The company is also increasing its net revenue outlook for Fiscal 2007 to $1.150 billion, as compared to its prior outlook of $1.075 billion, based on better-than-expected net revenue performance in the second quarter and an increase in the company's third quarter net revenue outlook for its distribution business. The company believes that the increase in its third quarter and full year net revenue outlook will be offset by higher legal expenses relating primarily to its internal review of historical stock option practices, including expenses relating to the previously announced informal SEC inquiry and derivative litigation, and the impact of the delayed release of Sony's PLAYSTATION®3 system in Europe until March 2007. The company expects that the majority of the impact will occur in its fiscal third quarter.
Activision also reaffirmed its fiscal year 2008 net revenue outlook which is expected to exceed $1.6 billion.
As previously announced, a special sub-committee of independent directors of Activision's board of directors is conducting an internal review of the company's historical stock option grant practices. The sub-committee, which has retained legal counsel, is working to complete its review of the company's historical stock option grant practices in a timely manner.
However, at this time, the sub-committee has not finished its work and has not reached any final conclusions. The statements below, therefore, are preliminary and are subject to change.
Although this review is ongoing, in the course of furnishing information to the sub-committee, the company determined that it appears likely that actual measurement dates for certain historical stock option grants will be found to differ from the recorded grant dates for such awards. As a result, it is possible that Activision will be required to record additional non-cash stock-based compensation expense related to stock option grants. However, the review of option grants has not yet been completed and the company is not yet able to quantify the accounting and tax effects that may result from any errors in the determination of measurement dates. The company is therefore unable to state with certainty at this time whether the impact of the errors on its current and historical financial statements will be material, or what, if any, historical periods will require restatement.
Based on the current status of the sub-committee's review, Activision does not expect that it will be in a position to file its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 in a timely manner. In that event, the company would not be in compliance with the requirements of the Nasdaq Global Select Market for continued listing of its shares on the Nasdaq Global Select Market. The company plans to become current in its periodic reports required under the Securities Exchange Act of 1934, as amended, as soon as practicable following the completion of the sub-committee's review.