THQ 2005 Annual Report Download - page 32

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9
Our ten largest customers worldwide include Wal-Mart, Target, Toys “R” Us, Best Buy, GameStop,
Electronics Boutique, Game Stores Group Ltd., and other national and regional retailers, discount store
chains and specialty retailers. Sales to these customers collectively accounted for approximately 48% of our
sales in fiscal 2005. Our largest customer, Wal-Mart, accounted for 14% of our worldwide sales in fiscal
2005.
Revenue Fluctuations and Seasonality. We have experienced, and will likely continue to experience,
significant quarterly fluctuations in net sales and operating results due to a variety of factors. The software
market is highly seasonal, with sales typically significantly higher during the quarter ending December 31
(due primarily to the increased demand for interactive games during the year-end holiday buying season).
Other factors that cause fluctuations include the timingof our release of new titles, the popularity of both
new titles and titles released in prior periods, changes in the mix of titles with varying gross margins, the
timing of customer orders, the timing of shipments by the manufacturers, fluctuations in the size and rate
of growth of consumer demand for software for various platforms, the timing of the introduction of new
platforms, and the accuracy of retailers’ forecasts of consumer demand. Our expenses are partially based
on our expectations of future sales and, as a result, operating results would be disproportionately and
adversely affected by a decrease in sales or a failure by us to meet our sales expectations. There can be no
assurance that we can maintain consistentprofitability on a quarterly or annual basis.
Agreement with JAKKS Pacific.In June1999, we entered into an operating agreement with JAKKS
Pacific, Inc. (“JAKKS”) that governs our relationship with respect to the World Wrestling Entertainment,
Inc. (“WWE”) license. This agreement with JAKKS was amended in January 2002. Our relationship with
JAKKS was established to develop, manufacture, distribute, market and sell video games pursuant to the
license from WWE. The principal terms of this operating agreement are as follows:
•We are responsible for funding all operations of the venture, including all payments owed to WWE;
•For the period commencing November 16, 1999 and ending June30, 2006, JAKKS is entitled to
receive a preferred payment based upon specified percentages of the net sales from the WWE-
licensed games (as defined) in amounts that vary based on the platform. The payment of these
amounts is guaranteed by us. We are entitled to the profits and cash distributions remaining after
the payment of these amounts;
•For periods after June30, 2006, the amount of the preferred payment will be subject to
renegotiation between the parties. An arbitration procedure is specified in the event the parties do
not reach agreement; and
•We are responsible for the day-to-day operations of the venture. We are responsible for
development, sales and distribution of the WWE-licensed games, and JAKKS is responsible for the
WWE approval process and other relationship matters with WWE.
For financial reporting purposes, we are deemed to control the venture; therefore, all venture operating
results are consolidated with our results.
In November 2001, through the venture with JAKKS, we entered into an amendment to expand the WWE
license to include exclusive rights to other wrestling content produced by the WWE. In exchange for these
rights we have agreed to increase the minimum guarantee payable to WWE throughDecember 31, 2013.
We are currently involved in litigation with the JAKKS and WWE with respect to the license. See
“Item 3.—Legal Proceedings—WWE Lawsuit” for more information.
Competition
The video game industry is intensely competitive. It is characterized by the continuous introduction of new
titles and the development of new technologies. Some of our competitors are very large, diversified
corporations. Our business is driven by hit titles, which requires us to invest significantly in production and