THQ 2005 Annual Report Download - page 90

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3. BusinessCombinations
In fiscal 2005, we acquired the following two entities for a total cost of $14.3 million, which was paid
primarily in cash:
•Relic Entertainment, located in Vancouver, British Columbia, Canada, a developer of interactive
entertainment software for video game hardware devices and personal computers
•Blue Tongue Entertainment Limited, located in Melbourne, Australia, a developer of interactive
entertainmentsoftware for video game hardware devices.
Also in fiscal 2005, we purchased an additional 25% of the outstanding common stock of Minick Holdings
AG for a total cost of $10.7 million. Minick develops and operates interactive software applications for
wireless devices such as Short Messaging Service (“SMS”), Enhanced Messaging Service (“EMS”),
Multimedia Messaging Service (“MMS”), messaging information, and multimedia and voting applications.
They are based in Zurich, Switzerland.
Goodwill recognized in the above transactions amounted to $18.2 million, none of which is expected to be
deductible for income tax purposes.
In 2002, we acquired ValuSoft, Inc. for a total cost of $14.2 million, which was paid primarily in cash. In
addition, we have since paid the former shareholders of ValuSoft additional consideration in the amount
of $4.6 million because ValuSoft reached certain pre-tax income targets in the two years subsequent to the
acquisition. They are still eligible for additional consideration in the amount of $6.4 million, which may be
paid by us in cash or stock, ifthey reach certain pre-tax income targets over the next three years. Any
additional consideration determined to be payable will increase goodwill in the period such pre-tax income
targets are reached. Goodwill recognized in the original transaction and in the payments of the additional
consideration has amounted to $16.6 million and is expected to be deductible for income tax purposes.
4. Credit Facility
On November 29, 2004, we amended our revolving credit agreement to (i) extend the term of the credit
agreement through November 29, 2006; and (ii) increase the maximum monthly facility amount to $40
millionfor each August, September and October, and reduce the maximum monthly facility amount to $12
million for every other month. Additionally, pursuant to the amendment, the credit facility is now
unsecured and accordingly the bank terminated its lien over our assets on January 4, 2005. The credit
agreement contains customary financial and non-financial covenants that require us to maintain specified
operating profits and liquidity and limits our ability to incur additional indebtedness, sell assets, pay cash
dividends and enter into certain mergers or acquisitions. As of March 31, 2005, we were in compliance with
all the covenants under the credit facility and had outstanding letters of credit of approximately
$3.8 million.
5. Allowance for Price Protection, Returns and DoubtfulAccounts
We derive revenues 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 on
hand. We maintain a policy of giving credits for price protection and returns, but do not give cash refunds.
Management uses significant judgment and makes estimates in connection with establishing allowances for
price protection, returns, and doubtful accounts in any accounting period.