THQ 2007 Annual Report Download - page 89

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81
declaration that theWWE is entitled to terminate the video game license and seek monetarydamages. On
February 8, 2007,the Company and the LLC jointly moved to strike oneof theclaims, for violation of the
Connecticut Unfair Trading Practices Act; on March 28, 2007, theCourt denied that motion, without
prejudice to the defendants’ ability to raise the same issue at alater date. On February 22, 2007, theCourt
established aschedule for this case, including discovery, and ordering that thecasebe “exposed for trial”
as of October14, 2008.However, on March30, 2007,WWE moved for leave to amend its pleadings to add
allegations and claims substantially similar to those already pendinginWWE’s lawsuit in theSouthern
District of NewYork and to “cite in” theother defendants from that action. Thedefendants objected to
this motion. At a hearing on May 8, 2007, the Court granted WWE’s request to amend the complaint and
adddefendants. The Court also suspended deadlines under itsexisting scheduling order and indicated it
will re-examine thescheduleafter thenewdefendants have been servedand have appeared. The amended
complaint wasserved on the Company and Brian Farrell on or about May 10, 2007. The Company believes
it and the LLC have several bases for defending any claim of breach of theWWE videogame license
agreement resulting from the manner of distribution of WWE-licensed products in Japan and other Asian
territories.Weintend to vigorously defendourselves against the claims raised in this action, including
those raised in the amended complaint.
Dueto the earlystatus of this litigation with WWEwe cannot estimate apossibleloss,if any. Games we
develop based upon our WWE videogamelicense havecontributed to approximately15% of our net sales
during each of the three years in the period ended March 31,2007. The loss of theWWE license would
have anegative impact on our future financial results.
Operating agreement with JAKKS Pacific, Inc.
In June1999 we entered into an operatingagreement with JAKKS that governs our relationship with
respect to the WWE videogame license. Pursuant to the terms of this agreement, JAKKS is entitled to a
preferred payment from revenues derived from exploitation of theWWE videogame license. Theamount
of thepreferredpayment to JAKKS for theperiod beginning July 1, 2006 and ending December 31, 2009
(the “First Subsequent Distribution Period”)is to be determined by agreement or, failing that, by
arbitration.
Theparties have not reached agreement on thepreferred payment for theFirst SubsequentDistribution
Period. Accordingly, as provided in the operating agreement, theparties are in the process of selecting an
arbitrator to resolve this dispute. Although we believe continuation of the previous preferred payment
would represent significantly excessive compensationto JAKKS for the First Subsequent Distribution
Period, we arenot able to predict the outcome of the arbitration or otherwise estimate the amount of the
preferred payment for the First Subsequent Distribution Period. Accordingly, we are currently accruingfor
apreferred payment to JAKKS at the previous rate. However, we have advised JAKKS that we do not
intend to make any paymentuntil the amount of the preferred payment payable to JAKKS for theFirst
Subsequent DistributionPeriod is agreedor otherwise determined as provided in the operating agreement.
On April30, 2007,wefiled a petition to compelarbitration andappoint an arbitrator in the Superior Court
of the State of California for theCountyof LosAngeles, West District. Our petition seeks a court order
compelling JAKKS to comply with thearbitration provisions in the operating agreement and establishing a
process and timelineforselecting an arbitrator. On or about May 22, 2007, JAKKS filed a responseto our
petition, as wellas an application for provisionalreliefrequesting that, pending conclusion of the
arbitration, THQ either be enjoined fromdistributing to itself anyproceeds from thejoint venturesince
June 2006 or be compelled to resume payments to JAKKS at the samerate that was in effect prior to
June 2006. A hearing on thepetition is scheduled for June19, 2007.
We do not expect the resolution of this dispute to have amaterial adverseimpacton our resultsof
operations, financial position or cash flows.