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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): March 21, 2000
THQ INC.
(Exact name of registrant as specified in charter)
Delaware
(State or other jurisdiction
of incorporation or organization)
Commission file Number: 0-18813
13-3541686
(I.R.S. employer identification no.)
27001 Agoura Road
Calabasas Hills, California 91301
(Address of principal executive
offices, including zip code)
(818) 871-5000
(Registrant's telephone number,
including area code)
5016 North Parkway Calabasas
Calabasas, California 91302
(Former Address)
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ITEM 5. OTHER EVENTS.
This filing is being made for the purpose of updating the
Cautionary Statement Regarding Forward-Looking Statements and the Risk Factors
set forth in our Current Report on Form 8-K/A filed on March 10, 1999.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
AND RISK FACTORS
Our filings with the Securities and Exchange Commission, our
press releases and our other public statements may include, or may incorporate
by reference, certain statements that may be deemed "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements relating to our
objectives, strategies, plans, intentions and expectations are forward-looking
statements, as are all statements that address actions, events or circumstances
that we expect, believe or intend will occur in the future (other than
statements of historical facts). We do not undertake to publicly update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise. All forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
historical results or those anticipated in the forward-looking statements. Those
risks and uncertainties include the following:
WE MUST CONTINUE TO DEVELOP AND SELL NEW TITLES IN ORDER TO REMAIN PROFITABLE.
Our historical profitability has directly resulted from our ability to
timely develop and sell successful new titles for use on various platforms. We
cannot assure you that we will be able to secure the rights to new titles at a
rate that will maintain our current development and release schedule, that we
will be able to release new titles by the dates we have scheduled, or that all
of our scheduled titles will ever be released. If the revenues from our new
titles fail to replace declining revenues from existing titles, our revenues and
profits would be materially and adversely affected.
While we develop a limited number of games for which no license is
required, the development of most of our new games is dependent upon our ability
to identify and license desirable properties. Examples of properties that we
seek to license are entertainment projects, such as movies, television programs
and arcade games; sports and entertainment personalities; and popular sports,
fads or concepts that have high public visibility or recognition or that reflect
the trends of popular culture. The inability to renew successful licenses could
limit our economic success.
Consumer preferences for games are difficult to predict, and even the
most successful titles remain popular for only limited periods of time, often
less than six months. The life cycle of a game generally consists of a
relatively high level of sales during the first few months after introduction,
followed by a decline in sales. Accordingly, substantially all of our net sales
for a particular year are generated by titles released in that year and in the
latter part of the prior year. In some instances, a sales decline may also be
accompanied by decreasing sales prices, which may result in credits or
allowances to our customers.
In addition, the development cycle for new titles is long, typically
ranging from nine to 24 months. In order to distribute a product, we must
develop the necessary game software, obtain approval
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from the manufacturer and produce the initial order of cartridges or CD-ROMs.
During the development cycle, the market appeal of a title may decline.
WE RELY ON EXTERNAL DEVELOPERS FOR THE DEVELOPMENT OF MANY OF OUR TITLES.
Although we have several titles in development by our internal studios,
many of our titles are developed by third party developers. A delay in the work
performed by third party developers may result in delays in product releases.
The future success of many of our titles will depend on our continued ability to
maintain proven relationships and obtain developer agreements on favorable terms
with skilled third party developers. We cannot guarantee that we will be able to
establish or maintain relationships with third party developers.
CUSTOMER ACCOMMODATIONS OR UNSALEABLE INVENTORY COULD ADVERSELY AFFECT OUR
EARNINGS.
We sometimes negotiate accommodations to retailers or distributors when
demand for specific games falls below expectations, in order to maintain our
relationships with our customers. These accommodations include our not requiring
that all booked orders be filled. We also negotiate price discounts, credits
against future orders and the return of products with our customers.
Although we believe that the reserves that we have established for
customer accommodations are adequate, there is the possibility that actual
customer accommodations could exceed our reserves. The effect of this would be a
reduction in our earnings. We cannot predict the amount or nature of
accommodations that will be provided to our customers in future periods.
We have established reserves for slow-moving or obsolete inventory. An
unsuccessful title would require that we increase the reserve for that title or
that we write down the inventory for that title to its estimated net realizable
value. We work to minimize this risk by communicating frequently with our
customers and by attempting to accurately forecast retailer and consumer demand
for each of our titles. However, this can be often difficult to accomplish,
especially for games for the Nintendo platforms, since there is a 30 to 60-day
manufacturing cycle for these cartridge-based products.
OVER 58% OF OUR SALES ARE MADE TO OUR TEN LARGEST CUSTOMERS. WE COULD BE
ADVERSELY AFFECTED IF ANY OF THEM REDUCED OR TERMINATED THEIR PURCHASES FROM US
OR DID NOT PAY THEIR OBLIGATIONS TO US.
Sales to our ten largest customers collectively accounted for
approximately 67% of our gross sales in 1997, 65% of our gross sales in 1998 and
58% of our gross sales in 1999. Our largest single customer is Wal-Mart.
Wal-Mart accounted for 17% of our net sales in 1999, as compared to 19% in 1998.
We have no written agreements or other understandings with any of our
customers that relates to future purchases, so purchases by these customers or
any others could be reduced or terminated at any time. A substantial reduction
or a termination of purchases by any of our largest customers would have a
material adverse effect on us.
Our sales are typically made on credit, with terms that vary depending
upon the customer and other factors. Normally we do not hold any collateral to
secure payment by our customers, and currently we do not factor any of our
receivables. While we attempt to carefully monitor the creditworthiness of our
customers and distributors, we bear the risk of their inability to pay our
receivables and of any delay in
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payment. A business failure by any of our largest customers would have a
material adverse effect on us, as could a business failure by any of our
distributors or other retailers.
THE DEVELOPMENT AND MARKETING OF PC TITLES DIFFER FROM CONSOLE TITLES AND ENTAIL
ADDITIONAL RISKS.
We have less experience developing and marketing PC titles than games
for consoles. The development and marketing of PC games subjects us to some
different risks than those we encounter in connection with console games. These
risks include the ability to accurately predict which titles have appeal to the
purchasers of games for PC's, greater reliance on distributors in order to
obtain retail distribution, and higher retailer returns experienced for PC
games. We cannot assure you that we will be able to successfully develop and
market titles for the PC market.
WE CANNOT PUBLISH OR MANUFACTURE TITLES WITHOUT MANUFACTURERS' APPROVAL. OUR
ABILITY TO CONTINUE TO DEVELOP AND MARKET SUCCESSFUL CONSOLE TITLES IS DEPENDENT
ON THE MANUFACTURERS CONTINUING TO DO BUSINESS WITH US.
We are wholly dependent on the manufacturers and our non-exclusive
licenses with them, both for the right to publish titles for their platforms and
for the manufacture of our products for their platforms. Our existing platform
licenses for Dreamcast, PlayStation, Game Boy Color and Nintendo 64 require that
we obtain approval for the publication of new games on a title-by-title basis.
We expect that licenses for the next generation of platforms will contain
similar provisions. As a result, the number of titles we are able to publish for
these platforms, and thus our revenues from titles for these platforms, may be
limited.
We currently have good relationships with the manufacturers. However,
should any manufacturer choose not to renew or extend our license agreement at
the end of its current term, or if any manufacturer were to terminate our
license for any reason, we would be unable to publish additional titles for that
manufacturer's platform.
Each of the manufacturers is the sole source for the fabrication of the
products we publish for that manufacturer's platforms. Each platform license
provides that the manufacturer may change prices for products at any time and
includes other provisions that give the manufacturer substantial control over
our release of new titles.
Since each of the manufacturers is also a publisher of games for its own
platforms, and also manufactures products for all of its other licensees, a
manufacturer may give priority to its own products or those of other publishers
in the event of insufficient manufacturing capacity. We could be materially and
adversely affected by unanticipated delays in the delivery of products.
IF WE NEEDED TO WRITE OFF PREPAID ROYALTIES OR CAPITALIZED DEVELOPMENT COSTS IN
EXCESS OF THE AMOUNTS WE HAVE RESERVED, OUR RESULTS OF OPERATIONS COULD BE
ADVERSELY AFFECTED.
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; in addition, the THQ/JAKKS Pacific, LLC
Agreement requires minimum guaranteed payments to JAKKS Pacific, Inc. We cannot
assure you that the sales of products for which such royalties are paid or
guaranteed payments are made will be sufficient to cover the amount of these
required payments.
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We capitalize our advances to developers on our balance sheet as a part
of "prepaid royalties." We analyze all of our capitalized costs quarterly, and
we take write-offs when, based on our estimates, future individual product
contribution will not be sufficient to recover our investment.
WE HAVE RECENTLY EXPANDED OUR FOREIGN DISTRIBUTION ACTIVITIES THROUGH THE
ACQUISITION OF RUSHWARE. INCREASED DISTRIBUTION ACTIVITIES AND FOREIGN
OPERATIONS SUBJECTS US TO CERTAIN RISKS.
In December 1998, we acquired Rushware Microhandelsgesellschaft GmbH and
its subsidiaries, Softgold Computerspiele GmbH and ABC Spielspass GmbH. Rushware
is a leading German distributor of interactive entertainment software for PC's,
and will serve as our distributor and publisher in Germany and other
German-speaking countries. We believe this acquisition will significantly
increase both the proportion of our business that consists of the distribution
of products published by other companies and the proportion of our foreign sales
that are made in German-speaking countries.
The increase in our distribution activities and foreign operations
subject us to the following risks, and may entail other risks:
- The distribution business generally operates on lower gross margins
than the publishing business, and thus may require a greater level of
sales in order to cover overhead.
- We will have to maintain inventories of other companies' products.
Rushware has a license for the exclusive right to continue distributing,
through August 1, 2000, the PC and PlayStation products developed and published
by LucasArts in German-speaking Europe.
Rushware's license agreement with LucasArts has contributed a
substantial portion of Rushware's sales in the past and is expected to do so in
2000. The termination or non-renewal of Rushware's license agreement with
LucasArts would have a material effect on Rushware's sales and profitability.
As a result of this acquisition and our other efforts to increase our
foreign sales, foreign sales accounted for a greater portion of our net sales in
1999 than in the past. Foreign sales are subject to inherent risks, including
unexpected changes in regulatory requirements, tariffs and other barriers,
difficulties in staffing and managing foreign operations, and possible
difficulties collecting foreign accounts receivable. These factors or others
could have an adverse effect on our future foreign sales or the profits
generated from these sales.
Sales generated by Rushware will generally be denominated in Deutsche
marks or European Currency Units ("euros"). To the extent our foreign sales are
not denominated in U.S. dollars, our sales and profits could be materially and
adversely affected by foreign currency fluctuations.
OUR REVENUES FLUCTUATE DUE TO SEASONAL DEMAND AND THE NATURE OF THE INTERACTIVE
ENTERTAINMENT BUSINESS.
We have experienced, and may continue to experience, significant
quarterly fluctuations in net sales and operating results. The interactive
entertainment market is highly seasonal, with sales typically significantly
higher during the fourth quarter, due primarily to the increased demand for
games during the year-end holiday buying season. Other factors that cause
fluctuations include:
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- 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 shipments by the manufacturers;
- fluctuations in the size and rate of growth of consumer demand for
titles for different platforms; and
- the timing of the introduction of new platforms and the accuracy of
retailers' forecasts of consumer demand.
We may not be able to maintain consistent profitability on a quarterly
or annual basis.
THE INTERACTIVE ENTERTAINMENT INDUSTRY GENERATES SIGNIFICANT COMPETITION FOR
EMPLOYEES. WE MUST ATTRACT AND RETAIN KEY EMPLOYEES TO IMPLEMENT OUR BUSINESS
STRATEGY.
We rely to a substantial extent on the management, marketing, sales,
technical and software development skills of a limited number of employees to
formulate and implement our business plan, including the development of our
titles. Our success depends upon, to a significant extent, our ability to
attract and retain key personnel. Competition for employees can be intense and
the process of locating key personnel with the right combination of skills is
often lengthy. The loss of services of key personnel could have a material
adverse effect on us. The officers with whom we have employment agreements are
Brian J. Farrell, our President and Chief Executive Officer, Jeffrey C. Lapin,
our Vice Chairman, C. Noah Davis, our Chief Technology Officer, Don Traeger,
President of Pacific Coast Power & Light Company, Dennis Harper, Vice President
- - Product Development of Pacific Coast Power & Light Company, and Shawn
Broderick, President of Genetic Anomalies, Inc.
OUR FAILURE TO TIMELY DEVELOP TITLES FOR NEW PLATFORMS THAT ACHIEVE SIGNIFICANT
MARKET ACCEPTANCE, OR TO MAINTAIN NET SALES THAT ARE COMMENSURATE WITH PRODUCT
DEVELOPMENT COSTS, WOULD HAVE A MATERIAL ADVERSE EFFECT ON US.
The interactive entertainment industry has experienced periods of
significant growth in consumer interest, followed by periods in which growth has
substantially declined. Our sales are dependent, among other factors, on the
popularity and unit sales of the game platforms of the various manufacturers.
The popularity of the consoles marketed by the manufacturers has experienced
wide fluctuations. Unexpected declines in the popularity of a particular
platform can be expected to have a material adverse effect on consumer demand
for titles released or scheduled for release for that platform.
The interactive entertainment industry is characterized by rapid
technological change. As a result, we must continually anticipate and adapt our
offerings to emerging platforms and evolving consumer preferences. The
development of titles for new platforms requires substantial investment.
Generally, these development efforts must occur well in advance of the release
of new platforms in order to introduce titles on a timely basis following the
release of such platforms. The development and marketing of titles for
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new platforms may require greater financial and technical resources than have
prior development and marketing efforts.
The introduction of new technologies, including new platforms such as
Sega's Dreamcast, Sony's Playstation 2, and the newly announced DVD-based next
generation Nintendo console, could materially affect our business. The new
platforms for which we develop titles may not achieve market acceptance. We
anticipate it will be more costly to develop titles for the new platforms. Our
development efforts with respect to such new platforms may not lead to
marketable titles or titles that generate sufficient revenues to recover their
development and marketing costs. This risk can be expected to increase in the
future, as continuing increases in development costs require corresponding
increases in net sales in order for us to maintain profitability.
The introduction of new platforms and technologies can render existing
titles obsolete and unmarketable. More commonly, as more advanced platforms are
introduced, consumer demand for titles for older platforms diminishes. We cannot
assure you that, as a result of such reduced consumer demand for titles on older
platforms, our titles for such platforms will generate sufficient sales to make
such titles profitable.
A number of our competitors have developed or are currently developing
games for use by consumers over the Internet. We will be releasing our first
on-line game, which is currently in development by our recently acquired studio,
Genetic Anomalies, Inc., in mid-2000. We cannot be assured that our approach to
on-line games will meet with customer acceptance. While we believe that the
market for these games has not had a material effect on the sales of our
products, future increases in the availability of such games or technological
advances in these games or the Internet could result in a decline in
platform-based games and thus have a material adverse effect on us.
WE COULD BE ADVERSELY AFFECTED BY THE UNAUTHORIZED COPYING OF OUR GAMES.
As a result of the proprietary rights of the manufacturers and the
efforts taken by the manufacturers to protect their rights, we do not believe
that there is a material amount of unauthorized copying of our products.
However, unauthorized production occurs in the computer software industry
generally, and were a significant amount of unauthorized production of our
CD-ROM products to occur, we could be materially and adversely affected.
THE INTERACTIVE ENTERTAINMENT INDUSTRY IS CONSOLIDATING. IN MAKING ACQUISITIONS,
WE FACE SIGNIFICANT COMPETITION FROM OTHER COMPANIES WITH GREATER FINANCIAL
RESOURCES.
Consistent with our strategy to enhance our distribution and product
development capabilities, we intend to continue to pursue acquisitions of
companies, intellectual property rights and other assets that can be acquired on
acceptable terms and which we believe can be operated or exploited profitably.
As the interactive entertainment industry continues to consolidate, we
face significant competition in making acquisitions, which may constrain our
ability to complete suitable transactions. This is particularly of concern for
us because many of our competitors for potential acquisitions, such as Microsoft
Corporation and Hasbro Inc., have significant financial and other resources.
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WE MUST CONFRONT OTHER CONSEQUENCES OF THE INTENSE COMPETITION IN OUR INDUSTRY.
The interactive entertainment industry is intensely competitive.
Significant elements of this competition include the following:
- We compete, for both licenses to properties and the sale of games,
with the manufacturers. Each of the manufacturers is the largest
developer and marketer of titles for its platforms. As a result of
their commanding positions in the industry, the manufacturers
generally have better bargaining positions with respect to retail
pricing, shelf space and retailer accommodations than do any of their
licensees, including us.
- Some of our other competitors have greater name recognition among
consumers and licensors of properties; a broader product line; or
greater financial, marketing and other resources than us.
Accordingly, these competitors may be able to market their products
more effectively or make larger offers or guarantees in connection
with the acquisition of licensed properties.
- We believe that large toy companies and large software companies are
increasing their focus on the interactive entertainment market, which
might result in greater competition for us. In addition, many of our
competitors are developing on-line interactive games and interactive
networks that will be competitive with our interactive products.
Competitive pressures could have the following effects on us:
- As competition for popular properties increases, our cost of
acquiring licenses for such properties may increase, resulting in
reduced margins.
- As competition for retail shelf space becomes more intense, we may
need to increase our marketing expenditures to maintain sales of our
games.
- We could be required to reduce the wholesale unit prices of our games.
FLUCTUATIONS IN STOCK PRICE
The market price of our common stock has experienced and may continue to
experience wide fluctuations. Factors affecting our stock price may include:
- Actual or anticipated variations in our operating results;
- Variations in the level of market acceptance of our titles;
- Delays and timing of product introductions;
- Changes in recommendations or earning estimates by securities
analysts;
- Conditions and trends in our industry; or
- General market or economic conditions.
Because of these and other factors affecting our operating results and financial
condition, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
THQ INC.
By: /s/ Fred A. Gysi
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Fred A. Gysi, Chief Financial Officer,
Chief Financial Officer, Vice President -
Finance & Administration and Secretary
Date: March 21, 2000
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