THQ 2010 Annual Report Download - page 76

68
position and establishing a significantly lower Preferred Return rate to JAKKS. The new rate was effective as
of July 1, 2006 and applied through December 31, 2009. On August 17, 2009, we entered into a settlement
agreement with JAKKS, which reflected the decision of the arbitrator. From July 1, 2006 through June 30,
2009, we had been accruing this expense at the contract payment rate that expired June 30, 2006, which,
prior to the arbitrator’s decision, was the best basis available upon which to estimate this expense. As a
result of establishing the Preferred Return rate for the period under dispute, we revised our previous estimate
which resulted in a one-time reduction in accrued venture partner expense of $24.2 million, with a
corresponding reduction in venture partner expense during the three months ended September 30, 2009. In
August 2009, we paid Jakks $32.8 million, related to the period beginning July 1, 2006 and ending
March 31, 2009, which we had previously not paid, pending the settlement of the Preferred Return rate
matter.
Set tlement Agreements related to the License
From October 2004 through December 2009, we were involved in various legal disputes with both WWE and
Jakks related to the License. On December 22, 2009, we entered into settlement agreements with both
WWE and Jakks related to the License and the LLC. The material terms of the agreements are summarized
below. The summary is qualified in its entirety by reference to the Agreements.
Settlement Agreement between THQ and WWE
The settlement agreement between THQ and the WWE provides that (i) THQ will pay $13,175,000 to
the WWE; (ii) WWE will dismiss with prejudice all remaining claims against THQ, Jakks and the LLC;
and (iii) THQ and WWE will release claims against each other (including claims against Brian Farrell)
as more fully specified in the WWE Settlement Agreement. The settlement agreement contained a
provision stating that it would not become effective unless and until, prior to December 31, 2009,
(a) THQ and WWE entered into a new license agreement for WWE video games, (b) WWE entered
into a release agreement with Jakks, and (c) THQ entered into a settlement agreement with Jakks.
This settlement agreement became effective on December 22, 2009. Accordingly, in December 2009,
THQ paid $13,175,000 to WWE and all remaining claims against THQ, Jakks and the LLC were
dismissed or withdrawn, with prejudice.
Agreements between THQ and Jak ks
We entered into two agreements with Jakks. The first settlement agreement (1) terminated the LLC
Operating Agreement and provided for the parties to dissolve the LLC as of December 31, 2009;
(2) vests ownership of, and all right, title and interest in and to, all assets, obligations and liabilities of
the LLC, including, but not limited to, intellectual property belonging to the LLC in THQ, effective
January 1, 2010; (3) allows THQ to enter into a video game license with WWE effective January 1,
2010; and (4) provides that the LLC shall not renew the License and that any notice of renewal sent
to the WWE shall be of no force and effect and thus the License shall terminate as of December 31,
2009. As consideration for the termination provisions set forth in this agreement, THQ agreed to pay
Jakks a total of $20.0 million as follows: (a) $6.0 million on or before June 30, 2010; (b) $6.0 million
on or before June 30, 2011; (c) $4.0 million on or before June 30, 2012; and (d) $4.0 million on or
before June 30, 2013. The present value of these amounts is included in other current liabilities and
other long-term liabilities in our March 31, 2010 consolidated balance sheet. The LLC was dissolved
as of December 31, 2009.
The second settlement agreement between THQ and Jakks provides that THQ shall make the
payments to Jakks as set forth in the above-referenced agreement and that the parties will dismiss
and/or withdraw with prejudice all outstanding claims against each other. As of December 31, 2009,
both parties had dismissed or withdrew, with prejudice, all claims against each other.
To determine the appropriate accounting for the settlement agreements, we first identified the various
elements of each arrangement. We determined that we were not able to reliably estimate the fair value of the
litigation component of the settlement, and thus have measured this component as the residual value
remaining after determining the fair value of any assets received. The fair value of the assets received—the
new WWE license—was determined using Level 3 valuation inputs; specifically, a discounted future cash flow
model, over the eight-year term of the license, and we concluded that the license rate approximated fair
value. As a result, in the period ended December 31, 2009, we recorded a $29.5 million charge which was
classified as venture partner expense and represented the present value of the current and future cash
payment contained in the settlement (the residual value), less amounts previously accrued.