest in full on 7/2/99. 7/2/08
------------ ------------
Total 1,000,000
============
(a) Exercise price will be equal to the average closing price of the
Company's common stock on the NASDAQ National Market for the 30
trading days preceding September 16, 2003.
In May 1999, the Company granted warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $11.63 per share to
Cabela's, Inc. ("Cabela's") in connection with, and as partial
consideration for, a license agreement that allows the Company to utilize
the Cabela's name in conjunction with certain Activision products. The
warrants have a seven year term and vest in annual increments of
approximately 14.25%.
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. In accordance with the Financial
Accounting Standards Board's Emerging Issues Task Force Issue No. 96-18
"Accounting for Equity Instruments that are Issued To Other Than
Employees for Acquiring or in Connection With Selling Goods or Services"
(EITF 96-18), the Company measures the fair value of the securities on
the measurement date. The measurement date is the earlier of the date on
which the other party's performance is completed or the date of a
performance commitment, as defined. The fair value of each warrant is
capitalized and amortized to royalty expense when the related product is
released and the related revenue is recognized. During fiscal year 2000
and 1999, $5.8 million and $0.4 million, respectively, was amortized and
included in royalty expense relating to warrants. No amortization was
recognized in 1998.
PRO FORMA INFORMATION
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock options.
Under APB No. 25, if the exercise price of the Company's employee
F-24
stock options equals the market price of the underlying stock on the date
of grant, no compensation expense is recognized in the Company's
financial statements.
Pro forma information regarding net income (loss) and 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 2000, 1999 and 1998 under the fair value method of
that statement. The fair value of options granted in the years ended
March 31, 2000, 1999 and 1998 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
-------------------------- --------------------------- -------------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
-------- -------- -------- -------- -------- -------- -------- -------- --------
Expected life (in years) 1 1.5 3.0 0.5 0.5 0.5 1 0.5 -
Risk free interest rate 6.15% 4.77% 5.62% 6.15% 4.77% 5.62% 6.15% 4.77% -
Volatility 67% 66% 63% 67% 66% 71% 67% 66% -
Dividend yield - - - - - - - - -
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in the opinion of management, the existing
models do not necessarily provide a reliable single measure of the fair
value of its options. 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 to employees and directors during the years ended
March 31, 1999 and 1998 was $11.12 and $13.47 per share, respectively.
The per share weighted average estimated fair value of Employee Stock
Purchase Plan shares granted during the years ended March 31, 2000, 1999
and 1998 were $3.35, $2.85 and $2.65, 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,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Pro forma net income (loss) $(45,355) $748 $(2,422)
Pro forma basic earnings per share (1.84) 0.01 (0.13)
Pro forma diluted earnings per share (1.84) 0.01 (0.13)
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
eligible employees. The retirement plan is qualified in accordance with
Section 401(k) of the Internal Revenue Code. Under the plan, employees
may defer up to 15% of their pre-tax salary, but not more than statutory
limits. The Company contributes 5% of each dollar contributed by a
participant. The Company's matching contributions to the plan were
$46,000, $40,000 and $25,000 during the years ended March 31, 2000, 1999
and 1998, respectively.
F-25
12. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities and supplemental cash flow
information is as follows (amounts in thousands):
Years ended March 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Non-cash investing and financing activities:
Stock and warrants to acquire common stock issued in
exchange for licensing rights $ 8,529 $ 3,368 $ 1,214
Tax benefit derived from net operating loss
carryforward utilization 1,266 2,430 -
Tax benefit attributable to stock option exercises 3,017 1,059 1,247
Subordinated loan stock debentures converted to
common stock in pooling transaction - - 3,216
Redeemable preferred stock converted to common
stock in pooling transaction - - 1,286
Convertible preferred stock converted to common stock
in pooling transaction - - 214
Stock issued to effect business combination 7,171 - 174
Assumption of debt to effect business combination - 9,100 -
Conversion of notes payable to common stock - 4,500 -
Supplemental cash flow information:
Cash paid for income taxes $ 6,333 $ 2,814 $ 2,174
============ ============ ============
Cash paid for interest $ 10,519 $ 5,513 $ 675
============ ============ ============
F-26
13. QUARTERLY FINANCIAL AND MARKET INFORMATION (UNAUDITED)
Quarter Ended
----------------------------------------------------
Year
(Amounts in thousands, except per share data) June 30 Sept 30 Dec 31 Mar 31 (1) Ended
---------- ---------- ----------- ------------ ------------
Fiscal 2000 (quarter ended June 30 restated):
Net revenues $ 84,142 $ 115,363 $ 268,862 $ 103,838 $ 572,205
Operating income (loss) (6,101) 3,525 38,241 (65,990) (30,325)
Net income (loss) (4,575) 1,063 22,301 (52,877) (34,088)
Basic earnings (loss) 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 14.56 17.75 17.50 17.69 17.75
Low 10.31 12.63 13.94 12.06 10.31
Fiscal 1999 (restated):
Net revenues $ 61,541 $ 66,182 $ 193,537 $ 115,266 $ 436,526
Operating income (loss) (5,524) (2,735) 25,873 9,053 26,667
Net income (loss) (3,671) (2,206) 15,736 5,032 14,891
Basic earnings (loss) per share (0.16) (0.10) 0.69 0.22 0.65
Diluted earnings (loss) per share (0.16) (0.10) 0.61 0.21 0.62
Common stock price per share
High 11.62 13.75 14.87 13.81 14.87
Low 9.37 9.37 8.75 9.75 8.75
(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."
14. ORGANIZATIONAL STRUCTURE
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
organization 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 formation of a holding
company structure without a vote of the stockholders of the constituent
corporations. In the merger, ATVI Merger Sub, Inc., a Delaware
corporation, organized for the purpose of implementing the holding
company organizational structure,(the "Merger Sub"), merged with and into
Activision with Activision as the surviving corporation (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 converted 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 under the symbol ATVI.
F-27
The conversion of shares of Activision's common stock in the merger
occurred without an exchange of certificates. Accordingly, certificates
formerly representing shares of outstanding common stock of Activision
are deemed to represent the same number of shares of common 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.
15. SUBSEQUENT EVENTS -- UNAUDITED
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 purchased
from time to time through the open market or in privately negotiated
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 shares, 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 June 19, 2000, the Company
has 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 exercise
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 tender or exchange offer
which would result in the bidder's beneficial ownership 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 business
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 of the common
stock of the Company, the Rights Plan "grandfathers" their current level
of ownership, so long as they do not purchase additional 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.
As discussed in Note 10, the Company obtained an amendment to its U.S.
Facility relating to the Rights Plan and the Company's stock repurchase
plan.
F-28
SCHEDULE II
ACTIVISION, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Balance at
Beginning of Balance at End
Description Period Additions(A) Deductions (B) of Period
- ---------------------------------------------- ----------------- ----------------- ----------------- -----------------
Year ended March 31, 2000
Allowance for sales returns,
price protection and doubtful
accounts 14,979 97,362 80,820 31,521
Deferred tax valuation allowance 6,916 6,125 - 13,041
Year ended March 31, 1999 (Restated)
Allowance for sales returns,
price protection and doubtful
accounts 15,582 53,773 54,376 14,979
Deferred tax valuation allowance 8,107 1,239 2,430 6,916
Year ended March 31, 1998 (Restated)
Allowance for sales returns,
price protection and doubtful
accounts 7,674 39,437 31,529 15,582
Deferred tax valuation allowance 8,107 - - 8,107
(A) Includes increases in allowance for sales returns, price protection and
doubtful accounts due to normal reserving terms and allowance accounts
acquired in conjunction with acquisitions.
(B) Includes actual write-offs of uncollectible accounts receivable or sales
returns and price protection, recoveries of previously written off
receivables and foreign currency translation adjustments.
F-29
EXHIBIT INDEX
ITEM 14(a). EXHIBITS.
Exhibit Sequential Page
Number Exhibit Number
------ ------- ------
2.1 Agreement and Plan of Merger dated as of June 9, 2000 among
Activision, Inc., Activision Holdings, Inc. and ATVI Merger
Sub, Inc. (incorporated by reference to Exhibit 2.4 of the
Company's Form 8-K filed June 16, 2000).
3.1 Amended and Restated Certificate of Incorporation of Activision
Holdings, dated June 1, 2000 (incorporated by reference to Exhibit
2.5 of the Company's Form 8-K, filed on June 16, 2000).
3.2 Amended and Restated Bylaws of Activision Holdings
(incorporated by reference to Exhibit 2.6 of the Company's Form
8-K, filed on June 16, 2000).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Activision Holdings dated as of June 9, 2000
(incorporated by reference to Exhibit 2.7 of the Company's Form
8-K, filed on June 16, 2000).
4.1 Rights Agreement dated as of April 18, 2000, between the
Company and Continental Stock Transfer & Trust Company, which
includes as exhibits the form of Right Certificates as Exhibit
A, the Summary of Rights to Purchase Series A Junior Preferred
Stock as Exhibit B and the form of Certificate of Designation
of Series A Junior Preferred Stock of the Company as Exhibit C,
(incorporated by reference to the Company's Registration
Statement on Form 8-A, Registration No. 001-15839, filed April
19, 2000).
10.1 Mediagenic 1991 Stock Option and Stock Award Plan, as amended
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-8, Registration No. 33-63638,
filed on December 8, 1995).
10.2 Mediagenic 1991 Director Warrant Plan, as amended (incorporated
by reference to Exhibit 28.2 to the Company's Registration
Statement on Form S-8, Registration No. 33-63638, filed on June
1, 1993).
10.3 Activision, Inc. Employee Stock Purchase Plan, as amended,
(incorporated by reference to Exhibit 4.1 of the Company's Form
S-8, Registration No. 333-36272 filed on May 4, 2000).
10.4 Activision, Inc. 1998 Incentive Plan (incorporated by reference
to Appendix I of the Company's 1998 Proxy Statement).
10.5 Activision, Inc. 1999 Incentive Plan
10.6 Lease Agreement dated as of December 20, 1996, between the
Company and Barclay Curci Investment Company (incorporated by
reference to Exhibit 10.14 of the Company's Form 10-Q for the
quarter ended December 31, 1996).
F-30
10.7 Share Exchange Agreement dated November 23, 1997, among the
Company and the holders of all of the issued and outstanding
capital stock of Combined Distribution (Holdings) Limited
(incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed December 5, 1997).
10.8 Purchase Agreement dated as of December 16, 1997, among the
Company and Credit Suisse First Boston Corporation, Piper
Jaffray, Inc. and UBS Securities LLC (the "Initial Purchasers")
(incorporated by reference to Exhibit 10.1 of the Company's
Form 8-K filed December 23, 1997).
10.9 Registration Rights Agreement dated as of December 16, 1997,
among the Company and the Initial Purchasers (incorporated by
reference to Exhibit 10.2 of the Company's Form 8-K filed
December 23, 1997).
10.10 Indenture dated as of December 22, 1997, between the Company
and State Street Bank and Trust Company of California, N.A., as
Trustee (incorporated by reference to Exhibit 10.3 of the
Company's Form 8-K filed December 23, 1997).
10.11 Employment agreement dated January 12, 1999 between the Company
and Robert A. Kotick (incorporated by reference to Exhibit
10.10 of the Company's Form 10-K for the year ending March 31,
1999).
10.12 Employment agreement dated October 19, 1998 between the Company
and Ronald Doornink (incorporated by reference to Exhibit 10.12
of the Company's Form 10-K for the year ending March 31, 1999).
10.13 Employment agreement dated March 4, 1999 between the Company
and Lawrence Goldberg (incorporated by reference to Exhibit
10.13 of the Company's Form 10-K for the year ending March 31,
1999).
10.14 Employment agreement dated April 1, 1998 between the Company
and Mitchell Lasky (incorporated by reference to Exhibit 10.15
of the Company's Form 10-K for the year ending March 31, 1999).
10.15 Employment agreement dated April 1, 1998 between the Company
and Ronald Scott (incorporated by reference to Exhibit 10.16 of
the Company's Form 10-K for the year ending March 31, 1999).
10.16 Service Agreement dated November 24, 1997 between Combined
Distribution (Holdings) Limited and Richard Andrew Steele
(incorporated by reference to Exhibit 10.17 of the Company's
Form 10-K for the year ending March 31, 1999).
10.17 Employment agreement dated January 12, 1999 between the Company
and Brian G. Kelly (incorporated by reference to Exhibit 10.11
of the Company's Form 10-K for the year ending March 31, 1999).
10.18 Articles of Merger dated June 30, 1998 between S.B.F.
Acquisition Corp., a wholly owned subsidiary of the Company,
and S.B.F.
F-31
Services, Limited dba Head Games Publishing (incorporated by
reference to Exhibit 2.1 of the Company's Form 8-K, filed
on July 2, 1998).
10.19 Share Exchange Agreement dated September 29, 1998 by and
between the Company and Mr. Frank d'Oleire, Mrs. Christa
d'Oleire, Ms. Fiona d'Oleire, Ms. Alexa d'Oleire acting as Dr.
d'Oleire Beteiligungsgesellschaft bR, Mr. Martinus J.C. Bubbert,
and Mr. Dennis W. Buis (incorporated by reference to Exhibit
10.1 of the Company's Form 8-K, filed on October 8, 1998).
10.20 Amended and Restated Agreement and Plan of Merger dated April
19, 1999 by and among the Company, Expert Acquisition Corp. and
Expert Software, Inc. (incorporated by reference to Exhibit 2.1
of the Form 8-K of Expert Software, Inc., filed April 29, 1999).
10.21 Credit Agreement dated as of June 21, 1999 among the Company,
Head Games Publishing, Inc., Expert Software, Inc., various
financial institutions, PNC Bank, National Association, as issuing
bank, administrative agent and collateral agent for such financial
institutions, and Credit Suisse First Boston, as syndication agent
(incorporated by reference to Exhibit 10.22 of the Company's Form
10-K for the year ending March 31, 1999).
10.22 Share Exchange Agreement dated as of June 29, 1999, among the
Company, Jill G. Mark and Robert N. Herrick (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-3, Registration No. 333-85385, filed August
17, 1999).
10.23 Agreement and Plan of Reorganization dated as of September 30,
1999, among the Company, Neversoft Entertainment, Inc., JCM
Productions, Inc., Joel Jewett, Michael West and Christopher
Ward (incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form S-3, Registration No. 333-94509,
filed January 12, 2000).
10.24 Employment agreement dated July 12, 1999, between the Company
and Mr. Michael Rowe (incorporated by reference to Exhibit 6.1
of the Company's Form 10-Q for the quarter ending June 30,
1999).
10.25 Employment agreement dated July 12, 1999, between the Company
and Ms. Kathy Vrabek (incorporated by reference to Exhibit 6.2
of the Company's Form 10-Q for the quarter ending June 30,
1999).
10.26 Amendment to Employment Agreement between Mr. Ronald Doornink
and the Company, dated April 30 1999 (incorporated by reference
to Exhibit 6.1 of the Company's Form 10-Q for the quarter
ending December 31, 1999).
10.27 Employment agreement dated April 7, 2000, between the Company
and Mr. Michael Pole.
10.28 First Amendment effective as of June 8, 2000 to the Credit
Agreement dated June 21, 1999 among the Company, Head Games
Publishing, Inc., Expert Software, Inc., various financial
institutions, PNC Bank, National Association as issuing bank,
administrative agent and collateral agent for such lenders and
Credit Suisse First Boston, as syndication agent.
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21.1 Principal subsidiaries of the Company.
23.1 Independent Auditors' Consent.
27.1 Fiscal 1998 Year to Date Financial Data Schedule.
27.2 Fiscal 1999 Year to Date Financial Data Schedule.
27.3 Fiscal 2000 Year to Date Financial Data Schedule.
(b) Reports on Form 8-K. There have been no reports on Form
8-K that have been filed by the Company during the last
quarter of the fiscal year ending March 31, 2000. The
following reports on Form 8-K have been filed by the
Company during the first quarter of the fiscal year ending
March 31, 2001:
1.1 The Company filed a Form 8-K on April 19, 2000,
reporting under "Item 5. Other Events" the
announcement of the Company's stockholders' rights
plan.
1.2 The Company filed a Form 8-K on June 16, 2000
reporting under "Item 5. Other Events" the
announcement of the organizational restructuring of the
Company into a holding company format organizational
structure.
F-33