NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1
.
Basis of Presentation
The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q ("10-Q") present the results of operations, financial position and cash flows of THQ Inc. and its subsidiaries (collectively "THQ," "we," "us," "our," or the "Company"). In the opinion of management, the accompanying condensed consolidated balance sheets and related interim condensed consolidated statements of operations, and condensed consolidated statements of comprehensive loss and condensed consolidated statements of cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to accounts receivable allowances, licenses, software development, revenue recognition, stock-based compensation expense and income taxes. Interim results are not necessarily indicative of results for a full year. The balance sheet at
March 31, 2012
has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The information included in this 10-Q should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
March 31, 2012
(the "2012 10-K").
At
September 30, 2012
, we had working capital of
$5.6 million
, including cash and cash equivalents of
$36.3 million
, and we had a total stockholders' deficit of
$41.2 million
. Development of quality products requires substantial up-front expenditures and thus we expect to utilize a substantial portion of our existing cash and cash equivalents and other working capital to develop our upcoming products. In addition to our cash and cash equivalents, we have an asset-based credit facility that, subject to the terms and conditions thereof, provides up to
$50.0 million
in financing that we have drawn against in order to fund our business operations. Although the asset-based credit facility provides up to
$50.0 million
in borrowings, the current available borrowing base reduces the potential for additional borrowing at this time. At September 29, 2012 we were in default under the terms of the asset-based credit facility; see "Note
6
—
Debt
" for further information.
On November 5, 2012, we announced the delayed releases of:
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•
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South Park: The Stick of Truth
, which was originally scheduled for release on March 5, 2013, to early fiscal 2014 due to the need for additional development time; and
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|
•
|
Company of Heroes 2
and
Metro: Last Light
, both of which are expected to ship in March 2013, later than initially planned.
|
Because of the calendar movement for the release of games, we will likely need to raise additional capital and may also need to defer and/or curtail currently planned expenditures, cancel projects currently in development, sell assets and/or pursue additional external sources of liquidity, which may not be available on financially attractive terms. We have engaged Centerview Partners LLC to assist us in evaluating strategic and financial alternatives intended to improve our overall liquidity, including raising additional capital, and preserve our ability to bring games to market during advantageous release windows and to help address our
$100.0 million
5%
convertible senior notes due August 2014 ("Notes"). There can be no assurance that the evaluation of strategic and financing alternatives will result in a transaction or financing, or that, if completed, said transaction and/or financing will be on attractive terms. Our inability to successfully complete a transaction or financing on attractive terms would have a material adverse impact on our ability to comply with the requirements of our credit and debt facilities (see "Note
6
—
Debt
") and to sustain our operations.
Principles of Consolidation.
Our condensed consolidated financial statements include the accounts of THQ Inc. and our wholly-owned subsidiaries.
Reverse Stock Split.
On January 25, 2012, we received a notification letter from NASDAQ notifying us that we were not in compliance with the
$1.00
minimum bid price requirement (NASDAQ Marketplace Rule 5450(a)(1)) (the "Rule") because the bid price for our common stock closed below
$1.00
over the prior
30
consecutive business days. To regain compliance with this requirement, we held a special meeting of stockholders on June 29, 2012 to solicit stockholder approval of a proposal to approve an amendment to our certificate of incorporation to effect a reverse stock split ("Reverse Stock Split"). On July 2, 2012, we announced the timing and details regarding stockholder approval of the Reverse Stock Split, which was effected on July 5, 2012 at a ratio of one-for-ten with no change in par value. No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who otherwise were entitled to receive fractional shares were entitled to an amount in cash (without interest or deduction) equal to the fraction of one share to which such stockholder would otherwise be entitled multiplied by
$5.75
. On July
23, 2012, we received a letter from NASDAQ informing us that we had regained compliance with the Rule. All consolidated per share information presented in this 10-Q gives effect to the Reverse Stock Split.
Summary of Significant Accounting Policies.
In the
six
months ended
September 30, 2012
, we did not have any material changes to our significant accounting policies.
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-05, "Comprehensive Income (Topic 220): Presentation of Comprehensive Income" ("ASU 2011-05"). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements and it eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. ASU 2011-05 does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05" ("ASU 2011-12"). ASU 2011-12 defers the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of ASU 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Our adoption of this pronouncement in the
six
months ended
September 30, 2012
did not materially impact our results of operations, financial position or cash flows. We do not expect that the proposed deferral guidance will have a material impact on our consolidated financial statements when and if adoption is required.
In December 2011, the FASB issued ASU 2011-11, "Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"). ASU 2011-11 creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required, which will be our quarter ending June 30, 2013. The new disclosures are designed to make financial statements that are prepared under U.S. Generally Accepted Accounting Principles more comparable to those prepared under International Financial Reporting Standards. The adoption is not expected to have a material impact on our results of operations, financial position or cash flows.
Fiscal Quarter.
We report our fiscal year on a 52/53-week period with our fiscal year ending on the Saturday nearest March 31. For simplicity, all fiscal periods in our condensed consolidated financial statements and accompanying notes are presented as ending on a calendar month end. The results of operations for the
three
and
six
months ended
September 30, 2012
and
2011
contain the following number of weeks:
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|
Fiscal Period
|
|
Number of Weeks
|
|
Fiscal Period End Date
|
|
Three months ended September 30, 2012
|
|
13 weeks
|
|
September 29, 2012
|
|
Three months ended September 30, 2011
|
|
13 weeks
|
|
October 1, 2011
|
|
Six months ended September 30, 2012
|
|
26 weeks
|
|
September 29, 2012
|
|
Six months ended September 30, 2011
|
|
26 weeks
|
|
October 1, 2011
|
2
.
Balance Sheet Details
Inventory.
Inventory at
September 30, 2012
and
March 31, 2012
consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
March 31,
2012
|
|
Finished goods
|
$
|
11,550
|
|
|
$
|
16,860
|
|
|
Components
|
832
|
|
|
1,625
|
|
|
Inventory
|
$
|
12,382
|
|
|
$
|
18,485
|
|
Inventory balances at
September 30, 2012
and
March 31, 2012
are net of reserves of
$19.1 million
and
$21.1 million
, respectively. The inventory reserve balance at
September 30, 2012
consists primarily of reserves related to our uDraw Game Tablet ("uDraw").
Prepaid expenses and other current assets.
Prepaid expenses and other current assets at
September 30, 2012
and
March 31, 2012
primarily consisted of product costs totaling
$3.9 million
and
$33.4 million
, respectively, that were deferred in connection with the deferral of related net revenue. Also included in prepaid expenses and other current assets at
September 30, 2012
and
March 31, 2012
were product prepayments of
$2.3 million
and
$1.1 million
, respectively.
Property and equipment, net
. Property and equipment, net at
September 30, 2012
and
March 31, 2012
consisted of the following (amounts in thousands):
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|
|
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|
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|
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Useful lives
|
|
September 30,
2012
|
|
March 31,
2012
|
|
Building
|
30 yrs
|
|
$
|
730
|
|
|
$
|
730
|
|
|
Land
|
—
|
|
401
|
|
|
401
|
|
|
Computer equipment and software
|
3-10 yrs
|
|
52,321
|
|
|
53,624
|
|
|
Furniture, fixtures and equipment
|
5 yrs
|
|
6,366
|
|
|
7,570
|
|
|
Leasehold improvements
|
3-6 yrs
|
|
14,959
|
|
|
13,005
|
|
|
Automobiles
|
2-5 yrs
|
|
—
|
|
|
87
|
|
|
|
|
|
74,777
|
|
|
75,417
|
|
|
Less: accumulated depreciation
|
|
|
(51,887
|
)
|
|
(53,285
|
)
|
|
Property and equipment, net
|
|
|
$
|
22,890
|
|
|
$
|
22,132
|
|
Depreciation expense associated with property and equipment amounted to
$2.0 million
and
$4.1 million
for the
three
and
six
months ended
September 30, 2012
, respectively, and
$2.7 million
and
$5.6 million
for the
three
and
six
months ended
September 30, 2011
, respectively.
Accrued and other current liabilities.
Accrued and other current liabilities at
September 30, 2012
and
March 31, 2012
consisted of the following (amounts in thousands):
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|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
March 31,
2012
|
|
Accrued liabilities
|
$
|
11,730
|
|
|
$
|
13,345
|
|
|
Settlement payment
|
4,200
|
|
|
4,000
|
|
|
Accrued compensation
|
7,649
|
|
|
13,117
|
|
|
Accrued third-party software developer milestones
|
7,222
|
|
|
15,201
|
|
|
Accrued royalties
|
18,993
|
|
|
38,030
|
|
|
Accrued and other current liabilities
|
$
|
49,794
|
|
|
$
|
83,693
|
|
Other long-term liabilities.
Other long-term liabilities at
September 30, 2012
and
March 31, 2012
consisted of the following (amounts in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
March 31,
2012
|
|
Minimum license guarantees
|
$
|
30,000
|
|
|
$
|
36,405
|
|
|
Deferred rent
|
7,100
|
|
|
6,667
|
|
|
Accrued liabilities
|
6,703
|
|
|
7,127
|
|
|
Settlement payment
|
604
|
|
|
3,638
|
|
|
Other long-term liabilities
|
$
|
44,407
|
|
|
$
|
53,837
|
|
Settlement payments included in the tables above are payable to JAKKS Pacific, Inc. ("Jakks"). In the
three
months ended June 30, 2012 we paid
$2.0 million
and renegotiated the payment terms of the remaining liability. Under these renegotiated terms we paid
$1.0 million
on each of
August 30, 2012
and
October 30, 2012
and there are
ten
payments remaining of
$0.4 million
each that are due monthly beginning in February 2013, through to November 2013. Of the remaining settlement payment due to Jakks,
$4.2 million
is reflected in "Accrued and other current liabilities" and
$0.6 million
is reflected in "Other long-term liabilities" in our condensed consolidated balance sheets, reflecting the present value of the remaining consideration payable under the agreement between THQ and Jakks. See "Note
14
—
Joint Venture and Settlement Agreements
" in the notes to the consolidated financial statements in our 2012 10-K for a discussion of the Jakks settlement payments.
3
.
Licenses and Software Development
Licenses.
As of
September 30, 2012
and
March 31, 2012
, the net carrying value of our licenses was
$47.6 million
and
$64.5 million
, respectively, and was reflected as “Licenses” and “Licenses, net of current portion” in our condensed consolidated balance sheets. At
September 30, 2012
, we had commitments
of
$0.1 million
that are
not reflected in our condensed consolidated balance sheet due to remaining performance obligations of the licensor. License amortization and royalties expense in the
three
and
six
months ended
September 30, 2011
included a
$16.0 million
charge related to the abandonment of a license for an unannounced game that was cancelled in connection with a studio closure.
Software development.
As of
September 30, 2012
and
March 31, 2012
, the net carrying value of our software development was
$104.0 million
and
$130.6 million
, respectively, and was reflected as “Software development” and “Software development, net of current portion” in our condensed consolidated balance sheets. At
September 30, 2012
we had commitments of
$59.8 million
that are not reflected in our condensed consolidated balance sheet due to remaining performance obligations of the external developers. Software amortization and royalties expense in the
six
months ended
September 30, 2012
included a
$5.2 million
charge related to the write-off of capitalized software development due to the cancellation of an unreleased title and a
$1.4 million
charge related to a change in the development direction of another unreleased title. Additionally, software amortization and royalties expense in the
six
months ended
September 30, 2012
included a net benefit of
$2.3 million
related to the June 1, 2012 transfer of the license we previously had to develop games based on the Ultimate Fighting Championship ("UFC"). The net benefit was the result of charges incurred related to the write-off of software development costs we had previously capitalized for the UFC game that was under development at the time of the license transfer, offset by a cash payment we received from the licensor upon the transfer of the license. All these actions were undertaken in connection with our realignment plans (see "Note
5
—
Restructuring and Other Charges
”). Software amortization and royalties expense in the
three
and
six
months ended
September 30, 2011
included charges of
$17.5 million
and
$18.9 million
, respectively, related to the write-offs of capitalized software development for unannounced games that were cancelled in connection with our realignment plans.
Impairment analysis.
We evaluate the future recoverability of our capitalized licenses and software development on a quarterly basis in connection with the preparation of our financial statements. In this evaluation, we compare the carrying value of such capitalized costs to their net realizable value, on a product-by-product basis. The net realizable value is determined using Level 3 inputs, specifically, the estimated future net sales from the product, reduced by the estimated future direct costs associated with the product such as completion costs, cost of sales, and selling and marketing expenses. Net sales inputs are developed using recent internal sales performance for similar titles, adjusted for current market trends and comparable products. As certain of our licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized license costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television series based on the intellectual property and the rights holder's continued promotion and exploitation of the intellectual property.
We did not record any software development impairment charges in the
three
and
six
months ended
September 30, 2012
. In the
six
months ended
September 30, 2011
we recognized a software development impairment charge of
$0.6 million
related to one of our titles.
4
.
Other Long-Term Assets
Other long-term assets include our investment in Yuke's, a Japanese video game developer. We own approximately
15%
of Yuke's, which is publicly traded on the Nippon New Market in Japan. This investment is classified as available-for-sale and reported at fair value with unrealized holding gains and losses excluded from earnings and reported as a component of accumulated other comprehensive income until realized. The pre-tax unrealized holding gain related to our investment in Yuke's for the
six
months ended
September 30, 2012
and
2011
was
$0.1 million
and
$0.4 million
, respectively. As of
September 30, 2012
, the inception-to-date unrealized holding gain on our investment in Yuke's was
$1.5 million
. Due to the long-term nature of this relationship, this investment is included in "Other long-term assets, net" in our condensed consolidated balance sheets.
Other long-term assets as of
September 30, 2012
and
March 31, 2012
consisted of the following (amounts in thousands):
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|
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|
|
|
|
|
|
|
|
September 30,
2012
|
|
March 31,
2012
|
|
Investment in Yuke's
|
$
|
4,694
|
|
|
$
|
4,641
|
|
|
Deferred financing costs
|
1,192
|
|
|
1,510
|
|
|
Other
|
8,284
|
|
|
6,536
|
|
|
Total other long-term assets
|
$
|
14,170
|
|
|
$
|
12,687
|
|
5
.
Restructuring and Other Charges
Restructuring charges and adjustments are recorded as "Restructuring" expenses in our condensed consolidated statements of operations and generally include costs such as, severance and other employee-based charges in excess of standard business practices, costs associated with lease abandonments (less estimates of sublease income), charges related to long-lived assets, and costs of other non-cancellable contracts.
Fiscal 2013 second quarter realignment and other associated charges.
On
July 19, 2012
, we announced a consolidation of our two Quality Assurance teams into one location in order to reduce operating costs and centralize our resources at THQ Montreal. As a result, our Phoenix, Arizona Quality Assurance Office will be closed by the end of fiscal 2013. Additionally, on August 20, 2012, we announced a personnel reduction in our marketing and production groups based in Agoura Hills, reflective of our ongoing strategy to create a more focused, agile and digitally-oriented organization.
In connection with these actions, in the
three
months ended
September 30, 2012
, we incurred charges of
$1.4 million
related to cash severance and other employee-based charges (recorded within operating expenses in our condensed consolidated statements of operations). Additionally, we could incur up to
$0.8 million
in cash charges related to
lease and other contract terminations
and non-cash charges of up to
$0.2 million
related to long-lived assets. We expect the majority of these charges to be recorded in the quarter ended March 31, 2013. These amounts are preliminary and subject to change as we finalize our assessment of the charges and costs associated with the above items.
Fiscal 2013 first quarter realignment and other associated charges.
On June 1, 2012, we entered into an agreement to transfer our license to develop future games based on the Ultimate Fighting Championship ("UFC"). This action resulted in the closure of the studio developing the UFC game that was under development at the time of the license transfer. The following table summarizes the components and activity under the fiscal
2013
first quarter realignment, classified as "Restructuring" in our condensed consolidated statements of operations, for the
three
and
six
months ended
September 30, 2012
, and the related restructuring reserve balances (amounts in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
Six Months Ended September 30, 2012
|
|
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Beginning balance
|
|
$
|
996
|
|
|
$
|
—
|
|
|
$
|
996
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Charges (benefit) to operations
|
|
(59
|
)
|
|
(173
|
)
|
|
(232
|
)
|
|
856
|
|
|
120
|
|
|
976
|
|
|
Non-cash write-offs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(293
|
)
|
|
(293
|
)
|
|
Cash payments, net of sublease income and other cash receipts
|
|
(149
|
)
|
|
173
|
|
|
24
|
|
|
(187
|
)
|
|
173
|
|
|
(14
|
)
|
|
Foreign currency and other adjustments
|
|
15
|
|
|
—
|
|
|
15
|
|
|
134
|
|
|
—
|
|
|
134
|
|
|
Ending balance
|
|
$
|
803
|
|
|
$
|
—
|
|
|
$
|
803
|
|
|
$
|
803
|
|
|
$
|
—
|
|
|
$
|
803
|
|
In connection with the transfer of the license we had with the UFC, we recorded a net benefit of
$2.3 million
(recorded within “Cost of sales — Software amortization and royalties” in our condensed consolidated statement of operations). The net benefit was the result of charges incurred related to the write-off of software development costs we had previously capitalized for the UFC game that was under development at the time of the license transfer, offset by a cash payment we received from the licensor upon the transfer of the license. Additionally, in the
three
and
six
months ended
September 30, 2012
, we incurred a benefit of
$0.1 million
and charges of
$0.9 million
, respectively, related to cash severance and other employee-based charges (recorded within operating expenses in our condensed consolidated statements of operations) associated with the closure of the studio that had been developing the UFC game that was under development at the time of the license transfer.
Additionally, in the
six
months ended
September 30, 2012
, we incurred a
$5.2 million
charge related to the write-off of capitalized software development due to the cancellation of an unreleased title and a
$1.4 million
charge related to a change in the development direction of another unreleased title (recorded within “Cost of sales — Software amortization and royalties” in our condensed consolidated statements of operations). These actions were taken in June 2012 in connection with an evaluation of our products under development by our new President, appointed on May 25, 2012.
We do not expect any significant future charges under the fiscal
2013
first quarter realignment, other than additional facility-related charges and adjustments in the event actual and estimated sublease income changes.
Fiscal 2012 fourth quarter realignment and other associated charges.
On January 26, 2012, we initiated a plan of restructuring in connection with our updated business strategy in order to better align our operating expenses with the lower expected future revenue. The following table summarizes the components and activity under the fiscal 2012 fourth quarter realignment, classified as "Restructuring" in our condensed consolidated statements of operations, for the
three
and
six
months ended
September 30, 2012
, and the related restructuring reserve balances (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
Six Months Ended September 30, 2012
|
|
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Beginning balance
|
|
$
|
409
|
|
|
$
|
—
|
|
|
$
|
409
|
|
|
$
|
536
|
|
|
$
|
—
|
|
|
$
|
536
|
|
|
Charges to operations
|
|
244
|
|
|
17
|
|
|
261
|
|
|
261
|
|
|
17
|
|
|
278
|
|
|
Non-cash write-offs
|
|
—
|
|
|
(17
|
)
|
|
(17
|
)
|
|
—
|
|
|
(17
|
)
|
|
(17
|
)
|
|
Cash payments, net of sublease income
|
|
(176
|
)
|
|
—
|
|
|
(176
|
)
|
|
(261
|
)
|
|
—
|
|
|
(261
|
)
|
|
Foreign currency and other adjustments
|
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
|
(72
|
)
|
|
—
|
|
|
(72
|
)
|
|
Ending balance
|
|
$
|
464
|
|
|
$
|
—
|
|
|
$
|
464
|
|
|
$
|
464
|
|
|
$
|
—
|
|
|
$
|
464
|
|
Since the inception of the fiscal 2012 fourth quarter realignment through
September 30, 2012
, total restructuring charges amounted to
$1.5 million
.
In connection with these actions, in the
three
and
six
months ended
September 30, 2012
, we incurred charges of
$0.5 million
and
$0.3 million
, respectively, related to changes in estimates of cash severance and other employee-based charges (recorded within operating expenses in our condensed consolidated statements of operations), and a
$1.3 million
gain related to accumulated foreign currency translation adjustments (recorded within "Interest and other income (expense), net" in our condensed consolidated statements of operations). Additionally, in the
six
months ended
September 30, 2012
, we incurred a benefit of
$2.0 million
related to the release of a license obligation that had been accrued at
March 31, 2012
in connection with our negotiations with one of our previous kids' licensors (recorded within “Cost of sales — License amortization and royalties” expense in our condensed consolidated statements of operations). We do not expect any significant future charges under the fiscal 2012 fourth quarter realignment, other than additional facility-related charges and adjustments in the event actual and estimated sublease income changes.
Fiscal 2012 second quarter realignment.
On August 9, 2011, we announced a plan to realign our internal studio development teams and video games in development in order to better match our resources with our target portfolio of interactive entertainment and continue our transition away from traditional console games based on licensed kids' titles and movie entertainment properties. The following table summarizes the components and activity under the fiscal 2012 second quarter realignment, classified as "Restructuring" in our condensed consolidated statements of operations, for the
three
and
six
months ended
September 30, 2012
, and the related restructuring reserve balances (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
Six Months Ended September 30, 2012
|
|
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Beginning balance
|
|
$
|
2,109
|
|
|
$
|
—
|
|
|
$
|
2,109
|
|
|
$
|
2,341
|
|
|
$
|
—
|
|
|
$
|
2,341
|
|
|
Benefit to operations
|
|
(505
|
)
|
|
—
|
|
|
(505
|
)
|
|
(428
|
)
|
|
—
|
|
|
(428
|
)
|
|
Non-cash write-offs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash payments, net of sublease income
|
|
(284
|
)
|
|
—
|
|
|
(284
|
)
|
|
(584
|
)
|
|
—
|
|
|
(584
|
)
|
|
Foreign currency and other adjustments
|
|
14
|
|
|
—
|
|
|
14
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
Ending balance
|
|
$
|
1,334
|
|
|
$
|
—
|
|
|
$
|
1,334
|
|
|
$
|
1,334
|
|
|
$
|
—
|
|
|
$
|
1,334
|
|
Since the inception of the fiscal 2012 second quarter realignment through
September 30, 2012
, total restructuring charges amounted to
$3.7 million
.
We do not expect any future charges under the fiscal 2012 second quarter realignment, other than additional facility-related charges and adjustments in the event actual and estimated sublease income changes.
Fiscal 2012 first quarter realignment
. In the first quarter of fiscal 2012, we announced the closure of our studio located in the U.K. as we continued to refine our video game line-up and utilize studio locations in more cost effective markets. The following table summarizes the components and activity under the fiscal 2012 first quarter realignment, classified as "Restructuring" in our condensed consolidated statements of operations, for the
three
and
six
months ended
September 30, 2012
, and the related restructuring reserve balances (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
Six Months Ended September 30, 2012
|
|
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Beginning balance
|
|
$
|
528
|
|
|
$
|
—
|
|
|
$
|
528
|
|
|
$
|
585
|
|
|
$
|
—
|
|
|
$
|
585
|
|
|
Charges to operations
|
|
7
|
|
|
—
|
|
|
7
|
|
|
13
|
|
|
—
|
|
|
13
|
|
|
Non-cash write-offs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash payments, net of sublease income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
|
—
|
|
|
(52
|
)
|
|
Foreign currency and other adjustments
|
|
(40
|
)
|
|
—
|
|
|
(40
|
)
|
|
(51
|
)
|
|
—
|
|
|
(51
|
)
|
|
Ending balance
|
|
$
|
495
|
|
|
$
|
—
|
|
|
$
|
495
|
|
|
$
|
495
|
|
|
$
|
—
|
|
|
$
|
495
|
|
Since the inception of the fiscal 2012 first quarter realignment through
September 30, 2012
, total restructuring charges amounted to
$0.8 million
.
There were no other significant charges recorded in the
three
and
six
months ended
September 30, 2012
related to this realignment. In the
three
and
six
months ended
September 30, 2011
, we incurred
$27,000
and
$1.7 million
, respectively, of cash severance and other employee-based charges related to the notification to employees of position eliminations (recorded within operating expenses in our condensed consolidated statements of operations), and a
$1.6 million
loss related to accumulated foreign currency translation adjustments (recorded within "Interest and other income (expense), net" in our condensed consolidated statements of operations). Additionally, in the
three
months ended June 30, 2011, we incurred a
$1.4 million
charge related to the cancellation of an unannounced title in development at this studio (recorded within software development amortization in our condensed consolidated statements of operations). We do not expect any future charges under the fiscal 2012 first quarter realignment, other than additional facility related charges and adjustments in the event actual and estimated sublease income changes.
Fiscal 2011 fourth quarter realignment
. In the fourth quarter of fiscal 2011, we performed an assessment of our product development and publishing staffing models. This resulted in a change to our staffing plans to better address peak service periods, as well as better utilize shared-services and more cost-effective locations. The following table summarizes the components and activity under the fiscal 2011 fourth quarter realignment, classified as "Restructuring" in our condensed consolidated statements of operations, for the
three
and
six
months ended
September 30, 2012
, and the related restructuring reserve balances (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2012
|
|
Six Months Ended September 30, 2012
|
|
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Lease and Contract Terminations
|
|
Net Asset Impairments
|
|
Total
|
|
Beginning balance
|
|
$
|
250
|
|
|
$
|
—
|
|
|
$
|
250
|
|
|
$
|
321
|
|
|
$
|
—
|
|
|
$
|
321
|
|
|
Charges to operations
|
|
26
|
|
|
—
|
|
|
26
|
|
|
76
|
|
|
—
|
|
|
76
|
|
|
Non-cash write-offs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash payments, net of sublease income
|
|
(43
|
)
|
|
—
|
|
|
(43
|
)
|
|
(171
|
)
|
|
—
|
|
|
(171
|
)
|
|
Foreign currency and other adjustments
|
|
1
|
|
|
—
|
|
|
1
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
Ending balance
|
|
$
|
234
|
|
|
$
|
—
|
|
|
$
|
234
|
|
|
$
|
234
|
|
|
$
|
—
|
|
|
$
|
234
|
|
Since the inception of the fiscal 2011 fourth quarter realignment through
September 30, 2012
, total restructuring charges amounted
to
$0.6 million
. In the
three
and
six
months ended
September 30, 2012
we had a loss of
$0.2 million
related to accumulated foreign currency translation adjustments (recorded within "Interest and other income (expense), net" in our condensed consolidated statements of operations). There were no other significant charges recorded in the
three
and
six
months ended
September 30, 2012
related to this realignment.
Additionally, in connection with this change, in the
three
and
six
months ended
September 30, 2011
, we also incurred
$0.1 million
and
$1.9 million
, respectively, of cash severance and other employee-based charges related to the notification to employees of position eliminations (recorded within operating expenses in our condensed consolidated statements of operations), and a
$0.5 million
loss related to accumulated foreign currency translation adjustments (recorded within "Interest and other income (expense), net" in our condensed consolidated statements of operations). We do not expect any future charges under the fiscal 2011 fourth quarter realignment, other than additional facility related charges and adjustments in the event actual and estimated sublease income changes.
Fiscal 2009 realignment
. During the twelve months ended March 31, 2009 ("fiscal 2009"), we updated our strategic plan in an effort to increase our profitability and cash flow generation. We significantly realigned our business to focus on fewer, higher quality games, and established an operating structure that supports our more focused product strategy. The fiscal 2009 realignment included the cancellation of several titles in development, the closure or spin-off of several of our development studios, and the streamlining of our corporate organization in order to support the new product strategy, including reductions in worldwide personnel. We do not expect any future charges under the fiscal 2009 realignment, other than additional facility related charges and adjustments in the event actual and estimated sublease income changes.
The following table summarizes the restructuring lease and contract termination activity under the fiscal 2009 realignment for the
three
and
six
months ended
September 30, 2012
and
2011
, and the related restructuring reserve balances (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Six Months Ended September 30,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Beginning balance
|
|
$
|
1,123
|
|
|
$
|
1,015
|
|
|
$
|
1,211
|
|
|
$
|
1,335
|
|
|
Charges to operations
|
|
146
|
|
|
386
|
|
|
177
|
|
|
243
|
|
|
Non-cash write-offs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash payments, net of sublease income
|
|
(91
|
)
|
|
(153
|
)
|
|
(190
|
)
|
|
(326
|
)
|
|
Foreign currency and other adjustments
|
|
23
|
|
|
48
|
|
|
3
|
|
|
44
|
|
|
Ending balance
|
|
$
|
1,201
|
|
|
$
|
1,296
|
|
|
$
|
1,201
|
|
|
$
|
1,296
|
|
Since the inception of the fiscal 2009 realignment through
September 30, 2012
, total restructuring charges amounted to
$18.9 million
.
The aggregated restructuring accrual balances at
September 30, 2012
and
March 31, 2012
of
$4.5 million
and
$5.0 million
, respectively, related to future lease payments for facilities vacated under all of our realignment plans (offset by estimates of future sublease income), and accruals for other non-cancellable contracts. As of
September 30, 2012
,
$2.3 million
of the restructuring accrual is included in "Accrued and other current liabilities" and
$2.2 million
is included in "Other long-term liabilities" in our condensed consolidated balance sheet. As of
March 31, 2012
,
$1.9 million
of the restructuring accrual was included in "Accrued and other current liabilities" and
$3.1 million
was included in "Other long-term liabilities" in our condensed consolidated balance sheet. We expect the final settlement of this accrual to occur by August 1, 2015, which is the last payment date under our lease agreements that were vacated.
6
.
Debt
Credit Facility
On September 23, 2011, we entered into a Credit Agreement and a Security Agreement with Wells Fargo Capital Finance, LLC (“Wells Fargo”), which were amended pursuant to Amendment Number One to Credit Agreement and Security Agreement dated July 23, 2012 (collectively, as so amended, the “Credit Facility”). The Credit Facility provides for an asset based revolving credit facility providing for up to
$50.0 million
in aggregate principal amount of loans and other financing accommodations. The Credit Facility allows for up to
$10.0 million
to be used as a letter of credit subfacility. Although the Credit Facility provides up to
$50.0 million
in borrowings, the current available borrowing base reduces the potential for additional borrowing at this time. At September 29, 2012 we were in default under the terms of the Credit Facility (see discussion below).
The Credit Facility has a four-year term; however, it will terminate on June 16, 2014 if any obligations are then still outstanding under the Notes, as more fully described below. Borrowings under the Credit Facility bear interest at a rate equal to an applicable margin plus, at our option, either a variable base rate or a LIBOR rate. The applicable margin for base rate loans ranges from
2.25%
to
2.5%
and for LIBOR rate loans ranges from
3.75%
to
4.0%
, in each case, depending on the level of our revolving borrowings. Debt issuance costs capitalized in connection with the Credit Facility totaled
$1.3 million
; these costs are being amortized over the term of the Credit Facility. We are required to pay other customary fees, including an unused line fee based on usage under the Credit Facility as well as fees with respect to letters of credit.
During the
three
months ended
September 30, 2012
we borrowed
$21.0 million
under the Credit Facility. In the
three
and
six
months ended
September 30, 2012
interest expense was
$0.2 million
, and amortization of debt issuance costs related to the Credit Facility was
$0.2 million
. As of
September 30, 2012
we had outstanding borrowings under the Credit Facility of
$21.0 million
. During the
six
months ended
September 30, 2012
, we established a letter of credit for
$0.6 million
under the Credit Facility that is related to a lease we have for one of our studio locations.
The Credit Facility provides for certain events of default such as nonpayment of principal and interest when due, breaches of representations and warranties, noncompliance with covenants, acts of insolvency, default on certain agreements related to indebtedness, including the Notes more fully described below, and entry of certain judgments against us. Upon the occurrence of a continuing event of default and at the option of the required lenders (as defined in the Credit Facility), all of the amounts outstanding under the Credit Facility may be declared to be immediately due and payable and any amount outstanding will bear interest at
2.0%
above the interest rate otherwise applicable. In the event loan availability on the Credit Facility is below
12.5%
(
16%
beginning January 1, 2013) of the maximum revolver amount (the "Covenant Testing Level"), the Credit Facility requires, among other matters, that we maintain certain financial covenants. In the event the financial covenants become applicable, we would be required to maintain an annual fixed charge coverage ratio, as defined in the Credit Facility, of at least
1.1
to
1.0
.
The Credit Facility is guaranteed by most of our domestic subsidiaries and secured by substantially all of our assets. The Credit Facility contains financial reporting covenants and other customary affirmative and negative covenants, including, among other terms and conditions, limitations (subject to certain permitted actions) on our ability to: create, incur, guarantee or be liable for indebtedness; dispose of assets outside the ordinary course; acquire, merge or consolidate with or into another person or entity; create, incur or allow any lien on any of their respective properties; make investments or capital expenditures; or pay dividends or make distributions.
At September 29, 2012, the last day of our fiscal 2013 second quarter, borrowings under the Credit Facility were
$21.0 million
. The borrowings are classified as a current liability and reflected in the “Secured credit line” line item in our condensed consolidated balance sheet. On October 15, 2012, we submitted to Wells Fargo a detail of our eligible accounts receivable and inventories as of September 29, 2012. Wells Fargo used that information to calculate the borrowing base certificate as of September 29, 2012. That borrowing base certificate was returned to us on October 16, 2012 and indicated we were over-advanced under the Credit Facility, thereby triggering the requirement that we maintain certain financial covenants and reduce the amount of our borrowings under the Credit Facility. As of September 29, 2012, we did not meet the applicable financial covenant and thus an event of default arose under the terms of the Credit Facility. On October 17, 2012, we repaid
$5.6 million
in borrowings under the Credit Facility in an effort to regain compliance under the Credit Facility as of that date. On October 17, 2012, after the repayment, borrowings outstanding under the Credit Facility were
$15.4 million
. Wells Fargo continued to fund our requests for borrowings under the Credit Facility, as evidenced by a
$1.0 million
borrowing made on November 2, 2012. On November 7, 2012, we were informed by Wells Fargo that because (i) loan availability was less than the Covenant Testing Level on one or more occasions as of and after September 29, 2012, and (ii) we failed to comply with the fixed charge coverage ratio for the quarter ended September 29, 2012, an event of default had occurred under the terms of the Credit Facility. We are currently in discussions with Wells Fargo regarding the asserted event of default and believe that we will reach an agreement with Wells Fargo with respect to such default; however, there can be no assurance that we will achieve an agreement. As of September 29, 2012, the default under our Credit Facility did not trigger a cross-default under the Notes.
Convertible Senior Notes
On August 4, 2009, we issued the Notes. After offering costs, the net proceeds to THQ were
$96.8 million
. The Notes are due August 15, 2014, unless earlier converted, redeemed or repurchased. The Notes pay interest semiannually, in arrears on February 15 and August 15 of each year, beginning February 15, 2010, through maturity and are convertible at each holder's option at any time prior to the close of business on the trading day immediately preceding the maturity date. The Notes are our unsecured and unsubordinated obligations. All share and per share information presented gives effect to the Reverse Stock Split, which occurred on July 5, 2012.
The Notes are initially convertible into shares of our common stock at a conversion rate of
11.7474
shares of common stock per
$1,000
principal amount of Notes, equivalent to an initial conversion price of approximately
$85.13
per share. At this conversion rate and upon conversion of
100%
of the Notes outstanding at
September 30, 2012
, the Notes would convert into
1.2 million
shares of common stock. The conversion rate is subject to adjustment in certain events such as a stock split, the declaration of a dividend or the issuance of additional shares. Also, the conversion rate will be subject to an increase in certain events constituting a make-whole fundamental change; provided, however, that the maximum number of shares to be issued thereunder cannot exceed
1.5 million
, subject to adjustment. We considered all our other commitments that may require the issuance of stock (e.g., stock options, restricted stock units, warrants, and other potential common stock issuances) and have determined that as of
September 30, 2012
, we have sufficient authorized and unissued shares available for the conversion of the Notes during the maximum period the Notes could remain outstanding. The Notes will be redeemable, in whole or in part, at our option, at any time after August 20, 2012 for cash, at a redemption price of
100%
of the principal amount of the Notes, plus accrued but unpaid interest, if the price of a share of our common stock has been at least
150%
of the conversion price then in effect for specified periods.
In the case of certain events such as the acquisition or liquidation of THQ, or delisting of our common stock from a U.S. national securities exchange, holders may require us to repurchase all or a portion of the Notes for cash at a purchase price of
100%
of the principal amount of the Notes, plus accrued and unpaid interest.
Costs incurred related to the Notes offering amounted to
$3.2 million
and are classified as "Other long-term assets, net" in our condensed consolidated balance sheets at
September 30, 2012
; these costs are being amortized over the term of the Notes.
The effective interest rate, before capitalization of any interest expense and amortization of debt issuance costs, was
5.65%
for the
three
and
six
months ended
September 30, 2012
and
2011
.
Capitalization of Interest Expense
We capitalize interest expense and related amortization of debt issuance costs as part of in-process software development costs. Capitalization commences with the first capitalized expenditure for the software development project and continues until the project is completed. We amortize these balances to "Cost of sales — Software amortization and royalties" as part of the software development costs. In the
six
months ended
September 30, 2012
and
2011
we capitalized
$3.2 million
and
$2.8 million
, respectively, of interest expense and related amortization of debt issuance costs.
7
.
Commitments and Contingencies
A summary of annual minimum contractual obligations and commercial commitments as of
September 30, 2012
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations and Commercial Commitments (6)
|
|
Fiscal
Years Ending
March 31,
|
|
Licenses and
Software
Development (1)
|
|
Advertising (2)
|
|
Leases (3)
|
|
Debt (4)
|
|
Other (5)
|
|
Total
|
|
Remainder of 2013
|
|
$
|
45,027
|
|
|
$
|
5,004
|
|
|
$
|
7,464
|
|
|
$
|
21,000
|
|
|
$
|
1,981
|
|
|
$
|
80,476
|
|
|
2014
|
|
30,967
|
|
|
9,020
|
|
|
14,093
|
|
|
—
|
|
|
3,624
|
|
|
57,704
|
|
|
2015
|
|
13,600
|
|
|
970
|
|
|
12,620
|
|
|
100,000
|
|
|
424
|
|
|
127,614
|
|
|
2016
|
|
7,500
|
|
|
567
|
|
|
7,636
|
|
|
—
|
|
|
90
|
|
|
15,793
|
|
|
2017
|
|
7,500
|
|
|
509
|
|
|
4,721
|
|
|
—
|
|
|
—
|
|
|
12,730
|
|
|
Thereafter
|
|
—
|
|
|
375
|
|
|
11,948
|
|
|
—
|
|
|
—
|
|
|
12,323
|
|
|
|
|
$
|
104,594
|
|
|
$
|
16,445
|
|
|
$
|
58,482
|
|
|
$
|
121,000
|
|
|
$
|
6,119
|
|
|
$
|
306,640
|
|
|
|
|
|
(1)
|
Licenses and Software Development.
We enter into contractual arrangements with third parties for the rights to exploit intellectual property and for the development of products. Under these agreements, we commit to provide specified payments to an intellectual property holder or developer. Assuming all contractual provisions are met, the total future minimum contract commitments for such agreements in place as of
September 30, 2012
are
$104.6 million
. License commitments in the table above include
$44.8 million
of commitments payable to licensors that are included in both "Accrued and other current liabilities" and "Other long-term liabilities" in our
September 30, 2012
condensed consolidated balance sheet because the licensors do not have any remaining significant performance obligations.
|
|
|
|
|
(2)
|
Advertising.
We have certain minimum advertising commitments under many of our major license agreements. These minimum commitments are based upon the specific arrangements we have with the respective licensors and range from fixed
|
amounts to specified percentages of projected net sales (ranging from
3%
-
8%
) related to the respective licenses.
|
|
|
|
(3)
|
Leases.
We are committed under operating leases with lease termination dates through 2020. Most of our leases contain rent escalations. Of these obligations,
$2.3 million
and
$2.2 million
are accrued and classified as "Accrued and other current liabilities" and "Other long-term liabilities," respectively, in our
September 30, 2012
condensed consolidated balance sheet due to the abandonment of certain lease obligations in connection with our realignment plans (see "Note
5
—
Restructuring and Other Charges
"). We expect future sublease rental income under non-cancellable agreements of approximately
$2.1 million
; this income is not contemplated in the lease commitments shown in the table above.
|
|
|
|
|
(4)
|
Debt.
We issued the Notes on August 4, 2009. The Notes pay interest semiannually, in arrears on February 15 and August 15 of each year, beginning February 15, 2010, through maturity and are convertible at each holder's option at any time prior to the close of business on the trading day immediately preceding the maturity date. Absent any conversions or required repurchases of the Notes, we expect to pay
$2.5 million
in the remainder of fiscal 2013,
$5.0 million
in fiscal 2014, and
$2.5 million
in fiscal 2015, for an aggregate of
$10.0 million
in interest payments over the remaining term of the Notes (see "Note
6
—
Debt
"). Additionally, as of
September 30, 2012
we had outstanding borrowings under the Credit Facility of
$21.0 million
(see "Note
6
—
Debt
").
|
|
|
|
|
(5)
|
Other.
As discussed more fully in "Note
14
—
Joint Venture and Settlement Agreements
" in the notes to the consolidated financial statements in our
2012 10-K
, amounts payable to Jakks totaling
$5.0 million
are reflected in the table above. The present value of these amounts is included in "Accrued and other current liabilities" and "Other long-term liabilities" in our condensed consolidated balance sheet at
September 30, 2012
(see "Note
2
—
Balance Sheet Details
"). The remaining other commitments included in the table above are also included as current or long-term liabilities in our
September 30, 2012
condensed consolidated balance sheet.
|
|
|
|
|
(6)
|
We have omitted unrecognized tax benefits from this table due to the inherent uncertainty regarding the timing and amount of certain payments related to these unrecognized tax benefits. The underlying positions have not been fully developed under audit to quantify at this time. At
September 30, 2012
, we had
$3.9 million
of unrecognized tax benefits. See "Note
9
—
Income Taxes
" for further information regarding the unrecognized tax benefits.
|
Manufacturer Indemnification.
We must indemnify the platform manufacturers (Microsoft, Nintendo, Sony) of our games with respect to all loss, liability and expenses resulting from any claim against such manufacturer involving the development, marketing, sale or use of our games, including any claims for copyright or trademark infringement brought against such 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 others and incorporated into the products, may infringe the rights of third parties. Our agreements with our third-party software developers and property licensors typically provide indemnification rights for us with respect to certain matters. However, if a manufacturer brings a claim against us for indemnification, the developers or licensors may not have sufficient resources to, in turn, indemnify us.
Indemnity Agreements.
We have entered into indemnification agreements with the members of our Board of Directors, our Chief Executive Officer and our Chief Financial Officer, to provide a contractual right of indemnification to such persons to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by any such person as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which such person is sued as a result of service as a member of our Board of Directors, as Chief Executive Officer or as Chief Financial Officer. The indemnification agreements provide specific procedures and time frames with respect to requests for indemnification and clarify the benefits and remedies available to the indemnitees in the event of an indemnification request.
Litigation.
Federal Securities Class Action Case
A purported class action lawsuit on behalf of purchasers of THQ common stock between May 3, 2011 and February 3, 2012 (the "Class Period"), styled Zaghian vs. THQ Inc., et al., was filed against the Company and certain executive officers of the Company on June 15, 2012, in the United States District Court for the Central District of California, Southern Division. The complaint alleges that the defendants knowingly made materially false and misleading statements regarding the Company's uDraw GameTablet during the Class Period. The complaint seeks unspecified damages, reasonable attorneys' and experts' fees and costs and other relief. On July 19, 2012, the court granted the parties' stipulation providing that the defendants do not have to answer or file a motion to dismiss until sixty (60) days after the filing of an amended complaint. On September 14, 2012, the Court appointed Mike Hernandez as lead plaintiff and his counsel Levi Korsinsky as lead counsel. Pursuant to the stipulation and order of the court, an amended complaint is to be filed within sixty (60) days of the Court's order appointing lead counsel or November
13, 2012. The Company and the other defendants believe the complaint is without merit and intend to vigorously defend the pending lawsuit.
Shareholder Derivative Actions
Three derivative actions were filed against the Company, Brian Farrell, Paul Pucino and the independent members of the Board of Directors by three different purported THQ shareholders - Parker Hine, Jonathan Kaplan, and Basudeb Dey. The actions filed by plaintiffs Parker Hine and Basudeb Dey were filed in Los Angeles Superior Court on August 28, 2012 and October 10, 2012, respectively. The action filed by plaintiff Jonathan Kaplan was filed in the United States District Court for the Central District of California on September 21, 2012. The allegations in each complaint are similar and predicated on the allegations in the federal securities class action summarized above.
Additionally, we are subject to ordinary routine claims and litigation incidental to our business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our financial position or results of operations.
8
.
Stock-based Compensation
Subject to certain adjustments, as of
September 30, 2012
, the total number of shares of THQ common stock reserved for issuance under our Long-Term Incentive Plan (“LTIP”) was
1.9 million
shares.
9
.
Income Taxes
We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. A cumulative taxable loss in recent years provides significant negative evidence in considering whether deferred tax assets are realizable. As we have had U.S. taxable losses in recent years, we can no longer rely on common tax planning strategies to use our U.S. tax losses and we are precluded from relying on projections of future taxable income to support the recognition of deferred tax assets. As such, the ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.
Our income tax expense for the
three
and
six
months ended
September 30, 2012
was
$2.3 million
and
$2.8 million
, respectively, primarily related to foreign tax jurisdictions. These amounts represent effective tax rates for the
three
and
six
months ended
September 30, 2012
of
12.1%
(provision on a loss) and
98.6%
(provision on a loss), respectively. In the
three
and
six
months ended
September 30, 2011
we had a tax benefit of
$2.0 million
and
$0.9 million
, respectively, which primarily related to losses in foreign tax jurisdictions. These amounts represent effective tax rates for the
three
and
six
months ended
September 30, 2011
of
2.1%
and
0.7%
(benefit on a loss), respectively. The rate for the
three
and
six
months ended
September 30, 2012
and
2011
differs from the U.S. federal statutory rate of
35%
primarily due to taxable losses in the U.S., which are fully offset by a valuation allowance.
Our unrecognized tax benefits increased by
$0.1 million
in the
six
months ended
September 30, 2012
, from
$3.8 million
at
March 31, 2012
to
$3.9 million
at
September 30, 2012
, all of which would impact our effective tax rate if recognized. Due to inherent uncertainty we are not able to determine the timing and recognition of our unrecognized tax benefits. Additionally, due to the valuation of our deferred tax assets, any benefit recognized would not be realized in our effective tax rate for at least the next
12 months
.
We conduct business internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. Federal, U.S. state, and certain foreign jurisdictions. Accordingly, we are subject to examination by taxing authorities throughout the world, including Australia, China, France, Germany, Italy, Japan, Korea, Luxembourg, Netherlands, Spain, Switzerland, and the U.K. Certain state and certain non-U.S. income tax returns are currently under various stages of audit or potential audit by applicable tax authorities and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. We are no longer subject to U.S. Federal, state, and local or foreign jurisdiction income tax examinations by tax authorities for March 31, 2007 and prior years.
At
September 30, 2012
, approximately
52%
of our cash and cash equivalents were domiciled in foreign tax jurisdictions. We expect to repatriate all or a portion of these funds to the U.S., and we may be required to pay additional taxes (such as foreign withholdings) in certain foreign jurisdictions, which we do not expect to be significant. We do not anticipate that such repatriation, in the short-term, would result in actual cash payments in the U.S., as the taxable event would likely be offset by the utilization of our net operating losses and tax credits. However, the repatriation of foreign cash may be subject to certain restrictions and/or limitations which may hinder our ability to repatriate such cash to the U.S.
Our policy is to recognize interest and penalty expense, if any, related to uncertain tax positions as a component of income tax expense. As of
September 30, 2012
, we had no amounts accrued for interest and for the potential payment of penalties.
10
.
Loss Per Share
All loss per share information presented gives effect to the Reverse Stock Split, which occurred on July 5, 2012. The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted loss per share for the periods presented (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Six Months Ended
September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Net loss used to compute basic loss per share
|
$
|
(20,980
|
)
|
|
$
|
(92,385
|
)
|
|
$
|
(5,595
|
)
|
|
$
|
(130,830
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares outstanding — basic
|
6,854
|
|
|
6,834
|
|
|
6,853
|
|
|
6,833
|
|
|
Dilutive effect of potential common shares
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Number of shares used to compute loss per share — diluted
|
6,854
|
|
|
6,834
|
|
|
6,853
|
|
|
6,833
|
|
As a result of our net loss for the
three
and
six
months ended
September 30, 2012
and
2011
, the result of the if-converted calculation applied to the Notes was antidilutive and as such we did not include the potential conversion of
1.2 million
shares under the Notes in our diluted earnings per share calculation.
As a result of our net loss for the
three
and
six
months ended
September 30, 2012
and
2011
, all potential shares were excluded from the computation of diluted loss per share, as their inclusion would have been antidilutive. As a result, there were
1.3 million
and
1.0 million
potential common shares that were excluded from the computation of diluted loss per share for the
three
and
six
months ended
September 30, 2012
and
2011
, respectively. Had we reported net income for these periods, an additional
0.1 million
shares of common stock would have been outstanding in the number of shares used to calculate diluted loss per share for the
three
and
six
months ended
September 30, 2012
. An additional
21,000
and
19,000
shares of common stock would have been outstanding in the number of shares used to calculate diluted loss per share for the
three
and
six
months ended
September 30, 2011
.
11
.
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. We used the following methods and assumptions to estimate the fair value of our financial assets:
•
Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. We do not adjust the quoted prices for these investments.
•
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 — Discounted cash flow analysis using unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, as discussed further below.
Our policy is to recognize transfers between these levels of the fair value hierarchy as of the beginning of the reporting period.
The following table summarizes our financial assets measured at fair value on a recurring basis as of
September 30, 2012
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents - Money market funds
|
$
|
88
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88
|
|
|
Other long-term assets, net - Investment in Yuke's
|
4,694
|
|
|
—
|
|
|
—
|
|
|
4,694
|
|
|
Total
|
$
|
4,782
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,782
|
|
The following table summarizes our financial assets measured at fair value on a recurring basis as of
March 31, 2012
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Cash equivalents - Money market funds
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other long-term assets, net - Investment in Yuke's
|
4,641
|
|
|
—
|
|
|
—
|
|
|
4,641
|
|
|
Total
|
$
|
4,641
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,641
|
|
During the
six
months ended
September 30, 2012
we did not hold any Level 3 financial assets.
Financial Instruments
The carrying value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and accrued royalties approximate fair value based on their short-term nature.
The book value and fair value of the Notes at
September 30, 2012
was
$100.0 million
and
$53.0 million
, respectively; the fair value was determined using quoted market prices in active markets.
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 GBP and the Euro, which may result in a gain or loss of earnings to us. We utilize foreign currency exchange forward contracts to mitigate foreign currency risk associated with foreign currency-denominated assets and liabilities, primarily certain inter-company receivables and payables. Our foreign currency exchange forward contracts are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts are reported as "Prepaid expenses and other current assets" or "Accrued and other current liabilities" in our condensed consolidated balance sheets, and the associated gains and losses from changes in fair value are reported in "Interest and other income (expense), net" in our condensed consolidated statements of operations.
Cash Flow Hedging Activities
. From time to time, we may elect to hedge a portion of our foreign currency risk related to forecasted foreign currency-denominated sales and expense transactions by entering into foreign currency exchange forward contracts that generally have maturities of less than
90 days
. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements in net sales and operating expenses. During the
six
months ended
September 30, 2012
and
2011
, we did not enter into any foreign exchange forward contracts related to cash flow hedging activities.
Balance Sheet Hedging Activities
. The foreign currency exchange forward contracts related to balance sheet hedging activities generally have a contractual term of
one month
or less and are transacted near month-end. Therefore, the fair value of the forward contracts are generally not significant at each month-end.
At
September 30, 2012
, we did not have any outstanding foreign currency exchange forward contracts related to balance sheet hedging activities. At
March 31, 2012
, we had foreign currency exchange forward contracts related to balance sheet hedging activities in the notional amount of
$92.2 million
with a fair value that approximates
zero
at
March 31, 2012
. We estimated the fair value of these contracts using Level 1 inputs, specifically, inputs obtained in quoted public markets. In the
three
months ended
September 30, 2012
, we did not enter into any foreign currency exchange forward contracts related to balance sheet hedging activities, and thus did not have a gain or loss. The net loss recognized from these contracts during the
six
months ended
September 30, 2012
was
$4.3 million
. The net loss recognized from these contracts during the
three
and
six
months ended
September 30, 2011
was
$4.2 million
and
$2.7 million
, respectively. Net gains and losses recognized from these contracts are included in "Interest and other income (expense), net" in our condensed consolidated statements of operations.
12
.
Capital Stock Transactions
On July 31, 2007 and October 30, 2007, our board authorized the repurchase of up to
$25.0 million
of our common stock from time to time on the open market or in private transactions, for an aggregate of
$50.0 million
.
As of
September 30, 2012
and
March 31, 2012
we had
$28.6 million
, authorized and available for common stock repurchases. During the
six
months ended
September 30, 2012
, we did not repurchase any shares of our common stock. There
is no expiration date for the authorized repurchases.
13
.
Segment and Geographic Information
We operate in
one
reportable segment in which we are a developer, publisher and distributor of interactive entertainment software
for video game consoles, handheld devices and PCs, including via the Internet. The following information sets forth geographic information on our net sales and total assets for the
three
and
six
months ended
September 30, 2012
and
2011
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
Europe
|
|
Asia
Pacific
|
|
Consolidated
|
|
Three months ended September 30, 2012
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers before changes in deferred net revenue
|
$
|
53,460
|
|
|
$
|
32,322
|
|
|
$
|
6,016
|
|
|
$
|
91,798
|
|
|
Changes in deferred net revenue
|
14,357
|
|
|
403
|
|
|
799
|
|
|
15,559
|
|
|
Net sales to unaffiliated customers
|
$
|
67,817
|
|
|
$
|
32,725
|
|
|
$
|
6,815
|
|
|
$
|
107,357
|
|
|
Total assets
|
$
|
109,690
|
|
|
$
|
122,614
|
|
|
$
|
33,110
|
|
|
$
|
265,414
|
|
|
Six months ended September 30, 2012
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers before changes in deferred net revenue
|
$
|
76,785
|
|
|
$
|
44,328
|
|
|
$
|
9,210
|
|
|
$
|
130,323
|
|
|
Changes in deferred net revenue
|
72,290
|
|
|
29,676
|
|
|
8,755
|
|
|
110,721
|
|
|
Net sales to unaffiliated customers
|
$
|
149,075
|
|
|
$
|
74,004
|
|
|
$
|
17,965
|
|
|
$
|
241,044
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2011
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers before changes in deferred net revenue
|
$
|
68,757
|
|
|
$
|
40,145
|
|
|
$
|
10,708
|
|
|
$
|
119,610
|
|
|
Changes in deferred net revenue
|
24,597
|
|
|
2,746
|
|
|
(949
|
)
|
|
26,394
|
|
|
Net sales to unaffiliated customers
|
$
|
93,354
|
|
|
$
|
42,891
|
|
|
$
|
9,759
|
|
|
$
|
146,004
|
|
|
Total assets
|
$
|
328,720
|
|
|
$
|
161,114
|
|
|
$
|
42,539
|
|
|
$
|
532,373
|
|
|
Six months ended September 30, 2011
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers before changes in deferred net revenue
|
$
|
156,500
|
|
|
$
|
75,375
|
|
|
$
|
28,974
|
|
|
$
|
260,849
|
|
|
Changes in deferred net revenue
|
53,113
|
|
|
27,005
|
|
|
190
|
|
|
80,308
|
|
|
Net sales to unaffiliated customers
|
$
|
209,613
|
|
|
$
|
102,380
|
|
|
$
|
29,164
|
|
|
$
|
341,157
|
|
Information about our net sales by platform for the
three
and
six
months ended
September 30, 2012
and
2011
is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Six Months Ended
September 30,
|
|
Platform
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Consoles
|
|
|
|
|
|
|
|
|
|
Microsoft Xbox 360
|
|
$
|
38,240
|
|
|
$
|
36,098
|
|
|
$
|
52,220
|
|
|
$
|
87,640
|
|
|
Sony PlayStation 3
|
|
35,804
|
|
|
28,115
|
|
|
45,665
|
|
|
63,897
|
|
|
Nintendo Wii
|
|
58
|
|
|
15,503
|
|
|
3,254
|
|
|
34,527
|
|
|
Sony PlayStation 2
|
|
445
|
|
|
1,292
|
|
|
729
|
|
|
2,311
|
|
|
|
|
74,547
|
|
|
81,008
|
|
|
101,868
|
|
|
188,375
|
|
|
Handheld
|
|
|
|
|
|
|
|
|
|
Nintendo Dual Screen
|
|
2,233
|
|
|
17,677
|
|
|
5,700
|
|
|
38,961
|
|
|
Sony PlayStation Portable
|
|
582
|
|
|
1,974
|
|
|
1,223
|
|
|
4,096
|
|
|
Wireless
|
|
429
|
|
|
730
|
|
|
850
|
|
|
1,466
|
|
|
|
|
3,244
|
|
|
20,381
|
|
|
7,773
|
|
|
44,523
|
|
|
|
|
|
|
|
|
|
|
|
|
PC
|
|
14,007
|
|
|
18,221
|
|
|
20,682
|
|
|
27,951
|
|
|
Net sales before changes in deferred net revenue
|
|
91,798
|
|
|
119,610
|
|
|
130,323
|
|
|
260,849
|
|
|
Changes in deferred net revenue
|
|
15,559
|
|
|
26,394
|
|
|
110,721
|
|
|
80,308
|
|
|
Total net sales
|
|
$
|
107,357
|
|
|
$
|
146,004
|
|
|
$
|
241,044
|
|
|
$
|
341,157
|
|
14
.
Subsequent Events
In October 2012, we made changes to our publishing organization in Australia. As we focus on wholly-owned intellectual properties and move away from affiliate label programs, we have moved from a direct sales model to a distributor model, and will be closing our Melbourne publishing office. This action could result in cash charges of up to $
0.5 million
related to severance, up to $
0.4 million
in cash charges related to lease and other contract terminations and non-cash charges of up to $
0.3 million
related to long-lived assets. We expect the majority of these charges to be recorded in the quarter ended
December 31, 2012
. These amounts are preliminary and subject to change as we finalize our assessment of the charges and costs associated with the above items.