TAKE TWO INTERACTIVE SOFTWARE INC - 10-Q Quarterly Report

PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of July 31, 2002 and October 31, 2001 (unaudited)
(In thousands, except share data)

	July 31, 2002			October 31, 2001

ASSETS
Current assets
Cash and cash equivalents	$	73,898		$	6,056
Accounts receivable, net of provision for doubtful accounts and sales allowances of $26,595 and $26,106 at July 31, 2002 and October 31, 2001, respectively		64,759			94,950
Inventories, net		49,591			61,937
Prepaid royalties		18,100			21,892
Prepaid expenses and other current assets		21,195			17,925
Investments		448			6,241
Deferred tax asset		17,790			13,873

Total current assets		245,781			222,874

Fixed assets, net		15,091			11,033
Prepaid royalties		12,962			11,097
Capitalized software development costs, net		9,994			9,739
Investments		62			75
Goodwill, net		56,033			56,033
Intangibles, net		58,594			34,337
Deferred tax asset		7,892			7,892
Other assets, net		—			1,917

Total assets	$	406,409		$	354,997

LIABILITIES and STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	47,976		$	60,223
Accrued expenses and other current liabilities		37,005			20,250
Income taxes payable		11,268			—
Lines of credit, current portion		—			54,073
Current portion of capital lease obligation		92			99

Total current liabilities		96,341			134,645

Capital lease obligation, net of current portion		229			291

Total liabilities		96,570			134,936

Stockholders’ equity
Common stock, par value $.01 per share; 50,000,000 shares authorized; 39,019,760 and 36,640,972 shares issued and outstanding		390			366
Additional paid-in capital		251,346			213,908
Deferred compensation		(455	)		—
Retained earnings		65,471			16,239
Accumulated other comprehensive loss		(6,913	)		(10,452	)

Total Stockholders’ Equity		309,839			220,061

Total Liabilities and Stockholders’ Equity	$	406,409		$	354,997

The accompanying notes are an integral part of the unaudited consolidated condensed financial statements.

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the three and nine months ended July 31, 2002 and 2001 (unaudited)
(In thousands, except per share data)

	Three months ended July 31						Nine months ended July 31

	2002			2001			2002			2001

Net sales	$	122,461		$	81,327		$	575,717		$	327,097

Cost of sales
Product costs (includes impairment charge on Internet gaming assets of $3,397 in nine months 2001 period)		62,209			44,568			302,807			194,514
Royalties		12,245			4,181			53,894			13,561
Capitalized software development costs (includes impairment charge on Internet gaming assets of $389 in nine months 2001 period)		2,125			863			6,018			3,193

Total cost of sales		76,579			49,612			362,719			211,268

Gross profit		45,882			31,715			212,998			115,829

Operating expenses
Selling and marketing (includes impairment charge on Internet gaming assets of $401 in nine months 2001 period)		15,912			12,057			58,429			36,186
General and administrative		17,390			11,297			55,311			30,915
Research and development		1,812			1,984			7,703			4,985
Depreciation and amortization		2,899			3,270			7,687			9,230

Total operating expenses		38,013			28,608			129,130			81,316

Income from operations		7,869			3,107			83,868			34,513

Interest (income) expense, net		(299	)		1,964			728			7,249
Gain on sale of subsidiary		—			(651	)		—			(651	)
(Gain) loss on Internet investments		—			—			(159	)		20,754
Class action settlement costs		—			—			1,468			—

Total non-operating (income) expenses		(299	)		1,313			2,037			27,352

Income before income taxes, extraordinary loss and cumulative effect of change in accounting principle		8,168			1,794			81,831			7,161

Provision for income taxes		3,402			511			32,599			3,776

Income before extraordinary loss and cumulative effect of change in accounting principle		4,766			1,283			49,232			3,385
Extraordinary loss on early extinguishment of debt, net of taxes of $1,217		—			1,948			—			1,948
Cumulative effect of change in accounting principle, net of taxes of $3,558					—			—			5,337

Net income (loss)	$	4,766		$	(665	)	$	49,232		$	(3,900	)

The accompanying notes are an integral part of the unaudited consolidated condensed financial statements.

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations (continued)
For the three and nine months ended July 31, 2002 and 2001 (unaudited)
(In thousands, except per share data)

	Three months ended July 31					Nine months ended July 31

		2002		2001			2002		2001

Per share data:
Basic:
Weighted average common shares outstanding		38,705		34,293			37,500		33,098

Income before extraordinary loss and cumulative effect of change in accounting principle per share	$	0.12	$	0.04		$	1.31	$	0.10
Extraordinary loss per share		—		(0.06	)		—		(0.06	)
Cumulative effect of change in accounting principle per share		—		—			—		(0.16	)

Net income (loss) per share – Basic	$	0.12	$	(0.02	)	$	1.31	$	(0.12	)

Diluted:
Weighted average common shares outstanding		40,231		35,769			38,947		34,285

Income before extraordinary loss and cumulative effect of change in accounting principle per share	$	0.12	$	0.03		$	1.26	$	0.09
Extraordinary loss per share		—		(0.05	)		—		(0.05	)
Cumulative effect of change in accounting principle per share		—		—			—		(0.16	)

Net income (loss) per share – Diluted	$	0.12	$	(0.02	)	$	1.26	$	(0.12	)

The accompanying notes are an integral part of the unaudited consolidated condensed financial statements.

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the nine months ended July 31, 2002 and 2001 (unaudited)
(In thousands)

	Nine months ended July 31

	2002			2001

Cash flows from operating activities:
Net income (loss)	$	49,232		$	(3,900	)
Adjustment to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		7,687			9,230
Loss on disposal of fixed assets		122			172
Gain on sale of subsidiary		—			(651	)
(Gain) loss on Internet investments		(159	)		20,754
Impairment charge on Internet assets		—			4,187
Extraordinary loss on early extinguishment of debt, net of taxes		—			1,948
Change in deferred tax asset		(3,917	)		(7,679	)
Pro

Delaware	51-0350842
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Condensed Balance Sheets - As of July 31, 2002 and October 31, 2001 (unaudited)	1

	Consolidated Condensed Statements of Operations - For the three and nine months ended July 31, 2002 and 2001 (unaudited)	2

	Consolidated Condensed Statements of Cash Flows - For the nine months ended July 31, 2002 and 2001 (unaudited)	4

	Consolidated Condensed Statements of Stockholders' Equity - For the year ended October 31, 2001 and the nine months ended July 31, 2002 (unaudited)	6

	Notes to Unaudited Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative & Qualitative Disclosures About Market Risk	39

Item 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 2.	Changes in Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	41

Item 5.	Other Information	41

Item 6.	Exhibits and Reports on Form 8-K	41

	Signatures	42

	Certification of Principal Executive Officer	43

	Certification of Principal Financial Officer	44