THQ 2005 Annual Report Download - page 42

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We have traditionally been a market leader in video games for handheld devices and we plan to leverage
this leadership during the transition period. In fiscal 2006, we plan to release more than ten titles on the
Nintendo DS and the Sony PlayStation Portable combined, capitalizing on the significant installed base of
these devices by holiday 2005. We also expect to benefit from the new Nintendo Micro handheld device, to
be released in fall 2005, which plays Game Boy Advance games. We are also expanding our handheld
leadership position to wireless devices and plan to extend many of our upcoming console titles tothe
wireless platform, including Destroy All Humans! and Juiced.
We continue to focus on establishing strong technology and internal development capabilities in order to
improve our operating margins and create better quality products. We expanded our internal development
resources in fiscal 2005 with the acquisitions of Relic Entertainment, located in Canada, and Blue Tongue
Entertainment Limited, located in Australia, and with the formation of a new studio, Concrete Games,
located near San Diego, California. With the addition of these three development studios and expansion in
our existing studios, our worldwide product development operations now include over 900 employees
located at our corporate offices and in ten studios. Our focus on improving profitability includes bringing
key brands, such as Disney/Pixar and Nickelodeon, in-house to develop.
Critical Accounting Policies
The Management’s Discussion and Analysis ofFinancial Condition and Results ofOperations discusses
our consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. The
policies discussed below are considered by management to be critical because they are both important to
the portrayal of our financial condition and results of operations and because their application places the
most significant demands on management’s judgment, with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies
are described in the following paragraphs. For all of these policies, management cautions that actual
results may differ materially from these estimates under different assumptions or conditions.
Allowances for price protection, returns and doubtful accounts. We derive revenue from sales of packaged
software for video game systems and personal computers and sales of content and services for wireless
devices. Product revenue is recognized net of allowances for price protection and returns and various
customer discounts. We typically only allow returns for our personal computer products; however, we may
decide to provide price protection or allow returns for our video game systems or personal computer
products after we analyze: (1) inventory remaining in the retail channel, (2) the rate of inventory sell-
through in the retail channel, and (3) our remaining inventory onhand. We maintain a policy of giving
credits for price protection and returns, but do not give cash refunds.
We establish sales allowances based on estimates of future price protection and returns with respect to
current period product revenue. We analyze historical price protection granted, historical returns, current
sell-through of retailer and distributor inventory of our products, current trends in the video game market
and the overall economy, changes in customer demand and acceptance of our products, and other related
factors when evaluating the adequacy of the price protection and returns allowance. In addition,
management monitors the volume of our sales to retailers and distributors and their inventories, because
slow-moving inventory in the distribution channel can result in the requirement for price protection or
returns in subsequent periods. In the past, actual price protection and returns have not generally exceeded
our reserves. However, actual price protection and returns in any future period are uncertain. While
management believes it can make reliable estimates for these matters, if we changed our assumptions and
estimates, our price protection and returns reserves would change, which would impact the net revenue we