Our primary cash requirements are to fund the development and marketing of our products. We satisfy our working capital requirements primarily through cash flow from operations. At October 31, 2004, we had working capital of $395,131 as compared to working capital of $347,922 at October 31, 2003.
Back to Index
Our cash and cash equivalents decreased $28,382 during fiscal 2004 as follows:
| | | Years ended October 31, | |
| | |
| |
| | | 2004 | | 2003 | | 2002 | |
| | |
| |
| |
| |
| Cash provided by operations | | $ | 20,458 | | $ | 80,628 | | $ | 144,998 | |
| Cash used in investing activities | | | (64,422 | ) | | (45,881 | ) | | (18,084 | ) |
| Cash provided (used) by financing activities | | | 16,315 | | | 44,562 | | | (31,988 | ) |
| Effect of foreign exchange rates on cash and cash equivalents | | | (733 | ) | | (4,201 | ) | | 7,387 | |
| | |
| |
| |
| |
| Net (decrease) increase in cash and cash equivalents | | $ | (28,382 | ) | $ | 75,108 | | $ | 102,313 | |
| | |
| |
| |
| |
Operating Activities: Cash provided by operations decreased by 75% or $60,170 to $20,458 reflecting an increase in working capital, primarily due to increased levels of accounts receivables and inventories, offset by higher net income adjusted for non-cash items.
Investing Activities: Over the last three years we have acquired several development studios and used cash as part of the purchase price. In fiscal 2004, we used $39,336 in cash to acquire Indie, TDK, Mobius and Venom compared to $27,973 and $3,788 in cash for acquisitions in fiscal 2003 and 2002. In 2004, we incurred capital expenditures associated with the build-out of our new corporate offices and the continued improvement of our software systems.
Financing Activities: We continue to generate cash from the exercise of stock options by employees. The amounts can vary significantly by year. Proceeds from exercise of stock options decreased by $28,182 in fiscal 2004 to $16,683. In fiscal 2002, we repaid all amounts outstanding, totaling $54,284, under our line of credit.
Significant Balance Sheet Changes: The increase of $128,571 in gross accounts receivable, before allowances, at October 31, 2004 is attributable primarily to sales from a major product release at the end of fiscal 2004.
Our allowances, which include doubtful accounts, returns, price concessions, rebates and other sales allowances, increased to $72,215 at October 31, 2004 from $62,817 at October 31, 2003 and decreased as a percentage of receivables to 20.2% at October 31, 2004 from 27.4% at October 31, 2003. The dollar increase in allowances is consistent with the volume of products launched at year end. The decrease in the allowance as a percentage of gross receivables was primarily the result of sales from a major product release on which lower allowances were required. We had accounts receivable days outstanding of 59 days for the three months ended October 31, 2004, as compared to 56 days for the three months ended October 31, 2003. Receivable days outstanding increased primarily as a result of the significant amount of sales of a major product release at year end. Our receivable days outstanding fluctuate from period to period depending on the timing of product releases.
Generally, we have been able to collect our receivables in the ordinary course of business. We do not hold any collateral to secure payment from customers and our receivables are generally not covered by insurance. As a result, we are subject to credit risks, particularly in the event that any of the receivables represent a limited number of retailers or are concentrated in foreign markets. If we are unable to collect our accounts receivable as they become due, it could adversely affect our liquidity and working capital position and we would be required to increase our provision for doubtful accounts.
Inventories of $154,345 at October 31, 2004 increased $52,597 from October 31, 2003, reflecting higher levels of distribution products. Accounts payable of $163,961 at October 31, 2004 increased $57,789 primarily due to the increase in inventory levels. Accrued expenses increased as a result of an increase in royalties payable under a royalty program based on product sales for certain of our internal development personnel and the provision for the offer of settlement with the SEC.
25
Back to Index
Loan Facilities: In December 1999, we entered into a credit agreement, as amended and restated in August 2002, with a group of lenders led by Bank of America, N.A., as agent. The agreement provides for borrowings of up to $40,000 through the expiration of the line of credit on August 28, 2005. Generally, advances under the line of credit are based on a borrowing formula equal to 75% of eligible accounts receivable plus 35% of eligible inventory. Interest accrues on such advances at the bank’s prime rate plus 0.25% to 1.25%, or at LIBOR plus 2.25% to 2.75% depending on the Company’s consolidated leverage ratio (as defined). We are required to pay a commitment fee to the bank equal to 0.5% of the unused loan balance. Borrowings under the line of credit are collateralized by our accounts receivable, inventory, equipment, general intangibles, securities and other personal property, including the capital stock of our domestic subsidiaries. Available borrowings under the agreement are reduced by the amount of the outstanding standby letter of credit, which was $1,560 at October 31, 2004. The loan agreement contains certain financial and other covenants, including the maintenance of consolidated net worth, consolidated leverage ratio and consolidated fixed charge coverage ratio. As of October 31, 2004, we were in compliance with such covenants. The loan agreement limits or prohibits us from declaring or paying cash dividends, merging or consolidating with another corporation, selling assets (other than in the ordinary course of business), creating liens and incurring additional indebtedness. We had no outstanding borrowings under the revolving line of credit as of October 31, 2004 and 2003.
In February 2001, our United Kingdom subsidiary entered into a credit facility agreement, as amended in March 2002 and April 2004, with Lloyds TSB Bank plc (“Lloyds”) under which Lloyds agreed to make available borrowings of up to approximately $24,000. Advances under the credit facility bear interest at the rate of 1.25% per annum over the bank’s base rate, and are guaranteed by us. Available borrowings under the agreement are reduced by the amount of outstanding guarantees. The facility expires on March 31, 2005. We had no material outstanding guarantees and no borrowings under this facility as of October 31, 2004 and 2003.
Capital Expenditures: We expect to spend an additional $3.5 million in connection with the continued improvement of our software systems for our domestic and international operations. We also expect to make additional capital expenditures of $4.5 million for leasehold improvements and equipment in our new warehouse facilities in Cincinnati, Ohio. As of the date of this report, we have no other material commitments for capital expenditures.
Our Board of Directors authorized a stock repurchase program under which we may repurchase up to $25,000 of our common stock from time to time in the open market or in privately negotiated transactions. We have not repurchased any shares under this program.
We have incurred and may continue to incur significant legal, accounting and other professional fees and expenses in connection with regulatory and compliance matters.
Based on our currently proposed operating plans and assumptions, we believe that projected cash flow from operations and available cash resources will be sufficient to satisfy our cash requirements for the reasonably foreseeable future.
Contractual Obligations and Contingent Liabilities and Commitments
Our offices and warehouse facilities are occupied under non-cancelable operating leases expiring at various times from December 2004 to September 2014. We also lease certain furniture, equipment and automobiles under non- cancelable leases expiring through March 2008. Our future minimum rental payments for the fiscal 2005 are $9,875 and aggregate minimum rental payments through applicable lease expirations are $61,848.
We have entered into distribution agreements under which we purchase various software games. These agreements, which expire between March 2005 and December 2005, require remaining aggregate minimum guaranteed payments of $7,487 at October 31, 2004. Additionally, assuming performance by third-party developers, we have outstanding commitments under various software development agreements to pay developers an aggregate of $82,342 during fiscal 2005.
In connection with the acquisition of Mobius in fiscal 2004, we agreed to make additional contingent payments of approximately $2,000 based on delivery of products. In fiscal 2003 we agreed to make payments of up to $2,500 to the former owners of Cat Daddy based on a percentage of Cat Daddy’s profits for the first three years after acquisition. The payables will be recorded when the conditions requiring their payment are met.
In connection with our acquisition of the publishing rights to the Duke Nukem franchise for PC and video games we are obligated to pay $6,000 contingent upon delivery of the final version of Duke Nukem Forever for the PC. In May 2003, we agreed to make payments of up to $6,000 in cash upon the achievement of certain sales targets for Max Payne 2. We do not expect that these sales targets will be achieved.
26
Back to Index
The following table summarizes our minimum contractual obligations (excluding obligations under employment agreements) and commercial commitments as of October 31, 2004:
| | | | | Payments due by periods ended October 31, | |
| | | | |
| |
| Contractual Obligations | | Total | | 2005 | | 2006 to
2007 | | 2008 to
2009 | | 2010 and
Thereafter | |
| | |
| |
| |
| |
| |
| |
| Operating Lease Obligations | | $ | 61,848 | | $ | 9,875 | | $ | 15,952 | | $ | 20,719 | | $ | 15,302 | |
| | | | | | | | | | | | | | | | | |
| Letters of Credit | | | 1,560 | | | 1,560 | | | –– | | | –– | | | –– | |
| | | | | | | | | | | | | | | | | |
| Publishing Arrangements | | | 123,706 | | | 82,342 | | | 41,364 | | | –– | | | –– | |
| | | | | | | | | | | | | | | | | |
| Distribution Arrangements | | | 7,487 | | | 6,149 | | | 1,338 | | | –– | | | –– | |
| | |
| |
| |
| |
| |
| |
| Total | | $ | 194,601 | | $ | 99,926 | | $ | 58,654 | | $ | 20,719 | | $ | 15,302 | |
| | |
| |
| |
| |
| |
| |
Fluctuations in Operating Results and Seasonality
We have experienced fluctuations in quarterly operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or enhancements of existing titles; projected and actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us and our competitors; the size and timing of acquisitions; the timing of orders from major customers; order cancellations; and delays in product shipment. Sales of our titles are also seasonal, with peak shipments typically occurring in the fourth calendar quarter (our fourth and first fiscal quarters) as a result of increased demand for titles during the holiday season. Quarterly comparisons of operating results are not necessarily indicative of future operating results.
International Operations
Sales in international markets, principally in the United Kingdom and other countries in Europe, have accounted for a significant portion of our net sales. For fiscal 2004 and 2003, sales in international markets accounted for approximately 27.5% and 27.9%, respectively, of our net sales. We are subject to risks inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays and international political, regulatory and economic developments, all of which can have a significant impact on our operating results.
Risk Factors
The market for our titles is characterized by short product life cycles.The market for our titles is characterized by short product life cycles and frequent introductions of new products. New products introduced by us may not achieve significant market acceptance or achieve sufficient sales to permit us to recover development, manufacturing and marketing costs. The life cycle of a game generally involves a relatively high level of sales during the first few months after introduction followed by a decline in sales, although sales of certain products may extend for significant periods of time, including through our election to participate in Sony’s Greatest Hits and Microsoft’s Platinum Hits programs. Because revenues associated with the initial shipments of a new product generally constitute a high percentage of the total revenues associated with the life of a product, any delay in the introduction of one or more new products could adversely affect our operating results for particular periods. If we introduce a relatively limited number of new products in any period, the failure of one or more of our products to achieve market acceptance could adversely affect our operating results.
27
Back to Index
A significant portion of our revenues is derived from a limited number of titles. For the year ended October 31, 2004, our ten best selling titles accounted for approximately 46.3% of our revenues, with Grand Theft Auto: San Andreas for the PlayStation 2 accounting for 20.9% of our revenues; Grand Theft Auto Double Pack for the Xbox accounting for 5.7% of our revenues; Grand Theft Auto: Vice City for PlayStation 2 accounting for 3.6% of our revenues; Max Payne 2: The Fall of Max Payne for PlayStation 2 accounting for 3.2% of our revenues; and Manhunt for PlayStation 2 accounting for 2.9% of our revenues. For the year ended October 31, 2003, our ten best selling titles accounted for approximately 50.6% of our revenues, with Grand Theft Auto: Vice City for PlayStation 2 accounting for 33.6% of our revenues; Midnight Club 2 for PlayStation 2 accounting for 4.1% of our revenues, and Grand Theft Auto: Vice City for PC accounting for 2.6% of our revenues. For the year ended October 31, 2002, our ten best selling titles accounted for approximately 59.5% of our revenues. If we fail to continue to develop and sell new, commercially successful titles, our revenues and profits may decrease substantially and we may incur losses.
Our quarterly operating results may vary significantly, which could cause our stock price to decline. We have experienced and may continue to experience wide fluctuations in quarterly operating results. The interactive entertainment industry is highly seasonal, with sales typically higher during the fourth calendar quarter (our fourth and first fiscal quarters), due primarily to the increased demand for games during the holiday buying season. Our failure or inability to introduce products on a timely basis to meet seasonal fluctuations in demand will harm our business and operating results. These fluctuations could also cause our stock price to decline. Other factors that cause fluctuations include:
| • | delays in the introduction of new titles; |
| • | the size and timing of product and business acquisitions; |
| • | variations in sales of titles designed to operate on particular platforms; |
| • | development and promotional expenses relating to the introduction of new titles; |
| • | availability of hardware platforms; |
| • | the timing and success of title introductions by our competitors; |
| • | product returns and price concessions; and |
| • | the timing of orders from major customers. |
Our expense levels are based, in part, on our expectations regarding future sales and therefore our operating results would be harmed by a decrease in sales or a failure to meet our sales expectations. The uncertainties associated with interactive entertainment software development, manufacturing lead times, production delays and the approval process for products by hardware manufacturers and other licensors make it difficult to predict the quarter in which our products will ship and therefore may cause us to fail to meet financial expectations. In future quarters our operating results may fall below the expectations of securities analysts and investors. In this event, the market price of our common stock could significantly decline.
Our business is cyclical, and we may fail to anticipate changing consumer preferences. Our business is subject to all of the risks generally associated with the interactive entertainment software industry, which has been cyclical in nature and has been characterized by periods of significant growth followed by rapid declines. Our future operating results will depend on numerous factors beyond our control, including:
| • | the popularity, price and timing of new software and hardware platforms being released and distributed by us and our competitors; |
| • | international, national and regional economic conditions, particularly economic conditions adversely affecting discretionary consumer spending; |
| • | war, acts of terrorism and military action, which could adversely affect consumer preferences in entertainment; |
| • | changes in consumer demographics; |
| • | the availability and popularity of other forms of entertainment; and |
| • | critical reviews and public tastes and preferences, all of which change rapidly and cannot be predicted. |
In order to plan for acquisition and promotional activities, we must anticipate and respond to rapid changes in consumer tastes and preferences. A decline in the popularity of interactive entertainment software or particular platforms could cause sales of our titles to decline dramatically. The period of time necessary to develop new game titles, obtain approvals of manufacturers and produce finished products is unpredictable. During this period, consumer appeal for a particular title may decrease, causing product sales to fall short of expectations.
28
Back to Index
Rapidly changing technology and platform shifts could hurt our operating results. The interactive entertainment industry in general is associated with rapidly changing technology. As more advanced platforms achieve market acceptance, consumer demand for software for older platforms declines.
We are continuing to devote significant development resources primarily on products designed for Sony’s PlayStation 2 and Microsoft’s Xbox. If consumer demand for these platforms declines generally or as a result of the next hardware transition cycle, we may experience lower than expected sales or losses from products designed for these platforms.
We also have begun to devote significant development resources on products designed for next-generation hardware platforms, initially for Microsoft’s Xbox 2. It is difficult to anticipate hardware development cycles and we must make software development commitments and investment decisions well in advance of the introduction of new hardware platforms. If new hardware platforms are delayed or do not achieve consumer acceptance, we may not be able to recover our investments and our business and financial results could be materially adversely affected.
A number of software publishers who compete with us have developed or are currently developing software for use by consumers over the Internet. Future increases in the availability of such software or technological advances in such software or the Internet could result in a decline in platform-based software and impact our sales. Direct sales of software by major publishers over the Internet would materially adversely affect our distribution business.
Our expansion into the market for sports and other licensed titles may not be successful. We are seeking to diversify our product offerings by capitalizing on significant growth opportunities in the market for sports and other licensed action and strategy titles. Our success in this market will depend in part on our ability to attract licensors with popular properties and to enter into favorable arrangements with these licensors, including with licensors representing the major sports leagues and players associations. Competition for sports and other licensed properties is intense. If we are unable to obtain and maintain licenses to popular properties, our revenue and profitability with respect to these products could decline dramatically. Competition for these licenses also may increase advances and royalties payable to licensors. We may be unable to enter into favorable license agreements, and our efforts to diversify our product offerings may not result in increased revenues or profitability.
Our business is dependent on publishing arrangements with third parties. Our success depends on our ability to identify and develop new titles on a timely basis. We have entered into agreements with third parties to acquire the rights to publish and distribute interactive entertainment software. These agreements typically require us to make advance payments, pay royalties and satisfy other conditions. Our advance payments may not be sufficient to permit developers to develop new software successfully.
Software development costs, promotion and marketing expenses and royalties payable to software developers have increased significantly in recent years, and reduce potential profits derived from sales of our software. We expect that the costs associated with the development of next generation software will increase significantly. Future sales of our titles may not be sufficient to recover advances to software developers, and we may not have adequate financial and other resources to satisfy our contractual commitments. If we fail to satisfy our obligations under agreements with third-party developers, the agreements may be terminated or modified in ways that may be burdensome to us.
Returns of our published titles and price concessions may adversely affect our operating results. We are exposed to the risk of product returns and price concessions with respect to our customers. Our distribution arrangements with customers generally do not give them the right to return titles to us or to cancel firm orders. However, we sometimes accept product returns from our distribution customers for stock balancing and negotiate accommodations to customers which include credits and returns, when demand for specific products falls below expectations. We accept returns and grant price concessions in connection with our publishing arrangements. Revenue is recognized after deducting estimated reserves for returns and price concessions. We believe that we can reliably estimate future returns and price concessions. However, if return rates and price concessions for our published titles exceed our reserves, our revenues will decline.
29
Back to Index
The interactive entertainment software industry is highly competitive. We compete for both licenses to properties and the sale of interactive entertainment software with Sony, Microsoft and Nintendo, each of which is a large developer and marketer of software for its own platforms. Each of these competitors has the financial resources to withstand significant price competition and to implement extensive advertising campaigns, particularly for prime-time television spots. These companies may also increase their own software development efforts or focus on developing software products for third-party platforms. We also compete with domestic companies such as Electronic Arts, Activision, THQ, Midway Games and Atari and international companies such as SEGA, Vivendi, Ubi Soft, Eidos, Capcom, Konami and Namco. Some of our competitors have greater financial, technical, personnel and other resources than we do, and are able to carry larger inventories and make higher offers to licensors and developers for commercially desirable properties than we can. Our titles also compete with other forms of entertainment such as motion pictures, television and audio and video products featuring similar themes, online computer programs and forms of entertainment which may be less expensive or provide other advantages to consumers.
Our distribution business also operates in a highly competitive environment. The intense competition that characterizes our industry is based primarily on breadth, availability and quality of product lines; price; terms and conditions of sale; credit terms and availability; speed and accuracy of delivery; and effectiveness of sales and marketing programs. Our competitors include regional, national and international distributors, as well as hardware manufacturers and software publishers. We may lose market share or be forced in the future to reduce our prices in response to the actions of our competitors, and thereby experience a reduction in our gross margins.
Increased competition for limited shelf space and promotional support from retailers could affect the success of our business and require us to incur greater expenses to market our titles. Retailers have limited shelf space and promotional resources, and competition is intense among an increasing number of newly introduced interactive entertainment software titles for adequate levels of shelf space and promotional support. Competition for retail shelf space is expected to increase, which may require us to increase our marketing expenditures to maintain current levels of sales of our titles. Competitors with more extensive lines and popular titles may have greater bargaining power with retailers. Accordingly, we may not be able to achieve the levels of promotional support and shelf space that such competitors receive.
A limited number of customers account for a significant portion of our sales. Sales to our five largest customers accounted for approximately 38.9% and 38.6% of our revenues, respectively, for the years ended October 31, 2004 and 2003. For the year ended October 31, 2004, sales of our products to Wal-Mart accounted for 10.4% of our revenues. Our sales are made primarily pursuant to purchase orders without long-term agreements or other commitments. Our customers may terminate their relationship with us at any time. The loss of our relationships with principal customers or a decline in sales to principal customers could harm our operating results. Bankruptcies or consolidations of certain large retail customers could also seriously hurt our business.
We are subject to credit and collection risks. Our sales are typically made on credit. We do not hold any collateral to secure payment by our customers. As a result, we are subject to credit risks, particularly in the event that any of our receivables represent sales to a limited number of retailers or are concentrated in foreign markets. Although we continually assess the creditworthiness of our customers, which are principally large, national retailers, if we are unable to collect our accounts receivable as they become due, it could adversely affect our financial condition.
Rating systems for interactive entertainment software, potential legislation and consumer opposition could inhibit sales of our products. Trade organizations within the video game industry require interactive entertainment software publishers to provide consumers with information relating to graphic violence, profanity or sexually explicit material contained in software titles, and impose penalties for noncompliance. Certain countries have also established similar rating systems as prerequisites for sales of interactive entertainment software in such countries. In some instances, we may be required to modify our products to comply with the requirements of such rating systems, which could delay the release of those products in such countries. Our software titles receive a rating of “E” (age 6 and older), “T” (age 13 and over) or “M” (age 17 and over). Most of our new titles (including our Grand Theft Auto titles, Max Payne 2: The Fall of Max Payne, Manhunt and Mafia) have received an M rating. We believe that we comply with such rating systems and properly display the ratings and content descriptions received for our titles.
30
Back to Index
Several proposals have been made for federal legislation to regulate the interactive entertainment software, motion picture and recording industries, including a proposal to adopt a common rating system for interactive entertainment software, television and music containing violence or sexually explicit material, and the Federal Trade Commission has issued reports with respect to the marketing of such material to under-17 audiences. Consumer advocacy groups have also opposed sales of interactive entertainment software containing graphic violence or sexually explicit material by pressing for legislation in these areas (including legislation prohibiting the sale of certain “M” rated video games to under-17 audiences) and by engaging in public demonstrations and media campaigns. Retailers may decline to sell interactive entertainment software containing graphic violence or sexually explicit material, which may limit the potential market for our “M” rated products, and adversely affect our operating results. If any groups (including international, national and local political and regulatory bodies) were to target our “M” rated titles, we might be required to significantly change or discontinue a particular title, which in the case of our best selling titles could seriously hurt our business. Although lawsuits seeking damages for injuries allegedly suffered by third parties as a result of video games have been unsuccessful, a claim of this kind has been asserted against us.
We cannot publish our console titles without the approval of hardware manufacturers. We are required to obtain a license from Sony, Microsoft and Nintendo, our principal competitors, to develop and publish titles for their respective hardware platforms. Our existing hardware console platform licenses require that we obtain approval for the publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish for these hardware platforms, along with our ability to time the release of these titles and, accordingly, our net sales from titles for these hardware platforms, may be limited. If any manufacturer chooses not to renew or extend our license agreement at the end of its current term, or if the manufacturer were to terminate our license for any reason, we would be unable to publish additional titles for that manufacturer’s hardware platform. Termination of any such agreements would seriously hurt our business.
License agreements relating to these rights generally extend for a term of three or four years and are automatically renewable for successive one-year terms. The agreements are terminable upon the occurrence of a number of factors, including: (1) breach of the agreement by us; (2) our bankruptcy or insolvency; or (3) our entry into a relationship with, or acquisition by, a competitor of the manufacturer. We cannot assure you that we will be able to obtain new or maintain existing licenses on acceptable terms, or at all.
Sony and Nintendo are the sole manufacturers of the titles we publish under license from them. Games for the Xbox must be manufactured by pre-approved manufacturers. Each platform license provides that the manufacturer may raise prices for the titles at any time and grants the manufacturer substantial control over the release of new titles. Each of these manufacturers also publishes software for its own platforms and manufactures titles for all of its other licensees and may choose to give priority to its own titles or those of other publishers if it has insufficient manufacturing capacity or if there is increased demand for its or other publishers’ products.
In addition, these manufacturers may not have sufficient production capacity to satisfy our scheduling requirements during any period of sustained demand. If manufacturers do not supply us with finished titles on favorable terms without delays, our operations would be materially interrupted, and we would be unable to obtain sufficient amounts of our product to sell to our customers. If we cannot obtain sufficient product supplies, our net sales will decline and we could incur losses.
We may not be able to protect our proprietary rights or avoid claims that we infringe on the proprietary rights of others. We develop proprietary software and have obtained the rights to publish and distribute software developed by third parties. We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution. Our software is susceptible to piracy and unauthorized copying. Unauthorized third parties may be able to copy or to reverse engineer our software to obtain and use programming or production techniques that we regard as proprietary. Well organized piracy operations have proliferated in recent years as a result of the ability to download pirated copies of our software over the Internet. Although we attempt to incorporate protective measures into our software, piracy of our products could negatively impact our future profitability.
As the amount of interactive entertainment software titles in the market increases and the functionality of this software further overlaps, we believe that interactive entertainment software will increasingly become the subject of claims that such software infringes the copyrights or patents of others. From time to time, we receive notices from third parties or are named in lawsuits by third parties alleging infringement of their proprietary rights. Although we believe that our software and technologies and the software and technologies of third-party developers and publishers with whom we have contractual relations do not and will not infringe or violate proprietary rights of others, it is possible that infringement of proprietary rights of others has or may occur. Any claims of infringement, with or without merit, could be time consuming, costly and difficult to defend. Moreover, intellectual property litigation or claims could require us to discontinue the distribution of products, obtain a license or redesign our products, which could result in additional substantial costs and material delays.
31
Back to Index
We are dependent on third-party software developers to complete certain of our titles. We rely on third-party software developers for the development of certain of our titles. Quality third-party developers are continually in high demand. Software developers who have developed titles for us in the past may not be available to develop software for us in the future. Due to the limited number of third-party software developers and the limited control that we exercise over them, these developers may not be able to complete titles for us on a timely basis or within acceptable quality standards, if at all.
We depend on third-party software developers and our internal development studios to develop new interactive entertainment software within anticipated release schedules and cost projections. The development cycle for new titles ranges from twelve to twenty-four months. After development of a product, it may take between nine to twelve additional months to develop the product for other hardware platforms. If developers experience financial difficulties, additional costs or unanticipated development delays, we will not be able to release titles according to our schedule.
Our software is susceptible to errors, which can harm our financial results and reputation. The technological advancements of new hardware platforms allow for more complex software products. As software products become more complex, the risk of undetected errors in products when first introduced increases. If, despite testing, errors are found in new products or releases after shipments have been made, we could experience a loss of or delay in timely market acceptance, product returns, loss of revenues and damage to our reputation.
Gross margins relating to our distribution business have been historically narrow which increases the impact of variations in costs on our operating results. As a result of intense price competition, our gross margins in our distribution business have historically been narrow and may continue to be narrow in the future. Accordingly, slight variations in operating costs and expenses could result in losses in our distribution business from period to period.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand. A significant portion of our selling and general and administrative expense is comprised of personnel and facilities. In the event of a significant decline in net sales, we may not be able to exit facilities, reduce personnel, or make other significant changes to our cost structure without significant disruption to our operations or without significant termination and exit costs. Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in net sales and gross profit.
Our distribution business is dependent on suppliers to maintain an adequate supply of products to fulfill customer orders on a timely basis. Our ability to obtain particular products in required quantities and to fulfill customer orders on a timely basis is critical to our success. In most cases, we have no guaranteed price or delivery agreements with suppliers. In certain product categories, limited price concessions or return rights offered by publishers may have a bearing on the amount of product we may be willing to purchase. Our industry may experience significant hardware supply shortages from time to time due to the inability of certain manufacturers to supply certain products on a timely basis. As a result, we have experienced, and may in the future continue to experience, short-term hardware inventory shortages. In addition, manufacturers or publishers who currently distribute their products through us may decide to distribute, or to substantially increase their existing distribution, through other distributors, or directly to retailers.
We are subject to the risk that our inventory values may decline and protective terms under supplier arrangements may not adequately cover the decline in values. The interactive entertainment software and hardware industry is characterized by the introduction of new and enhanced generations of products and evolving industry standards. These changes may cause inventory to decline substantially in value or to become obsolete. We are also exposed to inventory risk in our distribution business to the extent that supplier price concessions are not available on all products or quantities and are subject to time restrictions. In addition, suppliers may become insolvent and unable to fulfill price concession obligations.
32
Back to Index
We are subject to risks and uncertainties of international trade. Sales in international markets, primarily in the United Kingdom and other countries in Europe, have accounted for a significant portion of our net sales. Sales in international markets accounted for approximately 27.5% and 27.9%, respectively, of our revenues for fiscal 2004 and 2003. We are subject to risks inherent in foreign trade, including increased credit risks; tariffs and duties; fluctuations in foreign currency exchange rates; shipping delays; and international political, regulatory and economic developments, all of which can have a significant impact on our operating results. All of our international sales are made in local currencies.
The market price for our common stock may be highly volatile. The market price of our common stock has been and may continue to be highly volatile. Factors such as our operating results, announcements by us or our competitors and various factors affecting the interactive entertainment software industry may have a significant impact on the market price of our common stock.
We are subject to rapidly evolving regulation affecting financial reporting, accounting and corporate governance matters. In response to recent corporate events, legislators and government agencies have focused on the integrity of financial reporting, and regulatory accounting bodies have recently announced their intention to issue several new accounting standards, including accounting for stock options as compensation expense, certain of which are significantly different from current accounting standards. We cannot predict the impact of the adoption of any such proposals on our future financial results. Additionally, recently enacted legislation focused on corporate governance, auditing and internal accounting controls imposes compliance burdens on us, and will require us to devote significant financial, technical and personnel resources to address compliance issues.
We are dependent on our management and key personnel. We rely on our management and other key personnel for the successful operation of our business. We are dependent upon the expertise and skills of certain of our Rockstar employees responsible for content creation and product development and marketing. Although we have employment agreements with each of these creative, development and marketing personnel, and we have granted them incentives in the form of an internal royalty program based on sales of Rockstar published products, there can be no assurance that we will be able to continue to retain these personnel at current compensation levels, or at all. Failure to continue to attract and retain qualified management, creative, development, financial, marketing, sales and technical personnel could materially adversely affect our business and prospects.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
(Dollars in thousands)
We are subject to market risks in the ordinary course of our business, primarily risks associated with interest rate and foreign currency fluctuations.
Historically, fluctuations in interest rates have not had a significant impact on our operating results. At October 31, 2004, we had no outstanding variable rate indebtedness.
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant fiscal quarter or year end. Translation adjustments are included as a separate component of stockholders’ equity. For fiscal 2004 our foreign currency translation adjustment gain was $7,290 and our foreign exchange transaction gain was $1,199. A hypothetical 10% change in applicable currency exchange rates at October 31, 2004 would result in a material translation adjustment.
| Item 8. | Financial Statements and Supplementary Data |
The financial statements appear in a separate section of this report following Part III.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
33
Back to Index
| Item 9A. | Controls and Procedures |
Based on their evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level for recording, processing, summarizing and reporting the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934. There were no changes in our internal controls over financial reporting during the fiscal quarter ended October 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
| Item 9B. | Other Information |
Not available.
34
Back to Index
PART III
| Item 10. | Directors and Executive Officers of the Registrant |
The information required by this Item is incorporated by reference to the section of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2005, entitled “Election of Directors” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
| Item 11. | Executive Compensation |
The information required by this Item is incorporated by reference to the section of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2005, entitled “Executive Compensation” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
The information required by this Item is incorporated by reference to the section of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2005, entitled “Security Ownership of Certain Beneficial Owners and Management” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
| Item 13. | Certain Relationships and Related Transactions |
The information required by this Item is incorporated by reference to the section of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2005, entitled “Certain Relationships and Related Transactions” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
| Item 14. | Principal Accountant Fees and Services |
The information required by this Item is incorporated by reference to the section of our definitive Proxy Statement for our Annual Meeting of Stockholders to be held in 2005, entitled “Principal Accountant Fees and Services” to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Report.
35
Back to Index
PART IV
| Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
| (a) | The following documents are filed as part of this Report: |
| | | | |
| | (i) | Financial Statements. See Index to Financial Statements on page 39 of this Report. |
| | | | |
| | (ii) | Financial Statement Schedule. See page 67 of this Report. |
| | | | |
| | (iii) | Exhibits |
| | | | |
| | | 3.1 | Restated Certificate of Incorporation (14) |
| | | | |
| | | 3.1.1 | Certificate of Designation, dated March 11, 1998 (14) |
| | | | |
| | | 3.1.2 | Certificate of Amendment of Restated Certificate of Incorporation, dated April
30, 1998 (14) |
| | | | |
| | | 3.1.3 | Certificate of Amendment of Restated Certificate of Incorporation, dated
November 17, 2003 (14) |
| | | | |
| | | 3.2 | By-Laws (1) |
| | | | |
| | | 10.1 | 1997 Stock Option Plan (1) + |
| | | | |
| | | 10.2 | 2002 Stock Option Plan (2) + |
| | | | |
| | | 10.3 | Incentive Stock Plan. (3) + |
| | | | |
| | | 10.4 | Amended and Restated Credit Agreement, dated August 28, 2002, by and among the Company, certain of its subsidiaries, certain lenders and Bank of America, N.A., as agent. (4) |
| | | | |
| | | 10.5 | Loan Agreement with Lloyds TBS Commercial and Take-Two Interactive Software Europe Ltd. (5) |
| | | | |
| | | 10.6 | Employment Agreement, dated February 15, 2002 by and between the Company
and Karl H. Winters. (6) + |
| | | | |
| | | 10.7 | Letter Agreement dated April 14, 2004 by and between the Company and Paul Eibeler. (12) |
| | | | |
| | | 10.8 | Letter Agreement dated June 7, 2004 by and between the Company and Richard W. Roedel. (12) |
| | | | |
| | | 10.9 | Employment Agreement dated July 30, 2004 by and between the Company and
Gary Lewis. (13) |
| | | | |
| | | 10.10 | Employment Agreement dated July 30, 2004 by and between the Company and Samuel A. Judd. (13) |
| | | | |
| | | 10.11 | Licensed Publishing Agreement dated April 1, 2000 between Sony Computer Entertainment America, Inc. and the Company. (7) * |
| | | | |
36
Back to Index
| | | | |
| | | 10.12 | Publishing Agreement dated May 8, 1998 between Gathering of Developers I, Ltd. and Apogee Software, Ltd/ 3D Realms. (8) * |
| | | | |
| | | 10.13 | Xbox Publisher License Agreement dated December 14, 2000 between Microsoft Corporation and the Company. (5) * |
| | | | |
| | | 10.14 | Confidential License Agreement for Nintendo Game Cube dated September 24, 2001 between Nintendo of America, Inc. and the Company. (5) * |
| | | | |
| | | 10.15 | Letter Agreement dated July 21, 2001 between Apogee Software, Ltd and the Company. (7) |
| | | | |
| | | 10.16 | Development and Publishing Agreement dated February 10, 2000 by and between the Company and VIS International plc. (9) |
| | | 10.17 | Lease Agreement between the Company and Moklam Enterprises, Inc. dated July 1, 2002. (4) |
| | | | |
| | | 10.18 | Asset Purchase Agreement between Apogee Software, Ltd., Remedy Entertainment and the Company. (10) |
| | | | |
| | | 10.19 | Stock Purchase Agreement, dated November 19, 2002, by and between the Company and Angel Studios, Inc. (11) |
| | | | |
| | | 21.1 | Subsidiaries of the Company. |
| | | | |
| | | 23.1 | Consent of PricewaterhouseCoopers LLP. |
| | | | |
| | | 31.1 | Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | | 31.2 | Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | | 32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | | 32.2 | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | | |
| | + | Represents a management contract or compensatory plan or arrangement. |
| | | |
| | * | Portions hereof have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment in accordance with Exchange Act Rule 24b-2. |
| | | |
| | (1) | Incorporated by reference to the applicable exhibit contained in the Company’s Registration Statement on Form SB-2 (File No. 333-6414). |
| | | |
| | (2) | Incorporated by reference to the Company’s Proxy Statement dated May 12, 2004. |
| | | |
| | (3) | Incorporated by reference to the Company’s Proxy Statement dated May 12, 2004. |
| | | |
| | (4) | Incorporated by reference to the applicable exhibit contained in the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2002. |
37
Back to Index
| | | |
| | (5) | Incorporated by reference to the applicable exhibit contained in the Company’s Annual Report on Form 10-K for the year ended October 31, 2001. |
| | | |
| | (6) | Incorporated by reference to the applicable exhibit contained in the Company’s Annual Report on Form 10-K/A in the year ended October 31, 2001. |
| | | |
| | (7) | Incorporated by reference to the applicable exhibit contained in the Company’s Current Report on Form 8-K dated May 7, 2002. |
| | | |
| | (8) | Incorporated by reference to the applicable exhibit contained in the Company’s Registration Statement on Form S-3/A dated September 14, 2001 (File no. 333- 66748). |
| | | |
| | (9) | Incorporated by reference to the applicable exhibit contained in the Company’s Quarterly Report on Form 10-Q for the three months ended April 30, 2002. |
| | | |
| | (10) | Incorporated by reference to the applicable exhibit contained in the Company’s Current Report on Form 8-K dated June 5, 2002. |
| | | |
| | (11) | Incorporated by reference to the applicable exhibit contained in the Company’s Current Report on Form 8-K dated November 22, 2002. |
| | | |
| | (12) | Incorporated by reference to the applicable exhibit contained in the Company’s Quarterly Report on Form 10-Q for the three months ended April 30, 2004. |
| | | |
| | (13) | Incorporated by reference to the applicable exhibit contained in the Company’s Quarterly Report on Form 10-Q for the three months ended July 31, 2004. |
| | | |
| | (14) | Incorporated by reference to the applicable exhibit contained in the Company’s Annual Report on Form 10-K for the year ended October 31, 2003. |
| | | |
| (b) | Reports on Form 8-K filed during the quarter ended October 31, 2004: |
| | | |
| | | On September 10, 2004, the Company furnished a Current Report on Form 8-K to report the Press Release dated September 10, 2004 relating to the Company’s financial results for the third fiscal quarter ended July 31, 2004. (Items 7, 9 and 12) |
38
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC.
YEAR ENDED OCTOBER 31, 2004 |
|
INDEX TO FINANCIAL STATEMENTS
39
Back to Index
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Take-Two Interactive Software, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Take-Two Interactive Software, Inc. and its subsidiaries (“the Company”) at October 31, 2004 and October 31, 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
December 15, 2004
40
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data) |
|
| | | | | As of October 31, | |
| | | | | 2004 | | | 2003 | |
| ASSETS | |
|
| |
|
| |
| Current assets | | | | | | | |
| | Cash and cash equivalents | | $ | 155,095 | | $ | 183,477 | |
| | Accounts receivable, net of allowances of $72,215 and $62,817 at October 31, 2004 and 2003, respectively | | |
285,709 | | |
166,536 | |
| | Inventories, net | | | 154,345 | | | 101,748 | |
| | Prepaid royalties | | | 38,220 | | | 12,196 | |
| | Prepaid expenses and other current assets | | | 60,018 | | | 41,112 | |
| | Deferred tax asset | | | 11,554 | | | 8,173 | |
| | | |
|
| |
|
| |
| | Total current assets | | | 704,941 | | | 513,242 | |
| | | | | | | | | |
| | Fixed assets, net | | | 34,291 | | | 22,260 | |
| | Prepaid royalties | | | 3,982 | | | 8,439 | |
| | Capitalized software development costs | | | 27,785 | | | 16,336 | |
| | Goodwill | | | 135,477 | | | 101,498 | |
| | Intangibles, net | | | 36,104 | | | 44,836 | |
| | Long-term deferred tax asset | | | 6,219 | | | 160 | |
| | Other assets | | | 1,714 | | | 527 | |
| | | |
|
| |
|
| |
| | Total assets | | $ | 950,513 | | $ | 707,298 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| LIABILITIES and STOCKHOLDERS’ EQUITY | | | | | | | |
| Current liabilities | | | | | | | |
| | Accounts payable | | $ | 163,961 | | $ | 106,172 | |
| | Accrued expenses and other current liabilities | | | 128,530 | | | 56,883 | |
| | Income taxes payable | | | 17,319 | | | 2,265 | |
| | | |
|
| |
|
| |
| | Total current liabilities | | | 309,810 | | | 165,320 | |
| | Deferred tax liability | | | 5,233 | | | 8,486 | |
| | | |
|
| |
|
| |
| | Total liabilities | | | 315,043 | | | 173,806 | |
| | | |
|
| |
|
| |
| | | | | | | | | |
| Stockholders’ equity | | | | | | | |
| | Common stock, par value $.01 per share; | | | | | | | |
| | 100,000,000 and 50,000,000 shares authorized; 45,439,651 and 44,227,215 shares issued and outstanding at October 31, 2004 and 2003, respectively | | | 454 | | | 442 | |
| | Additional paid-in capital | | | 382,156 | | | 350,852 | |
| | Deferred compensation | | | (3,896 | ) | | (1,890 | ) |
| | Retained earnings | | | 250,402 | | | 185,024 | |
| | Accumulated other comprehensive income (loss) | | | 6,354 | | | (936 | ) |
| | | |
|
| |
|
| |
| | Total Stockholders’ Equity | | | 635,470 | | | 533,492 | |
| | | |
|
| |
|
| |
| | Total Liabilities and Stockholders’ Equity | | $ | 950,513 | | $ | 707,298 | |
| | | |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
41
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except share data) |
|
| | | | | Years Ended October 31, | |
| | | | | 2004 | | | 2003 | | | 2002 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Net sales | | $ | 1,127,751 | | $ | 1,033,693 | | $ | 794,676 | |
| | |
|
| |
|
| |
|
| |
| Cost of sales | | | | | | | | | | |
| | Product costs | | | 619,685 | | | 537,257 | | | 411,518 | |
| | Royalties | | | 114,073 | | | 89,294 | | | 80,442 | |
| | Software development costs | | | 15,922 | | | 11,003 | | | 8,124 | |
| | | |
|
| | |
| |
|
| |
| | Total cost of sales | | | 749,680 | | | 637,554 | | | 500,084 | |
| | | |
|
| |
|
| |
|
| |
| | Gross profit | | | 378,071 | | | 396,139 | | | 294,592 | |
| Operating expenses | | | | | | | | | | |
| | Selling and marketing | | | 117,606 | | | 103,015 | | | 77,990 | |
| | General and administrative | | | 98,226 | | | 88,083 | | | 71,544 | |
| | Research and development | | | 43,259 | | | 25,107 | | | 11,524 | |
| | Depreciation and amortization | | | 16,846 | | | 16,923 | | | 10,829 | |
| | | |
|
| |
|
| |
|
| |
| | Total operating expenses | | | 275,937 | | | 233,128 | | | 171,887 | |
| | | |
|
| |
|
| |
|
| |
| | Income from operations | | | 102,134 | | | 163,011 | | | 122,705 | |
| Interest (income) expense, net | | | (1,976 | ) | | (2,265 | ) | | 480 | |
| Gain on sale of investments | | | — | | | (39 | ) | | (181 | ) |
| Class action settlement costs | | | — | | | — | | | 1,468 | |
| Provision for settlement | | | 7,500 | | | –– | | | –– | |
| | |
|
| |
|
| |
|
| |
| | Total non-operating expense (income) | | | 5,524 | | | (2,304 | ) | | 1,767 | |
| | | |
|
| |
|
| |
|
| |
| | Income before income taxes | | | 96,610 | | | 165,315 | | | 120,938 | |
| Provision for income taxes | | | 31,232 | | | 67,197 | | | 49,375 | |
| | | |
|
| |
|
| |
|
| |
| | Net income | | $ | 65,378 | | $ | 98,118 | | $ | 71,563 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Per share data: | | | | | | | | | | |
| Basic: | | | | | | | | | | |
| Weighted average common shares outstanding | | | 44,736 | | | 41,965 | | | 38,030 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Net income per share – Basic | | $ | 1.46 | | $ | 2.34 | | $ | 1.88 | |
| | | |
|
| |
|
| |
|
| |
| Diluted: | | | | | | | | | | |
| Weighted average common shares outstanding | | | 45,682 | | | 43,297 | | | 39,570 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Net income per share – Diluted | | $ | 1.43 | | $ | 2.27 | | $ | 1.81 | |
| | | |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
42
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands) |
|
| | | | | Years Ended October 31, | |
| | | | | 2004 | | | 2003 | | | 2002 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | | $ | 65,378 | | $ | 98,118 | | $ | 71,563 | |
| | Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| | Depreciation and amortization | | | 16,846 | | | 12,516 | | | 10,829 | |
| | Impairment of intellectual property and technology | | | –– | | | 7,892 | | | — | |
| | Non-cash charges for consolidation of distribution facilities | | | –– | | | 5,474 | | | — | |
| | Provision for deferred taxes | | | (12,693 | ) | | 13,040 | | | 6,726 | |
| | Provision for sales allowances | | | 196,287 | | | 120,329 | | | 72,096 | |
| | Provision for doubtful accounts | | | 4,395 | | | 4,322 | | | 2,405 | |
| | Amortization of various expenses and discounts | | | 19,801 | | | 9,301 | | | 6,262 | |
| | Write off of prepaid royalties and capitalized software | | | 8,772 | | | 9,588 | | | 15,616 | |
| | Tax benefit from exercise of stock options | | | 4,136 | | | 20,858 | | | 10,700 | |
| | Compensatory stock and stock options | | | 3,331 | | | 3,445 | | | 3,053 | |
| | Other | | | (1,899 | ) | | (2,260 | ) | | (895 | ) |
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | | | | | |
| | Increase in accounts receivable | | | (322,438 | ) | | (185,611 | ) | | (87,100 | ) |
| | Increase in inventories | | | (50,532 | ) | | (25,146 | ) | | (12,852 | ) |
| | Increase in prepaid royalties | | | (27,865 | ) | | (10,764 | ) | | (8,157 | ) |
| | Increase in prepaid expenses and other current assets | | | (11,397 | ) | | (7,423 | ) | | (3,034 | ) |
| | Increase in capitalized software development costs | | | (12,802 | ) | | (5,152 | ) | | (895 | ) |
| | (Increase) decrease in other non-current assets | | | (1,301 | ) | | — | | | 257 | |
| | Increase in accounts payable | | | 62,277 | | | 20,148 | | | 23,019 | |
| | Increase in accrued expenses and other current liabilities | | | 57,614 | | | 4,445 | | | 33,834 | |
| | Increase (decrease) in income taxes payable | | | 22,548 | | | (12,492 | ) | | 1,571 | |
| | | |
|
| |
|
| |
|
| |
| | Net cash provided by operating activities | | | 20,458 | | | 80,628 | | | 144,998 | |
| | | |
|
| | |
| |
|
| |
| Cash flows from investing activities: | | | | | | | | | | |
| | Purchase of fixed assets | | | (21,586 | ) | | (15,464 | ) | | (10,466 | ) |
| | Sale of investments | | | –– | | | 114 | | | 6,170 | |
| | Acquisitions, net of cash acquired | | | (39,336 | ) | | (27,973 | ) | | (3,788 | ) |
| | Acquisition of intangible assets | | | (3,500 | ) | | (2,075 | ) | | (10,000 | ) |
| | Other investing activities | | | –– | | | (483 | ) | | — | |
| | | |
|
| |
|
| |
|
| |
| | Net cash used in investing activities | | | (64,422 | ) | | (45,881 | ) | | (18,084 | ) |
| | | |
|
| |
|
| |
|
| |
| Cash flows from financing activities: | | | | | | | | | | |
| | Net repayments under lines of credit | | | –– | | | — | | | (54,284 | ) |
| | Proceeds from exercise of stock options and warrants | | | 16,683 | | | 44,865 | | | 23,308 | |
| | Other financing activities | | | (368 | ) | | (303 | ) | | (1,012 | ) |
| | | |
|
| |
|
| |
|
| |
| | Net cash provided by (used in) financing activities | | | 16,315 | | | 44,562 | | | (31,988 | ) |
| | | |
|
| |
|
| |
|
| |
| Effect of foreign exchange rates | | | (733 | ) | | (4,201 | ) | | 7,387 | |
| | | |
|
| |
|
| |
|
| |
| | Net (decrease) increase in cash for the period | | | (28,382 | ) | | 75,108 | | | 102,313 | |
| Cash and cash equivalents, beginning of the period | | | 183,477 | | | 108,369 | | | 6,056 | |
| | |
|
| |
|
| |
|
| |
| Cash and cash equivalents, end of the period | | $ | 155,095 | | $ | 183,477 | | $ | 108,369 | |
| | |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
43
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands) |
|
| | | | Years Ended October 31, | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
| |
| |
| |
| Supplemental data: | | | | | | | | | | |
| | | | | | | | | | | |
| Cash paid during the year for interest | | $ | 163 | | $ | 110 | | $ | 1,513 | |
| | |
| |
| | |
| |
| | | | | | | | | | | |
| Cash paid during the year for taxes | | $ | 23,364 | | $ | 48,361 | | $ | 30,045 | |
| | |
| |
| | |
| |
| | | | | | | | | | | |
| Supplemental information of businesses acquired: | | | | | | | | | | |
| Fair value of assets acquired | | | | | | | | | | |
| Current assets | | $ | 2,580 | | $ | 437 | | $ | 36 | |
| Non-current assets | | | 1,083 | | | 507 | | | 67 | |
| Intangible assets | | | 14,364 | | | 4,720 | | | 1,800 | |
| Goodwill | | | 33,979 | | | 38,692 | | | 6,772 | |
| Less, liabilities assumed | | | | | | | | | | |
| Current liabilities | | | (6,588 | ) | | (9,826 | ) | | (1,086 | ) |
| | |
| |
| | |
| |
| Net assets of businesses acquired, excluding cash | | $ | 45,418 | | $ | 34,530 | | $ | 7,589 | |
| | |
| |
| | |
| |
| | | | | | | | | | | |
| Cash paid for businesses acquired | | $ | 40,250 | | $ | 29,257 | | $ | 3,825 | |
| Less cash acquired | | | (914 | ) | | (1,284 | ) | | (37 | ) |
| | |
| |
| | |
| |
| Net cash paid for businesses acquired | | | 39,336 | | | 27,973 | | | 3,788 | |
| | | | | | | | | | | |
| Deferred consideration | | | 922 | | | –– | | | –– | |
| Issuance of common stock in connection with acquisitions | | | 5,160 | | | 6,557 | | | 3,801 | |
| | |
| |
| | |
| |
| Total consideration | | $ | 45,418 | | $ | 34,530 | | $ | 7,589 | |
| | |
| |
| | |
| |
The accompanying notes are an integral part of these consolidated financial statements.
44
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
For the years ended October 31, 2002, 2003 and 2004
(In thousands) |
|
| | | | Common Stock | | | Additional
Paid-in Capital | | | Deferred
Compensation | | | Retained
Earnings | | | Accumulated Other
Comprehensive Income (Loss) | | | Total | |
| | |
|
|
|
| | | | Shares | | | Amount | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance, November 1, 2001 | | | 36,641 | | $ | 366 | | $ | 213,908 | | $ | — | | $ | 15,343 | | $ | (10,452 | ) | $ | 219,165 | |
| Foreign currency translation adjustment, net of taxes | | | — | | | — | | | — | | | — | | | — | | | 5,553 | | | 5,553 | |
| Net unrealized loss on investments, net of taxes of $87 | | | — | | | — | | | — | | | — | | | — | | | (142 | ) | | (142 | ) |
| Net income | | | — | | | — | | | — | | | — | | | 71,563 | | | — | | | 71,563 | |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 76,974 | |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Proceeds from exercise of stock options and warrants | | | 2,434 | | | 25 | | | 23,283 | | | — | | | — | | | — | | | 23,308 | |
| Amortization of deferred compensation | | | — | | | — | | | — | | | 682 | | | — | | | — | | | 682 | |
| Deferred compensation in connection with restricted stock issued | | | 50 | | | 1 | | | 908 | | | (909 | ) | | — | | | — | | | — | |
| Issuance of common stock in connection with acquisition of business and intangibles | | | 1,212 | | | 12 | | | 22,332 | | | — | | | — | | | — | | | 22,344 | |
| Issuance of compensatory stock and stock options | | | 25 | | | — | | | 2,371 | | | — | | | — | | | — | | | 2,371 | |
| Tax benefit in connection with the exercise of stock options | | | — | | | — | | | 10,700 | | | — | | | — | | | — | | | 10,700 | |
| | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Balance, October 31, 2002 | | | 40,362 | | | 404 | | | 273,502 | | | (227 | ) | | 86,906 | | | (5,041 | ) | | 355,544 | |
| Foreign currency translation adjustment, net of taxes | | | — | | | — | | | — | | | — | | | — | | | 4,119 | | | 4,119 | |
| Net unrealized loss on investments, net of taxes of $9 | | | — | | | — | | | — | | | — | | | — | | | (14 | ) | | (14 | ) |
| Net income | | | — | | | — | | | — | | | — | | | 98,118 | | | — | | | 98,118 | |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 102,223 | |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Proceeds from exercise of stock options and warrants | | | 3,404 | | | 34 | | | 44,831 | | | — | | | — | | | — | | | 44,865 | |
| Amortization of deferred compensation | | | — | | | — | | | — | | | 3,427 | | | — | | | — | | | 3,427 | |
| Issuance of common stock in connection with acquisition | | | 236 | | | 2 | | | 6,555 | | | — | | | — | | | — | | | 6,557 | |
| Issuance of compensatory stock and stock options | | | 225 | | | 2 | | | 5,106 | | | (5,090 | ) | | — | | | — | | | 18 | |
| Tax benefit in connection with the exercise of stock options | | | — | | | — | | | 20,858 | | | –– | | | — | | | — | | | 20,858 | |
| | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Balance, October 31, 2003 | | | 44,227 | | $ | 442 | | $ | 350,852 | | $ | (1,890 | ) | $ | 185,024 | | $ | (936 | ) | $ | 533,492 | |
| Foreign currency translation adjustment, net of taxes | | | — | | | — | | | — | | | — | | | — | | | 7,290 | | | 7,290 | |
| Net income | | | — | | | — | | | — | | | — | | | 65,378 | | | — | | | 65,378 | |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Comprehensive income | | | | | | | | | | | | | | | | | | | | | 72,668 | |
| | | | | | | | | | | | | | | | | | | | |
|
| |
| Proceeds from exercise of stock options and warrants | | | 885 | | | 9 | | | 16,674 | | | — | | | — | | | — | | | 16,683 | |
| Amortization of deferred compensation | | | — | | | — | | | — | | | 3,331 | | | — | | | — | | | 3,331 | |
| Issuance of common stock in connection with acquisition | | | 164 | | | 2 | | | 5,158 | | | — | | | — | | | — | | | 5,160 | |
| Issuance of compensatory stock and stock options | | | 164 | | | 1 | | | 5,336 | | | (5,337 | ) | | — | | | — | | | –– | |
| Tax benefit in connection with the exercise of stock options | | | — | | | — | | | 4,136 | | | — | | | — | | | — | | | 4,136 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Balance, October 31, 2004 | | | 45,440 | | $ | 454 | | $ | 382,156 | | $ | (3,896 | ) | $ | 250,402 | | $ | 6,354 | | $ | 635,470 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The accompanying notes are an integral part of these consolidated financial statements.
45
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
1. DESCRIPTION OF THE BUSINESS
Take-Two Interactive Software, Inc. (the “Company”) was incorporated in the State of Delaware in September 1993. The Company develops interactive software games designed for PCs, video game consoles and handheld platforms and publishes games developed internally and by third parties. The Company also distributes games for video game consoles and handheld platforms published internally and by third parties, as well as hardware and accessories manufactured by third parties.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries and for entities for which the Company is deemed to be the primary beneficiary as defined in FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities”. All material inter-company balances and transactions have been eliminated in consolidation.
Certain amounts in the financial statements of the prior years have been reclassified to conform to the current year presentation for comparative purposes.
Estimates
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 the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of prepaid royalties, capitalized software development costs and intangibles, valuation of inventories, realization of deferred income taxes and the adequacy of allowances for returns, price concessions and doubtful accounts. Actual amounts could differ significantly from these estimates.
Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximates fair value because of their short maturities. The carrying amount of prepaid royalties and capitalized software costs approximates fair value based upon the recoverability of these assets.
The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.
The Company transacts business in various foreign currencies and has significant sales and purchase transactions denominated in foreign currencies. The Company uses forward exchange contracts to mitigate foreign currency risk associated with foreign currency assets and liabilities, primarily certain intercompany receivables and payables. The Company does not designate foreign currency forward contracts as hedging instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. As a result the Company marks to market its foreign currency forward contracts each period and any gains and losses are recognized in net income. At October 31, 2004, the Company has forward contracts to buy British pounds through February 15, 2005. The notional value and fair value of such contracts were $8,002 and $8,553, respectively.
Concentration of Credit Risk
A significant portion of the Company’s cash balance is maintained with several major financial institutions. While the Company attempts to limit credit exposure with any single institution, there are times that balances will exceed insurable amounts.
46
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
If the financial condition and operations of the Company’s customers deteriorate, the risk of collection could increase substantially. As of October 31, 2004 and 2003, the receivable balances from the Company’s five largest customers amounted to approximately 45.1% and 54.6% of the Company’s net receivable balance, respectively, with two customers accounting for 12.8% and 11.2% of such balance at October 31, 2004 and with two customers representing 16.6% and 11.7% at October 31, 2003. Except for the largest customers noted above, all receivable balances from the remaining individual customers are less than 10% of the Company’s net receivable balance.
Inventories, net
Inventories are stated at the lower of average cost or market. The Company periodically evaluates the carrying value of its inventories and makes adjustments as necessary. Estimated product returns are included in the inventory balance at their cost.
Prepaid Royalties
The Company’s agreements with licensors and developers generally provide it with exclusive publishing rights and require it to make advance royalty payments that are recouped against royalties due to the developer based on contractual amounts on product sales, adjusted for certain related costs. Prepaid royalties are amortized as cost of sales on a title-by-title basis based on the greater of the proportion of current year sales to total of current and estimated future sales for that title or the contractual royalty rate based on actual net product sales as defined in the respective agreements. At each balance sheet date, the Company evaluates the recoverability of prepaid royalties and charge to cost of sales the amount that management determines is probable that will not be recouped at the contractual royalty rate based on current and future sales in the period in which such determination is made or if the Company determines that it will cancel a development project. Prepaid royalties are classified as current and non-current assets based upon estimated net product sales within the next year.
Property and Equipment
Office equipment, furniture and fixtures are depreciated using the straight-line method over their estimated lives ranging from five to seven years. Computer equipment and software are depreciated using the straight-line method over three years. Leasehold improvements are amortized over the lesser of the term of the related lease or estimated useful lives. The cost of additions and betterments are capitalized, and repairs and maintenance costs are charged to operations in the periods incurred. When depreciable assets are retired or sold, the cost and related allowances for depreciation are removed from the accounts and the gain or loss is recognized. The carrying amounts of these assets are recorded at historical cost.
Capitalized Software Development Costs
The Company capitalizes internal software development costs, as well as film production and other content costs, subsequent to establishing technological feasibility of a title. Capitalized software development costs represent the costs associated with the internal development of the Company’s publishing products. Amortization of such costs as a component of cost of sales is recorded on a title-by-title basis based on the greater of the proportion of current year sales to total of current and estimated future sales for the title or the straight-line method over the remaining estimated useful life of the title. At each balance sheet date, the Company evaluates the recoverability of capitalized software costs based on undiscounted future cash flows and will charge to cost of sales any amounts that are deemed unrecoverable or for projects that it will abandon.
Goodwill and Intangible Assets
Goodwill is the excess purchase price paid over identified intangible and tangible net assets of acquired companies. Intangible assets consist of trademarks, intellectual property, non-compete agreements, customer lists and acquired technology. Certain intangible assets acquired in a business combination are recognized as assets apart from goodwill. Identifiable intangibles are amortized using the straight-line method over the period of expected benefit ranging from three to ten years, except for intellectual property, which is amortized based on the shorter of the useful life or expected revenue stream. Intangible assets with indefinite lives, if any, and goodwill are not amortized.
47
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
The Company performs an annual test for impairment of goodwill, in the fourth quarter of each fiscal year. The Company determines the fair value of each reporting unit using discounted cash flow analysis and compares such values to the respective reporting unit’s carrying amount. At October 31, 2004 and 2003, the fair value of the Company’s reporting units exceeded the carrying amounts and no impairment was indicated.
Impairment of Long-Lived Assets
The Company reviews all long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including assets to be disposed of by sale, whether previously held and used or newly acquired. The Company compares the carrying amount of the asset to the estimated undiscounted future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company records an impairment charge for the difference between the carrying amount of the asset and its fair value. The estimated fair value is generally measured by discounting expected future cash flows at the Company’s incremental borrowing rate or fair value, if available.
Income Taxes
The Company recognizes deferred taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized after considering tax planning strategies, if applicable. No income taxes have been provided on the undistributed earnings of foreign subsidiaries, as such earnings are expected to be permanently reinvested in those companies.
Revenue Recognition
The Company earns its revenue from the sale of internally developed interactive software titles and from the sale of titles licensed from third-party developers (“Publishing revenue”). The Company also earns revenue from the sale of interactive software titles published by third parties, hardware and accessories (“Distribution revenue”).
The Company recognizes revenue upon the transfer of title and risk of loss to its customers. The Company applies the provisions of Statement of Position 97-2, “Software Revenue Recognition”in conjunction with the applicable provisions of Staff Accounting Bulletin No. 104, “Revenue Recognition.”Accordingly, the Company recognizes revenue for software titles when there is (1) persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order, (2) the software is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. The Company’s payment arrangements with customers typically provide net 30 and 60-day terms.
Revenue is recognized after deducting estimated reserves for returns and price concessions. In circumstances when the Company does not have a reliable basis to estimate returns and price concessions or is unable to determine that collection of a receivable is probable, it defers the sale until such time as it can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.
The Company accepts returns and grants price concessions in connection with its publishing arrangements. Following reductions in the price of the Company’s products, it grants price concessions to permit customers to take credits against amounts they owe the Company with respect to merchandise unsold by them. The Company’s customers must satisfy certain conditions to entitle them to return products or receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels.
The Company’s distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, the Company sometimes accepts returns from its distribution customers for stock balancing and makes accommodations to customers, which includes credits and returns, when demand for specific titles falls below expectations.
The Company makes estimates of future product returns and price concessions related to current period product revenue. The Company estimates the amount of future returns and price concessions for published titles based upon, among other factors, historical experience, customer inventory levels, analysis of sell-through rates, market conditions and changes in demand and acceptance of its products by consumers.
48
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price concessions in any accounting period. The Company believes it can make reliable estimates of returns and price concessions. However, actual results may differ from initial estimates as a result of changes in circumstances, market conditions and assumptions. Adjustments to estimates are recorded in the period in which they become known.
Consideration Given to Customers and Received from Vendors
The Company has various marketing arrangements with retailers and distributors of its products that provide for cooperative advertising and market develop funds, among others. Such amounts are accrued as a reduction to revenue when revenue is recognized, except for cooperative advertising which is included in selling and marketing expenses if there is a separate identifiable benefit and the benefit’s fair value can be established.
The Company also receives various incentives from its manufacturers. Such amounts are generally accounted for as a reduction in the price of the manufacturers product and included as a reduction of inventory or cost of sales, except where the incentive is in exchange for services rendered by the Company. Incentives in exchange for services are included in revenue providing there is an identifiable benefit to the vendor and the benefit’s value can be established.
Advertising
The Company expenses advertising costs as incurred. Advertising expense for the years ended October 31, 2004, 2003, and 2002 amounted to $72,165, $55,795 and $39,909, respectively.
Stock-Based Compensation
The Company accounts for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”(“SFAS 123”).
49
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company’s net income and the net income per share would have been reduced to the proforma amounts indicated below:
| | | | | Years Ended October 31, | |
| | | | | 2004 | | | 2003 | | | 2002 | |
| | | |
|
| |
|
| |
|
| |
| Net income, as reported | | $ | 65,378 | | $ | 98,118 | | $ | 71,563 | |
| Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | | | 2,036 | | | 2,123 | | | 1,878 | |
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | | | (15,946
| ) | | (18,194 | ) | | (16,415 | ) |
| | | |
|
| |
|
| |
|
| |
| Proforma net income | | $ | 51,468
| | $ | 82,047 | | $ | 57,026 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Earnings per share: | | |
| | | | | | | |
| | Basic – as reported | | $ | 1.46
| | $ | 2.34 | | $ | 1.88 | |
| | Basic – proforma | | | 1.15
| | | 1.96
| | | 1.50 | |
| | Diluted – as reported | | | 1.43
| | | 2.27
| | | 1.81 | |
| | Diluted – proforma | | | 1.13
| | | 1.90
| | | 1.44 | |
| | | | | | | | | | | | |
The proforma disclosures shown are not representative of the effects on net income and the net income per share in future periods.
The weighted average fair values of options granted are $18.39, $15.05 and $9.13 for the years ended October 31, 2004, 2003 and 2002. The fair value of the Company’s stock options used to compute proforma net income and the net income per share disclosures is the estimated present value at the grant date using the Black-Scholes option-pricing model with the following assumptions:
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| Risk free interest rate | | | 3.4 | % | | 2.6 | % | | 1.8 | % |
| Expected stock price volatility | | | 71.9 | % | | 78.0 | % | | 74.0 | % |
| Expected term until exercise (years) | | | 4.4 | | | 4.2 | | | 4.1 | |
| Dividends | | | None | | | None | | | None | |
Net Income per Share
Basic earnings per share (“EPS”) is computed by dividing the net income applicable to common stockholders for the year by the weighted-average number of common shares outstanding during the year. Diluted EPS is computed by dividing the net income applicable to common stockholders for the year by the weighted-average number of common and common stock equivalents, which include common shares issuable upon the exercise of stock options, restricted stock (for fiscal 2004 and 2003) and warrants outstanding during the year. Common stock equivalents are excluded from the computation if their effect is antidilutive.
Foreign Currency Translation
The functional currency for the Company’s foreign operations is primarily the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in income in the period in which they occur, except on intercompany balances considered to be long term. Transaction gains and losses on intercompany balances considered to be long term are recorded in other comprehensive income, net of taxes. Foreign exchange transaction gains included in net income for years ended October 31, 2004, 2003 and 2002 amounted to $1,199, $2,015 and $840, respectively.
50
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Accumulated Other Comprehensive Income (Loss)
Comprehensive income (loss) includes net income adjusted for the change in foreign currency translation adjustments net of tax, if applicable, and the change in net unrealized gain (loss) from investments.
Recently Adopted and New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” which revised Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to such transactions be recognized in the consolidated statement of operations. The revised statement is effective as of the first interim period beginning after June 15, 2005. The adoption of this standard, effective August 1, 2005, is expected to have a material impact on the consolidated financial statements.
In December 2003, The Financial Accounting Standards Board (“FASB”) revised Interpretation No. 46 “Consolidation of Variable Interest Entities” with certain clarifications and modifications. Revised Interpretation No. 46(R) provides guidance on the identification of variable interest entities, entities for which control is achieved through means other than through voting rights, and how to determine whether a variable interest holder should consolidate the variable interest entities. This Interpretation is required to be applied to all entities subject to this Interpretation no later than the first reporting period that ends after March 15, 2004. The adoption of the revised Interpretation did not have a material impact on the consolidated financial statements.
In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” which supercedes SAB No. 101, “Revenue Recognition in Financial Statements.” The primary purpose of SAB No. 104 is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, superceded as a result of the issuance of Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (“FAQ”) issued with SAB No. 101. The adoption of SAB No. 104 in the first quarter of 2004 did not have a material impact on the consolidated financial statements.
3. BUSINESS ACQUISITIONS AND CONSOLIDATION
The acquisitions described below have been accounted for as purchase transactions, accordingly, the results of operations and financial position of the acquired businesses are included in the Company’s consolidated financial statements from the respective dates of acquisition. To the extent that the purchase price allocation for these acquisitions is preliminary, the Company does not expect that the final purchase price allocation will be materially different. With the exception of the acquisition of TDK for fiscal 2003, the proforma impact of these acquisitions was not material.
2004 Transactions
In October 2004, the Company acquired certain assets from Microsoft including Indie the developer of the successful Top Spin (tennis), Amped and Amped 2 (snowboarding) and Links (golf) and the intellectual property rights associated with these products. The purchase price for these assets was $18,500 paid in cash at closing. In connection with the acquisition the Company recorded $5,828 in identifiable intangible assets, $11,593 of goodwill and $280 of fixed assets, and accounts receivable of $829 on a preliminary basis.
In December 2003, the Company acquired all of the outstanding capital stock and assumed certain liabilities of TDK Mediactive, Inc. (“TDK”). The purchase price consisted of $16,827 in cash (which is net of $8,051 previously due to TDK under a distribution agreement) and issuance of 163,641 shares of our restricted stock valued at $5,160. In connection with the acquisition, the Company recorded identifiable intangibles of $7,690, goodwill of $17,079 and net liabilities of $10,833.
51
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
The unaudited proforma data below for the year ended October 31, 2003 is presented as if the purchase of TDK Mediactive had been made as of November 1, 2002. The unaudited proforma financial information is based on management’s estimates and assumptions and does not purport to represent the results that actually would have occurred if the acquisition had, in fact, been completed on the date assumed, or which may result in the future. Proforma financial information for fiscal 2004 is not presented since the impact is not material as the acquisition was made near the beginning of the fiscal year.
| | | | Year Ended October 31, 2003 | |
| | |
|
| |
| | | | | |
| Net sales | | $ | 1,063,359 | |
| | |
|
| |
| | | | | |
| Net income | | $ | 80,403 | |
| | |
|
| |
| | | | | |
| Net income per share – Basic | | $ | 1.91 | |
| | |
|
| |
| Net income per share – Diluted | | $ | 1.85 | |
| | |
|
| |
During 2004, the Company made two other acquisitions of UK-based developers, Venom and Mobius, for a purchase price of $5,844, of which $4,922 was paid at closing and $922 is due in March 2005. In connection with these acquisitions, the Company recorded identifiable intangibles of $846 and goodwill of $5,307 on a preliminary basis. The Company also agreed to make additional contingent payments, in connection with one of the acquisitions, of approximately $2,000 based on delivery of products, which will be recorded as additional purchase price when the conditions requiring their payment are met.
In October 2004, the Company entered into a new agreement with Destineer Publishing Corp. (“Destineer”), a publisher of PC games, under which Destineer granted the Company the rights to distribute two titles and publish and distribute two further titles. The previous agreement dated April 2003 was terminated. The Company agreed to make recoupable advances to Destineer of approximately $3,149, in addition to the advances already made of $5,604. Under the new agreement, advances made by the Company are recouped against future royalties owed to Destineer. Pursuant to the requirements of FIN 46 (R), since Destineer is a variable interest entity and the Company is considered to be the primary beneficiary, the results of Destineer’s operations have been consolidated in the accompanying financial statements effective November 1, 2002. The new agreement did not change the designation of Destineer nor the Company as primary beneficiary.
2003 Transactions
During the quarter ended July 31, 2003, the Company acquired the assets of Frog City, Inc. (“Frog City”), the developer of Tropico 2: Pirate Cove, and the outstanding membership interests of Cat Daddy Games LLC (“Cat Daddy”), another development studio. The total purchase price for both studios consisted of $757 in cash and $319 of prepaid royalties previously advanced to Frog City. The Company also agreed to make additional payments of up to $2,500 to the former owners of Cat Daddy, based on a percentage of Cat Daddy’s profits for the first three years after acquisition, which will be recorded as compensation expense if the targets are met. In connection with the acquisitions, the Company recorded goodwill of $1,267 and net liabilities of $191.
In November 2002, the Company acquired all of the outstanding capital stock of Angel Studios, Inc. (“Angel”), the developer of Midnight Club and Smuggler’s Run. The purchase price consisted of 235,679 shares of restricted common stock (valued at $6,557), $28,512 in cash and $5,931 (net of $801 of royalties payable to Angel) of prepaid royalties previously advanced to Angel. In connection with the acquisition, the Company recorded identifiable intangibles of $4,720 (comprised of intellectual property of $2,810, technology of $1,600 and non-competition agreements of $310), goodwill of $37,425 and net liabilities of $1,145.
52
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
2002 Transaction
In August 2002, the Company acquired all of the outstanding capital stock of Barking Dog Studios Ltd. (“Barking Dog”), a Canadian-based development studio. The purchase price consisted of 242,450 shares of restricted common stock (valued at $3,801), $3,000 in cash, $825 of prepaid royalties previously advanced to Barking Dog and assumed net liabilities of $70. In connection with the acquisition, the Company recorded identifiable intangibles of $1,800, comprised of non-competition agreements of $1,600 and intellectual property of $200, and goodwill of $6,772.
4. PREPAID ROYALTIES
The following table provides the details of total prepaid royalties:
| | | | Years Ended October 31, | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| Balance, November 1 | | $ | 20,635 | | $ | 26,418 | | $ | 33,149 | |
| Additions | | | 66,055 | | | 30,034 | | | 28,555 | |
| Amortization | | | (39,114 | ) | | (19,065 | ) | | (21,238 | ) |
| Reclassification | | | –– | | | (7,251 | ) | | 1,419 | |
| Write down | | | (5,752 | ) | | (9,525 | ) | | (15,126 | ) |
| Foreign exchange | | | 378 | | | 24 | | | (341 | ) |
| | |
|
| |
|
| |
|
| |
| Ending balance | | | 42,202 | | | 20,635 | | | 26,418 | |
| Less current balance | | | 38,220 | | | 12,196 | | | 14,215 | |
| | |
|
| |
|
| |
|
| |
| Balance, October 31 | | $ | 3,982 | | $ | 8,439 | | $ | 12,203 | |
| | |
|
| |
|
| |
|
| |
Included in prepaid royalties at October 31, 2004 and 2003, respectively, are $35,124 and $14,241 related to titles that have not been released yet.
The reclassification for the year ended October 31, 2003 principally reflects the transfer of prepaid royalties paid to Angel Studios, Inc. and Frog City, Inc. prior to their acquisition by the Company as a component of the purchase price of the acquisitions.
5. INVENTORIES, NET
As of October 31, 2004 and 2003, inventories consist of:
| | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
| Parts and supplies | | $ | 7,146 | | $ | 4,793 | |
| Finished products | | | 147,199 | | | 96,955 | |
| | |
|
| |
|
| |
| | | | | | | | |
| Total | | $ | 154,345 | | $ | 101,748 | |
| | |
|
| |
|
| |
Estimated product returns included in inventories at October 31, 2004 and 2003 are $7,371 and $8,706, respectively. Allowances to reduce inventory amounts to net realizable value are $7,520 and $3,781 at October 31, 2004 and 2003.
53
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
6. FIXED ASSETS, NET
As of October 31, 2004 and 2003, fixed assets consist of:
| | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
| Computer equipment | | $ | 16,973 | | $ | 12,963 | |
| Office equipment | | | 6,405 | | | 5,096 | |
| Computer software | | | 15,480 | | | 11,529 | |
| Furniture and fixtures | | | 4,413 | | | 3,157 | |
| Leasehold improvements | | | 10,906 | | | 6,047 | |
| Capital leases | | | 398 | | | 398 | |
| Construction in progress | | | 3,922 | | | — | |
| | |
|
| |
|
| |
| | | | 58,497 | | | 39,190 | |
| Less: accumulated depreciation and amortization | | | 24,206 | | | 16,930 | |
| | |
|
| |
|
| |
| Total | | $ | 34,291 | | $ | 22,260 | |
| | |
|
| |
|
| |
Depreciation expense for the years ended October 31, 2004, 2003, and 2002, amounted to $12,443, $9,510 and $6,457, respectively.
7. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The following table provides the details of capitalized software development costs:
| | | | Years Ended October 31, | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| Balance, November 1 | | $ | 16,336 | | $ | 10,385 | | $ | 9,739 | |
| Additions | | | 25,960 | | | 15,923 | | | 9,645 | |
| Amortization | | | (12,902 | ) | | (10,940 | ) | | (7,633 | ) |
| Reclassification | | | — | | | — | | | (1,419 | ) |
| Write down | | | (3,020 | ) | | (63 | ) | | (490 | ) |
| Foreign exchange | | | 1,411 | | | 1,031 | | | 543 | |
| | |
|
| |
|
| |
|
| |
| Balance, October 31 | | $ | 27,785 | | $ | 16,336 | | $ | 10,385 | |
| | |
|
| |
|
| |
|
| |
8. GOODWILL AND INTANGIBLE ASSETS, NET
The following table sets forth the components of the intangible assets subject to amortization:
| | | | | | | As of October 31, 2004 | | | As of October 31, 2003 | |
| | | | | |
|
| |
|
| |
| | | | Range of
Useful Life
(years) | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net | | | Gross
Carrying
Amount | | | Accumulated
Amortization | | | Net | |
| | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Trademarks | | | 7-10 | | $ | 26,825 | | $ | (10,438 | ) | $ | 16,387 | | $ | 23,342 | | $ | (7,391 | ) | $ | 15,951 | |
| Customer lists and relationships | | | 5-10 | | | 4,673 | | | (3,007 | ) | | 1,666 | | | 4,673 | | | (2,733 | ) | | 1,940 | |
| Intellectual property | | | 2-6 | | | 39,783 | | | (27,151 | ) | | 12,632 | | | 31,823 | | | (8,737 | ) | | 23,086 | |
| Non-competition agreements | | | 3-6 | | | 7,888 | | | (3,002 | ) | | 4,886 | | | 4,790 | | | (2,311 | ) | | 2,479 | |
| Technology | | | 3 | | | 4,192 | | | (3,659 | ) | | 533 | | | 4,192 | | | (2,812 | ) | | 1,380 | |
| | | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Total | | | | | $ | 83,361 | | $ | (47,257 | ) | $ | 36,104 | | $ | 68,820 | | $ | (23,984 | ) | $ | 44,836 | |
| | | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
54
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
The change in intangibles for the years ended October 31, 2004 and 2003 is as follows:
| | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
| Balance, November 1 | | $ | 68,820 | | $ | 67,714 | |
| Acquisitions | | | 14,364 | | | 4,720 | |
| Other purchases of intangibles | | | 894 | | | 8,685 | |
| Impairment charges | | | (717 | ) | | (12,299 | ) |
| | |
|
| |
|
| |
| Balance, October 31 | | $ | 83,361 | | $ | 68,820 | |
| | |
|
| |
|
| |
Amortization expense for the years ended October 31, 2004, 2003 and 2002 is as follows:
| | | | Years Ended October 31, | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| Included in: | | | | | | | | | | |
| Cost of sales – product costs | | $ | 18,870 | | $ | 2,940 | | $ | 4,059 | |
| Depreciation and amortization | | | 4,403 | | | 8,660 | | | 5,834 | |
| | |
|
| |
|
| |
|
| |
| Total amortization expense | | $ | 23,273 | | $ | 11,600 | | $ | 9,893 | |
| | |
|
| |
|
| |
|
| |
Estimated amortization expense for the years ending October 31, is as follows:
| 2005 | | $ | 11,374 | |
| 2006 | | | 10,371 | |
| 2007 | | | 5,872 | |
| 2008 | | | 4,464 | |
| 2009 | | | 2,846 | |
| | |
|
| |
| Total | | $ | 34,927 | |
| | |
|
| |
The change in goodwill for the years ended October 31, 2004 and 2003 is as follows:
| | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
| Balance, November 1 | | $ | 101,498 | | $ | 61,529 | |
| Acquisitions: | | | | | | | |
| Angel | | | –– | | | 37,425 | |
| TDK | | | 17,079 | | | –– | |
| Indie | | | 11,593 | | | –– | |
| Other | | | 5,307 | | | 1,267 | |
| Adjustments to acquisitions in prior periods | | | –– | | | 1,277 | |
| | |
|
| |
|
| |
| Balance, October 31 | | $ | 135,477 | | $ | 101,498 | |
| | |
|
| |
|
| |
9. LINES OF CREDIT
In December 1999, the Company entered into a credit agreement, as amended and restated in August 2002, with a group of lenders led by Bank of America, N.A., as agent. The agreement provides for borrowings of up to $40,000 through the expiration of the line of credit on August 28, 2005. Generally, advances under the line of credit are based on a borrowing formula equal to 75% of eligible accounts receivable plus 35% of eligible inventory. Interest accrues on such advances at the bank’s prime rate plus 0.25% to 1.25%, or at LIBOR plus 2.25% to 2.75% depending on the Company’s consolidated leverage ratio (as defined). The Company is required to pay a commitment fee to the bank equal to 0.5% of the unused loan balance. Borrowings under the line of credit are collateralized by the Company’s accounts receivable, inventory, equipment, general intangibles, securities and other personal property, including the capital stock of the Company’s domestic subsidiaries. Available borrowings under the agreement are reduced by the amount of the outstanding standby letter of credit, which is $1,560 at October 31, 2004. The loan agreement contains certain financial and other covenants, including the maintenance of consolidated net worth, consolidated leverage ratio and consolidated fixed charge coverage ratio. As of October 31, 2004, the Company was in compliance with such covenants. The loan agreement limits or prohibits the Company from declaring or paying cash dividends, merging or consolidating with another corporation, selling assets (other than in the ordinary course of business), creating liens and incurring additional indebtedness. The Company had no outstanding borrowings under the revolving line of credit as of October 31, 2004 and 2003.
55
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
In February 2001, the Company’s United Kingdom subsidiary entered into a credit facility agreement, as amended in March 2002 and April 2004, with Lloyds TSB Bank plc (“Lloyds”) under which Lloyds agreed to make available borrowings of up to approximately $24,000. Advances under the credit facility bear interest at the rate of 1.25% per annum over the bank’s base rate, and are guaranteed by the Company. Available borrowings under the agreement are reduced by the amount of outstanding guarantees. The facility expires on March 31, 2005. The Company had no material guarantees and no outstanding borrowings under this facility as of October 31, 2004 and 2003.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities as of October 31, 2004 and 2003 consist of:
| | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
| Accrued co-op advertising and product rebates | | $ | 3,487 | | $ | 3,985 | |
| Accrued VAT and payroll taxes | | | 16,865 | | | 11,593 | |
| Royalties payable | | | 70,113 | | | 16,502 | |
| Deferred revenue | | | 3,448 | | | 2,358 | |
| Sales commissions | | | 2,238 | | | 2,400 | |
| Guarantee payable | | | 3,594 | | | –– | |
| Provision for settlement | | | 7,500 | | | –– | |
| Other | | | 21,285 | | | 20,045 | |
| | |
|
| |
|
| |
| Total | | $ | 128,530 | | $ | 56,883 | |
| | |
|
| | |
| |
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases 32 office and warehouse facilities. The offices are under non-cancelable operating leases expiring at various times from December 2004 to September 2014. In addition, the Company has leased certain equipment, furniture and auto leases under non-cancelable operating leases, which expire through March 2008. Some of the leases have fixed rent increases and also include inducements to enter into the lease. The effect of such amounts are deferred and recognized on a straight-line basis over the related lease term.
The Company’s principal executive offices are located at 622 Broadway, New York, New York. The Company has recently leased additional space at 622 Broadway to accommodate its expanded operations. In connection with signing a ten-year lease, the Company provided a standby letter of credit of $1,560.
The Company leases approximately 206,000 square feet of office and warehouse space in Cincinnati, Ohio and pays $1,100 per annum, plus taxes and insurance, under the lease, which expires in May 2006. Effective September 2004, the Company entered into a ten-year lease for 400,000 square feet of new office and warehouse space and will pay approximately $1,000 per annum under the lease, plus taxes and insurance. In addition, the Company will receive funds for leasehold improvements. The Company is entitled to a rent reduction in connection with its former warehouse space and will seek to sublease this space in April 2005. Both the rent reduction and leasehold payments will be amortized over the life of the new lease. The transition to the new facility is planned to be completed by the end of May 2005.
56
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Future minimum rental payments required as of October 31, 2004 are as follows:
| Years ending October 31: | | | | |
| | | | |
| 2005 | | $ | 9,997 | |
| 2006 | | | 8,206 | |
| 2007 | | | 7,754 | |
| 2008 | | | 7,285 | |
| 2009 | | | 13,434 | |
| Thereafter | | | 15,302 | |
| | |
|
| |
| Total minimum lease payments | | | 61,978 | |
| Less minimum rentals to be received under subleases | | | 130 | |
| | |
|
| |
| Total | | $ | 61,848 | |
| | |
|
| |
Rent expense amounted to $9,713, $7,445 and $5,090, for the years ended October 31, 2004, 2003, and 2002, respectively.
Legal and Other Proceedings
In November 2004, the Company submitted an offer of settlement of the previously announced investigation by the Enforcement Division of the Securities and Exchange Commission to the Staff of the Commission. The Staff has agreed to recommend the offer of settlement to the Commission. If approved by the Commission, the proposed settlement, under which the Company would neither admit nor deny the allegations of a Complaint, would fully resolve all claims relating to the investigation that commenced in December 2001. Pursuant to the offer of settlement, the Company would pay a civil penalty of $7.5 million, which has been accrued in the accompanying financial statements, and would be enjoined from future violations of the federal securities laws.
The Company is involved in routine litigation in the ordinary course of its business, which in management’s opinion will not have a material adverse effect on the Company’s financial condition, cash flows or results of operations.
Other
The Company periodically enters into distribution agreements to purchase various software games that require the Company to make minimum guaranteed payments. These agreements, which expire between March 15, 2005 and December 31, 2005, require remaining aggregate minimum guaranteed payments of $7,487 at October 31, 2004. Additionally, assuming performance by third-party developers, the Company has outstanding commitments under various software development agreements to pay developers an aggregate of $82,342 during fiscal 2005. The Company also expects to spend $3,500 in fiscal 2005 in connection with the continued improvement of our software systems for its domestic and international operations. In addition, the Company expects to spend $4,500 in fiscal 2005 on leasehold improvements and equipment for the warehouse in Ohio.
Effective May 2004, the Company entered into a three-year agreement with SEGA Corporation, whereby it co-publishes and exclusively distributes SEGA’s sports titles. Under the current arrangement, the Company is entitled to receive all of the revenue and profit, if any, from the sale of the sports titles developed by Visual Concepts and Kush, and it is obligated to pay for development and marketing costs of the sports titles. The agreement may be terminated under certain circumstances, including as a result of SEGA’s failure to obtain licenses from the major sports leagues and players associations.
Pursuant to an option agreement with SEGA, the Company has the right to purchase all of the outstanding capital stock of Visual Concepts and Kush. The option is exercisable until the earlier of (1) March 31, 2006 or (2) the termination of the distribution agreement with SEGA. The Company is currently negotiating the option price.
In connection with the acquisition of Mobius in fiscal 2004, the Company agreed to make additional contingent payments, of approximately $2,000 based on delivery of products. In fiscal 2003 the Company agreed to make additional payments of up to $2,500 to the former owners of Cat Daddy based on a percentage of Cat Daddy’s future profits for the first three years after acquisition. See Note 3. The payables will be recorded when the conditions requiring their payment are met.
57
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Additionally, in connection with the Company’s acquisition of the publishing rights to the franchise of Duke Nukem PC and video games in December 2000, the Company is contingently obligated to pay $6,000 in cash upon delivery of the final version of Duke Nukem Forever for the PC. In May 2003, the Company agreed to make payments of up to $6,000 in cash upon the achievement of certain sales targets for Max Payne 2. The Company does not expect these sales targets to be achieved.
12. EMPLOYEE SAVINGS PLAN
The Company maintains a 401(k) retirement savings plan and trust (the “401(k) Plan”). The 401(k) Plan is offered to all eligible employees and participants may make voluntary contributions.. The Company began matching contributions in July 2002. The matching contribution expense incurred by the Company during the years ended October 31, 2004, 2003 and 2002 was $583, $384 and $95, respectively.
13. INCOME TAXES
The Company is subject to foreign income taxes in certain countries where it does business. Domestic and foreign income before income taxes is as follows:
| | | | Years Ended October 31, | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| | |
| |
| | | | | | | | | | | |
| Domestic | | $ | 52,774 | | $ | 134,746 | | $ | 115,142 | |
| Foreign | | | 43,836 | | | 30,569 | | | 5,796 | |
| | |
|
| | |
| |
|
| |
| Total | | $ | 96,610 | | $ | 165,315 | | $ | 120,938 | |
| | |
|
| |
|
| |
|
| |
Income tax expense is as follows:
| | | | Years Ended October 31, | |
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| Current: | | | | | | | | | | |
| Federal | | $ | 28,628 | | $ | 33,167 | | $ | 35,275 | |
| State and local | | | 3,506 | | | 6,287 | | | 4,381 | |
| Foreign | | | 11,791 | | | 14,703 | | | 2,993 | |
| Deferred: | | | | | | | | | | |
| Federal, Foreign, State and Local | | | (12,693 | ) | | 13,040 | | | 6,726 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 31,232 | | $ | 67,197 | | $ | 49,375 | |
| | |
|
| |
|
| |
|
| |
58
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
The differences between the provision for income taxes and the income tax computed using the U.S. statutory federal income tax rate to pretax income are as follows:
| | | | | Years Ended October 31, | |
| | | | | 2004 | | | 2003 | | | 2002 | |
| | | |
|
| |
|
| |
|
| |
| | | | | | | | | | | | |
| Statutory federal tax expense | | $ | 33,814 | | $ | 57,860 | | $ | 42,324 | |
| Changes in expenses resulting from: | | | | | | | | | | |
| | State taxes, net of federal benefit | | | 1,651 | | | 4,035 | | | 2,995 | |
| | Foreign tax expense differential | | | (3,738 | ) | | 2,191 | | | 568 | |
| | Extraterritorial income exclusion | | | (3,858 | ) | | (9,163 | ) | | –– | |
| | Valuation allowances | | | 1,299 | | | 10,429 | | | 1,101 | |
| | Provision for settlement, not deductible | | | 2,625 | | | –– | | | –– | |
| | Other permanent items | | | (561 | ) | | 1,845 | | | 2,387 | |
| | | |
|
| | |
| |
|
| |
| | Income tax expense | | $ | 31,232 | | $ | 67,197 | | $ | 49,375 | |
| | | |
|
| |
|
| |
|
| |
The components of the net deferred tax asset as of October 31, 2004 and 2003 consists of the following:
| | | | | 2004 | | | 2003 | |
| | | |
|
| |
|
| |
| Current: | | | | | | | |
| Deferred tax asset: | | | | | | | |
| | Bad debt allowance | | $ | 3,871 | | $ | 1,405 | |
| | Other – including reserves | | | 5,942 | | | 6,768 | |
| | Compensation benefit | | | 1,741 | | | –– | |
| | | |
|
| |
|
| |
| | Total current deferred tax assets | | | 11,554 | | | 8,173 | |
| | | | | | | | | |
| | Long-term deferred tax assets: | | | | | | | |
| | Depreciation and amortization | | | 6,220 | | | 160 | |
| | State net operating losses | | | 4,773 | | | 3,311 | |
| | Foreign net operating losses | | | 3,240 | | | 3,240 | |
| | Capital loss carryforward | | | 7,799 | | | 7,963 | |
| | Less: Valuation allowances | | | (15,813 | ) | | (14,514 | ) |
| | | |
|
| |
|
| |
| Total long-term deferred tax assets | | | 6,219 | | | 160 | |
| | | | | | | | | |
| Long-term deferred tax liability: | | | | | | | |
| | Capitalized software | | | (5,233 | ) | | (8,486 | ) |
| | | |
|
| |
|
| |
| Net deferred tax asset (liability) | | $ | 12,540 | | $ | (153 | ) |
| | | |
|
| |
|
| |
At October 31, 2004, the Company had capital loss carryforwards totaling approximately $20,000. The capital loss carryforwards will expire in the periods fiscal 2006 through fiscal 2008. Management does not expect to generate sufficient taxable income from capital transactions prior to the expiration of these benefits, and accordingly a valuation allowance of $7,800 has been recorded for this asset as it is more likely than not that the deferred tax asset related to these carryforwards will not be realized. At October 31, 2004, the Company had foreign net operating losses of approximately $11,000 expiring between fiscal 2005 and fiscal 2010, and state net operating losses of approximately $62,000 expiring between fiscal 2021 and fiscal 2023. Management does not expect to generate sufficient certain state and foreign taxable income in future years to fully utilize the net operating losses carryforwards before expiration, accordingly valuation allowances have been recorded for these assets in the amounts of $4,773 and $3,240, respectively.
The total amount of undistributed earnings of foreign subsidiaries was approximately $89,700 and $60,700 for the years ended October 31, 2004 and 2003, respectively. It is the Company’s intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of foreign subsidiaries are paid as dividends to the Company.
59
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
14. STOCKHOLDERS’ EQUITY
In November 2003, at a special meeting, the Company’s stockholders voted to amend the certificate of incorporation to increase the Company’s authorized shares of common stock from 50,000,000 to 100,000,000 shares.
In January 2003, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $25,000 of its common stock from time to time in the open market or in privately negotiated transactions. The Company has not repurchased any shares under this program.
In February 2002, the Company issued 20,000 shares of restricted common stock to a former employee in connection with a separation agreement.
15. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of and changes in accumulated other comprehensive income (loss) are:
| | | | Foreign Currency Translation Adjustments | | | Net Unrealized Gain (Loss) on Investments | | | Accumulated Other Comprehensive Income (Loss) | |
| | |
|
| |
|
| |
|
| |
| Balance at November 1, 2001 | | $ | (10,608 | ) | $ | 156 | | $ | (10,452 | ) |
| Comprehensive income (loss) changes during the year, net of taxes of $87 | | | 5,553 | | | (142 | ) | | 5,411 | |
| | |
|
| |
|
| |
|
| |
| Balance at October 31, 2002 | | | (5,055 | ) | | 14 | | | (5,041 | ) |
| Comprehensive income (loss) changes during the year, net of taxes of $9 | | | 4,119 | | | (14 | ) | | 4,105 | |
| | |
|
| |
|
| |
|
| |
| Balance at October 31, 2003 | | | (936 | ) | | –– | | | (936 | ) |
| Comprehensive income changes during the year | | | 7,290 | | | –– | | | 7,290 | |
| | |
|
| |
|
| |
|
| |
| Balance at October 31, 2004 | | $ | 6,354 | | $ | –– | | $ | 6,354 | |
| | |
|
| |
|
| |
|
| |
The taxes in the above table relate to the changes in the net unrealized gain (loss) on investments. The foreign currency adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
16. STOCK-BASED PLANS
Incentive Stock Plan
The Incentive Stock Plan (“Incentive Plan”) was adopted by the Board of Directors on June 12, 2003 and approved by stockholders in June 2004. The Incentive Plan provides for the grant of restricted stock, deferred stock and other stock-based awards of the Company’s common stock to directors, officers and other employees of the Company. A maximum of 1,000,000 shares are authorized for grant under the Incentive Plan. The cost of restricted shares granted is expensed on a straight-line basis over the vesting period, which ranges from 1 to 4 years. The Incentive Plan is administered by the Compensation Committee of the Board of Directors.
Restricted shares granted under the plan and the weighted average fair value of the shares for the years ending October 31, 2004, 2003 and 2002 was as follows:
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| Restricted common stock (in thousands) | | | 160 | | | 235 | | | 50 | |
| Weighted average share price | | $ | 31.22 | | $ | 23.11 | | $ | 21.00 | |
60
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Stock Option Plans
In June 2002, the stockholders of the Company approved the Company’s 2002 Stock Option Plan, as previously adopted by the Company’s Board of Directors (the “2002 Plan”), pursuant to which officers, directors, employees and consultants of the Company may receive stock options to purchase shares of Common Stock. In June 2004, the stockholders approved an increase in the aggregate amount of shares to 6,000,000 shares from 3,000,000 shares.
In January 1997, the stockholders of the Company approved the Company’s 1997 Stock Option Plan, as amended, as previously adopted by the Company’s Board of Directors (the “1997 Plan”), pursuant to which officers, directors, employees and consultants of the Company may receive options to purchase up to an aggregate of 6,500,000 shares of the Company’s Common Stock. As of April 30, 2002, there are no options available for grant under the 1997 Plan.
Subject to the provisions of the plans, the Board of Directors or any Committee appointed by the Board of Directors, has the authority to determine the individuals to whom the stock options are to be granted, the number of shares to be covered by each option, the option price, the type of option, the option period, restrictions, if any, on the exercise of the option, the terms for the payment of the option price and other terms and conditions.
As of October 31, 2004 and 2003, the plans had outstanding stock options for an aggregate of 3,651,000 and 3,066,000 shares of the Company’s Common Stock, respectively, vesting at various times from 1998 to 2008 and expiring at various times from 2002 to 2009. Options granted generally vest over a period of three to five years.
Non-Plan Stock Options
As of October 31, 2004 and 2003, there are non-plan stock options outstanding for an aggregate of 1,512,000 and 1,503,000 shares of the Company’s Common Stock, respectively, vesting from 1999 to 2007 and expiring at various times from 2003 to 2009.
For those options with exercise prices less than fair value of the underlying shares at the measurement date, the difference is recorded as deferred compensation and is amortized on a straight-line basis over the vesting period.
The following table summarizes the activity in options under the plans inclusive of non-plan options:
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| | | | Shares
(in thousands) | | | Weighted
Average
Exercise
Price | | | Shares
(in thousands) | | | Weighted
Average
Exercise
Price | | | Shares
(in thousands) | | | Weighted
Average
Exercise
Price | |
| | |
|
| | |
| |
|
| |
|
| |
|
| |
|
| |
| Options outstanding at November 1 | | | 4,569 | | $ | 20.23 | | | 5,695 | | $ | 13.96 | | | 4,479 | | $ | 9.93 | |
| Granted-exercise price equal to fair value | | | 1,954 | | | 31.71 | | | 2,442 | | | 25.26 | | | 3,950 | | | 16.40 | |
| Granted-exercise price less than fair value | | | –– | | | –– | | | –– | | | –– | | | 30 | | | 0.01 | |
Exercised | | | (984 | ) | | 20.84 | | | (3,438 | ) | | 13.53 | | | (2,494 | ) | | 10.43 | |
| Forfeited | | | (376 | ) | | 28.87 | | | (130 | ) | | 17.13 | | | (270 | ) | | 12.31 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Options outstanding at October 31 | | | 5,163 | | $ | 23.85 | | | 4,569 | | $ | 20.23 | | | 5,695 | | $ | 13.96 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | | | | | | | | | |
| Options exercisable at October 31 | | | 2,172 | | $ | 18.00 | | | 1,389 | | $ | 15.09 | | | 3,014 | | $ | 12.56 | |
| | |
|
| | |
| |
|
| |
|
| |
|
| |
|
| |
61
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
The following summarizes information about stock options outstanding and exercisable at October 31, 2004:
| | | | Options Outstanding | | | Options Exercisable | |
| | | |
| | |
| |
| Range of Exercise Prices | | | Shares
(in thousands) | | | Weighted
Average
Exercise
Price | | | Average
Remaining
Contractual
Life
(in years) | | | Shares
(in thousands) | | | Weighted
Average
Exercise
Price | | | Average
Remaining
Contractual
Life
(in years) | |
| | | |
| | |
| | |
| | |
| | |
| | |
| |
| $5.50 – $13.91 | | | 784 | | | 10.32 | | | 1.5 | | | 734 | | | 10.31 | | | 1.4 | |
| $14.86 – $19.55 | | | 1,091 | | | 18.23 | | | 2.6 | | | 797 | | | 18.10 | | | 2.6 | |
| $20.10 – $26.88 | | | 926 | | | 22.90 | | | 3.3 | | | 359 | | | 22.94 | | | 3.2 | |
| $27.60 – $38.97 | | | 2,362 | | | 31.30 | | | 4.2 | | | 282 | | | 31.43 | | | 3.8 | |
| | |
|
| | | | | | | | |
| | | | | | | |
| | | | 5,163 | | | 23.85 | | | 3.3 | | | 2,172 | | | 18.00 | | | 2.5 | |
| | | |
| | | | | | | | |
| | | | | | | |
Compensation expense for all stock-based plans for the years ended October 31, 2004, 2003 and 2002 is $3,331, $3,445 and $3,053, respectively.
17. RESULTS BY QUARTER (UNAUDITED)
The following tables set forth quarterly supplementary data for each of the years in the two-year period ended October 31, 2004.
| 2004 | | | 1st
Quarter | | | 2nd
Quarter | | | 3rd
Quarter | | | 4th
Quarter | |
| | |
|
| |
|
| |
|
| |
|
| |
| Net sales | | $ | 375,512 | | $ | 153,368 | | $ | 160,858 | | $ | 438,013 | |
| Gross profit | | | 127,154 | | | 34,206 | | | 42,860 | | | 173,851 | |
| Net income (loss) | | $ | 31,758 | | $ | (14,576 | ) | $ | (14,435 | ) | $ | 62,631 | |
| | | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | | |
| Basic – EPS | | $ | 0.72 | | $ | (0.33 | ) | $ | (0.32 | ) | $ | 1.39 | |
| Diluted – EPS | | $ | 0.70 | | $ | (0.33 | ) | $ | (0.32 | ) | $ | 1.36 | |
| | | | | | | | | | | | | | |
| 2003 | | | | | | | | | | | | | |
| Net sales | | $ | 411,008 | | $ | 193,023 | | $ | 152,055 | | $ | 277,607 | |
| Gross profit | | | 165,947 | | | 71,483 | | | 58,519 | | | 100,190 | |
| Net income | | $ | 51,535 | | $ | 14,623 | | $ | 5,696 | | $ | 26,264 | |
| | | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | | |
| Basic – EPS | | $ | 1.26 | | $ | 0.35 | | $ | 0.13 | | $ | 0.60 | |
| Diluted – EPS | | $ | 1.22 | | $ | 0.35 | | $ | 0.13 | | $ | 0.58 | |
Under accounting principles generally accepted in the United States of America, quarterly computations of earnings per share must stand on their own and, therefore, the sum of basic and diluted EPS numbers for each of the four quarters of 2004 and 2003 may not equal full year basic and diluted EPS. Basic and diluted EPS for each quarter of 2004 and 2003 is computed using the weighted average number of shares outstanding during the quarter, while basic and diluted EPS for the full year is computed using the weighted average number of shares outstanding during the more extended period of time.
18. CONSOLIDATION OF DISTRIBUTION FACILITIES
In January 2003, based on management’s strategy to consolidate the Company’s distribution business, and after taking into account the relative cost savings involved, the Company closed its warehouse operations in Ottawa, Illinois and College Point, New York. Operations at these warehouses ceased by January 31 and the business conducted there was consolidated with the operations of the Company’s Jack of All Games distribution facility in Ohio.
As a result of the closures, the Company recorded a charge of $7,028. The charge consisted of: (1) lease termination costs, representing the fair value of remaining lease payments, net of estimated sublease rent; (2) disposition of fixed assets, representing the net book value of fixed assets and leasehold improvements; (3) other exit costs; and (4) an impairment charge with respect to an intangible asset, representing a customer list relating to the business conducted at the Illinois facility.
62
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
These costs are included in general and administrative expense for the year ended October 31, 2003, except for the intangibles impairment which is included in depreciation and amortization expense, and are summarized in the table below:
| | | | | | | | | | | | | | | | | |
| | | | Lease
Termination
Costs | | | Fixed Asset
Dispositions | | | Intangibles
Impairments | | | Other
Exit Costs | | | Total | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Provisions during year ended October 31, 2003 | | $ | 1,607 | | $ | 999 | | $ | 4,407 | | $ | 15 | | $ | 7,028 | |
| Asset write-offs | | | (65 | ) | | (999 | ) | | (4,407 | ) | | (3 | ) | | (5,474 | ) |
| Cash payments | | | (1,542 | ) | | — | | | — | | | (12 | ) | | (1,554 | ) |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
| Remaining Obligations at October 31, 2003 | | $ | –– | | $ | –– | | $ | –– | | $ | –– | | $ | –– | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
19. SEGMENT INFORMATION
The Company is a publisher and distributor of interactive software games. The Company’s operations involve similar products and customers worldwide. The products are developed and sold domestically and internationally. The Company is centrally managed and the chief operating decision makers, the chief executive and chief operating officers, use consolidated financial information supplemented by sales information by product category, major product title and platform for making operational decisions and assessing financial performance. Accordingly, the Company operates in a single segment.
Information about the Company’s total non-current assets in the United States and international areas as of October 31, 2004 and 2003 are presented below:
| | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
| Total non-current assets: | | | | | | | |
| United States | | $ | 163,709 | | $ | 118,683 | |
| Canada | | | 23,427 | | | 17,520 | |
| International: | | | | | | | |
| United Kingdom | | | 31,263 | | | 25,739 | |
| All other Europe | | | 16,809 | | | 19,275 | |
| Other | | | 10,364 | | | 12,839 | |
| | |
|
| |
|
| |
| Total | | $ | 245,572 | | $ | 194,056 | |
| | |
|
| |
|
| |
Information about the Company’s net sales in the United States and international areas for the years ended October 31, 2004, 2003 and 2002 are presented below (net sales are attributed to geographic areas based on product destination):
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| |
|
| |
|
| |
| United States | | $ | 712,999 | | $ | 667,580 | | $ | 606,467 | |
| Canada | | | 104,373 | | | 77,360 | | | 28,965 | |
| International: | | | | | | | | | | |
| United Kingdom | | | 99,896 | | | 88,381 | | | 47,021 | |
| All other Europe | | | 173,880 | | | 175,717 | | | 98,490 | |
| Asia Pacific | | | 35,280 | | | 22,885 | | | 12,593 | |
| Other | | | 1,323 | | | 1,770 | | | 1,140 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,127,751 | | $ | 1,033,693 | | $ | 794,676 | |
| | |
|
| |
|
| |
|
| |
| | | | | | | | | | | |
| Domestic (1) | | | 72.5 | % | | 72.1 | % | | 80.0 | % |
| International | | | 27.5 | % | | 27.9 | % | | 20.0 | % |
| | | | | | | | | | | |
| (1) includes Canada | | | | | | | | | | |
63
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Information about the Company’s net sales by product category for the years ended October 31, 2004, 2003 and 2002 are presented below:
| | | | 2004 | | | 2003 | | | 2002 | |
| | |
|
| | |
| |
|
| |
| Product category: | | | | | | | | | | |
| Publishing | | $ | 768,482 | | $ | 671,892 | | $ | 568,492 | |
| Distribution | | | 359,269 | | | 361,801 | | | 226,184 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,127,751 | | $ | 1,033,693 | | $ | 794,676 | |
| | |
|
| |
|
| |
|
| |
Publishing revenue is derived from the sale of internally developed interactive software titles or from the sale of titles licensed from third-party developers. Distribution revenue is derived from the sale of third-party interactive software titles, hardware and accessories.
Information about the Company’s net sales by product platforms for the years ended October 31, 2004, 2003 and 2002 are presented below:
| | | | | 2004 | | | 2003 | | | 2002 | |
| | | |
|
| |
|
| |
|
| |
| Platforms: | | | | | | | | | | |
| | Sony PlayStation 2 | | $ | 639,625 | | $ | 591,205 | | $ | 473,214 | |
| | Sony PlayStation | | | 24,244 | | | 58,334 | | | 58,718 | |
| | Microsoft Xbox | | | 222,165 | | | 84,112 | | | 54,144 | |
| | PC | | | 69,653 | | | 147,275 | | | 102,734 | |
| | Nintendo Game Boy Color, Game Boy Advance and 64 | | | 72,130 | | | 48,547 | | | 20,348 | |
| | Nintendo GameCube | | | 39,732 | | | 29,085 | | | 17,761 | |
| | SEGA Dreamcast | | | 6 | | | 109 | | | 1,602 | |
| | Accessories | | | 24,505 | | | 20,165 | | | 31,734 | |
| | Hardware | | | 35,691 | | | 54,861 | | | 34,421 | |
| | | |
|
| | |
| |
|
| |
| Total | | | $ | 1,127,751 | | $ | 1,033,693 | | $ | 794,676 | |
| | | |
|
| |
|
| |
|
| |
For the years ended October 31, 2004, 2003 and 2002, the Company’s five largest customers accounted for 38.9%, 38.6%, and 31.4% of net sales, respectively. For the years ended October 31, 2004 and 2003, one customer accounted for $117,236 and $117,636, or 10.4% and 11.4%, of net sales, respectively.
64
Back to Index
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
20. NET INCOME PER SHARE
The following table provides a reconciliation of basic earnings per share to diluted earnings per share for the years ended October 31, 2004, 2003, and 2002.
| | | | | Net
Income | | | Shares
(in thousands) | | | Per Share
Amount | |
| | | |
|
| |
|
| |
|
| |
| Year Ended October 31, 2004 | | | | | | | | | | |
| | Basic | | $ | 65,378 | | | 44,736 | | $ | 1.46 | |
| | Effect of dilutive securities – Stock options, restricted stock and warrants | | | — | | | 946 | | | | |
| | | |
|
| | |
| |
|
| |
| | Diluted | | $ | 65,378 | | | 45,682 | | $ | 1.43 | |
| | | |
|
| | |
| |
|
| |
| | | | | | | | | | | | |
| Year Ended October 31, 2003 | | | | | | | | | | |
| | Basic | | $ | 98,118 | | | 41,965 | | $ | 2.34 | |
| | Effect of dilutive securities – Stock options, restricted stock, and warrants | | | — | | | 1,332 | | | | |
| | | |
|
| |
|
| |
|
| |
| | Diluted | | $ | 98,118 | | | 43,297 | | $ | 2.27 | |
| | | |
|
| |
|
| |
|
| |
| Year Ended October 31, 2002 | | | | | | | | | | |
| | Basic | | $ | 71,563 | | | 38,030 | | $ | 1.88 | |
| | Effect of dilutive securities – Stock options and warrants | | | — | | | 1,540 | | | | |
| | | |
|
| |
|
| |
|
| |
| | Diluted | | $ | 71,563 | | | 39,570 | | $ | 1.81 | |
| | | |
|
| |
|
| |
|
| |
The computation for diluted number of shares excludes those unexercised stock options and warrants, which are antidilutive. The number of such shares was 579,000, 1,000,000 and 143,000 for the years ended October 31, 2004, 2003, 2002, respectively.
21. RELATED PARTY TRANSACTIONS
Effective June 2004, warehouse operations for our Italian subsidiary are provided by an entity owned by the Managing Director of the subsidiary. In 2004, the Company paid $202 for these services. The Company believes this arrangement is on terms no less favorable than could be obtained from an unaffiliated third-party.
The Company’s former corporate headquarters were leased under a non-cancelable operating lease with a company controlled by the father of the former chairman of the board. The lease expired in March 2004. Rent expense and certain utility expenses under this lease amounted to $166, $444, and $403, for the years ended October 31, 2004, 2003, and 2002, respectively.
65
Back to Index
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, in this day of December 2004.
| | | | | |
| | TAKE-TWO INTERACTIVE SOFTWARE, INC. | |
| | By: | | /s/ Richard W. Roedel | |
| |
|
| |
| | | | Richard W. Roedel | |
| | | | Chairman and Chief Executive Officer | |
| | | | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the date indicated.
| | | | | | |
| Signature | | Title | | Date | |
| |
| |
| |
| /s/ Richard W. Roedel | | Chief Executive Officer | | December 20, 2004 | |
| | (Principal Executive Officer) | | | |
| Richard W. Roedel | | | | | |
| | | | | | |
| /s/ Karl H. Winters | | Chief Financial Officer (Principal | | December 20, 2004 | |
| | Financial and Accounting Officer) | | | |
| Karl H. Winters | | | | | |
| | | | | | |
| /s/ Robert Flug | | Director | | December 20, 2004 | |
| | | | | |
| Robert Flug | | | | | |
| | | | | | |
| /s/ Steven Tisch | | Director | | December 20, 2004 | |
| | | | | |
| Steven Tisch | | | | | |
| | | | | | |
| /s/ Oliver R. Grace, Jr. | | Director | | December 20, 2004 | |
| | | | | |
| Oliver R. Grace, Jr. | | | | | |
| | | | | | |
| /s/ Todd Emmel | | Director | | December 20, 2004 | |
| | | | | |
| Todd Emmel | | | | | |
| | | | | | |
| /s/ Mark Lewis | | Director | | December 20, 2004 | |
| | | | | |
| Mark Lewis | | | | | |
| | | | | | |
| /s/ Paul Eibeler | | President and Director | | December 20, 2004 | |
| | | | | |
| Paul Eibeler | | | | | |
| | | | | | |
| /s/ Barbara A. Kaczynski | | Director | | December 20, 2004 | |
| | | | | |
| Barbara A. Kaczynski | | | | | |
66
Back to Index
SCHEDULE II
Take-Two Interactive Software, Inc. and Subsidiaries
Valuation and Qualifying Accounts
(In thousands)
| | | | Additions (A) | | | | | | | | | | |
| | |
| | | | | | | | | | |
| Description | | |
Balance at
Beginning of Period | | | Revenue
Reductions(D) | | | Expenses and Other Costs
(E) | | | Deductions (B) | | | Other (C) | | |
Balance at
End of Period | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Year Ended October 31, 2004 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Allowances | | $ | 62,817 | | $ | 174,150 | | $ | 26,532 | | $ | 194,667 | | $ | 3,383 | | $ | 72,215 | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended October 31, 2003 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Allowances | | $ | 30,806 | | $ | 112,682 | | $ | 11,969 | | $ | 94,937 | | $ | 2,297 | | $ | 62,817 | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended October 31, 2002 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Allowances | | $ | 32,350 | | $ | 62,522 | | $ | 11,979 | | $ | 76,714 | | $ | 669 | | $ | 30,806 | |
| | |
| (A) | Includes increases in allowance for sales returns and doubtful accounts due to normal reserving terms. |
| | |
| (B) | Includes actual write-offs of uncollectible accounts receivable or sales returns and recoveries of previously written off receivables. |
| | |
| (C) | Includes $2,265 of which $1,118 related to acquisitions, $2,297 and $669 related to foreign exchange in 2004, 2003 in 2002. |
| | |
| (D) | Includes price concessions of $57,287, $45,919 and $29,513; returns of $66,066, $47,342 and $28,350; other sales allowances including rebates and discounts of $50,797, $19,421 and $4,659 for the year ended October 31, 2004, 2003 and 2002, respectively. |
| | |
| (E) | Includes $22,137, $7,647 and $9,574 related to cooperative advertising for the year ended October 31, 2004, 2003 and 2002. Also includes $4,395, $4,322 and $2,405 related to allowance for bad debts for the year ended October 31, 2004, 2003 and 2002. |
| | |
67
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Transition Report Pursuant to Section 13 or 15(d) of the Securities