UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 For the quarterly period ended July 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________to__________
Commission File Number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
DELAWARE 51-0350842
(State of incorporation or organization) (IRS Employer Identification No.)
575 Broadway, New York, NY 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 941-2988
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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
As of September 9, 1997, there were 9,195,043 shares of the registrant's Common
Stock outstanding.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
QUARTER ENDED JULY 31, 1997
FORM 10-QSB
INDEX
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - As of July 31, 1997 (unaudited) 1
Consolidated Statements of Operations - For the three months ended
July 31, 1996 and 1997 and the nine months ended July 31, 1996 and
1997 (unaudited) 2
Consolidated Statements of Cash Flows - For the nine months ended July 31, 1996 and 1997 (unaudited) 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 14
</TABLE>
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Item 1.
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheet
As of July 31, 1997 (unaudited)
================================================================================
<TABLE>
<CAPTION>
ASSETS: July 31, 1997
--------------
(unaudited)
<S> <C>
Current assets:
Cash and cash equivalents $ 3,769,544
Accounts receivable, net of allowances of $633,076 3,038,095
Inventories 456,022
Prepaid royalties 1,286,444
Due from stockholder 43,279
Prepaids & other current assets 279,033
------------
Total current assets 8,872,417
Fixed assets, net 1,304,735
Capitalized software development costs, net 3,394,305
Intangibles, net 7,280,182
Other assets 62,923
------------
Total assets $ 20,914,562
============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of notes payable, net of discount $ 553,101
Current portion of notes payable due to related parties, net of discount 149,748
Current portion of capital lease obligation 153,328
Line of credit, current portion 870,309
Accounts payable 2,576,657
Accrued expenses 1,631,131
Due to stockholders 132,178
Due to related party 15,150
Advances-principally distributors 1,120,895
------------
Total current liabilities 7,202,497
Note payable, net of current portion and discount 384,367
Line of credit 123,499
Notes payable due to related parties, net of discount 1,386,169
Capital lease obligation, net of current portion 346,549
------------
Total liabilities 9,443,081
------------
Stockholders' equity:
Preferred stock - Class A; $1.00 par value; 317 shares authorized,
issued and outstanding 317
Common stock, par value $.01 per share; 15,000,000 shares authorized;
9,180,043 shares issued and outstanding 91,800
Additional paid-in capital 14,664,754
Deferred compensation (21,563)
Accumulated deficit (3,263,827)
------------
Total stockholders' equity 11,471,481
------------
Total liabilities and stockholders' equity $ 20,914,562
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended July 31, 1996 and 1997 and
the nine months ended July 31, 1996 and 1997 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended July 31, Nine Months Ended July 31,
---------------------------- ----------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 545,423 $ 2,843,146 $ 5,629,757 $ 12,480,137
Cost of sales 353,668 2,749,467 3,287,419 7,701,026
------------ ------------ ------------ ------------
Gross profit 191,755 93,679 2,342,338 4,779,111
------------ ------------ ------------ ------------
Operating expenses:
Research and development costs 133,742 289,064 506,144 890,003
Selling and marketing 171,435 235,084 1,434,215 2,734,494
General and administrative 415,869 774,149 1,279,388 1,816,942
Depreciation and amortization 56,443 186,353 169,344 494,572
------------ ------------ ------------ ------------
Total operating expenses 777,489 1,484,650 3,389,091 5,936,011
------------ ------------ ------------ ------------
Income (loss) from operations (585,734) (1,390,971) (1,046,753) (1,156,900)
Interest expense (income) 17,589 129,560 35,487 600,599
------------ ------------ ------------ ------------
Income (loss) before foreign withholding taxes (603,323) (1,520,531) (1,082,240) (1,757,499)
Provision for income taxes 1,054 112 24,236 18,104
------------ ------------ ------------ ------------
Net income (loss) (604,377) (1,520,643) (1,106,476) (1,775,603)
Preferred dividends (4,383) -- (13,149) (109,118)
Distributions paid to S corporation shareholders -- (1,637) -- (202,092)
------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders' $ (608,760) $ (1,522,280) $ (1,119,625) $ (2,086,813)
============ ============ ============ ============
Per share data:
Primary:
Weighted average common shares outstanding 7,671,064 8,766,719 7,671,064 8,049,478
============ ============ ============ ============
Net income (loss) per share $ (.08) $ (.17) $ (.15) $ (.26)
============ ============ ============ ============
Fully diluted:
Weighted average common shares outstanding 7,671,064 8,766,719 7,671,064 8,057,143
============ ============ ============ ============
Net income (loss) per share $ (.08) $ (.17) $ (.15) $ (.26)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended July 31, 1996 and 1997 (unaudited)
================================================================================
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<CAPTION>
Nine Months Ended July 31,
--------------------------
1996 1997
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss ) $(1,106,476) $(1,775,603)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 169,344 494,572
Provision for bad debts and return allowances 300,000
Amortization of deferred compensation 12,938 12,938
Amortization of loan discounts 412,974
Changes in operating assets and liabilities:
Issuance of compensatory stock 15,000
Decrease (increase) in accounts receivable 412,570 (2,238,812)
Decrease (increase) in capitalized software development costs 32,408 (1,287,197)
Decrease (increase) in prepaid royalties (157,083) (993,250)
Decrease (increase) in other assets 15,419 21,430
Decrease (increase) in inventories (168,627) 58,293
Decrease (increase) in due from related company (113,293) 113,000
Increase (decrease) in accounts payable 420,205 1,557,751
Increase (decrease) in accrued expenses 54,763 152,610
Increase (decrease) in advances 124,053 315,058
Increase (decrease) in due to/from stockholders (118,064) 75,920
----------- -----------
Net cash used in operating activities (406,843) (2,780,316)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (122,113) (45,129)
GameTek acquisition (100,000)
Additional royalty payment in connection with the Mission Acquisition (764,588)
----------- -----------
Net cash used in investing activities (122,113) (909,717)
----------- -----------
Cash flows from financing activities:
Issuance of stock in connection with a private placement, net of stock 192,000
issuance costs of $60,000
Issuance of stock and warrants, net of stock issuance costs of $1,952,774 45,000 7,431,226
Proceeds (repayments) under the line of credit (31,303) 35,653
Proceeds from exercise of stock options 750 260
Repayment of capital lease obligations (28,295)
Principal payments on note payable (8,529) (60,965)
Principal payments on short term 1996 financing (373,572)
Dividends and distributions (31,233) (237,092)
----------- -----------
Net cash provided by financing activities 166,685 6,767,215
----------- -----------
Net increase (decrease) in cash for the period (362,271) 3,077,182
Cash and cash equivalents, beginning of the period 536,198 692,362
----------- -----------
Cash and cash equivalents, end of the period $ 173,927 $ 3,769,544
=========== ===========
The Company acquired equipment under a capital lease obligation $ 17,040 $ 505,088
=========== ===========
The Company accrued an additional amount relating to the purchase of
Mission Studios Corporation $ 814,478
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information at July 31, 1997 and for the three and nine month periods
ended July 31, 1996 and 1997 is unaudited)
1. Organization:
Take-Two Interactive Software, Inc. and its wholly owned subsidiaries (the
"Company") designs, develops, publishes, markets and distributes interactive
software games for use on multimedia personal computer and video game console
platforms. The Company's interactive software games are sold primarily in the
United States, Europe and Asia. The Company delivers game titles to consumers
primarily through distribution and licensing arrangements.
2. Significant Accounting Policies and Transactions:
Basis of Presentation
The interim unaudited consolidated financial statements should be read in
conjunction with the Company's audited financial statements contained in its
Registration Statement on Form SB-2. All intercompany balances and transactions
have been eliminated. The interim unaudited consolidated financial statements
reflect adjustments, consisting only of normal recurring accruals, which are, in
the opinion of the Company's management, necessary for a fair presentation of
the results of operations for the periods presented. Revenues and net income
(loss) for any interim period are not necessarily indicative of the results for
a full year.
Net Income (Loss) per Share
In April 1997, the Company consummated an initial public offering of 1,600,000
shares of common stock and 1,840,000 common stock purchase warrants (including
240,000 warrants exercised pursuant to an over-allotment option). The proceeds
from the offering were $6,428,302, net of discounts and commissions and offering
expenses of $1,755,698. In connection with the initial public offering, the
Board of Directors voted to increase the aggregate number of shares that the
Company is authorized to issue to 20,000,317 shares, consisting of 15,000,000
shares of common stock, par value of $.01 per share, 317 shares of Class A
Preferred Stock and 5,000,000 shares of Preferred Stock which can be issued in
one or more series.
In May 1997, the Underwriter purchased 240,000 shares of common stock pursuant
to an over-allotment option. The proceeds were $1,002,924, net of discounts and
commissions and offering expenses of $197,076.
Net income (loss) per share has been computed in accordance with Accounting
Principles Board Opinion (APB) No. 15 and is based on the net income (loss) for
the period divided by the weighted average number of shares of common stock and
common stock equivalents outstanding during the period using the treasury stock
method. APB No. 15 requires that the weighted average number of shares
outstanding exclude the number of common shares issuable upon the exercise of
outstanding options and warrants and the conversion of preferred stock if such
inclusion would be anti-dilutive. For periods prior to the initial public
offering, pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, equity securities, including options and warrants, issued at
prices below the public offering price of $5.00
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during the 12-month period prior to the offering have been included in the
calculation as if they were outstanding for all periods presented, including
years that have losses where the impact of the incremental shares is
anti-dilutive.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the applicable
local currency. Accounts of foreign operations are translated into U.S. dollars
using quarter or year-end exchange rates for assets and liabilities and average
quarterly exchange rates for revenue and expense accounts. Adjustments resulting
from translation are included as a separate component of stockholders' equity.
3. Business Acquisitions
On July 29, 1997, the Company acquired all the outstanding stock of GameTek UK
Limited, now known as Take-Two Interactive Software Europe Limited ("Take-Two
Europe"), and Alternative Reality Technologies, Inc. ("ART"), and certain
software games including Dark Colony, The Quivering and The Reap. Take-Two
Europe is in the business of distributing computer software games in Europe and
other international markets and ART is a developer of computer software games.
The total cost of the acquisition was $5,226,057, consisting of a cash payment
of $100,000, promissory notes in the amount of $700,000, issuance of 406,553
restricted shares of common stock valued at $3,000,000, assumption of net
liabilities of $1,376,897 and direct transaction costs of $48,162. A Form 8-K
has been filed on August 13, 1997 with the Securities and Exchange Commission in
connection with the acquisition. The allocation of the cost of the acquisition,
financial statements of GameTek UK Limited, and unaudited proforma information
will be filed by amendment within 60 days of the date the Form 8-K was filed.
The acquisition described above has been accounted for as a purchase transaction
in accordance with APB No. 16 and accordingly, the results of operations and
financial position of the acquisition is included in the Company's consolidated
financial statements from the date of acquisition. The purchase price has been
allocated on a preliminary basis pending a final determination of the fair value
of the acquired assets.
On July 31, 1997, the Company acquired all the outstanding stock of Inventory
Management Systems, Inc. ("IMSI") and Creative Alliance Group, Inc. ("CAG").
IMSI and CAG are engaged in the wholesale distribution of interactive software
games. To effect the acquisition, all of the outstanding shares of common stock
of each of IMSI and CAG were converted into an aggregate of 900,000 shares of
restricted common stock of the Company. The acquisition has been accounted for
as a pooling of interests in accordance with APB No. 16 and accordingly, the
accompanying financial statements have been restated to include the results of
operations and financial position of IMSI and CAG for all periods presented
prior to the merger.
Prior to July 31, 1997, IMSI and CAG were S corporations. Distributions of
$202,092 were paid to the S corporation shareholders prior to the acquisition.
5
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Separate results of the combining entities for the nine months ended July 31,
1996 and 1997 are as follows:
Nine Months ended Nine Months Ended
July 31, 1996 July 31, 1997
------------- ------------
Total Revenues:
Take-Two $ 4,555,652 $ 8,763,075
IMSI & CAG 1,074,105 3,717,062
------------ ------------
$ 5,629,757 $ 12,480,137
============ ============
Net income (loss)
Take-Two $ (1,143,167) $ (2,220,752)
IMSI & CAG 36,691 445,149
------------ ------------
$ (1,106,476) $ (1,775,603)
============ ============
4. Agreements
In July 1997, the Company entered into two distribution agreements with GameTek,
Inc., which granted to the Company the right to distribute computer software and
related imagery for use on the Nintendo Gameboy portable console (the "Gameboy
Distribution Agreement") and the Wheel of Fortune and Jeopardy! games for use on
the N64 console game system (the "Jeopardy Distribution Agreement").
Pursuant to the Gameboy Distribution Agreement, the Company was granted the
exclusive right to sell and distribute Wheel of Fortune - German Edition,
Pinball Deluxe, Race Days and Humans in certain European countries for a period
commencing on July 29, 1997 and ending on the third anniversary of the release
of the first computer software game, but in no event later than July 28, 2001.
In consideration for such rights, the Company has agreed to pay to GameTek, Inc.
the cost of manufacturing, shipping and insuring the games, $.15 per game unit
and all royalties payable by GameTek, Inc. to third parties in respect of each
such game. Upon expiration of the Gameboy Distribution Agreement, provided such
termination was not as a result of a breach or default by the Company, the
Company is permitted to continue to sell existing inventories for a six-month
period.
Pursuant to the Jeopardy Distribution Agreement, the Company was granted the
exclusive worldwide right to sell and distribute Wheel of Fortune and Jeopardy!
for use on the Nintendo N64 game system for a period commencing on July 29, 1997
and ending on the August 31, 1998. However, if GameTek, Inc. is able to obtain
an extension of its license for these games, then the term shall extend through
the last day of any such extension. In consideration of such rights, the Company
has agreed to pay to GameTek, Inc. the cost of manufacturing and shipping the
games, a per game unit royalty payment (the "GameTek Share"), and all royalties
payable by GameTek, Inc. to third parties in respect of each such game. The
Company also agreed to pay to GameTek, Inc. a minimum aggregate GameTek Share
with respect to the first two game titles released, subject to certain
reductions and set-offs, $450,000 of which was paid upon the execution of the
agreement. Such amount may be recouped in the event GameTek, Inc. is unable to
obtain an extension of its license for Wheel of Fortune and Jeopardy! or the
Company's incurring more than $150,000 in advertising, marketing, promotion and
sales support for the software. Upon expiration of the Jeopardy Distribution
Agreement, provided such termination was not as a result of a breach or
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default by the Company, the Company is permitted to continue to sell existing
inventories for a six-month period.
In February 1997, the Company entered into an agreement pursuant to which the
Company granted a distributor the exclusive right to sell PC versions of Black
Dahlia and JetFighter Full Burn by means of retail and OEM distribution in
Europe, Iceland, the countries of the former USSR, the Middle East, Africa and
India. The agreement provides for the Company to receive 70% of net receipts
from retail sales and 50% of net receipts less the cost of sales from OEM
arrangements. The distributor has agreed to pay the Company aggregate advances
of approximately $1,240,000, of which $512,000 has been received to date. Under
the agreement, the Company is responsible for providing finished products but
may elect to subcontract the manufacturing and warehousing of its products to
the distributor at cost plus a management fee of 10% of such cost. The agreement
requires the Company to localize its products (subject to the distributor's
approval) for use in Germany, France and any other countries requested and to
provide all end-user technical support. The agreement has a term of three years
with respect to each product.
The Company also has an agreement with the same distributor entered into in
December 1996 (which was amended in July 1997) for the distribution of certain
of the Company's products in the United States and Canada. The agreement
obligates the distributor to provide the Company with advances in the aggregate
amount of $2,625,000, subject to the completion of specified stages of product
development, of which $1,225,000 has been received to date.
5. Promissory Notes Payable
In connection with the purchase of Take-Two Europe, ART and certain software
games (See Note 3), the Company issued an unsecured promissory note in the
amount of $500,000 payable in two equal annual installments of $250,000 on July
29, 1998 and July 29, 1999, and bears interest at a rate of 8% per annum,
payable quarterly. In addition, the Company issued a promissory note in the
amount of $200,000 which is payable on September 15, 1997.
6. Line of Credit
In December 1996, Take-Two Europe entered into a line-of-credit agreement which
provides for up to 500,000 pounds sterling (approximately $819,000) of
short-term financing. Any amounts taken against this line-of-credit bear
interest at the rate of 2.25% over Barclays Bank base rate per annum (9.0% as of
July 31, 1997). Interest is payable quarterly. Borrowings under the
line-of-credit are collateralized by the receivables of Take-Two Europe.
Take-Two Europe's accounts receivable balances must at all times be at least
twice the amount outstanding on the line-of-credit. The line-of-credit is
cancelable and repayable upon demand. The Company has classified the
line-of-credit as current. The available credit under this facility is
approximately 175,000 pounds sterling at July 31, 1997.
In February 1997, IMSI entered into a line-of-credit agreement which provides
for up to $250,000 of short-term financing. Any amounts taken against this
line-of-credit bear interest at Crestar's prime rate plus a margin of .5% per
annum (9.0% as of July 31, 1997). Borrowings under the line-of-credit are
collateralized by all the assets of IMSI. The agreement is cancelable at any
time by either party or 36 months from the date of the agreement, whichever is
sooner. The line-of-credit is due and payable upon
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demand. The Company has classified the line-of-credit as current. The available
credit under this facility is approximately $35,000 at July 31, 1997.
7. Employment Agreements
In connection with the acquisition of Take-Two Europe and ART (See Note 3), the
Company entered into an employment agreement with an executive officer of
Take-Two Europe for a term expiring July 29, 2000. The employment agreement
provides for a fixed base salary at an annual rate of 100,000 pounds sterling
(approximately $164,000), plus an annual bonus equal to 7.5% of the net pre-tax
profits of Take-Two Europe. The Company also has employment agreements with
three key employees of ART which expire February 6, 1998. The agreements provide
for annual salaries of 80,000 Canadian dollars (approximately $106,000) per
annum for each employee.
In connection with the acquisition of IMSI and CAG (See Note 3), a subsidiary of
the Company entered into an employment agreement with a former shareholder of
IMSI and CAG and a consulting agreement with another former shareholder of IMSI
and CAG for a term expiring on July 31, 2000. Pursuant to such agreements, the
former shareholders are entitled to receive 6% of earnings before interest and
taxes generated by the subsidiary up to $500,000 and 9% of earnings before
interest and taxes in excess of $500,000. In addition, the employment agreement
provides for a fixed base salary at an annual rate of $120,000.
8. Stock Options
In February 1997, the holder of the Class B Preferred Stock elected to convert
all outstanding shares into 409,791 shares of common stock. As an inducement to
enter into such agreement, the Company issued warrants to purchase 38,747 shares
of Common Stock at an exercise price of $2.41 per share. Approximately, $100,000
has been recorded as an additional dividend for the nine month period ended July
31, 1997, and is reflected in the earnings per share computations for such
period.
Concurrent with the initial public offering, options to purchase an aggregate of
390,000 shares were granted at exercise prices ranging from $5.00 to $5.50 to
various employees and officers of the Company.
9. Capital Leases
In May and June 1997, the Company leased computer equipment and software for the
development of software titles. The leases are capital leases which extend
through June 30, 2000, under which the Company pays $17,463 per month.
10. Recently Issued Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ( "SFAS 121").
SFAS 121 requires that an impairment loss be recognized for long-lived assets
and certain identifiable intangibles when the carrying amounts of these assets
may not be
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recoverable. The adoption of SFAS 121 in fiscal 1997 did not have a material
impact on the Company's results of operations or financial position.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting For Stock-Based Compensation." The statement allows companies to
measure compensation costs in connection with employee stock compensated plans
using a fair value based method or to continue to use an intrinsic-value based
method, which generally does not result in compensation cost. The Company
currently plans to continue using the intrinsic-value based method.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". The statement establishes standards for computing and
presenting earnings per share ("EPS") and is effective for financial statements
issued for periods ending after December 15, 1997. This statement will eliminate
the presentation of primary EPS and will require the presentation of basic EPS
(the principal difference being that common stock equivalents will not be
considered in the computation of basic EPS). It will also require the
presentation of diluted EPS which will give effect to all dilutive potential
common shares that were outstanding during the period. The Company has not
determined the effect of Statement No. 128 on the Company's EPS.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129,
"Disclosure of Information About Capital Structure". Under SFAS No. 129, an
entity shall explain, in summary form within the financial statements, the
pertinent rights and privileges of the various securities outstanding. This
standard is effective for financial statement periods ending after December 15,
1997.
11. Legal Proceedings
In January 1997, Navarre Corporation filed a lawsuit in the District Court of
Hennepin County, Minnesota against the Company alleging that the Company
breached a distribution agreement by failing to remit monies for product returns
and marketing charges. The Plaintiff is seeking $317,209 in damages. The Company
has served an answer denying such allegations and requesting that the court
dismiss the complaint. While the Company believes that it has meritorious
defenses to such action and intends to vigorously defend this lawsuit, there can
be no assurance that such action will be resolved in a manner favorable to the
Company.
12. Subsequent Events
In September 1997, Take-Two Europe entered into a letter of intent to acquire
the European publishing and distribution rights to six upcoming Ripcord Games
titles for personal computers. The games include Postal, Forced Alliance, Golden
Gate, Hidden Wars, Space Bunnies Must Die, and Terra Victus. The letter of
intent contemplates that Take-Two Europe would pay advances in the aggregate
amount of $1,200,000. There can be no assurance that Take-Two Europe will enter
into a definitive agreement relating to these rights.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995: The statements which are not historical facts contained in this Quarterly
Report are forward looking statements that involve risks and uncertainties,
including but not limited to, the Company's ability to integrate the operations
of newly acquired businesses into its operations and other risks described in
the Company's Registration Statement on Form SB-2. The Company's actual results
may differ materially from the results discussed in any forward looking
statement.
The Company's business operates on a low-margin basis and the Company has
achieved limited profitability for the year ended October 31, 1996. Operating
expenses have increased and will increase significantly in connection with the
Company's proposed product acquisition, development and marketing activities.
Accordingly, the Company's future profitability will depend on corresponding
increases in revenues from operations. Any competitive, technological or other
factor adversely affecting the introduction or sale of interactive software
products could have a material adverse effect on the Company's future operating
results. The Company incurred net losses for the nine month and three month
periods ended July 31, 1997.
The Company's operating results vary significantly from period to period as a
result of purchasing patterns of potential customers, the timing of new product
introductions by the Company and its competitors, product returns, marketing and
research and development expenditures and pricing. Sales of the Company's
products are seasonal, with peak product shipments typically occurring in the
fourth calendar quarter (the Company's first fiscal quarter), depending upon the
timing of product releases, as a result of increased demand for products during
the year-end holiday season.
On July 29, 1997, the Company acquired all the outstanding stock of Take-Two
Europe and ART. The acquisition was accounted for as a purchase transaction in
accordance with APB No. 16 and accordingly the results of operations and
financial position of the acquisition is included in the Company's consolidated
financial statements from the date of acquisition. On July 31, 1997, the Company
acquired all the outstanding stock of IMSI and CAG. The acquisition was
accounted for as a pooling of interests in accordance with APB No. 16 and
accordingly, the accompanying financial statements have been restated to include
the results of operations and financial position of IMSI and CAG for all periods
presented prior to the merger.
Three Months Ended July 31, 1996 Compared to Three Months Ended July 31, 1997
Net sales increased by $2,297,723, or 421.3%, from $545,423 for the three months
ended July 31, 1996 to $2,843,146 for the three months ended July 31, 1997. This
growth in net sales was primarily due to the increase in net sales by IMSI and
the release of various Gameboy titles by Take-Two Europe for the three months
ended July 31, 1997. Net sales for the three months ended July 31, 1996 did not
include sales from new releases.
Cost of sales increased by $2,395,799, or 677.4%, from $353,668 for the three
months ended July 31, 1996 to $2,749,467 for the three months ended July 31,
1997. The increase in absolute dollars is primarily attributable to the increase
in net sales for the three months ended July 31, 1997. Cost of sales as a
percentage of net sales increased to 96.7% for the three months ended July 31,
1997 from 64.8% for the three months ended July 31, 1996 due to certain sales of
Take-Two Europe for which there was minimal gross margin.
Research and development costs increased by $155,322, or 116.1%, from $133,742
for the three months ended July 31, 1996 to $289,064 for the three months ended
July 31, 1997. This increase is primarily attributable to increased staffing and
related expenses associated with the development of the Company's
10
<PAGE>
software technologies and the Mission acquisition. Mission Studios was acquired
in September 1996 and was accounted for as a purchase transaction and
accordingly its results of operations are not included in the three months ended
July 31, 1996. Research and development costs as a percentage of net sales
decreased to 10.2% for the three months ended July 31, 1997 from 24.5% for the
three months ended July 31, 1996. This decrease is attributable to the increase
in net sales.
Selling and marketing expenses increased by $63,649, or 37.1%, from $171,435 for
the three months ended July 31, 1996 to $235,084 for the three months ended July
31, 1997. The increase was primarily due to the promotional and marketing
expenses of titles not yet released, such as Black Dahlia and Jetfighter Full
Burn, for the three months ended July 31, 1997. Selling and marketing expenses
as a percentage of net sales decreased to 8.3% for the three months ended July
31, 1997 from 31.4% for the three months ended July 31, 1996. This decrease is
attributable to the increase in net sales.
General and administrative expenses increased by $358,280, or 86.2%, from
$415,869 for the three months ended July 31, 1996 to $774,149 for the three
months ended July 31, 1997. This increase is primarily attributable to Directors
and Officers liability insurance premiums, professional fees and other expenses
associated with being a public entity. In addition, the Company incurred
additional expenses consistent with its expansion plans. General and
administrative expenses as a percentage of net sales decreased to 27.2% for the
three months ended July 31, 1997 from 76.2% for the three months ended July 31,
1996. This decrease is attributable to the increase in net sales.
Depreciation and amortization expense increased by $129,910, or 230.2%, from
$56,443 for the three months ended July 31, 1996 to $186,353 for the three
months ended July 31, 1997. Amortization of intangible assets that resulted from
the Mission acquisition accounted for $110,035 of this increase.
Interest expense increased by $111,971, or 636.6%, from $17,589 for the three
months ended July 31, 1996 to $129,560 for the three months ended July 31, 1997.
This increase resulted primarily from the private placement of debt securities
in September 1996, see "Liquidity and Capital Resources", which was offset by
interest income from the investment of the initial public offering proceeds.
Income taxes are attributable to withholdings on certain foreign licensing
agreements. The decrease in foreign withholding taxes of $942, or 89.4%, from
$1,054 for the three months ended July 31, 1996 to $112 for the three months
ended July 31, 1997 was due to a decrease in net sales attributable to such
agreements.
As a result of the foregoing, the Company incurred a net loss of $1,520,643 for
the three months ended July 31, 1997, as compared to a net loss of $604,377 for
the three months ended July 31, 1996.
Nine Months Ended July 31, 1996 Compared to Nine Months Ended July 31, 1997
Net sales increased by $6,850,380, or 121.7%, from $5,629,757 for the nine
months ended July 31, 1996 to $12,480,137 for the nine months ended July 31,
1997. This growth in net sales was primarily due to the acquisition of Take-Two
Europe which released various Gameboy titles and the increase in net sales of
interactive games by IMSI in the nine months ended July 31, 1997. Also, the
successful release of Jetfighter III in November 1996, which sold in excess of
150,000 units worldwide, contributed to the growth in net sales.
11
<PAGE>
Cost of sales increased by $4,413,607, or 134.3%, from $3,287,419 for the nine
months ended July 31, 1996 to $7,701,026 for the nine months ended July 31,
1997. The increase in absolute dollars is primarily attributable to the increase
in net sales for the nine months ended July 31, 1997. Cost of sales as a
percentage of net sales increased to 61.7% for the nine months ended July 31,
1997 from 58.4% for the nine months ended July 31, 1996 due to certain sales of
Take-Two Europe for which there was minimal gross margin, and royalties incurred
from the release of Jetfighter III.
Research and development costs increased by $383,859, or 75.8%, from $506,144
for the nine months ended July 31, 1996 to $890,003 for the nine months ended
July 31, 1997. This increase is primarily attributable to increased staffing and
related expenses associated with the development of the Company's software
technologies. Approximately $226,000 of this increase is directly related to
research and development costs associated with Mission Studios. Mission Studios
was acquired in September 1996 and was accounted for as a purchase transaction
and accordingly its results of operations are not included in the nine months
ended July 31, 1996. Research and development costs as a percentage of net sales
decreased to 7.1% for the nine months ended July 31, 1997 from 9.0% for the nine
months ended July 31, 1996.
Selling and marketing expenses increased by $1,300,279, or 90.7%, from
$1,434,215 for the nine months ended July 31, 1996 to $2,734,494 for the nine
months ended July 31, 1997. The dollar increase was primarily a result of
distribution fees and marketing costs incurred in the nine months ended July 31,
1997 in connection with the Company's distribution agreement for Jetfighter III.
Selling and marketing expenses as a percentage of net sales decreased to 21.9%
for the nine months ended July 31, 1997 from 25.5% for the nine months ended
July 31, 1996.
General and administrative expenses increased by $537,554, or 42.0%, from
$1,279,388 for the nine months ended July 31, 1996 to $1,816,942 for the nine
months ended July 31, 1997. This increase is primarily the result of $150,000
paid to an officer of the Company in consideration of his covenant not to
compete, and Directors and Officers liability insurance premiums, professional
fees and other expenses associated with being a public entity. In addition, the
Company incurred additional expenses consistent with its acquisition expansion
plans. General and administrative expenses as a percentage of net sales
decreased to 14.6% for the nine months ended July 31, 1997 from 22.7% for the
three months ended July 31, 1996. This decrease is attributable to the increase
in net sales.
Depreciation and amortization expense increased by $325,228, or 192.1%, from
$169,344 for the nine months ended July 31, 1996 to $494,572 for the nine months
ended July 31, 1997. Amortization of intangible assets that resulted from the
Mission acquisition accounted for $291,810 of this increase.
Interest expense increased by $565,112, or 1,592.4%, from $35,487 for the nine
months ended July 31, 1996 to $600,599 for the nine months ended July 31, 1997.
This increase resulted primarily from the private placement of debt securities,
see "Liquidity and Capital Resources", which was offset by interest income from
the investment of the initial public offering proceeds.
Income taxes are attributable to withholdings on certain foreign licensing
agreements. The decrease in foreign withholding taxes of $6,132, or 25.3%, from
$24,236 for the nine months ended July 31, 1996 to $18,104 for the nine months
ended July 31, 1997 was due to a decrease in net sales attributable to such
agreements.
As a result of the foregoing, the Company incurred a net loss of $1,775,603 for
the nine months ended July 31, 1997, as compared to a net loss of $1,106,476 for
the nine months ended July 31, 1996.
12
<PAGE>
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to be to
fund the acquisition, development and commercialization of its proposed software
products. The Company has historically financed its operations through advances
made by distributors, the issuance of debt and equity securities and bank
borrowings. At July 31, 1997, the Company had working capital of $1,669,920.
Net cash used in operating activities for the nine months ended July 31, 1997
was $2,780,316 as compared to $406,843 for the nine months ended July 31, 1996.
The increase in cash used was primarily attributable to the loss for the period,
the increase in capitalized software development costs and the increase in
prepaid royalties. Net cash provided by financing activities for the nine months
ended July 31, 1997 was $6,767,215 as compared to net cash provided by financing
activities of $166,685 for the nine months ended July 31, 1996. The increase in
cash provided was primarily due to the receipt of the proceeds of the initial
public offering. At July 31, 1997, the Company had cash and cash equivalents of
$3,769,544.
In April 1997, the Company completed an initial public offering of 1,600,000
shares of common stock and 1,840,000 common stock purchase warrants (including
240,000 warrants exercised pursuant to the over-allotment option). The Company
received $6,428,302 from the offering, net of discounts, commissions and
expenses of the offering of $1,755,698. In addition, in May 1997, the Company
received $1,002,924 from the Underwriter's exercise of its over-allotment option
of 240,000 additional shares of Common Stock, net of discounts and commissions
and offering expenses of $197,076.
In connection with the purchase of Take-Two Europe, ART and certain software
games (See Note 3), the Company issued an unsecured promissory note in the
amount of $500,000 payable in two equal annual installments of $250,000 on July
29, 1998 and July 29, 1999, and bears interest at a rate of 8% per annum,
payable quarterly. In addition, the Company issued a promissory note in the
amount of $200,000 which is payable on September 15, 1997.
In connection with the Gameboy Distribution Agreement and the Jeopardy
Distribution Agreement (See Note 4), the Company will have to commit resources
in order to manufacture the games for use on the Nintendo Gameboy portable
console and the Nintendo N64 game system. The games are manufactured by Nintendo
who requires letters of credit from its customers. The Company may seek letters
of credit from its customers to collateralize its letters of credit to Nintendo.
In September 1996, the Company consummated a private placement pursuant to which
it issued (i) $2,088,539 principal amount of promissory notes and (ii) five-year
warrants to purchase 417,234 shares of Common Stock at an exercise price of $.01
per share. Of such indebtedness, $523,359 principal amount bears interest at the
rate of 2% above the prime rate established by Chase Manhattan Bank, N.A. and
was repayable on June 30, 1997. As of July 31, 1997, $149,748 principal amount
of such indebtedness was outstanding. The remaining $1,565,180 principal amount
of such indebtedness bears interest at the rate 14% per annum and is repayable
on May 14, 1998. In August 1997, the Company repaid $750,000 principal amount of
such indebtedness. The Company intends to obtain bank financing to repay the
balance of $815,180 principal amount of such indebtedness. For the nine months
ended July 31, 1997, the Company incurred a charge of $421,109 relating to the
warrants issued in the private placement.
13
<PAGE>
The Company's accounts receivable, less allowance for doubtful accounts and
product returns, at July 31, 1997, were $3,038,095. Delays in collection or
uncollectibility of accounts receivable could have a material adverse effect on
the Company's liquidity and working capital position.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 1997, Navarre Corporation filed a lawsuit in the District Court of
Hennepin County, Minnesota against the Company alleging that the Company
breached a distribution agreement by failing to remit monies for product returns
and marketing charges. The Plaintiff is seeking $317,209 in damages. The Company
has served an answer denying such allegations and requesting that the court
dismiss the complaint. While the Company believes that it has meritorious
defenses to such action and intends to vigorously defend this lawsuit, there can
be no assurance that such action will be resolved in a manner favorable to the
Company.
Item 2. Changes in Securities
In July 1997, the Company issued 406,553 restricted shares of Common Stock in
connection with the acquisition of Take-Two Europe and ART.
In July 1997, the Company issued 900,000 restricted shares of Common Stock in
connection with the acquisition of IMSI and CAG.
For the three months ended July 31, 1997, the Company issued 26,035 restricted
shares of Common Stock upon the exercise of warrants issued in connection with
the Company's 1996 private placement. The warrants had an exercise price of less
than $.01 per share.
In February 1997, the Company issued options to purchase 38,746 shares of Common
Stock at an exercise price of $2.41 per share.
All of the above securities were issued pursuant to an exemption under Section 4
(2) of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement of Computation of Earnings Per Share
Exhibit 27 - Financial Data Schedule
14
<PAGE>
(b) Reports on Form 8-K
Current Report on Form 8-K dated August 13, 1997 reporting under
Item 2 - Acquisition or disposition of assets and Item 7 -
Financial Statements and Exhibits - the completion of the
Company's acquisitions of GameTek (UK) Limited, Alternative
Reality Technologies, Inc., Inventory Management Systems, Inc.,
and Creative Alliance Group, Inc.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Take-Two Interactive Software, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Take-Two Interactive Software, Inc.
By: /s/ Ryan A. Brant Dated: September 15, 1997
--------------------------
Ryan A. Brant
Chief Executive Officer
Exhibit 11
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Statement of Computation of Earnings Per Share
For the three months ended July 31, 1996 and 1997 and
the nine months ended July 31, 1996 and 1997 (unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Primary:
Net income (loss) $ (608,760) $(1,522,280) $(1,119,625) $(2,086,813)
=========== =========== =========== ===========
Common stock outstanding 6,497,664 8,766,719 6,497,664 7,482,247
Common stock equivalents 1,173,400 -- 1,173,400 567,231
----------- ----------- ----------- -----------
Total 7,671,064 8,766,719 7,671,064 8,049,478
=========== =========== =========== ===========
Net income (loss) per share $ (.08) $ (.17) $ (.15) $ (.26)
=========== =========== =========== ===========
Fully diluted:
Net income (loss) $ (608,760) $(1,522,280) $(1,119,625) $(2,086,813)
=========== =========== =========== ===========
Common stock outstanding 6,497,664 8,766,719 6,497,664 7,482,247
Common stock equivalents 1,173,400 -- 1,173,400 574,896
----------- ----------- ----------- -----------
Total 7,671,064 8,766,719 7,671,064 8,057,143
=========== =========== =========== ===========
Net income (loss) per share $ (.08) $ (.17) $ (.15) $ (.26)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FINANCIAL STATEMENT INCLUDED IN THIS QUARTERLY REPORT ON
FORM 10-QSB, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Oct-31-1997
<PERIOD-END> Jul-31-1997
<CASH> 3,769,544
<SECURITIES> 0
<RECEIVABLES> 3,038,095
<ALLOWANCES> 0
<INVENTORY> 456,022
<CURRENT-ASSETS> 8,872,417
<PP&E> 2,128,258
<DEPRECIATION> 823,523
<TOTAL-ASSETS> 20,914,562
<CURRENT-LIABILITIES> 7,202,497
<BONDS> 0
0
317
<COMMON> 91,800
<OTHER-SE> 11,379,364
<TOTAL-LIABILITY-AND-EQUITY> 20,914,562
<SALES> 12,480,137
<TOTAL-REVENUES> 12,480,137
<CGS> 7,701,026
<TOTAL-COSTS> 7,701,026
<OTHER-EXPENSES> 1,384,575
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 600,599
<INCOME-PRETAX> (1,757,499)
<INCOME-TAX> 18,104
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,775,603)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
