<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 March 31, 1998
[ ] 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)
Delaware 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, $0.01 par value: 7,231,076 shares (as of May 13, 1998).
<PAGE> 2
THQ INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information Page
- ------------------------------ ----
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
for the Three Months Ended March 31, 1998
and 1997 4
Consolidated Statement of Shareholders' Equity
for the Three Months Ended March 31, 1998 and
the Year Ended December 31, 1997 5
Consolidated Statements of Cash Flows -
for the Three Months Ended March 31, 1998 and 1997 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 6. Exhibits and Reports on Form 8-K 16
Signatures 17
- ----------
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements.
THQ INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,936,000 $ 11,724,000
Accounts receivable-- net 25,617,000 30,856,000
Inventory 2,079,000 1,425,000
Prepaid and deferred royalties 5,292,000 3,645,000
Software development costs 8,902,000 6,044,000
Deferred income taxes 1,666,000 1,666,000
Prepaid expenses and other current assets 372,000 478,000
------------ ------------
Total current assets 65,864,000 55,838,000
Equipment-- net 1,245,000 1,163,000
Deferred royalties-- net of current portion -- 500,000
Software development costs-- net of current portion -- 1,300,000
Other long-term assets 606,000 652,000
------------ ------------
TOTAL ASSETS $ 67,715,000 $ 59,453,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 6,857,000 $ 10,952,000
Accrued royalties 17,482,000 9,949,000
Income taxes payable 2,972,000 3,475,000
------------ ------------
Total current liabilities 27,311,000 24,376,000
Accrued royalties-- net of current portion -- 1,550,000
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01, 35,000,000 shares authorized; 6,924,570 shares
and 6,775,899 shares issued and outstanding as
of March 31, 1998 and December 31, 1997, respectively 69,000 4,000
Additional paid-in capital 47,806,000 47,559,000
Cumulative foreign currency translation adjustment 154,000 81,000
Accumulated deficit (7,625,000) (14,117,000)
------------ ------------
Total shareholders' equity 40,404,000 33,527,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 67,715,000 $ 59,453,000
============ ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net sales $48,453,000 $11,839,000
Costs and expenses:
Cost of sales 20,363,000 7,242,000
Royalties 11,131,000 1,693,000
Product development 730,000 224,000
Selling 3,912,000 1,057,000
General and administrative 2,955,000 929,000
----------- -----------
Total costs and expenses 39,091,000 11,145,000
----------- -----------
Income from operations 9,362,000 694,000
Interest income, net 158,000 30,000
----------- -----------
Income before income taxes 9,520,000 724,000
Provision for income taxes 3,028,000 4,000
----------- -----------
Net income $ 6,492,000 $ 720,000
=========== ===========
Net income per share-- basic $ 0.95 $ 0.13
=========== ===========
Net income per share-- diluted $ 0.86 $ 0.12
=========== ===========
Shares used in per share calculation-- basic 6,808,000 5,535,000
=========== ===========
Shares used in per share calculation-- diluted 7,542,000 6,041,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Year Ended December 31, 1997 and
The Three Months Ended March 31, 1998
<TABLE>
<CAPTION>
Additional
Preferred Common Common Paid-in
Stock Shares Amount Capital
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 -- 4,739,883 $ 4,000 $ 34,558,000
Issuance of Common Stock -- 1,725,000 -- 11,708,000
Exercise of warrants and options -- 311,016 -- 1,293,000
Net income -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 -- 6,775,899 4,000 47,559,000
Exercise of options -- 148,671 1,000 247,000
Revaluation of Common Stock -- -- 64,000 --
Net income -- -- -- --
Foreign currency translation adjustment -- -- -- --
------------ ------------ ------------ ------------
Balance at March 31, 1998 (unaudited) -- 6,924,570 $ 69,000 $ 47,806,000
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Foreign
Currency
Translation Accumulated
Adjustment Deficit Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1, 1997 $ (52,000) $(23,462,000) $ 11,048,000
Issuance of Common Stock -- -- 11,708,000
Exercise of warrants and options -- -- 1,293,000
Net income -- 9,345,000 9,345,000
Foreign currency translation adjustment 133,000 -- 133,000
------------ ------------ ------------
Balance at December 31, 1997 81,000 (14,117,000) 33,527,000
Exercise of options -- -- 248,000
Revaluation of Common Stock -- -- 64,000
Net income -- 6,492,000 6,492,000
Foreign currency translation adjustment 73,000 -- 73,000
------------ ------------ ------------
Balance at March 31, 1998 (unaudited) $ 154,000 $ (7,625,000) $ 40,404,000
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,492,000 $ 720,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 105,000 111,000
Provision for doubtful accounts, discounts and returns 6,516,000 1,159,000
Changes in operating assets and liabilities:
Accounts receivable 1,828,000 6,206,000
Inventory (653,000) (1,012,000)
Prepaid and deferred royalties and
Software development costs 2,412,000 469,000
Prepaid expenses and other current assets 106,000 15,000
Accounts payable and accrued expenses (4,106,000) 466,000
Accrued income taxes (504,000) --
Accrued royalties 866,000 (2,463,000)
Accrued returns and allowances (3,069,000) (1,598,000)
------------ ------------
Net cash provided by operating activities 9,993,000 4,073,000
Cash flows used in investing activities:
Acquisition of equipment (139,000) (306,000)
------------ ------------
Cash flows from financing activities:
Repayment of advance from bank -- (5,355,000)
Net proceeds from issuance of common stock -- 11,697,000
Proceeds from exercise of options and warrants 312,000 44,000
------------ ------------
Net cash provided by financing activities 312,000 6,386,000
Effect of exchange rate changes on cash and cash equivalents 46,000 (81,000)
------------ ------------
Net increase in cash and cash equivalents 10,212,000 10,072,000
Cash and cash equivalents - beginning of period 11,724,000 2,734,000
------------ ------------
Cash and cash equivalents - end of period $ 21,936,000 $ 12,806,000
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 3,540,000 $ 4,000
============ ============
Cash paid during the period for interest $ 6,000 $ 36,000
============ ============
</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, 1997.
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 ended March 31, 1998 are not necessarily indicative of the
results to be expected for the full year or for any interim period.
Basic and Diluted Earnings Per Share. Basic EPS is based upon the
weighted-average number of common shares for the period. SFAS 128 also requires
dual presentation of basic and diluted EPS for companies with "complex capital
structures". EPS for the current and prior periods has been presented in
conformity with the provisions of SFAS 128. The following table is a
reconciliation of the weighted-average shares used in the computation of basic
and diluted EPS for the years presented herein:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income used to compute basic and
diluted earnings per share $6,492,000 $ 720,000
---------- ----------
Weighted average number of shares
Outstanding-- basic 6,808,000 5,535,000
Dilutive effect of stock options and warrants 734,000 506,000
---------- ----------
Number of shares used to compute
earnings per share-- diluted 7,542,000 6,041,000
========== ==========
</TABLE>
7
<PAGE> 8
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. In June 1997, the FASB issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS No. 130 requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Adopting SFAS No. 130 during the
period ended March 31, 1998 did not have an effect on the Company's financial
statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." SFAS No. 131 established standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for related
disclosure about products and services, geographic areas and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. Adopting of SFAS No. 131 during the period ended March 31,
1998 did not have an effect on the Company's financial statements.
In October of 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-2 "Software Revenue Recognition" ("SOP 97-2"). This statement provides
guidance on applying generally accepted accounting principles in recognizing
revenues on software transactions. This Statement supercedes Statement of
Position 91-1 "Software Revenue Recognition." This Statement is effective for
transactions entered into in fiscal years beginning after December 15, 1997.
Earlier application is encouraged as of the beginning of the fiscal year or
interim period for which financial statements or information have not been
issued. Retroactive application of the provisions of this statement is
prohibited. The Company has evaluated its revenue recognition policies of the
adaptation of SOP 97-2; and believes that such adoption will not have any
impact.
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<PAGE> 9
2. ACCOUNTS RECEIVABLE
Accounts receivable are due primarily from domestic and foreign
retailers and distributors, including mass merchants and specialty stores.
Accounts receivable at March 31, 1998 and December 31, 1997 are composed of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Accounts receivable-- domestic $ 34,401,000 $ 33,787,000
Other accounts receivable-- foreign 2,810,000 5,075,000
Other receivables 2,000 133,000
Allowance for foreign doubtful accounts (25,000) (10,000)
Allowance for foreign discounts and returns (671,000) (362,000)
Allowance for domestic doubtful accounts,
Discounts and returns (10,900,000) (7,767,000)
------------ ------------
Accounts receivable-- net $ 25,617,000 $ 30,856,000
============ ============
</TABLE>
3. REINCORPORATION
On January 6, 1998, T.HQ, Inc., a New York corporation ("THQ New York"),
was merged with and into its wholly owned subsidiary, THQ Inc., a Delaware
corporation ("THQ Delaware"), for the purpose of changing the Company's state of
incorporation from New York to Delaware (the "Reincorporation"). Pursuant to the
Reincorporation each share of THQ New York's common stock, par value $.0001 per
share, outstanding prior to the Reincorporation was converted into one share of
commmon stock, $0.01 par value per share, of THQ Delaware.
4. SUBSEQUENT EVENTS
On May 1, 1998, the Company acquired all of the outstanding shares of
GameFx, Inc., a Delaware corporation ("GameFx"), pursuant to a merger of GameFx
with and into a newly formed, wholly owned subsidiary of the Company. The
consideration paid by the Company consisted of (i) the issuance of approximately
236,800 shares of Common Stock, (ii) the assumption of stock options issued by
GameFx to its employees that, if and when exercised, permit the holders thereof
to acquire approximately 9,900 Shares, (iii) approximately $790,000 in cash, and
(iv) the assumption of the liabilities of GameFx incurred in the ordinary course
of its business.
---------------------------------
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 and Sony (the "Manufacturers"), and for personal
computers ("PC"). For the three months ended March 31, 1998, sales of Nintendo
Software constituted 45% of the Company's net sales, Sony PlayStation sales were
54%, and the remaining 1% was derived from sales of PC titles.
While the Company historically has published titles for the 16-bit
Platforms, it does not intend to publish any new titles after the release of its
last Super Nintendo title in March 1998. The Company does not intend to publish
any new titles for the Sega Platforms during 1998.
The Company's business cycle generally commences with the securing of a
license to publish one or more titles based on a Property. 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 the 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 and
generally causes a letter of credit to be opened in favor of the Manufacturer or
obtains a line of credit from the Manufacturer. Products are shipped at the
Company's expense to a public warehouse in California for domestic distribution
or in the United Kingdom for foreign distribution. Foreign sales to distributors
in countries other than the United Kingdom are shipped at the customer's expense
directly to the customer's location.
The Company has unfilled sales orders, the amount of which fluctuates
from time to time, commonly referred to as "backlog." However, substantially all
of the Company's product orders are fulfilled shortly after they are received.
Accordingly, the Company does not believe that the amount of its unfilled sales
orders as of the end of a period is a meaningful indicator of sales in future
periods.
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
10
<PAGE> 11
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.
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 on hand and in process at that date through June 29,
1999. Products released by the Company under this license accounted for 88% of
the Company's revenues in the three months ended March 31, 1998 and are expected
to account for a substantial portion of the Company's revenues in the remaining
three quarters of 1998. There can be no assurance that this development will not
have a material adverse affect on the Company.
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 and amortizes such
costs through royalty expense. 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 March 31, 1998, the Company had prepaid royalties and
capitalized development costs of $14.2 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 could be adversely affected.
11
<PAGE> 12
Discounts, Allowances and Returns; Inventory Management. Although the
Company's arrangements with its customers generally do not give such customers
the right to return 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, other customer accommodations and doubtful accounts 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 three
months ended March 31, 1998, provisions of $6.5 million were taken against gross
sales. As of March 31, 1998, the Company's aggregate reserve against accounts
receivable for returns, customer accommodations and doubtful accounts was $11.6
million.
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.
12
<PAGE> 13
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
Ended
March 31,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Domestic sales 87.1% 59.7%
Foreign sales 12.9 40.3
-------- --------
Net sales 100.0% 100.0%
Costs and expenses:
Cost of sales 42.0% 61.2%
Royalties 23.0 14.3
Product development 1.5 1.9
Selling 8.1 8.9
General and administrative 6.1 7.9
-------- --------
Total costs and expenses 80.7% 94.2%
-------- --------
Income from operations 19.3% 5.8%
Interest income, net 0.3 0.3
-------- --------
Income before income taxes 19.6% 6.1%
======== ========
Net income 13.4% 6.1%
======== ========
</TABLE>
The following table sets forth, for the three months ended March 31,
1998 and 1997, the titles released during such periods for the Platforms
indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
------ ------
<S> <C> <C>
PC CD-Rom 1 --
PlayStation 3 1
SNES 2 5
Genesis -- 2
Game Boy -- 1
====== ======
Total 6 9
====== ======
</TABLE>
13
<PAGE> 14
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998, TO THE THREE MONTHS ENDED
MARCH 31, 1997
The Company's net sales increased 309% to $48,453,000 in the three
months ended March 31, 1998, from $11,839,000 in the same period of 1997, as a
result of significantly higher unit sales per title shipped and increased demand
for previously released titles. For the three months ended March 31, 1998, net
sales of the Company's top three titles, WCW Nitro PlayStation (released
domestically in January 1998), WCW vs. NWO Nintendo 64 (originally released
domestically in November 1997 and internationally in February 1998), and WCW vs.
The World PlayStation (originally released in March 1997), were $20,892,000
(43.1% of net sales), $18,250,000 (37.7% of net sales), and $3,007,000 (6.2% of
net sales), respectively. In the three months ended March 31, 1997, net sales of
products based on the Company's top three titles, WCW vs. The World, Super
Empire Strikes Back and Super Return of the Jedi, were $2,117,000 (17.9% of net
sales), $1,736,000 (14.7% of net sales), and $1,674,000 (14.1% of net sales),
respectively.
Net sales relating to the PlayStation and Nintendo 64 Platforms
accounted for 54% and 38% respectively, of net sales for the three months ended
March 31, 1998 compared to 20% and 0% for the same period of 1997.
Foreign net sales increased to $6,242,000 in the three months ended
March 31, 1998, from $4,776,000 in the same period of 1997, but decreased as a
percentage of net sales to 12.9% from 40.3% because the Company released its
Ray Tracers, NBA Live '98 and WCW Nitro titles only in the United States. The
Company has domestic distribution rights only for Ray Tracers and NBA Live '98;
the Company will release WCW Nitro after the end of the first quarter.
Cost of sales for the three months ended March 31, 1998 decreased
significantly as a percentage of net sales to 42.0% from 61.2% in the same
period of 1997 primarily as a result of the increase in CD-ROM product sales
(which generally have more favorable gross margins than do cartridges).
Royalty expense as a percentage of net sales increased in the three
months ended March 31, 1998 to 23.0% from 14.8%, for 1997. The increase was due
to the higher volume of PlayStation and Nintendo 64 titles sold in 1998 which
generally have higher development costs and royalty rates than 8-bit and 16-bit
products.
For the three months ended March 31, 1998, selling expenses increased by
$2,855,000 compared to the same period of 1997, as a result of increased
marketing efforts for new titles (consisting primarily of print and retail
cooperative advertising) and increased warehouse expenses which are the result
of increased sales volumes. Selling expenses declined as a percentage of net
sales to 8.1% in 1998 from 8.9% in 1997 because of increased sales revenues.
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<PAGE> 15
General and administrative expenses for the three months ended March 31,
1998, increased in dollar terms over the comparable period of 1997 to $2,955,000
from $929,000, respectively. This increase was due in part to increased
infrastructure and personnel costs both domestically and internationally in 1998
incurred as a result of the Company's growth.
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 typically opens letters of credit in their favor or obtains a line of
credit from the Manufacturer. As of March 31, 1998, the Company had obligations
with respect to open letters of credit of $3,245,000. As of March 31, 1998, the
Company had obligations with respect to future guaranteed minimum royalties of
$17,482,000, all of which are payable within the subsequent twelve months.
Accounts receivable decreased from December 31, 1997 to March 31, 1998,
as a result of the timing of sales and collections during the period. Prepaid
and deferred royalties and Software development costs increased from December
31, 1997 as a result of the Company entering into several new contracts for both
Properties and new product development. (See "-- Recovery of Prepaid Royalties,
Guarantees and Capitalized Development Costs.") Since the Company records as a
liability the entire guarantee of a contract at its inception, accrued royalties
also increased significantly from December 31, 1997. Accounts payable and
accrued expenses decreased significantly from December 31, 1997 as a result of
the timing of large product receipts in the last part of 1997 and the timing of
payments on accounts payable.
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 funds provided by operations and funds available under
the Company's revolving credit facility with its 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. The Company does not anticipate making material additional capital
expenditures in 1998.
-------------------------------------------
15
<PAGE> 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
---------
Exhibit
Number Title
- -------- -----
3.1 Certificate of Incorporation (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-3 (File No. 333-32221), Amendment
No.1, and incorporated herein by reference)
3.2 Amendment to Certificate of Incorporation (Filed as Exhibit 3.2 to
the Company's Registration Statement on Form S-3 (File No.
333-32221), Amendment No.1, and incorporated herein by reference)
3.3 Bylaws (Filed as Exhibit 3.3 to the Company's Registration Statement
on Form S-3 (File No. 333-32221), Amendment No.1, and incorporated
herein by reference)
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On March 30, 1998, the Company filed a Current Report on Form
8-K to file, under Item 7, a Cautionary Statement Regarding
Forward-Looking Statements.
16
<PAGE> 17
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: May 14, 1998 THQ, INC.
By: /s/ Brian J. Farrell
-----------------------------------
Brian J. Farrell
President and Chief
Executive Officer
THQ, INC.
By: /s/ Fred Gysi
-----------------------------------
Fred Gysi
Vice President Finance
and Administration
Principal Accounting Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS FOUND IN FORM 10-Q AS FILED WITH THE
SECURITIES EXCHANGE COMMISSION ON MAY 15, 1998.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-01-1998
<EXCHANGE-RATE> 1
<CASH> 21,936,000
<SECURITIES> 0
<RECEIVABLES> 37,213,000
<ALLOWANCES> 807,000
<INVENTORY> 2,079,000
<CURRENT-ASSETS> 65,864,000
<PP&E> 1,825,000
<DEPRECIATION> 580,000
<TOTAL-ASSETS> 67,715,000
<CURRENT-LIABILITIES> 27,311,000
<BONDS> 0
0
0
<COMMON> 69,000
<OTHER-SE> 40,335,000
<TOTAL-LIABILITY-AND-EQUITY> 67,715,000
<SALES> 48,453,000
<TOTAL-REVENUES> 48,453,000
<CGS> 20,363,000
<TOTAL-COSTS> 20,363,000
<OTHER-EXPENSES> 18,728,000
<LOSS-PROVISION> 549,000
<INTEREST-EXPENSE> 6,000
<INCOME-PRETAX> 9,520,000
<INCOME-TAX> 3,028,000
<INCOME-CONTINUING> 6,492,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,492,000
<EPS-PRIMARY> 0.95
<EPS-DILUTED> 0.86
</TABLE>
