THQ 2012 Annual Report Download - page 31

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completed by March 31, 2012. We expect remaining severance amounts of $5.0 million to be paid by September 30, 2012.
These actions will have reduced headcount by approximately 370 people.
As a result of these strategic initiatives, we recorded charges affecting our operating loss totaling $117.6 million in fiscal 2012.
These realignment charges include $6.8 million of costs associated with lease abandonments, write-off of fixed assets, as well
as other non-cancellable contracts; non-cash charges of $74.7 million related to the write-off of capitalized software for games
that have been cancelled or reconfigured; non-cash charges of $18.4 million related to impairment of licenses in connection
with the cancelled games; and $17.8 million in cash charges related to severance and other employee benefits.
Consistent with our strategy, on June 1, 2012, we entered into an agreement to transfer our license to develop future games
based on the Ultimate Fighting Championship ("UFC"). After the write-off of the capitalized software development related to
the UFC game currently under development, we estimate that this will result in a small gain. We also expect this action to
result in the closure of the studio developing the UFC game, which could result in additional cash charges of up to $1.1 million
related to severance, up to $1.3 million in cash charges related to leased facilities and non-cash charges of up to $0.5 million
related to long-lived assets. For additional information, refer to "Note 22 — Subsequent Events" in the notes to the
consolidated financial statements included in Part II, Item 8 for further information.
With our revised product plan, lower cost structure, cash balance, existing credit facility and other sources of external liquidity,
we believe we have adequate resources to execute on our plan and deliver on our strong multi-year pipeline of games.
Business Trends
The following trends affect our business:
Shifting Preferences in the Casual and Lifestyle Market
Over the past few years, our industry has seen a shift in preferences in the casual and lifestyle games market away from kids'
and movie-based licensed console titles. We believe this shift is due to gameplay with online digital delivery methods,
including games played online and on social networking sites such as Facebook, and through wireless devices. As discussed
above, in response to this continued shift in preferences, we have exited the market for video games based on licensed kids' and
movie-based entertainment properties and uDraw. In fiscal 2012 and 2011, approximately 34% and 43%, respectively, of our
net sales, before the impact of changes in deferred net revenue, came from these types of games.
Strategic Changes to Future Product Lineup
As discussed above, we made significant changes to our future product lineup to focus our resources on core games with a
significant digital component that are best positioned for critical and commercial success. We reduced the number of games
being developed, and therefore expect our revenues for fiscal 2013 to be significantly lower than fiscal 2012. As a result of the
reduced number of products we expect to publish, each of our new releases will have more impact on our overall financial
results.
Increasing Shift to Online Content and Digital Downloads
We provide our products through both the retail channel and through online digital delivery methods. Recently, the interactive
entertainment software industry began delivering a growing amount of games, downloadable content and product add-ons by
direct digital download through the Internet and gaming consoles. We believe that much of the growth in the industry will
come via online distribution methods, including, multi-player online games (both subscription and free-to-play), free-to-play
micro-transaction based games, paid downloadable content ("DLC"), and digital downloads of full-games. Conversely, based
on industry data, we believe retail sales for the industry will continue to be a decreasing revenue source over the next several
years. For the twelve months ended December 31, 2011, retail software sales in the U.S. for the industry decreased 7.8%
compared to the same period in 2010 according to The NPD Group; for the same period, across the U.K., Germany, France,
Spain and Benelux, aggregated retail software sales decreased 7.4% compared to the same twelve-month period in 2010
according to GfK. However, digital sales for the industry are expected to grow over 20% worldwide in calendar 2012 and
almost double, over calendar 2011 levels, in the following five years to $58.7 billion worldwide according to the International
Development Group, Inc.'s Forecast Update (February 2012). Accordingly, we plan to continue integrating digital components
into our core game franchises. In the event our games are released with increasingly more undelivered elements at the time of
sale, such as the online service present within some of our games, more of our revenue may be deferred, which will impact the
timing of our revenue recognition but not our cash flow from operations.