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UNITED STATES
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 l934.

For the quarterly period ended July 31, 2004

Commission file number 0-29230

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

 Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
51-0350842
  (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 Exchange Act). Yes   No

As of September 7, 2004, there were 45,128,703 shares of the Registrant’s Common Stock outstanding.

 

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

INDEX

PART I. FINANCIAL INFORMATION
 
   
 
Item 1. Financial Statements
Consolidated Condensed Balance Sheets – As of July 31, 2004 and October 31, 2003 (unaudited)
   
 
Consolidated Condensed Statements of Operations – For the three and nine months ended July 31, 2004 and 2003 (Restated) (unaudited)
   
 
Consolidated Condensed Statements of Cash Flows – For the nine months ended July 31, 2004 and 2003 (Restated) (unaudited)
 
 
Consolidated Condensed Statements of Stockholders’ Equity - For the year ended October 31, 2003 and the nine months ended July 31, 2004 (unaudited)
   
 
Notes to Unaudited Consolidated Condensed Financial Statements
   
 
Item 2. Management’s Discussion and Analysis of Financial Condition
 
and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
   
 
Item 4. Controls and Procedures
   
 
PART II. OTHER INFORMATION
 
   
 
Item 1. Legal Proceedings
   
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
   
 
Item 4. Submission of Matters to a Vote of Security Holders
   
 
Item 6. Exhibits and Reports on Form 8-K
   
 
  Signatures

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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 July 31, 2004 and October 31, 2003 (unaudited)
(In thousands, except share data)

     
July 31,
2004
  
October 31,
2003
  
     
 
 
ASSETS              
Current assets              
  Cash and cash equivalents   $ 197,951   $ 183,477  
 
Accounts receivable, net of allowances of $51,970 and $62,817 at July 31, 2004 and October 31, 2003, respectively
     79,486     166,536  
  Inventories, net     96,882     101,748  
  Prepaid royalties     40,602     12,196  
  Prepaid expenses and other current assets     56,909     41,112  
  Deferred tax asset     8,333     8,333  
     
 
 
 
Total current assets
     480,163     513,402  
     
   
 
  Fixed assets, net     30,589     22,260  
  Prepaid royalties     3,333     8,439  
  Capitalized software development costs, net     25,792     16,336  
  Goodwill     123,703     101,498  
  Intangibles, net     33,586     44,836  
  Other assets, net     413     527  
     
 
 
 
Total assets
  $ 697,579   $ 707,298  
     
   
 
LIABILITIES and STOCKHOLDERS’ EQUITY              
                 
Current liabilities              
  Accounts payable   $ 63,275   $ 106,172  
  Accrued expenses and other current liabilities     65,857     56,883  
  Income taxes payable     167     2,265  
     
 
 
 
Total current liabilities
     129,299     165,320  
Deferred tax liability     8,486     8,486  
     
 
 
 
Total liabilities
     137,785     173,806  
     
 
 
Stockholders’ equity              
 
Common stock, par value $.01 per share; 100,000,000 shares authorized; 45,048,528 and 44,227,215 shares issued and outstanding at July 31, 2004 and October 31, 2003, respectively
     450     442  
  Additional paid-in capital     372,034     350,852  
  Deferred compensation     (2,644 )   (1,890 )
  Retained earnings     187,771     185,024  
  Accumulated other comprehensive income (loss)     2,183     (936 )
     
 
 
 
Total Stockholders’ Equity
     559,794     533,492  
     
 
 
 
Total Liabilities and Stockholders’ Equity
   $ 697,579   $ 707,298  
     
 
 

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

1

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

     
Three months ended
July 31,
Nine months ended
July 31,
   
 
     
2004
2003
2004
2003
   
 
 
 
 
     
 
(Restated)
 
(Restated)
                           
Net sales $ 160,858   $ 152,055   $ 689,738   $ 756,086  
   
 
 
 
 
Cost of sales                        
  Product costs   101,156     81,642     430,107     384,984  
  Royalties   14,600     10,052     47,614     66,595  
  Software development costs   2,242     1,842     7,797     8,558  
   
 
 
 
 
 
Total cost of sales
   117,998     93,536     485,518     460,137  
   
 
 
   
 
 
Gross profit
   42,860     58,519     204,220     295,949  
   
 
 
 
 
Operating expenses                        
  Selling and marketing   24,677     20,013     82,850     76,928  
  General and administrative   24,685     19,372     72,775     67,701  
  Research and development   10,529     7,043     32,186     17,419  
  Depreciation and amortization   4,327     2,930     11,982     13,689  
   
 
 
 
 
 
Total operating expenses
  64,218     49,358     199,793     175,737  
   
 
 
 
 
 
Income (loss) from operations
   (21,358 )   9,161     4,427     120,212  
   
 
 
 
 
 
Interest income, net
   530     625     1,604     1,713  
 
Gain on Internet investments
   —     —     —     39  
   
 
 
 
 
 
Total non-operating income
   530     625     1,604     1,752  
   
 
 
 
 
 
Income (loss) before income taxes
   (20,828 )   9,786     6,031     121,964  
                           
Provision (benefit) for income taxes   (6,393 )   4,090     3,284     50,110  
   
 
 
 
 
 
Net income (loss)
 $ (14,435 ) $ 5,696   $ 2,747   $ 71,854  
   
 
 
 
 
Per share data:                        
  Basic:                        
 
Weighted average common shares outstanding
  44,840     42,266     44,615     41,424  
   
 
 
 
 
 
Net income (loss) per share
$ (0.32 ) $ 0.13   $ 0.06   $ 1.73  
   
 
 
 
 
  Diluted:                        
 
Weighted average common shares outstanding
  44,840     43,548     45,554     42,701  
   
 
 
 
 
 
Net income (loss) per share
$ (0.32 ) $ 0.13   $ 0.06   $ 1.68  
   
 
 
 
 

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

2

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

       
Nine months ended July 31,
       
2004
2003
         
   
 
       
 
(Restated)
Cash flows from operating activities:            
  Net income $ 2,747   $ 71,854  
  Adjustment to reconcile net income to net cash provided by operating activities:            
    Depreciation and amortization   11,982     9,281  
    Gain on disposal of fixed assets and sale of Internet investments   (619 )   (95 )
    Amortization of intangible assets and other   15,142     5,741  
    Impairment of intellectual property and technology   —     7,892  
    Non-cash charges for consolidation of distribution facilities   —     5,474  
    Provision for doubtful accounts, returns and sales allowances   94,194     82,421  
    Write off of prepaid royalties and capitalized software   2,404     6,712  
    Tax benefit from exercise of stock options   1,820     11,931  
    Compensatory stock and stock options   1,938     2,173  
    Foreign currency transaction loss (gain)   1,344     (88 )
  Changes in operating assets and liabilities, net of effects of acquisitions:            
      Decrease (increase) in accounts receivable   1,015     (34,216 )
      Decrease in inventories   5,320     1,798  
      Increase in prepaid royalties   (23,827 )   (12,038 )
      Increase in prepaid expenses and other current assets   (11,448 )   (8,149 )
      Increase in capitalized software development costs   (8,899 )   (3,113 )
      Decrease in accounts payable   (38,132 )   (30,300 )
      Decrease in accrued expenses and other current liabilities   (12,870 )   (7,537 )
      (Decrease) increase in income taxes payable   (764 )   14,767  
       
 
 
     
Net cash provided by operating activities
   41,347     124,508  
       
 
 
Cash flows from investing activities:            
  Purchase of fixed assets   (16,368 )   (11,359 )
  Proceeds from sale of fixed assets and investments   871     114  
  Payments for intangible assets   (3,500 )   —  
  Acquisitions, net of cash acquired   (19,654 )   (27,966 )
  Other   —     (490 )
       
 
 
     
Net cash used in investing activities
  (38,651 )   (39,701 )
       
 
 
Cash flows from financing activities:            
  Proceeds from exercise of stock options and warrants   11,518     30,341  
  Other financing   (83 )   (280 )
   
 
 
     
Net cash provided by financing activities
  11,435     30,061  
       
 
 
Effect of foreign exchange rates   343     2,622  
 
 
 
     
Net increase in cash for the period
  14,474     117,490  
Cash and cash equivalents, beginning of the period   183,477     108,369  
 
 
 
Cash and cash equivalents, end of the period $ 197,951   $ 225,859  
 
 
 

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

3

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

       Nine months ended July 31,     
       
2004
2003
  
     
 
 
Supplemental information on businesses acquired:            
  Fair value of assets acquired            
    Cash $ 800   $ 1,284  
    Other current assets   2,148     437  
    Property and equipment, net   761     507  
    Intangible assets   6,423     4,720  
    Goodwill   22,205     38,683  
  Less, liabilities assumed            
    Current liabilities   (13,864 )   (3,574 )
    Stock issued   (5,160 )   (6,557 )
    Intercompany payables and advances   7,141     (6,250 )
     
 
 
Cash paid   20,454     29,250  
Less cash acquired   (800 )   (1,284 )
     
 
 
Net cash paid $ 19,654   $ 27,966  
     
 
 

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

4

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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 nine months ended July 31, 2004 (unaudited)
(In thousands)

   
Common Stock
                                
 
                               
 

Shares

Amount
Additional
Paid-in Capital
Deferred
Compen-sation
Retained
Earnings
Accumulated
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 )
Net income