<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 30, 1998
THQ INC.
(Exact name of registrant as specified in charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
Commission File Number: 0-18813
13-3541686
(I.R.S. employer identification no.)
5016 North Parkway Calabasas
Calabasas, California 91302
(Address of principal executive
offices, including zip code)
(818) 591-1310
(Registrant's telephone number,
including area code)
===============================================================================
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
Exhibits
99.1 Cautionary Statement Regarding Forward-Looking Statements
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
THQ INC.
By: /s/ Brian J. Farrell
--------------------------------------
Brian J. Farrell, President and Chief
Executive Officer
Date: March 30, 1998
<PAGE> 1
Exhibit 99.1
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, THQ Inc. (the "Company") wishes to
caution investors that the Company has made and makes forward-looking statements
regarding the intent, belief or current expectations of the Company and its
management. Prospective investors are cautioned that any such forward-looking
statements involve risks and uncertainties, and that the actual results may
differ materially from those in the forward-looking statements as a result of
various uncertainties and risks, including those set forth below. These
uncertainties and risks in some cases have affected the Company's actual results
and could cause the Company's results to differ materially from those expressed
in such forward-looking statements.
ACQUISITION OF PROPERTIES AND DEVELOPMENT OF NEW TITLES
The Company's continuing profitability is a direct result of its
ability to timely develop and sell new interactive software titles for use on
particular hardware platforms ("Titles") to replace declining revenues from
older Titles. Consumer preferences for interactive entertainment software
("Software") are difficult to predict, and few Software titles achieve sustained
market acceptance. If revenues from new Titles fail to replace declining
revenues from existing Titles, the Company would be materially and adversely
affected.
The development of new Titles is dependent in substantial part upon the
Company's identification and exploitation in a timely manner of Titles based
upon entertainment projects (such as movies, television programs and arcade
games), sports and entertainment personalities, or popular sports, trends or
concepts ("Properties") that have high public visibility or recognition or that
reflect the trends of popular culture. The determination of which Titles the
Company should develop is highly subjective and there can be no assurances that
any new Title will be successful. In addition, the Company is in competition
with numerous other Software companies for licenses to develop Software based on
such Properties. To the extent competition intensifies for licenses to highly
desirable Properties, the Company may encounter increased difficulty in
obtaining these licenses. The failure of the Company to accurately identify and
secure the rights to Properties that are or will become popular would have a
material adverse effect on the Company.
Properties often generate significant public interest for periods that
are unpredictable and short. Consequently, the Company's commercially successful
Titles may be marketable in material quantities for only a limited time, often
for less than six months. As is typical of Software, the life cycle of a Title
generally consists of a relatively high level of sales during the first few
months after introduction, followed by market saturation and a decline in sales.
Accordingly, substantially all of the Company's net sales for a particular year
are generated by Titles released in that year and in the latter part of the
prior year. In some instances, a sales decline may also be accompanied by
decreasing sales prices, which may result in credits or allowances to the
Company's customers. See "Discounts, Allowances and Returns; Inventory
Management." In addition, the development cycle for new Titles, including the
development of the necessary game software, approval by the Manufacturer and
production of the initial cartridges or CD-ROMs, typically has ranged from nine
to 18 months. During such period, the market appeal of a Title may decline. To
the extent the Company experiences delays in the development or shipments of new
Titles, or if new Titles are not successful in the market, the Company would be
materially and adversely affected.
For the reasons set forth above, there can be no assurance that the
Company will be able to release Titles scheduled for release within such
scheduled time period or at all, or that the Company will be able to secure the
rights to new Titles at a rate that will maintain the Company's current
development and release schedule.
TERMINATION OF WCW LICENSE
On March 10, 1998, the Company announced that its current license
agreement with World Championship Wrestling will not be renewed. The current
license agreement expires on December 29, 1998, and permits the Company to
continue to sell Products (as defined below) on hand and in process at that date
through June 29, 1999. Products released by the Company under this license
accounted for 39% of the Company's revenues in 1997 and are expected to account
for a substantial portion of the Company's revenues in 1998. There can be no
assurance that this development will not have a material adverse affect on the
Company.
<PAGE> 2
DISCOUNTS, ALLOWANCES AND RETURNS; INVENTORY MANAGEMENT
Although the Company's arrangements with its distributors and retailers
generally do not give such customers the right to return manufactured products
embodying the Titles (the "Products") to the Company (other than defective
Products) or to cancel firm orders, the Company often negotiates accommodations
to retailers (and, less often, to distributors) when demand for specific items
falls below expectations for the purpose of maintaining its relationships with
its customers. Such accommodations consist of acquiescing to the customer's
request that not all booked orders be filled or that not all shipped orders be
accepted, negotiated price discounts, credits against future orders and, less
often, the return of Products to the Company. It is the Company's practice to
accept all returns of defective or damaged Products.
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 and the Titles and other factors. For the years ended
December 31, 1996 and 1997, provisions of approximately $5.2 million and $10.5
million, respectively, were taken against gross sales made during such periods,
and as of December 31, 1997, the Company's aggregate reserve against accounts
receivable for returns and customer accommodations was approximately $9.3
million.
The Company cannot predict the amount or nature of accommodations that
will be provided to its customers in future periods. Although the Company
believes its reserves are adequate with respect to such matters, there can be no
assurance that actual returns and other customer accommodations will not exceed
the reserves established. To the extent such accommodations were to exceed the
Company's reserves, the Company would be adversely affected.
The identification by the Company of slow-moving or obsolete inventory,
whether as a result of requests from customers for accommodations or otherwise,
would require the Company to establish reserves against such inventory or to
write-down the value of such inventory to its estimated net realizable value. In
1993 and 1994 the Company incurred material charges to income as a result of
such write-downs, but has not experienced such problems subsequent to those
periods. While the Company believes that substantially all of its current
inventory is saleable in the ordinary course, there can be no assurance that in
the future the Company will not be required to incur charges related to
slow-moving or obsolete inventory.
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 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 hardware platforms ("Platforms"), the
timing of the introduction of new Platforms and the accuracy of retailers'
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 buying season). There can be no assurance that the Company can
maintain consistent profitability on a quarterly or annual basis.
CUSTOMER CONCENTRATION AND CREDIT RISK
Sales to the Company's ten largest customers collectively accounted for
approximately 54% of the Company's gross sales in 1996 and 67% of the Company's
gross sales in 1997. The Company has no written agreement or other understanding
with any of its customers that relate to future purchases by such customers, and
thus such purchases could
<PAGE> 3
be terminated at any time. A termination of or other adverse change in the
Company's relationship with any of its largest customers would have a material
adverse effect on the Company.
The Company's sales of Products are typically made on credit, with
terms that vary depending upon the customer and demand for such Products.
Normally the Company does not hold any collateral to secure payment by its
customers, and currently does not factor any of its receivables. Thus, the
Company bears the risk of its customers' and distributors' inability to pay such
receivables or the effect of any delay in such payment. Retailers and
distributors compete in a volatile industry and are subject to the risk of
business failure. A business failure by any of the Company's largest customers
would have, and a business failure by any of the Company's distributors or other
retailers could have, a material adverse effect on the Company.
RISKS ASSOCIATED WITH TITLES FOR MULTIMEDIA PERSONAL COMPUTERS AND PROPRIETARY
TITLES
In 1996, the Company acquired Heliotrope Studios, Inc. ("Heliotrope")
in order to expand its offerings of interactive games and to enable the Company
to develop Titles for the multimedia personal computer ("PC") market. While the
principals of Heliotrope have certain experience developing and marketing CD-ROM
games for PCs, prior to this acquisition the Company had no experience in this
segment of the Software market. The development and marketing of such Titles can
be expected to subject the Company to risks in addition to those encountered in
the operation of the Company's historical business, some of which may not be
anticipated by the Company. Such risks include the ability to accurately predict
which Titles have appeal to the purchasers of interactive games for PCs, greater
reliance on distributors in order to obtain retail distribution, and the greater
retailer returns experienced for CD-ROMs for PCs. There can be no assurance that
the Company will be able to successfully develop and market Titles for the PC
market.
In 1997, the Company released its first proprietary Title, Pax Imperia:
Eminent Domain, an intergalactic strategy game. The Company's strategy includes
acquiring or developing other Properties that are proprietary to the Company.
The developing and marketing of such Titles can also be expected to subject the
Company to additional risks, including the risk that Titles that do not have
high public visibility or recognition will have more limited market appeal.
GROWTH STRATEGY
From time to time the Company evaluates potential acquisitions of, or
investments in, other Software publishers or developers that the Company
believes will complement or enhance its business. In connection with any such
acquisitions, the Company may incur debt or issue debt or additional equity
securities, depending on market conditions and other factors. There can be no
assurance that the Company will consummate any such acquisitions or investments
or, if consummated, that such acquisitions or investments will prove to be
beneficial to the Company.
DEPENDENCE ON THE PLATFORM MANUFACTURERS
The Company is wholly dependent on the Manufacturers and its licenses
with the Manufacturers (the "Platform Licenses") for the right to publish Titles
for the Manufacturers' Platforms and for the manufacture of its Titles. For the
year ended December 31, 1996, 76% of net sales consisted of Nintendo Titles, 14%
consisted of Sega Titles and 10% consisted of Sony Titles, and for the year
ended December 31, 1997, 65% of the Company's net sales consisted of Nintendo
Software Titles, 22% consisted of Sony PlayStation Titles 10% consisted of
Sega Software Titles and the remaining 3% were derived from PC Titles. The
Company's Platform License with Sony and for Nintendo 64 require that the
Company obtain approval for the publication of new Titles on a title-by-title
basis. As a result, the number of Titles the Company is able to publish for
these Platforms, and thus the Company's revenues from Titles for these
Platforms, may be limited.
In the event that, at the end of the term of the current Platform
License with a Manufacturer, such Manufacturer chooses not to renew or extend
such agreement, or if a Manufacturer were to terminate such license for any
reason, the
<PAGE> 4
Company would be unable to publish additional Titles for such Manufacturer's
Platform, which would materially and adversely affect the Company.
Each of the Manufacturers is the sole manufacturer of the Products
published by the Company under license from such Manufacturer. The Platform
Licenses provide that such Manufacturer may raise prices for the Titles at any
time and include other provisions giving the Manufacturer substantial control
over the Company's release of new Titles. Furthermore, the relatively long
manufacturing cycle for cartridge-based Products (from 30 to 60 days) requires
the Company to accurately forecast retailer and consumer demand for its Titles.
Since each of the Manufacturers is also a publisher of Software for its own
Platforms, and also manufactures products for all of their other licensees, the
Manufacturers may give priority to their own products or those of other
publishers in the event of insufficient manufacturing capacity. If the Company
experiences unanticipated delays in the delivery of Products for these or any
other reasons, the Company would be materially and adversely affected.
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 these 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. 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 could be adversely affected.
CHANGES IN CONSUMER DEMAND AND TECHNOLOGY
During the approximately 20-year history of the interactive
entertainment industry, there have been periods of significant growth in
consumer interest, followed by periods in which growth has substantially
declined. The Company's sales are dependent, among other factors, on the
popularity and unit sales of Platforms generally, as well as the relative
popularity and unit sales of the Platforms of the various Manufacturers. The
relative popularity of Platforms has experienced wide fluctuations in recent
years. Unexpected declines in the popularity of a particular Platform can be
expected to have a material adverse effect on consumer demand for Titles
released or scheduled for release for such Platform.
The interactive game industry is characterized by rapid technological
change. As a result, the Company must continually anticipate and adapt its
offerings to emerging Platforms and evolving consumer preferences. The
development of Software for new Platforms requires substantial investment.
Generally, such development efforts must occur well in advance of the release of
New Platforms in order to introduce Titles on a timely basis following the
release of such Platforms. The development and marketing of Titles for new
Platforms may require greater financial and technical resources than are
currently available to the Company. In addition, there can be no assurance that
the new Platforms for which the Company develops Titles will achieve market
acceptance and, as a result, there can be no assurance that the Company's
development efforts with respect to such new Platforms will lead to marketable
Titles or Titles that generate sufficient revenues to recover their development
and marketing costs. This risk can be expected to increase in the future, as
continuing increases in development costs require corresponding increases in net
sales in order for the Company to maintain profitability. In addition, as the
Company introduces CD-ROM Titles for PCs, the Company's game software must
maintain compatibility with such computers, their operating software and their
hardware accessories. The failure of the Company to timely develop titles for
new Platforms that achieve significant market acceptance, to maintain net sales
that are commensurate with product development costs, or to maintain such
compatibility would have a material adverse effect on the Company.
<PAGE> 5
The introduction of new Platforms and technologies can render existing
Software obsolete and unmarketable. More commonly, as more advanced Platforms
are introduced, consumer demand for Software for older Platforms diminishes.
There can be no assurance that, as a result of such reduced consumer demand for
Titles on older Platforms, the Company's Titles for such Platforms will generate
sufficient sales to make such Titles profitable. The Company intends to continue
to publish new Titles for older Platforms for so long as the Company believes
there is a significant market for such Titles.
A number of Software publishers who compete with the Company are
currently developing Software for use by consumers over the Internet. While the
Company believes that the market for such Software has not had a material affect
on the sales of its Products, future increases in the availability of such
Software or technological advances in such Software could result in a decline in
Platform-based Software and thus have a material adverse effect on the Company.
COMPETITION
The interactive entertainment industry is intensely competitive. The
Company competes, for both licenses to Properties and the sale of Software, with
the Manufacturers, each of whom is the largest developer and marketer of
Software for its Platforms. There can be no assurance that these companies will
not increase their own Software development efforts. As a result of their
commanding positions in the industry as the manufacturers of Platforms and
publishers of Software for their Platforms, the Manufacturers generally have
better bargaining positions with respect to retail pricing, shelf space and
purchases than do any of their licensees, including the Company. In addition,
each of the Manufacturers and many of these other competitors (such as Acclaim
Entertainment, Inc., Disney Interactive, Inc., Electronic Arts Inc., GT
Interactive Software Corp., Midway Games Inc. and Microsoft Corporation) have
broader Software lines and greater financial, marketing and other resources than
the Company; these competitive advantages enable such competitors to market
their Software more aggressively and make higher offers or guarantees in
connection with the acquisition of licensed Properties. In addition, as
competition for retail shelf space becomes more intense, the Company may need to
increase marketing expenditures to maintain sales of its Titles; and as
competition for popular Properties increases, the cost of acquiring licenses for
such Properties is likely to increase, resulting in reduced margins. Prolonged
price competition, increased licensing costs or reduced profit margins would
have a material adverse effect on the Company. There can be no assurance that
the Company will be able to compete successfully with the Manufacturers and
their other licensees in the future.
In addition, the market for the Company's products is characterized by
significant price competition, and the Company expects that it will face
increasing pricing pressures from its current and future competitors.
Accordingly, there can be no assurance that the Company will be able to provide
products that compare favorably with the products of the Company's competitors
or that competitive pressures will not require the Company to reduce its prices.
Any material reduction in the price of the Company's products would negatively
affect operating income as a percentage of net revenue and would require the
Company to increase unit sales in order to maintain net revenue.
The Company believes that large diversified entertainment companies, in
addition to large software companies, are increasing their focus on the
interactive entertainment market, which will result in greater competition for
the Company. In particular, many of the Company's competitors are developing
on-line interactive games and interactive networks that will be competitive with
the Company's interactive products. There can be no assurance that the Company
will be able to compete successfully against current or future competitors or
that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results and financial conditions.
DEPENDENCE ON KEY PERSONNEL
The Company relies to a substantial extent on the management,
marketing, sales, technical and software development skills of a limited number
of employees to formulate and implement its business plan, including the
development of its Titles. The Company's success depends upon, to a significant
extent, its ability to attract and retain key management and software
development personnel. Competition for such employees is acute and the process
of locating key personnel with the combination of skills and attributes required
to execute the Company's strategy is often lengthy. The loss of services of key
personnel could have a material adverse effect on the Company. The only officer
with whom the Company has an employment agreement is Brian J. Farrell, its
President and Chief Executive Officer.
<PAGE> 6
PROPRIETARY RIGHTS OF THE MANUFACTURERS
The Company depends on the Manufacturers for the protection of
intellectual property rights to their respective Platforms, cartridges and
CD-ROMs, their ability to control the proliferation of new titles by licensees
and others, and their ability to discourage unauthorized persons from producing
Software for their Platforms. There can be no assurance that the Manufacturers
will be able to continue to (i) protect their rights so that the proprietary
information and technology licensed by the Company from the Manufacturers will
not become generally available, (ii) control the proliferation of Software,
(iii) discourage unauthorized persons from producing Software, or (iv) believe
that it is in their best interests to continue any of the foregoing policies. A
change in any of these policies could have a material adverse effect on the
Company.
PROPRIETARY RIGHTS OF THE COMPANY
The Company currently owns the rights to certain intellectual property
relating to the titles Pax Imperia, Dead Unity, Speedtribes and Vs. However,
other than such rights, its licenses from the Manufacturers to product Titles
and its licenses to develop and/or publish titles based on Properties owned or
controlled by others, the Company does not have any material proprietary rights,
technology or intellectual property.
As a result of the proprietary rights of the Manufacturers and the
efforts taken by the Manufacturers to protect such rights, the Company does not
believe that there is a material amount of unauthorized copying of the Company's
Titles. However, unauthorized production occurs in the computer software
industry generally, and were a significant amount of unauthorized production of
the Company's CD-ROM Products for PCs to occur, the Company could be materially
and adversely affected.
FOREIGN SALES AND CURRENCY FLUCTUATIONS
For fiscal years 1996 and 1997, foreign sales represented approximately
30% and 16%, respectively, of the Company's net sales, and the Company expects
that foreign sales will continue to account for a significant portion of its net
sales in future periods. Foreign sales are subject to inherent risks, including
unexpected changes in regulatory requirements, tariffs and other barriers,
difficulties in staffing and managing foreign operations and the possibility of
difficulty in accounts receivable collection. There can be no assurance that
these or other factors will not have an adverse effect on the Company's future
foreign sales.
Because the majority of foreign sales are made in U.S. dollars, the
Company does not believe that foreign currency fluctuations have had a material
effect on its results of operations. To the extent the Company's foreign sales
increase and such sales are not denominated in U.S. dollars, the Company
reported sales and results of operations could be adversely affected by foreign
currency fluctuations. The Company has not engaged in any foreign exchange
hedging activities and does not have any current plans to engage in any such
activities.
VOLATILITY OF SHARE PRICE
The market price of the Common Stock has been, and is likely to
continue to be, highly volatile. Such price has fluctuated substantially in
recent periods. In addition, there has been a history of significant volatility
in the market prices for shares of other companies engaged in the Software
industry. Factors such as the timing and market acceptance of new titles, the
introduction of new Software by the Company's competitors, loss of key personnel
of the Company, variations in quarterly operating results or changes in market
conditions in the Software industry generally could have a significant impact on
the market price of the Common Stock. Thus, there can be no assurance that the
market price of the Common Stock will not experience extreme volatility.
