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THQ has emerged as a global industry leader. THQ's management is deep, experienced, and dedicated to long-term growth. Our financial position is stronger than ever. We are continuing to build THQ's established brands while we create new franchise brands, expand distribution, and invest in leading-edge game technologies.
THQ, Inc. is a leading developer of gaming software for use on dedicated play stations, portable game players, and computers. The company produces a combination of licensed and self-developed titles. The licensed products include games based on WWF Wrestling, Scooby-Doo, Rugrats, Power Rangers, MTV Sports, and the Star Wars and Evil Dead motion pictures. Through its recently acquired Volition, Inc., subsidiary, the company produces original games such as Summoner and Descent. THQ games are primarily sold in the United States, but the company also has distribution arms in the United Kingdom, France, Germany, and Australia. The game industry has recently been developing new products with on-line components, and THQ is following this trend, as indicated by its purchase of the online gaming firm Genetic Anomalies, Inc., in 1999, its introduction of a wrestling game in 2000 with on-line features, and its preparation of games for Microsoft's on-line-capable Xbox platform, due for release in fall 2001.
THQ was founded by Jack Friedman, a toy industry veteran. Friedman had entered the business with LJN Toys in the mid-1960s and had risen to the position of company president 20 years later. After LJN was purchased by entertainment conglomerate MCA, Inc., Friedman grew disenchanted with working for a giant corporation and left to start his own company. In April 1990 he formed THQ, Inc., investing $1 million of his own money. The name was short for 'Toy Headquarters,' and the company, based in Calabasas, California, planned to produce a full line of toys including dolls, board games, and electronic games.
Soon after its formation, the company purchased Broderbund Software's video games division, and the first products came to market in October. Some early offerings were Peter Pan and the Pirates board games and action figures and Videomation and Wayne Gretzky Hockey games. THQ staffers came up with ideas for the products, but contracted out the actual design and manufacturing to other firms.
Needing cash to develop new product licenses, in the summer of 1991 Friedman merged THQ with Trinity Acquisition Corporation. The publicly traded Trinity had been formed some time earlier to raise capital for as yet unrealized ventures. The new entity retained the name of THQ, Inc. and continued to trade on the NASDAQ exchange. By the end of its first full year THQ, with 16 employees, had achieved annual sales of $33 million. The company could boast of two genuine hits: a video game based on the popular movie Home Alone and another drawn from the successful Where's Waldo book series. THQ video games were licensed to run on Nintendo game stations, and the company had recently extended its contract with Nintendo to allow it to market the games beyond North America to Europe, Australia, and parts of Asia. Nintendo manufactured the games, which were designed by THQ and programmed by an outside software company. Each of these parties took a cut of the profits, as did the licensor of the game's subject matter.
In the spring of 1992, THQ began working with Nintendo rival Sega to produce games for that company's home play system. THQ was also developing games for Nintendo's portable Game Boy units. Again needing more working capital, the company issued a secondary stock offering, selling 1.5 million shares at $4 each. THQ was actively seeking more licenses from popular entertainment or sports commodities on which to base products. Although its sales were rapidly climbing, its net profits were flat, due in part to problems with the dollar in overseas markets and higher product development and promotion costs. In 1993 Jack Friedman agreed to take an 11 percent pay cut and give up his options on 2.2 million shares of stock. Nonetheless, the company's founder was still earning a handsome $850,000 per year and held options on 1 million shares. During that same year, THQ purchased a Chicago-based home and arcade software company, Black Pearl Software. Black Pearl would retain an office in Chicago but moved its headquarters to Calabasas.
A Financial Crisis in 1993
Struggling to come up with new hits in an increasingly competitive and costly marketplace, the company saw its net profits begin to shrink, then turn into losses, which mounted quickly. Sales for 1993 reached $37.5 million, but losses totaled $16.2 million. The next year was even bleaker, with revenues of only $13.3 million and losses of $17.5 million. The company attempted to stop the hemorrhaging of money by cutting costs and even selling 3.5 million shares of stock for 50 cents apiece, but this had little impact. Finally, in 1995 founder Jack Friedman departed, turning over the reins to the chief financial officer, Brian J. Farrell.
In the months preceding Friedman's departure, THQ had focused on developing games for the new Nintendo Super NES platform, but this platform wound up being less popular than Sega's Genesis system. Sitting on a huge backlog of unsold Super NES games, Farrell immediately instituted strict inventory control procedures. He also eliminated half of THQ's staff of 60.
Using a new marketing tactic, Farrell decided to focus on supplying the needs of consumers who were still using older game platforms and avoid gambling on which new system would be most popular. Meeting with creditors, many of whom also happened to be product licensors such as Walt Disney Interactive, LucasArts, MTV, and Nickelodeon, Farrell was able to convince them to cut better deals on licenses to produce software for the older 16-bit systems. THQ developed new games that would cost only $9.99 to $14.99, compared with $40 to $60 for games for the most recent platforms. The company also increased its offerings, debuting 24 new games in 1995, more than twice the number it had introduced in 1994. The results were swift and gratifying. 1995 sales rebounded to more than $33 million, with a net profit of $600,000. The company was also able to establish a distribution office in the United Kingdom during the year.
Results for 1996 were even better, with sales reaching $50.2 million and profits hitting $1.9 million. The company released more than 30 titles and also invested in a software maker, Inland Productions, Inc., and acquired a design company, Heliotrope Studios, Inc. Deciding that the time was right to re-enter the big leagues, THQ began to design games for the newly released 64-bit systems. It struck a major new licensing agreement with World Championship Wrestling (WCW) to produce games based on its players, who included Hulk Hogan and Macho Man Randy Savage. The company was now making games for Nintendo's portable Game Boy, Sony's PlayStation, and for personal computers, in addition to Nintendo's other platforms. The Christmas shopping season of 1997 saw copies of WCW versus NWO:World Tour flying off the shelves, with nearly 40 percent of the company's $90 million in sales for the year coming from the wrestling game.
The bubble appeared to burst the following spring, however, when THQ lost the WCW license to its arch rival, Electronic Arts, in a bidding war. Within two days, THQ's stock value dropped by 40 percent. Quickly bouncing back, the ever-resilient Farrell obtained a license from Nickelodeon to make games based on the hit cartoon Rugrats and within a year had replaced the wrestling deal with a license from WCW's chief competitor, the World Wrestling Federation (WWF).
Late 1990s Acquisitions and More Sports-Based Games
During 1998 the company added two new subsidiaries. It purchased 3D graphics developer GameFX, Inc. for 246,000 shares of stock and $790,000 in cash. The Massachusetts-based firm was soon joined by German software distributor Rushware Microhandelsgesellschaft mbH, acquired for $6 million. Despite the loss of the WCW contract, THQ was allowed to produce its licensed games into 1999, and the company had successful offerings in WCW/NWO Revenge, WCW Nitro, and WCW/NWO Thunder. It conducted major advertising campaigns for the launch of these games, as well as for the company's Rugrats: Search for Reptar, targeted at children seven to 12 years old. THQ was now realizing 55 percent of its revenues from 64-bit Nintendo games, 30 percent from Sony PlayStation, and eight percent from Nintendo Game Boy. Only two percent came from sales of PC-based games. The majority of revenue, 85 percent, was earned in the United States.
THQ was also developing games that targeted fans of 'real' sports, offering Brunswick Bowling, Championship Motocross, and several BASS Masters Classic fishing simulation games in 1999. That same year, THQ made another acquisition in the spring when it purchased Pacific Coast Power & Light Co., a developer of game consoles. It also signed licensing deals with motocross star Ricky Carmichael, MTV Sports, and the makers of TV's 'Power Rangers' series. At the end of the year the company also acquired Genetic Anomalies, Inc., bringing THQ a developer of on-line gaming products. This area was heating up, as the possibilities of making games interactive via the Internet seemed to be the next major step for the industry. As the year ended THQ had its best Christmas sales season ever. The company had also moved to a new, larger headquarters site during the year.
The spring of 2000 saw the release of THQ's first on-line wrestling game, WWF With Authority, developed by Genetic Anomalies. The game could be played on-line in real time against another player anywhere in the world. Other features included chat capabilities and a world ranking system.
The volatile nature of the gaming marketplace was affecting THQ again, however, and the company announced in May that it would lose significantly more money than it had expected during the year. A transition in game console technology was pegged as the cause. It still had new ventures in the works, including an investment in Japanese game developer Yuke's Co. Ltd., a joint venture to market games with the Communication Devices division of Siemens AG of Germany, and the opening of an Australian office. The company also completed its largest acquisition to date, purchasing Volition, Inc. of Illinois for approximately $20 million. Volition was an established designer of original game concepts such as Descent and Freespace, and THQ had earlier teamed with the company to create Summoner and Red Faction. In September, THQ announced it would begin developing games for the newly announced Microsoft Xbox game system, due out in the fall of 2001. New releases included several more WWF titles and games based on television quiz show 'Who Wants to Be a Millionaire,' the Star Wars and Evil Dead movie series, and cartoon dog Scooby-Doo.
In only ten years, THQ had grown to become one of the top three independent video game makers in the United States. It offered what proved a winning mix of sports- and entertainment-based titles along with select original concepts. The company was now reaping the benefits of the hard lessons learned during its formative years. As the industry moved toward development of on-line gaming products, THQ appeared likely to remain a leader in its field.
Principal Subsidiaries: Black Pearl Software, Inc.; GameFx; Genetic Anomalies, Inc.; Heliotrope Studios, Inc.; Malibu Games, Inc.; Pacific Coast Power & Light Company; THQ Asia Pacific Pty. Ltd.; THQ Deutschland GmbH; THQ France; THQ International Ltd.; Volition, Inc.
Principal Competitors: The 3DO Company; Acclaim Entertainment, Inc.; Activision, Inc.; Electronic Arts, Inc.; Hasbro, Inc.; Havas SA; Infogrames Entertainment SA; Infogrames, Inc.; LucasArts Entertainment Company LLC; Microsoft Corporation; Midway Games, Inc.; Nintendo Co., Ltd.; SEGA Corporation; Take-Two Interactive Software, Inc.; The Walt Disney Company.