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Take-Two Interactive Software, Inc.
2004 Annual Report

Table of contents

  • Page 1
    Take-Two Interactive Software, Inc. 2004 Annual Report

  • Page 2
    ...The Company's video game publishing business is supported by strong internal development resources of over 1,000 dedicated employees at thirteen development studios. Take-Two's product offerings include titles for the leading hardware platforms: the PlayStation®2 computer entertainment system, Xbox...

  • Page 3
    ...355,544 $ 6,056 91,794 354,305 54,073 135,140 219,165 Per share data is adjusted for 3-for-2 stock split effected April 2005 Net Sales (Dollars in millions) Earnings Per Share (Diluted) Working Capital (Dollars in millions) 1,200 $1,128 $1,034 $1.51 2.0 $395 400 $348 350 300 250 1,000 800...

  • Page 4
    ... 2005, we acquired the Visual Concepts and Kush Games sports video game development studios, including the rights to the 2K brand. Having worked closely with these studios on the successful marketing and distribution of the 2K football, basketball, baseball and hockey titles, we have enormous regard...

  • Page 5
    Perhaps our biggest coup was our recently announced long term, third-party exclusive publishing relationship with Major League Baseball. As a result, we will be releasing a broad line-up of officially licensed MLB titles for console, PC and handheld platforms beginning in Spring 2006. More recently,...

  • Page 6
    ... to support our new titles, particularly in the sports category; and higher R&D costs related to our acquisitions of development studios. We continue to maintain solid financial resources to support future growth initiatives. At October 31, 2004, Take-Two had $155 million in cash and working capital...

  • Page 7
    ... second fiscal quarter was approximately $1,283,000,000. As of December 10, 2004, there were 46,091,024 shares of the Registrant's common stock outstanding. Documents Incorporated by Reference: Proxy Statement Relating to Annual Meeting to be held in Fiscal 2005 (Incorporated into Part III)

  • Page 8
    ... of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management ...Certain Relationships and Related Transactions ...Principal Accountant Fees and Services ...PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ...Index to...

  • Page 9
    ... this report. New Developments Effective May 2004, we entered into a three-year agreement with SEGA Corporation, whereby we co-publish and exclusively distribute SEGA's sports titles. Pursuant to an option agreement with SEGA, we have the right to acquire Visual Concepts Entertainment, Inc. ("Visual...

  • Page 10
    ... for future growth as the interactive entertainment industry continues to expand and evolve. Fiscal 2004 Product Launches We publish products in the action, racing, strategy, sports and simulation genres. During fiscal 2004, we published 9 new internally developed titles and 33 new titles developed...

  • Page 11
    ...of the titles developed by Visual Concepts and Kush is expected to help build long-term brand loyalty. We currently anticipate that we will ship ESPN MLB 2K5 (major league baseball) in fiscal 2005. Globalstar is also concentrating on the growing market for video games incorporating popular licensed...

  • Page 12
    ...2004, we entered into a three-year agreement with SEGA Corporation, whereby we co-publish and exclusively distribute SEGA's sports titles. Under our current arrangement, we are entitled to receive all of the revenue and profit, if any, from the sale of the sports titles developed by Visual Concepts...

  • Page 13
    ..., PlayStation 2, PSP, Xbox, Game Boy Advance and GameCube. We are not required to obtain any licenses to develop titles for the PC. Sony. We entered into a Licensed Publisher Agreement with Sony Computer Entertainment America, Inc. in May 2000. Under the agreement, Sony granted us the right and...

  • Page 14
    ... an agreement with Nintendo that expires in July 2007, granting us the right and license to develop software for Nintendo's Game Boy Advance in the western hemisphere. We entered into a similar agreement with Nintendo for European territories. Sales and Marketing We sell software titles to retail...

  • Page 15
    ... defects. Our software titles carry a 90-day limited warranty. Competition In our publishing business, we compete both for licenses to properties and the sale of interactive entertainment software with Sony, Microsoft and Nintendo, each of which is a large developer and marketer of software for its...

  • Page 16
    ...be time consuming, costly and difficult to defend. International Operations Sales in international markets, principally in the United Kingdom and other countries in Europe, have accounted for a significant portion of our revenues. For fiscal 2004 and 2003, sales in international markets accounted...

  • Page 17
    ... Statements. Employees As of October 31, 2004, we had 1,435 full-time employees. None of our employees is subject to a collective bargaining agreement. We consider our relations with employees to be good. Item 2. Properties Our principal executive offices are located at 622 Broadway, New York, New...

  • Page 18
    ... or pay any cash dividends in the foreseeable future. Changes in Securities. During the three months ended October 31, 2004, we issued an aggregate of 34,446 shares of restricted stock to nine employees under our Incentive Stock Plan. In connection with the above securities issuances, we relied on...

  • Page 19
    ... and Results of Operations (Dollars in thousands, except per share amounts) Overview We are a leading global publisher of interactive software games designed for personal computers, and video game consoles and handheld platforms manufactured by Sony, Microsoft and Nintendo. We also distribute...

  • Page 20
    ... opportunities in the market for sports and other licensed action and strategy titles. We recently made strategic acquisitions of sports development studios, and we have the right to acquire Visual Concepts and Kush. Estimates The preparation of financial statements in conformity with generally...

  • Page 21
    ... includes credits and returns, when demand for specific titles falls below expectations. We make estimates of future product returns and price concessions related to current period product revenue. We estimate the amount of future returns and price concessions for published titles based upon, among...

  • Page 22
    ... for Stock Issued to Employees." The revised statement addresses the accounting for share-based payment transactions with employees and other third parties, eliminates the ability to account for share-based compensation transactions using APB 25 and requires that the compensation costs relating to...

  • Page 23
    ... and $829 of accounts receivable, on a preliminary basis. Venom. In September 2004, we acquired all the outstanding capital stock of Venom, a UK-based developer of the boxing games Rocky and Rocky Legends. The purchase price was $1,295 paid in cash at closing. In connection with the acquisition...

  • Page 24
    ...agreement with Destineer Publishing Corp. ("Destineer"), a publisher of PC games, requires us to consolidate Destineer's operating results under FIN 46 (R). See Note 3 to Consolidated Financial Statements. Years Ended October 31, 2004 and 2003 Net Sales Years ended October 31, 2004 % 2003 % Increase...

  • Page 25
    ... with sports titles and increased expenses related to a royalty program based on product sales for certain of our internal development personnel. Software Development Costs. Software development costs increased due to the release of a greater number of internally developed titles during fiscal 2004...

  • Page 26
    ... (77) $42,809 14.2 11.5 72.3 (0.5) 18.4 Selling and marketing. The increase in selling and marketing expense was attributable to increased levels of advertising and promotional support for existing and new titles, specifically the ESPN sports titles, as well as higher personnel expenses, and is...

  • Page 27
    ... are derived from the sale of third-party software titles, accessories and hardware. The increase in distribution revenues was primarily attributable to our increasing market share for budget titles in North American retail channels. International operations accounted for approximately $288,753...

  • Page 28
    ...current period. These software development 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...

  • Page 29
    ... $128,571 in gross accounts receivable, before allowances, at October 31, 2004 is attributable primarily to sales from a major product release at the end of fiscal 2004. Our allowances, which include doubtful accounts, returns, price concessions, rebates and other sales allowances, increased to $72...

  • Page 30
    ... to make additional capital expenditures of $4.5 million for leasehold improvements and equipment in our new warehouse facilities in Cincinnati, Ohio. As of the date of this report, we have no other material commitments for capital expenditures. Our Board of Directors authorized a stock repurchase...

  • Page 31
    ... ï¬,uctuations in quarterly operating results as a result of the timing of the introduction of new titles; variations in sales of titles developed for particular platforms; market acceptance of our titles; development and promotional expenses relating to the introduction of new titles; sequels or...

  • Page 32
    ...variations in sales of titles designed to operate on particular platforms; development and promotional expenses relating to the introduction of new titles; availability of hardware platforms; the timing and success of title introductions by our competitors; product returns and price concessions; and...

  • Page 33
    ... activities, we must anticipate and respond to rapid changes in consumer tastes and preferences. A decline in the popularity of interactive entertainment software or particular platforms could cause sales of our titles to decline dramatically. The period of time necessary to develop new game titles...

  • Page 34
    ...if return rates and price concessions for our published titles exceed our reserves, our revenues will decline. The interactive entertainment software industry is highly competitive. We compete for both licenses to properties and the sale of interactive entertainment software with Sony, Microsoft and...

  • Page 35
    ... 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 36
    ...may not be able to complete titles for us on a timely basis or within acceptable quality standards, if at all. We depend on third-party software developers and our internal development studios to develop new interactive entertainment software within anticipated release schedules and cost projections...

  • Page 37
    ...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 38
    ... exchange rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the relevant fiscal quarter or year end. Translation adjustments are included as a separate component of stockholders' equity. For fiscal 2004 our foreign currency...

  • Page 39
    ... within 120 days after the end of the fiscal year covered by this Report. Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference to the section of our definitive Proxy Statement for our Annual Meeting of Stockholders to be...

  • Page 40
    ... between Sony Computer Entertainment America, Inc. and the Company. (7)* 10.12 Publishing Agreement dated May 8, 1998 between Gathering of Developers I, Ltd. and Apogee Software, Ltd/ 3D Realms. (8)* 10.13 Xbox Publisher License Agreement dated December 14, 2000 between Microsoft Corporation and the...

  • Page 41
    ... in the Company's Annual Report on Form 10-K for the year ended October 31, 2003. (b) Reports on Form 8-K filed during the quarter ended October 31, 2004: On September 10, 2004, the Company furnished a Current Report on Form 8-K to report the Press Release dated September 10, 2004 relating to the...

  • Page 42
    TAKE-TWO INTERACTIVE SOFTWARE, INC. YEAR ENDED OCTOBER 31, 2004 INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets - At October 31, 2004 and 2003 ...Consolidated Statements of Operations - For the years ended October 31, 2004, 2003 ...

  • Page 43
    Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Take-Two Interactive Software, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Take-...

  • Page 44
    ... taxes payable ...Total current liabilities ...Deferred tax liability ...Total liabilities ...Stockholders' equity Common stock, par value $.01 per share; 100,000,000 and 50,000,000 shares authorized; 45,439,651 and 44,227,215 shares issued and outstanding at October 31, 2004 and 2003, respectively...

  • Page 45
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Consolidated Statements of Operations (In thousands, except share data) Years Ended October 31, 2004 2003 2002 Net sales ...Cost of sales Product costs ...Royalties ...Software development costs ...Total cost of sales ...Gross profit ......

  • Page 46
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) Years Ended October 31, 2004 2003 2002 Cash ï¬,ows from operating activities: Net income ...Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and ...

  • Page 47
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Consolidated Statements of Cash Flows (continued) (In thousands) Years Ended October 31, 2004 2003 2002 Supplemental data: Cash paid during the year for interest ...Cash paid during the year for taxes ...Supplemental information of businesses ...

  • Page 48
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Consolidated Statements of Stockholders' Equity For the years ended October 31, 2002, 2003 and 2004 (In thousands) Accumulated Other Comprehensive Income (Loss) Common Stock Shares Amount Additional Paid-in Capital Deferred Compensation ...

  • Page 49
    ... 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 50
    ... The Company's agreements with licensors and developers generally provide it with exclusive publishing rights and require it to make advance royalty payments that are recouped against royalties due to the developer based on contractual amounts on product sales, adjusted for certain related costs...

  • Page 51
    ... The Company earns its revenue from the sale of internally developed interactive software titles and from the sale of titles licensed from third-party developers ("Publishing revenue"). The Company also earns revenue from the sale of interactive software titles published by third parties, hardware...

  • Page 52
    ..., when demand for specific titles falls below expectations. 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...

  • Page 53
    .... 123, the Company's net income and the net income per share would have been reduced to the proforma amounts indicated below: Years Ended October 31, 2004 2003 2002 Net income, as reported ...Add: Stock-based employee compensation expense included in reported net income, net of related tax effects...

  • Page 54
    ... (revised 2004), "Share-Based Payment" which revised Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation. This statement supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." The revised statement addresses the accounting for share-based...

  • Page 55
    ... purchase price when the conditions requiring their payment are met. In October 2004, the Company entered into a new agreement with Destineer Publishing Corp. ("Destineer"), a publisher of PC games, under which Destineer granted the Company the rights to distribute two titles and publish and...

  • Page 56
    ...Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share amounts) 3. BUSINESS ACQUISITIONS AND CONSOLIDATION (Continued) In November 2002, the Company acquired all of the outstanding capital stock of Angel Studios, Inc. ("Angel"), the developer of Midnight Club...

  • Page 57
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share amounts) 6. FIXED ASSETS, NET As of October 31, 2004 and 2003, fixed assets consist of: 2004 2003 Computer equipment ...Office equipment ...Computer...

  • Page 58
    ...TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share amounts) 8. GOODWILL AND INTANGIBLE ASSETS, NET (Continued) The change in intangibles for the years ended October 31, 2004 and 2003 is as follows: 2004 2003...

  • Page 59
    ... on a straight-line basis over the related lease term. The Company's principal executive offices are located at 622 Broadway, New York, New York. The Company has recently leased additional space at 622 Broadway to accommodate its expanded operations. In connection with signing a ten-year lease, the...

  • Page 60
    ...-year agreement with SEGA Corporation, whereby it co-publishes and exclusively distributes SEGA's sports titles. Under the current arrangement, the Company is entitled to receive all of the revenue and profit, if any, from the sale of the sports titles developed by Visual Concepts and Kush, and...

  • Page 61
    ... certain circumstances, including as a result of SEGA's failure to obtain licenses from the major sports leagues and players associations. Pursuant to an option agreement with SEGA, the Company has the right to purchase all of the outstanding capital stock of Visual Concepts and Kush. The option is...

  • Page 62
    ...INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share...asset related to these carryforwards will not be realized. At October 31, 2004, the Company had foreign net operating losses of approximately $11,000 expiring ...

  • Page 63
    ... $25,000 of its common stock from time to time in the open market or in privately negotiated transactions. The Company has not repurchased any shares under this program. In February 2002, the Company issued 20,000 shares of restricted common stock to a former employee in connection with a separation...

  • Page 64
    ...the option price and other terms and conditions. As of October 31, 2004 and 2003, the plans had outstanding stock options for an aggregate of 3,651,000 and 3,066,000 shares of the Company's Common Stock, respectively, vesting at various times from 1998 to 2008 and expiring at various times from 2002...

  • Page 65
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share amounts) 16. STOCK-BASED PLANS (Continued) The following table summarizes the activity in options under the plans inclusive of non-plan options: 2004 ...

  • Page 66
    ... (12) $- $ 7,028 (5,474) (1,554) $ - The Company is a publisher and distributor of interactive software games. The Company's operations involve similar products and customers worldwide. The products are developed and sold domestically and internationally. The Company is centrally managed and the...

  • Page 67
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share amounts) 19. SEGMENT INFORMATION (Continued) Information about the Company's total non-current assets in the United States and international areas as ...

  • Page 68
    TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (Dollars in thousands, except per share amounts) 19. SEGMENT INFORMATION (Continued) Information about the Company's net sales by product platforms for the years ended October 31, 2004, 2003 ...

  • Page 69
    ... Director of the subsidiary. In 2004, the Company paid $202 for these services. The Company believes this arrangement is on terms no less favorable than could be obtained from an unaffiliated third-party. The Company's former corporate headquarters were leased under a non-cancelable operating...

  • Page 70
    ... of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, in this day of December 2004. TAKE-TWO INTERACTIVE SOFTWARE, INC. By: /s/ Richard W. Roedel Richard...

  • Page 71
    ... terms. (B) Includes actual write-offs of uncollectible accounts receivable or sales returns and recoveries of previously written off receivables. (C) Includes $2,265 of which $1,118 related to acquisitions, $2,297 and $669 related to foreign exchange in 2004, 2003 in 2002. (D) Includes price...

  • Page 72
    ... Angel Studios, Inc. Global Star Software, Inc. Indie Built, Inc. Take-Two Licensing, Inc. International Subsidiaries: Take-Two Interactive Software Europe Limited Silvero Ltd (formerly Goldweb Services) (4) Take-Two Interactive France S.A. (5) Take-Two Interactive GmbH (5) Jack of All Games Austria...

  • Page 73
    ...; 333-45708; 333-36986 and 333-53514) of Take-Two Interactive Software, Inc. of our report dated December 15, 2004 relating to the consolidated financial statements and financial statement schedule which is included in this Form 10-K. /s/ PricewaterhouseCoopers LLP New York, New York December 20...

  • Page 74
    ... I have reviewed this Annual Report on Form 10-K for the year ended October 31, 2004 of Take-Two Interactive Software, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light...

  • Page 75
    ... 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER Section 302 Certification I, Karl H. Winters, Chief Financial Officer of Take-Two Interactive Software, Inc, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended October 31, 2004 of Take-Two Interactive Software, Inc...

  • Page 76
    ... SARBANES-OXLEY ACT OF 2002 In connection with the Annual Reportof Take-Two Interactive Software, Inc. (the "Company") on Form 10-K for the year ended October 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard W. Roedel, as Chief Executive Of...

  • Page 77
    ... ACT OF 2002 In connection with the Annual Report of Take-Two Interactive Software, Inc. (the "Company") on Form 10-K for the year ended October 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Karl H. Winters, as Chief Financial Officer of the...

  • Page 78
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  • Page 79
    ... New York, NY 10017 Transfer Agent American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 Karl Winters Chief Financial Officer Common Stock Information The Company's common stock is listed on the Nasdaq National Market® under the symbol TTWO. Common Stock Price Range (prices...

  • Page 80
    Take-Two Interactive Software, Inc. 2004 Annual Report