TAKE TWO INTERACTIVE SOFTWARE INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended January 31, 2003

Commission file number 0-29230

TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)

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

622 Broadway, New York, New York 10012
(Address of principal executive offices including zip code)

Registrant’s Telephone Number, Including Area Code (646) 536-2842

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No

As of March 11, 2003, there were 41,301,411 shares of the Registrant’s Common Stock outstanding.

TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED JULY 31, 2002

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Condensed Balance Sheets - As of January 31, 2003 and October 31, 2002 (unaudited)	1

	Consolidated Condensed Statements of Operations - For the three months ended January 31, 2003 and 2002 (unaudited)	2

	Consolidated Condensed Statements of Cash Flows - For the three months ended January 31, 2003 and 2002 (unaudited)	3

	Consolidated Condensed Statements of Stockholders’ Equity - For the year ended October 31, 2002 and the three months ended January 31, 2003 (unaudited)	5

	Notes to Unaudited Consolidated Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative & Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	31

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 2.	Changes in Securities	32

Item 5.	Other Information	32

Item 6.	Exhibits and Reports on Form 8-K	32

	Signatures	33

	Certification of Principal Executive Officer	34

	Certification of Principal Financial Officer	35

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of January 31, 2003 and October 31, 2002 (unaudited)
(In thousands, except share data)

	January 31, 2003			October 31, 2002

ASSETS
Current assets
Cash and cash equivalents	$	164,085		$	108,369
Accounts receivable, net of provision for doubtful accounts, returns and sales allowances of $45,559 and $27,941 at January 31, 2003 and October 31, 2002, respectively		120,779			108,441
Inventories		76,604			74,391
Prepaid royalties		10,040			13,723
Prepaid expenses and other current assets		16,845			19,569
Deferred tax asset		5,392			5,392

Total current assets		393,745			329,885


Fixed assets, net		16,707			15,319
Prepaid royalties		4,435			12,203
Capitalized software development costs, net		10,628			10,385
Investments		—			97
Goodwill, net		97,538			61,529
Intangibles, net		45,873			55,293
Deferred tax asset		7,983			7,983
Other assets, net		228			266

Total assets	$	577,137		$	492,960

LIABILITIES and STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable	$	55,997		$	79,660
Accrued expenses and other current liabilities		76,561			51,074
Income taxes payable		17,751			1,603
Current portion of capital lease obligation		97			95

Total current liabilities		150,406			132,432

Capital lease obligation, net of current portion		174			201
Deferred tax liability		3,885			3,885

Total liabilities		154,465			136,518


Stockholders’ equity
Common stock, par value $.01 per share; 50,000,000 shares authorized; 40,964,890 and 40,361,739 shares issued and outstanding, respectively		410			404
Additional paid-in capital		286,277			273,502
Deferred compensation		—			(227	)
Retained earnings		138,266			87,804
Accumulated other comprehensive loss		(2,281	)		(5,041	)

Total Stockholders’ Equity		422,672			356,442

Total Liabilities and Stockholders’ Equity	$	577,137		$	492,960

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 months ended January 31, 2003 and 2002 (unaudited)
(In thousands, except per share data)

		Three months ended January 31,

	2003			2002

Net sales	$	408,794		$	282,926

Cost of sales
Product costs		204,428			156,700
Royalties		36,888			20,168
Software development costs		3,351			2,955

Total cost of sales		244,667			179,823

Gross profit		164,127			103,103

Operating expenses
Selling and marketing		34,454			21,995
General and administrative		31,359			18,997
Research and development		5,615			1,954
Depreciation and amortization		7,562			1,913

Total operating expenses		78,990			44,859

Income from operations		85,137			58,244

Interest (income) expense, net		(345	)		974
Gain on Internet investments		(39	)		(127	)

Total non-operating (income) expenses		(384	)		847

Income before income taxes		85,521			57,397
Provision for income taxes		35,059			22,568

Net income	$	50,462		$	34,829

Per share data:
Basic:
Weighted average common shares outstanding		40,786			36,724

Net income per share	$	1.24		$	0.95

Diluted:
Weighted average common shares outstanding		42,202			37,896

Net income per share	$	1.20		$	0.92

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 three months ended January 31, 2003 and 2002 (unaudited)
(In thousands)

	Three months ended January 31,

	2003			2002

Cash flows from operating activities:
Net income	$	50,462		$	34,829
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,155			1,913
(Gain) loss on disposal of fixed assets		(6	)		122
Gain on sale of Internet investments		(39	)		(127	)
Provision for doubtful accounts, returns and sales allowances		14,254			9,672
Amortization of various expenses and discounts		1,183			1,107
Impairment of intellectual property and technology		7,892			—
Non-cash charges for consolidation of distribution facilities		5,406			—
Write off of prepaid royalties and capitalized software		6,712			740
Tax benefit from exercise of stock options		1,447			185
Foreign currency transaction loss		1,011			152
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(27,820	)		(37,423	)
(Increase) decrease in inventories		(1,637	)		10,133
(Increase) decrease in prepaid royalties		(2,311	)		2,428
Increase in prepaid expenses and other current assets		(642	)		(940	)
Decrease (increase) in capitalized software development costs		(116	)		3,004
Decrease in other non-current assets		—			1,236
(Decrease) increase in accounts payable		(26,115	)		12,997
Increase in accrued expenses and other current liabilities		33,405			14,815
Increase in income taxes payable		15,327			21,341

Net cash provided by operating activities		81,568			76,184

Cash flows from investing activities:
Purchase of fixed assets		(3,691	)		(3,279	)
Proceeds from sale of investments		—			5,817
Acquisitions, net of cash acquired		(27,225	)		—
Direct transaction costs, current and prior year acquisitions		(70	)		—

Net cash (used in) provided by investing activities		(30,986	)		2,538

Cash flows from financing activities:
Net repayments under lines of credit		—			(54,073	)
Proceeds from exercise of stock options and warrants		4,777			1,989
Repayment of capital lease obligation		(25	)		(23	)

Net cash provided by (used in) financing activities		4,752			(52,107	)

Effect of foreign exchange rates		382			(1,699	)

Net increase in cash for the period		55,716			24,916
Cash and cash equivalents, beginning of the period		108,369			6,056

Cash and cash equivalents, end of the period	$	164,085		$	30,972

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 (continued)
For the three months ended January 31, 2003 and 2002 (unaudited)
(In thousands)

	Three months ended January 31,

		2003			2002

Supplemental information on intangibles and businesses acquired:
Fair value of assets acquired
Cash	$	1,275		$	—
Other current assets		438			—
Property and equipment, net		481			—
Intangible assets		4,720			—
Goodwill		35,951			—
Less, liabilities assumed
Current liabilities		(1,865)			—
Stock and other consideration		(12,488	)		—
Direct transaction costs		(12	)		—

Cash paid		28,500			—
Less cash acquired		(1,275	)		—

Net cash paid	$	27,225		$	—

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 Stockholders’ Equity
For the year ended October 31, 2002 and the three months ended January 31, 2003 (unaudited)
(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	$	—	$	16,239	$	(10,452	)	$	220,061
Foreign currency translation adjustment		—		—		—		—		—		5,553			5,553
Net unrealized income on investments, net of taxes		—