THQ 2006 Annual Report Download - page 36

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based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for
the potential outcome for any uncertain tax issue, including our recent claim for research and development
income tax credits, requires judgment. We believe we have adequately provided for any reasonably
foreseeable outcome related to these matters. However, our future results may include favorable or
unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved
or when statutes of limitation on potential assessments expire.
As a result of the items discussed above, our actual effective income tax rates can differ from the projected
effective income tax rates used when preparing our consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-
Based Payment” (“SFAS No. 123R”), a revision of SFAS No. 123. SFAS No. 123R requires companies to,
among other things, measure all employee stock-based compensation awards using a fair value method and
record the expense in the company’s consolidated financial statements. The provisions of SFAS No. 123R,
SEC Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment” and other related clarifying
pronouncements, are effective no later than the beginningof the next fiscal year that begins after June 15,
2005. We will adopt the new requirements in our fiscal year beginning April 1, 2006 using the modified
prospective transition method, wherein prior period amounts willnot be restated. In addition to the
recognition of expense in the financial statements, under SFAS No. 123R, any excess tax benefits received
upon exercise of options will be presented as a financing activity inflow rather than as an adjustment of
operating activity as currently presented. Based on our current analysis and information, management has
determined the adoption of SFAS No. 123R will have a material impact on our consolidated results of
operations and earnings per share. We expect the adoption of SFAS No. 123R will result in amounts that
are similar to our current pro forma disclosures under SFAS No. 123.
In November 2005, the FASB issued Staff Position No. FAS 115-1, “The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Investments” (“FSP No. 115-1”). FSP No. 115-1
provides accounting guidance for identifying and recognizing other-than-temporary impairments of debt
and equity securities, as well as cost method investments in addition to disclosure requirements.
FSP No. 115-1 is effective for reporting periods beginning after December 15, 2005, and earlier application
is permitted. We adopted FSP No. 115-1 in our fiscal fourth quarter beginning January 1, 2006, and this
adoption did not have a material impact on our consolidated results of operations and earnings per share.
Results of Operations
Comparison of Fiscal2006 to Fiscal 2005
Our net income for fiscal 2006 was $34.3 million, or $0.52 per diluted share, as compared to $62.8 million,
or $1.04 per diluted share in the prior fiscal year.
Net Sales
We derive revenue principally from sales of packaged interactive software games designed for play on
video game consoles, handheld devices and personal computers. We also derive revenue through
downloads by mobile phone users of our wireless content.