TAKE-TWO INTERACTIVE SOFTWARE, INC.
ANNUAL REPORT 2012
DEAR
SHAREHOLDERS,
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During fiscal year 2012, we made signifi
fi
cant progress on
our creative, operational and strategic objectives, even
though we were unable to achieve our revenue and profitfi
goals. Our fi nancial results for the year were negatively
affected by our decision to postpone the release of several
titles in order to allow for additional development time.
We believe that our unwavering commitment to quality
is the right approach for maximizing shareholder value,
even though income may occasionally be deferred in the
short-term. We expect to generate substantial revenue
growth and profitability in fi
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scal year 2013.
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KEY ACHIEVEMENTS
Over the past year, our team:
• Launched L.A. Noire, which transcends the boundary
between interactive entertainment and cinema.
This groundbreaking title received excellent reviews
and, according to NPD data for the U.S., was the
highest-selling new intellectual property in our
industry during 2011.
• Delivered the top-ranked and top-selling basketball
video game for the 11th year in a row with the release
of NBA 2K12. The title received the highest Metacritic
score in the history of 2K Sports and, for the second
consecutive year, sold-in over 5 million units and
.
led 2K Sports to achieve profi tability
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• Grew our revenue from digitally delivered content
to a record $107 million – representing 13% of our
total net revenue in fiscal 2012.
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• Released three new titles for iOS, as well as our
Grand Theft Auto III – 10th
fi rst offering for Android.
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Anniversary Edition for the first time delivered the
full console experience of Grand Theft Auto to
smartphones and tablets and is our highest-selling
.
and most profitable mobile release to date
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• Launched our fi rst social game,
Civ World, for
Facebook, which received excellent reviews and is
the most immersive game available on the platform.
While not a meaningful contributor to revenue, this
project was invaluable in helping us understand
what drives success on social platforms.
• Continued to make substantial progress on our
three online games for Asian markets.
• Raised $250 million through a convertible
notes offering and renewed our credit facility –
both on highly attractive terms.
• Launched new online stores for Rockstar Games
and 2K, which enable consumers to discover and
purchase games and branded merchandise directly
from our labels.
OUR STRATEGY FOR GROWTH
Take-Two’s strategy is to develop the highest-quality,
most compelling entertainment franchises in the business,
and deliver them on any platform that is relevant to our
audience. We are actively investing in both our core
console and PC businesses, as well as in offerings for
emerging online and mobile platforms.
World-class creative teams: Everything starts with our
investment in world-class creative teams. The talent we
continue to attract and retain at our Rockstar Games and
2K labels is an essential ingredient to building what we
believe is the strongest portfolio of intellectual property
in our industry. Today, we have approximately 1,700
developers in 15 studios around the world. Our creative
teams have proven their ability to deliver games that
consistently achieve high critical praise. While strong
ratings may not necessarily guarantee blockbuster sales,
there is certainly a correlation. In addition, quality games
tend to withstand the test of time, which is reflected in
the robust catalog sales that many of our titles enjoy.
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Diverse portfolio of industry-leading intellectual
property: We believe our portfolio of intellectual property
is the strongest in our industry. We have 9 franchises
with individual titles that have sold-in approximately
5 million or more units. Since 2007, we have launched
5 successful new franchises and released 34 distinct
multi-million unit selling titles. We aim to manage our
portfolio of intellectual property carefully in order to
reap the benefi ts of dependable hit franchises without
creating untimely product fatigue. To that end, we
continually strive to balance our development efforts
between new IP and sequels to our existing hit franchises.
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fi
Driving value through evolving business models:
Our willingness to embrace evolving business models is
an important driver of incremental growth and margins.
Take-Two was among the first publishers to create
downloadable add-on content, and we continue to be a
leader in delivering innovative offerings, both digitally and
as packaged goods. Add-on content generates revenue
and profi ts, and prolongs consumer engagement with
our titles. This not only extends the life and value of each
release, it also helps mitigate demand for used copies of
our games. We had great success with add-on content
for Grand Theft Auto IV, Borderlands and Red Dead
Redemption, and expect add-on content to play an
integral role in enhancing most of our future releases.
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Investing in traditional and digital distribution
platforms: The fi nal component of our growth strategy
is to distribute our products to consumers through all
relevant platforms and channels, whether as packaged
goods or through digital downloads.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. ANNUAL REPORT 2012
Mobile gaming, especially on tablets, represents an
important growth opportunity for our Company. We will
continue to invest to bring both our deep catalog of
titles and select new releases to mobile platforms.
Our online gaming initiatives currently are focused
on Asian markets, where we have partnered with three of
the region’s leading developers and publishers. Working
with Tencent, we are in the open beta phase of publishing
an online version of NBA 2K for distribution in China and
K
other key markets. We are also co-developing an online
baseball game for the South Korean market with Nexon
Corporation and a massively multiplayer online game for
Asia based on a 2K Games franchise with XL Games. These
partnerships are enabling Take-Two to enter the world’s
largest online gaming market with a measured approach
to managing risk. If successful, these initiatives will be
signifi cantly accretive to revenue and earnings, and
provide a more predictable and recurring revenue stream
to complement our core business.
fi
By making our products available wherever and
however consumers want them, we are maximizing our
audiences, expanding our business, creating value over
time and informing our business decisions for the future.
fifi
Take-Two possesses the
Solid financial foundation:
strongest liquidity and balance sheet in its history – and
the ability to invest aggressively for long-term growth.
As of March 31, 2012, we had $420 million in cash and no
borrowings under our $100 million line of credit.
ROBUST LINEUP OF NEW RELEASES
Our strong outlook for fi scal 2013 and beyond is
fi
driven by the most robust lineup of new releases in
Take-Two’s history.
In May, Rockstar Games launched their eagerly
anticipated Max Payne 3, which fused action gameplay
seamlessly with a dark single-player story and their
deepest multiplayer experience to date. The title received
critical acclaim, including from The New York Times which
wrote, “Max Payne 3 is a taut and compelling action
game wrapped in the sumptuous, gritty and delightful
production detail that is the Rockstar hallmark.”
In June, 2K Games released Sid Meier’s Civilization V:
Gods & Kings, a massive expansion pack for the
award-winning strategy title, and Spec Ops: The Line,
a military shooter that combines intense action with a
riveting narrative set against the backdrop of a
sandstorm-ravaged Dubai.
Starting this summer, 2K Play will launch a new slate
of mobile titles, including Herd, Herd, Herd; House Pest
Starring Fiasco the Cat; GridBlock; Carnival Games
MiniGolf; and Comedy Central’s Indecision Game –
a battle of political wits kept honest by ballot peeks,
smear campaigns and recounts.
In September, 2K Games will launch Borderlands 2,
the next installment in our critically acclaimed franchise,
which is in development at Gearbox Software. Gamers
can play as one of four new vault hunters in seeking
treasure and mayhem on the untamed planet of Pandora.
Players will face off against massive new worlds, creatures,
psychos, and the evil mastermind, Handsome Jack.
With action-packed single- and cooperative multiplayer
experiences, Borderlands 2 will continue to defi
fi
2
role-playing shooter genre.
ne the
In October, 2K Sports will release NBA 2K13. We are
confident that the title will once again raise the bar for
fi
excellence in a basketball video game. This new installment
in the top-selling and top-rated NBA simulation franchise
features the Oklahoma City Thunder’s Kevin Durant,
Los Angeles Clippers’ Blake Griffin and the Chicago
Bulls’ Derrick Rose as the chosen trio of cover athletes
representing the new dynasty of NBA future legends.
fi
Also in October, 2K Games will bring one of gaming’s
most beloved franchises back to fans with XCOM: Enemy
Unknown. Developed by Firaxis Games, the strategy
experts behind our Civilization franchise, the title
combines strategy with intense combat as players fight
to control the fate of the human race by defending against
a terrifying global alien invasion. In addition, 2K Marin
continues to move forward with the development of XCOM,
a tactical squad-based shooter offering a strong character-
driven experience, which is planned for release during
fi
fiscal year 2014.
fi
BioShock Infinitefifi
is currently in development at
Irrational Games and is planned to launch on February 26,
2013. Fans of the franchise can look forward to classic
BioShock gameplay and an immersive story, as well
as exciting innovations that include aerial combat on
high-speed Sky-Lines and an arsenal of new weapons
and abilities.
k
And, Grand Theft Auto V is in full development and
V
promises to continue Rockstar Games’ incredible track
record of delighting fans by setting new benchmarks in
interactive entertainment through this iconic franchise.
OUR FUTURE
Looking ahead, we believe that success in our industry
requires four key elements:
• Top creative talent;
• The highest quality owned intellectual property;
• Cutting-edge technology; and
• A sound fi nancial footing.
fi
Today, Take-Two possesses all of these attributes and
is stronger than ever before in every facet of its business.
We are exceedingly optimistic about our long-term outlook
for growth and profitability.
We’d like to thank our colleagues for their continued
dedication and hard work throughout this past year and
our shareholders for their valued support.
fi
Sincerely,
Strauss Zelnick
Chairman and Chief Executive Officerfi
TAKE-TWO INTERACTIVE SOFTWARE, INC. ANNUAL REPORT 2012
(cid:95)
(cid:134)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended March 31, 2012
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from to .
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)
622 Broadway
New York, New York
(Address of principal executive offices)
51-0350842
(I.R.S. Employer
Identification No.)
10012
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (646) 536-2842
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $.01 par value
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) No (cid:134)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)
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
uu
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:95) No (cid:134)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. (cid:95)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
a
Large accelerated filer (cid:95)
Accelerated filer (cid:134)
Non-accelerated filer (cid:134)
(Do not check if a smaller reporting
company)
Smaller reporting company (cid:134)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:134) No (cid:95)
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s
most recently completed second fiscal quarter was approximately $1,080,996,000.
As of May 21, 2012, there were 89,877,335 shares of the Registrant’s Common Stock outstanding.
e
Documents Incorporated by Reference:
Portions of the registrant’s definitive proxy statement for the 2012 Annual Meeting of Stockholders
are incorporated by reference into Part III herein.
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
INDEX
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Re
f
sults of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
t
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules
Index to Financial Statements
Signatures
PAGE
1
8
18
19
19
19
19
21
22
40
41
41
41
42
42
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82
EXPLANATORY NOTE
On October 25, 2010, the Board of Directors of Take-Two Interactive Software, Inc. (the “Company,” “we,” “us,” or similar
pronouns) approved a change in the Company’s fiscal year end from October 31 to March 31, as reported in the Company’s
Current Report on Form 8-K filed on October 25, 2010. As required by the Securities Exchange Act of 1934, the Company
filed a Transition Report on Form 10-KT on December 20, 2010 covering the period from, and including the financial
information for, the five-month period from November 1, 2009 to March 31, 2010 (the “Transition Period”).
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The statements contained herein which are not historical facts are considered forward-looking statements under federal
securities laws and may be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,”
“plans,” “potential,” “predicts,” “projects,” “seeks,” “will,” or words of similar meaning and include, but are not limited
to, statements regarding the outlook for the Company’s future business and financial performance. Such forward-looking
statements are based on the current beliefs of our management as well as assumptions made by and information currently
available to them, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict.
Actual outcomes and results may vary materially from these forward-looking statements based on a variety of risks and
uncertainties including, but not limited to, those discussed under the heading “Risk Factors” included in Part I, Item 1A
herein. All forward-looking statements are qualified by these cautionary statements and speak only as of the date they are
made. The Company undertakes no obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.
tt
ff
PART I
Item 1. Business
General
We are a leading developer, marketer and publisher of interactive entertainment for consumers around the globe. The
Company develops and publishes products through its two wholly-owned labels Rockstar Games and 2K, which publishes its
titles under the 2K Games, 2K Sports and 2K Play brands. Our products are designed for console gaming systems such as
Sony’s PlayStation®3 (“PS3”) and PlayStation®2 (“PS2”), Microsoft’s Xbox 360® (“Xbox 360”) and Nintendo’s Wii™
(“Wii”); handheld gaming systems such as Nintendo’s DS (“DS”), Nintendo’s 3DS (“3DS”) and Sony’s PlayStation Portable
(“PSP”); and personal computers including smartphones and tablets. We deliver our products through physical retail, digital
download, online platforms and cloud streaming services.
Video games are a widespread and growing form of mainstream entertainment. As a result of the widening popularity of
interactive entertainment, the video game market is expected to continue to grow in coming years. Growth is expected to be
driven by games played on traditional consoles, mobile gaming platforms such as tablets and smartphones, and online
including through social networks. Overall, the installed base of console systems and handheld devices has continued to
expand. According to the “Global Video Game Market Update” published by International Development Group (“IDG”) in
April 2012, the installed base of console systems and handhelds devices grew to 497.8 million units as of December 2011, an
increase of 55.4 million units or 13% from December 2010, and forecasts that the number will increase to an estimated
753.0 million units in calendar 2016. Further, according to IDG, global sales of console, handheld, PC software and digital
gaming segments, inclusive of mobile gaming platforms and online, surpassed $57.2 billion in calendar 2011 and forecasts
that their annual sales will increase to an estimated $89.3 billion in calendar 2016.
The demographics of the interactive entertainment industry audience have broadened significantly over the past few years,
Essential
m
with video games becoming an increasingly popular form of mainstream entertainment. According to the “2011
Facts About The Computer And Video Game Industry” published by Entertainment Software Association (“ESA”), an
estimated 72% of all American households play PC or video games. The average game player is 37 years old and has been
actively playing for 12 years.
hing high-quality interactive
Our core strategy is to capitalize on the popularity of video games by developing and publis
entertainment experiences across a range of genres. We focus on building compelling entertainment franchises by publishing
a select number of titles for which we can create sequels and add-on content. We support the success of our products in the
marketplace through innovative marketing programs and global distribution on all platforms and through all channels that are
relevant to our target audience.
a
1
We were incorporated under the laws of the State of Delaware in 1993 and are headquartered in New York, New York with
2,235 employees globally. Our telephone number is (646) 536-2842 and our website address is www.take2games.com. We
make all of our filings with the Securities and Exchange Commission (“SEC”) available free of charge on our website under
the caption “Corporate—SEC Filings.” Included in these filings are our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and amendments to those reports, which are available as soon as reasonably
practicable after we electronically file or furnish such materials with the SEC pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934.
Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual
Report on Form 10-K. You may also obtain copies of our reports without charge by writing to:
Take-Two Interactive Software, Inc.
622 Broadway
New York, NY 10012
Attn: Investor Relations
You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE,
Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room.
The SEC maintains a website that contains annual, quarterly and current reports, proxy and information statements and other
information that issuers (including the Company) file electronically with the SEC. The SEC’s website is www.sec.gov.
Strategy
Overview. We endeavor to be the most creative, innovative and efficient company in our industry. Our core strategy is to
capitalize on the popularity of video games by developing and publishing high-quality interactive entertainment experiences
across a range of genres. We focus on building compelling entertainment franchises by publishing a select number of titles
for which we can create sequels and add-on content. Most of our intellectual property is internally owned and developed,
which we believe best positions us financially and competitively. We have established a portfolio of proprietary software
content for the major hardware platforms in a wide range of genres, including action, adventure, racing, role-playing, sports
and strategy, which we distribute worldwide. We believe that our commitment to creativity and innovation is a distinguishing
strength, enabling us to differentiate our products in the marketplace by combining advanced technology with compelling
storylines and characters that provide unique gameplay experiences for consumers. We have created, acquired or licensed a
group of highly recognizable brands to match the broad consumer demographics we serve, ranging from adults to children
and game enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the
marketplace through innovative marketing programs and global distribution on all platforms and through all channels that are
relevant to our target audience.
u
r
Support Label Structure to Target Distinct Market Segments. Our business consists of our wholly-owned labels Rockstar
Games and 2K, which publishes its titles under 2K Games, 2K Sports and 2K Play. Each group focuses on distinct product
genres and target demographics. Rockstar Games is the developer and publisher of the interactive entertainment industry’s
most iconic and critically acclaimed brand, Grand Theft Auto, as well as other successful franchises including L.A. Noire,
Max Payne, Midnight Club, and Red Dead. We expect Rockstar Games to continue to be a leader in the action / adventure
product category and create groundbreaking entertainment by leveraging our existing franchises as well as developing new
brands. 2K Games is the publisher of the critically acclaimed, multi-million unit selling BioShock, Borderlands, Mafia, and
Sid Meier’s Civilization franchises. We expect 2K Games to continue to be a leader in the shooter, action, role-playing and
strategy categories by building on its existing brands, as well as developing new franchises in the future. 2K Sports publishes
NBA 2K, the top-ranked NBA basketball vide
o game for 11 years running, as well as other sports titles including Major
League Baseball 2K and Top Spin. 2K Play focuses on casual and family-friendly games such as Carnival Games, an
internally developed and owned franchise, and licensed titles based on popular Nickelodeon television programs. We also
have expansion initiatives in the rapidly growing Asia-Pacific markets, where our strategy is to broaden the distribution of
our existing products, expand our business in Japan, and establish an online gaming presence, especially in China and Korea.
KK
aa
Focus on Core Strength of Producing Select, High Quality Titles. We focus on publishing a select number of high-quality
titles based on internally-owned and developed intellectual property, which typically provide higher margins than licensed
products. We currently own the intellectual property rights of 19 proprietary brands. In addition, we will selectively develop
titles based on licensed properties, including sports, and also publish externally developed titles.
2
We use a product investment review process to evaluate potential titles for investment, to review existing titles in
development, and to assess titles after release to measure their performance in the market and the return on our investment.
We apply this process to all of our products, whether internally or externally developed. The product investment review
process includes reviews of each project at various stages of development by our executive management team and senior
management of our publishing labels, and includes coordination between our sales and marketing personnel before the launch
enhance the competitiveness and profitability of
of the titles. This disciplined approach to product investment is expected to
our titles.
d
We develop our products using a combination of our internal and external development resources acting under contract with
us. We typically select our external developers based on their track record and expertise in developing products in the same
category or genre. One developer will generally produce the same game for multiple platforms and will also produce sequels
to an original game. We believe that selecting and using development resources in this manner allows us to leverage the
particular expertise of our internal and external development resources, which we believe increases the quality of our
products.
Leverage Emerging Technologies, Platforms and Distribution Channels, Including Digitally Delivered Content.
Interactive entertainment played on mobile platforms, including tablets and smartphones, and online platforms, including
social networks, represent exciting opportunities to enhance our growth and prof
ff
itability. In addition, the interactive
t
entertainment industry is increasingly delivering content through digital download. We are actively investing to capitalize on
these trends in order to diversify our product mix, reduce our operating risks, and increase our revenue. Each of our labels has
released offerings for tablets and smartphones across a variety of genres. In December 2011, we released Grand Theft
Auto III: 10th Anniversary Edition, which was our first title for Android and our highest-selling title for Apple’s iOS platform
to date. In July 2011, we launched our first social gaming experience,
Sid Meier’s Civilization World, for Facebook, and we
have several initiatives underway to develop online games primarily for Asian markets. We will continue to invest in
emerging opportunities in mobile and online gameplay, particularly for our wholly-owned franchises, as well as
downloadable content and micro-transactions, where gamers can pay to download additional content to enhance their game
playing experience.
d
Expand International Business. The global market for interactive entertainment continues to grow and we seek to increase
our presence internationally, particularly in Asia, Eastern Europe and Latin America. We have expansion initiatives in the
Asian markets, where our strategy is to broaden the distribution of our existing products, expand our business in Japan, and
establish an online gaming presence, especially in China and Korea. We are a direct publisher in Japan and Korea.
Historically, we distributed our products in Asia through license agreements with local publishers in Japan and Korea, and
distribution agreements with local distributors of finished goods elsewhere in Asia. While we retain title to all intellectual
property, under license agreements local publishers are responsible for localization of software content, distribution and
marketing of the products in their respective local markets. We intend to con
tinue to build upon our licensing relationships
and also expand finished goods distribution strategies to grow our international business.
r
Our Publishing and Software Development Businesses
Revenue in our publishing business is primarily derived from the sale of internally developed software titles and software
titles developed by third-parties for our benefit. Operating margins in our publishing business are dependent in part upon our
ability to continually release new, commercially successful products and to manage software product development costs. We
have internal development studios located in Australia, Canada, China, Czech Republic, the United Kingdom and the United
States. As of March 31, 2012, we had a research and development staff of 1,653 employees with the technical capabilities to
develop software titles for all major current and prior generation consoles, handheld hardware platforms and PCs in multiple
languages and territories.
Operating margins associated with our externally developed titles, or titles for which we do not own the intellectual property,
are generally lower because they require us to acquire licenses, provide minimum development guarantees, and pay
third-party royalties. Agreements with third-party developers generally give us exclusive publishing and marketing rights and
require us to make development payments, pay royalties based on product sales and satisfy other conditions. Development
payments for software titles are typically recoupable against royalties otherwise due to developers based on software sales.
Our agreements with third-party developers generally provide us with the right to monitor development efforts and to cease
making development payments if specified development milestones are not satisfied. We also regularly monitor the level of
development payments in light of expected sales for the related titles.
3
The development cycle for our titles generally ranges from 12 to more than 24 months and our top-selling titles could take up
to 3 years or longer to develop. Although we often simultaneously develop our software for multiple platforms, in certain
cases it can take 9 to 12 months to adapt a product for additional hardware platforms after initial development for one
platform is completed. The cost to develop a frontline software title generally ranges from $10 million to $60 million, with
our top titles exceeding these amounts. We expect that development costs and time will continue to increase for current
generation platforms.
We continue to explore evolving business models such as downloadable content, online gaming and micro-transactions. We
expect downloadable content to become more prevalent as broadband connectivity continues to gain popularity and digital
delivery platforms such as Microsoft’s Xbox LIVE® Marketplace (“Xbox LIVE”) and the Sony Entertainment Network
, where our strategy is to
(“SEN”) gain additional customers. We also have expansion initiatives in the Asia-Pacific markets
broaden the distribution of our existing products, expand our business in Japan, and establish an online gaming presence,
especially in China and Korea.
aa
Rockstar Games. Software titles published by our Rockstar Games label are primarily internally developed. We expect
Rockstar Games, our wholly-owned publisher of the Grand Theft Auto, Max Payne, Midnight Club, Red Dead and other
popular franchises, to continue to be a leader in the action / adventure product category and create groundbreaking
entertainment by leveraging our existing titles as well as developing new brands. We believe that Rockstar has established a
uniquely original, popular cultural phenomenon with its Grand Theft Auto series, which we believe is the interactive
entertainment industry’s most iconic and critically acclaimed brand and has sold-in approximately 120 million units.
Rockstar continues to expand on our established franchises by releasing sequels, as well as offering downloadable episodes
and content. In May 2011, Rockstar released the commercially successful and critically acclaimed L.A. Noire, which became
the first video game ever chosen as an official selection of the Tribeca Film Festival. Rockstar has released several
downloadable content packs to support that title. Rockstar is also well known for developing brands in other genres,
including the Bully and Manhunt franchises.
2K. Our 2K label publishes its titles under 2K Games, 2K Sports and 2K Play:
2K Games. 2K Games has published a variety of popular entertainment properties across multiple genres and platforms and
we expect 2K Games to continue to develop new and successful franchises in the future. 2K Games’ internally owned and
ff
developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia, and Sid Meier’s
Civilization series. 2K Games has also published titles that were externally developed, such as Borderlands, which has
become a key franchise for 2K Games since its launch in October 2009 and has been supported by several successful
downloadable content packs.
2K Sports. 2K Sports publishes realistic sports simulation titles, including our flagship NBA 2K series, which has been the
top-ranked NBA basketball video game for 11 years running, the Major League Baseball 2K series, and our Top Spin tennis
series. We develop most of our 2K Sports software titles through our internal development studios. 2K Sports has secured
long-term licensing agreements with the National Basketball Association (“NBA”). Our current licenses with Major League
Baseball Properties, the Major League Baseball Players Association and Major League Baseball Advanced Media expire in
fiscal 2013.
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We also have expansion initiatives in the rapidly growing Asia markets, where our strategy is to broaden the distribution of
our existing products, expand our business in Japan, and establish an online gaming presence, especially in China and Korea.
2K Sports has secured a multi-year license from the NBA to develop an online version of the NBA simulation game in China,
Taiwan, South Korea and Southeast Asia.
2K Play. 2K Play focuses on developing and publishing titles for the casual and family-friendly games market. 2K Play titles
are developed by both internal development studios and third-party developers. Internally developed titles include Carnival
Games and Let’s Cheer!. 2K Play also has a partnership with Nickelodeon to publish video games based on its top rated
Nick Jr. titles such as Dora the Explorer; Go, Diego, Go!; Ni Hao, Kai-lan and The Backyardigans. We expect
family-oriented gaming to continue to be a component of our business in the future.
Discontinued operations
In February 2010, we completed the sale to SYNNEX Corporation (“Synnex”) of our Jack of All Games third-party
distribution business, which primarily distributed third-party interactive entertainment software, hardware and accessories in
North America for approximately $44.0 million, including $37.3 million in cash, subject to purchase price adjustments, and
up to an additional $6.7 million, subject to the achievement of certain items, which were not met. In April 2011, we settled on
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the purchase price adjustments and as a result the purchase price was lowered by $1.5 million. Consequently, the net
purchase price after the settlement was $35.8 million. The financial results of this business, which were previously reported
as our distribution business, have been classified as discontinued operations in our Consolidated Statements
of Operations for
all periods presented. The assets and liabilities of this business are reflected as assets and liabilities of discontinued
operations in the Consolidated Balance Sheets for all periods presented. See Note 2 to our Consolidated Financial Statements
for additional information regarding discontinued operations.
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Intellectual Property
Our business is highly dependent on the creation, acquisition, licensing and protection of intellectual property. Some of the
intellectual property rights we have created or acquired for our internally-owned portfolio of brands are: BioShock, Bully,
Carnival Games, The Darkness, Grand Theft Auto, L.A. Noire, Mafia, Manhunt, Max Payne, Midnight Club, Red Dead,
Rockstar Games Presents Table Tennis, Sid Meier’s Civilization, Sid Meier’s Pirates!, Spec Ops, and Top Spin. We believe
that content ownership facilitates our internal product development efforts and maximizes profit potential. We attempt to
protect our software and production techniques under copyright, trademark and trade secret laws as well as through
contractual restrictions on disclosure, copying and distribution. Although we generally do not hold any patents, we obtain
trademark and copyright registrations for many of our products.
We also enter into content license agreements, such as those with sports leagues and players associations, movie studios and
performing talent, music labels and musicians. These licenses are typically limited to use of the licen
sed rights in products forff
specific time periods. In addition, we license and include console manufacturer technology in our products on a non-
exclusive basis, which allows our games to be played on their respective hardware systems.
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Manufacturing
Sony, Microsoft and Nintendo either manufacture or control selection of approved manufacturers of software products sold
for use on their respective hardware platforms. We place a purchase order for the manufacture of our products with Sony,
the manufacturer, together with related
Microsoft or Nintendo and then send software code and a prototype of the product to
artwork, user instructions, warranty information, brochures and packaging designs for approval, defect testing and
manufacture. Games are generally shipped within two to three weeks of receipt of our purchase order and all materials.
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Production of PC software is performed by third-party vendors in accordance with ou
r specifications and includes CD-ROM /
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DVD-ROM pressing, assembly of components, printing of packaging and user manuals and shipping of finished goods. We
send software code and a prototype of a title, together with related artwork, user instructions, warranty information,
brochures and packaging designs to the manufacturers. Games are generally shipped within two weeks of receipt of our
manufacturing order.
We occasionally experience difficulties or delays in the manufacture of our titles; however such
delays have not significantly
harmed our business to date. We have not experienced material delays due to manufacturing defects. Our software titles
typically carry a 90-day limited warranty.
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Sales
We sell software titles to retail outlets in North America, Europe and Asia through direct relationships with large retail
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customers and third-party distributors. Our customers in North America include leading mass merchandisers such as Wal-
Mart; specialty retailers such as GameStop; electronics stores such as Best Buy; toy stores such as Toys “R” Us; national and
regional drug stores; rental outlets; and supermarket and discount store chains. Our European customers include Game,
GameStop, GEM Distribution and Media Markt. We have sales operations in Asia, Australia, Austria, Canada, France,
Germany, the Netherlands, New Zealand, Spain, Switzerland, the United Kingdom and the United States.
We are dependent on a limited number of customers that account for a significant portion of our sales. Sales to our five
largest customers during the fiscal year ended March 31, 2012 accounted for approximately 43.9% of our net revenue, with
GameStop and Wal-Mart accounting for 19.0% and 10.7%, respectively. No other customer accounted for more than 10.0%
of our net revenue during the fiscal year ended March 31, 2012.
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We also digitally distribute our titles, downloadable content and micro-transactions direct to consoles and PCs, including
smartphones and tablets. We view digital distribution as an important growth opportunity for our industry and Company;
however, we continue to expect that packaged goods and traditional retailers will be the primary channel for the sale of our
products for the foreseeable future.
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Marketing
Our marketing and promotional efforts are intended to maximize consumer interest in our titles, promote brand name
recognition of our franchises, assist retailers and properly position, package and merchandise our titles.
We market titles by:
•
•
•
Implementing public relations campaigns, using print and online advertising, television, radio spots and outdoor
advertising. We believe that we label and market our products in accordance with the applicable principles and
guidelines of the Entertainment Software Rating Board, or the ESRB, an independent self-regulatory body that
assigns ratings and enforces advertising guidelines for the interactive software industry.
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Satisfying certain shelf life and sales requirements under our agreements with hardware manufacturers in order
to qualify for Sony’s Greatest Hits Programs and Microsoft’s Platinum Hits Program. In connection with these
programs, we receive manufacturing discounts from Sony and Microsoft.
Stimulating continued sales by reducing the wholesale prices of our products to retailers at various times during
the life of a product. Price concessions may occur at any time in a product’s life cycle, but typically occur three
to nine months after a product’s initial launch. During the fiscal years ended March 31, 2012, 2011 and 2010,
five months ended March 31, 2010 and fiscal year ended October 31, 2009, price concessions to retailers
amounted to $86.0 million, $59.9 million, $61.1 million, $53.2 million and $49.4 million, respectively. In
certain international markets, we also provide volume rebates to stimulate continued product sales.
• Employing various other marketing methods designed to promote consumer awareness, including social media,
in-store promotions and point-of-purchase displays, direct mail, co-operative advertising, as well as attendance
at trade shows.
In addition to our media, retail and public relations campaigns, an important part of our marketing strategy leverages
evolving business models, such as downloadable add-on content for our front line titles. Add-on content generates
incremental revenues and also helps to prolong consumer engagement with our titles, which extends the life of each new
release and enhances the value of our franchises. As of March 31, 2012, we had a sales and marketing staff of 283 people.
Product Procurement
We procure products from suppliers principally using standard purchase orders based on our assessment of market demand,
as well as pre-orders from retailers. We carry inventory quantities that we believe are necessary to provide rapid response to
retailer orders. We utilize electronic data interchange with many of our customers to enhance the efficiency of placing and
shipping orders and receiving payments.
Competition
In our publishing business, we compete with:
• Companies that range in size and cost structure from very small with limited resources to very large companies
with greater financial, marketing and technical personnel and other resources than ours, including Activision
Blizzard, Electronic Arts and THQ, and international companies, such as Capcom, Konami, Namco-Bandai,
SEGA, Square Enix and Ubisoft.
•
Sony, Microsoft and Nintendo for licenses to properties and the sale of interactive entertainment software, each
of which is a large developer and marketer of software for its own platforms. Each of these competitors has the
financial resources to withstand significant price competition and to implement extensive advertising
campaigns.
• Other software, hardware, entertainment and media for limited retail shelf space and promotional resources. The
competition is intense among an increasing number of newly introduced entertainment software titles and
hardware for adequate levels of shelf space and promotional support.
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• Other forms of entertainment such as motion pictures, television and audio, online computer programs and other
forms of entertainment which may be less expensive or provide other advantages to consumers.
Competition in the entertainment software industry is based on innovation, features, playability, and product quality; brand
name recognition; compatibility with popular platforms; access to distribution channels; price; marketing; and customer
service. Our business is driven by hit titles, which require increasing budgets for development and marketing. Competition
for our titles is influenced by the timing of competitive product releases and the similarity of such products to our titles and
may result in loss of shelf space or a reduction in sell-through of our titles at retail stores.
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Trends and Factors Affecting our Business
Product Release Schedule. Our financial results are affected by the timing of our product releases and the commercial
success of those titles. Our Grand Theft Auto products in particular have historically accounted for a substantial portion of
our revenue. Sales of Grand Theft Auto products generated approximately 13.8% of the Company’s net revenue for the fiscal
year ended March 31, 2012. The timing of our Grand Theft Auto releases varies significantly, which in turn may affect our
financial performance on a quarterly and annual basis.
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Economic Environment and Retailer Performance. We continue to monitor economic conditions that may unfavorably affect
our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables,
and foreign currency exchange rates. Our business is dependent upon a limited number of customers who account for a
significant portion of our revenue. Our five largest customers accounted fo
r 43.9%, 43.8%, 59.8%, 55.7%, and 56.4% of net
revenue during the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year
ended October 31, 2009, respectively. As of March 31, 2012 and 2011, our five largest customers accounted for 61.3% and
54.2% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross
accounts receivable balance comprised 40.6% and 38.2% of such balances at March 31, 2012 and 2011, respectively. The
economic environment has affected our customers in the past, and may do so in the future. Bankruptcies or consolidations of
our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration
of purchasing power among the remaining large retailers. Certain of our large customers sell used copies of our games, which
may negatively affect our business by reducing demand for new copies of our games. While the downloadable episodes that
we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to affect
our business.
Hardware Platforms. The majority of our products are made for the hardware platforms developed by three companies—
Sony, Microsoft and Nintendo. Note 16 to our Consolidated Financial Statements, “Segment and Geographic Information,”
discloses that Sony, Microsoft and Nintendo hardware platforms comprised approximately 89.4% of the Company’s net
revenue by product platform for the fiscal year ended March 31, 2012. The success of our business is dependent upon the
consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new
eclines, which may negatively affect our
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hardware platforms are introduced, demand for software based on older platforms d
business. Additionally, our development costs are generally higher for titles based on new platforms, and we have limited
ability to predict the consumer acceptance of the new platforms, which may affect our sales and profitability. As a result, we
believe it is important to focus our development efforts on a select number of titles, which is consistent with our strategy.
Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of
content through digital online delivery methods. We provide a variety of online delivered products and services. A number of
our titles that are available through retailers as packaged goods products are also available through direct digital download
through the Internet (from websites we own and others owned by third-parties). We also offer downloadable add-on content
Sid Meier’s
to our packaged goods titles. In addition, in July 2011, we launched our first social gaming experience,
Civilization World, for Facebook, and we have several initiatives underway to develop online games primarily for Asian
markets. We expect online delivery of games and game services to become an increasing part of our business over the long-
term.
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International Operations
International sales are a significant part of our business. For the fiscal years ended March 31, 2012, 2011 and 2010, five
months ended March 31, 2010 and fiscal year ended October 31, 2009, approximately 45.6%, 45.5%, 40.4%, 35.6% and
42.8%, respectively, of our net revenue was earned outside the United States. We have also expanded our Asian operations in
an effort to increase our geographical scope and diversify our revenue base. We are subject to risks inherent in foreign trade,
including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays and
international political, regulatory and economic developments, all of which can have a significant effect on our operating
results. See Notes 1 and 16 to the Consolidated Financial Statements.
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Segment and Geographic Information
See Note 16 to the Consolidated Financial Statements.
Employees
As of March 31, 2012, we had 2,235 full-time employees, of which 1,140 were employed outside of the United States. None
of our employees are subject to collective bargaining agreements. We consider our relations with employees to be
satisfactory.
Item 1A. Risk Factors
Our business is subject to many risks and uncertainties, which may affect our future financial performance. Because of the
risks and uncertainties described below, as well as other factors affecting our operating results and financial condition, past
financial performance should not be considered to be a reliable indicator of future performance and our business and
financial performance could be harmed and the market value of our securities could decline.
Risks relating to our business
We are dependent on the future success of our Grand Theft Auto products and we must continue to publish “hit” titles or
sequels to such “hit” titles in order to compete successfully in our industry.
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Grand Theft Auto and certain of our other titles are “hit” products and have historically accounted for a substantial portion of
our revenue. Sales of Grand Theft Auto products generated approximately 13.8% of the Company’s net revenue for the fiscal
year ended March 31, 2012 and the ten best-selling titles (including Grand Theft Auto) that significantly contributed to the
Company’s net revenue for the fiscal year ended March 31, 2012 in the aggregate accounted for approximately 89.7% of the
Company’s net revenue. If we fail to continue to develop and sell new commercially successful “hit” titles or sequels to such
e commercial release of our “hit” titles or
“hit” titles or experience any delays in product releases or disruptions following th
their sequels, our revenue and profits may decrease substantially and we may incur losses. In addition, competition in our
industry is intense and a relatively small number of hit titles account for a large portion of total revenue in our industry. Hit
products offered by our competitors may take a larger share of consumer spending than we anticipate, which could cause
revenue generated from our products to fall below our expectations. If our competitors develop more successful products or
services at lower price points or based on payment models perceived as offering better value, or if we do not continue to
develop consistently high quality and well-received products and services, our revenue and profitability may decline. In
addition, both the online and mobile games marketplaces are characterized by frequent product introductions, relatively low
barriers to entry, and new and evolving business methods, technologies and platforms for development. Widespread
consumer adoption of these new platforms for games and other technological advances in online or mobile game offerings
could negatively affect our sales of console and traditional PC products before we have an opportunity to develop profitable
businesses in such markets.
We are subject to product development risks which could result in delays and additional costs, and we must adapt to
changes in software technologies.
We depend on our internal development studios and third-party software developers to develop new interactive entertainment
software within anticipated release schedules and cost projections. The development cycle for new titles generally ranges
from 12 to more than 24 months, and our top-selling titles could take up to 3 years or longer to develop. Development times
and costs of current generation software have increased substantially as a result of the additional and enhanced features
available in the newest games. Further, after development of a product it may take between 9 and 12 additional months to
develop the product for other hardware platforms. If our third-party software developers experience unanticipated
development delays, financial difficulties or additional costs we will not be able to release titles according to our schedule
and at budgeted costs. Certain of our licensing and marketing agreements also contain provisions that would impose penalties
if we fail to meet agreed upon game release dates. There can be no assurance that our products will be sufficiently successful
so that we can recoup these costs or make a profit on these products.
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Additionally, in order to stay competitive, our internal development studios must anticipate and adapt to rapid technological
changes affecting software development. Any inability to respond to technological advances and implement new
technologies could render our products obsolete or less marketable.
8
The inability of our products to achieve significant market acceptance, delays in product releases or disruptions following
the commercial release of our products may have a material adverse effect on our operating results.
New products may not achieve significant market acceptance, generate sufficient sales or be introduced in a timely manner to
permit us to recover development, manufacturing and marketing cost
s associated with these products. The life cycle of a title
generally involves a relatively high level of sales during the first few months after introduction followed by a rapid decline in
sales. Because revenue associated with an initial product launch generally constitutes a high percentage of the total revenue
associated with the life of a product, delays in product releases or disruptions following the commercial release of one or
more new products could have a material adverse effect on our operating results and cause our operating results to be
materially different from our expectations.
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Our business is subject to the continued popularity of current generation video game platforms and our ability to develop
commercially successful products for these platforms.
We derive most of our revenue from the sale of products made for video game platforms manufactured by third-parties, such
as Sony’s PS3, Microsoft’s Xbox 360 and Nintendo’s Wii. Note 16 to our Consolidated Financial Statements, “Segment and
Geographic Information,” discloses that Sony, Microsoft and Nintendo hardware platforms comprised approximately 89.4%
of the Company’s net revenue by product platform for the fiscal year ended March 31, 2012. The success of our business is
subject to the continued popularity of these platforms and our ability to develop commercially successful products for these
platforms.
Connectivity issues related to digital delivery platforms could affect our ability to sell and provide online services for our
products and could affect our profitability.
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We rely upon third-party digital delivery platforms, such as Xbox Live and SEN, to provide connectivity from the consumer
to our digital products and our online services. Connectivity issues could prevent customers from accessing this content and
our ability to successfully market and sell our products could be adversely affected. In addition, we could experience similar
issues related to services we host on our internal servers. Such issues also could affect our ability to provide online services
and could affect our business.
Our business could be adversely affected if our consumer data protection measures are not seen as adequate or there are
breaches of our security measures or unintended disclosures of our consumer data.
We are collecting and storing consumer information, including personal information and credit card information. We take
measures to protect our consumer data from unauthorized access or disclosure. It is possible that our security controls over
consumer data may not prevent the improper access or disclosure of personally identifiable information. In addition, due to
the high profile nature of our products, we may draw a disproportionately higher amount of attention and attempts to breach
our security controls than companies with lower profile products. A security breach that leads to disclosure of consumer
account information (including personally identifiable information) could harm our reputation, compel us to comply with
disparate breach notification laws in various jurisdictions and otherwise subject us to liability under laws that protect personal
data, resulting in increased costs or loss of revenue. A resulting perception that our products or services do not adequately
protect the privacy of personal information could result in a loss of current or potential consumers and business partners. In
addition, if any of our business partners experience a security breach that leads to disclosure of consumer account
information, our reputation could be harmed, resulting in loss of revenue.
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The interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere are often
uncertain, contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is
inconsistent with our data practices. If so, this could result in government imposed fines or orders requiring that we change
our data practices, which could have an adverse effect on our business. Complying with these various laws could cause us to
incur substantial costs or require us to change our business practices in a manner adverse to our business.
In addition, certain of our products are online-enabled. The ability of our products to offer online functionality, and our
ability to offer content through a video game platform’s digital distribution channel, is dependent upon the continued
operation and security of such platform’s online network. These third-party networks, as well as our own internal systems
and websites, and the security measures related thereto may be breached as a result of third-party action, including intentiona
l
misconduct by computer hackers, employee error, malfeasance or otherwise, and result in someone obtaining unauthorized
access to our customers’ data or our data, including our intellectual property and other confidential business information, or
our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems,
change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these
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techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, we may
lose business, suffer irreparable damage to our reputation, and/or incur significant costs and expenses relating to the
investigation and possible litigation of claims relating to such event.
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Security breaches involving the source code for our products could adversely affect our revenues.
We securely store the source code for our interactive entertainment software products as it is created. A breach, whether
physical, electronic or otherwise, of the systems on which such source code and other sensitive data are stored could lead to
damage or piracy of our software. If we are subject to data security breaches, we may have a loss in sales or increased costs
arising from the restoration or implementation of additional security measures which could materially and adversely affect
ade secrets and other confidential business
our profitability. Any theft and/or unauthorized use or publication of our tr
information as a result of such an event could adversely affect our competitive position, reputation, brand and future sales of
our products. Our business could be subject to significant disruption, and we could suffer monetary and other losses and
reputational harm, in the event of such incidents and claims.
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If we are unable to sustain launch pricing on current generation titles, our operating results may suffer.
The interactive entertainment software and hardware industry is characterized by the introduction of new and enhanced
generations of products and evolving industry standards. Current generation titles for the PS3, Xbox 360 and Wii have been
offered at premium retail prices since the launch of such consoles. We expect to continue to price current generation titles at a
premium level. However, circumstances may arise in which we may need to reduce prices for such titles. If we are unable to
sustain launch pricing on these current generation titles, it will have a material adverse effect on our margins, profitability and
operating results.
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We depend on our key management and product development personnel.
Our continued success will depend to a significant extent on our senior management team and our relationship with
ZelnickMedia Corporation (“ZelnickMedia”). Our Executive Chairman and Chief Executive Officer and Chief Operating
Officer are partners of ZelnickMedia. We are also highly dependent on the expertise, skills and knowledge of certain of our
Rockstar employees and other key creative personnel responsible for content creation and development of our Grand Theft
Auto titles and titles based on other brands. We may not be able to continue to retain th
ese personnel at current compensation
levels, or at all.
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The loss of the services of our executive officers, ZelnickMedia, our key
Rockstar employees or other key creative personnel
could significantly harm our business. In addition, if one or more key employees were to join a competitor or form a
competing company, we may lose additional personnel, experience material interruptions in product development, delays in
bringing products to market and difficulties in our relationships with licensors, suppliers and customers, which would
significantly harm our business. Failure to continue to attract and retain other qualified management and creative personnel
could adversely affect our business and prospects.
Declines in consumer spending and other adverse changes in the economy could have a material adverse effect on our
business and operating results.
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Most of our products involve discretionary spending on the part of consumers. We believe that consumer spending is
influenced by general economic conditions and the availability of discretionary income. This makes our products particularly
sensitive to general economic conditions and economic cycles as consumers are generally more willing to make discretionary
purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. Adverse
economic conditions such as a prolonged U.S. or international general economic downturn, including periods of increased
inflation, unemployment levels, tax rates, interest rates, energy prices or declining consumer confidence could also reduce
consumer spending. Reduced consumer spending has and may continue to result in reduced demand for our products and
may also require increased selling and promotional expenses, which has had and may continue to have an adverse effect on
our business, financial condition and operating results. Furthermore, uncertainty and adverse changes in the economy could
also increase the risk of material losses on our investments, increase costs associated with developing and publishing our
products, increase the cost and availability of sources of financing, and increase our exposure to material losses from bad
debts, any of which could have a material adverse effect on our financial condition and operating results. If economic
conditions worsen, our business, financial condition and operating results could be adversely affected.
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Our quarterly operating results are dependent on the release of “hit” titles and are highly seasonal which may cause our
quarterly operating results to fluctuate significantly.
We have experienced and may continue to experience wide fluctuations in quarterly operating results. The release of a “hit”
title typically leads to a high level of sales during the first few months after introduction followed by a rapid decline in sales.
In addition, the interactive entertainment industry is highly seasonal, with sales typically higher during the fourth calendar
quarter, due primarily to increased demand for games during the holiday season. Demand for and sales of our sports titles are
also seasonal in that they are typically released just prior to the start of the sport season which they depict. If a key event or
sports season to which our product release schedule is tied were to be delayed or cancelled, our sales would also suffer
disproportionately. Our failure or inability to produce “hit” titles or introduce products on a timely basis to meet seasonal
fluctuations in demand could adversely affect our business and operating results. The uncertainties associated with software
development, manufacturing lead times, production delays and the approval process for products by hardware manufacturers
and other licensors make it difficult to predict the quarter in which our products will ship and therefore may cause us to fail to
meet financial expectations.
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Returns of our published titles by our customers and price concessions granted to our customers may adversely affect our
operating results.
We are exposed to the risk of product returns and price concessions with respect to our customers. Our distribution
arrangements with customers generally do not give them the right to return titles to us or to cancel firm orders. However, we
sometimes accept product returns from our distribution customers for stock balancing and negotiate accommodations for
customers, which include credits and returns, when demand for specific products falls below expectations. We accept returns
and grant price concessions in connection with our publishing arrangements and revenue is recognized after deducting
estimated reserves for returns and price concessions. While we believe that we can reliably estimate future returns and price
concessions, if return rates and price concessions for our products exceed our reserves, our revenue could decline.
Increased sales of used video game products could lower our sales.
Certain of our larger customers sell used video games, which are generally priced lower than new video games. If our
customers continue to increase their sales of used video games, it could negatively affect our sales of new video games and
have an adverse influence on our operating results.
A limited number of customers account for a significant portion of our sales. The loss of a principal customer could
seriously hurt our business.
A substantial portion of our product sales are made to a limited number of customers. Sales to our five largest customers
during the fiscal year ended March 31, 2012 accounted for approximately 43.9% of our net revenue, with GameStop and
Wal-Mart accounting for 19.0% and 10.7%, respectively. Our sales are made primarily pursuant to purchase orders without
long-term agreements or other commitments, and our customers may terminate their relationship with us at any time. Certain
of our customers may decline to carry products containing mature content. The lo
ss of our relationships with principal
customers or a decline in sales to principal customers, including as a result of a product being rated “AO” (age 18 and over),
could materially adversely affect our business and operating results. Furthermore, our customers may also be placed into
bankruptcy, become insolvent or be liquidated due to economic downturns, global contractions of credit or for other factors.
Bankruptcies or consolidations of certain large retail customers could seriously hurt our business, including as a result of
uncollectible accounts receivable from such customers and the concentration of purchasing power among remaining large
retailers. In addition, our results of operations may be adversely affected if certain of our customers who purchase on credit
terms are no longer eligible to purchase on such terms due to their financial di
stress, which may reduce the quantity of
products they demand from us.
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If our marketing and advertising efforts fail to resonate with our customers, our business and operating results could be
adversely affected.
Our products are marketed worldwide through a diverse spectrum of advertising and promotional programs such as television
and online advertising, print advertising, retail merchandising, website development and event sponsorship. Our ability to sell
our products and services is dependent in part on the success of these programs. If the marketing for our products and
services fails to resonate with our customers, particularly during the holiday season or other key selling periods, or if
advertising rates or other media placement costs increase, these factors could have a material adverse influence on our
business and operating results.
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The interactive entertainment software industry is highly competitive.
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We compete for both 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 own platforms. We also compete with domestic
game publishers, such as Activision Blizzard, Electronic Arts and THQ and international publishers, such as Capcom,
Konami, Namco-Bandai, SEGA, Square Enix and Ubisoft. As our business is dependent upon our ability to develop hit titles,
which require increasing budgets for development and marketing, the availability of significant financial resources has
become a major competitive factor in developing and marketing software games. Some of our competitors have greater
financial, technical, personnel and other resources than we do and are able to finance larger budgets for development and
marketing and make higher offers to licensors and developers for commercially desirable properties. Our titles also compete
with other forms of entertainment, such as social media and casual games, in addition to motion pictures, television and audio
and video products featuring similar themes, online computer programs and other entertainment, which may be less
expensive or provide other advantages to consumers.
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A number of software publishers who compete with us have developed and commercialized or are currently developing
online games for use by consumers over the Internet. If technological advances significantly increase the availability of
online games and if consumer acceptance of online gaming grows substantially, it could result in a decline in our
platform-based software sales and negatively affect sales of such products.
Increased competition for limited shelf space and promotional support from retailers could affect the success of our
business and require us to incur greater expenses to market our titles.
Retailers have limited shelf space and promotional resources and competition is intense among newly introduced interactive
entertainment software titles for adequate levels of shelf space and promotional support. Competition for retail shelf space is
expected to continue to increase, which may require us to increase our marketing expenditures to maintain desirable sales
levels of our titles. Competitors with more extensive lines and more popular titles may have greater bargaining power with
retailers. Accordingly, we may not be able, or we may have to pay more than our competitors, to achieve similar levels of
promotional support and shelf space.
t
Our business is dependent on our ability to enter into successful software development arrangements with third-parties.
Our success depends on our ability to continually identify and develop new titles on a timely basis. We rely on third-party
software developers for the development of some of our titles. Quality third-party developers are continually in high demand.
Software developers who have developed titles for us in the past may not be available to develop software for us in the
future. Due to the limited number of third-party software developers and the limited control that we exercise over them, these
developers may not be able to complete titles for us on a timely basis or within acceptable quality standards, if at all. We
have entered into agreements with third-parties to acquire the rights to publish and distribute interactive entertainment
software as well as to use licensed intellectual properties in our titles. These agreements typically require us to make
development payments, pay royalties and satisfy other conditions. Our development payments may not be sufficient to permit
developers to develop new software successfully, which could result in material delays and significantly increase our costs to
bring particular products to market. Software development costs, promotion and marketing expenses and royalties payable to
software developers and third-party licensors have increased significantly in recent years and reduce potential profits derived
from sales of our software. Future sales of our titles may not be sufficient to recover development payments and advances to
software developers and licensors, and we may not have adequate financial and other resources to satisfy our contractual
commitments to such developers. If we fail to satisfy our obligations under agreements with third-party developers and
licensors, the agreements may be terminated or modified in ways that are burdensome to us, and have a material adverse
effect on our financial condition and operating results.
f
We cannot publish our titles without the approval of hardware licensors that are also our competitors.
We are required to obtain licenses from Sony, Microsoft and Nintendo, which are also our competitors, to develop and
publish titles for their respective hardware platforms. Our existing 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, our ability to manage the timing of the release of these titles and, accordingly, our net revenue from titles for these
hardware platforms, may be limited. If a licensor chooses not to renew or extend our license agreement at the end of its
current term, or if a licensor were to terminate our license for any reason or does not approve one or more of our titles, we
may be unable to publish that title as well as additional titles for that licensor’s platform. Termination of any such agreements
or disapproval of titles could seriously hurt our business and prospects. We may be unable to continue to enter into license
agreements for certain current generation platforms on satisfactory terms or at all. Failure to enter into any such agreement
could also seriously hurt our business.
12
Our platform licensors control the fee structures for online distribution of our games on their platforms.
Certain platform licensors have retained the right to change the fee structures for online distribution of both paid content and
free content (including patches and corrections) on their platforms. Each licensor’s ability to set royalty rates may increase
costs, which could negatively affect our operating margins. We may be unable to distribute our content in a cost-effective or
profitable manner through this distribution channel, which could adversely affect our business and results of operations.
We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in
demand.
In the event of a significant decline in revenue, we may not be able to dispose of facilities, reduce personnel or make other
changes to our cost structure without disruption to our operations or without significant termination and exit costs.
Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in
revenue and profit. Moreover, reducing costs may impair our ability to produce and develop software titles at sufficient levels
in the future.
We submit our products for rating by the Entertainment Software Rating Board (“ESRB”) in the United States and other
voluntary or government ratings organizations in foreign countries. Failure to obtain a target rating for certain of our
products could negatively affect our ability to distribute and sell those games, as could the re-rating of a game for any
reason.
We voluntarily submit our game products to the ESRB, a U.S.-based non-profit and independent ratings organization. The
ESRB system provides consumers with information about game content using a rating symbol that generally suggests the
appropriate player age group and specific content descriptors, such as graphic violence, profanity or sexually explicit
material. The ESRB may impose significant penalties on game publishers for violations of its rules related to rating or
marketing games, including revocation of a rating or monetary fines up to $1 million. Other countries require voluntary or
government backed ratings as prerequisites for product sales. In some instances, we may have to modify our products in
order to market them under the target rating, which could delay or disrupt the release of our products. In addition, some of
our titles may not be sold at all or without extensive edits in certain countries, such as Germany.
h
In the United States, if the ESRB rates a game as “AO” (age 18 and older), platform licensors may not certify the game and
retailers may refuse to sell it. In addition, some consumers have reacted to re-ratings or controversial game content by
refusing to purchase such games, demanding refunds for games that they had already purchased, and refraining from buying
other games published by us. Many of our Rockstar titles and certain of our 2K Games titles have been rated “M” (age 17 and
older) by the ESRB. If we are unable to obtain “M” ratings and instead receive “AO” ratings on future versions of those or
similar titles as a result of changes in the ESRB’s ratings standards or for other reasons, including the adoption of legislation
in this area, our business and prospects could be negatively affected. If any of our games are re-rated by the ESRB or other
foreign based ratings organizations, we could be exposed to litigation, admini
strative fines and penalties and other potential
liabilities, and our operating results and financial condition could be significantly affected.
aa
We have implemented processes to comply with the requirements of the ESRB and other ratings organizations and properly
display the designated rating symbols and content descriptions. Nonetheless, these processes are subject to human error,
circumvention, overriding and reasonable resource constraints. If a video game we published were found to contain
undisclosed pertinent content, the ESRB could re-rate a game, retailers could refuse to sell it and demand that we accept the
return of any unsold copies or returns from customers, and consumers could refuse to buy it or demand that we refund their
money. This could have a material negative affect on our operating results and financial condition. In addition, we may be
exposed to litigation, administrative fines and penalties and our reputation could be harmed, which could affect sales of other
video games we sell. If any of these consequences were to occur, our business and financial performance could be
significantly harmed.
Content policies adopted by retailers, consumer opposition and litigation could negatively affect sales of our products.
Retailers may decline to sell interactive entertainment software containing what they judge to be graphic violence or sexually
explicit material or other content that they deem inappropriate for their businesses. If retailers decline to sell our products
based upon their opinion that they contain objectionable themes, graphic violence or sexually explicit material or other
generally objectionable content, or if any of our previously “M” rated series products are rated “AO,” we might be required
to significantly change or discontinue particular titles or series, which in the case of our best-selling Grand Theft Auto titles
could seriously affect our business. Consumer advocacy groups have opposed sales of interactive entertainment software
containing objectionable themes, violence or sexual material or other objectionable content by pressing for legislation in
13
these areas and by engaging in public demonstrations and media campaigns. Additionally, although lawsuits seeking
damages for injuries allegedly suffered by third-parties as a result of video games have generally been unsuccessful in the
courts, claims of this kind have been asserted against us from time to time and may be asserted and be successful in the
future.
tt
We are subject to risks and uncertainties of international trade, including fluctuat
ions in the values of local foreign
currencies against the dollar.
f
Sales in international markets, primarily in Europe, have accounted for a significant portion of our net revenue. Note 16 to
our Consolidated Financial Statements, “Segment and Geographic Information,” discloses that sales in Europe comprised
approximately 29.8% of the Company’s net revenue for the fiscal year ended March 31, 2012. We have also expanded our
Asian operations in an effort to increase our geographical scope and diversify our revenue base. We are subject to risks
inherent in foreign trade, including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates,
shipping delays, and international political, regulatory and economic developments, all of which can have a significant
cal currencies, which could fluctuate against
influence on our operating results. Many of our international sales are made in lo
the dollar. While we may use forward exchange contracts to a limited extent to seek to mitigate foreign currency risk, our
operating results could be adversely affected by unfavorable foreign currency fluctuations.
r
f
We face risks from our international operations.
We are subject to certain risks because of our international operations, particularly as we continue to grow our business and
presence in Asia, Latin America and other parts of the world. Changes to and compliance with a variety of foreign laws and
regulations may increase our cost of doing business and our inability or failure to obtain required approvals could harm our
international and domestic sales. Trade legislation in either the United States or other countries, such as a change in the
current tariff structures, import/export compliance laws or other trade laws or policies, could adversely affect our ability to
sell or to distribute in international markets. We incur additional legal compliance costs associated with our international
operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and
regulations which may be substantially different from those in the United States. In many foreign countries, particularly in
those with developing economies, it may be common to engage in business practices that are prohibited by United States
laws and regulations, such as the Foreign Corrupt Practices Act, and by local laws, such as laws prohibiting corrupt payments
to government officials. Although we implement policies and procedures designed to
ensure compliance with these laws,
there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource
certain of our business operations, including those based in or from countries where practices which violate such laws may be
customary, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have
a material adverse effect on our business.
mm
If we are unable to protect the intellectual property relating to our software, the commercial value of our products will be
adversely affected and our competitive position could be harmed.
We develop proprietary software and have obtained the rights to publish and distribute software developed by third-parties.
We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as
through contractual restrictions on disclosure, copying and distribution. Our software is susceptible to piracy and
engineer our software to obtain and use
unauthorized copying. Unauthorized third-parties may be able to copy or to reverse
programming or production techniques that we regard as proprietary. Well organized piracy operations have also proliferated
in recent years, resulting in the ability to download pirated copies of our software over the Internet. Although we attempt to
incorporate protective measures into our software, piracy of our products could negatively affect our future profitability.
rr
If we infringe on or are alleged to infringe on the intellectual property rights of third-parties, our business could be
adversely affected.
-
As our industry grows, we may be subject to an increasing amount of litigation that is common in the software industry based
on allegations of infringement or other alleged violations of patent, copyright and/or trademarks. In addition, we believe that
interactive entertainment software will increasingly become the subject of claims that such software infringes on the
intellectual property rights of others with both the growth of online functionality and advances in technology, game content
and software graphics as games become more realistic. From time to time, we receive notices from third-parties or are named
in lawsuits by third-parties alleging infringement of their proprietary rights. Although we believe that our software and
technologies and the software and technologies of third-party developers and publishers with whom we have contractual
relations do not and will not infringe or violate proprietary rights of others, it is possible that infringement of proprietary
rights of others may occur. Any claims of infringement, with or without merit, could be time consuming, costly and difficult
to defend. Moreover, intellectual property litigation or claims could require us to discontinue the distribution of products,
obtain a license or redesign our products, which could result in additional substantial costs and material delays.
r
14
Our software is susceptible to errors, which can harm our financial results and reputation.
The technological advancements of new hardware platforms result in the development of more complex software products.
As software products become more complex, the risk of undetected errors in new products increases. We may need to
produce and distribute patches in order to repair such errors, which could be costly and may distract our developers from
working on new products. If, despite testing, errors are found in new products or releases after shipments have been made, we
could experience a loss of or delay in timely market acceptance, product returns, loss of revenue, increases in costs relating to
the repair of such errors and damage to our reputation.
If we acquire or invest in other businesses, intellectual properties or other assets, we may be unable to integrate them with
our business, our financial performance may be impaired and/or we may not realize the anticipated financial and
strategic goals for such transactions.
ee
If appropriate opportunities present themselves, we may acquire or make investments in businesses, intellectual properties
and other assets that we believe are strategic. We may not be able to identify, negotiate or finance any future acquisition or
investment successfully. Even if we do succeed in acquiring or investing in a business, intellectual property or other asset,
such acquisitions and investments involve a number of risks, including:
•
•
•
•
•
•
•
•
•
retaining key employees and maintaining the key business and customer relationships of the businesses we
acquire;
cultural challenges associated with integrating employees from an acquired company or business into our
organization;
the possibility that the combined company would not achieve the expected benefits, including any anticipated
operating and product synergies, of the acquisition as quickly as anticipated or that the costs of, or operational
difficulties arising from, an acquisition would be greater than anticipated;
significant acquisition-related accounting adjustments, particularly relating to an acquired company’s deferred
f
revenue, that may cause reported revenue and profits of the combined company to be lower than the sum of
their stand-alone revenue and profits;
significant accounting charges resulting from the completion and integration of a sizeable acquisition and
increased capital expenditures, including potential impairment charges incurred to write down the carrying
amount of intangible assets generated as a result of an acquisition;
the possibility that we will not discover important facts during due diligence that could have a material adverse
effect on the value of the businesses we acquire, including the possibility that a change of control of a company
we acquire triggers a termination of contractual or intellectual property rights important to the operation of its
business;
the need to integrate an acquired company’s accounting, management information, human resource and other
administrative systems to permit effective management and timely reporting, and the need to implement or
remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior
to the acquisition, lacked these controls, procedures and policies;
litigation or other claims in connection with, or inheritance of claims or litigation risks as a result of, an
acquisition, including claims from terminated employees, customers or other third-parties; and
to the extent that we engage in strategic transactions outside of the United States, we face additional risks,
including risks related to integration of operations across different cultures and languages, currency risks and
the particular economic, political and regulatory risks associated with specific countries.
Future acquisitions and investments could also involve the issuance of our equity and equity-linked securities (potentially
diluting our existing stockholders), the incurrence of debt, contingent liabilities or amortization expenses, write-offs of
goodwill, intangibles, or acquired in-process technology, or other increased cash and non-cash expenses such as stock- based
compensation. Any of the foregoing factors could harm our financial condition or prevent us from achieving improvements in
our financial condition and operating performance that could have otherwise been achieved by us on a stand-alone basis. Our
stockholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.
d
a
15
Our ability to acquire and maintain licenses to intellectual property, especially for sports titles, affects our revenue and
profitability. Competition for these licenses may make them more expensive and increase our costs.
Certain of our products are based on or incorporate intellectual property owned by others. For exampl
e, our 2K Sports
products include rights licensed from major sports leagues and players’ associations. Similarly, some of our other titles are
based on licenses of popular entertainment products. Competition for these licenses is intense. If we are unable to maintain
these licenses or obtain additional licenses on reasonable economic terms or with significant commercial value, our revenue
and profitability could decline significantly. Competition for these licenses may also increase the advances, guarantees and
royalties that we must pay to the licensor, which could significantly increase our costs and adversely affect our profitability.
In addition, on certain intellectual property licenses, we are subject to guaranteed minimum payments, royalties or standards
of performance and may not be able to terminate these agreements prior to their stated expiration. If such licensed products
do not generate revenues in excess of such minimum guarantees, our profitability will be adversely affected.
m
y
We are subject to contractual covenants which place certain limitations on how we manage our business.
Our Credit Agreement (as defined herein) and the indentures governing our Convertible Notes (as defined herein) limit our
ability to take various actions, including incurring additional debt, paying dividends, repurchasing shares and acquiring or
disposing of assets or businesses. In addition, we have granted a security interest in connection with certain compensatory
arrangements which limits our ability to incur senior debt in excess of certain amounts. Accordingly, we may be restricted
from taking actions that management believes would be desirable and in the best interests of us and our stockholders. Our
Credit Agreement and the indentures also require us to satisfy specified financial and non-financial covenants. A breach of
any of the covenants contained in our Credit Agreement could result in an event of default under the agreement and under the
indentures governing our Convertible Notes and would allow our lenders and noteholders to pursue various remedies,
including accelerating the repayment of any outstanding indebtedness.
Our involvement, and the involvement of some of our former executive officers, in a wide variety of lawsuits,
investigations and proceedings has had, and may in the future have, a material adverse effect on us.
We and some of our former officers, directors and employees have been the subject of three separate governmental
investigations and a substantial amount of litigation and other proceedings relating to the subject matter of those
investigations. While these matters have been resolved we may be subject to heightened scrutiny in the futu
re as a result of
our historical legal proceedings, including an increased likelihood of a government investigation occurring and an increased
likelihood that any such investigation is more extensive than in the past. Furthermore, any future fines, restrictions or other
penalties imposed as a result of any such investigation may be more severe than those which may be imposed on a company
without our history.
d
Our business and products are subject to potential legislation. The adoption of such proposed legislation could limit the
retail market for our products.
Several proposals have been made for federal legislation to regulate our industry. Such proposals seek to prohibit the sale of
products containing content included in some of our games. If any such proposals are enacted into law, it may limit the
potential market for some of our games in the United States, and adversely affect our operating results. Other countries, such
as Germany, have adopted laws regulating content both in packaged games and those transmitted over the Internet that are
stricter than current United States laws. In the United States, proposals have also been made by numerous state legislators to
regulate and prohibit the sale of interactive entertainment software products containing certain types of violent or sexual
content to under 17 or 18 audiences, such as the State of California’s “ultraviolent video game
s law” that sought to ban the
ff
sale or rental of violent video games to minors. While such legislation to date has been enjoined by industry and retail groups
or been found unconstitutional, the adoption into law of such legislation in federal and/or in state jurisdictions in which we do
significant business could severely limit the retail market for some of our games.
We may need additional capital if we incur losses.
ii
If we incur losses in the future, we may be required to raise additional capital in order to fund our operations. We could seek
to raise capital in a number of ways, including through the issuance of debt or equity, or through other financing
arrangements. In October 2011, we entered into a Second Amended and Restated Credit Agreement (the “Credit
Agreement”) which amended and restated our July 2007 Credit Agreement (as defined herein), which requires us to make
periodic interest or other debt service payments. In addition, we issued 4.375% Convertible Notes due 2014 in June 2009 (the
“4.375% Convertible Notes”) and 1.75% Convertible Notes due 2016 in November 2011 (the “1.75% Convertible Notes”
and together with the 4.375% Convertible Notes, the “Convertible Notes”), which require us to make periodic interest
16
payments to the holders of the Convertible Notes. If we borrow additional funds, further debt service payments would
probably be necessary. In addition, the terms of additional debt may impose significant restrictions on our ability to operate
our business. If we seek financing through the sale of equity or equity-based securities (such as our Convertible Notes), our
current stockholders will suffer dilution in their percentage ownership of common st
ock. We cannot be certain as to our
n
ability to raise additional capital in the future or under what terms capital would be available. If we need to raise capital andaa
are not successful in doing so, we will have to consider other options that may include, but are not limited to, a reduction in
our expenditures for internal and external new product development, reductions in overhead expenses, and sales of
intellectual property and other assets. These actions, should they become necessary, will likely re
sult in a reduction in the size
y
of our operations and could materially affect the prospects of our business.
rr
We may be required to record a significant charge to earnings if our goodwill becomes impaired.
We are required under U.S. generally accepted accounting principles to review our goodwill for impairment at least annually
or more frequently when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that
may be considered a change in circumstances, indicating a requirement to reevaluate whether our goodwill continues to be
recoverable, include a significant decline in stock price and market capitalization, slower growth rates in our industry or other
materially adverse events. We may be required to record a significant charge to earnings in our financial statements during
the period in which any impairment of our goodwill is determined. This may adversely affect our operating results.
t
Our reported financial results could be adversely affected by the application of existing or future accounting standards to
our business as it evolves.
Our reported financial results are affected by the accounting policies promulgated by the SEC and national accounting
standards bodies and the methods, estimates, and judgments that we use in applying our accounting policies. For example,
standards regarding software revenue recognition have and could further significantly affect the way we account for revenue
related to our products and services. We expect that a significant portion of our games will be online- enabled in the future,
and we could be required to recognize the related revenue over an extended period of time rather than at the time of sale. As
we enhance, expand and diversify our business and product offerings, the application of existing or future financial
accounting standards, particularly those relating to the way we account for revenue, could have a significant adverse effect on
our reported results although not necessarily on our cash flows.
n
Risks relating to our common stock
For purposes of this section “—Risks relating to our common stock,” references to “the Company,” “we,” “our,” and “us”
refer only to Take-Two Interactive Software, Inc. and not to its subsidiaries.
Additional issuances of equity securities by us would dilute the ownership of our existing stockholders.
We may issue equity or equity-based securities (such as our Convertible Notes) in the future in connection with acquisitions
or strategic transactions, to adjust our ratio of debt to equity, including through repayment of outstanding debt, to fund
expansion of our operations or for other purposes. To the extent we issue additional equity securities, the percentage
ownership of our existing stockholders would be reduced.
Future sales or other issuances of our common stock could adversely affect its market price.
The sale of substantial amounts of our common stock could adversely affect its price. The sale or the availability for sale of a
large number of shares of our common stock in the public market could cause the price of our common stock to decline. The
issuance of shares of our common stock upon conversion of our Convertible Notes could also adversely affect the price of
our common stock.
Our stock price has been volatile and may continue to fluctuate significantly.
The market price of our common stock historically has been, and we expect will continue to be, subject to significant
fluctuations. These fluctuations may be due to factors specific to us including those discussed in the risk factors in this
section as well as others not currently known to us or that we currently do not believe are material, to changes in securities
analysts’ earnings estimates or ratings, to our results or future financial guidance falling below our expectations and analysts’
and investors’ expectations, to factors affecting the computer, software, entertainment, media or electronics industries, or to
national or international economic conditions.
17
Stock markets, in general, have experienced over the years, and continue to experience significant price and volume
fluctuations that have affected market prices for companies such as ours and that may be unrelated or disproportionate to the
operating performance of the affected companies. These broad market and industry fluctuations may adversely affect the
price of our stock, regardless of our operating performance.
f
The convertible senior note hedge and warrant transactions entered into in connection with the offering of our 4.375%
Convertible Notes may affect the value of those notes and our common stock.
f
In connection with the offering of our 4.375% Convertible Notes, we entered into convertible senior note hedge transactions
which are expected to reduce the potential dilution upon conversion of the notes. However, we also entered into warrant
transactions which could separately have a dilutive effect on our earnings per share to the extent that the market price per
share of our common stock exceeds the applicable strike price of the warrants. In addition, the counterparties to the hedge
and warrant transactions, and/or their respective affiliates, may modify their hedge positions by entering into or unwinding
various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market
transactions at any time prior to the maturity of the 4.375% Convertible Notes (and are likely to do so during any observation
period related to a conversion of the 4.375% Convertible Notes). This activity could also cause or avoid an increase or a
decrease in the market price of our common stock or the 4.375% Convertible Notes.
Delaware law, our charter documents and provisions of our debt agreements may impede or discourage a takeover, which
could cause the market price of our shares to decline.
f
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability
of a third-party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our
Board has the power, without stockholder approval, to adopt a stockholder rights plan and/or to designate the terms of one or
more series of preferred stock and issue shares of preferred stock. In addition, we may under certain circumstances involving
a change of control, be obligated to repurchase all or a portion of our Convertible Notes and any potential acquirer would be
required to assume our obligations related to any outstanding Convertible Notes. We or any possible acquirer may not have
available financial resources necessary to repurchase those notes. The ability of our Board to create and issue a new series of
preferred stock and certain provisions of Delaware law, our certificate of incorporation and bylaws and the indenture
governing our notes could impede a merger, takeover or other business combination involving us or discourage a potential
acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market
price of our common stock and the value of any outstanding notes.
Our ability to use net operating loss carryforwards to reduce future years’ taxes could be substantially limited if we
experience an ownership change as defined in the Internal Revenue Code.
Section 382 of the Internal Revenue Code contains rules that limit the ability of a company to use its net operating loss
carryforwards in years after an ownership change, which is generally defined as any change in ownership of more than 50%
of its stock over a three-year testing period. These rules generally operate by focusing on ownership changes among
stockholders owning directly or indirectly 5% or more of the stock of a company and/or any change in ownership arising
from a new issuance of stock by the company. If, as a result of future transactions involving our common stock, including
purchases or sales of stock by 5% stockholders, we undergo cumulative ownership changes which exceed 50% over the
testing period, our ability to use our net operating loss carryforwards would be subject to additional limitations under
Section 382.
y
Generally, if an ownership change occurs, the annual taxable income limitation on the use of net operating loss carryforwards
is equal to the product of the applicable long-term tax exempt rate and the value of the company’s stock immediately before
the ownership change. Depending on the resulting limitation, a portion of our net operating loss carryforwards could expire
before we would be able to use them.
Our inability to fully utilize our net operating losses to offset taxable income generated in the future could have a material
and negative affect on our future financial position and results of operations.
d
Item 1B. Unresolved Staff Comments
None.
18
Item 2. Properties
Our principal executive offices are located at 622 Broadway, New York, New York in approximately 64,000 square feet of
space under a lease expiring in March 2023 for an annual rent of approximately $2.7 million.
Take-Two Interactive Software Europe Ltd, our wholly-owned subsidiary, leases 12,500 square feet of office space in
Windsor, United Kingdom for an annual rent of approximately $0.6 million plus taxes and utilities, which expires in
December 2021. Rockstar North, our wholly-owned subsidiary, leases 42,000 square feet of office space in Edinburgh,
Scotland, for an annual rent of approximately $2.9 million.
That lease expires in 2014.
t
2K corporate offices and two development studios occupy approximately 64,000 square
tt
California. The lease provides for an annual rent of approximately $1.9 million and expires in 2019.
feet of leased office space in Novato,
In addition, our other subsidiaries lease office space in Sydney and Canberra, Australia; Toronto and Vancouver, Canada;
Chengdu, Hanghzhou and Shanghai, China; Brno and Prague, Czech Republic; Paris, France; Munich, Germany; Tokyo,
Japan; Seoul, Korea; Breda, Netherlands; Auckland, New Zealand; Newton, Singapore; Madrid, Spain; London, Lincoln, and
Leeds, United Kingdom and, in the United States, San Diego, and Northridge, California; Sparks, Maryland; Andover and
Quincy, Massachusetts; Glen Cove, New York; Cincinnati, Ohio; Kirkland, Washington; for an aggregate annual rent of
approximately $7.9 million.
Item 3. Legal Proceedings
We are, or may become, subject to demands and claims (including intellectual property claims) and are involved in routine
litigation in the ordinary course of business which we do not believe to be material to our business or financial statements.
We have appropriately accrued amounts related to certain of these claims and legal and other proceedings. While it is
reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial statements, we believe that
such losses, unless otherwise disclosed, would not be material.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol “TTWO.” The following table sets forth,
for the periods indicated, the range of the high and low sale prices for our common stock as reported by NASDAQ.
High
Low
Fiscal Year Ended March 31, 2012
First Quarter ended June 30, 2011 ...............................................................
Second Quarter ended September 30, 2011 .................................................
Third Quarter ended December 31, 2011 ....................................................
Fourth Quarter ended March 31, 2012 ........................................................
$17.58 $14.26
10.63
15.77
11.78
16.27
13.78
16.99
Fiscal Year Ended March 31, 2011
First Quarter ended June 30, 2010 ...............................................................
Second Quarter ended September 30, 2010 .................................................
Third Quarter ended December 31, 2010 ....................................................
Fourth Quarter ended March 31, 2011 ........................................................
$11.84
10.83
13.62
16.75
$8.98
7.98
9.77
12.04
The number of record holders of our common stock was 78 as of May 21, 2012.
19
Dividend Policy
We have never declared or paid cash dividends. We currently anticipate that all future earnings will be retained to finance the
growth of our business and we do not expect to declare or pay any cash dividends in the foreseeable future. The payment of
dividends in the future is within the discretion of our Board of Directors and will depend upon future earnings, capital
requirements and other relevant factors. Our Credit Agreement restricts the payment of dividends on our stock.
Securities Authorized for Issuance under Equity Compensation Plans
The table setting forth this information is included in Part III—Item 12, Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
Stock Performance Graph
The following line graph compares, from October 31, 2006 through March 31, 2012, the cumulative total stockholder return
on our common stock with the cumulative total return on the stocks comprising the NASDAQ Composite Index and the
stocks comprising a peer group index consisting of Activision Blizzard, Electronic Arts and THQ. The comparison assumes
$100 was invested on October 31, 2006 in our common stock and in each of the following indices and assumes reinvestment
of all cash dividends, if any, paid on such securities. We have not paid any cash dividends and, therefore, our cumulative total
return calculation is based solely upon stock price appreciation and not upon reinvestment of cash dividends. Historical stock
price is not necessarily indicative of future stock price performance.
f
t
Comparison of 65 Month Cumulative Total Return*
Among Take-Two Interactive Software, Inc., The NASDAQ Composite Index and a Peer Group
March 2012
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
10/31/2006
10/31/2007
10/31/2008
10/31/2009
3/31/2010
3/31/2011
3/31/2012
Take-Two Interactive Software, Inc.
NASDAQ Composite-Total Returns
Peer Group
*
$100 invested on October 31, 2006 in stock or index- including reinvestment of dividends.
Take-Two Interactive Software, Inc.
NASDAQ Composite-Total Returns
Peer Group
October 31,
2006
$100.00
100.00
100.00
October 31,
2007
$134.23
121.74
120.64
October 31,
2008
$84.78
73.89
64.26
October 31,
2009
$78.42
88.74
53.52
March 31,
2010
$70.56
103.80
58.86
March 31,
2011
$109.88
121.65
56.09
March 31,
2012
$110.02
136.69
59.24
20
SS
Unregistered Sales of Equity Securities and Use of Proceeds
In March 2012, we issued 128,439 shares of our common stock as additional consideration in connection with our
December 2007 acquisition of substantially all of the assets of Illusion Softworks, a.s., the developer of the Mafia video game
franchise, to one of the sellers of the business. The issuance of these shares was exempt from
m
registration under Section 4(2)
f
of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering.
Item 6. Selected Financial Data
The following tables present selected financial data for the two fiscal years ended March 31, 2012, five months ended
March 31, 2010 and the three fiscal years ended October 31, 2009 (in thousands, except per share data).
STATEMENT OF OPERATIONS DATA:
Net revenue
Cost of goods sold
Gross profit
Selling and marketing
General and administrative
Research and development
Business reorganization and related
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Interest and other, net
Income (loss) from continuing operations
before income taxes
Provision for income taxes
Income (loss) from continuing operations
Income (loss) from discontinued
operations, net of taxes
Net income (loss)
Earnings (loss) per share:
Continuing operations
Discontinued operations
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Diluted earnings (loss) per share
Weighted average shares outstanding:
Basic
Diluted
BALANCE SHEET DATA:
Cash and cash equivalents
Working capital
Total assets
Long-term debt
Total liabilities
Stockholders’ equity
Fiscal Year Ended
March 31,
2012
2011
Five Months
Ended
March 31, 2010
Fiscal Year Ended October 31,
2008
2009
$825,823 $1,136,876
689,381
528,855
447,495
296,968
176,294
183,749
109,484
121,200
69,576
64,162
—
—
14,999
12,123
370,353
381,234
77,142
(84,266)
(13,519)
(19,571)
$359,231
222,396
136,835
72,402
43,466
25,279
—
6,622
147,769
(10,934)
(11,352)
$701,057 $1,231,106
709,719
521,387
154,396
166,228
63,929
4,478
21,322
410,353
111,034
(3,279)
467,576
233,481
141,962
130,376
63,748
—
17,574
353,660
(120,179)
(5,771)
2007
$695,828
475,737
220,091
115,203
145,657
48,455
17,467
21,206
347,988
(127,897)
(629)
(103,837)
3,863
(107,700)
63,623
9,819
53,804
(22,286)
4,266
(26,552)
(125,950)
4,487
(130,437)
107,755
13,271
94,484
(128,526)
9,943
(138,469)
(1,116)
$(108,816)
(5,346)
$48,458
(2,250)
(10,017)
$(28,802) $(140,454)
2,613
63
$97,097 $(138,406)
$(1.30)
(0.01)
$(1.31)
$(1.30)
(0.01)
$(1.31)
83,356
83,356
$0.62
(0.06)
$0.56
$0.62
(0.06)
$0.56
86,127
86,139
$(0.34)
(0.03)
$(0.37)
$(0.34)
(0.03)
$(0.37)
78,453
78,453
2012
$420,279
524,892
1,149,427
316,340
553,700
595,727
As of March 31,
2011
$280,359
335,715
971,659
107,239
356,380
615,279
2010
$145,838
216,733
839,276
99,865
318,653
520,623
$(1.70)
(0.13)
$(1.83)
$(1.70)
(0.13)
$(1.83)
$1.23
0.03
$1.26
$1.22
0.03
$1.25
76,815
76,815
77,254
77,666
As of October 31,
2009
$102,083
274,274
1,007,128
97,063
461,502
545,626
2008
$280,277
358,355
1,083,352
70,000
468,234
615,118
$(1.93)
—
$(1.93)
$(1.93)
—
$(1.93)
71,860
71,860
2007
$77,757
186,362
831,143
18,000
359,989
471,154
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Our Business
We are a leading developer, marketer and publisher of interactive entertainment for consumers around the globe. The
Company develops and publishes products through its two wholly-owned labels Rockstar Games and 2K, which publishes its
titles under the 2K Games, 2K Sports and 2K Play brands. Our products are designed for console gaming systems such as
Sony’s PlayStation®3 (“PS3”) and PlayStation®2 (“PS2”), Microsoft’s Xbox 360® (“Xbox 360”) and Nintendo’s Wii™
(“Wii”); handheld gaming systems such as Nintendo’s DS (“DS”), Nintendo’s 3DS (“3DS”) and Sony’s PlayStation Portable
(“PSP”); and personal computers including smartphones and tablets. We deliver our products through physical retail, digital
download, online platforms and cloud streaming services.
We endeavor to be the most creative, innovative and efficient company in our industry. Our core strategy is to capitalize on
the popularity of video games by developing and publishing high-quality interactive entertainment experiences across a range
of genres. We focus on building compelling entertainment franchises by publishing a select number of titles for which we can
create sequels and add-on content. Most of our intellectual property is internally owned and developed, which we believe best
positions us financially and competitively. We have established a portfolio of proprietary software content for the major
hardware platforms in a wide range of genres, including action, adventure, racing, role-playing, sports and strategy, which we
distribute worldwide. We believe that our commitment to creativity and innovation is a distinguishing strength, enabling us to
differentiate our products in the marketplace by combining advanced technology with compelling storylines and characters
that provide unique gameplay experiences for consumers. We have created, acquired or licensed a group of highly
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recognizable brands to match the broad consumer demographics we serve, ranging from adults to children and game
enthusiasts to casual gamers. Another cornerstone of our strategy is to support the success of our products in the marketplace
through innovative marketing programs and global distribution on all platforms and through all channels that are relevant to
our target audience.
t
Our revenue is primarily derived from the sale of internally developed software titles and software titles developed by
third-parties for our benefit. Operating margins are dependent in part upon our ability to continually release new,
commercially successful software products and to effectively manage their development costs. We have internal development
studios located in Australia, Canada, China, Czech Republic, the United Kingdom, and the United States.
Software titles published by our Rockstar Games label are primarily internally developed. We expect Rockstar Games, our
wholly-owned publisher of the Grand Theft Auto, Max Payne, Midnight Club, Red Dead and other popular franchises, to
continue to be a leader in the action / adventure product category and create groundbreaking entertainment by leveraging our
existing titles as well as developing new brands. We believe that Rockstar has established a uniquely original, popular
cultural phenomenon with its Grand Theft Auto series, which is the interactive entertainment industry’s most iconic and
critically acclaimed brand and has sold-in approximately 120 million units. Rockstar continues to expand on our established
franchises by releasing sequels, as well as offering downloadable episodes and content. In May 2011, Rockstar released the
commercially successful and critically acclaimed L.A. Noire, which became the first video game ever chosen as an official
selection of the Tribeca Film Festival. Rockstar has released several downloadable content packs to support that title.
Rockstar is also well known for developing brands in other genres, including the Bully and Manhunt franchises.
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t
2K Games has published a variety of popular entertainment properties across multiple genres and platforms and we expect
2K Games to continue to develop new and successful franchises in the future. 2K Games’ internally owned and developed
franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia, and Sid Meier’s Civilization series.
2K Games has also published titles that were externally developed, such as Borderlands, which has become a key franchise
n
for 2K Games since its launch in October 2009 and has been supported by several successful downloadable content packs.
2K Sports publishes realistic sports simulation titles, including our flagship NBA 2K series, which has been the top-ranked
NBA basketball video game for 11 years running, the Major League Baseball 2K series, and our
Top Spin tennis series. We
develop most of our 2K Sports software titles through our internal development studios. 2K Sports has secured long-term
licensing agreements with the National Basketball Association (“NBA”). Our current licenses with Major League Baseball
Properties, the Major League Baseball Players Association and Major League Baseball Advanced Media expire in
fiscal 2013.
K
K
22
2K Play focuses on developing and publishing titles for the casual and family-friendly games market. 2K Play titles are
developed by both internal development studios and third-party developers. Internally developed titles include Carnival
Games and Let’s Cheer!. 2K Play also has a partnership with Nickelodeon to publish video games based on its top rated Nick
Jr. titles such as Dora the Explorer; Go, Diego, Go!; Ni Hao, Kai-lan and The Backyardigans. We expect family- oriented
gaming to continue to be a component of our business in the future.
We also have expansion initiatives in the rapidly growing Asia markets, where our strategy is to broaden the distribution of
our existing products, expand our business in Japan, and establish an online gaming presence, especially in China and Korea.
2K Sports has secured a multi-year license from the NBA to develop an online version of the NBA simulation game in China,
Taiwan, South Korea and Southeast Asia.
Discontinued operations
In February 2010, we completed the sale to SYNNEX Corporation (“Synnex”) of our Jack of All Games third-party
distribution business, which primarily distributed third-party interactive entertainment software, hardware and accessories in
North America for approximately $44.0 million, including $37.3 million in cash, subject to purchase price adjustments, and
up to an additional $6.7 million, subject to the achievement of certain items, which were not met. In April 2011, we settled on
the purchase price adjustments and as a result the purchase price was lowered by $1.5 million. Consequently, the net
purchase price after the settlement was $35.8 million. The financial results of this business, which were previously reported
as our distribution business, have been classified as discontinued operations in our Consolidated Statements of Operations for
all periods presented. The assets and liabilities of this business are reflected as assets and liabilities of discontinued
operations in the Consolidated Balance Sheets for all periods presented. See Note 2 to our Consolidated Financial Statements
for additional information regarding discontinued operations.
Trends and Factors Affecting our Business
Product Release Schedule. Our financial results are affected by the timing of our product releases and the commercial
success of those titles. Our Grand Theft Auto products in particular have historically accounted for a substantial portion of
our revenue. Sales of Grand Theft Auto products generated approximately 13.8% of the Company’s net revenue for the fiscal
year ended March 31, 2012. The timing of our Grand Theft Auto releases varies significantly, which in turn may affect our
financial performance on a quarterly and annual basis.
u
Economic Environment and Retailer Performance. We continue to monitor economic conditions that may unfavorably affect
our businesses, such as deteriorating consumer demand, pricing pressure on our products, credit quality of our receivables,
and foreign currency exchange rates. Our business is dependent upon a limited number of customers who account for a
significant portion of our revenue. Our five largest custom
ers accounted for 43.9%, 43.8%, 59.8%, 55.7%, and 56.4% of net
revenue during the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year
ended October 31, 2009, respectively. As of March 31, 2012 and 2011, the five largest customers accounted for 61.3% and
54.2% of our gross accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross
accounts receivable balance comprised 40.6% and 38.2% of such balances at March 31, 2012 and 2011, respectively. The
economic environment has affected our customers in the past, and may do so in the future. Bankruptcies or consolidations of
our large retail customers could seriously hurt our business, due to uncollectible accounts receivables and the concentration
of purchasing power among the remaining large retailers. Certain of our large customers sell used copies of our games, which
may negatively affect our business by reducing demand for new copies of our games. While the downloadable episodes that
we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to affect
our business.
Hardware Platforms. The majority of our products are made for the hardware platforms developed by three companies—
Sony, Microsoft and Nintendo. Note 16 to our Consolidated Financial Statements, “Segment and Geographic Information,”
discloses that Sony, Microsoft and Nintendo hardware platforms comprised approximately 89.4% of the Company’s net
revenue by product platform for the fiscal year ended March 31, 2012. The success of our business is dependent upon the
consumer acceptance of these platforms and the continued growth in the installed base of these platforms. When new
hardware platforms are introduced, demand for software based on older platforms d
eclines, which may negatively affect our
d
business. Additionally, our development costs are generally higher for titles based on new platforms, and we have limited
ability to predict the consumer acceptance of the new platforms, which may affect our sales and profitability. As a result, we
believe it is important to focus our development efforts on a select number of titles, which is consistent with our strategy.
23
Online Content and Digital Distribution. The interactive entertainment software industry is delivering a growing amount of
content through digital online delivery methods. We provide a variety of online delivered products and services. A number of
our titles that are available through retailers as packaged goods products are also available through direct digital download
through the Internet (from websites we own and others owned by third-parties). We also offer downloadable add-on content
to our packaged goods titles. In addition, in July 2011, we launched our first social gaming experience, Sid Meier’s
Civilization World, for Facebook, and we have several initiatives underway to develop online games primarily for Asian
markets. We expect online delivery of games and game services to become an increasing part of our business over the long-
term.
y
Product Releases
We released the following key titles in fiscal year 2012:
Title
L.A. Noire
Duke Nukem Forever
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NBA® 2K12
The Darkness II
I
Major League Baseball 2K12
Publishing Label
Rockstar Games
2K Games
2K Sports
2K Games
2K Sports
Internal or External
Development
External
External
Internal
External
Internal
Platform(s)
PS3, Xbox 360
PS3, Xbox 360, PC
PS3, PS2, PSP, Xbox 360, Wii, PC
PS3, Xbox 360, PC
PS3, PS2, PSP, Xbox 360, Wii, DS, PC
Date Released
May 17, 2011
June 10, 2011
October 4, 2011
February 7, 2012
March 6, 2012
Product Pipeline
We have announced expected release dates for the following key titles (this list does not represent all titles currently in
development):
Title
Max Payne 3
Max Payne 3
Spec Ops: The Line
Borderlands™ 2
NBA® 2K13
XCOM: Enemy Unknown
BioShock®kk Infinite
XCOM®MM
V
Grand Theft Auto V
Publishing Label
Rockstar Games
Rockstar Games
2K Games
2K Games
2K Sports
2K Games
2K Games
2K Games
Rockstar Games
Internal or External
Development
Internal
Internal
External
External
Internal
Internal
Internal
Internal
Internal
Platform(s)
PS3, Xbox 360
PC
PS3, Xbox 360, PC
PS3, Xbox 360, PC
PS3, PSP, Xbox 360, Wii, PC
PS3, Xbox 360, PC
PS3, Xbox 360, PC
PS3, Xbox 360, PC
To be announced
Actual / Expected
Release Date
May 15, 2012 (released)
June 1, 2012
June 26, 2012
September 18, 2012
October 2, 2012
October 9 2012
February 26, 2013
Fiscal year 2014
To be announced
Fiscal 2012 Financial Summary
Our fiscal year ended March 31, 2012 net revenue was led by titles from a variety of our top franchises, including
d
NBA 2K12, Grand Theft Auto products, Duke Nukem Forever and
$825.8 million, a decrease of $311.1 million or 27.4% from the fiscal year ended March 31, 2011.
L.A. Noire,
Red Dead Redemption. Our net revenue decreased to
r
For the fiscal year ended March 31, 2012, our net loss was $108.8 million, as compared to net income of $48.5 million in the
prior year. Net loss per share for the fiscal year ended March 31, 2012 was $1.31, as compared to earnings per share for the
fiscal year ended March 31, 2011 of $0.56. Our net loss for the fiscal year ended March 31, 2012 as compared to our net
income for the fiscal year ended March 31, 2011 was primarily as a result of (1) a decrease of $311.1 million in net revenue,
(2) a decrease of 3 points in our gross profit as a percent of net revenue, (3) an increase of 14 points in our operating expenses
as a percent of net revenue, (4) an increase of $6.1 million in interest and other, net, expense and (5) a decrease of
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$4.2 million in our loss from discontinued operations, for the fiscal year ended March 31, 2012.
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million at March 31, 2011. Our
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At March 31, 2012 we had $420.3 million of cash and cash equivalents, compared to $280.4
increase in cash and cash equivalents from March 31, 2011 was primarily a result of cash provided by financing activities
partially offset by cash used in operating activities, cash used in investing activities and the effect of exchange rates.
Cash provided by financing activities was generated from the net proceeds from the issuance of $250.0 million of 1.75%
Convertible Notes in November 2011. Cash used in operating activities was primarily due to our net loss of $108.8 million.
Cash used in investing activities was primarily due to purchases of fixed assets of $10.8 million and we paid contingent
consideration of $4.1 million for our prior year acquisitions. Cash and cash equivalents were negatively affected by
$4.3 million as a result of foreign currency exchange rate movements.
24
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”)
requires management to make estimates and assumptions about future events and apply judgments that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of net revenues and expenses during the reporting periods. We base our estimates, assumptions and
judgments on historical experience, current trends and other factors that management believes to be relevant at the time our
Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies,
assumptions, estimates and judgments to ensure that our financial statements are fairly presented in accordance with
U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual amounts could
differ significantly from these estimates.
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We have identified the policies below as critical to our business operations and the understanding of our financial results and
they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about
the effect of matters that are inherently uncertain. The affect and any associated risks related to these policies on our business
operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations
where such policies affect our reported and expected financial results. For a detailed discussion on the application of these
and other accounting policies, see Note 1 to the Consolidated Financial Statements included in Item 8. Management has
d
reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition
We recognize revenue upon the transfer of title and risk of loss to our customers.
Accordingly, we recognize revenue for
software titles when there is (1) persuasive evidence that an arrangement with the customer exists, which is generally based
on a customer purchase order, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of
the customer receivable is deemed probable. Certain products are sold to customers with a street date (i.e., the earliest date
these products may be sold by retailers). For these products we recognize revenue on the later of the street date or the sale
date.
f
Our payment arrangements with customers typically provide net 30 and 60 day terms. Advances received for licensing and
exclusivity arrangements are reported on our Consolidated Balance Sheets as
deferred revenue until we meet our
performance obligations, at which point we recognize the revenue.
d
Some of our software products provide limited online functionality at no additional cost to the consumer. Generally, we
consider such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, we do
not defer revenue related to products containing such online features. We determine whether our products contain substantial
online functionality by evaluating the significance of the development effort and the nature of the online features, the extent
of anticipated marketing focus on the online features, the significance of the online features to the customers’ anticipated
overall gameplay experience, and the significance of our post sale obligations to cu
stomers. Overall, online play functionality
is still an emerging area for us, and we continue to monitor this developing functionality and its significance to our products.
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In addition, some of our software products are sold exclusively as downloads of digital content for which the consumer takes
possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is
made available (assuming all other recognition criteria are met).
Certain of our software products include in-game advertising for third- party products. Advance payments received for in-
game advertising are reported on the balance sheet as deferred revenue until we meet our performance obligations, at which
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point we recognize the revenue, which is generally at the time of the initial release of the product.
Revenue is recognized after deducting estimated reserves for returns, price concessions and other allowances. In
circumstances when we do not have a reliable basis to estimate returns and price concessions or are unable to determine that
collection of a receivable is probable, we defer the revenue until such time as we can reliably estimate any related returns and
allowances and determine that collection of the receivable is probable.
25
Allowances for Returns, Price Concessions and Other Allowances
We accept returns and grant price concessions in connection with our publishing arrangements. Following reductions in the
price of our products, we grant price concessions to permit customers to take credits against amounts they owe us with
respect to merchandise unsold by them. Our customers must satisfy certain conditions to entitle them to return products or
receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels.
Our distribution arrangements with customers generally do not give them the right to return titles or to cancel firm orders.
However, we occasionally accept returns from our customers for stock balancing and make accommodations to customers,
which include credits and returns, when demand for specific titles falls below expectations.
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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 other factors, historical experience and
performance of the titles in similar genres, historical performance of the hardware platform, customer inventory levels,
analysis of sell-through rates, sales force and retail customer feedback, industry pricing, market conditions and changes in
demand and acceptance of our products by consumers.
Significant management judgments and estimates must be made and used in connection with establishing the allowance for
returns and price concessions in any accounting period. We believe we can make reliable estimates of returns and price
concessions. However, actual results may differ from initial estimates as a result of changes in circumstances, market
conditions and assumptions. Adjustments to estimates are recorded in
the period in which they become known.
h
d
Software Development Costs and Licenses
Capitalized software development costs include direct costs incurred for internally developed titles and payments made to
third-party software developers under development agreements.
We capitalize internal software development costs (including stock-based compensation, specifically identifiable employee
payroll expense and incentive compensation costs related to the completion and release of titles), third-party production and
other content costs, subsequent to establishing technological feasibility of a software title. Technological feasibility of a
product includes the completion of both technical design documentation and game design documentation. Significant
management judgment and estimates are utilized in establishing technological feasibility.
d
We enter into agreements with third-party developers that require us to make payments for game development and production
services. In exchange for these payments, we receive the exclusive publishing and distribution rights to the finished game
title as well as, in some cases, the underlying intellectual property rights. Such agreements allow us to fully recover these
payments to the developers at an agreed upon royalty rate earned on the subsequent retail sales of such software, net of any
agreed upon costs. Prior to establishing technological feasibility of a product we record any costs incurred by third- party
developers as research and development expenses. Subsequent to establishing technological feasibility of a product we
capitalize all development and production service payments to third-party developers as software development costs and
licenses. We typically enter into agreements with third-party developers after completing the technical design documentation
for our products and therefore record the design costs leading up to a signed development contract as research and
development expense. When we contract with third-party developers, we generally select third-party developers that have
proven technology and experience in the genre of the software being developed, which often allows for the establishment of
technological feasibility early in the development cycle. In instances where the documentation of the design and technology
are not in place prior to an executed contract, we monitor the software development process and require our third-party
developers to adhere to the same technological feasibility standards that apply to our internally developed products.
d
Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks,
copyrights or other intellectual property rights in the development of our products. Agreements with license holders generally
provide for guaranteed minimum royalty payments for use of their intellectual property. Guaranteed minimum payments are
initially recorded as an asset (licenses) and as a liability (accrued licenses) upon execution of a licensing agreement, provided
that no significant performance remains to be completed by the licensor. When significant performance remains to be
completed by the licensor, we record payments when actually paid.
Certain licenses, especially those related to our sports products, extend over multi-year periods and encompass multiple game
titles. In addition to guaranteed minimum payments, these licenses frequently contain provisions that could require us to pay
royalties to the license holder based on pre-agreed unit sales thresholds.
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26
Amortization of capitalized software development costs and licenses commences when a product is released and is recorded
on a title-by-title basis in cost of goods sold. For capitalized software development costs, amortization is calculated using
(1) the proportion of current year revenues to the total revenues expected to be recorded over the life of the title or (2) the
straight-line method over the remaining estimated useful life of the title, whichever is greater. For capitalized licenses,
amortization is calculated as a ratio of (1) current period revenues to the total revenues expected to be recorded over the
remaining life of the title or (2) the contractual royalty rate based on actual net product sales as defined in the licensing
agreement, whichever is greater.
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Significant management judgments and estimates are utilized in the assessment of the recoverability of capitalized software
costs. At each balance sheet date, or earlier if an indicator of impairment exists, we evaluate the recoverability of capitalized
software costs, licenses and any other unrecognized minimum commitments that have not been paid, using an undiscounted
future cash flow analysis. We use various measures to evaluate expected product performance and estimate future revenues
for our software titles including historical performance of comparable titles; orders for titles prior to release; and the
estimated performance of a sequel title based on the performance of the title on which the sequel is based. When management
determines that the value of a title is unlikely to be recovered by product sales, capitalized costs are charged to cost of goods
sold in the period in which such determination is made.
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We have established profit and unit sales based internal royalty programs that provide for certain of our employees to
participate in the success of software titles that they assist in developing. Royalties earned by employees under this program
are recorded as cost of goods sold as they are incurred.
Fair Value Estimates
The preparation of financial statements in conformity with U.S. GAAP often requires us to determine the fair value of a
particular item to fairly present our Consolidated Financial Statements. Without an independent market or another
representative transaction, determining the fair value of a particular item requires us to make several assumptions that are
inherently difficult to predict and can have a material influence on the conclusion of the appropriate accounting.
There are various valuation techniques used to estimate fair value. These include (1) the market approach where market
transactions for identical or comparable assets or liabilities are used to determine the fair value, (2) the income approach,
which uses valuation techniques to convert future amounts (for example, future cash flows or future earnings) to a single
present amount, and (3) the cost approach, which is based on the amount that would be required to replace an asset. For many
of our fair value estimates, including our estimates of the fair value of acquired intangible assets, we use the income
approach. Using the income approach requires the use of financial models, which require us to make various estimates
including, but not limited to (1) the potential future cash flows for the asset, liability or equity instrument being measured,
(2) the timing of receipt or payment of those future cash flows, (3) the time value of money associated with the delayed
receipt or payment of such cash flows, and (4) the inherent risk associated with the cash flows (risk premium). Making these
cash flow estimates are inherently difficult and subjective, and, if any of the estimates used to determine the fair value using
the income approach turns out to be inaccurate, our financial results may be negatively affected. Furthermore, relatively small
changes in many of these estimates can have a significant influence on the estimated fair value resulting from the financial
models or the related accounting conclusion reached. For example, a relatively small change in the estimated fair value of an
asset may change a conclusion as to whether an asset is impaired. While we are required to make certain fair value
assessments associated with the accounting for several types of transactions, the following areas are the most sensitive to the
assessments:
Inventory Obsolescence. We regularly review inventory quantities on-hand and in the retail channels and record an inventory
for our products. Significant changes in
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provision for excess or obsolete inventory based on the future expected demand
demand for our products would affect management’s estimates in establishing our inventory provision. We write down
inventory based on excess or obsolete inventories determined primarily by future anticipated demand for our products.
Inventory write-downs are measured as the difference between the cost of the inventory and market value, based upon
assumptions about future demand that are inherently difficult to assess.
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Business Combinations—Goodwill and Intangible Assets. We must estimate the fair value of assets acquired and liabilities
assumed in a business combination. Our assessment of the estimated fair value of each of these can have a material effect on
our reported results as intangible assets are amortized over various lives. Furthermore, a change in the estimated fair value of
an asset or liability often has a direct influence on the amount to recognize as goodwill, which is an asset that is not
amortized. Often determining the fair value of these assets and liabilities assumed requires an assessment of expected use of
the asset, the expected cost to extinguish the liability or our expectations related to the timing and the successful completion
of development of an acquired in-process technology. Such estimates are inherently difficult and subjective and can have a
material influence on our financial statements.
27
We use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income
approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the
asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its
replacement or reproduction cost. The market approach estimates value based on what other participants in the market have
paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the
approach ultimately selected is based on the characteristics of the asset and the availability of information.
aa
We evaluate our goodwill annually for impairment or whenever events or changes in circumstances indicate the fair value of
a reporting unit is below its carrying amount. The determination of whether or not goodwill has become impaired involves a
significant level of judgment in the assumptions underlying the approach used to determine the value of our reporting units.
Changes in our strategy and/or market conditions could significantly affect these judgments and require reductions to
recorded intangible asset balances.
Long-lived assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various
estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the
useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an
impairment loss requires a determination of fair value, which is based on the best information available. We use internal
discounted cash flow estimates, quoted market prices when available and independent appraisals, as appropriate, to determine
fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and
apply an appropriate discount rate.
Stock-based Compensation
Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as
expense over the vesting period. Determining the fair value of stock-based awards at the gr
ant date requires judgment in
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estimating expected stock volatility and the amount of stock-based awards that are expected to be forfeited. If actual results
differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially
affected.
We have granted stock options to non-employees, which were subject to variable accounting. When variable accounting is
applied to stock option grants, we re-measured the fair value of the unvested options at the end of each reporting period or
until the options are cancelled or expire unexercised. Compensation expense in any given period was calculated as the
difference between total earned compensation at the end of the period, less total earned compensation at the beginning of the
period, both of which was based on the price of our common stock at such dates. As a result, fluctuations in the price of our
common stock changed compensation expense recognized by us from period to period.
We have also granted time and market-based restricted stock awards to employees and non-employees. Time-based and
market-based awards to non-employees are subject to variable accounting. For the time-based restricted stock grants to non-
employees, we cumulatively remeasure the fair value at the end of every period based on the month end closing price of our
common stock. Market-based restricted stock awards vest based on the relative performance of our common stock to a
composite index. We calculate the fair value of market-based restricted stock using a Monte Carlo Simulation method, which
requires a substantial number of inputs and estimates of future market conditions and considers the range of various vesting
probabilities. As a result, expense recorded for our non-employee awards can fluc
tuate substantially from period to period.
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Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income
taxes is computed using the asset and liability method, under which deferred income taxes are recognized for differences
acted statutory tax rates for the years in
a
between the financial statement and tax bases of assets and liabilities at currently en
which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.
Our cumulative pre-tax loss in recent fiscal years represents sufficient evidence for us to determine that the establishment of a
valuation allowance against the deferred tax asset is appropriate. This valuation allowance offsets deferred tax assets
associated with future tax deductions as well as carryforward items.
f
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Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we
have lower statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or
interpretations thereof. In addition, our filed tax returns are subject to examination by the Internal Revenue Service and othe
r
u
tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes.
We recognize and measure uncertain tax positions and record tax benefits when it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement.
At each period end, it is necessary for us to make certain estimates and assumptions to compute the provision for income
taxes including allocations of certain transactions to different tax jurisdictions, amounts of permanent and temporary
differences, the likelihood of deferred tax assets being recovered and the outcome of contingent tax risks. These estimates
and assumptions are revised as new events occur, more experience is acquired and additional information is obtained. The
effect of these revisions is recorded in income tax expense or benefit in the period in which they become known.
Recently Issued Accounting Pronouncements
Multiple-Deliverable Revenue Arrangements
On April 1, 2011, the Company adopted new guidance related to the accounting for multiple-deliverable revenue
arrangements. These new rules amend the existing guidance for separating consideration in multiple-deliverable
arrangements and establish a selling price hierarchy for determining the selling price of a deliverable. The adoption of this
new guidance did not have any effect on our consolidated financial position, cash flows or results of operations.
Certain Revenue Arrangements That Include Software Elements
On April 1, 2011, the Company adopted new guidance that changes the accounting model for revenue arrangements by
excluding tangible products containing both software and non-software components that function together to deliver the
product’s essential functionality. The adoption of this new guidance did not have any effect on our consolidated financial
position, cash flows or results of operations.
Testing Goodwill for Impairment
On September 30, 2011, the Company adopted new guidance related to testing goodwill for impairment effective for the
Company’s annual impairment test as of August 1, 2011. This new guidance permits an entity to make a qualitative
assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. If it is determined through the
qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remainin
g
impairment steps would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the
quantitative assessment. This new guidance is effective for annual and interim goodwill impairment tests performed in fiscal
years beginning after December 15, 2011. However, early adoption is permitted, including for annual and interim goodwill
impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent
annual or interim period have not yet been issued. The early adoption of this new guidance did not have any effect on our
consolidated financial position, cash flows or results of operations.
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Comprehensive Income
In June 2011, new guidance was issued related to the presentation of comprehensive income. The main provisions of the new
guidance provide that an entity that reports items of other comprehensive income has the option to present comprehensive
income as (i) a single statement that presents the components of net income and total net income, the components of other
comprehensive income and total other comprehensive income and a total for comprehensive income or (ii) in two separate
but consecutive statements, whereby an entity must present the components of net income and total net income in the first
statement and that statement is immediately followed by a financial statement that presents the components of other
comprehensive income, a total for other comprehensive income and a total for comprehensive income. The new rules
eliminate the option to present the components of other comprehensive income as part of the statement of stockholders’
equity. These new rules are to be applied retrospectively and become effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2011 (April 1, 2012 for the Company), with early adoption permitted.
29
We do not expect the adoption of this new guidance to have a material effect on our consolidated financial position, cash
flows or results of operations.
Fluctuations in Operating Results and Seasonality
We have experienced fluctuations in quarterly and annual 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 enhancements of existing titles; projected and
actual changes in platforms; the timing and success of title introductions by our competitors; product returns; changes in
pricing policies by us and our competitors; the size and timing of acquisitions; the timing of orders from major customers;
with peak shipments typically
order cancellations; and delays in product shipment. Sales of our products are also seasonal,
occurring in the fourth calendar quarter as a result of increased demand for titles during the holiday season. Quarterly and
annual comparisons of operating results are not necessarily indicative of future operating results.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage of net revenue represented by certain line items in o
statements of operations, net revenue by geographic region and net revenue by platform:
y
ur
Net revenue
Cost of goods sold
Gross profit
Selling and marketing
General and administrative
Research and development
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Interest and other, net
Income (loss) from continuing operations before income taxes
Provision for income taxes
Income (loss) from continuing operations
Loss from discontinued operations, net of taxes
Net income (loss)
Net revenue by geographic region:
United States
International
Net revenue by platform:
Console
PC and other
Handheld
Fiscal Years Ended March 31, 2012 and 2011
(thousands of dollars)
Net revenue
Product costs
Software development costs and
royalties(1)
Internal royalties
Licenses
Cost of goods sold
Gross profit
2012
%
2011
%
$825,823 100.0% $1,136,876 100.0%
28.7%
255,236
326,936
30.9%
164,487
34,156
74,976
528,855
$296,968
19.9%
4.1%
9.1%
64.0%
36.0%
172,397
115,032
75,016
689,381
$447,495
15.2%
10.1%
6.6%
60.6%
39.4%
(1)
Includes $5,144 and $10,695 of stock-based compensation expense in 2012 and 2011, respectively.
30
Fiscal Year Ended March 31,
2010
2011
100.0% 100.0%
64.8%
60.6%
35.2%
39.4%
15.5%
20.3%
15.2%
9.6%
7.6%
6.1%
2.1%
1.3%
45.2%
32.5%
6.9% (10.0)%
(2.5)%
5.7% (12.5)%
1.7%
1.0%
4.7% (14.2)%
(1.9)%
4.2% (16.1)%
2012
100.0%
64.0%
36.0%
22.3%
14.7%
7.8%
1.4%
46.2%
(10.2)%
(2.4)%
(12.6)%
0.4%
(13.0)%
(0.2)%
(13.2)%
(0.5)%
(1.2)%
54.4%
45.6%
85.1%
10.6%
4.3%
54.5%
45.5%
85.7%
9.7%
4.6%
59.6%
40.4%
80.4%
9.3%
10.3%
Increase/
(decrease)
$(311,053)
(71,700)
(7,910)
(80,876)
(40)
(160,526)
$(150,527)
% Increase/
(decrease)
(27.4)%
(21.9)%
(4.6)%
(70.3)%
(0.1)%
(23.3)%
(33.6)%
Net revenue decreased $311.1 million for the fiscal year ended March 31, 2012 as compared to the prior year. This decrease
is primarily due to $486.9 million in lower sales of the previous fiscal year’s releases mainly Red Dead Redemption, which
Sid Meier’s Civilization® V, which released in
released in May 2010, Mafia II, which released in August 2010,
September 2010, and Top Spin 4, which released in March 2011, as well as approximately $46.8 million in lower sales of our
Grand Theft Auto franchise. These decreases were partially offset by $283.9 million in increases from the current fiscal
year’s releases mainly L.A. Noire in May 2011, Duke Nukem Forever in June 2011 and
The Darkness II in February 2012.
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II
Net revenue on consoles accounted for 85.1% of our total net revenue for the fiscal year ended March 31, 2012, which was in
line with 85.7% for the prior year. PC and other sales increased to 10.6% of our total net revenue for the fiscal year ended
March 31, 2012, as compared to 9.7% for the prior year, primarily due to the December 2011 release of Grand Theft Auto III:
10 Year Anniversary Edition for the iPad, iPhone and iPod touch, and select Android powered devices. Handheld sales
accounted for 4.3% of our total net revenue for the fiscal year ended March 31, 2012, which is in line with 4.6% for the prior
year.
Gross profit as a percentage of net revenue decreased for the fiscal year ended March 31, 2012, as compared to the prior year.
Product costs increased as a percentage of net revenue as a result of a greater share of net revenue being generated from a
product mix with lower selling price points. Software development costs and royalties increased as a percentage of net
revenue for the fiscal year ended March 31, 2012 as we incurred higher royalty costs primarily associated with the May 2011
The Darkness II, all of
release of L.A. Noire, the June 2011 release of Duke Nukem Forever and the February 2012 release of
which were externally developed. Partially offsetting the decrease in gross profit as a percentage of net revenue is lower
internal royalty expense, which was primarily due to higher income generated in the prior year from the release of
Red Dead
Redemption in May 2010.
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Net revenue earned outside of the United States accounted for 45.6% of our total net revenue for the fiscal year ended
March 31, 2012, which was in line with 45.5% for the prior year. Foreign currency exchange rates increased net revenue and
gross profit by approximately $20.3 million and $3.2 million, respectively, for the fiscal year ended March 31, 2012 as
compared to the prior year.
Operating Expenses
(thousands of dollars)
Selling and marketing
General and administrative
Research and development
Depreciation and amortization
Total operating expenses(1)
2012
$183,749
121,200
64,162
12,123
$381,234
2011
% of net
revenue
22.3% $176,294
109,484
14.7%
69,576
7.8%
14,999
1.4%
46.2% $370,353
% of net
revenue
15.5%
9.6%
6.1%
1.3%
32.5%
Increase/
(decrease)
$7,455
11,716
(5,414)
(2,876)
$10,881
% Increase/
(decrease)
4.2%
10.7%
(7.8)%
(19.2)%
2.9%
(1)
Includes stock-based compensation expense, as follows:
Selling and marketing
General and administrative
Research and development
2012
$ 5,042
$19,963
$ 3,345
2011
$4,659
$9,781
$3,630
Foreign currency exchange rates increased total operating expenses by approximately $7.7 million in the fiscal year ended
March 31, 2012 as compared to the prior year.
Selling and marketing
Selling and marketing expenses increased $7.5 million for the fiscal year ended March 31, 2012, as compared to the prior
year, primarily due to higher advertising expenses related to L.A. Noire, Duke Nukem Forever and
The Darkness II partially
offset by lower advertising expenses incurred for the May 2010 release of Red Dead Redemption and the August 2010 release
of Mafia II.II
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General and administrative
General and administrative expenses increased $11.7 million for the fiscal year ended March 31, 2012, as compared to the
prior year primarily due to a $12.9 million increase in stock-based compensation expense for stock-based awards granted to
ZelnickMedia, reflecting the grants of restricted stock pursuant to the New Management Agreement (as defined in Note 3 to
our Consolidated Financial Statements), $2.5 million of income resulting from a favorable legal settlement in the prior year
and $2.4 million in additional rent expense primarily due to a net liability incurred for a lease assumption without economic
benefit during the fiscal year ended March 31, 2012. Partially offsetting the increase in general and administrative expenses is
a decrease of $4.4 million for personnel costs and a decrease of $3.0 million for consulting expense, primarily due to lower
performance-based incentive compensation as a result of the Company’s performance.
General and administrative expenses for the fiscal years ended March 31, 2012 and 2011 include occupancy expense
(primarily rent, utilities and office expenses) of $15.7 million and $14.3 million, respectively, related to our development
studios.
Research and development
Research and development expenses decreased $5.4 million for the fiscal year ended March 31, 2012, as compared to the
in production expenses and higher payroll
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prior year primarily due to a decrease of $6.7 million attributable to a decrease
capitalization rates at our development studios primarily due to a greater number of titles having reached technological
feasibility partially offset by a $1.0 million increase in additional personnel-related costs.
Depreciation and amortization
Depreciation and amortization expenses decreased $2.9 million for the fiscal year ended March 31, 2012, as compared to the
prior year primarily due to lower purchases of fixed assets during recent years.
Interest and other, net
(thousands of dollars)
Interest income (expense), net
Gain (loss) on sale
Foreign currency exchange gain (loss)
Other
Interest and other, net
2012
$(20,616)
2,200
(1,311)
156
$(19,571)
2011
% of net
revenue
(2.5)% $(15,248)
(106)
1,414
421
(2.4)% $(13,519)
0.3%
(0.2)%
0.0%
% of net
revenue
Increase/
(decrease)
% Increase/
(decrease)
(1.3)%
0.0%
0.1%
0.0%
(1.2)%
$(5,368)
2,306
(2,725)
(265)
$(6,052)
35.2%
(2175.5)%
(192.7)%
(62.9)%
44.8%
Interest and other, net was an expense of $19.6 million for the fiscal year ended March 31, 2012, as compared to an expense
of $13.5 million for the fiscal year ended March 31, 2011, primarily due to $5.4 million in interest expense associated with
the November 2011 issuance of the 1.75% Convertible Notes and we recorded a greater foreign currency exchange loss for
the fiscal year ended March 31, 2012 partially offset by a $2.2 million gain on the sale of certain intellectual property assets.
Provision for income taxes
Income tax expense was $3.9 million for the fiscal year ended March 31, 2012, as compared to $9.8 million for the fiscal year
ended March 31, 2011. The decrease in tax expense was primarily due to lower taxable earnings in certain foreign
jurisdictions and adjustments for certain foreign tax filings. Our effective tax rate differed from the federal statutory rate
primarily due to changes in valuation allowances and changes in gross unrecognized tax benefits during both the fiscal years
ended March 31, 2012 and 2011. Our valuation allowances increased by $19.5 million during the fiscal year ended March 31,
2012 primarily due to a loss before income taxes without tax benefit in the fiscal year ended March 31, 2012, while our
valuation allowance decreased by $26.6 million during the same period in 2011 primarily due to the use of carried forward
net operating losses applied to income earned during that period.
As of March 31, 2012, we had gross unrecognized tax benefits, including interest and penalties, of $22.4 million, all of which
would affect our effective tax rate if realized. For the fiscal year ended March 31, 2012, gross unrecognized tax benefits
increased by $7.3 million, which primarily related to an increase in uncertain tax positions in foreign jurisdictions. We are
generally no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended October 31,
2008 and state income tax returns for periods prior to fiscal year ended October 31, 2004. With few exceptions, we are no
32
longer subject to income tax examinations in non-U.S. jurisdictions for years prior to fiscal year ended October 31, 2005.
ng October 31, 2008 and 2009. Certain U.S.
U.S. federal taxing authorities have commenced their audit of fiscal years endi
state taxing authorities are currently examining our income tax returns from fiscal years ended October 31, 2004 through
October 31, 2006. In addition, tax authorities in certain non-U.S. jurisdictions are currently examining our income tax
returns. The determination as to further adjustments to our gross unrecognized tax benefits during the next 12 months is not
practicable.
aa
We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of
amounts claimed and the payment of additional taxes. We believe that our tax positions comply with applicable tax law, and
that we have adequately provided for reasonably foreseeable tax assessments.
Discontinued operations
Loss from discontinued operations, net of income tax, reflects the results of our former distribution business for which the net
assets were sold in February 2010. For the fiscal year ended March 31, 2012, the net loss was $1.1 million as compared to a
net loss of $5.3 million for the prior year. The net loss during the fiscal year ended March 31, 2011 was primarily due to costs
associated with a liability for a lease assumption without economic benefit less estimates of sublease income. The net loss
during the fiscal year ended March 31, 2012 was primarily due to changes in estimates of sublease income primarily as a
result of deteriorating market conditions.
Net income (loss) and earnings (loss) per share
For the fiscal year ended March 31, 2012, our net loss was $108.8 million, as compared to net income of $48.5 million in the
prior year. Net loss per share for the fiscal year ended March 31, 2012 was $1.31, as compared to earnings per share of $0.56
for the fiscal year ended March 31, 2011. Weighted average shares outstanding decreased compared to the prior year,
primarily due to the exclusion of unvested share-based awards that are considered participating restricted stock due to the net
loss generated during the fiscal year ended March 31, 2012, offset, in part, by the vesting of restricted stock awards over the
last twelve months. See Note 1 to our consolidated financial statements for additional information regarding earnings (loss)
per share.
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t
Fiscal Years Ended March 31, 2011 and 2010
(thousands of dollars)
Net revenue
Product costs
Software development costs and
royalties(1)
Internal royalties
Licenses
Cost of goods sold
Gross profit
2011
$1,136,876
326,936
%
2010
100.0% $762,941
253,369
28.7%
172,397
115,032
75,016
689,381
$447,495
140,397
15.2%
35,195
10.1%
65,618
6.6%
494,579
60.6%
39.4% $268,362
%
100.0%
33.2%
Increase/
(decrease)
$373,935
73,567
18.4%
4.6%
8.6%
64.8%
35.2%
32,000
79,837
9,398
194,802
$179,133
% Increase/
(decrease)
49.0%
29.0%
22.8%
226.8%
14.3%
39.4%
66.8%
(1)
Includes $10,695 and $5,213 of stock-based compensation expense in 2011 and 2010, respectively.
K
Net revenue increased $373.9 million for the fiscal year ended March 31, 2011 as compared to the prior year, primarily due
to the releases of Red Dead Redemption in May 2010 and Mafia II in August 2010 and a period-over-period increase in sales
of our NBA 2K franchise. Partially offsetting the increas
e in net revenue were decreases in BioShock 2 and Borderlands,
which were released in February 2010 and October 2009, respectively, and a decrease in sales of our Grand Theft Auto
franchise of approximately $63.5 million. The decrease in our Grand Theft Auto franchise was primarily due to decreases in
Grand Theft Auto: Chinatown Wars, as well as from downloadable episodes Grand Theft
sales from Grand Theft Auto IV and
Auto IV: The Lost and Damned and
Grand Theft Auto: The Ballad of Gay Tony, which released in prior periods, partially
offset by the current year release of Grand Theft Auto IV: Complete.
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Net revenue on consoles accounted for approximately 85.7% of our total net revenue for the fiscal year ended March 31,
2011, as compared to 80.4% for the prior year. The increase is primarily due to releases of Red Dead Redemption in
May 2010 and Mafia II in August 2010 and a period-over-period increase in our
NBA franchise. PC and other sales increased
to approximately 9.7% of our total net revenue for the fiscal year ended March 31, 2011, as compared to 9.3% for the prior
I
33
year, primarily due to the September 2010 release of Sid Meier’s Civilization® V. Handheld sales decreased to 4.6% of our
total net revenue for the fiscal year ended March 31, 2011, as compared to 10.3% for the prior year primarily due to a
decrease in sales of Grand Theft Auto: Chinatown Wars, which released on the PSP in October 2009 and the Nintendo DS in
March 2009, as well as the effect of the increased net revenue on current generation consoles for the fiscal year ended
March 31, 2011 mentioned above.
VV
Gross profit as a percentage of net revenue increased in 2011 compared to the prior year primarily due to improved pricing
mix resulting from the release of Red Dead Redemption in May 2010 and higher development royalties in the prior year
primarily due to the October 2009 release of the externally developed Borderlands, partially offset by higher internal royalty
expense, which was primarily due to increased income generated from Red Dead Redemption.
Net revenue earned outside of the United States accounted for 45.5% for the fiscal year ended March 31, 2011, as compared
to 40.4% in the prior year. The increase was primarily due to the global release of Red Dead Redemption in May 2010 while
2K Sports titles, which are mostly sold in North America, made up a larger proportion of our net revenue during the fiscal
year ended March 31, 2010. Foreign currency exchange rates decreased net revenue and gross profit by approximately
$9.1 million and $1.1 million, respectively, for the fiscal year ended March 31, 2011 as compared to the prior year.
Operating Expenses
(thousands of dollars)
Selling and marketing
General and administrative
Research and development
Depreciation and amortization
Total operating expenses(1)
2011
$176,294
109,484
69,576
14,999
$370,353
% of net
revenue
2010
% of net
revenue
Increase/
(decrease)
% Increase/
(decrease)
15.5% $154,519
115,673
9.6%
57,888
6.1%
16,403
1.3%
32.5% $344,483
20.3%
15.2%
7.6%
2.1%
45.2%
$21,775
(6,189)
11,688
(1,404)
$25,870
14.1%
(5.4)%
20.2%
(8.6)%
7.5%
(1)
Includes stock-based compensation expense, as follows:
Selling and marketing
General and administrative
Research and development
2011
$4,659
$9,781
$3,630
2010
$ 3,321
$14,319
$ 3,650
Foreign currency exchange rates decreased total operating expenses by approximately $2.0 million in the fiscal year ended
March 31, 2011 as compared to the prior year.
y
Selling and marketing
Selling and marketing expenses increased $21.8 million for the fiscal year ended March 31, 2011, as compared to the prior
year primarily due to higher advertising expenses related to Red Dead Redemption and Mafia II partially offset by lower
advertising expenses incurred for the February 2010 release of BioShock 2, the October 2009 release of Borderlands and the
Grand Theft Auto franchise.
I
General and administrative
General and administrative expenses decreased $6.2 million for the fiscal year ended March 31, 2011, as compared to the
prior year primarily due to reduced salary expense as a result of cost cutting initiatives, $2.5 million of income as a result of a
favorable legal settlement and $2.4 million of reduced stock-based compensation expense related to the stock options issued
to ZelnickMedia as they became fully vested in August 2010. The decrease was partially offset by higher performance-based
incentive compensation as a result of the Company’s improved performance.
General and administrative expenses for the fiscal years ended March 31, 2011 and 2010 include occupancy expense
(primarily rent, utilities and office expenses) of $14.3 million and $14.8 million, respectively, related to our development
studios.
34
Research and development
Research and development expenses increased $11.7 million for the fiscal year ended March 31, 2011, as compared to the
prior year primarily due to lower payroll capitalization rates at our development studios due to the transition of efforts bein
g
t
refocused to new projects following the May 2010 release of Red Dead Redemption and an increase in production expenses.
Depreciation and amortization
Depreciation and amortization expenses decreased $1.4 million for the fiscal year ended March 31, 2011, as compared to the
prior year primarily due to lower purchases of fixed assets during the current period.
Interest and other, net
(thousands of dollars)
Interest expense, net
Loss on sale of subsidiary
Foreign currency exchange gain (loss)
Other
Interest and other, net
2011
$(15,248)
(106)
1,414
421
$(13,519)
% of net
revenue
2010
% of net
revenue
(1.3)% $(13,584)
(3,831)
(609)
(770)
(1.2)% $(18,794)
0.0%
0.1%
0.0%
(1.8)%
(0.5)%
(0.1)%
(0.1)%
(2.5)%
Increase/
(decrease)
$(1,664)
3,725
2,023
1,191
$5,275
% Increase/
(decrease)
12.2%
(97.2)%
(332.2)%
(154.7)%
(28.1)%
Interest and other, net was an expense of $13.5 million for the fiscal year ended March 31, 2011, as compared to an expense
of $18.8 million for the fiscal year ended March 31, 2010, primarily due to a loss on the sale of our Italian subsidiary during
the fiscal year ended March 31, 2010 and we recorded a greater foreign currency exchange gain for the fiscal year ended
March 31, 2011, partially offset by higher interest expense. The increase in interest expense, net is primarily due to higher
average debt and interest rates for the fiscal year ended March 31, 2011.
Provision for income taxes
Income tax expense was $9.8 million for the fiscal year ended March 31, 2011, compared to $13.1 million for the fiscal year
ended March 31, 2010. The tax in 2011 is due to increased income in the foreign jurisdictions, while the 2010 tax expense
related to an increase to our valuation allowance as a result of deferred tax liabilities related to goodwill and a tax expense
resulting from the cancellation of stock options. Our effective tax rate differed from the federal statutory rate primarily due to
changes in valuation allowances and changes in gross unrecognized tax benefits during both the 2011 and 2010 periods. Our
valuation allowances decreased by $26.6 million during the 2011 period primarily due to the use of net operating losses,
while our valuation allowance increased by $25.1 million during the same period in 2010 primarily due to taxable losses
incurred during the period.
y
As of March 31, 2011, we had gross unrecognized tax benefits, including interest and penalties, of $15.1 million, all of which
would affect our effective tax rate if realized. For the fiscal year ended March 31, 2011, gross unrecognized tax benefits
increased by $4.2 million, primarily related to domestic tax issues. We are generally no longer subject to audit for U.S.
federal income tax returns for periods prior to our fiscal year ended October 31, 2007 and state income tax returns for periods
prior to fiscal year ended October 31, 2004. With few exceptions, we are no longer subject to income tax examinations in
non-U.S. jurisdictions for years prior to fiscal year ended October 31, 2005. U.S. federal taxing authorities have completed
examinations of our income tax returns through the fiscal years ended October 31, 2006 and have recently informed us of
their intent to audit subsequent years through fiscal year ending October 31, 2009. Certain U.S. state taxing authorities are
currently examining our income tax returns from fiscal years ended October 31, 2004 through October 31, 2006. In addition,
tax authorities in certain non-U.S. jurisdictions are currently examining our income tax returns. The determination as to
further adjustments to our gross unrecognized tax benefits during the next 12 months is not practicable.
We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of
amounts claimed and the payment of additional taxes. We believe that our tax positions comply with applicable tax law, and
that we have adequately provided for reasonably foreseeable tax assessments.
35
Discontinued operations
Loss from discontinued operations, net of income tax, reflects the results of our former distribution business for which the net
assets were sold in February 2010. For the fiscal year ended March 31, 2011, the loss was $5.3 million as compared to a loss
of $14.9 million for the prior year. The loss during the fiscal year ended March 31, 2011 is primarily due to costs associated
with a net liability for a lease assumption without economic benefit. The loss generated during the fiscal year ended
March 31, 2010 is primarily due to the impairment of goodwill and intangible assets, net of income tax, and also reflected our
active involvement in the distribution business at that time.
Net income (loss) and earnings (loss) per share
For the fiscal year ended March 31, 2011, our net income was $48.5 million, as compared to a net loss of $123.0 million in
the prior year. Earnings per share for the fiscal year ended March 31, 2011 was $0.56, as compared to a net loss per share of
$1.58 for the fiscal year ended March 31, 2010. Total weighted average shares outstanding for the fiscal year ended
March 31, 2011 increased compared to the prior year period primarily due to the inclusion of the dilutive effect of
participating restricted stock for the fiscal year ended March 31, 2011 and the vesting of restricted stock over the last twelve
months.
Liquidity and Capital Resources
Our primary cash requirements have been to fund (i) the development, manufacturing and marketing of our published
products, (ii) working capital, (iii) acquisitions and (iv) capital expenditures. We expect to rely on funds provided by our
operating activities, our Credit Agreement and our Convertible Notes to satisfy our working capital needs.
Credit Agreement
In October 2011, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) which
amended and restated our July 2007 Credit Agreement. The Credit Agreement provides for borrowings of up to
$100.0 million, which may be increased by up to $40.0 million pursuant to the terms of the Credit Agreement, and is secured
by substantially all of our assets and the equity of our subsidiaries. The Credit Agreement expires on October 17, 2016.
Revolving loans under the Credit Agreement bear interest at our election of (a) 1.50% to 2.00% above a certain base rate
(4.75% at March 31, 2012), or (b) 2.50% to 3.00% above the LIBOR Rate (approximately 2.74% at March 31, 2012), with
the margin rate subject to the achievement of certain average liquidity levels. We are also required to pay a monthly fee on
the unused available balance, ranging from 0.375% to 0.50% based on availability.
Prior to its amendment and restatement in October 2011, the July 2007 Credit Agreement provided for borrowings of up to
$140.0 million and was secured by substantially all of our assets and the equity of our subsidiaries. We had no outstanding
borrowings at March 31, 2011 related to the July 2007 Credit Agreement.
Availability under the Credit Agreement is restricted by our domestic and United Kingdom based accounts receivable and
inventory balances. The Credit Agreement also allows for the issuance of letters of credit in an aggregate amount of up to
$25.0 million.
As of March 31, 2012, there was $79.1 million available to borrow under the Credit Agreement. At March 31, 2012, we had
no outstanding borrowings related to the Credit Agreement and $1.7 million of letters of credit outstanding.
The Credit Agreement contains covenants that substantially limit us and our subsidiaries’ ability to: create, incur, assume or
be liable for indebtedness; dispose of assets outside the ordinary course of business; acquire, merge or consolidate with or
into another person or entity; create, incur or allow any lien on any of their respective properties; make investments; or pay
dividends or make distributions (each subject to certain limitations); or optionally prepay any indebtedness (subject to certain
exceptions, including an exception permitting the redemption of the Company’s Convertible Notes upon the meeting of
certain minimum liquidity requirements). In addition, the Credit Agreement provides for certain events of default such as
nonpayment of principal and interest, breaches of representations and warranties, noncompliance with covenants, acts of
n
insolvency, default on indebtedness held by third-parties and default on certain
material contracts (subject to certain
d
limitations and cure periods). The Credit Agreement also contains a requirement that we maintain an interest coverage ratio
of more than one to one for the trailing twelve month period, if certain average liquidity levels fall below $30.0 million. As of
March 31, 2012, we were in compliance with all covenants and requirements outlined
in the Credit Agreement.
aa
4.375% Convertible Notes Due 2014
In June 2009, we issued $138.0 million aggregate principal amount of 4.375% Convertible Notes due 2014 (the “4.375%
Convertible Notes”). Interest on the 4.375% Convertible Notes is payable semi-annually in arrears on June 1st and
December 1st of each year, and commenced on December 1, 2009. The 4.375% Convertible Notes mature on June 1, 2014,
unless earlier redeemed or repurchased by the Company or converted.
t
t
36
The 4.375% Convertible Notes are convertible at an initial conversion rate of 93.6768 shares of our common stock per
$1,000 principal amount of 4.375% Convertible Notes (representing an initial conversion price of approximately $10.675 per
share of common stock for a total of approximately 12,927,000 underlying conversion shares) subject to adjustment in certain
circumstances. Holders may convert the 4.375% Convertible Notes at their option prior to the close of business on the
business day immediately preceding December 1, 2013 only under the following circumstances: (1) during any fiscal quarter
commencing after July 31, 2009, if the last reported sale price of the common stock for at least 20 trading days (whether or
not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter
is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five
business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per
$1,000 principal amount of 4.375% Convertible Notes for each day of that measurement period was less than 98% of the
ion rate on each such day; (3) if we call
product of the last reported sale price of our common stock and the applicable convers
the 4.375% Convertible Notes for redemption, at any time prior to the close of business on the third scheduled trading day
prior to the redemption date; or (4) upon the occurrence of specified corporate events. On and after December 1, 2013 until
the close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their
4.375% Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 4.375% Convertible
Notes may be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of our
common stock. Our common stock price exceeded 130% of the applicable conversion price of $10.675 per share for at least
20 trading days during the 30 consecutive trading days ended March 31, 2012. Accordingly, as of April 1, 2012, the 4.375%
Convertible Notes may be converted at the holder’s option through June 30, 2012. If the 4.375% Convertible Notes were to
be converted during this period, our current intent and ability, given our option, would be to settle the conversion in shares of
our common stock. As such, we have continued to classify these 4.375% Convertible Notes as long-term debt.
f
At any time on or after June 5, 2012, the Company may redeem all of the outstanding 4.375% C
onvertible Notes for cash, but
m
only if the last reported sale of our common stock for 20 or more trading days in a period of 30 consecutive trading days
ending on the trading day prior to the date we provide notice of redemption to holders of the 4.375% Convertible Notes
exceeds 150% of the conversion price in effect on each such trading day. The redemption price will equal 100% of the
principal amount of the 4.375% Convertible Notes to be redeemed, plus all accrued and unpaid interest (including additional
interest, if any) to, but excluding, the redemption date.
The indenture governing the 4.375% Convertible Notes contains customary terms and covenants and events of default. As of
March 31, 2012, we were in compliance with all covenants and requirements outlined in the indenture governing the 4.375%
Convertible Notes.
1.75% Convertible Notes Due 2016
On November 16, 2011, we issued $250.0 million aggregate principal amount of 1.75% Convertible Notes due 2016 (the
le Notes, the “Convertible Notes”). Interest on the 1.75%
“1.75% Convertible Notes” and together with the 4.375% Convertib
t
st of each year, commencing on June 1,
t
Convertible Notes is payable semi-annually in arrears on June 1st and December 1
2012. The 1.75% Convertible Notes mature on December 1, 2016, unless earlier repurchased by the Company or converted.
The Company does not have the right to redeem the 1.75% Convertible No
tes prior to maturity.
m
r
The 1.75% Convertible Notes are convertible at an initial conversion rate of 52.3745 shares of our common stock per $1,000
principal amount of 1.75% Convertible Notes (representing an initial conversion price of approximately $19.093 per share of
common stock for a total of approximately 13,094,000 underlying conversion shares) subject to adjustment in certain
circumstances. Holders may convert the 1.75% Convertible Notes at their option prior to the close of business on the business
day immediately preceding June 1, 2016 only under the following circumstances: (1) during any fiscal quarter commencing
after March 31, 2012, if the last reported sale price of the common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is
greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business
day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000
principal amount of 1.75% Convertible Notes for each day of that measurement period was less than 98% of the product of
the last reported sale price of our common stock and the applicable conversion rate on each such day; or (3) upon the
occurrence of specified corporate events. On and after June 1, 2016 until the close of business on the business day
immediately preceding the maturity date, holders may convert their 1.75% Convertible Notes at any time, regardless of the
foregoing circumstances. Upon conversion, the 1.75% Convertible Notes may be settled, at our election, in cash, shares of
our common stock, or a combination of cash and shares of the Company’s common stock.
t
The indenture governing the 1.75% Convertible Notes contains customary terms and covenants and events of default. As of
March 31, 2012, we were in compliance with all covenants and requirements outlined in the indenture governing the 1.75%
Convertible Notes.
37
Financial Condition
We are subject to credit risks, particularly if any of our receivables represent a limited number of customers or are
concentrated in foreign markets. If we are unable to collect our accounts receivable as they become due, it could adversely
affect our liquidity and working capital position.
Generally, we have been able to collect our accounts receivable in the ordinary course of business. We do not hold any
collateral to secure payment from customers. We have trade credit insurance on the majority of our customers to mitigate
accounts receivable risk.
A majority of our trade receivables are derived from sales to major retailers and distributors. Our five largest customers
accounted for 43.9%, 43.8%, and 59.8% of net revenue during the fiscal years ended March 31, 2012, 2011 and 2010,
respectively. As of March 31, 2012 and 2011, our five largest customers accounted for 61.3% and 54.2% of our gross
accounts receivable, respectively. Customers that individually accounted for more than 10% of our gross accounts receivable
balance comprised 40.6% and 38.2% of such balances at March 31, 2012 and 2011, respectively. We believe that the
receivable balances from these largest customers do not represent a significant credit risk based on past collection experience,
although we actively monitor each customer’s credit worthiness and economic conditions that may affect our customers’
business and access to capital. We are monitoring the current global economic conditions, including credit markets and other
factors as it relates to our customers in order to manage the risk of uncollectible accounts receivable.
We believe our current cash and cash equivalents and projected cash flow from operations, along with availability under our
Credit Agreement will provide us with sufficient liquidity to satisfy our cash requirements for working capital, capital
expenditures and commitments through at least the next 12 months.
As of March 31, 2012, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was
approximately $124.5 million. These balances are dispersed across various locations around the world. We believe that such
dispersion meets the business and liquidity needs of our foreign affiliates. In addition, the Company expects in the
foreseeable future to have the ability to generate sufficient cash domestically to support o
ngoing operations. Consequently, it
is the Company’s intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. In the event the
Company needed to repatriate funds outside of the U.S., such repatriation may be subject to local laws and tax consequences
including foreign withholding taxes or U.S. income taxes. It is not practicable to estimate th
e tax liability and the Company
would try to minimize the tax effect to the extent possible. However, any repatriation may not result in actual cash payments
as the taxable event would likely be offset by the utilization of the then available net operating losses and tax credits.
f
t
t
Our changes in cash flows were as follows:
(thousands of dollars)
Cash (used in) provided by operating activities
Cash (used in) provided by investing activities
Cash provided by financing activities
Effects of foreign currency exchange rates on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Fiscal Year Ended March 31,
2011
$134,798
(7,578)
734
6,567
$134,521
2010
$(135,702)
23,025
45,784
8,593
$(58,300)
2012
$(84,964)
(14,162)
243,364
(4,318)
$139,920
At March 31, 2012 we had $420.3 million of cash and cash equivalents, compared to $280.4
million at March 31, 2011. Our
qq
increase in cash and cash equivalents from March 31, 2011 was primarily a result of cash provided by financing activities
partially offset by cash used in operating activities, cash used in investing activities and the effect of foreign currency
exchange rates.
Cash provided by financing activities was generated from the net proceeds from the issuance of $250.0 million of 1.75%
Convertible Notes in November 2011. Cash used in operating activities was primarily due to our net loss of $108.8 million.
Cash used in investing activities was primarily due to purchases of fixed assets of $10.8 million and the payment of
contingent consideration of $4.1 million for our prior year acquisitions. Cash and cash equivalents were negatively affected
by $4.3 million as a result of foreign currency exchange rate movements.
38
Contractual Obligations and Commitments
We have entered into various agreements in the ordinary course of business that require substantial cash commitments over
the next several years. Generally, these include:
• Agreements to acquire licenses to intellectual property such as trademarks, copyrights and technology for use in
the publishing, marketing and distribution of our software titles. In addition, we have certain minimum
marketing support commitments where we commit to spend specified amounts related to marketing our
products. Our licensing and marketing commitments primarily reflect agreements with major sports leagues and
players’ associations and expire at various times through September 2018;
• Contractual payments to third-party software developers that expire at various times through July 2014.
Guaranteed minimum payments assume satisfactory performance;
• Operating leases, primarily related to occupancy, furniture and equipment, expiring at various times through
March 2023. Included in the cash commitments for operating leases below is a liability for a lease assumption
without economic benefit, which was approximately $3.7 million at March 31, 2012, and is recorded in
liabilities of discontinued operations on the consolidated balance sheet. See Note 2 to our Consolidated
Financial Statements for additional information regarding discontinued operations; and
•
Purchase obligations primarily related to agreements to purchase services that are enforceable and legally
binding on the Company that specifies all significant terms, including fixed, minimum or variable pricing
provisions; and the approximate timing of the transactions, expiring at various times through October 2015.
A summary of annual minimum contractual obligations and commitments as of March 31, 2012 is as follows (in thousands of
dollars):
Fiscal Year Ending March 31,
2013
2014
2015
2016
2017
Thereafter
Total
Licensing and
Marketing
$61,591
16,520
10,825
13,893
12,400
20,250
$135,479
Operating
Software
Development
Leases
$16,506
$37,759
14,991
10,728
11,073
809
9,804
—
—
4,958
— 29,828
$87,160
$49,296
Purchase
Obligations
$4,057
4,305
2,341
899
—
—
$11,602
Convertible
Notes Interest
Convertible
Notes
Total
$10,595
10,413
7,394
4,375
4,375
—
$37,152
138,000
$— $130,508
— 56,957
170,442
— 28,971
271,733
— 50,078
$388,000 $708,689
250,000
In addition to the cash commitments above, we have also entered into acquisition agreements that contain provisions for us to
pay contingent cash consideration, typically contingent on the acquired company achieving certain financial, unit sales, or
performance conditions. The amount and timing of these payments are currently not fixed or determinable. See Note 5 to the
Consolidated Financial Statements for a full discussion of our potential acquisition commitments.
Income Taxes. At March 31, 2012, the Company had recorded a liability for gross unrecognized tax benefits of $15.6 million
for which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled witht
the respective tax authorities, therefore, these liabilities have not been included in the contractual obligations table.
Off-Balance Sheet Arrangements
As of March 31, 2012 and 2011, we did not have any relationships with unconsolidated entities or financial parties, such as
entities often referred to as structured finance or variable interest entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we do not have any
off-balance sheet arrangements and are not exposed to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.
y
International Operations
Net revenue earned outside of the United States is principally generated by our operations in Europe, Asia, Australia, Canada
and Latin America. For the fiscal years ended March 31, 2012, 2011 and 2010, approximately 45.6%, 45.5% and 40.4%,
respectively, of our net revenue was earned outside the United States. We are subject to risks inherent in foreign trade,
including increased credit risks, tariffs and duties, fluctuations in foreign currency exchange rates, shipping delays and
international political, regulatory and economic developments, all of which can have a significant effect on our operating
results.
39
Fluctuations in Quarterly Operating Results and Seasonality
We have experienced fluctuations 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 enhancements of existing titles; projected and actual changes in
platforms; the timing and success of title introductions by our competitors; product returns; changes in pricing policies by us
and our competitors; the accuracy of retailers’ forecasts of consumer demand; the size and timing of acquisitions; the timing
of orders from major customers; and order cancellations and delays in product shipment. Sales of our titles are also seasonal,
with peak shipments typically occurring in the fourth calendar quarter as a result of increased demand for titles during the
holiday season. Quarterly comparisons of operating results are not necessarily indicative of future operating results.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily
include fluctuations in interest rates and foreign currency exchange rates.
Interest Rate Risk
Historically, fluctuations in interest rates have not had a significant effect on our operating results. Under our Credit
Agreement, outstanding balances bear interest at our election of (a) 1.50% to 2.00% above a certain base rate (4.75% at
March 31, 2012), or (b) 2.50% to 3.00% above the LIBOR rate (approximately 2.74% at March 31, 2012), with the margin
rate subject to the achievement of certain average liquidity levels. Changes in market rates may affect our future interest
expense if there is an outstanding balance on our line of credit. The 1.75% Convertible Notes and the 4.375% Convertible
Notes pay interest semi-annually at a fixed rate of 1.75% and 4.375%, respectively, per annum and we expect that there will
be no fluctuation related to the Convertible Notes affecting our cash component of interest expense. For additional details on
our Convertible Notes see Note 12 to our Consolidated Financial Statements.
Foreign Currency Exchange Rate Risk
We transact business in foreign currencies and are exposed to risks resulting from fluctuations in foreign currency exchange
rates. Accounts relating to foreign operations are translated into United States dollars using prevailing exchange rates at the
relevant period end. Translation adjustments are included as a separate component of stockholders’ equity. For the fiscal year
ended March 31, 2012, our foreign currency translation loss adjustment was approximately $3.8 million. We recognized a
foreign currency exchange transaction loss for the fiscal years ended March 31, 2012 and 2010 of $1.3 million and
$0.6 million, respectively, and a foreign currency exchange transaction gain in inte
rest and other, net in our Consolidated
uu
r
Statements of Operations for the fiscal year ended March 31, 2011 of $1.4 million.
t
Cash Flow Hedging Activities
During the fiscal year ended March 31, 2012, we entered into foreign currency forward contracts to mitigate foreign currency
risk associated with forecasted non-functional currency denominated expenses. These transactions, which are designated and
qualify as cash flow hedges, are accounted for as derivatives whereby the fair value of the contracts is reported as either
assets or liabilities on our Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in the
fair value of these hedges is initially reported, net of tax, as a component of accumulated other comprehensive income (loss)
sulting from changes in the fair value
f
in stockholders’ equity. The gross amount of the effective portion of gains or losses re
of these hedges is subsequently reclassified into cost of goods sold or research and
development expenses, as appropriate, in
d
the period when the forecasted transaction is recognized in our Consolidated Statements of Operations. In the event that the
gains or losses in accumulated other comprehensive income (loss) are deemed to be ineffective, the ineffective portion of
gains or losses resulting from changes in fair value, if any, is reclassified to interest and other, net, in our Consolidated
Statements of Operations. In the event that the underlying forecasted transactions do not occur, or it becomes probable that
they will not occur, within the defined hedge period, the gains or losses on the related cash flow hedges are reclassified from
accumulated other comprehensive income (loss) to interest and other, net, in our Consolidated Statements of Operations.
During the fiscal year ended March 31, 2012, all forecasted transactions occurred, and therefore, there were no such gains or
losses reclassified into interest and other, net. We do not enter into derivative financial contracts for speculative or trading
purposes. As of March 31, 2012, we had $10.2 million of forward contracts outstanding to buy foreign currencies in
exchange for U.S. dollars all of which have maturities of less than one year. As of March 31, 2012, the fair value of these
outstanding forward contracts was immaterial and is included in prepaid expenses and other.
40
Balance Sheet Hedging Activities
We use foreign currency forward contracts to mitigate foreign currency risk associated with non-functional currency
denominated cash balances and inter-company funding loans, non-functional currency denominated accounts receivable and
non-functional currency denominated accounts payable. These transactions are not designated as hedging instruments and are
accounted for as derivatives whereby the fair value of the contracts is reported as either assets or liabilities on our
Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other,
net, in our Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or
trading purposes. At March 31, 2012, we had $4.0 million of forward contracts outstanding to buy foreign currencies in
exchange for U.S. dollars and $28.3 million of forward contracts outstanding to sell foreign currencies in exchange for U.S.
dollars all of which have maturities of less than one year. At March 31, 2011, we had $2.4 million of forward contracts
outstanding to buy foreign currencies in exchange for U.S. dollars and $35.5 million of forward contracts outstanding to sell
foreign currencies in exchange for U.S. dollars all of which have maturities of less than one year. For the fiscal year ended
March 31, 2012, we recorded a gain of $0.7 million and for the fiscal years ended March 31, 2011 and 2010, we recorded
losses of $6.9 million and $1.0 million, respectively, related to foreign currency forward contracts in interest and other, net ont
the Consolidated Statements of Operations. As of March 31, 2012 and 2011, the fair value of these outstanding forward
contracts was immaterial and is included in accrued expenses and other current liabilities.
Our hedging programs are designed to reduce, but do not entirely eliminate, the effect of currency exchange rate movements.
We believe the counterparties to these foreign currency forward contracts are creditworthy multinational commercial banks
and that the risk of counterparty nonperformance is not material. Notwithstanding our efforts to mitigate some foreign
currency exchange rate risks, there can be no assurance that our hedging activities will adequately protect us against the risks
associated with foreign currency fluctuations. For the fiscal year ended March 31, 2012, 45.6% of the Company’s revenue
was generated outside the United States. Using sensitivity analysis, a hypothetical 10% increase in the value of the U.S.
dollar against all currencies would decrease revenues by 4.6%, while a hypothetical 10% decrease in the value of the U.S.
dollar against all currencies would increase revenues by 4.6%. In the opinion of management, a substantial portion of this
fluctuation would be offset by cost of goods sold and operating expenses incurred in local currency.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data appear in a separate section of this report following Part IV. We provide
details of our valuation and qualifying accounts in “Note 18—Supplementary Financial Information” to the Consolidated
Financial Statements. All schedules have been omitted since the information required to be submitted has been included on
the Consolidated Financial Statements or notes thereto or has been omitte
d as not applicable or not required.
a
r
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Definition and Limitations of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our
reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in
the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to management,
including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding
required disclosures.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations
include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable
resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we
believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose
under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but
not absolute assurance, of achieving their objectives.
41
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and princip
al financial officer, has evaluated the
f
effectiveness of our disclosure controls and procedures at March 31, 2012, the end of the period covered by this report. Based
on this evaluation, the principal executive officer and principal financial officer concluded that, at March 31, 2012, our
disclosure controls and procedures were effective to provide reasonable assurance th
at information required to be disclosed
ff
by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and
reported on a timely basis, and (ii) accumulated and communicated to management, including our principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the criteria set forth in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management has concluded
that our internal control over financial reporting was effective as of March 31, 2012.
r
Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on our internal control
over financial reporting. The report on the audit of internal control over financial reporting is included in this Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2012, which
were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the
Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated herein by reference to the sections entitled “Proposal 1—Election of
Directors” and “Executive Compensation—Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
definitive Proxy Statement (the “Proxy Statement”) for the Annual Meeting of Stockholders to be held in 2012. The
Company intends to file the Proxy Statement within 120 days after the end of the fiscal year (i.e. on or before July 30, 2012).
The Company’s Code of Business Conduct and Ethics applicable to its directors and all employees, including senior financial
officers, is available on the Company’s website at www.take2games.com. If the Company makes any amendment to its Code
of Business Conduct and Ethics that is required to be disclosed pursuant to the Exchange Act, the Company will make such
disclosures on its website.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to the section entitled “Executive Compensation
and Related Information” in the Company’s Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to the sections entitled “Voting Security Ownership
of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Company’s Proxy
Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated herein by reference to the section entitled “Certain Relationships and
Related Transactions” in the Company’s Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to the section entitled “Principal Accounting Fees
and Services” in the Company’s Proxy Statement.
42
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a)
The following documents are filed as part of this Report:
(i)
(ii)
Financial Statements. See Index to Financial Statements on page 46 of this Report.
Financial Statement Schedule. See Note 18 to the Consolidated Financial Statements.
(iii)
Index to Exhibits:
Restated Certificate of Incorporation
Exhibit Description
Incorporated by Reference
Form Filing Date
10-K
2/12/2004
Exhibit
3.1
Filed
Herewith
Certificate of Amendment of Restated Certificate of Incorporation, dated
April 30, 1998
Certificate of Amendment of Restated Certificate of Incorporation, dated
November 17, 2003
10-K
2/12/2004
3.1.2
10-K
2/12/2004
3.1.3
Certificate of Amendment of the Restated Certificate of Incorporation, dated
April 23, 2009.
8-K
4/23/2009
Certificate of Designation of Series A Preferred Stock, dated March 11, 1998
10-K
2/12/2004
Certificate of Designation of Series B Preferred Stock, dated March 24, 2008
Amended and Restated Bylaws of the Company
Indenture, dated as of June 3, 2009, between the Company and The Bank of
New York Mellon, as Trustee
Supplemental Indenture, dated as of June 3, 2009, between the Company and
The Bank of New York Mellon, as Trustee, to Indenture, dated as of June 3,
2009, between the Company and The Bank of New York Mellon, as Trustee,
relating to 4.375% Convertible Notes
Form of 4.375% Convertible Note (included in Exhibit 4.2)
Indenture, dated as of November 16, 2011, by and between the Company and
The Bank of New York Mellon, as Trustee, relating to 1.75% Convertible Notes
Form of 1.75% Convertible Note (included in Exhibit 4.4)
2002 Stock Option Plan+
Amendment to the 2002 Stock Option Plan+
Incentive Stock Plan+
Amendment to the Incentive Stock Plan+
Form of Stock Option Grant Letter+
Form of Restricted Stock Award Letter—Directors+
Form of Restricted Stock Award Letter—Employees+
Take-Two Interactive Software, Inc. Change in Control Employee Severance
Plan+
2009 Stock Incentive Plan+
Amendment No. 2 to the 2009 Stock Incentive Plan+
Form of Employee Restricted Stock Agreement+
Form of Non-Employee Director Restricted Stock Agreement+t
Employment Agreement dated February 28, 2007 between the Company and
Seth Krauss+
8-K
8-K
3/26/2008
2/24/2010
8-K
6/4/2009
8-K
8-K
6/4/2009
6/4/2009
8-K 11/18/2011
8-K 11/18/2011
10-Q
9/8/2005
8-K
4/23/2009
10-Q
9/8/2005
8-K
4/23/2009
10-K
1/31/2006
10-K 12/20/2007
10-K 12/20/2007
8-K
8-K
8-K
10-Q
10-Q
3/7/2008
4/23/2009
9/27/2011
6/5/2009
6/5/2009
8-K
3/6/2007
Amendment to Employment Agreement, dated March 25, 2008, by and between
the Company and Seth Krauss+
8-K
3/26/2008
Employment Agreement between the Company and Lainie Goldstein dated
July 16, 2007+
8-K
7/17/2007
Amendment to Employment Agreement, dated March 25, 2008, by and between
the Company and Lainie Goldstein+
8-K
3/26/2008
43
3.1
3.1.1
3.2
3.1
4.1
4.2
4.2
4.1
4.1
10.2
10.2
10.1
10.3
10.15
10.23
10.24
10.1
10.1
10.1
10.2
10.3
10.1
10.2
10.1
10.1
Exhibit
Number
3.1
3.1.1
3.1.2
3.1.3
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Exhibit
Number
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
Exhibit Description
Second Amendment to Employment Agreement, dated December 16, 2009, by
and between the Company and Lainie Goldstein+
Employment Agreement, dated February 14, 2008, by and between the
Company and Benjamin Feder+
Employment Agreement, dated February 14, 2008, by and between the
Company and Karl Slatoff+ff
Employment Agreement, dated March 16, 2009, between the Company and
Manuel Sousa+
10-Q
6/5/2009
Incorporated by Reference
Form Filing Date
Exhibit
Filed
Herewith
10-K 12/18/2009
10.41
Management Agreement between the Company and ZelnickMedia Corporation
dated March 30, 2007+
Amendment dated July 26, 2007 to the Management Agreement dated
March 30, 2007 between the Company and ZelnickMedia Corporation+
Second Amendment, dated February 14, 2008, to the Management Agreement
dated March 30, 2007 between the Company and ZelnickMedia Corporation+
Management Agreement, dated as of May 20, 2011, by and between Take-Two
Interactive Software, Inc. and ZelnickMedia Corporation+
Security Agreement dated as of July 3, 2007, made by each of the Grantors
listed on the signature pages thereof and Wells Fargo Foothill, Inc. in its capacity
as administrative agent for the Lender Group and the Bank Product Providers
Supplement to Security Agreement dated as of November 16, 2007, made by
each of the grantors listed on the signature pages thereof and Wells Fargo
Foothill, Inc. in its capacity as administrative agent for the Lender Group and the
Bank Product Providers
8-K
2/15/2008
8-K
2/15/2008
8-K
4/4/2007
8-K
7/27/2007
8-K
2/15/2008
8-K
5/24/2011
10.2
10.3
10.4
99.1
99.1
10.1
10.1
8-K
7/9/2007
10.2
8-K 11/20/2007
99.2
Warrant Transaction Confirmation, dated May 28, 2009, between the Company
and JPMorgan Chase Bank, National Association, as dealer
8-K
6/3/2009
Warrant Transaction Confirmation, dated May 28, 2009, between the Company
and Barclays Bank PLC, as dealer
8-K
6/3/2009
10.5
10.6
Convertible Note Hedge Transaction Confirmation, dated May 29, 2009,
between the Company and JPMorgan Chase Bank, National Association, as
dealer
Convertible Note Hedge Transaction Confirmation, dated May 29, 2009,
between the Company and Barclays Bank PLC, as dealer
Warrant Transaction Confirmation, dated May 28, 2009, between the Company
and JPMorgan Chase Bank, National Association, as dealer
Warrant Transaction Confirmation, dated May 28, 2009, between the Company
and Barclays Bank PLC, as dealer
Convertible Note Hedge Transaction Confirmation, dated May 29, 2009,
between the Company and JPMorgan Chase Bank, National Association, as
dealer
Convertible Note Hedge Transaction Confirmation, dated May 29, 2009,
between the Company and Barclays Bank PLC, as dealer
Second Amended and Restated Credit Agreement, dated as of October 17, 2011,
by and among the Company, each of its Subsidiaries identified on the signature
pages thereto as Borrowers, each of its Subsidiaries identified on the signature
pages thereto as Guarantors, the lender parties thereto, and Wells Fargo Capital
Finance, Inc., as administrative agent
Xbox 360 Publisher License Agreement dated November 17, 2006, between
Microsoft Licensing, GP and the Company*
Amendment to Xbox 360 Publisher License Agreement, dated December 4,
2008, between Microsoft Licensing, GP and the Company*
Amendment to the Xbox 360 Publisher License Agreement, dated
November 22, 2011, between the Company and Microsoft Licensing, GP*
Confidential License Agreement for the Wii Console dated August 20, 2007,
between Nintendo of America Inc. and the Company*
8-K
6/3/2009
10.1
8-K
6/3/2009
8-K
6/3/2009
8-K
6/3/2009
8-K
6/3/2009
8-K
6/3/2009
10.2
10.7
10.8
10.3
10.4
8-K 10/17/2011
10.1
10-Q
11/8/2011
10-Q
6/5/2009
10-Q
2/3/2012
10-Q
9/10/2007
10.3
10.1
10.1
10.1
44
Exhibit Description
Form Filing Date
Exhibit
Filed
Herewith
Incorporated by Reference
Exhibit
Number
10.40
10.41
10.42
10.43
10.44
10.45
21.1
23.1
31.1
31.2
32.1
32.2
10-Q
3/10/2010
10.3
First Amendment, effective August 21, 2009, to the Confidential License
Agreement, effective February 21, 2007, by and among Nintendo of
America Inc. and Take-Two Interactive Software, Inc. and certain of its affiliates
party thereto
Global Playstation 3 Format Licensed Publisher Agreement, dated May 18,
2010, between Take-Two International S.A. and Sony Computer Entertainment
Europe Limited*
Global Playstation 3 Format Licensed Publisher Agreement, dated May 20,
2010, between the Company and Sony Computer Entertainment America LLC*
10-Q
11/8/2011
10-Q
11/8/2011
10.2
10.1
Asset Purchase Agreement, dated December 21, 2009, by and among SYNNEX
Corporation, Jack of All Games, Inc., Jack of All Games (Canada), Inc., and
solely for purposes of Section 9.2 therein, the Company
8-K 12/21/2009
10.1
Lease Agreement between the Company and Moklam Enterprises, Inc. dated
July 1, 2002
10-Q
9/16/2002
10.2
Amendment to Lease Agreement, dated January 18, 2012, between the
Company and Moklam Enterprises, Inc.
Subsidiaries of the Company
Consent of Ernst & Young LLP
Chief Executive Officer Certification Pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification Pursuant to Rules 13a-15(e) and 15d-15(e)
under the Securities and Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Calculation Linkbase Document.
101.LAB XBRL Taxonomy Label Linkbase Document.
101.PRE XBRL Taxonomy Presentation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Document.
X
X
X
X
X
X
X
X
X
X
X
X
X
+
*
Represents a management contract or compensatory plan or arrangement.
Portions hereof have been omitted and filed separately with the Securities and Exchange Commission pursuant to a
request for confidential treatment that was granted in accordance with Exchange Act Rule 24b-2.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language):
(i) Consolidated Balance Sheets at March 31, 2012 and 2011, (ii) Consolidated Statements of Operations for the fiscal years
ended March 31, 2012, 2011 and 2010 (unaudited), five months ended March 31, 2010 and fiscal year ended October 31,
2009, (iii) Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2012, 2011 and 2010 (unaudited),
five months ended March 31, 2010 and fiscal year ended October 31, 2009, (iv) Consolidated Statements of Stockholders’
Equity for the fiscal year ended October 31, 2009, the five months ended March 31, 2010 and the fiscal years ended
March 31, 2011 and 2012; and (v) Notes to the Consolidated Financial Statements.
d
45
TAKE-TWO INTERACTIVE SOFTWARE, INC.
FISCAL YEAR ENDED MARCH 31, 2012
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets—At March 31, 2012 and 2011
Consolidated Statements of Operations—For the fiscal years ended March 31, 2012, 2011 and 2010 (unaudited), five
months ended March 31, 2010 and fiscal year ended October 31, 2009
Consolidated Statements of Cash Flows—For the fiscal years ended March 31, 2012, 2011 and 2010 (unaudited), five
months ended March 31, 2010 and fiscal year ended October 31, 2009
Consolidated Statements of Stockholders’ Equity—For the fiscal year ended October 31, 2009, the five months ended
March 31, 2010 and the fiscal years ended March 31, 2011 and 2012
Notes to the Consolidated Financial Statements
Page
47
49
50
51
52
53
(All other items in this report are inapplicable)
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Take-Two Interactive Software, Inc.
We have audited the accompanying consolidated balance sheets of Take-Two Interactive Software, Inc. as of March 31, 2012
and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years
ended March 31, 2012 and 2011, the five months ended March 31, 2010 and for the year ended October 31, 2009. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
t
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Take-Two Interactive Software, Inc. at March 31, 2012 and 2011, and the consolidated results of its operations
and its cash flows for each of the years ended March 31, 2012 and 2011, the five months ended March 31, 2010 and for the
year ended October 31, 2009 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Take-Two Interactive Software, Inc.’s internal control over financial reporting as of March 31, 2012, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated May 22, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
May 22, 2012
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Take-Two Interactive Software, Inc.
We have audited Take-Two Interactive Software, Inc.’s internal control over financial reporting as of March 31, 2012, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). Take-Two Interactive Software, Inc.’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our
audit.
t
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
aa
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
s are subject to the risk that controls may become inadequate
f
projections of any evaluation of effectiveness to future period
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Take-Two Interactive Software, Inc. maintained, in all material respects, effective internal control over
financial reporting as of March 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Take-Two Interactive Software, Inc. as of March 31, 2012 and 2011, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for each of the years ended March 31, 2012
and 2011, the five months ended March 31, 2010, and for the year ended October 31, 2009 of Take-Two Interactive
Software, Inc. and our report dated May 22, 2012 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
May 22, 2012
48
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Current assets:
ASSETS
Cash and cash equivalents
Accounts receivable, net of allowances of $51,002 and $42,900 at March 31, 2012
$420,279
$280,359
March 31,
2012
March 31,
2011
and 2011, respectively
Inventory
Software development costs and licenses
Prepaid taxes and taxes receivable
Prepaid expenses and other
Total current assets
Fixed assets, net
Software development costs and licenses, net of current portion
Goodwill
Other intangibles, net
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenue
Liabilities of discontinued operations
Total current liabilities
Long-term debt
Income taxes payable
Other long-term liabilities
Liabilities of discontinued operations, net of current portion
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 5,000 shares authorized
Common stock, $.01 par value, 150,000 shares authorized; 90,215 and 86,119 shares
issued and outstanding at March 31, 2012 and 2011, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes.
45,035
22,477
211,224
2,669
41,933
743,617
18,949
104,755
228,169
16,266
37,671
$1,149,427
$46,681
156,768
13,864
1,412
218,725
316,340
15,621
695
2,319
553,700
84,217
24,578
131,676
8,280
37,493
566,603
19,632
138,320
225,170
17,833
4,101
$971,659
$56,153
158,459
13,434
2,842
230,888
107,239
12,037
2,961
3,255
356,380
—
—
902
799,431
(211,339)
6,733
595,727
$1,149,427
861
706,482
(102,523)
10,459
615,279
$971,659
49
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Net revenue
Cost of goods sold
Gross profit
Selling and marketing
General and administrative
Research and development
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Interest and other, net
Income (loss) from continuing
operations before income taxes
Provision for income taxes
Income (loss) from continuing
operations
Loss from discontinued operations,
net of taxes
Net income (loss)
Earnings (loss) per share:
Continuing operations
Discontinued operations
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Diluted earnings (loss) per share
Fiscal Year Ended March 31,
2011
2012
$1,136,876
689,381
447,495
176,294
109,484
69,576
14,999
370,353
77,142
(13,519)
2010
(Unaudited)
$762,941
494,579
268,362
154,519
115,673
57,888
16,403
344,483
(76,121)
(18,794)
63,623
9,819
(94,915)
13,145
$825,823
528,855
296,968
183,749
121,200
64,162
12,123
381,234
(84,266)
(19,571)
(103,837)
3,863
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$359,231
222,396
136,835
72,402
43,466
25,279
6,622
147,769
(10,934)
(11,352)
(22,286)
4,266
$701,057
467,576
233,481
141,962
130,376
63,748
17,574
353,660
(120,179)
(5,771)
(125,950)
4,487
(107,700)
53,804
(108,060)
(26,552)
(130,437)
(1,116)
$(108,816)
(5,346)
$48,458
(14,935)
$(122,995)
(2,250)
$(28,802)
(10,017)
$(140,454)
$(1.30)
(0.01)
$(1.31)
$(1.30)
(0.01)
$(1.31)
$0.62
(0.06)
$0.56
$0.62
(0.06)
$0.56
$(1.39)
(0.19)
$(1.58)
$(1.39)
(0.19)
$(1.58)
$(0.34)
(0.03)
$(0.37)
$(0.34)
(0.03)
$(0.37)
$(1.70)
(0.13)
$(1.83)
$(1.70)
(0.13)
$(1.83)
50
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended March 31,
2011
2012
2010
(Unaudited)
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
Operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities:
Amortization and impairment of software development costs and
licenses
Depreciation and amortization
Loss from discontinued operations
Amortization and impairment of intellectual property
Stock-based compensation
Gain on sale of intellectual property
Loss on sale of subsidiary
Deferred income taxes
Amortization of discount on Convertible Notes
Amortization of debt issuance costs
Other, net
Changes in assets and liabilities, net of effect from purchases of
businesses:
Accounts receivable
Inventory
Software development costs and licenses
Prepaid expenses, other current and other non-current assets
Deferred revenue
Accounts payable, accrued expenses, income taxes payable and
other liabilities
Net cash (used in) provided by discontinued operations
Net cash (used in) provided by operating activities
Investing activities:
Purchase of fixed assets
Net cash (used in) provided by discontinued operations
Cash received from sale of intellectual property
Cash received from sale of business
Payments in connection with business combinations,
net of cash acquired
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from exercise of employee stock options
Net payments on line of credit
Proceeds from issuance of Convertible Notes
Purchase of convertible note hedges
Issuance of warrants to purchase common stock
Payment of debt issuance costs
Net cash provided by financing activities
Effects of foreign currency exchange rates on cash and
cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of period
Supplemental data:
Interest paid
Income taxes paid (received)
See accompanying Notes.
$(108,816)
$48,458
$(122,995)
$(28,802)
$(140,454)
150,700
12,123
1,116
983
33,494
(2,200)
—
1,878
11,728
1,527
1,231
143,811
14,999
5,346
3,927
28,765
—
—
(1,095)
7,374
1,251
(1,097)
112,742
16,403
14,935
109
26,503
—
3,831
4,550
5,457
1,136
788
39,182
2,101
(191,223)
2,537
430
(10,082)
(99)
(156,782)
16,943
1,490
(3,332)
5,581
(171,855)
(14,091)
(12,371)
(39,748)
(2,007)
(84,964)
(10,786)
(1,475)
2,200
—
(4,101)
(14,162)
239
—
250,000
—
—
(6,875)
243,364
41,217
(9,628)
134,798
(5,314)
2,221
(135,702)
(9,653)
—
—
3,075
(1,000)
(7,578)
734
—
—
—
—
—
734
(9,933)
37,250
—
2,512
(6,804)
23,025
18
(70,000)
138,000
(43,592)
26,342
(4,984)
45,784
50,956
6,622
2,250
40
10,479
—
3,831
761
2,802
521
1,086
106,930
1,893
(61,563)
(6,420)
5,610
(95,604)
5,187
6,579
(3,149)
37,250
—
2,512
(991)
35,622
—
—
—
—
—
—
—
(4,318)
139,920
280,359
$420,279
6,567
134,521
145,838
$280,359
8,593
(58,300)
204,138
$145,838
1,554
43,755
102,083
$145,838
$6,992
$1,018
$7,361
$6,336
$5,196
$1,673
$3,680
$10,519
105,521
17,574
10,017
478
25,933
—
—
3,432
2,655
852
(4,456)
(57,275)
11,792
(164,828)
(309)
(49,829)
13,728
14,965
(210,204)
(11,176)
—
—
—
(5,813)
(16,989)
22
(70,000)
138,000
(43,592)
26,342
(4,984)
45,788
3,211
(178,194)
280,277
$102,083
$4,371
$(5,423)
51
TAKE-TWO INTERACTIVE SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Balance, October 31, 2008
Net loss
Change in cumulative foreign currency translation adjustment
Proceeds from exercise of stock options
Purchase of call options
Sale of warrants
Stock-based compensation
Issuance of 4.375% Convertible Notes
Issuance of restricted stock, net of forfeitures and cancellations
Income tax effect of stock award cancellations and forfeitures
Balance, October 31, 2009
Net loss
Change in cumulative foreign currency translation adjustment
Stock-based compensation
Issuance of restricted stock, net of forfeitures and cancellations
Income tax effect of stock award cancellations and forfeitures
Balance, March 31, 2010
Net income
Change in cumulative foreign currency translation adjustment
Proceeds from exercise of stock options
Stock-based compensation
Issuance of restricted stock, net of forfeitures and cancellations
Issuance of common stock in connection with acquisition
Balance, March 31, 2011
Net loss
Change in cumulative foreign currency translation adjustment
Proceeds from exercise of stock options
Change in unrealized gains on derivative instruments, net
Stock-based compensation
Issuance of 1.75% Convertible Notes
Issuance of restricted stock, net of forfeitures and cancellations
Issuance of common stock in connection with acquisition
Balance, March 31, 2012
See accompanying Notes.
Common Stock
Shares Amount
777
77,694
Additional
Paid-in
Capital
603,579
—
2
—
—
—
4,229
—
81,925
—
—
2,052
—
83,977
—
65
—
1,884
193
86,119
—
21
—
—
—
3,947
128
90,215
—
—
—
—
—
42
—
819
—
—
21
—
840
—
1
—
18
2
861
—
1
—
—
—
39
1
$902
—
22
(43,592)
26,342
31,193
42,018
(42)
(726)
658,794
—
12,930
(21)
2,774
674,477
—
732
29,293
(18)
1,998
706,482
—
238
—
39,571
51,180
(39)
1,999
$799,431
Retained
Earnings
(Accumulated
Deficit)
18,275
(140,454)
—
—
—
—
—
—
—
—
(122,179)
(28,802)
—
—
—
—
(150,981)
48,458
—
—
—
—
—
(102,523)
(108,816)
—
—
—
—
—
—
—
$(211,339)
Accumulated
Other
Comprehensive
Income
(Loss)
(7,513)
15,705
—
—
—
—
—
—
—
8,192
(11,905)
—
—
—
(3,713)
14,172
—
—
—
—
10,459
(3,785)
—
59
—
—
—
—
$6,733
Total
Stockholders’
Equity
615,118
(140,454)
15,705
22
(43,592)
26,342
31,193
42,018
—
(726)
545,626
(28,802)
(11,905)
12,930
—
2,774
520,623
48,458
14,172
733
29,293
—
2,000
615,279
(108,816)
(3,785)
239
59
39,571
51,180
—
2,000
$595,727
52
TAKE-TWO INTERACTIVE SOFTWARE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Take-Two Interactive Software, Inc. (the “Company,” “we,” “us,” or similar pronouns) was incorporated in the state of
Delaware in 1993. We are a leading developer, marketer and publisher of interactive entertainment for consumers around the
globe. The Company develops and publishes products through its two wholly-owned labels Rockstar Games and 2K, which
publishes its titles under the 2K Games, 2K Sports and 2K Play brands. Our products are designed for console systems,
handheld gaming systems and personal computers, including smart phones and tablets, and are delivered through physical
retail, digital download, online platforms and cloud streaming services.
Principles of Consolidation
The Consolidated Financial Statements include the financial statements of the Company and its wholly-owned subsidiaries.
All material inter-company balances and transactions have been eliminated in consolidation.
Change in Fiscal Year
On October 25, 2010, the Company’s Board of Directors approved a change in the Company’s fiscal year end from
October 31 to March 31. A Transition Report on Form 10-KT was filed for the period from, and including the financial
information for, the five-month period from November 1, 2009 to March 31, 2010. For comparative purposes, an unaudited
Consolidated Statement of Operations and Consolidated Statement of Cash Flows have been included for the fiscal year
ended March 31, 2010. The reported numbers for the fiscal year ended March 31, 2010, which have not been audited, are
derived from the books and records of the Company and, in the opinion of management, reflect all adjustments necessary to
present the financial position and results of operations in accordance with U.S. generally accepted accounting principles.
Reclassifications
Certain amounts in the financial statements of the prior years have been reclassified to conform to the current year
presentation for comparative purposes.
Discontinued Operations
In February 2010, we completed the sale to SYNNEX Corporation (“Synnex”) of our Jack of All Games third-party
distribution business, which primarily distributed third-party interactive entertainment software, hardware and accessories in
North America. The financial results of our distribution business have been classified as discontinued operations in the
Consolidated Statements of Operations for all of the periods presented. The assets and liabilities of this business are reflected
as assets and liabilities of discontinued operations in the Consolidated Balance Sheets for all periods presented. See Note 2
for additional information regarding discontinued operations. Unless otherwise noted, amounts and disclosures throughout
the Notes to Consolidated Financial Statements relate to the Company’s continuing operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses
e to the recoverability of software
during the reporting periods. The most significant estimates and assumptions relat
development costs, licenses and intangibles, valuation of inventories, realization of deferred income taxes, the adequacy of
allowances for sales returns, price concessions and doubtful accounts, accrued liabilities, the service period for deferred net
revenue, fair value estimates, the valuation of stock-based compensation and assumptions used in our goodwill impairment
test. These estimates generally involve complex issues and require us to make judgments, involve analysis of historical and
m
the prediction of future trends, and are subject to change from period to period. Actual amounts could differ significantly
from these estimates.
t
53
Financial Instruments
The carrying amounts of our financial instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, approximate fair value because of their short maturities. We consider all highly liquid
instruments purchased with original maturities of three months or less to be cash equivalents. At March 31, 2012 and 2011
we had $16,464 and $20,091, respectively, of cash on deposit reported as a component of prepaid expenses and other in the
accompanying Consolidated Balance Sheets because its use was restricted.
As of March 31, 2012, the estimated fair value of the Company’s 4.375% Conver
tible Notes due 2014 and the Company’s
r
1.75% Convertible Notes due 2016 was $213,265 and $263,600, respectively. See Note 12 for additional information
d
regarding our Convertible Notes. The fair value was determined using observable market data for the Convertible Notes and
its embedded option feature.
We transact business in various foreign currencies and have significant sales and purchase transactions denominated in
foreign currencies, subjecting us to foreign currency exchange rate risk. From time to time, we use hedging programs in an
effort to mitigate the effect of currency exchange rate movements.
Cash Flow Hedging Activities
During the fiscal year ended March 31, 2012, we entered into foreign currency forward contracts to mitigate foreign currency
exchange rate risk associated with forecasted non-functional currency denominated expenses. These transactions, which are
designated and qualify as cash flow hedges, are accounted for as derivatives whereby the fair value of the contracts is
reported as either assets or liabilities on our Consolidated Balance Sheets. The effective portion of gains or losses resulting
from changes in the fair value of these hedges is initially reported, net of tax, as a component of accumulated other
comprehensive income (loss) in stockholders’ equity. The gross amount of the effective portion of gains or losses resulting
from changes in the fair value of these hedges is subsequently reclassified into cost of goods sold or research and
development expenses, as appropriate, in the period when the forecasted transaction is recognized in our Consolidated
Statements of Operations. In the event that the gains or losses in accumulated other comprehensive income (loss) are deemed
to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to
interest and other, net, in our Consolidated Statements of Operations. In the event that the underlying forecasted transactions
do not occur, or it becomes probable that they will not occur, within the defined hedge period, the gains or losses on the
related cash flow hedges are reclassified from accumulated other comprehensive income (loss) to interest and other, net, in
our Consolidated Statements of Operations. During the fiscal year ended March 31, 2012, all forecasted transactions
occurred, and therefore, there were no such gains or losses reclassified into interest and other, net. We do not enter into
derivative financial contracts for speculative or trading purposes. As of March 31, 2012, we had $10,192 of forward contracts
outstanding to buy foreign currencies in exchange for U.S. dollars all of which have maturities of less than one year. As of
March 31, 2012, the fair value of these outstanding forward contracts was immaterial and is included in prepaid expenses and
other.
Balance Sheet Hedging Activities
We use foreign currency forward contracts to mitigate foreign currency exchange rate risk associated with non-functional
currency denominated cash balances and inter- company funding loans, non-functional currency denominated accounts
receivable and non-functional currency denominated accounts payable. These transactions are not designated as hedging
instruments and are accounted for as derivatives whereby the fair value of the contracts is reported as either assets or
liabilities on our Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in
interest and other, net, in our Consolidated Statements of Operations. We do not enter into derivative financial contracts for
speculative or trading purposes. At March 31, 2012, we had $4,005 of forward contracts outstanding to buy foreign
currencies in exchange for U.S. dollars and $28,304 of forward contracts outstanding to sell foreign currencies in exchange
for U.S. dollars all of which have maturities of less than one year. At March 31, 2011, we had $2,399 of forward contracts
outstanding to buy foreign currencies in exchange for U.S. dollars and $35,539 of forward contracts outstanding to sell
foreign currencies in exchange for U.S. dollars all of which have maturities of less than one year. For the fiscal year ended
March 31, 2012, we recorded a gain of $746 and for the fiscal years ended March 31, 2011 and 2010, five months ended
March 31, 2010 and fiscal year ended October 31, 2009, we recorded losses of $6,901, $953, $2,300 and $73, respectively,
related to foreign currency forward contracts in interest and other, net on the Consolidated Statements of Operations. As of
March 31, 2012 and 2011, the fair value of these outstanding forward contracts was immaterial and is included in accrued
expenses and other current liabilities.
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54
Concentration of Credit Risk and Accounts Receivable
We maintain cash balances at several major financial institutions. While we attempt to limit credit exposure with any single
institution, balances often exceed insurable amounts.
If the financial condition and operations of our customers deteriorate, our risk of collection could increase substantially. A
majority of our trade receivables are derived from sales to major retailers and distributors. Our five largest customers
accounted for 43.9%, 43.8%, 59.8%, 55.7%, and 56.4% of net revenue during the fiscal years ended March 31, 2012, 2011
and 2010, five months ended March 31, 2010 and fiscal year ended October 31, 2009, respectively. As of March 31, 2012
and 2011, the five largest customers accounted for 61.3% and 54.2% of our gross accounts receivable, respectively.
Customers that individually accounted for more than 10% of our gross accounts receivable balance comprised 40.6% and
38.2% of such balances at March 31, 2012 and 2011, respectively. We believe that the receivable balances from these largest
customers do not represent a significant credit risk based on past collection experience.
t
Inventory
Inventory is stated at the lower of average cost or market. Estimated product returns are included in the inventory balance at
their cost. We regularly review inventory quantities on-hand and in the retail channe
ls and record an inventory provision for
excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our
products would affect management’s estimates in establishing our inventory provision.
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Software Development Costs and Licenses
Capitalized software development costs include direct costs incurred for internally developed titles and payments made to
third-party software developers under development agreements.
We capitalize internal software development costs (including stock-based compensation, specifically identifiable employee
payroll expense and incentive compensation costs related to the completion and release of titles), third-party production and
other content costs, subsequent to establishing technological feasibility of a software title. Technological feasibility of a
product includes the completion of both technical design and game design documentation.
We enter into agreements with third-party developers that require us to make payments for game development and production
services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game title
as well as, in some cases, the underlying intellectual property rights. Such agreements allow us to fully recover these
payments to the developers at an agreed upon royalty rate earned on the subsequent retail sales of such software, net of any
agreed upon costs. Prior to establishing technological feasibility of a product we record any costs incurred by third- party
developers as research and development expenses. Subsequent to establishing technological feasibility of a product we
capitalize all development and production service payments to third-party developers as software development costs and
licenses. We typically enter into agreements with third-party developers after completing the technical design documentation
for our products and therefore record the design costs leading up to a signed development contract as research and
development expense. When we contract with third-party developers, we generally select those that have proven technology
and experience in the genre of the software being developed, which often allows for the establishment of technological
feasibility early in the development cycle. In instances where the documentation of the design and technology are not in place
prior to an executed contract, we monitor the software development process and require our third-party developers to adhere
to the same technological feasibility standards that apply to our internally developed products.
d
Licenses consist of payments and guarantees made to holders of intellectual property rights for use of their trademarks,
copyrights or other intellectual property rights in the development of our products. Agreements with license holders generally
provide for guaranteed minimum royalty payments for use of their intellectual property. Guaranteed minimum payments are
initially recorded as an asset (licenses) and as a liability (accrued licenses) upon execution of a licensing agreement, provided
that no significant performance remains to be completed by the licensor. When significant performance remains to be
completed by the licensor, we record payments when actually paid.
d
y
Certain licenses, especially those related to our sports products, extend over multi-year periods and encompass multiple game
titles. In addition to guaranteed minimum payments, these licenses frequently contain provisions that could require us to pay
royalties to the license holder based on pre-agreed unit sales thresholds.
n
r
55
Amortization of capitalized software development costs and licenses commences when a product is released and is recorded
on a title-by-title basis in cost of goods sold. For capitalized software development costs, amortization is calculated using
(1) the proportion of current year revenues to the total revenues expected to be recorded over the life of the title or (2) the
straight-line method over the remaining estimated useful life of the title, whichever is greater. For capitalized licenses,
amortization is calculated as a ratio of (1) current period revenues to the total revenues expected to be recorded over the
remaining life of the title or (2) the contractual royalty rate based on actual net product sales as defined in the licensing
agreement, whichever is greater.
r
At each balance sheet date, or earlier if an indicator of impairment exists, we evaluate the recoverability of capitalized
software costs, licenses and any other unrecognized minimum commitments that have not been paid, using an undiscounted
future cash flow analysis. We use various measures to evaluate expected product performance and estimate future revenues
for our software titles including historical performance of comparable titles; orders for titles prior to release; and the
estimated performance of a sequel title based on the performance of the title on which the sequel is based. When management
determines that the value of a title is unlikely to be recovered by product sales, capitalized costs are charged to cost of goods
sold in the period in which such determination is made.
f
We have established profit and unit sales based internal royalty programs that allow selected employees to each participate in
the success of software titles that they assist in developing. Royalties earned by employees under this program are recorded
as a component of cost of goods sold as they are incurred.
Fixed Assets, net
Office equipment, furniture and fixtures are depreciated using the straight-line method over their estimated useful life of fiv
e
years. Computer equipment and software are generally depreciated using the straight-line method over three years. Leasehold
improvements are amortized over the lesser of the term of the related lease or
seven years. The cost of additions and
betterments are capitalized, and repairs and maintenance costs are charged to operations, in the periods incurred. When
depreciable assets are retired or sold, the cost and related allowances for depreciation are removed from the accounts and the
gain or loss is recognized. The carrying amounts of these assets are recorded at historical cost.
r
t
t
Goodwill and Intangible Assets
Goodwill is the excess of purchase price paid over identified intangible and tangible net assets of acquired companies.
Intangible assets consist of trademarks, intellectual property, non-compete agreements, customer lists and acquired
technology. Certain intangible assets acquired in a business combination are recognized as assets apart from goodwill.
We use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income
approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the
asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its
replacement or reproduction cost. The market approach estimates value based on what other participants in the market have
paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the
approach ultimately selected is based on the characteristics of the asset
and the availability of information.
n
aa
Identified intangibles other than goodwill are generally amortized using the straight-line method over the period of expected
benefit ranging from three to ten years, except for intellectual property, which is a usage-based intangible asset that is
amortized using the shorter of the useful life or expected revenue stream.
f
We perform an annual test for impairment of goodwill as of the beginning of August
, or whenever events or changes in
circumstances indicate the fair value of a reporting unit is below its carrying amount. In the evaluation of goodwill for
impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the
reporting unit is less than the carrying amount. If it is determined through the qualitative assessment that a reporting unit’s
fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. If
however it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not less tha
n
its carrying value, we perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value.
ff
In performing the quantitative assessment we measure the fair value of the reporting unit using a combination of the income
approach, which uses discounted cash flows, and the market approach, which uses market capitalization and comparable
companies’ data. Each step requires us to make judgments and involves the use of significant estimates and assumptions.
These estimates and assumptions include long-term growth rates and operating margins used to calculate projected future
cash flows, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions
56
and the determination of appropriate market comparables. These estimates and assumptions have to be made for each
reporting unit evaluated for impairment. Our estimates for market growth are based on historical data, various internal
estimates and observable external sources when available, and are based on assumptions that are consistent with the plans
and estimates we use to manage the underlying business. If the carrying value of a reporting unit exceeds its fair value, the
goodwill of that reporting unit is potentially impaired and we proceed to step two of
the impairment analysis. In step two of
the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over
its implied fair value should such a circumstance arise.
mm
Long-lived Assets
cate that the carrying amount of an asset
r
We review all long-lived assets whenever events or changes in circumstances indi
may not be recoverable. We compare the carrying amount of the asset to the estimated undiscounted future cash flows
expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted
future cash flows, we record an impairment charge for the difference between the carrying amount of the asset and its fair
value. The estimated fair value is generally measured by discounting expected future cash flows using our incremental
borrowing rate or fair value, if available.
Income Taxes
We record a tax provision for the anticipated tax consequences of the reported results of operations. Our provision for income
taxes is computed using the asset and liability method, under which deferred income taxes are recognized for differences
between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in
which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment. Valuation allowances are established when we determine that it is more likely than not
that such deferred tax assets will not be realized. We do not record income tax expense related to foreign withholding taxes or
United States income taxes which may become payable upon the repatriation of undistr
ibuted earnings of foreign
uu
subsidiaries, as such earnings are expected to be reinvested indefinitely outside of the United States.
We use estimates and assumptions to compute the provision for income taxes including allocations of certain transactions to
different tax jurisdictions, amounts of permanent and temporary differences, the likelihood of deferred tax assets being
recovered and the outcome of contingent tax risks. These estimates and assumptions are revised as new events occur, more
experience is acquired and additional information is obtained. The effect of these revisions is recorded in income tax expense
or benefit in the period in which they become known.
We recognize and measure uncertain tax positions and record tax benefits when it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater
than 50% likelihood of being realized upon ultimate settlement.
Revenue Recognition
We earn our revenue from the sale of internally developed interactive software titles and from the sale of titles developed by
and/or licensed from third- party developers.
We recognize revenue upon the transfer of title and risk of loss to our customers. We recognize revenue for software titles
when there is (1) persuasive evidence that an arrangement with the customer exists, which is generally based on a customer
purchase order, (2) the product is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer
receivable is deemed probable. Certain products are sold to customers with a street date (i.e., the earliest date these products
may be sold by retailers). For these products we recognize revenue on the later of the street date or the sale date.
Our payment arrangements with customers typically provide net 30 and 60 day terms. Advances received for licensing and
exclusivity arrangements are reported on the balance sheet as deferred revenue
until we meet our performance obligations, at
n
which point we recognize the revenue.
Some of our software products provide limited online functionality at no additional cost to the consumer. Generally, we
consider such features to be incidental to the overall product offering and an inconsequential deliverable. Accordingly, we do
not defer revenue related to products containing such online features. We determine whether our products contain substantial
online functionality by evaluating the significance of the development effort and the nature of the online features, the extent
of anticipated marketing focus on the online features, the significance of the online features to the customers’ anticipated
overall gameplay experience, and the significance of our post sale obligations to customers. Overall, online play functionality
is still an emerging area for us, and we continue to monitor this developing functionality and its significance to our products.
57
In addition, some of our software products are sold exclusively as downloads of digital content for which the consumer takes
possession of the digital content for a fee. Revenue from product downloads is generally recognized when the download is
made available (assuming all other recognition criteria are met).
Certain of our software products include in-game advertising for third- party products. Advance payments received for in-
game advertising are reported on our Consolidated Balance Sheets as deferred revenue until we meet our performance
obligations, at which point we recognize the revenue, which is generally at the time of the initial release of the product.
f
Revenue is recognized after deducting estimated reserves for returns, price concessions and other allowances. In
circumstances when we do not have a reliable basis to estimate returns and price concessions or are unable to determine that
collection of a receivable is probable, we defer the revenue until such time as we can reliably estimate any related returns and
allowances and determine that collection of the receivable is probable.
Allowances for Returns, Price Concessions and Other Allowances
We accept returns and grant price concessions in connection with our publishing arrangements. Following reductions in the
price of our products, we grant price concessions to permit customers to take credits against amounts they owe us with
respect to merchandise unsold by them. Our customers must satisfy certain conditions to entitle them to return products or
receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels.
Generally, our distribution arrangements with customers do not give them the right to return titles or to cancel firm orders.
However, we occasionally accept returns from our customers for stock balancing and make accommodations to customers,
which include 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 other factors, historical experience and
performance of the titles in similar genres, historical performance of the hardware platform, customer inventory levels,
analysis of sell-through rates, sales force and retail customer feedback, industry pricing, market conditions and changes in
demand and acceptance of our products by consumers.
Significant management judgments and estimates must be made and used in connection with establishing the allowance for
returns and price concessions in any accounting period. We believe we can make reliable estimates of returns and price
concessions. However, actual results may differ from initial estimates as a result of changes in circumstances, market
conditions and assumptions. Adjustments to estimates are recorded in
the period in which they become known.
h
d
Consideration Given to Customers and Received from Vendors
We have various marketing arrangements with retailers and distributors of our products that provide for cooperative
advertising and market development funds, among others, which are generally based on single exchange transactions. Such
amounts are accrued as a reduction to revenue at the later of: (1) the date at which the related revenue is recognized by us, or
ich is included in selling and
(2) the date at which the sales incentive is offered, except for cooperative advertising wh
marketing expense if there is a separate identifiable benefit and the benefit’s fair value can be established.
t
We receive various incentives from our manufacturers, including up-front cash payments as well as rebates based on a
cumulative level of purchases. Such amounts are generally accounted for as a reduction in the price of the manufacturer’s
product and included as a reduction of inventory or cost of goods sold, based on (1) a ratio of current period revenue to the
total revenue expected to be recorded over the remaining life of the product or (2) an agreed upon per unit rebate, based on
actual units manufactured during the period.
Advertising
We expense advertising costs as incurred. Advertising expense for the fiscal years ended March 31, 2012, 2011 and 2010,
five months ended March 31, 2010 and fiscal year ended October 31, 2009 amounted to $122,932, $115,089, $103,718,
$51,481, and $93,390, respectively.
58
Earnings (Loss) per Share (“EPS”)
Basic EPS is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted
average number of shares of common stock outstanding during the same period. Diluted EPS is computed by dividing the net
income (loss) applicable to common stockholders for the period by the weighted average number of shares of common stock
and common stock equivalents outstanding.
The following table sets forth the computation of basic and diluted EPS (shares in thousands):
f
Fiscal Year Ended March 31,
2011
2012
2010
(Unaudited)
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
Computation of Basic EPS:
Net income (loss)
Less: net income allocated to participating
securities
Net income (loss) for basic EPS
calculation
Total weighted average shares
outstanding—basic
Less: weighted average participating
shares outstanding
Weighted average common shares
outstanding—basic
Basic EPS
Computation of Diluted EPS:
Net income (loss)
Less: net income allocated to participating
securities
Net income (loss) for diluted EPS
calculation
Weighted average common shares
outstanding—basic
Add: dilutive effect of common stock
equivalents
Weighted average common shares
outstanding—diluted
Diluted EPS
$(108,816)
$48,458
$(122,995)
$(28,802)
$(140,454)
— (3,159)
—
—
—
$(108,816)
$45,299
$(122,995)
$(28,802)
$(140,454)
83,356
86,127
77,858
78,453
76,815
— (5,615)
—
—
—
83,356
$(1.31)
80,512
$0.56
77,858
$(1.58)
78,453
$(0.37)
76,815
$(1.83)
$(108,816)
$48,458
$(122,995)
$(28,802)
$(140,454)
— (3,159)
—
—
—
$(108,816)
$45,299
$(122,995)
$(28,802)
$(140,454)
83,356
80,512
77,858
78,453
76,815
—
12
—
—
—
83,356
$(1.31)
80,524
$0.56
77,858
$(1.58)
78,453
$(0.37)
76,815
$(1.83)
The Company incurred a net loss for the fiscal years ended March 31, 2012 and 2010, five months ended March 31, 2010 and
fiscal year ended October 31, 2009; therefore, the basic and diluted weighted average shares outstanding exclude the effect of
unvested share-based awards that are considered participating restricted stock and all common stock equivalents because their
effect would be antidilutive.
Our unvested restricted stock rights (including restricted stock units, time-based and market-based restricted stock awards)
ts to dividends or dividend
u
are considered participating restricted stock since these securities have non-forfeitable righ
equivalents during the contractual period of the award, and thus require the two-class method of computing EPS. The
calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted stock rights
from the numerator and excludes the dilutive effect of those awards from the denominator. For the fiscal year ended
March 31, 2012, fiscal year and five months ended March 31, 2010 and fiscal year ended October 31, 2009, we had
5,724,000, 6,261,000 and 5,320,000, respectively, of unvested share-based awards that are considered participating restricted
stock which are excluded due to the net loss for those periods.
d
59
The Company defines common stock equivalents as unexercised stock options, common stock equivalents underlying the
Convertible Notes (see Note 12) and warrants outstanding during the period. Common stock equivalents are measured using
the treasury stock method, except for the Convertible Notes, which are assessed for their effect on diluted EPS using the more
dilutive of the treasury stock method or the if-converted method. Under the provisions of the if-converted method, the
Convertible Notes are assumed to be converted and included in the denominator of the EPS calculation and the interest
expense, net of tax, recorded in connection with the Convertible Notes is added back to the numerator.
uu
u
In connection with the issuance of our 4.375% Convertible Notes
in June 2009, the Company purchased convertible note
hedges (see Note 12) which were excluded from the calculation of diluted EPS because their effect is always considered
antidilutive since the call option would be exercised by the Company when the exercise price is lower than the market price.
Also in connection with the issuance of our 4.375% Convertible Notes, the Company entered into warrant transactions (see
Note 12). For the fiscal year ended March 31, 2011, the Company excluded the warrants outstanding from its diluted EPS
because the warrants’ strike price of $14.945 was greater than the average market price of our common stock.
Other common stock equivalents excluded from the diluted EPS calculation were unexercised stock option awards of
approximately 2,164,000 for the fiscal year ended March 31, 2012, 3,514,000 for the fiscal year and five months ended
March 31, 2010 and 3,803,000 for the fiscal year ended October 31, 2009 due to the net loss for those periods. For the fiscal
year ended March 31, 2011, the Company excluded from its diluted EPS calculation approximately 2,299,000 of common
stock equivalents which were antidilutive because the common stock equivalents’ exercise prices exceeded the average fair
market value of the Company’s common stock.
Stock-based Compensation
We have issued stock-based compensation to employees and non-employee consultants, such as ZelnickMedia Corporation.
We calculated the fair value of our employee and non-employee stock option awards using the Black-Scholes pricing model.
Employee stock option awards were amortized as stock-based compensation expe
nse on a straight-line basis over the
rr
expected vesting period, which was generally three years, and reduced for estimated forfeitures. We applied variable
accounting to our non-employee based stock option awards, whereby we remeasured the fair value of the unvested portion of
the awards at each vest date, and recorded stock- based compensation expense for the difference between total earned
compensation at the end of the period and total earned compensation at the beginning of the period.
We value time-based restricted stock awards to employees using our closing stock price on the date of grant. Time-based
restricted stock awards are amortized and recorded as expense on a straight-line basis over their expected vesting period,
which is typically three years, and reduced for estimated forfeitures. We apply variable accounting to our non-employee time-
based restricted stock awards, whereby we remeasure the value of such awards at each balance sheet date and adjust the value
of the awards based on the closing price of our common stock at the end of the reporting period. Changes in the value of the
awards from period to period are recorded as stock- based compensation expense over the vesting period, which typically
ranges from three to four years.
t
Estimated forfeitures are adjusted, if necessary, in subsequent periods if actual forfeitures differ from our estimates.
Market-based restricted stock is typically awarded to executives and non-employee consultants. We estimate the fair value of
market-based awards using the Monte Carlo Simulation method which takes into account the probability that the market
conditions of the awards will be achieved. We apply variable accounting to our non-employee market-based awards. We have
issued market- based awards that vest based on a variety of conditions. Our employee and non-employee market-based
awards are amortized over their estimated derived service period, which typically ranges from three to four years.
y
See Note 15 for a full discussion of our stock-based compensation arrangements.
Foreign Currency
The functional currency for our foreign operations is primarily the applicable local currency. Accounts of foreign operations
are translated into U.S. dollars using exchange rates for assets and liabilities at the balance sheet date and average prevailing
exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in
accumulated other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in our
Consolidated Statements of Operations in the period in which they occur, except on inter-company balances considered to be
long term. Transaction gains and losses on inter-company balances which are considered to be long term are recorded in
accumulated other comprehensive income (loss). The Company recorded foreign currency exchange transaction losses of
60
$1,311, $609 and $704 for the fiscal years ended March 31, 2012 and 2010 and five months ended March 31, 2010,
respectively, and foreign currency exchange transaction gains of $1,414 and $4,289 for the fiscal years ended March 31, 2011
and October 31, 2009, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes in equity except those resulting from investments by owners
and distributions to owners. The Company’s items of accumulated other comprehensive income (loss) include foreign
currency translation adjustments, which relate to investments that are permanent in nature and therefore do not require tax
adjustments, and the net of tax amounts for unrealized gains (losses) on derivative instruments designated as cash flow
hedges.
Recently Issued Accounting Pronouncements
Multiple-Deliverable Revenue Arrangements
On April 1, 2011, the Company adopted new guidance related to the accounting for multiple-deliverable revenue
arrangements. These new rules amend the existing guidance for separating consideration in multiple-deliverable
arrangements and establish a selling price hierarchy for determining the selling price of a deliverable. The adoption of this
new guidance did not have any effect on our consolidated financial position, cash flows or results of operations.
Certain Revenue Arrangements That Include Software Elements
On April 1, 2011, the Company adopted new guidance that changes the accounting model for revenue arrangements by
excluding tangible products containing both software and non-software components that function together to deliver the
product’s essential functionality. The adoption of this new guidance did not have any effect on our consolidated financial
position, cash flows or results of operations.
Testing Goodwill for Impairment
On September 30, 2011, the Company adopted new guidance related to testing goodwill for impairment effective for the
Company’s annual impairment test as of August 1, 2011. This new guidance permits an entity to make a qualitative
assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying value as a basis for
determining whether it is necessary to perform the two-step goodwill impairment test. If it is determined through the
qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, the remainin
g
impairment steps would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the
quantitative assessment. This new guidance is effective for annual and interim goodwill impairment tests performed in fiscal
years beginning after December 15, 2011. However, early adoption is permitted, including for annual and interim goodwill
impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent
annual or interim period have not yet been issued. The early adoption of this new guidance did not have any effect on our
consolidated financial position, cash flows or results of operations.
r
Comprehensive Income
In June 2011, new guidance was issued related to the presentation of comprehensive income. The main provisions of the new
guidance provide that an entity that reports items of other comprehensive income has the option to present comprehensive
income as (i) a single statement that presents the components of net income and total net income, the components of other
comprehensive income and total other comprehensive income and a total for comprehensive income or (ii) in two separate
but consecutive statements, whereby an entity must present the components of net income and total net income in the first
statement and that statement is immediately followed by a financial statement that presents the components of other
comprehensive income, a total for other comprehensive income and a total for comprehensive income. The new rules
eliminate the option to present the components of other comprehensive income as part of the statement of stockholders’
equity. These new rules are to be applied retrospectively and become effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2011 (April 1, 2012 for the Company), with early adoption permitted.
We do not expect the adoption of this new guidance to have a material effect on our consolidated financial position, cash
flows or results of operations.
61
2.
DISCONTINUED OPERATIONS
In February 2010, we completed the sale of our Jack of All Games third-party distribution business, which primarily
distributed third-party interactive entertainment software, hardware and accessories in North America, for approximately
$44,000, including $37,250 in cash, subject to purchase price adjustments, and up to an additional $6,750, subject to the
achievement of certain items, which were not met. In April 2011, we settled on the purchase adjustments and as a result the
purchase price was lowered by $1,475. Consequently, the net purchase price after the settlement was $35,775. The sale has
allowed us to focus our resources on our publishing operations. The financial information of our distribution business has
been classified as discontinued operations in the Consolidated Financial Statements for all of the periods presented.
The following is a summary of the results of the discontinued operations:
Net revenue
Loss before income taxes
Loss on sale
Provision (benefit) for income taxes
Net loss
$—
$(1,116)
—
—
$(1,116)
Fiscal Year Ended March 31,
2011
2012
2010
(Unaudited)
$— $254,447
$(16,484)
(447)
(1,996)
$(14,935)
$(4,416)
(570)
360
$(5,346)
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$131,937
$(2,216)
(447)
(413)
$(2,250)
$267,431
$(9,983)
—
34
$(10,017)
The results for the fiscal year ended March 31, 2011 include an expense of $5,464 related to a liability for a lease assumption
without economic benefit less estimates of sublease income. The lease matures on September 30, 2014.
The following is a summary of the liabilities of discontinued operations:
Liabilities of discontinued operations:
Current:
Accrued expenses and other current liabilities
Total current liabilities
Other non-current liabilities
Total liabilities of discontinued operations
3.
MANAGEMENT AGREEMENT
March 31,
2012
2011
$1,412
1,412
2,319
$3,731
$2,842
2,842
3,255
$6,097
In March 2007, we entered into a management services agreement (as amended, the “Management Agreement”) with
ZelnickMedia Corporation (“ZelnickMedia”), whereby ZelnickMedia provides us with certain management, consulting and
executive level services. Strauss Zelnick, the President of ZelnickMedia, serves as our Executive Chairman and Chief
Executive Officer and Karl Slatoff, a partner of ZelnickMedia, serves as our Chief Operating Officer. In May 2011, we
entered into a new management agreement (the “New Management Agreement”) with ZelnickMedia pursuant to which
ZelnickMedia will continue to provide management, consulting and executive level services to the Company through
May 2015. As part of the New Management Agreement, Mr. Zelnick serves as Executive Chairman and Chief Executive
Officer and Mr. Slatoff serves as Chief Operating Officer. In September 2011, the New Management Agreement, which upon
effectiveness, superseded and replaced the Management Agreement was approved by the Company’s stockholders at the
Company’s 2011 Annual Meeting. The New Management Agreement provides for the annual management fee to remain at
$2,500, subject to annual increases in the amount of 3% over the term of the agreement, and the maximum annual bonus was
increased to $3,500 from $2,500, subject to annual increases in the amount of 3% over the term of the agreement, based on
the Company achieving certain performance thresholds. In consideration for ZelnickMedia’s services, we recorded consulting
expense (a component of general and administrative expenses) of $2,500, $5,521, $3,021, $1,563 and $2,500 for the fiscal
years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended October 31, 2009,
respectively.
Pursuant to the Management Agreement, we also issued stock-based awards to ZelnickMedia. See Note 15 for a discussion of
such awards.
62
4.
FAIR VALUE MEASUREMENTS
We follow a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires
entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs
used to measure fair value are as follows:
• Level 1—Quoted prices in active markets for identical assets or liabilities.
• Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for markets that
r
are not active or other inputs that are observable or can be corroborated by observable market data.
• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies
and similar techniques that use significant unobservable inputs.
The table below segregates all assets that are measured at fair value on a recurring basis (which is measured at least annually)
into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the
measurement date.
Money market funds
Bank-time deposits
March 31,
2012
$211,711
$126,820
Quoted prices
in active markets
for identical assets
(level 1)
$211,711
$126,820
Significant other
observable inputs
(level 2)
Significant unobservable
inputs
(level 3)
$—
$—
$—
$—
5.
BUSINESS ACQUISITIONS AND CONSOLIDATION
In prior years, we consummated the acquisitions described below, which largely reflect our strategy to diversify our business
by adding experienced development studios, intellectual properties and talented personnel resources to our existing
infrastructure. The acquisitions were not considered to be material to our Consolidated Statements of Operations, individually
or in the aggregate. The results of operations and financial positions of these acquisitions are included in our Consolidated
Financial Statements from their respective acquisition dates forward and therefore affect comparability from period to period.
During the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended
October 31, 2009, we paid contingent consideration in cash of $4,101, $1,000, $6,804, $991 and $5,813, respectively, for our
prior year acquisitions. During the fiscal years ended March 31, 2012 and 2011, we paid $2,000 and $2,000 by issuing
128,439 and 192,826 shares, respectively, of our unregistered common stock as contingent consideration for our prior year
acquisitions.
t
Acquisition
Date
March 2008
Cash and
Development
Advances
Paid
Value of
Stock
Issued
Goodwill
Recorded on
Acquisition
Date
$4,715
$1,353
$4,617
Acquired Business
Mad Doc
Software LLC
Illusion Softworks
December 2007
5,033
27,875
24,901
Identified
Intangible
Assets
Contingent Consideration
$1,275 Up to $15,000 payable in cash or
stock, based on meeting certain
employment provisions and future
product sales, of which $1,250 was
paid as of March 31, 2012.
8,200 Up to $10,000 based on future
product sales, of which $8,601 was
paid as of March 31, 2012.
In March 2008, we acquired the assets of Rockstar New England, Inc., formerly known as Mad Doc Software LLC
(“Rockstar New England”), an independent development studio in North America and developer of the Bully franchise. Total
consideration paid upon acquisition was $6,068, consisting of $3,740 in cash, 53,033 shares of our unregistered common
stock and $975 of development advances paid prior to the acquisition. The terms of the transaction also include additional
contingent deferred payments payable in cash or stock of up to $15,000, which are being allocated to purchase price when the
conditions requiring their payment are met. The goodwill recorded in connection with this acquisition is deductible for tax
purposes.
63
In December 2007, we acquired all of the outstanding capital stock of 2K Czech a.s., formerly known as Illusion Softworks,
a.s. (“2K Czech”), the Czech Republic developer of the Mafia video game franchise. The acquisition reflects our strategy to
add high-value intellectual property and development studios to our portfolio. Total consideration paid upon acquisition was
$32,908, consisting primarily of 1,496,647 shares of our unregistered common stock and $4,645 of development advances
paid prior to the acquisition. The terms of the transaction also include additional co
ntingent deferred payments in cash and
f
stock of up to $10,000, which are being allocated to purchase price when the conditions requiring their payment are met. The
goodwill recorded in connection with this acquisition is
not deductible for tax purposes.
n
6.
COMPREHENSIVE INCOME (LOSS)
Components of comprehensive income (loss) are as follows:
Net income (loss)
Foreign currency translation adjustment
Change in unrealized gains on derivative
instruments, net
Comprehensive income (loss)
7.
INVENTORY
Inventory balances by category are as follows:
Finished products
Parts and supplies
Inventory
Fiscal Year Ended March 31,
2010
2011
2012
(Unaudited)
$(108,816) $48,458 $(122,995)
21,394
14,172
(3,785)
59
—
$(112,542) $62,630 $(101,601)
—
Five Months Ended
March 31,
2010
Fiscal Year Ended
October 31,
2009
$(28,802)
(11,905)
$(140,454)
15,705
—
$(40,707)
—
$(124,749)
March 31,
2012
$20,076
2,401
$22,477
2011
$21,541
3,037
$24,578
Estimated product returns included in inventory at March 31, 2012 and 2011 were $1,610 and $1,183, respectively.
8.
SOFTWARE DEVELOPMENT COSTS AND LICENSES
Details of our capitalized software development costs and licenses are as follows:
Software development costs, internally developed
Software development costs, externally developed
Licenses
Software development costs and licenses
March 31, 2012
March 31, 2011
Current
$154,557
53,542
3,125
$211,224
Non-current
Current
$84,315
14,440
6,000
$104,755
$65,297
65,292
1,087
$131,676
Non-current
$100,251
38,069
—
$138,320
Software development costs and licenses as of March 31, 2012 and 2011 included $313,090 and $263,082, respectively,
related to titles that have not been released.
64
Amortization and impairment of software development costs and licenses are as follows:
Amortization and impairment of software
development costs and licenses
Less: Portion representing stock-based compensation
Amortization and impairment, net of stock-based
Fiscal Year Ended March 31,
2012
2011
2010
(Unaudited)
Five Months Ended
March 31,
2010
Fiscal Year Ended
October 31,
2009
$155,844 $154,506
(10,695)
(5,144)
$117,955
(5,213)
$53,108
(2,152)
$111,615
(6,094)
compensation
$150,700 $143,811
$112,742
$50,956
$105,521
9.
FIXED ASSETS, NET
Fixed asset balances by category are as follows:
Computer equipment
Computer software
Leasehold improvements
Office equipment
Furniture and fixtures
Less: accumulated depreciation
Fixed assets, net
March 31,
2012
$41,827
32,645
27,604
6,331
5,366
113,773
94,824
$18,949
2011
$38,224
29,900
24,733
5,853
5,052
103,762
84,130
$19,632
Depreciation expense related to fixed assets for the fiscal years ended March 31, 2012, 2011 and 2010, five months ended
March 31, 2010 and fiscal year ended October 31, 2009 was $11,467, $14,016, $15,169, $6,180 and $15,713, respectively.
10.
GOODWILL AND INTANGIBLE ASSETS, NET
We perform an annual test for impairment of goodwill as of the beginning of August or whenever events or changes in
circumstances indicate the fair value of a reporting unit is below its carrying amount. In the evaluation of goodwill for
impairment, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the
reporting unit is less than the carrying amount. If it is determined through the qualitative assessment that a reporting unit’s
fair value is more likely than not greater than its carrying value, the remaining impairment steps would be unnecessary. If
however it is determined through the qualitative assessment that a reporting unit’s fair value is more likely than not less than
its carrying value, we must then perform a quantitative assessment and compare the fair value
of the reporting unit to the
carrying value. The first step of the quantitative assessment measures impairment by applying fair value-based tests at the
reporting unit level. The second step (if necessary) measures the amount of impairment by applying fair value-based tests to
individual assets and liabilities within each reporting unit. Prior to the sale of our Jack of All Games third-party distribution
business, which closed in February 2010 (see Note 2), we managed our business primarily based on our publishing and
distribution businesses. Accordingly, after the sale of the assets of our distribution business, the Company operates as a single
reporting unit.
t
In performing the quantitative assessment we measure the fair value of the reporting unit using a combination of the income
approach, which uses discounted cash flows, and the market approach, which uses market capitalization and comparable
companies’ data. Each step requires us to make judgments and involves the use of significant estimates and assumptions.
These estimates and assumptions include long-term growth rates and operating margins used to calculate projected future
cash flows, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions
and the determination of appropriate market comparables. Our estimates for market growth are based on historical data,
various internal estimates and observable external sources when available, and are based on assumptions that are consistent
with the plans and estimates we use to manage the underlying business.
r
Due to a decline in the retail environment during the fiscal year ended October 31, 2009 and its effect on our outlook for our
distribution reporting unit, we determined that the goodwill and intangible assets attributed to our distribution reporting unit
were impaired. As a result, we recorded an impairment charge of $14,754 which was reported in loss from discontinued
operations on the Consolidated Statements of Operations (see Note 2). For the fiscal years ended March 31, 2012 and 2011
and five months ended March 31, 2010, we did not recognize an impairment loss on goodwill.
65
The change in our goodwill balance is as follows:
Balance at March 31, 2010
Additions and adjustments
Currency translation adjustment
Balance at March 31, 2011
Additions and adjustments
Currency translation adjustment
Balance at March 31, 2012
Total
$216,289
5,272
3,609
225,170
5,000
(2,001)
$228,169
The following table sets forth the components of the intangible assets subject to amortization:
Intellectual property
Trademarks
Technology
Non-compete
Estimated
Useful
Lives
(Years)
2-6
7-10
3
5-10
March 31, 2012
March 31, 2011
Gross
Carrying
Amount
$26,957
13,860
4,333
5,245
$50,395
Accumulated
Amortization
$(11,724)
(13,339)
(3,893)
(5,173)
$(34,129)
Net Book
Value
$15,233
521
440
72
$16,266
Gross
Carrying
Amount
$26,962
13,796
4,394
5,246
$50,398
Accumulated
Amortization
$(10,744)
(12,910)
(3,954)
(4,957)
$(32,565)
Net Book
Value
$16,218
886
440
289
$17,833
Amortization of intangible assets is included in our Consolidated Statements of Operations as follows:
Cost of goods sold
Depreciation and amortization
Total amortization of intangible assets
2011
Fiscal Year Ended March 31,
2010
2012
(Unaudited)
$109
1,234
$1,343
$3,927
983
$4,910
$983
656
$1,639
Five Months Ended
March 31,
2010
Fiscal Year Ended
October 31,
2009
$40
442
$482
$478
1,861
$2,339
Estimated future amortization of intangible assets that will be recorded in cost of goods sold and operating expenses for the
years ending March 31 are as follows:
2013
2014
2015
2016
2017
Thereafter
Total
$6,083
9,210
932
12
12
17
$16,266
11.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
Income tax payable and deferred tax liability
Licenses
Software development royalties
Compensation and benefits
Marketing and promotions
Rent and deferred rent obligations
Professional fees
Deferred consideration for acquisitions
Other
Accrued expenses and other current liabilities
66
March 31,
2012
$38,490
32,706
31,689
15,435
9,771
5,511
4,387
1,399
17,380
$156,768
2011
$12,481
28,488
63,720
19,699
8,238
5,006
4,093
2,500
14,234
$158,459
12.
LONG-TERM DEBT
Credit Agreement
In October 2011, we entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) which
amended and restated our July 2007 Credit Agreement. The Credit Agreement provides for borrowings of up to $100,000,
which may be increased by up to $40,000 pursuant to the terms of the Credit Agreement, and is secured by substantially all of
our assets and the equity of our subsidiaries. The Credit Agreement expires on October 17, 2016. Revolving loans under the
Credit Agreement bear interest at our election of (a) 1.50% to 2.00% above a certain base rate (4.75% at March 31, 2012), or
(b) 2.50% to 3.00% above the LIBOR Rate (approximately 2.74% at March 31, 2012), w
ith the margin rate subject to the
a
achievement of certain average liquidity levels. We are also required to pay a monthly fee on the unused available balance,
ranging from 0.375% to 0.50% based on availability. We had no outstanding borrowings at March 31, 2012 related to the
Credit Agreement.
Prior to its amendment and restatement in October 2011, the July 2007 Credit Agreement provided for borrowings of up to
$140,000 and was secured by substantially all of our assets and the equity of our subsidiaries. We had no outstanding
borrowings at March 31, 2011 related to the July 2007 Credit Agreement.
Availability under the Credit Agreement is restricted by our domestic and United Kingdom based accounts receivable and
inventory balances. The Credit Agreement also allows for the issuance of letters of credit in an aggregate amount of up to
$25,000.
Information related to availability on our Credit Agreement is as follows:
Available borrowings
Outstanding letters of credit
March 31, 2012 March 31, 2011
$115,503
1,664
$79,069
1,664
We recorded $1,248, $1,783, $2,731, $910 and $4,782 of interest expense and fees related to the Credit Agreement for the
fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended October 31,
2009, respectively.
The Credit Agreement contains covenants that substantially limit us and our subsidiaries’ ability to: create, incur, assume or
be liable for indebtedness; dispose of assets outside the ordinary course of business; acquire, merge or consolidate with or
into another person or entity; create, incur or allow any lien on any of their respective properties; make investments; or pay
dividends or make distributions (each subject to certain limitations); or optionally prepay any indebtedness (subject to certain
exceptions, including an exception permitting the redemption of the Company’s Convertible Notes upon the meeting of
certain minimum liquidity requirements). In addition, the Credit Agreement provides for certain events of default such as
nonpayment of principal and interest, breaches of representations and warranties, noncompliance with covenants, acts of
insolvency, default on indebtedness held by third-parties and default on certain
n
material contracts (subject to certain
d
limitations and cure periods). The Credit Agreement also contains a requirement that we maintain an interest coverage ratio
of more than one to one for the trailing twelve month period, if certain average liquidity levels fall below $30,000. As of
March 31, 2012, we were in compliance with all covenants and requirements outlined
in the Credit Agreement.
aa
4.375% Convertible Notes Due 2014
In June 2009, we issued $138,000 aggregate principal amount of 4.375% Convertible No
tes due 2014 (the “4.375%
Convertible Notes”). The issuance of the 4.375% Convertible Notes included $18,000 related to the exercise of an over-
allotment option by the underwriters. Interest on the 4.375% Convertible Notes is payable semi-annually in arrears on
June 1st and December 1
t
st of each year, and commenced on December 1, 2009. The 4.375% Convertible Notes mature on
June 1, 2014, unless earlier redeemed or repurchased by the Company or converted.
t
t
The 4.375% Convertible Notes are convertible at an initial conversion rate of 93.6768 shares of ou
r common stock per $1
principal amount of 4.375% Convertible Notes (representing an initial conversion price of approximately $10.675 per share
of common stock for a total of approximately 12,927,000 underlying conversion shares) subject to adjustment in certain
circumstances. Holders may convert the 4.375% Convertible Notes at their option prior to the close of business on the
business day immediately preceding December 1, 2013 only under the following circumstances: (1) during any fiscal quarter
commencing after July 31, 2009, if the last reported sale price of the common stock for at least 20 trading days (whether or
not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter
f
67
t
is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five
business day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1
principal amount of 4.375% Convertible Notes for each day of that measurement period was less than 98% of the product of
the last reported sale price of our common stock and the applicable conversion rate on each such day; (3) if we call the
4.375% Convertible Notes for redemption, at any time prior to the close of business on the third scheduled trading day prior
to the redemption date; or (4) upon the occurrence of specified corporate events. On and after December 1, 2013 until the
close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their
4.375% Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 4.375% Convertible
Notes may be settled, at our election, in cash, shares of our common stock, or a combination of cash and shares of the
Company’s common stock. Our common stock price exceeded 130% of the applicable conversion price of $10.675 per share
for at least 20 trading days during the 30 consecutive trading days ended March 31, 2012. Accordingly, as of April 1, 2012,
the 4.375% Convertible Notes may be converted at the holder’s option through June 30, 2012. If the 4.375% Convertible
Notes were to be converted during this period, our current intent and ability, given our option, would be to settle the
conversion in shares of our common stock. As such, we have continued to classify these 4.375% Convertible Notes as long-
term debt.
r
At any time on or after June 5, 2012, the Company may redeem all of the outstanding 4.375% C
onvertible Notes for cash, but
m
only if the last reported sale of our common stock for 20 or more trading days in a period of 30 consecutive trading days
ending on the trading day prior to the date we provide notice of redemption to holders of the 4.375% Convertible Notes
exceeds 150% of the conversion price in effect on each such trading day. The redemption price will equal 100% of the
principal amount of the 4.375% Convertible Notes to be redeemed, plus all accrued and unpaid interest (including additional
interest, if any) to, but excluding, the redemption date.
Upon the occurrence of certain fundamental changes involving the Company, holders of the 4.375% Convertible Notes may
require us to purchase all or a portion of their 4.375% Convertible Notes for cash at a price equal to 100% of the principal
amount of the notes to be purchased, plus accrued and unpaid interest (including additional interest, if any) to, but excluding,
the fundamental change purchase date.
The indenture governing the 4.375% Convertible Notes contains customary terms and covenants and events of default. If an
event of default (as defined therein) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least
25% in aggregate principal amount of the 4.375% Convertible Notes then outstanding by notice to the Company and the
Trustee, may, and the Trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid
interest (including additional interest, if any) on all the 4.375% Convertible Notes to be due and payable. In the case of an
event of default arising out of certain bankruptcy events, 100% of the principal of and accrued and unpaid interest (including
additional interest, if any), on the 4.375% Convertible Notes will automatically become due and payable immediately. As of
March 31, 2012, we were in compliance with all covenants and requirements outlined in the indenture governing the 4.375%
Convertible Notes.
The 4.375% Convertible Notes are senior unsecured obligations and rank senior in right of payment to our existing and future
indebtedness that may be expressly subordinated in right of payment to the 4.375
% Convertible Notes; equal in right of
payment to our existing and future indebtedness that is not so subordinated; junior in right of payment to any of our secured
indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and
future indebtedness incurred by our subsidiaries.
f
In connection with the offering of the 4.375% Convertible Notes, we entered into convertible note hedge transactions which
are expected to reduce the potential dilution to our common stock upon conversion of the 4.375% Convertible Notes. The
convertible note hedge transactions allow the Company to receive shares of its common stock related to the excess
conversion value that it would convey to the holders of the 4.375% Convertible Notes upon conversion. The transactions
include options to purchase approximately 12,927,000 shares of common stock at $10.675 per share, expiring on June 1,
2014, for a total cost of approximately $43,600, which was charged to additional paid-in capital.
Separately, the Company entered into a warrant transaction with a strike price of $14.945 per share. The warrants will be net
share settled and will cover approximately 12,927,000 shares of the Company’s common stock and expire on August 30,
2014, for total proceeds of approximately $26,300, which was credited to additional paid-in capital.
A portion of the net proceeds from the 4.375% Convertible Notes offering was used to pay the net cost of the convertible
note hedge transactions (after such cost was partially offset by proceeds from
m
the sale of the warrants). We recorded
t
approximately $3,410 of banking, legal and accounting fees related to the issuance of the 4.375% Convertible Notes which
were capitalized as debt issuance costs and will be amortized to interest and other, net over the term of the 4.375%
Convertible Notes.
68
The following table provides additional information related to our 4.375% Convertible Notes:
Additional paid-in capital
Principal amount of 4.375% Convertible Notes
Unamortized discount of the liability component
Net carrying amount of 4.375% Convertible Notes
Carrying amount of debt issuance costs
March 31,
2012
$42,018
$138,000
22,369
$115,631
$1,479
2011
$42,018
$138,000
30,761
$107,239
$2,161
The following table provides the components of interest expense related to our 4.375% Convertible Notes:
Cash interest expense (coupon interest expense)
Non-cash amortization of discount on 4.375% Convertible
Fiscal Year Ended March 31,
2010
2012
(Unaudited)
$5,032
$6,004
2011
$6,038
Notes
7,374
Amortization of debt issuance costs
682
Total interest expense related to 4.375% Convertible Notes $15,112 $14,060
8,392
682
5,457
566
$11,055
1.75% Convertible Notes Due 2016
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$2,516
2,802
284
$5,602
$2,516
2,655
282
$5,453
On November 16, 2011, we issued $250,000 aggregate principal amount of 1.75% Convertible Notes due 2016 (the “1.75%
Convertible Notes” and together with the 4.375% Convertible Notes, the “Convertible Notes”). The issuance of the 1.75%
Convertible Notes included $30,000 related to the exercise of an over-allotment option by the underwriters. Interest on the
st of each year, commencing on
1.75% Convertible Notes is payable semi-annually in arrears on June 1st and December 1
t
June 1, 2012. The 1.75% Convertible Notes mature on December 1, 2016, unless earlier repu
rchased by the Company or
converted. The Company does not have the right to redeem the 1.75% Convertible Notes prior to maturity.
r
t
The 1.75% Convertible Notes are convertible at an initial conversion rate of 52.3745 shares of our common stock per $1
principal amount of 1.75% Convertible Notes (representing an initial conversion price of approximately $19.093 per share of
common stock for a total of approximately 13,094,000 underlying conversion shares) subject to adjustment in certain
circumstances. Holders may convert the 1.75% Convertible Notes at their option prior to the close of business on the business
day immediately preceding June 1, 2016 only under the following circumstances: (1) during any fiscal quarter commencing
after March 31, 2012, if the last reported sale price of the common stock for at least 20 trading days (whether or not
consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is
greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business
day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1 principal
amount of 1.75% Convertible Notes for each day of that measurement period was less than 98% of the product of the last
reported sale price of our common stock and the applicable conversion rate on each such day; or (3) upon the occurrence of
specified corporate events. On and after June 1, 2016 until the close of business on the business day immediately preceding
the maturity date, holders may convert their 1.75% Convertible Notes at any time, regardless of the foregoing circumstances.
Upon conversion, the 1.75% Convertible Notes may be settled, at our election, in cash, shares of our common stock, or a
combination of cash and shares of the Company’s common stock.
h
Upon the occurrence of certain fundamental changes involving the Company, holders of the 1.75% Convertible Notes may
require us to purchase all or a portion of their 1.75% Convertible Notes for cash at a price equal to 100% of the principal
amount of the notes to be purchased, plus accrued and unpaid interest (including additional interest, if any) to, but excluding,
the fundamental change purchase date.
The indenture governing the 1.75% Convertible Notes contains customary terms and covenants and events of default. If an
event of default (as defined therein) occurs and is continuing, the Trustee by notice to the Company, or the holders of at least
25% in aggregate principal amount of the 1.75% Convertible Notes then outstanding by notice to the Company and the
Trustee, may, and the Trustee at the request of such holders shall, declare 100% of the principal of and accrued and unpaid
interest (including additional interest, if any) on all the 1.75% Convertible Notes to be due and payable. In the case of an
event of default arising out of certain bankruptcy events, 100% of the principal of and accrued and unpaid interest (including
69
additional interest, if any), on the 1.75% Convertible Notes will automatically become due and payable immediately. As of
March 31, 2012, we were in compliance with all covenants and requirements outlined in the indenture governing the 1.75%
Convertible Notes.
The 1.75% Convertible Notes are senior unsecured obligations and rank senior in right of payment to our existing and future
indebtedness that is expressly subordinated in right of payment to the 1.75% Convertible Notes; equal in right of payment to
our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured
indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and
future indebtedness incurred by our subsidiaries.
We separately account for the liability and equity components of the 1.75% Convertible Notes in a manner that reflects the
Company’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. We estimated the fair
value of the 1.75% Convertible Notes to be $197,373, as of the date of issuance of our 1.75% Convertible Notes, assuming a
6.9% non-convertible borrowing rate. The carrying amount of the equity component was determined to be $52,627 by
deducting the fair value of the liability component from the par value of the 1.75% Convertible Notes. The excess of the
principal amount of the liability component over its carrying amount is amortized to interest and other, net over the term of
the 1.75% Convertible Notes using the effective interest method. The equity compone
nt is not remeasured as long as it
ff
continues to meet the conditions for equity classification. In accounting for the $6,875 of banking, legal and accounting fees
related to the issuance of the 1.75% Convertible Notes, we allocated $5,428 to the liability component and $1,447 to the
equity component. Debt issuance costs attributable to the liability component are being amortized to interest and other, net
over the term of the 1.75% Convertible Notes, and issuance costs attributable to the equity component were netted with the
equity component in additional paid-in capital.
f
The following table provides additional information related to our 1.75% Convertible Notes:
Additional paid-in capital
Principal amount of 1.75% Convertible Notes
Unamortized discount of the liability component
Net carrying amount of 1.75% Convertible Notes
Carrying amount of debt issuance costs
The following table provides the components of interest expense related to our 1.75% Convertible Notes:
Cash interest expense (coupon interest expense)
Non-cash amortization of discount on 1.75% Convertible Notes
t
Amortization of debt issuance costs
Total interest expense related to 1.75% Convertible Notes
13.
COMMITMENTS AND CONTINGENCIES
March 31, 2012
$51,180
$250,000
49,291
$200,709
$4,979
Fiscal Year Ended
March 31, 2012
$1,641
3,336
449
$5,426
A summary of annual minimum contractual obligations and commitments as of March 31, 2012 is as follows:
Fiscal Year Ending March 31,
2013
2014
2015
2016
2017
Thereafter
Total
Licensing
and
Marketing
$61,591
16,520
10,825
13,893
12,400
20,250
$135,479
Operating
Software
Leases
Development
$16,506
$37,759
14,991
10,728
11,073
809
9,804
—
—
4,958
— 29,828
$87,160
$49,296
Purchase
Obligations
$4,057
4,305
2,341
899
—
—
$11,602
70
Convertible
Notes Interest
Convertible
Notes
Total
$10,595
10,413
7,394
4,375
4,375
—
$37,152
138,000
$— $130,508
— 56,957
170,442
— 28,971
271,733
— 50,078
$388,000 $708,689
250,000
Licensing and Marketing Agreements: Our licensing commitments primarily consist of obligations to holders of intellectual
property rights for use of their trademarks, copyrights, technology or other intellectual property rights in the development of
our products. In addition, we have certain minimum marketing support commitments where we commit to spend specified
amounts related to marketing our products. Licensing and marketing commitments expire at various times through
September 2018 and primarily reflect our agreements with major sports leagues and players’ associations. Certain of our
a
mm
licensing and marketing agreements also contain provisions that would im
pose penalties if we fail to meet agreed upon
software release dates.
n
aa
Software Development Agreements: We make payments to third-party software developers that include contractual payments
to developers under several software development agreements that expire at various times through July 2014. Our aggregate
outstanding software development commitments assume satisfactory performance by third-party software developers.
Lease Commitments: Our offices are occupied under non-cancelable operating leases expiring at various times through
March 2023. We also lease certain furniture, equipment and automobiles under non-cancelable leases expiring through
March 2020. Some of the leases have fixed rent increases and also include inducements to enter into the lease. The effect of
such amounts are deferred and recognized on a straight-line basis over the related lease term. Included in the cash
commitments for operating leases above is a lease assumption without economic benefit related to our discontinued
operations. See Note 2 to our Consolidated Financial Statements for additional information regarding discontinued
operations. Rent expense amounted to $16,018, $14,088, $13,809, $6,131 and $13,601 for the fiscal years ended March 31,
2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended October 31, 2009, respectively.
Purchase obligations: These obligations are primarily related to agreements to purchase services that are enforceable and
legally binding on the Company that specifies all significant terms, including fixed, minimum or variable pricing provisions;
and the approximate timing of the transactions, expiring at various times through October 2015.
Contingent Consideration: Part of our business acquisition strategy has been to make a portion of the purchase price of
certain acquisitions dependent on product delivery or future product sales. The amounts and timing of these payments are
currently not fixed or determinable. See Note 5 for a discussion of our contingent commitments related to our business
acquisitions.
Employee Savings Plan: We maintain a 401(k) retirement savings plan and trust. Our 401(k) plan is offered to all eligible
employees and participants may make voluntary contributions. The Company matched a portion of the contributions during
the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended October 31,
2009 and the matching contribution expense incurred by us was $3,130, $2,767, $2,616, $1,146 and $2,665, respectively.
Income Taxes: At March 31, 2012, the Company had recorded a liability for gross unrecognized tax benefits of $15,621 for
e
which we are unable to make a reasonable and reliable estimate of the period in which these liabilities will be settled with th
respective tax authorities, therefore, these liabilities have not been included in the contractual
obligations table.
n
n
Legal and Other Proceedings: We are, or may become, subject to demands and claims (including intellectual property
claims) and are involved in routine litigation in the ordinary course of business which we do not believe to be material to our
business or financial statements. We have appropriately accrued amounts related to certain of these claims and legal and other
proceedings. While it is reasonably possible that a loss may be incurred in excess of the amounts accrued in our financial
statements, we believe that such losses, unless otherwise disclosed, would not be material.
14.
INCOME TAXES
Components of income (loss) before income taxes are as follows:
Domestic
Foreign
Income (loss) from continuing operations
before income taxes
Fiscal Year Ended March 31,
2012
2011
$(62,655) $29,926
33,697
(41,182)
2010
(Unaudited)
$(38,182)
(56,733)
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$2,688
(24,974)
$(78,825)
(47,125)
$(103,837) $63,623
$(94,915)
$(22,286)
$(125,950)
71
Provision for current and deferred income taxes consists of the following:
Current:
U.S. federal
U.S. state and local
Foreign
Total current income taxes
Deferred:
U.S. federal
U.S. state and local
Foreign
Total deferred income taxes
Provision for income taxes
Fiscal Year Ended March 31,
2012
2011
2010
(Unaudited)
$(729) $3,193
1,521
(55)
6,189
2,769
1,985 10,903
1,712
126
40
(798)
(45)
(241)
1,878 (1,084)
$3,863 $9,819
$(3,666)
52
8,925
5,311
8,486
293
(945)
7,834
$13,145
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$(4,566)
124
5,404
962
3,458
255
(409)
3,304
$4,266
$(3,870)
(779)
6,475
1,826
3,633
(40)
(932)
2,661
$4,487
A reconciliation of our effective tax rate to the U.S. statutory federal income tax rate is as follows:
U.S. federal statutory rate
Foreign tax rate differential
State and local taxes, net of U.S. federal benefit
Federal valuation allowance
Other
Effective tax rate
2011
2012
Fiscal Year Ended March 31,
2010
(Unaudited)
(35.0)%
29.0%
(1.3)%
15.1%
6.0%
13.8%
(35.0)% 35.0%
16.5% (7.1)%
0.0% 1.3%
20.5% (19.8)%
1.7% 6.0%
3.7% 15.4%
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
(35.0)%
61.7%
0.8%
(4.7)%
(3.7)%
19.1%
(35.0)%
22.1%
(1.9)%
23.9%
(5.5)%
3.6%
The effects of temporary differences that gave rise to our deferred tax assets and liabilities were as follows:
Current deferred tax assets and (liabilities):
Sales returns and allowances (including bad debt)
Inventory reserves
Deferred rent
Deferred revenue
Other
Capitalized software and depreciation
Total current deferred tax (liabilities) assets
Less: Valuation allowance
Net current deferred tax liability(a)
Non-current deferred tax assets and (liabilities):
Equity compensation
Domestic net operating loss carryforward
Foreign tax credit carryforward
Convertible debt
Foreign net operating loss carryforwards
Intangible amortization
Capitalized software and depreciation
Total non-current deferred tax asset
Less: Valuation allowance
Net non-current deferred tax asset (liability)(b)
Deferred taxes, net
72
March 31,
2012
2011
$7,017
815
1,843
2,339
14,920
(46,886)
(19,952)
(15,921)
(35,873)
2,574
166,887
7,680
(26,380)
22,898
(1,867)
(22,511)
149,281
(118,247)
31,034
$(4,839)
$4,883
798
3,405
2,741
16,881
(19,706)
9,002
(9,002)
—
2,535
116,652
7,348
(11,380)
11,947
1,100
(25,522)
102,680
(105,641)
(2,961)
$(2,961)
(a)
(b)
Included in accrued expenses and other current liabilities as of March 31, 2012.
Included in other assets as of March 31, 2012 and other long-term liabilities as of March 31, 2011.
The valuation allowance is primarily attributable to net operating losses for which no benefit is provided due to uncertainty
with respect to their realization. The net deferred tax liability is primarily the result of deferred tax liabilities related t
o
goodwill which cannot be used to offset deferred tax assets.
f
At March 31, 2012, we had domestic net operating loss carryforwards totaling $428,464, which will begin to expire in 2027.
In addition, we had foreign net operating loss carryforwards of $194,218, of which $5,840 will begin to expire in 2013,
$173,340 will begin to expire in 2016, $1,614 will expire in 2023, and the remainder may be carried forward indefinitely.
The total amount of undistributed earnings of foreign subsidiaries was approximately $151,400 at March 31, 2012 and
$200,900 at March 31, 2011. It is our intention to reinvest undistributed earnings of our foreign subsidiaries and thereby
indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or U.S.
income taxes which may become payable if undistributed earnings of foreign subsidiaries are repatriated. It is not practicable
to estimate the tax liability that would arise if these earnings were remitted.
We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of
amounts claimed and the payment of additional taxes. We believe that our tax return positions comply with applicable tax
le assessments of additional taxes. Additionally, we
law and that we have adequately provided for reasonably foreseeab
believe that any assessments in excess of the amounts provided for will not have a material adverse effect on the
Consolidated Financial Statements.
d
As of March 31, 2012 and 2011, we had gross unrecognized tax benefits, including interest and penalties, of $22,406 and
$15,091, respectively, all of which would affect our effective tax rate if realized.
The aggregate changes to the liability for gross uncertain tax positions, excludi
a
ng interest and penalties, were as follows:
Balance, beginning of period
Additions:
Current year tax positions
Prior year tax positions
Reduction of prior year tax positions
Settlements
Lapse of statute of limitations
Other, net
Balance, end of period
Fiscal Year Ended March 31,
2010
2011
2012
(Unaudited)
$13,182
$9,195
$13,352
1,741
5,805
—
—
(750)
180
1,077
4,097
6,318
2,237
— (6,034)
— (7,033)
—
525
$9,195
(1,273)
256
$20,328 $13,352
Five Months
Ended
March 31,
2010
Fiscal Year
Ended
October 31,
2009
$18,423
$18,412
1,942
—
(4,350)
(6,487)
—
(333)
$9,195
5,630
3,316
(4,013)
(4,762)
—
(160)
$18,423
We recognize interest and penalties related to uncertain tax positions in the provision for income taxes in our Consolidated
Statements of Operations. For the fiscal years ended March 31, 2012 and 2011, we recognized an increase in interest and
penalties of approximately $339 and $5, respectively. For the fiscal year ended March 31, 2010, five months ended
March 31, 2010 and fiscal year ended October 31, 2009, we recognized a decrease in interest and penalties of approximately
$2,507, $4,480 and $1,773, respectively. The gross amount of interest and penalties accrued as of March 31, 2012 and 2011
was approximately $2,078 and $1,739, respectively.
We are generally no longer subject to audit for U.S. federal income tax returns for periods prior to our fiscal year ended
October 31, 2008 and state income tax returns for periods prior to the fiscal year ended October 31, 2004. With few
exceptions, we are no longer subject to income tax examinations in non-U.S. jurisdictions for years prior to our fiscal year
ended October 31, 2005. U.S. federal taxing authorities have completed examinations of our income tax returns through the
fiscal years ended October 31, 2006 and commenced their audit of fiscal years ending October 31, 2008 and 2009. Certain
U.S. state taxing authorities are currently examining our income tax returns for fiscal years ending October 31, 2004 through
October 31, 2006. In addition, tax authorities in certain non-U.S. jurisdictions are currently examining our income tax
returns. The determination as to further adjustments to our gross unrecognized tax benefits during the next 12 months is not
practicable.
73
We believe that we have provided for any reasonably foreseeable outcomes related to our tax audits and that any settlement
will not have a material adverse effect on our consolidated financial statements. However, there can be no assurances as to
the possible outcomes.
15.
STOCK-BASED COMPENSATION
Our stock-based compensation plans are broad-based, long-term retention programs intended to attract and retain talented
employees and align stockholder and employee interests. For similar reasons, we also granted non-employee equity awards,
which are subject to variable accounting, to ZelnickMedia in connection with their contract to provide executive management
services to us. We began replacing stock option awards with restricted stock awards during the fiscal year ended October 31,
2007. We issue shares to employees on the date the restricted stock is granted and therefore shares granted have voting rights,
participate in dividends and are considered issued and outstanding.
d
In April 2009, our stockholders approved our 2009 Stock Incentive Plan (the “2009 Plan”). The aggregate number of shares
issuable under this plan is 6,409,000, representing 4,900,000 new shares available for grant approved by our stockholders and
1,509,000 shares allocated from the Incentive Stock Plan and 2002 Stock Option Plan (the “2002 Plan”). In April 2010, our
stockholders approved an amendment to the 2009 Plan to increase the available shares for issuance by 2,750,000. In
September 2011, our stockholders approved Amendment No. 2 to the 2009 Plan to increase the available shares for issuance
by 5,000,000. The 2009 Plan is administered by the Compensation Committee of the Board of Directors and allows for
awards of restricted stock, deferred stock and other stock-based awards of our common stock to employees and non-
employees. As of March 31, 2012, there were approximately 4,366,000 shares available for issuance under the 2009 Plan.
In April 2008, our stockholders approved an increase to the number of shares available for grant under the Incentive Stock
Plan from 4,500,000 to 6,500,000. The Incentive Stock Plan is administered by the Compensation Committee of the Board of
Directors and allows for awards of restricted stock, deferred stock and other stock-based awards of our common stock to
employees and non-employees. As of March 31, 2012, there were no shares available for issuance under the Incentive Stock
Plan.
In June 2002, our stockholders approved our 2002 Plan, as previously adopted by our Board of Directors, pursuant to which
officers, directors, employees and consultants may receive options to purchase shares of our common stock. The aggregate
amount of shares issuable under the 2002 Plan was 11,000,000 shares. As of March 31, 2012, there were no shares available
for issuance under the 2002 Plan.
f
Subject to the provisions of the plans, the Board of Directors or any Committee appointed by the Board of Directors, has the
authority to determine the individuals to whom the equity awards are to be granted, the number of shares to be covered by
each equity award, the vesting period, restrictions, if any, on the equity award, the terms and conditions of the equity award.
The following table summarizes stock-based compensation expense resulting from stock options and restricted stock included
in our Consolidated Statements of Operations:
Cost of goods sold
Selling and marketing
General and administrative
Research and development
Stock-based compensation expense
Capitalized stock-based compensation expense
Total stock-based compensation expense
2011
Fiscal Year Ended March 31,
2010
2012
(Unaudited)
$5,213
3,321
14,319
3,650
26,503
13,521
$40,024
$5,144 $10,695
4,659
5,042
9,781
19,963
3,630
3,345
28,765
33,494
11,266
11,220
$44,714 $40,031
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$2,152
1,492
4,908
1,927
10,479
4,617
$15,096
$6,094
2,551
14,119
3,169
25,933
11,413
$37,346
During the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended
October 31, 2009, we recorded $13,365, $3,159, $6,456, $1,588 and $6,502, respectively, of stock- based compensation
expense for non-employee awards, which was included in general and administrative expenses.
We capitalize and amortize stock-based compensation awards in accordance with our software development cost accounting
policy.
74
Restricted Stock
Restricted stock awards granted to employees under our stock-based compensation plans generally vest over 3 years from the
date of grant. Certain restricted stock awards granted to key officers, senior-level employees, and key employees vest based
on market conditions, primarily related to the performance of the price of our common stock.
In June 2008, pursuant to an amendment to our Management Agreement, we granted 600,000 shares of restricted stock to
ZelnickMedia that vested annually over a three year period and 900,000 shares of market-based restricted stock that vest over
a four year period through 2012, provided that the Company’s Total Shareholder Return (as defined in the relevant grant
agreements) is at or higher than the 75th percentile of the NASDAQ Industrial Index measured annually on a cumulative
basis. For the fiscal years ended March 31, 2012, 2011 and 2010 and fiscal year ended October 31, 2009, we recorded
expenses of $499, $1,594, $2,467 and $2,534, respectively, and for the five months ended March 31, 2010, we recorded a
benefit of $104 of stock- based compensation (a component of general and administrative expenses) related to these grants of
restricted stock.
In addition, pursuant to the New Management Agreement, we granted 1,100,000 shares of restricted stock to ZelnickMedia
that will vest annually through April 1, 2015 and 1,650,000 shares of market-based restricted stock that vest through April 1,
2015, provided that the price of our common stock outperforms 75% of the companies in the NASDAQ Composite Index
measured annually on a cumulative basis. For the fiscal year ended March 31, 2012, we recorded an expense of $12,866 of
stock-based compensation (a component of general and administrative expenses) related to these grants of restricted stock.
We measure the fair value of our market-based awards to employees and non-employees usin
g the Monte Carlo Simulation
method, which takes into account assumptions such as the expected volatility of our common stock, the risk-free interest rate
based on the contractual term of the award, expected dividend yield, vesting schedule and the probability that the market
conditions of the award will be achieved. The estimated value of market-based restricted stock awards granted to employees
during the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal year ended
October 31, 2009 was $16.29, $15.36, $8.96, $9.25 and $6.00 per share, respectively.
mm
Each reporting period, we remeasure the fair value of the unvested portion of the market-based restricted stock awards
granted to ZelnickMedia during the fiscal years ended March 31, 2012 and October 31, 2008. For the fiscal year ended
March 31, 2012, the estimated value of the awards granted to ZelnickMedia during the fiscal year ended March 31, 2012 was
$12.10 per share. For the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March 31, 2010 and fiscal
year ended October 31, 2009, the estimated value of the awards granted to ZelnickMedia during the fiscal year ended
October 31, 2008 was $0.02, $1.11, $3.20, $2.58 and $4.67 per share, respectively.
The following table summarizes the weighted-average assumptions used in the Monte Carlo Simulation method:
Risk-free interest rate
Expected stock price volatility
Expected service period (years)
Dividends
Risk-free interest rate
Expected stock price volatility
Expected service period (years)
Dividends
March 31, 2012
Fiscal Year Ended
March 31, 2011
March 31, 2010
Employee
Market-Based
0.4%
58.2%
2.0
None
Non-Employee
Market-Based
0.4%
46.3%
3.1
None
Employee
Market-Based
1.4%
52.6%
2.0
None
Non-Employee
Market-Based
0.5%
55.0%
4.0
None
Employee
Market-Based
1.6%
58.0%
2.0
None
Non-Employee
Market-Based
1.4%
66.4%
3.3
None
Five Months Ended
March 31, 2010
Fiscal Year Ended
October 31, 2009
Employee
Market-Based
1.6%
57.2%
2.0
None
Non-Employee
Market-Based
1.1%
69.2%
3.5
None
Employee
Market-Based
1.2%
60.8%
2.0
None
Non-Employee
Market-Based
1.5%
61.4%
2.9
None
The following table summarizes the activity in non-vested restricted stock awarded to employees and ZelnickMedia under
our stock-based compensation plans:
75
Non-vested restricted stock at March 31, 2011
Granted
Vested
Forfeited
Non-vested restricted stock at March 31, 2012
Shares
(in thousands)
Weighted
Average Fair
Value on
Grant Date
5,118
2,970
(2,439)
(102)
5,547
$9.68
13.27
10.77
11.27
$11.06
As of March 31, 2012, the total future unrecognized compensation cost, net of estimated forfeitures, related to outstanding
unvested restricted stock was approximately $37,911 and will be recognized as compensation expense on a straight-line basis
over the remaining vesting period, or capitalized as software development costs.
Stock Options
As of March 31, 2012, all of the outstanding stock options are exercisable and expire at various times through the fiscal year
ending March 31, 2018. Options granted generally vested over a period of three to four years and expire within a period of
five to ten years.
Pursuant to the Management Agreement, in August 2007, we issued stock options to ZelnickMedia to acquire 2,009,075
shares of our common stock at an exercise price of $14.74 per share, which vested over 36 months and expire 10 years from
the date of grant. Each month, we remeasured the fair value of the unvested portion of such options and recorded
compensation expense for the difference between total earned compensation at the end of the period and total earned
compensation at the beginning of the period. As a result, changes in the price of our common stock affected compensation
expense or benefit recognized from period to period. For the fiscal years ended March 31, 2011 and 2010, five months ended
March 31, 2010 and fiscal year ended October 31, 2009, we recorded $1,565, $3,989, $1,692 and $3,968, respectively, of
stock-based compensation related to this option grant.
The following table summarizes the activity in stock options awarded to employees and ZelnickMedia under our stock-based
compensation plans and also includes non-plan options:
(options in thousands)
Outstanding at beginning of period
Exercised
Forfeited
Outstanding at end of period
Exercisable at period-end
Remaining weighted average contractual life
of options exercisable (years)
Fiscal Year Ended
March 31, 2012
March 31, 2011
Five Months Ended
March 31, 2010
Fiscal Year Ended
October 31, 2009
Weighted
Average
Exercise
Options
Price
3,514
$15.37
(65)
10.96
19.52 (1,132)
2,317
$15.16
2,317
$15.16
Weighted
Average
Exercise
Price
$18.17
11.30
24.30
$15.37
$15.37
Weighted
Average
Exercise
Options
Price
$18.45 4,347
(2)
—
(542)
21.89
$18.17 3,803
$18.43 3,133
Weighted
Average
Exercise
Price
$18.92
10.42
22.24
$18.45
$19.08
Options
3,803
—
(289)
3,514
3,183
Options
2,317
(22)
(131)
2,164
2,164
5.0
5.7
4.3
4.1
The total estimated fair value of options vested during the fiscal years ended March 31, 2011 and 2010, five months ended
March 31, 2010 and fiscal year ended October 31, 2009 was $1,880, $5,225, $1,928 and $7,848, respectively.
The following summarizes information about stock options outstanding and exercisable at March 31, 2012 (options in
thousands):
Options Outstanding and Exercisable
Exercise Price Ranges
To
From
$14.74
20.51
$14.74
20.80
Weighted
Average
Remaining
Contractual
Life (years)
5.4
0.1
5.0
Weighted
Average
Exercise
Price
$14.74
20.59
15.16
Aggregate
Intrinsic
Value
$1,296
Number of
Options
2,009
155
2,164
76
The fair value of our stock options was estimated using the Black-Scholes option-pricing model. This model requires the
input of assumptions regarding a number of complex and subjective variables that would usually have a significant effect on
the fair value estimate. These variables included, but were not limited to, the volatility of our common stock price, the current
market price of our common stock, the risk-free interest rate and expected exercise term. The following table summarizes the
weighted average assumptions used in the Black-Scholes option-pricing model to value outstanding stock options awarded to
ZelnickMedia in August 2007 and employee stock options, which were last granted during the fiscal year ended October 31,
2007:
Risk-free interest rate
Expected stock price volatility
Expected term until exercise (years)
Dividends
Valuation Assumptions
Fiscal Year Ended
March 31,
2010
2011
3.4% 3.4%
57.2% 62.3%
8.0
None
7.3
None
Five Months
Ended March 31,
2010
Fiscal Year Ended
October 31,
2009
3.6%
59.6%
7.7
None
3.2%
67.4%
8.4
None
Generally, our assumptions are based on historical information and judgment is required to determine if historical trends
could be indicators of future outcomes. For the fiscal years ended March 31, 2012, 2011 and 2010, five months ended March,
31, 2010 and fiscal year ended October 31, 2009, we estimated stock price volatility of all stock-based compensation awards
d
using a combination of historical volatility and implied volatility for publicly traded options on our common stock. In
addition, stock-based compensation expense is calculated based on the number of awards that are ultimately expected to vest,
and therefore are reduced for estimated forfeitures. Our estimate of expected forfeitures is based on our historical annual
forfeiture rate of 5%. The estimated forfeiture rate, which is evaluated at each balance sheet date throughout the life of the
award, provides a time-based adjustment of forfeited shares. The estimated forfeiture rate is reassessed at each balance sheet
date and may have changed based on new facts and circumstances.
16.
SEGMENT AND GEOGRAPHIC INFORMATION
We operate in one reportable segment in which we are a publisher of interactive software games designed for console
systems, handheld gaming systems and personal computers, including smart phones and tablets, and are delivered through
physical retail, digital download, online platforms and cloud streaming services. Our reporting segment is based upon our
internal organizational structure, the manner in which our operations are managed and the criteria used by our Chief
Executive Officer, our chief operating decision maker (“CODM”) to evaluate performance. The Company’s operations
involve similar products and customers worldwide. We are centrally managed and the CODM primarily uses consolidated
financial information supplemented by sales information by product category, major product title and platform to make
operational decisions and assess financial performance. Our business consists of our Rockstar Games and 2K labels which
have been aggregated into a single reportable segment (the “publishing segment”) based upon their similar economic
characteristics, products and distribution methods. Revenue earned from our publishing segment is primarily derived from
the sale of internally developed software titles and software titles developed on our behalf by third-parties.
a
We attribute net revenue to geographic regions based on product destination. Net revenue by geographic region was as
follows:
Fiscal Year Ended March 31,
Net revenue by geographic region:
2012
2011
United States
Europe
Asia Pacific
Canada and Latin America
Total net revenue
$449,189
246,260
68,601
61,773
$619,731
364,017
81,652
71,476
$825,823 $1,136,876
2010
(Unaudited)
$454,805
207,305
44,764
56,067
$762,941
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$231,357
77,550
18,474
31,850
$359,231
$400,674
218,195
43,185
39,003
$701,057
77
Net revenue by product platform was as follows:
Fiscal Year Ended March 31,
Net revenue by product platform:
2012
2011
Microsoft Xbox 360
Sony PlayStation 3
PC and other
Nintendo Wii
Sony PSP
Nintendo DS
Sony PlayStation 2
Total net revenue
17.
INTEREST AND OTHER, NET
$370,032
300,530
87,318
19,700
18,521
16,796
12,926
$454,362
442,115
110,511
57,148
21,676
30,735
20,329
$825,823 $1,136,876
2010
(Unaudited)
$350,754
159,097
70,814
61,774
46,240
32,392
41,870
$762,941
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$163,826
87,019
33,119
30,672
15,644
12,935
16,016
$359,231
$283,094
113,117
81,866
76,543
51,716
45,823
48,898
$701,057
Interest income (expense), net
Gain (loss) on sale
Foreign currency exchange gain (loss)
Other
Interest and other, net
$(20,616) $(15,248)
(106)
1,414
421
$(19,571) $(13,519)
2,200
(1,311)
156
Fiscal Year Ended March 31,
2011
2012
Five Months
Ended March 31,
2010
Fiscal Year
Ended October 31,
2009
$(6,461)
(3,831)
(704)
(356)
$(11,352)
$(9,611)
—
4,289
(449)
$(5,771)
2010
(Unaudited)
$(13,584)
(3,831)
(609)
(770)
$(18,794)
During the fiscal year ended March 31, 2012, we sold certain intellectual property assets for $2,200 in cash and additional
contingent royalties, resulting in a gain on sale of $2,200. The disposition did not involve a significant amount of assets or
materially affect our operating results.
During the fiscal year and five months ended March 31, 2010, we sold the shares of our wholly-owned Italian subsidiary for
approximately $6,072 in cash and notes receivable resulting in a loss on sale of approximately $3,831. The disposition of our
Italian subsidiary did not involve a significant amount of assets or materially affect our operating results.
78
18.
SUPPLEMENTARY FINANCIAL INFORMATION
The following table provides details of our valuation and qualifying accounts:
Fiscal Year Ended March 31, 2012
Valuation allowance for deferred income taxes
Sales returns, price protection and other allowances
Allowance for doubtful accounts
Total accounts receivable allowances
Fiscal Year Ended March 31, 2011
Valuation allowance for deferred income taxes
Sales returns, price protection and other allowances
Allowance for doubtful accounts
Total accounts receivable allowances
Fiscal Year Ended March 31, 2010 (Unaudited)
Valuation allowance for deferred income taxes
Sales returns, price protection and other allowances
Allowance for doubtful accounts
Total accounts receivable allowances
Five Months Ended March 31, 2010
Valuation allowance for deferred income taxes
Sales returns, price protection and other allowances
Allowance for doubtful accounts
Total accounts receivable allowances
Fiscal Year Ended October 31, 2009
Valuation allowance for deferred income taxes
Sales returns, price protection and other allowances
Allowance for doubtful accounts
Total accounts receivable allowances
Beginning
Balance
Additions(1)
Deductions
Other
Ending
Balance
$114,643
$42,104
796
$42,900
$141,231
$71,764
771
$72,535
$116,177
$39,868
5,878
$45,746
$130,024
$35,330
1,861
$37,191
$104,305
$54,718
4,044
$58,762
19,525
$119,462
—
$119,462
—
$(110,085)
(84)
$(110,169)
— $134,168
$50,290
712
$51,002
$(1,191)
—
$(1,191)
—
$90,119
43
$90,162
25,054
$87,305
(882)
$86,423
11,207
$64,946
(1,010)
$63,936
25,719
$70,527
1,988
$72,515
(26,588)
$(119,356)
(32)
$(119,388)
— $114,643
$42,104
796
$42,900
$(423)
14
$(409)
—
$(55,400)
(4,819)
$(60,219)
— $141,231
$71,764
771
$72,535
$(9)
594
$585
—
$(27,132)
—
$(27,389)
— $141,231
$71,764
771
$72,535
$(1,380)
(80)
$(1,460)
—
$(89,621)
(4,819)
$(94,440)
— $130,024
$35,330
1,861
$37,191
$(294)
648
$354
(1)
Includes price concessions of $85,977, $59,894, $61,147, $53,237 and $49,354; returns of $9,608, $8,721, $19,940,
$10,653 and $12,592; and other sales allowances including rebates, discounts and cooperative advertising of
$23,877, $21,504, $6,218, $1,056 and $8,581 for the fiscal years ended March 31, 2012, 2011 and 2010, five months
r
ended March 31, 2010 and fiscal year ended October 31, 2009, respectively.
79
19.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth quarterly supplementary data for each of the years in the two-year period ended March 31,
2012:
Fiscal Year Ended March 31, 2012
Net revenue
Product costs
Software development costs and royalties
Internal royalties
Licenses
Cost of goods sold
Gross profit
Selling and marketing
General and administrative
Research and development
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Interest and other, net
Income (loss) from continuing operations before income taxes
Provision (benefit) for income taxes
Income (loss) from continuing operations
Loss from discontinued operations, net of taxes
Net income (loss)
Earnings (loss) per share:
Continuing operations
Discontinued operations
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Diluted earnings (loss) per share
First
$334,380
98,451
84,602
16,512
11,654
211,219
123,161
74,683
30,577
16,519
3,245
125,024
(1,863)
(3,680)
(5,543)
3,076
(8,619)
(94)
$(8,713)
$(0.11)
—
$(0.11)
$(0.11)
—
$(0.11)
Quarter
Second
$107,034
40,137
17,248
6,579
10,739
74,703
32,331
28,773
25,785
15,998
3,284
73,840
(41,509)
(4,333)
(45,842)
1,419
(47,261)
(110)
$(47,371)
Third
$236,325
68,803
27,236
9,907
20,521
126,467
109,858
40,228
29,705
16,823
2,854
89,610
20,248
(6,190)
14,058
(127)
14,185
(81)
$14,104
$(0.57)
—
$(0.57)
$(0.57)
—
$(0.57)
$0.16
—
$0.16
$0.16
—
$0.16
Fourth
$148,084
47,845
35,401
1,158
32,062
116,466
31,618
40,065
35,133
14,822
2,740
92,760
(61,142)
(5,368)
(66,510)
(505)
(66,005)
(831)
$(66,836)
$(0.78)
(0.01)
$(0.79)
$(0.78)
(0.01)
$(0.79)
80
Fiscal Year Ended March 31, 2011
Net revenue
Product costs
Software development costs and royalties
Internal royalties
Licenses
Cost of goods sold
Gross profit
Selling and marketing
General and administrative
Research and development
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Interest and other, net
Income (loss) from continuing operations before income taxes
Provision for income taxes
Income (loss) from continuing operations
Income (loss) from discontinued operations, net of taxes
Net income (loss)
Earnings (loss) per share:
Continuing operations
Discontinued operations
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Diluted earnings (loss) per share
First
$375,390
101,077
64,038
67,462
11,469
244,046
131,344
49,805
26,202
16,181
3,765
95,953
35,391
(4,738)
30,653
3,291
27,362
(1,048)
$26,314
$0.32
(0.01)
$0.31
$0.31
(0.01)
$0.30
Quarter
Second
$244,972
67,026
44,592
15,803
9,221
136,642
108,330
46,602
26,620
18,074
4,005
95,301
13,029
(1,644)
11,385
3,347
8,038
(4,699)
$3,339
Third
$334,259
98,067
40,276
22,001
28,306
188,650
145,609
47,861
27,492
18,073
3,501
96,927
48,682
(4,013)
44,669
3,849
40,820
39
$40,859
$0.09
(0.05)
$0.04
$0.09
(0.05)
$0.04
$0.47
—
$0.47
$0.45
—
$0.45
Fourth
$182,255
60,766
23,491
9,766
26,020
120,043
62,212
32,026
29,170
17,248
3,728
82,172
(19,960)
(3,124)
(23,084)
(668)
(22,416)
362
$(22,054)
$(0.27)
—
$(0.27)
$(0.27)
—
$(0.27)
Basic and diluted earnings per share are computed independently for each of the quarters presented. Therefore, the sum of
quarterly basic and diluted earnings per share information may not equal annual basic and diluted earnings per share.
aa
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Ac
report to be signed on its behalf by the undersigned, thereunto duly authorized.
f
t
t of 1934 the registrant has duly caused this
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By:
/s/ STRAUSS ZELNICK
Strauss Zelnick
Chairman and Chief Executive Officer
May 22, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
persons on behalf of the Registrant in the capacities and on the date indicated.
f
signed below by the following
Signature
Title
Date
/s/ STRAUSS ZELNICK
Strauss Zelnick
/s/ LAINIE GOLDSTEIN
Lainie Goldstein
/s/ MICHAEL DORNEMANN
Michael Dornemann
/s/ ROBERT A. BOWMAN
Robert A. Bowman
/s/ SUNGHWAN CHO
SungHwan Cho
/s/ BRETT ICAHN
Brett Icahn
/s/ J MOSES
J Moses
/s/ JAMES L. NELSON
James L. Nelson
/s/ MICHAEL SHERESKY
Michael Sheresky
Chairman and Chief Executive
Officer (Principal Executive Officer)
May 22, 2012
Chief Financial Officer (Principal
Financial and Accounting Officer)
May 22, 2012
Lead Independent Director
May 22, 2012
Director
Director
Director
Director
Director
Director
May 22, 2012
May 22, 2012
May 22, 2012
May 22, 2012
May 22, 2012
May 22, 2012
82
Name
North America Subsidiaries:
2K Games, Inc.
2K Marin, Inc.
2K Play, Inc.
2Ksports, Inc.
Cat Daddy Games L.L.C.
Firaxis Games, Inc.
Gathering of Developers, Inc.
Irrational Games, LLC
Kush Games, Inc.
Rockstar Games, Inc.
Rockstar New England, Inc.
Rockstar San Diego, Inc.
Rockstar Toronto Inc.
Rockstar Vancouver Inc.
Take 2 Productions, Inc.
Take-Two Licensing, Inc.
Take-Two Interactive Canada, Inc.
Visual Concepts Entertainment
WC Holdco, Inc.
International Subsidiaries:
2K Australia Pty. Ltd.
2K Czech a.s.
2K Games (Chengdu) Co., Ltd.
2K Games (Hangzhou) Co. Ltd.
2K Games (Shanghai) Co., Ltd.
Maxcorp Ltd.
Rockstar Leeds Ltd.
Rockstar Lincoln, Ltd.
Rockstar London, Ltd.
Rockstar North Ltd.
Take-Two Great Britain Ltd.
Take-Two Asia Pte. Ltd.
Take-Two Interactive Austria GmbH
Take-Two Interactive Benelux B.V.
Take-Two Interactive Espana S.L.
Take-Two Interactive France SAS
Take-Two Interactive Korea Ltd.
Take-Two Interactive Software Europe Ltd
Take-Two Interactive Software Pty. Ltd.
Take-Two Interactive GmbH
Take-Two International SA
Take-Two Interactive Japan G.K.
Subsidiaries of the Company
Exhibit 21.1
Jurisdiction of Incorporation
Delaware
Delaware
Delaware
Delaware
Washington
Delaware
Texas
Delaware
California
Delaware
Delaware
Virginia
Canada
Canada
Delaware
Delaware
Canada
California
New York
Australia
Czech Republic
China
China
China
Bermuda
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Singapore
Austria
Netherlands
Spain
France
Korea
United Kingdom
Australia
Germany
Switzerland
Japan
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Form S-8 File No.’s, 333-158735, 333-177822
and Form S-3 File No. 333-159499) of Take-Two Interactive Software, Inc., of our reports dated May 22, 2012, with respect
to the consolidated financial statements of Take-Two Interactive Software, Inc. included in its Annual Report (Form 10-K)
for the year ended March 31, 2012 and the effectiveness of internal control over financial reporting of Take-Two Interactive
Software, Inc., filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Exhibit 23.1
New York, New York
May 22, 2012
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Section 302 Certification
Exhibit 31.1
I, Strauss Zelnick, certify that:
1.
“registrant”);
I have reviewed this Annual Report on Form 10-K of Take-Two Interactive Software, Inc. (the
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 of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
aa
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
May 22, 2012
/s/ STRAUSS ZELNICK
Strauss Zelnick
Chairman and Chief Executive Officer
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Section 302 Certification
Exhibit 31.2
I, Lainie Goldstein, certify that:
1.
“registrant”);
I have reviewed this Annual Report on Form 10-K of Take-Two Interactive Software, Inc. (the
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 of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
May 22, 2012
/s/ LAINIE GOLDSTEIN
Lainie Goldstein
Chief Financial Officer
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Take-Two Interactive Software, Inc. (the “Company”) on Form 10-K for the period
ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Strauss
Zelnick, as Chariman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
May 22, 2012
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ STRAUSS ZELNICK
Strauss Zelnick
Chariman and Chief Executive Officer
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
CERTIFICATION PURSUANT TO
18 U. S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Take-Two Interactive Software, Inc. (the “Company”) on Form 10-K for the period
ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lainie
Goldstein, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
May 22, 2012
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ LAINIE GOLDSTEIN
Lainie Goldstein
Chief Financial Officer
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OFFICERS
CORPORATE OFFICES
CORPORATE INFORMATION
STRAUSS ZELNICK
Chairman and
Chief Executive Offi cer
LAINIE GOLDSTEIN
Chief Financial Offi cer
KARL SLATOFF
Chief Operating Offi cer
SETH KRAUSS
Executive Vice President and
General Counsel
BOARD OF DIRECTORS
STRAUSS ZELNICK
Chairman
MICHAEL DORNEMANN
Lead Independent Director
ROBERT BOWMAN
SUNGHWAN CHO
BRETT ICAHN
J MOSES
JAMES L. NELSON
MICHAEL SHERESKY
CORPORATE
HEADQUARTERS
Take-Two Interactive Software, Inc.
622 Broadway
New York, NY 10012
(646) 536-2842
STOCKHOLDER INFORMATION
A copy of the Company’s Annual
Report on Form 10-K, as fi led with
the Securities and Exchange
Commission, will be furnished
without charge upon written
request to Investor Relations at
the Corporate Headquarters.
Take-Two Interactive
Software Europe, Ltd.
Saxon House
2-4 Victoria Street
Windsor, Berkshire SL4 1EN
Take-Two Pte Ltd.
47 Scotts Road
#11-01 Goldbell Towers
Singapore 228233
PRINCIPAL OPERATING OFFICES
Rockstar Games, Inc.
622 Broadway
New York, NY 10012
2K Games, Inc.
2K Sports, Inc.
2K Play, Inc.
10 Hamilton Landing
Novato, CA 94949
INVESTOR RELATIONS
IR@take2games.com
INDEPENDENT AUDITORS
Ernst & Young LLP
5 Times Square
New York, NY 10036
TRANSFER AGENT
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
COMMON STOCK INFORMATION
The Company’s common
stock is listed on the NASDAQ
Global Select Market under
the symbol TTWO.
www.take2games.com
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TAKE-TWO INTERACTIVE SOFTWARE, INC.
622 Broadway
New York, NY 10012
(646) 536-2842
www.take2games.com