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FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     

THQ INC.

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     þ  No      o

      Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

      Common stock, $0.01 par value: 21,925,238 shares (as of November 1, 2001).

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THQ INC. AND SUBSIDIARIES

INDEX

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Part I — Financial Information

Item 1.      Financial Statements.

THQ INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

      See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

See notes to consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

1.     Basis of Presentation

      In the opinion of management, the accompanying balance sheets and related interim statements of operations, cash flows and Stockholders’ equity include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with U.S. generally accepted accounting principles. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses. Examples include doubtful accounts, discounts and returns. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2000. Certain reclassifications have been made for consistent presentation.

2.     Accounts Receivable

      Accounts receivable are due primarily from domestic and foreign retailers and distributors including mass merchants and specialty stores. Accounts receivable at September 30, 2001 and December 31, 2000 consist of the following:

3.     Credit Facility

      We have entered into the Fifth and Sixth Amendments to the Revolving Credit Agreement, dated August 28, 2001 and October 26, 2001, respectively, with Union Bank of California and a syndicate of other financial institutions. Under the terms of the Revolving Credit Agreement, as amended, we are permitted to borrow (and maintain obligations under outstanding letters of credit) up to an aggregate of $35,000,000 through August 1, 2002 subject to the following:

      We may maintain outstanding letters of credit for product purchases and outstanding borrowings in the aggregate up to $35,000,000 between August 1, 2001 and January 31, 2002; and $20,000,000 between February 1, 2002 and July 31, 2002. In addition, outstanding borrowings cannot exceed $10,000,000 for August 1, 2001 through October 31, 2001; $30,000,000 from November 1, 2001 through December 31, 2001; $20,000,000 from January 1, 2002 through January 31, 2002; and $10,000,000 from February 1, 2002 to July 31, 2002.

      We can not have any outstanding borrowings for a period of at least 60 days during each year of the agreement.

      This credit facility is secured by a lien on substantially all of our assets and contains customary financial and non-financial covenants which require us to maintain a specified minimum net worth and limit the ability for us to incur additional indebtedness, sell assets and enter into certain mergers or acquisitions. We are not permitted to pay cash dividends. Amounts outstanding under these credit facilities bear interest, at our choice, at either a) the bank’s prime rate (6.00% at September 30, 2001) or b) the London Interbank Offered Rate

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(2.63% at September 30, 2001) plus 1.85%. As of September 30, 2001, we had approximately $21,294,000 in obligations with respect to outstanding letters of credit and no outstanding borrowings.

4.     Stock Option Plan

      On July 20, 2001, our stockholders approved an amendment to the Amended and Restated 1997 Stock Option Plan (the “1997 Amended Plan”) to increase the number of shares of common stock for which options may be issued. The 1997 Amended Plan now provides for the issuance of up to 7,025,000 shares of common stock for option grants to directors, officers and key employees. The purchase price per share of common stock purchasable upon exercise of each option may not be less than the fair market value of such share of common stock on the date that such option is granted. Generally, options granted under this plan become exercisable over three years and expire within five years from the date of grant.

5.     Capital Stock Transactions

      In connection with obtaining the World Wrestling Federation license in August 1999, we issued to Titan Sports Inc. (now known as World Wrestling Federation Entertainment, Inc. (“World Wrestling Federation Entertainment”)) and another party related to the World Wrestling Federation Entertainment, Stanley Shenker Associates, Inc., warrants to purchase an aggregate amount of 281,250 shares of common stock, which had a fair value of $3,063,000 at the time these warrants were issued. The purchase price for each share of common stock underlying these warrants was $10.42 per share, and the warrants were to expire on December 31, 2009. On June 8, 2001, World Wrestling Federation Entertainment exchanged all of its warrants for 201,660 shares of common stock in a non-cash transaction with a fair market value of $53.61 per share. On July 23, 2001, Stanley Shenker Associates, Inc. exchanged all of its warrants for 25,282 shares of common stock in a non-cash transaction with a fair market value of $57.00 per share.

      On April 19, 2001, in connection with the execution of a development agreement, we issued to such developer warrants to purchase an aggregate amount of 10,000 shares of our common stock, which had a fair value of $198,000 at the time these warrants were issued. Further, these warrants vested immediately upon their grant and may be exercised, in whole or in part, at any time prior to April 19, 2004 for a purchase price of $38.90 per share of the underlying common stock.

      On August 2, 2001, in connection with the execution of a license agreement, we issued to such licensor warrants to purchase an aggregate amount of 10,000 shares of our common stock, which had a fair value of $223,000 at the time these warrants were issued. Further, these warrants vested immediately upon their grant and may be exercised, in whole or in part, at any time prior to August 2, 2004 for a purchase price of $43.70 per share of the underlying common stock.

      On July 20, 2001, our shareholders approved an amendment to our Certificate of Incorporation to increase the number of authorized shares of our common stock from 35,000,000 to 75,000,000. On July 24, 2001, we amended our Certificate of Incorporation to reflect this increase in authorized shares.

6.     Other Long-Term Assets

      On June 13, 2001, THQ International Ltd. and HotGen Studios Ltd. entered into a Joint Venture Agreement pursuant to which THQ International Ltd. acquired a 44% interest in Network Interactive Sports Limited (“NI Sports”), formerly wholly owned by HotGen Studios Ltd. In exchange for this interest, THQ International Ltd. agreed to invest $3.3 million in cash, of which $2.7 million was paid upon execution of the Joint Venture Agreement with the balance to be paid in four equal monthly installments. This investment is included in Other long-term assets in the accompanying balance sheet and is accounted for using the equity method. For the three months and nine months ended September 30, 2001, our equity in the net loss of the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

joint venture is immaterial and included in General and Administrative expenses in the accompanying statements of operations.

      NI Sports uses client/server technology to offer multi-player games to subscribers across a variety of platforms including PCs and Wireless Application Protocol enabled mobile phones. Areas of potential future growth are extensions of this technology to game consoles, interactive television and other internet-access devices. NI Sports’ first product is Sky Sports Football Manager, an online soccer game for the United Kingdom market. We also utilize HotGen Studios Ltd. as an independent software developer. As of September 30, 2001, they were developing one game for us with a contract value of $500,000 of which $270,000 has been paid and is included in Software Development Costs in the accompanying balance sheet.

7.     Commitments and Contingencies

      There have been no material developments in the legal proceedings previously disclosed in Part II, Item 1 of the 10-Q for second quarter ended June 30, 2001, filed on August 14, 2001. We and certain of our officers and directors are defendants in a class action lawsuit filed in the United States District Court for the Central District of California entitled In re THQ Inc. Securities Litigation, Master File No. CV-00-1783-AHM. On December 20, 2000, the court dismissed this action with prejudice as to all of the defendants. On April 23, 2001, the United States District Court for the Central District of California modified its December 20, 2000 order and permitted plaintiffs to file a third amended complaint. Defendants have filed an answer denying all of the material allegations of the third amended complaint and asserting legal and factual defenses. The third amended complaint alleges that defendants violated Rule 10b-5 and Section 20(a) of the Securities Exchange Act of 1934, including allegations that defendants manipulated the company’s stock price; distributed false and misleading information concerning revenue recognition, forecasts and earnings estimates; selectively disclosed material information; and engaged in insider trading. The complaint seeks an unspecified amount in damages. The plaintiffs are purported investors who purchased shares of our common stock from October 26, 1999 through May 24, 2000. The lawsuit is in the discovery phase and a trial date has been set for November 12, 2002. We and all of the individual defendants have taken the position that this lawsuit is without merit. At this early stage, however, we cannot predict the likely outcome of this litigation.

      We also are a party to lawsuits in the normal course of our business, none of which are material.

8.     Basic and Diluted Earnings Per Share

      The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted EPS for the years presented:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.     Recently Issued Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. We adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have an impact on our financial statements.

      In June 2001, the FASB issued two new pronouncements: SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS 141 prohibits the use of the pooling-of-interests method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001 that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 as to all goodwill and other intangible assets recognized in an entity’s statement of financial position at that date, regardless of when those assets were initially recognized. We are currently evaluating the provisions of SFAS 141 and 142 and have not determined the impact, if any, they will have on our financial statements.

      In August 2001, the FASB issued a new pronouncement SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes FASB 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. We are currently evaluating the provisions of SFAS 144 and have not determined the impact, if any, it will have on our financial statements.

10.     Subsequent Events

      On November 7, 2001, we announced that we had entered into a letter of intent to acquire Rainbow Multimedia Group, Inc (“Rainbow Studios”) for approximately 1,000,000 shares of our common stock. The acquisition is subject to the satisfaction of certain conditions, including the execution of definitive documents.

      We believe that the acquisition of Rainbow Studios will strengthen our internal development capabilities, enhancing our ability to create gaming content for the next-generation of console systems including PlayStation 2, GameCube and Xbox.

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Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

      This Quarterly Report contains, or incorporates by reference, certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including those described above and the following: changes in demand for our products, product mix, the timing of customer orders and deliveries, the impact of competitive products and pricing and difficulties encountered in the integration of acquired businesses. In addition, such statements could be affected by growth rates and market conditions relating to the interactive software industry and general domestic and international economic conditions. Specific information concerning these and other such factors is contained in our Registration Statements filed on Form S-3 with the Securities and Exchange Commission on August 20, 2001, as amended. A copy of this filing may be obtained by contacting us or the SEC. The forward-looking statements contained herein speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this report.

Overview

      We are a leading global developer and publisher of interactive entertainment software for the major hardware platforms in the home video game market. We currently develop and publish titles for Sony PlayStation 2 and PlayStation, Nintendo Game Boy Advance and Game Boy Color, and PCs. We are currently developing and plan to publish titles for the Microsoft Xbox and Nintendo GameCube consoles. These hardware platforms are scheduled to launch in November 2001. Our titles span most major interactive entertainment software genres, including action, adventure, children’s, driving, fighting, puzzle, role playing, simulation, sports and strategy.

      Our software is based on intellectual property licensed or assigned from third parties or created internally. We continually seek to identify and develop titles based on content from other entertainment media (such as movies and television programs), sports and entertainment personalities, popular sports and trends or concepts that have high public visibility or recognition or that reflect the trends of popular culture. Our portfolio of licensed brands includes the World Wrestling Federation, Rugrats, Scooby-Doo, Star Wars, Hot Wheels, Power Rangers and Disney/ Pixar’s Monsters, Inc.

      We also develop software based on brands created by our six internal development studios and by external developers under contract with us. Our original brands include Red Faction™, MX2002 featuring Ricky Carmichael, Summoner™, New Legends™ and Dark Summit™. Other than games that we release on PCs, all of our products are manufactured for us by the manufacturers or their authorized vendors.

      In North America, we market and distribute our software to customers including Wal-Mart, Toys “R” Us, Electronics Boutique, Target, Kmart, GameStop (formerly known as Babbage’s Etc.), Best Buy, Kay Bee Toys and other regional and national general merchandisers, discount store chains and specialty retailers. Outside North America, we market and distribute our software to retailers in 70 countries and territories through offices in the United Kingdom, France, Germany and Australia.

      Our business cycle generally commences with the securing of a license to publish one or more titles based on a property or agreement with a proven developer to create a game based on original content. These licenses typically require an advance payment to the licensor and a guarantee of minimum future royalties. We also develop games internally through our development studios Cedar Ridge Construction, Genetic Anomalies, Inc. (“GA”), Heavy Iron Studios, Helixe, Pacific Coast Power & Light Company (“PCP&L”) and Volition, Inc. (“Volition”). After we acquire rights to a property from a licensor or develop a concept internally, we begin software development for the title. Upon completion of development and approval of the title by the manufacturer and licensor, we order products and generally cause a letter of credit to be opened in favor of the

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      Unfilled sales orders are commonly referred to as “backlog.” Since substantially all of our product orders are fulfilled shortly after we receive them, we do not believe that the amount of our unfilled sales orders as of the end of a period is a meaningful indicator of sales in future periods. Accordingly, we do not report the amount of our unfilled sales orders.

      On August 31, 2000, we completed the acquisition of Volition. The acquisition has been accounted for as a pooling of interests under Accounting Principles Board Opinion No. 16. Accordingly, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position and cash flows as if Volition had always been part of our company.

      On November 7, 2001, we announced that we had entered into a letter of intent to acquire Rainbow Multimedia Group, Inc (“Rainbow Studios”) for approximately 1,000,000 shares of our common stock. The acquisition is subject to the satisfaction of certain conditions, including the execution of definitive documents.

      We believe that the acquisition of Rainbow Studios will strengthen our internal development capabilities, enhancing our ability to create gaming content for the next-generation of console systems including PlayStation 2, GameCube and Xbox.

      Revenue Fluctuations and Seasonality. We have experienced, and may continue to experience, significant quarterly fluctuations in net sales and operating results due to a variety of factors. The software market is highly seasonal with sales typically significantly higher during the fourth quarter (due primarily to the increased demand for interactive games during the year-end holiday buying season). Other factors that cause fluctuations include the timing of our release of new titles, the popularity of both new titles and titles released in prior periods, changes in the mix of titles with varying gross margins, the timing of customer orders, the timing of shipments by the manufacturers, fluctuations in the size and rate of growth of consumer demand for software for various platforms, the timing of the introduction of new platforms and the accuracy of retailers’ forecasts of consumer demand. Our expenses are partially based on our expectations of future sales and, as a result, operating results would be disproportionately and adversely affected by a decrease in sales or a failure by us to meet our sales expectations. There can be no assurance that we can maintain consistent profitability on a quarterly or annual basis.

      Profit margins may vary over time as a result of a variety of factors. Profit margins for cartridge products for the Game Boy platforms can vary based on the cost of the memory chip used for a particular title. CD-ROM and DVD-ROM-based products have significantly lower per unit manufacturing costs than cartridge-based products; however, they have higher development costs than cartridge-based products.

      Recently Issued Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. We adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have an impact on our financial statements.

      In June 2001, the FASB issued two new pronouncements: Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS 141 prohibits the use of the pooling-of-interests method for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001 that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 as to all goodwill and other intangible assets recognized in an

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      In August 2001, the FASB issued a new pronouncement Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 addresses the financial accounting and reporting issues for the impairment or disposal of long-lived assets. This statement supersedes FASB 121 but retains the fundamental provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sales. It is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. We are currently evaluating the provisions of SFAS 144 and have not determined the impact, if any, it will have on our financial statements.

Euro Currency Conversion

      On January 1, 1999, 11 of the 15 member countries of the European Union adopted the Euro as their common legal currency. The Euro trades on currency exchanges and is available for non-cash transactions. From January 1, 1999 through January 1, 2002, participating countries can also maintain their national (“legacy”) currencies as legal tender for goods and services. Beginning January 1, 2002, new Euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation no later than July 1, 2002. Our operating subsidiaries in Germany and France have been affected by the Euro conversion and have established plans to address any business issues raised including the competitive impact of cross-border price transparency. It is not anticipated that there will be any near-term business ramifications; however, the long-term implications, including any changes or modifications that will need to be made to business and financial strategies, are still being reviewed. From an accounting, treasury and computer system standpoint, the Euro currency conversion did not have a material impact on our financial position or results of operations.

Results of Operations

Sales by Platform

      The following table set forth our net sales by platform as a percentage of sales for the three months and nine months ended September 30, 2001 and 2000:

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      The following tables set forth our net sales by platform for the three months and nine months ended September 30, 2001 and 2000 (in thousands):

      Sony PlayStation 2 Net Sales

      We had no new releases of PlayStation 2 titles in the third quarter of 2001. However, Red Faction™ and MX 2002 featuring Ricky Carmichael had continued strong sales in the third quarter of 2001.

      Sony PlayStation Net Sales

      PlayStation net sales decreased for the three months and the nine months ended September 30, 2001 compared to the same periods in the prior year for two reasons: 1) sales of WWF Smackdown! which was released in the first half of 2000 and 2) the expected weaker market for PlayStation products due to the transition to PlayStation 2.

      Nintendo Game Boy Advance Net Sales

      We released ten Game Boy Advance titles during the third quarter of 2001 including Rocket Power: Dream Scheme, MX 2002 featuring Ricky Carmichael, Tetris Worlds and Rugrats: Castle Capers.

      Nintendo Game Boy Color Net Sales

      Game Boy Color net sales decreased during the third quarter of 2001 as compared to the same period last year due to the introduction of the Game Boy Advance platform. Year to date, net sales have increased due to the increased number of titles released as compared to the same period last year.

      Nintendo 64 Net Sales

      We had no releases of Nintendo 64 (“N64”) product in the third quarter of 2001 and one N64 release in the third quarter of 2000. For the nine months ended September 30, 2001, we have released two titles for N64

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      PC CD-ROM Net Sales

      The significant increase in PC CD-ROM net sales, for both the three months and nine months ended September 30, 2001 as compared to the same periods last year, can be attributed to the worldwide release of Red Faction™ for the PC, as well as Hot Wheels and Matchbox titles released under our license agreement with Mattel.

Sales by Territory

      The following tables set forth, for the three months and nine months ended September 30, 2001 and 2000, our sales for the North America and international territories (in thousands):

     North America Net Sales

      The increase in net sales in North America for the three months ended September 30, 2001 as compared to the same period last year was primarily due to:

	•	The release of seven Game Boy Advance titles including, Rocket Power: Dream Scheme, Tetris Worlds and Rugrats: Castle Capers.
	•	The release of eight PC CD-ROM titles, including Red Faction™ for the PC, during the third quarter of 2001 compared to only one PC CD-ROM title released during the same period last year.
	•	Continued strong sales of Red Faction™ and MX 2002 featuring Ricky Carmichael for PlayStation 2, which we released in the second quarter of 2001.
		This increase was offset by a 90% decrease in N64 net sales, a 53% decrease in PlayStation net sales and a 43% decrease in Game Boy Color net sales related to the transition to next generation hardware.

      The slight increase in net sales in North America for the nine months ended September 30, 2001 as compared to the same period last year was primarily due to

	•	The release of Red Faction™ and MX 2002 featuring Ricky Carmichael on the PlayStation 2 and continued strong sales of various WWF titles.
	•	The release of Red Faction™ for the PC as well as nine other PC CD-ROM titles compared to only one PC CD-ROM title released during the same period last year.
	•	A 73% increase in net sales of titles for handheld gaming systems — Nintendo Game Boy Color and Nintendo Game Boy Advance.

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		This increase was offset by a 58% decrease in N64 net sales and a 59% decrease in PlayStation net sales related to the transition to next generation hardware.

      To date, the recent terrorist attacks in the United States have not had a material impact on our financial position or results of operations. The future economic consequences of those attacks are still unknown at this time. We cannot determine if the attacks or any events arising as a result of those attacks will have a material impact on our business in the future.

     International Net Sales

      The increase in net sales in the international territories for the three months ended September 30, 2001 as compared to the same period last year was primarily due to:

	•	The release of MX 2002 featuring Ricky Carmichael for PlayStation 2 and the release of Red Faction™ for the PC and continued strong sales of Red Faction™ for PlayStation 2.
	•	A 147% increase in net sales of titles for handheld gaming systems — Nintendo Game Boy Color and Nintendo Game Boy Advance.
		This increase was offset by a slight decrease in PlayStation net sales related to the transition to PlayStation 2 hardware and an overall decrease of 24% in net sales of PC CD-ROM titles.