2K Sports 2003 Annual Report Download

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Take-Two Interactive Software, Inc.
2003 Annual Report

Table of contents

  • Page 1
    Take-Two Interactive Software, Inc. 2003 Annual Report

  • Page 2
    Take-Two's diverse business model is centered around video game publishing, supported by strong internal development resources and innovative marketing techniques. The Company also has powerful distribution capabilities to secure the necessary retail shelf space for its products and to capitalize on...

  • Page 3
    ...Highlights (In thousands, except per share data) Fiscal Years Ended October 31 Statement of Operations Data: 2003 2002 (Restated) 2001 (Restated) 2000 (Restated) 1999 (Restated) Net sales $1,033,693 Income from operations 163,011 Income (loss) before cumulative effect of change in accounting...

  • Page 4
    .... Recognized for outstanding game play, unique game style and witty humor, Rockstar titles are among the most anticipated in the interactive entertainment industry. Rockstar operates from New York City with a family of development studios in North America and Europe. their blockbuster Grand...

  • Page 5
    ... 2004 launch. Gathering Gathering publishes premium and mid-priced products on PC, console and handheld platforms. Gathering's critically acclaimed franchises include Mafia, Railroad Tycoon, Hidden & Dangerous, Tropico and Stronghold. Based in New York City, Gathering works with internally owned...

  • Page 6
    ...the installed base of video game platforms increases - creating more consumers for our products. Global Star Global Star Software publishes value-priced entertainment software across all platforms. Core Global Star franchises include the hit Outlaw sports series (under license from MTV); the Tycoon...

  • Page 7
    ...in order to concentrate on our publishing business, the return of Paul Eibeler as President, and the appointment of company veteran Gary Lewis as Global Chief Operating Officer. These changes demonstrate the pool of management talent we have to draw upon. Fiscal 2003 was an exceptional year for Take...

  • Page 8
    ... is headquartered in New York City, with its international headquarters based in Windsor (England). The Company has development studios in Edinburgh, San Diego, Vancouver, Toronto, Vienna, Leeds (England), Fenton (Missouri), Bellevue (Washington) and San Francisco; product development and testing in...

  • Page 9
    Westlake Village (California), New York City and Austin; electronic peripheral and accessory manufacturing in Hong Kong; and sales and marketing offices in Cincinnati, New York City, Toronto, London, Windsor (England), Paris, Munich, Madrid, Milan, Sydney, Breda (Netherlands) and Auckland. Breda ...

  • Page 10
    TAKE-TWO INTERACTIVE SOFTWARE, INC. "For fiscal 2003, Take-Two's revenues exceeded $1 billion, with net income of $98 million" 8

  • Page 11
    ... Contents Selected Financial Data ...10 Management's Discussion and Analysis of Financial Condition and Results of Operations ...11 Consolidated... of Stockholders' Equity ...31 Notes to Consolidated Financial Statements...32 Report of Independent Auditors ...50 Corporate Information ...I.B.C. 9

  • Page 12
    ... period in which we communicated the price concessions to our customers. We also restated our financial statements for the fiscal years ended October 31, 2000 and 2001 to increase our provision for returns at October 31, 2000 by approximately $4.9 million for certain sales transactions primarily to...

  • Page 13
    ... as well as third-party products, hardware and accessories to retail outlets in North America through our Jack of All Games subsidiary, and we have sales, marketing and publishing operations in the United Kingdom, France, Germany, Holland, Austria, Italy, Australia, New Zealand and Canada. 11

  • Page 14
    ... interactive entertainment hardware and software decline, our distribution business benefits from the wider availability of higher margin, value priced software titles. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management...

  • Page 15
    ... about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation and amends APB Opinion No. 28, "Interim Financial Reporting" to require disclosures about such effects in interim financial information. The disclosure provisions of...

  • Page 16
    ... 72.1% International 27.9 Net Sales Mix: Publishing 65.0% Distribution 35.0 Platform Mix (publishing): Console 81.2% PC 17.2 Accessories and handheld 1.6 Principal Products: Grand Theft Auto: Vice City, PS2 (released October- November 2002) 33.6% Grand Theft Auto: Vice City, PC (released May 2003...

  • Page 17
    ... our increasing market share for budget titles in North American retail channels. We expect continued growth in our distribution business in fiscal 2004, and that distribution revenues may increase as a percentage of net sales during this period. International operations accounted for approximately...

  • Page 18
    ... costs relate to our internally developed titles. In future periods, cost of sales may be adversely affected by manufacturing and other costs, price competition and by changes in product and sales mix and distribution channels. Operating Expenses Years ended October 31, 2003 Selling and marketing...

  • Page 19
    ... designed for the PC accounted for approximately 14.3% of fiscal 2002 publishing net sales as compared to 35.6% for fiscal 2001. The decrease is a result of fewer PC titles released during fiscal 2002. The increase in distribution revenues was primarily attributable to the commercial introduction...

  • Page 20
    ... expense was attributable to increased personnel expenses primarily relating to salaries of additional executive, financial, accounting and information technology personnel and legal and professional fees incurred in connection with legal proceedings and regulatory matters as well as litigation...

  • Page 21
    ... the agreement are reduced by the amount of outstanding letters of credit, which were $9,290 at October 31, 2003. The loan agreement contains certain financial and other covenants, including the maintenance of consolidated net worth, consolidated leverage ratio and consolidated fixed charge coverage...

  • Page 22
    ... 2003. The increase was due to additional price concessions and returns for our published products and additional bad debts, net of deductibles and insurance proceeds, related to the bankruptcy of two customers, the losses from which were not entirely covered by insurance. We had accounts receivable...

  • Page 23
    ...of our net sales. Our ten best-selling titles accounted for approximately 30.8% of our net sales for the fiscal year ended October 31, 2001. Our future titles may not be commercially viable. If we fail to continue to develop and sell new, commercially successful titles, our net sales and profits may...

  • Page 24
    ... of new titles; availability of hardware platforms; the timing and success of title introductions by our competitors; product returns and price concessions; and the timing of orders from major customers. Our expense levels are based, in part, on our expectations regarding future sales and...

  • Page 25
    ... could inhibit sales of our products. Trade organizations within the video game industry require interactive entertainment software publishers to provide consumers with information relating to graphic violence, profanity or sexually explicit material contained in software titles, and impose...

  • Page 26
    ...platform licenses require that we obtain approval for the publication of new titles on a title-by-title basis. As a result, the number of titles we are able to publish for these hardware platforms, along with our ability to time the release of these titles and, accordingly, our net sales from titles...

  • Page 27
    ... results, announcements by us or our competitors and various factors affecting the interactive entertainment software industry may have a significant impact on the market price of our common stock. We are subject to rapidly evolving regulation affecting financial reporting, accounting and corporate...

  • Page 28
    ... of our Rockstar employees responsible for content creation and product development and marketing. Although we have employment agreements with each of these creative, development and marketing personnel, and we have granted them incentives in the form of an internal royalty program based on sales of...

  • Page 29
    ... liabilities Capital lease obligation, net of current portion Deferred tax liability Total liabilities Stockholders' equity Common stock, par value $.01 per share; 50,000,000 shares authorized (100,000,000 as of November 17, 2003); 44,227,215 and 40,361,739 shares issued and outstanding at October...

  • Page 30
    ...INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per share data) Years Ended October 31, 2003 Net sales Cost of sales Product costs Royalties Software development costs Total cost of sales Gross profit Operating expenses Selling and marketing...

  • Page 31
    ... Provision for returns Provision for price concessions Provision for doubtful accounts and sales allowances Amortization of various expenses and discounts Write-off of prepaid royalties and capitalized software Tax benefit from exercise of stock options Compensatory stock and stock options Other...

  • Page 32
    ... Ended October 31, 2003 Supplemental disclosure of non-cash investing activities: Issuance of common stock in connection with acquisitions Supplemental information on intangible assets and businesses acquired: Fair value of assets acquired Cash Current assets Non-current assets Intangible assets...

  • Page 33
    ...) and 2003 (In thousands) Common Stock Shares Amount Additional Paid-in Capital Deferred Compensation Retained Earnings Accumulated Other Comprehensive Income (Loss) Total (Restated) Balance, November 1, 2000 Foreign currency translation adjustment Net unrealized income on investments, net of...

  • Page 34
    ... The Company develops interactive software games designed for PCs, video game consoles and handheld platforms and publishes games developed internally and by third parties. The Company also distributes games for video game consoles and handheld platforms published internally and by third parties, as...

  • Page 35
    .... The Company makes estimates of future product returns and price concessions related to current period product revenue. The Company estimates the amount of future returns and price concessions for published titles based upon, among other factors, historical experience, customer inventory levels...

  • Page 36
    ... associated with the internal development of the Company's publishing products. Amortization of such costs as a component of cost of sales is recorded on a title-by-title basis, based on the greater of the proportion of current year sales to total of current and estimated future sales for the title...

  • Page 37
    ... reported as a result of adjustments made to correct computational errors. The fair value of the Company's stock options used to compute pro forma net income and the net income per share disclosures is the estimated present value at the grant date using the Black-Scholes option-pricing model...

  • Page 38
    ..., with no impact on reported net loss. Recently Adopted Accounting Pronouncements In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143...

  • Page 39
    .... The value of the Company's common stock issued in connection with these acquisitions has been based on the market price of the Company's common stock at the time such proposed transactions were agreed and announced. The acquisitions described below have been accounted for as purchase transactions...

  • Page 40
    ... Hong Kong-based design and engineering firm specializing in video game accessories. In consideration, the Company issued 30,000 shares of the Company's restricted common stock (valued at $572), paid $100 in cash and assumed net liabilities of approximately $2,856. In connection with the acquisition...

  • Page 41
    ... exclusive worldwide publishing rights to the franchise of Duke Nukem PC and video games. In connection with the transaction, the Company paid $2,300 in cash and issued 557,103 shares of its common stock (valued at approximately $5,400). In addition, the Company is required to make a further payment...

  • Page 42
    ...cumulative effect of change in accounting principle-as reported Earnings (loss) per share: Reported earnings (loss) per share-basic Add: Goodwill amortization, net of taxes Adjusted earnings (loss) per share-basic Add: Cumulative effect of change in accounting principle Adjusted income (loss) before...

  • Page 43
    ... outstanding letters of credit, which was $9,290 at October 31, 2003. The loan agreement contains certain financial and other covenants, including the maintenance of consolidated net worth, consolidated leverage ratio and consolidated fixed charge coverage ratio. As of October 31, 2003, the Company...

  • Page 44
    ...certain accounting matters related to the Company's financial statements, periodic reporting and internal accounting controls. The Company's Chairman, an employee and two former officers also received Wells Notices. The Company has entered into discussions with the Staff to address the issues raised...

  • Page 45
    ..., in connection with the Company's acquisition of the publishing rights to the franchise of Duke Nukem PC and video games in December 2000, the Company is contingently obligated to pay $6,000 in cash upon delivery of the final version of Duke Nukem Forever for the PC. In May 2003, the Company agreed...

  • Page 46
    ..."), adopted by the Board of Directors on June 12, 2003, allows the granting of restricted stock, deferred stock and other stock-based awards of the Company's common stock to directors, officers and other employees of the Company. A maximum of 500,000 shares are available for distribution under the...

  • Page 47
    ...aggregate of 1,503,000 and 2,931,000 shares of the Company's common stock, respectively, vesting from 1999 to 2006 and expiring at various times from 2003 to 2007. For those options with exercise prices less than fair value of the underlying shares at the measurement date, the difference is recorded...

  • Page 48
    ... been restated for the revised revenue recognition policy related to the change in the method of accounting for price concessions identified in Note 2. 1st Quarter 2nd Quarter (Restated) 3rd Quarter (Restated) 4th Quarter 2003 Net sales Gross profit Net income Per share data: Basic-EPS Diluted-EPS...

  • Page 49
    ... FACILITIES In January 2003, based on management's strategy to consolidate the Company's distribution business, and after taking into account the relative cost savings involved, the Company closed its warehouse operations in Ottawa, Illinois and College Point, New York. Operations at these...

  • Page 50
    ... about the Company's net sales by product platforms for the years ended October 31, 2003, 2002 and 2001 is presented below: 2003 Platforms: Sony PlayStation 2 $ Sony PlayStation Microsoft Xbox PC Nintendo Game Boy Color, Game Boy Advance and 64 Nintendo GameCube Sega Dreamcast Accessories Hardware...

  • Page 51
    ...Corvette. During the three months ended October 31, 2003, the Company recorded $9,225 of net sales related to this agreement. At October 31, 2003, the Company owed $5,945 to TDK for purchases made under the agreement, which was included in accounts payable, and remaining guarantee payments of $3,491...

  • Page 52
    ... the amortization of goodwill as of that date. Also, as discussed in Note 3, effective November 1, 2000, the Company changed its method of accounting for revenue recognition to conform to the requirements of SEC Staff Bulletin No. 101, "Revenue Recognition." New York, New York February 12, 2004 50

  • Page 53
    ... Agent American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 Common Stock Information The Company's common stock is listed on the Nasdaq National Market® under the symbol TTWO. Common Stock Price Range Fiscal Year Ended October 31, 2002 High Low OFFICERS AND DIRECTORS Officers...

  • Page 54
    Take-Two Interactive Software, Inc. www.take2games.com