filings.toolsTake-Two Interactive 10-K 2015-03-31
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10-K 1 a2224758z10-k.htm 10-K
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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION **WASHINGTON, D.C. 20549
FORM 10-K
| ý | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the fiscal year ended March 31, 2015 | ||
| OR | ||
| o | 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 001-34003
**TAKE-TWO INTERACTIVE SOFTWARE, INC. **(Exact name of registrant as specified in its charter)
| Delaware (State or Other Jurisdiction of Incorporation or Organization) | 51-0350842 (I.R.S. Employer Identification No.) | |
| 622 Broadway New York, New York (Address of principal executive offices) | 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 | Name of each exchange on which registered | |
| Common Stock, $.01 par value | 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 ý No o
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 o No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 ý No o
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 ý No o
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. ý
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):
| Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
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 $1,864,553,000.
As of May 15, 2015, there were 84,609,452 shares of the Registrant's Common Stock outstanding, net of treasury stock.
Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III herein.
**INDEX **
**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.
**PART I **
Item 1. Business
**
**General **
We are a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. We develop and publish products through our two wholly-owned labels Rockstar Games and 2K. Our products are currently designed for console gaming systems such as Sony's PlayStation®3 ("PS3") and PlayStation®4 ("PS4"), Microsoft's Xbox 360® ("Xbox 360") and Xbox One® ("Xbox One"); and personal computers ("PC"), including smartphones and tablets. We deliver our products through physical retail, digital download, online platforms and cloud streaming services.
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 continuing increases in the installed base of traditional consoles, along with the growing popularity of games played on emerging platforms such as tablets and smartphones, and online including through social networks. According to the "Global Video Game Market" published by International Development Group ("IDG") in April 2015, the installed base of console systems that we support grew to 158.8 million units as of December 2014, an increase of 24.2 million units or 18% from December 2013, and forecasts that the number will increase to an estimated 233.6 million units in calendar 2019. In addition, according to IDG, global sales from the console, handheld, PC software and digital gaming segments that we support, inclusive of mobile gaming platforms and online, surpassed $65.0 billion in calendar 2014 and forecasts that their annual sales will increase to an estimated $87.3 billion in calendar 2019.
The demographics of the interactive entertainment industry audience have broadened significantly in recent years, with video games becoming an increasingly popular form of mainstream entertainment. According to the "2015 Essential Facts about the Computer and Video Game Industry" published by Entertainment Software Association ("ESA"), 51% of U.S. households own at least one dedicated game console. The average game player is 35 years old and has been actively playing for 13 years.
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 franchises by publishing a select number of titles for which we can create sequels and incremental revenue opportunities through add-on content, microtransactions and online play. 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.
We were incorporated under the laws of the State of Delaware in 1993 and are headquartered in New York, New York with approximately 2,840 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 incremental revenue opportunities through add-on content, microtransactions and online play. 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, family/casual, racing, role-playing, shooter, 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.
Support Label Structure to Target Distinct Market Segments. Our business consists of our wholly-owned labels Rockstar Games and 2K. 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 publishes high-quality, owned and licensed titles across a range of genres including shooter, action, role-playing, strategy, sports and family/casual. 2K is the publisher of a number of critically acclaimed, multi-million unit selling franchises including BioShock, Borderlands, Carnival Games, Evolve, Mafia, NBA 2K, Sid Meier's Civilization, WWE 2K and XCOM Enemy Unknown. We expect 2K to continue to be a leader by building on its existing brands, as well as by developing new franchises in the future.
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 properties, which typically provide higher margins than licensed products. We currently own the intellectual property rights to 20 proprietary brands. In addition, we will selectively develop titles based on licensed properties, including sports, and also publish externally developed titles.
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 the senior management of our publishing labels, and includes coordination between our sales and marketing personnel before the launch of titles. This disciplined approach to product investment is expected to enhance the competitiveness and profitability of our titles.
We develop our products using a combination of our internal development teams and external development resources acting under contract with us. We typically select 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 the 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 profitability. In addition, the interactive entertainment software industry is delivering a growing amount of content for traditional platforms through digital download on the Internet. We provide a variety of online delivered products and offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download on the Internet (from websites we own and third-party websites). We also aim to drive ongoing engagement and incremental revenues from recurrent consumer spending on our titles after their initial purchase, through downloadable offerings including add-on content, microtransactions and online play. In addition, we are publishing an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download via the Internet. 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 microtransactions that enable gamers to pay to download additional content to enhance their game playing experience.
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 are continuing our expansion initiatives in the Asian markets, where our strategy is to broaden the distribution of our existing products and establish an online gaming presence, especially in China and South Korea. We are a direct publisher in Japan and South Korea. 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 continue to build upon our licensing relationships and also continue to expand on finished goods distribution strategies to grow our international business.
**Our Businesses **
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 products and to manage software product development
costs. We have internal development studios located in Canada, China, Czech Republic, the United Kingdom and the United States. As of March 31, 2015, we had a research and development staff of approximately 2,120 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.
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 to 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 the expected sales for the related titles.
We continue to explore evolving business models such as downloadable content, online gaming and microtransactions. We expect to continue to generate incremental revenue opportunities through add-on content, microtransactions and online play.
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 to create groundbreaking entertainment by leveraging our existing titles as well as by 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 over 210 million units. The latest installment, Grand Theft Auto V, was released on Sony's PlayStation 3 and Microsoft's Xbox 360 in September 2013, on Sony's PlayStation 4 and Microsoft's Xbox One in November 2014, and on the PC in April 2015. Grand Theft Auto V includes access to Grand Theft Auto Online, which initially launched in October 2013. Rockstar Games is also well known for developing brands in other genres, including the LA Noire, Bully and Manhunt franchises. Rockstar Games continues to expand on our established franchises by developing sequels, offering downloadable add-on episodes, content and virtual currency, and releasing titles for smartphones and tablets.
2K. Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports and family/casual entertainment. We expect 2K to continue to develop new, successful franchises in the future.
2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling BioShock, Mafia, Sid Meier's Civilization and XCOM Enemy Unknown series. 2K also publishes highly successful externally developed franchises such as Borderlands and Evolve. 2K's realistic sports simulation titles, including our flagship NBA 2K series which has been the top-ranked NBA basketball video game for 14 years running and the WWE 2K series.
We are continuing our expansion initiatives in the Asia markets, where our strategy is to broaden the distribution of our existing products and establish an online gaming presence, especially in China and South Korea. 2K has secured a multi-year license from the NBA to develop an online version of the NBA 2K simulation game in China, Taiwan, South Korea and Southeast Asia. In October 2012, NBA 2K Online, our free-to-play NBA simulation game co-developed by 2K and Tencent, launched commercially on the Tencent Games portal in China. In addition, South Korean-based studio XLGAMES is presently developing Civilization Online, a new online game for the Asian market, which is planned for commercial launch in Korea during our fiscal year 2016.
**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, Evolve, 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, Top Spin and XCOM. 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, patent, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution.
We also enter into content license agreements, such as those with sports leagues, players associations, music labels and musicians. These licenses are typically limited to use of the licensed rights in products for 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.
**Manufacturing **
Sony and Microsoft 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 or Microsoft's approved replicator and then send software code and a prototype of the product to the manufacturer, together with related 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.
Production of PC software is performed by third-party vendors in accordance with our specifications and includes CD-ROM / 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. Our software titles typically carry a 90-day limited warranty.
**Sales **
We sell software titles both physically and digitally in the United States, Europe, Canada, Latin America and Asia Pacific through direct relationships with large retail customers and third-party distributors. Our customers in the United States include, among others, GameStop, Microsoft, Sony, Steam and Wal-Mart. Our international customers include, among others, Amazon EU SARL, Exertis, Game, GameStop, and Media Markt. We have sales operations in Australia, Canada, France, Germany, Japan, the Netherlands, New Zealand, Singapore, South Korea, Spain, Switzerland, Taiwan, 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, 2015 accounted for approximately 64.6% of our net revenue, with GameStop, Sony, Microsoft and Steam each accounted for more than 10.0% of our net revenue during the fiscal year ended March 31, 2015.
We also digitally distribute our titles, add-on content and microtransactions 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 a significant channel for the sale of our products for the foreseeable future.
**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. From time to time, we also receive marketing support from hardware manufacturers in connection with their own promotional efforts.
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.
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. In certain international markets, we also provide volume rebates to stimulate continued product sales. Sales returns, price protection and other allowances amounted to $51.5 million, $138.1 million, $109.1 million during the fiscal years ended March 31, 2015, 2014 and 2013, respectively.
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, attendance at trade shows as well as product sampling through demonstration software distributed via the Internet or the digital online services.
As of March 31, 2015, we had a sales and marketing staff of approximately 345 people.
**Product Procurement **
We procure products from suppliers principally using standard purchase orders based on our assessment of market demand. 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 business, we compete with:
Companies that range in size and cost structure from very small with limited resources to very large with greater financial, marketing and technical personnel and other resources than ours, including Activision Blizzard, Electronic Arts, and international companies, such as Capcom, SEGA, Square Enix, and Ubisoft.
Sony and Microsoft for the sale of interactive entertainment software. Each of these competitors is a large developer and marketer of software for their own platforms, and 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.
Other forms of entertainment such as motion pictures, television and audio, social networking, online computer programs, mobile games 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.
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 28.0% of the Company's net revenue for the fiscal year ended March 31, 2015. The timing of our Grand Theft Auto releases varies significantly, which in turn may affect our financial performance on a quarterly and annual basis.
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 for 64.6%, 39.4% and 52.5% of net revenue during the fiscal years ended March 31, 2015, 2014 and 2013, respectively. As of March 31, 2015 and 2014, five customers comprised approximately 63.9% and 68.3% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for approximately 54.5% and 59.8% of such balance at March 31, 2015 and 2014, respectively. We had three customers who accounted for approximately 18.5%, 18.4% and 17.6% of our gross accounts receivable as of March 31, 2015 and three customers who accounted for 22.6%, 22.3% and 14.9% of our gross accounts receivable as of March 31, 2014. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2015 and 2014. 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 content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adversely affect our business.
Hardware 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 and PS4 and Microsoft's Xbox 360 and Xbox One, which comprised approximately 81.4% of the Company's net revenue by product platform for the fiscal year ended March 31, 2015. 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 typically declines, which may negatively affect our business during the market transition to the new consoles. Additionally, we have limited ability to predict the consumer acceptance of the new platforms, which may affect our sales and profitability. Accordingly, our strategy is to focus our development efforts on a select number of the
highest quality titles for these platforms, while also expanding our offerings for emerging platforms such as mobile and online games.
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 offerings. Virtually all of our titles that are available through retailers as packaged goods products are also available through direct digital download via the Internet (from websites we own and others owned by third-parties). In addition, we aim to drive ongoing engagement and recurrent consumer spending on our titles after their initial purchase by generating incremental revenues through downloadable offerings, including add-on content, microtransactions and online play. We also publish an expanding variety of titles for tablets and smartphones, which are delivered to consumers through digital download via the Internet. Note 14 to our Consolidated Financial Statements, "Segment and Geographic Information," discloses that net revenue from digital online channels comprised approximately 42.0% of the Company's net revenue by distribution channel for the fiscal year ended March 31, 2015. We expect online delivery of games and game offerings to become an increasing part of our business over the long-term.
**International Operations **
International sales are a significant part of our business. For the fiscal years ended March 31, 2015, 2014 and 2013, approximately 42.5%, 53.5% and 41.5%, respectively, of our net revenue was earned outside the United States. We also have 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 14 to the Consolidated Financial Statements.
**Segment and Geographic Information **
See Note 14 to the Consolidated Financial Statements.
**Employees **
As of March 31, 2015, we had approximately 2,840 full-time employees, of which approximately 1,360 were employed outside of the United States. None of our employees is 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.
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 28.0% of the Company's net revenue for the fiscal year ended March 31, 2015 and the ten best-selling franchises (including Grand Theft Auto) that significantly contributed to the Company's net revenue for the fiscal year ended March 31, 2015 in the aggregate accounted for approximately 97.1% of the Company's net revenue. If we fail to continue to develop and sell new commercially successful "hit" titles or sequels to such "hit" titles or experience any delays in product releases or disruptions following the commercial release of our "hit" titles or 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 more than 4 years to develop. Therefore our development costs can be substantial. If we or our third party developers experience unanticipated development delays, financial difficulties or additional costs, we may not be able to release titles according to our schedule and at budgeted costs. 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.
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.
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 business, financial condition and 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 costs 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 business, financial condition and operating results and cause our operating results to be materially different from our expectations.
Our business is subject to our ability to develop commercially successful products for the current generation video game 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 and PS4 and Microsoft's Xbox 360 and Xbox One, which comprised approximately 81.4% of the Company's net revenue by product platform for the fiscal year ended March 31, 2015. 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 could affect our ability to sell and provide online services for our products and could affect our profitability.
We rely upon third-party digital delivery platforms, such as Steam, Microsoft's Xbox Live and Sony Entertainment Network, and other third-party service providers, 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 have a material adverse effect on our business, financial condition and operating results.
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. 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.
The interpretation and application
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Item 1B. Unresolved Staff Comments
**
None.
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.
Take-Two Interactive Software Europe Ltd, our wholly-owned subsidiary, leases 12,500 square feet of office space in Windsor, United Kingdom, which expires in January 2022. Rockstar North, our wholly-owned subsidiary, leases 72,000 square feet of office space in Edinburgh, Scotland, which expires in June 2024.
2K corporate offices and two development studios occupy approximately 110,000 square feet of leased office space in Novato, California. The lease expires in March 2019.
In addition, our other subsidiaries lease office space in Sydney, Australia; Toronto, Canada; Chengdu, Hanghzhou and Shanghai, China; Brno, Czech Republic; Paris, France; Munich, Germany; Tokyo, Japan; Seoul, South Korea; Breda, Netherlands; Auckland, New Zealand; Singapore; Madrid, Spain; Taipei, Taiwan; London, Lincoln, and Leeds, United Kingdom and, in the United States, San Diego, and Northridge, California; Sparks, Maryland; Andover and Quincy, Massachusetts; Las Vegas, Nevada; Glen Cove, New York; Kirkland, Washington.
For information regarding our lease commitments, see Note 11 of the Notes to Consolidated Financial Statements.
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 and Holders
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, 2015 | |||||||
| First Quarter ended June 30, 2014 | $ | 22.47 | $ | 18.45 | |||
| Second Quarter ended September 30, 2014 | 24.28 | 20.40 | |||||
| Third Quarter ended December 31, 2014 | 29.10 | 20.13 | |||||
| Fourth Quarter ended March 31, 2015 | 30.80 | 24.19 | |||||
| Fiscal Year Ended March 31, 2014 | |||||||
| First Quarter ended June 30, 2013 | $ | 17.54 | $ | 14.08 | |||
| Second Quarter ended September 30, 2013 | 19.25 | 15.05 | |||||
| Third Quarter ended December 31, 2013 | 18.59 | 16.00 | |||||
| Fourth Quarter ended March 31, 2014 | 22.41 | 16.40 |
The number of record holders of our common stock was 65 as of May 15, 2015.
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. See "Liquidity and Capital Resources" under Item 7 for additional information on our Credit Agreement.
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 March 31, 2010 through March 31, 2015, 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 and Electronic Arts. The comparison assumes $100 was invested on March 31, 2010 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.
*Comparison of 65 Month Cumulative Total Return Among Take-Two Interactive Software, Inc., The NASDAQ Composite Index and a Peer Group March 2015 **
$100 invested on March 31, 2010 in stock or index- including reinvestment of dividends.
| March 31, | |||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||
| Take-Two Interactive Software Inc | $ | 100.00 | $ | 155.72 | $ | 155.93 | $ | 163.63 | $ | 222.19 | $ | 257.95 | |||||||
| NASDAQ Composite Index | 100.00 | 117.06 | 131.47 | 140.86 | 183.38 | 216.60 | |||||||||||||
| Peer Group | 100.00 | 95.97 | 102.78 | 116.13 | 170.87 | 250.85 |
Issuer Purchases of Equity Securities
In January 2013, our Board of Directors authorized the repurchase of up to 7,500,000 shares of our common stock. The authorization permits the Company to purchase shares from time to time through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any purchases at any specific time or situation. Repurchases are subject to the availability of stock, prevailing market conditions, the trading price of the stock, the Company's financial performance and other conditions. The program may be suspended or discontinued at any time for any reason. During the fiscal year ended March 31, 2015, the Company did not repurchase any shares of its common stock as part of the program. During the fiscal year ended March 31, 2014, the Company repurchased approximately 4,217,000 shares of its common stock in the open market for approximately $73.3 million, including commissions of $0.04 million, as part of the program. As of March 31, 2015, up to approximately 3,283,000 shares of our common stock remain available for repurchase under the Company's share repurchase authorization. On May 13, 2015, our Board of Directors approved an increase to the share repurchase authorization, increasing the total number of shares that the Company is permitted to repurchase to up to 10,000,000 shares of our common stock.
Repurchase from Icahn Group
In November 2013, the Company entered into a Purchase Agreement with High River Limited Partnership, Icahn Partners LP, Icahn Partners Master Fund LP, Icahn Partners Master Fund II LP and Icahn Partners Master Fund III LP (collectively, the "Icahn Group"), pursuant to which the Company repurchased approximately 12,021,000 shares of the Company's common stock owned by the Icahn Group, at a price per share of $16.93, resulting in an aggregate purchase price of approximately $203.5 million (the "Repurchase Transaction"). The closing of the Repurchase Transaction occurred on November 26, 2013. The Repurchase Transaction was conducted outside the Company's share repurchase program described above.
Item 6. Selected Financial Data
**
The following Selected Financial Data should be read in conjunction with our Consolidated Financial Statements and related Notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. (in thousands, except per share data)
| Fiscal Year Ended March 31, | ||||||||||||||||
| STATEMENT OF OPERATIONS DATA (in thousands, except per share data): | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||
| Net revenue | $ | 1,082,938 | $ | 2,350,568 | $ | 1,214,483 | $ | 825,823 | $ | 1,136,876 | ||||||
| Cost of goods sold | 794,867 | 1,414,327 | 715,837 | 528,855 | 689,381 | |||||||||||
| | | | | | | | | | | | | | | | | |
| Gross profit | 288,071 | 936,241 | 498,646 | 296,968 | 447,495 | |||||||||||
| | | | | | | | | | | | | | | | | |
| Selling and marketing | 235,341 | 240,996 | 257,329 | 183,749 | 176,294 | |||||||||||
| General and administrative | 175,093 | 161,374 | 147,260 | 121,200 | 109,484 | |||||||||||
| Research and development | 115,043 | 105,256 | 78,184 | 64,162 | 69,576 | |||||||||||
| Depreciation and amortization | 21,057 | 13,359 | 10,634 | 12,123 | 14,999 | |||||||||||
| | | | | | | | | | | | | | | | | |
| Total operating expenses | 546,534 | 520,985 | 493,407 | 381,234 | 370,353 | |||||||||||
| | | | | | | | | | | | | | | | | |
| Income (loss) from operations | (258,463 | ) | 415,256 | 5,239 | (84,266 | ) | 77,142 | |||||||||
| Interest and other, net | (31,893 | ) | (33,553 | ) | (31,351 | ) | (19,571 | ) | (13,519 | ) | ||||||
| Gain on long-term investments, net | 17,476 | — | — | — | — | |||||||||||
| Loss on extinguishment of debt | — | (9,014 | ) | — | — | — | ||||||||||
| Gain on convertible note hedge and warrants, net | — | 3,461 | — | — | — | |||||||||||
| | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations before income taxes | (272,880 | ) | 376,150 | (26,112 | ) | (103,837 | ) | 63,623 | ||||||||
| | | | | | | | | | | | | | | | | |
| Provision for income taxes | 6,590 | 14,459 | 5,050 | 3,863 | 9,819 | |||||||||||
| | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | (279,470 | ) | 361,691 | (31,162 | ) | (107,700 | ) | 53,804 | ||||||||
| Income (loss) from discontinued operations, net of taxes | — | (86 | ) | 1,671 | (1,116 | ) | (5,346 | ) | ||||||||
| | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (279,470 | ) | $ | 361,605 | $ | (29,491 | ) | $ | (108,816 | ) | $ | 48,458 | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Earnings (loss) per share: | ||||||||||||||||
| Continuing operations | $ | (3.48 | ) | $ | 3.79 | $ | (0.36 | ) | $ | (1.30 | ) | $ | 0.62 | |||
| Discontinued operations | — | — | 0.02 | (0.01 | ) | (0.06 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
| Basic earnings (loss) per share | $ | (3.48 | ) | $ | 3.79 | $ | (0.34 | ) | $ | (1.31 | ) | $ | 0.56 | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Continuing operations | $ | (3.48 | ) | $ | 3.20 | $ | (0.36 | ) | $ | (1.30 | ) | $ | 0.62 | |||
| Discontinued operations | — | — | 0.02 | (0.01 | ) | (0.06 | ) | |||||||||
| | | | | | | | | | | | | | | | | |
| Diluted earnings (loss) per share | $ | (3.48 | ) | $ | 3.20 | $ | (0.34 | ) | $ | (1.31 | ) | $ | 0.56 | |||
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 80,367 | 84,519 | 85,581 | 83,356 | 86,127 | |||||||||||
| Diluted | 80,367 | 113,882 | 85,581 | 83,356 | 86,139 |
| As of March 31, | ||||||||||||||||
| BALANCE SHEET DATA: | 2015 | 2014 | 2013 | 2012 | 2011 | |||||||||||
| Cash and cash equivalents | $ | 911,120 | 935,400 | 402,502 | $ | 420,279 | $ | 280,359 | ||||||||
| Working capital | 815,048 | 924,620 | 529,153 | 524,892 | 335,715 | |||||||||||
| Total assets | 2,231,100 | 1,799,630 | 1,277,839 | 1,149,427 | 971,659 | |||||||||||
| Long-term debt | 476,057 | 454,031 | 335,202 | 316,340 | 107,239 | |||||||||||
| Total liabilities | 1,668,012 | 997,824 | 689,844 | 553,700 | 356,380 | |||||||||||
| Stockholders' equity | 563,088 | 801,806 | 587,995 | 595,727 | 615,279 |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
**
**Overview **
Our Business
We are a leading developer, publisher and marketer of interactive entertainment for consumers around the globe. We develop and publish products through our two wholly-owned labels Rockstar Games and 2K. Our products are currently designed for console gaming systems such as Sony's PlayStation®3 ("PS3") and PlayStation®4 ("PS4") and Microsoft's Xbox 360® ("Xbox 360") and Xbox One® ("Xbox One"); and personal computers ("PC"), 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 incremental revenue opportunities through add-on content, microtransactions and online play. 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, family/casual, racing, role-playing, shooter, 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.
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 release new, commercially successful software products and to manage effectively their development costs. We have internal development studios located in 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 to create groundbreaking entertainment by leveraging our existing titles as well as by 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 over 210 million units. The latest installment, Grand Theft Auto V, was released on Sony's PS3 and Microsoft's Xbox 360 in September 2013, on ony's PS4 and Microsoft's Xbox One in November 2014, and on PC in April 2015. Grand Theft Auto V includes access to Grand Theft Auto Online, which initially launched in October 2013. Rockstar is also well known for developing brands in other genres, including the L.A. Noire, Bully and Manhunt franchises. Rockstar continues to expand on our established franchises by developing sequels, offering downloadable episodes, content and virtual currency, and releasing titles for smartphones and tablets.
Our 2K label has published a variety of popular entertainment properties across all key platforms and across a range of genres including shooter, action, role-playing, strategy, sports and family/casual entertainment. We expect 2K to continue to develop new, successful franchises in the future. 2K's internally owned and developed franchises include the critically acclaimed, multi-million unit selling
BioShock, Mafia, Sid Meier's Civilization and XCOM Enemy Unknown series. 2K also publishes successful externally developed franchises, such as Borderlands and Evolve. 2K's realistic sports simulation titles include our flagship NBA 2K series, which has been the top-ranked NBA basketball video game for 14 years running, and the WWE 2K series.
We are continuing our expansion initiatives in the Asia markets, where our strategy is to broaden the distribution of our existing products and establish an online gaming presence, especially in China and South Korea. 2K has secured a multi-year license from the NBA to develop an online version of the NBA 2K simulation game in China, Taiwan, South Korea and Southeast Asia. In October 2012, NBA 2K Online, our free-to-play NBA simulation game co-developed by 2K and Tencent, launched commercially on the Tencent Games portal in China. In addition, South Korean-based studio XLGAMES is presently developing Civilization Online, a new online game for the Asian market, which is planned for commercial launch in Korea during our fiscal year 2016.
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 28.0% of the Company's net revenue for the fiscal year ended March 31, 2015. The timing of our Grand Theft Auto releases varies significantly, which in turn may affect our financial performance on a quarterly and annual basis.
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 for 64.6%, 39.4% and 52.5% of net revenue during the fiscal years ended March 31, 2015, 2014 and 2013, respectively. As of March 31, 2015 and 2014, our five largest customers comprised approximately 63.9% and 68.3% of our gross accounts receivable, respectively, with our significant customers (those that individually comprised more than 10% of our gross accounts receivable balance) accounting for approximately 54.5% and 59.8% of such balance at March 31, 2015 and 2014, respectively. We had three customers who accounted for approximately 18.5%, 18.4% and 17.6% of our gross accounts receivable as of March 31, 2015 and three customers who accounted for 22.6%, 22.3% and 14.9% of our gross accounts receivable as of March 31, 2014. We did not have any additional customers that exceeded 10% of our gross accounts receivable as of March 31, 2015 and 2014. 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 content that we now offer for certain of our titles may serve to reduce used game sales, we expect used game sales to continue to adver
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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) 0.50% to 1.00% above a certain base rate (3.75% at March 31, 2015), or (b) 1.50% to 2.00% above the LIBOR rate (approximately 1.76% at March 31, 2015), 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 1.00% Convertible Notes pay interest semi-annually at a fixed rate of 1.75% and 1.00%, 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 10 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, 2015 and 2014, our foreign currency translation adjustment was approximately $32.7 million loss and $6.4 million gain, respectively. We recognized a foreign currency exchange transaction loss of $2.1 million for the fiscal year ended March 31, 2015, a foreign currency gain of $0.2 million for the fiscal year ended March 31, 2014, and a foreign currency exchange transaction loss for the fiscal year ended March 31, 2013 of $0.8 million, in interest and other, net in our Consolidated Statements of Operations.
Cash Flow Hedging Activities
We use foreign currency forward contracts to mitigate foreign currency exchange rate risk associated with forecasted transactions involving non-functional currency denominated expenditures. These contracts, 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 reporting periods presented, 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. At March 31, 2015 we did not have cash flow hedging contracts outstanding and at March 31, 2014, we had $0.9 million, of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars all of which had maturities of less than one year. As of March 31, 2014, the fair value of these outstanding forward contracts was immaterial and is
included in prepaid expenses and other. The fair value of these outstanding forward contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
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, 2015, we had $4.1 million of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars and $72.5 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. At March 31, 2014, we had $68.5 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 years ended March 31, 2015, 2014 and 2013, we recorded a gain of $18.5 million, a loss of $18.4 million and a gain of $2.2 million, respectively, related to foreign currency forward contracts in interest and other, net on the Consolidated Statements of Operations. As of March 31, 2015 the fair value of these outstanding forward contracts was a loss of $0.6 million and as of March 31, 2014 was immaterial and is included in prepaid expenses and other. The fair value of these outstanding forward contracts is estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period.
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, 2015, 42.5% 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 4.3%, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase revenues by 4.3%. 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 17—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 omitted as not applicable or not required.
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.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures at March 31, 2015, 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, 2015, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed 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 2013 framework ("COSO"). Based on this evaluation, management has concluded that our internal control over financial reporting was effective as of March 31, 2015.
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, 2015, 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 2015. The Company intends to file the Proxy Statement within 120 days after the end of the fiscal year (i.e. on or before July 29, 2015). 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" 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 "Independent Auditor Fee Information" in the Company's Proxy Statement.
**PART IV **
Item 15. Exhibits, Financial Statement Schedules
**
(a)
The following documents are filed as part of this Report:
(i)
Financial Statements. See Index to Financial Statements on page 65 of this Report.
(ii)
Financial Statement Schedule. See Note 17 to the Consolidated Financial Statements.
(iii)
Index to Exhibits:
| Incorporated by Reference | ||||||||||||||
| Exhibit Number | Exhibit Description | Form | Filing Date | Exhibit | Filed Herewith | |||||||||
| 3.1 | Restated Certificate of Incorporation | 10-K | 2/12/2004 | 3.1 | ||||||||||
| 3.1.1 | Certificate of Amendment of Restated Certificate of Incorporation, dated April 30, 1998 | 10-K | 2/12/2004 | 3.1.2 | ||||||||||
| 3.1.2 | Certificate of Amendment of Restated Certificate of Incorporation, dated November 17, 2003 | 10-K | 2/12/2004 | 3.1.3 | ||||||||||
| 3.1.3 | Certificate of Amendment of Restated Certificate of Incorporation, dated April 23, 2009. | 8-K | 4/23/2009 | 3.1 | ||||||||||
| 3.1.4 | Certificate of Amendment of Restated Certificate of Incorporation, dated September 21, 2012 | 8-K | 8/24/2012 | 3.1 | ||||||||||
| 3.2 | Certificate of Designation of Series A Preferred Stock, dated March 11, 1998 | 10-K | 2/12/2004 | 3.1.1 | ||||||||||
| 3.3 | Certificate of Designation of Series B Preferred Stock, dated March 24, 2008 | 8-K | 3/26/2008 | 3.2 | ||||||||||
| 3.4 | Amended and Restated Bylaws of the Company | 8-K | 2/24/2010 | 3.1 | ||||||||||
| 3.5 | Amendment to Amended and Restated Bylaws of the Company | 8-K | 11/18/2010 | 3(ii) | ||||||||||
| 3.6 | Amended and Restated Bylaws of Take-Two Interactive Software, Inc., effective as of December 2, 2014. | 8-K | 12/5/2014 | 3.1 | ||||||||||
| 4.1 | 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 | 8-K | 11/18/2011 | 4.1 | ||||||||||
| 4.2 | Form of 1.75% Convertible Note (included in Exhibit 4.1) | 8-K | 11/18/2011 | 4.1 | ||||||||||
| 4.3 | Indenture, dated as of June 18, 2013, by and between the Company and The Bank of New York Mellon, as Trustee | 8-K | 6/18/2013 | 4.1 |
| Incorporated by Reference | ||||||||||||||
| Exhibit Number | Exhibit Description | Form | Filing Date | Exhibit | Filed Herewith | |||||||||
| 4.4 | Supplemental Indenture, dated as of June 18, 2013, between the Company and The Bank of New York Mellon, as Trustee, to Indenture, dated as of June 18, 2013, between the Company and The Bank of New York Mellon, as Trustee | 8-K | 6/18/2013 | 4.2 | ||||||||||
| 4.5 | Form of Global Note (included in Exhibit 4.4) | 8-K | 6/18/2013 | 4.2 | ||||||||||
| 10.1 | Take-Two Interactive Software, Inc. Change in Control Employee Severance Plan+ | 8-K | 3/7/2008 | 10.1 | ||||||||||
| 10.2 | Amended and Restated Take-Two Interactive Software, Inc. 2009 Stock Incentive Plan+ | 14A | 7/29/2013 | Annex A | ||||||||||
| 10.3 | Form of Employee Restricted Stock Agreement+ | 10-Q | 6/5/2009 | 10.2 | ||||||||||
| 10.4 | Form of Non-Employee Director Restricted Stock Agreement+ | 10-Q | 6/5/2009 | 10.3 | ||||||||||
| 10.5 | Form of Employee Restricted Unit Agreement+ | 10-Q | 8/1/2012 | 10.1 | ||||||||||
| 10.6 | Form of Employee Restricted Unit Agreement+ | 10-Q | 10/30/2013 | 10.1 | ||||||||||
| 10.7 | Form of Employee Restricted Unit Agreement+ | 10-Q | 10/30/2013 | 10.2 | ||||||||||
| 10.8 | Form of Employee Restricted Unit Agreement+ | 10-Q | 10/30/2013 | 10.3 | ||||||||||
| 10.9 | Form of Employee Restricted Unit Agreement+ | 10-Q | 10/30/2013 | 10.4 | ||||||||||
| 10.10 | Form of Employee Restricted Unit Agreement+ | 10-Q | 10/30/2013 | 10.5 | ||||||||||
| 10.11 | Employment Agreement, dated June 4, 2010, between the Company and Seth Krauss+ | 10-Q | 6/9/2010 | 10.2 | ||||||||||
| 10.12 | Amendment to Employment Agreement, dated October 25, 2010, between the Company and Seth Krauss+ | 8-K | 10/25/2010 | 10.2 | ||||||||||
| 10.13 | Second Amendment to Employment Agreement, dated September 14, 2012, between the Company and Seth Krauss+ | 10-Q | 10/31/2012 | 10.3 | ||||||||||
| 10.14 | Employment Agreement, dated May 12, 2010, between the Company and Lainie Goldstein+ | 8-K | 5/14/2010 | 10.1 |
| Incorporated by Reference | ||||||||||||||
| Exhibit Number | Exhibit Description | Form | Filing Date | Exhibit | Filed Herewith | |||||||||
| 10.15 | Amendment to Employment Agreement, dated October 25, 2010, between the Company and Lainie Goldstein+ | 8-K | 10/25/2010 | 10.1 | ||||||||||
| 10.16 | Second Amendment to Employment Agreement, dated August 27, 2012, between the Company and Lainie Goldstein+ | 10-Q | 10/31/2012 | 10.6 | ||||||||||
| 10.17 | Employment Agreement, dated February 14, 2008, by and between the Company and Karl Slatoff+ | 8-K | 2/15/2008 | 10.3 | ||||||||||
| 10.18 | Management Agreement between the Company and ZelnickMedia Corporation dated March 30, 2007+ | 8-K | 4/4/2007 | 99.1 | ||||||||||
| 10.19 | Amendment dated July 26, 2007 to the Management Agreement dated March 30, 2007 between the Company and ZelnickMedia Corporation+ | 8-K | 7/27/2007 | 99.1 | ||||||||||
| 10.20 | Second Amendment, dated February 14, 2008, to the Management Agreement dated March 30, 2007 between the Company and ZelnickMedia Corporation+ | 8-K | 2/15/2008 | 10.1 | ||||||||||
| 10.21 | Management Agreement, dated as of May 20, 2011, by and between Take-Two Interactive Software, Inc. and ZelnickMedia Corporation+ | 8-K | 5/24/2011 | 10.1 | ||||||||||
| 10.22 | Amendment to Non-Qualified Stock Option Agreement with ZelnickMedia Corporation, dated as of November 18, 2013+ | 8-K | 11/18/2013 | 10.1 | ||||||||||
| 10.23 | Management Agreement, dated as of March 10, 2014, by and between the Company and ZelnickMedia Corporation.+ | 8-K | 3/10/2014 | 10.1 | ||||||||||
| 10.24 | 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 | 8-K | 7/9/2007 | 10.2 | ||||||||||
| 10.25 | 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 | 11/20/2007 | 99.2 |
| Incorporated by Reference | ||||||||||||||
| Exhibit Number | **Exhibit Descr |
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