Blizzard 2002 Annual Report Download - page 19

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Additional shares of our common stock also may be issued to Treyarch’s equity holders and employees over
the course of several years, depending on the satisfaction of cer tain product performance requirements and
other criteria. This contingent consideration will be recorded as an additional element of the purchase price
for Treyarch when those contingencies are resolved.
Acquisition of Gray Matter. On December 30, 1999, we acquired a 40% interest in the outstanding capital
stock of Gray Matter Interactive Studios, Inc., formerly known as Video Games West (“Gray Matter”), a
privately held software development company, as well as an option to purchase the remaining 60% of
outstanding capital stock. Gray Matter was the developer for our first person action PC product, Return
to Castle Wolfenstein. Effective January 9, 2002, we exercised our option to acquire the remaining 60%
of outstanding capital stock of Gray Matter in exchange for 133,690 shares of our common stock. The
purchase price of the transaction, including acquisition costs, was valued at approximately $3.6 million with
a significant portion of the purchase price being assigned to goodwill. This goodwill has been included in the
publishing segment of our business and is non-deductible for tax purposes. The results of operations of Gray
Matter are included in our consolidated statement of operations beginning January 9, 2002.
Acquisition of Shaba. On March 27, 2002, we acquired all of the outstanding ownership interests of Shaba
Games, LLC (“Shaba”), a privately held interactive software development company, in exchange for 258,621
shares of our common stock. Shaba is a console software developer with a focus on action and action-
sports video games. The purchase price of the transaction, including acquisition costs, was valued at approx-
imately $7.4 million with approximately $6.2 million of the purchase price being assigned to goodwill. This
goodwill has been included in the publishing segment of our business and is non-deductible for tax purposes.
The results of operations of Shaba are included in our consolidated statement of operations beginning
March 27, 2002.
Additional shares of our common stock also may be issued to Shaba’s equity holders and employees over
the course of several years, depending on the satisfaction of cer tain product performance requirements and
other criteria. This contingent consideration will be recorded as an additional element of the purchase price
for Shaba when those contingencies are resolved.
A significant portion of the purchase price for each of these acquisitions was assigned to goodwill as the
primary asset we acquired in each transaction was an assembled workforce with proven technical and
design talent with a history of high quality product creation. Pro forma consolidated statements of operations
reflecting these acquisitions are not shown, as they would not differ materially from reported results.
Fiscal 2000 Transactions
Acquisition of Neversoft. On September 30, 1999, we acquired Neversoft, a privately held console software
developer, in exchange for 1,048,253 shares of our common stock. The acquisition was accounted for as
a pooling of interests. Accordingly, in fiscal 2000, we restated the consolidated financial statements for all
periods prior to the closing of the transaction.
The following table represents the results of operations of the previously separate companies for the period
before the combination was consummated which are included in fiscal year 2000 combined net income
(loss) (amounts in thousands).
Activision Neversoft Total
Six Months Ended Six Months Ended Six Months Ended
Fiscal Year 2000 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, we acquired Elsinore Multimedia, Inc. (“Elsinore”), a pri-
vately held interactive software development company, in exchange for 306,672 shares of our common stock.
The acquisition was accounted for using the purchase method of accounting. Accordingly, the results of
operations of Elsinore have been included in our consolidated financial statements from the date of acquisi-
tion. The aggregate purchase price has been allocated to the assets and liabilities acquired, consisting mostly
of goodwill of $3.0 million. 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, we 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
and other stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, compensation expense is recorded
for the issuance of stock options and other stock-based compensation based on the intrinsic value of the
stock options and other stock-based compensation on the date of grant or measurement date. Under the
intrinsic value method, compensation expense is recorded on the date of grant or measurement date only
if the current market price of the underlying stock exceeds the stock option or other stock-based
compensation exercise price. We have elected to continue to account for stock options and other
stock-based compensation in accordance with APB No. 25. In accordance with SFAS No. 123, we provide
pro forma net income and pro forma earnings (loss) per share disclosures for employee stock option
and other stock-based compensation grants as if the fair value method as prescribed by SFAS No. 123 had
been applied.
Stock warrants are granted to non-employees in connection with the development of software and acquisi-
tion of licensing rights for intellectual property. In accordance with the Financial Accounting Standards
Board’s Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments that are Issued
to Other Than Employees for Acquiring or in Connection With Selling Goods or Services,” the fair value of
stock warrants granted is determined as of the measurement date and is capitalized, expensed and amor-
tized consistent with our policies relating to software development and intellectual property license costs.
Related Parties. As of March 31, 2002 and 2001, we had $3.1 million and $4.3 million, respectively, of loans
due from employees. The loans bear interest at 6.75% and are primarily due from Activision executives.
In August 2001, we elected to our Board of Directors an individual who is a partner in a law firm that has
provided legal services to Activision for more than ten years. We paid approximately $600,000 in fiscal
2002 during the period in which the individual served upon our Board of Directors for legal services ren-
dered by the law firm. Total payments made to this law firm represent less than 1% of that firm’s revenue.
Recently Issued Accounting Standards. In August 2001, SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” was issued, which supersedes SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the accounting and
repor ting provisions of APB No. 30, “Reporting the Results of Operations—Repor ting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions.” SFAS No. 144 addresses financial accounting and repor ting for the impairment or disposal of
long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. We believe the adoption of SFAS No. 144 will not have a material impact on our
consolidated financial statements.
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), share-
holders’ equity or net increase in cash and cash equivalents.
2. Acquisitions
Fiscal 2002 Transactions
During the year ended March 31, 2002, we separately completed the acquisition of three privately held
interactive software development companies. We accounted for those acquisitions in accordance with SFAS
No. 141, “Business Combinations.” SFAS No. 141 was issued on July 20, 2001 and addresses financial
accounting and reporting for business combinations, requiring that the purchase method be used to account
and report for all business combinations. These acquisitions fur ther enable us to implement our multi-
platform development strategy by bolstering our internal product development capabilities for the next-
generation console systems and personal computers and strengthen our position in the first person action,
action and action-sports genres.
Acquisition of Treyarch. Effective October 1, 2001, we acquired all of the outstanding ownership interests of
Treyarch Invention, LLC (“Treyarch”), a privately held interactive software development company, in
exchange for 818,961 shares of our common stock. Treyarch is a console software developer with a focus
on action and action-sports video games. The purchase price of the transaction, including the forgiveness of
a note receivable and acquisition costs, was valued at approximately $15.6 million with approximately $14.5
million of the purchase price being assigned to goodwill. This goodwill has been included in the publishing
segment of our business and is non-deductible for tax purposes. The results of operations of Treyarch are
included in our consolidated statement of operations beginning October 1, 2001.