THQ 2007 Annual Report Download - page 66

Download and view the complete annual report

Please find page 66 of the 2007 THQ annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 108

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108

58
2007,2006 and2005, we had foreign exchange forwardcontracts in the notional amount of $47.0 million,
$60.3 million and $35.1 million, respectively. The netlossrecognized from foreign currency contracts in
fiscal 2007 was $872,000, and the netgains recognizedfrom foreign currency contracts in fiscal 2006 and
fiscal 2005 were $493,000 and $682,000, respectively,and areincluded in interest and other income in our
consolidated statements of operations.
Accounts Receivable Allowances. We derive revenues from sales of packaged software for video game
systems and personal computers and sales of contentandservices 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 forour video game systems or personal computer products after we analyze:
(1) inventory remaining in theretail channel, (2) the rate of inventory sell-through in theretail channel,
and (3) ourremaining inventoryon hand. We maintainapolicy of giving credits forprice protectionand
returns, but do not give cash refunds. Management uses significant judgment and makes estimates in
connection with establishing allowances forpriceprotection, returns, and doubtful accounts in any
accounting period.Included in our accounts receivable allowances is our allowancefor co-operative
advertising that we engage in with our retailchannel partners. Our co-operative advertisingallowance is
basedupon specific contractual commitments and does not involveestimates made by management.
Concentrations of CreditRisk. Financial instrumentswhich potentially subjectus to concentration of
creditrisk consist principally of cash and cash equivalents, short-term investments, accounts receivable and
long-term marketable securities. We placecash and cash equivalents and short-term investments with high
credit-quality institutions andlimit the amount of credit exposure to any one institution. We believe this
risk is immaterial due to the short-term nature of such investments. As of March 31, 2007 we did not have
any long-termmarketable securities. Most of oursales are made directly to mass merchandisers and
national retailers. Due to the increasedvolume of sales to these channels,we have experienced an
increased concentration of credit risk, andas a result, may maintain individually significant receivable
balances with such mass merchandisers and national retailers. We perform ongoing credit evaluations of
our customers, maintain an allowance for potential credit losses, and most of our foreign receivables are
covered by credit insurance. As of March 31, 2007and 2006,approximately 22% and 25%, respectively, of
ourgross accounts receivable outstanding waswith one major customer. Our largestsingle customer
accounted for18% of our gross sales in fiscal2007, 19% of our gross sales in fiscal 2006 and 14%of our
gross sales in fiscal 2005.
Inventory. Inventory, whichconsists principally of finished products,is stated at thelower of cost (moving
weighted average) or market. We estimate thenetrealizable valueof slow-moving inventory on a title by
titlebasis, and charge the excess of cost overnet realizable value to cost of sales—product costs.
Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of theassets. Leasehold improvements are
depreciated over the shorter of their useful lives or theremaining leaseterm.
Licenses. Minimum guaranteed royalty payments for intellectual property licenses are initially recorded
on ourbalance sheet as an asset(licenses) and as a liability (accruedroyalties) at the contractual amount
upon execution of the contract if no significant performanceobligation remains with the licensor. When a
significant performance obligation remains with the licensor, we record royalty paymentsasan asset
(licenses) when payable rather than upon execution of the contract. Royalty payments for intellectual
property licenses are classified as current assets and current liabilities to the extent such royalty payments
relate to anticipatedsales during the subsequent year and long-term assets and long-term liabilities if such
royalty payments relate to anticipated sales after one year.
We evaluate thefuture recoverability of ourcapitalized licenses on aquarterly basis. The recoverability of
capitalized licensecosts is evaluated based on the expected performanceof the specific products in which