TAKE TWO INTERACTIVE SOFTWARE INC - 10-Q Quarterly Report

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 January 31, 2005

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 Exchange Act). Yes No

As of March 7, 2005, there were 46,828,283 shares of the Registrant’s Common Stock outstanding.

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INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets – As of January 31, 2005 and October 31, 2004 (unaudited)	1

	Consolidated Condensed Statements of Operations – For the three months ended January 31, 2005 and 2004 (unaudited)	2

	Consolidated Condensed Statements of Cash Flows – For the three months ended January 31, 2005 and 2004 (unaudited)	3

	Consolidated Condensed Statements of Stockholders’ Equity – For the year ended October 31, 2004 and the three months ended January 31, 2005 (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 and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	34

Item 6.	Exhibits	34

	Signatures	35

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets (Unaudited)
As of January 31, 2005 and October 31, 2004
(In thousands, except share data)

			January 31, 2005			October 31, 2004
ASSETS
	Current assets
		Cash and cash equivalents	$	303,070		$	155,095
		Accounts receivable, net of allowances of $79,796 and $72,215 at January 31, 2005 and October 31, 2004, respectively		136,515			285,709
		Inventories, net		134,103			154,345
		Software development costs		34,827			33,980
		Licenses		6,689			4,240
		Prepaid expenses and other current assets		49,535			60,018
		Deferred tax asset		11,699			11,554

		Total current assets		676,438			704,941

		Fixed assets, net		37,952			34,291
		Software development costs, net of current portion		53,181			30,342
		Licenses, net of current portion		1,800			1,425
		Goodwill		163,631			135,477
		Intangibles, net		57,375			36,104
		Long-term deferred tax asset		6,219			6,219
		Other assets		2,316			1,714

		Total assets	$	998,912		$	950,513

	LIABILITIES and STOCKHOLDERS’ EQUITY

	Current liabilities
		Accounts payable	$	87,409		$	163,961
		Accrued expenses and other current liabilities		174,659			125,567
		Income taxes payable		14,934			17,319

		Total current liabilities		277,002			306,847
		Other long-term liabilities		2,741			2,963
		Deferred tax liability		9,937			5,233

		Total liabilities		289,680			315,043

	Stockholders’ equity
		Common stock, par value $.01 per share; 100,000,000 shares authorized; 46,393,738 and 45,439,651 shares issued and outstanding at January 31, 2005 and October 31, 2004, respectively		464			454
		Additional paid-in capital		410,227			382,156
		Deferred compensation		(14,905	)		(3,896	)
		Retained earnings		305,651			250,402
		Accumulated other comprehensive income		7,795			6,354

		Total stockholders’ equity		709,232			635,470

		Total liabilities and stockholders’ equity	$	998,912		$	950,513

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 (Unaudited)
For the three months ended January 31, 2005 and 2004
(In thousands, except per share data)


		Three months ended January 31,

		2005		2004

Net sales		$	502,474	$	375,512

Cost of sales
	Product costs		237,485		224,378
	Royalties		80,209		19,998
	Software development costs		4,205		3,982

	Total cost of sales		321,899		248,358

	Gross profit		180,575		127,154
Operating expenses
	Selling and marketing		50,931		35,902
	General and administrative		28,687		24,040
	Research and development		23,417		13,429
	Depreciation and amortization		4,786		3,745

	Total operating expenses		107,821		77,116

	Income from operations		72,754		50,038
Interest income, net			540		426

	Income before income taxes		73,294		50,464

Provision for income taxes			18,045		18,706

	Net income	$	55,249	$	31,758

Per share data:
	Basic:
	Weighted average common shares outstanding		45,686		44,386

	Net income per share	$	1.21	$	0.72

	Diluted:
	Weighted average common shares outstanding		46,516		45,421

	Net income per share	$	1.19	$	0.70

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 (Unaudited)
For the three months ended January 31, 2005 and 2004
(In thousands)

			Three months ended January 31,

			2005			2004

Cash flows from operating activities:
Net income			$	55,249		$	31,758
	Adjustment to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		4,786			3,745
		Loss on disposal of fixed assets		15			—
		Amortization of intellectual property and other		3,365			10,794
		Amortization of compensatory stock		4,774			833
		Amortization of software development costs and licenses		14,614			10,117
		Provision for doubtful accounts, returns and sales allowances		50,630			42,308
		Write-off of software development costs and licenses		3,364			1,300
		Tax benefit from exercise of stock options		3,750			717
		Foreign currency transaction loss (gain)		147			(10	)
Changes in operating assets and liabilities, net of effects of acquisitions:
		Decrease (increase) in accounts receivable		115,630			(13,991	)
		Decrease (increase) in inventories		20,363			(8,268	)
		Increase in software development costs		(41,530	)		(10,142	)
		Increase in licenses		(3,297	)		(2,222	)
		Decrease in prepaid expenses and other current assets		4,519			8,765
		Increase in other non-current assets		(602	)		(7	)
		(Decrease) increase in accounts payable		(78,421	)		6,160
		Increase (decrease) in accrued expenses and other liabilities		34,761			(5,037	)
		(Decrease) increase in income taxes payable		(2,641	)		11,076

		Net cash provided by operating activities		189,476			87,896

Cash flows from investing activities:
		Purchase of fixed assets		(5,651	)		(2,947	)
		Acquisition of intangible assets		(20,000	)		(3,100	)
		Acquisitions, net of cash acquired		(23,244	)		(16,032	)

		Net cash used in investing activities		(48,895	)		(22,079	)


Cash flows from financing activities:
		Proceeds from exercise of stock options		7,365			2,433
		Other financing		(27	)		(26	)

		Net cash provided by financing activities		7,338			2,407

Effect of foreign exchange rates				56			2,452

		Net increase in cash for the period		147,975			70,676

Cash and cash equivalents, beginning of the period				155,095			183,477

Cash and cash equivalents, end of the period			$	303,070		$	254,153

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 (Unaudited) (continued)
For the three months ended January 31, 2005 and 2004
(In thousands)

			Three months ended January 31,

			2005			2004

Supplemental information on businesses acquired:
	Fair value of assets acquired:
		Current assets	$	111		$	1,432
		Non-current assets		1,196			750
		Intangible assets		5,300			7,690
		Goodwill		24,850			17,079
	Less: liabilities assumed
		Current liabilities		(1,797	)		(5,759	)

Net assets of businesses acquired, excluding cash			$	29,660		$	21,192

Cash paid for businesses acquired			$	24,000		$	16,827
	Less: cash acquired			(756	)		(795	)

Net cash paid for businesses acquired				23,244			16,032
Additional payments in connection with acquisition (See Note 4)				6,416			—
Issuance of restricted stock in connection with acquisition				—			5,160

Total consideration			$	29,660		$	21,192

Supplemental cash flow information:
Issuance of warrants to licensor			$	1,183		$	—
Cash paid for taxes				18,821			1,031
Cash paid for interest				50			60

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 (Unaudited)
For the year ended October 31, 2004 and the three months ended January 31, 2005
(In thousands)

	Common Stock

		Shares		Amount		Additional Paid-in Capital		Deferred Compensation			Retained Earnings		Accumulated Other Comprehensive Income			Total

Balance, October 31, 2003		44,227	$	442	$	350,852	$	(1,890	)	$	185,024	$	(936	)	$	533,492

Foreign currency translation adjustment		—		—		—		—			—		7,290			7,290
Net income		—		—		—		—			65,378		—			65,378

Comprehensive income																72,668

Proceeds from exercise of stock options and warrants		885		9		16,674		—			—		—			16,683
Amortization of deferred compensation		—		—		—		3,331			—		—			3,331
Issuance of common stock in connection with acquisition		164		2		5,158		—			—		—			5,160
Issuance of compensatory stock		164		1		5,336		(5,337	)		—		—			—
Tax benefit in connection with the exercise of stock options		—		—		4,136		—