-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GkkGH5m9RcBIHTFLFzS0/ygeDGEmOZJ+BNx9iM9I7m9dkY1woRpLpL+uig7eqmgI 0+xxhLVK/UzqJS+PHmrqLg== 0000950148-97-002811.txt : 19971113 0000950148-97-002811.hdr.sgml : 19971113 ACCESSION NUMBER: 0000950148-97-002811 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: THQ INC CENTRAL INDEX KEY: 0000865570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133541686 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18813 FILM NUMBER: 97716248 BUSINESS ADDRESS: STREET 1: 5016 N PKWY CALABASAS STREET 2: SUITE 100 CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8185911310 MAIL ADDRESS: STREET 1: 5016 N PKWY CALABASAS STREET 2: STE 100 CITY: CALABASAS STATE: CA ZIP: 91302 FORMER COMPANY: FORMER CONFORMED NAME: TRINITY ACQUISITION CORP/NY/ DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] 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) New York 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, $0.0001 par value: 6,657,428 shares (as of November 11, 1997). 2 THQ, INC. AND SUBSIDIARIES INDEX
Part I - Financial Information Page - ------------------------------ ---- Item 1. Consolidated Financial Statements: Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 3 Consolidated Statements of Operations - for the Three Months and Nine Months Ended September 30, 1997 and 1996 4 Consolidated Statement of Shareholders' Equity for the Nine Months Ended September 30, 1997 and the Year Ended December 31, 1996 5 Consolidated Statements of Cash Flows - for the Nine Months Ended September 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 17 Signatures 19
2 3 Part I - Financial Information Item 1. Financial Statements. THQ, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 ------------- ------------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 12,578,000 $ 2,734,000 Accounts receivable - net 12,778,000 14,186,000 Inventory 1,324,000 1,013,000 Prepaid and deferred royalties 5,566,000 717,000 Software development costs 7,266,000 2,329,000 Prepaid expenses and other current assets 759,000 485,000 ------------ ------------ Total current assets 40,271,000 21,464,000 Equipment - net 1,007,000 581,000 Other long-term assets 661,000 795,000 ============ ============ TOTAL ASSETS $ 41,939,000 $ 22,840,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 7,277,000 $ 3,304,000 Accrued royalties 8,089,000 3,133,000 Accrued income taxes 427,000 -- Advance from bank -- 5,355,000 ------------ ------------ Total current liabilities 15,793,000 11,792,000 Commitments and contingencies -- -- Shareholders' equity: Common stock, par value $.0001, 100,000,000 shares authorized; 6,620,834 shares and 4,739,883 shares issued and outstanding as of September 30, 1997 and December 31, 1996, respectively 4,000 4,000 Additional paid-in capital 46,805,000 34,558,000 Cumulative foreign currency translation adjustment (343,000) (52,000) Accumulated deficit (20,320,000) (23,462,000) ------------ ------------ Total shareholders' equity 26,146,000 11,048,000 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 41,939,000 $ 22,840,000 ============ ============
See notes to consolidated financial statements. 3 4 THQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 1997 1996 1997 1996 ----------- ------------ ----------- ------------ Net sales $16,355,000 $ 11,102,000 $40,459,000 $ 29,772,000 ----------- ------------ ----------- ------------ Costs and expenses: Cost of sales 8,906,000 5,737,000 22,651,000 16,783,000 Royalties 2,389,000 2,045,000 5,872,000 5,084,000 Product development 283,000 226,000 779,000 767,000 Project abandonment 150,000 125,000 450,000 375,000 Selling 1,360,000 987,000 3,139,000 2,304,000 General and administrative 1,596,000 999,000 4,107,000 2,764,000 Operating interest 31,000 271,000 168,000 589,000 ----------- ------------ ----------- ------------ Total costs and expenses 14,715,000 10,390,000 37,166,000 28,666,000 ----------- ------------ ----------- ------------ Income from operations 1,640,000 712,000 3,293,000 1,106,000 Interest income (expense), net 198,000 (60,000) 329,000 (215,000) ----------- ------------ ----------- ------------ Income before income taxes 1,838,000 652,000 3,622,000 891,000 Provision for income taxes 410,000 -- 480,000 4,000 ----------- ------------ ----------- ------------ Net income $ 1,428,000 $ 652,000 $ 3,142,000 $ 887,000 =========== ============ =========== ============ Net income per share $ 0.20 $ 0.13 $ 0.46 $ 0.19 =========== ============ =========== ============ Shares used in per share calculation 7,184,000 4,992,000 6,761,000 4,684,000 =========== ============ =========== ============
See notes to consolidated financial statements. 4 5 THQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Cumulative Foreign Retained Additional Currency Earnings Preferred Common Common Paid-in Translation (Accumulated Stock Stock Amount Capital Adjustment Deficit) Total --------- ------- -------- --------- ------------- ------------ ------------ Balance at January 1, 1996 325 4,217,391 $4,000 $33,317,000 $(360,000) $(25,363,000) $ 7,598,000 Exercise of warrants and options -- 272,115 -- 712,000 -- -- 712,000 Conversion of preferred stock to common stock (325) 127,717 -- -- -- -- -- Issuance of common stock -- 122,660 -- 529,000 -- -- 529,000 Net income -- -- -- -- -- 1,901,000 1,901,000 Foreign currency translation adjustment -- -- -- -- 308,000 -- 308,000 ---- --------- ------ ----------- --------- ------------ ------------ Balance at December 31, 1996 -- 4,739,883 4,000 34,558,000 (52,000) (23,462,000) 11,048,000 Issuance of common stock for cash -- 1,725,000 -- 11,708,000 -- -- 11,708,000 Exercise of options and warrants -- 155,951 -- 539,000 -- -- 539,000 Net income -- -- -- -- -- 3,142,000 3,142,000 Foreign currency translation adjustment -- -- -- -- (291,000) -- (291,000) ---- --------- ------ ----------- --------- ------------ ------------ Balance at September 30, 1997 (unaudited) -- 6,620,834 $4,000 $46,805,000 $(343,000) $(20,320,000) $ 26,146,000 ==== ========= ====== =========== ========= ============ ============
See notes to consolidated financial statements. 5 6 THQ, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ------------------------------ 1997 1996 ------------ ----------- Cash flows from operating activities: Net income $ 3,142,000 $ 887,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 355,000 176,000 Provision for doubtful accounts, discounts and returns 3,576,000 3,282,000 Changes in operating assets and liabilities: Accounts receivable 74,000 (2,696,000) Inventory (346,000) (868,000) Prepaid and deferred royalties and Software development costs (3,230,000) 1,922,000 Prepaid and deferred taxes -- (19,000) Prepaid expenses and other current assets (287,000) (290,000) Accounts payable and accrued expenses 4,026,000 (58,000) Accrued income taxes 417,000 -- Accrued royalties (1,601,000) (348,000) Accrued returns and allowances (2,395,000) (3,132,000) ------------ ----------- Net cash provided by (used in) operating activities 3,731,000 (1,144,000) Cash flows used in investing activities: Long-term assets -- (501,000) Acquisition of equipment (649,000) (267,000) ------------ ----------- Net cash used in investing activities (649,000) (768,000) Cash flows from financing activities: Advance from bank -- 1,478,000 Repayment of advance from bank (5,355,000) -- Net proceeds from issuance of common stock 11,708,000 -- Proceeds from exercise of options and warrants 539,000 606,000 ------------ ----------- Net cash provided by financing activities 6,892,000 2,084,000 Effect of exchange rate changes on cash (130,000) (23,000) ------------ ----------- Net increase in cash 9,844,000 149,000 Cash and cash equivalents - beginning of period 2,734,000 1,895,000 ============ =========== Cash and cash equivalents - end of period $ 12,578,000 $ 2,044,000 ============ =========== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 37,000 $ -- ============ =========== Cash paid during the period for interest $ 47,000 $ 260,000 ============ ===========
See notes to consolidated financial statements. (continued) 6 7 Non-cash Transaction: On July 1, 1996 the Company issued 70,000 shares of the Company's common stock, $.0001 par value, (the "Common Stock") in lieu of cash to a consultant of the Company. This transaction resulted in a reduction in accounts payable and accrued expenses and a like increase in additional paid in capital in the amount of $229,000, the fair value of the stock issued on the date of issuance. Also on July 1, 1996, the Company issued 52,660 shares of Common Stock as part of the purchase price for a 25% interest in Inland Productions, Inc., increasing other long-term assets and additional paid-in capital by $300,000. See notes to consolidated financial statements. 7 8 THQ, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited Interim Financial Information. The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. While the Company believes that the disclosures made are adequate to make the information presented not misleading, it is recommended that these financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. In the opinion of management, such unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the information set forth herein. The results for the three month and nine month periods ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year or for any interim period. Net Income Per Share. Net income per share has been computed using the weighted average number of common shares and common share equivalents (which consists of warrants and options, to the extent they are dilutive). The difference between primary and fully diluted earnings per share is not significant. Cash and Cash Equivalents. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Recently Issued Accounting Pronouncements. The Financial Accounting Standards Board issued Statement of Financial Accounting Standard Number 128 Earnings Per Share ("FAS 128"), in February 1997. This statement specifies the computation of earnings per share ("EPS") as basic EPS, consisting of the weighted average shares outstanding and diluted EPS, consisting of weighted average shares and all dilutive potential common shares that were outstanding during the period. The Company does not expect the impact of adopting FAS 128 to be material in the Consolidated Statement of Operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years 8 9 beginning after December 15, 1997. The Company does not expect the impact of SFAS No. 130 to be material in relation to its financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosure about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company does not expect the impact of SFAS No. 131 to be material in relation to its financial statements. 2. ACCOUNTS RECEIVABLE Accounts receivable are due primarily from domestic and foreign retailers and distributors, including mass merchants and specialty stores. Accounts receivable at September 30, 1997 and December 31, 1996 are composed of the following:
September 30, December 31, 1997 1996 ------------- ------------- Accounts receivable - domestic $ 16,047,000 $ 13,428,000 Other accounts receivable - foreign 1,702,000 5,004,000 Other receivables 385,000 112,000 Allowance for foreign doubtful accounts (1,171,000) (1,294,000) Allowance for foreign discounts and returns (271,000) (292,000) Allowance for domestic doubtful accounts, Discounts and returns (3,914,000) (2,772,000) ------------ ------------ Accounts receivable - net $ 12,778,000 $ 14,186,000 ============ ============
3. LINE OF CREDIT On September 22, 1997, the Company entered into an agreement for a larger and lower cost banking facility with Imperial Bank. The new bank credit agreement is designed to mirror the seasonal trends of the Company's business, providing advances under the credit line of up to $23 million during the Company's peak selling season, and up to $12 million outside of the peak season. The former agreement provided for advances of up to $9 million based on a formula of accounts receivable and inventory. Although the agreement contains certain covenants regarding financial and other matters, the Company's borrowings are no longer restricted to a formula based on receivables and inventory. Interest on the outstanding balance is payable at Imperial Bank's prime rate. 9 10 4. CAPITAL STOCK TRANSACTIONS On February 14, 1997, the Company completed a public offering of 1,500,000 shares of the Company's Common Stock. In conjunction with the offering, the Company granted to the underwriters an overallotment option, exercisable within 30 days of the date of February 11, 1997, to purchase up to 225,000 additional shares of the Common Stock at the public offering price of $7.50 per share. On March 11, 1997, the underwriters exercised their overallotment option. All of these shares were newly issued and sold on behalf of the Company. The net proceeds of the 1,725,000 shares sold by the Company, were approximately $11.7 million. 5. INCOME TAXES Net Operating Loss Carryforwards. At December 31, 1996, for federal income tax purposes the Company had reported approximately $16.9 million of NOL carryforwards incurred since 1993. The sale of 1,500,000 shares of Common Stock offered by the Company on February 11, 1997 resulted in an "ownership change" of the Company for purposes of Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. As a result, the amount of the NOL carryforwards available to reduce the Company's federal income tax liability in future years in which the Company has taxable income will be limited to an annual amount equal to (i) the fair market value of the Company's capital stock immediately prior to the consummation of the offering on February 11, 1997, multiplied by (ii) the "long-term tax exempt rate" published by the Internal Revenue Service for the month in which the offering was consummated. Based upon a long-term tax exempt rate for February 1997 of 5.48% and an assumed market price of the Common Stock immediately prior to consummation of this offering of $8.56 per share (the last reported sale price of the Common Stock on February 10, 1997), such amount is estimated to be approximately $2,225,000 per year. 6. STOCK OPTIONS On June 24, 1997 the shareholders approved the Board of Directors proposal for an additional stock option plan, (the "1997 Option Plan") which provides for the issuance of up to 650,000 shares available for employees, consultants and non-employee directors. Stock options granted under the 1997 Option Plan may be incentive stock options under the requirements of the Internal Revenue Code, or may be nonstatutory stock options which do not meet such requirements. Options may be granted under the 1997 Option Plan to, in the case of incentive stock options, all employees (including officers) of the Company; or, in the case of nonstatutory stock options, all employees (including officers) or non-employee directors of the Company. On August 18, 1997 the Company granted approximately 184,000 shares to employees at a fair market value of $9.75. --------------------------------- 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company develops, publishes and distributes interactive entertainment software ("Software") for the market dominant hardware platforms ("Platforms") sold by Nintendo, Sega and Sony (the "Manufacturers"), and for personal computers ("PC"). For the nine months ended September 30, 1997, sales of Nintendo Software constituted 60% of the Company's net sales, Sega Software sales were 11%, and the remaining 29% were derived from sales of Sony PlayStation titles. For the nine months ended September 30, 1997, PC sales constituted less than one percent of sales. Although there remains a large installed base of 16-bit Platforms, the Company believes that growth in the Software market will be derived principally from games developed for the more advanced Platforms. Accordingly, the Company is devoting an increasing portion of its resources to the development of titles for 32-bit and 64-bit Platforms and PCs. In the nine months ended September 30, 1997 and 1996, respectively, 29% and 11% of the Company's net sales consisted of 32-bit titles. There were no sales of 64-bit titles in either period. The Company's business cycle generally commences with the securing of a license to publish one or more titles based upon entertainment projects (such as movies, television programs and arcade games), sports and entertainment personalities, or popular sports, trends or concepts ("Property" or "Properties") that have high public visibility or recognition or that reflect the trends of popular culture. Such licenses typically require an advance payment to the licensor and a guarantee of minimum future royalties. See "-- Recovery of Prepaid Royalties, Guarantees and Capitalized Development Costs." After securing a Property, the Company commences Software development for the title. Upon completion of development and approval of the title by the Manufacturer, the Company orders products from, and generally causes a letter of credit to be opened in favor of, the Manufacturer. Revenue Fluctuations and Seasonality. The Company has experienced and may continue to experience significant quarterly fluctuations in net sales and operating results due to a variety of factors, including the timing of releases of new titles by the Company, the popularity of both new titles and titles released in prior periods, fluctuations in the mix of titles with varying profit margins, the timing of customer orders, the timing of shipments by the Manufacturers, fluctuations in the size and rate of growth of consumer demand for Software for various Platforms, the timing of the introduction of new Platforms and the accuracy of retailer's forecasts of consumer demand. The Company's expenses are based, in part, on its expectations of future revenues and, as a result, operating results would be disproportionately and adversely affected by a decrease in sales or a failure by the Company to meet its sales expectations. In addition, the Software market is highly seasonal, with sales typically significantly higher during the fourth quarter (due primarily to the increased demand for interactive games during the year-end holiday buying season). There can be no assurance that the Company can maintain consistent profitability on a quarterly or annual basis. 11 12 Profit margins may vary over time as a result of a variety of other factors. Profit margins for cartridge products can vary based on the cost of the memory chip used for a particular title. As Software has grown more complex, the trend in the Software industry has been to utilize chips with greater capacity and thus greater cost. CD-ROMs have significantly lower per unit manufacturing costs than cartridge-based products. However, such savings may be offset by typically higher development costs for titles published on CD-ROMs; such higher costs result from the creation of increased and enhanced content to take advantage of the greater storage capacity available on CD-ROMs. Recovery of Prepaid Royalties, Guarantees and Capitalized Development Costs. The Company typically enters into agreements with licensors of Properties and developers of titles that require advance payments of royalties and/or guaranteed minimum royalty payments. There can be no assurance that the sales of products for which such royalties are paid will be sufficient to cover the amount of these required royalty payments. The Company capitalizes its prepaid royalties, and capitalizes Software development costs upon the establishment of technological feasibility of the title under development. Amortization of these payments and costs is determined on a title-by-title basis based on the greater of (i) the ratio of current gross revenues for a title to the sum of its current and anticipated gross revenues, or (ii) the straight-line method over the estimated remaining economic life of the title. The Company analyzes such capitalized costs quarterly and writes off as project abandonment losses those capitalized payments and costs (and expenses any unpaid guaranteed minimum royalties) when, based on the Company's estimate, future revenues will not be sufficient to recover such costs. As of September 30, 1997, the Company had prepaid royalties and capitalized development costs of approximately $12.8 million. If the Company were required to write off a material portion of its prepaid royalties or capitalized development costs, the Company's results of operations would be adversely affected. Discounts, Allowances and Returns; Inventory Management. At the time of product shipment, the Company establishes provisions against the gross revenues generated by such shipment based on estimates of future returns of, and other customer accommodations that may be granted with respect to, such products, based on the Company's historical experience, retailer inventories of the titles and other factors. For the nine months ended September 30, 1997 and 1996, respectively, provisions of approximately $4.7 and $3.3 million were taken against gross sales, and the Company's aggregate reserves against accounts receivable for returns, customer accommodations and doubtful accounts for these periods were approximately $5.4 and $4.6 million, respectively. 12 13 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the components of the Company's net sales and its consolidated operating data as a percentage of net sales:
Three Months Nine Months Ended Ended September 30, September 30, --------------------- ----------------- 1997 1996 1997 1996 ----- ----- ----- ----- Domestic sales 95.3% 83.9% 82.1% 74.8% Foreign sales 4.7 16.1 17.9 25.2 ----- ----- ----- ----- Net sales 100.0% 100.0% 100.0% 100.0% Costs and expenses: Cost of sales 54.5 51.7 56.0 56.4 Royalties 14.6 18.4 14.5 17.1 Product development 1.7 2.0 1.9 2.6 Project abandonment 0.9 1.1 1.1 1.3 Selling 8.3 8.9 7.8 7.7 General and administrative 9.8 9.0 10.2 9.2 Operating interest 0.2 2.5 0.4 2.0 ----- ----- ----- ----- Total costs and expenses 90.0 93.6 91.9 96.3 ----- ----- ----- ----- Income from operations 10.0 6.4 8.1 3.7 Interest income (expense), net 1.2 (0.5) 0.8 (0.7) ----- ----- ----- ----- Income before income taxes 11.2 5.9 8.9 3.0 ===== ===== ===== ===== Net income 8.7% 5.9% 7.8% 3.0% ===== ===== ===== =====
The following table sets forth, for the three months and nine months ended September 30, 1997 and 1996, the titles released during such periods for the Platforms indicated:
Three Months Ended Nine Months Ended September 30, September 30, ---------------- ---------------- 1997 1996 1997 1996 -------- ------ ------ ------ PC CD-Rom -- -- 1 -- Saturn -- 2 -- 3 PlayStation 1 2 5 3 SNES 1 3 6 6 Genesis 1 1 3 2 Game Boy 1 2 6 7 -- -- -- -- Total 4 10 21 21 == == == ==
13 14 COMPARISON OF THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997, TO THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 The Company's net sales increased 47.3% to $16,355,000 in the three months ended September 30, 1997, from $11,102,000 in the same period of 1996, as a result of higher unit sales per title shipped and increased demand for previously released titles. For the three months ended September 30, 1997, net sales of the Company's Madden NFL 98 for the Sega Genesis, Disney Game Boy re-releases ( Aladdin, Duck Tales, The Jungle Book, and The Lion King) and WCW Vs the World for the Sony PlayStation, were $3,717,000 (22.7% of net sales), $2,330,000 (14.2% of net sales), $1,700,000 (10.4% of net sales), respectively. In the third quarter of 1996, net sales of products based on the Company's Disney's Toy Story, Alone in the Dark, and PGA European Tour licenses were $1,723,000 (15.5% of net sales), $1,537,000 (13.8% of net sales), and $1,480,000 (13.3% of net sales), respectively. Due to the higher sales volume of cartridge based products (which generally have less favorable gross margins) in the current period the Company experienced lower gross margins of 45.5% versus 48.3%. The Company's net sales increased 35.9% to $40,459,000 in the nine months ended September 30, 1997, from $29,772,000 in the same period of 1996, as a result of an increase in unit volumes for newly released titles and continued support for previously released titles. Cost of sales for the nine months ended September 30, 1997 decreased as a percentage of net sales to 56.0% from 56.4% in the same period of 1996, primarily as a result of the increase in 32-bit product sales. Foreign net sales decreased slightly to $7,236,000 in the nine months ended September 30, 1997, from $7,508,000 in the same period of 1996, and decreased as a percentage of net sales to 17.9% from 25.2% because the Company's Madden NFL 98 and WCW Vs the World titles were shipped only in the United States. WCW Vs the World is scheduled to ship in foreign markets in the fourth quarter of 1997. Foreign net sales decreased in dollar terms to $775,000 from $1,789,000 and as a percentage of net sales to 4.7% from 16.1% in the three months ended September 30, 1997 and 1996, respectively. These decreases are the result of significant sales of the Company's PGA European Tour and Olympics Summer Games titles in foreign markets during 1996. Royalty expense as a percentage of net sales decreased in the three and nine months ended September 30, 1997 to 14.6% and 14.5% from 18.4% and 17.1%, respectively, for the same periods of 1996. The decrease was due in part to 1997 royalties relating to certain distribution agreements having been included in cost of sales rather than in royalty expense. Additionally, a significant portion of 1997 sales were comprised of cartridge based products, which generally have lower royalty rates. For the three months and nine months ended September 30, 1997, selling expenses increased by $373,000 and $835,000, respectively, compared to the same periods of 1996, as a result of increased marketing efforts for new titles and an increase in retail cooperative advertising. 14 15 General and administrative expenses for the three months and nine months ended September 30, 1997, increased both in dollar terms and as a percentage of net sales over the comparable periods of 1996. This increase was due in part to increased warehousing and personnel costs in 1997 (as a result of the increased sales volume over the same periods in 1996) and an increase in shareholder relations costs. Operating interest, which consists of interest and fees paid to the Company's bank and fees paid to other issuers of letters of credit, decreased as a percentage of net sales to 0.2% and 0.4% for the three months and nine months ended September 30, 1997, from 2.5% and 2.0%, respectively, of net sales for the same periods of 1996. The decline is a result of a more beneficial banking arrangement (See "-- Credit Facilities") and the use of funds generated by the Company's common stock offering which was completed on February 14, 1997. See "-- Liquidity and Capital Resources." LIQUIDITY AND CAPITAL RESOURCES The Company's principal uses of cash are product purchases, guaranteed payments to licensors, advance payments to developers and the costs of internal Software development. In order to purchase products from the Manufacturers, the Company must generally open letters of credit in their favor. As of September 30, 1997, the Company had obligations with respect to future guaranteed minimum royalties of $8,089,000, substantially all of which were payable within the subsequent twelve months. As of September 30, 1997, the Company had obligations with respect to open letters of credit of $7,069,000. Due to seasonal factors, accounts receivable decreased and inventory increased slightly from December 31, 1996 to September 30, 1997. Prepaid and deferred royalties and Software development costs increased from December 31, 1996 as a result of the Company entering into several new contracts for both intellectual properties and new product development (See "--Recovery of Prepaid Royalties, Guarantees and Capitalized Development Costs."). Since the Company records the entire amount of a contract at its inception, accrued royalties has also increased significantly from December 31, 1996. Accounts payable and accrued expenses increased significantly from December 31, 1996 as a result of the timing of large product receipts in the last days of the period. The amount of the Company's accounts receivable is subject to significant seasonal variations due to the seasonality of sales, and is typically highest at the end of the year. As a result, the Company's working capital requirements are greatest during its third and fourth quarters. The Company believes that the proceeds from its recently completed common stock offering, together with funds provided by operations and funds available under the Company's revolving credit facility with its bank, will be adequate to meet the Company's anticipated requirements for operating expenses, product purchases, guaranteed payments to licensors and Software development through 1998. However, to the extent accounts receivable, inventories and guaranteed and advance payments increase as a result of growth of the Company's business, the Company could require additional working capital to fund its operations. The Company does not anticipate making material additional capital expenditures in 1997. 15 16 For the nine months ended September 30, 1997, the Company's net cash provided by operating activities was $3,731,000, compared to $1,144,000 used in operating activities for the same period in 1996, primarily as a result of an increase in net income plus an increase in accounts payable and accrued expenses. Such increases were offset in part by reductions in prepaid and deferred royalties and Software development costs and accrued royalties. For the nine months ended September 30, 1997, the Company's net cash used in investing activities was $649,000 (primarily as a result of the installation of an upgraded computer network and accounting software package), compared to $768,000 for the corresponding period in 1996. For the nine months ended September 30, 1997, the Company's net cash provided by financing activities was $6,892,000 compared to $2,084,000 for the same period in 1996. This is primarily as a result of the receipt of the proceeds from the public offering of 1,725,000 shares of the Company's common stock in 1997, less repayment of advances from the bank. Credit Facilities. In September 1997, the Company entered into a new financing and banking arrangement with Imperial Bank (the "Imperial Agreement"). The Imperial Agreement matures on June 30, 1998, subject to earlier termination. As of September 30, 1997, the Company had no advances under the Imperial Agreement and open letters of credit from Imperial Bank of $7,069,000. The Company has also entered into agreements with two additional lenders (the "North American Lender" and the "European Lender") pursuant to which such lenders have agreed to issue letters of credit ("L/Cs") on the Company's behalf to the Manufacturers for the purchase of products for the Company's North American operations (up to a maximum of $5,000,000) and the Company's European operations (up to a maximum of $2,500,000), respectively. As of September 30, 1997, there were no open letters of credit issued by the North American or the European lender. Public Offering. For information concerning the offering of common stock by the Company in February and March 1997, see note 4 of Notes to Consolidated Financial Statements. ------------------------------------------- 16 17 Part II - Other Information Item 1. Litigation. Studio e Litigation. On January 13, 1997, a complaint was filed in Illinois state court by Studio e, Inc. ("Studio e"), a video game Software development company, against Inland Productions, Inc. ("Inland"), its two principals and the Company. The Company acquired 25% of Inland in June 1996. On March 12, 1997, the Company filed an answer to the complaint denying all allegations asserted against the Company and also filed a counterclaim against Studio e. On September 29, 1997, the Company announced that the lawsuits and countersuits among the parties had been settled. The Company will have no financial liability or obligations under the settlement agreement. In addition, no party admitted any wrong doing with respect to the claims and counter claims contained in the suits. Item 4. Submission of Matters to a Vote of Security Holders. The Company held its Annual Meeting of Shareholders on June 24, 1997 which was continued on July 22, 1997. Information concerning the Annual Meeting is set forth in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. The Company plans to complete its reincorporation from New York to Delaware early in the fourth quarter of 1997. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 3.1 Articles of Incorporation (Filed as an exhibit to Registration Statement on Form S-18 (File No. 33-35582-NY) of Trinity, and incorporated herein by reference. Amendments made to documents since original filing were filed as exhibits to the Company's Proxy Statements dated April 24, 1992, April 30, 1993 and April 28, 1994, respectively, and are incorporated herein by reference) Exhibit 3.2 Bylaws, as amended (Filed as an exhibit to Registration Statement on Form S-18 (File No. 33-35582-NY) of Trinity, and incorporated herein by reference. Amendments made to documents since original filing were filed as exhibits to the Company's Proxy Statements dated April 24, 1992, April 30, 1993 and April 28, 1994, respectively, and are incorporated herein by reference) 17 18 Exhibit 10 Imperial Bank Line of Credit Agreement dated September 22, 1997 Exhibit 11 Statement Regarding Computation of Per Share Earnings Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K None. 18 19 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: November 13, 1997 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 19 EX-10 2 EXHIBIT 10 1 EXHIBIT 10 [IMPERIAL BANK LETTERHEAD] NOTE $12,000,000.00* Inglewood, California, September 22, 1997 On June 30, 1998, and as hereinafter provided, for value received, the undersigned promises to pay to IMPERIAL BANK ("Bank") a California banking corporation, or order, at its Los Angeles Airport Regional office, the principal sum of $12,000,000.00 MAXIMUM or such sums up to the maximum if so stated, as the Bank may now or hereafter advance to or for the benefit of the undersigned in accordance with the terms hereof, together with interest from date of disbursement or N/A, whichever is later, on the unpaid principal balance [ ] at the rate of % per year [X] at the rate of 0.00% per year in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in such Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, divided by 360, which shall, for interest computation purposes, be considered one year. Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal [ ] in addition to principal [ ] beginning October 29, 1997, and if not so paid shall become a part of the principal. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. [ ] (If checked), Principal shall be payable in installments of $ or more, each installment on the day of each , beginning . Advances not to exceed any unpaid balance owing at any one time equal to the maximum amount specified above, may be made at the option of Bank. Any partial prepayment shall be applied to installments, if any, in inverse order of maturity. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this note, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s) to pay principal or interest when due; the filing as to each person obligated hereon, whether as maker, co-maker, endorser or guarantor (individually or collectively referred to as the "Obligor") of a voluntary or involuntary petition under the provisions of the Federal Bankruptcy Act; the issuance of any attachment or execution against any asset of any Obligor; the death of any Obligor; or any deterioration of the financial condition of any Obligor which results in the holder hereof considering itself, in good faith, insecure. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent ten or more days, Obligor agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the holder of this note to accept payment of any payment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, each Obligor promises to pay all costs and expenses of collection and reasonable attorneys fee incurred by the holder hereof on account of such collection, plus interest at the rate applicable to principal, whether or not suit is filed hereon. Each Obligor shall be jointly and severally liable hereon and consents to renewals, replacements and extensions of time for payment hereof, before, at, or after maturity; consents to the acceptance, release or substitution of security for this note; and waives demand and protest and the right to assert any statute of limitations. Any married person who signs this note agrees that recourse may be had against separate property for any obligations hereunder. The indebtedness evidenced hereby shall be payable in lawful money of the United States. In any action brought under or arising out of this note, each Obligor, including successor(s) or assign(s) hereby consents to the application of California law, to the jurisdiction of any competent court within the State of California, and to service of process by any means authorized by California law. No single or partial exercise of any power hereunder, or under any deed of trust, security agreement or other agreement in connection herewith shall preclude other or further exercises thereof or the exercise of any other such power. The holder hereof shall at all times have the right to proceed against any portion of the security for this note in such order and in such manner as such holder may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of the holder hereof in exercising any right hereunder, or under any deed of trust, security agreement or other agreement, shall not operate as a waiver of such right, or of any other right, under this note or any deed of trust, security agreement or other agreement in connection herewith. *Up to $15,000,000.00 from September 22, 1997 through and including September 30, 1997. Up to $23,000,000.00 from October 1, 1997 through and including January 31, 1998. Subject to the conditions, restrictions and limitations contained in the Credit Terms and Conditions dated September 22, 1997, and attached Reference Provision. T.HQ, INC. By: - ------------------------------------ ---------------------------------------- MALIBU GAMES, INC. By: - ------------------------------------ ---------------------------------------- BLACK PEARL SOFTWARE, INC. By: - ------------------------------------ ---------------------------------------- L 494 E (REV 6/97) 2 Attachment to the Note dated September 22, 1997 T.HQ, INC., MALIBU GAMES, INC., AND BLACK PEARL SOFTWARE, INC. The following Reference Provision is by this reference incorporated in the Note: "REFERENCE PROVISION 1. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Note ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure, or their successor section ("CCP"), which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the real property securing this Agreement, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Superior Court is empowered to issue temporary and/or provisional remedies, as appropriate. 2. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceedings. All proceedings and hearings conducted 3 before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. 3. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new rial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 4. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding." T.HQ, INC. By: ----------------------------------- MALIBU GAMES, INC. By: ----------------------------------- BLACK PEARL SOFTWARE, INC. By: ----------------------------------- 4 IMPERIAL BANK September 22, 1997 9920 S. La Cienega Bl. Inglewood, California, 90301 Subject: CREDIT TERMS AND CONDITIONS Gentlemen: To induce you ("Bank") to make loans to T.HQ, Inc., Malibu Games, Inc., Black Pearl Software, Inc. ("Borrowers"), and in consideration of any loan or loans you, in your sole discretion, may make to Borrowers, Borrowers jointly and severally warrant and agree as follows: A. Borrowers represent and warrants that: 1. EXISTENCE AND RIGHTS. Borrowers are corporations duly organized and existing and in good standing under the laws of the State of New York and Illinois, without limit as to the duration of their existence and are authorized and in good standing to do business in the State of California; Borrowers have powers and adequate authority, rights and franchises to own their property and to carry on their business as now conducted, and are duly qualified and in good standing in each State in which the character of the properties owned by them therein or the conduct of their business makes such qualification necessary; and Borrowers have the power and adequate authority to make and carry out this Agreement. Borrower intends to reincorporate T.HQ, Inc. to Delaware and to dissolve Black Pearl Software, Inc. and Malibu Games, Inc. Borrowers have no investment in any other business entity, other then as disclosed in Borrower's financial statements. 2. AGREEMENT AUTHORIZED. The execution, borrowings delivery and performance of this Agreement is duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; is not in contravention of or in conflict with any law or regulation or any term or provision of Borrower's articles of incorporation, by-laws, or Articles of Association, as the case may be, and this Agreement is the valid, binding and legally enforceable obligation of Borrowers in accordance with their terms. 3. NO CONFLICT. The execution, delivery and performance of this Agreement is not in contravention of or in conflict with any agreement, indenture or undertaking to which Borrowers are a party or by which they or any of their property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 4. LITIGATION. There is no litigation other than disclosed in financial statements or other proceeding pending or threatened against or affecting Borrowers, and Borrowers are not in default with respect to any order, writ, injunction, decree or demand of court or other governmental or regulatory authority. 5. FINANCIAL CONDITION. The balance sheet of Borrowers as of 8/30/97 a copy of which has heretofore been delivered to you by Borrowers, and all other statements and data submitted in writing by Borrowers to you in connection with this request for credit is true and correct in all material respects, and said balance sheet truly presents the financial condition of 1 5 Borrowers as of the date thereof, and has been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date there have been no material adverse changes in the financial condition of business of Borrowers. Borrowers have no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrowers have not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of their business, which may have a materially adverse effect upon their financial condition, operations or business as now conducted. 6. TITLE TO ASSETS. Borrowers have good title to their assets, and the same are not subject to any liens or encumbrances other than those permitted by Section C.3 hereof. 7. TAX STATUS. Borrowers have no liability for any delinquent state, local or federal taxes, and, if Borrowers have contracted with any government agency, Borrowers have no liability for renegotiation of profits. 8. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possess all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct their business as now operated, without any known conflict with the valid trademarks, trade names, copyrights, patents and license rights of others. (a) The Borrowers shall use all reasonable commercial efforts to obtain from all persons, corporations, partnerships, limited liability companies, and other entities from whom the Borrowers have obtained or from time to time will obtain licenses in connection with the video games which they sell (the "Licensors") the consent of such Licensors to the Borrowers' granting to the Bank of a security interest in such licenses, (ii) to obtain from the Licensors their cooperation in connection with the Bank obtaining a perfected first priority security interest in such licenses, which cooperation shall include, without limitation, the execution and delivery by the Licensors of memoranda of licenses and other documents which may be filed in the U.S. Copyright Office to evidence the licenses granted to the Borrowers, and (iii) to obtain from Licensors the right of the Bank to have a reasonable period of time in which to foreclose on Borrowers' inventory and liquidate the same before said Licensors terminate the right of the Borrowers (or the Bank) to sell the remaining inventory. (b) The Borrowers hereby jointly and severally represent and warrant that all agreements between "Licensors" (as that term is defined herein) and Borrowers are in full force and effect and are enforceable in accordance with their respective terms against the parties thereto. The foregoing representations and warranties shall be deemed made again each time that the Bank advances any monies to the Borrowers under this Agreement or any other agreement by and among any of the Borrowers and the Bank. 9. REGULATION U. The proceeds of this loan shall not be used to purchase or carry margin stock (as defined within Regulation U of the Board of Governors of the Federal Reserve system). B. Borrowers agree that so long as they are indebted to you, under, or other indebtedness, they will, unless you shall otherwise consent in writing: 1. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of their business; maintain their properties, equipment and facilities in good order and repair; conduct their business in an orderly manner without 2 6 voluntary interruption and, if a corporation or partnership, maintain and preserve their existence. 2. INSURANCE. Maintain public liability, property damage and workers' compensation insurance and insurance on all their insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses and/or in the exercise of good business judgment. 3. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against them or any of their properties, and all their other liabilities at any time existing, except to the extent and so long as: (a) The same is being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon their financial condition or the loss of any right of redemption from any sale thereunder; and (b) They shall have set aside on their books reserves (aggregated to the extent required by generally accepted accounting practice) deemed by them adequate with respect thereto. 4. NET WORTH AND WORKING CAPITAL. Borrowers shall maintain a tangible net worth (meaning the excess of all assets, including prepaid royalties, any value for goodwill, trademarks, patents, copyrights, leaseholds, all amounts due from officers, stockholders, affiliates, organization expense and other similar intangible items, over their liabilities of not less than $24,000,000; maintain net current assets excluding all amounts due amounts due from officers, stockholders, and affiliates (i.e. working capital) of not less than $9,000,000; and maintain a ratio of current assets to current liabilities of not less than 1.50 to 1.00; all as computed and determined in accordance with generally accepted accounting principles on a basis consistently maintained by Borrowers. 5. DEBT TO TANGIBLE NET WORTH. Borrowers shall maintain a ratio of total liabilities to tangible net worth of not more than 1.00 to 1.00. 6. CASH FLOW TO CURRENT PORTION TERM DEBT AND LEASES. Borrowers shall maintain a ratio of cash flow to current portion term debt and leases of not less than 1.25 to 1.00 for each quarter and fiscal period. Cash flow is defined as net profit after taxes plus depreciation and amortization less dividends or distributions. 7. Compliance with all financial covenants shall be calculated and monitored on a quarterly basis. 8. Maintain profitable operations on a fiscal year end basis. 9. OUT-OF-DEBT PERIOD. Borrowers shall be out-of-debt for 30 consecutive days during each line year on the revolving line of credit loans borrowings. 10. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit your representatives to have access to, and to examine their properties, books and records at all reasonable times during normal business hours; and furnish you: 3 7 (a) As soon as available, and in any event within 45 days after the close of each quarter of any each fiscal year of Borrowers, commencing with the quarter next ending, a balance sheet, profit and loss statement and reconciliation of Borrower's capital accounts as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period, all in reasonable detail accompanied by Form 10-Q, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrowers and certified by an appropriate officer of Borrowers, subject, however, to year-end audit adjustments; (b) As soon as available, and in any event within 120 days after the close of each fiscal year of Borrowers, a report of Company as of the close of and for such fiscal year, all in reasonable detail accompanied by Form 10-K, submitted on an "Unqualified" basis by accountants satisfactory to you. (c) Within 120 days after the end of each fiscal year of Borrowers, a certificate of chief financial officer or partner of Borrowers, stating that Borrowers have performed and observed each and every covenant contained in this Letter to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof; (d) Promptly after the receipt thereof by Borrowers, copies of any detailed audit reports submitted to Borrowers by independent accountants in connection with each annual or interim audit of the account of Borrowers made by such accountants; (e) Promptly after the same is available, copies of all such proxy statements, financial statements and reports as Borrowers shall send to their stockholders, if any, and copies of all reports which Borrowers may file with the Securities and Exchange Commission or any governmental authority at any time substituted therefor; (f) Quarterly accounts receivable and accounts payable summary agings, within 20 days after and as of the end of the preceding quarter; and (g) Such other information relating to the affairs of Borrowers as you reasonably may request from time to time. C. Borrowers agrees that so long as it is indebted to you, it will not, without your written consent, such consent not to be reasonably denied: 1. TYPE OF BUSINESS; EXECUTIVES' COMPENSATION. Make any substantial change in the character of their business; or make any change in their executive management. 2. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from you except obligations now existing as shown in the financial statement dated 6/30/97, excluding those being refinanced 4 8 by your bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. 3. LIENS AND ENCUMBRANCES. Create, incur, or assume any mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now owned, other than liens for taxes not delinquent and liens in your favor. 4. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary course and normal course of their business as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of their business. 5. ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of their business as now conducted; or sell, lease, assign, or transfer any substantial part of their business or fixed assets, or any property or other assets necessary for the continuance of their business as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. 6. DIVIDENDS, STOCK PAYMENTS. If a corporation, declare or pay any dividend (other than dividends payable in common stock of Borrowers) or make any other distribution on any of their capital stock now outstanding or hereafter issued or purchase, redeem or retire any of such stock. 7. CAPITAL EXPENDITURES. Make or incur obligations for capital expenditures in excess of $700,000 in any one fiscal year. 8. LEASE LIABILITY. Make or incur liability for payments of rent under leases of real property in excess of $400,000 and personal property in excess of $200,000 in any one fiscal year. D. The occurrence of any of the following events of default shall, at your option, terminate your commitment to lend and make all sums of principal and interest then remaining unpaid on all Borrowers's indebtedness to you immediately due and payable, all without demand, presentment or notice, all of which is hereby expressly waived: 1. FAILURE TO PAY NOTE. Failure to pay any installment of principal of or interest on any indebtedness of Borrowers to you. 2. BREACH OF COVENANT. Failure of Borrowers to perform any other term or condition of this Letter of Inducement binding upon Borrowers, where such breach has a material financial consequence. 3. BREACH OF WARRANTY. Any of Borrowers' material representations or material warranties made herein or any statement or certificate at any time given in writing pursuant hereto or in connection herewith shall be false or misleading in any material respect. 5 9 4. INSOLVENCY; RECEIVER OR TRUSTEE. Borrowers shall become insolvent; or admit their inability to pay their debts as they mature; or make an assignment for the benefit of creditors; or apply for or consent to the appointment of a receiver or trustee for it or for a substantial part of their property or business. 5. JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of attachment, or similar process shall be entered or filed against Borrowers or any of their assets and shall remain unvacated, unbonded or unstayed for a period of 10 days or in any event later than five days prior to the date of any proposed sale thereunder. 6. BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against Borrowers and, if instituted against it, shall be consented to. E. Miscellaneous Provisions. 1. FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Imperial Bank or any holder of Notes issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or any other right, power or privilege. All rights and remedies existing under this agreement or any note issued in connection with a loan that Imperial Bank may make hereunder, is cumulative to, and not exclusive of, any rights or remedies otherwise available. 2. NOTICE OF DEFAULT. Promptly notify Imperial Bank in writing of the occurrence of any event of default hereunder upon the notice and lapse of time. 3. OPERATING ACCOUNTS. Borrowers shall maintain all primary domestic accounts and banking relationship with Imperial Bank during the term of the Loan. Borrowers shall maintain, or cause to be maintained, on deposit with Imperial Bank, non-interest bearing demand deposit balances sufficient to compensate Bank for all services provided by Bank. Balances shall be calculated after reduction for the reserve requirement of the Federal Reserve Board and uncollected funds. Any deficiencies shall be charged directly to the Borrowers on a monthly basis. 4. Borrowers will have received supporting domestic letters of credit in their favor in an amount equal to any additional requested commercial letters of credit, once the total amount of letters of credit issued by Bank equals or exceeds $15,000,000.00. T.HQ, INC. BLACK PEARL SOFTWARE, INC. By: ______________________________ By: ____________________________________ President President MALIBU GAMES, INC. By: ______________________________ President 6 10 [IMPERIAL BANK LETTERHEAD] ITEMIZATION OF AMOUNT FINANCED DISBURSEMENT INSTRUCTIONS Name(s): T.HQ, INC. Date: September 22, 1997 MALIBU GAMES, INC., BLACK PEARL SOFTWARE, INC. $ paid to you directly by Cashiers Check No. $ 23,000,000.00 credited to deposit account No. 09-098-992 When advances or wires are requested and for the issuance of Letters of Credit $ paid on Loan(s) No. $ amounts paid to Bank for: Amounts paid to others on your behalf; $ to Title Insurance Company $ to Public Officials $ to $ to $ to $ to $ 23,000,000.00 SUBTOTAL (NOTE AMOUNT) Less $ 0.00 Prepaid Finance Charge (Loan fee(s)) $ 23,000,000.00 TOTAL (AMOUNT FINANCED) Upon consummation of this transaction, this document will also serve as the authorization for Imperial Bank to disburse the loan proceeds as stated above. T.HQ, INC. BLACK PEARL SOFTWARE, INC. BY: BY: - --------------------------------------- -------------------------------------- Signature Signature MALIBU GAMES, INC. BY: BY: - --------------------------------------- -------------------------------------- Signature Signature L 531 E(Rev 10/92) 11 [IMPERIAL BANK LETTERHEAD] AGREEMENT TO PROVIDE INSURANCE (REAL OR PERSONAL PROPERTY) To: IMPERIAL BANK Date: September 22, 1997 9920 La Cienega Blvd. Borrower: Inglewood, California 90301 T.HQ, Inc. MALIBU GAMES, INC. BLACK PEARL SOFTWARE, Inc. In consideration of a loan in the amount of $23,000,000.00, secured by all tangible personal property including inventory and equipment I/We agree to obtain adequate insurance coverage to remain in force during the term of the loan. I/We also agree to advise the below named agent to add Imperial Bank as loss payee on the new or existing insurance policy, and to furnish Bank at above address with a copy of said policy/endorsements and any subsequent renewal policies. I/We understand that the policy must contain: 1. Fire and extended coverage in an amount sufficient to cover: a) The amount of the loan, OR b) All existing encumbrances, whichever is greater, But not in excess of the replacement value of the improvements on the real property. 2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of Imperial Bank, or any other form acceptable to Bank. INSURANCE INFORMATION Insurance Co./Agent Telephone No.: Agent's Address: T.HQ, INC. MALIBU GAMES, INC. Signature of Obligor: By: BY: -------------------------------- BLACK PEARL SOFTWARE, Inc. Signature of Obligor: By: -------------------------------- ================================================================================ - ------------------------------------------------- FOR BANK USE ONLY INSURANCE VERIFICATION: Date: -------------- Person Spoken to: ---------------------------- Policy Number: ------------------------------- Effective From: To: -------------- ------------ Verified By: --------------------------------- - ------------------------------------------------- L 245 E (R 10/92) EX-11 3 EXHIBIT 11 1 EXHIBIT 11 THQ, INC. STATEMENT OF COMPUTATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
For the Three Months Ended For the Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Net income used to compute primary and fully diluted earnings per share $1,428,000 $ 652,000 $3,142,000 $ 887,000 ========== ========== ========== ========== Weighted average number of shares outstanding 6,561,000 4,613,000 6,175,000 4,458,000 Dilutive effect of stock options and warrants 623,000 379,000 586,000 226,000 ---------- ---------- ---------- ---------- Number of shares used to compute primary and fully diluted earnings per share 7,184,000 4,992,000 6,761,000 4,684,000 ========== ========== ========== ========== Net earnings per share $ 0.20 $ 0.13 $ 0.46 $ 0.19 ========== ========== ========== ==========
EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF OPERATIONS AND THE CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FOUND IN THE FORM 10-Q AS FILED WITH THE SECURITIES EXCHANGE COMMISSION ON NOVEMBER 14, 1997. 1 U.S. DOLLARS 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 1 12,578,000 0 18,134,000 5,356,000 1,324,000 40,271,000 1,825,000 818,000 41,939,000 15,793,000 0 0 0 4,000 26,142,000 41,939,000 40,459,000 40,459,000 22,651,000 22,651,000 14,515,000 123,000 47,000 3,622,000 480,000 142,000 0 0 0 3,142,000 0.46 0.46
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