<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 March 31, 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: 11,395,263 shares (as of May 10, 1999).
<PAGE> 2
THQ INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
for the Three Months Ended March 31, 1999 and 1998 4
Consolidated Statement of Shareholders' Equity -
for the Three Months Ended March 31, 1999 and
the Year Ended December 31, 1998 5
Consolidated Statements of Cash Flows -
for the Three Months Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
2
<PAGE> 3
Part I - Financial Information
Item 1. Financial Statements.
THQ INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 50,174,000 $ 19,019,000
Accounts receivable - net 23,112,000 59,520,000
Inventory 10,575,000 16,937,000
Prepaid and deferred royalties 6,782,000 6,770,000
Software development costs 6,159,000 3,011,000
Deferred income taxes 8,320,000 8,321,000
Prepaid expenses and other current assets 1,885,000 1,548,000
------------- -------------
Total current assets 107,007,000 115,126,000
Property and equipment - net 2,403,000 2,451,000
Deferred royalties - net of current portion 758,000 375,000
Software development costs - net of current portion 675,000 1,173,000
Deferred income taxes - net of current portion 2,053,000 2,053,000
Other long-term assets 8,097,000 7,739,000
------------- -------------
TOTAL ASSETS $ 120,993,000 $ 128,917,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 3,255,000 $ 9,909,000
Accounts payable 3,270,000 18,659,000
Accrued expenses 10,600,000 11,017,000
Accrued royalties 22,326,000 16,594,000
Income taxes payable 6,386,000 8,266,000
------------- -------------
Total current liabilities 45,837,000 64,445,000
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; 11,374,560 shares
and 11,287,331 shares issued and outstanding as of March 31, 1999 and
December 31, 1998,
respectively 114,000 113,000
Additional paid-in capital 62,671,000 62,052,000
Accumulated other comprehensive income (173,000) 60,000
Retained earnings 12,019,000 1,872,000
------------- -------------
Total shareholders' equity 74,631,000 64,097,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 120,993,000 $ 128,917,000
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net sales $78,541,000 $48,453,000
Costs and expenses:
Cost of sales 30,771,000 20,363,000
Royalties and project abandonment 15,430,000 11,131,000
Product development 1,945,000 730,000
Selling and marketing 9,472,000 3,912,000
General and administrative 4,679,000 2,955,000
----------- -----------
Total costs and expenses 62,297,000 39,091,000
----------- -----------
Income from operations 16,244,000 9,362,000
Interest income, net 203,000 158,000
----------- -----------
Income before income taxes 16,447,000 9,520,000
Income taxes 6,300,000 3,028,000
----------- -----------
Net income $10,147,000 $ 6,492,000
=========== ===========
Net income per share - basic $ 0.90 $ 0.64
=========== ===========
Net income per share - diluted $ 0.83 $ 0.57
=========== ===========
Shares used in per calculation - basic 11,329,000 10,212,000
=========== ===========
Shares used in per calculation - diluted 12,268,000 11,313,000
=========== ===========
</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 Three Months Ended March 31, 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 10,163,848 $ 4,000 $ 47,559,000 $ 81,000 $(14,117,000) $ 33,527,000
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
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 -- -- -- -- 15,989,000 15,989,000
Other comprehensive income
Foreign currency translation
adjustment -- -- -- (21,000) (21,000)
------------
Comprehensive income -- -- -- -- -- 15,968,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 11,287,331 113,000 62,052,000 60,000 1,872,000 64,097,000
Exercise of warrants and options 87,229 1,000 358,000 -- -- 359,000
Tax benefit related to
the exercise of
employee stock options -- -- 261,000 -- -- 261,000
Comprehensive income:
Net income -- -- -- -- 10,147,000 10,147,000
Other comprehensive income
Foreign currency
translation adjustment -- -- -- (233,000) -- (233,000)
------------
Comprehensive income -- -- -- -- -- 9,914,000
------------ ------------ ------------ ------------ ------------ ------------
Balance at March 31, 1999 11,374,560 $ 114,000 $ 62,671,000 $ (173,000) $ 12,019,000 $ 74,631,000
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,147,000 $ 6,492,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 305,000 105,000
Provision for doubtful accounts, discounts and returns 6,911,000 6,516,000
Changes in operating assets and liabilities:
Accounts receivable 29,206,000 (1,241,000)
Inventory 4,814,000 (653,000)
Prepaid and deferred royalties and
software development costs (1,732,000) 2,412,000
Prepaid expenses and other current assets 489,000 106,000
Accounts payable (15,126,000) (4,106,000)
Accrued expenses (166,000) --
Accrued royalties 4,185,000 866,000
Income taxes payable (1,639,000) (504,000)
------------ ------------
Net cash provided by operating activities 37,394,000 9,993,000
Cash flows used in investing activities:
Increase in other long-term assets (196,000) --
Acquisition of equipment (225,000) (139,000)
------------ ------------
Net cash used in investing activities (421,000) (139,000)
Cash flows (used in) provided by financing activities:
Net decrease in short-term borrowings (6,361,000) --
Proceeds from exercise of options and warrants 359,000 312,000
------------ ------------
Net cash (used in) provided by financing activities (6,002,000) 312,000
Effect of exchange rate changes on cash 184,000 46,000
------------ ------------
Net increase in cash and cash equivalents 31,155,000 10,212,000
Cash and cash equivalents - beginning of period 19,019,000 11,724,000
------------ ------------
Cash and cash equivalents - end of period $ 50,174,000 $ 21,936,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 8,053,000 $ 3,540,000
============ ============
Interest $ 91,000 $ 6,000
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Tax benefit from disqualified disposition $ 261,000 $ 398,000
============ ============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
THQ INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information. The financial statements
included herein have been prepared by 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 ended March 31, 1999 are not necessarily indicative of the results to be
expected for the full year or for any interim period.
Basic and Diluted Earnings Per Share. The following table is a
reconciliation of the weighted-average shares used in the computation of basic
and diluted EPS for the years presented herein:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income used to compute basic and diluted earnings
per share $10,147,000 $ 6,492,000
=========== ===========
Weighted average number of shares outstanding - basic 11,329,000 10,212,000
Dilutive effect of stock options and warrants 939,000 1,101,000
----------- -----------
Number of shares used to compute earnings per share - diluted 12,268,000 11,313,000
=========== ===========
</TABLE>
Cash Equivalents. We consider all highly liquid investments purchased
with maturities less than three months to be cash equivalents.
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
7
<PAGE> 8
statements for periods beginning after June 15, 1999. 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. ACCOUNTS RECEIVABLE
Accounts receivable are due primarily from domestic and foreign
retailers and distributors, including mass merchants and specialty stores.
Accounts receivable at March 31, 1999 and December 31, 1998 are composed of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Accounts receivable -- domestic $ 31,489,000 $ 66,406,000
Other receivables -- domestic 231,000 280,000
Allowance for domestic doubtful accounts,
discounts and returns (15,785,000) (15,008,000)
Other accounts receivable -- foreign 10,959,000 11,732,000
Allowance for foreign doubtful accounts (2,084,000) (2,345,000)
Allowance for foreign discounts and returns (1,698,000) (1,545,000)
------------ ------------
Accounts receivable -- net $ 23,112,000 $ 59,520,000
============ ============
</TABLE>
8
<PAGE> 9
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." 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
forward-looking statements. Prospective investors are cautioned that any such
forward-looking statements involve risks and uncertainties, and that the 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, dated 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
Ended March 31,
----------------
Platform 1999 1998
------ ------
<S> <C> <C>
Nintendo 64 20.9% 38.1%
PlayStation 66.2% 54.0%
PC 5.4% 0.2%
16-bit -- 3.4%
Game Boy 7.0% 4.3%
Other 0.5% --
</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
9
<PAGE> 10
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 PC title incurred after the establishment of technological
feasibility of the title. (We have not incurred material internal development
costs for console titles). 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
10
<PAGE> 11
recover such amounts. As of March 31, 1999, we have prepaid royalties and
capitalized software development costs of $14.4 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 consists of acquiescing to the
customer's request that not all booked orders be filled or that not all shipped
orders be accepted, negotiated price discounts 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 three
months ended March 31, 1998 and March 31, 1999, provisions of $6.2 million and
$6.9 million, respectively, were taken against gross sales made during such
periods. As of March 31, 1999, our aggregate reserve against accounts receivable
for returns, customer accommodations and doubtful accounts was $19.6 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,
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<PAGE> 12
could have a material adverse effect on us. The worst case scenario if such
problems occur, 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 its consolidated operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------
1999 1998
------ ------
<S> <C> <C>
Domestic sales 83.0% 87.1%
Foreign sales 17.0 12.9
----- -----
Net sales 100.0% 100.0%
Costs and expenses:
Cost of sales 39.2% 42.0%
Royalties and project abandonment 19.6 23.0
Product development 2.5 1.5
Selling and marketing 12.1 8.1
General and administrative 6.0 6.1
------ -----
Total costs and expenses 79.4% 80.7%
------ -----
Income from operations 20.6% 19.3%
Interest income, net 0.3 0.3
------ -----
Income before income taxes 20.9 19.6
Income taxes 8.0 6.2
------ -----
Net income 12.9% 13.4%
====== =====
</TABLE>
Title Releases
The following table sets forth, for the three months ended March 31,
1999 and 1998, the titles released during such periods for the platforms
indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------
1999 1998
----- -----
<S> <C> <C>
PC CD-ROM -- 1
Nintendo 64 2 --
PlayStation 1 3
SNES -- 2
----- -----
Total 3 6
===== =====
</TABLE>
12
<PAGE> 13
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999, TO THE THREE MONTHS ENDED
MARCH 31, 1998
Our net sales increased 62% to $78,541,000 in the three months ended
March 31, 1999, from $48,453,000 in the same period of 1998, primarily as a
result of higher unit sales per title shipped and a growth in foreign sales. For
the three months ended March 31, 1999, net sales of WCW titles, Rugrats titles,
and Disney/Pixar's A Bug's Life were $49,072,000 (62.5% of net sales),
$17,422,000 (22.2% of net sales), and $2,756,000 (3.5% of net sales),
respectively.
Our foreign net sales increased to $13,370,000 for the three months
ended March 31, 1999, from $6,242,000 in the same period of 1998, and increased
as a percentage of net sales to 17.0% from 12.9%. 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.
Our cost of sales for the three months ended March 31, 1999 decreased
as a percentage of net sales to 39.2% from 42.0% in the same period of 1998,
primarily as a result of the increase in PlayStation and PC CD-ROM product sales
(which generally have more favorable gross margins than cartridge titles for
Nintendo's platforms). PlayStation and PC CD-ROM titles accounted for 70.6% of
net sales in the first quarter 1999, compared with 54.2% of net sales in the
first quarter 1998.
Our royalty and project abandonment expense for the three months ended
March 31, 1999 decreased as a percentage of net sales to 19.6% from 23.0% for
the same period in 1998. This decrease is primarily related to a project
abandonment accrual in the three months ended March 31, 1998 that was not
necessary for the same period of 1999.
For the three months ended March 31, 1999, product development expense
increased $1,215,000 over the same period in 1998. This was primarily due to
expenses incurred at our wholly owned subsidiary GameFx, a company acquired in
May 1998 to develop high-end PC titles, as well as an increase in infrastructure
and personnel costs incurred as a result of our growth.
For the three months ended March 31, 1999, selling and marketing
expenses increased $5,560,000 over the same period 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. Our international
marketing expenses have increased primarily as a result of our acquisition of
Rushware.
Our general and administrative expenses for the three months ended
March 31, 1999 decreased as a percentage of net sales to 6.0% from 6.1% for the
same period of 1998, but increased in dollar terms by $1,724,000 over 1998. This
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.
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<PAGE> 14
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. As of March 31, 1999, we had obligations with respect to future
guaranteed minimum royalties of $22,851,000.
Our cash and cash equivalents increased $31,155,000 from $19,019,000 at
December 31, 1998 to $50,174,000 at March 31, 1999, and was $58,306,000 as of
May 10, 1999. Cash provided by operating activities for the three months ended
March 31, 1999 was $37,394,000, resulting in part from $10,147,000 in net income
and collection of accounts receivable during the post-holiday selling 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. As a result, accounts receivable
decreased substantially from December 31, 1998 to March 31, 1999 as the sales
generated during the fourth quarter of 1998 were collected.
Inventory and accounts payable decreased during the quarter ended March
31, 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 also
increased as a result of new contracts for product development. Additionally,
increased demand for certain titles sold in 1999 resulted in royalties due in
excess of the minimum guarantees.
The decrease in accrued expenses is attributable to a reduction in
operating expenses during the first quarter as compared to those incurred during
the year-end holiday buying season.
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 at March 31, 1999 was $421,000
and was utilized for capital expenditures. We expect to make capital
expenditures of between $1,500,000 and $2,000,000 in 1999.
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<PAGE> 15
Net cash used in financing activities at March 31, 1999 was $6,002,000,
attributable to the repayment of short-term borrowings. As of March 31, 1999, we
had no outstanding borrowings under our credit facilities with Union Bank and
had obligations in respect of outstanding letters of credit of $2.2 million. As
of May 10, 1999 we had no outstanding borrowings and outstanding letters of
credit were $9,824,000.
Rushware Revolving Credit Facilities. Prior to March 31, 1999, Rushware
had separate revolving credit agreements with three German banks, each of which
permitted Rushware to borrow up to 5 million Deutsche marks (approximately $3
million) to finance the working capital requirements of Rushware and its
subsidiaries. These agreements expired on March 31, 1999, but we are currently
in the process of negotiating new terms with two of these banks. As of March 31,
1999, we had $3,253,000 in outstanding borrowings under these credit facilities
and had no obligations in respect of outstanding letters of credit. As of May
10, 1999, we had $3,191,000 in outstanding borrowings. THQ Inc. guarantees all
borrowings under these facilities.
15
<PAGE> 16
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.
-------------------------------------------
16
<PAGE> 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Number Title
------ -----
<S> <C>
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).
3.3 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1998).
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated January 8, 1999,
reporting under item 5, as amended by Form 8-K/A filed
with the Securities and Exchange Commission on
March 10, 1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 14, 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
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS FOUND IN FORM 10-Q AS FILED WITH THE SEC
ON MAY 14, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 50,174,000
<SECURITIES> 0
<RECEIVABLES> 42,679,000
<ALLOWANCES> 19,567,000
<INVENTORY> 10,575,000
<CURRENT-ASSETS> 107,007,000
<PP&E> 3,556,000
<DEPRECIATION> 1,153,000
<TOTAL-ASSETS> 120,993,000
<CURRENT-LIABILITIES> 45,837,000
<BONDS> 0
0
0
<COMMON> 114,000
<OTHER-SE> 74,517,000
<TOTAL-LIABILITY-AND-EQUITY> 74,631,000
<SALES> 78,541,000
<TOTAL-REVENUES> 78,541,000
<CGS> 30,771,000
<TOTAL-COSTS> 30,771,000
<OTHER-EXPENSES> 31,526,000
<LOSS-PROVISION> 6,911,000
<INTEREST-EXPENSE> 81,000
<INCOME-PRETAX> 16,447,000
<INCOME-TAX> 6,300,000
<INCOME-CONTINUING> 10,147,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,147,000
<EPS-PRIMARY> .90
<EPS-DILUTED> .83
</TABLE>
