As filed with the Securities and Exchange Commission on May 31, 2002.
Registration No. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_________________________
ACTIVISION, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4803544
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3100 Ocean Park Boulevard
Santa Monica, California 90405
(310) 255-2000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
_________________________
Ronald Doornink
President
Activision, Inc.
3100 Ocean Park Boulevard
Santa Monica, California 90405
(310) 255-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_________________________
Copies To:
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, New York 10104
Attention: Kenneth L. Henderson, Esq.
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
===================================== ================= ======================
Proposed Maximum
Title of Class of Amount Offering Price
Securities to be Registered to be Registered Per Share(1)
------------------------------------- ----------------- ----------------------
Common Stock, $.000001 par value(2) 492,636 shares $32.00
===================================== ================= ======================
======================= =======================
Proposed
Maximum Aggregate Amount of
Offering Price(2)(3) Registration Fee
----------------------- -----------------------
$15,764,352 $1,450(3)
======================= =======================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to the provisions of Rule 457(c) under the Securities Act of 1933, as
amended, based on the average of the reported last high and low sales
prices on the Nasdaq National Market on May 29, 2002.
(2) Each share of common stock includes a right to purchase one one-hundredth
of a share of Series A Junior Preferred Stock pursuant to rights agreement
between the registrant and Continental Stock Transfer & Trust Company, as
rights agent.
(3) Pursuant to Rule 457(p) of the Securities Act of 1933, as amended, the
registration fee of $1,450 is offset against the $57,141 registration fee
(of which $16,415 remains) that was previously paid to the Commission
relating to 6,900,000 shares of Common Stock previously registered by the
registrant pursuant to its Registration Statement on Form S-3 filed with
the Commission on July 30, 2001 (File No. 333-66280), which Registration
Statement was withdrawn on October 22, 2001, prior to the issuance of any
such shares.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 31, 2002
492,636 Shares
ACTIVISION, INC.
Common Stock
____________________
The stockholders of Activision, Inc. listed in this prospectus under the
section entitled "Selling Stockholders" are offering and selling up to 492,636
shares of our common stock under this prospectus. The shares of common stock
being offered hereby (i) were issued by us to the principal shareholders of
Z-Axis, Ltd., a Nevada based console software development company, in connection
with our acquisition of Z-Axis on May 20, 2002 and (ii) will be issued by us to
id Software, Inc. upon exercise of a warrant to purchase 150,000 shares of our
common stock granted by us to id on April 1, 2002 pursuant to a software license
agreement.
We will not receive any of the proceeds from the sale of shares being
offered by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"ATVI." On May 30, 2002, the closing sale price of our common stock as reported
by Nasdaq was $33.20 per share.
Our principal executive offices are located at 3100 Ocean Park Boulevard,
Santa Monica, California 90405, and our telephone number is (310) 255-2000.
No underwriting is being used in connection with this offering of common
stock. The shares of common stock are being offered without underwriting
discounts. The expenses of this registration will be paid by us. Normal
brokerage commissions, discounts and fees will be payable by the selling
stockholders.
Investing in our common stock involves risks that are described in the
"Risk Factors" section beginning on page 2 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The information in this prospectus is not complete and may be changed.
These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this Prospectus is __________, 2002.
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS....................................................1
RISK FACTORS..................................................................2
ACTIVISION, INC..............................................................10
RECENT DEVELOPMENTS..........................................................13
USE OF PROCEEDS..............................................................14
SELLING STOCKHOLDERS.........................................................15
DESCRIPTION OF CAPITAL STOCK.................................................16
PLAN OF DISTRIBUTION.........................................................16
LEGAL MATTERS................................................................17
EXPERTS......................................................................17
WHERE YOU CAN FIND MORE INFORMATION..........................................17
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................17
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
____________________
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. These securities are not
being offered for sale in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus
is accurate only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
Information contained in our web site does not constitute part of this
document.
____________________
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FORWARD-LOOKING STATEMENTS
We make statements in this prospectus and the documents incorporated by
reference that are considered forward-looking statements under the federal
securities laws. Such forward-looking statements are based on the beliefs of our
management as well as assumptions made by and information currently available to
them. The words "anticipate," "believe," "may," "estimate," "expect," and
similar expressions, and variations of such terms or the negative of such terms,
are intended to identify such forward-looking statements.
All forward-looking statements are subject to certain risks, uncertainties
and assumptions. If one or more of these risks or uncertainties materialize, or
if underlying assumptions prove incorrect, our actual results, performance or
achievements could differ materially from those expressed in, or implied by, any
such forward-looking statements. Important factors that could cause or
contribute to such difference include those discussed under "Risk Factors" in
this prospectus and under "Business--Factors Affecting Future Performance" in
our Annual Report on Form 10-K for the fiscal year ended March 31, 2001. You
should not place undue reliance on such forward-looking statements, which speak
only as of their dates. We do not undertake any obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. You should carefully consider the information set forth
under the heading "Risk Factors."
RISK FACTORS
You should carefully consider the risks described below before investing in
our common stock. The occurrence of any of the following risks could harm our
business and our prospects. In that event, our business may be negatively
affected, the price of our stock may decline and you may lose part or all of
your investment.
We depend on a relatively small number of brands for a significant portion of
our revenues and profits.
A significant portion of our revenues are derived from products based on a
relatively small number of popular brands each year. In addition, many of these
products have substantial production or acquisition costs and marketing budgets.
In fiscal 2001, 49% of our worldwide net publishing revenues (37% of
consolidated net revenues) was derived from two brands, one of which accounted
for 39% and the other of which accounted for 10% of worldwide net publishing
revenues (29% and 8%, respectively, of consolidated net revenues). In fiscal
2000, two brands accounted for 34% of our worldwide net publishing revenues (24%
of consolidated net revenues), one of which accounted for 19%, and the other of
which accounted for 15% of worldwide net publishing revenues (13% and 11%,
respectively, of consolidated net revenues). We expect that a limited number of
popular brands will continue to produce a disproportionately large amount of our
revenues. Due to this dependence on a limited number of brands, the failure of
one or more products based on these brands to achieve anticipated results may
significantly harm our business and financial results.
Our future success depends on our ability to release popular products.
The life of any one game product is relatively short, in many cases less
than one year. It is therefore important for us to be able to continue to
develop many high quality new products that are popularly received. If we are
unable to do this, our business and financial results may be significantly
harmed.
We focus our development and publishing activities principally on products
that are, or have the potential to become, franchise brand properties. Many of
these products are based on intellectual property and other character or story
rights acquired or licensed from third parties. The license and distribution
agreements are limited in scope and time, and we may not be able to renew key
licenses when they expire or to include new products in existing licenses. The
loss of a significant number of our intellectual property licenses or of our
relationships with licensors could have a material adverse effect on our ability
to develop new products and therefore on our business and financial results.
The current transition in console platforms has a material impact on the market
for interactive entertainment software.
When new console platforms are announced or introduced into the market,
consumers typically reduce their purchases of game console entertainment
software products for current console platforms in anticipation of new platforms
becoming available. During these periods, sales of our game console
entertainment software products can be expected to slow down or even decline
until new platforms have been introduced and have achieved wide consumer
acceptance. We are currently experiencing such a transition period. Each of the
three current principal hardware producers recently launched a new platform.
Sony made the first shipments of its PlayStation 2 console system in North
America and Europe in the fourth quarter of calendar year 2000. During that
quarter, Sony's manufacturing shortages resulted in significant shipment delays
of PlayStation 2 units in North America and Europe. Microsoft made the first
shipments of its Xbox console system in North America in November 2001 and
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in Europe and Japan in the first quarter of calendar year 2002. Nintendo made
the first shipments of its Nintendo GameCube console system in North America in
November and in Europe in May 2002. Additionally, in June 2001, Nintendo
launched its Game Boy Advance hand held device. Shortages of these platforms or
lack of consumer acceptance could adversely affect our sales of products for
these platforms. Current sales of some of our products for the existing
PlayStation and Nintendo 64 platforms have been negatively affected by the new
platform transition.
We must make significant expenditures to develop products for new platforms
which may not be successful or released when anticipated.
The interactive entertainment software industry is subject to rapid
technological change. New technologies could render our current products or
products in development obsolete or unmarketable. We must continually anticipate
and assess the emergence and market acceptance of new interactive entertainment
software platforms well in advance of the time the platform is introduced to
consumers. New platforms have historically required the development of new
software and also have the effect of undermining demand for products based on
older technologies. Because product development cycles are difficult to predict,
we must make substantial product development and other investments in a
particular platform well in advance of introduction of the platform. If the
platforms for which we develop new software products or modify existing products
are not released on a timely basis or do not attain significant market
penetration, or if we develop products for a delayed or unsuccessful platform,
we may not be able to recover in revenues our development costs which could be
significant and our business and financial results could be significantly
harmed. An announcement by Sega Corporation that it has discontinued its
Dreamcast platform shows that even experienced hardware manufacturers are not
immune to failure.
We are exposed to seasonality in the purchases of our products.
The interactive entertainment software industry is highly seasonal, with
the highest levels of consumer demand occurring during the year-end holiday
buying season. As a result, our net revenues, gross profits and operating income
have historically been highest during the second half of the year. Additionally,
in a platform transition period such as the one taking place now, sales of game
console software products can be significantly affected by the timeliness of
introduction of game console platforms by the manufacturers of those platforms,
such as Sony, Microsoft and Nintendo. The timing of hardware platform
introduction is also often tied to holidays and is not within our control.
Further, delays in development, licensor approvals or manufacturing can also
affect the timing of the release of our products, causing us to miss key selling
periods such as the year-end holiday buying season.
We depend on skilled personnel.
Our success depends to a significant extent on our ability to identify,
hire and retain skilled personnel. The software industry is characterized by a
high level of employee mobility and aggressive recruiting among competitors for
personnel with technical, marketing, sales, product development and management
skills. We may not be able to attract and retain skilled personnel or may incur
significant costs in order to do so. If we are unable to attract additional
qualified employees or retain the services of key personnel, our business and
financial results could be negatively impacted.
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We depend on Sony and Nintendo for the manufacture of products that we develop
for their hardware platforms.
Generally, when we develop interactive entertainment software products for
hardware platforms offered by Sony or Nintendo, the products are manufactured
exclusively by that hardware manufacturer. Our hardware platform licenses with
Sony and Nintendo provide that the manufacturer may change prices for the
manufacturing of products. In addition, these agreements include other
provisions such as approval rights of all products and related promotional
materials that give the manufacturer substantial control over our costs and the
release of new titles. Since each of the manufacturers is also a publisher of
games for its own hardware platforms and manufactures products for all of its
other licensees, a manufacturer may give priority to its own products or those
of our competitors in the event of insufficient manufacturing capacity. Our
business and financial results could be materially harmed by unanticipated
delays in the manufacturing and delivery of our products by Sony or Nintendo. In
addition, our business and financial results could be materially harmed if Sony
or Nintendo used their rights under these agreements to delay the manufacture or
delivery of our products, limit the costs recoverable by us to manufacture
software for their consoles, or elect to manufacture software themselves or use
developers other than us.
If our products contain defects, our business could be harmed significantly.
Software products as complex as the ones we publish may contain undetected
errors when first introduced or when new versions are released. We cannot assure
you that, despite extensive testing prior to release, errors will not be found
in new products or releases after shipment, resulting in loss of or delay in
market acceptance. This loss or delay could significantly harm our business and
financial results.
Inadequate intellectual property protections could prevent us from enforcing or
defending our proprietary technology.
We regard our software as proprietary and rely on a combination of
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights. We
own or license various copyrights and trademarks. While we provide "shrinkwrap"
license agreements or limitations on use with our software, it is uncertain to
what extent these agreements and limitations are enforceable. We are aware that
some unauthorized copying occurs within the computer software industry, and if a
significantly greater amount of unauthorized copying of our interactive
entertainment software products were to occur, it could cause material harm to
our business and financial results.
Policing unauthorized use of our products is difficult, and software piracy
can be a persistent problem, especially in some international markets. Further,
the laws of some countries where our products are or may be distributed either
do not protect our products and intellectual property rights to the same extent
as the laws of the United States, or are poorly enforced. Legal protection of
our rights may be ineffective in such countries, and as we leverage our software
products using emerging technologies such as the Internet and online services,
our ability to protect our intellectual property rights and to avoid infringing
intellectual property rights of others may diminish. We cannot assure you that
existing intellectual property laws will provide adequate protection for our
products in connection with these emerging technologies.
We may be subject to intellectual property claims.
As the number of interactive entertainment software products increases and
the features and content of these products continue to overlap, software
developers increasingly may become subject to infringement claims. Many of our
products are highly realistic and feature materials that are based on real
-4-
world examples, which may inadvertently infringe upon the intellectual property
rights of others. Although we believe that we make reasonable efforts to ensure
that our products do not violate the intellectual property rights of others, it
is possible that third parties still may claim infringement. From time to time,
we receive communications from third parties regarding such claims. Existing or
future infringement claims against us, whether valid or not, may be time
consuming and expensive to defend.
Intellectual property litigation or claims could force us to do one or more
of the following:
o Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
o Obtain a license from the holder of the infringed intellectual
property, which if available at all, may not be available on
commercially favorable terms; or
o Redesign our interactive entertainment software products, which could
cause us to incur additional costs, delay introduction and possibly
reduce commercial appeal of our products.
Any of these actions may cause material harm to our business and financial
results.
We rely on independent third parties to develop many of our software products.
We often rely on independent third party interactive entertainment software
developers to develop many of our software products. Since we depend on these
developers in the aggregate, we remain subject to the following risks:
o Continuing strong demand for developers' resources, combined with
recognition they receive in connection with their work, may cause
developers who worked for us in the past to either work for our
competitors in the future or to renegotiate our agreements with them
on terms less favorable to us.
o Limited financial resources and business expertise and inability to
retain skilled personnel may force developers out of business prior to
completing our products or require us to fund additional costs.
Increased competition for skilled third party software developers also has
compelled us to agree to make significant advance payments on royalties to game
developers. If the products subject to these arrangements do not generate
sufficient revenues to recover these royalty advances, we would have to
write-off unrecovered portions of these payments, which could cause material
harm to our business and financial results. In a few cases, we also agree to pay
developers fixed per unit product royalties after royalty advances are fully
recouped. To the extent that sales prices of products on which we have agreed to
pay a fixed per unit royalty are marked down, our profitability could be
adversely affected.
We operate in a highly competitive industry.
The interactive entertainment software industry is intensely competitive
and new interactive entertainment software products and platforms are regularly
introduced. Our competitors vary in size from small companies to very large
corporations with significantly greater financial, marketing and product
development resources than we have. Due to these greater resources, certain of
our competitors can undertake more extensive marketing campaigns, adopt more
aggressive pricing policies, pay higher fees to licensors of desirable motion
picture, television, sports and character properties and pay more to third party
software developers than we can. We believe that the main competitive factors in
the
-5-
interactive entertainment software industry include: product features; brand
name recognition; compatibility of products with popular platforms; access to
distribution channels; quality of products; ease of use; price; marketing
support; and quality of customer service.
We compete primarily with other publishers of personal computer and video
game console interactive entertainment software. Significant third party
software competitors currently include, among others: Acclaim Entertainment,
Inc.; Capcom Co. Ltd.; Eidos PLC; Electronic ArtsInc.; Infogrames SA; Konami
Company Ltd.; Namco Ltd.; Sega Enterprises, Ltd.; Take-Two Interactive Software,
Inc.; THQ Inc. and Vivendi Universal Publishing. In addition, integrated video
game console hardware and software companies such as Sony Computer
Entertainment, Nintendo Co. Ltd., and Microsoft Corporation compete directly
with us in the development of software titles for their respective platforms.
We also compete with other forms of entertainment and leisure activities.
For example, we believe that the overall growth in the use of the Internet and
online services by consumers may pose a competitive threat if customers and
potential customers spend less of their available time using interactive
entertainment software and more using the Internet and online services.
We may face difficulty obtaining access to retail shelf space necessary to
market and sell our products effectively.
Retailers of our products typically have a limited amount of shelf space
and promotional resources, and there is intense competition among consumer
interactive entertainment software products for high quality retail shelf space
and promotional support from retailers. To the extent that the number of
products and platforms increases, competition for shelf space may intensify and
may require us to increase the consideration we pay to vendors. Retailers with
limited shelf space typically devote the most and highest quality shelf space to
the best selling products. We cannot assure you that our new products will
consistently achieve such "best seller" status. Due to increased competition for
limited shelf space, retailers and distributors are in an increasingly better
position to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return policies. Our products
constitute a relatively small percentage of any retailer's sale volume, and we
cannot assure you that retailers will continue to purchase our products or to
provide our products with adequate levels of shelf space and promotional support
on acceptable terms. A prolonged failure in this regard may significantly harm
our business and financial results.
Our sales may decline substantially without warning and in a brief period of
time because we generally do not have long-term contracts for the sale of our
products.
We currently sell our products directly through our own sales force to mass
merchants, warehouse club stores, large computer and software specialty chains
and through catalogs, as well as to a limited number of distributors, in the
United States and Canada. Outside North America, we sell our products directly
to retailers as well as third party distributors in certain territories. Our
sales are made primarily on a purchase order basis without long-term agreements
or other forms of commitments. The loss of, or significant reduction in sales
to, any of our principal retail customers or distributors could significantly
harm our business and financial results. Our two largest customers, Wal-Mart
Stores, Inc. and Toys "R" Us, Inc., accounted for approximately 13% and 12%,
respectively, of our worldwide net publishing revenues for fiscal 2001 (10% and
9%, respectively, of our consolidated net revenues). Our five largest retailers,
including Wal-Mart and Toys "R" Us, accounted for approximately 45% of our
worldwide net publishing revenues for fiscal 2001 (34% of our consolidated net
revenues). Our two largest customers, Wal-Mart and Toys "R" Us, accounted for
approximately 13% and 9%, respectively, of our worldwide net publishing revenues
for fiscal 2000 (9% and 6%, respectively, of our consolidated net
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revenues). Our five largest retailers, including Wal-Mart and Toys "R" Us,
accounted for approximately 37% of our worldwide net publishing revenues for
fiscal 2000 (26% of our consolidated net revenues).
We may permit our customers to return our products and to receive pricing
concessions which could reduce our net revenues and results of operations.
We are exposed to the risk of product returns and price protection with
respect to our distributors and retailers. We may permit product returns from or
grant price protection to our customers under certain conditions. Return
policies allow distributors and retailers to return defective, shelf-worn and
damaged products in accordance with terms granted. Price protection policies,
when granted and applicable, allow customers a credit against amounts they owe
us with respect to merchandise unsold by them. We provide price protection to a
number of our customers to manage our customers' inventory levels in the
distribution channel. We also offer a 90-day limited warranty to our end users
that our products will be free from manufacturing defects. Although we maintain
a reserve for returns and price protection, and although we may place limits on
product returns and price protection, we could be forced to accept substantial
product returns and provide price protection to maintain our relationships with
retailers and our access to distribution channels. Product returns and price
protection that exceed our reserves could significantly harm our business and
financial results.
We may be burdened with payment defaults and uncollectible accounts if our
distributors or retailers cannot honor their credit arrangements with us.
Distributors and retailers in the interactive entertainment software
industry have from time to time experienced significant fluctuations in their
businesses, and a number of them have failed. The insolvency or business failure
of any significant retailer or distributor of our products could materially harm
our business and financial results. We typically make sales to most of our
retailers and some distributors on unsecured credit, with terms that vary
depending upon the customer and the nature of the product. Although we have
insolvency risk insurance to protect against our customers' bankruptcy,
insolvency or liquidation, this insurance contains a significant deductible and
a co-payment obligation, and the policy does not cover all instances of
non-payment. In addition, while we maintain a reserve for uncollectible
receivables, the reserve may not be sufficient in every circumstance. As a
result, a payment default by a significant customer could significantly harm our
business and financial results.
We may not be able to maintain our distribution relationships with key vendors.
Our CD Contact, NBG and CentreSoft subsidiaries distribute interactive
entertainment software products and provide related services in the Benelux
territories, Germany and the United Kingdom, respectively, and, via export, in
other European territories for a variety of entertainment software publishers,
many of which are our competitors. These services are generally performed under
limited term contracts. While we expect to use reasonable efforts to retain
these vendors, we may not be successful in this regard. The cancellation or
non-renewal of one or more of these contracts could significantly harm our
business and financial results. Sony and Eidos products accounted for
approximately 26% and 13%, respectively, of our worldwide net distribution
revenues for fiscal 2001.
Our international revenues may be subject to regulatory requirements as well as
currency fluctuations.
Our international revenues have accounted for a significant portion of our
total revenues. International sales and licensing accounted for 66%, 51% and 43%
of our total net revenues in fiscal 1999, 2000 and 2001, respectively. We expect
that international revenues will continue to account for a significant portion
of our total revenues in the future. International sales may be subject to
unexpected
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regulatory requirements, tariffs and other barriers. Additionally,
foreign sales which are made in local currencies may fluctuate. Presently, we
engage in limited 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 negative impact on revenues from
international sales and licensing and thus our business and financial results.
Our software may be subject to governmental restrictions or rating systems.
Legislation is periodically introduced at the local, state and federal
levels in the United States and in foreign countries to establish a system for
providing consumers with information about graphic violence and sexually
explicit material contained in interactive entertainment software products. In
addition, many foreign countries have laws that permit governmental entities to
censor the content and advertising of interactive entertainment software. We
believe that mandatory government-run rating systems eventually may be adopted
in many countries that are significant markets or potential markets for our
products. We may be required to modify our products or alter our marketing
strategies to comply with new regulations, which could delay the release of our
products in those countries.
Due to the uncertainties regarding such rating systems, confusion in the
marketplace may occur, and we are unable to predict what effect, if any, such
rating systems would have on our business. In addition to such regulations,
certain retailers have in the past declined to stock some of our products
because they believed that the content of the packaging artwork or the products
would be offensive to the retailer's customer base. While to date these actions
have not caused material harm to our business, we cannot assure you that similar
actions by our distributors or retailers in the future would not cause material
harm to our business.
Our software may be subject to legal claims.
Within the past two years, two lawsuits, Linda Sanders, et al. v. Meow
Media, Inc., et al., United States District Court for the District of Colorado,
and Joe James, et al. v. Meow Media, Inc., et al., United States District Court
for the Western District of Kentucky, Paducah Division, have been filed against
numerous video game companies, including us, by the families of victims who were
shot and killed by teenage gunmen. These lawsuits allege that the video game
companies manufactured and/or supplied these teenagers with violent video games,
teaching them how to use a gun and causing them to act out in a violent manner.
While our general liability insurance carrier has agreed to defend us in these
lawsuits, it is uncertain whether or not the insurance carrier would cover all
or any amounts which we might be liable for if the lawsuits are not decided in
our favor. If either of the lawsuits are decided against us and our insurance
carrier does not cover the amounts we are liable for, it could have a material
adverse effect on our business and financial results. It is possible that
similar additional lawsuits may be filed in the future. Payment of significant
claims by insurance carriers may make such insurance coverage materially more
expensive or unavailable in the future, thereby exposing our business to
additional risk.
We may face limitations on our ability to integrate additional acquired
businesses or to find suitable acquisition opportunities.
We intend to pursue additional acquisitions of companies, properties and
other assets that can be purchased or licensed on acceptable terms and which we
believe can be operated or exploited profitably. Some of these transactions
could be material in size and scope. While we will continually be searching for
additional acquisition opportunities, we may not be successful in identifying
suitable acquisitions. As the interactive entertainment software industry
continues to consolidate, we face significant competition in seeking and
consummating acquisition opportunities. We may not be able to consummate
potential acquisitions or an acquisition may not enhance our business or may
decrease rather than increase our
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earnings. In the future, we may issue additional shares of our common stock in
connection with one or more acquisitions, which may dilute our existing
stockholders. Future acquisitions could also divert substantial management time
and result in short term reductions in earnings or special transaction or other
charges. In addition, we cannot guarantee that we will be able to successfully
integrate the businesses that we may acquire into our existing business. Our
stockholders may not have the opportunity to review, vote on or evaluate future
acquisitions.
Our shareholder rights plan, charter documents and other agreements may make it
more difficult to acquire us without the approval of our Board of Directors.
We have adopted a shareholder rights plan under which one right entitling
the holder to purchase one one-hundredth of a share of our Series A Junior
Preferred Stock at a price of $40 per share (subject to adjustment) under
certain circumstances is attached to each outstanding share of common stock.
Such shareholder rights plan makes an acquisition of control in a transaction
not approved by our Board of Directors more difficult. Our Amended and Restated
By-laws have advance notice provisions for nominations for election of nominees
to the Board of Directors which may make it more difficult to acquire control of
us. Our long-term incentive plans provide for acceleration of stock options
following a change in control, which has the effect of making an acquisition of
control more expensive. A change in control constitutes a default under our
revolving credit facility. In addition, some of our officers have severance
compensation agreements that provide for substantial cash payments and
acceleration of other benefits in the event of a change in control. These
agreements and arrangements may also inhibit a change in control and may have a
negative effect on the market price of our common stock.
Our stock price is highly volatile.
The trading price of our common stock has been and could continue to be
subject to wide fluctuations in response to certain factors, including:
o Quarter to quarter variations in results of operations
o Our announcements of new products
o Our competitors' announcements of new products
o Our product development or release schedule
o General conditions in the computer, software, entertainment, media or
electronics industries
o Timing of the introduction of new platforms and delays in the actual
release of new platforms
o Changes in earnings estimates or buy/sell recommendations by analysts
o Investor perceptions and expectations regarding our products, plans
and strategic position and those of our competitors and customers
o Other events or factors.
In addition, the public stock markets experience extreme price and trading
volume volatility, particularly in high technology sectors of the market. This
volatility has significantly affected the market prices of securities of many
technology companies for reasons often unrelated to the operating
-9-
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of our common stock.
We do not pay cash dividends on our common stock.
We have not paid any cash dividends on our common stock and do not
anticipate paying dividends in the near future. In addition, our revolving
credit facility currently prohibits us from paying dividends on our common
stock.
ACTIVISION, INC.
We are a leading international publisher of interactive entertainment
software products. We have built a company with a diverse portfolio of products
that spans a wide range of categories and target markets and that is used on a
variety of game hardware platforms and operating systems. We have created,
licensed and acquired a group of highly recognizable brands which we market to a
growing variety of consumer demographics.
Our products cover the action, adventure, extreme sports, racing, role
playing, simulation and strategy game categories. We offer our products in
versions which operate on the Sony PlayStation, Sony PlayStation 2, Nintendo 64,
Nintendo GameCube and Microsoft Xbox console systems, the Nintendo Game Boy
hand held devices, as well as on personal computers. Over the next few
years, we plan to produce many titles for the recently released Sony PlayStation
2, Microsoft Xbox and Nintendo GameCube console systems and Game Boy Advance
hand held device. Driven partly by the enhanced capabilities of the next
generation of platforms, we believe that in the next few years there will be
significant growth in the market for interactive entertainment software and we
plan to leverage our skills and resources to extend our leading position in the
industry.
Our publishing business involves the development, marketing and sale of
products, either directly, by license or through our affiliate label program
with third party publishers. In addition to publishing, we maintain distribution
operations in Europe that provide logistical and sales services to third party
publishers of interactive entertainment software, our own publishing operations
and manufacturers of interactive entertainment hardware.
Our objective is to be a worldwide leader in the development, publishing
and distribution of quality interactive entertainment software products that
deliver a highly satisfying consumer entertainment experience. Our strategy
includes the following elements:
Create and Maintain Diversity in Product Mix, Platforms and Markets. We
believe that maintaining a diversified mix of products can reduce our operating
risks and enhance profitability. Therefore, we develop and publish products
spanning a wide range of product categories, including action, adventure,
extreme sports, racing, role playing, simulation and strategy, and products
designed for target audiences ranging from game enthusiasts and children to mass
market consumers and "value priced" buyers. We develop, publish and distribute
products that operate on Sony PlayStation and PlayStation 2, Nintendo 64,
Nintendo GameCube and Microsoft Xbox systems, Nintendo Game Boy hand held
devices and the personal computer. We typically release our console products for
use on multiple platforms in order to reduce the risks associated with any
single platform, leverage our costs over a larger installed base and increase
unit sales.
Create, Acquire and Maintain Strong Brands. We focus development and
publishing activities principally on products that are, or have the potential to
become, franchise properties with sustainable consumer appeal and brand
recognition. These products can thereby serve as the basis for sequels, prequels
and related new products that can be released over an extended period of time.
We believe that
-10-
the publishing and distribution of products based in large part on franchise
properties enhances predictability of revenues and the probability of high unit
volume sales and operating profits. We have entered into a series of strategic
relationships with the owners of intellectual property pursuant to which we have
acquired the rights to publish products based on franchises such as Star Trek,
various Disney films such as Toy Story 2 and Marvel Comics' properties such as
Spider-Man, X-Men, Blade, Iron Man and Fantastic Four. We have also capitalized
on the success of our Tony Hawk's Pro Skater products to sign long-term
agreements, many of which are exclusive, with numerous other extreme sports
athletes including superstars Mat Hoffman in BMX pro biking, Kelly Slater in pro
surfing, Shaun Palmer in snowboarding, Shaun Murray in wakeboarding and Travis
Pastrana in pro motorcross biking.
Enforce Disciplined Product Selection and Development Processes. The
success of our publishing business depends, in significant part, on our ability
to develop games that will generate high unit volume sales and that can be
completed up to our high quality standards. Our publishing units have
implemented a formal control process for the selection, development, production
and quality assurance of our products. We apply this process, which we refer to
as the "Greenlight Process," to products under development with external, as
well as internal resources. The Greenlight Process includes in-depth reviews of
each project at five intervals during the development process by a team that
includes several of our highest ranking operating managers and coordination
between our sales and marketing personnel and development staff at each step in
the process.
We develop our products using a strategic combination of our internal
development resources and external development resources acting under contract
with us, some of whom are independent and some of whom we have a capital
investment. We typically select our external developers based on their track
record and expertise in producing products in the same category. One developer
will often produce the same game for multiple platforms and will produce sequels
to the original game. We believe that this selection process allows us to
strengthen and leverage the particular expertise of our internal and external
development resources.
Continue to Improve Profitability. We are continually striving to reduce
our risk and increase our operating leverage and efficiency with the goal of
increased profitability. We believe the key factor affecting our profitability
will be the success rate of our product releases. Therefore, our product
selection and development process includes, as a significant component, periodic
evaluations of the expected commercial success of products under development.
Through this process, titles that we determine to be less promising are either
discontinued before we incur additional development costs, or if necessary,
corrections can be made in the development process. In addition, our focus on
cross platform releases and branded products will, we believe, contribute to
this strategic goal.
In order to further our emphasis on improved profitability, we have
implemented a number of operational initiatives. We have significantly increased
our product development capabilities by allocating a portion of our product
development investments to experienced independent development companies working
under contract with us, thereby taking advantage of specialized third party
developers without incurring the fixed overhead obligations associated with
increased internally employed staff. Our sales and marketing operations work
with our studio resources to increase the visibility of new product launches and
to coordinate timing and promotion of product releases. Our finance and
administration and sales and marketing personnel work together to improve
inventory management and receivables collections. We have broadly instituted
objective-based reward programs that provide incentives to management and staff
throughout the organization to produce results that meet our financial
objectives.
Grow Through Continued Strategic Acquisitions and Alliances. The
interactive entertainment industry is consolidating, and we believe 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
-11-
predictability of revenues and cash flow, 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 thirteen completed acquisitions since 1997, we
believe that we have successfully diversified our operations, our channels of
distribution, our development talent pool and our library of titles, and have
emerged as one of the industry's leaders. We intend to continue to expand our
resources through acquisitions, strategic relationships and key license
transactions. We expect to focus our acquisition strategy on increasing our
development capacity through the acquisition of or investment in selected
experienced development firms, and expanding our intellectual property library
through licenses and strategic relationships with intellectual property owners.
-12-
RECENT DEVELOPMENTS
On May 7, 2002, we reported our financial results for the fourth
quarter and fiscal year ended March 31, 2002. Net revenues for our fiscal year
ended March 31, 2002 were $786.4 million or 27% higher as compared to $620.2
million for our fiscal year ended March 31, 2001. Net income for our fiscal year
ended March 31, 2002 was $52.2 million or $0.88 per diluted share as compared
with net income of $20.5 million or $0.50 per diluted share reported for our
2001 fiscal year. All of fiscal 2001 share and per share amounts have been
restated to reflect our three-for-two stock split for shareholders of record as
of November 6, 2001, paid November 20, 2001.
Net revenues for our fourth quarter ended March 31, 2002 were $164.9
million, 30% greater than net revenues of $126.8 million that we reported for
the fourth quarter of our prior fiscal year. For our fourth quarter ended March
31, 2002, we reported net income of $10.9 million or $0.17 per diluted share an
increase of $10.0 million compared to net income of $875,000 or $0.02 per
diluted share for our prior fiscal year's fourth quarter. Our fourth quarter
2002 per diluted share results were $0.06 ahead of the consensus of analyst
expectations as reported by First Call.
Set forth below is our condensed consolidated statements of operations
for the fourth quarters and fiscal years ended March 31, 2002 and 2001 and
condensed consolidated balance sheets for the fiscal years ended March 31, 2002
and 2001.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except earnings per share data)
Quarter ended March 31, Year ended March 31,
------------------------- ------------------------
2002 2001 2002 2001
--------- -------- -------- ---------
Restated Restated
Net revenues $ 164,912 $ 126,789 $ 786,434 $ 620,183
Costs and expenses:
Cost of sales 105,647 89,367 534,731 414,609
Product development 11,900 11,086 40,960 41,396
Sales and marketing 19,096 16,872 86,161 85,378
General and administrative 11,407 7,449 44,008 38,993
--------- -------- --------- ----------
Total operating expenses 148,050 124,774 705,860 580,376
Operating income 16,862 2,015 80,574 39,807
Interest income (expense), net 622 (632) 2,546 (7,263)
Income before provision for
income taxes 17,484 1,383 83,120 32,544
Provision for income taxes 6,600 508 30,882 12,037
--------- -------- --------- ----------
Net income $ 10,884 $ 875 $ 52,238 $ 20,507
========= ======== ========= ==========
Basic earnings per share $ 0.20 $ 0.02 $ 1.03 $ 0.55
Weighted average common shares
outstanding 54,921 38,988 50,651 37,298
--------- -------- --------- ----------
Diluted earnings per share $ 0.17 $ 0.02 $ 0.88 $ 0.50
Weighted average common shares
outstanding assuming dilution 62,599 46,379 59,455 41,100
--------- -------- --------- ----------
Share data and earnings per share data for the quarter ended March 31, 2001 and
the year ended March 31, 2001 have been restated to reflect our three-for-two
stock split for shareholders of record as of November 6, 2001, paid November 20,
2001.
-13-
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, March 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 279,007 $ 125,550
Accounts receivable, net 76,733 73,802
Inventories 20,736 43,888
Software development 36,263 21,265
Intellectual property licenses 6,326 6,237
Deferred income taxes 22,608 14,292
Other current assets 15,200 13,196
Total current assets 456,873 298,230
Software development 3,254 2,154
Intellectual property licenses 10,899 12,549
Property and equipment, net 17,832 15,240
Deferred income taxes 28,795 13,759
Other assets 3,242 7,709
Goodwill 35,992 10,316
--------- ----------
Total assets $ 556,887 $ 359,957
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 168 $ 10,231
Accounts payable 64,410 60,980
Accrued expenses 59,096 44,039
--------- ----------
Total current liabilities 123,674 115,250
Long-term debt, less current portion 3,122 3,401
Convertible subordinated notes - 60,000
--------- ----------
Total liabilities 126,796 178,651
Stockholders' equity:
Preferred stock - -
Common stock - -
Additional paid-in capital 397,528 200,786
Retained earnings 64,384 12,146
Accumulated other comprehensive loss (11,498) (11,377)
Treasury stock (20,323) (20,249)
Total stockholders' equity 430,091 181,306
--------- ----------
Total liabilities and stockholders' equity $ 556,887 $ 359,957
========= =========
Consistent with our acquisition strategy, we acquired a privately owned software
developer in March 2002 and Z-Axis in May 2002, for a combined purchase price of
approximately $28 million with consideration in the form of common stock and a
combination of common stock and cash. Additional shares of our common stock may
also be issued to these developers in future periods, depending upon the
satisfaction of certain performance requirements relating to certain product
titles produced by the developers.
USE OF PROCEEDS
All net proceeds from the sale of our shares of common stock will go to the
stockholders who offer and sell their shares. Accordingly, we will not receive
any of the proceeds from the sale of the common stock being offered hereby for
the account of the selling stockholders.
-14-
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of our common stock by the selling stockholders as of May
30, 2002, the number of shares of common stock being offered by this prospectus
and the number of shares of common stock beneficially owned by the selling
stockholders after the offering.
Name of Number of Shares of Number of Shares Number of Shares of
Selling Common Stock Owned of Common Stock Common Stock Owned
Stockholder Prior to the Offering Being Offered After the Offering
------------- --------------------- ---------------- -------------------
Luntz Family 171,892 171,892(1) 0
Revocable Trust
Irving Luntz 28,609 28,609(1) 0
Robert E. Meldman 17,540 17,540(1) 0
id Software, Inc. 150,000 150,000 0
All Selling
Stockholders
as a Group 368,041 368,041 0
________________
(1) This amount does not include the following, which are more fully described
below: (i) 31,149 shares of common stock subject to certain escrow
requirements; and (ii) 93,446 shares of common stock to be issued to the
selling stockholders upon completion of certain software program delivery
and revenue requirements.
We have entered into (i) a license agreement with id Software pursuant to
which id has granted us the right to distribute certain of id's entertainment
software products and (ii) an agreement and plan of merger (the "Merger
Agreement") with Activision Publishing, Inc., Record Time Acquisition, Inc.,
Z-Axis, and the selling stockholders pursuant to which Record Time Acquisition
was merged with and into Z-Axis. The selling stockholders were all of the
principal shareholders of Z-Axis. The transactions contemplated by the Merger
Agreement were consummated on May 20, 2002.
Pursuant to an escrow agreement among us, the selling stockholders and
Comerica Bank, as escrow agent, an aggregate of 31,149 shares of common stock,
or approximately 9.1% of the total number of shares of common stock issued in
connection with the merger, have been deposited in an escrow account in
connection with the transaction (the "Escrow Shares"). The Escrow Shares have
been deposited in order to ensure that the representations, warranties and
covenants made by the selling stockholders under the Merger Agreement are not
breached and in order to provide a source of indemnification to Activision
pursuant to the Merger Agreement. The Escrow Shares will be released from escrow
and issued to the selling stockholders on February 20, 2003, to the extent not
used to indemnify us prior to such date. In addition, an aggregate amount of
93,446 shares of common stock, or approximately 27.27% of the total number of
shares of our common stock issued in connection with the merger, have been
deposited in an escrow account (the "Product Escrow Shares"). The Product Escrow
Shares are subject to release from escrow and issuance to the selling
stockholders upon fulfillment of certain software program delivery and ranking
requirements and certain revenue requirements, as described in the Merger.
We will file a prospectus supplement to this prospectus to reflect any
increase in the number of shares of common stock being offered by the selling
stockholders hereunder in the event the conditions described above are
fulfilled.
Prior to the acquisition of Z-Axis by us, Z-Axis was a party to various
development agreements with us. Other than such contracts, the id license
agreement and the fact that the selling stockholders (other than id) were
shareholders of Z-Axis, which became a wholly owned subsidiary of ours on May
20, 2002 pursuant to the Merger Agreement, none of the selling stockholders has
had a material relationship with us within the past three years.
-15-
DESCRIPTION OF CAPITAL STOCK
We have 130,000,000 shares of authorized capital stock, $.000001 par value,
consisting of 125,000,000 shares of common stock and 3,750,000 shares of serial
preferred stock and 1,250,000 shares of Series A Junior Preferred Stock. As of
May 28, 2002, 58,779,634 shares of our common stock were outstanding. Our common
stock is listed on the Nasdaq National Market under the symbol "ATVI."
Each outstanding share of common stock entitles the holder to one vote on
all matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding shares of common stock
can elect all of the directors then standing for election. Subject to
preferences which may be applicable to any outstanding shares of preferred
stock, holders of common stock are entitled to such distributions as may be
declared from time to time by our Board of Directors out of funds legally
available. We have not paid, and have no current plans to pay, cash dividends on
our common stock. We intend to retain all earnings for use in our business.
Holders of common stock have no conversion, redemption or preemptive rights
to subscribe to any of our securities. All outstanding shares of common stock
are fully paid and nonassessable. In the event of any liquidation, dissolution
or winding-up of the affairs of holders of our common stock will be entitled to
share ratably in our assets remaining after provision for payment of liabilities
to creditors and preferences applicable to outstanding shares of preferred
stock.
The rights, preferences and privileges of holders of common stock are
subject to the rights of the holders of any outstanding shares of preferred
stock. At present, no shares of preferred stock are outstanding. As of May 21,
2002, we had approximately 3,200 stockholders of record, excluding banks,
brokers and depository companies that are stockholders of record for the account
of beneficial owners.
The transfer agent for our common stock is Continental Stock Transfer &
Trust Company, 17 Battery Place, New York, New York 10004.
-16-
PLAN OF DISTRIBUTION
The common stock may be sold from time to time by the selling stockholders,
or by pledgees, donees, transferees or other successors in interest. Such sales
may be made on one or more exchanges or in the over-the-counter market, or
otherwise, at prices and at terms then prevailing or at prices related to the
then current market price, or in negotiated transactions. The shares may be sold
from time to time in one or more of the following transactions, without
limitation: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction, (b) purchases by a broker or
dealer as principal and resale by such broker or dealer or for its account
pursuant to this prospectus, as supplemented, (c) an exchange distribution in
accordance with the rules of such exchange, and (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus, as supplemented. From time to time the selling stockholders may
engage in short sales, short sales against the box, puts and calls and other
transactions in our securities or derivatives thereof, and may sell and deliver
the shares in connection therewith.
From time to time selling stockholders may pledge their shares pursuant to
the margin provisions of their respective customer agreements with their
respective brokers. Upon a default by a selling stockholder, the broker may
offer and sell the pledged shares of common stock from time to time as described
above.
All expenses of registration of the common stock (other than commissions
and discounts of underwriters, dealers or agents), estimated to be approximately
$21,450 shall be borne by us. As and when we are required to update this
prospectus, we may incur additional expenses in excess of this estimated amount.
LEGAL MATTERS
Certain legal matters in connection with the shares of common stock offered
hereby have been passed upon for us by Robinson Silverman Pearce Aronsohn &
Berman LLP, 1290 Avenue of the Americas, New York, New York 10104. Kenneth L.
Henderson, one of our directors, is a managing partner of Robinson Silverman. In
addition, Robinson Silverman owns approximately 14,250 shares of our common
stock.
EXPERTS
Our consolidated financial statements and schedule as of March 31, 2000,
and for each of the years in the two-year period ended March 31, 2000, have been
incorporated by reference and included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent accountants, and upon the
authority of said firm as experts in accounting and auditing.
The consolidated financial statements as of and for the year ended March
31, 2001, included herein and incorporated by reference in this prospectus have
been so included and incorporated by reference in reliance upon the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission, or the SEC. You may read and copy such material at the Public
Reference Room maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for more information on the
operation of the Public Reference Room. You can also find our SEC filings at the
SEC's web site at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information that we file later with
the SEC will automatically update and supersede this information. We incorporate
by reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934:
o Our Annual Report on Form 10-K for the fiscal year ended March 31,
2001;
o Our Quarterly Reports on Form 10-Q for the quarterly periods ended
June 30, 2001, September 30, 2001, and December 31, 2001;
o Our Current Reports on Form 8-K filed on July 11, 2001, July 31, 2001,
October 4, 2001, January 18, 2002 and May 22, 2002; and
o The description of our common stock and the rights associated with our
common stock contained in our Registration Statement on Form S-3,
Registration No. 333-46425, and our Registration Statement on Form
8-A, File No. 001-15839, filed on April 19, 2000.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Activision, Inc.
3100 Ocean Park Boulevard
Santa Monica, California 90405
(310) 255-2000
Attn: Investor Relations
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-1
Consolidated Balance Sheets as of March 31, 2001 and 2000 F-3
Consolidated Statements of Operations for the Years Ended March 31, 2001,
2000 and 1999 F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended March 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows for the Years Ended March 31, 2001,
2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders:
In our opinion, the accompanying consolidated balance sheet as of March 31, 2001
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows present fairly, in all material respects, the financial
position of Activision, Inc. and its subsidiaries (the "Company") at March 31,
2001, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Los Angeles, CA
May 9, 2001,
except for the stock split in Note 1,
as to which the date is November 6, 2001
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders:
We have audited the accompanying consolidated balance sheet of ACTIVISION, INC.
and subsidiaries as of March 31, 2000 and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the years
in the two-year period ended March 31, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACTIVISION, INC. and
subsidiaries as of March 31, 2000, and the results of their operations and their
cash flows for each of the years in the two-year period ended March 31, 2000, in
conformity with generally accepted accounting principles.
KPMG LLP
Los Angeles, California
May 5, 2000,
except as to Note 17,
which is as of June 9, 2000,
and Note 6, which is as of April 1, 2001
and Note 1, which is as of November 6, 2001
F-2
Part I. Financial Information.
Item I. Financial Statements.
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
March 31, March 31,
2001 2000
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 125,550 $ 49,985
Accounts receivable, net of allowances of
$28,461 and $31,521 at March 31, 2001
and 2000, respectively 73,802 108,108
Inventories 43,888 40,453
Prepaid royalties and capitalized software costs 27,502 31,655
Deferred income taxes 14,292 14,159
Other current assets 13,196 17,815
Total current assets 298,230 262,175
Prepaid royalties and capitalized software costs 14,703 9,153
Property and equipment, net 15,240 10,815
Deferred income taxes 13,759 6,055
Goodwill, net 10,316 12,347
Other assets 7,709 9,192
Total assets $ 359,957 $ 309,737
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt $ 10,231 $ 16,260
Accounts payable 60,980 38,286
Accrued expenses 44,039 49,404
Total current liabilities 115,250 103,950
Long-term debt, less current portion 3,401 13,778
Convertible subordinated notes 60,000 60,000
Total liabilities 178,651 177,728
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.000001 par value, 5,000,000
shares authorized, no shares issued at
March 31, 2001 and 2000 - -
Common stock, $.000001 par value, 50,000,000 shares
authorized, 45,249,683 and 39,732,390 shares issued
and 40,923,714 and 38,982,390 shares outstanding
at March 31, 2001 and 2000, respectively - -
Additional paid-in capital 200,786 151,714
Retained earnings (deficit) 12,146 (8,361)
Accumulated other comprehensive loss (11,377) (6,066)
Less: Treasury stock, cost, 4,325,969 and 750,000
shares as of March 31, 2001 and 2000, respectively (20,249) (5,278)
Total shareholders' equity 181,306 132,009
Total liabilities and shareholders' equity $ 359,957 $ 309,737
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the years ended March 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
Net revenues $ 620,183 $ 572,205 $ 436,526
Costs and expenses:
Cost of sales - product costs 324,907 319,422 260,041
Cost of sales - royalties and software
amortization 89,702 91,238 36,990
Product development 41,396 26,275 22,875
Sales and marketing 85,378 87,303 66,420
General and administrative 37,491 36,674 21,948
Amortization of intangible assets 1,502 41,618 1,585
--------- --------- ---------
Total costs and expenses 580,376 602,530 409,859
--------- --------- ---------
Income (loss) from operations 39,807 (30,325) 26,667
Interest expense, net (7,263) (8,411) (3,031)
--------- --------- ---------
Income (loss) before income tax provision
32,544 (38,736) 23,636
Income tax provision (benefit) 12,037 (4,648) 8,745
--------- --------- ---------
Net income (loss) $ 20,507 $ (34,088) $ 14,891
========= ========= =========
Basic earnings (loss) per share $ 0.55 $ (0.92) $ 0.43
========= ========= =========
Weighted average common shares
outstanding 37,298 37,037 34,292
========= ========= =========
Diluted earnings (loss) per share $ 0.50 $ (0.92) $ 0.41
========= ========= =========
Weighted average common shares
outstanding - assuming dilution 41,100 37,037 35,898
========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
ACTIVISION, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended March 31, 2001, 2000 and 1999
Accumulated
Common Stock Additional Retained Treasury Stock Other
------------------ Paid-In Earnings ------------------ Comprehensive Shareholders'
(In thousands) Shares Amount Capital (Deficit) Shares Amount Income (Loss) Equity
----------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 34,661 $ - $ 91,825 $ 10,836 (750) $ (5,278) $ 92 $ 97,475
Components of comprehensive
income
Net income for the year - - - 14,891 - - - 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 - - - - 3,368
Issuance of common stock
pursuant to employee stock
option plans 907 - 5,271 - - - - 5,271
Issuance of common stock
pursuant to employee stock
purchase plan 138 - 798 - - - - 798
Tax benefit attributable to
employee stock option plans - - 1,059 - - - - 1,059
Tax benefit derived from net
operating loss carryforward
utilization - - 2,430 - - - - 2,430
Conversion of notes payable
to common stock - - 4,500 - - - - 4,500
-------------------------------------------------------------------------------------------------
Balance, March 31, 1999 35,706 - 109,251 25,727 (750) (5,278) (2,510) 127,190
Components of comprehensive
income:
Net loss for the year - - - (34,088) - - - (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 - - - - 8,529
Issuance of common stock
pursuant to employee stock
option plans 3,497 - 21,718 - - - - 21,718
Issuance of common stock
pursuant to employee stock
purchase plan 108 - 762 - - - - 762
Tax benefit attributable to
employee stock option plans - - 3,017 - - - - 3,017
Tax benefit derived from net
operating loss carryforward
utilization - - 1,266 - - - - 1,266
Acquisitions and investments
made with common stock and
common stock options 421 - 7,171 - - - - 7,171
-------------------------------------------------------------------------------------------------
Balance, March 31, 2000 39,732 - 151,714 (8,361) (750) (5,278) (6,066) 132,009
Components of comprehensive
income:
Net income for the year - - - 20,507 - - - 20,507
Foreign currency translation
adjustment - - - - - - (5,311) (5,311)
----------
Total comprehensive income 15,196
----------
Issuance of common stock and
common stock warrants 150 - 1,050 - - - - 1,050
Issuance of common stock
pursuant to employee
stock option plans 5,249 - 31,693 - - - - 31,693
Issuance of common stock
pursuant to employee stock
purchase plan 119 - 845 - - - - 845
Tax benefit attributable to
employee stock option plans - - 11,832 - - - - 11,832
Tax benefit derived from net
operating loss carryforward
utilization - - 3,652 - - - - 3,652
Purchase of treasury shares - - - - (3,576) (14,971) - (14,971)
-------------------------------------------------------------------------------------------------
Balance March 31, 2001 45,250 $ - $200,786 $ 12,146 (4,326) $ (20,249) $(11,377) $ 181,306
=================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended March 31,
------------------------------------
2001 2000 1999
--------- --------- ----------
Cash flows from operating activities:
Net income (loss) $ 20,507 $ (34,088) $ 14,891
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Deferred income taxes (6,597) (4,311) 3,806
Depreciation and amortization 6,268 45,866 6,488
Amortization of prepaid
royalties and capitalized
software costs 68,925 78,714 27,055
Expense related to common
stock warrants 1,406 5,769 388
Tax benefit of stock options exercised 11,832 3,017 1,059
Change in assets and liabilities
(net of effects of purchases and
acquisitions):
Accounts receivable 30,027 9,900 (43,686)
Inventories (5,283) (7,342) (11,506)
Prepaid royalties and
capitalized software costs (65,964) (74,506) (60,531)
Other assets 6,062 (6,307) (6,862)
Accounts payable 21,361 (8,038) (6,620)
Accrued expenses and other
liabilities (6,979) (5,791) 33,177
--------- --------- ----------
Net cash provided by (used in)
operating activities 81,565 2,883 (42,341)
--------- --------- ----------
Cash flows from investing activities:
Cash used in purchase acquisitions
(net of cash acquired) - (20,523) -
Capital expenditures ( 9,780) (4,518) (3,800)
Proceeds from disposal of
property and equipment 1,149 - -
--------- --------- ----------
Net cash used in investing activities (8,631) (25,041) (3,800)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from issuance of
common stock pursuant to employee
stock option plans 31,693 21,718 5,271
Proceeds from issuance of
common stock pursuant to
employee stock purchase plan 845 762 798
Proceeds from issuance of
common stock pursuant to warrants 1,050 - -
Borrowing under line-of-credit
agreement 577,590 361,161 5,300
Payment under line-of-credit
agreement (581,618) (355,156) (5,300)
Payment on term loan (11,450) (1,645) -
Proceeds from term loan - 25,000 -
Notes payable, net (592) (6,457) 1,151
Cash paid to secure line of credit
and term loan - (3,355) -
Purchase of treasury stock (14,971) - -
--------- --------- ----------
Net cash provided by financing
activities 2,547 42,028 7,220
--------- --------- ----------
Effect of exchange rate changes
on cash 84 (2,922) (2,361)
--------- --------- ----------
Net increase (decrease) in
cash and cash equivalents 75,565 16,948 (41,282)
Cash and cash equivalents at
beginning of period 49,985 33,037 74,319
--------- --------- ----------
Cash and cash equivalents at
end of period $125,550 $ 49,985 $ 33,037
========= ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
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 currently focuses its publishing, development
and distribution efforts on products designed for personal computers
("PCs") as well as the Sony PlayStation ("PSX") and PlayStation 2 ("PS2")
and Nintendo N64 ("N64") console systems and Nintendo Game Boy handheld
game devices. The Company is also currently focusing on the development of
products for Microsoft Xbox ("Xbox") and Nintendo GameCube console systems
and Nintendo Game Boy Advance hand held device. During January 2001, Sega
Corp., the maker of the Sega Dreamcast ("Dreamcast") announced that it
would stop making the Dreamcast in March 2001. Net revenues from the
Dreamcast have historically represented only a small percentage of the
Company's total net revenues. Accordingly, the Company believes that the
departure of the Dreamcast console system from the market will not have a
material impact upon its financial position or results of operations.
The Company maintains operations in the U.S., Canada, the United Kingdom,
France, Germany, Japan, Australia, Belgium and the Netherlands. For fiscal
year 2001, international operations contributed approximately 43% of net
revenues.
Principles of Consolidation
The consolidated financial statements include the accounts of Activision,
Inc., a Delaware corporation, and its wholly-owned subsidiaries (the
"Company" or "Activision"). All intercompany accounts and transactions have
been eliminated in consolidation.
Basis of Presentation and Stock Split
In October 2001, the Board of Directors approved a three-for-two stock
split effected in the form of a 50% stock dividend. The stock split was
paid at the close of business on November 20, 2001, to shareholders of
record as of November 6, 2001. The financial statements, including all
share and per share data, have been restated as if the stock split had
occurred as of the earliest period presented.
The consolidated financial statements have been retroactively restated to
reflect the poolings of interests of the Company with JCM Productions, Inc.
dba Neversoft Entertainment ("Neversoft") in September 1999.
Cash and Cash Equivalents
Cash and cash equivalents include cash, money markets and short-term
investments with original maturities of not more than 90 days.
The Company's cash and cash equivalents were comprised of the following at
March 31, 2001 and 2000 (amounts in thousands):
March 31,
---------------------------
2001 2000
---------- ----------
Cash $ 63,018 $ 32,637
Money market funds 62,532 17,348
---------- ----------
$ 125,550 $ 49,985
========== ==========
F-7 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, 2001 and 2000, the 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.
As of and for the year ending March 31, 2001, the Company's publishing
business had one customer that accounted for 10% of its consolidated net
revenues and 15% of its consolidated accounts receivable, net. For the
years ending March 31, 2000 and 1999, no single customer accounted for 10%
or more of consolidated net revenues.
Fair Value of Financial Instruments
The estimated fair values of financial instruments have been determined by
the Company using available market information and valuation methodologies
described below. However, considerable judgment is required in interpreting
market data to develop the estimates of fair value. Accordingly, the
estimates presented herein may not be indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions or valuation methodologies may have a material effect on
the estimated fair value amounts.
Cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities: The carrying amounts of these instruments approximate
fair value due to their short-term nature.
Long-term debt and convertible subordinated notes: The carrying amounts of
the Company's variable rate debt approximate fair value because the
interest rates are based on floating rates identified by 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 $73.6 million and $60.0 million, respectively, as
of March 31, 2001 and $90.0 million and $81.6 million, respectively, as of
March 31, 2000.
Prepaid Royalties and Capitalized Software Costs
Prepaid royalties include payments made to independent software 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.
F-8
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 prepaid royalties and capitalized software
development costs are amortized to cost of sales - royalties and software
amortization on the ratio of current revenues to total projected revenues,
generally resulting in an amortization period of one year or less. For
products that have been released, management evaluates the future
recoverability of capitalized amounts on a quarterly basis.
As of March 31, 2001, prepaid royalties and unamortized capitalized
software costs totaled $38.3 million (including $14.7 million classified as
non-current) and $3.9 million, respectively. As of March 31, 2000, prepaid
royalties and unamortized capitalized software costs totaled $29.2 million
(including $9.2 million classified as non-current) and $11.6 million,
respectively. Amortization of prepaid royalties and capitalized software
costs was $68.9 million, $78.7 million and $27.1 million for the years
ended March 31, 2001, 2000 and 1999, respectively.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market.
Revenue Recognition
Product Sales: The Company recognizes revenue from the sale of its products
once they are shipped and are available for general release to customers.
Subject to certain limitations, the Company permits 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, 2001, 2000 and 1999 were
approximately $16.5 million, $18.6 million and $15.6 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, 2001 and 2000, accumulated amortization
amounted to $51.9 million and $50.8 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-9
Interest Expense, net
Interest expense, net is comprised of the following, (amounts in
thousands):
March 31,
----------------------------
2001 2000 1999
-------- -------- -------
Interest expense $(9,399) $(9,375) $(4,974)
Interest income 2,136 964 1,943
-------- -------- -------
Net interest income (expense) $(7,263) $(8,411) $(3,031)
Income Taxes
The Company accounts for income taxes using SFAS No. 109, "Accounting for
Income Taxes." Under SFAS No. 109, income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are their
local currencies. All assets and liabilities of the Company's foreign
subsidiaries are translated into U.S. dollars at the exchange rate in
effect at the end of the period, and revenue and expenses are translated at
weighted average exchange rates during the period. The resulting
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 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 and conversion of the Company's convertible debt.
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-10
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied. The Company has elected to continue to apply the
provisions of APB No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
Warrants granted to non-employees are accounted for in accordance with the
Financial Accounting Standards Board's Emerging Issues Task Force Issue No.
96-18 "Accounting for Equity Instruments that are Issued To Other Than
Employees for Acquiring or in Connection With Selling Goods or Services"
(EITF 96-18).
Related Parties
As of March 31, 2001 and 2000, the Company had $4.3 million and $2.7
million, respectively, of loans outstanding due from employees. The loans
bear interest at 6.75% and are primarily due from Company executives.
Implementation of SAB 101
The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, in
December 1999. The SAB summarizes certain of the SEC staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. During the year ended March 31, 2001, the Company
performed a review of its revenue recognition policies and determined that
it is in compliance with SAB 101.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," ("SFAS No. 133") as
subsequently amended by SFAS No. 137 and SFAS No. 138, is 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. Management does not believe
the adoption of SFAS No. 133 will have a material impact on the financial
position or results of operations of the Company.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications had no effect on net income (loss), shareholders' equity
or net increase (decrease) in cash and cash equivalents.
2. Acquisitions
Fiscal 2000 Transactions
Acquisition of Neversoft
On September 30, 1999, the Company acquired Neversoft, a privately held
console software developer, in exchange for 1,048,253 shares of the
Company's common stock. The acquisition was accounted for as a pooling of
interests. Accordingly, in fiscal 2000 the Company restated the financial
statements for all periods prior to the closing of the transaction.
F-11
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) (amounts
in thousands).
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 306,672 shares of the Company's common stock.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the results of operations of Elsinore have been included in
the Company's consolidated financial statements from the date of
acquisition. The aggregate purchase price has been allocated to the assets
and liabilities acquired, consisting mostly of goodwill of $3.0 million,
that is being amortized over a five year period. Pro forma 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.
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 phased out the use of the
Expert name. As a result of these initiatives, in fiscal 2000, the Company
incurred a nonrecurring charge of $26.3 million resulting from the
write-down of intangibles acquired, including goodwill.
F-12
Fiscal 1999 Transactions
The acquisitions of Head Games and CD Contact were originally treated as
immaterial poolings of interests. However, after reviewing the results of
operations of the entities, including the materiality and impact on the
Company's trends, in fiscal 1999 the Company restated the financial
statements for all periods prior to the closing of each respective
transaction.
Acquisition of Head Games
On June 30, 1998, the Company acquired Head Games in exchange for 1,500,000
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
2,850,000 shares of the Company's common stock and the assumption of $9.1
million in outstanding debt payable to CD Contact's former shareholders.
The acquisition was accounted for as a pooling of interests.
The following table represents the results of operations of the previously
separate companies for the periods before the combinations were consummated
that are included in the fiscal 1999 combined net income of the Company
(amounts in thousands):
Fiscal Year 1999
---------------------------------------------------------------
Head
Games
Three CD Contact Total
Activision Months Six Months Neversoft Year
Year Ended Ended Ended Year Ended Ended
March 31, June 30, Sept. 30, March 31, March 31,
1999 1998 1998 1999 1999
----------- --------- ---------- ----------- ----------
Revenues $ 412,225 $ 2,195 $ 22,065 $ 41 $ 436,526
Net income
(loss) $ 14,194 $ 394 $ 666 $ (363) $ 14,891
3. Strategic Restructuring Plan
In the fourth quarter of fiscal 2000, the Company finalized a strategic
restructuring plan to accelerate the development and sale of interactive
entertainment and leisure products for the next-generation consoles and the
Internet. Costs associated with this plan amounted to $70.2 million,
approximately $61.8 million net of taxes, and were recorded in the
consolidated statement of operations in the fourth quarter of fiscal year
2000 and classified as follows (amount in millions):
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
represented a write down of intangibles including goodwill, relating to
Expert Software, Inc. ("Expert"), one of the Company's value publishing
subsidiaries, totaling $26.3 million. The Company consolidated Expert into
Head Games, forming one integrated business unit. As part of this
consolidation, the Company discontinued substantially all of Expert's
product lines, terminated substantially all of Expert's employees and
phased 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
fiscal 2000, the OEM market went through radical changes due to price
declines of PCs and
F-13
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 resulted in an increase in the allowance for sales returns of $11.7
million and the allowance for doubtful accounts of $3.4 million. The plan
also included a severance charge of $1.2 million for employee redundancies.
The components of the charge included in cost of sales - royalties and
software amortization and product development represent costs to write down
certain assets associated with exiting certain product lines and
re-evaluating other product lines which resulted in reduced expectations.
During fiscal 2001, the Company completed the restructuring initiatives
associated with the fiscal 2000 restructuring plan without any significant
adjustments.
4. Inventories
The Company's inventories consist of the following (amounts in thousands):
March 31,
----------------------
2001 2000
-------- --------
Purchased parts and components $ 1,885 $ 2,857
Finished goods 42,003 37,596
-------- --------
$ 43,888 $ 40,453
======== ========
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 of, the cost and accumulated depreciation thereon are removed and
any resultant gains or losses are recognized in current operations.
Property and equipment was as follows (amounts in thousands):
March 31,
----------------------
2001 2000
-------- --------
Land $ 214 $ 526
Buildings 4,004 2,468
Computer equipment 21,512 18,670
Office furniture and other equipment 5,585 5,800
Leasehold improvements 3,713 3,229
-------- --------
Total cost of property and equipment 35,028 30,693
Less accumulated depreciation (19,788) (19,878)
-------- --------
Property and equipment, net $ 15,240 $ 10,815
======== ========
Depreciation expense for the years ended March 31, 2001, 2000 and 1999 was
$4.8 million, $4.2 million and $4.9 million, respectively.
F-14
6. Goodwill and Other Intangible Assets - Adoption of SFAS No. 142
We adopted SFAS No. 142 effective April 1, 2001. The following table
reconciles net income (loss) and earnings per share as reported for the
years ended March 31, 2001, 2000 and 1999 to net income (loss) and earnings
per share as adjusted to exclude goodwill amortization (amounts in
thousands, except per share data).
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
Reported net income (loss) $ 20,507 $(34,088) $ 14,891
Add back: Goodwill amortization 1,502 4,465 1,585
-------- -------- --------
Adjusted net income (loss) $ 22,009 $(29,623) $ 16,476
======== ======== ========
Basic earnings per share:
Reported net income (loss) $ 0.55 $ (0.92) $ 0.43
Goodwill amortization 0.04 0.12 0.05
-------- -------- --------
Adjusted net income (loss) $ 0.59 $ (0.80) $ 0.48
======== ======== ========
Diluted earnings per share:
Reported net income (loss) $ 0.50 $ (0.92) $ 0.41
Goodwill amortization 0.04 0.12 0.05
Adjusted net income (loss) $ 0.54 $ (0.80) $ 0.46
======== ======== ========
In the year ended March 31, 2000, we additionally recorded a charge
relating to the impairment of goodwill of $37,153.
7. Accrued Expenses
Accrued expenses were comprised of the following (amounts in thousands):
March 31,
----------------------
2001 2000
-------- --------
Accrued royalties payable $ 14,764 $ 13,300
Affiliated label payable 733 4,033
Accrued selling and marketing costs 4,603 10,493
Income tax payable 859 4,934
Accrued interest expense 1,150 1,013
Accrued bonus and vacation pay 11,958 5,514
Other 9,972 10,117
-------- --------
Total $ 44,039 $ 49,404
F-15
8. Operations by Reportable Segments and Geographic Area
The Company publishes, develops and distributes interactive entertainment
and leisure products for a variety of game platforms, including PCs, the
Sony PlayStation and PlayStation 2 console systems, the Nintendo 64 console
system, the Nintendo Game Boy and the Sega Dreamcast console system. The
Company has also begun product development for next-generation console
systems and hand held devices, including Microsoft's Xbox and Nintendo's
GameCube and Game Boy Advance. Based on its organizational structure, the
Company operates in two reportable segments: publishing and distribution.
The Company's publishing segment publishes titles that are developed 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, Canada 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.
The President and Chief Operating Officer allocates resources to each of
these segments using information on their respective revenues and operating
profits before interest and taxes. The President and Chief Operating
Officer has been identified as the Chief Operating Decision Maker as
defined by SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," ("SFAS No. 131").
The President and Chief Operating Officer does not evaluate individual
segments based on assets or depreciation.
The accounting policies of these segments are the same as those described
in the Summary of Significant Accounting Policies. Revenue derived from
sales between segments is eliminated in consolidation.
Information on the reportable segments for the three years ended March 31,
2001 is as follows (amounts in thousands):
Year ended March 31, 2001
-------------------------------------
Publishing Distribution Total
---------- ------------ ---------
Total segment revenues $ 466,062 $ 154,121 $ 620,183
Revenue from sales between
segments (39,331) 39,331 -
---------- ------------ ---------
Revenues from external customers $ 426,731 $ 193,452 $ 620,183
========== ============ =========
Operating income $ 35,687 $ 4,120 $ 39,807
========== ============ =========
Total assets $ 271,488 $ 88,469 $ 359,957
========== ============ =========
F-16
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)
========== ============ =========
Total assets $ 230,961 $ 78,776 $ 309,737
========== ============ =========
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 $ 12,398 $ 14,269 $ 26,667
========== ============ =========
Total assets $ 185,567 $ 97,778 $ 283,345
========== ============ =========
Geographic information for the three years ended March 31, 2001 is based on
the location of the selling entity. Revenues from external customers by
geographic region were as follows (amounts in thousands):
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
United States $352,893 $282,847 $149,705
Europe 256,228 277,485 278,032
Other 11,062 11,873 8,789
-------- -------- --------
Total $620,183 $572,205 $436,526
======== ======== =========
Revenues by platform were as follows (amounts in thousands):
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
Console $466,893 $410,277 $268,246
PC 153,290 161,928 168,280
-------- -------- --------
Total $620,183 $572,205 $436,526
======== ======== =========
F-17
9. Computation of Earnings Per Share
The following table sets forth the computations of basic and diluted
earnings (loss) per share, (amounts in thousands, except per share data):
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
Numerator
Numerator for basic and diluted
earnings per share-income
(loss) available to
common shareholders $ 20,507 $(34,088) $ 14,891
======== ======== =========
Denominator
Denominator for basic earnings
per share-weighted average
common shares outstanding 37,298 37,037 34,292
Effect of dilutive securities:
Employee stock options 3,531 - 1,413
Warrants to purchase common stock 271 - 193
-------- -------- --------
Potential dilutive common shares 3,802 - 1,606
-------- -------- --------
Denominator for diluted earnings
per share-weighted average
common shares outstanding plus
assumed conversions 41,100 37,037 35,898
======== ======== =========
Basic earnings (loss) per share $ 0.55 $ (0.92) $ 0.43
======== ======== =========
Diluted earnings (loss) per share $ 0.50 $ (0.92) $ 0.41
======== ======== =========
Options to purchase 3,508,262, 3,833,096 and 3,282,263 shares of common
stock were outstanding for the years ended March 31, 2001, 2000 and 1999,
respectively, but were not included in the calculations of diluted earnings
(loss) per share because their effect would be antidilutive. Convertible
subordinated notes were also not included in the calculations of diluted
earnings per share because their effect would be antidilutive.
Subsequent to March 31, 2001, the Company called for the redemption of its
$60.0 million convertible subordinated notes due 2005. In connection with
that call, holders have converted into common stock approximately $60.0
million aggregate principal amount of their convertible subordinated notes,
resulting in the issuance of approximately 4,762,500 shares of common stock
to such holders.
F-18
10. Income Taxes
Domestic and foreign income (loss) before income taxes and details of the
income tax provision (benefit) are as follows (amounts in thousands):
Year Ended March 31,
------------------------------
2001 2000 1999
-------- -------- --------
Income (loss) before income taxes:
Domestic $ 24,276 $(37,115) $ 5,945
Foreign 8,268 (1,621) 17,691
-------- -------- --------
$ 32,544 $(38,736) $ 23,636
======== ======== ========
Income tax expense (benefit):
Current:
Federal $ 394 $ (383) $ 37
State 112 337 124
Foreign 4,351 2,610 5,456
-------- -------- --------
Total current 4,857 2,564 5,617
======== ======== ========
Deferred:
Federal (5,610) (10,047) (418)
State (1,761) (1,448) 57
Foreign (479) - -
-------- -------- --------
Total deferred (7,850) (11,495) (361)
======== ======== ========
Add back benefit credited to
additional paid-in capital:
Tax benefit related to stock
option exercises 11,378 3,017 1,059
Tax benefit related to utilization
of pre-bankruptcy net operating
loss carryforwards 3,652 1,266 2,430
-------- -------- --------
15,030 4,283 3,489
-------- -------- --------
Income tax provision (benefit) $ 12,037 $ (4,648) $ 8,745
======== ======== ========
F-19
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,
------------------------------
2001 2000 1999
-------- -------- --------
Federal income tax provision
(benefit) at statutory rate 35.0% (34.0%) 34.0%
State taxes, net of federal
benefit 3.3% (4.5%) 1.3%
Nondeductible amortization 1.3% 18.6% 1.7%
Nondeductible merger fees - 0.4% 0.8%
Research and development credits (5.7%) (8.6%) (5.4%)
Incremental effect of foreign tax rates 0.5% 2.8% (0.9%)
Increase of valuation allowance 4.0% 13.8% 5.1%
Rate changes (1.5%) - -
Other 0.1% (0.5%) 0.4%
-------- -------- --------
37.0% (12.0%) 37.0%
======== ======== ========
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,
----------------------
2001 2000
-------- --------
Deferred asset:
Allowance for bad debts $ 716 $ 1,019
Allowance for sales returns 3,900 5,151
Inventory reserve 992 799
Vacation & bonus reserve 1,663 763
Royalty reserve 170 774
Other 1,643 1,585
Tax credit carryforwards 14,224 12,062
Net operating loss carryforwards 12,362 12,828
Amortization & depreciation 6,816 7,055
-------- --------
Deferred asset 42,486 42,036
Valuation allowance (9,895) (13,041)
-------- --------
Net deferred asset 32,591 28,995
-------- --------
Deferred liability:
Capitalized research expenses 3,087 7,864
State taxes 1,453 917
-------- --------
Deferred liability 4,540 8,781
-------- --------
Net deferred asset $28,051 $20,214
======== ========
In accordance with Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code," issued
by the AICPA, benefits from loss carryforwards arising prior to the
Company's reorganization are recorded as additional paid-in capital. During
the year ended March 31, 2001, $3.7 million was recorded as additional
paid-in capital.
F-20
As of March 31, 2001, the Company's available federal net operating loss
carryforward of $30.8 million is subject to certain limitations as defined
under Section 382 of the Internal Revenue Code. The net operating loss
carryforwards expire from 2006 to 2019. The Company's available state net
operating loss carryforward of $8.0 million is not subject to limitations
under Section 382 of the Internal Revenue Code. The Company has tax credit
carryforwards of $9.4 million and $4.8 million for federal and state
purposes, respectively, which expire from 2006 to 2021.
At March 31, 2001, the Company's deferred income tax asset for tax credit
carryforwards and net operating loss carryforwards was reduced by a
valuation allowance of $9.9 million. Of such valuation allowance, none
relates to SOP 90-7 which, if realized, would be recorded as additional
paid-in capital. Realization of the deferred tax assets is dependent upon
the continued generation of sufficient taxable income prior to expiration
of tax credits and loss carryforwards. Although realization is not assured,
management believes it is more likely than not that the net carrying value
of the deferred tax asset will be realized. The amount of deferred tax
assets considered realizable, however, could be reduced in the future if
estimates of future taxable income are reduced.
Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $22.8 million at March 31,
2001. Deferred income taxes on these earnings have not been provided as
these amounts are considered to be permanent in duration.
11. Long-Term Debt
Bank Lines of Credit and Other Debt
The Company's long-term debt consists of the following (amounts in
thousands):
March 31,
----------------------
2001 2000
-------- --------
U.S. Facility $ 8,432 $ 22,496
The Netherlands Facility 1,759 3,509
Mortgage notes payable and other 3,441 4,033
-------- --------
13,632 30,038
Less current portion (10,231)
(16,260)
Long-term debt, less current portion $ 3,401 $ 13,778
In June 1999, the Company obtained a $100.0 million revolving credit
facility and a $25.0 million term loan (the "U.S. Facility") with a
syndicate of banks. The revolving portion of the U.S. Facility provides the
Company with the ability to borrow up to $100.0 million and issue letters
of credit up to $80 million on a revolving basis against eligible accounts
receivable and inventory. The $25.0 million term loan portion of the U.S.
Facility was used to acquire Expert Software, Inc. in June 1999 and to pay
costs related to such acquisition and the securing of the U.S. Facility.
The term loan has a three year term with principal amortization on a
straight-line quarterly basis beginning December 31, 1999 and a borrowing
rate based on the banks' base rate (which is 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% and matures June 2002. The U.S. Facility had a
weighted average interest rate of approximately 9.70% and 9.50% for the
year ended March 31, 2001 and 2000, respectively. The Company pays a
commitment fee of 1/2% on the unused portion of the revolving line. The
U.S. Facility is 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, 2001 and 2000, the Company was
in compliance with these covenants. As of March 31, 2001, approximately
$8.5 million was outstanding under the term loan portion of the U.S.
Facility. As of March 31, 2001, there were no borrowings outstanding and
$18.2
F-21
million of letters of credit outstanding against the revolving portion of
the U.S. Facility. As of March 31, 2000, $20.0 million was outstanding
under the term loan portion 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.
The Company has a revolving credit facility through its CD Contact
subsidiary in the Netherlands (the "Netherlands Facility"). The Netherlands
Facility permits revolving credit loans and letters of credit up to
Netherlands Guilders ("NLG") 26 million ($10.4 million) as of March 31,
2001 and NLG 45 million ($19.4 million) as of March 31, 2000, based upon
eligible accounts receivable and inventory balances. The Netherlands
Facility is due on demand, bears interest at a Eurocurrency rate plus 1.50%
and 1.25% in fiscal 2001 and 2000, respectively (weighted average interest
rate of approximately 7.40% and 6.80% as of March 31, 2001 and 2000,
respectively) and matures August 2003. Borrowings outstanding under the
Netherlands Facility were $1.8 million and $3.5 million at March 31, 2001
and 2000, respectively. Letters of credit outstanding under the Netherlands
Facility were NLG 3.8 million ($1.6 million) as of March 31, 2000. There
were no letters of credit outstanding under the Netherlands Facility as of
March 31, 2001.
The Company also has revolving credit facilities with its CentreSoft
subsidiary located in the United Kingdom (the "UK Facility") and its NBG
subsidiary located in Germany (the "German Facility"). The UK Facility
provides for British Pounds ("GBP") 7.0 million ($10.0 million) of
revolving loans and GBP 3.0 million ($4.3 million) of letters of credit as
of March 31, 2001 and GBP 7.0 million ($11.2 million) of revolving loans
and GBP 6.0 million ($9.6 million) of letters of credit as of March 31,
2000. The UK Facility bears interest at LIBOR plus 2%, is collateralized by
substantially all of the assets of the subsidiary and matures in July 2001.
The UK Facility also contains various covenants that require the subsidiary
to maintain specified financial ratios related to, among others, fixed
charges. As of March 31, 2001 and 2000, the Company was in compliance with
these covenants. No borrowings were outstanding against the UK facility at
March 31, 2001 or 2000. Letters of credit of GBP 3.0 million ($4.3 million)
and GBP 6.0 million ($9.6 million) were outstanding against the UK Facility
at March 31, 2001 and 2000, respectively. As of March 31, 2001 and 2000,
the German Facility provides for revolving loans up to Deutsche Marks
("DM") 4 million ($1.8 million), bears interest at 7.0%, is collateralized
by a cash deposit of approximately GBP 650,000 ($928,000) made by the
Company's CentreSoft subsidiary and has no expiration date. No borrowings
were outstanding against the German Facility as of March 31, 2001 and 2000.
Mortgage notes payable relate to the land, office and warehouse facilities
of the Company's German and Netherlands subsidiaries. The notes bear
interest at 5.45% and 5.35%, respectively, and are collateralized by the
related assets. The Netherlands mortgage note payable is due in quarterly
installments of NLG 25,000 ($10,000) and matures January 2019. The German
mortgage note payable is due in bi-annual installments of DM 145,000
($65,500) beginning June 2002 and matures December 2019.
Annual maturities of long-term debt are as follows (amounts in thousands):
2002 $ 10,231
2003 235
2004 171
2005 171
2006 171
Thereafter 2,653
---------
Total $ 13,632
=========
Private Placement of Convertible Subordinated Notes
In December 1997, the Company completed the private placement of $60.0
million principal amount of 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
F-22
repurchased, into common stock, $.000001 par value, of the Company, at a
conversion price of $12.583 per share, (equivalent to a conversion rate of
79.4723 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.
12. 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, 2001, the total future
minimum contract commitment is approximately $62.1 million, which is
scheduled to be paid as follows (amount in thousands):
Year ending March 31,
2002 $ 35,197
2003 13,528
2004 6,250
2005 2,925
2006 1,675
Thereafter 2,500
-----------
$ 62,075
===========
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 for an estimated $5.7 million. Failure
by the developers to complete the project within the contractual time frame
or specifications alleviates the Company's commitment.
Lease Obligations
The Company leases certain of its facilities under non-cancelable operating
lease agreements. Total future minimum lease commitments as of March 31,
2001 are as follows (amounts in thousands):
Year ending March 31,
2002 $ 3,991
2003 3,728
2004 3,606
2005 3,389
2006 3,044
Thereafter 5,576
-----------
Total $ 23,334
===========
Facilities rent expense for the years ended March 31, 2001, 2000 and 1999
was approximately $4.7 million, $4.4 million and $4.4 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-24
13. Stock Compensation Plans
Employee Options
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 11,350,500. The 1991 Plan requires
available shares to consist in whole or in part of authorized and unissued
shares or treasury shares. There were approximately 343,500 shares
remaining available for grant under the 1991 Plan as of March 31, 2001.
On September 23, 1998, the stockholders of the Company approved the
Activision 1998 Incentive Plan (the "1998 Plan"). The 1998 Plan permits the
granting of "Awards" in the form of non-qualified stock options, ISOs,
SARS, restricted stock awards, deferred stock awards and other common
stock-based awards to directors, officers, employees, consultants and
others. The total number of shares of common stock available for
distribution under the 1998 Plan is 4,500,000. The 1998 Plan requires
available shares to consist in whole or in part of authorized and unissued
shares or treasury shares. There were approximately 972,000 shares
remaining available for grant under the 1998 Plan as of March 31, 2001.
On, April 26, 1999, the Board of Directors approved the Activision 1999
Incentive Plan (the "1999 Plan"). The 1999 Plan permits the granting of
"Awards" in the form of non-qualified stock options, ISOs, SARs, restricted
stock awards, deferred share awards and other common stock-based awards to
directors, officers, employees, consultants and others. The total number of
shares of common stock available for distribution under the 1999 Plan is
7,500,000. 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, 2001, there were approximately 393,000 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, which administers the Plans), and for ISOs, is not to be less
than the fair market value of the Company's common stock at the date of
grant, or in the case of non-qualified options, must exceed or be equal to
85% of the fair market value at the date of grant. Options typically become
exercisable in installments over a period not to exceed five years and must
be exercised within 10 years of the date of grant. However, certain options
granted to executives vest immediately. Historically, stock options have
been granted with exercise prices equal to or greater than the fair market
value at the date of grant.
In connection with current and prior employment agreements between the
Company and Robert A. Kotick, the Company's Chairman and Chief Executive
Officer, and Brian G. Kelly, the Company's Co-Chairman, Mr. Kotick and Mr.
Kelly have been granted options to purchase common stock. Relating to such
grants, as of March 31, 2001, 6,403,500 and 4,779,000 shares with weighted
average exercise prices of $5.62 and $6.15 were outstanding and
exercisable, respectively.
The Company also issues stock options in conjunction with acquisition
transactions. For the year ended March 31, 2001, approximately 19,500 and
1,500 options with weighted average exercise prices of $6.49 and $4.51 were
outstanding and exercisable, respectively, relating to options issued in
conjunction with the acquisitions of Head Games and Expert.
Director Warrants
The Director Warrant Plan, which expired on December 19, 1996, provided for
the automatic granting of warrants ("Director Warrants") to purchase 25,001
shares of common stock to each director of the Company who was not an
officer or employee of the Company or any of its subsidiaries. Director
Warrants granted under the Director Warrant Plan vest 25% on the first
anniversary of the date of grant, and 12.5% each six months thereafter. The
expiration of the Plan had no effect on the outstanding Director Warrants.
As of March 31, 2001, there were no shares of common stock available for
distribution under the Director Warrant Plan.
F-24
The range of exercise prices for Director Warrants outstanding as of March
31, 2001 was $0.50 to $5.67. The range of exercise prices for Director
Warrants is wide due to increases and decreases in the Company's stock
price over the period of the grants. As of March 31, 2001, 43,050 of the
outstanding and vested Director Warrants have a weighted average remaining
contractual life of 0.78 years and a weighted average exercise price of
$0.50; 30,000 of the outstanding and vested Director Warrants have a
weighted average remaining contractual life of 3.82 years and a weighted
average exercise price of $4.33; and 30,000 of the outstanding and vested
Director Warrants have a weighted average remaining contractual life of
3.82 years and a weighted average exercise price of $5.67.
During the fiscal year ended March 31, 1997, the Company issued warrants to
purchase 60,000 shares of the Company's common stock, at exercise prices
ranging from $7.87 to $9.25 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. Relating to
such warrants, as of March 31, 2001, 60,000 and 58,500 shares with weighted
average exercise prices of $8.57 and $8.59 were outstanding and
exercisable, respectively.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for all eligible employees
(the "Purchase Plan"). Under the Purchase Plan, shares of the Company's
common stock may be purchased at six-month intervals at 85% of the lower of
the fair market value on the first or last day of each six-month period
(the "Offering Period"). Employees may purchase shares having a value not
exceeding 10% of their gross compensation during an Offering Period.
Employees purchased 51,923 and 58,503 shares at a price of $6.31 and $7.12
per share during the Purchase Plan's offering period ended September 30,
2000 and 1999, respectively, and 65,865 and 50,160 shares at a price of
$7.86 and $6.83 per share during the Purchase Plan's offering period ended
March 31, 2001 and 2000, respectively.
Activity of Employee and Director Options and Warrants
Activity of all employee and director options and warrants during the last
three fiscal years was as follows (amounts in thousands, except weighted
average exercise price amounts):
2001 2000 1999
---------------- ---------------- ----------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
------ -------- ------ -------- ------ --------
Outstanding at
beginning of year 15,498 $7.38 14,924 $7.03 9,327 $7.65
Granted 10,151 4.61 5,651 7.68 8,307 6.85
Exercised (5,250) 6.04 (3,497) 6.10 (907) 5.79
Forfeited (2,483) 6.49 (1,580) 7.94 (1,803) 10.22
------ -------- ------ -------- ------ --------
Outstanding at
end of year 17,916 $6.45 15,498 $7.38 14,924 $7.03
====== ======== ====== ======== ====== ========
Exercisable at
end of year 9,816 $6.66 7,073 $6.83 6,231 $6.67
====== ======== ====== ======== ====== ========
For the year ended March 31, 2001, 6,513,000 options with a weighted
average exercise price of $4.79 were granted at an exercise price equal to
the fair market value on the date of grant and 3,637,500 options with a
weighted average exercise price of $4.29 were granted at an exercise price
greater than fair market value on the date of grant.
For the year ended March 31, 2000, 3,751,500 options with a weighted
average exercise price of $8.59 were granted at an exercise price equal to
the fair market value on the date of grant and 1,057,500 options with a
weighted average exercise price of $7.14 were granted at an exercise price
greater than fair market value on the date of grant. Additionally, in
conjunction with the acquisition of Expert, 841,500 options with a weighted
average exercise price of $4.32 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-25
For the year ended March 31, 1999, 7,980,000 options were granted at an
exercise price equal to the fair market value on the date of grant and
327,000 options were granted at an exercise price greater than fair market
value on the date of grant.
The following tables summarize information about all employee and director
stock options and warrants outstanding as of March 31, 2001 (share amounts
in thousands):
Outstanding Options Exercisable Options
----------------------------- ---------------------
Remaining
Wtd Avg Wtd
Contractual Avg
Life Exercise Wtd Avg
Shares (in years) Price Shares Exercise Price
------ ----------- --------- ------ --------------
Range of
exercise prices:
$0.50 to $0.50 44 0.78 0.50 44 0.50
$2.00 to $4.00 2,004 8.30 3.88 500 3.53
$4.02 to $4.09 3,003 9.14 4.09 1,376 4.09
$4.11 to $6.29 1,959 8.04 5.19 759 5.80
$6.33 to $6.83 2,412 6.88 6.59 2,193 6.59
$6.87 to $6.87 510 8.29 6.87 250 6.87
$6.92 to $7.00 2,999 7.97 7.00 2,962 7.00
$7.04 to $8.33 1,961 7.48 7.43 633 7.32
$8.42 to $9.67 1,958 7.87 9.02 498 8.96
$9.71 to $15.91 1,066 6.31 11.89 601 12.57
Non-Employee Warrants
In prior years, the Company has granted stock warrants to third parties in
connection with the development of software and the acquisition of
licensing rights for intellectual property. The warrants generally vest
upon grant and are exercisable over the term of the warrant. The exercise
price of third party warrants is generally greater than or equal to the
fair market value of the Company's common stock at the date of grant.
No such grants were made during the fiscal year ending March 31, 2001. As
of March 31, 2001, 1,974,000 third party warrants to purchase common stock
were outstanding with a weighted average exercise price of $7.26 per share.
During the fiscal year ended March 31, 2000, the Company granted warrants
to a third party to purchase 150,000 shares of the Company's common stock
at an exercise price of $7.75 per share in connection with, and as partial
consideration for, a license agreement that allows the Company to utilize
the third party's name in conjunction with certain Activision products. The
warrants vested upon grant, have a seven year term and become exercisable
ratably in annual installments over the warrant term. As of March 31, 2000,
2,370,000 third party warrants to purchase common stock were outstanding
with a weighted average exercise price of $7.35 per share.
F-26
During the fiscal year ended March 31, 1999, the Company issued the
following warrants to third parties to purchase an aggregate of 1,500,000
shares of common stock in connection with software license agreements:
Exercise Expiration
Warrants Shares Price Vesting Schedule Date
-------- ------ -------- ------------------------------- ----------
#1 750,000 $ 6.85 Vested upon date of grant; 9/16/08
exercisable ratably over
5 years beginning on date
of grant.
#2 375,000 (a) Vested upon date of grant; 9/16/08
exercisable ratably over
5 years beginning on 9/16/03.
#3 375,000 $ 8.47 Vested and exercisable upon 7/2/08
date of grant.
--------- ------
Total 1,500,000
=========
(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.
As of March 31, 1999, 2,220,000 third party warrants to purchase common
stock were outstanding with a weighted average exercise price of $7.32 per
share
The fair value of the warrants was determined using the Black-Scholes
pricing model, assuming a risk-free rate of 4.77%, a volatility factor of
66% and expected terms as noted above. The weighted average estimated fair
value of third party warrants granted during the years ending March 31,
2000 and 1999 were $5.26 per share and $5.29 per share, respectively. No
warrants were granted during the fiscal year ending March 31, 2001. In
accordance EITF 96-18, the Company measures the fair value of the
securities on the measurement date. The fair value of each warrant is
capitalized and amortized to royalty expense when the related product is
released and the related revenue is recognized. During fiscal year 2001,
2000 and 1999, $1.4 million, $5.8 million and $0.4 million, respectively,
was amortized and included in royalty expense relating to warrants.
Pro Forma Information
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employee stock options. Under
APB No. 25, if the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized in the Company's financial statements.
Pro forma information regarding net income (loss) and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its employee stock options (including
shares issued under the Purchase Plan and Director Warrant Plan and other
employee option grants, collectively called "options") granted during
fiscal 2001, 2000 and 1999 under the fair value method of that statement.
The fair value of options granted in the years ended March 31, 2001, 2000
and 1999 reported below has been estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
Option Plans
and Other Director
Employee Options Purchase Plan Warrant Plan
-------------------- ------------------ --------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999
------ ------ ------ ------ ------ ------ ------ ------ ------
Expected
life
(in years) 1 1 1.5 0.5 0.5 0.5 1 1 0.5
Risk free
interest
rate 4.09% 6.15% 4.77% 4.09% 6.15% 4.77% 4.09% 6.15% 4.77%
Volatility 70% 67% 66% 70% 67% 66% 70% 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
F-27
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 2001, the
per share weighted average fair value of options with exercise prices equal
to market value on date of grant and exercise prices greater than market
value were $2.08, and $0.89, respectively. For options granted during
fiscal 2000, the per share weighted average fair value of options with
exercise prices equal to market value on date of grant, exercise prices
greater than market value and exercise prices less than market value were
$3.94, $1.76 and $5.33, respectively. The weighted average estimated fair
value of options and warrants granted during the year ended March 31, 1999
was $7.41 per share. The per share weighted average estimated fair value of
Employee Stock Purchase Plan shares granted during the years ended March
31, 2001, 2000 and 1999 were $2.32, $2.23 and $1.90, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (amounts in thousands except for
per share information):
Year ended March 31,
2001 2000 1999
--------- -------- --------
Pro forma net
income (loss) $ 11,531 $(45,355) $ 748
Pro forma basic earnings
(loss) per share 0.31 (1.22) 0.01
Pro forma diluted
earnings (loss)
per share 0.28 (1.22) 0.01
The effects on pro forma disclosures of applying SFAS No. 123 are not
likely to be representative of the effects on pro forma disclosures of
future years.
Employee Retirement Plan
The Company has a retirement plan covering substantially all of its
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 $62,000,
$46,000 and $40,000 during the years ended March 31, 2001, 2000 and 1999,
respectively.
F-28
14. Shareholders Equity
a. 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 notes, market conditions, and such other factors as the
Company's management deemed appropriate. The Company has financed the
purchase of shares with available cash. As of the quarter ending June 30,
2000, the Company had repurchased 3.5 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.
F-29
15. 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,
--------------------------------
2001 2000 1999
-------- -------- --------
Non-cash investing and
financing activities:
Stock and warrants to acquire
common stock issued in
exchange for licensing rights $ - $ 8,529 $ 3,368
Tax benefit derived from net
operating loss carryforward
utilization 3,652 1,266 2,430
Stock issued to effect business
combination - 7,171 -
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 $ 6,753 $ 6,333 $ 2,814
Cash paid for interest $ 5,720 $ 10,519 $ 5,513
16. Quarterly Financial and Market Information - Restated (Unaudited)
Quarter Ended
-------------------------------------
Year
(Amounts in thousands, June 30 Sept 30 Dec 31 Mar 31 (1) Ended
except per share data) --------- --------- --------- ---------- ---------
Fiscal 2001:
Net revenues $ 84,558 $144,363 $ 264,473 $ 126,789 $620,183
Operating income
(loss) (6,498) 9,536 34,754 2,015 39,807
Net income (loss) (5,179) 4,306 20,505 875 20,507
Basic earnings
(loss) per share (0.14) 0.12 0.56 0.02 0.55
Diluted earnings
(loss) per share (0.14) 0.11 0.47 0.02 0.50
Common stock price
per share
High 8.10 10.42 10.17 16.83 16.83
Low 3.58 4.21 6.88 9.08 3.58
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 (0.13) 0.03 0.59 (1.38) (0.92)
Diluted earnings (loss)
per share (0.13) 0.03 0.50 (1.38) (0.92)
Common stock price per share
High 9.75 11.83 11.75 12.17 12.17
Low 6.75 8.17 8.92 7.75 6.75
F-30
Per share amounts restated to give effect to our three-for-two stock split
effected in the form of a 50% stock dividend for shareholders of record as
of November 6, 2001, paid November 20, 2001.
(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."
17. 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.
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.
18. Subsequent Events -- Unaudited
Subsequent to March 31, 2001, the Company called for the redemption of its
$60.0 million convertible subordinated notes due 2005. In connection with
that call, as of June 20, 2001, holders have converted into common stock
approximately $60.0 million aggregate principal amount of their convertible
subordinated notes.
In May 2001, the Company repaid in full the remaining $8.5 million balance
of the term loan portion of the U.S. Facility. In conjunction with the
accelerated repayment of the term loan, the Company amended the U.S.
Facility effective May 7, 2001. The amended and restated U.S. Facility
eliminates the term loan, reduces the revolver to $78.0 million, reduces
the interest rate to Prime plus 1.25% or LIBOR plus 2.25%, eliminates
certain covenants, increases the advance rates and reduces the fee paid for
maintenance of the facility.
F-31
================================================================================
492,636 Shares
ACTIVISION, INC.
Common Stock
________________
PROSPECTUS
________________
____________, 2002
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table itemizes the expenses incurred by Activision, Inc. (the
"Company") in connection with the offering of the common stock being registered.
All amounts shown are estimates except the Securities and Exchange Commission
(the "Commission") registration fee.
Item Amount
---- ------
Registration Fee - Securities and Exchange Commission.............$ 1,450*
Legal Fees and Expenses........................................... 7,500
Accounting Fees and Expenses...................................... 10,000
Miscellaneous..................................................... 2,500
-----
TOTAL.........................................................$ 21,450
_________________
* Pursuant to Rule 457(p) of the Securities Act of 1933, as amended, the
registration fee of $1,450 is offset against the $57,141 registration fee
(of which $16,415 remains) that was previously paid to the Commission
relating to 6,900,000 shares of Common Stock previously registered by the
registrant pursuant to its Registration Statement on Form S-3 filed with
the Commission on July 30, 2001, (File No. 333-66280), which Registration
Statement was withdrawn on October 22, 2001, prior to the issuance of any
such shares.
Item 15. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law ("DGCL"), paragraphs A
and B of Article SIXTH of the Company's Amended and Restated Certificate of
Incorporation, as amended (the "Certificate of Incorporation"), and paragraph 5
of Article VII of the Company's Amended and Restated By-laws (the "By-Laws")
provide for the indemnification of the Company's directors and officers in a
variety of circumstances, which may include liabilities under the Securities Act
of 1933, as amended (the "Securities Act").
Paragraph B of Article SIXTH of the Certificate of Incorporation provides
mandatory indemnification rights to any officer or director of the Company who,
by reason of the fact that he or she is an officer or director of the Company,
is involved in a legal proceeding of any nature. Such indemnification rights
shall include reimbursement for expenses incurred by such officer or director in
advance of the final disposition of such proceeding in accordance with the
applicable provisions of the DGCL. Paragraph 5 of Article VII of the Company's
By-laws currently provides that the Company shall indemnify its directors and
officers to the fullest extent permitted by the DGCL.
Paragraph A of Article SIXTH of the Certificate of Incorporation contains a
provision which eliminates the personal liability of a director to the Company
and its stockholders for certain breaches of his or her fiduciary duty of care
as a director. This provision does not, however, eliminate or limit the personal
liability of a director (i) for any breach of such director's duty of loyalty to
the Company or its
stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
the Delaware statutory provision making directors personally liable, under a
negligence standard, for unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) for any transaction from which the director derived an
improper personal benefit. This provision offers persons who serve on the Board
of Directors of the Company protection against awards of monetary damages
resulting from negligent (except as indicated above) and "grossly" negligent
actions taken in the performance of their duty of care, including grossly
negligent business decisions made in connection with takeover proposals for the
Company. As a result of this provision, the ability of the Company or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care has been limited. However, the provision does not
affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care.
The Company maintains a directors' and officers' insurance policy which
insures the officers and directors of the Company from any claim arising out of
an alleged wrongful act by such persons in their respective capacities as
officers and directors of the Company. In addition, the Company has entered into
indemnification agreements with its officers and directors containing provisions
which are in some respects broader than the specific indemnification provisions
contained in the DGCL. The indemnification agreements require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. The Company believes that
these agreements are necessary to attract and retain qualified persons as
directors and officers.
It is currently unclear as a matter of law what impact these provisions
will have regarding securities law violations. The Commission takes the position
that indemnification of directors, officers and controlling persons against
liabilities arising under the Securities Act is against public policy as
expressed in the Securities Act and therefore is unenforceable.
Item 16. Exhibits
(a) Exhibits:
4.1 Warrant to purchase 150,000 shares of common stock granted to
id Software, Inc. by Activision, Inc. dated April 1, 2002.
5.1 Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP as to the
legality of securities being registered.
23.1 Consent of Robinson Silverman Pearce Aronsohn & Berman LLP (included
as part of Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
24.1 Power of attorney (included on signature page).
II-2
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
Company pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), that are incorporated by reference in\
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The Company hereby further undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The Company hereby further undertakes to deliver or cause to be delivered
with the Prospectus, to each person to whom the Prospectus is sent or given, the
latest annual report to security holders that is incorporated by reference in
the Prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Exchange Act; and, where interim financial
information required to be presented by Article 3 of Regulation S-X are not set
forth in the Prospectus, to deliver, or cause to be delivered to each person to
whom the Prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the Prospectus to provide such interim
financial information.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that
II-3
a claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of Los Angeles, State of California, on May 22, 2002.
ACTIVISION, INC.
By:/s/ Ronald Doornink
--------------------------
Ronald Doornink, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Robert A. Kotick, Brian G. Kelly and
Ronald Doornink, and each or any of them, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective documents in connection therewith), with
the Securities and Exchange Commission, granting unto each said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Robert A. Kotick Chairman, Chief Executive Officer May 22, 2002
------------------------- and Director
(Robert A. Kotick)
/s/ Brian G. Kelly Co-Chairman and Director May 22, 2002
-------------------------
(Brian G. Kelly)
/s/ Ronald Doornink President, Activision, Inc.; May 22, 2002
------------------------- Chief Executive Officer, Activision
(Ronald Doornink) Publishing Inc. (Principal Executive
Officer)
/s/ William J. Chardavoyne Executive Vice President and May 22, 2002
-------------------------- Chief Financial Officer
(William J. Chardavoyne) (Principal Financial
and Accounting Officer)
/s/ Kenneth L. Henderson Director May 22, 2002
-------------------------
(Kenneth L. Henderson)
/s/ Barbara S. Isgur Director May 22, 2002
-------------------------
(Barbara S. Isgur)
/s/ Steven T. Mayer Director May 22, 2002
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(Steven T. Mayer)
/s/ Robert J. Morgado Director May 22, 2002
-------------------------
(Robert J. Morgado)
II-5
EXHIBIT INDEX
Exhibit No. Description
4.1 Warrant to purchase 150,000 shares of common stock granted to id
Software, Inc. by Activision, Inc. dated April 1, 2002.
5.1 Opinion of Robinson Silverman Pearce Aronsohn & Berman LLP as to the
legality of securities being registered.
23.1 Consent of Robinson Silverman Pearce Aronsohn & Berman LLP (included as
part of Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3 Consent of PricewaterhouseCoopers LLP.
24.1 Power of attorney (included on signature page).