<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------ --------------
Commission file No.: 0-18813
----------------------------
THQ, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-3541686
- ------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5016 North Parkway Calabasas, Suite 100, Calabasas, CA 91302
------------------------------------------------------------
(Address of Principal Executive Offices)
818-591-1310
----------------------------------------------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, $0.0001 par value: 6,537,584 shares (as of August 11, 1997).
1
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THQ, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
<S> <C>
Part I - Financial Information Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations -
for the Three Months and Six Months Ended
June 30, 1997 and 1996 4
Consolidated Statement of Shareholders' Equity
for the Six Months Ended June 30, 1997 and
the Year Ended December 31, 1996 5
Consolidated Statements of Cash Flows -
for the Six Months Ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements.
THQ, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,166,000 $ 2,734,000
Accounts receivable - net 6,891,000 14,186,000
Inventory 795,000 1,013,000
Prepaid and deferred royalties 3,716,000 717,000
Software development costs 6,277,000 2,329,000
Prepaid expenses and other current assets 527,000 485,000
------------ ------------
Total current assets 33,372,000 21,464,000
Equipment - net 883,000 581,000
Other long-term assets 707,000 795,000
------------
------------ ------------
TOTAL ASSETS $ 34,962,000 $ 22,840,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,292,000 $ 3,304,000
Accrued royalties 7,280,000 3,133,000
Advance from bank -- 5,355,000
------------ ------------
Total current liabilities 10,572,000 11,792,000
Commitments and contingencies -- --
Shareholders' equity:
Common stock, par value $.0001, 100,000,000 shares authorized; 6,506,755
shares and 4,739,883 shares issued and outstanding as
of June 30, 1997 and, December 31, 1996 respectively 4,000 4,000
Additional paid-in capital 46,364,000 34,558,000
Cumulative foreign currency translation adjustment (230,000) (52,000)
Accumulated deficit (21,748,000) (23,462,000)
------------ ------------
Total shareholders' equity 24,390,000 11,048,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,962,000 $ 22,840,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
THQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 12,265,000 $ 12,087,000 $ 24,104,000 $ 18,670,000
------------ ------------ ------------ ------------
Costs and expenses:
Cost of sales 6,503,000 7,290,000 13,745,000 11,046,000
Royalties 1,940,000 1,842,000 3,483,000 3,039,000
Product development 304,000 326,000 496,000 541,000
Project abandonment 150,000 125,000 300,000 250,000
Selling 1,007,000 780,000 1,779,000 1,317,000
General and administrative 1,332,000 923,000 2,511,000 1,765,000
Operating interest 71,000 221,000 138,000 318,000
------------ ------------ ------------ ------------
Total costs and expenses 11,307,000 11,507,000 22,452,000 18,276,000
------------ ------------ ------------ ------------
Income from operations 958,000 580,000 1,652,000 394,000
Interest income (expense), net 102,000 (84,000) 132,000 (155,000)
------------ ------------ ------------ ------------
Income before income taxes 1,060,000 496,000 1,784,000 239,000
Provision for income taxes 66,000 -- 70,000 4,000
------------ ------------ ------------ ------------
Net income $ 994,000 $ 496,000 $ 1,714,000 $ 235,000
============ ============ ============ ============
Net income per share $ 0.14 $ 0.10 $ 0.26 $ 0.05
============ ============ ============ ============
Shares used in per share calculation 7,111,000 4,731,000 6,581,000 4,530,000
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
THQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 1996 and
the Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Preferred Common Common
Stock Stock Amount
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1996 325 4,217,391 $ 4,000
Exercise of warrants and options -- 272,115 --
Conversion of preferred stock to
Common Stock (325 127,717 --
Issuance of stock -- 122,660 --
Net income -- -- --
Foreign currency translation adjustment -- -- --
------------ ------------ ------------
Balance at December 31, 1996 -- 4,739,883 4,000
Issuance of common stock for cash -- 1,725,000 --
Exercise of options -- 41,872 --
Net income -- -- --
Foreign currency translation adjustment -- -- --
------------ ------------ ------------
Balance at June 30, 1997 (unaudited) -- 6,506,755 $ 4,000
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Foreign Retained
Additional Currency Earnings
Paid-in Translation (Accumulated
Capital Adjustment Deficit) Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $ 33,317,000 $ (360,000) $(25,363,000) $ 7,598,000
Exercise of warrants and options 712,000 -- -- 712,000
Conversion of preferred stock to
Common Stock -- -- -- --
Issuance of stock 529,000 -- -- 529,000
Net income -- -- 1,901,000 1,901,000
Foreign currency translation adjustment -- 308,000 -- 308,000
------------ ------------ ------------ ------------
Balance at December 31, 1996 34,558,000 (52,000) (23,462,000) 11,048,000
Issuance of common stock for cash 11,657,000 -- -- 11,657,000
Exercise of options 149,000 -- -- 149,000
Net income -- -- 1,714,000 1,714,000
Foreign currency translation adjustment -- (178,000) -- (178,000)
------------ ------------ ------------ ------------
Balance at June 30, 1997 (unaudited) $ 46,364,000 $ (230,000) $(21,748,000) $ 24,390,000
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
THQ, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,714,000 $ 235,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 227,000 116,000
Provision for doubtful accounts, discounts and returns 2,021,000 2,118,000
Changes in operating assets and liabilities:
Accounts receivable 7,199,000 (466,000)
Inventory 195,000 258,000
Prepaid and deferred royalties and
Software development costs (748,000) 1,411,000
Prepaid expenses and other current assets (43,000) (226,000)
Accounts payable and accrued expenses 12,000 (196,000)
Accrued royalties (2,052,000) (163,000)
Accrued returns and allowances (2,055,000) (2,298,000)
------------ ------------
Net cash provided by operating activities 6,470,000 789,000
Cash flows used in investing activities:
Acquisition of equipment (440,000) (134,000)
------------ ------------
Cash flows from financing activities:
Repayment of advance from bank (5,355,000) --
Net proceeds from issuance of common stock 11,657,000 --
Proceeds from exercise of options and warrants 149,000 185,000
------------ ------------
Net cash provided by financing activities 6,451,000 185,000
Effect of exchange rate changes on cash (49,000) (35,000)
------------ ------------
Net increase in cash 12,432,000 805,000
Cash and cash equivalents - beginning of period 2,734,000 1,895,000
------------ ------------
Cash and cash equivalents - end of period $ 15,166,000 $ 2,700,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 4,000 $ 4,000
============ ============
Cash paid during the period for interest $ 42,000 $ 178,000
============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
THQ, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information. The financial statements
included herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. While the Company
believes that the disclosures made are adequate to make the information
presented not misleading, it is recommended that these financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
In the opinion of management, such unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the information set forth herein. The results for
the three months and six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year or for any interim
period.
Net Income Per Share. Net income per share has been computed using
the weighted average number of common shares and common share equivalents (which
consists of warrants and options, to the extent they are dilutive). The
difference between primary and fully diluted earnings per share is not
significant.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Recently Issued Accounting Pronouncements. The Financial Accounting
Standards Board issued Statement of Financial Accounting Standard Number 128
Earnings Per Share ("FAS 128"), in February 1997. This statement specifies the
computation of earnings per share ("EPS") as basic EPS, consisting of the
weighted average shares outstanding and diluted EPS, consisting of weighted
average shares and all dilutive potential common shares that were outstanding
during the period. The Company does not expect the impact of adopting FAS 128 to
be material in the Consolidated Statement of Operations.
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<PAGE> 8
2. ACCOUNTS RECEIVABLE
Accounts receivable are due primarily from domestic and foreign
retailers and distributors, including mass merchants and specialty stores.
Accounts receivable at June 30, 1997 and December 31, 1996 are composed of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Accounts receivable - domestic $ 8,863,000 $ 13,428,000
Other accounts receivable - foreign 2,184,000 5,004,000
Other receivables 1,000 112,000
Allowance for foreign doubtful accounts (1,180,000) (1,294,000)
Allowance for foreign discounts and returns (379,000) (292,000)
Allowance for domestic doubtful accounts,
Discounts and returns (2,598,000) (2,772,000)
------------ ------------
Accounts receivable - net $ 6,891,000 $ 14,186,000
============ ============
</TABLE>
3. CAPITAL STOCK TRANSACTIONS
On February 14, 1997, the Company completed a public offering of
1,500,000 shares of the Company's Common Stock. In conjunction with the
offering, the Company granted to the underwriters an overallotment option,
exercisable within 30 days of the date of February 11, 1997, to purchase up to
225,000 additional shares of the Common Stock at the public offering price of
$7.50 per share. On March 11, 1997, the underwriters exercised their
overallotment option. All of these shares were newly issued and sold on behalf
of the Company. The net proceeds of the 1,725,000 shares sold by the Company,
were approximately $11.7 million.
4. INCOME TAXES
Net Operating Loss Carryforwards. At December 31, 1995, for federal
income tax purposes the Company had reported approximately $17.5 million of NOL
carryforwards incurred since 1993. The December 31, 1996 tax return has not been
completed and thus, the net operating loss figures have not been adjusted for
1996 taxable income. The sale of 1,500,000 shares of Common Stock offered by the
Company on February 11, 1997 resulted in an "ownership change" of the Company
for purposes of Sections 382 and 383 of the Internal Revenue Code of 1986, as
amended. As a result, the amount of the NOL carryforwards available to reduce
the Company's federal income tax liability in future years in which the Company
has taxable income will be limited to an annual amount equal to (i) the fair
market value of the Company's capital stock immediately prior to the
consummation of the offering on February 11, 1997, multiplied by (ii) the
"long-term tax exempt rate" published by the Internal Revenue Service for the
month in which the offering was consummated. Based upon a long-term tax exempt
rate
8
<PAGE> 9
for February 1997 of 5.48% and an assumed market price of the Common Stock
immediately prior to consummation of this offering of $8.56 per share (the last
reported sale price of the Common Stock on February 10, 1997), such amount is
estimated to be approximately $2,225,000 per year.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company develops, publishes and distributes interactive
entertainment software ("Software") for the market dominant hardware platforms
("Platforms") sold by Nintendo, Sega and Sony (the "Manufacturers"), and for
personal computers ("PC"). For the six months ended June 30, 1997, sales of
Nintendo Software constituted 61% of the Company's net sales, Sega Software
sales were 2%, and the remaining 37% were derived from sales of Sony PlayStation
titles. For the six months ended June 30, 1997, PC sales constituted less than
one percent of sales.
Although there remains a large installed base of 16-bit Platforms,
the Company believes that growth in the Software market will be derived
principally from games developed for the more advanced Platforms. Accordingly,
the Company has begun devoting an increasing portion of its resources to the
development of titles for 32-bit and 64-bit Platforms and PCs. In the six months
ended June 30, 1997 and 1996, respectively, 36% and 9% of the Company's net
sales consisted of 32-bit titles. There were no sales of 64-bit titles in either
period.
The Company's business cycle generally commences with the securing of
a license to publish one or more titles based upon entertainment projects (such
as movies, television programs and arcade games), sports and entertainment
personalities, or popular sports, trends or concepts ("Property" or
"Properties") that have high public visibility or recognition or that reflect
the trends of popular culture. Such licenses typically require an advance
payment to the licensor and a guarantee of minimum future royalties. See " --
Recovery of Prepaid Royalties, Guarantees and Capitalized Development Costs."
After securing a Property, the Company commences Software development for the
title. Upon completion of development and approval of the title by the
Manufacturer, the Company orders products from, and generally causes a letter of
credit to be opened in favor of, the Manufacturer.
Revenue Fluctuations and Seasonality. The Company has experienced and
may continue to experience significant quarterly fluctuations in net sales and
operating results due to a variety of factors, including the timing of releases
of new titles by the Company, the popularity of both new titles and titles
released in prior periods, fluctuations in the mix of titles with varying profit
margins, the timing of customer orders, the timing of shipments by the
Manufacturers, fluctuations in the size and rate of growth of consumer demand
for Software for various Platforms, the timing of the introduction of new
Platforms and the accuracy of retailer's forecasts of consumer demand. The
Company's expenses are based, in part, on its expectations of future revenues
and, as a result, operating results would be disproportionately and adversely
affected by a decrease in sales or a failure by the Company to meet its sales
expectations. In addition, the Software market is highly seasonal, with sales
typically significantly higher during the fourth quarter (due primarily to the
increased demand for interactive games during the year-end holiday
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<PAGE> 11
buying season). There can be no assurance that the Company can maintain
consistent profitability on a quarterly or annual basis.
Profit margins may vary over time as a result of a variety of other
factors. Profit margins for cartridge products can vary based on the cost of the
memory chip used for a particular title. As Software has grown more complex, the
trend in the Software industry has been to utilize chips with greater capacity
and thus greater cost. CD-ROMs have significantly lower per unit manufacturing
costs than cartridge-based products. However, such savings may be offset by
typically higher development costs for titles published on CD-ROMs; such higher
costs result from the creation of increased and enhanced content to take
advantage of the greater storage capacity available on CD-ROMs.
Recovery of Prepaid Royalties, Guarantees and Capitalized Development
Costs. The Company typically enters into agreements with licensors of Properties
and developers of titles that require advance payments of royalties and/or
guaranteed minimum royalty payments. There can be no assurance that the sales of
products for which such royalties are paid will be sufficient to cover the
amount of these required royalty payments. The Company capitalizes its prepaid
royalties, and capitalizes Software development costs upon the establishment of
technological feasibility of the title under development. Amortization of these
payments and costs is determined on a title-by-title basis based on the greater
of (i) the ratio of current gross revenues for a title to the sum of its current
and anticipated gross revenues, or (ii) the straight-line method over the
estimated remaining economic life of the title. The Company analyzes such
capitalized costs quarterly and writes off as project abandonment losses those
capitalized payments and costs (and expenses any unpaid guaranteed minimum
royalties) when, based on the Company's estimate, future revenues will not be
sufficient to recover such costs. As of June 30, 1997, the Company had prepaid
royalties and capitalized development costs of approximately $10 million. If the
Company were required to write off a material portion of its prepaid royalties
or capitalized development costs, the Company's results of operations would be
adversely affected.
Discounts, Allowances and Returns; Inventory Management. At the time
of product shipment, the Company establishes provisions against the gross
revenues generated by such shipment based on estimates of future returns of, and
other customer accommodations that may be granted with respect to, such
products, based on the Company's historical experience, retailer inventories of
the titles and other factors. For the six months ended June 30, 1997 and 1996,
respectively, provisions of approximately $2.0 and $2.1 million were taken
against gross sales, and the Company's aggregate reserves against accounts
receivable for returns, customer accommodations and doubtful accounts for these
periods were approximately $4.2 and $4.3 million, respectively.
11
<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of the Company's net sales and its consolidated operating data as a
percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------- -------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Domestic sales 86.3% 68.7% 73.2% 69.4%
Foreign sales 13.7 31.3 26.8 30.6
----- ----- ----- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 53.0 60.3 57.0 59.2
Royalties 15.8 15.2 14.4 16.3
Product development 2.5 2.7 2.1 2.9
Project abandonment 1.2 1.0 1.2 1.3
Selling 8.2 6.5 7.4 7.1
General and administrative 10.9 7.6 10.4 9.5
Operating interest 0.6 1.8 0.6 1.7
----- ----- ----- -----
Total costs and expenses 92.2 95.1 93.1 98.0
----- ----- ----- -----
Income from operations 7.8 4.9 6.9 2.0
Interest income (expense), net 0.8 (0.7) 0.5 (0.8)
----- ----- ----- -----
Income before income taxes 8.6 4.2 7.4 1.2
----- ----- ----- -----
Net income 8.1% 4.2% 7.1% 1.2%
===== ===== ===== =====
</TABLE>
The following table sets forth, for the three months and six months
ended June 30, 1997 and 1996, the titles released during such periods for the
Platforms indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
PC CD-Rom 1 __ 1 __
Saturn __ 1 __ 1
PlayStation 3 __ 4 1
SNES __ 3 5 3
Genesis __ 1 2 1
Game Boy 4 3 5 5
-- -- -- --
Total 8 8 17 11
== == == ==
</TABLE>
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<PAGE> 13
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997, TO THE THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 1996
The Company's net sales increased 1.5% to $12,265,000 in the three
months ended June 30, 1997, from $12,087,000 in the same period of 1996. For the
three months ended June 30, 1997, net sales of the Company's WCW Vs the World
and K-1 Arena Fighters for the Sony PlayStation, and the Company's Disney Game
Boy re-releases ( Aladdin, Duck Tales, The Jungle Book, and The Lion King) were
$4,185,000 (34.1% of the net sales), $1,627,000 (13.3% of net sales), and
$2,157,000 (17.6% of net sales), respectively. In the second quarter of 1996,
net sales of products based on the Company's Olympic Summer Games, Toy Story,
and BASS Masters Classic licenses were $5,556,000 (46% of net sales), $2,341,000
(19% of net sales), and $1,897,000 (16% of net sales), respectively. Due to the
higher sales volume of 32-bit products (which generally have more favorable
gross margins) in the current period the Company experienced higher gross
margins of 47.0% versus 39.7%.
The Company's net sales increased 29.1% to $24,104,000 in the six
months ended June 30, 1997, from $18,670,000 in the same period of 1996, as a
result of both an increase in the number of new titles shipped, and an increase
in unit volumes for newly released titles. Cost of sales for the six months
ended June 30, 1997 decreased as a percentage of net sales to 57.0% from 59.2%
in the same period of 1996, primarily as a result of the increase in 32-bit
product sales.
Foreign net sales grew to $6,461,000 in the six months ended June 30,
1997, from $5,719,000 in the same period of 1996, but decreased as a percentage
of net sales to 26.8% from 30.6% because the Company's WCW Vs the World and K-1
Arena Fighters titles were shipped only in the United States. These products are
scheduled to ship in foreign markets in the third and fourth quarters of 1997.
Foreign net sales decreased in dollar terms to $1,685,000 from $3,786,000 and as
a percentage of net sales to 13.7% from 31.3% in the three months ended June 30,
1997 and 1996, respectively. These decreases are the result of both WCW Vs the
World and K-1 titles not being released until later in the year and of
significant 1996 sales for the Company's Olympics Summer Games titles in foreign
markets.
Royalty expense as a percentage of net sales increased to 15.8% for
the three months ended June 30, 1997 from 15.2% for 1996, as a result of the
increase in sales volume along with a change in the product mix from 1996 to
1997. Royalties decreased as a percentage of net sales for the six months ended
June 30, 1997 to 14.4%, from 16.3% for the same period of 1996, because in 1997
royalties relating to certain distribution agreements were included in cost of
sales rather than in royalty expense.
For the three months and six months ended June 30, 1997, selling
expenses increased by $227,000 and $462,000, respectively, compared to the same
periods of 1996, as a result of increased marketing efforts for new titles and
an increase in retail cooperative advertising.
General and administrative expenses for the three months and six
months ended June 30, 1997, increased both in dollar terms and as a percentage
of net sales over the comparable periods
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<PAGE> 14
of 1996. This increase was due in part to increased warehousing and personnel
costs in 1997 (as a result of the increased sales volume over the same periods
in 1996) and an increase in shareholder relations costs.
Operating interest, which consists of interest and fees paid to the
Company's bank and fees paid to other issuers of letters of credit, decreased as
a percentage of net sales to 0.6% for the three months and six months ended June
30, 1997, from 1.8% and 1.7%, respectively, of net sales for the same periods of
1996. The decline is a result of a more beneficial banking arrangement (See " --
Credit Facilities") and the use of funds generated by The Company's common stock
offering which was completed on February 14, 1997. See " -- Liquidity and
Capital Resources."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of cash are product purchases,
guaranteed payments to licensors, advance payments to developers and the costs
of internal Software development. In order to purchase products from the
Manufacturers, the Company must generally open letters of credit in their favor.
As of June 30, 1997, the Company had obligations with respect to future
guaranteed minimum royalties of $7,280,000, substantially all of which were
payable within the subsequent twelve months. As of June 30, 1997, the Company
had obligations with respect to open letters of credit of $2,845,000.
Accounts receivable and inventory decreased from December 31, 1996 to
June 30, 1997 as a result of both seasonal factors and the Company's aggressive
receivables and inventory management. Prepaid and deferred royalties and
Software development costs increased from December 31, 1996 as a result of the
Company entering into several new contracts for both intellectual properties and
new product development (See " -- Recovery of Prepaid Royalties, Guarantees and
Capitalized Development Costs."). Since the Company records the entire amount of
a contract at its inception, accrued royalties has also increased significantly
from December 31, 1996. The amount of the Company's accounts receivable is
subject to significant seasonal variations due to the seasonality of sales, and
is typically highest at the end of the year. As a result, the Company's working
capital requirements are greatest during its third and fourth quarters. The
Company believes that the proceeds from its recently completed common stock
offering, together with funds provided by operations and funds available under
the Company's revolving credit facility with Imperial Bank, will be adequate to
meet the Company's anticipated requirements for operating expenses, product
purchases, guaranteed payments to licensors and Software development through
1998. However, to the extent accounts receivable, inventories and guarantees and
advance payments increase as a result of growth of the Company's business, the
Company could require additional working capital to fund its operations. The
Company does not anticipate making material additional capital expenditures in
1997.
For the six months ended June 30, 1997, the Company's net cash
provided by operating activities was $6,470,000, compared to $789,000 for the
same period in 1996, primarily as a result of an increase in net income plus
collections of receivables.
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<PAGE> 15
For the six months ended June 30, 1997, the Company's net cash used
in investing activities was $440,000 (primarily as a result of the installation
of an upgraded computer network and accounting software package), compared to
$134,000 for the corresponding period in 1996.
For the six months ended June 30, 1997, the Company's net cash
provided by financing activities was $6,451,000, compared to $185,000 for the
same period in 1996. As a result of the receipt of the proceeds from the public
offering of 1,725,000 shares of the Company's common stock in 1997, less
repayment of advances from the bank.
Credit Facilities. In July 1996, the Company terminated its factoring
and credit agreement and entered into a new financing and banking arrangement
with Imperial Bank (the "Imperial Agreement"). The Imperial Agreement matures on
August 29, 1997, subject to earlier termination. The Company and Imperial Bank
are currently negotiating the terms of an extension to the agreement. As of June
30, 1997, the Company had no advances under the Imperial Agreement and open
letters of credit from Imperial Bank of $2,845,000.
The Company has also entered into agreements with two additional
lenders (the "North American Lender" and the "European Lender") pursuant to
which such lenders have agreed to issue letters of credit ("L/Cs") on the
Company's behalf to the Manufacturers for the purchase of products for the
Company's North American operations (up to a maximum of $5,000,000) and the
Company's European operations (up to a maximum of $2,500,000), respectively. As
of June 30, 1997, there were no open letters of credit issued by the North
American or the European lender.
Public Offering. For information concerning the offering of common
stock by the Company in February and March 1997, see note 3 of Notes to
Consolidated Financial Statements.
15
<PAGE> 16
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 24, 1997
and was continued on July 22, 1997. The following matters were voted
upon:
1. Six directors were elected:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Withheld
--------- ------- --------
<S> <C> <C> <C>
Brian J. Farrell 5,999,306 0 54,633
Lawrence Burstein 6,001,705 0 52,234
L. Michael Haller 6,001,372 0 52,567
Bruce Jagid 6,001,372 0 52,567
Jeffrey C. Lapin 6,001,705 0 52,234
James L. Whims 6,001,705 0 52,234
</TABLE>
2. A proposal to change the state of incorporation
of the Company from New York to Delaware was approved by a
vote of 4,505,474 for, 221,131 against, and 45,396
withheld.
3. A proposal to adopt the Company's 1997 Stock
Option Plan, which would provide for up to 650,000 shares
of common stock to be available for option grants to
employees of the Company and others, was ratified by a vote
of 3,721,950 for, 601,953 against, and 87,664 withheld.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 3.1 Articles of Incorporation (Filed as an
exhibit to Registration Statement on
Form S-18 (File No. 33-35582-NY) of
Trinity, and incorporated herein by
reference. Amendments made to documents
since original filing were filed as
exhibits to the Company's Proxy
Statements dated April 24, 1992, April
30, 1993 and April 28, 1994,
respectively, and are incorporated
herein by reference)
Exhibit 3.2 Bylaws, as amended (Filed as an exhibit
to Registration Statement on Form S-18
(File No. 33-35582-NY) of Trinity, and
incorporated herein by reference.
Amendments made to documents since
original filing were filed as
16
<PAGE> 17
exhibits to the Company's Proxy
Statements dated April 24, 1992, April
30, 1993 and April 28, 1994,
respectively, and are incorporated
herein by reference)
Exhibit 11
Statement Regarding Computation of Per
Share Earnings
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K On May 6, 1997, the Company filed a
Current Report on Form 8-K/A (reporting under Item 7 of
Form 8-K), for the purpose of correcting the Company's
concentration of customer base, amending the Current
Report on Form 8-K filed by the Company on March 28,
1997.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 12, 1997 THQ, INC.
By: /s/ Brian J. Farrell
-----------------------------------
Brian J. Farrell
President and Chief
Executive Officer
THQ, INC.
By: /s/ Deborah A. Lake
-----------------------------------
Deborah A. Lake
Vice President Finance
and Administration
Principal Accounting Officer
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 12, 1997 THQ, INC.
By:/S/ Brian J. Farrell
-----------------------------------
Brian J. Farrell
President and Chief
Executive Officer
THQ, INC.
By:/s/ Deborah A. Lake
-----------------------------------
Deborah A. Lake
Vice President Finance
and Administration
Principal Accounting Officer
18
<PAGE> 1
EXHIBIT 11
THQ, INC.
STATEMENT OF COMPUTATION OF NET EARNINGS PER
COMMON AND COMMON EQUIVALENT SHARES
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income used to compute
primary and fully diluted earnings
per share $ 994,000 $ 496,000 $1,714,000 $ 235,000
---------- ---------- ---------- ----------
Weighted average number of shares
outstanding 6,484,000 4,431,000 6,012,000 4,380,000
Dilutive effect of stock options and warrants 627,000 300,000 569,000 150,000
Dilutive effect assuming conversion of
preferred stock -- -- -- --
---------- ---------- ---------- ----------
Number of shares used to compute primary
and fully diluted earnings per share 7,111,000 4,731,000 6,581,000 4,530,000
========== ========== ========== ==========
Net earnings per share $ 0.14 $ 0.10 $ 0.26 $ 0.05
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET THE CONSOLIDATED STAMENTS OF OPERATIONS AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS FOUND N THE FORM 10-Q AS FILED WITH THE
SEC ON AUG 14, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,166,000
<SECURITIES> 0
<RECEIVABLES> 11,048,000
<ALLOWANCES> 4,157,000
<INVENTORY> 795,000
<CURRENT-ASSETS> 33,372,000
<PP&E> 1,622,000
<DEPRECIATION> 739,000
<TOTAL-ASSETS> 34,962,000
<CURRENT-LIABILITIES> 10,572,000
<BONDS> 0
0
0
<COMMON> 4,000
<OTHER-SE> 20,386,000
<TOTAL-LIABILITY-AND-EQUITY> 34,962,000
<SALES> 24,104,000
<TOTAL-REVENUES> 24,104,000
<CGS> 13,745,000
<TOTAL-COSTS> 13,745,000
<OTHER-EXPENSES> 8,707,000
<LOSS-PROVISION> 84,000
<INTEREST-EXPENSE> 42,000
<INCOME-PRETAX> 1,784,000
<INCOME-TAX> 70,000
<INCOME-CONTINUING> 1,714,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,714,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
