| ACTIVISION INC /NY Item 1A RISK FACTORS Our business is subject to many risks and uncertainties, which may affect our future financial performance |
| If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations, and the market value of our securities could decline |
| We depend on a relatively small number of brands for a significant portion of our revenues and profits |
| A significant portion of our revenues is derived from products based on a relatively small number of popular brands each year, and these products are responsible for a disproportionate amount of our profits |
| In addition, many of these products have substantial production or acquisition costs and marketing budgets |
| In fiscal 2006, 30prca of our consolidated net revenues (38prca of worldwide publishing net revenues) was derived from three brands, which accounted for 14prca, 8prca, and 8prca of consolidated net revenues (18prca, 10prca, and 10prca of worldwide publishing net revenues) |
| In fiscal 2005, 37prca of our consolidated net revenues (48prca of worldwide publishing net revenues) was derived from three brands, which accounted for 16prca, 11prca, and 10prca of consolidated net revenues (21prca, 14prca, and 13prca of worldwide publishing net revenues) |
| In fiscal 2004, 35prca of our consolidated net revenues (49prca of worldwide publishing net revenues) was derived from three brands, which accounted for 17prca, 14prca, and 4prca of consolidated net revenues (24prca, 20prca, and 5prca of worldwide publishing net revenues) |
| We expect that a limited number of popular brands will continue to produce a disproportionately large amount of our revenues and profits |
| Due to this dependence on a limited number of brands, the failure to achieve anticipated results by one or more products based on these brands 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 |
| The life cycle of a title generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in sales |
| Because revenues associated with an initial product launch generally constitute a high percentage of the total revenues associated with the life of a product, delays in product releases or disruptions following the commercial release of one or more new products could have a material adverse effect on our operating results and cause our operating results to be materially different from expectations |
| It is therefore important for us to be able to continue to develop many high quality new products that are popularly received |
| We focus our development and publishing activities principally on products that are, or have the potential to become, franchise brand properties |
| If we are unable to do this, our business and financial results may be negatively affected |
| 10 ______________________________________________________________________ If we are unable to maintain or acquire licenses to intellectual property, we may publish fewer “hit” titles and our revenue may decline |
| Many of our products are based on intellectual property and other character or story rights acquired or licensed from third parties |
| These 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, or inability to obtain additional licenses of significant commercial value could have a material adverse effect on our ability to develop new products and therefore on our business and financial results |
| Additionally, the failure of intellectual property acquired by us to be popularly received could impact the market acceptance of our products in which the intellectual property is included |
| Such lack of market acceptance could result in the write-off of the unrecovered portion of acquired intellectual property assets, which could cause material harm to our business and financial results |
| Furthermore, the competition for these licenses and distribution agreements is often intense |
| Competition for these licenses may also drive up the advances, guarantees, and royalties that we must pay to the licensor, which could increase our costs |
| Transitions in console platforms could have 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 may be expected to slow or even decline until new platforms are introduced and achieve wide consumer acceptance |
| This decline may not be offset by increased sales of products for the new console platforms |
| In fiscal 2006, Microsoft released Xbox360 and in calendar 2006, Sony and Nintendo plan to introduce their respective next-generation hardware platforms, the Playstation 3 and Wii, respectively |
| We began selling games for the Xbox360 concurrently with its launch and are developing titles for the next-generation console systems being developed by Sony and Nintendo |
| Delays in the launch, shortages, technical problems, or lack of consumer acceptance of the next-generation platforms could adversely affect our sales of products for these platforms |
| In addition, as console hardware moves through its life cycle, hardware manufacturers typically enact price reductions and decreasing prices may put downward pressure on our software prices |
| We must make significant expenditures to develop products for new platforms which may not be successful or released when anticipated |
| We must make substantial product development and other investments in a particular platform well in advance of introduction of the platform and we may be required to realign our product portfolio and development efforts in response to market changes |
| Furthermore, development costs for new console platforms are greater than current console platforms |
| If increased costs are not offset by higher revenues and other cost efficiencies, our operating results will suffer and our financial position will be harmed |
| 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 or cancel development of products in response to market changes, 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 |
| In addition, we seek to release many of our products in conjunction with specific events, such as the release of a related movie |
| If we miss these key selling periods, due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately |
| We are exposed to seasonality in the sale 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 calendar year |
| Additionally, in a platform transition period, 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, Nintendo, and Microsoft |
| The timing of hardware platform introduction is also often tied to holidays and is not within our control |
| If a hardware platform is released unexpectedly close to the holidays, this would result in a shortened holiday buying season and could negatively impact the sales of our products |
| 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 |
| 11 ______________________________________________________________________ If the average price of current-generation titles continues to decline or if we are unable to sustain launch pricing on next-generation titles, our operating results will suffer |
| We have experienced a decrease in the average price of our titles for current-generation platforms |
| As the interactive entertainment industry transitions to next-generation video game platforms, we expect there to be fewer current-generation titles able to command premium price points, and we expect that even these titles will be subject to price reductions at an earlier point in their sales cycle than we have seen in prior years |
| We expect the average price of current-generation titles to continue to decline, which may have a negative effect on our margins and operating results |
| With the launch of the Xbox360 we have priced our next-generation titles at a premium retail price of dlra59dtta99 |
| We also plan to offer our next-generation titles for the PS3 at the same premium pricing |
| We expect to continue to price next-generation titles at premium pricing, but if we are unable to sustain launch pricing on these next-generation titles we may experience a negative effect on our margins and operating results |
| If we do not continue to attract and retain key personnel, we will be unable to effectively conduct our business |
| 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 |
| Our platform licensors are our chief competitors and frequently control the manufacturing of and have broad approval rights over our video game products |
| Generally, when we develop interactive entertainment software products for hardware platforms offered by Sony, Nintendo, or Microsoft, the products are manufactured exclusively by that hardware manufacturer or their approved replicator |
| Our agreements with these manufacturers include certain provisions, such as approval rights over all products and related promotional materials and the ability to change the fee they charge for the manufacturing of products, that allow them substantial influence over our costs and the release schedule of our products |
| In addition, 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 |
| Accordingly, Sony, Nintendo, or Microsoft could cause unanticipated delays in the release of our products as well as increases to our development, manufacturing, marketing, or distribution costs, which could materially harm our business and financial results |
| In addition, as online capabilities for video game platforms emerge, our platform licensors will control our ability to provide online game capabilities for our console platform products and will in large part establish the financial terms on which these services are offered to consumers |
| Currently, Microsoft provides online capabilities for the Xbox and Xbox360 and Sony provides online capabilities for PS2 products |
| We expect Sony will also provide online capabilities for PS3 products |
| In each case, compatibility code and the consent of the licensor are required for us to include online capabilities in our products |
| In addition, the business model for Microsoft’s and Sony’s online businesses for their video game products may compete with our online business |
| As these capabilities become more significant, the failure or refusal of our licensors to approve our products, or the successful deployment by these licensors of services competitive to ours, may harm our business |
| Our platform licensors set the royalty rates and other fees that we must pay to publish games for their platforms, and therefore have significant influence on our costs |
| We pay a licensing fee to the hardware manufacturer for each copy of a product manufactured for that manufacturer’s game platform |
| Starting in fiscal 2005 and continuing into fiscal 2007, our platform licensors have begun to introduce new hardware platforms into the market |
| In order to publish products for new hardware platforms, we must take a license from the platform licensor which gives the platform licensor the opportunity to set the fee structure that we must pay in order to publish games for that platform |
| Similarly, the platform licensors have retained the flexibility to change their fee structures for online gameplay and features for their consoles and the manufacturing of products |
| The control that platform licensors have over the fee structures for their future platforms and online 12 ______________________________________________________________________ access makes it difficult for us to predict our costs and profitability in the medium to long term |
| It is also possible that platform licensors will not renew our licenses |
| Because publishing products for console systems is the largest portion of our business, any increase in fee structures or nonrenewal of licenses would have a significant negative impact on our business model and profitability |
| 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 |
| Despite extensive testing prior to release, we cannot be certain that errors will not be found in new products or releases after shipment, that could result in loss of or delay in market acceptance |
| This loss or delay could significantly harm our business, financial results, and reputation |
| 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 |
| Return policies allow distributors and retailers to return defective, shelf-worn, and damaged products in accordance with terms granted |
| Price protection, when granted and applicable, allows customers a credit against amounts they owe us with respect to merchandise unsold by them |
| We may permit product returns from, or grant price protection to, our customers under certain conditions |
| 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 |
| When we offer price protection, we offer it with respect to a particular product to all of our retail customers; however, only those customers who meet the conditions detailed above can avail themselves of such price protection |
| 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 substantial 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 |
| 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 |
| 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 is 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 |
| In addition, though we take steps to make the unauthorized copying and distribution of our products more difficult, as do the manufacturers of consoles on which our games are played, neither our efforts nor those of the console manufacturers may be successful in controlling the piracy of our products |
| This could have a negative effect on our growth and profitability in the future |
| Moreover, 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 be certain 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 world examples, which may inadvertently infringe upon the intellectual property rights of others |
| Our products often utilize complex, cutting edge technology that may become subject to the intellectual property rights of others |
| Although we believe that we make reasonable 13 ______________________________________________________________________ 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: • Cease selling, incorporating, or using products or services that incorporate the challenged intellectual property; • 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 • Redesign the affected interactive entertainment software products, which could cause us to incur additional costs, delay introduction and possibly reduce commercial appeal of our products |
| We rely on independent third parties to develop some of our software products |
| We rely on independent third-party interactive entertainment software developers to develop some of our software products |
| Since we depend on these developers, in the aggregate, we remain subject to the following risks: • Continuing strong demand for developers’ resources, combined with the recognition they receive in connection with their work, may cause developers who worked for us in the past either to work for our competitors in the future or to renegotiate our agreements with them on terms less favorable for us; • 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; and • Our competitors may acquire the businesses of key developers or sign them to exclusive development arrangements |
| In either case, we would not be able to continue to engage such developers’ services for our products, except for those that they are contractually obligated to complete for us |
| 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 |
| Typically, we pay developers a royalty based on a percentage of net revenues, less agreed upon deductions, but in a few cases, we have agreed 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 |
| Our industry is highly competitive and our competition may succeed in narrowing our market share and reducing our sales |
| We compete primarily with other publishers of personal computer and video game console interactive entertainment software |
| Our competitors vary in size from small companies with limited resources to very large corporations with significantly greater financial, marketing, and product development resources than we have |
| 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 |
| Certain of these competitors can spend more money and time on developing and testing products, undertake more extensive marketing campaigns, adopt more aggressive pricing policies, pay higher fees to licensors for desirable motion picture, television, sports and character properties, and pay more to third-party software developers than we can |
| 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 14 ______________________________________________________________________ Internet and online services |
| A number of software publishers who compete with us have developed and commercialized or are currently developing online games for use by consumers over the Internet |
| Future increased consumer acceptance and increases in the availability of online games or technological advances in online game software or the Internet could result in a decline in platform-based software and negatively impact sales of our products |
| Direct sales of software over the Internet by competitors could materially adversely affect our distribution business |
| Competition in our industry is intense and we expect new competitors to continue to emerge |
| While many new products are regularly introduced, only a relatively small number of “hit” titles account for a significant portion of net revenue |
| Hit products published by our competitors may take a larger share of consumer spending than we anticipate, which could cause our product sales to fall below our expectations |
| If our competitors develop more successful products, offer competitive products at lower price points, or if we do not continue to develop consistently high-quality and well-received products, our revenue, margins, and profitability will decline |
| 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 our marketing expenditures |
| Retailers with limited shelf space typically devote the most and highest quality shelf space to those products expected to be best sellers |
| We cannot be certain 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 sales volume |
| We cannot be certain 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 do not have long-term contracts for the sale of our products |
| In the United States and Canada, we primarily sell our products on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores |
| Our products are sold internationally on a direct-to-retail basis, through third-party distribution and licensing arrangements and through our wholly-owned European distribution subsidiaries |
| Our sales are made primarily on a purchase order basis without long-term agreements or other forms of commitments |
| Our largest customers, Wal-Mart and GameStop, accounted for approximately 22prca and 10prca of consolidated net revenues for the year ended March 31, 2006 |
| For the year ended March 31, 2005, our largest customer, Wal-Mart, accounted for 23prca of consolidated net revenues |
| 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 |
| We may be burdened with payment defaults and uncollectible accounts if our distributors or retailers cannot honor their credit arrangement 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’s credit history, solvency, credit limits, and sales history, as well as whether we can obtain sufficient credit insurance |
| Although, as in the case with most of our customers, 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, although 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 |
| 15 ______________________________________________________________________ We may not be able to maintain our distribution relationships with key vendors |
| Our CD Contact, NBG, and Centresoft subsidiaries distribute interactive entertainment software and hardware products and provide related services in the Benelux countries, Germany, and the United Kingdom, respectively, and via export in other European countries for a variety of entertainment software publishers, many of which are our competitors, and hardware manufacturers |
| These services are generally performed under limited term contracts |
| Although 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, Nintendo, and Microsoft products accounted for approximately 24prca, 3prca, and 3prca, respectively, of our worldwide distribution net revenues for fiscal 2006 |
| 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 52prca, 50prca, and 53prca of our consolidated net revenues in fiscal 2006, 2005, and 2004, 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 regulatory requirements, tariffs, and other barriers |
| Additionally, foreign sales that are made in local currencies may fluctuate |
| We have and may continue to engage in limited currency hedging activities |
| Currency exchange rate fluctuations may in the future have a material negative impact on revenues from international sales and licensing and thus our business and financial results |
| We are subject to the rating of our content by the Entertainment Software Rating Board |
| Failure to obtain our target ratings for our products could negatively impact our sales |
| The Entertainment Software Rating Board, sometimes referred to as the ESRB, requires game publishers to provide consumers with information relating to graphic violence, profanity, or sexually explicit material contained in software titles, and imposes significant penalties for noncompliance |
| Certain countries have also established similar rating systems as prerequisites for product sales in those countries |
| In some instances, we may be required to modify our products to comply with the requirements of rating systems, which could delay or disrupt the release of our products |
| Our software titles receive a rating of “E” (age 6 and older), “E10+” (age 10 and older), “T” (age 13 and over), or “M” (age 17 and over) |
| We believe that we comply with rating systems and properly display the ratings and content descriptions received for our titles |
| If we are unable to obtain the ratings we have targeted for our products as a result of changes in the ESRB’s ratings standards or for other reasons, including the adoption of legislation in this area, our business and prospects could be negatively affected |
| The ESRB requires publishers to conduct pertinent content audit certifications with respect to certain top selling titles, the objective of which is to assess what portion, if any, of the games on the market include undisclosed pertinent content on the disc that undermines the accuracy of the ESRB rating |
| This self audit procedure applies to certain current titles and may be applied to additional titles in the future |
| We are currently conducting a self audit in accordance with the ESRB’s requirements |
| It is possible that there may be content in our games that could be determined to be pertinent content that causes a change to our current ESRB rating |
| In such event, we may be required to record a reserve for anticipated product returns and inventory obsolescence which could expose us to additional litigation, administrative fines and penalties, and other potential liabilities, and could adversely affect our operating results |
| Our business, products, and distribution are subject to increasing regulation in key territories of content, consumer piracy, and online delivery |
| If we do not successfully respond to these regulations, our business may suffer |
| Legislation is continually being introduced that may affect both the content of our products and their distribution |
| For example, privacy laws in the United States and Europe impose various restrictions on our web sites |
| Those rules vary by territory although the Internet recognizes no geographical boundaries |
| In addition, many foreign countries have laws that permit governmental entities to censor the content and advertising of interactive entertainment software |
| Other countries, such as Germany, have adopted laws regulating content both in packaged goods and those transmitted over the Internet that are stricter than current United States laws |
| Several proposals have been made for federal legislation in the United States to regulate our industry, including a bill, referred to as The Family Entertainment Protection Act, which was recently introduced into the 16 ______________________________________________________________________ Senate |
| Such bill proposes to prohibit the sale of “M” rated, “AO” rated, and “Rating Pending” products to under-17 audiences |
| If the bill is adopted into law, it may limit the potential market for our “M” rated products, and adversely affect our operating results |
| We may also be required to modify our products or alter our marketing strategies to comply with new regulations, which could delay the release of our products |
| Due to the uncertainties regarding such regulations, confusion in the marketplace may occur, and we are unable to predict what effect, if any, such regulations would have on our business |
| In addition, a number of state legislative bodies in states such as Illinois, California, New York, and Washington introduced various forms of legislation designed to regulate and control sales of video games deemed inappropriate for sales to minors |
| In the event such legislation is adopted and enforced, the sales of our products in states with such laws may be negatively affected |
| Our products may be subject to legal claims |
| In prior fiscal years, two lawsuits, Linda Sanders, et al |
| Meow Media, Inc, et al, United States District Court for the District of Colorado, and Joe James, et al |
| 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 in attacks perpetrated at schools |
| These lawsuits alleged 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 |
| These lawsuits have been dismissed |
| Similar additional lawsuits may be filed in the future |
| Although our general liability insurance carrier agreed to defend us in such lawsuits in the past, it is uncertain whether the insurance carrier would do so in the future, or if it would cover all or any amounts which we might be liable for if such future lawsuits are not decided in our favor |
| If such future lawsuits are filed and ultimately 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 |
| 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 find suitable acquisition opportunities or to integrate additional acquired businesses |
| 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 |
| Although we continue to search 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 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 shareholders |
| 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 shareholders may not have the opportunity to review, vote on, or evaluate future acquisitions |
| From time to time, we may make a capital investment and hold a minority interest in a third-party developer in connection with interactive entertainment software products to be developed by such developer for us, which we believe helps to create a closer relationship between us and the developer |
| We account for those capital investments over which we have the ability to exercise significant influence using the equity method |
| For those investments over which we do not have the ability to exercise significant influence, we account for our investment using the cost method |
| There can be no assurance that we will realize long-term benefits from such investments or that we will continue to carry such investments at their current value |
| We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand |
| A significant portion of our selling and general and administrative expense is comprised of personnel and facilities |
| In the event of a significant decline in revenues, we may not be able to exit facilities, reduce personnel, or make other changes to our cost structure without disruption to our operations or without significant termination and exit costs |
| Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in revenues and profit |
| 17 ______________________________________________________________________ Changes in our tax rates or exposure to additional tax liabilities could adversely affect our operating results and financial condition |
| We are subject to income taxes in the United States and in various foreign jurisdictions |
| Significant judgment is required in determining our worldwide provision for income taxes and, in the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain |
| Although we believe our tax estimates are reasonable, the estimate process is inherently uncertain, and our estimates are not binding on tax authorities |
| Our effective tax rate could be adversely affected by changes in our business, including the mix of earnings in countries with differing statutory tax rates, changes in the elections we make, changes in applicable tax laws as well as other factors |
| Further, our tax determinations are regularly subject to audit by tax authorities and developments in those audits could adversely affect our income tax provision |
| Should our ultimate tax liability exceed our estimates, our income tax provision and net income could be materially affected |
| We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property, and goods and services taxes, in both the United States and various foreign jurisdictions |
| We are regularly under examination by tax authorities with respect to these non-income taxes |
| There can be no assurance that the outcomes from these examinations, changes in our business or changes in applicable tax rules will not have an adverse effect on our operating results and financial condition |
| 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 six-hundredths (1/600) of a share, as adjusted on account of stock dividends made since the plan’s adoption, of our Series A Junior Preferred Stock price at an exercise price of dlra6dtta67 per share, subject to adjustment and as adjusted on account of stock dividends made since the plan’s adoption, 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, in the discretion of a committee, for acceleration of stock options following a change in control under certain circumstances, which has the effect of making an acquisition of control more expensive |
| In addition, some of our officers have severance compensation agreements that provide for substantial cash payments and accelerations of other benefits in the event of a change in control |
| These agreements and arrangements may also inhibit a change in control |
| 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 many factors, including: • Quarter to quarter variations in results of operations; • Our announcements of new products; • Our competitors’ announcements of new products; • Our product development or release schedule; • General conditions in the computer, software, entertainment, media or electronics industries, and in the economy; • Timing of the introduction of new platforms and delays in the actual release of new platforms; • Hardware manufacturers’ announcements of price reductions in hardware platforms; • Consumer spending trends; 18 ______________________________________________________________________ • Changes in earnings estimates or buy/sell recommendations by analysts; and • Investor perceptions and expectations regarding our products, plans and strategic position, and those of our competitors and customers |
| 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 performance of the specific companies |
| These broad market fluctuations may adversely affect the market price of our common stock |
| We seek to manage our business with a view to achieving long-term results, and this could have a negative effect on short-term trading |
| We focus on creation of shareholder value over time, and we intend to make decisions that will be consistent with this long-term view |
| As a result, some of our decisions, such as whether to make or discontinue operating investments, manage our balance sheet and capital structure, or pursue or discontinue strategic initiatives, may be in conflict with the objectives of short-term traders |
| Further, this could adversely affect our quarterly or other short-term results of operations |
| Financial Information about Foreign and Domestic Operations and Export Sales See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10 of Notes to Consolidated Financial Statements included in Item 8 |
| activision |
| Furthermore, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge and through our website |
| The information found on our website is not a part of, and is not incorporated by reference into, this or any other report we file with or furnish to the SEC |