<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, 2000
[ ] 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.)
27001 Agoura Road, Suite 325, Calabasas Hills, CA 91301
(Address of Principal Executive Offices)
818-871-5000
(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: 19,149,296 shares (as of May 10, 2000).
<PAGE> 2
THQ INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
- ------------------------------ ----
<S> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
for the Three Months Ended March 31, 2000 and 1999 4
Consolidated Statement of Shareholders' Equity -
for the Three Months Ended March 31, 2000 and
the Year Ended December 31, 1999 5
Consolidated Statements of Cash Flows -
for the Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</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,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,866,000 $ 21,303,000
Accounts receivable - net 59,233,000 96,641,000
Inventory 9,084,000 5,455,000
Prepaid and deferred royalties 23,820,000 23,478,000
Software development costs 9,592,000 11,640,000
Deferred income taxes 6,857,000 6,817,000
Income taxes receivable 6,712,000 965,000
Prepaid expenses and other current assets 1,707,000 2,226,000
------------- -------------
Total current assets 146,871,000 168,525,000
Property and equipment - net 6,447,000 5,659,000
Deferred royalties - net of current portion 3,286,000 3,371,000
Software development costs - net of current portion 2,148,000 1,824,000
Deferred income taxes - net of current portion 2,865,000 2,865,000
Other long-term assets 7,787,000 2,790,000
------------- -------------
TOTAL ASSETS $ 169,404,000 $ 185,034,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Lines of credit $ -- $ 16,702,000
Accounts payable 9,962,000 13,170,000
Accrued expenses 14,204,000 12,998,000
Accrued royalties 27,979,000 31,254,000
------------- -------------
Total current liabilities 52,145,000 74,124,000
Accrued royalties - net of current portion 150,000 150,000
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01, 35,000,000 shares authorized;
19,139,999 shares and 19,007,124 shares issued and
outstanding as of March 31, 2000 and December 31, 1999,
respectively 191,000 190,000
Additional paid-in capital 80,429,000 78,378,000
Accumulated other comprehensive loss (1,231,000) (842,000)
Retained earnings 37,720,000 33,034,000
------------- -------------
Total shareholders' equity 117,109,000 110,760,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 169,404,000 $ 185,034,000
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
THQ INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net sales $70,378,000 $78,805,000
Costs and expenses:
Cost of sales 26,885,000 30,775,000
Royalties and project abandonment 12,841,000 15,431,000
Product development 3,674,000 2,801,000
Selling and marketing 9,274,000 9,483,000
Payment to venture partner 5,303,000 --
General and administrative 4,643,000 4,717,000
----------- -----------
Total costs and expenses 62,620,000 63,207,000
----------- -----------
Income from operations 7,758,000 15,598,000
Interest income, net 55,000 185,000
----------- -----------
Income before income taxes 7,813,000 15,783,000
Income taxes 3,127,000 6,299,000
----------- -----------
Net income $ 4,686,000 $ 9,484,000
=========== ===========
Net income per share - basic $ 0.25 $ 0.53
=========== ===========
Net income per share - diluted $ 0.23 $ 0.48
=========== ===========
Shares used in per share calculation - basic 19,033,000 17,941,000
=========== ===========
Shares used in per share calculation - diluted 20,550,000 19,639,000
=========== ===========
</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, 1999 and
the Three Months Ended March 31, 2000
<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, 1999 17,878,481 $ 120,000 $ 62,731,000 $ 60,000 $ 93,000 $ 63,004,000
Exercise of warrants and options 1,128,643 8,000 4,855,000 -- -- 4,863,000
Issuance of warrants -- -- 3,627,000 -- -- 3,627,000
Stock compensation -- -- 464,000 -- -- 464,000
Tax benefit related to the
exercise of employee stock
options -- -- 6,763,000 -- -- 6,763,000
Three-for two stock dividend -- 62,000 (62,000) -- -- --
Comprehensive income:
Net income -- -- -- -- 32,941,000 32,941,000
Other comprehensive loss
Foreign currency translation
adjustment -- -- -- (902,000) -- (902,000)
-------------
Comprehensive income -- -- -- -- -- 32,039,000
------------- ------------- ------------- ------------- ------------- -------------
Balance at December 31, 1999 19,007,124 190,000 78,378,000 (842,000) 33,034,000 110,760,000
Exercise of warrants and options 132,875 1,000 1,876,000 -- -- 1,877,000
Stock compensation -- -- 101,000 -- -- 101,000
Tax benefit related to the
exercise of employee stock
options -- -- 74,000 -- -- 74,000
Comprehensive income:
Net income -- -- -- -- 4,686,000 4,686,000
Other comprehensive loss
Foreign currency
translation adjustment -- -- -- (389,000) -- (389,000)
-------------
Comprehensive income -- -- -- -- -- 4,297,000
------------- ------------- ------------- ------------- ------------- -------------
Balance at March 31, 2000 19,139,999 $ 191,000 $ 80,429,000 $ (1,231,000) $ 37,720,000 $ 117,109,000
============= ============= ============= ============= ============= =============
</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,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,686,000 $ 9,484,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 851,000 338,000
Provision for doubtful accounts, discounts and returns 9,265,000 6,911,000
Loss on disposal of fixed assets 14,000 3,000
Stock compensation 101,000 123,000
Increase in deferred income taxes (49,000) --
Changes in operating assets and liabilities:
Accounts receivable 27,934,000 29,099,000
Inventory (3,686,000) 4,814,000
Prepaid and deferred royalties and
software development costs (4,474,000) (1,494,000)
Prepaid expenses and other current assets 498,000 490,000
Accounts payable and accrued expenses (1,778,000) (14,993,000)
Accrued royalties 2,581,000 4,366,000
Income taxes payable (5,676,000) (1,639,000)
------------ ------------
Net cash provided by operating activities 30,267,000 37,502,000
Cash flows investing activities:
Proceeds from sale of property and equipment 20,000 --
Acquisition of property and equipment (1,382,000) (240,000)
Investment in Yuke's Co., Ltd. (See Footnote 5) (5,020,000) --
Increase in other long-term assets (262,000) (196,000)
------------ ------------
Net cash in investing activities (6,644,000) (436,000)
Cash flows used in financing activities:
Net decrease in short-term borrowings (16,702,000) (6,361,000)
Proceeds from exercise of options and warrants 1,877,000 372,000
------------ ------------
Net cash used in financing activities (14,825,000) (5,989,000)
Effect of exchange rate changes on cash (235,000) 182,000
------------ ------------
Net increase in cash and cash equivalents 8,563,000 31,259,000
Cash and cash equivalents - beginning of period 21,303,000 19,063,000
------------ ------------
Cash and cash equivalents - end of period $ 29,866,000 $ 50,322,000
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period:
Income taxes $ 8,946,000 $ 8,053,000
============ ============
Interest $ 181,000 $ 112,000
============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
In 1999 and 2000, income taxes payable and additional paid-in capital include
tax benefits of $261,000 and $74,000, respectively, resulting from disqualified
dispositions of common stock by officers and employees of THQ acquired through
the exercise of stock options.
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/A for the year ended December 31, 1999.
In our opinion, such unaudited financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
fairly present the information provided. The results for the three months ended
March 31, 2000 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:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income used to compute basic
and diluted earnings per share $ 4,686,000 $ 9,484,000
=========== ===========
Weighted average number of shares
outstanding - basic 19,033,000 17,941,000
Dilutive effect of stock options and warrants 1,517,000 1,698,000
----------- -----------
Number of shares used to compute earnings
per share - diluted 20,550,000 19,639,000
=========== ===========
</TABLE>
Recently Issued Accounting Pronouncements. In June 1998, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes the
accounting and reporting standards for derivative financial instruments and for
hedging activities. It requires that an entity measure all derivatives at fair
value and recognize them in the balance sheet as an asset or liability,
depending upon the entity's rights or obligations under the applicable
derivative contract. SFAS 133, as amended is effective for financial statements
for periods beginning after June 15, 2000. We are currently evaluating the
potential impact of adopting SFAS No. 133.
Reclassification. Certain items in the 1999 financial statements have
been reclassified to conform to the 2000 presentation.
7
<PAGE> 8
2. BUSINESS COMBINATION
On May 24, 1999 we completed a merger with PCP&L. In the merger, each
share of PCP&L was converted into 0.09008 shares of our common stock, or a total
of approximately 727,000 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 196,000 shares of our common stock.
On December 13, 1999 we completed a merger with Genetic Anomalies, Inc.,
a Delaware corporation ("GA"). In the merger, each share of GA was converted
into 0.0536 shares of our common stock, or a total of approximately 220,000
shares. In addition, outstanding GA employee stock options were assumed by us
and converted, at the same conversion rate, into options to purchase
approximately 45,000 shares of our common stock.
The mergers have been accounted for as poolings 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
and GA had always been part of our company.
All transactions between us, PCP&L and GA have been eliminated in the
consolidated financial statements. The results of operations for the separate
companies and the combined amounts presented in the consolidated financial
statements follow.
For the Three Months Ended
March 31,
<TABLE>
<CAPTION>
Net sales 1999
------------
<S> <C>
THQ Inc. $ 78,540,000
PCP&L 665,000
GA 30,000
Intercompany elimination (430,000)
------------
Combined $ 78,805,000
============
</TABLE>
For the Three Months Ended
March 31,
<TABLE>
<CAPTION>
Net income (loss) 1999
------------
<S> <C>
THQ Inc. $ 10,151,000
PCP&L (45,000)
GA (192,000)
Intercompany elimination (430,000)
------------
Combined $ 9,484,000
============
</TABLE>
8
<PAGE> 9
3. 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, 2000 and December 31, 1999 are composed of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Accounts receivable -- domestic $ 67,722,000 $ 93,455,000
Other receivables -- domestic 2,169,000 1,469,000
Allowance for domestic returns and doubtful
accounts (16,342,000) (16,845,000)
Accounts receivable -- foreign 12,605,000 25,888,000
Allowance for foreign returns and doubtful
accounts (6,921,000) (7,326,000)
------------ ------------
Accounts receivable -- net $ 59,233,000 $ 96,641,000
============ ============
</TABLE>
4. STOCK COMPENSATION
PCP&L and Genetic Anomalies, Inc. ("GA") granted stock options to
employees 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 and three years, respectively. For the three
months ended March 31, 2000 and 1999, stock-based compensation of $101,000 and
$123,000, respectively, was amortized to expense. As of March 31, 2000 and
December 31, 1999 we had unamortized stock-based compensation expense of
$1,009,000 and $1,110,000, respectively.
5. OTHER LONG-TERM INVESTMENTS
In February 2000, Inland Productions, Inc., purchased back the 25%
interest we acquired in 1996. Our original investment consisted of $300,000 in
cash and 118,485 shares of common stock valued at $300,000 and was included in
other long-term assets in the accompanying balance sheet at December 31, 1999.
On March 21, 2000, we acquired a minority equity interest in a Japanese
developer Yuke's Co., Ltd. ("Yuke's"). This investment consisted of $5,020,000
in cash and is included in other long-term assets in the accompanying balance
sheet. The agreement provided that Yuke's will create exclusively for us for a
certain period of time in North America and Europe, wrestling games for
PlayStation and PlayStation 2 platforms. The value of Yuke's shares is not
readily determinable and the investment is carried at cost.
9
<PAGE> 10
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, filed on March 21, 2000 with the Securities and
Exchange Commission.
OVERVIEW
We develop, publish and distribute interactive entertainment software
for the major platforms sold by Nintendo, Sega 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 2000 1999
------ ------
<S> <C> <C>
Nintendo 64 24.7% 20.8%
PlayStation 55.0% 66.0%
Game Boy Color/Game Boy 16.2% 7.0%
PC CD-Rom 3.2% 5.4%
Other 0.9% 0.8%
</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 warehouses in the United Kingdom,
Germany or France for foreign distribution. We sell directly to our major retail
accounts both domestically and in the United Kingdom, Germany and France.
Foreign sales to distributors in other territories are shipped directly to the
customers' locations at their expense.
10
<PAGE> 11
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.
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 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, 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, 2000, and March 31, 1999, provisions of $9.3 million and
$6.9 million, respectively, were taken against gross sales made during such
periods. As of March 31, 2000, our aggregate reserve against accounts receivable
for returns, customer accommodations and doubtful accounts was $23.3 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.
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the Euro as their common legal currency. The Euro trades
on currency exchanges and is available for non-cash transactions. From January
1, 1999 through January 1, 2002, participating countries can also maintain their
national ("legacy") currencies as legal tender for goods and services. Beginning
January 1, 2002, new Euro-denominated bills and coins will be issued, and legacy
currencies will be withdrawn from circulation no later than July 1, 2002. Our
operating subsidiaries in the United Kingdom, Germany and France have been
affected by the Euro conversion and have established plans to address any
business issues raised, including the competitive impact of cross-border price
transparency. It is not anticipated that there will be any near term business
ramifications; however, the long-term implications, including any changes or
modifications that will need to be made to business and financial strategies,
are still being reviewed. From an accounting, treasury and computer system
standpoint, the impact from the Euro currency conversion is not expected to have
a material impact on our or any of our subsidiaries financial position or
results of operations.
11
<PAGE> 12
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
Ended March 31,
---------------------
2000 1999
------ ------
<S> <C> <C>
Domestic sales 85.3% 83.0%
Foreign sales 14.7 17.0
------ ------
Net sales 100.0% 100.0%
Costs and expenses:
Cost of sales 38.2% 39.1%
Royalties and project abandonment 18.3 19.6
Product development 5.2 3.5
Selling and marketing 13.2 12.0
Payment to venture partner 7.5 --
General and administrative 6.6 6.0
------ ------
Total costs and expenses 89.0% 80.2%
------ ------
Income from operations 11.0% 19.8%
Interest income, net 0.1 0.2
------ ------
Income before income taxes 11.1 20.0
------ ------
Net income 6.7% 12.0%
====== ======
</TABLE>
Title Releases
The following table sets forth, for the three months ended March 31,
2000, and 1999, the titles released during such periods for the platforms
indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
------ ------
<S> <C> <C>
Nintendo 64 -- 2
PlayStation 2 1
Game Boy Color 2 --
PC CD-Rom 1 --
Other -- --
------ ------
Total 5 3
====== ======
</TABLE>
12
<PAGE> 13
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000, TO THE THREE MONTHS ENDED
MARCH 31, 1999
Our net sales decreased to $70,378,000 in the three months ended March
31, 2000, from $78,805,000 in the same period of 1999. Revenues for the first
quarter of 2000 included domestic sales of WWF Smackdown! for the PlayStation
which released in early March 2000 and continuing sales of WWF Wrestlemania 2000
for the Nintendo 64, Rugrats titles and Toy Story 2 for the Game Boy Color.
Revenues during the first quarter ended March 31, 1999 were impacted by the
early launch of three wrestling games under a now-expired license with World
Championship Wrestling ("WCW"), plus the continued sales of selected titles
released in the fourth quarter of 1998. For the three months ended March 31,
2000, net sales of World Wrestling Federation ("WWF"), Rugrats and Disney titles
were $51,379,000 (73.0% of net sales), $7,129,000 (10.1% of net sales), and
$3,473,000 (4.9% of net sales), respectively.
Our foreign net sales decreased to $10,318,000 for the three months
ended March 31, 2000, from $13,370,000 in the same period of 1999, and decreased
as a percentage of net sales to 14.7% from 17.0%. WWF Smackdown! was not
released internationally until the second quarter of 2000, while WCW Thunder for
the PlayStation was released internationally during the first quarter of 1999.
Our cost of sales for the three months ended March 31, 2000 decreased
slightly as a percentage of net sales to 38.2% from 39.1% in the same period of
1999. This decrease in the cost of sales percentage is primarily related to
higher average sales prices for the three months ended March 31, 2000, as
compared to the same period of 1999.
Our royalty and project abandonment expense for the three months ended
March 31, 2000 decreased as a percentage of net sales to 18.3% from 19.6% for
the same period of 1999. This decrease is primarily related to favorable royalty
rates on certain titles sold during the first quarter of 2000.
For the three months ended March 31, 2000, product development expense
increased to $3,674,000 (5.2% of net sales) from $2,801,000 (3.5% of net sales).
This increase is due to a larger number of titles currently in development than
in the same period for 1999 and the growth of our internal studios.
Selling and marketing expenses remained relatively constant at
$9,274,000 for the three months ended March 31, 2000, from $9,483,000 in the
same period of 1999, but increased as a percentage of net sales to 13.2% from
12.0%. During 2000, we anticipate that selling and marketing expenses will
continue at a higher percentage of net sales than in the prior year due to more
aggressive advertising support for key titles.
For the three months ended March 31, 2000, we incurred expense in the
amount of $5,303,000 to our venture partner, JAKKS Pacific. THQ pays JAKKS
Pacific a preferred return on product sales and other income derived from the
license. Because the license with the WWF was not effective until November 1999,
there were no WWF product sales in the first quarter of 1999.
Our general and administrative expenses as a percentage of net sales
remained relatively constant at 6.6% for March 31, 2000 compared to 6.0% in the
same period of 1999.
13
<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.
Our cash and cash equivalents increased $8,563,000 from $21,303,000 at
December 31, 1999 to $29,866,000 at March 31, 2000, and were $49,577,000 as of
May 10, 2000. Cash provided by operating activities for the three months ended
March 31, 2000 was $30,267,000, resulting in part from $4,686,000 in net income
and collection of accounts receivable during the post holiday selling season.
Operating cash flow was also affected by a decrease in accounts payable.
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, 1999 to March 31, 2000 as the sales
generated during the fourth quarter of 1999 were collected.
Inventory increased during the three months ended March 31, 2000, as a
result of product reorders for WWF titles and Disney/Pixar's Toy Story 2 for
Game Boy Color.
Prepaid and deferred royalties and software development costs increased
from December 31, 1999. This was 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 quarter of
2000 for sales from the fourth quarter of 1999. As of March 31, 2000, we had
obligations with respect to future guaranteed minimum royalties of $28,129,000.
The decrease in our lines of credit and accounts payable is attributable
to a reduction in product purchases during the first quarter as compared to
those incurred during the year-end holiday buying season.
Accrued expenses increased slightly from December 31, 1999 primarily due
to a television advertising campaign for WWF Smackdown! on PlayStation during
the first quarter of 2000.
Our working capital requirements are greatest during our third and
fourth quarters. We believe that cash on hand, funds provided by operations, and
our borrowing capability will be adequate to meet our anticipated requirements
for operating expenses, product purchases, guaranteed payments to licensors and
software development through 2000.
Net cash used in investing activities for the three months ended March
31, 2000 was $6,644,000 and was primarily utilized to invest in Yuke's
($5,020,000) and additional capital expenditures ($1,382,000).
Net cash used in financing activities for the three months ended March
31, 2000 was $14,825,000, and was attributable to the repayment of short-term
borrowings. As of March 31, 2000, we had no outstanding borrowings under our
credit facilities with Union Bank and had
14
<PAGE> 15
obligations in respect of outstanding letters of credit for $1,020,000. As of
May 10, 2000 we had no outstanding borrowings and outstanding letters of credit
were $2,395,000.
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 risk associated with interest rate and
foreign currency fluctuations.
INTEREST RATE RISK
Our interest rate risk is immaterial due to the short maturity of the
debt. We have no fixed rate debt.
FOREIGN CURRENCY RISK
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.
Our earnings are affected by fluctuations in the value of our
subsidiaries' functional currency as compared to the currencies of our foreign
denominated sales and purchases. The results of operations of our subsidiaries,
as reported in U.S. dollars, may be significantly affected by fluctuations in
the value of the local currencies in which we transact business. Such amount is
recorded upon the translation of the foreign subsidiaries' financial statements
into U.S. dollars, and is dependent upon the various foreign exchange rates and
the magnitude of the foreign subsidiaries' financial statements. During the
three months ended March 31, 2000, our foreign currency translation loss
adjustment was $389,000. A hypothetical 10% change in the relevant currency
rates at March 31, 2000 would not result in a material gain or loss. In addition
to the direct effects of changes in exchange rates, which impact the dollar
value of the resulting sales and related expenses, changes in exchange rates
also affect the volume of sales or the foreign currency sales price as
competitors' products become more or less attractive.
15
<PAGE> 16
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.
Current Report on Form 8-K dated March 21, 2000.
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 12, 2000 THQ INC.
By: /s/ Brian J. Farrell
------------------------------------
Brian J. Farrell
President and Chief
Executive Officer
THQ INC.
By: /s/ Fred Gysi
------------------------------------
Fred Gysi
Vice President Finance
and Administration
Principal Accounting Officer
17
<PAGE> 18
EXHIBIT INDEX
<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>
<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 12, 2000.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 29,866,000
<SECURITIES> 0
<RECEIVABLES> 82,496,000
<ALLOWANCES> 23,263,000
<INVENTORY> 9,084,000
<CURRENT-ASSETS> 146,871,000
<PP&E> 10,376,000
<DEPRECIATION> 3,929,000
<TOTAL-ASSETS> 169,404,000
<CURRENT-LIABILITIES> 52,145,000
<BONDS> 0
0
0
<COMMON> 191,000
<OTHER-SE> 116,918,000
<TOTAL-LIABILITY-AND-EQUITY> 169,404,000
<SALES> 70,378,000
<TOTAL-REVENUES> 70,378,000
<CGS> 26,885,000
<TOTAL-COSTS> 26,885,000
<OTHER-EXPENSES> 62,620,000
<LOSS-PROVISION> 9,265,000
<INTEREST-EXPENSE> 252,000
<INCOME-PRETAX> 7,813,000
<INCOME-TAX> 3,127,000
<INCOME-CONTINUING> 4,686,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,686,000
<EPS-BASIC> 0.25
<EPS-DILUTED> 0.23
</TABLE>
