Activision Blizzard (ATVI)

5) Detailed Description of the Material Weakness and Plan of Remediation.

As further described in Note 2, “Restatement of Consolidated Financial Statements,” of the Notes to Consolidated Financial Statements, our Consolidated Financial Statements have been restated to correct errors in the determination of measurement dates for certain stock options granted and modified in our fiscal years between 1994 and 2006. These errors have been corrected in this Form 10-K/A.  As described in Management’s Report on Internal

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Control Over Financial Reporting, these errors were determined to be a material weakness in our internal control over financial reporting as of March 31, 2006.

Although we reviewed our internal control procedures for options in early 2004, it appears that these control procedures and control questions did not elicit information as to the date the grants were finalized and approved or as to the fair market value on that date, and that those controls were inadequate to ensure identification of, and proper accounting for, misdated, modified or repriced options.

The need for the measurement date corrections arose from our 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.  Management has determined that a material weakness existed as of March 31, 2006 with respect to the application of accounting principles to the equity award granting and modification process during the period covered by this report.  In this regard, management has also determined that:

·                  We did not design and implement controls necessary to provide reasonable assurance that the measurement date for stock option grants was appropriately determined, and that modifications and repricings of options were appropriately accounted for in accordance with GAAP;

·                  We failed to ensure that actions of the Compensation Committee were timely and adequately documented;

·                  We failed to ensure that managers and other personnel involved in the stock option granting process understood the consequences of timely completion and approval of finalized employee grant lists.

After March 31, 2006, we have made a number of changes that may materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.

New policies and procedures for our stock option grant practices were approved on November 21, 2006 by the Joint Compensation and Nominating and Governance Committee of our Board, and became effective January 1, 2007.  Our new option granting policies and procedures are designed to ensure internal control surrounding the pricing and modification of option grants is adequate, and also provide the Compensation Committee with the full ability to review and approve all grants prior to pricing on a date set on or after the date of the Compensation Committee action.  Some of the highlights of the new option granting process are:

·      All proposed grants during the month will be verified so as to comply with pre-approved grant guidelines and other financial and legal requirements by the seventh day of the following month.  For these purposes, a team of legal, human resources and finance personnel (“Cross Functional Team”) has been established to review each proposed grant for compliance with documentation and procedures.  No grant will be issued until such compliance is established and the grant is approved by the Compensation Committee.

·      The Compensation Committee will meet at least quarterly, to review and approve all documented  and verified proposed grants submitted by the Cross Functional Team.  All grants approved by the Compensation Committee will be effective, and will be priced based on the closing price of our stock, on a date set by the Compensation Committee that will be on or after the date of Compensation Committee action.  Details of the grant (including the exercise price) will be communicated to the grantees promptly following approval and pricing.

·      All new hire offer letters and employee renewal agreements will provide that all grants and terms of grants are subject to approval by the Compensation Committee.

·      Stock option data will be entered into Equity Edge, our stock option tracking software, promptly (and only) after grant approval is received from the Compensation Committee.

In addition, we have realigned certain internal responsibilities related to the granting and reporting of stock options.  In this regard, the employment contract of our former head of human resources, which expired on March 31, 2007, was not renewed; a new head of human resources is being recruited and, in the interim, responsibilities for stock

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option granting and reporting have been reassigned.  To further enhance our corporate governance practices, we have established and filled a position of principal compliance officer, with a reporting line directly to the Nominating and Governance Committee, and are reviewing the configuration of the Compensation Committee of the Board.

In addition, consistent with the recommendations of the Special Subcommittee, we have disengaged from our prior outside corporate counsel and have engaged new outside corporate counsel.

Finally, the Special Subcommittee recommended that Board meetings include more senior executives and that human resources, finance and legal personnel receive additional training on options and compliance issues.  Many of these recommendations have already been implemented and we plan to implement the remaining recommendations in our fiscal year that began on April 1, 2007.