THQ Inc. 27001 Agoura Road, Suite 325 Calabasas Hills, California
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THQ INC. THQ Inc. ANNUAL REPORT 27001 Agoura Road, Suite 325 Calabasas Hills, California 91301 2003 www.thq.com 2003 ANNUAL REPORT 2003 ANNUAL REAL-WORLD STRENGTH. STRATEGIC FOCUS. FINANCIAL FLEXIBILITY. THQ IS MAKING THE MOST OF THEM BOTH. WE’RE INVESTING IN NEW LICENSED BRANDS. INVESTING IN NEW ORIGINAL GAMES. INVESTING IN NEW LINES OF BUSINESS. INVESTING IN THE EMERGING WIRELESS GAME SPACE. AND INVESTING IN OUR COMPANY. IN SHORT, WE’RE INVESTING IN OUR FUTURE. REAL-WORLD GROWTH. FINANCIAL HIGHLIGHTS OPERATING RESULTS Three Months Ended March 31, Years Ended December 31, (in thousands, except per share data) 2003 2002 Unaudited 2002 2001 2000 1999 Net sales $066,800 $079,682 $480,529 $378,992 $347,003 $303,483 Net income (loss) $ (7,686) a* $002,765 $012,994 b $036,013 $018,189 c*** $031,326 Earnings per diluted share $ (0.20)* $0.07 $0.32** $ 1.01 $ 0.56*** $ 0.99 Diluted shares 38,319 41,725 41,243 35,623 32,352 31,796 FINANCIAL POSITION March 31, December 31, (in thousands, except per share data) 2003 2002 Unaudited 2002 2001 2000 1999 Working capital $286,899 $325,992 $320,588 $319,605 $110,269 $ 91,860 Total assets $472,949 $476,735 $537,860 $487,966 $229,942 $184,057 Total liabilities $076,536 $069,901 $128,994 $089,104 $097,817 $075,751 Stockholders’ equity $396,413 $406,834 $408,866 $398,862 $132,125 $108,306 See Notes to Consolidated Financial Statements. (a) Includes a charge of $1.8 million related to the other than temporary impairment of our investment in Yuke’s Co., Ltd. (b) Includes a charge of $7.9 million, net of tax for the cancellation of 20 SKUs as well as a charge of $4.6 million, net of tax related to the settlement of a class action lawsuit and a charge of $1.1 million, net of tax related to the write-off of inventory and software development for “WWF”-branded games, and a charge of $2.8 million, net of tax related to the discontinua- tion of our online joint venture in the United Kingdom (Network Interactive Sports, Ltd.). (c) Includes a charge of $5.9 million, net of tax related to a regular impaired asset review and also as a result of changing technology in the video game market.The charge consisted of costs associated with software development and related costs for products that had been discontinued or whose values were deemed unrecoverable through future undiscounted cash flows. 500 500 400 400 300 300 200 200 100 100 STOCKHOLDERS’ NET SALES 0 EQUITY 0 ($ million) 99 00 01 02 ($ million) 99 00 01 02 Poised for Growth TO OUR STOCKHOLDERS, CUSTOMERS AND EMPLOYEES: During 2002, THQ grew revenue substantially. We gained market share. And we outpaced the industry in a tough environment. Video game retailers and publishers began 2002 with unbridled optimism. However, in the December quarter, with few exceptions, video game publishers reported disappointing results. THQ was among them. We understand what happened. We’ve adjusted our strategy and we’re pleased to report that THQ is in excellent shape to take advantage of the opportunities that lie before us. How have we adjusted our business strategy to account for the changing environment? We’ve reduced our product count, trimming the weakest products in development, so we can focus our product development, sales and marketing efforts toward higher-quality titles. Overall, our perspective hasn’t changed: Video games remain a growth category. THQ is a category leader. And we are poised to grow. We succeeded in posting 27% top-line growth in 2002, outpacing industry growth of approximately 20%. And we are committed to investing in THQ’s long-term growth and success. Left to Right: Peter Dille, Senior Vice President, Worldwide Marketing. Brian J. Farrell Tiffany Ternan, Senior Vice President, US Sales and Distribution. President and Chief Executive Officer Tim Walsh, Senior Vice President, International Publishing and Wireless. The Power of Perspective NEW PRODUCT DEVELOPMENT INITIATIVE L OOKING TOWARDS THE SWEET SPOT AND BEYOND We’ve completed a major initiative to reorganize our product As we look to the future, it’s important to view these measures development group, placing an even stronger emphasis on prod- in the context of the video game marketplace: Over the next uct quality and timing. To make the most of our talent on a few years, worldwide software revenues are poised for signifi- global scale, we established three separate production groups cant growth, and THQ is positioned to reap the full benefits of based in the US, Australia and the UK. Each group is comprised the mass market’s arrival on game consoles. We consider this of four key teams: creative, technical, project management and stage of the platform cycle our “sweet spot,” since we have a quality assurance. We’ve also instituted a more rigorous review broad portfolio of mass-market brands – including Disney of products in development, with the objective of generating and Pixar, Nickelodeon, Warner Bros. Scooby-Doo, World better games, on schedule. Wrestling Entertainment and Mattel’s Hot Wheels – that play to this audience. We expect this initiative to yield both immediate and lasting benefits. For example, in May 2003, we released the first games At the same time, we’re investing in the future through our stu- from our multi-property, cross-platform agreement with Disney dio operations, preparing new technology and developing new Interactive and Pixar Animation Studios. We delivered six properties geared to the core gamer. We now own eight studios high-quality Finding Nemo SKUs in advance of the theatrical employing approximately 300 people. In addition to launching release. Our recent industry trade show, E3, also demonstrated several new original properties in fiscal 2004 and 2005, we the impact of our product development initiative. Several of believe the technologies we are developing will benefit THQ as our original properties won recognition at the show, including we transition to the next generation of platforms in 2005-2006. Full Spectrum Warrior, MX Unleashed, Sphinx and the Shadow of Set™,S.T.A.L.K.E.R.™: Oblivion Lost and Tak and the Power of JuJu™. GLOBAL BRAND MANAGEMENT We’ve also reorganized our marketing organization under a product and gamer-focused Global Brand Management struc- ture. Since our strategy is to build and maintain franchise prop- erties with global appeal, this structure is designed to maximize market performance in all territories, creating long-term game franchises and increasing our worldwide market share. Left to Right: Jack Sorensen, Executive Vice President, Worldwide Studios. Bill Goodmen, Senior Vice President, Human Resources. Fred Gysi, Senior Vice President, Finance and Chief Financial Officer. Jim Kennedy, Senior Vice President, Business and Legal Affairs. Investing in New Licensed Brands We view licensing as a key growth initiative and we compete In April 2003, Nickelodeon and THQ began marketing Tak, aggressively for top properties. Our license partners include some employing Nickelodeon’s powerful media support several months of the largest content companies in the world – Nickelodeon, ahead of the game’s release. If you are a kid living in America, World Wrestling Entertainment, Disney and Pixar, Warner Bros., chances are you will know who Tak is long before the game is Mattel and others. Top content companies trust their leading launched this fall. brands to THQ because of our deep commitment and proven execution. CREATING AN EVEN RICHER WWE EXPERIENCE EXCLUSIVE AGREEMENT WITH DISNEY AND PIXAR Our relationship with World Wrestling Entertainment and JAKKS Pacific also reflects a close degree of collaboration. THQ engages In 2002, we entered into an exclusive multi-property publishing in a continuous dialog with the WWE to ensure that we meet agreement with Disney Interactive and Pixar Animation Studios player demand for games that keep pace with the WWE’s fast- to develop titles based on the next three Walt Disney Pictures changing programming. This year, we’re also working to make our Presentations of Pixar Animation Studios’ Films: “Finding Nemo,” story modes more robust than ever by bringing more outside-the- ”The Incredibles,” and ”Cars.” The publishing agreement includes ring content into the game experience. In doing so, we’re working multiple titles per film across all key platforms and all territories with the WWE creative team and its writers to bring a higher worldwide. Finding Nemo, the first title from this relationship, was level of authenticity and believability to every game. Gamers will released in May 2003. Games based on ”The Incredibles” are experience these innovations in our new WWE WrestleMania® XIX already in development and we expect them to launch in conjunc- for GameCube™, WWE Raw® 2 for Xbox™ and WWE SmackDown!™ tion with the theatrical release during holiday 2004. With ”Cars” Here Comes the Pain for PlayStation®2, all due out in the second scheduled for release during holiday 2005, we expect that this half of 2003. WWE has been a consistent multimillion-unit seller relationship will yield substantial revenue and earnings for the over the years, and we intend to build on this success. next several years. CREATIVE COLLABORATION WITH NICKELODEON There’s no better example of what a strong partnership can yield in terms of business opportunity and creative innovation than Tak and the Power of JuJu. Our groundbreaking ”game first” collabora- tion with Nickelodeon is scheduled for release in October 2003. The idea for Tak began with a question THQ and Nickelodeon explored together: ”What if we worked to establish a property in the game space first, with the express purpose of migrating it onto Nick’s airwaves afterwards?” Tak combines Nick’s expertise in developing characters and story- lines with THQ’s ability to transform them into fun and rewarding interactive entertainment – a favorite medium for Nick’s audience.