TAKE TWO INTERACTIVE SOFTWARE INC - 10-Q Quarterly Report

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF l934.

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

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes

As of March 10, 2004, there were 44,601,412 shares of the Registrant’s Common Stock outstanding.

TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED JANUARY 31, 2004


INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Condensed Balance Sheets – As of January 31, 2004 and October 31, 2003 (unaudited)	1

	Consolidated Condensed Statements of Operations – For the three months ended January 31, 2004 and 2003 (Restated) (unaudited)	2

	Consolidated Condensed Statements of Cash Flows – For the three months ended January 31, 2004 and 2003 (Restated) (unaudited)	3

	Consolidated Condensed Statements of Stockholders’ Equity – For the year ended October 31, 2003 and the three months ended January 31, 2004 (unaudited)	5

	Notes to Unaudited Consolidated Condensed Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative & Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 2.	Changes in Securities	38

Item 4.	Submission of Matters to a Vote of Security Holders	38

Item 5.	Other Information	38

Item 6.	Exhibits and Reports on Form 8-K	38

	Signatures	39

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PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of January 31, 2004 and October 31, 2003 (unaudited)
(In thousands, except share data)

	January 31, 2004			October 31, 2003

ASSETS
Current assets
Cash and cash equivalents	$	254,153		$	183,477
Accounts receivable, net of allowances of $82,675 and $62,817 at January 31, 2004 and October 31, 2003, respectively		145,464			166,536
Inventories		110,879			101,748
Prepaid royalties		16,707			12,196
Prepaid expenses and other current assets		30,732			41,112
Deferred tax asset		8,333			8,333

Total current assets		566,268			513,402

Fixed assets, net		23,839			22,260
Prepaid royalties		7,023			8,439
Capitalized software development costs, net		16,282			16,336
Goodwill, net		119,619			101,498
Intangibles, net		39,482			44,836
Other assets, net		489			527

Total assets	$	773,002		$	707,298


LIABILITIES and STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable	$	107,935		$	106,172
Accrued expenses and other current liabilities		67,199			56,707
Income taxes payable		10,841			2,265
Current portion of capital lease obligation		112			103

Total current liabilities		186,087			165,247
Capital lease obligation, net of current portion		56			73
Deferred tax liability		8,486			8,486

Total liabilities		194,629			173,806

Stockholders’ equity
Common stock, par value $.01 per share; 100,000,000 shares authorized; 44,580,156 and 44,227,215 shares issued and outstanding, at January 31, 2004 and October 31, 2003, respectively		446			442
Additional paid-in capital		359,158			350,852
Deferred compensation		(1,057	)		(1,890	)
Retained earnings		216,782			185,024
Accumulated other comprehensive income (loss)		3,044			(936	)

Total Stockholders’ Equity		578,373			533,492

Total Liabilities and Stockholders’ Equity	$	773,002		$	707,298

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the three months ended January 31, 2004 and 2003 (unaudited)
(In thousands, except per share data)

	Three months ended January 31,
	2004		2003

			(Restated)

Net sales	$	375,512	$	411,008

Cost of sales
Product costs		224,378		204,428
Royalties		19,998		37,282
Software development costs		3,982		3,351

Total cost of sales		248,358		245,061

Gross profit		127,154		165,947

Operating expenses
Selling and marketing		35,902		34,454
General and administrative		24,040		31,359
Research and development		13,429		5,615
Depreciation and amortization		3,745		7,562

Total operating expenses		77,116		78,990

Income from operations		50,038		86,957

Interest income, net		426		345
Gain on Internet investments		—		39

Total non-operating income		426		384

Income before income taxes		50,464		87,341

Provision for income taxes		18,706		35,806

Net income	$	31,758	$	51,535

Per share data:
Basic:
Weighted average common shares outstanding		44,386		40,786

Net income per share	$	0.72	$	1.26

Diluted:
Weighted average common shares outstanding		45,421		42,202

Net income per share	$	0.70	$	1.22

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the three months ended January 31, 2004 and 2003 (unaudited)
(In thousands)

	Three months ended January 31,
	2004			2003

				(Restated)
Cash flows from operating activities:
Net income	$	31,758		$	51,535
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,745			3,155
Gain on disposal of fixed assets and sale of Internet investments		—			(45	)
Amortization of intangible assets and other		11,627			1,183
Impairment of intellectual property and technology		—			7,892
Non-cash charges for consolidation of distribution facilities		—			5,406
Provision for doubtful accounts, returns and sales allowances		14,816			19,189
Write off of prepaid royalties and capitalized software		1,300			6,712
Tax benefit from exercise of stock options		717			1,447
Foreign currency transaction (gain) loss		(10	)		1,011
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable		13,501			(30,034	)
Increase in inventories		(8,268	)		(1,637	)
Increase in prepaid royalties		(2,557	)		(1,917	)
Decrease (increase) in prepaid expenses and other current assets		8,765			(308	)
Decrease (increase) in capitalized software development costs		310			(116	)
Increase in other non-current assets		(7	)		—
Increase (decrease) in accounts payable		6,160			(26,115	)
(Decrease) increase in accrued expenses and other current liabilities		(5,037	)		28,470
Increase in income taxes payable		11,076			15,740

Net cash provided by operating activities		87,896			81,568

Cash flows from investing activities:
Purchase of fixed assets		(2,947	)		(3,691	)
Payments for intangible assets		(3,100	)		—
Acquisitions, net of cash acquired		(16,032	)		(27,295	)

Net cash used in investing activities		(22,079	)		(30,986	)

Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		2,433			4,777
Other financing		(26	)		(25	)

Net cash provided by financing activities		2,407			4,752

Effect of foreign exchange rates		2,452			382

Net increase in cash for the period		70,676			55,716

Cash and cash equivalents, beginning of the period		183,477			108,369

Cash and cash equivalents, end of the period	$	254,153		$	164,085

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (continued)
For the three months ended January 31, 2004 and 2003 (unaudited)
(In thousands)

	Three months ended January 31,
	2004			2003

Supplemental information on businesses acquired:
Fair value of assets acquired
Cash	$	766		$	1,275
Other current assets		2,124			438
Property and equipment, net		702			481
Intangible assets		6,326			4,720
Goodwill		18,121			35,951
Less, liabilities assumed
Current liabilities		(14,132	)		(1,865	)
Stock issued		(5,160	)		(6,557	)
Intercompany payables and advances		8,051			(5,931	)

Cash paid		16,798			28,512
Less cash acquired		(766	)		(1,275	)

Net cash paid	$	16,032		$	27,237

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Stockholders’ Equity
For the year ended October 31, 2003 and the three months ended January 31, 2004 (unaudited)
(In thousands)

	Common Stock
												Accumulated
	Shares		Amount		Additional Paid-in Capital		Deferred Compensation			Retained Earnings		Other Comprehensive Income (Loss)			Total

Balance, November 1, 2002		40,362		$404		$273,502		$ (227	)		$86,906		$(5,041	)		$ 355,544

Foreign currency translation adjustment		—		—		—		—			—		4,119			4,119
Net unrealized loss on investment, net of taxes of $9		—		—		—		—			—		(14	)		(14	)
N

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)