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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2014

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

        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 web site, 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 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

        As of February 2, 2015, there were 84,368,648 shares of the Registrant's Common Stock outstanding, net of treasury stock.

   


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INDEX

PART I.

 

FINANCIAL INFORMATION

    2  

Item 1.

 

Financial Statements (Unaudited)

    2  

 

Condensed Consolidated Balance Sheets

    2  

 

Condensed Consolidated Statements of Operations

    3  

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

    4  

 

Condensed Consolidated Statements of Cash Flows

    5  

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

    6  

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    26  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

    42  

Item 4.

 

Controls and Procedures

    44  

PART II.

 

OTHER INFORMATION

    46  

Item 1.

 

Legal Proceedings

    46  

Item 1A.

 

Risk Factors

    46  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

    46  

Item 6.

 

Exhibits

    47  

 

Signatures

    48  

(All other items in this report are inapplicable)

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements


TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

 
  December 31,
2014
  March 31,
2014
 
 
  (Unaudited)
   
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

  $ 897,452   $ 935,400  

Short-term investments

    79,140      

Restricted cash

    31,301     193,839  

Accounts receivable, net of allowances of $86,630 and $75,518 at December 31, 2014 and March 31, 2014, respectively

    435,709     53,143  

Inventory

    24,617     29,780  

Software development costs and licenses

    178,968     116,203  

Deferred cost of goods sold

    42,441     5,002  

Prepaid expenses and other

    116,385     66,073  

Total current assets

    1,806,013     1,399,440  

Fixed assets, net

    63,436     42,572  

Software development costs and licenses, net of current portion

    115,814     109,506  

Deferred cost of goods sold, net of current portion

    26,622     858  

Goodwill

    221,071     226,705  

Other intangibles, net

    4,793     5,113  

Other assets

    16,069     15,436  

Total assets

  $ 2,253,818   $ 1,799,630  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current liabilities:

             

Accounts payable

  $ 113,240   $ 16,452  

Accrued expenses and other current liabilities

    255,862     397,173  

Deferred revenue

    338,003     61,195  

Total current liabilities

    707,105     474,820  

Long-term debt

    470,420     454,031  

Non-current deferred revenue

    197,943     18,128  

Other long-term liabilities

    62,961     50,845  

Total liabilities

    1,438,429     997,824  

Commitments and contingencies

             

Stockholders' equity:

             

Preferred stock, $.01 par value, 5,000 shares authorized

         

Common stock, $.01 par value, 200,000 shares authorized; 104,602 and 105,156 shares issued and 88,364 and 88,918 outstanding at December 31, 2014 and March 31, 2014, respectively

    1,046     1,052  

Additional paid-in capital

    1,024,626     954,699  

Treasury stock, at cost (16,238 common shares at December 31, 2014 and March 31, 2014)

    (276,836 )   (276,836 )

Retained earnings

    84,096     120,775  

Accumulated other comprehensive (loss) income

    (17,543 )   2,116  

Total stockholders' equity

    815,389     801,806  

Total liabilities and stockholders' equity

  $ 2,253,818   $ 1,799,630  

   

See accompanying Notes.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except per share amounts)

 
  Three Months Ended
December 31,
  Nine Months Ended
December 31,
 
 
  2014   2013   2014   2013  

Net revenue

  $ 531,147   $ 1,863,869   $ 782,849   $ 2,155,360  

Cost of goods sold

    278,013     1,119,734     384,185     1,306,039  

Gross profit

    253,134     744,135     398,664     849,321  

Selling and marketing

    96,892     70,476     182,874     213,419  

General and administrative

    53,564     34,718     136,891     110,601  

Research and development

    31,221     29,233     79,886     76,624  

Depreciation and amortization

    5,845     3,413     15,123     9,837  

Total operating expenses

    187,522     137,840     414,774     410,481  

Income (loss) from operations

    65,612     606,295     (16,110 )   438,840  

Interest and other, net

    (9,458 )   (5,949 )   (24,689 )   (26,018 )

Gain (loss) on long-term investments

    (1,500 )       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

    54,654     600,346     (23,323 )   407,269  

Provision for income taxes

    14,561     21,902     13,356     14,804  

Income (loss) from continuing operations

    40,093     578,444     (36,679 )   392,465  

Loss from discontinued operations, net of taxes

        (18 )       (73 )

Net income (loss)

  $ 40,093   $ 578,426   $ (36,679 ) $ 392,392  

Earnings (loss) per share:

                         

Continuing operations

  $ 0.46   $ 5.88   $ (0.46 ) $ 4.02  

Discontinued operations

                 

Basic earnings (loss) per share

  $ 0.46   $ 5.88   $ (0.46 ) $ 4.02  

Continuing operations

  $ 0.42   $ 4.69   $ (0.46 ) $ 3.29  

Discontinued operations

                 

Diluted earnings (loss) per share

  $ 0.42   $ 4.69   $ (0.46 ) $ 3.29  

   

See accompanying Notes.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(in thousands)

 
  Three Months Ended
December 31,
  Nine Months Ended
December 31,
 
 
  2014   2013   2014   2013  

Net income (loss)

  $ 40,093   $ 578,426   $ (36,679 ) $ 392,392  

Other comprehensive (loss) income:

   
 
   
 
   
 
   
 
 

Foreign currency translation adjustment

    (12,032 )   (474 )   (19,512 )   6,518  

Change in unrealized gains on cash flow hedges, net of taxes

        67     32     269  

Unrealized gains and (losses) on available-for-sale securities, net of taxes

    (94 )       (179 )    

Other comprehensive (loss) income

    (12,126 )   (407 )   (19,659 )   6,787  

Comprehensive income (loss)

  $ 27,967   $ 578,019   $ (56,338 ) $ 399,179  

   

See accompanying Notes.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 
  Nine Months Ended
December 31,
 
 
  2014   2013  

Operating activities:

             

Net income (loss)

  $ (36,679 ) $ 392,392  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

             

Amortization and impairment of software development costs and licenses

    89,768     252,229  

Depreciation and amortization

    15,123     9,837  

Loss from discontinued operations

        73  

Amortization and impairment of intellectual property

    320     3,375  

Stock-based compensation

    52,474     57,594  

Deferred income taxes

    641     (5,487 )

Amortization of discount on Convertible Notes

    16,389     17,507  

Amortization of debt issuance costs

    1,260     1,510  

(Gain) loss on long-term investment

    (17,476 )    

Loss on extinguishment of debt

        9,014  

Gain on convertible note hedge and warrants, net

        (3,461 )

Other, net

    2,262     (414 )

Changes in assets and liabilities, net of effect from purchases of businesses:

             

Restricted cash

    162,538     171,892  

Accounts receivable

    (382,566 )   77  

Inventory

    5,163     (14,817 )

Software development costs and licenses

    (155,454 )   (151,275 )

Prepaid expenses, other current and other non-current assets

    (52,092 )   (377,608 )

Deferred revenue

    456,623     24,447  

Deferred cost of goods sold

    (63,203 )   (232 )

Accounts payable, accrued expenses and other liabilities

    (34,565 )   345,174  

Net cash used in discontinued operations

        (1,034 )

Net cash provided by operating activities

    60,526     730,793  

Investing activities:

             

Purchase of fixed assets

    (36,579 )   (23,455 )

Purchases of short-term investments

    (79,677 )    

Purchase of long-term investments

    (5,000 )      

Cash received from sale of long-term investment

    21,976      

Payments in connection with business combinations, net of cash acquired

        (1,000 )

Net cash used in investing activities

    (99,280 )   (24,455 )

Financing activities:

             

Excess tax benefit from stock-based compensation

    10,352      

Repurchase of common stock

          (276,836 )

Proceeds from issuance of 1.00% Convertible Notes

        283,188  

Payment for extinguishment of 4.375% Convertible Notes

        (165,999 )

Proceeds from termination of convertible note hedge transactions

        84,429  

Payment for termination of convertible note warrant transactions

        (55,651 )

Payment of debt issuance costs for the issuance of 1.00% Covertible Notes

        (2,815 )

Net cash provided by (used in) financing activities

    10,352     (133,684 )

Effects of foreign currency exchange rates on cash and cash equivalents

    (9,546 )   (2,986 )

Net (decrease) increase in cash and cash equivalents

    (37,948 )   569,668  

Cash and cash equivalents, beginning of year

    935,400     402,502  

Cash and cash equivalents, end of period

  $ 897,452   $ 972,170  

   

See accompanying Notes.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited)

(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, publisher and marketer of interactive entertainment for consumers around the globe. The Company develops and publishes products through its two wholly-owned labels Rockstar Games and 2K. Our products are designed for console systems and personal computers, including smart phones and tablets, and are delivered through physical retail, digital download, online platforms and cloud streaming services.

Basis of Presentation

        The accompanying Condensed Consolidated Financial Statements are unaudited and include the accounts of the Company and its wholly-owned subsidiaries and reflect all normal and recurring adjustments necessary for the fair presentation of our financial position, results of operations and cash flows. All material inter-company accounts and transactions have been eliminated in consolidation. The preparation of these Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in these Condensed Consolidated Financial Statements and accompanying notes. As permitted under U.S. generally accepted accounting principles, interim accounting for certain expenses, including income taxes, are based on full year assumptions when appropriate. Actual results could differ materially from those estimates.

        Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), although we believe that the disclosures are adequate to make the information presented not misleading. These Condensed Consolidated Financial Statements and accompanying notes should be read in conjunction with our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the year ended March 31, 2014.

        Certain reclassifications have been made to prior period amounts to conform to the current period presentation.

Financial Instruments

        The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash, 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. Our restricted cash balance is primarily related to a dedicated account limited to the payment of certain royalty obligations.

Short-term Investments

        Short-term investments designated as available-for-sale securities are carried at fair value, which is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. Investments with original maturities greater than 90 days and remaining maturities of less than one year are normally classified within short-term investments. In addition, investments with maturities beyond one year at the time of purchase that are highly liquid in nature and represent the investment of cash that is available for current operations are classified as short-term investments.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Unrealized gains and losses of the Company's available-for-sale securities are excluded from earnings and are reported as a component of other comprehensive income (loss), net of tax, until the security is sold, the security has matured, or the Company determines that the fair value of the security has declined below its adjusted cost basis and the decline is other-than-temporary. Realized gains and losses on short-term investments are calculated based on the specific identification method and would be reclassified from accumulated other comprehensive income (loss) to interest and other, net.

        Short-term investments are evaluated for impairment quarterly. The Company considers various factors in determining whether it should recognize an impairment charge, including the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, the severity of the impairment, the reason for the decline in value, and our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If the Company concludes that an investment is other-than-temporarily impaired, it recognizes an impairment charge at that time in the Condensed Consolidated Statements of Operations. In determining whether the decline in fair value is other-than-temporary requires management judgment based on the specific facts and circumstances of each security. The ultimate value realized on these securities is subject to market price volatility until they are sold.

Sale of Long-Term Investment

        The Company held an investment in Twitch Interactive, Inc.'s ("Twitch") Class C Preferred stock, which was accounted for under the cost method of accounting. In September 2014, the Company recognized a pretax gain of approximately $18,976 in connection with the sale of Twitch. The pretax gain is presented within "Gain (loss) on long-term investments" in our Condensed Consolidated Statements of Operations for the nine months ended December 31, 2014.

Hedging Activities

        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 foreign currency exchange rate movements.

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 Condensed 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 Condensed 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

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

interest and other, net, in our Condensed 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 Condensed 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 December 31, 2014, we had no forward contracts outstanding to buy or sell foreign currencies in exchange for U.S. dollars designated as cash flow hedges. At March 31, 2014, we had $890 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, 2014, the fair value of these outstanding forward contracts was immaterial and was 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 Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other, net, in our Condensed Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or trading purposes. At December 31, 2014, we had $4,609 of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars and $231,346 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 $68,520 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 three months ended December 31, 2014 and 2013, we recorded a gain of $7,702 and a loss of $7,196, respectively, related to foreign currency forward contracts in interest and other, net on the Condensed Consolidated Statements of Operations. For the nine months ended December 31, 2014 and 2013, we recorded a gain of $7,270 and a loss of $17,463, respectively, related to foreign currency forward contracts in interest and other, net on the Condensed Consolidated Statements of Operations. As of December 31, 2014 and 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.

Revenue Recognition

        For some of our software products, we enter into multiple element revenue arrangements in which we may provide a combination of full game software, add-on content, maintenance or support. When all other revenue recognition criteria are met for these arrangements, we determine the fair value of each delivered and undelivered element using vendor-specific objective evidence ("VSOE") of fair value and allocate the total price among the various elements. When we have not established VSOE

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

for each element, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. For arrangements that require the deferral of revenue, the cost of goods sold is deferred and recognized as the related net revenue is recognized. Deferred cost of goods sold includes product costs, royalties and licenses. We determine VSOE for each element based on historical stand-alone sales to third parties. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

        In identifying the deliverables within an arrangement we consider whether our software products contain more-than-inconsequential online functionality by evaluating the significance of the development effort, the nature of the online features, the extent of anticipated marketing focus on the online features, the significance of the online features to the consumers' anticipated overall gameplay experience, and the significance and length of time of our post sale obligations to consumers. Determining whether the online functionality for a particular game constitutes a more than an inconsequential deliverable is subjective and requires management's judgment.

        When our software products provide limited online functionality at no additional cost to the consumer, we generally 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. When software products provide online functionality that represents a more-than-inconsequential deliverable, we recognize the software-related revenues and the related cost of goods sold ratably over the estimated service period of the title (assuming all other recognition criteria are met) as we have not established VSOE for that deliverable.

        During the fiscal quarter ending December 31, 2014, the Company concluded that the updates being provided with Grand Theft Auto V were no longer considered an inconsequential deliverable because of the add-on content updates provided to date and expected to be provided in the future. As a result, the net revenue and cost of goods sold that have been deferred will be recognized ratably over the expected service period, which is equal to the estimated remaining life of the game which we have concluded for Grand Theft Auto V to be 24 months from the time of release.

Debt

        As of December 31, 2014, the estimated fair value of the Company's 1.75% Convertible Notes due 2016 and the Company's 1.00% Convertible Notes due 2018 was $379,575 and $403,593, respectively. See Note 8 for additional information regarding our Convertible Notes. The fair value was determined using observable market data for the Convertible Notes and its embedded option feature.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

        In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification ("ASC") Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for the annual and interim periods beginning after December 15, 2016 (April 1, 2017 for the Company) and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently determining its implementation approach and evaluating the impact of adopting this update on our Condensed Consolidated Financial Statements.

Requirements for Reporting Discontinued Operations

        In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This new guidance raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014 (April 1, 2015 for the Company). Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this new guidance is not expected to have a material effect on our Condensed Consolidated Financial Statements.

Presentation of Unrecognized Tax Benefits

        In July 2013, new guidance was issued requiring that entities that have an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset for the loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the loss or tax credit carryforward under the tax law. The disclosure requirements became effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2013 (April 1, 2014 for the Company), and is applied prospectively. The adoption of this guidance has not had a material effect on our Condensed Consolidated Financial Statements.

2. MANAGEMENT AGREEMENT

        In March 2007, we entered into a management services agreement, which was renewed in May 2011 (as amended, the "2011 Management Agreement") with ZelnickMedia Corporation ("ZelnickMedia"), pursuant to which ZelnickMedia provided us with certain management, consulting and executive level services. In March 2014, we entered into a new management agreement, (the "2014 Management Agreement"), with ZelnickMedia pursuant to which ZelnickMedia continues to provide financial and management consulting services to the Company through March 31, 2019. The 2014 Management Agreement became effective April 1, 2014 and supersedes and replaces the 2011 Management Agreement, except as otherwise contemplated by the 2014 Management Agreement. As part of the 2014 Management Agreement, Strauss Zelnick, the President of ZelnickMedia, continues to serve as Executive Chairman and Chief Executive Officer and Karl Slatoff, a partner of ZelnickMedia, continues to serve as President of the Company. The 2014 Management Agreement provides for an

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

2. MANAGEMENT AGREEMENT (Continued)

annual management fee of $2,970 over the term of the agreement and a maximum annual bonus opportunity of $4,752 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 $3,119 and $1,591 for the three months ended December 31, 2014 and 2013, respectively, and $5,792 and $4,774 for the nine months ended December 31, 2014 and 2013, respectively.

        Pursuant to the 2011 Management Agreement, we granted 1,100,000 shares of restricted stock to ZelnickMedia that vest annually through May 15, 2015 and 1,650,000 shares of market-based restricted stock that are eligible to vest through May 15, 2015, based on the Company's Total Shareholder Return (as defined in the relevant grant agreements) relative to the Total Shareholder Return of the companies that constitute the NASDAQ Composite Index measured annually on a cumulative basis. To earn all of the shares of market-based restricted stock, the Company must perform at the 75th percentile, or top quartile, of the NASDAQ Composite Index. Each reporting period, we remeasure the fair value of the unvested portion of the shares of market-based restricted stock granted to ZelnickMedia. The unvested portion of the shares of restricted stock granted pursuant to the 2011 Management Agreement as of December 31, 2014 and March 31, 2014 was 1,133,000 and 1,894,750 shares, respectively. For the three months ended December 31, 2014 and 2013, we recorded an expense of $11,239 and a gain of $1,528, respectively, of stock-based compensation (a component of general and administrative expenses) related to the shares of restricted stock granted pursuant to the 2011 Management Agreement. For the nine months ended December 31, 2014 and 2013, we recorded an expense of $19,045 and $4,592, respectively, of stock-based compensation (a component of general and administrative expenses) related to the shares of restricted stock granted pursuant to the 2011 Management Agreement.

        In connection with the 2014 Management Agreement, on April 1, 2014, we granted 178,654 time-based restricted units to ZelnickMedia that will vest on April 1, 2016, provided that the 2014 Management Agreement has not been terminated prior to such vesting date. In addition, we granted 330,628 market-based restricted units that are eligible to vest based on the Company's Total Shareholder Return (as defined in the relevant grant agreement) relative to the Total Shareholder Return (as defined in the relevant grant agreement) of the companies that constitute the NASDAQ Composite Index as of the grant date measured over the two-year period ending on April 1, 2016. To earn the target number of 165,314 market-based restricted units, the Company must perform at the 50th percentile, with the maximum number of 330,628 market-based restricted units if the Company performs at the 75th percentile. Each reporting period, we remeasure the fair value of the unvested portion of the shares of market-based restricted units granted to ZelnickMedia. We also granted 110,208 performance-based restricted units of which 50% are tied to "New IP" and 50% to "Major IP" (as defined in the relevant grant agreement) that are eligible to vest based on the Company's achievement of certain performance metrics (as defined in the relevant grant agreement) of individual product releases of "New IP" or "Major IP" measured over the two-year period ending on April 1, 2016. The target number of performance-based restricted units that may be earned pursuant to these grants is 55,104, with a maximum number of 110,208 performance-based restricted units. Each reporting period, we assess the performance metric and upon achievement of certain thresholds record an expense for the unvested portion of the shares of performance-based restricted units. During the three months ended December 31, 2014, the maximum target performance vesting condition for "Major IP" unit sales was achieved. As a result, the Company recorded an expense of approximately $97 in

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

2. MANAGEMENT AGREEMENT (Continued)

stock compensation included below for the three and nine months ended December 31, 2014. The unvested portion of time-based, market-based and performance-based restricted units granted pursuant to the 2014 Management Agreement as of December 31, 2014 was 619,490. For the three and nine months ended December 31, 2014 we recorded an expense of $2,495 and $5,074, respectively, of stock-based compensation (a component of general and administrative expenses) related to the restricted stock units granted pursuant to the 2014 Management Agreement.

3. 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:

        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.

 
  December 31,
2014
  Quoted prices
in active markets
for identical
assets (level 1)
  Significant other
observable inputs
(level 2)
  Significant
unobservable
inputs
(level 3)
  Balance Sheet
Classification

Money market funds

  $ 610,419   $ 610,419   $   $   Cash and cash equivalents

Bank-time deposits

    44,399     44,399           Cash and cash equivalents

Corporate bonds

    79,140         79,140       Short-term investments

4. SHORT-TERM INVESTMENTS

        Our short-term investments consisted of the following available-for-sale securities as of December 31, 2014:

 
  As of December 31, 2014  
 
   
  Gross
Unrealized
   
 
 
  Cost or
Amortized Cost
  Fair
Value
 
 
  Gains   Losses  

Short-term investments

                         

Available-for-sale securities:

                         

Corporate bonds

  $ 79,319   $ 9   $ (188 ) $ 79,140  

Total short-term investments

  $ 79,319   $ 9   $ (188 ) $ 79,140  

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

4. SHORT-TERM INVESTMENTS (Continued)

        Unrealized gains and losses of the Company's available-for-sale securities are reported as a component of other comprehensive income (loss), net of tax, until the security is sold, the security has matured, or the Company determines that the fair value of the security has declined below its adjusted cost basis and the decline is other-than-temporary. We evaluate our investments for impairment quarterly. The Company considers various factors in the review of investments with an unrealized loss, including the credit quality of the issuer, the duration that the fair value has been less than the adjusted cost basis, the severity of the impairment, the reason for the decline in value and our intent to sell and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. Based on our review, we did not consider these investments to be other-than-temporarily impaired as of December 31, 2014.

        The following table summarizes the contracted maturities of our short-term investments classified as available-for-sale at December 31, 2014:

 
  As of December 31,
2014
 
 
  Amortized
Cost
  Fair
Value
 

Short-term investments

             

Due in 1 - 2 years

  $ 79,319   $ 79,140  

Total short-term investments

  $ 79,319   $ 79,140  

5. INVENTORY

        Inventory balances by category are as follows:

 
  December 31,
2014
  March 31,
2014
 

Finished products

  $ 21,849   $ 28,418  

Parts and supplies

    2,768     1,362  

Inventory

  $ 24,617   $ 29,780  

        Estimated product returns included in inventory at December 31, 2014 and March 31, 2014 were $1,826 and $578, respectively.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

6. SOFTWARE DEVELOPMENT COSTS AND LICENSES

        Details of our capitalized software development costs and licenses are as follows:

 
  December 31, 2014   March 31, 2014  
 
  Current   Non-current   Current   Non-current  

Software development costs, internally developed

  $ 50,458   $ 106,514   $ 53,041   $ 60,196  

Software development costs, externally developed

    127,378     9,300     51,643     49,310  

Licenses

    1,132         11,519      

Software development costs and licenses

  $ 178,968   $ 115,814   $ 116,203   $ 109,506  

        Software development costs and licenses as of December 31, 2014 and March 31, 2014 included $235,061 and $211,302, respectively, related to titles that have not been released. During the nine months ended December 31, 2014 and 2013, we recorded $14,297 and $41,777, respectively, of software development impairment charges (a component of cost of goods sold).

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

        Accrued expenses and other current liabilities consist of the following:

 
  December 31,
2014
  March 31,
2014
 

Software development royalties

  $ 54,860   $ 258,129  

Compensation and benefits

    54,847     44,255  

Licenses

    46,091     16,917  

Marketing and promotions

    33,573     16,552  

Sales tax liability

    29,976     6,592  

Income tax payable and deferred tax liability

    6,705     15,362  

Other

    29,810     39,366  

Accrued expenses and other current liabilities

  $ 255,862   $ 397,173  

8. DEBT

Credit Agreement

        In August 2014, we entered into a Third Amendment to the Second Amended and Restated October 2011 Credit Agreement (the "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 August 18, 2019. Revolving loans under the Credit Agreement bear interest at our election of (a) 0.50% to 1.00% above a certain base rate (3.75% at December 31, 2014), or (b) 1.50% to 2.00% above the LIBOR Rate (approximately 1.67% at December 31, 2014), with the margin rate subject to the achievement of certain average liquidity levels. We are also required to pay a

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

monthly fee on the unused available balance, ranging from 0.25% to 0.375% based on availability. We had no outstanding borrowings at December 31, 2014 and March 31, 2014.

        Availability under the Credit Agreement is restricted by our United States 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 $5,000.

        Information related to availability on our Credit Agreement is as follows:

 
  December 31,
2014
  March 31,
2014
 

Available borrowings

  $ 98,317   $ 63,630  

Outstanding letters of credit

    1,664     1,664  

        We recorded interest expense and fees related to the Credit Agreement of $111 and $160 for the three months ended December 31, 2014 and 2013, respectively and $408 and $479 for nine months ended December 31, 2014 and 2013, 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 unsecured convertible senior 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 material contracts (subject to certain 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 December 31, 2014, we were in compliance with all covenants and requirements outlined in the Credit Agreement.

4.375% Convertible Notes Due 2014

        In June 2009, we issued $138,000 aggregate principal amount of 4.375% Convertible Notes 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 was paid semi-annually in arrears on June 1st and December 1st of each year, and commenced on December 1, 2009. The 4.375% Convertible Notes were scheduled to mature on June 1, 2014, unless earlier redeemed or repurchased by the Company or converted.

        On June 12, 2013, we issued a notice of redemption calling all of our outstanding 4.375% Convertible Notes, in the aggregate principal amount of $138,000, for redemption on August 29, 2013 at a redemption price of $1 per $1 principal amount, plus accrued and unpaid interest up to, but not including, the redemption date (the period from June 12, 2013 to August 29, 2013 is the "Notice Period"). Holders who elected to convert during the Notice Period were entitled to make-whole shares

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

in addition to such shares they would otherwise be entitled to receive upon conversion. The notice of redemption specified that we would settle any 4.375% Convertible Notes surrendered for conversion in connection with the redemption on a combination settlement basis by paying cash up to a cash amount equal to $166,000 in the aggregate of converted notes and delivering shares of our common stock in respect of the amount, if any, by which our conversion obligation exceeded such cash amount. During the Notice Period, $137,993 of 4.375% Convertible Notes were converted for $165,992 in cash and 3,217,000 shares of our common stock. On August 29, 2013, we paid $7 in cash and we redeemed $7 of 4.375% Convertible Notes.

        In connection with the June 2009 offering of the 4.375% Convertible Notes, we entered into convertible note hedge transactions which were expected to reduce the potential dilution to our common stock upon conversion of the 4.375% Convertible Notes. The transactions included 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, in June 2009, the Company entered into warrant transactions with a strike price of $14.945 per share. The warrants covered approximately 12,927,000 shares of the Company's common stock and were scheduled to expire on August 30, 2014, for total proceeds of approximately $26,300, which was credited to additional paid-in capital.

        On June 12, 2013, the Company entered into Unwind Agreements with respect to the convertible note hedge transactions and Unwind Agreements with respect to the warrant transactions with each of the hedge counterparties (collectively, the "Unwind Agreements"). Pursuant to the terms of the Unwind Agreements, and in connection with the Company's issuance of a notice of redemption for all the 4.375% Convertible Notes, the Company had the right to deliver a notice to the hedge counterparties, prior to the redemption date set forth in such redemption notice, designating an early termination date for the convertible note hedge transactions and warrant transactions. The hedge counterparties owed a cash payment to the Company as a result of the early termination of the convertible note hedge transactions that was calculated based on its current fair market value. The Company owed a cash payment to the warrant holders, as applicable, as a result of the early termination of the warrant transactions that was calculated based on its current fair market value. As a result of the Unwind Agreements, the convertible note hedge transactions and warrant transactions were accounted for as derivatives whereby the fair values of these transactions were reported as a convertible note hedge receivable and as a convertible note warrant liability with an offsetting impact to additional paid-in capital. Gains and losses resulting from changes in the fair value were reported in gain on convertible note hedge and warrants, net, in our Condensed Consolidated Statements of Operations. In August 2013, the payment received from unwinding the associated convertible note hedge transactions resulted in proceeds to us of $84,429, offset by $55,651 we paid the warrant holders.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

        The following table provides the components of interest expense related to our 4.375% Convertible Notes, which was extinguished in August 2013:

 
  Three Months
Ended
December 31,
  Nine Months
Ended
December 31,
 
 
  2013   2013  

Cash interest expense (coupon interest expense)

  $   $ 2,516  

Non-cash amortization of discount on 4.375% Convertible Notes

        4,358  

Amortization of debt issuance costs

        284  

Total interest expense related to 4.375% Convertible Notes

  $   $ 7,158  

1.75% Convertible Notes Due 2016

        On November 16, 2011, we issued $250,000 aggregate principal amount of 1.75% Convertible Notes due 2016 (the "1.75% Convertible Notes"). Interest on the 1.75% Convertible Notes is payable semi-annually in arrears on June 1st and December 1st of each year, commencing on June 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 Notes prior to maturity.

        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. Our common stock price exceeded 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ended December 31, 2014. Accordingly, as of January 1, 2015 the 1.75% Convertible Notes may be converted at the holder's option through March 31, 2015. If the 1.75% Convertible Notes were to be converted during this period, our current intent and ability, given

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

our option, would be to settle the conversion in shares of our common stock. As such, we have continued to classify these 1.75% Convertible Notes as long-term debt.

        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 additional interest, if any), on the 1.75% Convertible Notes will automatically become due and payable immediately. As of December 31, 2014, 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 expense 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 component is not remeasured as long as it 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.

        As of December, 31, 2014 and March 31, 2014, the if-converted value of our 1.75% Convertible Notes exceeded the principal amount of $250,000 by $117,025 and $37,151, respectively.

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

        The following table provides additional information related to our 1.75% Convertible Notes:

 
  December 31,
2014
  March 31,
2014
 

Additional paid-in capital

  $ 51,180   $ 51,180  

Principal amount of 1.75% Convertible Notes

  $ 250,000   $ 250,000  

Unamortized discount of the liability component

    22,112     30,025  

Net carrying amount of 1.75% Convertible Notes

  $ 227,888   $ 219,975  

Carrying amount of debt issuance costs

  $ 1,921   $ 2,716  

        The following table provides the components of interest expense related to our 1.75% Convertible Notes:

 
  Three Months
Ended
December 31,
  Nine Months
Ended
December 31,
 
 
  2014   2013   2014   2013  

Cash interest expense (coupon interest expense)

  $ 1,094   $ 1,094   $ 3,282   $ 3,282  

Non-cash amortization of discount on 1.75% Convertible Notes

    2,682     2,509     7,913     7,403  

Amortization of debt issuance costs

    262     274     795     833  

Total interest expense related to 1.75% Convertible Notes

  $ 4,038   $ 3,877   $ 11,990   $ 11,518  

1.00% Convertible Notes Due 2018

        On June 18, 2013, we issued $250,000 aggregate principal amount of 1.00% Convertible Notes due 2018 (the "1.00% Convertible Notes" and together with the 1.75% Convertible Notes, the "Convertible Notes"). The 1.00% Convertible Notes were issued at 98.5% of par value for proceeds of $246,250. Interest on the 1.00% Convertible Notes is payable semi-annually in arrears on July 1st and January 1st of each year, commencing on January 1, 2014. The 1.00% Convertible Notes mature on July 1, 2018, unless earlier repurchased by the Company or converted. The Company does not have the right to redeem the 1.00% Convertible Notes prior to maturity. The Company also granted the underwriters a 30-day option to purchase up to an additional $37,500 principal amount of 1.00% Convertible Notes to cover overallotments, if any. On July 17, 2013, the Company closed its public offering of $37,500 principal amount of the Company's 1.00% Convertible Notes as a result of the underwriters exercising their overallotment option in full on July 12, 2013, bringing the total proceeds to $283,188.

        The 1.00% Convertible Notes are convertible at an initial conversion rate of 46.4727 shares of our common stock per $1 principal amount of 1.00% Convertible Notes (representing an initial conversion price of approximately $21.52 per share of common stock for a total of approximately 13,361,000 underlying conversion shares) subject to adjustment in certain circumstances. Holders may convert the 1.00% Convertible Notes at their option prior to the close of business on the business day immediately

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

preceding January 1, 2018 only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2013, 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 1.00% 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 January 1, 2018 until the close of business on the business day immediately preceding the maturity date, holders may convert their 1.00% Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 1.00% 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.

        Upon the occurrence of certain fundamental changes involving the Company, holders of the 1.00% Convertible Notes may require us to purchase all or a portion of their 1.00% 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 1.00% 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 1.00% 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 1.00% 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 1.00% Convertible Notes will automatically become due and payable immediately. As of December 31, 2014, we were in compliance with all covenants and requirements outlined in the indenture governing the 1.00% Convertible Notes.

        The 1.00% 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 1.00% 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 1.00% Convertible Notes in a manner that reflects the Company's nonconvertible debt borrowing rate. We estimated the fair value of the 1.00% Convertible Notes to be $225,567 upon issuance of our 1.00% Convertible Notes, assuming a 6.15% non-convertible borrowing rate. The carrying amount of the equity component was determined to be approximately $57,621 by deducting the fair value of the liability component from the net proceeds of the 1.00% 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 1.00% Convertible Notes using the effective interest method. The equity component is not remeasured as long

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

8. DEBT (Continued)

as it continues to meet the conditions for equity classification. In accounting for the $2,815 of banking, legal and accounting fees related to the issuance of the 1.00% Convertible Notes, we allocated $2,209 to the liability component and $606 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 1.00% Convertible Notes, and issuance costs attributable to the equity component were netted with the equity component in additional paid-in capital.

        As of December, 31, 2014 and March 31, 2014, the if-converted value of our 1.00% Convertible Notes exceeded the principal amount of $287,500 by $87,009 and $5,507, respectively. The following table provides additional information related to our 1.00% Convertible Notes:

 
  December 31,
2014
  March 31,
2014
 

Additional paid-in capital

  $ 35,784   $ 35,784  

Principal amount of 1.00% Convertible Notes

  $ 287,500   $ 287,500  

Unamortized discount of the liability component

    44,968     53,444  

Net carrying amount of 1.00% Convertible Notes

  $ 242,532   $ 234,056  

Carrying amount of debt issuance costs

  $ 1,480   $ 1,831  

        The following table provides the components of interest expense related to our 1.00% Convertible Notes:

 
  Three Months
Ended
December 31,
  Nine Months
Ended
December 31,
 
 
  2014   2013   2014   2013  

Cash interest expense (coupon interest expense)

  $ 719   $ 718   $ 2,156   $ 1,541  

Non-cash amortization of discount on 1.00% Convertible Notes

    2,868     2,702     8,477     5,746  

Amortization of debt issuance costs

    116     121     352     258  

Total interest expense related to 1.00% Convertible Notes

  $ 3,703   $ 3,541   $ 10,985   $ 7,545  

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

9. EARNINGS (LOSS) PER SHARE ("EPS")

        The following table sets forth the computation of basic and diluted EPS (shares in thousands):

 
  Three Months Ended
December 31,
  Nine Months Ended
December 31,
 
 
  2014   2013   2014   2013  

Computation of Basic EPS:

                         

Net income (loss)

  $ 40,093   $ 578,426   $ (36,679 ) $ 392,392  

Less: net income allocated to participating securities          

    (3,127 )   (77,857 )       (42,482 )

Net income (loss) for basic EPS calculation

  $ 36,966   $ 500,569   $ (36,679 ) $ 349,910  

Total weighted average shares outstanding—basic

    87,483     98,290     80,128     97,529  

Less: weighted average participating shares outstanding

    (6,824 )   (13,230 )       (10,559 )

Weighted average common shares outstanding—basic          

    80,659     85,060     80,128     86,970  

Basic EPS

  $ 0.46   $ 5.88   $ (0.46 ) $ 4.02  

Computation of Diluted EPS:

                         

Net income (loss)

  $ 40,093   $ 578,426   $ (36,679 ) $ 392,392  

Less: net income allocated to participating securities

    (2,401 )   (61,200 )       (32,412 )

Add: interest expense, net of tax, on Convertible Notes          

    7,199     7,418         26,221  

Net income (loss) for diluted EPS calculation

  $ 44,891   $ 524,644   $ (36,679 ) $ 386,201  

Weighted average shares outstanding—basic

    80,659     85,060     80,128     86,970  

Add: dilutive effect of common stock equivalents          

    26,455     26,752         30,304  

Weighted average common shares outstanding—diluted

    107,114     111,812     80,128     117,274  

Diluted EPS

  $ 0.42   $ 4.69   $ (0.46 ) $ 3.29  

        The Company incurred a net loss for the nine months ended December 31, 2014; therefore, the basic and diluted weighted average shares outstanding exclude the effect of unvested share-based awards that are considered participating securities and all common stock equivalents because their effect would be antidilutive.

        Certain of our unvested restricted stock awards (including restricted stock units, time-based and market-based restricted stock awards) are considered participating securities since these securities have non-forfeitable rights to dividends or dividend 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 participating securities from the numerator and excludes the dilutive effect of those awards from the denominator. For the nine months ended December 31, 2014, we had approximately 6,536,000 participating securities, which are excluded due to the net loss for that period.

        The Company defines common stock equivalents as unexercised stock options, common stock equivalents underlying the Convertible Notes (see Note 8) and warrants outstanding during the period. Common stock equivalents are measured using the treasury stock method, except for the Convertible

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

9. EARNINGS (LOSS) PER SHARE ("EPS") (Continued)

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.

        In connection with the issuance of our 4.375% Convertible Notes in June 2009, the Company purchased convertible note hedges (see Note 8) 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 8). On June 12, 2013, the Company entered into Unwind Agreements with respect to the convertible note hedge transactions and Unwind Agreements with respect to the warrant transactions with each of the hedge counterparties (see Note 8).

        For the three and nine months ended December 31, 2014, we issued approximately 14,000 and 2,064,000, respectively, of restricted stock awards and we canceled approximately 72,000 and 645,000, respectively, of unvested restricted stock awards.

10. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

        The following table provides the components of accumulated other comprehensive income (loss):

 
  Nine Months Ended December 31, 2014  
 
  Foreign
currency
translation
adjustments
  Unrealized
gain (loss)
on derivative
instruments
  Unrealized
gain (loss) on
available-
for-sales
securities
  Total  

Balance at March 31, 2014

  $ 1,531   $ 585   $   $ 2,116  

Other comprehensive (loss) income before reclassifications

    (19,512 )   32     (179 )   (19,659 )

Amounts reclassified from accumulated other comprehensive income (loss)

                 

Balance at December 31, 2014

  $ (17,981 ) $ 617   $ (179 ) $ (17,543 )

 

 
  Nine Months Ended December 31, 2013  
 
  Foreign
currency
translation
adjustments
  Unrealized
gain (loss)
on derivative
instruments
  Total  

Balance at March 31, 2013

  $ (4,916 ) $ 344   $ (4,572 )

Other comprehensive income before reclassifications

    6,518     269     6,787  

Amounts reclassified from accumulated other comprehensive income (loss)

             

Balance at December 31, 2013

  $ 1,602   $ 613   $ 2,215  

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

11. 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, that 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.

        We attribute net revenue to geographic regions based on product destination. Net revenue by geographic region was as follows:

 
  Three Months Ended
December 31,
  Nine Months Ended
December 31,
 
Net revenue by geographic region:
  2014   2013   2014   2013  

United States

  $ 334,257   $ 819,095   $ 458,423   $ 982,353  

Europe

    127,600     745,658     215,743     838,489  

Asia Pacific

    46,417     141,218     65,441     161,313  

Canada and Latin America

    22,873     157,898     43,242     173,205  

Total net revenue

  $ 531,147   $ 1,863,869   $ 782,849   $ 2,155,360  

        Net revenue by product platform was as follows:

 
  Three Months Ended
December 31,
  Nine Months Ended
December 31,
 
Net revenue by product platform:
  2014   2013   2014   2013  

Console

  $ 443,093   $ 1,803,107   $ 620,547     1,995,178  

PC and other

    88,054     60,762     162,302     160,182  

Total net revenue

  $ 531,147   $ 1,863,869   $ 782,849   $ 2,155,360  

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TAKE-TWO INTERACTIVE SOFTWARE, INC.

Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)

(Dollars in thousands, except share and per share amounts)

11. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

        Our products are delivered through physical retail and digital online services (digital download, online platforms and cloud streaming). Net revenue by distribution channel was as follows:

 
  Three Months Ended
December 31,
  Nine Months Ended
December 31,
 
Net revenue by distribution channel:
  2014   2013   2014   2013  

Digital online

  $ 149,840   $ 125,270   $ 310,687   $ 287,579  

Physical retail and other

    381,307     1,738,599     472,162     1,867,781  

Total net revenue

  $ 531,147   $ 1,863,869   $ 782,849   $ 2,155,360  

12. COMMITMENTS AND CONTINGENCIES

        At December 31, 2014, we did not have any significant changes to our commitments since March 31, 2014. See Note 11 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended March 31, 2014 for more information regarding our commitments.

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.

13. SHARE REPURCHASE

Share Repurchase Program

        In January 2013, our Board of Directors (the "Board") 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 nine months ended December 31, 2014, the Company did not repurchase any shares as part of the program. As of December 31, 2014, up to approximately 3,283,000 shares of our common stock remain available for repurchase under the Company's share repurchase authorization.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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 those contained herein, in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2014, in the section entitled "Risk Factors," and the Company's other periodic filings with the SEC. 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.

        Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition and cash flows. The following discussion should be read in conjunction with the MD&A and our annual consolidated financial statements and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

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, 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.

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        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 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 Games 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 205 million units. The latest installment, Grand Theft Auto V, was released on Sony's PS3 and Microsoft's Xbox 360 in September 2013 and on Sony's PlayStation 4 and Microsoft's Xbox One in November 2014. Grand Theft Auto V includes access to Grand Theft Auto Online, which 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.

        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 and 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. 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 also have expansion initiatives in the 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 South Korea. 2K 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. 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.

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 23% of the Company's net revenue for the nine months ended December 31, 2014. 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 60.8% and 42.6% of net revenue during the nine months ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and March 31, 2014, our

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five largest customers comprised approximately 51.4% and 68.3% of our gross accounts receivable, respectively. We had three customers who accounted for approximately 13.6%, 12.5% and 11.1% of our gross accounts receivable as of December 31, 2014 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 December 31, 2014 and March 31, 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 79.1% of the Company's net revenue by product platform for the nine months ended December 31, 2014. 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. We continually monitor console hardware sales. We manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development. Additionally, our development costs are generally higher for titles during platform transition periods, and we have a limited ability to predict the consumer acceptance of the future 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. 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 aim to drive recurrent consumer spending by generating incremental revenues from our titles through digital download 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 through the Internet. Note 11 to our Condensed Consolidated Financial Statements, "Segment and Geographic Information," discloses that net revenue from digital online channels comprised approximately 39.7% of the Company's net revenue by distribution channel for the nine months ended December 31, 2014. We expect online delivery of games and game offerings to become an increasing part of our business over the long- term.

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Product Releases

        We released the following key titles during the nine months ended December 31, 2014.

Title
  Publishing Label   Internal or External
Development
  Platform(s)   Date Released

NBA 2K15

    2K   Internal   PS3, PS4, Xbox 360, Xbox One, PC   October 7, 2014

Borderlands: The Pre-Sequel

    2K   Internal/External   Xbox 360, PS3, PC   October 14, 2014

Sid Meier's Civilization: Beyond Earth

    2K   Internal   PC   October 24, 2014

WWE 2K15

    2K   Internal/External   PS3, Xbox 360   October 28, 2014

WWE 2K15

    2K   Internal/External   PS4, Xbox One   November 18, 2014

Grand Theft Auto V

    Rockstar Games   Internal   Xbox One, PS4   November 18, 2014

Grand Theft Auto Online

    Rockstar Games   Internal   Xbox One, PS4   November 18, 2014

Product Pipeline

        We have announced the following future key titles to date (this list does not represent all titles currently in development):

Title
  Publishing Label   Internal or External
Development
  Platform(s)   Expected Release Date

Evolve

    2K   External   Xbox One, PS4, PC   February 10, 2015

Grand Theft Auto V

    Rockstar Games   Internal   PC   March 24, 2015

Grand Theft Online

    Rockstar Games   Internal   PC   March 24, 2015

Sid Meier's Starships

    2K   Internal   PC Mac, iOS   Spring 2015

Battleborn

    2K   External   Xbox One, PS4, PC   Fiscal Year 2016

Critical Accounting Policies and Estimates

        Our most critical accounting policies, which are those that require significant judgment, include: revenue recognition; allowances for returns, price concessions and other allowances; capitalization and recognition of software development costs and licenses; fair value estimates including inventory obsolescence, valuation of goodwill, intangible assets and long-lived assets; valuation and recognition of stock-based compensation; and income taxes. In-depth descriptions of these can be found in our Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

Revenue Recognition

        For some of our software products, we enter into multiple element revenue arrangements in which we may provide a combination of full game software, add-on content, maintenance or support. When all other revenue recognition criteria are met for these arrangements, we determine the fair value of each delivered and undelivered element using vendor-specific objective evidence ("VSOE") of fair value and allocate the total price among the various elements. When we have not established VSOE for each element, revenue is deferred until the earlier of the point at which VSOE of fair value exists for any undelivered element or until all elements of the arrangement have been delivered. For arrangements that require the deferral of revenue, the cost of goods sold is deferred and recognized as the related net revenue is recognized. Deferred cost of goods sold includes product costs, royalties and licenses. We determine VSOE for each element based on historical stand-alone sales to third parties. In determining VSOE, we require that a substantial majority of the selling prices for a product or service fall within a reasonably narrow pricing range. Changes in assumptions or judgments or changes to the elements in a software arrangement could cause a material increase or decrease in the amount of revenue that we report in a particular period.

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        In identifying the deliverables within an arrangement we consider whether our software products contain more-than-inconsequential online functionality by evaluating the significance of the development effort, the nature of the online features, the extent of anticipated marketing focus on the online features, the significance of the online features to the consumers' anticipated overall gameplay experience, and the significance and length of time of our post sale obligations to consumers. Determining whether the online functionality for a particular game constitutes a more than an inconsequential deliverable is subjective and requires management's judgment.

        When our software products provide limited online functionality at no additional cost to the consumer, we generally 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. When software products provide online functionality that represents a more-than-inconsequential deliverable, we recognize the software-related revenues and the related cost of goods sold ratably over the estimated service period of the title (assuming all other recognition criteria are met) as we have not established VSOE for that deliverable.

        During the fiscal quarter ending December 31, 2014, the Company concluded that the updates being provided with Grand Theft Auto V were no longer considered an inconsequential deliverable because of the add-on content updates provided to date and expected to be provided in the future. As a result, the net revenue and cost of goods sold that have been deferred will be recognized ratably over the expected service period, which is equal to the estimated remaining life of the game which we have concluded for Grand Theft Auto V to be 24 months from the time of release.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

        In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification ("ASC") Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for the annual and interim periods beginning after December 15, 2016 (April 1, 2017 for the Company) and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently determining its implementation approach and evaluating the impact of adopting this update on our Condensed Consolidated Financial Statements.

Requirements for Reporting Discontinued Operations

        In April 2014, the FASB issued ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This new guidance raises the threshold for a disposal to qualify as discontinued operations and requires new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. Under the new standard, companies report discontinued operations when they have a disposal that represents a strategic shift that has or will have a major impact on operations or financial results. This update will be applied prospectively and is effective for annual periods, and interim periods within those years, beginning after December 15, 2014 (April 1, 2015 for the Company). Early adoption is permitted provided the disposal was not previously disclosed. The adoption of this new guidance is not expected to have a material effect on our Condensed Consolidated Financial Statements.

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Presentation of Unrecognized Tax Benefits

        In July 2013, new guidance was issued requiring that entities that have an unrecognized tax benefit and a net operating loss carryforward or similar tax loss or tax credit carryforward in the same jurisdiction as the uncertain tax position present the unrecognized tax benefit as a reduction of the deferred tax asset for the loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the loss or tax credit carryforward under the tax law. The disclosure requirements became effective for annual periods (and interim periods within those annual periods) beginning after December 15, 2013 (April 1, 2014 for the Company), and is applied prospectively. The adoption of this guidance has not had a material effect on our Condensed Consolidated Financial Statements.

Results of Operations

        The following table sets forth, for the periods indicated, the percentage of net revenue represented by certain line items in our Condensed Consolidated Statements of Operations, net revenue by geographic region, net revenue by platform and net revenue by distribution channel:

 
  Three Months
Ended
December 31,
  Nine Months
Ended
December 31,
 
 
  2014   2013   2014   2013  

Net revenue

    100.0 %   100.0 %   100.0 %   100.0 %

Cost of goods sold

   
52.3

%
 
60.1

%
 
49.1

%
 
60.6

%

Gross profit

    47.7 %   39.9 %   50.9 %   39.4 %

Selling and marketing

    18.2 %   3.8 %   23.4 %   9.9 %

General and administrative

    10.1 %   1.9 %   17.5 %   5.1 %

Research and development

    5.9 %   1.6 %   10.2 %   3.6 %

Depreciation and amortization

    1.1 %   0.1 %   1.9 %   0.5 %

Total operating expenses

    35.3 %   7.4 %   53.0 %   19.1 %

Income (loss) from operations

    12.4 %   32.5 %   (2.1 )%   20.3 %

Interest and other, net

    (1.8 )%   (0.3 )%   (3.2 )%   (1.2 )%

Gain (loss) on long-term investments

    (0.3 )%   0.0 %   2.3 %   0.0 %

Loss on extinguishment of debt

    0.0 %   0.0 %   0.0 %   (0.4 )%

Gain on convertible note hedge and warrants, net

    0.0 %   0.0 %   0.0 %   0.2 %

Income (loss) from continuing operations before income taxes

    10.3 %   32.2 %   (3.0 )%   18.9 %

Provision for income taxes

    2.8 %   1.3 %   1.7 %   0.7 %

Income (loss) from continuing operations

    7.5 %   30.9 %   (4.7 )%   18.2 %

Loss from discontinued operations, net of taxes

    0.0 %   0.0 %   0.0 %   0.0 %

Net income (loss)

    7.5 %   30.9 %   (4.7 )%   18.2 %

Net revenue by geographic region:

                         

United States

    62.9 %   43.9 %   58.6 %   45.6 %

International

    37.1 %   56.1 %   41.4 %   54.4 %

Net revenue by platform:

   
 
   
 
   
 
   
 
 

Console

    83.4 %   96.7 %   79.3 %   92.6 %

PC and other

    16.6 %   3.3 %   20.7 %   7.4 %

Net revenue by distribution channel:

   
 
   
 
   
 
   
 
 

Physical retail and other

    71.8 %   93.3 %   60.3 %   86.7 %

Digital online

    28.2 %   6.7 %   39.7 %   13.3 %

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Three Months Ended December 31, 2014 Compared to December 31, 2013

(thousands of dollars)
  2014   %   2013   %   Increase/
(decrease)
  % Increase/
(decrease)
 

Net revenue

  $ 531,147     100.0 % $ 1,863,869     100.0 % $ (1,332,722 )   (71.5 )%

Software development costs and royalties(1)

   
108,214
   
20.4

%
 
200,333
   
10.7

%
 
(92,119

)
 
(46.0

)%

Product costs

    102,068     19.2 %   374,710     20.1 %   (272,642 )   (72.8 )%

Internal royalties

    14,099     2.7 %   502,169     26.9 %   (488,070 )   (97.2 )%

Licenses

    53,632     10.1 %   42,522     2.3 %   11,110     26.1 %

Cost of goods sold

    278,013     52.3 %   1,119,734     60.1 %   (841,721 )   (75.2 )%

Gross profit

  $ 253,134     47.7 % $ 744,135     39.9 % $ (491,001 )   (66.0 )%

(1)
Includes $8,323 and $27,220 of stock-based compensation expense in 2014 and 2013, respectively, included in software development costs and royalties.

        For the three months ended December 31, 2014, net revenue decreased $1,332.7 million as compared to the prior year. This decrease was primarily due to a decrease of approximately $1,413.9 million in sales from our Grand Theft Auto franchise, as last year's results benefited from the release of Grand Theft Auto V on the PS3 and Xbox 360 console gaming systems, which was partially offset this year by the November 2014 release of Grand Theft Auto V on the PS4 and Xbox One console gaming systems and growth in revenue from Grand Theft Auto Online. The overall decrease in net revenue was partially offset by a $130.3 million increase in net sales due to the October 2014 releases of Borderlands: The Pre-Sequel and Sid Meier's Civilization: Beyond Earth and higher sales of our WWE 2K franchise.

        Net revenue on consoles decreased to 83.4% of our total net revenue for the three months ended December 31, 2014 as compared to 96.7% for the same period in the prior year, as last year's results benefited from release the of Grand Theft Auto V on the PS3 and Xbox 360 console gaming systems. PC and other sales increased to 16.6% of our total net revenue for the three months ended December 31, 2014 as compared to 3.3% for the prior year's period, primarily due to the PC release of Sid Meier's Civilization: Beyond Earth in October 2014.

        Net revenue from physical retail and other channels decreased to 71.8% of our total net revenue for the three months ended December 31, 2014 as compared to 93.3% for the same period in the prior year, as the prior year's results reflected the release of Grand Theft Auto V on the PS3 and Xbox 360 console gaming systems. Net revenue from digital online channels increased to 28.2% of our total net revenue for the three months ended December 31, 2014 as compared to 6.7% for the same period in the prior year. The increase was primarily driven by the decreased proportion of net revenues from physical retail and other and higher sales of digitally-delivered offerings from our Grand Theft Auto and NBA 2K franchises, as well as the PC release of Sid Meier's Civilization: Beyond Earth in October 2014. Recurrent consumer spending (including add-on content, microtransactions and online play) represented 39.5% and 30.3% of net revenue from digital online channels for the three months ended December 31, 2014 and 2013, respectively.

        Gross profit as a percentage of net revenue for the three months ended December 31, 2014 was 47.7% as compared to 39.9% for the prior year period. The increase was primarily due to: (i) lower internal royalties, as we generated lower income from our Grand Theft Auto franchise in the current year period and (ii) lower product costs in the current year period as a percentage of net revenue primarily due to an increased proportion of net revenue from digital online channels which were partially offset by higher software development costs and royalties as a percentage of net revenue due to the October 2014 release of Borderlands: The Pre-Sequel which was externally developed. For the

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fiscal third quarter 2015, gross profit included the deferral of net revenue and cost or goods sold related to sales generated from Grand Theft Auto V.

        Net revenue earned outside of the United States accounted for 37.1% of our total net revenue for the three months ended December 31, 2014, as compared to 56.1% in the prior year. The year-over-year percentage decrease was primarily due to Grand Theft Auto V, which generated higher sales outside of the United States during the three months ended December 31, 2013. Foreign currency exchange rates decreased net revenue and gross profit by $5.7 million and $4.0 million, respectively, for the three months ended December 31, 2014 as compared to the prior year.

Operating Expenses

(thousands of dollars)
  2014   % of net
revenue
  2013   % of net
revenue
  Increase/
(decrease)
  % Increase/
(decrease)
 

Selling and marketing

  $ 96,892     18.2 % $ 70,476     3.8 % $ 26,416     37.5 %

General and administrative

    53,564     10.1 %   34,718     1.9 %   18,846     54.3 %

Research and development

    31,221     5.9 %   29,233     1.6 %   1,988     6.8 %

Depreciation and amortization

    5,845     1.1 %   3,413     0.1 %   2,432     71.3 %

Total operating expenses(1)

  $ 187,522     35.3 % $ 137,840     7.4 % $ 49,682     36.0 %

(1)
Includes stock-based compensation expense, which was allocated as follows (in thousands):

 
  2014   2013  

Selling and marketing

  $ 2,411   $ 3,414  

General and administrative

  $ 16,437   $ 1,736  

Research and development

  $ 1,457   $ 3,958  

        Foreign currency exchange rates decreased total operating expenses by $2.8 million for the three months ended December 31, 2014 as compared to the prior year.

Selling and marketing

        Selling and marketing expenses increased $26.4 million for the three months ended December 31, 2014 as compared to the prior year primarily due to $21.7 million in higher advertising expenses related to more titles releasing during the current period with no comparable titles releasing in the prior period such as the November 2014 release of Grand Theft Auto V on the PS4 and Xbox One console gaming systems and the October 2014 releases of Borderlands: The Pre-Sequel and Sid Meier's Civilization: Beyond Earth. Also contributing to the increase in selling and marketing expenses was a $2.9 million increase in personnel costs primarily due to the timing of recording performance-based incentive compensation as a result of the Company's performance.

General and administrative

        General and administrative expenses increased $18.8 million for the three months ended December 31, 2014, as compared to the prior year, primarily from ZelnickMedia stock based compensation expense mainly due to the Company's relative stock price performance related to the 2011 Management Agreement and the restricted units granted in connection with the 2014 Management Agreement.

        General and administrative expenses for the three months ended December 31, 2014 and 2013 include occupancy expense (primarily rent, utilities and office expenses) of $4.8 million and $4.0 million, respectively, related to our development studios.

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Research and development

        Research and development expenses increased $2.0 million for the three months ended December 31, 2014 as compared to the prior year due to higher IT spend on equipment at our development studios and consulting services.

Interest and other, net

        Interest and other, net was an expense of $9.5 million for the three months ended December 31, 2014, as compared to an expense of $6.0 million for the three months ended December 31, 2013. The increase of $3.5 million was primarily due to a greater foreign currency exchange loss recorded during the three months ended December 31, 2014.

Provision (Benefit) for Income Taxes

        Income tax expense was $14.6 million for the three months ended December 31, 2014 as compared to $21.9 million for the three months ended December 31, 2013. The decrease in income tax expense is primarily attributable to changes in valuation allowance for tax credits carryforwards and deferred tax assets anticipated to be utilized, partially offset by an increase in taxable income. For the three months ended December 31, 2013, the Company fully utilized its U.S. federal tax loss carryforwards.

        Our effective tax rate differed from the federal statutory rate primarily due to changes in valuation allowances related to tax losses not anticipated to be utilized and tax credit carryforwards that will be utilized against income.

        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.

Net income and net income per share

        For the three months ended December 31, 2014, our net income was $40.1 million, as compared to $578.4 million in the prior year period. For the three months ended December 31, 2014, basic earnings per share were $.46 and diluted earnings per share were $.42 as compared to basic earnings per share of $5.88 and diluted earnings per share of $4.69 for the three months ended December 31, 2013. Basic and diluted weighted average shares outstanding were lower compared to the prior year's period primarily due to the repurchase of 16.2 million shares during fiscal year ended March 31, 2014, partially offset by the vesting of restricted stock awards. See Note 9 to our unaudited condensed consolidated financial statements for additional information regarding earnings per share.

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Nine Months Ended December 31, 2014 Compared to December 31, 2013

(thousands of dollars)
  2014   %   2013   %   Increase/
(decrease)
  % Increase/
(decrease)
 

Net revenue

  $ 782,849     100.0 % $ 2,155,360     100.0 % $ (1,372,511 )   (63.7 )%

Software development costs and royalties(1)

   
144,863
   
18.5

%
 
305,151
   
14.2

%
 
(160,288

)
 
(52.5

)%

Product costs

    139,421     17.8 %   438,839     20.4 %   (299,418 )   (68.2 )%

Licenses

    65,091     8.3 %   51,678     2.4 %   13,413     26.0 %

Internal royalties

    34,810     4.4 %   510,371     23.7 %   (475,561 )   (93.2 )%

Cost of goods sold

    384,185     49.1 %   1,306,039     60.6 %   (921,854 )   (70.6 )%

Gross profit

  $ 398,664     50.9 % $ 849,321     39.4 % $ (450,657 )   (53.1 )%

(1)
Includes $11,062 and $29,176 of stock-based compensation expense in 2014 and 2013, respectively.

        For the nine months ended December 31, 2014, net revenue decreased $1,372.5 million as compared to the prior year. This decrease was primarily due to a decrease of approximately $1,378.3 million in sales from our Grand Theft Auto franchise, as the prior year's results benefitted from the release of Grand Theft Auto V on the PS3 and Xbox 360 console gaming systems, which was partially offset this year by the November 2014 release of Grand Theft Auto V on the PS4 and Xbox One console gaming systems and growth in revenue from Grand Theft Auto Online. The overall decrease in net revenue was partially offset by a $134.8 million increase in net sales due to the October 2014 releases of Borderlands: The Pre-Sequel and Sid Meier's Civilization: Beyond Earth and higher sales of our WWE 2K franchise.

        Net revenue on consoles decreased to 79.3% of our total net revenue for the nine months ended December 31, 2014 as compared to 92.6% for the same period in the prior year due primarily to last year's results including the release of Grand Theft Auto V on the PS3 and Xbox 360 console gaming systems. PC and other sales increased to 20.7% of our total net revenue for the nine months ended December 31, 2014 as compared to 7.4% in the prior year period, primarily due to the PC release of Sid Meier's Civilization: Beyond Earth in October 2014.

        Net revenue from physical retail and other channels decreased to 60.3% of our total net revenue for the nine months ended December 31, 2014 as compared to 86.7% for the same period in the prior year, due primarily to last year's results benefitting from the release of Grand Theft Auto V on the PS3 and Xbox 360 console gaming systems. Net revenue from digital online channels increased to 39.7% of our total net revenue for the nine months ended December 31, 2014 as compared to 13.3% for the prior year period. The increase was primarily driven by the decreased proportion of net revenues from physical retail and other and higher sales of digitally-delivered offerings from our Grand Theft Auto and NBA 2K franchises as well as the PC release of Sid Meier's Civilization: Beyond Earth in October 2014, which were partially offset by lower sales of digitally delivered offerings for Borderlands 2, which benefitted from the release of several downloadable content packs during the prior year period. Recurrent consumer spending (including add-on content, microtransactions and online play) represented 44.8% and 39.2% of net revenue from digital online channels for the nine months ended December 31, 2014 and 2013, respectively.

        Gross profit as a percentage of net revenue for the nine months ended December 30, 2014 was 50.9% as compared to 39.4% for the prior year period. The increase was primarily due to (i) lower internal royalties during the nine months ended December 31, 2014 mainly due to lower income generated from our Grand Theft Auto franchise in the current year period and (ii) lower product costs in the current year as a percentage of net revenue due to an increased proportion of net revenue from digital online channels which were partially offset by higher software development costs and royalties as

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a percentage of net revenue due to the October 2014 release of Borderlands: The Pre-Sequel, which was externally developed. For the fiscal third quarter 2015, gross profit included the deferral of net revenue and cost of goods sold related to sales generated from Grand Theft Auto V.

        Net revenue earned outside of the United States accounted for 41.4% of our total net revenue for the nine months ended December 31, 2014, as compared to 54.4% in the prior year period. The percentage decrease was primarily due to Grand Theft Auto V on the PS3 and Xbox 360 gaming console systems, which generated higher sales outside of the United States during the nine months ended December 31, 2013. Foreign currency exchange rates decreased net revenue and gross profit by $4.6 million and $3.9 million, respectively, for the nine months ended December 31, 2014 as compared to the prior year.

Operating Expenses

(thousands of dollars)
  2014   % of net
revenue
  2013   % of net
revenue
  Increase/
(decrease)
  % Increase/
(decrease)
 

Selling and marketing

  $ 182,874     23.4 % $ 213,419     9.9 % $ (30,545 )   (14.3 )%

General and administrative

    136,891     17.5 %   110,601     5.1 %   26,290     23.8 %

Research and development

    79,886     10.2 %   76,624     3.6 %   3,262     4.3 %

Depreciation and amortization

    15,123     1.9 %   9,837     0.5 %   5,286     53.7 %

Total operating expenses(1)

  $ 414,774     53.0 % $ 410,481     19.1 % $ 4,293     1.0 %

(1)
Includes stock-based compensation expense, which was allocated as follows (in thousands):

 
  2014   2013  

Selling and marketing

  $ 6,660   $ 8,020  

General and administrative

  $ 30,492   $ 13,884  

Research and development

  $ 4,260   $ 6,514  

        Foreign currency exchange rates had an immaterial impact to operating expenses for the nine months ended December 31, 2014 as compared to the prior year period.

Selling and marketing

        Selling and marketing expenses decreased $30.5 million for the nine months ended December 31, 2014 as compared to the prior year, primarily due to $40.3 million in higher advertising expenses incurred in the prior year for the releases of Grand Theft Auto V on the PS3 and Xbox 360 gaming consoles in September 2013 and The Bureau: XCOM: Declassified in August 2013, which were partially offset by advertising expenses incurred in the current year for the releases of Grand Theft Auto V on the PS4 and Xbox One gaming consoles in November 2014, Borderlands: The Pre-Sequel and Sid Meier's Civilization: Beyond Earth in October 2014. Partially offsetting the overall decrease in selling and marketing expenses was $9.0 million in higher customer service costs and trade show costs due to our participating in the Electronic Entertainment Expo in 2014 but not in 2013.

General and administrative

        General and administrative expenses increased $26.3 million for the nine months ended December 31, 2014, as compared to the prior year period, primarily due to ZelnickMedia stock based compensation expense resulting from the Company's relative stock price performance related to the 2011 Management Agreement and the restricted units granted in connection with the 2014 Management Agreement, as well as higher professional fees incurred for certain legal matters.

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Table of Contents

        General and administrative expenses for the nine months ended December 31, 2014 and 2013 include occupancy expense (primarily rent, utilities and office expenses) of $13.6 million and $12.5 million, respectively, related to our development studios.

Research and development

        Research and development expenses increased $3.3 million for the nine months ended December 31, 2014 as compared to the prior year period primarily due to higher IT spend on equipment at our development studios and consulting services.

Interest and other, net

        Interest and other, net was an expense of $24.7 million for the nine months ended December 31, 2014, as compared to an expense of $26.0 million for the nine months ended December 31, 2013. The decrease of $1.3 million was primarily due to a net decrease of $4.0 million in interest expense primarily due to the redemption of our 4.375% Convertible Notes in August 2013 partially offset by interest on the 1.00% Convertible Notes issued in June 2013. This decrease was partially offset by an increase of $2.7 million due to a greater foreign currency exchange losses recorded during the nine months ended December 31, 2014.

Gain (loss) on long-term investments

        During the nine months ended December 31, 2014 the Company recognized a $17.5 million net gain on long-term investments, which was primarily comprised of the Company's sale of its investment in Twitch Interactive, Inc.'s ("Twitch") Class C Preferred stock, which was accounted for under the cost method of accounting. In September 2014, the Company recognized a pretax gain of approximately $19.0 million in connection with the sale of Twitch. The pretax gain is presented within "Gain (loss) on long-term investments" in our Condensed Consolidated Statements of Operations for the nine months ended December 31, 2014.

Loss on extinguishment of debt

        Loss on extinguishment of debt was $9.0 million for the nine months ended December 31, 2013 due to the conversion and redemption of our 4.375% Convertible Notes.

Gain on convertible note hedge and warrants, net

        Gain on convertible note hedge and warrants, net was $3.5 million for the nine months ended December 31, 2013 due to the increase in the Company's share price during the period from June 2013 to the net settlement of the hedge and warrants in August 2013.

Provision (Benefit) for Income Taxes

        Income tax expense was $13.4 million for the nine months ended December 31, 2014 as compared to $14.8 million for the nine months ended December 31, 2013. The decrease in income tax expense is primarily attributable to changes in valuation allowance for tax credits carryforwards and deferred tax assets anticipated to be utilized, partially offset by an increase in taxable income. For the nine months ended December 31, 2013, the Company fully utilized its U.S. federal tax loss carryforwards.

        Our effective tax rate differed from the federal statutory rate primarily due to changes in valuation allowances related to tax losses not anticipated to be utilized and tax credit carryforwards that will be utilized against income.

        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

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positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments.

Net income (loss) and net income (loss) per share

        For the nine months ended December 31, 2014, our net loss was $36.7 million, as compared to net income of $392.4 million in the prior year. Basic and diluted loss per share for the nine months ended December 31, 2014 were $0.46 and $0.46 as compared to basic earnings per share of $4.02 and diluted earnings per share of $3.29 for the nine months ended December 31, 2013. Basic and diluted weighted average shares outstanding decreased primarily due to the repurchase of 16.2 million shares during fiscal year ended March 31, 2014 and the convertible notes shares being anti-dilutive in the current period, partially offset by the vesting of restricted stock awards. See Note 9 to our Condensed Consolidated Financial Statements for additional information regarding earnings per share.

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. In addition, our cash funding requirements may be impacted by U.S. tax payments resulting from U.S. taxable income. We expect to rely on funds provided by our operating activities, our Credit Agreement and our Convertible Notes to satisfy our working capital needs.

Short-term Investments

        During the nine months ended December 31, 2014, the Company has purchased $79.7 million of short-term investments, which are highly liquid in nature and represent an investment of cash that is available for current operations. From time to time, the Company may purchase additional short-term investments depending on future market conditions and liquidity needs.

Credit Agreement

        In August 2014, we entered into a Third Amendment to the Second Amended and Restated October 2011 Credit Agreement (the "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 August 18, 2019. Revolving loans under the Credit Agreement bear interest at our election of (a) 0.50% to 1.00% above a certain base rate (3.75% at December 31, 2014), or (b) 1.50% to 2.00% above the LIBOR Rate (approximately 1.67% at December 31, 2014), 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 0.25% to 0.375% based on availability.

        Availability under the Credit Agreement is restricted by our United States 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 $5.0 million.

        As of December 31, 2014, there was $98.3 million available to borrow under the Credit Agreement. At December 31, 2014, we had no outstanding borrowings under 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

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(each subject to certain limitations); or optionally prepay any indebtedness (subject to certain exceptions, including an exception permitting the redemption of the Company's unsecured convertible senior 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 material contracts (subject to certain 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 December 31, 2014, we were in compliance with all covenants and requirements outlined in the Credit Agreement.

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 "1.75% Convertible Notes"). Interest on the 1.75% Convertible Notes is payable semi-annually in arrears on June 1st and December 1st of each year, commencing on June 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 Notes prior to maturity.

        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. Our common stock price exceeded 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ended December 31, 2014. Accordingly, as of January 1, 2015 the 1.75% Convertible Notes may be converted at the holder's option through March 31, 2015. If the 1.75% 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 1.75% Convertible Notes as long-term debt.

        The indenture governing the 1.75% Convertible Notes contains customary terms and covenants and events of default. As of December 31, 2014, we were in compliance with all covenants and requirements outlined in the indenture governing the 1.75% Convertible Notes.

1.00% Convertible Notes Due 2018

        On June 18, 2013, we issued $250.0 million aggregate principal amount of 1.00% Convertible Notes due 2018 (the "1.00% Convertible Notes" and together with the 1.75% Convertible Notes, the

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"Convertible Notes"). The 1.00% Convertible Notes were issued at 98.5% of par value for proceeds of $246.3 million. Interest on the 1.00% Convertible Notes is payable semi- annually in arrears on July 1st and January 1st of each year, commencing on January 1, 2014. The 1.00% Convertible Notes mature on July 1, 2018, unless earlier repurchased by the Company or converted. The Company does not have the right to redeem the 1.00% Convertible Notes prior to maturity. The Company also granted the underwriters a 30-day option to purchase up to an additional $37.5 million principal amount of 1.00% Convertible Notes to cover overallotments, if any. On July 17, 2013, the Company closed its public offering of $37.5 million principal amount of the Company's 1.00% Convertible Notes as a result of the underwriters exercising their overallotment option in full on July 12, 2013, bringing the proceeds to $283.2 million.

        The 1.00% Convertible Notes are convertible at an initial conversion rate of 46.4727 shares of our common stock per $1,000 principal amount of 1.00% Convertible Notes (representing an initial conversion price of approximately $21.52 per share of common stock for a total of approximately 13,361,000 underwriting conversion shares) subject to adjustment in certain circumstances. Holders may convert the 1.00% Convertible Notes at their option prior to the close of business on the business day immediately preceding January 1, 2018 only under the following circumstances: (1) during any fiscal quarter commencing after September 30, 2013, 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 1.00% 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 January 1, 2018 until the close of business on the business day immediately preceding the maturity date, holders may convert their 1.00% Convertible Notes at any time, regardless of the foregoing circumstances. Upon conversion, the 1.00% 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.

        The indenture governing the 1.00% Convertible Notes contains customary terms and covenants and events of default. As of December 31, 2014, we were in compliance with all covenants and requirements outlined in the indenture governing the 1.00% Convertible Notes.

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 approximately 60.8% and 42.6% of net revenue for the nine months ended December 31, 2014 and 2013, respectively. As of December 31, 2014 and March 31, 2014, our five largest customers accounted for approximately 51.4% and 68.3% of our gross accounts receivable balance, respectively. We had three customers who accounted for approximately 13.6%, 12.5% and 11.1% of our gross accounts receivable as of December 31, 2014 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 December 31, 2014 and March 31, 2014. Based upon performing ongoing credit evaluations,

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maintaining trade credit insurance on a majority of our customers and our past collection experience, we believe that the receivable balances from these largest customers do not represent a significant credit risk, 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, short-term investments 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 December 31, 2014, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was approximately $249.0 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 ongoing 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 the tax liability and the Company would try to minimize the tax impact to the extent possible.

        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 nine months ended December 31, 2014, the Company did not repurchase any shares as part of the program. As of December 31, 2014, up to approximately 3,283,000 shares of our common stock remain available for repurchase under the Company's share repurchase authorization.

        Our changes in cash flows were as follows:

 
  Nine Months Ended
December 31,
 
(thousands of dollars)
  2014   2013  

Net cash provided by operating activities

  $ 60,526   $ 730,793  

Net cash used in investing activities

    (99,280 )   (24,455 )

Net cash provided by (used in) financing activities

    10,352     (133,684 )

Effects of foreign currency exchange rates on cash and cash equivalents

    (9,546 )   (2,986 )

Net (decrease) increase in cash and cash equivalents

  $ (37,948 ) $ 569,668  

        At December 31, 2014, we had $897.5 million of cash and cash equivalents, compared to $935.4 million at March 31, 2014. The decrease was primarily due to cash used in investing activities partially offset by cash provided by operating activities. Net cash used in investing activities related to purchases of short-term investments and purchases of fixed assets and was partially offset by the proceeds received from the sale of our long-term investment. Net cash provided by operations was primarily due to an increase in deferred revenue generated by the sale of virtual currency partially offset by investments in software development.

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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. Other than agreements entered into in the ordinary course of business and in addition to the agreements requiring known cash commitments as reported in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014, the Company expects to pay approximately $180.3 million in software development licenses and royalties within the next twelve months.

Off-Balance Sheet Arrangements

        As of December 31, 2014 and March 31, 2014, we did not have any material 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 are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

International Operations

        Net revenue earned outside of the United States is principally generated by our operations in Europe, Canada, Latin America, Asia and Australia. For the three months ended December 31, 2014 and 2013, approximately 37.1% and 56.1%, respectively, of our net revenue was earned outside of the United States. For the nine months ended December 31, 2014 and 2013, approximately 41.4% and 54.4%, respectively, of our net revenue was earned outside of 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.

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 higher 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 3.    Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

        Our exposure to fluctuations in interest rates relates primarily to our short-term investment portfolio and variable rate debt under the Credit Agreement.

        We manage our interest rate risk by maintaining a short-term investment portfolio that consists primarily of corporate bonds with high credit quality and maturities less than two years. Since short-term investments mature relatively quickly and can be reinvested at the then-current market rates, interest income on a portfolio consisting of short-term securities is more subject to market fluctuations than a portfolio of longer term maturities. However, the fair value of a short-term portfolio is less sensitive to market fluctuations than a portfolio of longer term securities. We do not currently use

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derivative financial instruments in our short-term investment portfolio. Our investments are held for purposes other than trading.

        As of December 31, 2014, our $79.1 million of short-term investments were classified as available-for-sale securities and therefore, were recorded at fair market value with unrealized gains or losses resulting from changes in fair value reported as a separate component of accumulated other comprehensive income (loss), net of tax, in stockholders' equity. We also had $897.5 million of cash and cash equivalents that are comprised primarily of money market funds and bank-time deposits. The Company has determined that, based on the composition of our investment portfolio, there was no material interest rate risk exposure to the Company's Condensed Consolidated Financial Statements or liquidity as of December 31, 2014.

        Historically, fluctuations in interest rates have not had a significant impact 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 December 31, 2014), or (b) 1.50% to 2.00% above the LIBOR rate (approximately 1.67% at December 31, 2014), with the margin rate subject to the achievement of certain average liquidity levels. Changes in market rates may impact our future interest expense if there is an outstanding balance on our line of credit. The 1.00% Convertible Notes and 1.75% Convertible Notes pay interest semi-annually at a fixed rate of 1.00% and 1.75%, respectively, per annum and we expect that there will be no fluctuation in rates related to the Convertible Notes impacting our cash component of interest expense. For additional details on our Convertible Notes see Note 8 to our Condensed 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 nine months ended December 31, 2014, our foreign currency translation loss adjustment was approximately $19.5 million. We recognized foreign currency exchange transaction losses of $2.3 million for the nine months ended December 31, 2014 and foreign currency exchange gains of $0.4 million for the nine months ended December 31, 2013, respectively, in interest and other, net in our Condensed 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 Condensed 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 Condensed 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 Condensed 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 Condensed Consolidated Statements of Operations. During the reporting periods presented, all forecasted

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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 December 31, 2014, we had no forward contracts outstanding to buy or sell foreign currencies in exchange for U.S. dollars designated as cash flow hedges. At March 31, 2014, we had $0.9 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, 2014, the fair value of these outstanding forward contracts was immaterial and was 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 Condensed Consolidated Balance Sheets, and gains and losses resulting from changes in the fair value are reported in interest and other, net, in our Condensed Consolidated Statements of Operations. We do not enter into derivative financial contracts for speculative or trading purposes. At December 31, 2014, we had $4.6 million of forward contracts outstanding to buy foreign currencies in exchange for U.S. dollars and $231.3 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, 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 three months December 31, 2014 and 2013, we recorded a gain of $7.7 million and a loss of $7.2 million, respectively, related to foreign currency forward contracts in interest and other, net on the Condensed Consolidated Statements of Operations. For the nine months December 31, 2014 and 2013, we recorded a gain of $7.3 million and a loss of $17.5 million, respectively, related to foreign currency forward contracts in interest and other, net on the Condensed Consolidated Statements of Operations. As of December 31, 2014 and 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.

        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 nine months ended December 31, 2014, 41.4% 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 4.1%, while a hypothetical 10% decrease in the value of the U.S. dollar against all currencies would increase revenues by 4.1%. 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 4.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

        Based on an evaluation under the supervision and with the participation of management, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,

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as amended ("Exchange Act") were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

        There were no changes in our internal control over financial reporting during the quarter ended December 31, 2014, 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.

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PART II. OTHER INFORMATION

Item 1.    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 1A.    Risk Factors

        There have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2014.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

        Share Repurchase Program—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 three months ended December 31, 2014, the Company did not repurchase shares of our common stock in the open market as part of the program. As of December 31, 2014, up to approximately 3,283,000 shares of our common stock remain available for repurchase under the Company's share repurchase authorization.

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Item 6.    Exhibits

Exhibits:    
  10.1   Employment Agreement dated January 28, 2015 between the Company and Daniel Emerson.

 

10.2

 

Amendment to the Restricted Stock Agreement dated as of May 20, 2011 between the Company and ZelnickMedia Corporation, effective as of December 2, 2014.

 

10.3

 

Amendment to the Performance Based Restricted Stock Agreement dated as of May 20, 2011 between the Company and ZelnickMedia Corporation, effective as of December 2, 2014.

 

31.1

 

Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

 

Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

 

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.

 

32.2

 

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.

        Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at December 31, 2014 and March 31, 2014, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2014 and 2013, (iii) Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended December 31, 2014 and 2013, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2014 and 2013; and (v) Notes to Condensed Consolidated Financial Statements (Unaudited).

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Registrant)

Date: February 6, 2015

 

By:

 

/s/ STRAUSS ZELNICK


Strauss Zelnick
Chairman and Chief Executive Officer
(Principal Executive Officer)

Date: February 6, 2015

 

By:

 

/s/ LAINIE GOLDSTEIN


Lainie Goldstein
Chief Financial Officer
(Principal Financial Officer)

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