THQ 2009 Annual Report Download - page 33

for play on their platforms, such as its Super Mario games, and games that tap into mass-market trends,
such as music games. Additionally, sales of our games on the ‘‘kid friendly’’ PlayStation 2 decreased by
$160.6 million during the fiscal year ended March 31, 2009 as compared to the prior year. We believe that
much of this business has shifted to the Nintendo Wii and that, as discussed above, kids are choosing to
play original Nintendo games and music games on this console.
Foreign Currency Exchange Rates Impact on Results of Operations. Approximately 45% of our revenue for
the fiscal year ended March 31, 2009 was produced by sales outside of North America. We are exposed to
significant risks of foreign currency fluctuation, primarily from receivables denominated in foreign
currency, and are subject to transaction gains and losses, which are recorded as a component in
determining net income. The income statements of our non-U.S. operations are translated into U.S.
dollars at the month-to-date average exchange rates for each applicable month in a period. To the extent
the U.S. dollar strengthens against foreign currencies, as it did during fiscal 2009, the translation of these
foreign currency denominated transactions results in decreased revenue, operating expenses and income
from our non-U.S. operations. Similarly, our revenue, operating expenses and income from our non-U.S.
operations will increase if the U.S. dollar weakens against foreign currencies.
Seasonality. The interactive entertainment software market is highly seasonal. Sales are typically
significantly higher during the third quarter of our fiscal year, due primarily to the increased demand for
interactive games during the holiday buying season.
Strategic Plan and Business Realignment
In November 2008, in order to address the significant trends affecting our business, we updated our
strategic plan to focus on 1) developing a select number of high quality titles targeted at the core gamer,
2) extending our leadership in the fighting and racing categories, 3) reinvigorating the product portfolio
and improving profitability in our kids’ business, 4) building strong mass appeal/family game franchises,
and 5) extending our brands into online markets. In the second half of fiscal 2009, we made changes to our
organization to support this new business strategy. We restructured our product development organization
under new studio management and discontinued a number of titles in our product pipeline that did not fit
our strategic objectives. As a result, we have closed several of our studios and reduced our product
development headcount significantly. Additionally, we realigned our sales, marketing and corporate
organizational structure to support this more focused product strategy by reducing both costs and
headcount in our corporate and global publishing organizations. In total we reduced headcount by
approximately 600 people, or 24% of our workforce.
As a result of these realignment initiatives, we recorded a $12.3 million restructuring charge for the fiscal
year ended March 31, 2009. Restructuring charges include the costs associated with lease abandonments,
less estimates of sublease income, write-off of related fixed assets due to the studio closures, as well as
other non-cancellable contracts. Additionally, as of March 31, 2009, we incurred non-cash charges of
$63.3 million, recorded in cost of sales—software amortization and royalties, related to the write-off of
capitalized software for games that have been cancelled. We also incurred non-cash charges of $1.0 million,
recorded in cost of sales—license amortization and royalties, related to impairment of licenses in
connection with the cancelled games. In addition, we incurred $12.7 million in cash charges related to
severance and other employee benefits. Employee related severance costs are classified in product
development, selling and marketing, and general and administrative expenses in our consolidated
statements of operations based upon the terminated employee’s classification.
We have substantially completed the actions necessary to achieve our business realignment plan, and
expect to report additional charges of up to $10.0 million in fiscal 2010 as certain projects are completed
and facilities are vacated. We continue to maintain a strong studio system with eight internal development
studios and more than 1,200 people in our product development organization.
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