Blizzard 2005 Annual Report Download - page 70

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For฀the฀year฀ended฀March฀31,฀2005,฀net฀realized฀gains฀on฀short-term฀investments฀consisted฀of฀$471,000฀of฀gross฀realized฀gains฀and฀no฀gross฀realized฀losses.฀For฀the฀year฀
ended฀March฀31,฀2004,฀net฀realized฀gains฀on฀short-term฀investments฀consisted฀of฀$25,000฀of฀gross฀realized฀gains฀and฀$4,000฀of฀gross฀realized฀losses.฀For฀the฀year฀ended฀
March฀31,฀2003,฀net฀realized฀gains฀on฀short-term฀investments฀consisted฀of฀$350,000฀of฀gross฀realized฀gains฀and฀$116,000฀of฀gross฀realized฀losses.
In฀accordance฀with฀EITF฀03-1,฀“The฀Meaning฀of฀Other-Than-Temporary฀Impairment฀and฀Its฀Application฀to฀Certain฀Investments,”฀the฀fair฀value฀of฀investments฀in฀an฀unrealized฀
loss฀position฀for฀which฀an฀other-than-temporary฀impairment฀has฀not฀been฀recognized฀was฀$508,224,000฀and฀$28,583,000฀at฀March฀31,฀2005฀and฀2004,฀respectively,฀with฀
related฀gross฀unrealized฀losses฀of฀$4,144,000฀and฀$66,000,฀respectively.฀At฀March฀31,฀2005,฀the฀gross฀unrealized฀losses฀were฀comprised฀mostly฀of฀unrealized฀losses฀on฀
corporate฀bonds,฀U.S.฀agency฀ issues,฀and฀asset-back฀ securities฀with฀$464,000฀of฀unrealized฀loss฀being฀ in฀a฀continuous฀unrealized฀loss฀position฀for฀twelve฀months฀ or฀
greater.฀At฀March฀31,฀2004,฀the฀gross฀unrealized฀losses฀were฀comprised฀mostly฀of฀unrealized฀losses฀on฀corporate฀bonds,฀U.S.฀agency฀issues,฀and฀asset-back฀securities฀
with฀$21,000฀of฀unrealized฀loss฀being฀in฀a฀continuous฀unrealized฀loss฀position฀for฀twelve฀months฀or฀greater.
The฀Company’s฀investment฀portfolio฀consists฀of฀government฀and฀corporate฀securities฀with฀effective฀maturities฀less฀than฀30฀months.฀The฀longer฀the฀term฀of฀the฀securities,฀
the฀more฀susceptible฀they฀are฀to฀changes฀in฀market฀rates฀of฀interest฀and฀yields฀on฀bonds.฀Investments฀are฀reviewed฀periodically฀to฀identify฀possible฀impairment.฀When฀
evaluating฀the฀investments,฀the฀Company฀reviews฀factors฀such฀as฀the฀length฀of฀time฀and฀extent฀to฀which฀fair฀value฀has฀been฀below฀cost฀basis,฀the฀financial฀condition฀of฀
the฀issuer,฀and฀the฀Company’s฀ability฀and฀intent฀to฀hold฀the฀investment฀for฀a฀period฀of฀time฀which฀may฀be฀sufficient฀for฀anticipated฀recovery฀in฀market฀value.฀The฀Company฀
has฀the฀intent฀and฀ability฀to฀hold฀these฀securities฀for฀a฀reasonable฀period฀of฀time฀sufficient฀for฀a฀forecasted฀recovery฀of฀fair฀value฀up฀to฀(or฀beyond)฀the฀initial฀cost฀of฀the฀
investment.฀The฀Company฀expects฀to฀realize฀the฀full฀value฀of฀all฀of฀these฀investments฀upon฀maturity฀or฀sale.
5. SOFTWARE DEVELOPMENT COSTS AND INTELLECTUAL PROPERTY LICENSES
As฀of฀March฀31,฀2005,฀capitalized฀software฀development฀costs฀included฀$61.3฀million฀of฀internally฀developed฀software฀costs฀and฀$30.3฀million฀of฀payments฀made฀to฀third-
party฀software฀developers.฀As฀of฀March฀31,฀2004,฀capitalized฀software฀development฀costs฀included฀$35.3฀million฀of฀internally฀developed฀software฀costs฀and฀$51.5฀million฀
of฀payments฀made฀to฀third-party฀software฀developers.฀Capitalized฀ intellectual฀property฀ licenses฀ were฀$35.7฀million฀ and฀$48.5฀million฀as฀ of฀March฀31,฀2005฀and฀2004,฀
respectively.฀Amortization฀and฀write-offs฀of฀capitalized฀software฀development฀costs฀and฀intellectual฀property฀licenses,฀combined,฀was฀$134.8฀million,฀$87.9฀million฀and฀
$100.4฀million฀for฀the฀years฀ended฀March฀31,฀2005,฀2004฀and฀2003,฀respectively.
During฀the฀ three฀months฀ ended฀December฀ 31,฀2003,฀we฀completed฀a฀comprehensive฀review฀of฀ our฀product฀ portfolio฀ in฀ which฀we฀evaluated฀each฀product฀ based฀on฀a฀
number฀of฀criteria,฀including:฀the฀strength฀of฀the฀franchise,฀the฀projected฀product฀quality,฀the฀potential฀responsiveness฀of฀the฀product฀to฀aggressive฀marketing฀support฀and฀
the฀financial฀risk฀in฀the฀event฀of฀product฀failure.฀As฀a฀result฀of฀this฀review฀at฀the฀time,฀we฀found฀that฀we฀had฀an฀extensive฀slate฀of฀high-potential฀properties฀in฀development.฀
However,฀we฀also฀found฀that฀certain฀projects฀had฀a฀lower฀likelihood฀of฀achieving฀acceptable฀levels฀of฀operating฀performance฀and฀that฀continued฀pursuit฀of฀these฀projects฀would฀
create฀a฀substantial฀opportunity฀cost฀as฀it฀related฀to฀our฀slate฀of฀high-potential฀projects.฀Accordingly,฀in฀the฀three฀months฀ended฀December฀31,฀2003,฀we฀canceled฀the฀
development฀of฀ten฀products฀which฀we฀believed฀were฀unlikely฀to฀produce฀an฀acceptable฀level฀of฀return฀on฀our฀investment.฀In฀connection฀with฀the฀cancellation฀of฀these฀
products,฀we฀recorded฀a฀pre-tax฀charge฀of฀approximately฀$21฀million฀in฀the฀quarter฀ended฀December฀31,฀2003฀which฀is฀included฀in฀the฀consolidated฀statement฀of฀operations฀
in฀product฀development฀expense.
page 69
Activision, Inc. — 2005 Annual Report