THQ 2005 Annual Report Download - page 69

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46
obtain developer agreements on favorable terms with skilled external developers. Our competitors may
acquire the businesses of key developers or sign them to exclusive development arrangements. In either
case, we would not be able to continue to engage such developers’ services for our products, except for
those that they are contractually obligated to complete for us. We cannot guarantee that we will be able to
establish or maintain such relationships with external developers and failure to do so could result in a
material adverse effect on our business and financial results.
Defects in our gamesoftware could harm our reputationor decrease the market acceptance of our
products.
Our game software may contain defects. In addition, because we do not manufacture our games for
console platforms, we may not discover defects until after our products are in use by retail customers. Any
defects in our software could damage our reputation, cause our customers to terminate relationships with
us or to initiate product liability suits against us, divert our engineering resources, delay market acceptance
of our products, increase our costs or cause our revenue to decline.
We relyon a small number of customers that account for a significant amount of our sales.
Sales to our 10 largest customers collectively accounted for approximately 48%, 54% and 60% of our gross
sales for fiscal 2005, fiscal 2004 and the twelve monthsended March 31, 2003, respectively. Our largest
single customer in those periods was Wal-Mart. Wal-Mart accounted for 14% of our gross sales in fiscal
2005, 19% of our gross sales for fiscal 2004 and 18% of our gross sales for the twelve months ended
March 31, 2003. A substantial reduction, termination of purchases, orbusiness failure by any of our largest
customers would have a material adverse effect on us.
Increased foreign operations subject us to different business and economic risks.
Foreign sales are subject to different risks, including different consumer preferences, unexpected changes
in regulatory requirements, tariffs and other barriers, difficulties in staffing and managing foreign
operations, and possible difficulties collecting foreign accounts receivable. These factors or others could
have an adverse effect on our future foreign sales or the profits generated from these sales.
Sales generated by our European and Australian offices will generally be denominated in the currency of
the country in which the sales are made or, if made in Europe, Euros, if made in the United Kingdom,
GBP and if made in Australia, the Australian Dollar. To the extent our foreign sales are not denominated
in U.S. dollars, our sales and profits could be materially and adversely affected by foreign currency
fluctuations.
Competition in the interactive software entertainment industry may lead to reduced sales of our products
and reduced market share.
Our industry is intensely competitive. We compete for both licenses to properties and the sale of games
with the platform manufacturers and other publishers. As a result of their commanding positions in the
industry, the manufacturers may have better bargaining positions with respect to retail pricing, shelf space
and retailer accommodations than do any of their licensees, including us. Some of our competitors have
greater name recognition among consumers and licensors of properties, a broader product line, or greater
financial, marketing and other resources than we do. Accordingly, these competitors may be able to market
their products more effectively or make larger offers or guarantees inconnection with the acquisition of
licensed properties. Additionally, large media companies, such as Disney and Viacom, are increasing their
focus on the interactive entertainment software market, which might result in greater competition for us.
As competition for popular properties increases, our cost of acquiring licenses for such properties may
increase, resulting in reduced margins. In addition, as competition for retail shelf space becomes more