UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended April 30, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________to__________
Commission File Number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 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 June 7, 1999, there were 22,864,719 shares of the registrant's Common
Stock outstanding.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
QUARTER ENDED APRIL 30, 1999
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - As of October 31, 1998 and
April 30, 1999 (unaudited)
Consolidated Statements of Operations - For the three months ended
April 30, 1998 (unaudited) and 1999 (unaudited) and the six
months ended April 30, 1998 (unaudited) and 1999 (unaudited)
Consolidated Statements of Cash Flows - For the three months ended
April 30, 1998 (unaudited) and 1999 (unaudited)
Consolidated Statements of Shareholders' Equity - For the year
ended October 31, 1998 and the six months ended April 30,
1999 (unaudited)
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
<PAGE>
Item 1.
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheets
As of October 31, 1998 and April 30, 1999 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
October 31, 1998 April 30, 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,762,837 $ 1,447,145
Accounts receivable, net of allowances of $1,473,017 and $1,421,757 49,138,871 47,381,170
Inventories, net 26,092,541 24,067,656
Prepaid royalties 8,064,510 13,618,259
Advances to developers 4,319,989 5,961,900
Prepaid expenses and other current assets 3,981,942 4,439,491
Deferred tax asset 941,000 941,000
--------------- ---------------
Total current assets 95,301,690 97,856,621
Fixed assets, net 1,979,658 3,043,923
Prepaid royalties 1,388,673 410,000
Capitalized software development costs, net 2,260,037 2,184,609
Investment -- 1,332,000
Intangibles, net 8,421,777 12,920,695
Other assets, net 33,259 1,174,342
--------------- ---------------
Total assets $ 109,385,094 $ 118,922,190
=============== ===============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Lines of credit, current portion $ 30,226,899 $ 35,163,150
Notes payable due to related parties, net of discount 222,955 49,834
Current portion of capital lease obligation 82,373 83,086
Notes payable, net of discounts 137,140 --
Accounts payable 31,723,864 22,171,619
Accrued expenses 10,975,362 12,798,546
Advances-principally distributors 136,000 --
--------------- ---------------
Total current liabilities 73,504,593 70,266,235
Line of credit 123,499 --
Notes payable, net of current portion 97,392 --
Capital lease obligation, net of current portion 94,042 42,104
--------------- ---------------
Total liabilities 73,819,526 70,308,339
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A, no par value; 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, par value $.01 per share; 50,000,000 shares authorized;
18,071,972 and 19,353,809 shares issued and outstanding 180,719 193,538
Additional paid-in capital 33,546,417 42,386,451
Deferred compensation (223,657) (92,848)
Retained earnings 2,069,522 6,525,530
Foreign currency translation adjustment (7,433) (398,820)
--------------- ---------------
Total stockholders' equity 35,565,568 48,613,851
--------------- ---------------
Total liabilities and stockholders' equity $ 109,385,094 $ 118,922,190
=============== ===============
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended April 30, 1998 (unaudited) and 1999 (unaudited)
and the six months ended April 30, 1998 (unaudited) and 1999 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three months ended April 30, Six months ended April 30,
--------------------------- ----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 39,948,370 $ 52,165,332 $ 91,353,731 $120,445,985
Cost of sales 29,847,441 36,085,017 70,645,010 89,622,857
------------ ------------ ------------ ------------
Gross profit 10,100,929 16,080,315 20,708,721 30,823,128
------------ ------------ ------------ ------------
Operating expenses:
Research and development costs 518,408 632,005 1,005,371 1,224,149
Selling and marketing 3,812,260 5,328,266 8,043,437 9,489,469
General and administrative 3,536,619 6,168,379 5,671,865 10,579,877
Depreciation and amortization 403,257 560,006 779,799 1,013,421
Loss on disposal of fixed assets -- 57,504 -- 57,504
------------ ------------ ------------ ------------
Total operating expenses 8,270,544 12,746,160 15,500,472 22,364,420
Income from operations 1,830,385 3,334,155 5,208,249 8,458,708
Interest expense 972,818 782,953 2,520,853 1,599,470
------------ ------------ ------------ ------------
Income before income taxes 857,567 2,551,202 2,687,396 6,859,238
Provision for income taxes 135,767 990,030 144,415 2,403,230
------------ ------------ ------------ ------------
Net income before extraordinary item 721,800 1,561,172 2,542,981 4,456,008
Extraordinary net loss on early extinguishment of debt 225,395 -- 225,395 --
------------ ------------ ------------ ------------
Net income attributable to common stockholders'
- Basic and Diluted * $ 496,405 $ 1,561,172 $ 2,317,586 $ 4,456,008
============ ============ ============ ============
Per share data:
Basic:
Weighted average common shares outstanding 13,669,981 19,152,376 13,464,180 18,674,517
============ ============ ============ ============
Net income per share $ 0.04 $ 0.08 $ 0.17 $ 0.24
============ ============ ============ ============
Supplemental net income attributable to common
stockholders after giving effect to S corporation
distributions of $102,000 and $464,000 for the three
and the six months ended April 30, 1998, respectively $ 0.03 $ 0.08 $ 0.14 $ 0.24
============ ============ ============ ============
Diluted:
Weighted average common shares outstanding 16,440,902 20,751,120 15,656,706 20,131,660
============ ============ ============ ============
Net income per share $ 0.03 $ 0.08 $ 0.15 $ 0.22
============ ============ ============ ============
Supplemental net income attributable to common
stockholders after giving effect to S corporation
distributions of $102,000 and $464,000 for the three and
the six months ended April 30, 1998, respectively $ 0.02 $ 0.08 $ 0.12 $ 0.22
============ ============ ============ ============
</TABLE>
* Net income includes acquired S corporation net income of $156,515
(unaudited) and $326,175 (unaudited) for the three and six months ended
April 30, 1998, respectively.
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended April 30, 1998 and 1999 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended April 30,
----------------------------
1998 1999
------------ ------------
(unaudited)
<S>
<C> <C>
Cash flows from operating activities:
Net income $ 2,317,586 $ 4,456,008
Adjustment to retained earnings as a result of business combination, see (A) below (581,089) --
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 779,799 1,013,421
Loss on disposal of fixed asset -- 57,504
Loss on termination of capital lease 225,395 --
Provision for bad debts and return allowances 1,426,625 362,530
Inventory reserve allowances -- (28,904)
Amortization of Gathering purchase option -- 100,658
Amortization of deferred compensation 39,262 136,434
Forfeiture of compensatory stock options in connection with AIM acquistion -- (146,418)
Amortization of loan discounts 887,228 1,728
Amortization of deferred financing costs 246,204 --
Issuance of compensatory stock -- 299,779
Changes in operating assets and liabilities, net of effects of acquisitions:
(Decrease) increase in accounts receivable (932,688) 7,262,129
Decrease in inventories, net 893,341 4,355,461
Increase in prepaid royalties (517,317) (4,575,076)
Increase in advances to developers -- (1,641,911)
Decrease (increase) in prepaid expenses and other current assets 2,727,452 (137,426)
Decrease in capitalized software development costs 1,556,286 75,428
Decrease in other assets, net -- 33,259
Decrease in accounts payable (9,291,700) (15,684,653)
Increase in accrued expenses 5,998,204 1,452,212
Decrease in advances-principally distributors (835,770) (136,000)
Increase in due to/from related parties (145,242) --
------------ ------------
Net cash provided by (used in) operating activities 4,793,576 (2,743,837)
------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (282,152) (910,050)
Proceeds from sale of fixed assets -- 34,000
Cash paid for investment in Gathering of Developers -- (1,332,000)
Payments made for termination of capital lease (233,145) --
Acquisition, net cash paid (1,186,874) (81,712)
------------ ------------
Net cash used in investing activities (1,702,171) (2,289,762)
------------ ------------
Cash flows from financing activities:
Redemption of Preferred Stocks (317) --
Proceeds from Private Placement, net 948,333 --
Net borrowings under the line of credit (848,588) 2,602,236
Proceeds from notes payable 803,800 --
Repayment on notes payable (5,781,897) (409,381)
Proceeds from exercise of stock options 106,663 1,965,815
Proceeds from the exercise of public warrants -- 223,889
Repayment of capital lease obligation (28,323) (51,226)
Distribution to S corporation shareholders (464,000) --
------------ ------------
Net cash provided by (used in) financing activities (5,264,329) 4,331,333
------------ ------------
Effect of foreign exchange rates 332,595 (613,426)
------------ ------------
Net decrease in cash for the period (1,840,329) (1,315,692)
Cash and cash equivalents, beginning of the period 2,372,194 2,762,837
------------ ------------
Cash and cash equivalents, end of period $ 531,865 $ 1,447,145
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Tax benefit in connection with the exercise of stock options $ -- $ 723,323
============ ============
Gathering purchase option $ -- $ 1,275,000
============ ============
Supplemental information on businesses acquired:
Fair value of assets acquired
Cash $ 313,126 $ 343,865
Accounts receivables, net 2,642,301 5,852,779
Inventories, net 6,753,939 2,301,672
Prepaid expenses and other other assets 366,883 320,123
Property and equipement, net 97,580 629,155
Goodwill 2,008,119 5,136,686
Less, liabilities assumed
Line of credit (3,925,608) (2,210,517)
Accounts payable (4,779,229) (6,132,408)
Accrued expenses (108,111) (370,972)
Stock issued (1,615,706) (5,237,842)
Options issued (253,294) --
Direct transaction costs -- (206,964)
------------ ------------
Cash paid 1,500,000 425,577
Less, cash acquired (313,126) (343,865)
------------ ------------
Net cash paid $ 1,186,874 $ 81,712
============ ============
</TABLE>
(A) For the purposes of pooling of interests accounting, the statement of
operations for the year ended October 31, 1997 was combined with JAG's and
Talonsoft's December 31, 1997 statement of operations. The Company's
statement of operations for the year ended October 31, 1998 includes JAG's
and Talonsoft's restated statement of operations for the period November 1,
1997 to October 31,1998. Accordingly, JAG's and Talonsoft's net income of
$431,527 and $149,562, respectively, for the two months ended December 31,
1997 have been reflected as an adjustment to retained earnings for the year
ended October 31, 1998.
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the year ended October 31, 1998 and the six months
ended April 30, 1999(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Series A Convertible
Preferred Stock Preferred Stock Preferred Stock
----------------- ---------------- ----------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1997 317 $ 317 -- $ -- -- $ --
Issuance of common stock and compensatory stock
options in connection with AIM acquisition -- -- -- -- -- --
Issuance of preferred stock in connection with
BMG acquisition -- -- -- -- 1,850,000 18,500
Conversion of preferred stock to common stock issued
in connection with BMG acquisition -- -- -- -- (1,850,000) (18,500)
Issuance of common stock in connection with
DirectSoft acquisition -- -- -- -- -- --
Redemption of preferred stock (317) (317) -- -- -- --
Issuance of common stock in connection with
March 1998 private placement, net of issuance costs -- -- -- -- -- --
Issuance of common stock in connection with
May 1998 private placement, net of issuance costs -- -- -- -- -- --
Cashless exercise of public warrants, 1 share of
common stock for 2 warrants surrendered -- -- -- -- -- --
Cashless exercise of underwriters' warrants, 1 share of
common stock for 2 warrants surrendered -- -- -- -- -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Issuance of common stock in connection with
early extinguishment of debt -- -- -- -- -- --
Issuance of compensatory stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net income -- -- -- -- -- --
Less: net income of JAG and Talonsoft for the
two months ended December 31, 1997 -- -- -- -- -- --
------ ------ ------ --------- ---------- --------
Balance, October 31, 1998 -- -- -- -- -- --
Issuance of compensatory stock options -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Forfeiture of compensatory stock options in connection
with AIM acquisition -- -- -- -- -- --
Issuance of common stock in connection with
LDA and Joytech acquisition -- -- -- -- -- --
Issuance of common stock in connection with
DVDWave.com acquisition -- -- -- -- -- --
Issuance of common stock in connection with
Funsoft acquisition -- -- -- -- -- --
Issuance of common stock in connection with the
investment in Gathering -- -- -- -- -- --
Conversion of warrants to common stocks issued in
connection with IPO -- -- -- -- -- --
Capitalization of issuance costs in connection with the
Company's secondary offering -- -- -- -- -- --
Tax benefit in connection with the exercise of stock options -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net income -- -- -- -- -- --
------ ------ ------ --------- ---------- --------
Balance, April 30, 1999 (unaudited) -- $ -- -- $ -- -- $ --
====== ====== ====== ========= ========== ========
<CAPTION>
Common Stock
--------------------- Additional Deferred
Shares Amount Paid-in Capital Compensation
---------- -------- --------------- -------------
<S> <C> <C> <C> <C>
Balance, October 31, 1997 13,033,379 $130,333 $ 15,551,501 $ (17,250)
Issuance of common stock and compensatory stock
options in connection with AIM acquisition 500,000 5,000 1,864,000 (253,294)
Issuance of preferred stock in connection with
BMG acquisition -- -- 9,520,563 --
Conversion of preferred stock to common stock issued
in connection with BMG acquisition 1,850,000 18,500 -- --
Issuance of common stock in connection with
DirectSoft acquisition 40,000 400 256,100 --
Redemption of preferred stock -- -- -- --
Issuance of common stock in connection with
March 1998 private placement, net of issuance costs 158,333 1,583 896,750 --
Issuance of common stock in connection with
May 1998 private placement, net of issuance costs 770,000 7,700 5,049,300 --
Cashless exercise of public warrants, 1 share of
common stock for 2 warrants surrendered 897,183 8,972 (8,972) --
Cashless exercise of underwriters' warrants, 1 share of
common stock for 2 warrants surrendered 160,000 1,600 (1,600) --
Conversion of warrants to common stock issued in
connection with 1996 private placement 378,939 3,789 -- --
Exercise of stock options 252,000 2,520 156,743 --
Issuance of common stock in connection with
early extinguishment of debt 32,138 322 187,032 --
Issuance of compensatory stock options -- -- 75,000 (75,000)
Amortization of deferred compensation -- -- -- 121,887
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
Less: net income of JAG and Talonsoft for the
two months ended December 31, 1997 -- -- -- --
---------- -------- ------------ -----------
Balance, October 31, 1998 18,071,972 180,719 33,546,417 (223,657)
Issuance of compensatory stock options 140,043 1,400 304,004 (5,625)
Exercise of stock options 441,802 4,419 1,961,396 --
Amortization of deferred compensation -- -- -- 136,434
Forfeiture of compensatory stock options in connection
with AIM acquisition -- -- (146,418) --
Issuance of common stock in connection with
LDA and Joytech acquisition 377,932 3,779 3,851,127 --
Issuance of common stock in connection with
DVDWave.com acquisition 50,000 500 505,750 --
Issuance of common stock in connection with
Funsoft acquisition 106,265 1,063 875,623 --
Issuance of common stock in connection with the
investment in Gathering 125,000 1,250 1,273,750 --
Conversion of warrants to common stocks issued in
connection with IPO 40,795 408 223,481 --
Capitalization of issuance costs in connection with the
Company's secondary offering -- -- (732,002) --
Tax benefit in connection with the exercise of stock options -- -- 723,323 --
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
---------- -------- ------------ -----------
Balance, April 30, 1999 (unaudited) 19,353,809 $193,538 $ 42,386,451 $ (92,848)
========== ======== ============ ===========
<CAPTION>
Retained Other Comprehensive
Earnings Comprehensive Income
Deficit Income Total (Loss)
------------ ---------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, October 31, 1997 $(3,599,483) $(130,706) $ 11,934,712 $(3,572,189)
Issuance of common stock and compensatory stock
options in connection with AIM acquisition -- -- 1,615,706 --
Issuance of preferred stock in connection with
BMG acquisition -- -- 9,539,063 --
Conversion of preferred stock to common stock issued
in connection with BMG acquisition -- -- -- --
Issuance of common stock in connection with
DirectSoft acquisition -- -- 256,500 --
Redemption of preferred stock -- -- (317) --
Issuance of common stock in connection with
March 1998 private placement, net of issuance costs -- -- 898,333 --
Issuance of common stock in connection with
May 1998 private placement, net of issuance costs -- -- 5,057,000 --
Cashless exercise of public warrants, 1 share of
common stock for 2 warrants surrendered -- -- -- --
Cashless exercise of underwriters' warrants, 1 share of
common stock for 2 warrants surrendered -- -- -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement -- -- 3,789 --
Exercise of stock options -- -- 159,263 --
Issuance of common stock in connection with
early extinguishment of debt -- -- 187,354 --
Issuance of compensatory stock options -- -- -- --
Amortization of deferred compensation -- -- 121,887 --
Foreign currency translation adjustment -- 123,273 123,273 123,273
Net income 6,250,094 -- 6,250,094 6,250,094
Less: net income of JAG and Talonsoft for the
two months ended December 31, 1997 (581,089) -- (581,089) --
----------- --------- ------------ -----------
Balance, October 31, 1998 2,069,522 (7,433) 35,565,568 6,373,367
Issuance of compensatory stock options -- -- 299,779 --
Exercise of stock options -- -- 1,965,815 --
Amortization of deferred compensation -- -- 136,434 --
Forfeiture of compensatory stock options in connection
with AIM acquisition -- -- (146,418) --
Issuance of common stock in connection with
LDA and Joytech acquisition -- -- 3,854,906 --
Issuance of common stock in connection with
DVDWave.com acquisition -- -- 506,250 --
Issuance of common stock in connection with
Funsoft acquisition -- -- 876,686 --
Issuance of common stock in connection with the
investment in Gathering -- -- 1,275,000 --
Conversion of warrants to common stocks issued in
connection with IPO -- -- 223,889 --
Capitalization of issuance costs in connection with the
Company's secondary offering -- -- (732,002) --
Tax benefit in connection with the exercise of stock options -- -- 723,323 --
Foreign currency translation adjustment -- (391,387) (391,387) (391,387)
Net income 4,456,008 -- 4,456,008 4,456,008
----------- --------- ------------ -----------
Balance, April 30, 1999 (unaudited) $ 6,525,530 $(398,820) $ 48,613,851 $ 4,064,621
=========== ========= ============ ===========
</TABLE>
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Interim Consolidated
Financial Statements (Information at April
30, 1999 and for the three and six month
periods ended April 30, 1998 and 1999 is unaudited)
1. Organization:
Take-Two Interactive Software, Inc. (the "Company") was incorporated in the
State of Delaware on September 30, 1993. Take-Two and its wholly owned
subsidiaries, GearHead Entertainment ("GearHead"), Mission Studios Corporation
("Mission"), Take-Two Interactive Software Europe Limited ("TTE"), Alternative
Reality Technologies ("ART"), Inventory Management Systems, Inc. ("IMSI"),
Alliance Inventory Management ("AIM"), Jack of All Games, Inc. ("JAG"), Creative
Alliance Group Inc. ("CAG"), Talonsoft, Inc. ("Talonsoft"), DirectSoft Australia
Pty. Ltd. ("DirectSoft"), DVDWave.com ("DVDWave"), LDA Distribution Limited
("LDA"), Joytech Europe Limited ("Joytech"), and Funsoft Nordic A.S. ("Funsoft")
design, develop, publish, market and distribute 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, Australia, and Asia.
2. Significant Accounting Policies and Transactions:
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring entries necessary for a fair presentation have been included.
Operating results for the six and three month periods ended April 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ended October 31, 1999. For further information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report on
Form 10-KSB for the year ended October 31, 1998.
Prepaid Royalties
Prepaid royalties were written down $176,525 and $187,414 for the three months
ended April 30, 1998 and 1999, respectively, and $226,525 and $844,112 for the
six months ended April 30, 1998 and 1999, respectively, to net realizable value.
Amortization of prepaid royalties amounted to $1,777,086 and $1,952,532 for the
three months ended April 30, 1998 and 1999, respectively, and $5,363,000 and
$3,882,371 for the six months ended April 30, 1998 and 1999, respectively.
Capitalized Software Development Costs (Including Film Production Costs)
Capitalized software costs were written down by $29,491 and $520,068 for the
three months ended April 30, 1998
<PAGE>
and 1999, respectively, and $302,325 and $688,068 for the six months ended April
30, 1998 and 1999, respectively, to net realizable value. Amortization of
capitalized software costs amounted to $1,303,107 and $180,000 for the three
months ended April 30, 1998 and 1999, respectively, and $1,820,462 and $230,000
for the six months ended April 30, 1998 and 1999, respectively.
Revenue Recognition
Distribution revenue is derived from the sale of interactive software games
bought from third parties and is recognized upon the shipment of product to
retailers. Distribution revenue amounted to $20,125,620 and $21,065,176 for the
three months ended April 30, 1998 and 1999, respectively, and $54,595,525 and
$65,415,815 for the six months ended April 30, 1998 and 1999, respectively. The
Company's distribution arrangements with retailers generally do not give them
the right to return products to the Company or to cancel firm orders, although
the Company does accept product returns for stock balancing, price protection
and defective products. The Company sometimes negotiates accommodations to
retailers, including price discounts, credits and product returns, when demand
for specific products fall below expectations. Historically, less than 1% of
distribution revenues represent write-offs for returns.
Publishing revenue is derived from the sale of internally developed interactive
software games or from the sale of products licensed from a third party
developer and is recognized upon the shipment of product to retailers.
Publishing revenue amounted to $19,822,750 and $31,100,156 for the three months
ended April 30, 1998 and 1999, respectively, and $36,758,206 and $55,030,170 for
the six months ended April 30, 1998 and 1999, respectively. The Company's
publishing arrangements with retailers require the Company to accept product
returns for stock balancing, markdowns or defective products. The Company
establishes a reserve for future returns of published products at the time of
product sales, based primarily on these return policies and historical return
rates, and the Company recognizes revenues net of product returns. The Company
has historically experienced a product return rate of approximately 10% of gross
publishing revenues.
Geographic Information
For the three months ended April 30, 1998 and 1999, the Company's net sales in
domestic markets accounted for approximately 70.9% and 63.9%, respectively, and
net sales in international markets accounted for 29.1% and 36.1%, respectively.
For the six months ended April 30, 1998 and 1999, the Company's net sales in
domestic markets accounted for approximately 84.5% and 72.3%, respectively, and
net sales in international markets accounted for 15.5% and 27.7%, respectively.
As of April 30, 1999, the Company's net fixed assets in domestic and
international markets are $1,513,195 and $1,530,728, respectively.
3. Business Acquisitions
In August 1998, the Company acquired all the outstanding stock of JAG. JAG is
engaged in the distribution of interactive software games. To effect the
acquisition, all of the outstanding shares of common stock of JAG were exchanged
for 2,750,000 shares of common stock of the Company.
In December 1998, the Company acquired all the outstanding stock of Talonsoft.
Talonsoft is a developer and publisher of historical strategy games. To effect
the acquisition, all of the outstanding shares of
<PAGE>
common stock of Talonsoft were exchanged for 1,033,336 shares of common stock of
the Company.
The acquisitions have 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 for all
periods presented prior to the business combinations. Certain operating expenses
were reclassed to be consistent with the Company's financial statement
presentation.
Separate results of the combining entities for the three and six months ended
April 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended April 30, Ended April 30,
--------------------------- -----------------------------
1998 1999 1998 1999
------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Total revenues:
Take-Two $ 22,922,113 $49,874,242 $ 44,990,550 $116,536,787
JAG (1) 16,349,527 45,316,116
Talonsoft 676,730 2,291,090 1,047,065 3,909,198
------------ ----------- ------------- ------------
$ 39,948,370 $52,165,332 $ 91,353,731 $120,445,985
============ =========== ============= ============
Net income-Basic and Diluted
Take-Two $ 629,153 $ 1,126,871 $ 1,870,142 $ 3,512,895
JAG (1) 258,515 790,175
Talonsoft (391,263) 434,301 (342,731) 943,113
------------ ----------- ------------- ------------
$ 496,405 $ 1,561,172 $ 2,317,586 $ 4,456,008
============ =========== ============= ============
Net income per share - Basic $ 0.04 $ 0.08 $ 0.17 $ 0.24
============ =========== ============= ============
Net income per share - Diluted $ 0.03 $ 0.08 $ 0.15 $ 0.22
============ =========== ============= ============
</TABLE>
(1) In February 1999, JAG was merged into AIM and AIM changed its name to JAG.
Therefore, for 1999, JAG results are included in the Take-Two line item.
The acquisitions described below have been accounted for as purchase
transactions in accordance with APB No. 16 and, accordingly, the results of
operations and financial position of the acquired businesses are included in the
Company's consolidated financial statements from the date of acquisition. Under
purchase accounting, the assets and liabilities of the acquired businesses are
required to be adjusted from their historical amount to their estimated fair
value. Purchase accounting adjustments have been preliminarily estimated by the
Company's management based upon available information and are believed by
management to be reasonable. There can be no assurance, however, that the final
purchase accounting adjustments that will ultimately be determined by the
Company's management will not differ from these estimates.
The measurement dates for the per share price of stock issued for these purchase
transactions were accounted for in accordance with the Emerging Issues Task
Force 95-19 ("EITF 95-19") "Determination of the Measurement Date for the Market
Price of Securities Issued in a Purchase Business Combination."
Goodwill for the below acquisitions is being amortized over a ten year
useful life.
<PAGE>
In February 1999, the Company acquired all of the outstanding capital stock of
LDA and its subsidiary, Joytech, a company incorporated in the United Kingdom.
LDA is engaged in the distribution of video game software in the United Kingdom
and France and Joytech is a third-party publisher of computer accessories for
first-party console manufacturers. The Company paid (pound)200,000 ($327,577)
and issued 377,932 shares of restricted common stock valued at $3,854,906,
subject to change under certain circumstances, and incurred direct transaction
costs of $135,622. The cost of the acquisition was allocated to the assets
acquired and liabilities assumed based upon their estimated fair values as
follows:
Working Capital $ 863,933
Equipment 563,987
Intangibles 2,997,551
Long-term liability (107,366)
-----------------
$ 4,318,105
In February 1999, the Company acquired DVDWave.com, an on-line marketer of DVD
movie titles over the Internet, for 50,000 shares of the Company's common stock
valued at $506,250. The cost of the acquisition was allocated to the assets
acquired and liabilities assumed based upon their estimated fair values as
follows:
Working Capital $ 3,242
Equipment 2,425
Intangibles 500,583
-----------------
$ 506,250
In March 1999, the Company acquired Funsoft, a distributor and budget publisher
of interactive entertainment software in Norway, Sweden and Denmark, in exchange
for $98,000 in cash and 106,265 shares of common stock valued at $876,686,
subject to change under certain circumstances, and incurred direct transaction
costs of $71,342. The cost of the acquisition was allocated to the assets
acquired and liabilities assumed based upon their estimated fair values as
follows:
Working Capital $ (656,192)
Equipment 63,668
Intangibles 1,638,552
-----------------
$ 1,046,028
4. Gathering of Developers
In February 1999, the Company purchased a 19.9% class A limited partnership
interest in Gathering of Developers I, Ltd. ("Gathering"). Gathering is a
developer-driven computer and video game publishing company. The Company's
investment in Gathering amounted to $4 million, payable in six equal monthly
installments of $667,000, of which $1,332,000 has been paid as of April 30,
1999. The general partner and each class B limited partner of Gathering granted
the Company an option to purchase their interests, exercisable on two separate
occasions during the six-month periods ending April 30, 2001 and 2002. In
consideration of the option grant, the Company issued to the general partner and
the class B limited partners 125,000 shares of Common Stock. The Company also
granted to the general partner and class B limited partners an option to
purchase the Company's class A limited partnership interest, exercisable during
the six-month period ending April 30, 2003.
The 125,000 shares of common stock issued are being accounted for as an asset
and amortized over the life of the purchaes option.
<PAGE>
In May 1998, the Company entered into a distribution agreement ("the Agreement")
with Gathering, as amended in February 1999, which granted the company (i) the
exclusive right to distribute in the United States and Canada all products
designed by Gathering to operate on PC platforms and scheduled to be released by
May 31, 2003; (ii) the exclusive right to publish in Europe all products
designed by Gathering to operate on PC platforms and scheduled to be released by
May 31, 2003; (iii) until recoupment of the advances described below, rights of
first and last refusal for the exclusive worldwide publishing rights to any
console version of products for which Gathering has publishing rights; and (iv)
after recoupment of such advances, the rights of first and last refusal for
publishing rights and which Gathering has publishing by or on behalf of
Gathering on the PC or other non-console platform.
The agreement obligates the Company to pay Gathering additional recoupable
advances of $12,500,000, payable over one year from the date of the agreement,
of which $4,806,000 has been paid as of April 30, 1999. The agreement is
terminable by the Company with respect to a particular title in the event
Gathering fails to deliver a title 60 days after its delivery date specified in
the agreement or Gathering otherwise materially breaches the agreement. In any
such event, Gathering is obligated to refund any un-recouped portion of the
advance attributable to a particular title. In addition, Gathering may terminate
the agreement with respect to a particular title in the event we materially
breach the agreement and, upon any subsequent two material breaches, may
terminate the entire agreement.
5. Line of Credit
In February 1999, JAG entered into a line of credit with NationsBank, N.A.
("NationsBank") which provides for borrowings of up to $35,000,000 through
September 30, 1999 and $45,000,000 thereafter. This line replaces the existing
credit lines held separately by JAG and AIM. Advances under the line of credit
are based on a borrowing formula equal to the lesser of (i) the borrowing limit
in effect at the time or (ii) 80% of eligible accounts receivable, plus 50% of
eligible inventory. Interest accrues on such advances at NationsBank's prime
rate plus 0.5% and is payable monthly. Borrowings under the line of credit are
collateralized by all of JAG's accounts, inventory, equipment, general
intangibles, securities and other personal property. In addition to certain
financial covenants, the loan agreement limits or prohibits JAG from declaring
or paying cash dividends, merging or consolidation with another corporation,
selling assets (other than in the ordinary course of business), creating liens
and incurring additional indebtedness. The line of credit expires on February
28, 2001. The outstanding balance and available credit under the revolving line
of credit is $31,169,276 and $3,818,976 as of April 30, 1999, respectively.
6. Income Taxes
The provisions for income taxes for the three months ended April 30, 1998 and
1999 are based on the Company's estimated annualized tax rate for the respective
years, after giving effect to the utilization of available tax credits and tax
planning opportunities.
<PAGE>
7. Comprehensive Income
For the six months ended April 30, 1998 and 1999, the components of
comprehensive income were:
<TABLE>
<CAPTION>
Six Months Ended April 30,
1998 1999
--------------- --------------
<S> <C> <C>
Net income $2,317,586 $4,456,008
Change in foreign currency translation adjustment 463,301 (391,387)
--------------- --------------
Total comprehensive income $2,780,887 $4,064,621
=============== ==============
</TABLE>
8. Net Income per Share
The following table provides a reconciliation of basic earnings per share to
dilutive earnings per share for the three and six months ended April 30, 1998
and 1999.
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
-------------- ------------- -----------
<S> <C> <C> <C>
Three Months Ended April 30, 1998:
Basic EPS $496,405 13,669,981 $.04
Effect of dilutive securities - Stock options and warrants 2,770,921 (.01)
-------------- ------------- -----------
Diluted EPS $496,405 16,440,902 $.03
Three Months Ended April 30, 1999:
Basic EPS $1,561,172 19,152,376 $.08
Effect of dilutive securities - Stock options and warrants 1,598,744 -
-------------- ------------- -----------
Diluted EPS $1,561,172 20,751,120 $.08
Six Months Ended April 30, 1998:
Basic EPS $2,317,586 13,464,180 $.17
Effect of dilutive securities - Stock options and warrants 2,192,526 (.02)
-------------- ------------- -----------
Diluted EPS $2,317,586 15,656,706 $.15
Six Months Ended April 30, 1999:
Basic EPS $4,456,008 18,674,517 $.24
Effect of dilutive securities - Stock options and warrants 1,457,143 (.02)
-------------- ------------- -----------
Diluted EPS $4,456,008 20,131,660 $.22
</TABLE>
The computation for diluted number of shares excludes unexercised stock options
and warrants which are anti-dilutive. The number of such shares were 160,000 and
75,000 for the periods ended April 30, 1998 and 1999, respectively.
<PAGE>
9. Subsequent Events
In May 1999, the Company consummated a secondary public offering of 4,005,000
shares of common stock (including 505,000 common shares issued pursuant to an
over-allotment option), which included 3,005,000 shares offered by the Company
and 1,000,000 shares offered by selling shareholders at a public offering price
of $8.00 per share. The proceeds from the offering were $21,865,598, net of
discounts and commissions and offering expenses of $2,174,402.
<PAGE>
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 contained herein which are not historical facts are forward
looking statements that involve risks and uncertainties, including but not
limited to, risks associated with the Company's future growth and operating
results, the ability of the Company to successfully integrate the businesses and
personnel of newly acquired entities into its operations, changes in consumer
preferences and demographics, technological change, competitive factors,
unfavorable general economic conditions, Year 2000 compliance and other factors
described herein. Actual results may vary significantly from such forward
looking statements.
Overview
The Company derives its principal sources of revenues from publishing and
distribution activities. Publishing revenues are derived from the sale of
internally developed interactive entertainment software products or products
licensed from third parties. Distribution revenues are derived from the sale of
third-party software and hardware products. Publishing activities generally
generate higher margins than distribution activities, with sales of PC software
resulting in higher margins than sales of cartridges designed for video game
consoles. The Company recognizes revenue from software sales when products are
shipped. See Note 2 to Notes to Consolidated Financial Statements.
The Company's published products are subject to return if not sold to consumers,
including for stock balancing, markdowns or defective products. The Company
establishes a reserve for future returns of published products at the time of
product sales, based primarily on these return policies and historical return
rates, and the Company recognize revenues net of product returns. The Company
has historically experienced a product return rate of approximately 10% of gross
publishing revenues (less than 1% of distribution revenues represent write-offs
for returns). If future product returns significantly exceed these reserves, the
Company's operating results would be materially adversely affected.
Research and development costs (consisting primarily of salaries and related
costs) incurred prior to establishing technological feasibility are expensed in
accordance with Financial Accounting Standards Board (FASB) Statement No. 86. In
accordance with FASB 86, the Company capitalizes software development costs
subsequent to establishing technological feasibility (completion of a detailed
program design) which is amortized (included in cost of sales) based on the
greater of the proportion of current year sales to total estimated sales
commencing with the product's release or the straight line method. At April 30,
1999, the Company had capitalized $2,184,609 of software development costs. The
Company evaluates the recoverability of capitalized software costs which may be
reduced materially in future periods. See Note 2 to Notes to Consolidated
Financial Statements.
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in the Company's statement of
operations:
<TABLE>
<CAPTION>
Three Months Six Months
Ended April 30, Ended April 30,
------------------------ -----------------------
1998 1999 1998 1999
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 74.7 69.2 77.3 74.4
Research and development costs 1.3 1.2 1.1 1.0
Selling and marketing 9.5 10.2 8.8 7.9
General and administrative 8.9 11.8 6.2 8.8
Depreciation and amortization 1.0 1.1 0.9 0.8
Interest expense 2.4 1.5 2.8 1.3
Income taxes 0.3 1.9 0.2 2.0
Net income 1.2 3.0 2.5 3.7
</TABLE>
The following table sets forth the percentages of publishing revenues derived
from sales of titles designed to operate on specific platforms during the
periods indicated (percentage vary slightly due to rounding):
Three Months Six Months
Ended April 30, Ended April 30,
-------------- ---------------
Platform 1998 1999 1998 1999
- -------- ----- ----- ----- -----
PC 22.6% 35.8% 31.3% 37.3%
Video Game Consoles 77.4% 48.6% 68.7% 44.5%
Nintendo GameBoy -% 3.4% -% 11.3%
Accessories (Joytech) -% 12.2% -% 6.9%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Results of Three Months Ended April 30, 1998 and 1999
Net sales increased by $12,216,962, or 30.6%, from $39,948,370 for the three
months ended April 30, 1998 to $52,165,332 for the three months ended April 30,
1999. The increase in net sales was primarily attributable to the Company's
expanded presence in international markets. International revenues increased by
$7,203,201 or 61.9%, from $11,642,615 for the three months ended April 30, 1998
to $18,845,816 for the three months ended April 30, 1999 due to strong
publishing revenues of the Grand Theft Auto franchise and the recent acquisition
of Joytech, a publisher of computer accessories. In addition, revenues from
publishing activities in the United States increased by $6,260,842, or 80.4%
from $7,782,328 for the three months ended April 30, 1998 to $14,043,170 for the
three months ended April 30, 1999 due to sales of Grand Theft Auto Director's
Cut and PC releases from Talonsoft and Gathering.
Cost of sales increased by $6,237,576, or 20.9%, from $29,847,441 for the three
months ended April 30, 1998 to $36,085,017 for the three months ended April 30,
1999. The increase in absolute dollars is primarily a result of the expanded
scope of the Company's operations. Cost of sales as a percentage of net
<PAGE>
sales decreased to 69.2% for the three months ended April 30, 1999 from 74.7%
for the three months ended April 30, 1998 primarily due to the increase in
publishing revenues which provide higher margins than distribution operations
and the increase in sales of PC software which provide higher margins than sales
of cartridges designed for video game consoles. Publishing revenues as a
percentage of net sales increased to 59.6% for the three months ended April 30,
1999 from 49.6% for the three months ended April 30, 1998. PC publishing
revenues as a percentage of net sales increased to 35.8% for the three months
ended April 30, 1999 from 22.6% for the three months ended April 30, 1998.
Research and development costs increased by $113,597, or 21.9%, from $518,408
for the three months ended April 30, 1998 to $632,005 for the three months ended
April 30, 1999. This increase is primarily attributable to the Company's
increased product development operations. Research and development costs as a
percentage of net sales remained relatively constant.
Selling and marketing expenses increased by $1,516,006, or 39.8%, from
$3,812,260 for the three months ended April 30, 1998 to $5,328,266 for the three
months ended April 30, 1999. Selling and marketing expenses as a percentage of
net sales increased to 10.2% for the three months ended April 30, 1999 from 9.5%
for the three months ended April 30, 1998. The increase in both absolute dollars
and as a percentage of net sales is primarily due to the expansion of the
Company's publishing business and the establishment of marketing programs to
broaden product distribution and to assist retailers in positioning the
Company's products for sale to consumers.
General and administrative expenses increased by $2,631,760, or 74.4%, from
$3,536,619 for the three months ended April 30, 1998 to $6,168,379 for the three
months ended April 30, 1999. General and administrative expenses as a percentage
of net sales increased to 11.8% for the three months ended April 30, 1999 from
8.9% for the three months ended April 30, 1998. This increase in both absolute
dollars and as a percentage of net sales is primarily attributable to salaries,
rent, insurance premiums and professional fees associated with the Company's
expanded operations. In addition, the recent acquisitions of DirectSoft, LDA,
Funsoft and DVD and the hiring of additional staff contributed to the increase.
Depreciation and amortization expense increased by $156,749, or 38.9%, from
$403,257 for the three months ended April 30, 1998 to $560,006 for the three
months ended April 30, 1999. The increase is primarily due to the depreciation
of assets and amortization of goodwill that resulted from the Company's
acquisitions of LDA, Funsoft, and DVD.
Interest expense decreased by $189,865, or 19.5%, from $972,818 for the three
months ended April 30, 1998 to $782,953 for the three months ended April 30,
1999. The decrease resulted primarily from lower interest rates on borrowings.
Income taxes increased by $854,263, from $135,767 for the three months ended
April 30, 1998 to $990,030 for the three months ended April 30, 1999. The
increase resulted primarily from the full utilization of net operating loss
carryforwards in fiscal 1998.
As a result of the foregoing, the Company achieved net income of $1,561,172 for
the three months ended April 30, 1999, as compared to net income of $496,405 for
the three months ended April 30, 1998.
<PAGE>
Results of Six Months Ended April 30, 1998 and 1999
Net sales increased by $29,092,254, or 31.9%, from $91,353,731 for the six
months ended April 30, 1998 to $120,445,985 for the six months ended April 30,
1999. The increase in net sales was primarily attributable to the Company's
expanded presence in international markets. International revenues increased by
$20,337,436 or 155.5%, from $13,078,068 for the three months ended April 30,
1998 to $33,415,504 for the three months ended April 30, 1999 due to strong
publishing revenues of the Grand Theft Auto franchise and the acquisition of
Joytech, a publisher of computer accessories. In addition, revenues from
distribution activities in the United States increased by $10,820,290, or 19.8%
from $54,595,525 for the six months ended April 30, 1998 to $65,415,815 for the
six months ended April 30, 1999 due primarily to the acquisition of AIM in
December 1998.
Cost of sales increased by $18,977,847, or 26.9%, from $70,645,010 for the six
months ended April 30, 1998 to $89,622,857 for the six months ended April 30,
1999. The increase in absolute dollars is primarily a result of the expanded
scope of the Company's operations. Cost of sales as a percentage of net sales
decreased to 74.4% for the six months ended April 30, 1999 from 77.3% for the
six months ended April 30, 1998 due to the increase in higher margin
international publishing activities.
Research and development costs increased by $218,778, or 21.8%, from $1,005,371
for the six months ended April 30, 1998 to $1,224,149 for the six months ended
April 30, 1999. This increase is primarily attributable to the Company's
increased product development operations. Research and development costs as a
percentage of net sales remained relatively constant.
Selling and marketing expenses increased by $1,446,032, or 18.0%, from
$8,043,437 for the six months ended April 30, 1998 to $9,489,469 for the six
months ended April 30, 1999. The increase was primarily attributable to the
expansion of the Company's publishing business and the establishment of
marketing programs to broaden product distribution and to assist retailers in
positioning the Company's products for sale to consumers. Selling and marketing
expenses as a percentage of net sales decreased to 7.9% for the six months ended
April 30, 1999 from 8.8% for the six months ended April 30, 1998.
General and administrative expenses increased by $4,908,012, or 86.5%, from
$5,671,865 for the six months ended April 30, 1998 to $10,579,877 for the six
months ended April 30, 1999. General and administrative expenses as a percentage
of net sales increased to 8.8% for the six months ended April 30, 1999 from 6.2%
for the six months ended April 30, 1998. This increase in both absolute dollars
and as a percentage of net sales is primarily attributable to salaries, rent,
insurance premiums and professional fees associated with the Company's expanded
operations. In addition, the recent acquisitions of DirectSoft, LDA, Funsoft and
DVD and the hiring of additional staff contributed to the increase.
Depreciation and amortization expense increased by $233,622, or 30.0%, from
$779,799 for the six months ended April 30, 1998 to $1,013,421 for the six
months ended April 30, 1999. The increase is primarily due to the depreciation
of assets and amortization of goodwill that resulted from the Company's
acquisitions of LDA, Funsoft, and DVD.
Interest expense decreased by $921,383, or 36.6%, from $2,520,853 for the six
months ended April 30, 1998 to $1,599,470 for the six months ended April 30,
1999. The decrease resulted primarily from
<PAGE>
amortization of discount on borrowings in 1998.
Income taxes increased by $2,258,815, or 1,564.1%, from $144,415 for the six
months ended April 30, 1998 to $2,403,230 for the six months ended April 30,
1999. The increase resulted primarily from the full utilization of net operating
loss carryforwards in fiscal 1998.
As a result of the foregoing, the Company achieved net income of $4,456,008 for
the six months ended April 30, 1999, as compared to net income of $2,317,586 for
the six months ended April 30, 1998
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to be to
fund the acquisition, development, manufacture and commercialization of its
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 April 30, 1999, the Company had working capital of
$27,590,386 as compared to working capital of $21,797,097 at October 31, 1998.
Net cash used in operating activities for the six months ended April 30, 1999
was $2,743,837 as compared to net cash provided by operating activities of
$4,793,576 for the six months ended April 30, 1998. The increase in net cash
used in operating activities was primarily attributable to the decrease in
accounts payable and payment of prepaid royalties and advances to developers.
Net cash used in investing activities for the six months ended April 30, 1999
was $2,289,762 as compared to net cash used in investing activities of
$1,702,171 for the six months ended April 30, 1998. The increase in net cash
used in investing was primarily attributable to the Company's investment in
Gathering. Net cash provided by financing activities for the six months ended
April 30, 1999 was $4,331,333 as compared to net cash used in financing
activities of $5,264,329 for the six months ended April 30, 1998. The increase
in net cash provided by financing activities was primarily attributed to a
decrease in repayments on the Company's debt instruments and an increase in net
borrowings under the lines of credit. At April 30, 1999, the Company had cash
and cash equivalents of $1,447,145.
In February 1999, JAG entered into a line of credit with NationsBank, N.A.
("NationsBank") which provides for borrowings of up to $35,000,000 through
September 30, 1999 and $45,000,000 thereafter. This line replaces the existing
credit lines held separately by JAG and AIM. Advances under the line of credit
are based on a borrowing formula equal to the lesser of (i) the borrowing limit
in effect at the time or (ii) 80% of eligible accounts receivable, plus 50% of
eligible inventory. Interest accrues on such advances at NationsBank's prime
rate plus 0.5% and is payable monthly. Borrowings under the line of credit are
collateralized by all of JAG's accounts, inventory, equipment, general
intangibles, securities and other personal property. In addition to certain
financial covenants, the loan agreement limits or prohibits JAG from declaring
or paying cash dividends, merging or consolidation with another corporation,
selling assets (other than in the ordinary course of business), creating liens
and incurring additional indebtedness. The line of credit expires on February
28, 2001. The outstanding balance and available credit under the revolving line
of credit is $31,169,276 and $3,818,976 as of April 30, 1999, respectively.
In May 1999, the Company consummated a secondary public offering of 4,005,000
shares of common stock (including 505,000 common shares issued pursuant to an
over-allotment option), which included
<PAGE>
3,005,000 shares offered by the Company and 1,000,000 shares offered by selling
shareholders at a public offering price of $8.00 per share. The proceeds from
the offering were $21,865,598, net of discounts and commissions and offering
expenses of $2,174,402.
The Company's accounts receivable at April 30, 1999 were $47,381,170, net of
allowances of $1,421,757. Delays in collection or uncollectibility of accounts
receivable could adversely affect the Company's working capital position. The
Company is subject to credit risks, particularly in the event that any of its
receivables represent sales to a limited number of retailers or distributors or
are concentrated in foreign markets, which could require the Company to increase
its allowance for doubtful accounts. The Company has credit insurance for most
receivables.
Fluctuations in Operating Results and Seasonality
The Company has experienced and may continue to experience fluctuations in
operating results as a result of delays in the introduction of new titles;
variations in sales of titles developed for particular platforms; the size and
growth rate of the interactive entertainment software market; market acceptance
of the Company's 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 the Company's competitors; product returns; changes in pricing
policies by the Company and its 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 shipment.
Sales of the Company's titles are seasonal, with peak shipments typically
occurring in the fourth calendar quarter (the Company's fourth and first fiscal
quarter) as a result of increased demand for titles during the year-end holiday
season.
International Operations
Sales in international markets, primarily in the United Kingdom and other
countries in Europe and the Pacific Rim, have accounted for an increasing
portion of the Company's revenues. For the six months ended April 30, 1998 and
1999, sales in international markets accounted for approximately 15.5% and
27.7%, respectively, of the Company's revenues. The Company is 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 impact on the Company's operating results. Sales in France
and Germany are made in local currencies. The Company does not engage in foreign
currency hedging transactions.
Year 2000
The inability of many existing computers to recognize and properly process data
as the Year 2000 approaches may cause many computer software applications to
fail or reach erroneous results. Computer-controlled systems with time sensitive
components that use two digits to define years may experience system failures or
disruptions to operations as a result.
<PAGE>
The Company has assessed potential issues that may result from the Year 2000 and
is in the process of upgrading its accounting and management software, which the
Company expects to complete by June 1999. Based on the Companies preliminary
assessment, the Company believes its PC products to be Year 2000 compliant. The
Company does not contemplate incurring material costs in connection with
ensuring Year 2000 readiness.
The Company has contacted principal third-party suppliers and customers to
determine their Year 2000 readiness and believes that such suppliers and
customers are in the process of becoming Year 2000 compliant. However, the
Company's failure or the failure of the Company's third-party suppliers or
customers to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain of the Company's business operations.
The Company has not yet adopted a Year 2000 contingency plan.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
In February 1999, the Company issued an aggregate of 377,932 shares of common
stock (subject to decrease upon the occurrence of certain events) in connection
with the acquisition of LDA and Joytech.
In February 1999, the Company issued 50,000 shares of common stock in connection
with the acquisition of DVDWave.com.
In February 1999, the Company issued 125,000 shares to the general partner and
the Class B limited partners of the Gathering in exchange for the grant by the
general partner and the Class B limited partners of Gathering of options to
purchase their interests in Gathering.
In March 1999, the Company issued an aggregate of 106,265 shares of common stock
(subject to decrease upon the occurrence of certain events) in connection with
the acquisition of Funsoft.
In April 1999, the Company issued 2,227 shares of common stock upon the exercise
of warrants granted in connection with a 1996 private placement. The warrants
had an exercise price of $.01 per share.
In April 1999, the Company issued 50,000 shares of common stock upon the
exercise of options granted in connection with the 1994 Stock Option Plan. The
options had an exercise price of $.92.
For the three months ended April 1999, the Company issued 150,673 shares of
common stock upon the exercise of options granted in connection with the 1997
Stock Option Plan. The options had exercise prices that ranged from $5.00 to
$5.75.
For the three months ended April 1999, the Company issued 254,000 non-plan stock
options at prices ranging from $7.5625 to $12.5625 per share vesting from 1999
to 2002 and expiring in 2004.
In connection with the above securities issuances, the Company relied on Section
4(2) and Regulation D promulgated under the Securities Act of 1933, as amended.
Each purchaser of securities is an "accredited investor".
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on April 30, 1999. At the
Annual Meeting, Ryan A. Brant, Kelly Sumner, Anthony R. Williams, Oliver R.
Grace, Jr., Neil S. Hirsch and Robert Flug were voted as directors by a vote of
14,398,833 common shares for and 1,473,910 against. In addition, the
stockholders voted 10,476,475 for and 216,210 against, with 45,450 abstentions,
to increase the number of shares of Common Stock available under the Company's
1997 Stock Option Plan from 2,000,000 to 3,500,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 27 - Financial Data Schedule
<PAGE>
(b) Reports on Form 8-K
None
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: June 14, 1999
----------------------------
Ryan A. Brant
Chief Executive Officer
By: /s/ Larry Muller Dated: June 14, 1999
----------------------------
Larry Muller
Chief Financial Officer
<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-Q, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Oct-31-1999
<PERIOD-END> Apr-30-1999
<CASH> 1,447,145
<SECURITIES> 0
<RECEIVABLES> 48,802,927
<ALLOWANCES> 1,421,757
<INVENTORY> 24,067,656
<CURRENT-ASSETS> 97,856,621
<PP&E> 4,944,269
<DEPRECIATION> 1,900,346
<TOTAL-ASSETS> 118,922,190
<CURRENT-LIABILITIES> 70,266,235
<BONDS> 0
0
0
<COMMON> 193,538
<OTHER-SE> 48,420,313
<TOTAL-LIABILITY-AND-EQUITY> 118,922,190
<SALES> 120,445,985
<TOTAL-REVENUES> 120,445,985
<CGS> 89,622,857
<TOTAL-COSTS> 89,622,857
<OTHER-EXPENSES> 2,237,570
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,599,470
<INCOME-PRETAX> 6,859,238
<INCOME-TAX> 2,403,230
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,456,008
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.22
</TABLE>
