THQ 2011 Annual Report Download - page 24

Entertainment Software Ratings Board (“ESRB”) has reacted to discoveries of undisclosed content and features in other publisher's
products by changing the rating that was originally assigned to the product, requiring the publisher to change the game and/or
game packaging and/or fining the publisher. Retailers have on occasion reacted to the discovery of such undisclosed content by
removing these games from their shelves, refusing to sell them, and demanding that the publishers accept them as product returns.
Likewise, some consumers have reacted to the revelation of undisclosed content by refusing to purchase such games, demanding
refunds for games they have already purchased, refraining from buying other games published by the company whose game
contained the objectionable material, and, on at least one occasion, filing a lawsuit against the publisher of the product containing
such content.
We have implemented preventive measures designed to reduce the possibility of objectionable undisclosed content from
appearing in the video games we publish. Nonetheless, these preventive measures are subject to human error, circumvention,
overriding, and reasonable resource constraints. If a video game we publish is found to contain undisclosed content, we could be
subject to any of these consequences and our reputation could be harmed, which could have a negative impact on our operating
results and financial condition, and our business and financial performance could be significantly harmed.
Rating systems and future legislation may make it difficult to successfully market and sell our products.
Currently, the interactive entertainment software industry is self-regulated and products are rated by the ESRB. Our retail
customers take the ESRB rating into consideration when deciding which of our products they will purchase. If the ESRB or a
manufacturer determines that a product should have a rating directed to an older or more mature consumer, we may be less
successful in our marketing and sales of a particular product.
From time to time, legislation has been introduced for the establishment of a government mandated rating and governing
system in the U.S. and in foreign countries for our industry. In April 2010, the U.S. Supreme Court granted the state of California's
certiorari petition in connection with the constitutionality of California's proposed legislation to regulate the sale of violent video
games to minors. Various foreign countries already allow government censorship of interactive entertainment products. We
believe that if our industry were to become subject to a government rating system or other regulation (such as the law at issue in
the California case), our ability to successfully market and sell our products could be adversely impacted.
Breaches of our security measures and unintended disclosures of our intellectual property or our customer data could adversely
affect our business.
We take measures to prevent our source code, and other confidential information, from unauthorized access. A security
breach that results in the disclosure of our source code, other confidential assets, or pre-release software could lead to piracy of
our software or otherwise compromise our product plans. When we conduct business online directly with consumers, we may be
the victim of fraudulent transactions, including credit card fraud, which presents a risk to our revenues and potentially disrupts
service to our customers. As we increase our online businesses, we are also collecting and storing an increasing amount of customer
data, some of it personally identifiable information including credit card data. It is possible that our security controls over customer
data may not prevent the improper disclosure of personally identifiable information. A security breach that leads to disclosure of
customer account information (including personally identifiable information) could harm our reputation and subject us to liability
under laws that protect personal data, resulting in increased costs or loss of revenue. A resulting perception that our products or
services do not adequately protect the privacy of personal information could result in a loss of current or potential customers for
our online offerings that require the collection of customer data.
We have significant net operating loss and tax credit carryforwards ("NOLs"). If we are unable to use our NOLs, our future
profitability may be significantly impacted.
As of March 31, 2011, we had federal net operating loss carryforwards of $509.2 million and federal R&D tax credit
carryforwards of $25.5 million. Under applicable tax rules, we may "carry forward" these NOLs in certain circumstances to offset
any current and future taxable income and thus reduce our income tax liability, subject to certain requirements and restrictions.
Therefore, we believe that these NOLs could be a substantial asset. However, if we experience an "ownership change," as defined
in Section 382 of the Internal Revenue Code, our ability to use the NOLs could be substantially limited, which could significantly
increase our future income tax liability. On May 12, 2010, we entered into a Section 382 Rights Agreement with Computershare
Trust Company, N.A., as rights agent, in an effort to prevent an "ownership change" from occurring and thereby protect the value
of the NOLs. There can be no assurance, however, that the Section 382 Rights Plan will prevent an ownership change from
occurring or protect the value of the NOLs.
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