<PAGE> 1
UNITED STATES
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, 1999
[ ] 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: 11,916,442 shares (as of August 10, 1999).
<PAGE> 2
THQ INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
for the Three Months and Six Months Ended
June 30, 1999 and 1998 4
Consolidated Statement of Shareholders' Equity -
for the Six Months Ended June 30, 1999 and
the Year Ended December 31, 1998 5
Consolidated Statements of Cash Flows -
for the Six Months Ended June 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 22
</TABLE>
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements.
THQ INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,975,000 $ 19,044,000
Accounts receivable - net 20,139,000 59,521,000
Inventory 2,385,000 16,937,000
Prepaid and deferred royalties 4,823,000 5,270,000
Software development costs 7,135,000 3,011,000
Deferred income taxes 8,412,000 8,321,000
Prepaid expenses and other current assets 5,423,000 1,551,000
------------- -------------
Total current assets 87,292,000 113,655,000
Property and equipment - net 2,545,000 2,638,000
Deferred royalties - net of current portion 525,000 375,000
Software development costs - net of current portion 1,407,000 1,173,000
Deferred income taxes - net of current portion 2,053,000 2,053,000
Other long-term assets 7,929,000 7,739,000
------------- -------------
TOTAL ASSETS $ 101,751,000 $ 127,633,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 1,629,000 $ 9,909,000
Accounts payable and accrued expenses 14,624,000 29,888,000
Accrued royalties 7,251,000 15,944,000
Income taxes payable -- 8,270,000
------------- -------------
Total current liabilities 23,504,000 64,011,000
Accrued royalties - net of current portion 525,000 375,000
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01, 35,000,000 shares authorized; 11,888,914 shares
and 11,769,143 shares issued and outstanding as of June 30, 1999 and
December 31, 1998, respectively 119,000 118,000
Additional paid-in capital 63,370,000 62,187,000
Accumulated other comprehensive income (364,000) 60,000
Retained earnings 14,597,000 882,000
------------- -------------
Total shareholders' equity 77,722,000 63,247,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 101,751,000 $ 127,633,000
============= =============
</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,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 51,541,000 $ 29,438,000 $130,316,000 $ 78,176,000
Costs and expenses:
Cost of sales 27,059,000 13,611,000 57,830,000 33,974,000
Royalties and project abandonment 7,254,000 4,922,000 22,684,000 16,053,000
Product development 2,406,000 1,917,000 5,091,000 2,839,000
Selling and marketing 4,614,000 3,775,000 14,086,000 7,688,000
General and administrative 3,285,000 1,928,000 7,964,000 4,965,000
In-process research and development -- 7,232,000 -- 7,232,000
------------ ------------ ------------ ------------
Total costs and expenses 44,618,000 33,385,000 107,655,000 72,751,000
------------ ------------ ------------ ------------
Income (loss) from operations 6,923,000 (3,947,000) 22,661,000 5,425,000
Interest income, net 446,000 310,000 648,000 468,000
------------ ------------ ------------ ------------
Income (loss) before income taxes 7,369,000 (3,637,000) 23,309,000 5,893,000
Provision for income taxes 3,294,000 1,088,000 9,594,000 4,117,000
============ ============ ============ ============
Net income (loss) $ 4,075,000 $ (4,725,000) $ 13,715,000 $ 1,776,000
============ ============ ============ ============
Net income (loss) per share - basic $ 0.34 $ (0.42) $ 1.15 $ 0.16
============ ============ ============ ============
Net income (loss) per share - diluted $ 0.32 $ (0.42) $ 1.06 $ 0.15
============ ============ ============ ============
Shares used in per share calculation - basic 11,876,000 11,186,000 11,882,000 10,943,000
============ ============ ============ ============
Shares used in per share calculation - diluted 12,886,000 11,186,000 12,879,000 11,831,000
============ ============ ============ ============
</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, 1998 and
the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
Accumulated Retained
Additional Other Earnings
Common Common Paid-in Comprehensive (Accumulated
Shares Amount Capital Income (Loss) Deficit) Total
------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 10,645,660 $ 9,000 $ 47,578,000 $ 81,000 $(14,155,000) $ 33,513,000
Exercise of warrants and options 601,679 5,000 2,343,000 -- -- 2,348,000
Issuance of common stock 521,804 4,000 10,647,000 -- -- 10,651,000
Stock compensation -- -- 116,000 -- -- 116,000
Tax benefit related to the exercise
of employee stock options -- -- 1,603,000 -- -- 1,603,000
Reincorporation -- 100,000 (100,000) -- -- --
Comprehensive income:
Net income -- -- -- -- 15,037,000 15,037,000
Other comprehensive income
Foreign currency translation
adjustment -- -- -- (21,000) -- (21,000)
------------
Comprehensive income -- -- -- -- -- 15,016,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 11,769,143 118,000 62,187,000 60,000 882,000 63,247,000
Exercise of warrants and options 119,771 1,000 654,000 -- -- 655,000
Stock compensation -- -- 97,000 -- -- 97,000
Tax benefit related to the exercise
of employee stock options -- -- 432,000 -- -- 432,000
Comprehensive income:
Net income -- -- -- -- 13,715,000 13,715,000
Other comprehensive income
Foreign currency translation
adjustment -- -- -- (424,000) -- (424,000)
------------
Comprehensive income -- -- -- -- -- 13,291,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 11,888,914 $ 119,000 $ 63,370,000 $ (364,000) $ 14,597,000 $ 77,722,000
============ ============ ============ ============ ============ ============
</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,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 13,715,000 $ 1,776,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 643,000 491,000
Stock compensation 97,000 63,000
Provision for doubtful accounts, discounts and returns 7,533,000 9,855,000
In-process research and development -- 7,232,000
Increase in deferred income taxes (97,000) --
Changes in operating assets and liabilities:
Accounts receivable 31,313,000 11,981,000
Inventory 14,306,000 (1,171,000)
Prepaid and deferred royalties and
software development costs (2,507,000) 2,617,000
Prepaid expenses and other current assets (4,409,000) (304,000)
Prepaid taxes -- (162,000)
Accounts payable and accrued expenses (14,473,000) (4,454,000)
Accrued royalties (10,480,000) (6,676,000)
Accrued returns and allowances -- (5,565,000)
Income taxes payable (7,815,000) (3,408,000)
------------ ------------
Net cash provided by operating activities 27,826,000 12,275,000
Cash flows used in investing activities:
Marketable securities -- (1,081,000)
Investment in joint venture -- (2,010,000)
Payment for purchase of GameFx, Inc. -- (1,315,000)
Proceeds from sale of property and equipment 29,000 --
Increase in other long-term assets (223,000) --
Acquisition of equipment (511,000) (477,000)
------------ ------------
Net cash used in investing activities (705,000) (4,883,000)
Cash flows (used in) provided by financing activities:
Net decrease in short-term borrowings (7,934,000) --
Proceeds from exercise of options and warrants 655,000 1,178,000
------------ ------------
Net cash (used in) provided by financing activities (7,279,000) 1,178,000
Effect of exchange rate changes on cash 89,000 88,000
------------ ------------
Net increase in cash and cash equivalents 19,931,000 8,658,000
Cash and cash equivalents - beginning of period 19,044,000 11,754,000
------------ ------------
Cash and cash equivalents - end of period $ 38,975,000 $ 20,412,000
============ ============
</TABLE>
6
<PAGE> 7
<TABLE>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 18,182,000 $ 4,157,000
============ ============
Interest $ 214,000 $ 11,000
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Tax benefit from disqualified disposition $ 432,000 $ 425,000
============ ============
</TABLE>
NON-CASH TRANSACTIONS:
On May 1, 1998 we issued 355,184 shares of common stock as part of the purchase
price for GameFx, Inc. This issuance increased common stock and additional
paid-in capital by $2,000 and $6,217,000, respectively, and was allocated among
the net assets acquired, part of which was written off as in-process research
and development.
See notes to consolidated financial statements.
7
<PAGE> 8
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 us, 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 we believe 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 our
Annual Report on Form 10-K for the year ended December 31, 1998.
In our opinion, 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, 1999 are not necessarily indicative of the
results to be expected for the full year or for any other interim period.
Basic and Diluted Earnings Per Share. 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 For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) used to compute basic
and diluted earnings per share $ 4,075,000 $ (4,725,000) $ 13,715,000 $ 1,776,000
------------ ------------ ------------ ------------
Weighted average number of shares
outstanding - basic 11,876,000 11,186,000 11,882,000 10,943,000
Dilutive effect of stock options and warrants 1,010,000 -- 997,000 888,000
------------ ------------ ------------ ------------
Number of shares used to compute earnings per share -
diluted 12,886,000 11,186,000 12,879,000 11,831,000
============ ============ ============ ============
</TABLE>
Cash Equivalents. We consider all highly liquid investments purchased
with maturities less than three months to be cash equivalents.
8
<PAGE> 9
Recently Issued Accounting Pronouncements. In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedge Activities." SFAS
No. 133 establishes the accounting and reporting standard for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
financial statements for periods beginning after June 15, 2000. We are currently
evaluating the potential impact of SFAS No. 133.
Reclassifications. Certain items in the 1998 financial statements have
been reclassified to conform to the 1999 presentation.
2. BUSINESS COMBINATION
On May 24, 1999, we completed a merger with Pacific Coast Power and
Light Company, a California corporation ("PCP&L"). In the merger, each share of
PCP&L was converted into 0.09008 shares of our common stock, or approximately
485,000 shares. In addition, outstanding PCP&L employee stock options were
assumed by us and converted, at the same conversion rate, into options to
purchase approximately 131,000 shares of our common stock.
The merger has been accounted for as a pooling of interests under
Accounting Principles Board Opinion No. 16. Accordingly, all prior period
consolidated financial statements presented have been restated to include the
combined results of operations, financial position and cash flows as if PCP&L
had always been part of our company.
All transactions between us and PCP&L have been eliminated in the
combined financial statements. The results of operations for the separate
companies and the combined amounts presented in the consolidated financial
statements follow.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
Net sales 1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
THQ Inc. $ 51,321,000 $ 29,325,000 $ 129,862,000 $ 77,778,000
PCP&L 675,000 238,000 1,239,000 848,000
Intercompany elimination (455,000) (125,000) (785,000) (450,000)
------------- ------------- ------------- -------------
Combined $ 51,541,000 $ 29,438,000 $ 130,316,000 $ 78,176,000
============= ============= ============= =============
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
Net income (loss) 1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
THQ Inc. $ 4,434,000 $ (4,349,000) $ 14,582,000 $ 2,144,000
PCP&L 96,000 (251,000) (82,000) 82,000
Intercompany elimination (455,000) (125,000) (785,000) (450,000)
------------ ------------ ------------ ------------
Combined $ 4,075,000 $ (4,725,000) $ 13,715,000 $ 1,776,000
============ ============ ============ ============
</TABLE>
3. 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, 1999 and December 31, 1998 are composed of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Accounts receivable -- domestic $ 30,924,000 $ 66,407,000
Other receivables -- domestic 786,000 280,000
Allowance for domestic doubtful accounts,
discounts and returns (16,325,000) (15,008,000)
Other accounts receivable -- foreign 9,605,000 11,732,000
Allowance for foreign doubtful accounts (2,690,000) (2,345,000)
Allowance for foreign discounts and returns (2,161,000) (1,545,000)
------------ ------------
Accounts receivable -- net $ 20,139,000 $ 59,521,000
============ ============
</TABLE>
4. STOCK COMPENSATION
PCP&L granted stock options at prices below fair market value. The
difference between the fair value and the option grant price is amortized and
recognized over the option vesting period, generally four years. As of the six
months ended June 30, 1999 and 1998, stock-based compensation of $97,000 and
$63,000, respectively, was amortized to expense. As of June 30, 1999 and
December 31, 1998 we had unamortized and stock-based compensation expense of
$333,000 and $430,000, respectively.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report contains, or incorporates by reference, certain
statements that may be deemed "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such statements appear in
a number of places in this Report, including, without limitation, "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
statements relating to our objectives, strategies, plans, intentions, and
expectations, and all statements (other than statements of historical facts)
that address actions, events, or circumstances that we expect, believe, or
intend will occur in the future, are forward-looking statements. 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,
including, without limitation, uncertainties relating to the interactive
entertainment software industry and other factors, as more specifically set
forth in our Report on Form 8-K/A, filed on March 10, 1999 with the Securities
and Exchange Commission.
OVERVIEW
We develop, publish and distribute interactive entertainment software
for the major platforms sold by Nintendo and Sony and for use on PCs. The
following table sets forth, for the periods indicated, the percentage of our
revenues derived from sales of titles for the platforms indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Platform
Nintendo 64 44% 59% 30% 48%
PlayStation 21% 25% 49% 43%
Game Boy 15% 16% 10% 9%
PC CD-Rom 18% -- 10% --
Other 2% -- 1% --
</TABLE>
Our business cycle generally commences with the securing of a license to
publish one or more titles based on a property. These 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 obtaining the license, we begin software development for the
title. Upon completion of development and approval of the title by the
manufacturer, we order products and generally cause a letter of credit to be
opened in favor of the manufacturer or obtain a line of credit from the
manufacturer. Products are shipped at our expense to a public warehouse in
California for domestic distribution, or to the United
11
<PAGE> 12
Kingdom or Germany for foreign distribution. Foreign sales to distributors in
countries other than the United Kingdom and Germany are shipped at the
customer's expense directly to the customer's location. Both in the United
Kingdom and in Germany, we sell directly to our major retail accounts.
Unfilled sales orders are commonly referred to as "backlog." Since
substantially all of our product orders are fulfilled shortly after we receive
them, we do not believe that the amount of our unfilled sales orders as of the
end of a period is a meaningful indicator of sales in future periods.
Accordingly, we do not report the amount of our unfilled sales orders.
Revenue Fluctuations and Seasonality. We have experienced and may
continue to experience significant quarterly fluctuations in net sales and
operating results due to a variety of factors. 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). Other factors that cause fluctuations include the timing
of our release of new titles, the popularity of both new titles and titles
released in prior periods, changes in the mix of titles with varying profit
margins, the timing of customer orders, the timing of shipment by the
manufactures, 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 retailers' forecasts of consumer demand. Our expenses are
based, in part, on our 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 us to meet our sales expectations. There can
be no assurance that we can maintain consistent profitability on a quarterly or
annual basis.
Profit margins may vary over time as a result of a variety of factors.
Profit margins for cartridge products can vary based on the cost of the memory
chip used for a particular title. As games have become more complex by providing
higher playing capabilities, the trend in the interactive entertainment software
industry has been to utilize chips with greater capacity and thus greater cost.
While CD-Roms have significantly lower per unit manufacturing costs than
cartridge-based products, they generally have higher royalty rates.
Recovery of Prepaid Royalties, Guarantees and Capitalized Development
Costs. We typically enter into agreements with licensors of properties and
developers of titles that require advance payments of royalties and/or
guaranteed minimum royalty payments. We cannot guarantee that the sales of
products for which such royalties are paid will be sufficient to cover the
amount of these required royalty payments. We capitalize our advances to
developers as prepaid royalties and capitalize internal software development
costs for each title incurred after the establishment of technological
feasibility of the title. 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. We analyze such capitalized costs quarterly and write off associated
prepaid and deferred royalties and software development costs when, based on our
estimate, future revenues will not be sufficient to recover such amounts. As of
June 30, 1999, we have prepaid royalties and capitalized software
12
<PAGE> 13
development costs of $13.9 million. If we were required to write off prepaid
royalties or capitalized development costs in excess of the amounts reserved,
our results of operations could be materially and adversely affected.
Discounts, Allowances and Returns; Inventory Management. In general,
except for PC titles, our arrangements with our distributors and retailers do
not give them the right to return products to us (other than damaged or
defective products) or to cancel firm orders. However, we sometimes negotiate
accommodations to retailers (and, less often, to distributors) when demand for
specific items falls below expectations, in order to maintain our relationships
with our customers. These accommodations consist of acquiescing to the
customer's request that not all booked orders are filled or that not all shipped
orders be accepted, negotiated price discounts and credits against future
orders. We may also permit the return of products. Arrangements made with
distributors and retailers for PC titles do customarily require us to accept
product returns.
At the time of product shipment, we establish allowances based on
estimates of future returns, customer accommodations and doubtful accounts with
respect to such products. We base this amount on our historical experience,
retailer inventories, the nature of the titles and other factors. For the six
months ended June 30, 1998 and June 30, 1999, provisions of $9.9 million and
$7.5 million, respectively, were taken against gross sales made during such
periods. As of June 30, 1999, our aggregate reserve against accounts receivable
for returns, customer accommodations and doubtful accounts was $21.2 million.
The identification by us of slow-moving or obsolete inventory, whether
as a result of requests from customers for accommodations or otherwise, would
require us to establish reserves against such inventory or to write-down the
value of such inventory to its estimated net realizable value.
YEAR 2000 DISCLOSURE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process date fields containing a
two-digit year is commonly referred to as the "Year 2000 Compliance" issue. As
the year 2000 approaches, these systems may be unable to accurately process
certain date-based information. We have reviewed all of our significant internal
applications and we believe that no material modifications are necessary to
ensure Year 2000 Compliance. We do not anticipate that our total cost of these
Year 2000 Compliance activities will be material to our financial position or to
our results of operations.
We are in the process of communicating with others with whom we do
significant business (including our major retail accounts and certain providers
of product distribution information services) to determine their Year 2000
Compliance readiness and the extent to which we are vulnerable to any third
party Year 2000 issues. However, we cannot guarantee that the systems of other
companies on which our systems rely will be timely converted. A failure to
convert by another company, or a conversion that is incompatible with our
systems, could have a material adverse effect on us. The worst case scenario if
such problems occur,
13
<PAGE> 14
would be our inability to send or receive sales orders and record revenue. While
we are not aware of any significant Year 2000 issues for which we will not be
adequately prepared, there can be no assurance that our business, operating
results or financial condition will not be adversely affected by issues
surrounding the Year 2000 conversion.
RESULTS OF OPERATIONS
Net Sales
The following table sets forth, for the periods indicated, the
components of our net sales and our consolidated operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Domestic sales 73.0% 76.8% 79.0% 83.3%
Foreign sales 27.0 23.2 21.0 16.7
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 52.5% 46.2% 44.4% 43.5%
Royalties and project
abandonment 14.1 16.7 17.4 20.5
Product development 4.7 6.5 3.9 3.6
Selling and marketing 8.9 12.8 10.8 9.8
General and administrative 6.4 6.6 6.1 6.4
In-process research and
development -- 24.6 -- 9.3
-------- -------- -------- --------
Total costs and expenses 86.6% 113.4% 82.6% 93.1%
-------- -------- -------- --------
Income (loss) from operations 13.4% (13.4)% 17.4% 6.9%
Interest income, net 0.9 1.1 0.5 0.6
-------- -------- -------- --------
Income (loss) before income taxes 14.3 (12.3) 17.9 7.5
-------- -------- -------- --------
Net income (loss) 7.9% (16.1)% 10.5% 2.2%
======== ======== ======== ========
</TABLE>
14
<PAGE> 15
Title Releases
The following table sets forth, for the three months and six months
ended June 30, 1999 and 1998, the titles released during such periods for the
platforms indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Nintendo 64 1 1 3 1
PlayStation 1 1 2 4
Game Boy 1 1 1 1
PC CD-Rom 4 -- 4 1
16-Bit -- -- -- 1
------ ------ ------ ------
Total 7 3 10 8
====== ====== ====== ======
</TABLE>
COMPARISON OF THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999, TO THE THREE
MONTHS AND SIX MONTHS ENDED JUNE 30, 1998
Our net sales increased 75.1% to $51,541,000 in the three months ended
June 30, 1999, from $29,438,000 in the same period of 1998, as a result of more
titles being shipped, a growth in foreign sales, and strong continued sales from
products released in past periods. For the three months ended June 30, 1999, net
sales of Rugrats titles, WCW titles, and LucasArts' Star Wars titles were
$22,995,000 (44.6% of net sales), $15,877,000 (30.8% of net sales), and
$8,440,000 (16.4% of net sales), respectively.
Our net sales increased 66.7% to $130,316,000 in the six months ended
June 30, 1999, from $78,176,000 in the same period of 1998, as a result of a
significant increase in unit volumes for newly released titles on the
PlayStation and Game Boy platforms, as well as continued demand for previously
released titles.
Our foreign net sales increased to $13,935,000 for the three months
ended June 30, 1999, from $6,840,000 in the same period of 1998, and increased
as a percentage of net sales to 27.0% from 23.2%. This growth in foreign sales
is primarily attributable to our German publishing and distribution subsidiary
Rushware Microhandelsgesellschaft mbH ("Rushware"), which we acquired in
December 1998. Foreign net sales grew to $27,305,000 in the six months ended
June 30, 1999, from $13,082,000 in the same period of 1998, and increased as a
percentage of net sales to 21.0% from 16.7%, due in large part to the sales of
LucasArts' Star Wars titles by Rushware.
Our cost of sales for the three months ended June 30, 1999 increased as
a percentage of net sales to 52.5% from 46.2% in the same period of 1998,
primarily as a result of lower margins on the LucasArts' titles and the lower
proportion of PlayStation product sales (which generally have a higher gross
margin than Nintendo products) during the current period. For
15
<PAGE> 16
the six months ended June 30, 1999, cost of sales remained relatively constant
as a percentage of net sales at 44.4%, versus 43.5% in the same period of 1998.
Our royalty and project abandonment expense for the three months ended
June 30, 1999 decreased as a percentage of net sales to 14.1% from 16.7% for the
same period in 1998. Royalties and project abandonment decreased as a percentage
of net sales for the six months ended June 30, 1999 to 17.4%, from 20.5% for the
same period of 1998. This decrease is primarily related to a project abandonment
provision for the six months ended June 30, 1998 that was not necessary for the
same period of 1999, as well as favorable royalty rates on certain titles sold
during the first half of 1999.
For the three months and six months ended June 30, 1999, product
development expense increased $489,000 and $2,252,000 over the same periods in
1998. The increase was due primarily to expenses incurred by GameFx, a company
acquired in May 1998 to develop high-end PC titles, as well as increased
activity at Pacific Coast Power and Light Company ("PCP&L"), a company acquired
in May 1999 to develop next generation console titles.
For the three months and six months ended June 30, 1999, selling and
marketing expenses increased by $839,000 and $6,398,000 over the comparable
periods of 1998. This increase occurred in both our domestic and international
operations. We have increased our domestic marketing efforts for new titles
through print and retail cooperative advertising and national television ad
campaigns. We had a television ad campaign for WCW/NWO Thunder during the first
half of 1999, and we had no television advertising during the same period of
1998. Our increased international marketing expenses reflect higher levels of
support for international titles and our acquisition of Rushware.
Our general and administrative expenses for the three months and six
months ended June 30, 1999 decreased as a percentage of net sales to 6.4% from
6.6% and to 6.1% from 6.4% for the same periods of 1998, but increased in dollar
terms by $1,357,000 and $2,999,000 over 1998. The increase occurred both in
response to the growth we experienced in recent periods and as a result of the
inclusion of Rushware's general and administrative expenses in the current
period.
The in-process research and development charge of $7,232,000 incurred
during the second quarter of 1998 represents purchase costs relating to the
acquisition of GameFx. Purchased research and development includes the value of
products in the development stage and not considered to have reached
technological feasibility.
LIQUIDITY AND CAPITAL RESOURCES
Our 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, we typically
open letters of credit in their favor or obtain a line of credit from the
manufacturer.
16
<PAGE> 17
Our cash and cash equivalents increased $19,931,000 from $19,044,000 at
December 31, 1998 to $38,975,000 at June 30, 1999, and were $32,707,000 as of
August 10, 1999. Cash provided by operating activities for the six months ended
June 30, 1999 was $27,826,000, resulting in part from $13,715,000 in net income,
but primarily due to the collection of accounts receivable during the
post-holiday season. Operating cash flow was also affected by a decrease in
current liabilities.
The amount of our accounts receivable is subject to significant
quarterly variations as a consequence of the seasonality of our sales, and is
typically highest at the end of the year. This seasonality is responsible for
the substantial decrease in accounts receivable from December 31, 1998 to June
30, 1999 as the sales generated during the fourth quarter of 1998 were
collected.
Inventory and accounts payable decreased during the six months ended
June 30, 1999, as a result of sales of WCW titles that we had purchased prior to
the end of 1998 in anticipation of the expiration of our WCW license.
Prepaid and deferred royalties and software development costs increased
from December 31, 1998, as a result of our entering into several new contracts
for both properties and new product development. See "-- Recovery of Prepaid
Royalties, Guarantees and Capitalized Development Costs." Accrued royalties
decreased as a result of royalty payments made in the first half of 1999 for
sales from the fourth quarter of 1998. As of June 30, 1999, we had obligations
with respect to future guaranteed minimum royalties of $7,776,000.
Accounts payable and accrued expenses decreased significantly from
December 31, 1998 as a result of the timing of large product receipts in the
last quarter of 1998 and the timing of payments on accounts payable.
Our working capital requirements are greatest during our third and
fourth quarters. We believe that cash on hand, funds provided by operations, and
our revolving credit facility will be adequate to meet our anticipated
requirements for operating expenses, product purchases, guaranteed payments to
licensors and software development through 1999.
Net cash used in investing activities for the six months ended June 30,
1999 was $705,000 and was primarily utilized for capital expenditures. We expect
to make additional capital expenditures of between $1,500,000 and $2,000,000 in
1999, to be used primarily for a new financial and operations system and for
leasehold improvements and furniture and fixtures related to the relocation of
our corporate offices, scheduled for the fall of 1999.
Net cash used in financing activities for the six months ended June 30,
1999 was $7,279,000, and was attributable to the repayment of short-term
borrowings. As of June 30, 1999, we had no outstanding borrowings under our
credit facilities with Union Bank and had no obligations in respect of
outstanding letters of credit. As of August 10, 1999 we had no outstanding
borrowings and outstanding letters of credit were $5,051,000.
17
<PAGE> 18
Revolving Credit Facilities. As of June 30 and August 10, 1999, Rushware
had $1,629,000 in outstanding borrowings under a revolving credit agreement with
a German bank. This amount will be paid off in August 1999, and the credit
agreement will be terminated.
Subsequent to June 30, 1999, we entered into an amendment of our trade
finance agreements with Union Bank of California to increase by $8,000,000 the
amount which we are permitted to borrow and to increase by $2,000,000 the amount
which our United Kingdom subsidiary, T.HQ International Ltd., may borrow.
18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks arising from transactions in the
normal course of business, principally foreign currency fluctuation.
We have not hedged our foreign currency exposure in the past. It is
possible that in the future we will enter into foreign currency contracts in
order to manage or reduce foreign currency market risk.
We generate revenues and costs that fluctuate with changes in foreign
currency exchange rates when transactions are denominated in currencies other
than the local currency. The German and United Kingdom subsidiaries purchase
some products denominated in US dollars, but sell product primarily in German
Marks (or currencies that are closely tied to the Mark) and Pound Sterling. We
have not historically hedged this risk.
Based on the relative size and nature of our foreign operations, we do
not believe that a ten percent change in foreign currencies would have a
material impact on our financial statements.
-------------------------------------------
19
<PAGE> 20
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
We held our 1999 Annual Meeting of Shareholders on June 14, 1999. The
following matters were voted upon:
1. Seven directors were elected:
<TABLE>
<CAPTION>
Votes Votes Votes
For Against Withheld
---------- ---------- ----------
<S> <C> <C> <C>
Brian J. Farrell 10,782,671 0 281,036
Jeffrey C. Lapin 10,782,671 0 281,036
L. Michael Haller 10,782,671 0 281,036
Bruce Jagid 10,691,407 0 372,300
Lawrence Burstein 10,782,671 0 281,036
James L. Whims 10,782,671 0 281,036
L. Greg Ballard 10,782,671 0 281,036
</TABLE>
2. A proposal to adopt an amendment to our 1997 Stock Option Plan
to increase the number of shares of our common stock available for
issuance under such plan from 1,650,000 share to 2,750,000 shares was
approved by a vote of 4,658,732 for, 1,588,221 against, and 41,633
withheld.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Number Title
------ -----
2 Agreement of Merger dated as of May 10, 1999, among the Company,
PCPL Acquisition Company and Pacific Coast Power & Light Company
(incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K dated May 24, 1999).
3.1 Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to Post-Effective Amendment No. 1 to the
Registration Statement on Form S-3 filed on January 9, 1998
(File No. 333-32221) (the "S-3 Registration Statement")).
3.2 Amendment to Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to
the S-3 Registration Statement).
20
<PAGE> 21
3.3 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.3 to the Company's 3.3 Quarterly Report on Form 10-Q
for the fiscal quarter ended June 30, 1998).
10.1 Amended and Restated Employment Agreement dated as of June 30,
1999, between the Company and Brian J. Farrell.
10.2 Employment Agreement dated as of January 1, 1999, between the
Company and Jeffrey C. Lapin.
10.3 Amended and Restated 1997 Stock Option Plan (incorporated by
reference to Exhibit 4.4 to the Registration Statement on Form
S-8 filed on May 14, 1999 (File No. 333-78567)).
10.4 GameFx, Inc. 1997 Stock Option Plan (incorporated by reference
to Exhibit 4.4 to the Registration Statement on Form S-8 filed
on March 19, 1999 (File No. 333-74747) (the "GameFx S-8")).
10.5 GameFx, Inc. 1997 Stock Option Plan Amended and Restated Notice
of Stock Option Grant (incorporated by reference to Exhibit 4.5
to the GameFx S-8).
10.6 Pacific Coast Power & Light Company Employee Stock Option Plan
(incorporated by reference to Exhibit 4.4 to the Registration
Statement on Form S-8 filed on July 26, 1999 (File No.
333-83725) (the "PCPL S-8")).
10.7 Pacific Coast Power & Light Company Notice of Stock Option Grant
(incorporated by reference to Exhibit 4.5 to the PCPL S-8).
10.8 Stock Option Agreement dated as of October 21, 1998, between the
Company and Jeffrey C. Lapin.
10.9 Form of Stock Option Agreement dated as of December 23, 1998,
between the Company and Messrs. Lawrence Burstein, Bruce Jagid
and James Whims.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Current Report on Form 8-K dated May 24, 1999 reporting
under items 2 and 7.
21
<PAGE> 22
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 16, 1999 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
22
<PAGE> 1
EXHIBIT 10.1
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
DATED AS OF JUNE 30, 1999
BY AND BETWEEN THQ INC.,
A DELAWARE CORPORATION (THE "COMPANY"),
AND BRIAN J. FARRELL (THE "EXECUTIVE")
------------------------
The parties hereto desire to replace the Executive's existing
employment agreement with the Company with this Agreement and to provide for the
Executive's continued employment by the Company in accordance with the terms and
provisions set forth below:
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT: TERM.
The Company will continue to employ the Executive, and the Executive
will continue to work for the Company, as its President and Chief Executive
Officer until December 31, 2001, unless sooner terminated in accordance with
Section 7 hereof. Such period, together with the period of any extension or
renewal of such employment, is referred to herein as the "Employment Period."
2. DUTIES.
During the Employment Period, the Executive shall serve as the
President and Chief Executive Officer of the Company and of its subsidiaries and
affiliated companies, and perform such further duties as shall, from time to
time, be reasonably delegated or assigned to the Executive by the Board of
Directors of the Company consistent with his position and abilities.
3. DEVOTION OF TIME.
During the Employment Period, the Executive shall: (i) expend
substantially all of his working time for the Company; (ii) devote his best
efforts, energy and skill to the services of the Company and the promotion of
its interests; and (iii) not take part in activities reasonably known by the
Executive to be detrimental to the best interests of the Company.
<PAGE> 2
4. COMPENSATION.
4.1 In consideration for the services to be performed by the
Executive during the Employment Period hereunder, the Company shall compensate
the Executive at an annual base salary (payable at the normal pay periods of the
Company) during the Employment Period of $300,000, commencing January 1, 1997,
which amount increased to $360,000 commencing January 1, 1999. The base salary
shall be subject to annual review commencing at the end of 1999 and at the end
of each year thereafter, and may be increased (but not decreased) for subsequent
years.
4.2 In addition to the annual base salary payable to the Executive
pursuant to the provisions of Section 4.1 hereof, the Executive is also entitled
to a bonus for each fiscal year of the Company commencing during the Employment
Period, equal to the lesser of (i) 100% of his annual base salary for that year,
or (ii) 4.5% of the Company's net income before taxes for such year (prorated
for partial years). Net income before taxes shall be determined by the
independent public accountants for the Company in accordance with generally
accepted accounting principles consistently applied.
4.3 The Executive shall also be eligible for awards of options and
any other stock or equity based awards that may be available to executives of
the Company.
5. EXPENSES; ADDITIONAL BENEFITS; INDEMNIFICATION.
5.1 The Executive shall receive an automobile allowance for the use
of any automobile owned or leased by him, consistent with the Company's past
practices.
5.2 The Company shall pay directly, or reimburse the Executive for
all other reasonable and necessary expenses and disbursements incurred by him
for and on behalf of the Company in the performance of his duties under this
Agreement. For such purpose, the Executive shall submit to the Company itemized
reports of such expenses in accordance with the Company's policies.
5.3 The Executive shall be entitled to paid vacations during the
Employment Period in accordance with the Company's then prevalent practices for
executive employees; provided, however, that the Executive shall be entitled to
such paid vacations for not less than four (4) weeks per annum.
5.4 The Executive shall be entitled to participate in, and to
receive benefits under, any employee benefit plans of the Company (including,
without limitation, pension, profit sharing, group life insurance and group
medical insurance plans) as may exist from time to time for its executive
employees. Subject to the limitation contained in Section 5.7 below, the Company
shall make the maximum pension and profit sharing contribution for the Executive
legally permitted to be made by an employer and shall permit the Executive to
contribute the maximum pension and
-2-
<PAGE> 3
profit sharing contribution legally permitted to be made by an employee,
equaling an aggregate of $30,000 (the current maximum allowable payment) each
year during the Employment Period.
5.5 The Company shall provide to the Executive, and (subject to the
limitation contained in Section 5.7 below) pay the premiums therefor, insurance
on the Executive's life in an amount equal to $1,500,000 as well as disability
insurance for the Executive during the Employment Period and for a period of
twelve (12) months thereafter, each of which shall have the coverage reasonably
requested by the Executive; provided, however, that the foregoing coverage shall
be subject to any insurance examinations of the Executive required by the
insurer. The Executive shall designate the beneficiaries under the disability
and life insurance policies.
5.6 As a director and officer of the Company, the Executive shall be
entitled to the benefits of all provisions of the Articles of Incorporation of
the Company, as amended, and the Bylaws of the Company, as amended, that provide
for indemnification of officers and directors of the Company. No such provisions
shall be amended in any way to limit or reduce the extent of the indemnification
available to the Executive as an officer or director of the Company.
In addition, to the fullest extent permitted by law, the Company shall
indemnify and save and hold harmless the Executive from and against any and all
claims, demands, liabilities, costs and expenses, including judgments, fines or
amounts paid on account thereof (whether in settlement or otherwise), and
reasonable expenses, including attorneys' fees actually and reasonably incurred
(except only if and to the extent that such amounts shall be finally adjudged to
have been caused by the Executive's willful breach of the express provisions of
this Agreement) to the extent that the Executive is made a party to or witness
in any action, suit or proceeding, or if a claim or liability is asserted
against the Executive (whether or not in the right of the Company), by reason of
the fact that he was or is a director or officer, or acted in such capacity on
behalf of the Company, or by reason of or arising out of or resulting from
entering into this Agreement or the rendering of services by the Executive
pursuant to this Agreement, whether or not the same shall proceed to judgment or
be settled or otherwise brought to a conclusion. The Company shall advance to
the Executive on demand all reasonable expenses incurred by the Executive in
connection with the defense or settlement of any such claim, action, suit or
proceeding, and the Executive hereby undertakes to repay such amounts if and to
the extent that it shall be finally adjudged that the Executive is not entitled
to be indemnified by the Company under this Agreement or under the provisions of
the Certificate of Incorporation or Bylaws of the Company as of the date hereof
that govern indemnification of officers or directors of the Company (but giving
effect to future amendments that broaden or expand any such indemnification and
obligations or right more favorably to the Executive). The Executive shall also
be entitled to recover any costs of enforcing his rights under this Section
(including, without limitation, reasonable attorneys' fees and disbursements) in
the event any amount payable hereunder is not paid within thirty (30) days of
written request therefore by the Executive. The rights of the Executive under
this Section shall survive the termination of this Agreement and shall be
applicable for so long as the Executive may be subject to any claim, demand,
liability, cost or expense against which this Section is intended to protect and
indemnify him.
-3-
<PAGE> 4
Notwithstanding anything contained in this Agreement to the contrary,
the Company shall, at no cost to the Executive, use its best efforts to at all
times include the Executive during the term of the Employment Period and for a
period of not less than four (4) years thereafter, as an insured under any
directors and officers liability insurance policy maintained by the Company,
which policy shall provide such coverage in such amounts as the Board of
Directors shall deem appropriate for coverage of all directors and officers of
the Company.
5.7 The Company's share of the pension and profit sharing
contribution referenced in Section 5.4 and insurance premiums referenced in
Section 5.5 shall not exceed in any calendar year an aggregate of $30,000.
6. RESTRICTIVE COVENANT.
6.1 During the Employment Period and thereafter, the Executive shall
not reveal, divulge or make known to any person, firm, corporation or other
business organization, and shall not directly or indirectly use for his own
benefit, or for the benefit of anyone else, any secret or confidential
information used by the Company in its business, including, without limitation,
(i) pricing information, (ii) the terms of the Company's existing contracts with
suppliers, licensors and/or developers, (iii) any material information
pertaining to the Company's customers and their requirements, and (iv) any other
of the Company's trade secrets, all of which shall be collectively referred to
hereafter as the "Confidential Information."
6.2 The services of the Executive are unique, extraordinary and
essential to the business of the Company, particularly in view of the
Executive's access to Confidential Information. Accordingly, the Executive
agrees that if his employment hereunder shall at any time be terminated
voluntarily by the Executive, or by the Company for cause (as defined in Section
7.3), the Executive will not at any time within twelve months of such
termination, without the prior written approval of the Board of Directors of the
Company, directly or indirectly engage in any business activity competitive with
the business of the Company. Furthermore, the Executive agrees that, during such
twelve month period, he shall not solicit, directly or indirectly or knowingly
affect to the Company's detriment any relationship of the Company with any
customer, supplier, licensor, developer or employee of the Company or knowingly
cause any customer, supplier, licensor or developer to refrain from entrusting
additional business to the Company. If the employment of the Executive hereunder
is terminated by the Company other than for cause, the restraints on the
Executive set forth in the preceding two sentences shall be inapplicable. If
this Agreement shall not be renewed by either the Company or by the Executive
prior to its scheduled expiration date as recited in Section 1, such restraints
will apply for the period from January 1, 2002 through March 31, 2002.
6.3 In the event that any of the provisions of Section 6.1 and 6.2
hereof shall be adjudicated to exceed the time, geographic or other limitations
permitted by applicable law in any jurisdiction, then such provision shall be
deemed reformed in any such jurisdiction to the maximum time, geographic or
other limitations permitted by applicable law.
-4-
<PAGE> 5
6.4 As used in this Section 6, the term "Company" shall mean and
include any and all subsidiaries of the Company which either now exist or which
may hereafter be organized.
6.5 The Executive hereby acknowledges and agrees that, in the event
he shall violate any provisions of this Section 6, the Company will be without
an adequate remedy at law and accordingly, will be entitled to enforce such
restrictions by temporary or permanent injunctive or mandatory relief obtained
in any action or proceeding instituted in any court of competent jurisdiction
without the necessity of proving damages and without prejudice to any other
remedies which it may have at law or in equity.
7. EARLIER TERMINATION.
7.1 The Executive's employment hereunder shall automatically be
terminated upon the death of the Executive or the Executive's voluntarily
leaving the employ of the Company. In addition, the Executive's employment by
the Company may be terminated by the Company as follows:
7.1.1 Upon thirty (30) days' prior written notice by the
Company, in the event of the Executive's disability as set forth in Section 7.2
below; or
7.1.2 Upon thirty (30) days' prior written notice by the
Company, in the event that the Company terminates the Executive's employment
hereunder for cause as set forth in Section 7.3 below.
7.2 The Executive shall be deemed disabled hereunder if in the opinion
of the Board of Directors of the Company, as confirmed by competent medical
advice, he shall become physically or mentally unable to perform his duties for
the Company hereunder and such incapacity shall have continued for any period of
six (6) consecutive months.
7.3 For purposes hereof, "Cause" shall be limited to the following: (a)
the Executive's willful malfeasance or gross negligence; (b) any material
misrepresentation or concealment of a material fact made by the Executive in
connection with this Agreement; or (c) the material breach of any covenant made
by the Executive hereunder.
Notwithstanding the foregoing, termination by the Company for Cause
shall not be effective until and unless (i) in the event of any acts or
circumstances alleged to be a basis for termination that is capable of cure by
the Executive, the Executive is given written notice by the Board of such
alleged acts or circumstances, and such alleged acts or circumstances shall not
have been cured by the Executive within 20 days of receipt of such notice to the
satisfaction of the Board in the exercise of its reasonable judgment (or, if
within such 20-day period the Executive commences and proceeds to take all
reasonable actions to effect such cure, within such reasonable additional time
period (no longer than 60 days) as may be necessary), (ii) notice of intention
to terminate for Cause has been given by the Company within four months after
the Board learns of
-5-
<PAGE> 6
the act, failure or event constituting "Cause" and (iii) the Board has voted (at
a meeting of the Board duly called and held as to which termination of the
Executive is an agenda item) by a majority vote to terminate the Executive for
Cause after the Executive has been given notice of the particular acts or
circumstances which are the basis for the alleged termination for Cause and has
been afforded at least 20 days notice of the meeting and an opportunity to
present his position in writing and the Board has given notice of termination to
the Executive within three days thereafter, and (iii) if the Executive has
commenced an expedited arbitration in the manner prescribed below within 15 days
after such notice of termination, disputing the Company's right under this
Agreement to terminate for Cause, the Arbitrator shall have determined that the
Executive is terminable for Cause. Unless a majority of the Board at the time of
the giving of such notice of termination is then comprised of persons other than
Jeffrey C. Lapin, Bruce Jagid, Lawrence Burstein, L. Gregory Ballard, James
Whims and L. Michael Haller, then upon the giving of such notice of termination,
the Executive (x) shall be deemed suspended with pay until he shall be deemed to
have been terminated for Cause hereunder or until the Arbitrator shall have
determined that the Executive is not terminable for Cause and (y) while
suspended, the Executive shall cease to act as an executive of the Company and
shall depart the premises of the Company. If the Executive or his representative
fails to file a demand for arbitration with the American Arbitration Association
and file the requisite fees pursuant to Rule 4 of the national Rules within 15
days of receipt of notice of termination from the Board, and diligently pursue
such proceeding in accordance with the procedures set forth in Section 15
hereof, such termination shall be conclusively presumed to have been for Cause.
7.4 In the event that the Executive's employment shall be terminated
due to the Executive's death or disability, then the Company shall within 20
days of such termination pay to the Executive or his personal representative, as
the case may be, severance pay in a lump sum amount equal to his then annual
base salary, as set forth in Section 4 hereof, for a period of twelve months
from the date of such termination. If, however, subject to the provisions of
Sections 7.5 and 7.6 hereafter, this Agreement shall be terminated for any other
reason whatsoever, then the Company shall not obligated to make any severance
payments whatsoever to the Executive hereunder, except the compensation set
forth in Section 4 hereof which shall have accrued but be unpaid at the
effective time of termination.
7.5 In the event that the Executive's employment shall be terminated
due to the Executive's death or disability, effective as of the date of such
termination all Options (as herein after defined) not previously fully vested
shall become immediately vested and exercisable (not withstanding any provision
of the Company's stock option plan(s) to the contrary). The Options shall be
exercisable for the full Option term as is provided in such plan(s) and/or the
agreement(s) pursuant to which the Options were granted, notwithstanding any
subsequent events.
7.6 Notwithstanding any other provision herein, in order to protect the
Executive against the possible consequences and uncertainties of a Change of
Control (as hereinafter defined) of the Company and thereby induce the Executive
to remain in the employ
-6-
<PAGE> 7
of the Company, the Company undertakes the obligations and makes the agreements
set forth in Exhibit I to this Agreement (which provisions are hereby
incorporated herein).
8. NO REQUIREMENT OF RELOCATION.
The Company expressly agrees that the Executive, as a condition of his
employment, need not relocate his residence from the community in which he
presently resides. Any demand or requirement by the Company that the Executive
principally perform his duties at a location or office that requires more than
an additional hour of one-way commutation time than the Executive currently
experiences shall, in the absence of the Executive's consent (which may be
withheld for any reason), constitute a termination without cause by the Company
of the Executive's employment thereunder.
9. SERVICES AS DIRECTOR.
During the Employment Period, the Executive shall, if elected or
appointed, serve as a Director of the Company and/or any subsidiary of the
Company upon such terms as shall be mutually agreed upon by the Executive and
the Company.
10. ASSIGNMENT.
This Agreement, as it relates to the employment of the Executive, is a
personal contract and the rights and interests of the Executive hereunder may
not be sold, transferred, assigned, pledged or hypothecated, except as otherwise
set forth herein. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns, including without limitation,
any corporation or other entity into which the Company is merged or which
acquires all of the outstanding share of the Company's capital stock or all or
substantially all of the assets of the Company.
11. RIGHT TO PAYMENTS.
The Executive shall not under any circumstances have any option or
right to require payments hereunder otherwise than in accordance with the terms
hereof. To the extent permitted by law, the Executive shall not have any power
of anticipation, alienation or assignment of payments contemplated hereunder,
and all rights and benefits of the Executive shall be for the sole personal
benefit of the Executive, and no other person shall acquire any right, title or
interest hereunder by reason of any sale, assignment, transfer, claim or
judgment or bankruptcy proceedings against the Executive.
12. NOTICES.
For purposes of this Agreement, all notices and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
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<PAGE> 8
been duly given when delivered or three days after deposit in the United States
mail, certified and return receipt requested, postage prepaid, addressed (i) if
to the Executive, to the residence address of the Executive maintained from time
to time by the Company; and if to the Company, to its chief executive office,
addressed to the attention Vice President - Finance; (ii) to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notices of change of address shall be effective only upon
receipt.
13. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the internal laws of California without reference to conflicts
of laws, principles or rules.
14. WAIVER.
The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and not in any way affect or render invalid or unenforceable
any other provisions of this Agreement, and this Agreement shall be carried out
as if such invalid or unenforceable provisions were not embodied therein.
15. ARBITRATION.
Except as provided below, in the event of any controversy, dispute or
claim arising out of or related to this Agreement or the Executive's employment
by the Company, the parties shall negotiate in good faith in an attempt to reach
a mutually acceptable settlement of such dispute. If negotiations in good faith
do not result in a settlement of any such controversy, dispute or claim, it
shall be finally settled by expedited arbitration in accordance with the
National Rules of the American Arbitration Association governing employment
disputes, subject to the following:
15.1 The Arbitrator shall be determined from a list of names of five
impartial arbitrators each of whom shall be an attorney experienced in
arbitration matters concerning executive employment disputes, supplied by the
American Arbitration Association (the "Association") chosen by Executive and the
Company each in turn striking a name from the list until one name remains.
15.2 The Arbitrator shall determine whether and to what extent any
party shall be entitled to damages under this Agreement.
15.3 The Arbitrator shall not have the power to add to nor modify any
of the terms or conditions of the this Agreement. The Arbitrator's decision
shall not go beyond what is necessary for the interpretation and application of
the provision of this Agreement in respect of the issue before the Arbitrator.
The Arbitrator shall not substitute his or her judgment for that of the parties
in the exercise of rights granted or retained by this Agreement. The
Arbitrator's award
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<PAGE> 9
or other permitted remedy, if any, and the decision shall be based upon the
issue as drafted and submitted by the respective parties and the relevant and
competent evidence adduced at the hearing.
15.4 The Arbitrator shall have the authority to award any remedy or
relief provided for in this Agreement, in addition to any other remedy or relief
(including provisional remedies and relief) that a court of competent
jurisdiction could order or grant. In addition, the Arbitrator shall have the
authority to decide issues relating to the interpretation, meaning or
performance of this Agreement even if such decision would constitute an advisory
opinion in a court proceeding or if the issues would otherwise not be ripe for
resolution in a court proceeding, and any such decision shall bind the parties
in their continuing performance of this Agreement. The Arbitrator's written
decision shall be rendered within sixty days of the hearing. The decision
reached by the Arbitrator shall be final and binding upon the parties as to the
matter in dispute. To the extent that the relief or remedy granted by the
Arbitrator is relief or remedy on which a court could enter judgment, a judgment
upon the award rendered by the Arbitrator shall be entered in any court having
jurisdiction thereof (unless in the case of an award of damages, the full amount
of the award is paid within 10 days of its determination by the Arbitrator).
Otherwise, the award shall be binding on the parties in connection with their
continuing performance of this Agreement and in any subsequent arbitral or
judicial proceedings between the parties.
15.5 The arbitration shall take place in Los Angeles, California.
15.6 The arbitration proceeding and all filing, testimony, documents
and information relating to or presented during the arbitration proceeding shall
be disclosed exclusively for the purpose of facilitating the arbitration process
and for no other purpose and shall be deemed to be information subject to the
confidentiality provisions of this Agreement.
15.7 The parties shall continue performing their respective obligations
under this Agreement notwithstanding the existence of a dispute while the
dispute is being resolved unless and until such obligations are terminated or
expire in accordance with the provisions hereof.
15.8 The Arbitrator may order a pre-hearing exchange of information
including depositions, interrogatories, production of documents, exchange of
summaries of testimony or exchange of statements of position, and the Arbitrator
shall limit such disclosure to avoid unnecessary burden to the parties and shall
schedule promptly all discovery and other procedural steps and otherwise assume
case management initiative and control to effect an efficient and expeditious
resolution of the dispute. At any oral hearing of evidence in connection with an
arbitration proceeding, each party and its counsel shall have the right to
examine its witness and to cross-examine the witnesses of the other party. No
testimony of any witness shall be presented in written form unless the opposing
party or parties shall have the opportunity to cross-examine such witness,
except as the parties otherwise agree in writing.
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<PAGE> 10
15.9 Notwithstanding the dispute resolution procedures contained in
this Section 15, either party may apply to any court having jurisdiction (i) to
enforce this Agreement to arbitrate, (ii) to seek provisional injunctive relief
so as to maintain the status quo until the arbitration award is rendered or the
dispute is otherwise resolved, (iii) to challenge or vacate any final judgment,
award or decision of the Arbitrator that does not comport with the express
provisions of this Section 15, or (iv) to enforce or interpret the Company's
obligations, or to resolve any other dispute that arises, in whole or in part,
under the provisions set forth in Exhibit I hereto.
16. ATTORNEYS' FEES.
If any contest or dispute shall arise under the provisions of this
Agreement or involving the failure or refusal of the Company to perform fully in
accordance with the terms of this Agreement, the Company bear the expense of,
and shall pay and advance to the Executive, on a current basis, all legal fees
and expenses, if any, incurred by the Executive in connection with such contest
or dispute, together with interest in an amount equal to the prime or reference
rate of the Company's principal bank from time to time in effect, but in no
event higher than the maximum legal rate permissible under applicable law, such
interest to accrue from the date the Company receives the Executive's statement
for such fees and expenses through the date of payment thereof; provided,
however, that in the event the resolution of any such contest or dispute
includes a finding denying, in total, the Executive's claims in such contest or
dispute, (i) the Company shall be entitled to deduct and withhold from any funds
payable by the Company to the Executive the amount advanced to the Executive
pursuant to this Section 16, and (ii) to the extent not deducted by the Company
in such manner, the Executive shall be required to reimburse the Company, in
twelve equal monthly installments commencing 30 days after such resolution, such
amount.
17. HEADINGS.
The Article, Section, paragraph and subparagraph headings are for
convenience of reference only and shall not define or limit the provisions
hereof.
18. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and there are no representations,
warranties or commitments except as set forth herein. This Agreement replaces
the Executive's existing employment agreement in its entirety and supersedes any
other prior and contemporaneous agreements, understandings, negotiations and
discussions, whether written or oral, of the parties hereto relating to the
transactions contemplated by this Agreement; provided, however, that it is the
intention of the parties that this Agreement shall be interpreted and applied in
conjunction with the term of any option, warrant or other right now in existence
or hereinafter granted to the Executive to acquire shares of capital stock of
the Company. In the event of any conflict, however, the terms of this
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<PAGE> 11
Agreement shall govern and prevail. This Agreement may be amended only in a
writing executed by the parties hereto affected by such amendment.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first above written.
THQ INC., a Delaware Corporation
By: /s/ Fred Gysi
-----------------------------------
Fred Gysi, Vice President -
Finance and Administration
/s/ Brian J. Farrell
-----------------------------------
BRIAN J. FARRELL
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<PAGE> 12
EXHIBIT I: CHANGE OF CONTROL SEVERANCE BENEFITS
Preliminary Statement: This Exhibit I is attached to and made a part of
the Amended and Restated Employment Agreement, dated as of June 30, 1999,
between THQ Inc. and Brian J. Farrell (the "Employment Agreement"). The
Employment Agreement provides for the employment of the Executive by the Company
as an employee of the Company through December 31, 2001 (unless such employment
is extended by agreement of the parties or is sooner terminated as provided in
the Employment Agreement), and provides for certain bases upon which the
Executive's employment may be terminated by the Company "for cause." For the
purposes of integrating and clarifying the rights of the Executive and the
obligations of the Company under this Exhibit and the other provisions of this
Employment Agreement in the event of the termination of the Executive's
employment, the following shall apply:
A. In the event of any termination of the Executive's employment prior
to or following the Termination Period, or in the event of any termination of
the Executive's employment during the Termin ation Period by reason of a
Non-Qualifying Termination, the provisions of this Exhibit that provide or grant
to the Executive certain compensation, benefits, rights and remedies shall not
be applicable; and the rights and remedies of the Executive shall be governed
solely by the other provisions Employment Agreement (to the extent then in
effect) and/or any other written agreements that may be entered into between the
Executive and the Company and then in effect.
B. In the event of any termination of the Executive's employment during
the Termination Period other than by reason of a Non-Qualifying Termination:
(i) the Executive shall be entitled to the benefits set forth
in Section 3.2 of this Exhibit; and
(ii) the Executive shall have the right to elect whether to
receive (i) the amounts that would then be payable by the Company
pursuant to Section 3.1 of this Exhibit, or (ii) the amounts in respect
of salary and bonus that would then be payable by the Company pursuant
to the other provisions of the Employment Agreement (to the extent then
in effect) and/or any other written agreements that may be entered into
between the Executive and the Company and then in effect. Employee
shall make such election by notifying the Company in writing not later
than 60 days after the termination of his employment, and such election
shall be binding on the Executive and his successors and assigns and
shall be irrevocable. In the event that the Executive fails to make
such election within such time, the Executive shall be deemed to have
made the election to receive the payments that would then be payable by
the Company pursuant to this Exhibit.
C. In the event of any inconsistency or conflict between any provision
of this Exhibit, on the one hand, and (i) any other provision of the Employment
Agreement, any provision of the stock option plan(s) or agreements(s) pursuant
to which the Options are issued, on the other hand, the provision that provide
the greater protection, benefit or remedies to the Executive (as determined by
the Executive) shall prevail.
1. Definitions. The terms defined in Annex I hereto shall have the
respective meanings set forth therein.
<PAGE> 13
2. Effect of Change of Control on Stock Options.
2.1 Effective as of the date a Change of Control shall occur, all
Options not previously fully vested shall become immediately vested and
exercisable (notwithstanding any provision of the Company's stock option plan(s)
to the contrary). The Options shall be exercisable for the full Option term as
is provided in such plan(s) and/or the agreement(s) pursuant to which the
Options were granted, notwithstanding any subsequent events.
2.2 In lieu of exercising or retaining his right to exercise the
Options, the Executive may elect to surrender to the Company his rights in the
Options (whether or not then exercisable) and, upon such surrender, the Company
shall pay to the Executive an amount in cash per share equal to the difference
between (i) the aggregate exercise price of such surrendered Options, and (ii)
the greater of (A) the average price per share paid in connection with the
Change in Control if such control is acquired by the payment of cash, or the
then fair market value per share of the consideration paid if such control is
acquired for consideration other than cash, (B) the price per share paid in
connection with any tender offer leading to or constituting the Change of
Control, or (C) the closing price of the common stock on the Date of Termination
on NASDAQ or any other national securities exchange upon which the common stock
shall then be listed (or, if such date is not a trading day, on the immediately
preceding trading day). For purposes of this Section 2.2, "common stock" shall
mean the common stock of the Company or such other securities as may be issuable
to the Executive upon exercise of the surrendered Options.
3. Payments Upon Termination of Employment.
3.1 If during the Termination Period the employment of the
Executive shall terminate other than by reason of a Nonqualifying Termination,
the Company shall pay to the Executive (or to the Executive's beneficiary or
estate), as compensation for services rendered to the Company:
3.1.1 Within 10 days following the Date of Termination, a
cash amount equal to the sum of (i) the Executive's annual base salary from the
Company and its affiliated companies through the Date of Termination, to the
extent not theretofore paid, and (iii) any compensation previously deferred by
the Executive (together with any interest and earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid; plus
3.1.2 A cash amount equal to (i) 2.99 times the Executive's
annual base salary from the Company and its affiliated companies in effect at
the time the Change of Control occurs, plus (ii) 2.99 times the Executive's
annual bonus paid or payable, including by reason of any deferral, to the
Executive by the Company and its affiliated companies in respect of the fiscal
year of the Company immediately preceding the fiscal year in which the Change in
Control occurs. Such aggregate amount shall be payable, at the election of the
Executive (or the Executive's beneficiary or estate) either in a lump sum
(subject to any applicable payroll or other taxes required to be withheld)
within 10 days following the date of Termination or in 12 equal monthly
installments commencing 30 days following the date of Termination. The amounts
payable pursuant to this Section 3.1.2, together with any amounts or benefits
otherwise payable pursuant to this Exhibit, shall be paid in lieu of any other
amount of severance relating to salary or bonus continuation to be received by
the Executive upon termination of employment of the Executive under any
severance plan, policy or arrangement of the Company.
2
<PAGE> 14
3.2 If during the Termination Period the employment of the
Executive shall terminate other than by reason of a Nonqualifying Termination,
the Executive shall also be entitled to the following:
3.2.1 If on the Date of Termination the Executive shall not
be fully vested in the employer contributions made on his behalf under the Plan,
the Company shall pay to the Executive within 30 days following the Date of
Termination a lump sum cash amount equal to the value of the unvested portion of
such employer contributions; provided, however, that if any payment pursuant to
this Section 3.2.1 may or would result in such payment being deemed a
transaction which is subject to Section 16(b) of the Securities Exchange Act,
the Company shall make such payment so as to meet the conditions for an
exemption from such Section 16(b) as set forth in the rules (and interpretive
and no-action letters relating thereto) under Section 16. The value of any such
unvested employer contributions shall be determined as of the Date of
Termination as provided in clause (ii)(C) of Section 2.2 of this Exhibit.
3.2.2 For a period of 12 months commencing on the Date of
Termination, the Company shall continue to keep in full force and effect all
policies of medical, accident, disability and life insurance with respect to the
Executive and his dependents with the same level of coverage, upon the same
terms and otherwise to the same extent as such policies shall have been in
effect immediately prior to the Date of Termination or, if more favorable to the
Executive, as provided generally with respect to other peer executives of the
Company and its affiliated companies, and the Company and the Executive shall
share the costs of the continuation of such insurance coverage in the same
proportion as such costs were shared immediately prior to the Date of
Termination.
4. Limitation on Payments by the Company. Solely for the purposes of
the computation of benefits under this Exhibit and notwithstanding any other
provisions hereof, payments to the Executive under this Exhibit shall be reduced
(but not below zero) so that the present value, as determined in accordance with
Section 280G(d)(4) of the Code, of such payments plus any other payments that
must be taken into account for purposes of any computation relating to the
Executive under Section 280G(b)(2)(A)(ii) of the Code, shall not, in the
aggregate, exceed 2.99 times the Executive's "base amount," as such term is
defined in Section 280G(b)(3) of the Code. Notwithstanding any other provision
hereof, no reduction in payments under the limitation contained in the
immediately preceding sentence shall be applied to payments hereunder which do
not constitute "excess parachute payments" within the meaning of the Code. Any
payments in excess of the limitation of this Section 4 or otherwise determined
to be "excess parachute payments" made to the Executive hereunder shall be
deemed to be overpayments which shall constitute an amount owing from the
Executive to the Company with interest from the date of receipt by the Executive
to the date of repayment (or offset) at the applicable federal rate under
Section 1274(d) of the Code, compounded semi-annually, which shall be payable to
the Company upon demand.
5. Withholding Taxes. The Company may withhold from all payments due
to the Executive (or his beneficiary or estate) hereunder all taxes which, by
applicable federal, state, local or other law, the Company is required to
withhold therefrom.
6. Termination of Company Obligations. This obligations of the Company
set forth in this Exhibit shall terminate only upon (i) the Executive's death,
or (ii) termination of the Executive's employment with the Company prior to a
Change in Control, notwithstanding any prior expiration of the
3
<PAGE> 15
Employment Agreement or other event not resulting in the actual termination of
Executive's services to the Company.
7. Successors; Binding Agreement.
7.1 The obligations of the Company set forth in this Exhibit shall
not be terminated by any Reorganization irrespective of whether the Company is
or is not the surviving or resulting corporation or as a result of any transfer
of all or substantially all of the assets of the Company. In the event of any
such Reorganization or transfer of assets, the provisions of this Exhibit shall
be binding upon the surviving or resulting corporation or the Person to which
such assets are transferred.
7.2 The Company agrees that concurrently with any Reorganization
or transfer of assets in which either the Company is not the surviving Person or
the surviving Person or successor or transferee is not deemed to assume the
Company's obligations set forth in this Exhibit by operation of law, the Company
will cause the surviving Person, successor or transferee unconditionally to
assume, by written instrument delivered to the Executive (or his beneficiary or
estate), all of the obligations of the Company hereunder. Failure of the Company
to obtain such assumption prior to the effectiveness of any such Reorganization
or transfer of assets shall be a breach of the Company's obligations to the
Executive and shall entitle the Executive to compensation and other benefits
from the Company in the same amount and on the same terms as the Executive would
be entitled hereunder if the Executive's employment were terminated following a
Change in Control other than by reason of a Nonqualifying Termination. For
purposes of implementing the foregoing, the date on which any such
Reorganization or transfer becomes effective shall be deemed the Date of
Termination.
7.3 This Company's obligations set forth in this Exhibit shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive shall die while any amounts would be
payable to the Executive hereunder had the Executive continued to live, then,
unless otherwise provided herein, all such amounts, shall be paid in accordance
with the terms of this Exhibit to such Persons appointed in writing by the
Executive to receive such amounts or, if no Person is so appointed, to the
Executive's estate.
8. Notices. A written notice of the Executive's Date of Termination by
the Company or the Executive, as the case may be, to the other, shall (i)
indicate the specific termination provision in this Exhibit relied upon, (ii) to
the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) specify the termination
date (which date shall be not less than 15 days after the giving of such
notice). In addition, in the event the Company desires to terminate the
Executive's employment for Cause, the Company shall comply with Section 7.3 of
the Employment Agreement (if the Employment Agreement is then in effect) or with
any applicable provisions of any successor or other employment agreement. The
failure by the Executive or the Company to set forth in such notice any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive's or the Company's rights hereunder.
4
<PAGE> 16
9. Full Settlement; No Mitigation; Resolution of Disputes.
9.1 The Company's obligation to make any payments provided for in
this Exhibit and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or other Persons. In
no event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Exhibit, and such amounts shall not be reduced
whether or not the Executive obtains other employment.
9.2 If there shall be any dispute between the Company and the
Executive in the event of any termination of the Executive's employment, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such termination was for Cause, that the
determination by the Executive of the existence of Good Reason was not made in
good faith, or that the Company is not otherwise obligated to pay any amount or
provide any benefit to the Executive and his dependents or other beneficiaries,
as the case may be, under Sections 2 or 3 hereof, the Company shall pay all
amounts, and provide all benefits, to the Executive and his dependents or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Sections 2 and 3 hereof as though such termination were by
the Company without Cause or by the Executive with Good Reason; provided,
however, that the Company shall not be required to pay any disputed amounts
pursuant to this section except upon receipt of an undertaking by or on behalf
of the Executive to repay all such amounts to which the Executive is ultimately
adjudged by such court not to be entitled.
10. Validity. The invalidity or unenforceability of any provision of
this Exhibit shall not affect the validity or enforceability of any other
provision of this Exhibit, which other provisions shall remain in full force and
effect.
11. Miscellaneous. No provision of this Exhibit may be modified or
waived unless such modification or waiver is agreed to in writing and signed by
the Executive and by a duly authorized officer of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Exhibit to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. Failure by the
Executive or the Company to insist upon strict compliance with any provision of
this Exhibit or to assert any right the Executive or the Company may have
hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of such
provision or right or any other provision or right of this Exhibit. The rights
of, and benefits payable to, the Executive, his estate or his beneficiaries
pursuant to this Exhibit are in addition to any rights of, or benefits payable
to, the Executive, his estate or his beneficiaries under any other employee
benefit plan or compensation program of the Company.
5
<PAGE> 17
ANNEX A
TO
EXHIBIT I
CERTAIN DEFINED TERMS
1. "Board" means the Board of Directors of the Company.
2. "Cause" means, for purposes of this Exhibit (and notwithstanding any
other definition of "cause" or "for cause" set forth in the Employment Agreement
or any successor agreement thereto or other employment agreement in effect): a
material breach by the Executive of those duties and responsibilities of the
Executive which do not differ in any material respect from the duties and
responsibilities of the Executive during the 90-day period immediately prior to
a Change in Control (other than as a result of incapacity due to physical or
mental illness), which breach is (a) demonstrably willful and deliberate on the
Executive's part, (b) is committed in bad faith or without reasonable belief
that such breach is in the best interests of the Company, and (c) is not
remedied in a reasonable period of time after receipt of written notice from the
Company specifying such breach; or (ii) the commission by the Executive of a
felony involving moral turpitude.
3. "Change in Control" means the occurrence of any of the following:
3.1 The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either (i) the Outstanding Company Common Stock, or (ii) the combined voting
power of the Outstanding Company Voting Securities; provided, however, that the
following acquisitions shall not constitute a Change in Control:
3.1.1 any acquisition of voting securities of the Company
directly from the Company (including any acquisition resulting from the exercise
of a conversion or exchange privilege in respect of outstanding convertible or
exchangeable securities), unless such acquisition in connection with a
Reorganization;
3.1.2 any acquisition by the Company of voting securities of
the Company; or
3.1.3 any acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company;
provided further that, for purposes of Section 3.1.2 of this Annex, if
any Person (other than the Company or any employee benefit plan (or
related trust) sponsored or maintained by the Company or any
corporation controlled by the Company) shall become the beneficial
owner of 30% or more of the Outstanding Company Common Stock or 30% or
more of the Outstanding Company Voting Securities by reason of an
acquisition by the Company of another entity, and such Person shall,
after such acquisition by the Company, become the beneficial owner of
any additional shares of the Outstanding Company Common Stock or any
additional Outstanding Company Voting Securities and such beneficial
ownership is publicly announced, such additional beneficial ownership
shall constitute a Change in Control.
3.2 The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 10% or more of
either (i) the Outstanding Company Common
<PAGE> 18
Stock, or (ii) the combined voting power of the Outstanding Company Voting
Securities, if such beneficial ownership is deemed by the Board as having or
likely to have a material adverse impact on the business, operations or
prospects of the Company; provided, however, that the acquisitions set forth in
Sections 3.1.1 through 3.1.3 of this Annex shall not constitute a Change in
Control.
3.3 The individuals who, at any time, constitute the Incumbent
Board cease for any reason to constitute at least a majority of the Board.
4. "Code" means the Internal Revenue Code of 1986, as amended.
5. "Date of Termination" means (i) the effective date on which the
Executive's employment by the Company terminates as specified in a prior written
notice by the Company or the Executive, as the case may be, to the other, or
(ii) if the Executive's employment by the Company terminates by reason of death,
the date of death of the Executive.
6. "Employment Agreement" has the meaning set forth in the Preliminary
Statement to this Exhibit.
7. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
8. "Good Reason" means, unless the Executive expressly consents in
writing, the occurrence of any of the following events after a Change in
Control:
8.1 any removal or involuntary termination of the Executive by the
Company otherwise than as expressly permitted by this Exhibit;
8.2 a reduction by the Company in the Executive's rate of annual
base salary as in effect immediately prior to such Change in Control or as the
same may be increased from time to time thereafter, or the Company's failure to
pay such salary;
8.3 any reduction or other adverse change in the title(s),
responsibilities or nature of duties of the Executive;
8.4 any requirement of the Company that the Executive be based
anywhere other than in the Los Angeles metropolitan area (or, if at the time of
the Change of Control the Executive is based in another metropolitan area, any
requirement of the Company that the Executive be based anywhere other than in
that metropolitan area);
8.5 the failure of the Company to:
8.5.1 provide the Executive with employee benefit plans,
compensation plans, paid vacation and other fringe benefits, and expense
reimbursement, in accordance with the most favorable plans, practices, programs
and policies of the Company and its affiliated companies in effect for the peer
executives of the Company and its affiliated companies after the Change of
Control; or
8.5.2 provide the Executive and the Executive's dependents
welfare benefits (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee
A-2
<PAGE> 19
life, group life, accidental death and travel accident insurance plans and
programs) in accordance with the most favorable plans, practices, programs and
policies of the Company and its affiliated companies in effect for the peer
executives of the Company and its affiliated companies after the Change of
Control.
8.6 the failure of the Company to obtain the assumption agreement
as contemplated by Section 7.2 of Exhibit I.
9. "Incumbent Board" means (i) the individuals who, as of the date
hereof, constitute the Board, and (ii) any individual who becomes a director of
the Company subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, is approved by the vote of at least a
majority of the directors then comprising the Incumbent Board; provided,
however, that no individual who was initially elected as a director of the
Company as a result of an actual or threatened election contest, as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or
any other actual or threatened solicitation of proxies or consents by or on
behalf of any Person other than the Board, shall be deemed to be a member of the
Incumbent Board
10. "Nonqualifying Termination" means a termination of the Executive's
employment (i) by the Company for Cause, (ii) by the Executive for any reason
other than a Good Reason, (iii) as a result of the Executive's death, or (iv) by
the Company due to the Executive's absence from his duties with the Company on a
full-time basis for at least 180 consecutive days as a result of the Executive's
incapacity due to physical or mental illness (or such other period as may be
provided in the Employment Agreement (or any successor agreement thereto),
during such times as such agreement is in effect); provided, however, that
during the first 180 days after a Change of Control, Executive shall have the
right to terminate his employment for any reason or for no expressed reason, and
such termination shall not constitute a Nonqualifying Termination.
11. "Options" means all options, warrants and rights to acquire shares
of common stock of the Company, whether pursuant to employee benefit plans or
otherwise, granted by the Company to the Executive.
12. "Outstanding Company Common Stock" means, as of any time, the
shares of common stock of the Company outstanding as of that time.
13. "Outstanding Company Voting Securities" means, as of any time, the
securities of the Company entitled to vote generally in the election of
directors outstanding as of that time.
14. "Plan" means the Company's 401(k) Plan or any successor plan.
15. "Person" means any individual, entity or group, and includes any
"person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act.
16. "Reorganization" means reorganization, merger or consolidation to
which the Company is a party.
17. "Termination Period" means the period of time beginning with a
Change in Control and ending on the earlier to occur of (i) one year following
such Change in Control, and (ii) the Executive's death.
A-3
<PAGE> 1
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
DATED AS OF JANUARY 1, 1999
BY AND BETWEEN THQ INC.,
A DELAWARE CORPORATION (THE "COMPANY"),
AND JEFFREY C. LAPIN (THE "EXECUTIVE")
------------------------
The parties hereto desire to provide for the Executive's employment by
the Company in accordance with the terms and provisions set forth below:
NOW, THEREFORE, the parties agree as follows:
1. EMPLOYMENT: TERM.
The Company will employ the Executive, and the Executive will work for
the Company, as its Vice Chairman until December 31, 2001, unless sooner
terminated in accordance with Section 7 hereof. Such period, together with the
period of any extension or renewal of such employment, is referred to herein as
the "Employment Period."
2. DUTIES.
During the Employment Period, the Executive shall serve as the Vice
Chairman of the Company and of its subsidiaries and affiliated companies, and
perform such further duties as shall, from time to time, be reasonably delegated
or assigned to the Executive by the Chief Executive Officer or the Board of
Directors of the Company consistent with his position and abilities.
3. DEVOTION OF TIME.
During the Employment Period, the Executive shall: (i) expend
substantially all of his working time for the Company; (ii) devote his best
efforts, energy and skill to the services of the Company and the promotion of
its interests; and (iii) not take part in activities reasonably known by
Executive to be detrimental to the best interests of the Company.
4. COMPENSATION.
4.1 In consideration for the services to be performed by the
Executive during the Employment Period hereunder, the Company shall compensate
the Executive at an annual base salary (payable at the normal pay periods of the
Company) during the Employment Period of $225,000 for the first year (commencing
January 1, 1999), $275,000 for the second year
<PAGE> 2
(commencing January 1, 2000) and $325,000 for the third year (commencing January
1, 2001). The base salary shall be subject to annual review commencing at the
end of 1999 and at the end of each year thereafter, and may be increased (but
not decreased) for subsequent years.
4.2 In addition to the annual base salary payable to the Executive
pursuant to the provisions of Section 4.1 hereof, the Executive is also entitled
to a bonus for each fiscal year of the Company commencing during the Employment
Period, equal to the lesser of (i) 100% of his annual base salary for that year,
or (ii) 3.5% of the Company's net income before taxes for such year (prorated
for partial years). Net income before taxes shall be determined by the
independent public accountants for the Company in accordance with generally
accepted accounting principles consistently applied.
4.3 Executive shall also be eligible for awards of options and any
other stock or equity based awards that may be available to executives of the
Company.
5. EXPENSES; ADDITIONAL BENEFITS; INDEMNIFICATION.
5.1 [Omitted]
5.2 The Company shall pay directly, or reimburse the Executive for,
all reasonable and necessary expenses and disbursements incurred by him for and
on behalf of the Company in the performance of his duties under this Agreement.
For such purpose, the Executive shall submit to the Company itemized reports of
such expenses in accordance with the Company's policies.
5.3 The Executive shall be entitled to paid vacations during the
Employment Period in accordance with the Company's then prevalent practices for
executive employees; provided, however, that Executive shall be entitled to such
paid vacations for not less than four (4) weeks per annum.
5.4 The Executive shall be entitled to participate in, and to
receive benefits under, any employee benefit plans of the Company (including,
without limitation, pension, profit sharing, group life insurance and group
medical insurance plans) as may exist from time to time for its executive
employees. Subject to the limitation contained in Section 5.7 below, the Company
shall make the maximum pension and profit sharing contribution for the Executive
legally permitted to be made by an employer and shall permit the Executive to
contribute the maximum pension and profit sharing contribution legally permitted
to be made by an employee, equaling an aggregate of $30,000 (the current maximum
allowable payment) each year during the Employment Period.
5.5 The Company shall provide to Executive, and (subject to the
limitation contained in Section 5.7 below) pay the premiums therefor, insurance
on Executive's life in an amount equal to $1,500,000 as well as disability
insurance for the Executive during the
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<PAGE> 3
Employment Period and for a period of twelve (12) months thereafter, each of
which shall have the coverage reasonably requested by Executive; provided,
however, that the foregoing coverage shall be subject to any insurance
examinations of Executive required by the insurer. Executive shall designate the
beneficiaries under the disability and life insurance policies.
5.6 As a director and officer of the Company, the Executive shall be
entitled to the benefits of all provisions of the Articles of Incorporation of
the Company, as amended, and the Bylaws of the Company, as amended, that provide
for indemnification of officers and directors of the Company. No such provisions
shall be amended in any way to limit or reduce the extent of the indemnification
available to Executive as an officer or director of the Company.
In addition, to the fullest extent permitted by law, the Company shall
indemnify and save and hold harmless the Executive from and against any and all
claims, demands, liabilities, costs and expenses, including judgments, fines or
amounts paid on account thereof (whether in settlement or otherwise), and
reasonable expenses, including attorneys' fees actually and reasonably incurred
(except only if and to the extent that such amounts shall be finally adjudged to
have been caused by Executives willful breach of the express provisions of this
Agreement) to the extent that the Executive is made a party to or witness in any
action, suit or proceeding, or if a claim or liability is asserted against
Executive (whether or not in the right of the Company), by reason of the fact
that he was or is a director or officer, or acted in such capacity on behalf of
the Company, or by reason of or arising out of or resulting from entering into
this Agreement or the rendering of services by the Executive pursuant to this
Agreement, whether or not the same shall proceed to judgment or be settled or
otherwise brought to a conclusion. The Company shall advance to Executive on
demand all reasonable expenses incurred by Executive in connection with the
defense or settlement of any such claim, action, suit or proceeding, and
Executive hereby undertakes to repay such amounts if and to the extent that it
shall be finally adjudged that the Executive is not entitled to be indemnified
by the Company under this Agreement or under the provisions of the Certificate
of Incorporation or Bylaws of the Company as of the date hereof that govern
indemnification of officers or directors of the Company (but giving effect to
future amendments that broaden or expand any such indemnification and
obligations or right more favorably to Executive). Executive shall also be
entitled to recover any costs of enforcing his rights under this Section
(including, without limitation, reasonable attorneys' fees and disbursements) in
the event any amount payable hereunder is not paid within thirty (30) days of
written request therefore by Executive. The rights of Executive under this
Section shall survive the termination of this Agreement and shall be applicable
for so long as Executive may be subject to any claim, demand, liability, cost or
expense against which this Section is intended to protect and indemnify him.
Notwithstanding anything contained in this Agreement to the contrary,
the Company shall, at no cost to the Executive, use its best efforts to at all
times include the Executive during the term of the Employment Period and for a
period of not less than four (4) years thereafter, as an insured under any
directors and officers liability insurance policy maintained by
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<PAGE> 4
the Company, which policy shall provide such coverage in such amounts as the
Board of Directors shall deem appropriate for coverage of all directors and
officers of the Company.
5.7 The Company's share of the pension and profit sharing
contribution referenced in Section 5.4 and insurance premiums referenced in
Section 5.5 shall not exceed in any calendar year an aggregate of $30,000.
6. RESTRICTIVE COVENANT.
6.1 During the Employment Period and thereafter, the Executive shall
not reveal, divulge or make known to any person, firm, corporation or other
business organization, and shall not directly or indirectly use for his own
benefit, or for the benefit of anyone else, any secret or confidential
information used by the Company in its business, including, without limitation,
(i) pricing information, (ii) the terms of the Company's existing contracts with
suppliers, licensors and/or developers, (iii) any material information
pertaining to the Company's customers and their requirements, and (iv) any other
of the Company's trade secrets, all of which shall be collectively referred to
hereafter as the "Confidential Information."
6.2 The services of the Executive are unique, extraordinary and
essential to the business of the Company, particularly in view of the
Executive's access to Confidential Information. Accordingly, the Executive
agrees that if his employment hereunder shall at any time be terminated
voluntarily by the Executive, or by the Company for cause (as defined in Section
7.3), the Executive will not at any time within twelve months of such
termination, without the prior written approval of the Board of Directors of the
Company, directly or indirectly engage in any business activity competitive with
the business of the Company. Furthermore, the Executive agrees that, during such
twelve month period, he shall not solicit, directly or indirectly or knowingly
affect to the Company's detriment any relationship of the Company with any
customer, supplier, licensor, developer or employee of the Company or knowingly
cause any customer, supplier, licensor or developer to refrain from entrusting
additional business to the Company. If the employment of the Executive hereunder
is terminated by the Company other than for cause, the restraints on the
Executive set forth in the preceding two sentences shall be inapplicable. If
this Agreement shall not be renewed by either the Company or by the Executive
prior to its scheduled expiration date as recited in Section 1, such restraints
will apply for the period from January 1, 2002 through March 31, 2002.
6.3 In the event that any of the provisions of Section 6.1 and 6.2
hereof shall be adjudicated to exceed the time, geographic or other limitations
permitted by applicable law in any jurisdiction, then such provision shall be
deemed reformed in any such jurisdiction to the maximum time, geographic or
other limitations permitted by applicable law.
6.4 As used in this Section 6, the term "Company" shall mean and
include any and all subsidiaries of the Company which either now exist or which
may hereafter be organized.
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<PAGE> 5
6.5 The Executive hereby acknowledges and agrees that, in the event
he shall violate any provisions of this Section 6, the Company will be without
an adequate remedy at law and accordingly, will be entitled to enforce such
restrictions by temporary or permanent injunctive or mandatory relief obtained
in any action or proceeding instituted in any court of competent jurisdiction
without the necessity of proving damages and without prejudice to any other
remedies which it may have at law or in equity.
7. EARLIER TERMINATION.
7.1 The Executive's employment hereunder shall automatically be
terminated upon the death of the Executive or the Executive's voluntarily
leaving the employ of the Company. In addition, the Executive's employment by
the Company may be terminated by the Company as follows:
(a) Upon thirty (30) days' prior written notice by the
Company, in the event of the Executive's disability as set forth in Section 7.2
below; or
(b) Upon thirty (30) days' prior written notice by the
Company, in the event that the Company terminates the Executive's employment
hereunder for cause as set forth in Section 7.3 below.
7.2 The Executive shall be deemed disabled hereunder if in the
opinion of the Board of Directors of the Company, as confirmed by competent
medical advice, he shall become physically or mentally unable to perform his
duties for the Company hereunder and such incapacity shall have continued for
any period of six (6) consecutive months.
7.3 For purposes hereof, "Cause" shall be limited to the following:
(a) the Executive's willful malfeasance or gross negligence; (b) any material
misrepresentation or concealment of a material fact made by the Executive in
connection with this Agreement; or (c) the material breach of any covenant made
by the Executive hereunder.
Notwithstanding the foregoing, termination by the Company for Cause
shall not be effective until and unless (i) in the event of any acts or
circumstances alleged to be a basis for termination that is capable of cure by
the Executive, the Executive is given written notice by the Board of such
alleged acts or circumstances, and such alleged acts or circumstances shall not
have been cured by the Executive within 20 days of receipt of such notice to the
satisfaction of the Board in the exercise of its reasonable judgment (or, if
within such 20-day period the Executive commences and proceeds to take all
reasonable actions to effect such cure, within such reasonable additional time
period (no longer than 60 days) as may be necessary), (ii) notice of intention
to terminate for Cause has been given by the Company within four months after
the Board learns of the act, failure or event constituting "Cause" and (iii) the
Board has voted (at a meeting of the Board duly called and held as to which
termination of Executive is an agenda item) by a majority vote to terminate
Executive for Cause after Executive has been given notice of the particular acts
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<PAGE> 6
or circumstances which are the basis for the alleged termination for Cause and
has been afforded at least 20 days notice of the meeting and an opportunity to
present his position in writing and the Board has given notice of termination to
Executive within three days thereafter, and (iii) if Executive has commenced an
expedited arbitration in the manner prescribed below within 15 days after such
notice of termination, disputing the Company's right under this Agreement to
terminate for Cause, the Arbitrator shall have determined that the Executive is
terminable for Cause. Unless a majority of the Board at the time of the giving
of such notice of termination is then comprised of persons other than Brian J.
Farrell, Bruce Jagid, Lawrence Burstein, L. Gregory Ballard, James Whims and L.
Michael Haller, then upon the giving of such notice of termination, Executive
(x) shall be deemed suspended with pay until he shall be deemed to have been
terminated for Cause hereunder or until the Arbitrator shall have determined
that Executive is not terminable for Cause and (y) while suspended, Executive
shall cease to act as an executive of the Company and shall depart the premises
of the Company. If Executive or his representative fails to file a demand for
arbitration with the American Arbitration Association and file the requisite
fees pursuant to Rule 4 of the national Rules within 15 days of receipt of
notice of termination from the Board, and diligently pursue such proceeding in
accordance with the procedures set forth in Section 15 hereof, such termination
shall be conclusively presumed to have been for Cause.
7.4 In the event that the Executive's employment shall be terminated
due to the Executive's death or disability, then the Company shall within 20
days of such termination pay to the Executive or his personal representative, as
the case may be, severance pay in a lump sum amount equal to his then annual
base salary, as set forth in Section 4 hereof, for a period of twelve months
from the date of such termination. If, however, subject to the provisions of
Sections 7.5 and 7.6 hereafter, this Agreement shall be terminated for any other
reason whatsoever, then the Company shall not obligated to make any severance
payments whatsoever to the Executive hereunder, except the compensation set
forth in Section 4 hereof which shall have accrued but be unpaid at the
effective time of termination.
7.5 In the event that the Executive's employment shall be terminated
due to the Executive's death or disability, effective as of the date of such
termination all Options (as herein after defined) not previously fully vested
shall become immediately vested and exercisable (not withstanding any provision
of the Company's stock option plan(s) to the contrary). The Options shall be
exercisable for the full Option term as is provided in such plan(s) and/or the
agreement(s) pursuant to which the Options were granted, notwithstanding any
subsequent events.
7.6 Notwithstanding any other provision herein, in order to protect
the Executive against the possible consequences and uncertainties of a Change of
Control (as hereinafter defined) of the Company and thereby induce the Executive
to remain in the employ of the Company, the Company undertakes the obligations
and makes the agreements set forth in Exhibit I to this Agreement (which
provisions are hereby incorporated herein).
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<PAGE> 7
8. NO REQUIREMENT OF RELOCATION.
The Company expressly agrees that the Executive, as a condition of his
employment, need not relocate his residence from the community in which he
presently resides. Any demand or requirement by the Company that the Executive
principally perform his duties at a location or office that requires more than
an additional hour of one-way commutation time than the Executive currently
experiences shall, in the absence of the Executive's consent (which may be
withheld for any reason), constitute a termination without cause by the Company
of the Executive's employment thereunder.
9. SERVICES AS DIRECTOR.
During the Employment Period, the Executive shall, if elected or
appointed, serve as a Director of the Company and/or any subsidiary of the
Company upon such terms as shall be mutually agreed upon by the Executive and
the Company.
10. ASSIGNMENT.
This Agreement, as it relates to the employment of the Executive, is a
personal contract and the rights and interests of the Executive hereunder may
not be sold, transferred, assigned, pledged or hypothecated, except as otherwise
set forth herein. This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns, including without limitation,
any corporation or other entity into which the Company is merged or which
acquires all of the outstanding share of the Company's capital stock or all or
substantially all of the assets of the Company.
11. RIGHT TO PAYMENTS.
The Executive shall not under any circumstances have any option or
right to require payments hereunder otherwise than in accordance with the terms
hereof. To the extent permitted by law, the Executive shall not have any power
of anticipation, alienation or assignment of payments contemplated hereunder,
and all rights and benefits of the Executive shall be for the sole personal
benefit of the Executive, and no other person shall acquire any right, title or
interest hereunder by reason of any sale, assignment, transfer, claim or
judgment or bankruptcy proceedings against the Executive.
12. NOTICES.
For purposes of this Agreement, all notices and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered or three days after deposit in the United States
mail, certified and return receipt requested, postage prepaid, addressed (i) if
to the Executive, to the residence address of the Executive maintained from time
to time by the Company; and if to the Company, to its chief executive office,
addressed to the attention Chief Executive Officer, with a copy to the Secretary
of the Company at that address; (ii) to such other address as either party may
have furnished to
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<PAGE> 8
the other in writing in accordance herewith, except that notices of change of
address shall be effective only upon receipt.
13. GOVERNING LAW.
This Agreement shall be governed by and construed and enforced in
accordance with the internal laws of California without reference to conflicts
of laws, principles or rules.
14. WAIVER.
The waiver by either party of a breach of any provision of this
Agreement shall not operate or be construed as a Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and not in any way affect or render invalid or unenforceable
any other provisions of this Agreement, and this Agreement shall be carried out
as if such invalid or unenforceable provisions were not embodied therein.
15. ARBITRATION.
Except as provided below, in the event of any controversy, dispute or
claim arising out of or related to this Agreement or the Executive's employment
by the Company, the parties shall negotiate in good faith in an attempt to reach
a mutually acceptable settlement of such dispute. If negotiations in good faith
do not result in a settlement of any such controversy, dispute or claim, it
shall be finally settled by expedited arbitration in accordance with the
National Rules of the American Arbitration Association governing employment
disputes, subject to the following:
(a) The Arbitrator shall be determined from a list of names of
five impartial arbitrators each of whom shall be an attorney experienced in
arbitration matters concerning executive employment disputes, supplied by the
American Arbitration Association (the "Association") chosen by Executive and the
Company each in turn striking a name from the list until one name remains.
(b) The Arbitrator shall determine whether and to what extent
any party shall be entitled to damages under this Agreement.
(c) The Arbitrator shall not have the power to add to nor
modify any of the terms or conditions of the this Agreement. The Arbitrator's
decision shall not go beyond what is necessary for the interpretation and
application of the provision of this Agreement in respect of the issue before
the Arbitrator. The Arbitrator shall not substitute his or her judgment for that
of the parties in the exercise of rights granted or retained by this Agreement.
The Arbitrator's award or other permitted remedy, if any, and the decision shall
be based upon the issue as drafted and submitted by the respective parties and
the relevant and competent evidence adduced at the hearing.
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<PAGE> 9
(d) The Arbitrator shall have the authority to award any
remedy or relief provided for in this Agreement, in addition to any other remedy
or relief (including provisional remedies and relief) that a court of competent
jurisdiction could order or grant. In addition, the Arbitrator shall have the
authority to decide issues relating to the interpretation, meaning or
performance of this Agreement even if such decision would constitute an advisory
opinion in a court proceeding or if the issues would otherwise not be ripe for
resolution in a court proceeding, and any such decision shall bind the parties
in their continuing performance of this Agreement. The Arbitrator's written
decision shall be rendered within sixty days of the hearing. The decision
reached by the Arbitrator shall be final and binding upon the parties as to the
matter in dispute. To the extent that the relief or remedy granted by the
Arbitrator is relief or remedy on which a court could enter judgment, a judgment
upon the award rendered by the Arbitrator shall be entered in any court having
jurisdiction thereof (unless in the case of an award of damages, the full amount
of the award is paid within 10 days of its determination by the Arbitrator).
Otherwise, the award shall be binding on the parties in connection with their
continuing performance of this Agreement and in any subsequent arbitral or
judicial proceedings between the parties.
(e) The arbitration shall take place in Los Angeles,
California.
(f) The arbitration proceeding and all filing, testimony,
documents and information relating to or presented during the arbitration
proceeding shall be disclosed exclusively for the purpose of facilitating the
arbitration process and for no other purpose and shall be deemed to be
information subject to the confidentiality provisions of this Agreement.
(g) The parties shall continue performing their respective
obligations under this Agreement notwithstanding the existence of a dispute
while the dispute is being resolved unless and until such obligations are
terminated or expire in accordance with the provisions hereof.
(h) The Arbitrator may order a pre-hearing exchange of
information including depositions, interrogatories, production of documents,
exchange of summaries of testimony or exchange of statements of position, and
the Arbitrator shall limit such disclosure to avoid unnecessary burden to the
parties and shall schedule promptly all discovery and other procedural steps and
otherwise assume case management initiative and control to effect an efficient
and expeditious resolution of the dispute. At any oral hearing of evidence in
connection with an arbitration proceeding, each party and its counsel shall have
the right to examine its witness and to cross-examine the witnesses of the other
party. No testimony of any witness shall be presented in written form unless the
opposing party or parties shall have the opportunity to cross-examine such
witness, except as the parties otherwise agree in writing.
(i) Notwithstanding the dispute resolution procedures
contained in this Section 15, either party may apply to any court having
jurisdiction (i) to enforce this Agreement to arbitrate, (ii) to seek
provisional injunctive relief so as to maintain the status quo until the
arbitration award is rendered or the dispute is otherwise resolved, (iii) to
challenge or vacate any final judgment, award or decision of the Arbitrator that
does not comport with the express
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<PAGE> 10
provisions of this Section 15, or (iv) to enforce or interpret the Company's
obligations, or to resolve any other dispute that arises, in whole or in part,
under the provisions set forth in Exhibit I hereto.
16. ATTORNEYS' FEES
If any contest or dispute shall arise under the provisions of this
Agreement or involving the failure or refusal of the Company to perform fully in
accordance with the terms of this Agreement, the Company bear the expense of,
and shall pay and advance to the Executive, on a current basis, all legal fees
and expenses, if any, incurred by the Executive in connection with such contest
or dispute, together with interest in an amount equal to the prime or reference
rate of the Company's principal bank from time to time in effect, but in no
event higher than the maximum legal rate permissible under applicable law, such
interest to accrue from the date the Company receives the Executive's statement
for such fees and expenses through the date of payment thereof; provided,
however, that in the event the resolution of any such contest or dispute
includes a finding denying, in total, the Executive's claims in such contest or
dispute, (i) the Company shall be entitled to deduct and withhold from any funds
payable by the Company to the Executive the amount advanced to the Executive
pursuant to this Section 16, and (ii) to the extent not deducted by the Company
in such manner, the Executive shall be required to reimburse the Company, in
twelve equal monthly installments commencing 30 days after such resolution, such
amount.
17. HEADINGS.
The Article, Section, paragraph and subparagraph headings are for
convenience of reference only and shall not define or limit the provisions
hereof.
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18. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement between the parties
with respect to the subject matter hereof and there are no representations,
warranties or commitments except as set forth herein. This Agreement supersedes
any other prior and contemporaneous agreements, understandings, negotiations and
discussions, whether written or oral, of the parties hereto relating to the
transactions contemplated by this Agreement; provided, however, that it is the
intention of the parties that this Agreement shall be interpreted and applied in
conjunction with the term of any option, warrant or other right now in existence
or hereinafter granted to the Executive to acquire shares of capital stock of
the Company. In the event of any conflict, however, the terms of this Agreement
shall govern and prevail. This Agreement may be amended only in a writing
executed by the parties hereto affected by such amendment.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date and year first above written.
THQ Inc.,
a Delaware Corporation
By: /s/ Brian Farrell
-----------------------------
Brian Farrell, President
/s/ Jeffrey C. Lapin
-----------------------------
JEFFREY C. LAPIN
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EXHIBIT I: CHANGE OF CONTROL SEVERANCE BENEFITS
Preliminary Statement: This Exhibit I is attached to and made a part of
the Amended and Restated Employment Agreement, dated as of June 30, 1999,
between THQ Inc. and Brian J. Farrell (the "Employment Agreement"). The
Employment Agreement provides for the employment of the Executive by the Company
as an employee of the Company through December 31, 2001 (unless such employment
is extended by agreement of the parties or is sooner terminated as provided in
the Employment Agreement), and provides for certain bases upon which the
Executive's employment may be terminated by the Company "for cause." For the
purposes of integrating and clarifying the rights of the Executive and the
obligations of the Company under this Exhibit and the other provisions of this
Employment Agreement in the event of the termination of the Executive's
employment, the following shall apply:
A. In the event of any termination of the Executive's employment prior
to or following the Termination Period, or in the event of any termination of
the Executive's employment during the Termin ation Period by reason of a
Non-Qualifying Termination, the provisions of this Exhibit that provide or grant
to the Executive certain compensation, benefits, rights and remedies shall not
be applicable; and the rights and remedies of the Executive shall be governed
solely by the other provisions Employment Agreement (to the extent then in
effect) and/or any other written agreements that may be entered into between the
Executive and the Company and then in effect.
B. In the event of any termination of the Executive's employment during
the Termination Period other than by reason of a Non-Qualifying Termination:
(i) the Executive shall be entitled to the benefits set forth
in Section 3.2 of this Exhibit; and
(ii) the Executive shall have the right to elect whether to
receive (i) the amounts that would then be payable by the Company
pursuant to Section 3.1 of this Exhibit, or (ii) the amounts in respect
of salary and bonus that would then be payable by the Company pursuant
to the other provisions of the Employment Agreement (to the extent then
in effect) and/or any other written agreements that may be entered into
between the Executive and the Company and then in effect. Employee
shall make such election by notifying the Company in writing not later
than 60 days after the termination of his employment, and such election
shall be binding on the Executive and his successors and assigns and
shall be irrevocable. In the event that the Executive fails to make
such election within such time, the Executive shall be deemed to have
made the election to receive the payments that would then be payable by
the Company pursuant to this Exhibit.
C. In the event of any inconsistency or conflict between any provision
of this Exhibit, on the one hand, and (i) any other provision of the Employment
Agreement, any provision of the stock option plan(s) or agreements(s) pursuant
to which the Options are issued, on the other hand, the provision that provide
the greater protection, benefit or remedies to the Executive (as determined by
the Executive) shall prevail.
1. Definitions. The terms defined in Annex I hereto shall have the
respective meanings set forth therein.
<PAGE> 13
2. Effect of Change of Control on Stock Options.
2.1 Effective as of the date a Change of Control shall occur, all
Options not previously fully vested shall become immediately vested and
exercisable (notwithstanding any provision of the Company's stock option plan(s)
to the contrary). The Options shall be exercisable for the full Option term as
is provided in such plan(s) and/or the agreement(s) pursuant to which the
Options were granted, notwithstanding any subsequent events.
2.2 In lieu of exercising or retaining his right to exercise the
Options, the Executive may elect to surrender to the Company his rights in the
Options (whether or not then exercisable) and, upon such surrender, the Company
shall pay to the Executive an amount in cash per share equal to the difference
between (i) the aggregate exercise price of such surrendered Options, and (ii)
the greater of (A) the average price per share paid in connection with the
Change in Control if such control is acquired by the payment of cash, or the
then fair market value per share of the consideration paid if such control is
acquired for consideration other than cash, (B) the price per share paid in
connection with any tender offer leading to or constituting the Change of
Control, or (C) the closing price of the common stock on the Date of Termination
on NASDAQ or any other national securities exchange upon which the common stock
shall then be listed (or, if such date is not a trading day, on the immediately
preceding trading day). For purposes of this Section 2.2, "common stock" shall
mean the common stock of the Company or such other securities as may be issuable
to the Executive upon exercise of the surrendered Options.
3. Payments Upon Termination of Employment.
3.1 If during the Termination Period the employment of the
Executive shall terminate other than by reason of a Nonqualifying Termination,
the Company shall pay to the Executive (or to the Executive's beneficiary or
estate), as compensation for services rendered to the Company:
3.1.1 Within 10 days following the Date of Termination, a
cash amount equal to the sum of (i) the Executive's annual base salary from the
Company and its affiliated companies through the Date of Termination, to the
extent not theretofore paid, and (iii) any compensation previously deferred by
the Executive (together with any interest and earnings thereon) and any accrued
vacation pay, in each case to the extent not theretofore paid; plus
3.1.2 A cash amount equal to (i) 2.99 times the Executive's
annual base salary from the Company and its affiliated companies in effect at
the time the Change of Control occurs, plus (ii) 2.99 times the Executive's
annual bonus paid or payable, including by reason of any deferral, to the
Executive by the Company and its affiliated companies in respect of the fiscal
year of the Company immediately preceding the fiscal year in which the Change in
Control occurs. Such aggregate amount shall be payable, at the election of the
Executive (or the Executive's beneficiary or estate) either in a lump sum
(subject to any applicable payroll or other taxes required to be withheld)
within 10 days following the date of Termination or in 12 equal monthly
installments commencing 30 days following the date of Termination. The amounts
payable pursuant to this Section 3.1.2, together with any amounts or benefits
otherwise payable pursuant to this Exhibit, shall be paid in lieu of any other
amount of severance relating to salary or bonus continuation to be received by
the Executive upon termination of employment of the Executive under any
severance plan, policy or arrangement of the Company.
2
<PAGE> 14
3.2 If during the Termination Period the employment of the
Executive shall terminate other than by reason of a Nonqualifying Termination,
the Executive shall also be entitled to the following:
3.2.1 If on the Date of Termination the Executive shall not
be fully vested in the employer contributions made on his behalf under the Plan,
the Company shall pay to the Executive within 30 days following the Date of
Termination a lump sum cash amount equal to the value of the unvested portion of
such employer contributions; provided, however, that if any payment pursuant to
this Section 3.2.1 may or would result in such payment being deemed a
transaction which is subject to Section 16(b) of the Securities Exchange Act,
the Company shall make such payment so as to meet the conditions for an
exemption from such Section 16(b) as set forth in the rules (and interpretive
and no-action letters relating thereto) under Section 16. The value of any such
unvested employer contributions shall be determined as of the Date of
Termination as provided in clause (ii)(C) of Section 2.2 of this Exhibit.
3.2.2 For a period of 12 months commencing on the Date of
Termination, the Company shall continue to keep in full force and effect all
policies of medical, accident, disability and life insurance with respect to the
Executive and his dependents with the same level of coverage, upon the same
terms and otherwise to the same extent as such policies shall have been in
effect immediately prior to the Date of Termination or, if more favorable to the
Executive, as provided generally with respect to other peer executives of the
Company and its affiliated companies, and the Company and the Executive shall
share the costs of the continuation of such insurance coverage in the same
proportion as such costs were shared immediately prior to the Date of
Termination.
4. Limitation on Payments by the Company. Solely for the purposes of
the computation of benefits under this Exhibit and notwithstanding any other
provisions hereof, payments to the Executive under this Exhibit shall be reduced
(but not below zero) so that the present value, as determined in accordance with
Section 280G(d)(4) of the Code, of such payments plus any other payments that
must be taken into account for purposes of any computation relating to the
Executive under Section 280G(b)(2)(A)(ii) of the Code, shall not, in the
aggregate, exceed 2.99 times the Executive's "base amount," as such term is
defined in Section 280G(b)(3) of the Code. Notwithstanding any other provision
hereof, no reduction in payments under the limitation contained in the
immediately preceding sentence shall be applied to payments hereunder which do
not constitute "excess parachute payments" within the meaning of the Code. Any
payments in excess of the limitation of this Section 4 or otherwise determined
to be "excess parachute payments" made to the Executive hereunder shall be
deemed to be overpayments which shall constitute an amount owing from the
Executive to the Company with interest from the date of receipt by the Executive
to the date of repayment (or offset) at the applicable federal rate under
Section 1274(d) of the Code, compounded semi-annually, which shall be payable to
the Company upon demand.
5. Withholding Taxes. The Company may withhold from all payments due
to the Executive (or his beneficiary or estate) hereunder all taxes which, by
applicable federal, state, local or other law, the Company is required to
withhold therefrom.
6. Termination of Company Obligations. This obligations of the Company
set forth in this Exhibit shall terminate only upon (i) the Executive's death,
or (ii) termination of the Executive's employment with the Company prior to a
Change in Control, notwithstanding any prior expiration of the
3
<PAGE> 15
Employment Agreement or other event not resulting in the actual termination of
Executive's services to the Company.
7. Successors; Binding Agreement.
7.1 The obligations of the Company set forth in this Exhibit shall
not be terminated by any Reorganization irrespective of whether the Company is
or is not the surviving or resulting corporation or as a result of any transfer
of all or substantially all of the assets of the Company. In the event of any
such Reorganization or transfer of assets, the provisions of this Exhibit shall
be binding upon the surviving or resulting corporation or the Person to which
such assets are transferred.
7.2 The Company agrees that concurrently with any Reorganization
or transfer of assets in which either the Company is not the surviving Person or
the surviving Person or successor or transferee is not deemed to assume the
Company's obligations set forth in this Exhibit by operation of law, the Company
will cause the surviving Person, successor or transferee unconditionally to
assume, by written instrument delivered to the Executive (or his beneficiary or
estate), all of the obligations of the Company hereunder. Failure of the Company
to obtain such assumption prior to the effectiveness of any such Reorganization
or transfer of assets shall be a breach of the Company's obligations to the
Executive and shall entitle the Executive to compensation and other benefits
from the Company in the same amount and on the same terms as the Executive would
be entitled hereunder if the Executive's employment were terminated following a
Change in Control other than by reason of a Nonqualifying Termination. For
purposes of implementing the foregoing, the date on which any such
Reorganization or transfer becomes effective shall be deemed the Date of
Termination.
7.3 This Company's obligations set forth in this Exhibit shall
inure to the benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive shall die while any amounts would be
payable to the Executive hereunder had the Executive continued to live, then,
unless otherwise provided herein, all such amounts, shall be paid in accordance
with the terms of this Exhibit to such Persons appointed in writing by the
Executive to receive such amounts or, if no Person is so appointed, to the
Executive's estate.
8. Notices. A written notice of the Executive's Date of Termination by
the Company or the Executive, as the case may be, to the other, shall (i)
indicate the specific termination provision in this Exhibit relied upon, (ii) to
the extent applicable, set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) specify the termination
date (which date shall be not less than 15 days after the giving of such
notice). In addition, in the event the Company desires to terminate the
Executive's employment for Cause, the Company shall comply with Section 7.3 of
the Employment Agreement (if the Employment Agreement is then in effect) or with
any applicable provisions of any successor or other employment agreement. The
failure by the Executive or the Company to set forth in such notice any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive's or the Company's rights hereunder.
4
<PAGE> 16
9. Full Settlement; No Mitigation; Resolution of Disputes.
9.1 The Company's obligation to make any payments provided for in
this Exhibit and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or other Persons. In
no event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Exhibit, and such amounts shall not be reduced
whether or not the Executive obtains other employment.
9.2 If there shall be any dispute between the Company and the
Executive in the event of any termination of the Executive's employment, then,
unless and until there is a final, nonappealable judgment by a court of
competent jurisdiction declaring that such termination was for Cause, that the
determination by the Executive of the existence of Good Reason was not made in
good faith, or that the Company is not otherwise obligated to pay any amount or
provide any benefit to the Executive and his dependents or other beneficiaries,
as the case may be, under Sections 2 or 3 hereof, the Company shall pay all
amounts, and provide all benefits, to the Executive and his dependents or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Sections 2 and 3 hereof as though such termination were by
the Company without Cause or by the Executive with Good Reason; provided,
however, that the Company shall not be required to pay any disputed amounts
pursuant to this section except upon receipt of an undertaking by or on behalf
of the Executive to repay all such amounts to which the Executive is ultimately
adjudged by such court not to be entitled.
10. Validity. The invalidity or unenforceability of any provision of
this Exhibit shall not affect the validity or enforceability of any other
provision of this Exhibit, which other provisions shall remain in full force and
effect.
11. Miscellaneous. No provision of this Exhibit may be modified or
waived unless such modification or waiver is agreed to in writing and signed by
the Executive and by a duly authorized officer of the Company. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Exhibit to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. Failure by the
Executive or the Company to insist upon strict compliance with any provision of
this Exhibit or to assert any right the Executive or the Company may have
hereunder, including, without limitation, the right of the Executive to
terminate employment for Good Reason, shall not be deemed to be a waiver of such
provision or right or any other provision or right of this Exhibit. The rights
of, and benefits payable to, the Executive, his estate or his beneficiaries
pursuant to this Exhibit are in addition to any rights of, or benefits payable
to, the Executive, his estate or his beneficiaries under any other employee
benefit plan or compensation program of the Company.
5
<PAGE> 17
ANNEX A
TO
EXHIBIT I
CERTAIN DEFINED TERMS
1. "Board" means the Board of Directors of the Company.
2. "Cause" means, for purposes of this Exhibit (and notwithstanding any
other definition of "cause" or "for cause" set forth in the Employment Agreement
or any successor agreement thereto or other employment agreement in effect): a
material breach by the Executive of those duties and responsibilities of the
Executive which do not differ in any material respect from the duties and
responsibilities of the Executive during the 90-day period immediately prior to
a Change in Control (other than as a result of incapacity due to physical or
mental illness), which breach is (a) demonstrably willful and deliberate on the
Executive's part, (b) is committed in bad faith or without reasonable belief
that such breach is in the best interests of the Company, and (c) is not
remedied in a reasonable period of time after receipt of written notice from the
Company specifying such breach; or (ii) the commission by the Executive of a
felony involving moral turpitude.
3. "Change in Control" means the occurrence of any of the following:
3.1 The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 30% or more of
either (i) the Outstanding Company Common Stock, or (ii) the combined voting
power of the Outstanding Company Voting Securities; provided, however, that the
following acquisitions shall not constitute a Change in Control:
3.1.1 any acquisition of voting securities of the Company
directly from the Company (including any acquisition resulting from the exercise
of a conversion or exchange privilege in respect of outstanding convertible or
exchangeable securities), unless such acquisition in connection with a
Reorganization;
3.1.2 any acquisition by the Company of voting securities of
the Company; or
3.1.3 any acquisition by an employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company;
provided further that, for purposes of Section 3.1.2 of this Annex, if any
Person (other than the Company or any employee benefit plan (or related trust)
sponsored or maintained by the Company or any corporation controlled by the
Company) shall become the beneficial owner of 30% or more of the Outstanding
Company Common Stock or 30% or more of the Outstanding Company Voting Securities
by reason of an acquisition by the Company of another entity, and such Person
shall, after such acquisition by the Company, become the beneficial owner of any
additional shares of the Outstanding Company Common Stock or any additional
Outstanding Company Voting Securities and such beneficial ownership is publicly
announced, such additional beneficial ownership shall constitute a Change in
Control.
3.2 The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 10% or more of
either (i) the Outstanding Company Common
<PAGE> 18
Stock, or (ii) the combined voting power of the Outstanding Company Voting
Securities, if such beneficial ownership is deemed by the Board as having or
likely to have a material adverse impact on the business, operations or
prospects of the Company; provided, however, that the acquisitions set forth in
Sections 3.1.1 through 3.1.3 of this Annex shall not constitute a Change in
Control.
3.3 The individuals who, at any time, constitute the Incumbent Board
cease for any reason to constitute at least a majority of the Board.
4. "Code" means the Internal Revenue Code of 1986, as amended.
5. "Date of Termination" means (i) the effective date on which the
Executive's employment by the Company terminates as specified in a prior written
notice by the Company or the Executive, as the case may be, to the other, or
(ii) if the Executive's employment by the Company terminates by reason of death,
the date of death of the Executive.
6. "Employment Agreement" has the meaning set forth in the Preliminary
Statement to this Exhibit.
7. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
8. "Good Reason" means, unless the Executive expressly consents in
writing, the occurrence of any of the following events after a Change in
Control:
8.1 any removal or involuntary termination of the Executive by the
Company otherwise than as expressly permitted by this Exhibit;
8.2 a reduction by the Company in the Executive's rate of annual
base salary as in effect immediately prior to such Change in Control or as the
same may be increased from time to time thereafter, or the Company's failure to
pay such salary;
8.3 any reduction or other adverse change in the title(s),
responsibilities or nature of duties of the Executive;
8.4 any requirement of the Company that the Executive be based
anywhere other than in the Los Angeles metropolitan area (or, if at the time of
the Change of Control the Executive is based in another metropolitan area, any
requirement of the Company that the Executive be based anywhere other than in
that metropolitan area);
8.5 the failure of the Company to:
8.5.1 provide the Executive with employee benefit plans,
compensation plans, paid vacation and other fringe benefits, and expense
reimbursement, in accordance with the most favorable plans, practices, programs
and policies of the Company and its affiliated companies in effect for the peer
executives of the Company and its affiliated companies after the Change of
Control; or
8.5.2 provide the Executive and the Executive's dependents
welfare benefits (including, without limitation, medical, prescription, dental,
disability, salary continuance, employee
A-2
<PAGE> 19
life, group life, accidental death and travel accident insurance plans and
programs) in accordance with the most favorable plans, practices, programs and
policies of the Company and its affiliated companies in effect for the peer
executives of the Company and its affiliated companies after the Change of
Control.
8.6 the failure of the Company to obtain the assumption agreement as
contemplated by Section 7.2 of Exhibit I.
9. "Incumbent Board" means (i) the individuals who, as of the date
hereof, constitute the Board, and (ii) any individual who becomes a director of
the Company subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, is approved by the vote of at least a
majority of the directors then comprising the Incumbent Board; provided,
however, that no individual who was initially elected as a director of the
Company as a result of an actual or threatened election contest, as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or
any other actual or threatened solicitation of proxies or consents by or on
behalf of any Person other than the Board, shall be deemed to be a member of the
Incumbent Board
10. "Nonqualifying Termination" means a termination of the Executive's
employment (i) by the Company for Cause, (ii) by the Executive for any reason
other than a Good Reason, (iii) as a result of the Executive's death, or (iv) by
the Company due to the Executive's absence from his duties with the Company on a
full-time basis for at least 180 consecutive days as a result of the Executive's
incapacity due to physical or mental illness (or such other period as may be
provided in the Employment Agreement (or any successor agreement thereto),
during such times as such agreement is in effect); provided, however, that
during the first 180 days after a Change of Control, Executive shall have the
right to terminate his employment for any reason or for no expressed reason, and
such termination shall not constitute a Nonqualifying Termination.
11. "Options" means all options, warrants and rights to acquire shares
of common stock of the Company, whether pursuant to employee benefit plans or
otherwise, granted by the Company to the Executive.
12. "Outstanding Company Common Stock" means, as of any time, the
shares of common stock of the Company outstanding as of that time.
13. "Outstanding Company Voting Securities" means, as of any time, the
securities of the Company entitled to vote generally in the election of
directors outstanding as of that time.
14. "Plan" means the Company's 401(k) Plan or any successor plan.
15. "Person" means any individual, entity or group, and includes any
"person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act.
16. "Reorganization" means reorganization, merger or consolidation to
which the Company is a party.
17. "Termination Period" means the period of time beginning with a
Change in Control and ending on the earlier to occur of (i) one year following
such Change in Control, and (ii) the Executive's death.
A-3
<PAGE> 1
Exhibit 10.8
STOCK OPTION AGREEMENT
Grantee: Jeffrey C. Lapin
--------------------------------
Number of Shares of Company
Common Stock Underlying Option: 200,000
--------------------------------
Purchase Price Per Share: $16.75
--------------------------------
Date of Grant: October 21, 1998
--------------------------------
This Stock Option Agreement is entered into as of the 21st day of
October 1998 by and between THQ Inc., a Delaware corporation, currently having
its executive office at 5016 North Parkway Calabasas, California 91302 (the
"Company"), and Jeffrey C. Lapin (the "Grantee").
RECITAL
WHEREAS, the Company desires that Grantee become an employee and
officer of the Company and has determined that in order to induce Grantee to
become an employee and officer of the Company, the Company will grant to Grantee
an option to purchase shares of common stock of the Company.
1. STOCK OPTION
1.1 GRANT OF STOCK OPTION. The Company hereby grants to Grantee, and
Grantee hereby accepts, the right and option to purchase from the Company all or
any part of the Number of Shares of Company Common Stock Underlying Options set
forth above (the "Shares") at the Purchase Price Per Share set forth above on
the terms and conditions stated herein (the "Option"). The Option granted
hereunder is issued as a non-qualified option and is not intended to be an
"Incentive Stock Option," as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and is not issued under the THQ Inc. Amended
and Restated 1997 Stock Option Plan or any other Company plan. Grantee expressly
acknowledges that the Option creates certain tax liabilities upon exercise and
in certain other events.
1.2 TERMS OF STOCK OPTION. The Option shall be subject to the
following terms and conditions:
(a) Option Period. The Option shall not be exercisable after
5:00 p.m., Los Angeles time, on October 21, 2003 (the "Expiration Date"). The
Option, or portion thereof, may be exercised only with respect to whole shares
of common stock, par value $0.01 per share of the Company (the "Common Stock").
Notwithstanding Section 1.3 hereof or the provisions of any Agreement, the Board
of Directors of the Company (the "Board") or a committee (the "Committee")
designated by the Board consisting of two or more members of the Board each of
whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (if
the Board wishes to qualify under Section 162(m) of the Code) the Committee may
in its sole and absolute discretion extend the time for the exercise of the
Option.
<PAGE> 2
(b) Vesting. Subject to the limits set forth herein relating to
the termination of Grantee's employment by the Company, this Option shall be
deemed vested and thus exercisable by Grantee only to the extent of the
following number of Shares commencing on the following dates:
<TABLE>
<CAPTION>
First Date After Which
Number of Shares Shares May Be Purchased
---------------- -----------------------
<S> <C>
66,667 October 21, 1998
133,334 October 21, 1999
200,000 October 21, 2000
</TABLE>
(c) Method of Exercise. The Option may be exercised (i) by
giving written notice to the Company specifying the number of whole shares of
Common Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A) in
cash, (B) by delivery of previously owned whole shares of Common Stock (which
Grantee has held for at least six months prior to the delivery of such shares or
which Grantee purchased on the open market and in each case for which Grantee
has good title, free and clear of all liens and encumbrances) having an
aggregate Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (C) in cash by a
broker-dealer acceptable to the Company to whom Grantee has submitted an
irrevocable notice of exercise, or (D) a combination of (A), (B) and (C), in
each case to the extent not prohibited herein and (ii) by executing such
documents as the Company may reasonably request; provided, however, that
notwithstanding the foregoing or anything herein to the contrary, the Company
shall have sole discretion to disapprove of an election pursuant to clauses
(B)-(D). "Fair Market Value" shall mean the closing transaction price of a share
of Common Stock as reported in the NASDAQ National Market System, or other
exchange where the Common Stock is listed, on the date as of which such value is
being determined or, if there shall be no reported transactions on such date, on
the next preceding date for which transactions were reported; provided that if
Fair Market Value for any date cannot be determined as above provided, Fair
Market Value shall be determined by the Committee by whatever means or method as
the Committee, in the good faith exercise of its discretion, shall at such time
deem appropriate. Any fraction of a share of Common Stock which would be
required to pay such purchase price shall be disregarded and the remaining
amount due shall be paid in cash by Grantee. No certificate representing Common
Stock shall be delivered until the full purchase price therefor has been paid
(or arrangement made for such payment to the Company's satisfaction).
1.3 TERMINATION OF EMPLOYMENT.
(a) Total Disability. If Grantee's employment with the Company
terminates by reason of Total Disability, the Option shall be exercisable only
to the extent that the Option is exercisable on the effective date of such
Grantee's termination of employment and may thereafter be exercised by Grantee
(or Grantee's legal representative or similar person) until and including the
earliest to occur of (i) the date which is one year after the effective date of
Grantee's termination of employment, and (ii) the Expiration Date. "Total
Disability" shall mean the permanent and total disability of Grantee as
described in the written employment agreement, if any, between the Company and
Grantee (an "Employment Agreement"); and otherwise shall mean the inability of
Grantee substantially to perform Grantee's duties and responsibilities for a
continuous period of six months.
2
<PAGE> 3
(b) Death. If Grantee's employment with the Company terminates by
reason of death, the Option shall be exercisable only to the extent that the
Option is exercisable on the date of Grantee's death and may thereafter be
exercised by Grantee's executor, administrator, legal representative,
beneficiary or similar person until and including the earliest to occur of (i)
the date which is one year after the date of death, and (ii) the Expiration
Date.
(c) Termination for Cause. If the employment of Grantee is
terminated by the Company for Cause, the Option shall terminate automatically on
the date of such termination. "Cause" shall have the meaning ascribed in an
Employment Agreement and (i) shall also include Grantee's termination of his
employment for any reason, but (ii) shall not include termination by reason of
Grantee's Total Disability notwithstanding any language to the contrary in an
Employment Agreement; and otherwise shall mean the willful and continued failure
to substantially perform the duties with the Company (other than a failure
resulting from Grantee's Total Disability), the willful engaging in conduct
which is demonstrably injurious to the Company or any subsidiary of the Company
(a "Subsidiary"), monetarily or otherwise, including conduct that, in the
reasonable judgment of the Company, does not conform to the standard of the
Company's executives, any act of dishonesty, commission of a felony or a
significant violation of any statutory or common law duty of loyalty to the
Company, or Grantee's termination of his employment for any reason. If Grantee
is removed from the Board of Directors for cause as permitted under Delaware
law, the Option shall terminate automatically on the date of such termination.
(d) Other Termination. If Grantee's employment with the Company is
terminated by the Company for any reason other than Total Disability, death or
for Cause, the Option shall be exercisable only to the extent that the Option is
exercisable on the effective date of Grantee's termination of employment and may
thereafter be exercised by Grantee (or Grantee's legal representative or similar
person) until and including the earliest to occur of (i) the date which is three
months after the effective date of Grantee's termination of employment, and (ii)
the Expiration Date; provided, however, that if Grantee's employment with the
Company is terminated by the Company within the nine-month period following the
consummation of a Transaction (as defined in Section 6.1) for any reason other
than Total Disability, death or for Cause, the Option shall become fully
exercisable, and may thereafter be exercised by Grantee (or Grantee's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months after the effective date of Grantee's
termination of employment and (ii) the Expiration Date; provided further, that
if Grantee's employment with the Company is terminated by the Company at any
other time for any reason other than Total Disability, death or for Cause, the
Committee may, in its sole and absolute discretion, provide that the Option
shall become fully exercisable and may thereafter be exercised by Grantee (or
Grantee's legal representative or similar person) until and including the
earliest to occur of (i) the date which is three months after the effective date
of Grantee's termination of employment and (ii) the Expiration Date.
(e) Death Following Termination of Employment. If Grantee dies
during the period set forth in Section 1.3(a) following termination of
employment by reason of Total Disability, or if Grantee dies during the period
set forth in Section 1.3(d) following termination of employment by the Company
for any other reason other than Total Disability, death or for Cause, the Option
shall be exercisable only to the extent that the Option is exercisable on the
date of Grantee's death and may thereafter be exercised by Grantee's executor,
administrator, legal representative, beneficiary or similar person, as the case
may be, until and including the earliest to occur of (i) the date which is one
year after the date of death and (ii) the Expiration Date.
3
<PAGE> 4
2. TRANSFERABILITY
2.1 NON-TRANSFERABILITY. The Option may not be given, granted, sold,
exchanged, pledged, assigned, hypothecated or otherwise encumbered or disposed
of by Grantee, other than by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures set forth in Section 2.2. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of the Option hereunder, the Option and all rights thereunder
shall immediately become null and void. Except to the extent permitted by the
foregoing sentence, the Option may be exercised during Grantee's lifetime only
by Grantee or Grantee's legal representative or similar person.
2.2 DESIGNATION OF BENEFICIARY. (a) Grantee may file with the
Committee a written designation of one or more persons as Grantee's beneficiary
or beneficiaries (both primary and contingent) in the event of Grantee's death.
To the extent an outstanding option granted hereunder is exercisable, such
beneficiary or beneficiaries shall be entitled to exercise such option.
(b) Each beneficiary designation shall become effective only
when filed in writing with the Committee during Grantee's lifetime on a form
prescribed by the Committee. The spouse of a married Grantee domiciled in a
community property jurisdiction shall join in any designation of a beneficiary
other than such spouse. The filing with the Committee of a new beneficiary
designation shall cancel all previously filed beneficiary designations.
(c) If an Grantee fails to designate a beneficiary, or if all
designated beneficiaries of an Grantee predecease Grantee, then each outstanding
option hereunder held by such Grantee, to the extent exercisable, may be
exercised by such Grantee's executor, administrator, legal representative or
similar person.
3. WITHHOLDING TAXES
3.1 TAX WITHHOLDING. The Company shall have the right to require,
prior to the issuance or delivery of any shares of Common Stock, payment by
Grantee of any Federal, state, local or other taxes which may be required to be
withheld or paid in connection with the Option hereunder. Grantee may elect that
(i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered upon exercise of the option having an aggregate Fair
Market Value determined as of the date the obligation to withhold or pay taxes
arises in connection with the option (the "Tax Date") in the amount necessary to
satisfy any such obligation or (ii) Grantee satisfy any such obligation by any
of the following means: (A) a cash payment to the Company, (B) delivery to the
Company of previously owned whole shares of Common Stock (which Grantee has held
for at least six months prior to the delivery of such shares or which Grantee
purchased on the open market and in each case for which Grantee has good title,
free and clear of all liens and encumbrances) having an aggregate Fair Market
Value determined as of the Tax Date, equal to the amount necessary to satisfy
any such obligation, (C) a cash payment by a broker-dealer acceptable to the
Company to whom Grantee has submitted an irrevocable notice of exercise, or (D)
any combination of (A), (B) and (C), in each case to the extent not prohibited
by the Agreement relating to the option. Any fraction of a share of Common Stock
which would be required to satisfy such an obligation shall be disregarded and
the remaining amount due shall be paid in cash by Grantee; provided, however,
that the Committee shall have sole discretion to disapprove of an election
pursuant to any of clauses (B)-(D) and that if Grantee is subject to Section 16
of the Exchange Act, the Company may require that the method of satisfying any
such obligation be in compliance with Section 16 and the rules and regulations
thereunder. Any fraction of a share of Common
4
<PAGE> 5
Stock which would be required to satisfy such an obligation shall be disregarded
and the remaining amount due shall be paid in cash by Grantee.
4. SALE OR DISPOSITION OF SHARES
4.1 RESTRICTIONS ON SHARES. The Option shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to the
Option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to the Option bear a legend indicating that the sale,
transfer or other disposition thereof by the holder is prohibited except in
compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
5. ADJUSTMENTS
5.1 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee,
without an increase in the aggregate purchase price. The decision of the
Committee regarding any such adjustment shall be final and binding. If any
adjustment would result in a fractional security being subject to the Option,
the Company shall pay Grantee, in connection with the first exercise of the
Option in whole or in part occurring after such adjustment, an amount in cash
determined by multiplying (A) the fraction of such security (rounded to the
nearest hundredth) by (B) the excess, if any, of (x) the Fair Market Value on
the exercise date over (y) the exercise price of the option.
6. EFFECT OF CERTAIN TRANSACTIONS.
6.1 REORGANIZATION; MERGER; SALE OF ASSETS. In the event that the
Company enters into an agreement (a) to dispose of all or substantially all of
its assets, in contemplation of the distribution of the net proceeds of such
sale to the Company's shareholders, or (b) to consummate a merger or
consolidation in which the Company is not the surviving or resulting
corporation, or in the event the persons who, as of the date hereof, hold 60% or
more of the outstanding capital stock of the Company enter into an agreement to
sell all of such stock (such distribution, merger, consolidation or sale being
hereinafter referred to as a "Transaction"), then the Committee shall provide,
at its election made in its sole and absolute discretion, for one or more of the
following: (i) for the Option, whether or not then exercisable, to be replaced
with a comparable option to purchase shares of capital stock of a successor or
purchasing corporation or parent thereof, or (ii) for the Option, whether or not
then exercisable, to be assumed by a successor or purchasing corporation or
parent thereof (and, in the event of such assumption, the Option shall continue
to be exercisable, on the terms and subject to the conditions set forth herein,
and in cumulative amounts at the times provided herein, but shall, from and
after the consummation of such Transaction, be exercisable for the capital
stock, cash and/or other property received by the common stockholders of the
Company in such Transaction in an amount equal to what the holder of the Option
would have received had he exercised the Option immediately prior to the
consummation of such Transaction), or (iii) for the Option, whether or not then
exercisable, to
5
<PAGE> 6
become exercisable during such period prior to the scheduled consummation of
such Transaction as may be specified by the Committee. In the event the
Committee elects to cause the portion of the Option not then exercisable to
become exercisable prior to such Transaction (such portion the "Accelerated
Portion"), any exercise of the Accelerated Portion shall be conditioned upon,
and shall be effective only concurrently with, the consummation of such
Transaction; and if such Transaction is not consummated, the exercise of the
Accelerated Portion shall be of no further force or effect (and Grantee may
elect, with respect to the exercise during such period of the Option that was
otherwise exercisable, to so condition such exercise upon the consummation of
the Transaction). If the Option or Accelerated Portion is not exercised prior to
the consummation of such Transaction (and which is not being assumed by a
successor or purchasing corporation or parent thereof), the Option or
Accelerated Portion shall terminate and be of no further force or effect as of
the consummation of such Transaction.
6.2 POOLING TRANSACTION. If Grantee is subject to Section 16 of the
Exchange Act, (i) notwithstanding the exercise periods set forth in Sections 1.2
and 1.3, and (ii) notwithstanding the Expiration Date, in the event the Company
is involved in a business combination that is intended to be treated as a
pooling of interests for financial accounting purposes (a "Pooling Transaction")
or pursuant to which Grantee receives a substitute option to purchase securities
of any entity, including an entity directly or indirectly acquiring the Company,
then the Option (or option in substitution thereof) shall be exercisable to the
extent set forth herein until and including the latest of (x) the date set forth
pursuant to the then applicable paragraph of Section 1.2, 1.3 or the Expiration
Date, (y) the date which is six months and one day after the consummation of
such business combination and (z) the date which is ten business days after the
date of expiration of any period during which Grantee may not dispose of a
security issued in the Pooling Transaction in order for the Pooling Transaction
to be accounted for as a pooling of interests.
7. MISCELLANEOUS
7.1 NO RIGHT OF EMPLOYMENT. The Option granted hereunder shall not
confer upon Grantee any right to continued employment by the Company, any
Subsidiary or any affiliate of the Company or affect in any manner the right of
the Company, any Subsidiary or any affiliate of the Company to terminate the
employment of Grantee at any time without liability hereunder.
7.2 RIGHTS AS STOCKHOLDER. Grantee shall not have any rights as a
stockholder of the Company with respect to any shares of Common Stock which are
subject to the Option until Grantee becomes a stockholder of record with respect
to such shares of Common Stock.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
* * *
6
<PAGE> 7
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first set forth above.
THQ INC.
By: /s/ Brian J. Farrell
---------------------------------
Brian J. Farrell, President
GRANTEE:
/s/ Jeffrey C. Lapin
-------------------------------------
Jeffrey C. Lapin
7
<PAGE> 1
Exhibit 10.9
STOCK OPTION AGREEMENT
Grantee:
--------------------------------
Number of Shares of Company
Common Stock Underlying Option: 7,500
--------------------------------
Purchase Price Per Share: $27.813
--------------------------------
Date of Grant: December 23, 1998
--------------------------------
This Stock Option Agreement is entered into as of the 23rd day of
December 1998 by and between THQ Inc., a Delaware corporation, currently having
its executive office at 5016 North Parkway Calabasas, California 91302 (the
"Company"), and _______________ (the "Grantee").
RECITAL
WHEREAS, the Company desires that Grantee serve on the Mergers and
Acquisitions Committee of the Board of Directors of the Company (the "M&A
Committee") and has determined that in order to induce Grantee to become a
member of the M&A Committee, the Company will grant to Grantee an option to
purchase shares of common stock of the Company.
1. STOCK OPTION
1.1 GRANT OF STOCK OPTION. The Company hereby grants to Grantee, and
Grantee hereby accepts, the right and option to purchase from the Company all or
any part of the Number of Shares of Company Common Stock Underlying Options set
forth above (the "Shares") at the Purchase Price Per Share set forth above on
the terms and conditions stated herein (the "Option"). The Option granted
hereunder is issued as a non-qualified option and is not intended to be an
"Incentive Stock Option," as defined in Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and is not issued under the THQ Inc. Amended
and Restated 1997 Stock Option Plan or any other Company plan. Grantee expressly
acknowledges that the Option creates certain tax liabilities upon exercise and
in certain other events.
1.2 TERMS OF STOCK OPTION. The Option shall be subject to the
following terms and conditions:
(a) Option Period. The Option shall not be exercisable after
5:00 p.m., Los Angeles time, on December 23, 2008 (the "Expiration Date"). The
Option, or portion thereof, may be exercised only with respect to whole shares
of common stock, par value $0.01 per share of the Company (the "Common Stock").
Notwithstanding Section 1.3 hereof or the provisions of any Agreement, the Board
of Directors of the Company (the "Board") or a committee (the "Committee")
designated by the Board consisting of two or more members of the Board each of
whom shall be a "Non-Employee Director" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and (if
the Board wishes to qualify under Section 162(m) of the Code) the Committee may
in its sole and absolute discretion extend the time for the exercise of the
Option.
<PAGE> 2
(b) Vesting. Subject to the limits set forth herein relating to
the termination of Grantee's directorship by the Company, this Option shall be
deemed vested and thus exercisable by Grantee only to the extent of the
following number of Shares commencing on the following dates:
<TABLE>
<CAPTION>
First Date After Which
Number of Shares Shares May Be Purchased
---------------- -----------------------
<S> <C>
7,500 December 23, 1998
</TABLE>
(c) Method of Exercise. The Option may be exercised (i) by
giving written notice to the Company specifying the number of whole shares of
Common Stock to be purchased and accompanied by payment therefor in full (or
arrangement made for such payment to the Company's satisfaction) either (A) in
cash, (B) by delivery of previously owned whole shares of Common Stock (which
Grantee has held for at least six months prior to the delivery of such shares or
which Grantee purchased on the open market and in each case for which Grantee
has good title, free and clear of all liens and encumbrances) having an
aggregate Fair Market Value, determined as of the date of exercise, equal to the
aggregate purchase price payable by reason of such exercise, (C) in cash by a
broker-dealer acceptable to the Company to whom Grantee has submitted an
irrevocable notice of exercise, or (D) a combination of (A), (B) and (C), in
each case to the extent not prohibited herein and (ii) by executing such
documents as the Company may reasonably request; provided, however, that
notwithstanding the foregoing or anything herein to the contrary, the Company
shall have sole discretion to disapprove of an election pursuant to clauses
(B)-(D). "Fair Market Value" shall mean the closing transaction price of a share
of Common Stock as reported in the NASDAQ National Market System, or other
exchange where the Common Stock is listed, on the date as of which such value is
being determined or, if there shall be no reported transactions on such date, on
the next preceding date for which transactions were reported; provided that if
Fair Market Value for any date cannot be determined as above provided, Fair
Market Value shall be determined by the Committee by whatever means or method as
the Committee, in the good faith exercise of its discretion, shall at such time
deem appropriate. Any fraction of a share of Common Stock which would be
required to pay such purchase price shall be disregarded and the remaining
amount due shall be paid in cash by Grantee. No certificate representing Common
Stock shall be delivered until the full purchase price therefor has been paid
(or arrangement made for such payment to the Company's satisfaction).
1.3 TERMINATION OF DIRECTORSHIP.
(a) Total Disability. If Grantee's directorship with the Company
terminates by reason of Total Disability, the Option shall be exercisable only
to the extent that such option is exercisable on the effective date of Grantee's
termination of directorship and may thereafter be exercised by Grantee (or
Grantee's legal representative or similar person) until and including the
earliest to occur of (i) the date which is one year after the effective date of
Grantee's termination of directorship and (ii) the Expiration Date. "Total
Disability" shall mean the inability of Grantee substantially to perform
Grantee's duties and responsibilities as a director for a continuous period of
six months.
(b) Death. If Grantee's directorship with the Company terminates
by reason of death, the Option shall be exercisable only to the extent that the
Option is exercisable on the date of Grantee's death and may thereafter be
exercised by Grantee's executor, administrator, legal representative,
beneficiary or similar person until and including the earliest to occur of (i)
the date which is one year after the date of death, and (ii) the Expiration
Date.
2
<PAGE> 3
(c) Termination for Cause. If Grantee is removed from the Board
of Directors for cause as permitted under Delaware law, the Option shall
terminate automatically on the date of such termination.
(d) Other Termination. If Grantee's directorship with the
Company is terminated by the Company for any reason other than Total Disability,
death or for Cause, the Option shall be exercisable only to the extent that the
Option is exercisable on the effective date of Grantee's termination of
directorship and may thereafter be exercised by Grantee (or Grantee's legal
representative or similar person) until and including the earliest to occur of
(i) the date which is three months after the effective date of Grantee's
termination of directorship and (ii) the Expiration Date.
(e) Death Following Termination. If Grantee dies during the
period set forth in Section 1.3(c)(i) following termination of directorship by
reason of Total Disability, or if Grantee dies during the period set forth in
Section 1.3(c)(iv) following termination of directorship by the Company for any
other reason other than Total Disability, for Cause or death, the Option held by
Grantee shall be exercisable only to the extent that the Option is exercisable
on the date of Grantee's death and may thereafter be exercised by Grantee's
executor, administrator, legal representative, beneficiary or similar person, as
the case may be, until and including the earliest to occur of (i) the date which
is one year after the date of death and (ii) the Expiration Date.
2. TRANSFERABILITY.
2.1 NON-TRANSFERABILITY. The Option may not be given, granted, sold,
exchanged, pledged, assigned, hypothecated or otherwise encumbered or disposed
of by Grantee, other than by will or the laws of descent and distribution or
pursuant to beneficiary designation procedures set forth in Section 2.2. Upon
any attempt to so sell, transfer, assign, pledge, hypothecate, encumber or
otherwise dispose of the Option hereunder, the Option and all rights thereunder
shall immediately become null and void. Except to the extent permitted by the
foregoing sentence, the Option may be exercised during Grantee's lifetime only
by Grantee or Grantee's legal representative or similar person.
2.2 DESIGNATION OF BENEFICIARY. (a) Grantee may file with the
Committee a written designation of one or more persons as Grantee's beneficiary
or beneficiaries (both primary and contingent) in the event of Grantee's death.
To the extent an outstanding option granted hereunder is exercisable, such
beneficiary or beneficiaries shall be entitled to exercise such option.
(b) Each beneficiary designation shall become effective only
when filed in writing with the Committee during Grantee's lifetime on a form
prescribed by the Committee. The spouse of a married Grantee domiciled in a
community property jurisdiction shall join in any designation of a beneficiary
other than such spouse. The filing with the Committee of a new beneficiary
designation shall cancel all previously filed beneficiary designations.
(c) If an Grantee fails to designate a beneficiary, or if all
designated beneficiaries of an Grantee predecease Grantee, then each outstanding
option hereunder held by such Grantee, to the extent exercisable, may be
exercised by such Grantee's executor, administrator, legal representative or
similar person.
3
<PAGE> 4
3. WITHHOLDING TAXES.
3.1 TAX WITHHOLDING. The Company shall have the right to require,
prior to the issuance or delivery of any shares of Common Stock, payment by
Grantee of any Federal, state, local or other taxes which may be required to be
withheld or paid in connection with the Option hereunder. Grantee may elect that
(i) the Company shall withhold whole shares of Common Stock which would
otherwise be delivered upon exercise of the option having an aggregate Fair
Market Value determined as of the date the obligation to withhold or pay taxes
arises in connection with the option (the "Tax Date") in the amount necessary to
satisfy any such obligation or (ii) Grantee satisfy any such obligation by any
of the following means: (A) a cash payment to the Company, (B) delivery to the
Company of previously owned whole shares of Common Stock (which Grantee has held
for at least six months prior to the delivery of such shares or which Grantee
purchased on the open market and in each case for which Grantee has good title,
free and clear of all liens and encumbrances) having an aggregate Fair Market
Value determined as of the Tax Date, equal to the amount necessary to satisfy
any such obligation, (C) a cash payment by a broker-dealer acceptable to the
Company to whom Grantee has submitted an irrevocable notice of exercise, or (D)
any combination of (A), (B) and (C), in each case to the extent not prohibited
by the Agreement relating to the option. Any fraction of a share of Common Stock
which would be required to satisfy such an obligation shall be disregarded and
the remaining amount due shall be paid in cash by Grantee; provided, however,
that the Committee shall have sole discretion to disapprove of an election
pursuant to any of clauses (B)-(D) and that if Grantee is subject to Section 16
of the Exchange Act, the Company may require that the method of satisfying any
such obligation be in compliance with Section 16 and the rules and regulations
thereunder. Any fraction of a share of Common Stock which would be required to
satisfy such an obligation shall be disregarded and the remaining amount due
shall be paid in cash by Grantee.
4. SALE OR DISPOSITION OF SHARES.
4.1 RESTRICTIONS ON SHARES. The Option shall be subject to the
requirement that if at any time the Company determines that the listing,
registration or qualification of the shares of Common Stock subject to the
Option upon any securities exchange or under any law, or the consent or approval
of any governmental body, or the taking of any other action is necessary or
desirable as a condition of, or in connection with, the delivery of shares
thereunder, such shares shall not be delivered unless such listing,
registration, qualification, consent, approval or other action shall have been
effected or obtained, free of any conditions not acceptable to the Company. The
Company may require that certificates evidencing shares of Common Stock
delivered pursuant to the Option bear a legend indicating that the sale,
transfer or other disposition thereof by the holder is prohibited except in
compliance with the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
5. ADJUSTMENTS.
5.1 ADJUSTMENT. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization or
event, or any distribution to holders of Common Stock other than a regular cash
dividend, the number and class of securities subject to the Option and the
purchase price per security shall be appropriately adjusted by the Committee,
without an increase in the aggregate purchase price. The decision of the
Committee regarding any such adjustment shall be final and binding. If any
adjustment would result in a fractional security being subject to the Option,
the Company shall pay Grantee, in connection with the first exercise of the
Option in whole or in part occurring after such adjustment, an amount in cash
determined by multiplying (A) the fraction of such security (rounded to the
nearest hundredth) by (B) the excess, if any, of (x) the Fair Market Value on
the exercise date over (y) the exercise price of the option.
4
<PAGE> 5
6. EFFECT OF CERTAIN TRANSACTIONS.
6.1 REORGANIZATION; MERGER; SALE OF ASSETS. In the event that the
Company enters into an agreement (a) to dispose of all or substantially all of
its assets, in contemplation of the distribution of the net proceeds of such
sale to the Company's shareholders, or (b) to consummate a merger or
consolidation in which the Company is not the surviving or resulting
corporation, or in the event the persons who, as of the date hereof, hold 60% or
more of the outstanding capital stock of the Company enter into an agreement to
sell all of such stock (such distribution, merger, consolidation or sale being
hereinafter referred to as a "Transaction"), then the Committee shall provide,
at its election made in its sole and absolute discretion, for one or more of the
following: (i) for the Option, whether or not then exercisable, to be replaced
with a comparable option to purchase shares of capital stock of a successor or
purchasing corporation or parent thereof, or (ii) for the Option, whether or not
then exercisable, to be assumed by a successor or purchasing corporation or
parent thereof (and, in the event of such assumption, the Option shall continue
to be exercisable, on the terms and subject to the conditions set forth herein,
and in cumulative amounts at the times provided herein, but shall, from and
after the consummation of such Transaction, be exercisable for the capital
stock, cash and/or other property received by the common stockholders of the
Company in such Transaction in an amount equal to what the holder of the Option
would have received had he exercised the Option immediately prior to the
consummation of such Transaction), or (iii) for the Option, whether or not then
exercisable, to become exercisable during such period prior to the scheduled
consummation of such Transaction as may be specified by the Committee. In the
event the Committee elects to cause the portion of the Option not then
exercisable to become exercisable prior to such Transaction (such portion the
"Accelerated Portion"), any exercise of the Accelerated Portion shall be
conditioned upon, and shall be effective only concurrently with, the
consummation of such Transaction; and if such Transaction is not consummated,
the exercise of the Accelerated Portion shall be of no further force or effect
(and Grantee may elect, with respect to the exercise during such period of the
Option that was otherwise exercisable, to so condition such exercise upon the
consummation of the Transaction). If the Option or Accelerated Portion is not
exercised prior to the consummation of such Transaction (and which is not being
assumed by a successor or purchasing corporation or parent thereof), the Option
or Accelerated Portion shall terminate and be of no further force or effect as
of the consummation of such Transaction.
6.2 POOLING TRANSACTION. If Grantee is subject to Section 16 of the
Exchange Act, (i) notwithstanding the exercise periods set forth in Sections 1.2
and 1.3, and (ii) notwithstanding the Expiration Date, in the event the Company
is involved in a business combination that is intended to be treated as a
pooling of interests for financial accounting purposes (a "Pooling Transaction")
or pursuant to which Grantee receives a substitute option to purchase securities
of any entity, including an entity directly or indirectly acquiring the Company,
then the Option (or option in substitution thereof) shall be exercisable to the
extent set forth herein until and including the latest of (x) the date set forth
pursuant to the then applicable paragraph of Section 1.2, 1.3 or the Expiration
Date, (y) the date which is six months and one day after the consummation of
such business combination and (z) the date which is ten business days after the
date of expiration of any period during which Grantee may not dispose of a
security issued in the Pooling Transaction in order for the Pooling Transaction
to be accounted for as a pooling of interests.
7. MISCELLANEOUS.
7.1 NO RIGHT OF EMPLOYMENT. The Option granted hereunder shall not
confer upon Grantee any right to continued employment by the Company, any
Subsidiary or any affiliate of the Company
5
<PAGE> 6
or affect in any manner the right of the Company, any Subsidiary or any
affiliate of the Company to terminate the employment of Grantee at any time
without liability hereunder.
7.2 RIGHTS AS STOCKHOLDER. Grantee shall not have any rights as a
stockholder of the Company with respect to any shares of Common Stock which are
subject to the Option until Grantee becomes a stockholder of record with respect
to such shares of Common Stock.
7.3 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
* * *
6
<PAGE> 7
IN WITNESS WHEREOF, the Company and Grantee have executed this
Agreement as of the date first set forth above.
THQ INC.
By: /s/ Brian J. Farrell
-----------------------------
Brian J. Farrell, President
GRANTEE:
-----------------------------
7
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH (B) FINANCIAL STATEMENTS FOUND IN FORM 10-Q AS FILED WITH THE
SEC ON AUGUST 16, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 38,975,000
<SECURITIES> 0
<RECEIVABLES> 41,315,000
<ALLOWANCES> 21,176,000
<INVENTORY> 2,385,000
<CURRENT-ASSETS> 87,292,000
<PP&E> 4,973,000
<DEPRECIATION> 2,428,000
<TOTAL-ASSETS> 101,751,000
<CURRENT-LIABILITIES> 23,504,000
<BONDS> 0
0
0
<COMMON> 119,000
<OTHER-SE> 77,603,000
<TOTAL-LIABILITY-AND-EQUITY> 101,751,000
<SALES> 130,316,000
<TOTAL-REVENUES> 130,316,000
<CGS> 57,830,000
<TOTAL-COSTS> 57,830,000
<OTHER-EXPENSES> 49,825,000
<LOSS-PROVISION> 7,533,000
<INTEREST-EXPENSE> 134,000
<INCOME-PRETAX> 23,309,000
<INCOME-TAX> 9,594,000
<INCOME-CONTINUING> 13,715,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,715,000
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.06
</TABLE>
