UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

(Mark one)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended June 30, 2006
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to             

Commission File Number 0-12699

ACTIVISION, INC.
(Exact name of registrant as specified in its charter)

 

(310) 255-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

The number of shares of the registrant’s Common Stock outstanding as of June 1, 2007 was 283,310,734.

ACTIVISION, INC. AND SUBSIDIARIES

INDEX

		Explanatory Note
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements (Restated)
		Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and March 31, 2006
		Consolidated Statements of Operations for the three months ended June 30, 2006 and 2005 (Unaudited)
		Consolidated Statements of Cash Flows for the three months ended June 30, 2006 and 2005 (Unaudited)
		Consolidated Statement of Changes in Shareholders’ Equity for the three months ended June 30, 2006 (Unaudited)
		Notes to Consolidated Financial Statements for the three months ended June 30, 2006 (Unaudited)
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures about Market Risk
Item 4.		Controls and Procedures
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings
Item 1A.		Risk Factors
Item 6.		Exhibits
SIGNATURES
CERTIFICATIONS

 

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CAUTIONARY STATEMENT

This Amended Quarterly Report on Form 10-Q/A contains, or incorporates by reference, certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow projections or other financial items; (2) statements of our plans and objectives, including those relating to product releases; (3) statements of future economic performance; and (4) statements of assumptions underlying such statements. We generally use words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “future”, “intend”, “may”, “plan”, “positioned”, “potential”, “project”, “scheduled”, “set to”, “subject to”, “upcoming” and other similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk, reflect management’s current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Our actual results could differ materially. The forward-looking statements contained herein speak only as of the date on which they were made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed under the heading “Risk Factors”, included in Part II Item 1A. All references to “we”, “us”, “our”, “Activision” or “the Company” in the following discussion and analysis mean Activision, Inc. and its subsidiaries.

EXPLANATORY NOTE

We are amending our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006 as filed with the Securities and Exchange Commission (the “SEC”) on August 8, 2006 (the “Original Filing”) to restate our consolidated financial statements as of June 30, 2006 and for the three months ended June 30, 2006 and 2005 and the related disclosures.  See Note 2, “Restatement of Unaudited Consolidated Financial Statements,” of the Notes to the Consolidated Financial Statements for a detailed discussion of the effect of the restatement.  The impacts of the restatement adjustments extend to periods from the fiscal year ended March 31, 1994 through the fiscal quarter ended June 30, 2006.  We have restated our consolidated financial statements for the year ended March 31, 2006 and we filed an Amended Annual Report on Form 10-K/A with the SEC on May 25, 2007.  In these restated consolidated financial statements, the cumulative compensation expense, including the related income tax impacts, as of March 31, 2003, is recognized as a net decrease to beginning retained earnings as of March 31, 2003. All share and per share information presented in this report has been adjusted to reflect splits and dividends of our common stock.

The restatement reflects the findings of a special subcommittee of independent members of our Board of Directors, which was established in July 2006 to review our historical stock option granting practices (the “Special Subcommittee”).  The Special Subcommittee conducted its investigation with the assistance of Munger Tolles & Olson LLP as its independent counsel and Deloitte & Touche USA LLP (“Deloitte”) as forensic accounting experts retained by counsel.  The Special Subcommittee found that 3,450 of the option grants reviewed, covering 148,747,202 shares, required measurement date corrections.  As a result, we recorded approximately $66.7 million in additional pre-tax $45.4 million after-tax non-cash stock-based compensation expense over the thirteen year period from April 1, 1993 through March 31, 2006 in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and $0.6 million in additional pre-tax non-cash stock-based compensation expense during the quarter ended June 30, 2006 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”.  More than 80% or $55.4 million of the $66.7 million relates to periods through March 31, 2003 and 4% or $2.6 million of the non-cash pre-tax expense relates to the fiscal year 2006. Separately, the restatement reflects an additional $1.7 million pre-tax charge ($1.1 million after-tax) related to recently identified insufficient payroll tax withholdings in fiscal 2005.

In connection with the restatement of stock-based compensation expense, we are also restating the pro forma disclosures for stock-based compensation expense required under SFAS No. 123, “Accounting for Stock—Based Compensation” included in Note 2 of the Notes to the Consolidated Financial Statements.

The Special Subcommittee reviewed 4,849 option grants covering 204,230,604 shares and found that 3,450 grants covering 148,747,202 shares required measurement date corrections. A majority of the grants requiring measurement date corrections (measured by number of shares) occurred on 16 dates over the 15-year period.  The need for these measurement date corrections arose from failure to understand and apply the correct accounting rules, failure to establish and maintain adequate procedures and controls, failure on certain occasions to appreciate the implications of available information, and insufficient finality and documentation.  As a result, the exercise prices

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for certain options were affected by selection of grant dates with hindsight, which led to errors in the determination of measurement dates, and we did not correctly account for modifications and repricings after initial grant dates.

The Special Subcommittee found that four individuals — former heads of human resources, finance and legal, and a senior partner of our former outside corporate law firm who sat on and acted as secretary to our Board — bore significant responsibility, in varying degrees, for measurement date inaccuracies by virtue of their positions and/or involvement in the option granting process at varying times.  The Special Subcommittee made no finding as to intentional wrongdoing by these individuals.

The Special Subcommittee also determined that Robert A.  Kotick (chairman of the board and chief executive officer), Brian G.  Kelly (co-chairman of the board), Ronald Doornink (director and senior advisor), and George Rose (senior vice president, general counsel and secretary) did not engage in intentional wrongdoing with respect to our stock option granting practices.

For more information on these matters, please refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; Item 4, “Controls and Procedures”; and Note 2 of the Notes to the Consolidated Financial Statements.

We have not amended, and we do not intend to amend, any of our other previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatement other than our Annual Report on Form 10-K/A for the year ended March 31, 2006 and our Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2006 originally filed with the SEC on August 8, 2006.  For this reason, the Consolidated Financial Statements and related financial information contained in any related previously filed financial reports should no longer be relied upon.

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety, as amended by, and to reflect, the restatement.  This Form 10-Q/A also reflects certain corrections to the exhibit index of the Original Filing that came to our attention in the course of preparing this Form 10-Q/A and other pending filings.  The following sections of this Form 10-Q/A have been amended to reflect the restatement and exhibit index corrections.

Part I — Item 1 — Financial Statements (Restated);

Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations, as to matters related to the restatement;

 Part I — Item 4 — Controls and Procedures;

Part II — Item 1A — Risk Factors as to matters related to the restatement; and

 Part II — Item 6 — Exhibits.

In addition, in accordance with applicable rules and regulations promulgated by the SEC, this Form 10-Q/A includes updated certifications from our Chief Executive Officers and Chief Financial Officer as Exhibits 31.1, 31.2, 31.3, 32.1, 32.2, and 32.3.

Other than as stated above, this Form 10-Q/A continues to speak as of June 30, 2006 or (where applicable) as of the date of the Original Filing, and the information in this Form 10-Q/A does not modify or update any other item or disclosure in the Original Filing or reflect any other events occurring after the Original Filing.

This Amended Quarterly Report on Form 10-Q/A should be read in conjunction with our Amended Annual Report on Form 10-K/A for the year ended March 31, 2006, filed with the SEC on May 25, 2007, and our current reports on Form 8-K that have been filed subsequent to the date of the Original Filing.

 

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FINANCIAL INFORMATION.

Item 1.  Financial Statements.

ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

		June 30, 2006
		(Unaudited)			March 31, 2006
		As restated(1)			As restated(1)
Assets
Current assets:
Cash and cash equivalents		$	245,023		$	354,331
Short-term investments		547,553			590,629
Accounts receivable, net of allowances of $87,155 and $98,253 at June 30, 2006 and March 31, 2006, respectively		65,361			28,782
Inventories		64,095			61,483
Software development		65,650			40,260
Intellectual property licenses		23,844			4,973
Deferred income taxes		12,245			9,664
Other current assets		40,229			25,933
Total current assets		1,064,000			1,116,055
Software development		12,982			20,359
Intellectual property licenses		73,100			82,073
Property and equipment, net		43,986			45,368
Deferred income taxes		57,349			52,545
Other assets		4,113			1,409
Goodwill		180,646			100,446
Total assets		$	1,436,176		$	1,418,255
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	73,344		$	88,994
Accrued expenses		87,142			104,862
Total current liabilities		160,486			193,856
Other liabilities		40,960			1,776
Total liabilities		201,446			195,632
Commitments and contingencies (Note 15)
Shareholders’ equity:
Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at June 30, 2006 and March 31, 2006		—			—
Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at June 30, 2006 and March 31, 2006		—			—
Common stock, $.000001 par value, 450,000,000 shares authorized, 280,315,487 and 277,020,898 shares issued and outstanding at June 30, 2006 and March 31, 2006, respectively		—			—
Additional paid-in capital		909,584			867,297
Retained earnings		323,681			341,990
Accumulated other comprehensive income		1,465			16,369
Unearned compensation		—			(3,033		)
Total shareholders’ equity		1,234,730			1,222,623
Total liabilities and shareholders’ equity		$	1,436,176		$	1,418,255

(1) See Note 2 “Restatement of Unaudited Consolidated Financial Statements.”

The accompanying notes are an integral part of these consolidated financial statements.

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ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

		For the three months ended June 30,
		2006			2005
		As restated(1)			As restated(1)
Net revenues		$	188,069		$	241,093
Costs and expenses:
Cost of sales — product costs		108,623			136,754
Cost of sales — software royalties and amortization		19,261			14,576
Cost of sales — intellectual property licenses		9,916			20,940
Product development		25,625			18,078
Sales and marketing		36,179			46,367
General and administrative		21,914			18,697
Total costs and expenses		221,518			255,412
Operating loss		(33,449		)	(14,319		)
Investment income, net		8,275			7,348
Loss before income tax benefit		(25,174		)	(6,971		)
Income tax benefit		(6,865		)	(2,724		)
Net loss		$	(18,309	)	$	(4,247	)
Basic loss per share		$	(0.07	)	$	(0.02	)
Weighted average common shares outstanding		278,335			269,141
Diluted loss per share		$	(0.07	)	$	(0.02	)
Weighted average common shares outstanding assuming dilution		278,335			269,141

(1) See Note 2 “Restatement of Unaudited Consolidated Financial Statements.”

The accompanying notes are an integral part of these consolidated financial statements.

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ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

		For the three months ended June 30,
		2006			2005
		As restated(1)			As restated(1)
Cash flows from operating activities:
Net loss		$	(18,309	)	$	(4,247	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(6,797		)	(8,615		)
Realized gain on sale of short term investments		(2		)	(1,343		)
Depreciation and amortization		4,421			3,161
Amortization of capitalized software development costs and intellectual property licenses		21,116			21,815
Stock-based compensation expense		5,849			866
Tax benefit of stock option exercises		2,763			5,871
Excess tax benefit from stock option exercises		(2,005		)	—
Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable		(25,469		)	14,383
Inventories		1,012			2,882
Software development and intellectual property licenses		(44,862		)	(37,005		)
Other assets		637			943
Accounts payable		(22,058		)	(43,532		)
Accrued expenses and other liabilities		(19,969		)	(9,654		)
Net cash used in operating activities		(103,673		)	(54,475		)
Cash flows from investing activities:
Capital expenditures		(2,631		)	(5,231		)
Cash payments to effect business combinations, net of cash acquired		(30,500		)	(6,925		)
Increase in restricted cash		—			(7,500		)
Purchases of short-term investments		(63,455		)	(73,756		)
Proceeds from sales and maturities of short-term investments		80,967			66,892
Net cash used in investing activities		(15,619		)	(26,520		)
Cash flows from financing activities:
Proceeds from issuance of common stock to employees		4,837			13,169
Excess tax benefit from stock option exercises		2,005			—
Net cash provided by financing activities		6,842			13,169
Effect of exchange rate changes on cash		3,142			(3,441		)
Net decrease in cash and cash equivalents		(109,308		)	(71,267		)
Cash and cash equivalents at beginning of period		354,331			313,608
Cash and cash equivalents at end of period		$	245,023		$	242,341

(1) See Note 2 “Restatement of Unaudited Consolidated Financial Statements.”

The accompanying notes are an integral part of these consolidated financial statements.

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ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the three months ended June 30, 2006
(Unaudited)
(In thousands)

 

		Common Stock					Additional Paid-In			Retained			Accumulated Other Comprehensive			Unearned			Shareholders’
		Shares		Amounts			Capital			Earnings			Income (Loss)			Compensation			Equity
Balance, March 31, 2006, as restated(1)		277,021		$	—		$	867,297		$	341,990		$	16,369		$	(3,033	)	$	1,222,623
Components of comprehensive income:
Net loss, as restated(1)		—		—			—			(18,309		)	—			—			(18,309		)
Unrealized depreciation on short-term investments (net of tax benefit of $7.1 million)		—		—			—			—			(18,482		)	—			(18,482		)
Foreign currency translation adjustment, as restated(1)		—		—			—			—			3,578			—			3,578
Total comprehensive loss, as restated(1)																			(33,213		)
Issuance of common stock pursuant to employee stock option and stock purchase plans		912		—			4,837			—			—			—			4,837
Issuance of stock to effect business combination		2,382		—			30,000			—			—			—			30,000
Stock based compensation expense related to employee stock options, restricted stock, and employee stock purchases, as restated(1)		—		—			7,720			—			—			—			7,720
Tax benefit attributable to employee stock options and common stock warrants, as restated(1)		—		—			2,763			—			—			—			2,763
Reclassification of unearned compensation		—		—			(3,033		)	—			—			3,033			—
Balance, June 30, 2006, as restated(1)		280,315		$	—		$	909,584		$	323,681		$	1,465		$	—		$	1,234,730

(1) See Note 2 “Restatement of Unaudited Consolidated Financial Statements

The accompanying notes are an integral part of these consolidated financial statements.

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ACTIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
For the three months ended June 30, 2006

1.              Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements include the accounts of Activision, Inc. and its subsidiaries (“Activision” or “we”).  The information furnished is unaudited and consists of only normal recurring adjustments that, in the opinion of management, are necessary to provide a fair statement of the results for the interim periods presented.  The Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in our Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006 as filed with the Securities and Exchange Commission (“SEC”) on May 25, 2007.

Software Development Costs and Intellectual Property Licenses

Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

We account for software development costs in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed.”  Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable.  Technological feasibility of a product encompasses both technical design documentation and game design documentation.  For products where proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis.  Prior to a product’s release, we expense, as part of “cost of sales — software royalties and amortization,” capitalized costs when we believe such amounts are not recoverable.  Capitalized costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.  Amounts related to software development which are not capitalized are charged immediately to product development expense.  We evaluate the future recoverability of capitalized amounts on a quarterly basis.  The recoverability of capitalized software development costs is evaluated based on the expected performance of the specific products for which the costs relate.  Criteria used to evaluate expected product performance include: historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

Commencing upon product release, capitalized software development costs are amortized to cost of sales — software royalties and amortization based on the ratio of current revenues to total projected revenues, generally resulting in an amortization period of six months or less.  For products that have been released in prior periods, we evaluate the future recoverability of capitalized amounts on a quarterly basis.  The primary evaluation criterion is actual title performance.

Significant management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs.  In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred.  If revised forecasted or actual product sales are less than, and/or revised forecasted or actual costs are greater than, the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.

Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks, copyrights, software, technology, or other intellectual property or proprietary rights in the development of our products.  Depending upon the agreement with the rights holder, we may obtain the rights to use acquired intellectual property in multiple products over multiple years, or alternatively, for a single product.

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We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis.  The recoverability of capitalized intellectual property license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is to be used.  As many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property, and the rights holder’s continued promotion and exploitation of the intellectual property.  Prior to the related product’s release, we expense, as part of cost of sales — intellectual property licenses, capitalized intellectual property costs when we believe such amounts are not recoverable.  Capitalized intellectual property costs for those products that are cancelled or abandoned are charged to product development expense in the period of cancellation.  Criteria used to evaluate expected product performance include: historical performance of comparable products using comparable technology; orders for the product prior to its release; and estimated performance of a sequel product based on the performance of the product on which the sequel is based.

Commencing upon the related product’s release, capitalized intellectual property license costs are amortized to cost of sales — intellectual property licenses based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed property will be utilized.  As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year.  For intellectual property included in products that have been released, we evaluate the future recoverability of capitalized amounts on a quarterly basis.  The primary evaluation criterion is actual title performance.

Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized costs.  In evaluating the recoverability of capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional costs to be incurred.  If revised forecasted or actual product sales are less than, and/or revised forecasted or actual costs are greater than, the original forecasted amounts utilized in the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment charge.  Additionally, as noted above, as many of our intellectual property licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized intellectual property license costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property and the rights holder’s continued promotion and exploitation of the intellectual property.  Material differences may result in the amount and timing of charges for any period if management makes different judgments or utilizes different estimates in evaluating these qualitative factors.

Revenue Recognition

We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers.  Certain products are sold to customers with a street date (the date that products are made widely available by retailers).  For these products we recognize revenue no earlier than the street date.  Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection.  With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery of such copies. Per copy royalties on sales that exceed the guarantee are recognized as earned.  In addition, in order to recognize revenue for both product sales and licensing transactions, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.  Revenue recognition also determines the timing of certain expenses, including cost of sales — intellectual property licenses and cost of sales — software royalties and amortization.

Sales incentives or other consideration given by us to our customers is accounted for in accordance with the Financial Accounting Standards Board’s Emerging Issues Task Force (“EITF”) Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).”  In

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accordance with EITF Issue 01-9, sales incentives and other consideration that are considered adjustments of the selling price of our products, such as rebates and product placement fees, are reflected as reductions of revenue.  Sales incentives and other consideration that represent costs incurred by us for assets or services received, such as the appearance of our products in a customer’s national circular ad, are reflected as sales and marketing expenses.

Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence

In determining the appropriate unit shipments to our customers, we benchmark our titles using historical and industry data.  We closely monitor and analyze the historical performance of our various titles, the performance of products released by other publishers, and the anticipated timing of other releases in order to assess future demands of current and upcoming titles.  Initial volumes shipped upon title launch and subsequent reorders are evaluated to ensure that quantities are sufficient to meet the demands from the retail markets but at the same time, are controlled to prevent excess inventory in the channel.

We may permit product returns from, or grant price protection to, our customers under certain conditions.  In general, price protection refers to the circumstances when we elect to decrease the wholesale price of a product by a certain amount and, when granted and applicable, allows customers a credit against amounts owed by such customers to us with respect to open and/or future invoices.  The conditions our customers must meet to be granted the right to return products or price protection are, among other things, compliance with applicable payment terms, delivery to us of weekly inventory and sell-through reports, and consistent participation in the launches of our premium title releases.  We may also consider other factors, including the facilitation of slow-moving inventory and other market factors.  Management must make estimates of potential future product returns and price protection related to current period product revenue.  We estimate the amount of future returns and price protection for current period product revenue utilizing historical experience and information regarding inventory levels and the demand and acceptance of our products by the end consumer.  The following factors are used to estimate the amount of future returns and price protection for a particular title:  historical performance of titles in similar genres, historical performance of the hardware platform, historical performance of the brand, console hardware life cycle, Activision sales force and retail customer feedback, industry pricing, weeks of on-hand retail channel inventory, absolute quantity of on-hand retail channel inventory, our warehouse on-hand inventory levels, the title’s recent sell-through history (if available), marketing trade programs, and competing titles.  The relative importance of these factors varies among titles depending upon, among other items, genre, platform, seasonality, and sales strategy.  Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price protection in any accounting period.  Based upon historical experience we believe our estimates are reasonable.  However, actual returns and price protection could vary materially from our allowance estimates due to a number of reasons including, among others, a lack of consumer acceptance of a title, the release in the same period of a similarly themed title by a competitor, or technological obsolescence due to the emergence of new hardware platforms.  Material differences may result in the amount and timing of our revenue for any period if factors or market conditions change or if management makes different judgments or utilizes different estimates in determining the allowances for returns and price protection.  For example, a 1% change in our June 30, 2006 allowance for returns and price protection would impact net revenues by $0.8 million.

Similarly, management must make estimates of the uncollectibility of our accounts receivable.  In estimating the allowance for doubtful accounts, we analyze the age of current outstanding account balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in our customers’ payment terms and their economic condition, as well as whether we can obtain sufficient credit insurance.  Any significant changes in any of these criteria would affect management’s estimates in establishing our allowance for doubtful accounts.

We value inventory at the lower of cost or market.  We regularly review inventory quantities on hand and in the retail channel and record a provision for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would impact management’s estimates in establishing our inventory provision.

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Stock-Based Compensation Expense

On April 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (“employee stock purchases”) based on estimated fair values. SFAS No. 123R supersedes our previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).  In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS No. 123R. We have applied the provisions of SAB 107 in our adoption of SFAS No. 123R.

We adopted SFAS No. 123R using the modified prospective transition method, which requires the application of the accounting standard as of April 1, 2006, the first day of our fiscal year 2007. The Company’s Consolidated Financial Statements as of and for the three months ended June 30, 2006 reflect the impact of SFAS No. 123R. In accordance with the modified prospective transition method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123R.  Stock-based compensation expense recognized under SFAS No. 123R for the three months ended June 30, 2006 was $5.8 million.  See Note 16 for additional information.

SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our Consolidated Statement of Operations. Prior to the adoption of SFAS No. 123R, the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB No. 25 as allowed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Under APB No. 25, compensation expense was 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 measurement date.  Under the intrinsic value method, compensation expense was recorded on the date of grant or measurement date only if the current market price of the underlying stock exceeded the stock option or other stock-based award’s exercise price.  For the three months ended June 30, 2005, we recognized $0.9 million of stock-based compensation expense related to employee stock options, restricted stock, and employee stock purchases under APB No. 25.  See Notes 2 and 16 for additional information.

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our Consolidated Statement of Operations for the first quarter of fiscal 2007 included compensation expense for share-based payment awards granted prior to, but not yet vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the pro forma provisions of SFAS No. 123 and compensation expense for the share-based payment awards granted subsequent to April 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. As stock-based compensation expense recognized in the Consolidated Statement of Operations for the first quarter of fiscal 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

As of April 1, 2005, we changed our method of valuation for share-based awards to a binomial-lattice model from the Black-Scholes option-pricing model (“Black-Scholes model”) which was used for options granted prior to April 1, 2005.  For additional information, see Note 16.  Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

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Restricted Stock

In June 2005, we issued the rights to 155,763 shares of restricted stock to an employee.  Additionally, in October 2005 we issued the rights to 96,712 shares of restricted stock to an employee.  These shares vest over a five-year period and remain subject to forfeiture if vesting conditions are not met.  In accordance with APB No. 25, we recognized unearned compensation in connection with the grant of restricted shares equal to the fair value of our common stock on the date of grant.  The fair value of these shares when issued was approximately $12.84 and $15.51 per share, respectively, and resulted in increases in “Additional paid-in capital” and “Unearned compensation” of $2.0 million and $1.5 million on the respective balance sheets at the times of grant.  Prior to the adoption of SFAS No. 123R, we reduced unearned compensation and recognized compensation expense over the vesting periods.  Upon adoption of SFAS No. 123R, unearned compensation was reclassified against additional paid in capital and we will increase additional paid in capital and recognize compensation expense over the respective remaining vesting periods.  For the first quarter of fiscal 2007, we recorded expense related to these shares of approximately $175,000, which was included as a component of stock-based compensation expense within “General and administrative” on the accompanying statements of operations.  Since issuance, we have recognized $642,000 of the $3.5 million of unearned compensation with the remainder to be recognized over a weighted-average period of 4.1 years.

2.              Restatement of Unaudited Consolidated Financial Statements

The restatement reflects the findings of the Special Subcommittee of independent members of our Board of Directors, which was established in July 2006 to review our historical stock option granting practices.

Background of Review:  In June 2006, two investment companies published reports analyzing companies in the video game publishing industry (including the Company) for potentially problematic option grants. In response to these reports, we directed Bryan Cave LLP, which was then our outside counsel, to review historic stock option grants to our senior executive officers, including grants identified in the published investment company reports, and to compile materials relating to such grants.  In July 2006, two stockholder derivative lawsuits were filed against certain of our current and former officers and directors alleging improprieties in our issuance of stock options.  On July 25, 2006, the Board approved the appointment of a Special Subcommittee of independent directors to conduct a comprehensive independent review of our practices and policies relating to the granting of stock options (the “Special Subcommittee”).

Scope of Review:  On or about August 4, 2006, the Special Subcommittee retained the law firm of Munger Tolles & Olson LLP to serve as counsel to the Special Subcommittee and to assist the Special Subcommittee in conducting its review.  Counsel to the Special Subcommittee thereafter retained Deloitte & Touche USA LLP (“Deloitte”), an independent registered public accounting firm, to assist in a review of facts and circumstances regarding our historical stock option grants and to advise Special Subcommittee counsel on accounting issues with respect to the stock option grants.

Findings:  The Special Subcommittee reviewed 4,849 option grants covering 204,230,604 shares, or about 86% of the 237,756,486 options granted in the period covering from fiscal year 1992 through fiscal year 2006 and the first five months of fiscal year 2007 (including the quarterly period covered by this Amended Quarterly Report on Form 10-Q/A), and found that 3,450 grants covering 148,747,202 shares required measurement date corrections.  Of the options found to require measurement date corrections, a majority — covering approximately 88,250,000 shares, were granted to non-officer employees or former officers of the Company, while options covering approximately 60,500,000 shares were granted to current officers and directors.

A majority of the grants requiring measurement date corrections (measured by number of shares) occurred on 16 dates over the 15-year period reviewed by the Special Subcommittee.  Twelve annual grants, covering 29,423,701 shares, were found to require measurement date corrections, including almost 100% of the options included in the annual grants made in the 10 calendar years 1996 through 2005 and approximately 5.9% of the annual grants made in calendar year 2006 (covering 24.3% of the shares covered by the 2006 annual grants).  In addition, acquisition grants covering 4,656,491 million shares were found to require measurement date corrections.  The remaining grants requiring measurement date corrections

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(covering 114,667,010 shares), consisted of various employment service related grants over the 15-year period reviewed by the Special Subcommittee, which included employment contract related grants (new contracts or the renewal of existing contracts), new hire grants, promotion grants, merit and bonus grants, and retention incentive grants.

The need for these measurement date corrections arose from failure to understand and apply the correct accounting rules, failure to establish and maintain adequate procedures and controls, failure on certain occasions to appreciate the implications of available information, and insufficient finality and documentation.  As a result, the exercise prices for certain options were affected by selection of grant dates with hindsight, which led to errors in the determination of measurement dates, and we did not correctly account for modifications and repricings after initial grant dates.

Determination of Measurement Dates:  According to APB No. 25, the measurement date is the first date on which proper approval is obtained and all of the following are known: (1) the individual employee who is entitled to receive the option grant, (2) the number of options that an individual employee is entitled to receive, and (3) the option’s exercise price.  To correct the measurement date inaccuracies, we re-determined the measurement date based on the date when all APB No. 25 criteria were satisfied. Effective April 1, 2006, the determination of the measurement date in accordance with SFAS No. 123R additionally includes the requirement to communicate the terms of the option award to the grantee.  In re-determining the most appropriate measurement date of an option grant, we considered meeting minutes and other documents of our Board of Directors, including minutes of the Compensation Committee, in addition to the following data:

·      reports on Form 4 filed with the SEC;

·      personnel files;

·      payroll records;

·                  information obtained in interviews with various current and former Company employees and members of our Board of Directors;

·      various records maintained by our human resources department;

·      contemporaneous emails; and

·                  the date on which such grants were entered into the Company’s stock option system (“option entry date”) and thereby constructively communicated to each recipient via each recipient’s individual stock option account as administered by a third-party on-line broker.

For grants where there was not sufficient evidence and documentation to support the original measurement date or to determine the precise date when the number of options and exercise price were finalized, we used all available relevant information to form a reasonable conclusion as to the most likely measurement date for such option grants.

Over the 15 year review period covering from fiscal year 1992 through fiscal year 2006 and the first five months of fiscal 2007 (including the quarterly period covered by this Amended Quarterly Report on Form 10-Q/A), over 80% of all grants, representing over 90% of all shares, were either individually reviewed (such as an employment contract grant) or were reviewed as a separate block of grants (such as annual grants or acquisition related grants) or as an identifiable category of grants with common characteristics.  The remaining 1,489 grants, representing less than 8% of all shares, were not individually reviewed and did not appear to have any unusual pricing or other characteristics indicating a need for full individual review.  Sampling and other analysis indicated that these remaining grants consisted of grants to “rank-and-file” employees, largely in the categories of employment contract, bonus, and other miscellaneous grants.  These remaining grants, for the 5 year period from fiscal year 2002 through fiscal year 2006, represented 4,953,230 shares and 2% of all the shares granted during the entire 15 year review period.  Various analytics and sensitivities were performed to determine whether these remaining grants had any unique pricing or other characteristics.  None were identified.  For perspective as a sensitivity

14

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analysis, if the high market price between the option grant date and the option entry date (the date on which such grants were entered into the Company’s stock option system and available to employees) was used as an alternative measurement date price for a sampling of grants based on distribution patterns and price ranges, the total additional non-cash pre-tax stock-based compensation expense would be approximately $2.5 million spread over a period from fiscal year 1994 through fiscal year 2006, and approximately $1.3 million of non-cash pre-tax stock-based compensation expense would impact the five fiscal years from 2002 through 2006.  Given the immaterial number of shares and limited potential income statement impact, along with the absence of unique pricing or other characteristics, additional review procedures were not deemed necessary for these remaining grants and were therefore not applied, and no change was made to the original grant date as the measurement date.

The following is a summary of the primary stock-option accounting errors underlying this restatement and their impact in key categories of option grants.

Grant Dates and Exercise Prices Based on Employment Service Related “Business Events” Insufficient to Support Reported Measurement Date

A large number of the grants requiring measurement date corrections were made in connection with employment service related “business events” (including employment contracts for both new hires and contract renewals for existing employees).  In many instances, the Special Subcommittee determined that the lowest price was chosen from among several alternative dates, on the theory that it was permissible to use a date that was tied to a “business event,” such as the date negotiations commenced, the date of a handshake agreement, the date that an employee began working for the Company, or the date that the contract was signed by the employee.  These grants account for approximately $34.5 million, or about 52% of the total of approximately $66.7 million in additional pre-tax stock-based compensation expense recorded by the Company in the restated financial statements reported in the Company’s Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006.

Annual Grants Affected by Insufficient Finality and Documentation and Selection of Dates with Hindsight

Annual grants were issued to a large number of employees each year (typically in April) and were made at the lowest or second-lowest price of the month in which they were granted from calendar year 1997 through calendar year 2003.  The Special Subcommittee found evidence that the dates of some or all of these grants were chosen in late April or early May and were therefore affected by selection of dates with hindsight, and that required details of various annual grants did not have the required level of finality, including completion of allocations of options to individual employees, or were not supported by sufficient documentation until after the reported grant date.  In total, twelve annual grants, covering 29,423,701 shares, were found to require measurement date corrections, including almost 100% of the options included in the annual grants made for the 10 calendar years 1996 through 2005 and approximately 5.9% of the annual grants made for calendar year 2006 (covering 24.3% of the shares covered by the calendar year 2006 annual grants).  Annual grants account for approximately $18.7 million or approximately 28% of the approximately $66.7 million in additional pre-tax stock-based compensation expense recorded by the Company in the restated financial statements reported in the Company’s Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006.

Grants Affected by Modifications after Initial Grant Date

Certain grants were modified after the initial grant date, but the Company did not account correctly for the modification in accordance with APB No. 25.  The modifications included the acceleration of vesting, the continuation of the vesting period of options of terminated employees or the extension of the post-service exercise period for vested stock options of terminated employees.  Modifications were made to 337 option grants that were not accounted for in accordance with APB No. 25. We recorded approximately $10.0 million additional pre-tax stock-based compensation expense to properly account for these modifications, or about 15% of the approximately $66.7 million in additional pre-tax stock-based compensation expense recorded by the Company in the restated financial statements reported in the Company’s Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006.

15

Grants Affected by Repricings after Initial Grant Date

Certain grants (mostly relating to employment service related grants on three dates) were repriced after the initial grant date, but the Company did not account correctly for the repricing.  Such repricings are considered a modification of an award and require the application of variable accounting.  In accordance with the provisions of Financial Accounting Standard Board Interpretation 44, “Accounting for Certain Transactions involving Stock Compensation,” we determined that we should have recorded an additional $3.5 million in stock-based compensation expense related to these grants, or approximately 5% of the approximately $66.7 million in additional pre-tax stock-based compensation expense recorded by the Company in the restated financial statements reported in the Company’s Amended Annual Report on Form 10-K/A for the fiscal year ended March 31, 2006.

Impact.  We have recorded approximately $66.7 million in additional pre-tax stock-based compensation expense for the thirteen year period from April 1, 1993 through March 31, 2006 in accordance with APB No. 25.  The additional stock-based compensation expense is amortizable over the service period relating to each option, typically three to five years, with approximately two-thirds of the total expense being recorded in or before fiscal 2002.  Separately, the restatement reflects an additional $1.7 million pre-tax change ($1.1 million after-tax) related to recently identified insufficient payroll tax withholdings in fiscal 2005.  The additional pre-tax stock-based compensation expense and payroll tax withholdings change are included in the table below.  Additionally, approximately $0.6 million in additional pre-tax stock-based compensation expense was recorded to correct measurement date inaccuracies, pursuant to the provisions of SFAS No. 123R, during the three months ended June 30, 2006, for the period specifically covered by this Amended Quarterly Report on Form 10-Q/A. For the three months ended June 30, 2005, approximately $0.9 million in additional pre-tax stock-based compensation expense was recorded to correct measurement date inaccuracies, in accordance with APB No. 25 and has been included in the approximately $66.7 million in additional pre-tax stock-based compensation expense for the thirteen year period from April 1, 1993 through March 31, 2006.

Years ended March 31,				Total additional compensation expense			2006			2005			2004			Cumulative effect at April 1, 2003			2003			2002
Net income, as previously reported							$	41,899		$	138,335		$	77,715
Additional compensation expense resulting from improper measurement dates for stock option grants (1)				$	68,351		2,731			4,963		(1)	5,280			$	55,377		$	10,156		$	22,017
Tax related effects				(21,828		)	(1,083		)	(1,685		)	(1,663		)	(17,397		)	(2,979		)	(6,732		)
Total effect on net income				$	46,523		1,648			3,278			3,617			$	37,980		$	7,177		$	15,285
Net income, as restated							$	40,251		$	135,057		$	74,098

(1)             Also includes $1.7 million charge for insufficient payroll tax withholdings in fiscal 2005.

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Years ended March 31,				2001			2000			1999			1998			1997			1996			1995			1994
Additional compensation expense resulting from improper measurement dates for stock option grants				$	3,816		$	5,267		$	2,384		$	3,884		$	4,785		$	2,919		$	110		$	39
Tax related effects				(1,281		)	(1,598		)	(746		)	(1,392		)	(1,879		)	(740		)	(37		)	(13		)
Total effect on net income				$	2,535		$	3,669		$	1,638		$	2,492		$	2,906		$	2,179		$	73		$	26

 

The cumulative effect of all the restatement adjustments to our Consolidated Balance Sheet as of March 31, 2003 resulted in a decrease in retained earnings of $38.0 million, an increase in additional paid-in capital of $36.2 million, and a decrease in deferred tax assets of $1.8 million.

Certain Tax Consequences:  Certain stock options were granted with an exercise price lower than the fair market value on the actual measurement dates, with vesting occurring after December 31, 2004, which resulted in nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code.  Section 409A subjects the option holders to additional income tax, penalties and interest on the value of the options deferred and, in certain cases, exercised each year.  We do not have any tax liability associated with Section 409A. For options that have already been exercised by non-executive officer employees, that are subject to Section 409A consequences, the Company has elected to  participate in the Internal Revenue Service program described in IRS Announcement 2007-18 pursuant to which the Company was able to pay the Section 409A taxes on behalf of its non-executive officer employees, and has incurred $7.3 million in additional pre-tax compensation expense in the fiscal quarter ended March 31, 2007, in absorbing these related costs on behalf of these employees. With respect to unexercised options subject to Section 409A held by such current and former non-executive officer employees, the Company on or about June 7, 2007 is commencing an offer to amend the exercise price of these options to eliminate their Section 409A tax liability consistent with Internal Revenue Service guidance.  Pursuant to the offer, the Company will also make a cash payment in January 2008 to employees who accept the offer, in an amount equal to the difference between the original exercise price of each amended option and the amended exercise price of each amended option. This will likely result in additional future compensation expense to the Company once these actions occur.

The following tables reflect the impact of the additional non-cash charges for stock-based compensation expense and related tax effects on:

·                  the consolidated statements of operations for the quarters ended June 30, 2006 and 2005 (Unaudited).

·                  the consolidated balance sheets as of June 30, 2006 (Unaudited) and March 31, 2006.

·                  the consolidated statements of cash flows for the quarters ended June 30, 2006 and 2005 (Unaudited).

·                  the pro forma information required by SFAS No. 123 for the quarter ended June 30, 2005 (Unaudited).

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Consolidated Statement of Operations (Unaudited)

		For the three months ended June 30, 2006
(in thousands, except per share data)		As previously reported			Adjustments			As restated
Net revenues		$	188,069		$	—		$	188,069
Costs and expenses:
Cost of sales — product costs		108,623			—			108,623
Cost of sales — software royalties and amortization		19,250			11			19,261
Cost of sales — intellectual property licenses		9,916			—			9,916
Product development		25,422			203			25,625
Sales and marketing		36,194			(15		)	36,179
General and administrative		21,450			464			21,914
Total costs and expenses		220,855			663			221,518
Operating loss		(32,786		)	(663		)	(33,449		)
Investment income, net		8,275			—			8,275
Loss before income tax benefit		(24,511		)	(663		)	(25,174		)
Income tax benefit		(6,685		)	(180		)	(6,865		)
Net loss		$	(17,826	)	$	(483	)	$	(18,309	)
Basic loss per share		$	(0.06	)	$	(0.01	)	$	(0.07	)
Weighted average common shares outstanding		278,335			—			278,335
Diluted loss per share		$	(0.06	)	$	(0.01	)	$	(0.07	)
Weighted average common shares outstanding assuming dilution		278,335			—			278,335

 

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Consolidated Statement of Operations (Unaudited)

		For the three months ended June 30, 2005
(in thousands, except per share data)		As previously reported			Adjustments			As restated
Net revenues		$	241,093		$	—		$	241,093
Costs and expenses:
Cost of sales — product costs		136,754			—			136,754
Cost of sales — software royalties and amortization		14,576			—			14,576
Cost of sales — intellectual property licenses		20,940			—			20,940
Product development		17,802			276			18,078
Sales and marketing		46,318			49			46,367
General and administrative		18,151			546			18,697
Total costs and expenses		254,541			871			255,412
Operating loss		(13,448		)	(871		)	(14,319		)
Investment income, net		7,348			—			7,348
Loss before income tax benefit		(6,100		)	(871		)	(6,971		)
Income tax benefit		(2,515		)	(209		)	(2,724		)
Net loss		$	(3,585	)	(662		)	$	(4,247	)
Basic loss per share		$	(0.01	)	$	(0.01	)	$	(0.02	)
Weighted average common shares outstanding		269,141			$	—		269,141
Diluted loss per share		$	(0.01	)	$	(0.01	)	$	(0.02	)
Weighted average common shares outstanding assuming dilution		269,141			$	—		269,141

 

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Consolidated Balance Sheet (Unaudited)

		As of June 30, 2006
(in thousands, except per share data)		As previously reported			Adjustments			As restated
Assets
Current assets:
Cash and cash equivalents		$	245,023		$	—		$	245,023
Short-term investments		547,553			—			547,553
Accounts receivable, net of allowances of $87,155		65,361			—			65,361
Inventories		64,095			—			64,095
Software development		65,631			19			65,650
Intellectual property licenses		23,844			—			23,844
Deferred income taxes		12,245			—			12,245
Other current assets		40,229			—			40,229
Total current assets		1,063,981			19			1,064,000
Software development		13,072			(90		)	12,982
Intellectual property licenses		73,100			—			73,100
Property and equipment, net		43,986			—			43,986
Deferred income taxes		58,504			(1,155		)	57,349
Other assets		4,113			—			4,113
Goodwill		180,646			—			180,646
Total assets		$	1,437,402		$	(1,226	)	$	1,436,176
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	73,344		$	—		$	73,344
Accrued expenses		88,264			(1,122		)	87,142
Total current liabilities		161,608			(1,122		)	160,486
Other liabilities		40,960			—			40,960
Total liabilities		202,568			(1,122		)	201,446
Commitments and contingencies (Note 15)
Shareholders’ equity:
Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at June 30, 2006		—			—			—
Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at June 30, 2006		—			—			—
Common stock, $.000001 par value, 450,000,000 shares authorized, 280,315,487 shares issued and outstanding at June 30, 2006		—			—			—
Additional paid-in capital		862,678			46,906			909,584
Retained earnings		370,687			(47,006		)	323,681
Accumulated other comprehensive income		1,469			(4		)	1,465
Unearned compensation		—			—			—
Total shareholders’ equity		1,234,834			(104		)	1,234,730
Total liabilities and shareholders’ equity		$	1,437,402		$	(1,226	)	$	1,436,176

 

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Consolidated Balance Sheet
(in thousands, except per share data)

		As of March 31, 2006
		As previously reported			Adjustments			As restated
Assets
Current assets:
Cash and cash equivalents		$	354,331		$	—		$	354,331
Short-term investments		590,629			—			590,629
Accounts receivable, net of allowances of $98,253		28,782			—			28,782
Inventories		61,483			—			61,483
Software development		40,260			—			40,260
Intellectual property licenses		4,973			—			4,973
Deferred income taxes		9,664			—			9,664
Other current assets		25,933			—			25,933
Total current assets		1,116,055			—			1,116,055
Software development		20,359			—			20,359
Intellectual property licenses		82,073			—			82,073
Property and equipment, net		45,368			—			45,368
Deferred income taxes		53,813			(1,268		)	52,545
Other assets		1,409			—			1,409
Goodwill		100,446			—			100,446
Total assets		$	1,419,523		$	(1,268	)	$	1,418,255
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	88,994		$	—		$	88,994
Accrued expenses		103,169			1,693			104,862
Total current liabilities		192,163			1,693			193,856
Other liabilities		1,776			—			1,776
Total liabilities		193,939			1,693			195,632
Commitments and contingencies (Note 15)
Shareholders’ equity:
Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at March 31, 2006		—			—			—
Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at March 31, 2006		—			—			—
Common stock, $.000001 par value, 450,000,000 shares authorized, 277,020,898 shares issued and outstanding at March 31, 2006		—			—			—
Additional paid-in capital		823,735			43,562			867,297
Retained earnings		388,513			(46,523		)	341,990
Accumulated other comprehensive income		16,369			—			16,369
Unearned compensation		(3,033		)	—			(3,033		)
Total shareholders’ equity		1,225,584			(2,961		)	1,222,623
Total liabilities and shareholders’ equity		$	1,419,523		$	(1,268	)	$	1,418,255

 

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Consolidated Statement of Cash Flows (Unaudited)
(in thousands)

		For the three months ended June 30, 2006
		As previously reported			Adjustments			As restated
Cash flows from operating activities:
Net loss		$	(17,826	)	$	(483	)	$	(18,309	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(6,684		)	(113		)	(6,797		)
Realized gain on sale of short term investments		(2		)	—			(2		)
Depreciation and amortization		4,421			—			4,421
Amortization of capitalized software development costs and intellectual property licenses		21,140			(24		)	21,116
Stock-based compensation expense		5,203			646			5,849
Tax benefit of stock option exercises		—			2,763			2,763
Excess tax benefit from stock option exercises		—			(2,005		)	(2,005		)
Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable		(25,469		)	—			(25,469		)
Inventories		1,012			—			1,012
Software development and intellectual property licenses		(44,892		)	30			(44,862		)
Other assets		637			—			637
Accounts payable		(22,058		)	—			(22,058		)
Accrued expenses and other liabilities		(17,154		)	(2,815		)	(19,969		)
Net cash used in operating activities		(101,672		)	(2,001		)	(103,673		)
Cash flows from investing activities:
Capital expenditures		(2,631		)	—			(2,631		)
Cash payments to effect business combinations, net of cash acquired		(30,500		)	—			(30,500		)
Purchases of short-term investments		(63,455		)	—			(63,455		)
Proceeds from sales and maturities of short-term investments		80,967			—			80,967
Net cash used in investing activities		(15,619		)	—			(15,619		)
Cash flows from financing activities:
Proceeds from issuance of common stock to employees		4,837			—			4,837
Excess tax benefit from stock option exercises		—			2,005			2,005
Net cash provided by financing activities		4,837			2,005			6,842
Effect of exchange rate changes on cash		3,146			(4		)	3,142
Net decrease in cash and cash equivalents		(109,308		)	—			(109,308		)
Cash and cash equivalents at beginning of period		354,331			—			354,331
Cash and cash equivalents at end of period		$	245,023		$	—		$	245,023

 

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Consolidated Statement of Cash Flows (Unaudited)
(in thousands)

		For the three months ended June 30, 2005
		As previously reported			Adjustments			As restated
Cash flows from operating activities:
Net loss		$	(3,585	)	(662		)	$	(4,247	)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred income taxes		(9,304		)	689			(8,615		)
Realized gain on sale of short term investments		(1,343		)	—			(1,343		)
Depreciation and amortization		3,161			—			3,161
Amortization of capitalized software development costs and intellectual property licenses		21,815			—			21,815
Stock-based compensation expense		17			849			866
Tax benefit of stock option exercises		6,769			(898		)	5,871
Changes in operating assets and liabilities (net of effects of acquisitions):
Accounts receivable		14,383			—			14,383
Inventories		2,882			—			2,882
Software development and intellectual property licenses		(37,005		)	—			(37,005		)
Other assets		943			—			943
Accounts payable		(43,532		)	—			(43,532		)
Accrued expenses and other liabilities		(9,676		)	22			(9,654		)
Net cash used in operating activities		(54,475		)	—			(54,475		)
Cash flows from investing activities:
Capital expenditures		(5,231		)	—			(5,231		)
Cash payments to effect business combinations, net of cash acquired		(6,925		)	—			(6,925		)
Increase in restricted cash		(7,500		)	—			(7,500		)
Purchases of short-term investments		(73,756		)	—			(73,756		)
Proceeds from sales and maturities of short-term investments		66,892			—			66,892
Net cash used in investing activities		(26,520		)	—			(26,520		)
Cash flows from financing activities:
Proceeds from issuance of common stock to employees		13,169			—			13,169
Net cash provided by financing activities		13,169			—			13,169
Effect of exchange rate changes on cash		(3,441		)	—			(3,441		)
Net decrease in cash and cash equivalents		(71,267		)	—			(71,267		)
Cash and cash equivalents at beginning of period		313,608			—			313,608
Cash and cash equivalents at end of period		$	242,341		$	—		$	242,341

 

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