Blizzard 2008 Annual Report Download - page 59

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45
transaction, and (b) the agreement includes a disincentive for nonperformance that is sufficiently
large to make performance probable. The enforceability of the Rights results in a put option and
should be recognized as a free standing asset separate from the ARS. Upon acceptance of the offer
from UBS, we recorded the Rights asset at its estimated fair value of $8 million and recognized an
unrealized gain of $8 million in investment income, net. We subsequently recorded a $2 million
increase in the fair value of the Rights in investment income, net, in the Consolidated Statements
of Operations for the year ended December 31, 2008, for a total fair value of $10 million at
December 31, 2008. The Rights do not meet the definition of a derivative instrument under
SFAS 133, because the underlying securities are not readily convertible to cash. Therefore, we
have elected to measure the Rights at fair value under Statement of Financial Accounting Standard
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”),
which permits an entity to measure certain items at fair value, to mitigate volatility in reported
earnings from the changes in the fair value of the ARS. As a result, unrealized gains and losses
will be included in earnings in future periods. We expect that future changes in the fair value of
the Rights will largely mitigate fair value movements in the related ARS. We will continue to
classify our investment in ARS held through UBS as long-term investments until June 30, 2009,
one year prior to the expected settlement.
Restricted Cash—Compensating Balances
We have restricted cash of $37 million and $3 million at December 31, 2008 and at 2007,
respectively. Most of the restricted cash at December 31, 2008 relates to the standby letter of
credit required by one of our inventory manufacturers to qualify for payment terms on our
inventory purchases. Under the terms of this arrangement, we are required to maintain with the
issuing bank a compensating balance, restricted as to use, of not less than the sum of the available
amount of the letter of credit plus the aggregate amount of any drawings under the letter of credit
that have been honored thereunder, but not reimbursed. Restricted cash is included in short-term
investments.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentration of credit risk consist
principally of cash and cash equivalents and accounts receivable. We place our cash and cash
equivalents with financial institutions. At various times, we had deposits in excess of coverage by
the Federal Deposit Insurance Corporation (“FDIC”) 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. We perform ongoing credit evaluations of our customers
and maintain allowances for potential credit losses. We generally do not require collateral or other
security from our customers. We had two customers, Wal-Mart and GameStop, who each
accounted for 11% of the consolidated net revenues for the year ended December 31, 2008 and
accounted for 15% and 9% of consolidated gross receivable at December 31, 2008, respectively.
No sales made to one customer accounted for more than 10% of total consolidated net
revenues for the years ended December 31, 2007 and 2006.