Blizzard 2006 Annual Report Download

Download and view the complete annual report

Please find the complete 2006 Blizzard annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 87

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87

Table of contents

  • Page 1

  • Page 2
    growing our balanced portfolio

  • Page 3

  • Page 4
    forging key strategic alliances

  • Page 5

  • Page 6
    extending our global reach

  • Page 7
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT 14 consecutive years of revenue growth $ 1.47 BILLION 5 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 NET REVENUES

  • Page 8
    ...L.P. for Spider-Man® motion pictures through 2017. We signed a multi-year agreement with DreamWorks Animation® for the exclusive video game rights for certain platforms to four upcoming feature films and also extended our rights beyond "Shrek the Third" ™ to include potential future films in the...

  • Page 9
    ... 30 million units of video games having sold to date. Lastly, in June 2006, we acquired video game publisher RedOctane, Inc., and the popular Guitar Heroâ„¢ franchise. The acquisition provides Activision with an early leadership position in music-based gaming, which the company expects will...

  • Page 10
    ... 3 is designed as an entertainment platform. The platform's Blu-ray high-definition DVD player and Sony's plans for an online service will allow consumers to watch high-definition DVDs, listen to music, connect to the Internet at high speeds and play games with high-quality production values that...

  • Page 11
    ...With its established product portfolio, proven development capabilities, worldwide distribution operations and deep financial resources, Activision is well positioned to benefit from the market opportunities afforded by the new console era. In addition, emerging market segments such as online gaming...

  • Page 12
    ... enabled us to grow the brand's overall market share by releasing a state-of-the-art game targeted toward early adopters and a more immersive story-driven title for the mass-market audience. Additionally, we realized marketing synergies by maximizing consumer and trade activities that allowed us to...

  • Page 13
    ... 20 06 ANNUAL REPORT LEVERAGING EMERGING MARKET SEGMENTS Activision's ability to understand its audience and reach them through virtually every medium with brands that set quality standards in entertainment is the impetus for its future growth. We believe that there are three trends-online gaming...

  • Page 14
    ... have led major advertisers to focus more of their dollars on product placement. 12 While in-game product placement is not new, it's a trend that is rapidly turning from a novelty into a serious business. According to Nielsen Entertainment, in-game advertising is expected to be a $75 million market...

  • Page 15
    ... common shares outstanding(1) Net Cash Provided by (Used In): Operating activities Investing activities Financing activities As of March 31, Balance Sheet Data: Working capital Cash, cash equivalents and short-term investments Capitalized software development and intellectual property licenses...

  • Page 16
    .... 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. We conduct our international publishing activities through offices in the United Kingdom ("UK"), Germany, France...

  • Page 17
    ... addition, during the third quarter of fiscal 2006, we signed an agreement with Spider-Man Merchandising, LP to extend our exclusive worldwide publishing rights to publish entertainment software products based on subsequent SpiderMan movie sequels or new television series through 2017. We also have...

  • Page 18
    ... high profile intellectual property, we have also continued our focus on establishing and maintaining relationships with talented and experienced software development teams. We have strengthened our internal development capabilities through the acquisition of several development companies with...

  • Page 19
    ... 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...

  • Page 20
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations software development which are not capitalized are charged immediately to product development expense. We evaluate the future recoverability of capitalized amounts on a ...

  • Page 21
    ... 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...

  • Page 22
    ... the number of titles released. Our fiscal 2006 launch schedule included the largest slate of new releases in our history. In fiscal 2006, we released seventeen major titles including the following major releases: Doom 3 for the Xbox, Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends II...

  • Page 23
    ... year ended March 31, 2006. The increase reflects our largest slate of releases in company history and expansion of our hand-held presence with products for PSP, NDS, and GBA. This was offset by weaker market conditions resulting in higher provisions for returns and price protection. North America...

  • Page 24
    ...decrease in both absolute dollars and as a percentage of publishing revenue was due to the slate of PC titles released in fiscal 2005 in comparison to fiscal 2006. In fiscal 2005, we released the highly successful PC titles Doom 3 and Rome: Total War and also had strong continued sell through of our...

  • Page 25
    ...an increase in the provision for returns and price protection on new releases due to weaker market conditions. In addition, Madagascar, which was our fifth best selling PS2 title for fiscal 2006 in terms of units sold, was released at a lower initial retail pricing point of $39.99 compared to $49.99...

  • Page 26
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations titles were released at premium retail pricing of $59.99. Although limited by hardware availability in fiscal 2006, we experienced strong sales of these four titles, and...

  • Page 27
    ... business in line with the growth in the installed base in comparison to prior periods. Our net revenues from PC titles will be primarily driven by our product release schedule. A significant portion of our revenues and profits are derived from a relatively small number of popular titles and brands...

  • Page 28
    ...product costs associated with them as they do not require royalty payments to hardware manufacturers. • An increase in provision for returns and price protection throughout fiscal 2006 from 12% of net revenues in fiscal 2005 compared to 18% of net revenues in fiscal 2006, due to challenging market...

  • Page 29
    ... quarter of fiscal 2006. The number of titles with associated intellectual property remained relatively flat year over year. In fiscal 2006, we released the following titles with associated intellectual property: Doom 3 for the Xbox, Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends...

  • Page 30
    ... quarter fiscal 2006 releases, and risks associated with console transition, we performed a thorough review of our upcoming product slate. To better align opportunities associated with the next-generation console platforms with income potential and risks associated with certain titles in development...

  • Page 31
    ... quarter of fiscal 2006, increased bad debt write-offs, an increase in foreign currency transaction losses, and increased legal costs. We expect general and administrative expenses to decrease in absolute dollars in fiscal 2007 as we realize the benefits of a more efficient cost structure resulting...

  • Page 32
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations Investment Income, Net (in thousands) % of March 31, Consolidated 2006 Net Revenues $30,630 2% % of Consolidated Net Revenues 1% March 31, 2005 $13,092 Increase/ (...

  • Page 33
    ... Crime, Spider-Man, and Call of Duty. As a result of the strong performance of our key fiscal 2005 releases, we were able to maintain the original price points for those titles for an extended period of time. • Continued focus on international publishing expansion with the opening of offices in...

  • Page 34
    ...of several of our fiscal 2005 releases including THUG 2, Call of Duty: Finest Hour, X-Men Legends, Spider-Man 2, Shrek 2, Shark Tale, Lemony Snicket's A Series of Unfortunate Events, and Cabela's Big Game Hunter 2005. In fiscal 2005, we released thirteen titles for PS2 compared to ten in fiscal 2004...

  • Page 35
    ...the increase in the number of GBA titles released, we implemented a customized marketing plan for the GBA platform and demographic to support a strong slate of new releases including THUG 2, Shrek 2: Beg for Mercy!, Shark Tale, Lemony Snicket's A Series of Unfortunate Events, Spider-Man 2, and Shrek...

  • Page 36
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations Overall A significant portion of our revenues and profits is derived from a relatively small number of popular titles and brands each year as revenues and profits are ...

  • Page 37
    ... revenues was derived from titles that were internally developed with no associated intellectual property. In fiscal 2005 we released the following titles with associated intellectual property: Spider-Man 2, Shrek 2, Shark Tale, X-Men Legends, THUG 2, Lemony Snicket's A Series of Unfortunate Events...

  • Page 38
    ... our key fiscal 2005 "big proposition" title releases Spider-Man 2, Shrek 2, Doom 3, Shark Tale, X-Men Legends, THUG 2, Call of Duty: Finest Hour, and Lemony Snicket's A Series of Unfortunate Events. Our experience has shown that this increased spending will lengthen the product sales life cycle and...

  • Page 39
    .... Our business also has experienced and is expected to continue to experience significant seasonality, largely due to consumer buying patterns and our product release schedule focusing on those patterns. Net revenues typically are significantly higher during the fourth calendar quarter, primarily...

  • Page 40
    ...our common stock to employees through the exercise of options, which is described in more detail below in "Cash Flows from Financing Activities." We have not utilized debt financing as a significant source of cash flows. However, we do have available at certain of our international locations, credit...

  • Page 41
    ... our common stock, including the issuance of shares of common stock to employees and the public, and the purchase of treasury shares. We have not utilized debt financing as a significant source of cash flows. However, we do have available at certain of our international locations, credit facilities...

  • Page 42
    ....2 million available for utilization under the buyback program and no outstanding structured stock repurchase transactions. We actively manage our capital structure as a component of our overall business strategy. Accordingly, in the future, when we determine that market conditions are appropriate...

  • Page 43
    ... Spider-Man and X-Men. We also signed an agreement with Spider-Man Merchandising LP in the third quarter of fiscal 2006, to extend our exclusive worldwide rights to publish entertainment software products based on movie sequels subsequent to Spider-Man 3 or new television series to be produced...

  • Page 44
    ..., in connection with certain intellectual property right acquisitions and development agreements, we will commit to spend specified amounts for marketing support for the related game(s) which is to be developed or in which the intellectual property will be utilized. Additionally, we lease certain...

  • Page 45
    ... that is utilized in the preparation of our periodic public reports filed with the Securities and Exchange Commission. Financial results and other financial information also are reviewed with the Audit Committee of the Board of Directors on a quarterly basis. As required by applicable regulatory...

  • Page 46
    ... (b) prior interim periods of the year of adoption. As permitted by SFAS No. 123, prior to April 1, 2006, we accounted for share-based payments to employees using APB No. 25's intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the...

  • Page 47
    .... On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the "Act") which contains a number of tax law modifications with accounting implications. For companies that pay U.S. income taxes on manufacturing activities in the U.S., the Act provides...

  • Page 48
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations Inflation Our management currently believes that inflation has not had a material impact on continuing operations. Quantitative and Qualitative Disclosures About Market ...

  • Page 49
    ... reported within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) information is accumulated and communicated to management, including the Chief Executive Officers and Chief Financial Officer, as appropriate to allow timely decisions regarding required...

  • Page 50
    ... of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform...

  • Page 51
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally ...

  • Page 52
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Consolidated Balance Sheets (in thousands, except share data) As of March 31, 2006 2005 Assets Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net of allowances of $98,253 and $69,191 at March 31, 2006 and 2005, ...

  • Page 53
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Consolidated Statements of Operations (in thousands, except per share data) For the years ended March 31, Net revenues Costs and expenses: Cost of sales-product costs Cost of sales-software royalties and amortization Cost of sales-intellectual property ...

  • Page 54
    ... stock grant Cash distribution for fractional shares Amortization of unearned compensation Tax benefit attributable to employee stock options and common stock warrants Issuance of common stock to effect business combinations Balance, March 31, 2006 The accompanying notes are an integral part...

  • Page 55
    ... gain on sale of short-term investments Amortization and write-offs of capitalized software development costs and intellectual property licenses Amortization of stock compensation expenses Tax benefit of stock options and warrants exercised Change in operating assets and liabilities (net of effects...

  • Page 56
    ... Accounting Policies Business Activision, Inc. ("Activision," the "Company," or "we") is a leading international publisher of interactive entertainment software products. We have built a company with a diverse portfolio of products that spans a wide range of categories and target markets and...

  • Page 57
    ... Federal Deposit Insurance Corporation ("FDIC") limit at these financial institutions. Our customer base includes retail outlets and distributors, including mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores in the United States and countries worldwide...

  • Page 58
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Software Development Costs 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 ...

  • Page 59
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Notes to Consolidated Financial Statements 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...

  • Page 60
    ... 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...

  • Page 61
    ... 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...

  • Page 62
    ... option or other stock-based compensation exercise price. If the grant date stock price exceeds the strike price, then the intrinsic value is equal to the positive difference between these two values. At March 31, 2006, we awarded several stock-based employee compensation plans, which are described...

  • Page 63
    ... per share weighted average fair value of options with exercise prices equal to market value on the date of grant was $4.90, $3.08, and $1.56, respectively. The per share weighted average estimated fair value of Employee Stock Purchase Plan shares granted during the years ended March 31, 2006, 2005...

  • Page 64
    ... addresses financial accounting and reporting for business combinations, requiring that the purchase method be used to account and report for all business combinations. These acquisitions have further enabled us to implement our multi-platform development strategy by bolstering our internal product...

  • Page 65
    ... Fair Cost Gains Losses Value Cash and cash equivalents: Cash and time deposits Money market funds Commercial paper Corporate bonds Cash and cash equivalents Short-term investments: Auction rate notes Corporate bonds U.S. agency issues Asset-backed securities Municipal bonds Common stock Short...

  • Page 66
    ... million for the years ended March 31, 2006, 2005, and 2004, respectively. Amortization and write-offs of capitalized software development costs and intellectual property licenses for the year ended March 31, 2006 included product cancellation charges, exclusive of termination fees, of $10.3 million...

  • Page 67
    ..., we had write-downs of inventory costs for certain titles in the amount of $3.6 million. 7. Property and Equipment, Net Property and equipment, net was comprised of the following (amounts in thousands): As of March 31, Land Buildings Leasehold improvements Computer equipment Office furniture and...

  • Page 68
    ...-party publishers. In the United States, we primarily sell our products on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses, and game specialty stores. We conduct our international publishing activities through offices in the UK, Germany, France, Italy, Spain...

  • Page 69
    ...184,571 $1,306,963 Geographic information is based on the location of the selling entity. Revenues from external customers by geographic region were as ...our revenues is derived from products based on a relatively small number of popular brands each year. In fiscal 2006, 30% of our consolidated...

  • Page 70
    ... earnings per share-income available to common shareholders Denominator: Denominator for basic earnings per share-weighted average common shares outstanding Effect of dilutive securities: Employee stock options and stock purchase plan Warrants to purchase common stock Potential dilutive common...

  • Page 71
    ... of March 31, 2006, our available federal net operating loss carryforward of approximately $87.7 million is subject to certain limitations as defined under Section 382 of the Internal Revenue Code. The net operating loss carryforwards expire between 2020 and 2024. We have various state net operating...

  • Page 72
    .... On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the "Act") which contains a number of tax law modifications with accounting implications. For companies that pay U.S. income taxes on manufacturing activities in the U.S., the Act provides...

  • Page 73
    ..., in connection with certain intellectual property right acquisitions and development agreements, we will commit to spend specified amounts for marketing support for the related game(s) which is to be developed or in which the intellectual property will be utilized. Additionally, we lease certain...

  • Page 74
    ... 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegations that our revenues and assets were overstated during the period between February 1, 2001 and December 17, 2002, was filed in the United States District Court, Central District of California by the Construction Industry, and...

  • Page 75
    ... the form of non-qualified stock options, ISOs, SARs, restricted stock awards, deferred share awards, and other common stock-based awards to officers (other than executive officers), employees, consultants, advisors, and others. The 2002 Plan requires available shares to consist in whole or in part...

  • Page 76
    ... of "Awards" in the form of non-qualified stock options and restricted stock awards to key studio employees (other than executive officers) of Activision, our subsidiaries and affiliates, and to contractors and others. The 2002 Studio Plan requires available shares to consist in whole or in part of...

  • Page 77
    ... 2002 Purchase Plans' Offering Periods. Activity of Employee and Director Options and Warrants Activity of all employee and director options and warrants during the last three fiscal years was as follows (amounts in thousands, except weighted average exercise price amounts): 2006 Shares Outstanding...

  • Page 78
    ... 232 100 21 27,126 Non-Employee Warrants In prior years, we have granted stock warrants to third parties in connection with the development of software and the acquisition of licensing rights for intellectual property. The warrants generally vest upon grant and are exercisable over the term of the...

  • Page 79
    ... for general corporate purposes, including capital expenditures, working capital, repayment or reduction of long-term and shortterm debt, and the financing of acquisitions and other business combinations. We may invest funds that we do not immediately require in marketable securities. The second...

  • Page 80
    ...right a number of the acquiring company's common shares having a market value equal to two times the then current exercise price of the right. For persons who, as of the close of business on April 18, 2000, beneficially own 15% or more of the common stock of Activision, the Rights Plan "grandfathers...

  • Page 81
    ... financing activities: Subsidiaries acquired with common stock Adjustment-prior period purchase allocation Change in unrealized appreciation (depreciation) on investments Supplemental cash flow information: Cash paid for income taxes Cash received for interest, net 18. Quarterly Financial and Market...

  • Page 82
    ...or (b) prior interim periods of the year of adoption. As permitted by SFAS No. 123, prior to April 1, 2006 we accounted for share-based payments to employees using APB No. 25's intrinsic value method and, as such, generally recognized no compensation cost for employee stock options. Accordingly, the...

  • Page 83
    .... On October 22, 2004, the President of the United States signed the American Jobs Creation Act of 2004 (the "Act") which contains a number of tax law modifications with accounting implications. For companies that pay U.S. income taxes on manufacturing activities in the U.S., the Act provides...

  • Page 84
    ... Interactive and EON Productions, Ltd. have awarded us the rights to develop and publish interactive entertainment games based on the James Bond license through 2014. The agreement, signed on April 11, 2006, did not have an impact on our March 31, 2006 statement of financial condition or results of...

  • Page 85
    ACTIVISION, INC. •• 20 06 ANNUAL REPORT Market for Registrant's Common Equity and Related Shareholder Matters Our common stock is quoted on the Nasdaq National Market under the symbol "ATVI." The following table sets forth for the periods indicated the high and low reported sale prices for our ...

  • Page 86
    ... 31, 2006, which was filed with the United States Securities and Exchange Commission. Readers of this Annual Report are referred to this filing. Robin Kaminsky George L. Rose Executive Vice President, Publishing General Counsel and Secretary Corporate Counsel Bryan Cave LLP New York, New York...

  • Page 87
    3100 Ocean Park Boulevard Santa Monica, California 90405 telephone: (310) 255-2000 fax: (310) 255-2100 www.activision.com