THQ 2005 Annual Report Download - page 81

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include a manufacturing, printing and packaging fee as well as a royalty for the use of the manufacturer’s
name, proprietary information and technology, and are subject to adjustment by the manufacturers at their
discretion. The manufacturers have the right to review, evaluate and approve a prototype of each title and
the title’s packaging.
In addition, we must indemnify the manufacturers with respect to all loss, liability and expense resulting
from any claim against the manufacturer involving the development, marketing, sale, or use of our games,
including any claims for copyright or trademark infringement brought against the manufacturer. As a
result, we bear a risk that the properties upon which the titles are based, or that the information and
technology licensed from others and incorporated in the products, may infringe the rights of third parties.
Conversely, our agreements with our independent software developersand property licensors typically
provide for us to be indemnified with respect to certain matters. If any claim is brought by a manufacturer
against us for indemnification, however, our developers or licensors may not have sufficient resources to,
in turn, indemnify us. Furthermore, these parties’ indemnification of us may not cover the matter that gives
rise to the manufacturer’s claim.
Each platform license may be terminated by the manufacturer if a breach or default by us isnot cured after
we receive written notice from the manufacturer, or if we become insolvent. Upon termination of a
platform license for any reason other thanour breach or default, we have a limited period of time to sell
any existing product inventory remaining as of the date of termination. The length of this sell-off period
varies between 90and 180 days, depending upon the platform agreement. We must destroy any such
inventory remaining after the end of the sell-off period. Upon termination as a result of our breach or
default, we must destroy any remaining inventory.
2. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of THQ Inc. and
its wholly owned and majority owned subsidiaries as well as the venture we have withJAKKS Pacific, Inc.
See “Note 13—Agreement with JAKKS Pacific, Inc.” The results of operations for acquisitions of
companies accounted for using the purchase method have been included in the consolidated statements of
operationsbeginning on the closing date of acquisition.All material intercompanybalances and
transactions have been eliminated in consolidation.
Foreign Currency Translation. Assets and liabilities of foreign operations are translated at current rates of
exchange while results of operations are translated at average rates in effect for the period. Translation
gains or losses are shown as a separate component of accumulated other comprehensive income (loss).
The translation gain (loss) on long-term intercompany balances included in the foreign currency
translation was $1.2 million and $2.3 million for the fiscal years ended March 31, 2005 and 2004,
respectively. The translation gain (loss) on long-term intercompany balancesincluded in the foreign
currency translation was ($0.4) million and $1.8 million for Transition 2003 and the year ended
December 31, 2002, respectively. Foreigncurrency transaction gains and losses result from exchange rate
changes for transactions denominated in currencies other than the functional currency. For the fiscal years
ended March 31, 2005 and 2004, foreign currency transaction gains were $2.3 million and $1.4 million,
respectively, and are included in general and administrativeexpenses. For Transition 2003 and the year
ended December 31, 2002 foreign currency transaction gains (losses) were not material.