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 April 30, 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 June 6, 2005, there were 71,326,675 shares of the Registrant’s Common Stock outstanding.


INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets – As of April 30, 2005 and October 31, 2004 (unaudited)	1

	Condensed Consolidated Statements of Operations – For the three and six months ended April 30, 2005 and 2004 (unaudited)	2

	Condensed Consolidated Statements of Cash Flows – For the six months ended April 30, 2005 and 2004 (unaudited)	3

	Condensed Consolidated Statements of Stockholders’ Equity – For the year ended October 31, 2004 and the six months ended April 30, 2005 (unaudited)	5

	Notes to Unaudited Condensed Consolidated 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	35

Item 4.	Controls and Procedures	35

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 6.	Exhibits	36

	Signatures	37

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
As of April 30, 2005 and October 31, 2004
(In thousands, except share data)


		April 30, 2005			October 31, 2004
ASSETS
Current assets
Cash and cash equivalents	$	210,241		$	155,095
Accounts receivable, net of allowances of $56,496 and $72,215 at April 30, 2005 and October 31, 2004, respectively		127,278			285,709
Inventories, net		116,568			154,345
Software development costs		50,802			33,980
Licenses		5,981			4,240
Prepaid expenses and other current assets		73,871			60,018
Deferred tax asset		11,701			11,554

Total current assets		596,442			704,941

Fixed assets, net		43,075			34,291
Software development costs, net of current portion		47,423			30,342
Licenses, net of current portion		2,650			1,425
Goodwill		166,417			135,477
Intangibles, net		59,934			36,104
Deferred tax asset		6,219			6,219
Other assets		2,061			1,714

Total assets	$	924,221		$	950,513

LIABILITIES and STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	90,524		$	163,961
Accrued expenses and other current liabilities		84,982			125,567
Income taxes payable		8,758			17,319

Total current liabilities		184,264			306,847
Other long-term liabilities		2,741			2,963
Deferred tax liability		11,026			5,233

Total liabilities		198,031			315,043


Stockholders’ equity
Common stock, par value $.0067 per share; 100,000,000 shares authorized; 71,193,228 and 68,159,477 shares issued and outstanding at April 30, 2005 and October 31, 2004, respectively		475			454
Additional paid-in capital		436,714			382,156
Deferred compensation		(13,095	)		(3,896	)
Retained earnings		297,465			250,402
Accumulated other comprehensive income		4,631			6,354

Total stockholders’ equity		726,190			635,470

Total liabilities and stockholders’ equity	$	924,221		$	950,513

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
For the three and six months ended April 30, 2005 and 2004
(In thousands, except per share data)

		Three months ended April 30,						Six months ended April 30,

		2005			2004			2005		2004


Net sales	$	222,068		$	153,368		$	724,542	$	528,880


Cost of sales
Product costs		123,504			104,573			360,989		328,951
Royalties		21,938			13,016			102,147		33,014
Software development costs		4,780			1,573			8,985		5,555

Total cost of sales		150,222			119,162			472,121		367,520


Gross profit		71,846			34,206			252,421		161,360

Operating expenses
Selling and marketing		36,275			22,271			87,206		58,173
General and administrative		28,705			24,050			57,392		48,090
Research and development		13,785			8,228			37,202		21,657
Depreciation and amortization		5,102			3,910			9,888		7,655

Total operating expenses		83,867			58,459			191,688		135,575


Income (loss) from operations		(12,021	)		(24,253	)		60,733		25,785

Interest income, net		1,164			648			1,704		1,074


Income (loss) before income taxes		(10,857	)		(23,605	)		62,437		26,859

Provision (benefit) for income taxes		(2,671	)		(9,029	)		15,374		9,677


Net income (loss)	$	(8,186	)	$	(14,576	)	$	47,063	$	17,182



Per share data:
Basic:
Weighted average common shares outstanding		70,112			66,891			69,365		66,734

Net income (loss) per share	$	(0.12	)	$	(0.22	)	$	0.68	$	0.26


Diluted:
Weighted average common shares outstanding		70,112			66,891			70,678		68,228

Net income (loss) per share	$	(0.12	)	$	(0.22	)	$	0.67	$	0.25

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the six months ended April 30, 2005 and 2004
(In thousands)

		Six months ended April 30,

		2005			2004

Cash flows from operating activities:
Net income	$	47,063		$	17,182
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		9,888			7,655
Loss (gain) on disposal of fixed assets		15			(646	)
Amortization of intellectual property and other		6,642			12,625
Amortization of compensatory stock		9,266			1,220
Amortization of software development costs and licenses		28,327			15,012
Provision for doubtful accounts, returns and sales allowances		60,346			65,714
Write-off of software development costs and licenses		3,397			2,175
Tax benefit from exercise of compensatory stock and stock options		9,941			1,433
Foreign currency transaction loss		247			177
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable		116,747			40,516
Decrease in inventories		37,847			1,857
Increase in software development costs		(70,866	)		(27,045	)
Increase in licenses		(5,556	)		(2,466	)
(Increase) decrease in prepaid expenses and other current assets		(8,527	)		365
Increase in other non-current assets		(347	)		—
Decrease in accounts payable		(76,474	)		(25,237	)
Decrease in accrued expenses and other liabilities		(67,554	)		(10,316	)
Decrease in income taxes payable		(2,748	)		(160	)

Net cash provided by operating activities		97,654			100,061

Cash flows from investing activities:
Purchase of fixed assets		(14,610	)		(8,332	)
Acquisition of intangible assets		(20,000	)		(3,100	)
Acquisitions, net of cash acquired		(23,244	)		(19,625	)
Escrow payment for settlement		(7,500	)		—
Proceeds from sale of fixed assets and investments		73			864

Net cash used in investing activities		(65,281	)		(30,193	)

Cash flows from financing activities:
Proceeds from exercise of stock options and warrants		24,445			7,240
Other financing		(52	)		(53	)

Net cash provided by financing activities		24,393			7,187

Effect of foreign exchange rates		(1,620	)		801

Net increase in cash for the period		55,146			77,856
Cash and cash equivalents, beginning of the period		155,095			183,477

Cash and cash equivalents, end of the period	$	210,241		$	261,333

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
For the six months ended April 30, 2005 and 2004
(In thousands)

		Six months ended April 30,

		2005			2004

Supplemental information on businesses acquired:
Fair value of assets acquired:
Current assets	$	111		$	1,457
Non-current assets		1,196			809
Intangible assets		7,980			7,786
Goodwill		29,433			21,760
Less: liabilities assumed
Current liabilities		(3,275	)		(6,105	)
Deferred income taxes		(3,192	)		—

Net assets of businesses acquired, excluding cash	$	32,253		$	25,707


Cash paid for businesses acquired	$	24,000		$	20,454
Less: cash acquired		(756	)		(829	)

Net cash paid for businesses acquired		23,244			19,625
Additional payments in connection with acquisition		6,416			—
Contingent and deferred consideration		2,593			922
Issuance of restricted stock in connection with acquisition		—			5,160


Total consideration	$	32,253		$	25,707


Supplemental cash flow information:
Issuance of warrants to licensor	$	1,183		$	—
Cash paid for taxes		26,809			8,155
Cash paid for interest		131			84

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

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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
For the year ended October 31, 2004 and the six months ended April 30, 2005
(In thousands)

	Common Stock

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

Balance, October 31, 2003	66,341	$	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	1,326		9		16,674		—			—		—			16,683
Amortization of deferred compensation	—		—		—		3,331			—		—			3,331
Issuance of common stock in connection with acquisition	246		2		5,158		—			—		—			5,160
Issuance of compensatory stock	246		1		5,336		(5,337	)		—		—			—
Tax benefit in connection with the exercise of compensatory stock and stock options	—		—		4,136		—			—		—			4,136


Balance, October 31, 2004	68,159	$	454	$	382,156	$	(3,896	)	$	250,402	$	6,354		$	635,470

Foreign currency translation adjustment	—		—		—		—			—		(1,723	)		(1,723	)
Net income	—		—		—		—			47,063		—			47,063

Comprehensive income															45,340

Proceeds from exercise of stock options and warrants	2,222		16		24,429		—			—		—			24,445
Amortization of deferred compensation	—		—		—		9,266			—		—			9,266
Issuance of compensatory stock and stock options	812		5		19,005		(18,465	)		—		—			545
Tax benefit in connection with the exercise of compensatory stock and stock options	—		—		9,941		—			—		—