Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 13, 2012)
  • 10-Q (Aug 9, 2012)
  • 10-Q (Feb 9, 2012)
  • 10-Q (Nov 9, 2011)
  • 10-Q (Aug 11, 2011)
  • 10-Q (Feb 10, 2011)

 
8-K

 
Other

THQ 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32
  6. Graphic
  7. Graphic
WebFilings | EDGAR view
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________________________
 
 FORM 10-Q 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2010
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _______   to _______                  
 
Commission file number 0-18813
___________________________________________________________  
THQ INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
 
13-3541686
 
 
(State or Other Jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
 
29903 Agoura Road
 
 
 
 
Agoura Hills, CA
 
91301
 
 
(Address of principal executive offices)
 
(Zip Code)
 
Registrant's telephone number, including area code: (818) 871-5000
___________________________________________________________
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o
 
Accelerated filer  x
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
(Do not check if a smaller reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x
 
The number of shares outstanding of the registrant's common stock as of October 29, 2010 was approximately 67,947,685.


THQ INC. AND SUBSIDIARIES
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I — Financial Information
Item 1.  Condensed Consolidated Financial Statements
 
THQ INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
 
September 30,
2010
 
March 31,
2010
 
(Unaudited)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
66,391
 
 
$
188,378
 
Short-term investments
56,372
 
 
82,941
 
Cash, cash equivalents and short-term investments
122,763
 
 
271,319
 
Short-term investments, pledged
 
 
22,774
 
Accounts receivable, net of allowances
10,511
 
 
41,318
 
Inventory
21,234
 
 
13,970
 
Licenses
74,998
 
 
56,555
 
Software development
170,271
 
 
132,223
 
Deferred income taxes
7,297
 
 
5,590
 
Income taxes receivable
1,067
 
 
4,914
 
Prepaid expenses and other current assets
40,347
 
 
13,864
 
Total current assets
448,488
 
 
562,527
 
Property and equipment, net
31,038
 
 
28,374
 
Licenses, net of current portion
95,436
 
 
83,752
 
Software development, net of current portion
53,802
 
 
26,792
 
Deferred income taxes
433
 
 
433
 
Long-term investments
1,892
 
 
1,851
 
Other long-term assets, net
12,271
 
 
10,600
 
TOTAL ASSETS
$
643,360
 
 
$
714,329
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
59,167
 
 
$
40,305
 
Accrued and other current liabilities
141,677
 
 
137,332
 
Secured credit line
 
 
13,249
 
Total current liabilities
200,844
 
 
190,886
 
Other long-term liabilities
82,856
 
 
98,825
 
Convertible senior notes
100,000
 
 
100,000
 
Commitments and contingencies (see Note 11)
 
 
 
 
 
 
 
THQ Inc. stockholders' equity:
 
 
 
Preferred stock, par value $0.01, 1,000,000 shares authorized
 
 
 
Common stock, par value $0.01, 225,000,000 shares authorized as of September 30, 2010; 67,923,406 and 67,729,952 shares issued and outstanding as of September 30, 2010 and March 31, 2010, respectively
679
 
 
677
 
Additional paid-in capital
517,312
 
 
511,922
 
Accumulated other comprehensive income
14,875
 
 
7,867
 
Accumulated deficit
(273,206
)
 
(196,111
)
Total THQ Inc. stockholders' equity
259,660
 
 
324,355
 
Noncontrolling interest
 
 
263
 
Total equity
259,660
 
 
324,618
 
TOTAL LIABILITIES AND EQUITY
$
643,360
 
 
$
714,329
 
 
See notes to condensed consolidated financial statements.

3


THQ INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
For the Three Months
Ended September 30,
 
For the Six Months
Ended September 30,
 
(Unaudited)
 
(Unaudited)
 
2010
 
2009
 
2010
 
2009
Net sales
$
77,053
 
 
$
101,290
 
 
$
226,432
 
 
$
344,791
 
Cost of sales:
 
 
 
 
 
 
 
 
Product costs
35,003
 
 
38,975
 
 
95,706
 
 
118,904
 
Software amortization and royalties
21,162
 
 
24,191
 
 
54,515
 
 
69,227
 
License amortization and royalties
9,583
 
 
(9,049
)
 
30,473
 
 
23,490
 
Total cost of sales
65,748
 
 
54,117
 
 
180,694
 
 
211,621
 
 
 
 
 
 
 
 
 
Gross profit
11,305
 
 
47,173
 
 
45,738
 
 
133,170
 
Operating expenses:
 
 
 
 
 
 
 
Product development
17,900
 
 
19,304
 
 
34,375
 
 
41,462
 
Selling and marketing
24,023
 
 
19,028
 
 
57,649
 
 
57,471
 
General and administrative
11,878
 
 
14,055
 
 
23,722
 
 
30,633
 
Restructuring
(161
)
 
870
 
 
7
 
 
2,522
 
Total operating expenses
53,640
 
 
53,257
 
 
115,753
 
 
132,088
 
 
 
 
 
 
 
 
 
Operating income (loss)
(42,335
)
 
(6,084
)
 
(70,015
)
 
1,082
 
Interest and other income (expense), net
(3,991
)
 
290
 
 
(5,581
)
 
349
 
Income (loss) before income taxes
(46,326
)
 
(5,794
)
 
(75,596
)
 
1,431
 
Income taxes
659
 
 
154
 
 
1,499
 
 
1,154
 
Net income (loss) prior to allocation of noncontrolling interest
(46,985
)
 
(5,948
)
 
(77,095
)
 
277
 
Loss attributable to noncontrolling interest
 
 
378
 
 
 
 
562
 
Net income (loss) attributable to THQ Inc.
$
(46,985
)
 
$
(5,570
)
 
$
(77,095
)
 
$
839
 
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to THQ Inc. - basic
$
(0.69
)
 
$
(0.08
)
 
$
(1.14
)
 
$
0.01
 
Earnings (loss) per share attributable to THQ Inc. - diluted
$
(0.69
)
 
$
(0.08
)
 
$
(1.14
)
 
$
0.01
 
 
 
 
 
 
 
 
 
Shares used in per share calculation - basic
67,813
 
 
67,462
 
 
67,779
 
 
67,466
 
Shares used in per share calculation - diluted
67,813
 
 
67,462
 
 
67,779
 
 
67,745
 
 
See notes to condensed consolidated financial statements.
 

4


THQ INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF TOTAL EQUITY
(In thousands, except share data)
 
Six Months Ended September 30, 2010
(Unaudited)
 
Common stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Non-Controlling Interest
 
Total Equity
 
Shares
 
Amount
Balance at March 31, 2010
67,729,952
 
 
$
677
 
 
$
511,922
 
 
$
7,867
 
 
$
(196,111
)
 
$
263
 
 
$
324,618
 
Exercise of options
17,555
 
 
 
 
83
 
 
 
 
 
 
 
 
83
 
Issuance of common stock
20,250
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of ESPP shares
144,692
 
 
2
 
 
435
 
 
 
 
 
 
 
 
437
 
Issuance of restricted stock, net
(1,350
)
 
 
 
(7
)
 
 
 
 
 
 
 
(7
)
Conversion of stock unit awards
12,307
 
 
 
 
(39
)
 
 
 
 
 
 
 
(39
)
Stock-based compensation
 
 
 
 
4,918
 
 
 
 
 
 
 
 
4,918
 
Sale of noncontrolling interest
 
 
 
 
 
 
 
 
 
 
(263
)
 
(263
)
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
 
 
 
 
 
 
(77,095
)
 
 
 
(77,095
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain
 
 
 
 
 
 
4,534
 
 
 
 
 
 
4,534
 
Unrealized gain on investments, net of tax
 
 
 
 
 
 
2,721
 
 
 
 
 
 
2,721
 
Reclassification of gain on investments included in net loss, net of tax
 
 
 
 
 
 
(247
)
 
 
 
 
 
(247
)
Comprehensive loss
 
 
 
 
 
 
7,008
 
 
(77,095
)
 
 
 
(70,087
)
Balance at September 30, 2010
67,923,406
 
 
$
679
 
 
$
517,312
 
 
$
14,875
 
 
$
(273,206
)
 
$
 
 
$
259,660
 
 
Six Months Ended September 30, 2009
(Unaudited)
 
Common stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings (Accumulated Deficit)
 
Non-Controlling Interest
 
Total Equity
 
Shares
 
Amount
Balance at March 31, 2009
67,471,659
 
 
$
675
 
 
$
495,851
 
 
$
(2,392
)
 
$
(187,094
)
 
$
3,198
 
 
$
310,238
 
Exercise of options
41,378
 
 
 
 
215
 
 
 
 
 
 
 
 
215
 
Conversion of stock unit awards
23,545
 
 
 
 
 
 
 
 
 
 
 
 
 
Cancellation of restricted stock
(24,841
)
 
 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation
 
 
 
 
5,083
 
 
 
 
 
 
 
 
5,083
 
Taxes related to stock options
 
 
 
 
4,147
 
 
 
 
 
 
 
 
4,147
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
 
 
 
 
 
 
 
839
 
 
(562
)
 
277
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation gain
 
 
 
 
 
 
13,011
 
 
 
 
 
 
13,011
 
Unrealized gain on investments, net tax
 
 
 
 
 
 
2,218
 
 
 
 
 
 
2,218
 
Reclassification of gain on investments included in net income, net of tax
 
 
 
 
 
 
(641
)
 
 
 
 
 
(641
)
Comprehensive income (loss)
 
 
 
 
 
 
14,588
 
 
839
 
 
(562
)
 
14,865
 
Balance at September 30, 2009
67,511,741
 
 
$
675
 
 
$
505,296
 
 
$
12,196
 
 
$
(186,255
)
 
$
2,636
 
 
$
334,548
 
 
See notes to condensed consolidated financial statements. 

5


THQ INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) 
 
For the Six Months
Ended September 30,
 
(Unaudited)
 
2010
 
2009
OPERATING ACTIVITIES:
 
 
 
Net income (loss) prior to allocation of noncontrolling interest
$
(77,095
)
 
$
277
 
Adjustments to reconcile net income (loss) prior to allocation of noncontrolling interest to net cash used in operating activities:
 
 
 
Depreciation and amortization
5,616
 
 
7,099
 
Amortization of licenses and software development(1)
66,648
 
 
93,421
 
Loss on disposal of property and equipment
10
 
 
489
 
Restructuring charges
7
 
 
2,522
 
Change in deferred revenue and related expenses(3)
4,053
 
 
(5,230
)
Amortization of debt issuance costs
393
 
 
136
 
Amortization of interest
763
 
 
105
 
Gain on investments
(332
)
 
(734
)
Stock-based compensation(2)
4,357
 
 
5,388
 
Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net of allowances
30,204
 
 
56,931
 
Inventory
(6,992
)
 
(14,056
)
Licenses
(23,940
)
 
(3,270
)
Software development(3)
(116,763
)
 
(91,527
)
Prepaid expenses and other current assets(3)
(24,129
)
 
(19,652
)
Accounts payable
18,202
 
 
2,336
 
Accrued and other liabilities(3)
(39,446
)
 
(63,712
)
Income taxes
2,193
 
 
(6,122
)
Net cash used in operating activities
(156,251
)
 
(35,599
)
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Proceeds from sales and maturities of available-for-sale investments
93,248
 
 
8,776
 
Proceeds from sales and maturities of trading investments
22,775
 
 
2,925
 
Purchases of available-for-sale investments
(64,781
)
 
(39,989
)
Other long-term assets
(474
)
 
(124
)
Acquisitions, net of cash acquired
 
 
(840
)
Purchases of property and equipment
(8,265
)
 
(3,268
)
Net cash provided by (used in) investing activities
42,503
 
 
(32,520
)
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of common stock to employees
520
 
 
215
 
Payment of debt issuance costs
 
 
(3,646
)
Proceeds from issuance of convertible senior notes
 
 
100,000
 
Borrowings on secured credit line
 
 
2,500
 
Payment of secured credit line
(13,249
)
 
(8,441
)
Net cash provided by (used in) financing activities
(12,729
)
 
90,628
 
Effect of exchange rate changes on cash
4,490
 
 
10,633
 
Net increase (decrease) in cash and cash equivalents
(121,987
)
 
33,142
 
Cash and cash equivalents - beginning of period
188,378
 
 
131,858
 
Cash and cash equivalents - end of period
$
66,391
 
 
$
165,000
 
 
________________________________
(1)     
Excludes amortization of capitalized stock-based compensation expense
(2)     
Includes the net effects of capitalization and amortization of stock-based compensation expense.
(3)     
Six months ended September 30, 2009 has been reclassified to conform to current period presentation with respect to change in deferred revenue and related expenses.
See notes to condensed consolidated financial statements. 

6


THQ INC. AND SUBSIDIARIES
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 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, condensed consolidated statements of total equity, 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, 2010 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 Quarterly Report on Form 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, 2010.
 
Cost of Sales — License Amortization and Royalties.  Prior to April 1, 2010, we presented "Venture partner expense" related to the license agreement that the THQ / JAKKS Pacific LLC ("LLC") joint venture, comprised of THQ and JAKKS Pacific, Inc. ("Jakks"), had with WWE as a separate line item in the "Cost of sales" section of our statements of operations.  On December 31, 2009, the LLC was dissolved, the WWE license held by the LLC was terminated, and a new eight-year license was entered into directly between THQ and WWE.  The final expenses related to the joint venture were recorded as of December 31, 2009.  In this Quarterly Report on Form 10-Q, we include the historical venture partner expense for the three and six months ended September 30, 2009, within "Cost of sales — License amortization and royalties" in our statements of operations for comparability.
 
“Venture partner expense” in the three and six months ended September 30, 2009 was a benefit of $23.7 million and $22.4 million, respectively. The benefit reflects the settlement agreement we entered into with Jakks on August 17, 2009 that established the preferred payment rate owed to Jakks at a rate that was 40% lower than the previous contract rate. We had been accruing this expense at the contract payment rate that expired June 30, 2006, which, prior to the settlement, was the best basis available upon which to estimate this expense. As a result of establishing the preferred payment rate for the period that had been under dispute, we revised our previous estimate, which resulted in a one-time benefit in “Venture partner expense” of $24.2 million during the three months ended September 30, 2009. Excluding this one-time benefit, “Venture partner expense” in the three and six months ended September 30, 2009 would have been $0.5 million and $1.8 million, respectively, which reflected the 40% lower payment rate. Further, excluding this one-time benefit from this Quarterly Report on Form 10-Q, “Cost of sales - License amortization and royalties” in the three and six months ended September 30, 2009 would have been $15.2 million and $47.7 million, respectively.
 
Noncontrolling Interest.  Prior to April 30, 2010, we consolidated the results of THQ*ICE LLC (a joint venture with ICE Entertainment, Inc.) in the consolidated financial statements as we believed we were the primary beneficiary and would have received the majority of expected returns or absorbed the majority of expected losses of THQ*ICE LLC.  We sold our interest in THQ*ICE LLC on April 30, 2010 and recognized an insignificant gain.
 
Revenue Recognition.  In instances where we have both vendor specific objective evidence ("VSOE") for the fair value of an undelivered online service component of our games and a continuing involvement in providing the online service, we bifurcate the fair value of the online service component from the revenue recognized on the sale of the boxed product.  The fair value of the online service component, and the related specifically identifiable costs of providing the online service, such as server hosting and license royalties, if any, are deferred and recognized ratably over the estimated online service period of six months, beginning the month after shipment of the software product.  This timeframe is consistent with our revenue recognition for sales of boxed product where the online service is considered a deliverable, we have a significant continuing involvement in providing the online service, and we do not have VSOE for the fair value of the online service component.
 
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, 2010 and 2009

7


contain the following number of weeks:
Fiscal Period
 
Number of Weeks
 
Fiscal Period End Date
Three months ended September 30, 2010
 
13 weeks
 
October 2, 2010
Three months ended September 30, 2009
 
13 weeks
 
September 26, 2009
Six months ended September 30, 2010
 
26 weeks
 
October 2, 2010
Six months ended September 30, 2009
 
26 weeks
 
September 26, 2009
 
 
2.     Cash and Cash Equivalents
 
The following table summarizes the components of our cash and cash equivalents (in thousands): 
 
September 30,
2010
 
March 31,
2010
Cash and time deposits
$
38,447
 
 
$
116,170
 
Money market funds
21,917
 
 
21,049
 
Negotiable certificates of deposit(1)
5,338
 
 
28,545
 
Corporate securities
689
 
 
8,439
 
Municipal securities(2)
 
 
14,175
 
Cash and cash equivalents
$
66,391
 
 
$
188,378
 
________________________________________________
 
(1)     
Negotiable certificates of deposit consist of certificates issued by institutions outside the U.S.
(2)     
Municipal securities consist of bonds issued or deemed to be guaranteed by non-U.S. governments.
 
At September 30, 2010 and March 31, 2010, we had $6.0 million and $51.2 million, respectively, of trading securities classified as cash equivalents.  These investments are made up of negotiable certificates of deposit, corporate securities, and municipal securities, which, when purchased by us, had remaining maturities of three months or less.  Gains and losses recognized on these investments in the three and six months ended September 30, 2010, were immaterial.  During the six months ended September 30, 2009 we did not hold any trading securities classified as cash equivalents.
 
3.     Investment Securities
 
The following table summarizes our investment securities and their related inception-to-date gross unrealized gains and (losses), as of September 30, 2010 (in thousands):
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities(1)
$
3,412
 
 
$
248
 
 
$
(1
)
 
$
3,659
 
Corporate securities
47,254
 
 
2,087
 
 
(75
)
 
49,266
 
Negotiable certificates of deposit(2)
3,221
 
 
226
 
 
 
 
3,447
 
Total short-term investments
53,887
 
 
2,561
 
 
(76
)
 
56,372
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities(3)
2,000
 
 
 
 
(108
)
 
1,892
 
Total long-term investments
2,000
 
 
 
 
(108
)
 
1,892
 
Total available-for-sale investment securities
$
55,887
 
 
$
2,561
 
 
$
(184
)
 
$
58,264
 
 
________________________________________________
 
(1)     
Municipal securities classified as short-term includes bonds issued or deemed to be guaranteed by non-U.S. governments.
(2)     
Negotiable certificates of deposit consist of certificates issued by institutions outside the U.S.
(3)     
Municipal securities classified as long-term, consist of municipal Auction Rate Securities ("ARS") substantially all of which are backed by monoline bond insurance companies.
 
The following table summarizes our investment securities and their related inception-to-date gross unrealized gains and (losses), as of March 31, 2010 (in thousands):

8


 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Short-term investments:
 
 
 
 
 
 
 
Municipal securities(1)
$
17,222
 
 
$
26
 
 
$
(7
)
 
$
17,241
 
Corporate securities
64,220
 
 
187
 
 
(53
)
 
64,354
 
Negotiable certificates of deposit(2)
1,347
 
 
 
 
(1
)
 
1,346
 
Total short-term investments
82,789
 
 
213
 
 
(61
)
 
82,941
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities(3)
2,000
 
 
 
 
(149
)
 
1,851
 
Total long-term investments
2,000
 
 
 
 
(149
)
 
1,851
 
Total available-for-sale investment securities
$
84,789
 
 
$
213
 
 
$
(210
)
 
84,792
 
Put option
 
 
 
 
 
 
 
 
 
1,738
 
Trading securities(4)
 
 
 
 
 
 
 
 
 
21,036
 
Total short-term investments, pledged
 
 
 
 
 
 
 
 
 
22,774
 
Total investment securities
 
 
 
 
 
 
 
 
 
$
107,566
 
 ________________________________________________
 
(1)     
Municipal securities classified as short-term includes bonds issued or deemed to be guaranteed by non-U.S. governments, U.S. agency securities, U.S. Treasury securities, and local governments.
(2)     
Negotiable certificates of deposit consist of certificates issued by institutions outside the U.S.
(3)     
Municipal securities classified as long-term, consist of municipal ARS substantially all of which are backed by monoline bond insurance companies.
(4)     
Trading securities classified as short-term, pledged, consist of student loan ARS substantially all of which are guaranteed by the U.S. government under the Federal Family Educational Loan Program and backed by monoline bond insurance companies.
 
Available-for-sale investments
 
Our entire portfolio of available-for-sale investments had a fair value of $58.3 million at September 30, 2010, and inception-to-date net unrealized gains of $2.4 million (inclusive of gains and losses resulting from changes in foreign currency rates) that are recorded in accumulated other comprehensive income.  Included in our portfolio of available-for-sale investments at September 30, 2010, are securities with inception-to-date gross unrealized losses of $0.2 million; these losses are temporary, as we believe the decline in fair value is primarily attributable to the limited liquidity of these investments.  During the six months ended September 30, 2010 and September 30, 2009, no securities had an other-than-temporary impairment.
 
At September 30, 2010 and March 31, 2010 our portfolio of available-for-sale investments included two investments that have been in a continuous unrealized loss position for more than 12 months; both investments are long-term municipal ARS. The inception-to-date unrealized losses and fair value of these investments at both September 30, 2010 and March 31, 2010 was $0.1 million and $1.9 million, respectively.  These losses are temporary as we believe the decline in fair value is primarily attributable to the limited liquidity of these investments.
 
In the six months ended September 30, 2010 and 2009 we had pre-tax net unrealized gains of $2.7 million and $0.8 million on available-for-sale securities that is included in accumulated other comprehensive income.  In addition, in the six months ended September 30, 2010 and 2009, we had pre-tax unrealized holding gains of $0.4 million and $1.8 million, respectively, on our investment in Yuke's Co., Ltd. ("Yuke's") that is classified as available-for-sale and is included in other long-term assets, net (see "Note 6Other Long-Term Assets").
 
Realized gains and losses on sales of available-for-sale securities are recognized in net income (loss) on the specific identification basis and are included in interest and other income (expense), net in the condensed consolidated statements of operations. Pre-tax realized gains and losses in the three and six months ended September 30, 2010 are shown in the table below (in thousands):
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
 
2010
 
2009
 
2010
 
2009
Pre-tax realized gains
$
686
 
 
$
100
 
 
$
711
 
 
$
600
 
Pre-tax realized losses
$
41
 
 
$
 
 
$
380
 
 
$
 
 

9


The following table summarizes the amortized cost and fair value of our available-for-sale investment securities, classified by stated maturity, at September 30, 2010 (in thousands):
 
 
Amortized
Cost
 
Fair
Value
Short-term investments:
 
 
 
 
 
Due in one year or less
$
38,420
 
 
$
39,982
 
Due after one year through five years
15,467
 
 
16,390
 
Total short-term investments
53,887
 
 
56,372
 
Long-term investments:
 
 
 
 
 
Due in one year or less
500
 
 
490
 
Due after ten years
1,500
 
 
1,402
 
Total long-term investments
2,000
 
 
1,892
 
Total available-for-sale investment securities
$
55,887
 
 
$
58,264
 
 
Auction Rate Securities
 
At September 30, 2010, we had $1.9 million of ARS classified as long-term available-for-sale investments.  These ARS are variable rate bonds tied to short-term interest rates with long-term maturities.  ARS have interest rate resets through a modified Dutch auction at predetermined short-term intervals, typically every 7, 28, or 35 days.  Interest on ARS is generally paid at the end of each auction process or semi-annually and is based upon the interest rate determined during the prior auction.
 
At March 31, 2010, we had $1.9 million of ARS classified as long-term available-for-sale investments, and $21.0 million of ARS classified as short-term trading investments, pledged.  In addition, as further discussed below, we held a $1.7 million put option related to the short-term trading ARS that was also classified as short-term investments, pledged.
 
In October 2008, we entered into a settlement agreement with UBS Financial Services Inc. ("UBS"), the broker of certain of our ARS (the "UBS Agreement").   The UBS Agreement provided us with Auction Rate Securities Rights ("Rights") to sell such ARS to UBS at the par value of the underlying securities at any time during the period from June 30, 2010 through July 2, 2012 and in return, we agreed to release UBS from certain potential claims related to the ARS in certain specified circumstances.  These Rights were a freestanding instrument accounted for separately from the ARS, and were registered, nontransferable securities accounted for as a put option.  At March 31, 2010, the put option had a fair value of $1.7 million and was recorded in short-term investments, pledged in our consolidated balance sheet along with the underlying ARS which had a fair value of $21.0 million.
 
On June 30, 2010, we exercised our Rights and sold all of the remaining ARS underlying the UBS Agreement to UBS at par value in accordance with the terms of the UBS Agreement.  Accordingly, in the three months ended June 30, 2010, we recognized a loss of $1.7 million due to the exercise of the put option, which is recorded in interest and other income (expense), net in the condensed consolidated statement of operations.  This loss was offset by a gain of $1.7 million on the settlement of the underlying ARS.
 
Additionally, pursuant to the UBS Agreement, we entered into a Credit Agreement with UBS Bank USA, which allowed us to borrow up to 75% of the market value of the ARS (as determined by UBS) at any time, on a no net interest basis, to the extent that such ARS continued to be illiquid or until June 30, 2010 (see "Note 8Secured Credit Line"). In the three months ended June 30, 2010, we repaid the entire amount outstanding under the credit line, which was $13.2 million. The credit line established pursuant to the Credit Agreement was secured by certain of our ARS held with UBS.  At June 30, 2010 we had no borrowings outstanding under the Credit Agreement and thus the credit line was terminated, pursuant to its terms, on July 2, 2010.
 
4.     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 investment securities:
 
                  Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to

10


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, 2010 (in thousands):
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
21,917
 
 
$
 
 
$
 
 
$
21,917
 
Negotiable certificates of deposit
 
 
5,338
 
 
 
 
5,338
 
Corporate Securities
 
 
689
 
 
 
 
689
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
 
3,659
 
 
 
 
3,659
 
Corporate securities
 
 
49,266
 
 
 
 
49,266
 
Negotiable certificates of deposit
 
 
3,447
 
 
 
 
3,447
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
 
 
 
1,892
 
 
1,892
 
Other long-term assets, net:
 
 
 
 
 
 
 
 
 
 
 
Investment in Yuke's
5,955
 
 
 
 
 
 
5,955
 
Total
$
27,872
 
 
$
62,399
 
 
$
1,892
 
 
$
92,163
 
 
Level 3 assets at September 30, 2010 consist of AAA/Aaa rated ARS, which are backed by monoline bond insurance companies.  We historically invested in these securities as part of our cash management program.  However, the lack of liquidity in these credit markets has prevented us and other investors from selling these securities.  As such, these investments which were not subject to the UBS Agreement, are classified as long-term at September 30, 2010 to reflect the lack of liquidity.  We believe we have the ability to, and intend to, hold these ARS classified as available-for-sale until the auction process recovers or the securities mature.  These securities are investment grade, and we have no reason to believe that any of the underlying issuers of these ARS are presently at risk or that the underlying credit quality of the assets backing these ARS has been impacted by the reduced liquidity of these investments.  We have continued to receive interest payments on these ARS according to their terms.
 
We have estimated the fair value of these ARS using a discounted cash flow analysis that considered the following key inputs:  i) credit quality, ii) estimates on the probability of the issue being called or sold prior to final maturity, iii) current market rates, and iv) estimates of the next time the security is expected to have a successful auction.  The contractual terms of these securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than the stated par value of the security.
 
The following table summarizes our financial assets measured at fair value on a recurring basis as of March 31, 2010 (in thousands):
 

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Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
21,049
 
 
$
 
 
$
 
 
$
21,049
 
Negotiable certificates of deposit
 
 
28,545
 
 
 
 
28,545
 
Corporate securities
 
 
8,439
 
 
 
 
8,439
 
Municipal securities
 
 
14,175
 
 
 
 
14,175
 
Short-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
 
17,241
 
 
 
 
17,241
 
Corporate securities
 
 
64,354
 
 
 
 
64,354
 
Negotiable certificates of deposit
 
 
1,346
 
 
 
 
1,346
 
Short-term investments, pledged:
 
 
 
 
 
 
 
 
 
 
Student loan ARS
 
 
 
 
21,036
 
 
21,036
 
Put option
 
 
 
 
1,738
 
 
1,738
 
Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
 
 
 
 
1,851
 
 
1,851
 
Other long-term assets, net:
 
 
 
 
 
 
 
 
 
 
 
Investment in Yuke's
5,564
 
 
 
 
 
 
5,564
 
Total
$
26,613
 
 
$
134,100
 
 
$
24,625
 
 
$
185,338
 
 
Level 3 assets at March 31, 2010 primarily consist of ARS, the majority of which are AAA/Aaa rated and collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program and backed by monoline bond insurance companies.  Substantially all of the remaining ARS are also backed by monoline bond insurance companies.
 
In connection with the UBS Agreement, as discussed in "Note 3Investment Securities," at March 31, 2010, we had a put option with a fair value of $1.7 million recorded in short-term investments, pledged in our condensed consolidated balance sheet.  We elected fair value accounting for the put option in order to mitigate volatility in earnings caused by accounting for the put option and underlying ARS under different methods.  We estimated the value of the put option as the difference between the par value of the underlying ARS and the fair value of the ARS, after applying an estimated risk discount, as the put option gave us the right to sell the underlying ARS to the broker during the period June 30, 2010 to July 2, 2012 for a price equal to the par value.  On June 30, 2010, we exercised the put option and sold all of the remaining ARS underlying the UBS Agreement to UBS at par value in accordance with the terms of the UBS Agreement.
 
The following tables provide a summary of changes in fair value of our Level 3 financial assets in the three and six months ended September 30, 2010 and 2009 (in thousands):
 
 
 
Three Months Ended September 30,
 
 
2010
 
2009
Beginning balance
 
$
1,840
 
 
$
35,399
 
Total gains or (losses) (realized/unrealized):
 
 
 
 
 
Included in earnings
 
 
 
76
 
Included in accumulated other comprehensive income
 
52
 
 
424
 
Purchases, sales, issuances and settlements, net
 
 
 
(3,850
)
Transfers in/out of Level 3
 
 
 
(2,411
)
Ending balance
 
$
1,892
 
 
$
29,638
 
 

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Six Months Ended September 30,
 
 
2010
 
2009
Beginning balance
 
$
24,625
 
 
$
35,643
 
Total gains or (losses) (realized/unrealized):
 
 
 
 
 
Included in earnings
 
1
 
 
93
 
Included in accumulated other comprehensive income
 
41
 
 
213
 
Purchases, sales, issuances and settlements, net
 
(22,775
)
 
(3,900
)
Transfers in/out of Level 3
 
 
 
(2,411
)
Ending balance
 
$
1,892
 
 
$
29,638
 
 
In the three and six months ended September 30, 2009, transfers out of Level 3 represent ARS for which we received a call notice prior to September 30, 2009. Accordingly, these ARS were valued using Level 1 inputs and were classified as short-term investments in the condensed consolidated financial statements at September 30, 2009.
 
Financial Instruments
 
The carrying value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, accrued royalties, and secured credit line approximate fair value based on their short-term nature.  Investments classified as available for sale and trading are stated at fair value.
 
The book value and fair value of our convertible senior notes at September 30, 2010 was $100.0 million and $87.1 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 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 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 other current assets or 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 the condensed consolidated statements of operations.
 
Cash Flow Hedging Activities.  From time to time, we hedge a portion of our foreign currency risk related to forecasted foreign currency denominated sales and expense transactions by entering into foreign 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, 2010 and 2009, we did not enter into any foreign exchange forward contracts related to cash flow hedging activities.
 
Balance Sheet Hedging Activities.  We utilize foreign 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 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 other current assets or other current liabilities in our consolidated balance sheets, and the associated gains and losses from changes in fair value are reported in interest and other income (expense), net in the consolidated statements of operations.  The forward contracts generally have a contractual term of one month or less and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not significant at each month-end.
 
At September 30, 2010 and March 31, 2010, we had foreign exchange forward contracts related to balance sheet hedging activities in the notional amount of $85.4 million and $90.1 million, respectively, with a fair value that approximates zero at both September 30, 2010 and March 31, 2010.  We estimated the fair value of these contracts using Level 1 inputs, specifically, inputs obtained in quoted public markets.  The net loss recognized from these contracts during the three months ended September 30, 2010 was $0.4 million and the net gain recognized from these contracts during the six months ended September 30, 2010 was $2.3 million and was included in interest and other income (expense), net in our condensed consolidated statements of operations.
 
5.   Balance Sheet Details
 
Inventory.  Inventory at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):
 

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September 30,
2010
 
March 31,
2010
Components
$
5,752
 
 
$
2,447
 
Finished goods
15,482
 
 
11,523
 
Inventory
$
21,234
 
 
$
13,970
 
 
Prepaid expenses and other current assets. Included in prepaid expenses and other current assets at September 30, 2010 were product prepayments of $25.3 million related to the upcoming holiday season; product prepayments at March 31, 2010 were $1.2 million.
 
Licenses and Software development. At September 30, 2010 we had total capitalized licenses and software development assets of $170.4 million and $224.1 million, respectively. We evaluate the future recoverability of our capitalized licenses and software development on a quarterly basis. As a result of those evaluations, we recorded a license impairment charge in the three months ended September 30, 2010 of $5.9 million on an unannounced title and we had software development impairment charges in the three and six months ended September 30, 2010 of $4.5 million and $7.0 million, respectively, on one of our titles. In the six months ended September 30, 2009, we had a license impairment charge of $5.4 million related to one of our licenses.
 
Property and equipment, net.  Property and equipment, net at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):
 
 
Useful lives
 
September 30,
2010
 
March 31,
2010
Building
30 yrs
 
$
730
 
 
$
730
 
Land
-
 
401
 
 
401
 
Computer equipment and software
3-10 yrs
 
58,044
 
 
53,454
 
Furniture, fixtures and equipment
5 yrs
 
8,448
 
 
7,444
 
Leasehold improvements
3-6 yrs
 
15,021
 
 
12,978
 
Automobiles
2-5 yrs
 
82
 
 
78
 
 
 
 
82,726
 
 
75,085
 
Less: accumulated depreciation
 
 
(51,688
)
 
(46,711
)
 Property and equipment, net
 
 
$
31,038
 
 
$
28,374
 
 
Depreciation expense associated with property and equipment amounted to $2.9 million and $5.6 million for the three and six months ended September 30, 2010, respectively, and $3.4 million and $6.7 million for the three and six months ended September 30, 2009, respectively.
 
Accrued and other current liabilities. Accrued and other current liabilities at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):
 
 
September 30,
2010
 
March 31,
2010
Accrued liabilities
$
17,246
 
 
$
16,613
 
Settlement payment due to Jakks
6,000
 
 
6,000
 
Accrued compensation
17,400
 
 
34,696
 
Deferred revenue, net
10,443
 
 
6,403
 
Accrued third-party software developer milestones
18,791
 
 
23,676
 
Accrued royalties
71,797
 
 
49,944
 
Accrued and other current liabilities
$
141,677
 
 
$
137,332
 
 
Other long-term liabilities.  Other long-term liabilities at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):
 

14


 
September 30,
2010
 
March 31,
2010
Accrued royalties
$
63,611
 
 
$
75,163
 
Unrecognized tax benefits and related interest
 
 
1,612
 
Deferred rent
8,257
 
 
5,148
 
Accrued liabilities
4,263
 
 
4,741
 
Settlement payment due to Jakks
6,725
 
 
12,161
 
Other long-term liabilities
$
82,856
 
 
$
98,825
 
 
A portion of the settlement payment due to Jakks is reflected in current liabilities and a portion is reflected in long-term liabilities at the present value of the consideration payable under the agreement between THQ and Jakks.  See "Note 17 — Settlement Agreements" in the notes to the condensed consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 for a discussion of the Jakks settlement payments.
 
6.   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, 2010 and 2009 was $0.4 million and $1.8 million, respectively.  As of September 30, 2010, the inception-to-date unrealized holding gain on our investment in Yuke's was $2.8 million.  Due to the long-term nature of this relationship, this investment is included in other long-term assets in the condensed consolidated balance sheets.
 
Other long-term assets as of September 30, 2010 and March 31, 2010 consisted of the following (in thousands):
 
 
September 30,
2010
 
March 31,
2010
Investment in Yuke's
$
5,955
 
 
$
5,564
 
Deferred financing costs
2,464
 
 
2,781
 
Other
3,852
 
 
2,255
 
Total other long-term assets
$
12,271
 
 
$
10,600
 
 
7.   Restructuring
 
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 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. Restructuring charges and adjustments are recorded as restructuring expenses in our consolidated statement of operations and have included the costs associated with lease abandonments less estimates of sublease income, write-off of related long-lived assets due to the studio closures, as well as costs of other non-cancellable contracts.  As of September 30, 2010, restructuring charges under the fiscal 2009 realignment amounted to $18.0 million. In the three and six months ended September 30, 2010, restructuring charges and adjustments were minimal. 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 tables summarize the significant components and activity under the restructuring plan for the three and six months ended September 30, 2010 and 2009, and the related restructuring reserve balances (in thousands).
 

15


 
 
Lease and Contract Terminations
 
 
 
 
 
 
 
 
Three months ended September 30, 2010
 
Six months ended September 30, 2010
Beginning balance
 
$
2,085
 
 
$
2,392
 
Charges to operations
 
(161
)
 
7
 
Non-cash write-offs
 
 
 
 
Cash payments
 
(615
)
 
(1,203
)
Foreign currency and other adjustments
 
177
 
 
290
 
Ending balance
 
$
1,486
 
 
$
1,486
 
 
 
Three months ended September 30, 2009
 
Six months ended September 30, 2009
 
 
 
Lease and Contract Terminations
 
Net Asset Impairments
 
Total
 
Lease and Contract Terminations
 
Net Asset Impairments
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
 
$
5,534
 
 
$
 
 
$
5,534
 
 
$
5,056
 
 
$
 
 
$
5,056
 
 
Charges to operations
 
791
 
 
79
 
 
870
 
 
1,553
 
 
969
 
 
2,522
 
 
Non-cash write-offs
 
 
 
(79
)
 
(79
)
 
 
 
(969
)
 
(969
)
 
Cash payments
 
(892
)
 
 
 
(892
)
 
(1,490
)
 
 
 
(1,490
)
 
Foreign currency and other adjustments
 
(268
)
 
 
 
(268
)
 
46
 
 
 
 
46
 
 
Ending Balance
 
$
5,165
 
 
$
 
 
$
5,165
 
 
$
5,165
 
 
$
 
 
$
5,165
 
 
 
As of September 30, 2010, $1.1 million of the restructuring accrual is included in accrued short-term liabilities and $0.4 million is included in other long-term liabilities.  As of March 31, 2010, $1.6 million of the restructuring accrual was included in accrued short-term liabilities and $0.8 million was included in other long-term liabilities.  The accrual balances at September 30, 2010 and March 31, 2010 related to future lease payments for facilities vacated under our 2009 restructuring plan, offset by estimates of future sublease income.  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 abandoned.
 
 8.   Secured Credit Line
 
In October 2008, in conjunction with the UBS Agreement (see "Note 3Investment Securities"), we entered into a Credit Agreement with UBS Bank USA, which allowed us to borrow up to 75% of the market value of the ARS (as determined by UBS) at any time, on a no net interest basis, to the extent that such ARS continued to be illiquid or until June 30, 2010.  Borrowings under the credit line were due on demand and were secured by certain of our ARS held with UBS.  In the three months ended June 30, 2010, we repaid the entire amount outstanding under the credit line, which was $13.2 million.  At June 30, 2010 we had no borrowings outstanding under the Credit Agreement and the credit line was terminated, pursuant to its terms, on July 2, 2010.
 
9.   Convertible Senior Notes
 
On August 4, 2009, we issued $100.0 million 5% convertible senior notes ("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.
 
The Notes are initially convertible into shares of our common stock at a conversion rate of 117.4743 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $8.51 per share.  At this conversion rate and upon conversion of 100% of our Notes outstanding at September 30, 2010, our Notes would convert into 11.7 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 14.7 million, subject to adjustment.  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

16


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 the condensed consolidated balance sheet at September 30, 2010; these costs are being amortized over the term of the Notes.  Amortization expense associated with these costs was $0.1 million and $0.3 million in the three and six months ended September 30, 2010, respectively, and is classified as interest and other income (expense), net in the condensed consolidated statements of operations.  Additionally, interest expense related to the Notes was $1.2 million and $2.5 million in the three and six months ended September 30, 2010, respectively, and is classified as interest and other income (expense), net in the condensed consolidated statement of operations.  The effective interest rate, including amortization of debt issuance costs, for the three and six months ended September 30, 2010 was 5.6%.
 
10.   Credit Facility
 
On June 30, 2009, we entered into a Loan and Security Agreement (the "Credit Facility") with Bank of America, N.A. ("B of A"), as agent, and the lenders party thereto from time to time.  The Credit Facility provides for a $35.0 million revolving credit facility, which can be increased to $50.0 million, subject to lender consent, pursuant to a $15.0 million accordion feature, and includes a $15.0 million letter of credit subfacility.
 
The Credit Facility has a three-year term and bears interest at a floating rate equivalent to, at our option, either the base rate plus a spread of 1.0% to 2.5% or LIBOR plus 2.5% to 4.0%, depending on the fixed charge coverage ratio.  Borrowings under the Credit Facility are conditioned on our maintaining a certain fixed charge coverage ratio and a certain liquidity level, as set forth in the Credit Facility.  The amount we can borrow under the Credit Facility fluctuates based upon our levels of eligible North American accounts receivable.  At September 30, 2010, we had no borrowings under the Credit Facility.
 
The Credit Facility is guaranteed by most of our domestic subsidiaries (each, an "Obligor") and secured by substantially all of our assets.
 
The Credit Facility contains customary affirmative and negative covenants, including, among other terms and conditions, limitations on our and each Obligor's ability to: create, incur, guarantee or be liable for indebtedness (other than certain types of permitted indebtedness); dispose of assets outside the ordinary course (subject to certain exceptions); acquire, merge or consolidate with or into another person or entity (other than certain types of permitted acquisitions); create, incur or allow any lien on any of their respective properties (except for certain permitted liens); make investments or capital expenditures (other than certain types of investments or capital expenditures); or pay dividends or make distributions (each subject to certain limitations).  In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on certain material contracts (subject to certain limitations and cure periods).  At September 30, 2010 we were in compliance with all covenants related to the Credit Facility.
 
11.   Commitments and Contingencies
 
A summary of annual minimum contractual obligations and commercial commitments as of September 30, 2010 is as follows (in thousands):
 
 
 
Contractual Obligations and Commercial Commitments (6)
Fiscal
Years Ending
March 31,
 
License /
Software
Development
Commitments (1)
 
Advertising (2)
 
Leases (3)
 
Debt (4)
 
Other (5)
 
Total
Remainder of 2011
 
$
72,671
 
 
$
14,722
 
 
$
7,932
 
 
$
 
 
$
291
 
 
$
95,616
 
2012
 
79,864
 
 
18,070
 
 
15,180
 
 
 
 
6,582
 
 
119,696
 
2013
 
20,850
 
 
10,811
 
 
11,350
 
 
 
 
4,000
 
 
47,011
 
2014
 
14,000
 
 
5,000
 
 
10,100
 
 
 
 
4,000
 
 
33,100
 
2015
 
13,500
 
 
532
 
 
9,038
 
 
100,000
 
 
 
 
123,070
 
Thereafter
 
22,500
 
 
1,000
 
 
11,373
 
 
 
 
 
 
34,873
 
 
 
$
223,385
 
 
$
50,135
 
&