THQ 2007 Annual Report Download - page 84

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76
are exercisable over theterm of thewarrant. The exercise price of third-party warrants is equalto their fair
market value of our common stock at the date of grant. No third-party warrants were granted or exercised
during thefiscal yearsended March 31,2007 and 2006.
In fiscal 2005wegranted 240,000 warrants to third parties to purchaseup to 240,000 shares of our common
stock at an exercise price of $13.49 pershare in connection with alicense agreement that allowsusto
utilize intellectual property owned by such third parties. Thewarrants vested upon grant and have a six-
year term. The fair value of the warrants was determined usingtheBlack-Scholes pricing model,assuming
arisk-free rate of 2.9%, a volatility factor of 67% and the six-year term as noted above. The fair valueof
these warrants was$2.0 million.
At March 31, 2007 and 2006, we had 390,000 warrants outstanding with weighted averageexercise prices
per shareof$12.32. In fiscal 2006, 112,500 warrants expired unexercised.
In accordance with EITF No.96-18, “AccountingforEquityInstruments that areIssued to OtherThan
Employees for Acquiring or in Connection with Selling Goods or Services,” we measure thefair value of
these warrants on themeasurement date. The fair value of each warrant is capitalized and amortized to
expensewhenthe related product is released and therelated revenueis recognized. Additionally, as more
fully describedin Note 1, the recoverability of intellectual property licenses is evaluated on a quarterly
basis with amounts determined as not recoverable being charged to expense.Inconnectionwith the
evaluation of capitalized intellectual property licenses,any capitalized amounts for related third-party
warrants areadditionally reviewed forrecoverability with amounts determined as not recoverable being
amortizedtoexpense. For the years ended March 31, 2007, 2006 and 2005, $738,000, $1.3 million and $2.2
million, respectively,wasamortized and included in cost of sales—license amortization and royalties
expense.
Proforma information forperiods prior to the adoption of FAS 123R
Prior to theadoption of FAS 123R, we accounted for ourstock-based compensation to employees using
the intrinsic value method in accordance with APB 25 and thedisclosure-only provisions of FAS 123.
Employee stock-based compensation expenserecognized under FAS 123R was notreflected in ourresults
of operations for the fiscal yearsended March 31, 2006 and 2005. Forfeituresof our stock-based awards
were reflected in our disclosures as they occurred. Previously reported amounts have not been restated
relative to our adoption of FAS123R.
Thefairvalue of each optiongrant wasestimated on the date of grant using the Black-Scholes option-
pricing model. The following weighted-average assumptions were used foroption grants made underour
stock optionplans during thefiscal years ended March 31, 2006 and 2005:
Fiscal Year Ended
March 31,
2006 2005
Dividend yield............................................0%0%
Anticipatedvolatility.......................................51% 57%
Weighted average risk-freeinterestrate......................4.11% 3.48%
Expected lives. ............................................3years4years