Blizzard 2008 Annual Report Download - page 37

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Cash Flows from Operating Activities
The primary drivers of cash flows from operating activities have typically included the
collection of customer receivables generated by the sale of our products and our subscription
revenues, offset by payments to vendors for the manufacture, distribution and marketing of our
products, third-party developers and intellectual property holders and to our employees. A
significant operating use of our cash relates to our continued investment in software development
and intellectual property licenses. We expect that we will continue to make significant
expenditures relating to our investment in software development and intellectual property licenses.
Our future cash commitments relating to these investments are detailed in Note 18 of the Notes to
Consolidated Financial Statements.
Cash Flows from Investing Activities
The primary drivers of cash flows used in investing activities have typically included
capital expenditures, acquisitions of privately held interactive software development companies
and publishing companies and the net effect of purchases and sales/maturities of investments. The
goal of our investments is to minimize risk and maintain liquidity while maximizing returns,
funding anticipated working capital needs, and providing for prudent investment diversification.
For the year ended December 31, 2008, cash flows provided by investing activities were
primarily the result of the reverse acquisition of Activision, Inc., partially offset by cash paid for
capital expenditures, and the acquisitions of Freestyle Games, Ltd. and Budcat Creations, LLC.
Due to uncertainties surrounding the timing of liquidation of our auction rate securities
(“ARS”), which are comprised of debt obligations secured by higher education student loans, all
our investments in such securities were classified as long-term investments in our Consolidated
Balance Sheets at December 31, 2008. Liquidity for these auction rate securities is typically
provided by an auction process which allows holders to sell their notes and resets the applicable
interest rate at pre-determined intervals, usually every 7 to 35 days. On an industry-wide basis,
many auctions have failed, and there is, as yet, no meaningful secondary market for these
instruments. Each of the auction rate securities in our investment portfolio at December 31, 2008
has experienced a failed auction and there is no assurance that future auctions for these securities
will succeed. An auction failure means that the parties wishing to sell their securities could not be
matched with an adequate volume of buyers. In the event that there is a failed auction, the
indenture governing the security requires the issuer to pay interest at a contractually defined rate
that is generally above market rates for other types of similar instruments. The securities for which
auctions have failed will continue to earn interest at the contractual rate and be auctioned every 7
to 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our
ability to liquidate and fully recover the carrying value of our auction rate securities in the near
term may be limited or not exist. In August 2008, certain affiliates of Citigroup, Inc. (“Citi”) and
UBS through which we own our auction rate securities, announced agreements in principle with
various state regulatory agencies and the SEC, to address their clients’ liquidity issues arising from
the auction failures. On August 7, 2008, Citi announced that it would use its best efforts to provide
liquidity solutions to its institutional investor client who invested in auction rate securities by the
end of 2009.
On November 14, 2008, we accepted an offer from UBS, providing us with rights related
to our ARS held through UBS (the “Rights”). The Rights permit us to require UBS to purchase