of this Standard. The actual impact of adopting SFAS No. 123(R) in fiscal 2006 could differ from this estimate depending upon the number and timing of options granted during fiscal 2006, as well as their vesting period and vesting criteria. The Company’s assessment, which includes an estimate for future grants, is based on the Black-Scholes option pricing model and is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the volatility of the Company’s stock price and employee stock option exercise behaviors. As such, actual stock option expense may differ materially from this estimate.
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 and warrants outstanding during the year. Common stock equivalents are excluded from the computation if their effect is antidilutive.
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 the years ended October 31, 2005, 2004 and 2003 amounted to $1,560, $1,199 and $2,015, respectively.
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.
In May 2005, the FASB issued Statement of Financial Accounting Standards 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements – An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management does not believe the adoption of SFAS 154 will have a material impact on the Company’s consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (“SFAS 153”), “Exchange of Nonmonetary Assets – an amendment of APB Opinion No. 29.” SFAS 153 amends APB Opinion No. 29, “Accounting for Nonmonetary Transactions,” to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS 153 is effective for non-monetary exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of SFAS 153, effective August 1, 2005, had no impact on the Company’s financial statements.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
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 in December 2003, the proforma impact of these acquisitions was not material.
2005 Transactions
In August 2005, the Company acquired all of the outstanding membership interests in Irrational Studios (“Irrational”), the developer of certain of the Company’s titles. The purchase price consisted of $4,212 in cash and $2,000 of restricted stock, which was payable at closing, $1,550 of development advances previously paid to Irrational and $2,000 of deferred consideration which is payable in equal amounts on the first and second anniversary dates of the acquisition. In connection with the acquisition, the Company recorded $2,250 of identifiable intangible assets, $7,665 of goodwill, which is deductible for tax purposes, $187 of non-current assets and $340 of net current liabilities, on a preliminary basis. The Company also agreed to make additional payments of $2,000 based on the delivery of products which will be recorded as additional purchase price when the conditions requiring their payment are met.
In June 2005, the Company acquired all of the outstanding capital stock of Gaia Capital Group and its wholly-owned subsidiaries (“Gaia”), the developers of certain of the Company’s titles. The purchase price consisted of $5,748 in cash, $4,055 of development advances previously paid to Gaia and deferred consideration of $1,597. In connection with the acquisition, the Company recorded $3,940 of identifiable intangible assets, $7,918 of goodwill, which is deductible for tax purposes, $528 of non-current assets and $986 of net current liabilities, on a preliminary basis.
In January 2005, the Company acquired from SEGA all of the outstanding capital stock of Visual Concepts Entertainment and its wholly-owned subsidiary, Kush Games, the developers of certain of the Company’s sports titles, and certain intellectual property rights associated with these products. The purchase price consisted of $27,794 in cash, $1,866 of development advances previously paid to SEGA and contingent consideration of $2,593 based on the release of certain titles. In connection with the acquisition, the Company recorded $7,980 of identifiable intangible assets, $29,433 of goodwill, which is not deductible for tax purposes, $1,196 of non-current assets, $3,164 of net current liabilities and $3,192 of deferred tax liabilities related to identifiable intangible assets, on a preliminary basis.
Pursuant to FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities” (“FIN 46(R)”), the results of operations of Destineer Publishing Corp. (“Destineer”), a publisher of PC games, were consolidated in the Company’s financial statements effective November 1, 2003 through January 31, 2005. Effective February 1, 2005, the Company is no longer considered the primary beneficiary of Destineer nor does the Company hold a significant variable interest in Destineer. Accordingly, pursuant to the requirements of FIN 46(R), the results of Destineer’s operations are not included in the Company’s consolidated financial statements subsequent to February 1, 2005. The consolidation of Destineer did not have a material impact on the Company’s consolidated financial statements.
2004 Transactions
In October 2004, the Company acquired certain assets from Microsoft, including Indie Built (“Indie”), the developer of Top Spin (tennis), Amped series (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, $9,890 of goodwill, which is deductible for tax purposes, $280 of fixed assets, $1,317 of accounts receivable and $1,185 of net other current assets.
64
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
In September 2004, the Company acquired all the outstanding capital stock of Venom Games, a UK-based developer of the boxing games Rocky and Rocky Legends. The purchase price was $1,181 paid in cash at closing. In connection with the acquisition, the Company recorded identifiable intangibles of $750, goodwill of $626, which is deductible for tax purposes, and net current liabilities of $195.
In March 2004, the Company acquired all the outstanding capital stock of Mobius Entertainment (“Mobius”), a UK-based developer of titles for handheld platforms, including Sony’s PSP platform. The purchase price was approximately $4,515, of which $3,593 was paid in cash at closing and approximately $922 was paid in March 2005. In connection with the acquisition, the Company recorded identifiable intangibles of $96, goodwill of $4,681, which is not deductible for tax purposes, and net liabilities of $262. The Company also agreed to make additional contingent payments of approximately $1,950 based on delivery of products, which will be recorded as additional purchase price when the conditions requiring their payment are probable.
In December 2003, the Company acquired all of the outstanding capital stock and assumed certain liabilities of TDK Mediactive, Inc. (“TDK”). The purchase price of approximately $21,222 consisted of $16,062 in cash (which includes $8,051 previously due to TDK under a distribution agreement) and issuance of 163,641 shares of the Company’s restricted stock valued at $5,160. In connection with the acquisition, the Company recorded identifiable intangibles of $7,690, goodwill of $16,101, which is not deductible for tax purposes, net deferred tax assets of $978 and net liabilities of $3,547.
The unaudited proforma data below for the year ended October 31, 2003 is presented as if the purchase of TDK 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 revenues | $ | 1,063,359 | |
| |
| |
| Net income | $ | 80,403 | |
| |
| |
| Net income per share – Basic | $ | 1.27 | |
| |
| |
| Net income per share – Diluted | $ | 1.23 | |
| |
| |
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 development advances previously paid 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, which is deductible for tax purposes, 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 $28,500 in cash, 235,679 shares of restricted common stock (valued at $6,557), and $5,931 (net of $801 of royalties payable to Angel) of development advances previously paid 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, which is not deductible for tax purposes, $1,474 of deferred tax liabilities, and net assets of $329.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
4. 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, 2005, 2004, and 2003.
| | Net | | Shares | | Per Share | |
| | Income | | (in thousands) | | Amount | |
| |
|
| |
| |
|
| |
| Year Ended October 31, 2005 | | | | | | | | |
| Basic | $ | 37,475 | | 69,859 | | $ | 0.54 | |
| Effect of dilutive securities – Stock options, restricted stock and warrants | | — | | 1,040 | | | | |
| |
|
| |
| |
|
| |
| Diluted | $ | 37,475 | | 70,899 | | $ | 0.53 | |
| |
|
| |
| |
|
| |
| Year Ended October 31, 2004 | | | | | | | | |
| Basic | $ | 65,378 | | 67,104 | | $ | 0.97 | |
| Effect of dilutive securities – Stock options, restricted stock and warrants | | — | | 1,419 | | | | |
| |
|
| |
| |
|
| |
| Diluted | $ | 65,378 | | 68,523 | | $ | 0.95 | |
| |
|
| |
| |
|
| |
| Year Ended October 31, 2003 | | | | | | | | |
| Basic | $ | 98,118 | | 62,948 | | $ | 1.56 | |
| Effect of dilutive securities – Stock options, restricted stock, and warrants | | — | | 1,998 | | | | |
| |
|
| |
| |
|
| |
| Diluted | $ | 98,118 | | 64,946 | | $ | 1.51 | |
| |
|
| |
| |
|
| |
The computation for diluted number of shares excludes those unexercised stock options and warrants, which are antidilutive. The number of such shares was 3,126,000, 579,000 and 1,000,000 for the years ended October 31, 2005, 2004 and 2003, respectively.
5. 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, 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 | |
| Comprehensive income changes during the year | | (5,668 | ) | | –– | | | (5,668 | ) |
| |
|
| |
|
| |
|
| |
| Balance at October 31, 2005 | $ | 686 | | $ | –– | | $ | 686 | |
| |
|
| |
|
| |
|
| |
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.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
6. INVENTORIES
As of October 31, 2005 and 2004, inventories consist of:
| | 2005 | | 2004 | |
| |
|
| |
|
| |
| Finished products | $ | 128,753 | | $ | 147,199 | |
| Parts and supplies | | 7,474 | | | 7,146 | |
| |
|
| |
|
| |
| Total | $ | 136,227 | | $ | 154,345 | |
| |
|
| |
|
| |
Estimated product returns included in inventories at October 31, 2005 and 2004 are $8,857 and $7,371, respectively.
7. SOFTWARE DEVELOPMENT COSTS
The following table provides the details of software development costs:
| | Years Ended October 31, | |
| | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Beginning balance | $ | 64,322 | | $ | 36,746 | | $ | 36,691 | |
| Additions | | 118,711 | | | 87,405 | | | 38,593 | |
| Amortization | | (66,881 | ) | | (52,845 | ) | | (30,005 | ) |
| Write down | | (8,089 | ) | | (8,772 | ) | | (9,588 | ) |
| Foreign exchange | | 365 | | | 1,788 | | | 1,055 | |
| |
|
| |
|
| |
|
| |
| Ending balance | | 108,428 | | | 64,322 | | | 36,746 | |
| Less current portion | | 88,826 | | | 50,360 | | | 21,623 | |
| |
|
| |
|
| |
|
| |
| Non-current portion | $ | 19,602 | | $ | 13,962 | | $ | 15,123 | |
| |
|
| |
|
| |
|
| |
The amount of internally developed software included in software development costs was $60,324 and $27,785 at October 31, 2005 and October 31, 2004, respectively. The amount of software development costs resulting from advance payments and guarantees to third-party developers was $48,104 and $36,537 at October 31, 2005 and October 31, 2004, respectively. Amounts due to third-party developers were previously classified as prepaid royalties in the Company’s 2004 and 2003 consolidated financial statements.
Software development costs at October 31, 2005 and 2004 included amounts of $77,544 and $49,304, respectively, related to titles that have not been released yet.
Previously, all internal software development costs in fiscal 2001 through 2004 were classified as long-term which was not consistent with the accounting for external software development costs which are classified as either current or non-current based on the expected current year net revenues to the total of current and estimated future net revenues related to the release of a video game title. In 2004 and 2003, internal software development costs of $16,380 and $9,652, respectively, were reclassified to short-term software development costs to conform to the current year presentation for comparative purposes. See Note 2 to the Consolidated Financial Statements.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
8. LICENSES
The following table provides the details of licenses:
| | Years Ended October 31, | |
| | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Beginning balance | $ | 5,665 | | $ | 225 | | $ | 112 | |
| Additions | | 11,305 | | | 6,276 | | | 113 | |
| Amortization | | (6,433 | ) | | (836 | ) | | –– | |
| Write down | | (556 | ) | | –– | | | –– | |
| |
|
| |
|
| |
|
| |
| Ending balance | | 9,981 | | | 5,665 | | | 225 | |
| Less current portion | | 7,651 | | | 4,240 | | | 225 | |
| |
|
| |
|
| |
|
| |
| Non-current portion | $ | 2,330 | | $ | 1,425 | | $ | –– | |
| |
|
| |
|
| |
|
| |
Included in licenses at October 31, 2005 and October 31, 2004 are $5,466 and $5,593 related to titles that have not been released yet.
9. FIXED ASSETS, NET
As of October 31, 2005 and 2004, fixed assets consist of:
| | 2005 | | 2004 | |
| |
|
| |
|
| |
| Computer equipment | $ | 22,893 | | $ | 16,973 | |
| Office equipment | | 13,940 | | | 6,405 | |
| Computer software | | 26,411 | | | 15,480 | |
| Furniture and fixtures | | 6,338 | | | 4,413 | |
| Leasehold improvements | | 19,031 | | | 10,906 | |
| Capital leases | | 398 | | | 398 | |
| Construction in progress | | –– | | | 3,922 | |
| |
|
| |
|
| |
| | | 89,011 | | | 58,497 | |
| Less: accumulated depreciation and amortization | | 40,394 | | | 24,206 | |
| |
|
| |
|
| |
| Total | $ | 48,617 | | $ | 34,291 | |
| |
|
| |
|
| |
Depreciation expense for the years ended October 31, 2005, 2004, and 2003, amounted to $16,651, $12,443, and $9,510, respectively.
10. GOODWILL AND INTANGIBLE ASSETS, NET
The following table sets forth the components of the intangible assets subject to amortization:
| | | | As of October 31, 2005 | | As of October 31, 2004 | |
| | | |
| |
| |
| | Range of | | Gross | | | | | | Gross | | | | | |
| | Useful Life | | Carrying | | Accumulated | | | | Carrying | | Accumulated | | | |
| | (years) | | Amount | | Amortization | | Net | | Amount | | Amortization | | Net | |
| |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Trademarks | 7-10 | | $ | 29,365 | | $ | (14,145 | ) | $ | 15,220 | | $ | 26,825 | | $ | (10,438 | ) | $ | 16,387 | |
| Customer lists and relationships | 5-10 | | | 4,673 | | | (3,282 | ) | | 1,391 | | | 4,673 | | | (3,007 | ) | | 1,666 | |
| Intellectual property | 2-6 | | | 69,927 | | | (36,371 | ) | | 33,556 | | | 39,783 | | | (27,151 | ) | | 12,632 | |
| Non-competition agreements | 3-6 | | | 8,738 | | | (4,472 | ) | | 4,266 | | | 7,888 | | | (3,002 | ) | | 4,886 | |
| Technology | 3 | | | 9,032 | | | (4,799 | ) | | 4,233 | | | 4,192 | | | (3,659 | ) | | 533 | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Total | | | $ | 121,735 | | $ | (63,069 | ) | $ | 58,666 | | $ | 83,361 | | $ | (47,257 | ) | $ | 36,104 | |
| | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
The change in the gross carrying amount of intangibles for the years ended October 31, 2005 and 2004 is as follows:
| | 2005 | | 2004 | |
| |
|
| |
|
| |
| Beginning balance | $ | 83,361 | | $ | 68,820 | |
| Acquisitions | | 14,170 | | | 14,364 | |
| Purchase of intellectual property – Civilization | | 20,000 | | | — | |
| Other purchases of intangibles | | 5,564 | | | 894 | |
| Impairment charges | | (1,360 | ) | | (717 | ) |
| |
|
| |
|
| |
| Ending balance | $ | 121,735 | | $ | 83,361 | |
| |
|
| |
|
| |
Amortization expense for the years ended October 31, 2005, 2004 and 2003 is as follows:
| | Years Ended October 31, | |
| | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
| Included in: | | | | | | | | | |
| Cost of goods sold – product costs | $ | 10,364 | | $ | 18,870 | | $ | 2,940 | |
| Depreciation and amortization | | 5,365 | | | 4,403 | | | 8,660 | |
| |
|
| |
|
| |
|
| |
| Total amortization expense | $ | 15,729 | | $ | 23,273 | | $ | 11,600 | |
| |
|
| |
|
| |
|
| |
Estimated amortization expense for the years ending October 31, is as follows:
| 2006 | $ | 17,375 | |
| 2007 | | 13,847 | |
| 2008 | | 12,221 | |
| 2009 | | 6,693 | |
| Thereafter | | 8,530 | |
| |
|
| |
| Total | $ | 58,666 | |
| |
|
| |
The change in goodwill for the years ended October 31, 2005 and 2004 is as follows:
| | 2005 | | 2004 | |
| |
|
| |
|
| |
| Beginning balance | $ | 135,477 | | $ | 101,498 | |
| Acquisitions: | | | | | | |
| Visual Concepts and Kush Games | | 29,433 | | | — | |
| Gaia | | 7,918 | | | — | |
| Irrational | | 7,665 | | | — | |
| TDK | | (978 | ) | | 17,079 | |
| Indie | | (1,703 | ) | | 11,593 | |
| Other | | 2,081 | | | 5,307 | |
| |
|
| |
|
| |
| Ending balance | $ | 179,893 | | $ | 135,477 | |
| |
|
| |
|
| |
11. LINES OF CREDIT
On August 24, 2005, the Company entered into a new credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”), and terminated its credit agreement with Bank of America, N.A. The JPMorgan credit agreement provides for borrowings of up to $50,000 through the expiration of the agreement on August 23, 2006. Advances under the credit agreement bear interest at a rate of 0.25% to 0.75% over the bank’s prime rate, or at the Eurodollar rate plus 1.25% to 1.75% depending on the Company’s consolidated leverage ratio. The Company is required to pay a commitment fee to the bank equal to
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
0.25% of the unused loan balance and borrowings under the agreement are collateralized by certain of the Company’s assets. The credit agreement also contains financial and other covenants (including a consolidated asset coverage ratio) and limits or prohibits the Company from paying cash dividends, merging or consolidating with another corporation, selling or acquiring assets (other than in the ordinary course of business), creating liens and incurring additional indebtedness. Available borrowings under the agreement are reduced by the amount of any outstanding stand-by letters of credit. The Company had no borrowings or stand-by letters of credit under the credit agreement and was in compliance with all financial and other covenants at October 31, 2005.
In May 2005, the Company’s United Kingdom subsidiary renewed its credit facility agreement with Lloyds TSB Bank plc (“Lloyds”) under which Lloyds agreed to make available borrowings of up to approximately $23,000. 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, 2006. The Company had no outstanding guarantees and no borrowings under this facility as of October 31, 2005.
| 12. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities as of October 31, 2005 and 2004 consist of:
| | | 2005 | | | 2004 | |
| |
|
| |
|
| |
| Compensation and benefits | $ | 23,729 | | $ | 16,865 | |
| Royalties | | 17,940 | | | 56,012 | |
| Licenses | | 9,743 | | | 14,732 | |
| Provision for settlement | | — | | | 7,500 | |
| Deferred revenue | | 6,414 | | | 3,448 | |
| Rent and deferred rent obligations | | 6,484 | | | 2,977 | |
| Co-op advertising | | 3,802 | | | 3,487 | |
| Professional fees | | 7,219 | | | 2,140 | |
| Freight | | 2,321 | | | 5,354 | |
| Other | | 13,050 | | | 13,052 | |
| |
|
| |
|
| |
| Total | $ | 90,702 | | $ | 125,567 | |
| |
|
| |
|
| |
| | |
| 13. | LEGAL AND OTHER PROCEEDINGS |
Following the re-rating of Grand Theft Auto: San Andreas by the Entertainment Software Rating Board (“ESRB”) from “M” (age 17 and over) rating to an “AO” (age 18 and over) rating in July 2005, the Company was notified by the staff of the Federal Trade Commission’s (“FTC”) Division of Advertising Practices that it is conducting an inquiry into advertising claims made for the title and whether the Company engaged in unfair or deceptive acts or practices in violation of section 5 of the Federal Trade Commission Act, 15 U.S.C., Section 45. The Company is cooperating with the FTC inquiry and believes that it acted in accordance with all applicable laws and regulations. The Company cannot predict the outcome of this pending matter, which could result in the imposition of significant fines and penalties.
In January 2006, the City Attorney for the City of Los Angeles filed a complaint against the Company and its subsidiary, Rockstar Games, Inc. (“Rockstar”), in the Superior Court of the State of California. The complaint alleges that the Company and Rockstar violated sections of the California Business and Professions Code prohibiting untrue and misleading statements and unfair competition and that the Company and Rockstar were unjustly enriched as a result of the alleged failure to disclose that Grand Theft Auto: San Andreas contained “hidden” content which should have resulted in the game receiving an Adults Only (“AO”) rating from the ESRB rather than a Mature (“M”) rating. The complaint also alleges that the Company made misleading statements as to the origin of the “hidden” content. The complaint seeks injunctive relief, restitution for purchasers of the game and civil fines. The Company believes that the allegations in the City Attorney’s complaint are without merit, and intends to vigorously defend against these claims. However, the Company cannot predict the outcome of this action and, if determined adversely to the Company, such action could have a material adverse effect on the Company’s results of operations. The Company has also received requests for documents and information from the Attorneys General of the States of North Carolina and Connecticut relating to Grand Theft Auto: San Andreas.
In July 2005 the Company received three purported class action complaints against the Company and its subsidiary, Rockstar, which were filed in the United States District Court for the Southern District of New York (the “New York Actions”) and one such complaint which was filed in the United States District Court, Eastern District of Pennsylvania (the “Pennsylvania Action”). On September 8, 2005, another similar complaint was filed in the Circuit Court for the Twentieth Judicial District, St. Clair County, Illinois (the “Illinois Action”). The plaintiffs; alleged purchasers of
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
the Company’s Grand Theft Auto: San Andreas game, allege that the Company and Rockstar engaged in consumer deception, false advertising and common law fraud and were unjustly enriched as a result of the alleged failure of the Company and Rockstar to disclose that Grand Theft Auto: San Andreas contained “hidden” content, which resulted in the game receiving an “M” rating from the ESRB rather than an “AO” rating. The complaints seek unspecified damages, declarations of various violations of law and litigation costs. The New York Actions and the Pennsylvania Action have been consolidated in the Southern District of New York under the caption In re Grand Theft Auto Video Game Consumer Litigation, (05-CV-6734 (BSJ)). The Illinois Action has been removed to the United States District Court for the Southern District of Illinois, and the Company has moved the Judicial Panel on Multidistrict Litigation for an order transferring the Illinois Action to the Southern District of New York for coordinated or consolidated proceedings with the actions pending in New York. The Company believes these complaints are without merit and intends to vigorously defend and seek dismissals of these actions. However, the Company cannot predict the outcome of these actions and, if determined adversely to the Company, such actions could have a material adverse effect on the Company’s results of operations.
In February 2005, the personal representatives of the Estates of Arnold Strickland and Ace Mealer brought an action in the Circuit Court of Fayette County, Alabama against the Company, Sony Computer of America, Wal-Mart, GameStop and Devin Moore alleging under Alabama’s manufacturers’ liability and wrongful death statutes that the Company’s video games designed, manufactured, marketed and/or supplied to Mr. Moore resulted in “copycat violence” that caused the death of Messrs. Strickland and Mealer. The suit seeks damages (including punitive damages) against all of the defendants in excess of $600 million. Wal-Mart and Sony Computer of America have tendered their defense and requested indemnification from the Company, and the Company has accepted such tender. The Company’s motion to dismiss the action was denied and the Company moved to have certain issues certified for an immediate interlocutory appeal before the Alabama Supreme Court. The Company believes the complaint is without merit and intends to vigorously defend and seek dismissal of this action. However, the Company cannot predict the outcome of this action and, if determined adversely to the Company, such action could have a material adverse effect on the Company’s results of operations.
The Company has been advised that a purported class action has been filed in the Southern District of New York on behalf of St. Clair Shore General Employees Retirement System and other similarly situated plaintiffs against the Company and certain individuals alleging violations of the Securities Exchange Act regarding purported breaches of fiduciary duty and illegal insider trading. The Company has not been served in the action and not yet obtained or reviewed a copy of the complaint. The Company cannot predict the outcome of this action.
In January 2006, a proceeding was commenced in Delaware Chancery Court (Veek v. Take-Two Interactive Software, Inc.) seeking to compel the Company to produce certain books and records pursuant to Section 220 of Delaware Corporation Law in connection with Grand Theft Auto: San Andreas. The Company cannot predict the outcome of this action.
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.
| 14. | COMMITMENTS AND CONTINGENCIES |
A summary of annual minimum contractual obligations and commitments as of October 31, 2005 is as follows:
| Fiscal Years Ending October 31, | | | Licensing and Marketing Agreements | | | Software Development Agreements | | | Leases | | | Distribution
Agreements | | | Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| 2006 | | $ | 60,095 | | $ | 50,645 | | $ | 17,414 | | $ | 3,332 | | $ | 131,486 | |
| 2007 | | | 48,798 | | | 10,549 | | | 14,997 | | | 1,675 | | | 76,019 | |
| 2008 | | | 48,542 | | | 6,761 | | | 13,734 | | | — | | | 69,037 | |
| 2009 | | | 49,075 | | | 26 | | | 13,458 | | | — | | | 62,559 | |
| 2010 | | | 48,925 | | | — | | | 11,408 | | | — | | | 60,333 | |
| Thereafter | | | 90,325 | | | — | | | 30,237 | | | — | | | 120,562 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | $ | 345,760 | | $ | 67,981 | | $ | 101,248 | | $ | 5,007 | | $ | 519,996 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Licensing and Marketing Agreements: The Company’s license expense consists primarily of payments made to licensors for intellectual property rights under agreements which expire at various times through December 2012. As of October 31, 2005, the Company has minimum guaranteed licensing and marketing commitments of $345,760 outstanding, of which $5,747 is recorded in the Company’s consolidated balance sheet as the licensor does not have any significant performance obligation to the
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Company. Minimum guaranteed licensing and marketing commitments primarily reflect the Company’s agreements with major sports leagues and players’ associations.
Software Development Agreements: The Company’s payments made to third-party software developers include contractual advances and royalties under agreements which expire at various times through November 2008. Assuming performance by third-party developers, the Company has aggregate outstanding commitments of $67,981 under various software development agreements at October 31, 2005. The Company has also established an internal royalty program pursuant to which it pays royalties to its Rockstar development personnel based on product sales.
Lease Commitments: The Company’s office and warehouse facilities are occupied under non-cancelable operating leases expiring at various times from April 2006 to September 2014. The Company also leases certain furniture, equipment and automobiles under non-cancelable leases expiring through November 2009. 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. Aggregate minimum rental payments through applicable lease expirations are $101,248 at October 31, 2005. Rent expense amounted to $13,484, $9,713 and $7,445 for the years ended October 31, 2005, 2004 and 2003, respectively.
Distribution Agreements: The Company periodically enters into distribution agreements to purchase various software games. These agreements, which expire between December 2005 and January 2007, require remaining aggregate minimum guaranteed payments of $5,007 at October 31, 2005.
Contingent Consideration: In fiscal 2005, in connection with the acquisition of Irrational, the Company agreed to make additional payments of $2,000 to the former owners of Irrational based on the delivery of products. The Company does not anticipate making these contingent payments within the next twelve months. Additionally, in fiscal 2005, in connection with the acquisition of Visual Concepts and Kush Games, the Company agreed to make additional payments of approximately $2,600 to SEGA based on the commercial release of products. The additional payments to SEGA are expected to be made in fiscal 2006.
In March 2005, the Company renegotiated a $6,000 contingent obligation due upon delivery of the final PC version of Duke Nukem Forever through the payment of $4,250 and issuance of a promissory note in the principal amount of $500. The payment of the promissory note is contingent upon the commercial release of such product prior to December 31, 2006.
In connection with the acquisition of Mobius in March 2004, the Company agreed to make additional contingent payments of approximately $1,950 based on the 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. The Company does not anticipate making these contingent payments within the next twelve months.
Other: The ESRB requires publishers to conduct pertinent content audit certifications with respect to certain top selling titles, the objective of which is to assess what portion, if any, of the games on the market include undisclosed pertinent content on the disc that undermines the accuracy of the ESRB rating. This self audit procedure applies to certain current titles and may be applied to additional titles in the future. The Company is currently conducting a self audit in accordance with the ESRB’s requirements. It is possible that there may be content in the Company’s games that could be determined to be pertinent content that causes a change to the current ESRB rating. In such event, the Company may be required to record a reserve for anticipated product returns and inventory obsolescence which could expose the Company to additional litigation, administrative fines and penalties and other potential liabilities and could adversely affect the Company’s operating results.
Income (loss) before income taxes for the three years ended October 31, 2005, 2004 and 2003:
| | | Years Ended October 31, | |
| | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
|
| |
| Domestic | | $ | (29,146 | ) | $ | 45,734 | | $ | 134,746 | |
| Foreign | | | 72,842 | | | 50,876 | | | 30,569 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 43,696 | | $ | 96,610 | | $ | 165,315 | |
| | |
|
| |
|
| |
|
| |
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
Income tax expense (benefit) is as follows:
| | | Years Ended October 31, | |
| | | | 2005 | | | 2004 | | | 2003 | |
| | |
|
| |
|
| |
|
| |
| Current: | | | | | | | | | | |
| Federal | | $ | (6,339 | ) | $ | 28,289 | | $ | 33,167 | |
| State and local | | | (1,622 | ) | | 1,169 | | | 6,287 | |
| Foreign | | | 19,713 | | | 14,467 | | | 14,703 | |
| | |
|
| |
|
| |
|
| |
| | | | 11,752 | | | 43,925 | | | 54,157 | |
| Deferred: | | | | | | | | | | |
| Federal | | | (4,272 | ) | | (11,217 | ) | | 11,616 | |
| State and Local | | | (793 | ) | | (1,289 | ) | | 1,424 | |
| Foreign | | | (466 | ) | | (187 | ) | | –– | |
| | |
|
| |
|
| |
|
| |
| | | | (5,531 | ) | | (12,693 | ) | | 13,040 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 6,221 | | $ | 31,232 | | $ | 67,197 | |
| | |
|
| |
|
| |
|
| |
A reconciliation of the Company’s effective tax rate to the U.S. statutory federal income tax rate is as follows:
| | Years Ended October 31, | |
| | | 2005 | | | 2004 | | | 2003 | |
| | |
| | |
| | |
| |
| Statutory federal income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Foreign tax expense differential | | (13.0 | ) | | (3.9 | ) | | 1.6 | |
| Foreign income exclusion | | (6.2 | ) | | (4.0 | ) | | (5.5 | ) |
| State and local taxes, net of federal benefit | | (5.7 | ) | | 1.7 | | | 2.4 | |
| Valuation allowances | | 2.9 | | | 1.3 | | | 6.3 | |
| Provision for settlement, not deductible | | –– | | | 2.7 | | | –– | |
| Other | | 1.2 | | | (0.5 | ) | | 0.8 | |
| | |
| | |
| | |
| |
| Income tax expense | | 14.2 | % | | 32.3 | % | | 40.6 | % |
| | |
| | |
| | |
| |
The lower annual effective tax rate for 2005 is primarily due to a change in the mix of earnings, with a greater proportion of income being generated in lower tax jurisdictions, and a loss being generated in higher tax jurisdictions.
The components of the net deferred tax assets (liabilities) as of October 31, 2005 and 2004 consist of the following:
| | | 2005 | | | 2004 | |
| |
|
| |
|
| |
| Current: | | | | | | |
| Deferred tax assets (liabilities): | | | | | | |
| Sales returns and allowances (including bad debt) | $ | 9,758 | | $ | 6,273 | |
| Inventory reserves | | 5,097 | | | 2,658 | |
| Deferred rent | | 2,239 | | | 319 | |
| Deferred revenue | | 1,487 | | | (206 | ) |
| Capital loss carryforward | | 3,260 | | | –– | |
| Other – including reserves | | 2,828 | | | 2,509 | |
| Capitalized software and depreciation | | (7,400 | ) | | (3,394 | ) |
| |
|
| |
|
| |
| Total current deferred tax assets | | 17,269 | | | 8,159 | |
| Less: valuation allowance | | (6,326 | ) | | (3,165 | ) |
| |
|
| |
|
| |
| Total current deferred tax assets, net | | 10,943 | | | 4,994 | |
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
| Non-current: | | | | | | |
| Deferred tax assets (liabilities): | | | | | | |
| Capital loss carryforward | | 7,003 | | | 7,800 | |
| State net operating losses | | 6,025 | | | 4,773 | |
| Acquired net operating losses | | 3,524 | | | –– | |
| Foreign net operating losses | | 3,240 | | | 3,240 | |
| Intangible amortization | | 1,135 | | | 6,743 | |
| Capitalized software and depreciation | | (2,247 | ) | | (2,362 | ) |
| |
|
| |
|
| |
| Total non-current deferred tax assets | | 18,680 | | | 20,194 | |
| Less: valuation allowances | | (13,174 | ) | | (12,648 | ) |
| |
|
| |
|
| |
| Total non-current deferred tax assets, net | | 5,506 | | | 7,546 | |
| |
|
| |
|
| |
| Total deferred tax asset, net | $ | 16,449 | | $ | 12,540 | |
| |
|
| |
|
| |
In accordance with FASB issued Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes”, the allocation of the valuation allowance between gross current and non-current deferred tax assets was made by jurisdiction, on a pro rata basis and is not classified based solely on the item to which it relates.
At October 31, 2005, the Company had capital loss carryforwards totaling approximately $26,800. 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 $10,200 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, 2005, the Company had foreign net operating losses of approximately $10,000 expiring between fiscal 2006 and fiscal 2010, and state net operating losses of approximately $93,000 expiring between fiscal 2011 and fiscal 2026. Management does not expect to generate sufficient taxable income in certain foreign and state jurisdictions in future years to fully utilize the net operating loss carryforwards before expiration, and accordingly valuation allowances have been recorded for these assets in the amounts of $3,200 and $6,000, respectively.
The total amount of undistributed earnings of foreign subsidiaries was approximately $166,000 and $111,000 for the years ended October 31, 2005 and 2004, 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.
The Company is regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of amounts claimed and the payment of additional taxes. The Company believes that its tax positions comply with applicable tax law and that it has adequately provided for reasonably foreseeable tax assessments. Additionally, the Company believes that any assessments in excess of the amounts provided for will not have a material adverse impact on the Consolidated Financial Statements.
In January 2003, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $25,000 of the Company’s common stock from time to time in the open market or in privately negotiated transactions. In June and August 2005, the Company repurchased 925,341 shares of common stock at an aggregate cost of $24,929. All shares repurchased were retired in August 2005.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
In July 2005, the Company modified a stock compensation arrangement and accepted for return 412,500 shares of the Company’s common stock, held by three employees with a fair market value at the original issuance date of approximately $9,350, for cash bonuses payable in the future. At the date of modification, 366,667 shares were fully vested and $8,311 of compensation expense had been previously recognized. The remaining unvested shares were forfeited and the additional compensation expense of future cash bonuses of $1,039 is being recognized ratably as expense through February 2006. In October 2005, 412,500 common shares under this arrangement were retired.
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.
17. 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, 2005, 2004 and 2003 was $864, $583 and $384, respectively.
18. 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. The cost of restricted shares granted is expensed on a straight-line basis over the vesting period, which ranges from one to four years. The Incentive Plan is administered by the Compensation Committee of the Board of Directors. In June 2005, the stockholders approved an increase in the aggregate amount of shares to 2,500,000 shares from 1,500,000 shares.
Restricted shares granted under the plan and the weighted average fair value of the shares for the years ended October 31, 2005, 2004 and 2003 was as follows:
| | | 2005 | | 2004 | | 2003 | | |
| | |
|
| |
|
| |
|
| | |
| Restricted common stock (in thousands) | | | 1,022 | | | 241 | | | 353 | | |
| Weighted average share price | | $ | 22.90 | | $ | 20.81 | | $ | 15.41 | | |
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 2005, the stockholders approved an increase in the aggregate amount of shares to 11,000,000 shares from 9,000,000 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.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
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, 2005 and 2004, the plans had outstanding stock options in the aggregate of 6,691,000 and 5,441,000 shares of the Company’s Common Stock, respectively, vesting at various times from 2006 to 2009 and expiring at various times from 2006 to 2010. Options granted generally vest over a period of three to five years.
Non-Plan Stock Options
As of October 31, 2005 and 2004, there are non-plan stock options outstanding for an aggregate of 804,000 and 2,026,000 shares of the Company’s Common Stock, respectively. The non-plan stock options outstanding at October 31, 2005 vest from 2006 to 2007 and expire at various times from 2006 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:
| | | | 2005 | | 2004 | | | 2003 | |
| |
|
| |
| | | Weighted | | | | Weighted | | | Weighted | |
| Average | Average | Average |
| Shares | Exercise | Shares | Exercise | Shares | Exercise |
| (in thousands) | Price | (in thousands) | Price | (in thousands) | Price |
| | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Options outstanding at beginning of year | | | 7,467 | | $ | 15.87 | | | 6,855 | | $ | 13.49 | | | 8,617 | | $ | 9.36 | |
| Granted-exercise price equal to fair values | | | 2,940 | | | 23.95 | | | 2,931 | | | 21.16 | | | 3,663 | | | 16.85 | |
| Granted-exercise price less than fair value | | | –– | | | –– | | | –– | | | –– | | | –– | | | –– | |
| Exercised | | | (2,717 | ) | | 11.58 | | | (1,560 | ) | | 13.73 | | | (5,127 | ) | | 8.99 | |
| Forfeited | | | (195 | ) | | 20.75 | | | (759 | ) | | 19.17 | | | (298 | ) | | 12.70 | |
| | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Options outstanding at October 31 | | | 7,495 | | $ | 20.47 | | | 7,467 | | $ | 15.87 | | | 6,855 | | $ | 13.49 | |
| | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Options exercisable at October 31 | | | 3,135 | | $ | 17.56 | | | 3,258 | | $ | 12.00 | | | 2,084 | | $ | 10.06 | |
| | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
The following summarizes information about stock options outstanding and exercisable at October 31, 2005:
| | | | Options Outstanding | | | Options Exercisable | |
|
| |
| | | | | | Average | | | | | | Average | |
| Weighted | Remaining | Weighted | Remaining |
| | Average | Contractual | Average | Contractual |
| Shares | Exercise | Life | Shares | Exercise | Life |
Range of Exercise Prices | (in thousands) | Price | (in years) | (in thousands) | Price | (in years) |
| | | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| $3.66 – $12.23 | | | 497 | | $ | 9.25 | | | 1.1 | | | 497 | | $ | 9.25 | | | 1.1 | |
| $12.93 – $16.87 | | | 865 | | | 14.07 | | | 2.2 | | | 627 | | | 13.89 | | | 2.1 | |
| $17.19 – $21.28 | | | 2,796 | | | 20.11 | | | 3.5 | | | 1,529 | | | 20.12 | | | 3.6 | |
| $21.79 – $26.59 | | | 3,337 | | | 24.12 | | | 4.2 | | | 482 | | | 22.75 | | | 3.2 | |
| | | |
| | | | | | | |
|
| | | | | | | |
| | | | 7,495 | | | | | | | | | 3,135 | | | | | | | |
| | | |
| | | | | | | |
|
| | | | | | | |
Compensation expense for all stock-based plans for the years ended October 31, 2005, 2004 and 2003 is $14,860, $3,331, and $3,445, respectively.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
19. 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, 2003 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 in fiscal 2003 of $7,028 which was included in general and administrative expenses. The charge related to lease termination costs, disposition of fixed assets, other exit costs and an impairment charge with respect to an intangible asset. Cash payments and asset write-offs of $7,028 were incurred by the Company in fiscal 2003 and there was no remaining obligation at October 31, 2003.
20. 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, 2005 and 2004 are presented below:
| | | 2005 | | 2004 | |
| | |
|
| |
|
| |
| Total non-current assets: | | | | | | | |
| United States | | $ | 208,947 | | $ | 156,368 | |
| Canada | | | 13,353 | | | 19,802 | |
| International: | | | | | | | |
| Switzerland | | | 29,410 | | | 7,461 | |
| United Kingdom | | | 28,013 | | | 27,302 | |
| All other Europe | | | 29,749 | | | 9,222 | |
| Other | | | 10,162 | | | 10,364 | |
| | |
|
| |
|
| |
| Total | | $ | 319,634 | | $ | 230,519 | |
| | |
|
| |
|
| |
Information about the Company’s net revenues in the United States and international areas for the years ended October 31, 2005, 2004 and 2003 are presented below (net revenues are attributed to geographic areas based on product destination):
| | | 2005 | | 2004 | | 2003 | |
| | |
|
| |
|
| |
|
| |
| United States | | $ | 723,615 | | $ | 712,999 | | $ | 667,580 | |
| Canada | | | 93,979 | | | 104,373 | | | 77,360 | |
| International: | | | | | | | | | | |
| United Kingdom | | | 126,822 | | | 99,896 | | | 88,381 | |
| All other Europe | | | 223,957 | | | 173,880 | | | 175,717 | |
| Asia Pacific | | | 30,137 | | | 35,280 | | | 22,885 | |
| Other | | | 4,085 | | | 1,323 | | | 1,770 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,202,595 | | $ | 1,127,751 | | $ | 1,033,693 | |
| | |
|
| |
|
| |
|
| |
| North America | | | 68.0 | % | | 72.5 | % | | 72.1 | % |
| International | | | 32.0 | % | | 27.5 | % | | 27.9 | % |
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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 revenues by product category for the years ended October 31, 2005, 2004 and 2003 are presented below:
| | | 2005 | | 2004 | | 2003 | |
| | |
|
| |
|
| |
|
| |
| Product category: | | | | | | | | | | |
| Publishing | | $ | 853,237 | | $ | 768,482 | | $ | 671,892 | |
| Distribution | | | 349,358 | | | 359,269 | | | 361,801 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,202,595 | | $ | 1,127,751 | | $ | 1,033,693 | |
| | |
|
| |
|
| |
|
| |
Publishing revenue is derived from the sale of internally developed interactive software titles or from the sale of titles developed by and/or 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 revenues by product platforms for the years ended October 31, 2005, 2004 and 2003 is presented below:
| | | 2005 | | 2004 | | 2003 | |
| | |
|
| |
|
| |
|
| |
| Platforms: | | | | | | | | | | |
| Sony PlayStation 2 | | $ | 573,884 | | $ | 639,625 | | $ | 591,205 | |
| Sony PSP | | | 60,514 | | | –– | | | –– | |
| Sony PlayStation | | | 5,332 | | | 24,244 | | | 58,334 | |
| Microsoft Xbox | | | 204,535 | | | 222,165 | | | 84,112 | |
| PC | | | 145,435 | | | 69,653 | | | 147,275 | |
| Nintendo Game Boy Color, Game Boy Advance, DS and N64 | | | 74,476 | | | 72,130 | | | 48,547 | |
| Nintendo GameCube | | | 30,287 | | | 39,732 | | | 29,085 | |
| Hardware | | | 62,465 | | | 35,691 | | | 54,861 | |
| Accessories and other | | | 45,667 | | | 24,511 | | | 20,274 | |
| | |
|
| |
|
| |
|
| |
| Total | | $ | 1,202,595 | | $ | 1,127,751 | | $ | 1,033,693 | |
| | |
|
| |
|
| |
|
| |
For the years ended October 31, 2005, 2004 and 2003, the Company’s five largest customers accounted for 40.7%, 38.9% and 38.6% of net revenues, respectively. For the years ended October 31, 2005, 2004 and 2003, one customer accounted for $178,717, $117,236 and $117,636 or 14.9%, 10.4% and 11.4% of net revenues, respectively.
21. SUBSEQUENT EVENT
In November 2005, the Company acquired all of the outstanding capital stock of Firaxis Games, Inc. (“Firaxis”), a developer of PC and strategy titles, including the Civilization franchise. The purchase price consisted of $12,500 of restricted common stock and $857 in cash paid at closing, approximately $2,100 of development advances previously paid to Firaxis and $11,250 of contingent consideration which is payable based on future product sales. The Company currently in the process of performing a valuation of certain intangible assets acquired.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
22. SUPPLEMENTARY FINANCIAL INFORMATION
The following table provides details of the Company’s valuation and qualifying accounts. In 2003 and 2002, this information was provided in Schedule II to the Company’s annual report on Form 10-K.
| | | Additions(1) | | | | | | | | | | |
| | |
| | | | | | | | | | |
| Description | | Balance at
Beginning of Period | | Revenue
Reduction(2) | | Expenses and
Other Costs | | Deductions (3) | | Other (4) | | Balance at
End of Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Year Ended October 31, 2005 | | | | | | | | | | | | | | | | | | | |
| Sales returns, price protection and other allowances | | $ | 67,287 | | $ | 146,134 | | $ | 2,229 | | $ | (148,447 | ) | $ | (1,418 | ) | $ | 65,785 | |
| Allowance for doubtful accounts | | | 4,928 | | | –– | | | (674 | ) | | –– | | | (135 | ) | | 4,119 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | 72,215 | | | 146,134 | | | 1,555 | | | (148,447 | ) | | (1,553 | ) | | 69,904 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Year Ended October 31, 2004 | | | | | | | | | | | | | | | | | | | |
| Sales returns, price protection and other allowances | | $ | 58,511 | | $ | 174,855 | | $ | 1,678 | | $ | (175,130 | ) | $ | 7,373 | | $ | 67,287 | |
| Allowances for doubtful accounts | | | 4,306 | | | –– | | | 4,522 | | | (3,995 | ) | | 95 | | | 4,928 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | 62,817 | | | 174,855 | | | 6,200 | | | (179,125 | ) | | 7,468 | | | 72,215 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| Year Ended October 31, 2003 | | | | | | | | | | | | | | | | | | | |
| Sales returns, price protection and other allowances | | $ | 27,269 | | $ | 119,019 | | $ | 1,310 | | $ | (91,350 | ) | $ | 2,263 | | $ | 58,511 | |
| Allowances for doubtful accounts | | | 3,537 | | | –– | | | 4,322 | | | (3,587 | ) | | 34 | | | 4,306 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| | | | 30,806 | | | 119,019 | | | 5,632 | | | (94,937 | ) | | 2,297 | | | 62,817 | |
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| (1) | Includes increases in allowance for sales returns and doubtful accounts due to normal reserving terms. |
| (2) | Includes price concessions of $30,412, $52,827 and $45,919; returns of $70,237, $65,435 and $47,342; other sales allowances including rebates, discounts and cooperative advertising of $38,749, $56,593 and $25,758 for the years ended October 31, 2005, 2004 and 2003, respectively. |
| (3) | Includes actual write-offs of uncollectible accounts receivable, sales returns and price protection and recoveries of previously written off receivables. |
| (4) | Amounts primarily reflect the impact of foreign exchange in the years ended October 31, 2005, 2004 in 2003, respectively. |
23. 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, 2005.
| | | 1st | | 2nd | | 3rd | | 4th | |
| 2005 | | Quarter | | Quarter | | Quarter(3) | | Quarter(2)(3) | |
| | |
|
| |
|
| |
|
| |
|
| |
| Net revenues | | $ | 502,474 | | $ | 222,068 | | $ | 169,899 | | $ | 308,154 | |
| Gross profit | | | 180,575 | | | 71,846 | | | 47,720 | | | 116,456 | |
| Net income (loss) | | $ | 55,249 | | $ | (8,186 | ) | $ | (28,780 | ) | $ | 19,192 | |
| Per share data: | | | | | | | | | | | | | |
| Basic – EPS(1) | | $ | 0.81 | | $ | (0.12 | ) | $ | (0.41 | ) | $ | 0.27 | |
| Diluted – EPS(1) | | $ | 0.79 | | $ | (0.12 | ) | $ | (0.41 | ) | $ | 0.27 | |
| | | | | | | | | | | | | | |
| 2004 | | | | | | | | | | | | | |
| Net revenues | | $ | 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(1) | | $ | 0.48 | | $ | (0.22 | ) | $ | (0.21 | ) | $ | 0.93 | |
| Diluted – EPS(1) | | $ | 0.47 | | $ | (0.22 | ) | $ | (0.21 | ) | $ | 0.91 | |
| | | | | | | | | | | | | |
| (1) | 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 2005 and 2004 may not equal full year basic and diluted EPS. Basic and diluted EPS for each quarter of 2005 and 2004 is |
79
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts) |
|
| | 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. |
| | |
| (2) | In 2005, in connection with an SEC settlement, the Company paid a $7.5 million civil penalty, which the Company accrued for and expensed in the fourth quarter of 2004. |
| | |
| (3) | In the 3rd quarter 2005, net revenues and gross profit were reduced by estimated provisions of approximately $32.6 million and $29.6 million, respectively, primarily due to additional product returns and processing costs as a result of the re-rating of Grand Theft Auto: San Andreas by the Entertainment Software Rating Board (“ESRB”) in July 2005. In the 4th quarter 2005, the provisions were reduced due to better than expected sell-through of the product and lower processing costs which increased 4th quarter net revenues and gross profit by $8.2 million and $7.8 million, respectively. |
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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, on this day of January 30, 2006.
| | TAKE-TWO INTERACTIVE SOFTWARE, INC. |
| | | |
| | By: | /s/ Paul Eibeler |
| | |
|
| | | Paul Eibeler |
| | | Chief Executive Officer and President |
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/ Paul Eibeler | | Chief Executive Officer and President | | January 30, 2006 |
| | (Principal Executive Officer) | | |
| Paul Eibeler | | | | |
| | | | | |
| /s/ Karl H. Winters | | Chief Financial Officer (Principal | | January 30, 2006 |
| | Financial and Accounting Officer) | | |
| Karl H. Winters | | | | |
| | | | | |
| /s/ Robert Flug | | Director | | January 30, 2006 |
| | | | |
| Robert Flug | | | | |
| | | | | |
| /s/ Steven Tisch | | Director | | January 30, 2006 |
| | | | |
| Steven Tisch | | | | |
| | | | | |
| /s/ Oliver R. Grace, Jr. | | Director | | January 30, 2006 |
| | | | |
| Oliver R. Grace, Jr. | | | | |
| | | | | |
| /s/ Todd Emmel | | Director | | January 30, 2006 |
| | | | |
| Todd Emmel | | | | |
| | | | | |
| /s/ Mark Lewis | | Director | | January 30, 2006 |
| | | | |
| Mark Lewis | | | | |
| | | | | |
| /s/ Michael J. Malone | | Director | | January 30, 2006 |
| | | | |
| Michael J. Malone | | | | |
81
Annual Report Pursuant to Section 13 or 15(d) of the Securities
Transition Report Pursuant to Section 13 or 15(d) of the Securities