THQ 2005 Annual Report Download - page 73

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Any significant downturnin general economic conditions which results in a reduction in discretionary
spending could reduce demand for our productsand harm our business.
Our product sales are affected by the retail customer’s ability and desire to spend disposable income on the
purchase of our games. Any significant downturnin general economic conditions which results in a
reduction in discretionary spending could result in a reduction in demand for our products and could harm
our business. Such industry downturns have been, and may continue to be, characterized by diminished
product demand and subsequent erosion of average selling prices.
Because of these and other factors affecting our operating results and financial condition, past financial
performance shouldnot be considered a reliable indicator of future performance, and investors should not
use historical trends to anticipate results or trends in future periods.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks arising from transactions in the normal course of business,
principally risks associated with interest rate and foreign currency fluctuations.
Interest RateRisk
We have interest rate risk primarily related to our investment portfolio. A substantial portion of our
portfolio is inshort-term investments made up of floating rate securities and municipal securities. The
value of these investments may fluctuate with changes in interest rates. However, we believe this risk is
immaterial due to the short-term nature of the investments.The credit facility is based on variable interest
rates. At March 31, 2005, we had outstanding letters of credit of $3.8 million.
Foreign Currency Risk
We transact business in many different foreign currencies and are exposed to financial market risk
resulting from fluctuations in foreign currency exchange rates, particularly the GBP and the Euro, which
may result in a gain or loss of earnings to us. The volatility of the GBP and the Euro (and all other
applicable currencies) is monitored frequently throughout the year. We face two risks related to foreign
currency exchange: translation risk and transaction risk. Amounts invested in our foreign operations are
translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting
translation adjustments are recorded as a component of accumulated other comprehensive income(loss)
in the stockholders’ equity section of the consolidated balance sheets. Our foreign subsidiaries generally
collect revenues and pay expenses in currencies other than the U.S. dollar. Since the functional currencies
of our foreign operations are generally denominated in the local currency of our subsidiaries, the foreign
currency translation adjustments are reflected as a component of stockholders’ equity and do not impact
operating results. Revenues and expenses in foreign currencies translate into higher or lower revenues and
expenses in U.S. dollars as the U.S. dollar weakens or strengthens against other currencies. Therefore,
changes in exchange rates may negatively affect our consolidated revenues and expenses (as expressed in
U.S. dollars) from foreign operations. Currency transaction gains or losses arising from transactions in
currencies other than the functional currency are included within general and administrative expense
within the consolidated statements of operations.
We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign
currency denominated assets and liabilities, primarily certain inter-company receivables and payables. Our
foreign exchange forward contracts are accounted for as derivatives whereby the fair value of the contracts
are reflected as other current assets or other current liabilities and the associated gains and losses are
reflected in general and administrative expense in the consolidated statements of operations. These gains
and losses are designed to offset gains and losses on the underlying foreign-currency-denominated assets
and liabilities. As of March 31, 2005, we had foreign exchange forward contracts in the notional amount of