THQ 2005 Annual Report Download

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Table of contents

  • Page 1

  • Page 2
    FISCAL 2005: A RECORD YEAR FOR THQ Net sales of $757 million Earnings per share of $1.56 Shipped six titles that surpassed one million units, including four multi-million unit titles: 4.5 Million 2.5 Million 2 Million 2 Million 1 Million 1 Million More than doubled internal product development...

  • Page 3
    ... EPS ($) Fiscal Year 0.06 03* 04 05 See Notes to Consolidated Financial Statements. (a) Includes a $7.8 million benefit for research and development income tax credits claimed for prior years. (b) Includes a $4.0 million benefit for a settlement of dispute with directors' and officers' insurance...

  • Page 4
    ... and we expect it to become a million-unit seller. PC-exclusive title Warhammer® 40,000: Dawn of War™, developed by our Relic Entertainment studio, shipped more than half a million units in fiscal 2005. We plan to launch an extension to that franchise this year. 2 thq inc. 2005 annual report

  • Page 5
    ..., Company of Heroesâ„¢ and Titan Questâ„¢ and products for the mass-market PC gamer include games based on The Incredibles and SpongeBob SquarePantsâ„¢. Third, we plan to leverage our handheld leadership. In fiscal 2006, we plan to launch more than ten titles in total on the Nintendo DSâ„¢ and PSP...

  • Page 6
    ... 4.5+ million units life-to-date 7+ million units life-to-date 1. License agreement, including game sequel rights, extends four years from date of theatrical/game release. 2. Based on expected release by Pixar Animation Studios of one film per year starting in 2007. 4 thq inc. 2005 annual report

  • Page 7
    thq inc. 2005 annual report 5

  • Page 8
    ...revenues per year for THQ. HIGHLIGHTS MASTER AGREEMENT FOR ANIMATED TV AND MOVIE PROPERTIES Signed: Scope: Term: September 2000; Renewed October 2004 Exclusive, world-wide, all consoles and handheld 2010 MILLION-UNIT SELLERS TITLE LAUNCH DATE SALES PERFORMANCE The SpongeBob SquarePantsâ„¢ Movie...

  • Page 9
    thq inc. 2005 annual report 7

  • Page 10
    ...helps drive international sales of video games based on the brand. HIGHLIGHTS WWE AGREEMENT VIA THQ/JAKKS PACIFIC JOINT VENTURE Signed: Scope: Term: June 1998 Exclusive, world-wide, all consoles and handheld 2014 1 MILLION-UNIT SELLERS TITLE LAUNCH DATE SALES PERFORMANCE WWEâ„¢ SmackDown!â„¢ Vs...

  • Page 11
    thq inc. 2005 annual report 9

  • Page 12
    ...-unit selling MX Unleashed™ franchise with a new title under that brand. GAME RANKING* UNIT SALES DEVELOPMENT Full Spectrum Warrior™ Warhammer ® 40,000: Dawn of War™ MX vs. ATV Unleashed 84% 86% 83% 1+ million 500,000+ 500,000+ External Internal Internal *Based on GameRankings In order...

  • Page 13
    ... 500,000 units shipped threshold. In fiscal 2006, THQ plans to release an expansion pack to the real-time strategy game for PC. Warhammer 40,000: Dawn of War is based on the dark, futuristic, fantasy universe from Games Workshop (LSE:GAW) traveled by millions worldwide. thq inc. 2005 annual report...

  • Page 14
    MX VS. ATV UNLEASHEDâ„¢ The critically acclaimed game from renowned racing developer Rainbow Studios combines their expertise of ATV and motocross racing, redefining the off-road genre through a collection of new vehicles, event types and online racing options. The game's predecessor, MX Unleashed, ...

  • Page 15
    ... COMPANY OF HEROESâ„¢ Relic Entertainment launches the next revolution in action-strategy gaming on PC with its upcoming title, Company of Heroes. A realtime strategy game set in World War II, Company of Heroes is built on Relic's next-generation Essence Engine, and delivers cinematic visual detail...

  • Page 16
    ... in which players rise up through the gang system, gaining notoriety, earning respect and making money any way they can. Core gameplay is non-linear and includes multiple free-form activities such as car racing, gambling and extensive character customization. 14 thq inc. 2005 annual report

  • Page 17
    ... of key licensed brands, Disney/Pixar, Nickelodeon and WWE, and to publish more high-end PC titles like Full Spectrum Warrior™ and Warhammer ® 40,000: Dawn of War™. THQ also plans to expand internationally through increased direct sales and marketing efforts and the opening of new direct office...

  • Page 18
    ..., Juiced â„¢ and Destroy All Humans!â„¢, to wireless this year. In addition, we will launch new games and related products based on wireless-specific content such as Star Wars. 25 7 THQ Wireless Revenue Growth ($ Million ) Fiscal Year 04 05 THQ Wirelessâ„¢ 16 thq inc. 2005 annual report

  • Page 19
    ... YEAR FOR THQ We achieved record net sales and EPS and executed on our key strategies for long-term growth: Grew our base of predictable, recurring revenues Increased our portfolio of owned intellectual properties Strengthened our product development organization Grew our international business...

  • Page 20
    ...the Dawn of War game and the Warhammer 40,000 universe are either ®, ™ and/or © Games Workshop Ltd 2000-2004, variably registered in the UK and other countries around the world, used under license. All Rights Reserved. Destroy All Humans!-© 2005 THQ Inc. MX vs. ATV Unleashed-© 2005 THQ Inc. MX...

  • Page 21
    ... Santa Monica 1700 Ocean Avenue Santa Monica, California 90401 Senior Vice President, Business Development TIFFANY E. TERNAN Senior Vice President, North American Sales and Distribution TIM F. WALSH 29903 Agoura Road Agoura Hills, CA 91301 President, THQ Wireless thq inc. 2005 annual report 19

  • Page 22
    ... ⌧ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended March 31, 2005 or " Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 to For the transition period from Commission file number 0-18813 THQ INC...

  • Page 23
    THQ INC. INDEX TO ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED MARCH 31, 2005 ITEMS IN FORM 10-K PAGE PART I Item 1. Item 2. Item 3. Item 4. Business ...Properties ...Legal Proceedings ...Submission of Matters to a Vote of Security Holders......

  • Page 24
    ... Disney/Pixar properties Finding Nemo, The Incredibles, and Cars, which is expected to be released in spring 2006; Nickelodeon properties such as SpongeBob SquarePants™, Fairly OddParents™ and Jimmy Neutron™; World Wrestling Entertainment™; Bratz™; Power Rangers; Warhammer 40,000®: Dawn...

  • Page 25
    ... through 2010. In order to increase sales and profits from current brands, our goal is to continue building high quality products, market them aggressively and shift more development to our internal development studios. In fiscal 2005, our key Disney/Pixar and Nickelodeon titles were developed by...

  • Page 26
    ...we released new products targeted at the core gamer based upon both original and licensed intellectual properties including Full Spectrum Warriorâ„¢, MX v. ATV Unleashedâ„¢, The Punisher, and Warhammer 40,000: Dawn of Warâ„¢. Upcoming titles in this category include Company of Heroesâ„¢, Destroy All...

  • Page 27
    ... list identifies games that generated a significant portion of our sales during the fiscal years ended March 31, 2005 and 2004 and the twelve months ended March 31, 2003: • In fiscal 2005, Disney/Pixar's The Incredibles, The SpongeBob SquarePants Movie, and WWE™ SmackDown! Vs. Raw™; 4

  • Page 28
    ... us the right to develop, publish and distribute titles for use on such manufacturer's platform. Our key platform licenses currently include: • • • licenses with Nintendo to develop games for the GameCube, Game Boy Advance and DS; licenses with Sony to develop games for the PlayStation 2 and...

  • Page 29
    and distribute titles for GameCube, PlayStation 2, Xbox and Game Boy Advance in various additional territories, including Europe, Australia and New Zealand, parts of Asia and Central and South America. We expect to enter into additional platform licenses or extend current licenses as new platforms ...

  • Page 30
    ... strategy is to develop games based on our long-term key properties, such as those licensed from Disney/Pixar and Nickelodeon, using our internal studios so that we maintain greater control over the development process and obtain a higher operating margin. Original properties are generally developed...

  • Page 31
    ... fiscal 2005 that received television support included Fairly OddParents, Full Spectrum Warrior, The Incredibles, MX v. ATV Unleashed, Power Rangers, Scooby-Doo!, The SpongeBob SquarePants Movie, Tak 2: The Staff of Dreams, The Punisher, WWE Day of Reckoningâ„¢, and WWE SmackDown! Vs. Raw. Our games...

  • Page 32
    ... JAKKS Pacific, Inc. ("JAKKS") that governs our relationship with respect to the World Wrestling Entertainment, Inc. ("WWE") license. This agreement with JAKKS was amended in January 2002. Our relationship with JAKKS was established to develop, manufacture, distribute, market and sell video games...

  • Page 33
    ... of product releases, brand-name recognition, access to distribution channels, effectiveness of marketing and price. We compete both for licenses to properties and the sale of interactive entertainment software with Sony, Microsoft and Nintendo, each of which is a large developer and marketer of...

  • Page 34
    ...July 1, 2005, for our Relic Entertainment studio. Upon commencement of this lease, Relic will vacate its current premises. In addition to the leased facilities listed above, we also lease office space in various countries outside of the U.S. in order to support the international sales, marketing and...

  • Page 35
    ... Tetris Company, LLC ("Tetris") in the Superior Court of California, County of Los Angeles. The complaint alleges that Tetris breached its license agreement and certain oral agreements with THQ, which prevented THQ from releasing a Tetris product for the Nintendo DS system as planned in March 2005...

  • Page 36
    ... indicated, the high and low closing sales prices of our common stock as reported by the NASDAQ National Market: Closing Sales Prices High Low Fiscal Year Ended March 31, 2005 Fourth Quarter ended March 31, 2005...Third Quarter ended December 31, 2004 ...Second Quarter ended September 30, 2004...

  • Page 37
    ... was an employee of the Company on such date. Securities Issued in Private Transactions During the fiscal year ended March 31, 2005, we finalized the terms of warrants we issued in exchange for rights to publish video games based on a licensors' intellectual properties. We issued 160,000 warrants to...

  • Page 38
    ... per share data) Fiscal Year Ended March 31, 2005 (a) 2004 (b) 2003 (c) (Unaudited) Transition 2003 (c) Year Ended December 31, 2002 (d) 2001 2000 (e) Net sales ...Costs and expenses: Cost of sales ...License amortization and royalties ...Software development amortization ...Product development...

  • Page 39
    ...tax related to a regular asset impairment review and also as a result of changing technology in the video game market. The charge consisted of costs associated with software development and related costs for products that had been discontinued or whose values were deemed unrecoverable through future...

  • Page 40
    ... of interactive entertainment software. Our fiscal 2005 highlights include the following: • We published six titles that shipped more than one million units: The Incredibles: more than 4.5 million units The SpongeBob SquarePants Movie: more than 2.5 million units WWE SmackDown! Vs. Raw: more...

  • Page 41
    ... and the new Barnyard movie from Nickelodeon. We intend to continue developing and publishing new original properties and products targeted at the core gamer. In fiscal 2005, such releases included Full Spectrum Warrior, The Punisher and Warhammer 40,000: Dawn of War. Upcoming titles for the current...

  • Page 42
    ... to benefit from the new Nintendo Micro handheld device, to be released in fall 2005, which plays Game Boy Advance games. We are also expanding our handheld leadership position to wireless devices and plan to extend many of our upcoming console titles to the wireless platform, including Destroy All...

  • Page 43
    ... year. Licenses are expensed to license amortization and royalties at the higher of (1) the contractual royalty rate based on actual net product sales related to such license or (2) an effective rate based upon total projected revenue related to such license. When, in management's estimate, future...

  • Page 44
    ... uses our estimates of revenue for the reporting units, driven by anticipated success of our products and product release schedules, and estimated costs as well as appropriate discount rates. These estimates are consistent with the plans and estimates that we use to manage the underlying businesses...

  • Page 45
    ...shorter than we had originally estimated, and there are sufficient cash flows to support the carrying value of the assets, we accelerate the rate of depreciation charges in order to fully depreciate the assets over their new shorter useful lives. Income taxes. As part of the process of preparing our...

  • Page 46
    ... October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. We have not yet completed...

  • Page 47
    ... 2005 (a) Fiscal Year Ended March 31, 2004 (b) 2003 (c) (d) (Unaudited) Year Ended December 31, 2002 (d) Net sales ...$ 756,731 Costs and expenses: Cost of sales ...250,055 License amortization and royalties...85,926 Software development amortization...93,622 Product development . . 72,959 Selling...

  • Page 48
    ... For fiscal 2005, North American net sales increased to $470.6 million from $453.4 million in fiscal 2004 driven by: • the performance of Disney/Pixar's The Incredibles, The SpongeBob SquarePants Movie, and WWE SmackDown! Vs. Raw; strong sales of original titles: Full Spectrum Warrior, MX v. ATV...

  • Page 49
    ... million in fiscal 2004 driven by: • sales of Disney/Pixar's The Incredibles, The SpongeBob SquarePants Movie and WWE SmackDown! Vs. Raw; and strong sales of original titles Full Spectrum Warrior, the Punisher and Warhammer 40,000: Dawn of War. • International sales in fiscal 2004 were driven...

  • Page 50
    ...: • new releases of Disney/Pixar's The Incredibles, The SpongeBob SquarePants Movie and WWE SmackDown! Vs. Raw; sales of titles based on original properties Full Spectrum Warrior, MX v. ATV Unleashed, The Punisher and Tak 2: The Staff of Dreams; catalog sales of WWE SmackDown! Here Comes The Pain...

  • Page 51
    ... • sales of original properties including Full Spectrum Warrior, MX v. ATV Unleashed and The Punisher; sales of Disney/Pixar's The Incredibles and The SpongeBob SquarePants Movie; and strong catalog sales. Net sales in fiscal 2004 were driven by: • the release of titles based on our three key...

  • Page 52
    ... of original properties including Tak 2: The Staff of Dreams; and strong catalog sales, specifically Disney/Pixar's Finding Nemo and SpongeBob SquarePants: Battle for Bikini Bottom. Net sales in fiscal 2004 were driven by: • sales of key mass market brands: Disney/Pixar's Finding Nemo, SpongeBob...

  • Page 53
    ... fiscal 2005 from $74.9 million in fiscal 2004, an increase of 16%. PC sales in fiscal 2005 were primarily driven by: • sales of products targeted at the core gamer Full Spectrum Warrior and Warhammer 40,000: Dawn of War; sales of Disney/Pixar's The Incredibles and The SpongeBob SquarePants Movie...

  • Page 54
    ...in fiscal 2005 compared to fiscal 2004 was primarily due to Full Spectrum Warrior and Warhammer 40,000: Dawn of War. In fiscal 2004, sales were primarily driven by the strong performance of Disney/ Pixar's Finding Nemo and international sales of Broken Sword 3. Additionally, we released 67 PC titles...

  • Page 55
    ... rates by brand remaining relatively constant for fiscal 2005 and 2004. We expect license amortization and royalties as a percentage of net sales to decrease in fiscal 2006, reflecting greater sales mix of games based upon original properties. Software Development Amortization (in thousands) Year...

  • Page 56
    .../Pixar's The Incredibles, The SpongeBob SquarePants Movie, and WWE SmackDown! Vs. Raw, and other releases. We expect selling and marketing expense to increase in fiscal 2006 as compared to fiscal 2005 as we support the launches of an increased number of key titles based upon new original properties...

  • Page 57
    ... (2) our estimate of current fiscal year research and development income tax credits. Excluding the one-time benefit of $7.8 million, our effective income tax rate for fiscal 2005 would have been 29%. We expect our effective income tax rate to be approximately 31% for fiscal 2006. Minority Interest...

  • Page 58
    ... the mass-market titles, which drove North American sales in fiscal 2004: Disney/Pixar's Finding Nemo, SpongeBob SquarePants: Battle for Bikini Bottom, WWE SmackDown!: Here Comes The Pain for PlayStation 2, WWEâ„¢ Rawâ„¢ 2 for Xbox, WWE Wrestlemania X9 for GameCube, and Sonic Advance 2 for Game Boy...

  • Page 59
    ... 35% Net sales of video games for PlayStation 2 increased for fiscal 2004 due to the releases of: Disney/Pixar's Finding Nemo, Scooby-Doo! Mystery Mayhem, SpongeBob SquarePants: Battle for Bikini Bottom, WWE SmackDown! Here Comes the Pain and the launch of two new original brands-MX Unleashed and...

  • Page 60
    ...51,468 11.0% 19.2% Net sales of video games for GameCube in fiscal 2004 included releases of WWE Wrestlemania X9, SpongeBob SquarePants: Battle for Bikini Bottom and the launch of our original title, Tak and the Power of Juju. We released 11 GameCube SKUs during fiscal 2004 compared to 10 SKUs in...

  • Page 61
    ....5% 51.9% Net sales of our PC games increased in fiscal 2004 primarily due to strong sales of Disney/Pixar's Finding Nemo. Growth in net sales during fiscal 2004 was also due to strong sales of PC titles published by ValuSoft, our value division. In total we released 52 PC SKUs published from our...

  • Page 62
    ... on software developed for Game Boy Advance; (2) higher average net selling price for our PC products due to the success of Disney/Pixar's Finding Nemo; and (3) the increased percentage of wireless net sales, which carry minimal cost of sales. License Amortization and Royalties (in thousands) Year...

  • Page 63
    ... dollars was due to the advertising and other promotional support needed for such titles as WWE SmackDown! Here Comes The Pain, SpongeBob SquarePants Battle for Bikini Bottom, Splashdown: Rides Gone Wild, Disney/Pixar's Finding Nemo and the launch of original titles Sphinx and the Cursed Mummy...

  • Page 64
    ... of the collections of our sales compared to fiscal 2004. We expect to continue to make significant expenditures in fiscal 2006 relating to our investment in software development and intellectual property licenses. Cash used in investing activities increased by $24.7 million for fiscal 2005, as...

  • Page 65
    ... Obligations and Commercial Commitments Fiscal Years Ending March 31, License / Software Development Commitments(1) Letters of Credit(4) Advertising(2) Leases(3) Other(5) Total 2006 ...2007 ...2008 ...2009 ...2010 ...Thereafter ... $ 82,157 54,221 43,424 37,000 12,000 22,000 $250,802 $ 16,362...

  • Page 66
    ... the development, marketing, sale or use of our games, including any claims for copyright or trademark infringement brought against the manufacturer. As a result, we bear a risk that the properties upon which the titles of our games are based, or that the information and technology licensed from...

  • Page 67
    ... portion of our sales. A small number of our products make up a substantial portion of our sales each year, and these products are responsible for a disproportionate amount of our net income. In fiscal 2005, sales of titles for our three top-selling brands, Disney/Pixar, Nickelodeon, and WWE were 21...

  • Page 68
    ... available. During these periods, sales of our game console entertainment software products may be expected to slow or even decline until new platforms are introduced and achieve wide consumer acceptance. Microsoft, Sony, and Nintendo have announced plans to introduce new console platforms in the...

  • Page 69
    ... market acceptance of our products, increase our costs or cause our revenue to decline. We rely on a small number of customers that account for a significant amount of our sales. Sales to our 10 largest customers collectively accounted for approximately 48%, 54% and 60% of our gross sales for fiscal...

  • Page 70
    .... We rely to a substantial extent on the management, marketing, sales, technical and software development skills of a limited number of employees to formulate and implement our business plan, including the development of our titles and brands. Our success depends to a significant extent upon our...

  • Page 71
    ... property for use of its property without a license. Any of these actions may cause material harm to our business and financial results. Our reported financial results could be affected by changes in current accounting principles. Recent actions and public comments from the Securities and Exchange...

  • Page 72
    ...stock may fall or significantly fluctuate. Rating systems and future legislation may make it difficult to successfully market and sell our products. Currently, the interactive software entertainment industry is self-regulated and rated by the Entertainment Software Rating Board. Our retail customers...

  • Page 73
    ... variable interest rates. At March 31, 2005, we had outstanding letters of credit of $3.8 million. Foreign Currency Risk We transact business in many different foreign currencies and are exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the...

  • Page 74
    ... manage foreign exchange risks, there can be no assurances that our mitigating or hedging activities will adequately protect us against the risks associated with foreign currency fluctuations. Item 8. Financial Statements and Supplementary Data The report of Independent Registered Public Accounting...

  • Page 75
    ... accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of March 31, 2005, based...

  • Page 76
    Part I-Financial Information Item 1. Financial Statements. THQ INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) March 31, 2005 March 31, 2004 ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Cash, cash equivalents and short-term ...

  • Page 77
    ...share data) Year Ended March 31, 2005 2004 Transition 2003 Year Ended December 31, 2002 Net sales ...Costs and expenses: Cost of sales ...License amortization and royalties ...Software development amortization ...Product development ...Selling and marketing...Payment to venture partner...General...

  • Page 78
    ... of options ...Tax benefit related to the exercise of employee stock options . Repurchase of common stock ...Stock compensation ...Comprehensive loss: Net loss ...Other comprehensive loss...Foreign currency translation adjustment...Unrealized loss on investments ...Reclassification adjustment for...

  • Page 79
    ... of licenses and software development ...Loss on disposal of property and equipment ...Stock compensation ...Tax benefit related to the exercise of employee stock options ...Deferred income taxes ...Other than temporary impairment on investments...Write-off of Network Interactive Sports Ltd...

  • Page 80
    ... which are currently sold in the United States and Canada. We are licensed to publish and distribute titles for GameCube, PlayStation 2, Xbox and Game Boy Advance in various additional territories, including Europe, Australia and New Zealand, parts of Asia and Central and South America. We expect to...

  • Page 81
    ...involving the development, marketing, sale, or use of our games, including any claims for copyright or trademark infringement brought against the manufacturer. As a result, we bear a risk that the properties upon which the titles are based, or that the information and technology licensed from others...

  • Page 82
    ... rate securities as of March 31, 2005. In the previously reported consolidated statement of cash flows for the year ended March 31, 2004, cash used in investing activities related to these short-term investments of $166 million was included in cash and cash equivalents. The realized gains from sales...

  • Page 83
    ..., 2005 Gross Gross Unrealized Unrealized Costs Losses March 31, 2004 Gross Gross Unrealized Unrealized Gains Losses Amortized Costs Fair Value Amortized Costs Fair Value Available-for-sale (current): Corporate notes and bonds ...Municipal securities . Total available-for-sale investments...Held...

  • Page 84
    ... retailers. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit losses. Sales (before returns and allowances) to a major customer represented 14%, 19%, 25% and 16% of gross sales in the fiscal years ended March 31, 2005 and 2004, Transition 2003...

  • Page 85
    ... year. Licenses are expensed to license amortization and royalties at the higher of (1) the contractual royalty rate based on actual net product sales related to such license or (2) an effective rate based upon total projected revenue related to such license. When, in management's estimate, future...

  • Page 86
    ... revenue for packaged software when title and risk of loss transfers to the customer, provided that no significant vendor support obligations remain outstanding and that collection of the resulting receivable is deemed probable by management. Although we generally sell our products on a no-return...

  • Page 87
    ... 1,216,903 outstanding stock options on December 15, 2003 and on June 21, 2004 granted, in exchange for the canceled options, 758,836 new options. The replacement options have an exercise price of $21.73, which was the closing price of a share of THQ common stock on the Nasdaq Stock Market on June...

  • Page 88
    .... Fiscal Year Ended March 31, 2005 2004 (In thousands, except per share data) Transition 2003 Year Ended December 31, 2002 Net income (loss)-as reported ...Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects ...Deduct: Total stock-based...

  • Page 89
    ... to Employees." SFAS No. 123R originally required all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first quarter or annual period after June 15, 2005. On April 21, 2005 the...

  • Page 90
    3. Business Combinations In fiscal 2005, we acquired the following two entities for a total cost of $14.3 million, which was paid primarily in cash: • Relic Entertainment, located in Vancouver, British Columbia, Canada, a developer of interactive entertainment software for video game hardware ...

  • Page 91
    ...Purchase of Blue Tongue ...Effect of foreign currency exchange rates ...Balance at March 31, 2005 ...$58,609 (1,510) 2,300 59,399 9,064 8,611 2,300 2,452 1,614 $83,440 The adjustment to goodwill in fiscal 2004 related to acquired net operating loss carry forwards in Germany that were not recorded...

  • Page 92
    ...on net product sales and therefore not disclosed in years. The estimated amortization expense for licenses, software development and acquired intellectual property is based on anticipated release dates and total projected revenue. Amortization expense related to licenses and software development for...

  • Page 93
    ... certain World Wrestling Entertainment wrestling games for the PlayStation 2 and GameCube. In November 2004, we acquired all intellectual property rights to the Juiced franchise, a street racing property, including the Juiced videogame that we plan to release in the first quarter of fiscal 2006, for...

  • Page 94
    ...financial statements is as follows: Fiscal Year Ended March 31, 2005 2004 (In thousands) Transition 2003 Year Ended December 31, 2002 Federal provision (benefit) at statutory rate . State taxes (net of Federal benefit and state research and development income tax credit) ...Research and development...

  • Page 95
    ...Foreign Current Deferred income tax assets: Net operating loss ...Allowance for price protection, returns and doubtful accounts ...Accrued expenses ...State income taxes ...Other-net ...Valuation allowance ...Total deferred income tax assets ...Deferred income tax liabilities: Software development...

  • Page 96
    ... the 1997 Plan, but participation is reserved for employees who are not executive officers and only non-qualified options may be granted. The purchase price per share of common stock purchasable upon exercise of each option may not be less than the fair market value of such share of common stock on...

  • Page 97
    ... price per share of all options granted under the plans in the year ended December 31, 2002, Transition 2003 and the fiscal years ended March 31, 2004 and 2005 has been the closing market price of the stock on the date of the grant. Stock Options Weighted Average Exercise Price Number of Shares...

  • Page 98
    ... and shares exercised relating to options granted outside of our stock option plans during the year ended December 31, 2002, Transition 2003 and the fiscal years ended March 31, 2004 and 2005, are listed below. Share exercise prices for these options equal the market price of our common stock at...

  • Page 99
    ... 10 years. The fair value of the warrant is included in licenses in the consolidated balance sheet. The warrant expires December 31, 2013. As of March 31, 2005, this warrant has not been exercised and is outstanding. On July 1, 2002, we issued approximately 167,000 shares of common stock as part of...

  • Page 100
    ... JAKKS Pacific, Inc. ("JAKKS") that governs our relationship with respect to the World Wrestling Entertainment, Inc. ("WWE") license. This agreement was amended in January 2002. Our relationship with JAKKS was established to enable THQ to develop, manufacture, distribute, market and sell video games...

  • Page 101
    ... Obligations and Commercial Commitments Fiscal Years Ending March 31, License / Software Development Commitments(1) Letters of Credit(4) Advertising(2) Leases(3) Other(5) Total 2006 ...2007 ...2008 ...2009 ...2010 ...Thereafter... $ 82,157 54,221 43,424 37,000 12,000 22,000 $ 250,802 $ 16,362...

  • Page 102
    ... that, among other things, the THQ/JAKKS video game license is void. On March 30, 2005, WWE filed an amended complaint, adding both new claims and our president and chief executive officer, Brian Farrell, as a defendant. We believe that neither we, nor Brian Farrell, are directly accused of any...

  • Page 103
    ... The Tetris Company, LLC ("Tetris") in the Superior Court of California, County of Los Angeles. The complaint alleges that Tetris breached its license agreement and certain oral agreements with us, which prevented us from releasing a Tetris product for the Nintendo DS system as planned in March 2005...

  • Page 104
    ...reportable segment in which we are a developer, publisher and distributor of interactive entertainment software for home video game consoles, handheld platforms and personal computers. The following information sets forth geographic information on our sales and long-lived assets for the fiscal years...

  • Page 105
    ... million settlement of dispute with directors' and officers' insurance carrier, including the related income tax effect. For the quarter ended December 31, 2004, net income included a $7.8 million benefit for research and development income tax credits claimed for prior years. Item 9. Changes in and...

  • Page 106
    ...that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. (b) Internal Control over Financial Reporting Our management...

  • Page 107
    ... of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors...

  • Page 108
    ...REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of THQ Inc., Calabasas Hills, California We have audited management's assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that THQ Inc. and its subsidiaries (the "Company...

  • Page 109
    ... of the Public Company Accounting Oversight Board (United States), the Company's consolidated balance sheet as of March 31, 2005 and the related consolidated statements of operations, stockholder's equity and cash flows for the year then ended. Our report dated June 8, 2005 expressed an unqualified...

  • Page 110
    ... There were no reportable business relationships, transactions with management, or indebtedness of management during the fiscal year ended March 31, 2005. Item 14. Principal Accounting Fees and Services The information regarding principal accounting fees and services and the Company's pre-approval...

  • Page 111
    ... Schedules The following financial statements of the Company are included in Part II Item 8: REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ...CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets-March 31, 2005 and 2004...Consolidated statements of operations for the fiscal years...

  • Page 112
    ... Employee Stock Option Plan (incorporated by reference to Appendix C to Registrant's Proxy Statement on Schedule 14A filed July 3, 2003). Form of Severance Agreement with Executive Officers (incorporated by reference to Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year...

  • Page 113
    ... 2003 10-Q). PlayStation® Portable Licensed Publisher Agreement, dated as of November 17, 2004 between Sony Computer Entertainment America Inc. and THQ Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's December 2004 10-Q). Microsoft Corporation Xbox™ Publisher License Agreement...

  • Page 114
    ... the Registrant's June 2004 10-Q). Confidential License Agreement for the Nintendo DS handheld platform, dated as of January 25, 2005 between Nintendo of America, Inc. and THQ Inc. Lease agreement dated December 22, 2004 between THQ Inc., as Tenant, and FORCE-AGOURA ROAD, LLC and Dennis D. Jacobsen...

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    THQ INC. 27001 AGOURA ROAD, SUITE 325 CALABASAS HILLS CALIFORNIA www.thq.com