<PAGE>
As filed with the Securities and Exchange Commission on March 23, 1999.
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 7372 51-0350842
(state or other (Primary standard industrial (IRS employer
jurisdiction of classification number) identification
incorporation number) or organization)
575 Broadway
New York, New York 10012
(212) 941-2988
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
Ryan A. Brant, Chief Executive Officer
Take-Two Interactive Software, Inc.
575 Broadway
New York, New York 10012
(212) 941-2988
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
Robert J. Mittman, Esq. Steven Della Rocca, Esq.
Tenzer Greenblatt LLP Latham & Watkins
The Chrysler Building 885 Third Avenue
405 Lexington Avenue Suite 1000
New York, New York 10174 New York, New York 10022
Telephone No. (212) 885-5000 Telephone No. (212) 906-1200
Telecopier No. (212) 885-5001 Telecopier No. (212) 751-4864
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same
offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================
Proposed Proposed
Maximum Maximum
Title of each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share(1) Offering Price(1) Registration Fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share ......................... 5,750,000 (2) $ 9.125 $52,468,750 $ 14,586.31
============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes 1,500,000 shares of common stock offered by selling stockholders
and up to 750,000 shares of common stock (including up to 300,000 shares
to be offered by selling stockholders) pursuant to an over-allotment
option.
---------------------
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated , 1999
Prospectus
5,000,000 Shares
[GRAPHIC OMITTED]
Take-Two Interactive Software, Inc.
Common Stock
We are a leading developer, publisher and distributor of interactive
entertainment software. Through internal expansion and several strategic
acquisitions, we have become one of the largest distributors of interactive
entertainment software in the United States and one of the top ten publishers
of interactive entertainment software in Europe.
We are offering and selling 3,500,000 shares of common stock with this
prospectus, and the selling stockholders named under "Principal and Selling
Stockholders" on page 38 are selling 1,500,000 shares. We will not receive any
of the proceeds from shares sold by selling stockholders.
Our common stock is listed for trading on The Nasdaq Stock Market, Inc.'s
National Market under the symbol "TTWO." On , 1999, the last reported sale
price of our common stock on The Nasdaq National Market was $ .
-------------------------------
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
-------------------------------
Per Share Total
----------- ------
Public Offering Price ................................... $ $
Underwriting Discounts and Commissions .................. $ $
Proceeds to Take-Two Interactive Software, Inc. ......... $ $
Proceeds to Selling Stockholders ........................ $ $
The underwriters may purchase up to an additional 450,000 shares of common
stock from us and up to an additional 300,000 shares of common stock from the
selling stockholders to cover over-allotments of shares.
The underwriters are severally underwriting the shares being offered. The
underwriters are offering the shares when, as and if delivered to and accepted
by them, subject to various prior conditions, including their right to reject
orders in whole or in part. The underwriters expect to deliver the shares
against payment in New York, New York on , 1999.
ING Baring Furman Selz LLC
Gerard Klauer Mattison & Co., Inc.
Morgan Keegan & Company, Inc.
This prospectus is dated , 1999
<PAGE>
[Description of Artwork]
2
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain information contained elsewhere in this
prospectus. You should read the entire prospectus carefully, including our
financial statements and related notes, and especially the risks described
under "Risk Factors." Unless we state otherwise in this prospectus, all of the
information in this prospectus assumes that the underwriters do not exercise
their over-allotment option.
The Company
Our Business
We are a leading developer, publisher and distributor of interactive
entertainment software. Our software operates on multimedia personal computers,
video game console platforms manufactured by Sony, Nintendo and Sega and
Nintendo's GameBoy Color hand-held gaming system. Through internal expansion
and several strategic acquisitions, we have become one of the largest
distributors of interactive entertainment software in the United States and one
of the top ten publishers of interactive entertainment software in Europe.
Our software is developed internally by our five design studios, created
by third-party developers on our behalf and licensed from third-party
developers. Our relationships with third-party developers include Gathering of
Developers, a group of six premier interactive entertainment software
development studios, DMA Design and Z-Axis. We publish software globally under
the Rockstar Games, Talonsoft, Mission Studios, Gathering of Developers and
Take-Two labels. We have released a variety of popular titles in significant
interactive entertainment genres, including Grand Theft Auto, Railroad Tycoon
II and the Jetfighter series, and expect to release various new titles,
including versions of Fly!, Monster Truck Madness, Earthworm Jim 3-D, Max
Payne, Duke Nukem and Grand Theft Auto II.
We distribute our software as well as software of third parties worldwide
through our subsidiary Jack of All Games. We distribute interactive
entertainment software to over 20,000 retail outlets in the United States
through third party distributors and through direct relationships with large
retail customers. Our U.S. customers include WalMart, Toys R Us, Electronics
Boutique, Babbage's, Best Buy and Ames Department Stores, as well as leading
national and regional drug store, supermarket and discount store chains and
specialty retailers.
We have significantly expanded our international presence through the
acquisition of publishing and distribution operations in the United Kingdom,
France, Germany and Australia. We distribute interactive entertainment software
to over 19,000 retail outlets in Europe through third party distributors and
through direct relationships with retail customers in the United Kingdom,
France and Germany. Our Joytech subsidiary is a leading manufacturer of video
game hardware accessories in Europe. Sales in foreign markets have accounted
for an increasing portion of our revenues.
In recent years we have achieved significant growth in sales and net
income. Our revenues increased to $194.1 million for the year ended October 31,
1998 from $97.3 million for the year ended October 31, 1997. We generated
earnings of $7.2 million for the year ended October 31, 1998, as compared to a
loss of $2.8 million for the year ended October 31, 1997.
Our Strategy
Our objective is to achieve growth and increase profitability by
developing high-quality interactive entertainment software and by capitalizing
on our distribution expertise. Our strategy includes:
o Acquiring and developing a portfolio of high-quality content;
o Establishing and building strong brand recognition;
o Distributing software to a broader range of consumers;
o Continuing to expand our international operations;
3
<PAGE>
o Using our integrated and diversified operations to manage industry
changes; and
o Developing multi-player on-line gaming and pursuing distribution
opportunities over the Internet.
Recent Acquisitions
Since March 1998, we have completed the following acquisitions:
<TABLE>
<CAPTION>
Company Date Description
- ------- ---- -----------
<S> <C> <C>
BMG Interactive ........................ March 1998 Direct distribution, sales and marketing
operations in France and Germany; a
publishing and distribution group in the
United Kingdom; and rights to interactive
entertainment software.
Tarantula .............................. May 1998 A development studio specializing in
Nintendo GameBoy Color products.
DirectSoft Australia Pty. Limited ...... June 1998 Publisher and distributor of interactive
entertainment software in Australia and New
Zealand.
Jack of All Games, Inc. ................ August 1998 Distributor of interactive entertainment
software in the United States.
Talonsoft, Inc. ........................ December 1998 Developer of historical military strategy
games.
L.D.A. Distribution Limited ............ February 1999 Distributor of interactive entertainment
software to small retailers in the United
Kingdom and France.
Joytech Europe Limited ................. February 1999 Manufacturer of computer accessories and
peripherals.
Gathering of Developers I, Ltd. ........ February 1999 19.9% Class A limited partnership interest.
DVDWave.com ............................ February 1999 Distributor of DVD movie titles over the
Internet.
</TABLE>
We intend to pursue potential acquisition transactions and investments
that are consistent with our overall strategy and that we believe will add
value to our operations.
We were incorporated in the state of Delaware in September 1993. Our
principal executive offices are located at 575 Broadway, New York, New York
10012, and our telephone number is (212) 941-2988.
4
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered .................... 5,000,000 shares (including 3,500,000 shares
offered by us and 1,500,000 shares offered by
selling stockholders).
Over-allotment option ................... Up to 750,000 shares (including up to
450,000 shares offered by us and up to
300,000 shares offered by selling
stockholders). If the underwriters exercise
their over-allotment option in full at a public
price per share of $ , the total price to
public, underwriting discounts, proceeds to us
and proceeds to selling stockholders will be
$ , $ , $ and $ .
Common stock to be outstanding after this
offering .............................. shares, based on the number of
shares outstanding on , 1999. This
does not include shares issuable upon
exercise of options and warrants as of
, 1999.
Use of Proceeds ......................... We intend to use the net proceeds from this
offering to reduce outstanding indebtedness; to
fund our continued expansion; and for
additional working capital and general
corporate purposes. We may use a portion of
the net proceeds to acquire complementary
businesses, products or technologies.
Nasdaq National Market symbol ........... TTWO
Risk Factors ............................ You should read the "Risk Factors" section
beginning on page 7 and the other
cautionary statements in this prospectus to
ensure that you understand the risks
associated with an investment in our
common stock.
</TABLE>
Cautionary Note Regarding Forward-Looking Statements
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We
intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy and our plans are forward-looking statements. These statements can
sometimes be identified by our use of words such as "may," "anticipate,"
"expect," "intend," "believe," "estimate" or similar expressions. Our
expectations in any forward-looking statements may not turn out to be correct.
Our actual results could be materially different from our expectations.
Important factors that could cause our actual results to be materially
different from our expectations include those discussed under "Risk Factors."
We have no obligation to update these statements to reflect events and
circumstances after the date of this prospectus.
5
<PAGE>
Summary Financial Information
(In thousands, except per share data)
You should read the following summary financial information together with
the "Use of Proceeds" section and our financial statements and related notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Three Months Ended
Fiscal Years Ended October 31, January 31,
------------------------------------------ ---------------------------
1996 1997(2) 1998(3) 1998 1999
------------ ----------- ------------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales ............................ $ 55,123 $ 97,341 $ 194,052 $ 51,405 $ 68,281
Income (loss) from operations ........ 2,032 (895) 10,690 3,378 5,125
Income (loss) before income taxes..... 1,724 (2,739) 7,010 1,830 4,308
Net income (loss)(4) ................. 1,682 (2,768) 7,181 1,821 2,895
Net income (loss) per share(4)
Basic .............................. $ .16 $ (.25) $ .49 $ .14 $ .16
Diluted ............................ .15 (.25) .42 .13 .15
Weighted average number of shares
outstanding
Basic .............................. 10,281 11,697 14,747 13,258 18,212
Diluted ............................ 11,454 11,697 17,063 14,873 19,534
Net income (loss) per share
attributable to common
stockholders -- Diluted(5) ......... $ .06 $ (.31) $ .37 $ .10 .15
======== ======== ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of October 31, As of January 31, 1999
---------------------- ----------------------------
1997(2) 1998(3) Actual As Adjusted(6)
--------- ---------- ---------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash and cash equivalents ......... $ 2,372 $ 2,763 $ 4,761 $
Working capital ................... 16,037 21,797 25,980
Total assets ...................... 56,395 109,385 107,641
Total debt ........................ 22,031 30,808 31,916
Total liabilities ................. 44,460 73,820 68,175
Stockholders' equity .............. 11,935 35,566 39,467
</TABLE>
- -------------
(1) We acquired Inventory Management Systems, Inc. and Creative Alliance Group,
Inc. in July 1997, Jack of All Games, Inc. in August 1998 and Talonsoft,
Inc. in December 1998. The acquisitions are accounted for as pooling of
interests and our financial statements include the results of operations
and financial position of these entities for all periods presented.
(2) We acquired GameTek (UK) Limited and Alternative Reality Technologies, Inc.
in July 1997. The acquisition was accounted for as a purchase and the
results of operations and financial position of these entities are
included in our financial statements as of the date of the acquisition.
(3) We acquired L&J Marketing, Inc. d/b/a Alliance Distributors in December
1997, certain assets from BMG Interactive in March 1998 and DirectSoft,
Inc. in June 1998. These acquisitions were accounted for as a purchase and
the results of operations and financial position of these entities are
included in our financial statements as of the date of the acquisition.
(4) Does not give effect to distributions of $1,005,800, $673,092 and $931,000
paid to S-corporation shareholders prior to acquisitions for 1996, 1997
and 1998 and $362,000 (unaudited) for the three months ended January 31,
1998.
(5) Gives effect to distributions of $1,005,800, $673,092 and $931,000 paid to
S-corporation shareholders prior to acquisitions for 1996, 1997 and 1998
and $362,000 (unaudited) for the three months ended January 31, 1998.
(6) As adjusted to reflect the sale of 3,500,000 shares of common stock offered
by us with this prospectus.
6
<PAGE>
RISK FACTORS
The shares offered hereby involve a high degree of risk. Each prospective
investor should carefully consider the following risk factors before making an
investment decision.
Many Of Our Titles Have Short Lifecycles And Fail To Generate Significant
Revenues
The market for our interactive entertainment software is characterized by
short product lifecycles and the frequent introduction of new products. Many
software titles do not achieve sustained market acceptance or do not generate a
sufficient level of sales to offset the costs associated with product
development. A significant percentage of the sales of new titles generally
occurs within the first three months following their release. Therefore, our
continued profitability depends upon our ability to develop and sell new,
commercially successful titles and to replace revenues from titles in the later
stages of their lifecycles. Any competitive, financial, technological or other
factor which delays or impairs our ability to introduce and sell our software
could adversely affect our future operating results.
A significant portion of our revenues are derived from a limited number of
titles. For the year ended October 31, 1998, ten titles accounted for
approximately 31.3% of our revenues, with Grand Theft Auto, Three Lions Soccer
and Silicon Valley accounting for 7.6%, 4.0% and 3.7% of our revenues. For the
three-month period ended January 31, 1999, ten titles accounted for
approximately 28.5% of our revenues. While we expect to become less dependent
on any particular new title, future titles may not be commercially viable. We
also may not be able to release new titles within scheduled release times or at
all. If we fail to continue to develop and sell new, commercially successful
titles, our revenues and profits may decrease substantially.
Our Business Is Dependent On Licensing And Publishing Arrangements With Third
Parties
Our success depends on our ability to identify and exploit new titles on a
timely basis. We have entered into agreements with third parties to acquire the
rights to publish and distribute interactive entertainment software. These
agreements typically require us to make advance payments, pay royalties and
satisfy other conditions. Software development costs, promotion and marketing
expenses and royalties payable to software developers have increased
significantly in recent years and reduce the potential profits derived from
sales of our software. Future sales of our titles may not be sufficient to
recover advances to software developers, and we may not have adequate financial
and other resources to satisfy our contractual commitments. If we fail to
satisfy our obligations under these license agreements, the agreements may be
terminated or modified in ways that may be burdensome to us.
We recently entered into agreements with Gathering of Developers
(Gathering) granting us exclusive rights to distribute in the U.S. and publish
in Europe interactive entertainment software designed for personal computers
(PCs) through May 2003. The agreements obligate us to make advance payments of
$12.5 million (which are recoupable against royalties) to finance software
development costs and to make payments of $4.0 million to acquire a 19.9%
limited partnership interest in Gathering. Our advance payments may not be
sufficient to permit Gathering to develop new software successfully. In
addition, titles developed for us by Gathering may not achieve significant
market acceptance, and we may not recoup our advances or otherwise generate
meaningful sales of these titles. If our agreements with Gathering terminate
before we recoup our advances, for financial or other reasons, we will lose a
significant investment.
Our profitability depends upon our ability to continue to license popular
properties on commercially feasible terms. Numerous companies compete intensely
for properties, and we may not be able to license popular properties on
favorable terms or at all in the future.
We Continually Need To Develop New Interactive Entertainment Software For
Various Operating Systems
We depend on third-party software developers and our internal development
studios to develop new interactive entertainment software within anticipated
release schedules and cost projections. Most of our titles are externally
developed. If developers experience financial difficulties, additional costs or
unanticipated development delays, we will not be able to release titles
according to our schedule and may incur losses.
7
<PAGE>
The development of new interactive entertainment software is lengthy,
expensive and uncertain. Considerable time, effort and resources will be
required to complete development of our proposed titles. We have in the past
and may in the future experience delays in introducing new titles. Delays,
expenses, technical problems or difficulties could force the abandonment of or
material changes in the development and commercialization of our proposed
titles. In addition, the costs associated with developing titles for use on new
or future platforms may increase our development expenses.
The software incorporated into our titles may contain defects or errors
which do not become apparent until after commercial introduction. Remedying
such errors may delay our plans, cause us to incur additional costs and
adversely affect our operations.
We Are Subject To Various Distribution Risks
Our distribution business accounts for a substantial portion of our
revenues. Our distribution operations require us to:
o maintain our operating margins;
o secure adequate supplies of currently popular software and hardware on a
timely and competitive basis;
o continually turn our inventories; and
o maintain effective inventory and cost controls.
We are dependent on third-party software and hardware manufacturers,
developers, distributors and dealers, including our competitors, to provide
adequate inventories of popular interactive entertainment software to our
retail customers when needed and on favorable pricing terms. We generally do
not maintain agreements with suppliers. Suppliers may sell their software
directly to our retail customers, rather than through us, on more favorable
terms than those provided to us. We have historically purchased a significant
portion of our titles from a limited number of suppliers. If suppliers do not
provide us with competitive titles on favorable terms without delays, we will
be unable to deliver titles on competitive terms to our retail customers when
they require them.
We May Fail To Anticipate Changing Consumer Preferences
Our business is speculative and is subject to all of the risks generally
associated with the interactive entertainment software industry, which has been
cyclical in nature and has been characterized by periods of significant growth
followed by rapid declines. Our future operating results will depend on
numerous factors beyond our control, including:
o the popularity, price and timing of new interactive entertainment titles
being released and distributed by us and our competitors;
o international, national and regional economic conditions, particularly
economic conditions adversely affecting discretionary consumer spending;
o changes in consumer demographics;
o the availability of other forms of entertainment; and
o critical reviews and public tastes and preferences, all of which change
rapidly and cannot be predicted.
In order to plan for acquisition and promotional activities, we must
anticipate and respond to rapid changes in consumer tastes and preferences. A
decline in the popularity of interactive entertainment software or particular
platforms could cause sales of our titles to decline dramatically. The period
of time necessary to develop new game titles, obtain approvals of manufacturers
and produce CD-ROMs or game cartridges is unpredictable. During this period,
consumer appeal of a particular title may decrease, causing projected sales to
decline.
8
<PAGE>
Rapidly Changing Technology And Potential Obsolescence Of Software And
Platforms Could Harm Our Operating Results
The interactive entertainment software market and the PC and video game
console industries in general are associated with rapidly changing technology,
which leads to software and platform obsolescence and significant price erosion
of interactive entertainment software. Our titles have been developed primarily
for multimedia PCs and video game consoles, including Nintendo 64 and Sony
PlayStation. Sony has recently announced the creation of the next generation of
the Playstation. Sega has introduced its Dreamcast system in Japan and plans to
introduce it in the U.S. and Europe later this year. Nintendo has stated that
it is in the process of developing a new video game platform. If the sales
rates of multimedia PCs or video game consoles level off or decline as a result
of the anticipated release of new platforms or other technological changes,
sales of our titles developed for these platforms may decrease.
We need to anticipate technological changes and continually adapt our new
titles to emerging platforms to remain competitive in terms of price and
performance. Our success depends upon our ability and the ability of
third-party developers to adapt software to operate on and to be compatible
with the products of original equipment manufacturers and to function on
various hardware platforms and operating systems. If we design titles to
operate on new platforms, we may be required to make substantial development
investments well in advance of platform introductions, and we will be subject
to the risks that any new platform may not achieve initial or continued market
acceptance. In addition, our software designed for PCs must maintain
compatibility with computers, their operating software and their hardware
accessories. If we are unable to develop or adapt titles to operate on and be
compatible with future platforms that achieve market acceptance or to maintain
compatibility with new platforms as needed, we will be unable to offer titles
that may appeal to consumers in the future.
The introduction of new platforms and technologies can render existing
interactive entertainment software obsolete and unmarketable. We expect that as
more advanced platforms are introduced, consumer demand for software for older
platforms will decline. As a result, our titles developed for such platforms
may not generate sufficient sales to make such titles profitable. Obsolescence
of software or platforms could leave us with increased inventories of unsold
titles and limited amounts of new titles to sell to consumers.
A number of software publishers who compete with us have developed or are
currently developing software for use by consumers over the Internet. Future
increases in the availability of such software or technological advances in
such software or the Internet could result in a decline in platform-based
software and impact our sales.
Returns Of Our Titles May Adversely Effect Our Operating Results
Our arrangements with retailers for published titles require us to accept
returns for stock balancing, markdowns or defects. We establish a reserve for
future returns of published titles at the time of sales, based primarily on
these return policies and historical return rates, and we recognize revenues
net of returns. We have historically experienced a return rate of approximately
10% of gross publishing revenues.
Our distribution arrangements with retailers generally do not give them
the right to return titles to us or to cancel firm orders, although we do
accept returns for stock balancing, markdowns and defects. We sometimes
negotiate accommodations to retailers, including price discounts, credits and
returns, when demand for specific titles falls below expectations.
Historically, less than 1% of distribution revenues represent write-offs for
returns.
Our sales returns and allowances for the years ended October 31, 1997 and
1998 were $8,330,705 and $13,672,432.
Our Quarterly Operating Results Frequently Vary Significantly
We have experienced and may continue to experience wide fluctuations in
quarterly operating results as a result of:
o delays in the introduction of new titles;
9
<PAGE>
o variations in sales of titles designed to operate on particular
platforms;
o the size and growth rate of the interactive entertainment software
market;
o market acceptance of our titles;
o development and promotional expenses relating to the introduction of new
titles, sequels or enhancements of existing titles;
o projected and actual changes in platforms;
o the timing and success of title introductions by our competitors;
o product returns;
o changes in pricing policies by us and our competitors;
o the accuracy of retailers' forecasts of consumer demand;
o the size and timing of acquisitions;
o the timing of orders from major customers; and
o order cancellations and delays in shipment.
Sales of our titles are seasonal, with peak shipments typically occurring
in the fourth calendar quarter (our fourth and first fiscal quarters) as a
result of increased demand for interactive entertainment software during the
year-end holiday season.
The Interactive Entertainment Software Industry Is Highly Competitive
We compete both for licenses to properties and the sale of interactive
entertainment software with Sony, Nintendo and Sega, each of which is the
largest developer and marketer of software for its platforms. Sony and Nintendo
currently dominate the industry and have the financial resources to withstand
significant price competition and to implement extensive advertising campaigns,
particularly for prime-time television. These companies may also increase their
own software development efforts.
In addition, we compete with domestic public and private companies,
international companies, large software companies and media companies. Many of
our competitors have far greater financial, technical, personnel and other
resources than we do, and many are able to carry larger inventories, adopt more
aggressive pricing policies and make higher offers to licensors and developers
for commercially desirable properties than we can. Our titles also compete with
other forms of entertainment such as motion pictures, television and audio and
video cassettes featuring similar themes, on-line computer programs and forms
of entertainment which may be less expensive or provide other advantages to
consumers.
Retailers typically have limited shelf space and promotional resources,
and competition is intense among an increasing number of newly introduced
interactive entertainment software titles for adequate levels of shelf space
and promotional support. Competition for retail shelf space is expected to
increase, which may require us to increase our marketing expenditures just to
maintain current levels of sales of our titles. Competitors with more extensive
lines and popular titles frequently have greater bargaining power with
retailers. Accordingly, we may not be able to achieve the levels of support and
shelf space that such competitors receive. Similarly, as competition for
popular properties increases, our cost of acquiring licenses for such
properties is likely to increase, possibly resulting in reduced margins.
Prolonged price competition, increased licensing costs or reduced operating
margins would cause our profits to decrease significantly.
We Depend On Console Manufacturers For Supplies Of Our Games
We depend on non-exclusive licenses with Sony, Nintendo and Sega both for
the right to publish titles for their platforms and for the manufacture of our
software designed for use on their platforms. Our platform licenses for the
Sony PlayStation, Nintendo 64, Nintendo GameBoy and Sega Dreamcast require that
we
10
<PAGE>
obtain approval for the publication of new titles on a title-by-title basis. As
a result, the number of titles we are able to publish for these platforms may
be limited. If any of these licenses were terminated, we would lack alternative
sources for the manufacture of titles for these platforms and would be unable
to develop and publish software developed for these platforms.
Each of Sony, Nintendo and Sega is the sole manufacturer of the titles we
publish under license from such manufacturer. Each platform license provides
that the manufacturer may raise prices for the titles at any time and grants
the manufacturer substantial control over the release of new titles. The
relatively long manufacturing cycle for cartridge-based titles for the Nintendo
platform (from 30 to 45 days) requires us to accurately forecast retailer and
consumer demand for our titles far in advance of sales. Nintendo cartridges are
also more expensive to manufacture than CD-ROMs, resulting in greater inventory
risks for those titles. Each of these manufacturers also publishes software for
its own platforms and manufactures titles for all of its other licensees and
may choose to give priority to its own titles or those of other publishers if
it has insufficient manufacturing capacity or if there is increased demand.
These manufacturers may not have sufficient production capacity to satisfy
our scheduling requirements during any period of sustained demand. If
manufacturers do not supply us with finished titles on favorable terms without
delays, our operations could be materially interrupted, and our operating
results could be adversely affected.
We May Not Be Able To Protect Our Proprietary Rights Or Avoid Claims That We
Infringe On The Proprietary Rights Of Others
We develop proprietary software and technologies and have obtained the
rights to publish and distribute software developed by third parties. We
attempt to protect our software and production techniques under copyright,
trademark and trade secret laws as well as through contractual restrictions on
disclosure, copying and distribution. We generally do not hold any patents or
registered copyrights.
Interactive entertainment software is susceptible to unauthorized copying.
Unauthorized third parties may be able to copy or to reverse engineer our
software to obtain and use programming or production techniques that we regard
as proprietary. In addition, our competitors could independently develop
technologies substantially equivalent or superior to our technologies.
As the amount of interactive entertainment software in the market
increases and the functionality of this software further overlaps, we believe
that interactive entertainment software will increasingly become the subject of
claims that such software infringes the copyrights or patents of others. From
time to time, we receive notices from third parties alleging infringement of
their proprietary rights. Although we believe that our software and
technologies and the software and technologies of third-party developers and
publishers with whom we have contractual relations do not and will not infringe
or violate proprietary rights of others, it is possible that infringement of
proprietary rights of others may occur. Any claims of infringement, with or
without merit, could be time-consuming, costly and difficult to defend.
Our Rapid Expansion And Acquisitions May Strain Our Operations
We have expanded through internal growth and acquisitions, which have
placed and may continue to place a significant strain on our management,
administrative, operational, financial and other resources. We have released a
significant number of titles on new platforms, expanded our publishing and
distribution operations, increased our advances to developers and manufacturing
expenditures, enlarged our work force and expanded our presence in
international markets. To successfully manage this growth, we must continue to
implement and improve our operating systems as well as hire, train and manage a
substantial and increasing number of management, technical, marketing,
administrative and other personnel. We may be unable to effectively manage
rapidly expanded operations which are geographically dispersed.
We have acquired rights to various properties and businesses, and we
intend to continue to pursue opportunities by making selective acquisitions
consistent with our business strategy. We may be unable to successfully
integrate any new personnel, property or business into our operations. If we
are unable to successfully integrate future personnel, properties or businesses
into our operations, we may incur significant charges.
11
<PAGE>
Our publishing and distribution activities require significant amounts of
capital. We may seek to obtain additional debt or equity financing to fund the
cost of continuing expansion. The issuance of equity securities would result in
dilution to the interests of our stockholders.
Our Accounts Receivable May Be Concentrated In A Limited Number Of Customers
Sales to our five largest customers accounted for approximately 36.2% and
22.4%, respectively, of our revenues for the years ended October 31, 1997 and
1998. The loss of our relationships with principal customers or a decline in
sales to principal customers could harm our operating results. Our accounts
receivable, less an allowance for doubtful accounts and product returns, at
October 31, 1998 were $49,138,871. Approximately $7,344,952 or 14.9%, of our
net accounts receivable were due from Ames Department Stores. These receivables
are covered by insurance and have been collected in the ordinary course of
business to date.
Our sales are typically made on credit, with terms that vary depending
upon the customer and the demand for the particular title being sold. We do not
hold any collateral to secure payment by our customers. As a result, we are
subject to credit risks, particularly in the event that any of our receivables
represent sales to a limited number of retailers or are concentrated in foreign
markets. If we are unable to collect on accounts receivable as they become due
and such accounts are not covered by insurance, it could adversely affect our
financial condition.
We Have Significant Outstanding Indebtedness And Have Granted Security
Interests To Debtholders
We have incurred substantial indebtedness in order to finance our expanded
operations. As of February 28, 1999, $30,245,053 was outstanding under a line
of credit agreement between our subsidiary Jack of All Games, Inc. and
NationsBank, N.A. Borrowings under the line of credit with NationsBank are
collateralized by liens on accounts receivable and inventory of our subsidiary,
Jack of All Games, and are guaranteed by us. The loan agreement contains
certain financial covenants and limits or prohibits Jack of All Games, subject
to certain exceptions, from declaring or paying cash dividends, merging or
consolidating with another corporation, selling assets (other than in the
ordinary course of business), creating liens and incurring additional
indebtedness. Although we intend to use a portion of the proceeds of this
offering to reduce outstanding indebtedness under this line of credit, we
expect to use the resulting increased borrowing availability under the line of
credit to fund additional expansion. If we default on our obligations,
NationsBank could elect to declare our indebtedness to be due and payable and
foreclose on our assets.
We Are Dependent Upon Our Key Executives And Personnel
Our success is largely dependent on the personal efforts of certain key
personnel. The loss of the services of one or more of these key employees could
adversely affect our business and prospects. Our success is also dependent upon
our ability to hire and retain additional qualified operating, marketing,
technical and financial personnel. Competition for qualified personnel in the
computer software industry is intense, and we may have difficulty hiring or
retaining necessary personnel in the future. If we fail to hire and retain
necessary personnel as needed, our business will be significantly impaired.
Additional Shares Of Common Stock Will Be Eligible For Public Sale After This
Offering
A substantial number of shares of previously issued common stock are
eligible for resale under Rule 144 of the Securities Act, and may become freely
tradeable. We have also granted registration rights with respect to a
substantial number of shares of common stock, including options and warrants
exercisable to purchase shares of common stock. If holders of registration
rights choose to exercise such rights and sell shares of common stock in the
public market or if holders of currently restricted shares choose to sell such
shares in the public market under Rule 144, the prevailing market price for the
common stock may decline. Our directors, executive officers and certain
stockholders have agreed with the underwriters that they will not sell or
12
<PAGE>
otherwise dispose of their shares of common stock for a period of 120 days
after the date of this prospectus without the prior written consent of the
underwriters. Future public sales of shares of common stock may adversely
affect the market price of the common stock or our future ability to raise
capital by offering equity securities.
The Market Price Of The Common Stock May Be Volatile
The market price of the common stock may be highly volatile. Disclosures
of our operating results, announcements of various events by us or our
competitors and the development and marketing of new titles affecting the
interactive entertainment software industry may cause the market price of the
common stock to change significantly over short periods of time.
Rating Systems For Interactive Entertainment Software And Possible Consumer
Opposition To Violence And Explicit Material Could Inhibit Sales
The home video game industry requires interactive entertainment software
publishers to provide consumers with information relating to graphic violence
or sexually explicit material contained in software titles. Certain countries
have also recently established similar rating systems as prerequisites for
sales of interactive entertainment software in such countries. We seek to
comply with such rating systems and display the ratings received for our
titles. Our software titles have generally received a rating of "G" (all ages)
or "T" (age 13 and over), although certain of our titles received a rating of
"M" (age 18 and over), which limits the potential markets for these titles.
In the past, consumer advocacy groups have opposed sales of interactive
entertainment software containing graphic violence and sexually explicit
material by pressing for legislation in these areas and by engaging in public
demonstrations and media campaigns. If any groups were to target our titles, we
might be required to significantly change or discontinue a particular title. In
addition, certain retailers, such as WalMart, Kmart, Sears and Target Stores,
have declined to sell interactive entertainment software containing graphic
violence or sexually explicit material, which also limits the potential markets
for certain of our games.
We Are Subject To Risks And Uncertainties Of International Trade
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 our revenues. For the years ended October 31, 1997 and 1998, sales
in international markets accounted for approximately 5.9% and 21.6% of our
revenues. We are subject to risks inherent in foreign trade, including:
o increased credit risks;
o tariffs and duties;
o fluctuations in foreign currency exchange rates;
o shipping delays; and
o international political, regulatory and economic developments, all of
which can have a significant impact on our operating results.
Sales in France and Germany are made in local currencies. We do not engage
in foreign currency hedging transactions.
The Year 2000 Risk May Adversely Affect Us
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. We have assessed potential issues that may
result from the Year 2000 and are in the process of upgrading our accounting
and management software, which we expect to complete by June 1999. We have
contacted principal third-party suppliers and customers to determine their Year
2000 readiness and believe that such suppliers and customers are in the process
of becoming Year 2000 compliant. However, any failure by us, our third-party
suppliers or customers to correct a material Year 2000 problem could result in
an interruption in, or a failure of, certain of our business operations. We
have not yet adopted a Year 2000 contingency plan.
13
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $ million
(approximately $ million if the underwriters fully exercise their
over-allotment option). This estimate is after deducting estimated underwriting
discounts and commissions and other fees and expenses we expect to pay
totalling approximately $ . We will not receive any portion of the proceeds
from the sale of the shares of common stock by selling stockholders.
We intend to use approximately $ of the net proceeds from this offering
to reduce outstanding indebtedness under the line of credit agreement between
our wholly-owned subsidiary, Jack of All Games, and NationsBank. This line of
credit bears interest at a rate of NationsBank's prime rate plus 0.5% and
expires on February 28, 2001. Advances under this line of credit have been used
to finance the operations of Jack of All Games and our expanded distribution
capacities. At February 28, 1999, $30,245,053 was outstanding under the line of
credit. We expect to use the resulting increased borrowing availability under
this line of credit to fund additional expansion.
We intend to use a significant portion of the net proceeds in connection
with our plans for continued expansion either through internal growth or
strategic acquisitions, including providing advances to software developers
such as Gathering.
We intend to use the balance of the net proceeds for working capital and
general corporate purposes.
We intend to invest any net proceeds of this offering not immediately
required for the above purposes in short-term, interest-bearing instruments.
14
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the Nasdaq National Market under the
symbol "TTWO" since September 23, 1998. From our initial public offering in
April 14, 1997 to September 22, 1998, our common stock traded on the Nasdaq
SmallCap Market. The following table shows the high and low closing sales
prices per share of our common stock as reported by Nasdaq for each quarter
since we have been public.
High Low
--------- ---------
Fiscal Year Ended October 31, 1997
Second Quarter (from April 14, 1997) ............ $ 7 9/16 $5 9/16
Third Quarter ................................... 8 11/16 7 1/8
Fourth Quarter .................................. 8 3/32 6 11/16
Fiscal Year Ended October 31, 1998
First Quarter ................................... 7 3/8 5
Second Quarter .................................. 8 3/8 6 1/2
Third Quarter ................................... 8 9/16 5 1/2
Fourth Quarter .................................. 6 5/8 5 1/8
Fiscal Year Ended October 31, 1999
First Quarter ................................... 13 1/16 6 5/32
Second Quarter (through March 18, 1999) ......... 13 1/4 8 5/16
On March 18, 1999, the last reported price of our common stock on the
Nasdaq National Market was $9.125 per share. At March 19, 1999, there were
approximately 90 holders of record of our common stock. We believe that there
are in excess of 400 beneficial owners of our common stock.
We have never declared or paid any dividends on our common stock, and we
do not expect to declare or pay any cash dividends in the foreseeable future.
The payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon our earnings, if any, our capital
requirements, financial condition and other relevant factors.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of January 31, 1999
(1) on an actual basis and (2) as adjusted to reflect the sale of 3,500,000
shares of common stock offered by us with this prospectus. You should read this
table together with the "Use of Proceeds" section and our financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
January 31, 1999
-----------------------------
Actual As Adjusted
-------------- ------------
<S> <C> <C>
Short-term debt ..................................... $31,833,951 $
=========== =========
Long-term debt ...................................... 81,861
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued or outstanding. ......... -- --
Common stock, $.01 par value 50,000,000 shares
authorized; 18,425,942 issued and outstanding;
________ shares issued and outstanding, as
adjusted (1) .................................... 184,259
Additional paid-in capital ....................... 34,792,045
Deferred compensation ............................ (212,951) (212,951)
Retained earnings ................................ 4,964,358 4,779,499
Foreign currency translation adjustment .......... (261,142) (261,142)
Total stockholders' equity ....................... 39,466,569
----------- ---------
Total capitalization ............................. $39,548,430 $
=========== =========
</TABLE>
- ------------
(1) Does not include an aggregate of 3,216,149 shares of common stock reserved
for issuance upon exercise of outstanding options and warrants as of
January 31, 1999.
16
<PAGE>
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following selected financial data at and for the fiscal years ended
October 31, 1996, 1997 and 1998 and the three months ended January 31, 1998 and
1999 has been derived from the financial statements included elsewhere in this
prospectus and should be read in conjunction with the financial statements and
related notes.
<TABLE>
<CAPTION>
Fiscal Year Ended October 31, Three Months Ended January 31,
---------------------------------------- ------------------------------
1996 1997(2) 1998(3) 1998 1999
------------ ----------- ----------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales ...................................... $ 55,123 $ 97,341 $194,052 $ 51,405 $ 68,281
Cost of sales .................................. 44,316 81,479 147,555 40,798 53,538
-------- -------- -------- -------- --------
Gross profit ................................... 10,807 15,862 46,496 10,608 14,743
Operating expenses:
Research and development costs ............... 994 1,848 1,702 487 592
Selling and marketing ........................ 4,187 8,043 18,686 4,231 4,161
General and administrative ................... 3,252 5,862 13,583 2,135 4,411
Depreciation and amortization ................ 342 1,004 1,835 377 453
-------- -------- -------- -------- --------
Total operating expenses .................. 8,776 16,757 35,807 7,230 9,618
-------- -------- -------- -------- --------
Income (loss) from operations .................. 2,032 (895) 10,690 3,378 5,125
Interest expense ............................. 308 1,843 3,680 1,548 817
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 1,724 (2,739) 7,010 1,830 4,308
Provision (benefit) for income taxes ......... 42 30 (334) 9 1,413
-------- -------- -------- -------- --------
Net income (loss)(4) ........................... $ 1,682 $ (2,768) $ 7,181 $ 1,821 $ 2,895
======== ======== ======== ======== ========
Net income (loss) per share(4)
Basic ......................................... $ .16 $ (.25) $ .49 $ .14 $ .16
Diluted ....................................... .15 (.25) .42 .13 .15
Net income (loss) per share attributable to
common stockholders -- Diluted(5) ............. .06 (.31) .37 .10 .15
======== ======== ======== ======== ========
Weighted average number of common
shares outstanding
Basic ........................................ 10,281 11,697 14,747 13,258 18,212
Diluted ...................................... 11,454 11,697 17,063 14,873 19,534
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of October 31, As of January 31, 1999
---------------------- ----------------------------
1997(2) 1998(3) Actual As Adjusted(6)
--------- ---------- ---------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash and cash equivalents ......... $ 2,372 $ 2,763 $ 4,761 $
Working capital ................... 16,037 21,797 25,980
Total assets ...................... 56,395 109,385 107,641
Total debt ........................ 22,031 30,808 31,916
Total liabilities ................. 44,460 73,820 68,175
Stockholders' equity .............. 11,935 35,566 39,467
</TABLE>
- ------------
(1) We acquired Inventory Management Systems, Inc. and Creative Alliance Group,
Inc. in July 1997, Jack of All Games, Inc. in August 1998 and Talonsoft,
Inc. in December 1998. The acquisitions are accounted for as pooling of
interests and our financial statements include the results of operations
and financial position of these entities for all periods presented.
(2) We acquired GameTek (UK) Limited and Alternative Reality Technologies, Inc.
in July 1997. The acquisition was accounted for as a purchase and the
results of operations and financial position of these entities are
included in our financial statements as of the date of the acquisition.
(3) We acquired L&J Marketing, Inc. d/b/a Alliance Distributors in December
1997, certain assets from BMG Interactive in March 1998 and DirectSoft,
Inc. in June 1998. These acquisitions were accounted for as a purchase and
the results of operations and financial position of these entities are
included in our financial statements as of the date of the acquisition.
(4) Does not give effect to distributions of $1,005,800, $673,092 and $931,000
paid to S-corporation shareholders prior to acquisitions for 1996, 1997
and 1998 and $362,000 (unaudited) for the three months ended January 31,
1998.
(5) Gives effect to distributions of $1,005,800, $673,092 and $931,000 paid to
S-corporation shareholders prior to acquisitions for 1996, 1997 and 1998
and $362,000 (unaudited) for the three months ended January 31, 1998.
(6) As adjusted to reflect the sale of 3,500,000 shares of common stock offered
by us with this prospectus.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our principal sources of revenues are our publishing and distribution
activities. Publishing revenues are derived from the sale of internally
developed interactive entertainment software or software licensed from third
parties. Distribution revenues are derived from the sale of third-party
software and hardware. Publishing activities usually generate higher margins
than distribution activities, with sales of PC software resulting in higher
margins than sales of cartridges designed for video game consoles. We recognize
revenue from software sales when titles are shipped. See Note 2 to Notes to
Consolidated Financial Statements.
Our published titles are subject to return if not sold to consumers,
including for stock balancing, markdowns or defective titles. We establish a
reserve for future returns of published titles at the time of sales, based
primarily on return policies and historical return rates, and we recognize
revenues net of returns. We have historically experienced a return rate of
approximately 10% of gross publishing revenues (less than 1% of distribution
revenues represent write-offs for returns). If future returns significantly
exceed our reserves, our operating results would be 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, we capitalize 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 title's release or the straight line
method. At October 31, 1998, we had capitalized $2,260,037 of software
development costs. We evaluate the recoverability of capitalized software costs
which may be reduced materially in future periods. See Note 2 to Notes to
Consolidated Financial Statements.
Recent Acquisitions
In March 1998, we acquired substantially all of the assets of BMG
Interactive, including direct distribution, sales and marketing operations in
France and Germany; a publishing and distribution group in the United Kingdom;
distribution, publishing and certain sequel rights to interactive entertainment
software; and various back catalogue publishing and distribution rights. As
consideration for the acquisition, we issued BMG Interactive 1,850,000 shares
of newly created Series A Convertible Preferred Stock, which were subsequently
converted into common stock. See Note 3 to Notes to Consolidated Financial
Statements.
In June 1998, we acquired all of the assets of DirectSoft Australia Pty.
Limited, a publisher and distributor of interactive entertainment software in
Australia and New Zealand. As consideration for the assets, we issued 40,000
shares of common stock. See Note 3 to Notes to Consolidated Financial
Statements.
In August 1998, we acquired all of the outstanding capital stock of Jack
of All Games, Inc., a company engaged in the distribution of interactive
entertainment software, for an aggregate of 2,750,000 shares of common stock.
The acquisition was accounted for as a pooling of interests and, accordingly,
our consolidated financial statements have been restated to include the results
of operations and financial position of Jack of All Games for all periods
presented. See Note 3 to Notes to Consolidated Financial Statements.
In December 1998, we acquired all of the outstanding capital stock of
Talonsoft, Inc., a company engaged in the development of historical military
strategy games, in consideration of the issuance of 1,033,336 shares of common
stock. The acquisition was accounted for as a pooling of interests and,
accordingly our consolidated financial statements have been restated to include
the results of operations and financial position of Talonsoft, Inc., for all
periods presented. See Note 3 to Notes to Consolidated Financial Statements.
In February 1999, we acquired all of the outstanding capital stock of
L.D.A. Distribution Limited, a company engaged in the distribution of
interactive entertainment software to small retail accounts in the United
Kingdom and France, and L.D.A.'s subsidiary, Joytech Europe Limited, a
manufacturer of computer accessories and peripherals. Both L.D.A. and Joytech
are incorporated in the United Kingdom. We paid British Pounds200,000
(approximately $328,000) and issued 580,000 shares of common stock, subject to
decrease under certain circumstances. See Note 17 to Notes to Consolidated
Financial Statements.
18
<PAGE>
In February 1999, we purchased a 19.9% Class A limited partnership
interest in Gathering. We agreed to make a capital contribution to Gathering in
the aggregate amount of $4.0 million, payable in six equal monthly installments
of $667,000. The general partner and each Class B limited partner of Gathering
granted us an option to purchase all of their interests, exercisable on two
separate occasions during the six-month periods ending April 30, 2001 and 2002
based on a fixed formula. In consideration of the option grant, we issued to
the general partner and the Class B limited partners 125,000 shares of common
stock. We also granted to the general partner and Class B limited partners an
option to purchase our Class A limited partnership interest, exercisable during
the six-month period ending April 30, 2003 based on a fixed formula. See Note
17 to Notes to Consolidated Financial Statements.
In February 1999, we acquired DVDWave.com, a distributor of DVD movie
titles over the Internet, in exchange for 50,000 shares of common stock. See
Note 17 to Notes to Consolidated Financial Statements.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales represented by certain items reflected in our statement of
operations:
<TABLE>
<CAPTION>
Years Ended Three Months
October 31, Ended January 31,
------------------------- -------------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales .............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 80.4 83.7 76.0 79.4 78.4
Research and development costs ......... 1.8 1.9 0.9 0.9 0.9
Selling and marketing .................. 7.6 8.3 9.6 8.2 6.1
General and administrative ............. 5.9 6.0 7.0 4.2 6.5
Depreciation and amortization .......... 0.6 1.0 0.9 0.7 0.7
Interest expense ....................... 0.6 1.9 1.9 3.0 1.2
Income taxes ........................... 0.1 -- (0.2) -- 2.1
Net income (loss) ...................... 3.1 (2.8) 3.7 3.5 4.2
</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 (percentages vary slightly due to rounding):
<TABLE>
<CAPTION>
Three Months Ended
Years Ended October 31, January 31,
----------------------- -----------------------
Platform 1997 1998 1998 1999
- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PC ................................... 87.3% 28.5% 41.4% 39.1%
Nintendo (excluding GameBoy) ......... 8.0% 29.1% 47.8% 9.4%
Nintendo GameBoy ..................... -- -- -- 21.6%
Sony ................................. 4.8% 42.3% 10.7% 29.8%
Sega ................................. -- -- -- --
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
</TABLE>
Three Months Ended January 31, 1999 and 1998
Net sales increased by $16,875,292, or 32.8%, from $51,405,361 for the
three months ended January 31, 1998 to $68,280,653 for the three months ended
January 31, 1999. The increase in net sales was primarily attributable to our
expanded presence in international markets. International publishing revenues
increased by $13,134,215 or 915.0%, from $1,435,453 for the three months ended
January 31, 1998 to $14,569,668 for the three months ended January 31, 1999. In
addition, revenues from distribution activities in the United States increased
by $9,919,526, or 28.8% from $34,469,905 for the three months ended January 31,
1998 to $44,389,431 for the three months ended January 31, 1999.
Cost of sales increased by $12,740,271, or 31.2%, from $40,797,569 for the
three months ended January 31, 1998 to $53,537,840 for the three months ended
January 31, 1999. The increase in absolute dollars was primarily a result of
the expanded scope of our operations. Cost of sales as a percentage of net
sales remained relatively constant, primarily due to the offset of higher
margin international publishing activities by lower margin distribution
operations. In future periods, cost of sales may be adversely affected by
manufacturing and other costs, price competition and by changes in product and
sales mix and distribution channels.
19
<PAGE>
Research and development costs increased by $105,181, or 21.6%, from
$486,963 for the three months ended January 31, 1998 to $592,144 for the three
months ended January 31, 1999. This increase is primarily attributable to our
increased product development operations. Research and development costs as a
percentage of net sales remained relatively constant.
Selling and marketing expenses decreased by $69,974, or 1.7%, from
$4,231,177 for the three months ended January 31, 1998 to $4,161,203 for the
three months ended January 31, 1999. Selling and marketing expenses as a
percentage of net sales decreased to 6.1% for the three months ended January
31, 1999 from 8.2% for the three months ended January 31, 1998. The decrease in
both absolute dollars and as a percentage of net sales is primarily
attributable to our acquisition of leading software distributors and the
resulting shift from using third party distributors.
General and administrative expenses increased by $2,276,252, or 106.6%,
from $2,135,246 for the three months ended January 31, 1998 to $4,411,498 for
the three months ended January 31, 1999. General and administrative expenses as
a percentage of net sales increased to 6.5% for the three months ended January
31, 1999 from 4.2% for the three months ended January 31, 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 our expanded operations.
Depreciation and amortization expense increased by $76,873, or 20.4%, from
$376,542 for the three months ended January 31, 1998 to $453,415 for the three
months ended January 31, 1999. This increase is primarily due to the
depreciation of assets acquired in March 1998.
Interest expense decreased by $731,518, or 47.3%, from $1,548,035 for the
three months ended January 31, 1998 to $816,517 for the three months ended
January 31, 1999. The decrease resulted primarily from amortization of discount
on borrowings in 1998.
Income taxes increased by $1,404,552, from $8,648 for the three months
ended January 31, 1998 to $1,413,200 for the three months ended January 31,
1999. The increase resulted primarily from the full utilization of net
operating loss carryforwards in fiscal 1998.
As a result of the foregoing, our net income was $2,894,836 for the three
months ended January 31, 1999, as compared to net income of $1,821,181 for the
three months ended January 31, 1998.
Years Ended October 31, 1998 and 1997
Net sales increased by $96,710,341, or 99.4%, from $97,341,225 for the
fiscal year ended October 31, 1997 to $194,051,566 for the fiscal year ended
October 31, 1998. The increase was primarily attributable to the acquisition of
product rights from BMG and Gathering. Publishing revenues increased by
$73,572,671, or 417.7%, from $17,612,801 for fiscal 1997 to $91,185,472 for
fiscal 1998. We also acquired leading software distributors to complement our
publishing activities and to maximize product exposure and revenues.
Distribution revenues increased by $23,137,670, or 29.0%, from $79,728,424 for
fiscal 1997 to $102,866,094 for fiscal 1998.
For fiscal 1998, revenues from publishing and distribution activities
accounted for approximately 47.0% and 53.0%, respectively, of our net sales.
For this year, software products designed for PC and video game console
platforms accounted for approximately 12.0% and 70.2%, respectively, of our
revenues, with sales of video game hardware accounting for 11.2% of net sales.
In addition, we significantly expanded our presence in international markets.
International sales accounted for approximately $41,870,625, or 21.6%, of our
net sales for fiscal 1998.
Cost of sales increased by $66,075,764, or 81.1%, from $81,479,408 for
fiscal 1997 to $147,555,172 for fiscal 1998. The increase in absolute dollars
was primarily a result of the expanded scope of our operations. Cost of sales
as a percentage of net sales decreased from 83.7% for fiscal 1997 to 76.0% for
fiscal 1998. This decrease was primarily due to an increase in publishing
activities which provide higher margins than distribution operations.
Research and development costs decreased by $145,631, or 7.9%, from
$1,847,970 for fiscal 1997 to $1,702,339 for fiscal 1998. Research and
development costs as a percentage of sales decreased from 1.9% for fiscal 1997
to 0.9% for fiscal 1998. This decrease was attributable to the shift from
software development to publishing and distribution. We anticipate that
research and development costs will increase in absolute dollars in connection
with the acquisition of Talonsoft.
20
<PAGE>
Selling and marketing expenses increased by $10,643,139, or 132.3%, from
$8,042,947 for fiscal 1997 to $18,686,086 for fiscal 1998. Selling and
marketing costs as a percentage of net sales increased from 8.3% for fiscal
1997 to 9.6% for fiscal 1998. The increase in both absolute dollars and as a
percentage of net sales was primarily due to increased marketing and promotion
efforts undertaken to broaden product distribution and to assist retailers in
positioning our products for sale to consumers.
General and administrative expenses increased by $7,721,170 or 131.7%,
from $5,861,961 for fiscal 1997 to $13,583,131 for fiscal 1998. General and
administrative expenses as a percentage of net sales increased from 6.0% for
fiscal 1997 to 7.0% for fiscal 1998. The increase in both absolute dollars and
as a percentage of net sales was primarily due to increased salaries, rent,
insurance premiums and professional fees associated with recent acquisitions.
Depreciation and amortization expense increased by $830,919, or 82.8%,
from $1,004,138 for fiscal 1997 to $1,835,057 for fiscal 1998. This increase
was primarily attributable to the amortization of goodwill associated with the
acquisitions of Take-Two Interactive Software Europe Limited, L&J Marketing,
Inc., d/b/a Alliance Distributors and BMG.
Interest expense increased by $1,836,672, or 99.6%, from $1,843,403 for
fiscal 1997 to $3,680,075 for fiscal 1998. The increase resulted primarily from
increased borrowings during fiscal 1998.
Income taxes decreased $363,925 from a tax provision of $29,789 for fiscal
1997 to a tax benefit of $334,136 for fiscal 1998. This decrease was primarily
attributable to the recognition of a deferred tax asset of $941,000.
As a result of the foregoing, we achieved net income of $7,181,094 for
fiscal 1998, as compared to a net loss of $2,768,391 for fiscal 1997.
Years Ended October 31, 1997 and 1996
Net sales increased by $42,218,162, or 76.6%, from $55,123,063 for fiscal
1996 to $97,341,225 for fiscal 1997. The increase in net sales was primarily
attributable to an increase in distribution revenues. Distribution revenues
increased $37,965,935, or 90.9%, from $41,762,489 for fiscal 1996 to
$79,728,424 for fiscal 1997. Publishing revenues increased $4,252,227 or 31.8%,
from $13,360,574 for fiscal 1996 to $17,612,801 in fiscal 1997 due to the
release of Mission Studio's JetFighter III in November 1996, which sold in
excess of 190,000 units worldwide. For fiscal 1997, revenues from publishing
and distribution activities accounted for approximately 18.1% and 81.9%,
respectively, of net sales.
Cost of sales increased by $37,163,524, or 83.9%, from $44,315,884 for
fiscal 1996 to $81,479,408 for fiscal 1997. The increase in absolute dollars
was primarily a result of the expanded scope of our operations. Cost of sales
as a percentage of net sales increased to 83.7% in fiscal 1997 from 80.4% in
fiscal 1996, primarily due to the increase in distribution revenues which
provided lower margins than publishing operations.
Research and development costs increased by $853,621, or 85.9%, from
$994,349 for fiscal 1996 to $1,847,970 for fiscal 1997. This increase was
primarily attributable to the acquisition of software developers, Mission
Studios in September 1996 and Alternative Reality Technologies in July 1997,
and the increased staffing and related expenses associated with the development
of software technologies. Research and development costs as a percentage of net
sales remained relatively constant.
Selling and marketing expenses increased by $3,855,966, or 92.1%, from
$4,186,981 for fiscal 1996 to $8,042,947 for fiscal 1997. Selling and marketing
expenses as a percentage of net sales increased to 7.6% for fiscal 1996 to 8.3%
for fiscal 1997. The increase in both absolute dollars and as a percentage of
net sales was primarily attributable to increased marketing and promotion
efforts undertaken to broaden product distribution and to assist retailers in
positioning our products for sale to consumers.
General and administrative expenses increased by $2,609,745, or 80.3%,
from $3,252,216 for fiscal 1996 to $5,861,961 for fiscal 1997. This increase
was primarily attributable to salaries, rent, insurance premiums and
professional fees associated with our expanded operations. General and
administrative expenses as a percentage of net sales remained relatively
constant.
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<PAGE>
Depreciation and amortization expense increased by $662,006, or 193.5%,
from $342,132 for fiscal 1996 to $1,004,138 for fiscal 1997. This increase was
primarily due to the amortization of intangible assets that resulted from the
acquisitions of Mission Studios and Take-Two Interactive Software Europe
Limited.
Interest expense increased by $1,535,724, or 499.1%, from $307,679 for
fiscal 1996 to $1,843,403 for fiscal 1997. The increase resulted primarily from
increased borrowings from financial institutions in fiscal 1997 and from the
issuance of notes to related parties in September 1996 (See Note 9b to Notes to
Consolidated Financial Statements).
Income taxes decreased by $12,360, from $42,149 for fiscal 1996 to $29,789
for fiscal 1997.
As a result of the foregoing, we incurred a net loss of $2,768,391 for
fiscal 1997, as compared to net income of $1,681,673 for fiscal 1996.
Liquidity and Capital Resources
Our primary capital requirements have been and will continue to be to fund
the acquisition, development, manufacture and commercialization of our
software. We have historically financed our operations through cash flow from
operations, the issuance of debt and equity securities and bank borrowings. At
October 31, 1998, we had working capital of $21,797,097 as compared to working
capital of $16,036,686 at October 31, 1997. The increase was primarily
attributable to the acquisition of assets from BMG. At January 31, 1999 we had
working capital of $25,980,469.
Net cash used in operating activities for fiscal 1998 was $8,021,841, as
compared to net cash used in operating activities of $14,460,000 for fiscal
1997. The decrease was primarily attributable to net income of $7,181,094 for
fiscal 1998. We used net cash in operating activities primarily to finance
significantly increased levels of receivables, inventories and advances to
developers. Net cash used in investing activities for fiscal 1998 was $727,418,
as compared to $2,583,359 for fiscal 1997. Net cash provided by financing
activities for fiscal 1998 was $9,016,664, as compared to $18,809,333 for
fiscal 1997. The decrease was primarily the result of the repayment of
indebtedness and a decrease in debt and equity financings in fiscal 1998.
In December 1996, Take-Two Interactive Software Europe Limited entered
into a line of credit agreement, as amended in September 1997, April and July
1998 and January 1999, with Barclays Bank. The line of credit provides for
borrowings of up to approximately British Pounds2,000,000 (approximately
$3,347,200). Advances under the line of credit bear interest at the rate of
1.5% over Barclays' base rate per annum, payable quarterly. Borrowings are
collateralized by receivables of Take-Two Interactive Software Europe Limited,
which must be at least 200% of the amount outstanding under the line of credit,
and are guaranteed by us. The line of credit is cancellable and repayable upon
demand and is subject to review prior to December 31, 1999. The available
credit under this facility was approximately British Pounds664,759
(approximately $1,112,600) at October 31, 1998. There were amounts outstanding
under the line of credit as of February 28, 1999. See Note 7 to Notes to
Consolidated Financial Statements.
In May 1998, we consummated a private placement pursuant to which we
issued 770,000 shares of common stock and received proceeds (net of placement
fees) of $5,057,000.
In February 1999, Jack of All Games entered into a line of credit
agreement with NationsBank which provides for borrowings of up to $35,000,000
through September 30, 1999 and $45,000,000 thereafter. Advances under the line
of credit are based on a borrowing formula equal to the lesser of (1) the
borrowing limit in effect at the time (i.e., $35,000,000 or $45,000,000) or (2)
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 secured by all accounts,
inventory, equipment, general intangibles, securities and other personal
property of Jack of All Games. In addition to certain financial covenants, the
loan agreement limits or prohibits us from declaring or paying cash dividends,
merging or consolidating 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. As of February
28, 1999, $30,245,053 was outstanding under the line of credit. We intend to
use a portion of the net proceeds from this offering to reduce outstanding
indebtedness under this line of credit and expect to use the resulting
increased borrowing availability under this line of credit to fund additional
expansion.
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Our accounts receivable, less an allowance for doubtful accounts and
returns, at October 31, 1998 were $49,138,871. Approximately $7,344,952 or
14.9%, of our net accounts receivable were due from Ames Department Stores.
These receivables are covered by insurance and generally have been collected in
the ordinary course of business. Our sales are typically made on credit, with
terms that vary depending upon the customer and the demand for the particular
title being sold. We do not hold any collateral to secure payment by our
customers. As a result, we are subject to credit risks, particularly in the
event that any of our receivables represent sales to a limited number of
retailers or are concentrated in foreign markets. If we are unable to collect
on accounts receivable as they become due and such accounts are not covered by
insurance, our liquidity and working capital position could suffer.
We have no material commitments for capital expenditures.
Fluctuations in Operating Results; Seasonality
We have 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 our titles; development and promotional expenses relating to the
introduction of new titles, sequels or enhancements of existing titles;
projected and actual changes in platforms; the timing and success of title
introductions by our competitors; product returns; changes in pricing policies
by us and our competitors; the accuracy of retailers' forecasts of consumer
demand; the size and timing of acquisitions; the timing of orders from major
customers; and order cancellations and delays in shipment.
Sales of our titles are seasonal, with peak shipments typically occurring
in the fourth calendar quarter (our fourth and first fiscal quarters) 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 our revenues. For the years ended October 31, 1997 and 1998, sales
in international markets accounted for approximately 5.9% and 21.6%,
respectively, of our revenues. We are subject to risks inherent in foreign
trade, including increased credit risks, tariffs and duties, fluctuations in
foreign currency exchange rates, shipping delays and international political,
regulatory and economic developments, all of which can have a significant
impact on our operating results. Sales in France and Germany are made in local
currencies. We do not engage in foreign currency hedging transactions.
Impact of the 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.
We have assessed potential issues that may result from the Year 2000 and
are in the process of upgrading our accounting and management software, which
we expect to complete by June 1999. Based on our preliminary assessment, we
believe our PC products to be Year 2000 compliant. We do not contemplate
incurring material costs in connection with ensuring Year 2000 readiness.
We have contacted principal third-party suppliers and customers to
determine their Year 2000 readiness and believe that such suppliers and
customers are in the process of becoming Year 2000 compliant. However, any
failure by us, our third-party suppliers or customers to correct a material
Year 2000 problem could result in an interruption in, or a failure of, certain
of our business operations. We have not yet adopted a Year 2000 contingency
plan.
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<PAGE>
INDUSTRY OVERVIEW
The market for interactive entertainment software has grown significantly
in recent years, due in part to an increasing installed base of PCs, video
console platforms and hand-held systems such as the Nintendo GameBoy Color.
Steadily declining hardware prices combined with more powerful and realistic
computer graphics have resulted in greater demand for software games by
audiences of all ages.
According to the NPD Group (NPD), total U.S. sales of interactive
entertainment software reached $4.9 billion in 1998, an increase of 25.6% from
$3.9 billion in 1997.
Increasing Sales of PC Systems. The International Data Corporation (IDC)
has estimated that the number of U.S. households owning a PC would reach 46
million in 1998, representing a penetration rate of 45.5% of total U.S.
households. As the price of PC hardware continues to drop below $1,000, IDC
estimates that approximately 56 million households in the U.S. will own a PC by
2002, representing a penetration rate of 53% of total U.S. households. The
worldwide increase in penetration and sales of PC systems has caused demand for
PC entertainment software to grow. According to NPD, U.S. sales of PC
entertainment software were $1.2 billion in 1998.
Increasing Sales of Video Console Platforms. Three manufacturers of video
console platforms, Sony, Nintendo and Sega, have historically dominated the
video console market. According to IDC, U.S. console shipments are expected to
grow 14% from 15.3 million in 1997 to 17.5 million in 1998. The growth in
shipments of video console systems has driven a rapid expansion of console
software revenues. NPD data indicates that sales of entertainment software for
video console platforms and portable systems increased by 37.1% from $2.7
billion in 1997 to $3.7 billion in 1998.
Expanding Distribution Channels. Historically, interactive entertainment
software has been sold primarily through specialty retailers such as
Electronics Boutique, major retailers such as Best Buy and mass merchants such
as Wal-Mart. The introduction of budget-priced software (software priced at
less than $15) has attracted a wider user base, and non-traditional retail
outlets such as drugstore and supermarket chains have been emerging as
important new distribution channels for interactive entertainment software.
According to PC Data, 36% of interactive entertainment software games sold in
1998 for use on PCs were budget-priced titles. Although the number of
distribution channels for software titles has increased, an abundance of new
software titles has forced retailers to be highly selective in allocating shelf
space. Competition for shelf space has intensified as retailers continue to
carry a limited number of software products that they expect to sell in high
volumes.
Technology and Platform Shifts. Historically, the interactive
entertainment software industry has experienced periods of instability when new
console platforms fail to gain widespread acceptance or when development and
publishing companies fail to quickly adapt to changing consumer hardware
preferences. Sony has recently announced the creation of the next generation of
the PlayStation, which it plans to introduce in 2000. Sega has introduced its
Dreamcast system in Japan and plans to introduce it in the U.S. and Europe
later this year. Nintendo has stated that it is in the process of developing a
new video game platform. As a result, interactive entertainment software
companies may be required to make investments in research, game development and
inventory in order to supply products for new platforms. Industry sources have
suggested that the substantial installed base of multimedia PCs, the mass
market appeal and expanding user base of interactive entertainment software and
the increasing use of cost-effective CD-ROMs may diminish the effects of future
console platform shifts. In addition, Sony has announced that the next
generation of PlayStation will be the first console system to feature backwards
compatibility with existing PlayStation software, allowing consumers to play
their old PlayStation games on the new system. This feature may lessen the
impact of console shifts by extending the useful life of older software titles.
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<PAGE>
BUSINESS
We are a leading developer, publisher and distributor of interactive
entertainment software. Our software operates on multimedia PCs, video game
console platforms manufactured by Sony, Nintendo and Sega and Nintendo's
GameBoy Color hand-held gaming system. Through internal expansion and several
strategic acquisitions, we have become one of the largest distributors of
interactive entertainment software in the United States and one of the top ten
publishers of interactive entertainment software in Europe.
In recent years we have achieved significant growth in sales and net
income. Our revenues increased to $194.1 million for the year ended October 31,
1998 from $97.3 million for the year ended October 31, 1997. We generated
earnings of $7.2 million for the year ended October 31, 1998, as compared to a
loss of $2.8 million for the year ended October 31, 1997.
Our Strategy
Our objective is to achieve growth and increase profitability by
developing high-quality interactive entertainment software and capitalizing on
our distribution expertise. Our strategy includes:
o Acquiring and developing a portfolio of high-quality content. We believe
that our success depends on our ability to continue to develop and license
original and compelling software games with broad consumer appeal. We believe
that our publishing and distribution capabilities attract software publishers
and developers with popular software content. We plan on continuing to build a
varied portfolio of internally and externally developed titles to minimize our
reliance on any individual software title or platform.
o Establishing and building strong brand recognition through co-branding
and cross-promotional opportunities. We believe that the shared demographics
between some of our software titles and various industries such as music,
magazines and sports provide excellent opportunities to build strong brand
recognition through co-branding and cross-promotional initiatives. We believe
that the development of strong brand recognition can lead to increased market
acceptance of new titles and allow for a greater number of franchise titles or
titles that can be exploited beyond their initial release. We plan to use our
recently developed interactive entertainment software label, Rockstar Games, as
the focal point of this strategy.
o Distributing software to a broader range of consumers. We distribute
titles at different price points, ranging from high-end "front line" titles to
lower-priced "budget" titles, to a variety of traditional and non-traditional
retailers, including drug and grocery store chains. We intend to position our
titles for a broad range of consumers through different distribution
techniques, including through the continued acquisition and distribution of
budget-priced titles to non-traditional retail outlets on an exclusive basis.
o Continuing to expand our international operations. We have developed a
strong international distribution network, which we believe serves as a
complement to our development and publishing activities and enables us to
develop direct selling relationships with certain retail accounts. We intend to
apply the distribution strategy of Jack of All Games to our international
operations in addition to increasing our publishing and direct distribution
activities.
o Using our integrated and diversified operations to manage industry
changes. We have established integrated software development, publishing and
distribution capabilities. We will continue to coordinate these activities to
capitalize on rapidly expanding market opportunities, to minimize our exposure
to industry changes and our dependence on the success of individual titles and
to take advantage of economies of scale.
o Developing multi-player on-line gaming and pursuing distribution
opportunities over the Internet. We are currently developing a multi-player
on-line version of Grand Theft Auto and we intend to develop additional
multi-player on-line versions of certain of our titles in the near future.
Through our recent acquisition of DVDWave.com, we are pursuing opportunities to
distribute DVD products over the Internet.
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<PAGE>
Recent Releases
We actively seek to release titles with potential for mass appeal. For the
year ended October 31, 1997, the JetFighter series sold more than 190,000
copies and with Dark Colony accounted for approximately 8.1% and 2.2%,
respectively, of our revenues. For the year ended October 31, 1998, Grand Theft
Auto sold more than 630,000 copies and with Three Lions Soccer accounted for
approximately 7.6% and 4.0%, respectively, of our revenues. The following are
certain titles we have released:
<TABLE>
<CAPTION>
Title Platform Release Date Description
- ----- -------- ------------ -----------
<S> <C> <C> <C>
JetFighter III PC November 1996 3-D military flight simulation
game
Dark Colony PC August 1997 Strategy game set on Mars in
2026
Jetfighter Platinum PC October 1997 Technologically advanced version
Wheel of Fortune Nintendo 64 November 1997 Popular TV game show
Jeopardy! Nintendo 64 February 1998 Popular TV game show
Three Lions Soccer PC, Sony April 1998 Featuring England's World Cup
PlayStation soccer team
You Don't Know Jack! PC May 1998 Popular trivia game
(Europe)
Grand Theft Auto PC, Sony June 1998 Car game set in criminal
PlayStation underworld
Railroad Tycoon II PC October 1998 Player builds railroads to amass
wealth
Space Station: Silicon Valley Nintendo 64 October 1998 Save the world from mutant
animals
Tom Clancy's Rainbow Six PC October 1998 Save the world from terrorists
(Europe)
West Front PC November 1998 Historical battle game from
Talonsoft
Montezuma's Return GameBoy Color December 1998 Classic adventure game
</TABLE>
Proposed Releases
Monster Truck Madness, Earthworm Jim 3-D and Grand Theft Auto II are
expected to account for a significant portion of our publishing revenues for
the year ending October 31, 1999. The following is our currently proposed
schedule of certain title releases:
<TABLE>
<CAPTION>
Title Platform Release Date Description
- ----- -------- ------------ -----------
<S> <C> <C> <C>
GTA: London 1969 PC, Sony Spring 1999 First mission pack for Grand Theft
PlayStation Auto
Fly! PC Spring 1999 Flight simulation
Railroad Tycoon II Sony PlayStation Summer 1999 Player builds railroads to amass
wealth
Monster Truck Madness Nintendo 64 Summer 1999 Microsoft's successful PC game
In Fisherman's Bass Hunter 64 Nintendo 64, Summer 1999 Fishing simulation game
GameBoy Color
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Title Platform Release Date Description
- ----- -------- ------------ -----------
<S> <C> <C> <C>
Earthworm Jim 3-D Nintendo 64, Summer 1999 Everyone's favorite earthworm,
Sony PlayStation (North America) now in 3-D
Darkstone PC, Sony Summer 1999 Medieval action role-playing game
PlayStation (North America)
Max Payne PC, Sega Fall 1999 Gritty, noir third-person
Dreamcast action/shooter
JetFighter IV PC Fall 1999 Includes state-of-the-art photo
textures, advanced networking and
Internet support
Grand Theft Auto II PC, Sony Fall 1999 Sequel to the popular Grand Theft
PlayStation, Auto
Nintendo 64,
GameBoy Color
Spec Ops Sony PlayStation Fall 1999 Military combat action
Wild Metal Country PC, Sega Fall 1999 Futuristic high-tech action game
Dreamcast
Kiss: Psycho Circus PC, Sony Spring 2000 Rock and roll 3-D shooter
PlayStation,
GameBoy Color
Thrasher: Skate and Destroy Sony PlayStation Spring 2000 Urban extreme skateboarding
game
GTA II: Berlin PC, Sony Spring 2000 Misson pack for
PlayStation Grand Theft Auto II
Duke Nukem (untitled) TBA Fall 2000 Popular 3-D shooter
</TABLE>
Our proposed titles may not be released on a timely basis, or at all.
Publishing and Distribution Arrangements
Agreements with Gathering
In May 1998, we entered into distribution agreements with Gathering of
Developers, a group of six premier entertainment software developers, Ritual
Entertainment, Inc., Epic MegaGames, Inc., Terminal Reality, Inc., Apogee
Software, Inc./3D Realms Ltd., Poptop Software, Inc. and Edge of Reality, Inc.
Pursuant to the distribution agreements, Gathering granted us: (1) the
exclusive right to distribute its first ten titles, including Railroad Tycoon
II, Fly!, Max Payne, Nocturne and Kiss: Psycho Circus designed to operate on PC
platforms in the United States and Canada during the later of a four-year
period or three years following the release of any such title; (2) exclusive
European publishing rights for these titles; (3) a non-exclusive right to
distribute the titles on-line; and (4) certain rights of first refusal to
distribute the titles designed for use on console platforms in North America,
Europe, Israel, Australia and Africa. In December 1998, we obtained the
exclusive worldwide rights to publish and distribute Railroad Tycoon II, Max
Payne and Kiss: Psycho Circus designed for use on video game console platforms.
In February 1999, we entered into a distribution agreement with Gathering
amending our May 1998 agreement. Gathering granted us: (1) the exclusive right
to distribute in the United States and Canada all titles designed by Gathering
to operate on PC platforms and scheduled to be released by May 31, 2003; (2)
the exclusive right to publish in Europe all titles designed by Gathering to
operate on PC platforms and scheduled to be released by May 31, 2003; (3) until
recoupment of the advances described below, rights of first and last refusal
for the exclusive worldwide publishing rights to any console version of titles
for which Gathering has
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<PAGE>
publishing rights; and (4) after recoupment of such advances, the rights of
first and last refusal for publishing rights to any console port of any title
for which Gathering has publishing rights and which was originally published by
or on behalf of Gathering on the PC or other non-console platform.
This agreement obligates us to pay Gathering recoupable advances of
$12,500,000. We can terminate the agreement 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 pay us the 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.
Agreements with Video Game Console Manufacturers
In March 1999, we entered into four-year agreements with Sony Computer
Entertainment America granting us non-exclusive, nontransferable licenses to
develop and publish software on CD-ROMs for use on the PlayStation platform in
the United States and Canada. Under the agreements, Sony is the exclusive
manufacturer of all units and packaging materials for PlayStation titles.
In February 1998, we entered into a three-year agreement with Nintendo of
America Inc. granting us a non-exclusive license in North, Central and South
America to develop and sell software games incorporated in game cartridges for
use on the Nintendo 64 game system. The agreement requires Nintendo to approve
detailed title proposals as well as completed games, all associated artwork and
marketing materials. We retain the right to adapt any games for sale on other
platforms. We are obligated to pay Nintendo Co., Ltd., Nintendo's parent, to
manufacture, print and package all games we develop pursuant to the agreement,
which prices include royalties. In May 1998, Nintendo Co., Ltd. entered into a
similar three-year agreement with our subsidiary, Take-Two Interactive Software
Europe Limited granting us a non-exclusive license in Europe, Australia and New
Zealand to develop and sell software games incorporated in game cartridges for
use on the Nintendo 64 game system. In April 1998, we entered into an agreement
with Nintendo granting us a non-exclusive right to develop software games for
use on Nintendo GameBoy and GameBoy Color portable video game systems.
We are currently negotiating an agreement with Sega Enterprises, Ltd.
which will grant us a non-exclusive, non-transferable license to develop,
market and distribute software designed to operate on the Sega Dreamcast
system, formerly known as the Sega Katana platform.
We are not required to obtain any license for the development and
production of titles designed to operate on PCs.
Other Publishing and Distribution Arrangements
In March 1998, we acquired certain publishing and distribution rights from
BMG, including (1) the worldwide publishing and distribution rights and
copyright to Grand Theft Auto for PC and Sony PlayStation platforms, (2) the
worldwide publishing and distribution rights and intellectual property rights
to Space Station: Silicon Valley for the Nintendo 64 gaming system, (3) the
European distribution rights to PC recreational software titles including
Berkley Systems' After Dark screen saver series, You Don't Know Jack! trivia
series, gaming franchises such as Crystal Dynamic's Gex and Pandemonium series
for the Sony PlayStation and ASC Games' One for the Sony PlayStation, (4) the
worldwide publishing and distribution rights to a series of sales region
customized World Cup soccer games for the Sony PlayStation, (5) the worldwide
publishing, distribution and sequel rights to the role-playing game Monkey Hero
for the Sony PlayStation and PC platforms and (6) the worldwide publishing,
distribution and sequel rights to the military combat game Special Ops for the
Sony PlayStation and PC platforms.
Other agreements to develop, publish and distribute software titles
include: the grant by Interplay Entertainment Corp. of the exclusive right to
market, publish and distribute Nintendo 64 and Sony PlayStation versions of
Earthworm Jim 3-D in North and South America; the exclusive worldwide license
from Microsoft, Inc. to distribute a version of Monster Truck Madness 2
designed to operate on the Nintendo 64 platform; and the grant by Majesco
Sales, Inc. of exclusive European distribution rights for ten Nintendo Color
GameBoy titles, including Monopoly, Millipede, Frogger, Centipede, Breakout,
Battleship and Missile Command, licensed to Majesco by Hasbro Interactive.
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<PAGE>
Internal Software Development
We engage in software development activities through our wholly-owned U.S.
development subsidiaries, Talonsoft (a developer of historical military
strategy games), Mission Studios (a developer of flight simulation games),
Alternative Reality Technologies and GearHead Entertainment. We also maintain a
development studio focusing on games for the Nintendo GameBoy Color platform in
the United Kingdom under the name Tarantula. Our internal development studios
and product development department employ a total of 89 development personnel
with the technical capabilities to develop software titles for all major game
platforms.
Our production process is designed to enable us to manage and control
development, production budgets and timetables, identify and address possible
production and technical issues and coordinate and implement marketing
strategies in a creative environment. We utilize an integrated scheduling and
production process and software development tools, which include capabilities
to produce cinematic quality movie sequences, full motion digital video and
enhanced "real-time" 3-D graphics. We believe that our production capabilities
permit us to produce high quality software on a timely and cost-effective
basis.
For the years ended October 31, 1997 and 1998, we incurred costs of
$1,847,970 and $1,702,339 on research and development relating to our software
titles.
Marketing, Sales and Distribution
Our marketing and promotional efforts are intended to maximize exposure
and broaden distribution of our titles, promote brand name recognition, assist
retailers and properly position, package and merchandise our titles. We market
titles by implementing aggressive public relations campaigns using print and
on-line advertising. Advertisements are placed in industry magazines using
memorable tag lines, visually appealing full color art work and creative
concepts to position and distinguish our titles in the marketplace. We also
employ various other marketing methods designed to promote consumer awareness,
including in-store promotions and point-of-purchase displays, direct mail,
cooperative advertising, attendance at trade shows, as well as the use of
distinctive packaging. We maintain a sales and marketing staff of 69 persons.
We distribute both our own titles and titles developed by third parties
through our wholly-owned subsidiaries, Take-Two Interactive Software Europe
Limited, Jack of All Games, Inventory Management Systems, Inc., DirectSoft and
L.D.A. Distribution Limited. For the year ended October 31, 1998, the sale of
third-party products accounted for approximately 53.0% of our revenues. For the
year ended October 31, 1998, sales to Hollywood Entertainment and Ames
Department Stores accounted for approximately 6.5% and 5.5%, respectively, of
our revenues. No customer accounted for more than 10% of our revenues for that
year.
United States Sales. We distribute interactive entertainment software to
over 20,000 retail outlets in the United States through third party
distributors and through direct relationships with large retail customers. Our
U.S. customers include WalMart, Toys R Us, Electronics Boutique, Babbage's,
Best Buy and Ames Department Stores as well as leading national and regional
drug store, supermarket and discount store chains and specialty retailers.
International Sales. We have significantly expanded our international
presence through the acquisition of offices and marketing and distribution
operations in the United Kingdom, France, Germany and Australia. We distribute
interactive entertainment software to over 19,000 retail outlets in Europe,
through third party distributors and through direct relationships with retail
customers in the United Kingdom, France and Germany. We recently opened a
licensing office in Japan. Sales in foreign markets have accounted for an
increasing portion of our revenues.
Development of Rockstar Games. We have begun to actively pursue
relationships with participants in industries such as music, magazines and
sports aimed at the youth market through our internal console software
publishing label, Rockstar Games. We believe that the shared demographics
between various media and some of our software titles marketed by Rockstar
Games provide excellent cross-promotional opportunities. We have been working
with popular and emerging recording artists to create sophisticated game
soundtracks, have entered into agreements to license high-profile names and
likenesses, and are exploring co-branding opportunities. Our goal is to
accelerate the acceptance and growth of our titles, create brand awareness and
develop a greater number of franchise titles.
29
<PAGE>
Manufacturing
Our production of PC software includes CD-ROM pressing, assembly of
components, printing of packaging and user manuals and shipping of finished
goods, which is performed by third-party vendors in accordance with our
specifications and forecasts. We believe that there are alternative sources for
these services that could be implemented without delay. However, we are
dependent on Nintendo to provide supplies of video game cartridges and on Sony
to provide supplies of CDs for use on their video game platforms on a timely
basis and on favorable terms. Nintendo cartridges are more expensive to
manufacture than CDs, resulting in a greater inventory risk for those games. We
purchase titles manufactured by Nintendo and Sony by placing purchase orders in
the ordinary course of business and by obtaining letters of credit in favor of
Nintendo. We send software code and a prototype of a title, together with
related artwork, user instructions, warranty information, brochures and
packaging designs to manufacturers for approval, defect testing and
manufacturing. Titles are generally shipped within two weeks of receipt of
order. Titles manufactured by Nintendo are generally shipped within four to six
weeks of receipt of order. To date, we have not experienced any material
difficulties or delays in the manufacture of our titles or material delays due
to title defects. Our software titles carry a 90-day limited warranty. In
addition, our subsidiary Joytech Europe Limited manufactures computer
accessories and peripherals.
Competition
We compete both for licenses to properties and the sale of interactive
entertainment software with Sony, Nintendo and Sega, each of which is the
largest developer and marketer of software for its platforms. Sony and Nintendo
currently dominate the industry and have the financial resources to withstand
significant price competition and to implement extensive advertising campaigns,
particularly for prime-time television. These companies may also increase their
own software development efforts.
We also compete with domestic companies such as Activision, Electronic
Arts, GT Interactive, Acclaim Entertainment, THQ, Midway Games, Hasbro,
Microsoft and Mattel and international companies such as Capcom, Konami and
Namco. In addition, we believe that large software companies and media
companies are increasing their focus on the interactive entertainment software
market. Many of our competitors are developing on-line interactive games and
interactive networks that will compete with our software. Many of our
competitors have far greater financial, technical, personnel and other
resources than we do, and many are able to carry larger inventories, adopt more
aggressive pricing policies and make higher offers to licensors and developers
for commercially desirable properties than we can.
Interactive entertainment software distribution channels have undergone
rapid change in recent years, including financial difficulties of certain
retailers and the emergence of new channels for distribution of software such
as mass merchandisers, other retail outlets and the Internet. An increasing
number of companies and new market entrants are competing for access to these
channels.
Retailers typically have limited shelf space and promotional resources,
and competition is intense among an increasing number of newly introduced
entertainment software titles for adequate levels of shelf space and
promotional support. Competition for retail shelf space is expected to
increase, which may require us to increase our marketing expenditures just to
maintain current levels of sales of our titles. Competitors with more extensive
lines and popular titles frequently have greater bargaining power with
retailers. Accordingly, we may not be able to achieve the levels of support and
shelf space that such competitors receive. Similarly, as competition for
popular properties increases, our cost of acquiring licenses for such
properties is likely to increase, possibly resulting in reduced margins.
Prolonged price competition, increased licensing costs or reduced operating
margins would cause our profits to decrease significantly.
Competition for our titles is influenced by the timing of competitive
product releases and the similarity of such products to our titles and may
result in loss of shelf space or a reduction in sell-through of our titles at
retail stores. Our titles also compete with other forms of entertainment such
as motion pictures, television and audio and video cassettes featuring similar
themes, on-line computer programs and forms of entertainment which may be less
expensive or provide other advantages to consumers.
30
<PAGE>
Intellectual Property
We develop proprietary software and technologies and have obtained the
rights to publish and distribute software developed by third parties. We
attempt to protect our software and techniques under copyright, trademark and
trade secret laws as well as through contractual restrictions on disclosure,
copying and distribution. We generally do not hold any patents or registered
copyrights.
Interactive entertainment software is susceptible to unauthorized copying.
Unauthorized third parties may be able to copy or to reverse engineer our
titles to obtain and use programming or production techniques that we regard as
proprietary. In addition, our competitors could independently develop
technologies substantially equivalent or superior to our technologies.
As the amount of interactive entertainment software in the market
increases and the functionality of this software further overlaps, we believe
that interactive entertainment software will increasingly become the subject of
claims that such software infringes the copyrights or patents of others. From
time to time, we receive notices from third parties alleging infringement of
their proprietary rights. Although we believe that our titles and technologies
and the titles and technologies of third-party developers and publishers with
whom we have contractual relations do not and will not infringe or violate
proprietary rights of others, it is possible that infringement of proprietary
rights of others may occur. Any claims of infringement, with or without merit,
could be time-consuming, costly and difficult to defend.
Employees
As of February 28, 1999, we had 277 full-time employees, including five
executive officers, 89 employees engaged in product development, 69 in sales
and marketing and 114 in operations. None of our employees are subject to a
collective bargaining agreement. We consider our relations with employees to be
good.
Subsidiaries
Our subsidiaries include: (1) our domestic distribution subsidiaries:
Inventory Management Systems, Inc., Jack of All Games, Inc. and Falcon Ventures
Corporation d/b/a DVDWave.com; (2) our international publishing and
distribution subsidiaries: Take-Two Interactive Software Europe Limited,
Take-Two Interactive France, S.A. (France), Take-Two Interactive GMBH
(Germany), DirectSoft Australia Pty. Limited and L.D.A. Distribution Limited;
(3) our domestic development subsidiaries: GearHead Entertainment, Inc.,
Mission Studios, Inc., Talonsoft, Inc. and Alternative Reality Technologies,
Inc. (4) and our international accessory subsidiary: Joytech Europe Limited.
Properties
Executive Offices
Our principal executive and administrative office is located at 575
Broadway, New York, New York in approximately 5,000 square feet of office space
under a lease with 575 Broadway Corporation, a company controlled by Peter M.
Brant, a principal stockholder. We currently pay $14,864 per month rent,
subject to annual consumer price index adjustments. We intend to relocate our
executive offices to 10,000 square feet of office space in May 1999 under a new
five-year lease with 575 Broadway Corporation which provides for an annual rent
of $300,000 during the first five years. We believe that the terms of the lease
are no less favorable than those that could have been obtained from an
unaffiliated third-party.
International Operations
Take-Two Interactive Software Europe Limited leases 6,000 square feet of
office space in Windsor, United Kingdom. The lease provides for a current
annual rent of British Pounds100,000 (approximately $168,000) and expires in
August 2006. Take-Two Interactive Software Europe Limited also leases office
space in Lincoln, United Kingdom. The lease provides for a current annual rent
of British Pounds12,000 (approximately $20,200) and expires in 2007.
Subsidiaries of Take-Two Interactive Software Europe Limited lease office and
warehouse space at locations in Paris, France, Munich, Germany and Tokyo, Japan
for current aggregate annual rent of
31
<PAGE>
approximately $90,000. Directsoft leases office and warehouse space in Hornsby,
Australia at an annual rent of approximately $76,000. Joytech Europe Limited
leases office space in Leighton Buzzard Beds, United Kingdom at an annual rent
of British Pounds58,600 (approximately $98,400).
Development Facilities
GearHead maintains a production facility in Latrobe, Pennsylvania in 7,200
square feet of leased office space. The lease provides for an annual rent of
$78,000 and expires in December 1999, with an option to renew the lease for an
additional four-year period. Mission leases 2,600 square feet of office space
at an annual rate of $53,040, subject to annual increases, pursuant to a lease
that expires in February 2004. ART leases approximately 2,500 square feet of
space in Ontario, Canada at an annual rental of $32,400. Talonsoft leases
approximately 3,800 square feet of office space in Baltimore, Maryland.
Talonsoft currently pays $42,800 per annum under the lease, which expires in
April 1999.
Distribution Facilities
Inventory Management Systems, Inc. leases approximately 10,000 square feet
of office and warehouse space in Richmond, Virginia at an annual rental of
$67,000. Jack of All Games leases approximately 13,000 square feet of office
and warehouse space in College Point, New York. The lease provides for annual
rent of $96,000, plus increases in real estate taxes, and expires in July 2001.
Jack of All Games leases approximately 64,000 square feet of office and
warehouse space in Cincinnati, Ohio. Jack of All Games currently pays $225,000
per annum, plus taxes and insurance, under the lease, which expires in July
2002. Jack of All Games also leases 20,400 square feet of warehouse space in
Cincinnati, Ohio on a month-to-month basis at a cost of $5,525 per month.
32
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Ryan A. Brant ................ 27 Chief Executive Officer and Director
Kelly Sumner ................. 37 Vice President of International Operations and Director
Anthony R. Williams .......... 40 Chief Operating Officer and Director
Larry Muller ................. 41 Chief Financial Officer
Barbara A. Ras ............... 36 Chief Accounting Officer and Secretary
Oliver R. Grace, Jr .......... 45 Director
Neil S. Hirsch ............... 51 Director
Robert Flug .................. 51 Director
</TABLE>
Ryan A. Brant, our founder, has been Chief Executive Officer and a
director since our inception. Mr. Brant received a B.S. degree in Economics
from the University of Pennsylvania's Wharton School of Business.
Kelly Sumner has been a director since December 1997. Mr. Sumner has been
President of Take-Two Interactive Software Europe Limited since July 1997.
Prior thereto, from April 1993 to July 1997, Mr. Sumner was President and Chief
Operating Officer of Gametek, Inc. From June 1979 to April 1993, Mr. Sumner was
Managing Director of the UK subsidiary of Commodore Business Machines.
Anthony R. Williams has been a director since March 1998. Mr. Williams has
been our Chief Operating Officer since February 1998. Prior to joining us, Mr.
Williams was employed in various positions at Acclaim Entertainment from April
1988 to February 1998, most recently as Executive Vice President, Mergers and
Acquisitions. Mr. Williams also serves as a director of the Near East
Foundation. Mr. Williams received a B.A. in Economics from Cambridge
University.
Larry Muller has been our Chief Financial Officer since January 1999 and
Chief Financial Officer and Chief Operating Officer of Alliance Inventory
Management, Inc. since December 1997. Mr. Muller co-founded Alliance
Distributors in 1989 and served as its Chairman and Chief Financial Officer
until we acquired Alliance Distributors in December 1997. Mr. Muller received a
B.A. in Economics from Stonybrook University in 1979.
Barbara A. Ras, CPA, has served as our Chief Accounting Officer since
October 1998 and our Secretary since April 1997. From October 1994 to October
1998, Ms. Ras served as our Controller. Prior to joining us, Ms. Ras was
employed as a tax accountant from September 1992 to September 1994, and as an
internal auditor with The New York Times Company from March 1988 to June 1991.
Ms. Ras holds a B.S. degree in Accounting from St. John's University, and a
Masters degree in Taxation from the State University of New York at Albany.
Oliver R. Grace, Jr. has been a director since April 1997. Mr. Grace, a
private investor, has been the Chairman of the Board of Andersen Group, Inc., a
dental products and video broadcasting equipment manufacturing company, since
1990. Mr. Grace has also been a director of Republic Automotive Parts, Inc., a
distributor of replacement parts for the automotive aftermarket, since 1982.
Mr. Grace is a general partner of Anglo American Security Fund, L.P., a private
investment fund.
Neil S. Hirsch has been a director since May 1995. Mr. Hirsch has been the
President and Chief Executive Officer of Loanet, Inc., a worldwide
communications network managing securities lending transactions of banks and
brokerage firms since March 1994. From 1969 to January 1990, Mr. Hirsch was
Chairman, Chief Executive Officer and President of Telerate, Inc., a financial
information provider, which was acquired by Dow Jones & Co. Inc. Mr. Hirsch
served as a consultant to Telerate, Inc. until September 1993. Mr. Hirsch
served on the Board of Directors of Dow Jones & Co. Inc. from 1990 to May 1993.
Mr. Hirsch was elected to the Information Industry Hall of Fame in 1985.
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<PAGE>
Robert Flug has been a director since February 1998. Mr. Flug has been the
President and Chief Operating Officer of S.L. Danielle, a women's apparel
company, since September 1987. Mr. Flug received a B.S. in Business
Administration from New York University.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid during the
fiscal years ended October 31, 1996, 1997 and 1998 to our Chief Executive
Officer and our four most highly compensated executive officers other than our
Chief Executive Officer (each of whom was serving at the end of our fiscal year
ended October 31, 1998). We refer to these executive officers below as our
"Named Executives."
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Award
----------------------------------------------------------------- ---------------
Securities
Year Ended Other Annual Underlying
Name and Principal Position October 31, Salary($) Bonus($) Compensation(1) Options(#)
- --------------------------- ------------- ---------------- ---------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Ryan A. Brant
Chief Executive Officer ............ 1998 158,667 218,785 -- --
1997 125,000 -- -- 50,000(2)
1996 119,319 -- -- --
Larry Muller
Chief Financial Officer(3) ......... 1998 161,933 25,122 -- 20,000(2)
Anthony R. Williams
Chief Operating Officer(4) ......... 1998 164,039(5) -- -- 150,000(6)
Barbara A. Ras
Chief Accounting Officer and
Secretary ......................... 1998 114,167 -- -- 30,000(2)
1997 100,000 10,000 -- 25,000(2)
1996 82,233 -- -- --
Kelly Sumner
Vice President of International
Operations(7) ..................... 1998 166,220 119,175 -- 125,000(8)
1997 43,447 51,016 -- --
</TABLE>
- ------------
(1) The aggregate value of benefits to be reported under the "Other Annual
Compensation" column did not exceed the lesser of $50,000 or 10% of the
total of annual salary and bonus reported for the Named Executives.
(2) Represents options granted under our 1997 Stock Option Plan.
(3) Mr. Muller joined us in December 1997.
(4) Mr. Williams joined us in February 1998.
(5) Includes $15,200 paid as consulting fees prior to employment with us.
(6) Represents options to purchase 120,000 shares granted under our 1997 Stock
Option Plan and non-plan options to purchase 30,000 shares.
(7) Mr. Sumner joined us in July 1997.
(8) Represents options to purchase 85,000 shares granted under our 1997 Stock
Option Plan and non-plan options to purchase 40,000 shares.
34
<PAGE>
The following table sets forth information concerning options granted in
the fiscal year ended October 31, 1998 to the Named Executives:
Option Grants in Fiscal Year Ended October 31, 1998
<TABLE>
<CAPTION>
Individual Grants
------------------------------
Number of Potential Realizable
Securities Percent of Total Value at Assumed
Underlying Options Granted Exercise Annual Rates of Stock
Options to Employees in Price Expiration Price Appreciation for
Name Granted (#) Fiscal Year(%) ($/Sh) Date Option Term(1)
- ---- ------------- ------------------ ---------- ------------ ---------------------------
5%($) 10%($)
-------- --------
<S> <C> <C> <C> <C> <C> <C>
Ryan A. Brant ............. -- -- -- -- -- --
Larry Muller .............. 20,000 1.2 5.1875 8/31/2003 28,600 63,400
Anthony R. Williams ....... 30,000 2.50 8/31/2003 20,700 45,900
120,000 9.1 5.1875 8/31/2003 171,600 380,400
Barbara A. Ras ............ 30,000 1.8 5.1875 8/31/2003 42,900 95,100
Kelly Sumner .............. 40,000 5.00 12/31/2002 55,200 122,000
85,000 7.6 5.1875 12/31/2002 121,550 269,450
</TABLE>
- ------------
(1) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the options immediately prior to their
expiration, assuming our common stock appreciates at the compounded rates
specified over the term of the options. These numbers do not take into
account provisions of certain options providing for termination of the
option following termination of employment or nontransferability of the
options and do not make any provision for taxes associated with exercise.
Because actual gains will depend upon, among other things, future
performance of the common stock, there can be no assurance that the
amounts reflected in this table will be achieved.
The following table sets forth information concerning the value of options
exercised during the fiscal year ended October 31, 1998 and the value of
unexercised stock options held by the Named Executives as of October 31, 1998:
Aggregated Option Exercises and Year End Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares Value at October 31, 1998 (#) at October 31, 1998 ($)*
Acquired on Realized ------------------------------ -----------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ---------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Ryan A. Brant .............. 112,000 642,960 391,880 30,000 2,095,090 30,000
Larry Muller ............... -- -- -- 20,000 -- 26,250
Anthony R. Williams ........ -- -- -- 150,000 -- 277,500
Barbara A. Ras ............. -- -- 70,243 25,000 205,844 35,625
Kelly Sumner ............... -- -- 10,000 115,000 15,000 156,563
</TABLE>
- ------------
* Year-end values for unexercised in-the-money options represent the positive
spread between the exercise price of such options and the fiscal year-end
market value of the common stock, which was $6.50 on October 31, 1998.
35
<PAGE>
Director Compensation
Non-employee directors currently receive no cash compensation for serving
on the Board of Directors other than reimbursement of reasonable expenses
incurred in attending meetings. In December 1998, we issued Mr. Flug options to
purchase 10,000 shares of common stock at a price of $5.875 per share.
Employment Agreements
Ryan A. Brant entered into an employment agreement with us for a five-year
term commencing August 1, 1998. Pursuant to the employment agreement, Mr. Brant
agreed to devote his full time to our business as our Chief Executive Officer.
The employment agreement provides that Mr. Brant is entitled to receive a base
salary of $233,000 and a bonus equal to $20,000 per fiscal quarter in the event
we achieve certain earnings levels. We also agreed to issue to Mr. Brant
options to purchase 100,000 shares of common stock at an exercise price of
$6.25 per share. In the event the employment agreement is terminated under
certain circumstances (including in the event of a change of control), Mr.
Brant will be entitled to receive certain severance compensation. Mr. Brant's
employment agreement contains confidentiality and non-compete provisions.
Anthony R. Williams entered into an employment agreement with us for a
three-year term commencing August 1, 1998. Mr. Williams agreed to devote his
full time to our business as our Chief Operating Officer. The agreement
provides that Mr. Williams is entitled to receive a base salary of $233,000 and
a bonus based on our financial performance. In the event the employment
agreement is terminated under certain circumstances (including in the event of
a change of control), Mr. Williams will be entitled to receive certain
severance compensation. Mr. Williams' employment agreement contains
confidentiality and non-compete provisions.
Larry Muller entered into an employment agreement with us for a three-year
term commencing January 29, 1999. Mr. Muller agreed to devote his full time to
our business as our Chief Financial Officer. The agreement provides that Mr.
Muller is entitled to receive a base salary of $233,000 and a bonus based on
our financial performance. We also agreed to issue to Mr. Muller options to
purchase 10,000 shares of common stock at an exercise price of $5.875 per
share. In the event the employment agreement is terminated under certain
circumstances (including in the event of a change of control), Mr. Muller will
be entitled to receive certain severance compensation. Mr. Muller's employment
agreement contains confidentiality and non-compete provisions.
In July 1997, Take-Two Interactive Software Europe Limited, our
wholly-owned subsidiary, entered into an employment agreement (as amended) with
Kelly Sumner, an executive officer of Take-Two Interactive Software Europe
Limited, our Vice President of International Operations and one of our
directors, pursuant to which Mr. Sumner agreed to devote his full time as
President and Managing Director for a three-year term. The agreement provides
that Mr. Sumner is entitled to an annual salary of British Pounds100,000
(approximately $168,000) and a bonus equal to $15,000 per fiscal quarter in the
event Take-Two Interactive Software Europe Limited achieves certain earnings
levels. Mr. Sumner's employment agreement contains confidentiality and
non-compete provisions.
Stock Option Plans
1994 Stock Option Plan
In February 1994, our stockholders approved the 1994 Stock Option Plan, as
adopted by the Board of Directors, and as amended in April 1995 and January
1996, pursuant to which key employees are eligible to receive incentive stock
options to purchase up to an aggregate of 896,654 shares of common stock. No
options are available for grant under the 1994 Stock Option Plan.
The 1994 Stock Option Plan provides that the exercise price of each
incentive stock option must be at least equal to 100% of the fair market value
of the common stock on the date of grant (110% in the case of stockholders who
own more than 10% of the outstanding common stock), and requires that options
expire not later than the tenth anniversary of the date of grant (the fifth
anniversary in the case of stockholders who own
36
<PAGE>
more than 10% of the outstanding common stock). With certain limited
exceptions, in the event that an option holder ceases to be associated with us,
such option holder's incentive options immediately terminate. Pursuant to the
provisions of the 1994 Stock Option Plan, the aggregate fair market value,
determined as of the date(s) of grant, for which incentive stock options are
first exercisable by an option holder during any calendar year cannot exceed
$100,000.
1997 Stock Option Plan
In January 1997, our stockholders approved the 1997 Stock Option Plan, as
adopted by the Board of Directors, and as amended in April 1998, pursuant to
which officers, directors, employees and consultants are eligible to receive
incentive stock options and non-qualified stock options to purchase up to an
aggregate of 2,000,000 shares of common stock. As of January 31, 1999, no
options were available for grant pursuant to the 1997 Stock Option Plan.
The 1997 Stock Option Plan provides that the exercise price of each
incentive stock option must be at least equal to 100% of the fair market value
of the common stock on the date of grant (110% in the case of stockholders who
own more than 10% of the outstanding common stock), and requires that options
expire not later than the tenth anniversary of the date of grant (the fifth
anniversary in the case of stockholders who own more than 10% of the
outstanding common stock). With certain limited exceptions, in the event that
an option holder ceases to be employed by us or engages in or is involved with
any business similar to our business, such option holder's incentive options
immediately terminate. Pursuant to the provisions of the 1997 Stock Option
Plan, the aggregate fair market value, determined as of the date(s) of grant,
for which incentive stock options are first exercisable by an option holder
during any calendar year cannot exceed $100,000.
The 1997 Stock Option Plan requires that the exercise price of all
non-qualified stock options be at least equal to 100% of the fair market value
of the common stock on the date of grant, provided that non-qualified options
may be issued at a lower exercise price (but in no event less than 85% of fair
market value) if our net pre-tax income in the full fiscal year immediately
preceding the date of grant exceeded 125% of our mean annual average net
pre-tax income for the three fiscal years immediately preceding such year.
Non-qualified options must have an expiration date not later than the eighth
anniversary of the date of the grant. With certain limited exceptions, in the
event that the option holder ceases to be associated with us or engages in or
becomes involved with any business similar to our business, such option
holder's non-qualified options immediately terminate.
Limitations of Liability and Indemnification
Section 145 of the Delaware General Corporation Law ("DGCL") contains
provisions permitting our directors and officers to be indemnified against
judgments, fines, amounts paid in settlement and reasonable expenses (including
attorneys' fees) as the result of an action or proceeding in which they may be
involved by reason of having been a director or officer. Our Certificate of
Incorporation includes a provision that limits the personal liability of our
directors to us or our stockholders for monetary damages arising from a breach
of their fiduciary duties as directors to the fullest extent now or hereafter
permitted by the DGCL. Under the DGCL as currently in effect, this provision
limits a director's liability except for (i) any breach of the director's duty
of loyalty to us or our stockholders, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
actions covered under Section 174 of the DGCL or (iv) any transaction in which
the director obtains an improper personal benefit. This provision does not
prevent us or our stockholders from seeking equitable remedies, such an
injunctive relief or rescission. If equitable remedies are found not to be
available to stockholders in any particular case, stockholders may not have any
effective remedy against actions taken by directors that constitute negligence
or gross negligence.
Our Certificate of Incorporation provides that we shall indemnify our
officers and directors to the fullest extent permitted from time to time under
the DGCL (subject to certain exceptions) and requires us to advance expenses to
the extent permitted from time to time under the DGCL. In addition, our By-laws
require us to indemnify our officers, directors, employees and agents to the
extent permitted by the DGCL.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of , 1999,
relating to the beneficial ownership of shares of our common stock by (i) each
person or entity whom we know owns beneficially 5% or more of our outstanding
common stock, (ii) each of our directors, (iii) each of the Named Executives,
(iv) each selling stockholder and (v) all of our directors and executive
officers as a group.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned After
Prior to Offering(2) Offering(2)
---------------------- ------------------
Shares Being
Name of Beneficial Owner(1) Number Percent Offered Number Percent
- --------------------------------------------------- ----------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Peter M. Brant(3) ................................. 3,048,749 16.3%
BMG Entertainment ................................. 1,850,000 9.9
Robert Alexander(4) ............................... 1,425,000 7.6
David Rosenbaum(5) ................................ 1,252,500 6.7
Oliver R. Grace, Jr.(6) ........................... 781,338 4.2
Ryan A. Brant(7) .................................. 718,563 3.8
Neil S. Hirsch(8) ................................. 222,276 1.2
Larry Muller(9) ................................... 164,167 *
Robert Flug(10) ................................... 110,000 *
Anthony R. Williams(11) ........................... 100,000 *
Barbara A. Ras(12) ................................ 70,243 *
Kelly Sumner(13) .................................. 62,500 *
All directors and executive officers as a group
(eight persons)(14) .............................. 2,229,087 11.5
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 575
Broadway, New York, New York 10012.
(2) Unless otherwise indicated, we believe that all persons named in the table
have sole voting and investment power with respect to all shares of common
stock beneficially owned by them. A person is deemed to be the beneficial
owner of securities which may be acquired by such person within 60 days
from the date of this prospectus upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that options that are held by such person (but not
those held by any other person) and which are exercisable within 60 days
of the date of this prospectus, have been exercised.
(3) Includes 1,941,930 shares of common stock held by Brant Allen Industries
Incentive Profit Sharing Plan.
(4) Includes 50,000 shares of common stock issuable upon the exercise of
options granted under the 1997 plan which are currently exercisable.
(5) Includes 15,000 shares of common stock issuable upon the exercise of
options granted under the 1997 Plan which are currently exercisable.
(6) Includes: (i) 653,678 shares of common stock owned of record by Anglo
American Security Fund, L.P. ("Anglo American"), of which Mr. Grace is a
general partner, (ii) 17,960 shares of common stock issuable upon the
exercise of options owned by Anglo American, (iii) 88,913 shares of common
stock owned by an affiliated entity and (iv) 20,787 shares of common stock
issuable upon the exercise of options owned by Mr. Grace.
(7) Includes (i) 371,880 shares of common stock issuable upon the exercise of
options granted under the 1994 Plan which are currently exercisable and
(iii) 80,000 shares of common stock issuable upon the exercise of options
granted under the 1997 Plan which are currently exercisable. Does not
include 25,000 shares of common stock held by Mr. Brant's wife, as to
which Mr. Brant disclaims beneficial ownership.
38
<PAGE>
(8) Represents shares of common stock held by Bridgehampton Holdings, Inc., an
entity controlled by Mr. Hirsch.
(9) Includes 16,667 shares of common stock issuable upon the exercise of
options granted under the 1997 Plan which are currently exercisable.
(10) Includes 48,500 shares of common stock held by S.L. Danielle, Inc. and
10,000 shares of common stock issuable upon the exercise of options
granted under the 1997 Plan which are currently exercisable.
(11) Includes 60,000 shares of common stock issuable upon the exercise of
options granted under the 1997 Plan which are currently exercisable and
15,000 shares of common stock issuable upon the exercise of non-plan
options which are currently exercisable.
(12) Includes 40,000 shares of common stock issuable upon the exercise of
options granted under the 1997 Plan, which are currently exercisable.
(13) Represents 62,500 shares of common stock issuable upon the exercise of
options.
(14) Includes currently exercisable options to purchase an aggregate of 694,794
shares of common stock.
39
<PAGE>
CERTAIN TRANSACTIONS
In connection with a private financing in September 1996, Peter M. Brant,
a principal stockholder, Neil Hirsch, a director, and Anglo American, of which
Oliver R. Grace, Jr., a director, is a general partner, purchased $1,565,180,
$72,228 and $212,867, respectively, principal amount of notes and received
five-year warrants to purchase 312,339, 14,413 and 42,387 shares, respectively,
at an exercise price of $.01 per share. In April 1997, we repaid $212,867
principal amount of such notes to Anglo American. In January 1997, Peter M.
Brant agreed to extend the repayment of his portion of such notes until May 14,
1998, in consideration for which extension, the interest rate on the note held
by Mr. Brant was increased to 14% per annum. In October 1998, we repaid $72,228
principal amount of such notes to Mr. Hirsch. In August 1997, we repaid
$750,000 principal amount of such indebtedness to Mr. Brant and, in September
1997, obtained bank financing to repay the balance of $815,180 principal amount
of such indebtedness.
We lease our office space in New York from 575 Broadway Corporation, a
corporation controlled by Peter M. Brant.
In February 1997, Anglo American, of which Oliver R. Grace, Jr., a
director, is a general partner, agreed to convert shares of Series B
Convertible Preferred Stock into 409,791 shares of common stock. As an
inducement to enter into such agreement, we issued Anglo American options to
purchase 38,746 shares of common stock at an exercise price of $2.41 per share.
In addition, we entered into a three-year consulting agreement with an
affiliate of Anglo American, pursuant to which such affiliate agreed to provide
us management consulting services in consideration of the payment of $100,000
over the term of the agreement, of which $33,333 was paid in April 1997 and
$16,667 was paid in fiscal 1998. The Company also paid $35,000 to Anglo
American in dividends on the Series B Preferred Stock in fiscal 1997.
We believe that all of such transactions and arrangements were
advantageous to us and were on terms no less favorable to us than could have
been obtained from unaffiliated third parties.
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 50,000,000 shares of common
stock, par value $.01 per share, and 5,000,000 shares of preferred stock, no
par value per share. As of the date of this prospectus, and giving effect to
this offering there are shares of common stock outstanding and no shares
of preferred stock are outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors. Holders of common stock are entitled to receive
dividends when, as and if declared by the Board of Directors in its discretion
out of funds legally available therefor. In the event of our liquidation,
dissolution or winding up, holders of common stock are entitled to share
ratably in all assets, if any, legally available for distribution to them after
payment of debts and liabilities and after provision has been made for each
class of stock, if any, having preference over the common stock. Holders of
common stock have no conversion, preemptive or other subscription rights, and
there are no redemption or sinking fund provisions applicable to the common
stock. All of the outstanding shares of common stock are, and the shares of
common stock offered hereby will be, when issued upon payment of the
consideration set forth in this prospectus, fully paid and non-assessable.
Preferred Stock
Our Certificate of Incorporation authorizes us to issue preferred stock
with such designations, rights and preferences as may be determined from time
to time by the Board of Directors. There are currently no shares of Preferred
Stock outstanding. Accordingly, the Board of Directors has the power, without
stockholder approval, to issue preferred stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the voting
power or other rights of the holders of common stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
of discouraging, delaying or preventing a third party from gaining control of
us.
Delaware Anti-Takeover Law
We are subject to the "business combination" statute of the Delaware
General Corporation Law. In general, under Section 203, a publicly-held
Delaware corporation may not engage in any business combination with any
"interested stockholder" for a period of three years following the time such
stockholder became an interested stockholder, unless the business combination
is approved in a prescribed manner, such as the approval of a majority of
certain members of the Board of Directors. The term "business combination"
includes mergers and asset sales. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of a corporation's voting stock. This statute could, among other
things, make it more difficult for a third party to gain control of us or
otherwise adversely affect the market price of our common stock.
Transfer Agent and Warrant Agent
The transfer and registrar agent for our common stock is American Stock
Transfer & Trust Company, New York, New York.
41
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by ING
Baring Furman Selz LLC, have severally agreed to purchase from us the number of
shares of common stock set forth opposite their names below.
Number
Underwriters of Shares
- ------------ ---------
ING Baring Furman Selz LLC. ................
Gerard Klauer Mattison & Co., Inc. .........
Morgan Keegan & Company, Inc. ..............
Total ................................... 5,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal
matters and to certain other conditions. The underwriters are obligated to
purchase and accept delivery of all the shares of common stock (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers, a concession not in excess of $ share. After the initial offering
of the shares of common stock, the public offering price and other selling
terms may be changed by the underwriters at any time without notice.
The following table shows the underwriting fees to be paid to the
underwriters by us and by the selling stockholders in connection with this
offering. These amounts are shown assuming both no exercise and full exercise
of the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
Per No Full
Share Exercise Exercise
------- ---------- ---------
<S> <C> <C> <C>
Payable by Take-Two Interactive Software, Inc. ......... $ $ $
Payable by the selling stockholders .................... $ $ $
</TABLE>
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) to be paid by us are
expected to be approximately $ .
We have granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 750,000 additional shares of common stock
(including up to 450,000 shares offered by us and up to 300,000 shares offered
by selling stockholders) at the public offering price less the underwriting
discounts and commissions. The underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the underwriters exercise such option, each underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such underwriter's percentage underwriting
commitment as indicated in the table above.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments that the underwriters may be required to make in respect of any of
those liabilities.
Each of us, our executive officers and directors and certain stockholders
has agreed, subject to certain exceptions, not to: (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into or exercisable or exchangeable for
common stock; or (2) enter into any swap or other arrangement that transfers
all or a portion
42
<PAGE>
of the economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in clause (1) or (2)
is to be settled by the delivery of common stock, or such other securities, in
cash or otherwise) for a period of 120 days after the date of this prospectus
without the prior written consent of ING Baring Furman Selz LLC. In addition,
during such period, we have agreed not to file any registration statement with
respect to, and each of our executive officers, directors and certain
stockholders has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of ING Baring Furman Selz LLC.
Other than in the United States, neither we nor the underwriters have
taken any action that would permit a public offering of the shares of common
stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of common stock offered hereby may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about, and to observe, any restrictions
relating to the offering of the common stock and the distribution of this
prospectus. This prospectus is not an offer to sell or a solicitation of an
offer to buy any shares of common stock offered hereby in any jurisdiction in
which such an offer or solicitation is unlawful.
In the event the common stock does not constitute an excepted security
under the provisions of Regulation M promulgated by the SEC, the underwriters
and dealers may engage in passive market making transactions in accordance with
Rule 103 under Regulation M. In general, a passive market maker may not bid for
or purchase shares of common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive
market maker generally may not exceed 30% of its average daily trading volume
in the common stock during a specified two-month prior period, or 200 shares,
whichever is greater. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the common
stock above independent market levels. Underwriters and dealers are not
required to engage in passive market making and may end passive market making
activities at any time.
In connection with this offering, the underwriters may engage in
transactions on the Nasdaq National Market or the over-the-counter market or
otherwise that stabilize, maintain or otherwise affect the price of the common
stock. Specifically, the underwriters may overallot this offering, creating a
syndicate short position. In addition, the underwriters may bid for and purchase
shares of common stock in the open market to cover syndicate short positions or
to stabilize the price of the common stock. These activities may stabilize or
maintain the market price of the common stock above independent market levels.
The underwriters are not required to engage in these activities and may end any
of these activities at any time.
LEGAL MATTERS
Tenzer Greenblatt LLP, New York, New York will pass upon the validity of
the common stock offered hereby for us. Latham & Watkins, New York, New York
will pass upon certain legal matters relating to this offering for the
underwriters.
EXPERTS
The consolidated balance sheets of Take-Two Interactive, Inc. as of
October 31, 1998 and 1997 and the consolidated statements of operations,
stockholders' equity and cash flows for the three years in the period ended
October 31, 1998 have been included in reliance on the reports of
PricewaterhouseCoopers, LLP, independent accountants, given upon the authority
of that firm as experts in accounting and auditing.
The financial statements of Jack of All Games, Inc. as of and for the
years ended December 31, 1996 and December 31, 1997 have been included in
reliance upon the reports of Aronowitz, Chaiken & Hardesty, LLP, given upon the
authority of that firm as experts in accounting and auditing.
43
<PAGE>
ADDITIONAL INFORMATION
We are subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
file reports, proxy statements and other information with the SEC. Such
reports, proxy statements and other information may be inspected and copied at
the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661 and Seven World Trade Center, 13th Floor, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of
the SEC upon payment of certain fees prescribed by the SEC. The SEC's Web site
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
that site is http://www.sec.gov. Our common stock is quoted on the Nasdaq
National Market and our reports, proxy statements and other information may
also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act with respect to the securities offered in this prospectus. This
prospectus, which is filed as part of a registration statement, does not
contain all of the information set forth in the registration statement, certain
portions of which have been omitted in accordance with the SEC's rules and
regulations. Statements made in this prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete
and are qualified in their entirety by reference to each such contract,
agreement or other document which is filed as an exhibit to the registration
statement. The registration statement may be inspected without charge at the
public reference facilities maintained by the SEC, and copies of such materials
can be obtained from the Public Reference Section of the SEC at prescribed
rates.
44
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TAKE-TWO INTERACTIVE SOFTWARE, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Accountants ....................................................... F-2 and F-3
Consolidated Balance Sheets as of October 31, 1997 and 1998 and the Three Months Ended
January 31, 1999 (unaudited) ............................................................ F-4
Consolidated Statements of Operations for the years ended October 31, 1996, 1997 and 1998
and for the Three Months Ended January 31, 1998 and 1999 (unaudited) .................... F-6
Consolidated Statements of Cash Flows for the years ended October 31, 1996, 1997 and 1998
and for the Three Months Ended January 31, 1998 and 1999 (unaudited) .................... F-7
Consolidated Statements of Stockholders' Equity for the years ended October 31, 1996, 1997
and 1998 and for the Three Months ended January 31, 1999 (unaudited) .................... F-10
Notes to Consolidated Financial Statements ............................................... F-12
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Stockholders of
Take-Two Interactive Software, Inc. and Subsidiaries:
In our opinion, based on our audits and the report of other auditors for 1997
and 1996, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows,
present fairly, in all material respects, the financial position of Take-Two
Interactive Software, Inc. and Subsidiaries at October 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
December 31, 1997 and 1996 financial statements of Jack of All Games, Inc., a
wholly-owned subsidiary, which statements reflect total revenues constituting
77 percent and 74 percent, respectively, of the related consolidated totals.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for Jack
of All Games, Inc., is based solely on the reports of the other auditors. We
conducted our audits of these statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
December 21, 1998
1301 Avenue of the Americas
New York, NY
F-2
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and
Stockholders of Jack of All Games, Inc.
(An S Corporation)
Cincinnati, Ohio
We have audited the accompanying balance sheets of Jack of All Games, Inc.
(an S Corporation) as of December 31, 1997 and 1996, and the related statements
of income, retained earnings, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to in the first
paragraph present fairly, in all material respects, the financial position of
Jack of All Games, Inc. (an S Corporation) as of December 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles.
Aronowitz, Chaiken & Hardesty, LLP
Cincinnati, Ohio
February 26, 1998
F-3
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
ASSETS:
October 31,
------------------------------
1997 1998 January 31, 1999
-------------- -------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents .................................. $ 2,372,194 $ 2,762,837 $ 4,761,396
Cash restricted for letter of credit ....................... 1,089,760 -- --
Accounts receivable, net of allowances of
$104,972, $1,473,017, and $1,526,808
(unaudited), respectively ................................. 21,404,683 49,138,871 47,493,189
Inventories, net ........................................... 12,736,952 26,092,541 23,074,122
Prepaid royalties .......................................... 1,207,750 8,064,510 9,086,192
Advances to developers ..................................... -- 4,319,989 5,002,663
Prepaid expenses and other current assets .................. 4,851,766 3,981,942 3,650,591
Deferred tax asset ......................................... -- 941,000 941,000
------------ ------------ -------------
Total current assets .................................... 43,663,105 95,301,690 94,009,153
Fixed assets, net ............................................. 1,741,243 1,979,658 1,967,358
Prepaid royalties ............................................. 167,500 1,388,673 1,122,742
Capitalized software development costs, net ................... 4,315,728 2,260,037 2,402,958
Intangibles, net .............................................. 6,255,037 8,421,777 8,138,873
Other assets, net ............................................. 252,410 33,259 --
------------ ------------ -------------
Total assets ............................................ $ 56,395,023 $109,385,094 $ 107,641,084
============ ============ =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Lines of credit, current portion ........................... $ 904,843 $ 30,226,899 $ 31,589,639
Notes payable due to related parties, net of
discount .................................................. 255,513 222,955 128,734
Current portion of capital lease obligation ................ 158,030 82,373 80,266
Notes payable, net of discount ............................. 4,424,059 137,140 115,578
Accounts payable ........................................... 17,009,849 31,723,864 22,435,940
Accrued expenses ........................................... 3,477,440 10,975,362 13,678,527
Due to related parties ..................................... 148,916 -- --
Advances to distributors ................................... 1,247,769 136,000 --
------------ ------------ -------------
Total current liabilities ............................... 27,626,419 73,504,593 68,028,684
Line of credit ................................................ 13,959,073 123,499 --
Notes payable, net of current portion ......................... 2,365,496 97,392 81,861
Notes payable due to related parties, net of discount ......... 122,506 -- --
Capital lease obligation, net of current portion .............. 299,474 94,042 --
Other liabilities ............................................. 87,343 -- 63,970
------------ ------------ -------------
Total liabilities ....................................... 44,460,311 73,819,526 68,174,515
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
October 31,
-----------------------------------
1997 1998 January 31, 1999
---------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C>
Commitments and contingencies
Stockholders' equity:
Redeemable preferred stock, Class A, $1.00 par
value; 317 shares authorized, issued and out-
standing at October 31, 1997, no shares issued or
outstanding at October 31, 1998 and January 31,
1999 (unaudited) ..................................... 317 -- --
Preferred stock, Class B, $14.285 par value; 17,500
shares authorized, no shares issued and outstand-
ing at October 31, 1997, 1998 and January 31,
1999 (unaudited) ..................................... -- -- --
Preferred stock, Series A, no par value; 5,000,000
shares authorized; no shares issued or outstand-
ing at October 31, 1997, 1998 and January 31,
1999 (unaudited) ..................................... -- -- --
Common stock, par value $.01 per share;
50,000,000 shares authorized; 13,033,379,
18,071,972 and 18,425,924 shares issued and
outstanding at October 31, 1997, 1998 and Janu-
ary 31, 1999 (unaudited), respectively ............... 130,333 180,719 184,259
Additional paid-in capital ............................ 15,551,501 33,546,417 34,792,045
Deferred compensation ................................. (17,250) (223,657) (212,951)
Retained earnings ..................................... (3,599,483) 2,069,522 4,964,358
Foreign currency translation adjustment ............... (130,706) (7,433) (261,142)
---------- ---------- ----------
Total stockholders' equity ............................ 11,934,712 35,565,568 39,466,569
---------- ---------- ----------
Total liabilities and stockholders' equity ......... $ 56,395,023 $ 109,385,094 $ 107,641,084
============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------------------------
1996 1997 1998
--------------- ----------------- ----------------
<S> <C> <C> <C>
Net sales .................................... $ 55,123,063 $ 97,341,225 $ 194,051,566
Cost of sales ................................ 44,315,884 81,479,408 147,555,172
------------ ------------- -------------
Gross profit .............................. 10,807,179 15,861,817 46,496,394
Operating expenses:
Research and development costs .............. 994,349 1,847,970 1,702,339
Selling and marketing ....................... 4,186,981 8,042,947 18,686,086
General and administrative .................. 3,252,216 5,861,961 13,583,131
Depreciation and amortization ............... 342,132 1,004,138 1,835,057
------------ ------------- -------------
Total operating expenses .................. 8,775,678 16,757,016 35,806,613
------------ ------------- -------------
Income (loss) from operations ............. 2,031,501 (895,199) 10,689,781
Interest expense ............................. 307,679 1,843,403 3,680,075
------------ ------------- -------------
Income (loss) before income taxes and
extraordinary item ....................... 1,723,822 (2,738,602) 7,009,706
Provision (benefit) for income taxes ......... 42,149 29,789 (334,136)
------------ ------------- -------------
Net income (loss) before extraordinary
item* .................................... 1,681,673 (2,768,391) 7,343,842
Extraordinary net loss on early
extinguishment of debt ...................... -- -- 162,748
------------ ------------- -------------
Net income (loss) ............................ 1,681,673 (2,768,391) 7,181,094
Preferred dividends and warrants in lieu of
preferred dividends ......................... (17,532) (135,418) --
Net income (loss) -- Basic ................ $ 1,664,141 $ (2,903,809) $ 7,181,094
============ ============= =============
Net income (loss) -- Diluted .............. $ 1,664,141 $ (2,903,809) $ 7,181,094
============ ============= =============
Per share data:
Basic:
Weighted average common shares
outstanding .............................. 10,281,000 11,697,342 14,746,854
============ ============= =============
Net income (loss) before extraordinary gain
per share ................................. $ 0.16 $ (0.25) $ 0.50
Extraordinary gain per share ................ -- -- ( 0.01)
------------ ------------- -------------
Net income (loss) -- Basic ................ $ 0.16 $ (0.25) $ 0.49
============ ============= =============
Net income (loss) attributable to common
stockholders -- Basic ....................... $ 0.06 $ (0.31) $ 0.42
============ ============= =============
Diluted:
Weighted average common shares
outstanding ............................... 11,454,400 11,697,342 17,062,806
============ ============= =============
Net income (loss) before extraordinary gain
per share ................................. $ 0.15 $ (0.25) $ 0.43
Extraordinary gain per share ................ -- -- ( 0.01)
------------ ------------- -------------
Net income (loss) -- Diluted .............. $ 0.15 $ (0.25) $ 0.42
============ ============= =============
Net income (loss) attributable to common
stockholders -- Diluted ..................... $ 0.06 $ (0.31) $ 0.37
============ ============= =============
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Three months ended January 31,
----------------------------------
1998 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Net sales .................................... 51,405,361 68,280,653
Cost of sales ................................ 40,797,569 53,537,840
---------- ----------
Gross profit .............................. 10,607,792 14,742,813
Operating expenses:
Research and development costs .............. 486,963 592,144
Selling and marketing ....................... 4,231,177 4,161,203
General and administrative .................. 2,135,246 4,411,498
Depreciation and amortization ............... 376,542 453,415
---------- ----------
Total operating expenses .................. 7,229,928 9,618,260
---------- ----------
Income (loss) from operations ............. 3,377,864 5,124,553
Interest expense ............................. 1,548,035 816,517
---------- ----------
Income (loss) before income taxes and
extraordinary item ....................... 1,829,829 4,308,036
Provision (benefit) for income taxes ......... 8,648 1,413,200
---------- ----------
Net income (loss) before extraordinary
item* .................................... 1,821,181 2,894,836
Extraordinary net loss on early
extinguishment of debt ...................... -- --
---------- ----------
Net income (loss) ............................ 1,821,181 2,894,836
Preferred dividends and warrants in lieu of
preferred dividends ......................... -- --
Net income (loss) -- Basic ................ $ 1,821,181 $ 2,894,836
============ ============
Net income (loss) -- Diluted .............. $ 1,917,511 $ 2,894,836
============ ============
Per share data:
Basic:
Weighted average common shares
outstanding .............................. 13,258,379 18,212,240
============ ============
Net income (loss) before extraordinary gain
per share ................................. $ 0.14 $ 0.16
Extraordinary gain per share ................ -- --
------------ ------------
Net income (loss) -- Basic ................ $ 0.14 $ 0.16
============ ============
Net income (loss) attributable to common
stockholders -- Basic ....................... $ 0.11 $ 0.16
============ ============
Diluted:
Weighted average common shares
outstanding ............................... 14,872,511 19,534,411
============ ============
Net income (loss) before extraordinary gain
per share ................................. $ 0.13 $ 0.15
Extraordinary gain per share ................ -- --
------------ ------------
Net income (loss) -- Diluted .............. $ 0.13 $ 0.15
============ ============
Net income (loss) attributable to common
stockholders -- Diluted ..................... $ 0.10 $ 0.15
============ ============
</TABLE>
- ------------
* Net income (loss) includes acquired S corporation net income of $992,659,
$1,347,477 and $1,232,636 for the years ended 1996, 1997 and 1998,
respectively and $169,660 (unaudited) for the three months ended January 31,
1998.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended October 31,
----------------------------------------------------
1996 1997 1998
--------------- ----------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................... $ 1,681,673 $ (2,768,391) $ 7,181,094
Adjustment to retained earnings as a result
of business combination
(Note 3) ................................... -- -- (581,089)
Adjustment to reconcile net income (loss)
to net cash (used in)/provided by
operating activities:
Depreciation and amortization ............ 342,132 1,004,138 1,835,057
Loss on termination of capital lease ..... -- -- 225,395
Loss on disposal of equipment ............ -- 772 --
Non-cash revenue ......................... (150,000) -- --
Gain on extraordinary item ............... -- -- (62,647)
Recognition of deferred tax asset ........ -- -- (941,000)
Provision for doubtful accounts .......... 337,366 49,486 1,429,103
Provision for inventory
allowances .............................. -- -- 236,616
Amortization of deferred
compensation ............................ 17,250 17,250 121,887
Forfeiture of compensatory stock
options in connection with AIM
acquisition ............................. -- -- --
Amortization of loan discounts ........... 150,039 720,994 890,062
Amortization of deferred financing
costs ................................... -- 30,776 246,204
Issuance of compensatory stock ........... 15,000 -- --
Increase in cash value of life
insurance ............................... (1,015) (1,193) --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
(Increase) decrease in accounts
receivable ............................ (5,591,959) (12,770,174) (25,865,693)
(Increase) decrease in inventories,
net ................................... (4,971,388) (5,308,962) (5,579,244)
Increase in prepaid royalties ........... (285,000) (1,090,250) (466,809)
Increase in advances to developers -- -- (4,319,989)
(Increase) decrease in prepaid
expenses and other current assets (116,099) (3,495,307) 1,295,156
(Increase) decrease in capitalized
software development costs, net ....... 320,374 (1,033,618) 2,055,691
(Increase) decrease in other assets,
net ................................... -- -- (33,259)
Increase (decrease) in accounts
payable ............................... 4,342,357 6,899,111 8,540,452
Increase in accrued expenses ............ 439,106 2,443,016 6,920,367
(Increase) decrease in due to/from
related parties ....................... 25,749 400,420 49,917
Decrease in other liabilities ........... -- -- (87,343)
(Decrease) increase in
advances-principally distributors (1,481,582) 441,932 (1,111,769)
------------- ------------- --------------
Net cash (used in) provided by
operating activities ................. (4,925,997) (14,460,000) (8,021,841)
------------- ------------- --------------
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Three months ended January 31,
------------------------------
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................... $ 1,821,181 $ 2,894,836
Adjustment to retained earnings as a result
of business combination
(Note 3) ................................... (581,089) --
Adjustment to reconcile net income (loss)
to net cash (used in)/provided by
operating activities:
Depreciation and amortization ............ 376,542 453,415
Loss on termination of capital lease ..... -- --
Loss on disposal of equipment ............ -- --
Non-cash revenue ......................... -- --
Gain on extraordinary item ............... -- --
Recognition of deferred tax asset ........ -- --
Provision for doubtful accounts .......... 404,911 182,243
Provision for inventory
allowances .............................. -- --
Amortization of deferred
compensation ............................ 4,312 126,706
Forfeiture of compensatory stock
options in connection with AIM
acquisition ............................. -- (140,793)
Amortization of loan discounts ........... 664,580 1,008
Amortization of deferred financing
costs ................................... 184,653 --
Issuance of compensatory stock ........... -- 116,065
Increase in cash value of life
insurance ............................... -- --
Changes in operating assets and
liabilities, net of effects of
acquisitions:
(Increase) decrease in accounts
receivable ............................ 3,848,825 1,463,439
(Increase) decrease in inventories,
net ................................... 2,425,504 3,018,419
Increase in prepaid royalties ........... (596,956) (755,751)
Increase in advances to developers -- (682,674)
(Increase) decrease in prepaid
expenses and other current assets 2,654,352 331,351
(Increase) decrease in capitalized
software development costs, net ....... 1,278,854 (142,921)
(Increase) decrease in other assets,
net ................................... -- 33,259
Increase (decrease) in accounts
payable ............................... (7,244,244) (9,287,924)
Increase in accrued expenses ............ 496,629 2,703,165
(Increase) decrease in due to/from
related parties ....................... (32,727) --
Decrease in other liabilities ........... (87,343) --
(Decrease) increase in
advances-principally distributors (595,050) (136,000)
------------ ------------
Net cash (used in) provided by
operating activities ................. 5,022,934 177,843
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
Consolidated Statement of Cash Flows, continued
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------------------------------
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchase of fixed assets ...................... (283,422) (714,514) (630,304)
Proceeds from the sale of fixed assets ........ -- 1,500 --
Cash restricted for letter of credit .......... -- (1,089,760) 1,089,760
Investment in joint venture ................... (133,893) 133,893 --
Acquisition, net cash paid .................... (900,000) (100,000) (1,186,874)
Additional royalty payment in connection
with the Mission acquisition ................ -- (814,478) --
-------- ---------- ----------
Net cash used in investing
activities .............................. (1,317,315) (2,583,359) (727,418)
---------- ---------- ----------
Cash flows from financing activities:
Issuance of stock and warrants in
connection with initial public offering
net of stock issuance costs of
$1,920,232 .................................. -- 7,463,769 --
Costs associated with proposed initial
public offering ............................. (45,608) -- --
Redemption of preferred stocks ................ -- -- (317)
Proceeds from private placement, net .......... 192,000 -- 5,955,333
Net borrowings under lines of credit .......... 5,177,671 7,611,469 11,547,778
Proceeds from notes payable ................... 2,028,591 7,200,000 951,569
Repayments of notes payable ................... (20,634) (2,687,301) (8,349,682)
Proceeds from exercise of stock options ....... 45,750 156 148,264
Repayment of capital lease obligation ......... -- (70,668) (305,281)
Loans to stockholders ......................... (280,669) -- --
Repayment from stockholders ................... 161,617 -- --
Dividends to preferred stockholders ........... -- (35,000) --
Distributions to S corporation shareholders (1,005,800) (673,092) (931,000)
---------- ---------- ----------
Net cash provided by/(used in)
financing activities ........................ 6,252,918 18,809,333 9,016,664
---------- ---------- ----------
Effect of foreign exchange rates ............... -- (130,706) 123,238
Net increase (decrease) in cash for
the period .............................. 9,606 1,635,268 390,643
Cash and cash equivalents, beginning of
the period .................................... 727,320 736,926 2,372,194
---------- ---------- ----------
Cash and Cash equivalents, end of
the period .................................... $ 736,926 $ 2,372,194 $ 2,762,837
============= ============ ============
The Company declared dividends to the
holder of the cumulative convertible
preferred stock Class B and the full
amount was converted into notes payable
in connection with the 1996 financing ......... $ 17,500
=============
Certain amounts owned to a stockholder and
director of the Company under a
consulting agreement were converted into
common stock .................................. $ 102,221
=============
Certain amounts owned to a stockholder and
director of the Company under a
consulting agreement were converted into
short-term notes payable in
connection with the 1966 financing ............ $ 65,500
=============
Issuance of warrants in less of dividends ...... -- 100,352 --
============
Issuance of common stock in connection
with IMSI and CAG acqusition .................. -- 1,000 --
============= ============ ============
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Three months ended January 31,
--------------------------------
1998 1999
--------------- ---------------
(Unaudited)
<S> <C> <C>
Cash flows from investing activities:
Purchase of fixed assets ...................... (65,470) (184,408)
Proceeds from the sale of fixed assets ........ -- --
Cash restricted for letter of credit .......... -- --
Investment in joint venture ................... -- --
Acquisition, net cash paid .................... (1,186,874) --
Additional royalty payment in connection
with the Mission acquisition ................ -- --
---------- --------
Net cash used in investing
activities .............................. (1,252,344) (184,408)
---------- --------
Cash flows from financing activities:
Issuance of stock and warrants in
connection with initial public offering
net of stock issuance costs of
$1,920,232 .................................. -- --
Costs associated with proposed initial
public offering ............................. -- --
Redemption of preferred stocks ................ -- --
Proceeds from private placement, net .......... -- --
Net borrowings under lines of credit .......... (980,826) 1,239,241
Proceeds from notes payable ................... 803,800 --
Repayments of notes payable ................... (3,693,472) (132,322)
Proceeds from exercise of stock options ....... 45,000 1,157,897
Repayment of capital lease obligation ......... (30,113) (19,558)
Loans to stockholders ......................... -- --
Repayment from stockholders ................... -- --
Dividends to preferred stockholders ........... -- --
Distributions to S corporation shareholders (362,000) --
---------- ---------
Net cash provided by/(used in)
financing activities ........................ (4,217,611) 2,245,258
---------- ---------
Effect of foreign exchange rates ............... (10,418) (240,134)
Net increase (decrease) in cash for
the period .............................. (457,439) 1,998,559
Cash and cash equivalents, beginning of
the period .................................... 2,372,194 2,762,837
---------- ---------
Cash and Cash equivalents, end of
the period .................................... $ 1,914,755 $ 4,761,396
============ ===========
The Company declared dividends to the
holder of the cumulative convertible
preferred stock Class B and the full
amount was converted into notes payable
in connection with the 1996 financing .........
Certain amounts owned to a stockholder and
director of the Company under a
consulting agreement were converted into
common stock ..................................
Certain amounts owned to a stockholder and
director of the Company under a
consulting agreement were converted into
short-term notes payable in
connection with the 1966 financing ............
Issuance of warrants in less of dividends ...... -- --
Issuance of common stock in connection
with IMSI and CAG acqusition .................. -- --
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
Consolidated Statement of Cash Flows, continued
<TABLE>
<CAPTION>
Three months ended
Years Ended October 31, January 31,
-------------------------------------------------- ---------------------
1996 1997 1998 1998 1999
--------------- --------------- ---------------- -------------- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Issuance of common stock in connection
with JAG acquisition ...................... -- -- 27,500 -- --
============ ============ ============= ============ ===
Supplemental information in businesses
acquired:
Fair value of assets acquired ............. $ 2,693,928 $ 4,948,654 $ 23,718,551 $ 12,181,948 $--
Less, facilities assumed ................ (1,293,928) (1,100,492) (10,553,988) (8,812,948) --
Stock issued ........................... (440,000) (3,000,000) (11,411,289) (1,612,500) --
Note payable ........................... -- (700,000) -- -- --
Options issued ......................... -- -- (253,294) (256,500) --
Direct transection costs ............... -- (48,162) -- -- --
------------ ------------ ------------- ------------ ---
Cash paid .................................. 960,000 100,000 1,500,000 1,500,000 --
Less, cash acquired ....................... (60,000) -- (313,126) (313,126) --
------------ ------------ ------------- ------------ ---
Net cash paid .............................. $ 900,000 $ 100,000 $ 1,186,874 $ 1,186,874 $--
============ ============ ============= ============ ===
Cash paid during the period for interest ... $ 195,843 $ 1,290,318 $ 2,323,787
============ ============ =============
Cash paid during the period for taxes ...... $ 37,612 $ 28,654 $ 59,235
============ ============ =============
$ 17,040 $ 505,088 $ 75,418
============ ============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Series A
Class A Class B Convertible
Preferred Stock Preferred Stock Preferred Stock
------------------ -------------------------- ------------------
Shares Amount Shares Amount Shares Amount
-------- -------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1995 317 $ 317 17,500 $ 249,987 $ -- --
Issuance of common stock -- -- -- -- -- --
Issuance of compensatory stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Issuance of common stock in connection
with Mission Studios acquisition -- -- -- -- -- --
Issuance of warrants in connection with
'96 private placement -- -- -- -- -- --
Declaration of dividends to preferred
stockholders -- -- -- -- -- --
Conversion of consulting payments into
common stock -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Distributions to S corporation
shareholders prior to acquisition -- -- -- -- -- --
Net income -- -- -- -- -- --
--- ----- ------ ---------- ---- ----
Balance, October 31, 1996 317 317 17,500 249,987 -- --
Conversion of preferred stock -- -- (17,500) (249,987) -- --
Issuance of warrants in lieu of dividends -- -- -- -- -- --
Issuance of common stock and warrants
in connection with a public offering,
net of issuance costs -- -- -- -- -- --
Issuance of common stock and warrants
in connection with 1997 placement of
debt -- -- -- -- -- --
Conversion of warrants to common stock
issued in connection with 1996 private
placement -- -- -- -- -- --
Issuance of common stock in connection
with TTE and ART acquisition -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Declaration of dividends to preferred
stockholders -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Distributions to S corporation
shareholders prior to acquisition -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net loss -- -- -- -- -- --
--- ----- ------- ---------- ---- ----
Balance, October 31, 1997 317 317 -- -- -- --
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Common Stock Retained
-------------------------- Additional Deferred Earnings
Shares Amount Paid-in Capital Compensation Deficit
------------ ------------ ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1995 10,028,974 $ 100,289 $ 2,484,392 $ -- $ (680,923)
Issuance of common stock 24,944 249 59,751 -- --
Issuance of compensatory stock options -- -- 51,750 (51,750) --
Amortization of deferred compensation -- -- -- 17,250 --
Issuance of common stock in connection
with Mission Studios acquisition 182,923 1,829 438,171 -- --
Issuance of warrants in connection with
'96 private placement -- -- 750,197 -- --
Declaration of dividends to preferred
stockholders -- -- -- -- (17,532)
Conversion of consulting payments into
common stock 42,496 425 101,796 -- --
Exercise of stock options 1,663 17 733 -- --
Distributions to S corporation
shareholders prior to acquisition -- -- -- -- (1,005,800)
Net income -- -- -- -- 1,681,673
---------- --------- ----------- ---------- ------------
Balance, October 31, 1996 10,281,000 102,809 3,886,790 (34,500) (22,582)
Conversion of preferred stock 409,791 4,098 245,889 -- --
Issuance of warrants in lieu of dividends -- -- 100,352 -- (100,352)
Issuance of common stock and warrants
in connection with a public offering,
net of issuance costs 1,840,000 18,400 7,399,761 -- --
Issuance of common stock and warrants
in connection with 1997 placement of
debt 55,000 550 909,229 -- --
Conversion of warrants to common stock
issued in connection with 1996 private
placement 26,035 260 (104) -- --
Issuance of common stock in connection
with TTE and ART acquisition 406,553 4,066 2,995,934 -- --
Exercise of stock options 15,000 150 13,650 -- --
Declaration of dividends to preferred
stockholders -- -- -- -- (35,066)
Amortization of deferred compensation -- -- -- 17,250 --
Distributions to S corporation
shareholders prior to acquisition -- -- -- -- (673,092)
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- -- -- (2,768,391)
---------- --------- ----------- ---------- ------------
Balance, October 31, 1997 13,033,379 130,333 15,551,501 (17,250) (3,599,483)
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Accummulated
Other Comprehensive
Comprehensive Income
Income Total (Loss)
--------------- ----------------- ---------------
<S> <C> <C> <C>
Balance, November 1, 1995 $ -- $ 2,154,062 $ --
Issuance of common stock -- 60,000 --
Issuance of compensatory stock options -- -- --
Amortization of deferred compensation -- 17,250 --
Issuance of common stock in connection
with Mission Studios acquisition -- 440,000 --
Issuance of warrants in connection with
'96 private placement -- 750,197 --
Declaration of dividends to preferred
stockholders -- (17,532) --
Conversion of consulting payments into
common stock -- 102,221 --
Exercise of stock options -- 750 --
Distributions to S corporation
shareholders prior to acquisition -- (1,005,800) --
Net income -- 1,681,673 1,681,673
----------- --------------- -------------
Balance, October 31, 1996 -- 4,182,821 1,681,673
Conversion of preferred stock -- -- --
Issuance of warrants in lieu of dividends -- -- --
Issuance of common stock and warrants
in connection with a public offering,
net of issuance costs -- 7,418,161 --
Issuance of common stock and warrants
in connection with 1997 placement of
debt -- 909,779 --
Conversion of warrants to common stock
issued in connection with 1996 private
placement -- 156 --
Issuance of common stock in connection
with TTE and ART acquisition -- 3,000,000 --
Exercise of stock options -- 13,800 --
Declaration of dividends to preferred
stockholders -- (35,066) --
Amortization of deferred compensation -- 17,250 --
Distributions to S corporation
shareholders prior to acquisition -- (673,092) --
Foreign currency translation adjustment (130,706) (130,706) (130,706)
Net loss -- (2,768,391) (2,768,381)
----------- --------------- -------------
Balance, October 31, 1997 (130,706) 11,934,712.00 (2,899,097)
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-10
<PAGE>
Consolidated Statements of Stockholders' Equity, continued
<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>
Issuance of common stock and compen-
satory 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 com-
mon 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' war-
rants, 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 -- -- -- -- -- --
Distributions to S corporation
shareholders prior to acquisition -- -- -- -- -- --
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 -- -- -- -- -- --
Exercise of stock options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Issuance of warrants -- -- -- -- -- --
Issuance of compensatory stock -- -- -- -- -- --
Forfeiture of compensatory stock options
in connection with AIM acquisition -- -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- -- --
Net income -- -- -- -- -- --
---- ---- ---- ---- ---------- -------
Balance, January 31, 1999 (unaudited) -- $ -- $ -- $ -- $ -- $ --
==== ======= ====== ====== ============= ==========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Common Stock Retained
-------------------------- Additional Deferred Earnings
Shares Amount Paid-in Capital Compensation Deficit
-------------- ---------- ----------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock and compen-
satory 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 com-
mon 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 7,700 770,000 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' war-
rants, 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 --
Distributions to S corporation
shareholders prior to acquisition -- -- -- -- (931,000)
Foreign currency translation adjustment -- -- -- -- --
Net income -- -- -- -- 7,181,094
Less: net income of JAG and Talonsoft
for the two months ended December
31, 1997 -- -- -- -- (581,089)
--------- ------- --------- -------- ---------
Balance, October 31, 1998 18,071,972 180,719 33,546,417 (223,657) 2,069,522
Exercise of stock options 248,909 2,489 1,155,407 -- --
Amortization of deferred compensation -- -- -- 126,706 --
Issuance of warrants -- -- 116,000 (116,000) --
Issuance of compensatory stock 105,043 1,051 115,014 -- --
Forfeiture of compensatory stock options
in connection with AIM acquisition -- -- (140,793) -- --
Foreign currency translation adjustment -- -- -- -- --
Net income -- -- -- -- 2,894,836
---------- ------- ---------- -------- ---------
Balance, January 31, 1999 (unaudited) $18,425,924 $184,259 $34,792,045 $ (212,951) $4,964,358
=========== ======== =========== ========== ==========
</TABLE>
<PAGE>
[RESTUB]
<TABLE>
<CAPTION>
Accummulated
Other Comprehensive
Comprehensive Income
Income Total (Loss)
--------------- -------------- --------------
<S> <C> <C> <C>
Issuance of common stock and compen-
satory 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 com-
mon 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' war-
rants, 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 --
Distributions to S corporation
shareholders prior to acquisition -- (931,000) --
Foreign currency translation adjustment 123,273 123,273 123,273
Net income -- 7,181,094 7,181,094
Less: net income of JAG and Talonsoft
for the two months ended December
31, 1997 -- (581,089) --
------- --------- ---------
Balance, October 31, 1998 (7,433) 35,565,568 7,304,367
Exercise of stock options -- 1,157,896 --
Amortization of deferred compensation -- 126,706 --
Issuance of warrants -- -- --
Issuance of compensatory stock -- 116,065 --
Forfeiture of compensatory stock options
in connection with AIM acquisition -- (140,793) --
Foreign currency translation adjustment (253,709) (253,709) (253,709)
Net income -- 2,894,836 2,894,836
-------- ---------- ---------
Balance, January 31, 1999 (unaudited) $ (261,142) $39,466,569 $ 2,641,127
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-11
<PAGE>
Notes to Consolidated Financial Statements
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"), DirectSoft Australia Pty. Ltd.
("DirectSoft") and Talonsoft ("Talonsoft") 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 and Australasia.
2. Significant Accounting Policies and Transactions:
Basis of Presentation
The consolidated financial statements include the financial statements of
Take-Two and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
In July 1997, the Company acquired all the outstanding stock of IMSI and
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 exchanged for 900,000 shares of
restricted common stock of the Company. 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 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.
Unaudited Interim Financial Information
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 three months ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1999.
Risk and Uncertainties
For the years ended October 31, 1996, 1997 and 1998, substantially all of
the Company's net sales have been attributable to publishing and distribution
revenues. The publishing and distribution industries are subject to increasing
competition, rapid technological change and evolving consumer preferences,
which result in shorter product and platform lifecycles. The Company's
continued success depends upon its ability to acquire, manufacture and market
software products, which often requires substantial financing. Additionally,
the financing for software products acquired or licensed must be on terms
acceptable to the Company. If sales from newly acquired and manufactured
software products fail to materialize, the Company's business, operating
results and financial condition could be adversely affected in the near term.
F-12
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
2. Significant Accounting Policies and Transactions: -- (Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to:
the recoverability of capitalized software development costs, prepaid
royalties, advances to developers and other intangibles, allowances for returns
and income taxes. Actual amounts could differ from those estimates.
Concentration of Credit Risk
A significant portion of cash balances are maintained with several major
financial institutions with satisfactory standing and at times, exceeds
insurable amounts.
If the financial condition and operations of the Company's distributors or
retailers deteriorate, the risk of collection could increase substantially. As
of October 31, 1996, the receivable balances from its largest customers
amounted to approximately 10.8% and 10.3% of the Company's net receivable
balance. As of October 31, 1997, the receivable balances from its largest
customers amounted to approximately 19.0% and 10.7% of the Company's net
receivable balance. As of October 31, 1998, the receivable balance from its
largest customer amounted to approximately 14.9%, which is insured, of the
Company's net receivable balance. For the years ended October 1996, 1997 and
1998, the Company's five (5) largest customers accounted for 43.6%, 36.2% and
22.4% of net sales, 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 $41,762,489, $79,728,424 and
$102,866,094 for 1996, 1997 and 1998, respectively. Distribution revenue
amounted to $34,469,905 (unaudited) and $44,389,431 (unaudited) for the three
months ended January 31, 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, the Company's
write-offs from returns for its distribution activities has been less than 1%
of distribution revenues.
Publishing revenue is derived from the sale of internally developed
interactive software games or from the sale of product licensed from a third
party developer and is recognized upon the shipment of product to retailers.
Publishing revenue amounted to $13,360,574, $17,612,801 and $91,185,472 in
1996, 1997, and 1998, respectively. Publishing revenue amounted to $16,935,456
(unaudited) and $23,891,222 (unaudited) for the three months ended January 31,
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 years ended October 31, 1996, 1997 and 1998, the Company's net
sales in domestic markets accounted for approximately 93.8%, 94.1%, and 78.4%,
respectively, and net sales in international markets accounted for 6.2%, 5.9%,
and 21.6% of total sales, respectively. For the three months ended January 31,
1998 and 1999, the Company's net sales in domestic markets accounted for
approximately 97.2% (unaudited) and 78.7% (unaudited), respectively, of total
sales and net sales in international markets accounted for 2.8% (unaudited) and
21.3% (unaudited), respectively of total sales.
F-13
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
2. Significant Accounting Policies and Transactions: -- (Continued)
As of October 31, 1997 and 1998, the Company's net fixed assets in
domestic markets accounted for approximately $1,662,462 and $1,287,151,
respectively, and net fixed assets in international markets accounted for
$78,781 and $692,507, respectively. As of January 31, 1999, the Company's net
fixed assets in domestic and international markets are $1,291,148 (unaudited)
and $676,210 (unaudited), respectively.
Advertising
The Company reports the costs of all advertising as expenses in the
periods in which those costs are incurred. The Company shares portions of
certain customers' advertising expenses through co-op advertising arrangements.
Advertising expense for the years ended October 31, 1996, 1997 and 1998
amounted to $474,211, $1,038,407 and $6,670,303, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with
original maturities of three months or less to be cash equivalents.
Inventory
Inventories are stated at average cost. The Company periodically evaluates
the carrying value of its inventories and adjusts these as necessary.
Prepaid Royalties
Prepaid royalties represent prepayments made to independent software
developers under development agreements. Prepaid royalties are expensed at the
contractual royalty rate as cost of goods sold based on actual net product
sales. Management continuously evaluates the future realization of advance
royalties, and charges to cost of sales any amount that management deems
unlikely to be realized at the contractual royalty rate through product sales.
Prepaid royalties are classified as current and non-current assets based upon
estimated net product sales within the next year. Prepaid royalties were
written down $0, $350,000 and $884,454 for the years ended October 31, 1996,
1997 and 1998, respectively, to net realizable value. Amortization of prepaid
royalties amounted to $325,000, $3,644,935 and $9,093,885 during 1996, 1997 and
1998, respectively. Prepaid royalties were written down $656,698 (unaudited)
for the three months ended January 31, 1999 to net realizable value.
Amortization of prepaid royalties for the three months ended January 31, 1999
amounted to $1,929,839 (unaudited).
Fixed Assets
Depreciation of computer equipment, office equipment, furniture and
fixtures and automobiles is provided for by the straight-line method over their
estimated lives ranging from five to seven years. Depreciation of computer
software is depreciated by the straight-line method over three years.
Amortization of leasehold improvements is provided for over the lesser of the
term of the related lease or estimated useful lives. Accumulated amortization
includes the amortization of assets recorded under capital leases. The cost of
additions and betterments is capitalized, and repairs and maintenance costs are
charged to operations in the periods incurred. When depreciable assets are
retired or sold, the cost and related allowances for depreciation are removed
from the accounts and the gain or loss is recognized.
Capitalized Software Development Costs (Including Film Production Costs)
Costs associated with research and development are expensed as incurred.
Software development costs incurred subsequent to establishing technological
feasibility are capitalized. Technological feasibility is established upon the
completion of a detailed program design (in the absence of any high risk issues
or uncertainties). Amortization commences upon the general release of a game
title and is recognized as a
F-14
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
2. Significant Accounting Policies and Transactions: -- (Continued)
component of cost of sales by the greater of: (a) the straight-line method over
the remaining estimated life of two years or (b) the ratio that current gross
revenues for a product bears to the total of current and anticipated future
gross revenues for that product. Due to a short product life cycle, film
production costs are generally amortized over a period less than one year. It
is reasonably possible that the estimate of anticipated future gross revenues,
the remaining estimated economic life of the product, or both will be reduced
significantly in the near term and that the amortization of the capitalized
software costs may be accelerated materially in the near term. Capitalized
software costs are compared, by game title, to the net realizable value of the
product and capitalized amounts in excess of net realizable value, if any, are
immediately written off. Capitalized software costs were written down by $0,
$210,500 and $1,411,784 for the years ended October 31, 1996, 1997 and 1998,
respectively, to net realizable value. Amortization of capitalized software
costs amounted to $2,964,684, $755,986 and $1,767,486 during 1996, 1997 and
1998, respectively. Capitalized software costs were written down by $168,000
(unaudited) for the three months ended January 31, 1999 to net realizable
value. Amortization of capitalized software costs amounted to $50,000
(unaudited) for the three months ended January 31, 1999.
Net Income (Loss) per Share
Net income (loss) per share has been computed in accordance with the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS No. 128") which
requires the presentation of basic earnings per share ("EPS"), which excludes
common stock equivalents from its computation and requires the presentation of
diluted EPS which gives effect to all dilutive potential common shares that
were outstanding during the period. The computation excludes 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.
Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130"). Comprehensive income
(loss) represents the change in net assets of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. Comprehensive income (loss) of the Company includes net income (loss)
adjusted for the change in foreign currency translation adjustments. The net
effect of income taxes on comprehensive income (loss) is immaterial. The
disclosures required by SFAS No. 130 for the years ended October 31, 1996, 1997
and 1998 have been included in the Statements of Stockholders' Equity.
Segment Reporting
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which established
standards for reporting information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
had no impact on the Company's results of operations, financial position or
cash flows.
Intangible Assets
Intangible assets consist of trademarks and the remaining excess purchase
price paid over identified intangible and tangible net assets of acquired
companies. Intangible assets are amortized under the straight-line method over
the period of expected benefit of seven years for the Mission Studios
acquisition and ten years for the TTE, AIM, DirectSoft and BMG Interactive
Group acquisitions (See Note 3). These acquisitions were accounted for as a
purchase transaction. The Company assesses the recoverability of its intangible
assets by determining whether the carrying amounts can be recovered through
estimated future cash flows over its remaining life. If estimated future cash
flows indicate that the unamortized balance will not be
F-15
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
2. Significant Accounting Policies and Transactions: -- (Continued)
recovered, an adjustment will be made to reduce the carrying amounts to an
amount consistent with estimated future cash flows discounted at the Company's
incremental borrowing rate. Cash flow estimates are based on trends of
historical performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Goodwill amortization expense amounted to $38,965, $496,187 and $1,047,366 for
the years ended October 31, 1996, 1997 and 1998, respectively.
Income Taxes
The Company recognizes deferred taxes under the asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for differences between the financial statement and
tax bases of assets and liabilities at currently enacted statutory tax rates
for the years in which the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
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 at the balance sheet date and average prevailing exchange rates for
the period for revenue and expense accounts. Adjustments resulting from
translation are included as a separate component of stockholders' equity.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, prepaid royalties, advances to
developers, accounts payable and accrued liabilities, approximate fair value
because of their short maturities. The carrying amount of the Company's line of
credit, notes payable and capital lease obligation approximates the fair value
of such instruments based upon management's best estimate of interest rates
that would be available to the Company for similar debt obligations at October
31, 1998.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained For Internal Use," ("SOP 98-1"). This
statement establishes capitalization criteria for external and internal
computer software costs and is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company does not believe this
standard will have a material impact on the Company's financial position,
results of operations or cash flows.
In April 1998, the AICPA issued, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"), and is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of this SOP
should be reported as the cumulative effect of a change in accounting
principle. The Company does not believe this standard will have a material
impact on the Company's financial position, results of operations or cash
flows.
In December 1998, the AICPA issued, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions" which amends SOP
97-2, "Software Revenue Recognition" ("SOP 98-9"), to require recognition of
revenue using the residual method. Under the residual method, the total fair
value of the undelivered elements, as indicated by vendor-specific objective
evidence, is deferred and subsequently recognized in accordance with the
relevant sections of SOP 97-2 and the difference between the total arrangement
fee and the amount deferred for the undelivered elements is recognized as
revenue related to the
F-16
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
2. Significant Accounting Policies and Transactions: -- (Continued)
delivered elements. Effective December 15, 1998, this SOP amends SOP 98-4,
Deferral of the Effective Date of a Provision of SOP 97-2, Software Revenue
Recognition, to extend the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before March
15, 1999. All other provisions of this SOP are effective for transactions
entered into in fiscal years beginning after March 15, 1999. The Company does
not believe this standard will have a material impact on the Company's
financial position, results of operations or cash flows.
3. Business Acquisitions:
On September 17, 1996, the Company acquired all the outstanding stock of
Mission. The total cost of the acquisition was $2,560,428, consisting of a cash
payment of $1,674,478, a note payable of, $315,950, net of discount of $22,000,
a promissory note of $130,000, issuance of 182,923 shares of common stock
valued at $440,000. The promissory note includes an additional payment of
$200,000 which is contingent upon the inclusion of a specific software engine
in shipments of Jetfighter IV. If it is subsequently determined that payment is
probable, the $200,000 will be recorded as compensation expense.
On July 29, 1997, the Company acquired all the outstanding stock of
GameTek (UK) Limited, now known as Take-Two Interactive Software Europe Limited
("TTE"), and ART, and certain software games including Dark Colony, The
Quivering and The Reap. TTE 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 $3,848,162,
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, and direct transaction costs of $48,162. The cost of the
acquisition was allocated to the assets acquired and liabilities assumed based
upon their estimated fair values as follows:
Working capital $ (1,160,278)
Equipment 59,786
Software titles 1,175,000
Intangibles 3,773,654
-------------
$ 3,848,162
=============
In December 1997, the Company acquired all the outstanding stock of L&J
Marketing Inc. d/b/a Alliance Distributors ("Alliance"). Alliance is engaged in
the wholesale distribution of interactive software games and videos. Alliance
was merged into AIM, a newly formed wholly-owned subsidiary of IMSI. The total
cost of the acquisition was $3,369,000, consisting of a cash payment of
$1,500,000, issuance of 500,000 shares of restricted common stock valued at
$1,615,706 and issuance of 76,000 options valued at $253,294. The cost of the
acquisition was allocated to the assets acquired and liabilities assumed based
upon their estimated fair values as follows:
Working capital $ 1,010,007
Equipment 97,580
Intangibles 2,008,119
Deferred compensation 253,294
-----------
$ 3,369,000
===========
In March 1998, the Company acquired substantially all of the assets of BMG
Interactive Group, a division of BMG Entertainment North America ("BMG"),
including direct distribution, sales and marketing offices in France and
Germany; a product publishing and distribution group in the United Kingdom;
distribution, publishing and certain sequel rights to twelve upcoming video
game and PC game product
F-17
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
3. Business Acquisitions: -- (Continued)
releases; and various back catalog publishing and distribution rights. As
consideration for these assets, the Company issued to BMG 1,850,000 shares of
newly created Series A Convertible Preferred Stock (the "Preferred Stock")
valued at $9,539,063. The Preferred Stock was converted into Common Stock in
August 1998 on a one-for-one basis.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Working capital $ 247,000
Equipment 541,000
Software titles 7,831,125
Intangibles 919,938
-----------
$ 9,539,063
===========
In June 1998, the Company acquired all of the assets of DirectSoft
Australia Pty. Ltd., now known as DirectSoft Pty. Ltd. ("DirectSoft").
DirectSoft is a publisher and distributor of PC and video game software in
Australia and New Zealand. As consideration for these assets, the Company
issued 40,000 restricted shares of common stock valued at $256,500.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Working capital $ 23,131
Equipment 20,215
Intangibles 213,154
---------
$ 256,500
=========
The acquisitions described above 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.
On July 31, 1997, the Company acquired all the outstanding stock of IMSI
and 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 exchanged for 900,000 shares of
restricted common stock of the Company. IMSI and CAG reported its financial
results on an October 31 fiscal year-end basis.
In August 1998, the Company acquired all the outstanding stock of JAG. JAG
is engaged in the wholesale 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 common stock of
Talonsoft were exchanged for 1,033,336 shares of common stock of the Company.
The acquisitions described above 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 of these acquisitions for all periods presented.
The Company reports its financial results on an October 31 fiscal year-end
basis, whereas JAG and Talonsoft reported their financial results on a December
31 calendar year-end basis. For the purposes of restating the Company's
financial statements, the Company's balance sheet as of October 31, 1997 was
F-18
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
3. Business Acquisitions: -- (Continued)
combined with JAG's and Talonsoft's balance sheet as of December 31, 1997. In
addition, the Company's statement of operations for the years ended October 31,
1996 and 1997 were combined with JAG's and Talonsoft's statement of operations
for the years ended December 31, 1996 and 1997, respectively. The Company's
statement of operations for the year ended October 31, 1998 includes JAG's and
Talonsoft's 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 has been reflected as an adjustment to retained earnings for the year
ended October 31, 1998. The results of operations of JAG and Talonsoft for such
two months period includes net revenues of $23,893,108 and $351,609,
respectively.
The unaudited pro forma data below for the years ended October 31, 1997
and 1998 is presented as if these acquisitions had been made as of November 1,
1996 and 1997, respectively. The unaudited pro forma financial information is
based on management's estimates and assumptions and does not purport to
represent the results that actually would have occurred if the acquisitions
had, in fact, been completed on the dates assumed, or which may result in the
future.
<TABLE>
<CAPTION>
Pro forma Unaudited
--------------------------------------
October 31, 1997 October 31, 1998
------------------ -----------------
<S> <C> <C>
Total Revenues:
Take-Two (1) .............................................. $ 19,014,083 $ 26,917,102
Take-Two inclusive of Talonsoft ........................... 22,678,346 29,896,996
Take-Two inclusive of Talonsoft and JAG ................... 97,341,225 123,355,052
Take-Two inclusive of all acquired businesses (2) ......... 155,651,480 203,678,899
Net income (loss):
Take-Two (1) .............................................. $ (4,162,083) $ (54,229)
Take-Two inclusive of Talonsoft ........................... (4,115,870) 181,216
Take-Two inclusive of Talonsoft and JAG ................... (2,768,393) 1,679,259
Take-Two inclusive of all acquired businesses (2) ......... (41,951,277) 1,040,760
Net income (loss) per share -- Basic ...................... $ (3.59) $ 0.07
</TABLE>
- ------------
(1) includes IMSI and CAG
(2) includes TTE, ART, AIM, BMG, and DirectSoft
4. Inventory:
As of October 31, 1997 and 1998, inventories consist of:
1997 1998
------------- ---------------
Parts and Supplies .................. $ 185,793 $ 166,138
Finished products ................... 12,551,159 26,163,019
Provision ........................... -- (236,616)
----------- -----------
$12,736,952 $26,092,541
=========== ===========
F-19
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
5. Advances to Developers:
In May 1998, the Company entered into a distribution agreement with
Gathering of Developers I, Ltd. ("Gathering"), pursuant to which Gathering
granted the Company (i) the exclusive right to distribute through standard
retail channels ten titles designed to operate on the PC platform in the United
States and Canada during the later of a four-year period or three years
following the release of any such product; (ii) a non-exclusive right to
distribute the products on-line; and (iii) certain rights of first refusal to
distribute the products designed for use on console platforms in North America,
Europe, Israel, Australia and Africa. As an advance against future product
purchases of the various game titles, the Company paid Gathering $7,500,000.
Under the agreement, the Company receives a distribution fee ranging from 12%
to 20% based upon the quantities sold. Advances are recouped from customer
receipts, net of the Company's distribution fee. Of the $7,500,000 advance,
$4,319,989 is remaining as of October 31, 1998. Actual game title sales through
October 31, 1998 and remaining sales forecasts indicate that the advance will
be fully recouped during the year ending October 31, 1999.
6. Fixed Assets:
As of October 31, 1997 and 1998, fixed assets consist of:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Computer equipment ....................................... $ 1,670,278 $ 1,691,801
Office equipment ......................................... 372,517 629,459
Computer software ........................................ 2,677 43,151
Furniture and fixtures ................................... 257,900 554,343
Automobiles .............................................. 189,810 323,957
Leasehold improvements ................................... 107,479 232,784
Capital leases ........................................... 164,945 248,462
------------ ------------
2,765,606 3,723,957
Less, accumulated depreciation and amortization .......... (1,024,363) (1,744,299)
------------ ------------
$ 1,741,243 $ 1,979,658
============ ============
</TABLE>
Depreciation expense for the years ended October 31, 1996, 1997 and 1998
amounted to $303,167, $507,951 and $787,691, respectively.
7. Lines of Credit:
a. In December 1995, the Company entered into a line of credit agreement
with a bank which provides for up to $250,000 of short-term financing at the
rate of prime plus 1% per annum (9.5% and 9.0% as of October 31, 1997 and 1998,
respectively). Substantially all the Company's assets were pledged as
collateral and the repayment of advances was personally guaranteed by a
shareholder and officer of the Company. In addition, the Company was required
to maintain a minimum balance of $50,000 at all times. The line of credit was
due and payable only if the lender terminates the right to obtain future loans
under such facility. Upon this event, the Company was required to pay the then
outstanding amounts in 24 equal installments. The Company has classified 12
monthly payments as current. The outstanding available credit under this
facility was $3,003, as of October 31, 1997 and 1998. In December 1998, the
outstanding balance of the line of credit was repaid.
b. In February 1997, IMSI entered into a line of credit agreement which
provided for up to $250,000 of short-term financing at the prime rate plus .5%
per annum (9.0% as of October 31, 1997). Borrowings under the line were
collateralized by the assets of IMSI. The agreement was cancelable at any time.
There was no available credit under this facility at October 31, 1997. In
December 1997, IMSI repaid the principal amount of such indebtedness.
F-20
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
7. Lines of Credit: -- (Continued)
c. In September 1997, Talonsoft entered into a line of credit agreement
which provides for up to $250,000 of short-term financing at the prime rate
plus 1.0% per annum (9.5% as of October 31, 1997 and 1998). Borrowings under
the line are collateralized by the assets of Talonsoft. The agreement is
cancelable at any time. The available credit under this facility at October 31,
1997 and 1998 was $250,000 and $175,000, respectively.
d. In December 1997, IMSI and AIM entered into a revolving line of credit
agreement, as amended in March 1998 and September 1998, with NationsBank, N.A.
The line provides for borrowings of up to $10,000,000. Advances under the line
of credit are based on a borrowing formula equal to the lesser of (i)
$10,000,000 or (ii) 80% of eligible accounts receivable plus 50% of eligible
inventory. Interest accrues on such advances at a rate of .75% over
NationsBank's prime rate (8.75% as of October 31, 1998) and is payable monthly.
Borrowings under the line of credit are collateralized by the assets of IMSI
and AIM and are guaranteed by the Company. The loan agreement limits or
prohibits IMSI and AIM, subject to certain exceptions, from declaring or paying
cash dividends, merging or consolidating with another corporation (excluding
the Company), selling assets (other than in the ordinary course of business),
creating liens and incurring additional indebtedness. The outstanding balance
and available credit under this facility was $6,922,860 and $370,754,
respectively, at October 31, 1998. In December 1998, the line was increased to
$11,000,000. The line of credit expires on May 31, 1999.
e. In December 1996, TTE entered into a line of credit agreement (as
amended in September 1997, April 1998 and July 1998) with Barclays Bank. The
line of credit provided for borrowings of up to approximately British
Pounds400,000 ($670,000) and British Pounds900,000 ($1,506,330), respectively,
as of October 31, 1997 and 1998. Advances under the line of credit bear
interest at the rate of 9.0% and 10.25% as of October 31, 1997 and 1998,
respectively, payable quarterly. Borrowings are collateralized by TTE's
receivables which must at all times be at least three times the amount
outstanding on the line of credit and are guaranteed by the Company. The
available credit under this facility was British Pounds82,781 ($138,659) and
British Pounds664,759 ($1,112,607) at October 31, 1997 and 1998, respectively.
In January 1999, the line was increased to British Pounds2,000,000
($3,347,200).
f. In August 1998, JAG entered into a Second Amended and Restated Loan and
Security Agreement with respect to its revolving line of credit with The
Provident Bank ("Provident") as amended in October 1998. The agreement with
Provident provides for aggregate borrowings by JAG including a revolving line
of credit up to $17.5 and $25 million, as of October 31, 1997 and 1998,
respectively. Advances under the line of credit are based on a borrowing
formula with respect to eligible inventory and accounts receivable. Interest
accrues on such advances at the prime rate established by Provident from time
to time plus 1.25% (9.75% and 9.25% as of October 31, 1997 and October 31,
1998, respectively) and is payable monthly. Borrowings under the line of credit
are collateralized by accounts receivable and inventory of JAG and guaranteed
by the Company as well as principal stockholders of the Company. The loan
agreement limits or prohibits JAG, subject to certain exceptions, from
declaring or paying cash dividends, merging or consolidating with another
company (excluding the Company), selling assets (other than in the ordinary
course of business), creating liens and incurring additional indebtedness. The
line of credit expires on June 1, 1999. In connection with the loan agreement,
the Company issued Provident warrants to purchase 20,000 shares of the
Company's common stock at an exercise price of $5.625 per share. The
outstanding balance and available credit under the revolving line of credit is
$13,835,575 and $3,664,425 as of October 31, 1997, respectively, and
$22,711,815 and $2,228,185, after a $60,000 letter of credit, as of October 31,
1998, respectively. In December 1998, the revolving line of credit was
increased to $28 million and the personal guarantees were released.
The Company has negotiated a new financing to replace existing lines of
credit at AIM and JAG. See Note 17.
F-21
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
8. Notes Payable:
a. Term Notes
In August 1997, JAG entered into a term note for the purchase of equipment
in the amount of $200,000 payable in 24 monthly installments of $9,230, at an
annual interest rate of 10%. The note is collateralized by a first lien on
substantially all the assets of the JAG. As of October 31, 1997 and 1998, the
principal amount of $177,457 and $97,132, respectively, was outstanding on the
note. Also, in 1997, JAG entered into a note payable in the amount of
$2,000,000 with Provident, payable June 1, 1999. The note is collateralized by
a first lien on substantially all the assets of JAG and the guarantees of two
of JAG's stockholders. Interest accrues at 16.5% per annum, payable monthly. As
of October 31, 1997, the principal amount of $2,000,000 was outstanding on the
note. In October 1998, JAG repaid the note.
In September 1997, Talonsoft entered into a term note for the purchase of
computer equipment in the amount of $60,000 payable in 36 monthly installments
of $1,911, at an annual interest rate of 9%. The note is collateralized by
substantially all the assets of Talonsoft. As of October 31, 1997 and 1998, the
principal amount of $55,476 and $45,735, respectively, was outstanding on the
note. Also, in May 1998, Talonsoft entered into a term note for the purchase of
furniture and fixtures in the amount of $100,000 payable in 60 monthly
installments of $1,985, at an annual interest rate of 6.99%. The note is
collateralized by substantially all the assets of Talonsoft. As of October 31,
1998, the principal amount of $91,665 was outstanding on the note.
b. Notes Payable to Related Parties
In connection with the purchase of Mission, the Company entered into a
purchase money note in the amount of $337,750 payable in 36 monthly
installments of $10,224, at an annual interest rate of 6%. The note was
recorded net of a discount of approximately $22,000 using the Company's
incremental borrowing rate at the date of acquisition of 10.25%. The discount
is being amortized over the term of the note using the "interest method". As of
October 31, 1997 and 1998, the remaining unamortized discount amounted to
approximately $9,000 and $2,300, respectively. The note is collateralized by
the issued and outstanding stock of Mission. As of October 31, 1997 and 1998
the principal amounts of $212,671 and $106,905, respectively, were outstanding
on the note. The outstanding principal amounts are net of the remaining
unamortized discounts.
In connection with the acquisition of Mission, the Company assumed debt of
$15,000 in the form of a promissory note, bearing interest at 12% per year to a
related party. The principal balance and any accrued interest is due in six
months upon demand by the related party, or if no demand is made the obligation
is due on December 31, 1998. As of October 31, 1997 and 1998, the outstanding
principal and interest balance was $15,600 and $16,050, respectively. Interest
expense was $3,567 and $1,827 for the years ended October 31, 1997 and 1998. In
December 1998, the promissory note and accrued interest balances were repaid.
In September 1996, a group of related parties loaned the Company an
aggregate of $2,088,539 in exchange for promissory notes that bear interest at
prime plus 2% per annum (10.5% as of October 31, 1997). The prime rate is
defined as the Chase Manhattan Bank, N.A.'s prime rate during the term of the
loan. The related parties also received warrants to purchase an aggregate of
417,234 shares of common stock at an exercise price of less than one cent per
share. The warrants expire on August 12, 2001. The Company has recorded the
notes at a discount of $750,197 to reflect an allocation of the proceeds to the
estimated value of the warrants and is being amortized into interest expense
using the "interest method" over the term of the financing. The estimated value
of the warrants were based on the Company's application of a commonly
recognized pricing model.
In January 1997, one noteholder agreed that his portion of the notes of
$1,565,180 ($1,115,062, net of discount of $450,118) would be repaid upon the
earlier of thirteen months from the consummation of an
F-22
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
8. Notes Payable: -- (Continued)
initial public offering or June 30, 1998. In consideration for this extension,
the interest rate was increased to 14% per annum. In August 1997, the Company
repaid $750,000 principal amount of such indebtedness. In September 1997, the
Company obtained bank financing to repay the balance of $815,180 in principal
amount of such indebtedness (See Note 8d).
Approximately $150,000 and $600,000 of the discount was included as
interest expense for the years ended October 31, 1996 and 1997, respectively.
As of October 31, 1997, $149,748 of principal and $18,266 of interest remained
outstanding. In October 1998, the principal amount and accrued interest of such
indebtedness was repaid.
In June and July 1998, Talonsoft entered into two promissory notes of
$50,000 each with a shareholder and employee that bear interest at a rate of
7.0% per annum. In December 1998, one of the promissory notes and accrued
interest balance were repaid.
c. Securities Purchase Agreement-Convertible Notes
Pursuant to a Securities Purchase Agreement, dated October 14, 1997, the
Company issued and sold to Infinity Investors Limited, Infinity Emerging
Opportunities Limited and Glacier Capital Limited (collectively, the "Funds")
(i) 10% collateralized convertible notes (the "Notes") in the aggregate
principal amount of $4,200,000; (ii) 50,000 shares of Common Stock, par value
$.01 per share (the "Grant Shares"); and (iii) five-year warrants (the
"Warrants") to purchase 250,000 shares of Common Stock (the "Warrant Shares")
exercisable at a price of $6.46 per share. The net proceeds to the Company from
the sale of the Notes, Grant Shares and Warrants was $4,007,000. In addition,
the Company paid a third party $168,000, and issued it 5,000 shares of Common
Stock and 20,000 warrants to acquire Common Stock; as a fee for services
rendered in connection with the transactions.
The Company has recorded the notes at a discount of $993,800 to reflect an
allocation of the proceeds to the estimated value of the warrants and common
stock. The discount is being amortized into interest expense using the
"interest method" over the term of the financing. $110,422 and $883,378 of such
discount was included in interest expense for the years ended October 31, 1997
and 1998, respectively. Interest is payable quarterly until maturity. The Notes
mature on September 30, 1999 and may be accelerated under certain
circumstances. Notes repaid after February 28, 1998 are repayable at a premium,
as defined in the agreement. In February 1998, the Notes and accrued interest
balances were repaid.
In addition, the Company has recorded $276,980 as deferred financing
costs. These costs are being amortized over the term of the financing. $30,776
and $246,204 of such costs was included in general and administrative expense
for the years ended October 1997 and 1998, respectively.
Interest accrued on the outstanding principal amount of the Convertible
Notes at the rate of 10% per annum and is payable quarterly.
Pursuant to the Securities Purchase Agreement, the Company was required to
issue additional shares to the Funds in the event that the closing bid price of
the Company's Common Stock during the effectiveness of a registration
statement, as defined, does not equal $7.75. As a result, in November 1998,
5,043 shares of common stock were issued.
d. Promissory Notes
In September 1997, Take-Two entered into a promissory note agreement with
a bank in the amount of $800,000 payable in 9 monthly installments of $30,000
and the balance of $530,000 payable on June 30, 1998. The note bears interest
at prime plus 2% per annum (10.5% as of October 31, 1997), payable monthly. The
note is personally guaranteed by related parties and is collateralized by
substantially all the assets of the Company. The Company must at all times
maintain certain financial ratios and maintain on deposit at the bank
F-23
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
8. Notes Payable: -- (Continued)
a cash balance of the lesser of (i) $500,000 or (ii) the aggregate amount
outstanding under the promissory note which was $740,000 as of October 31,
1997. As of October 31, 1997, the cash balance at the bank was $933,496. In
January 1998, the promissory note was repaid.
In connection with the TTE and ART acquisitions, in July 1997, the Company
issued an unsecured promissory note to GameTek's secured creditors in the
amount of $500,000 payable in two equal annual installments of $250,000 on July
28, 1998 (which was repaid in July 1998) and July 29, 1999, bearing interest at
a rate of 8% per annum, payable quarterly. In July 1998, the Company issued
32,138 shares of Common Stock in consideration of the cancellation of $250,000
of indebtedness. See Note 14 to Notes to Consolidated Financial Statements.
9. Accrued Expenses:
Accrued expenses as of October 31, 1997 and 1998 consist of:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Accrued co-op advertising, price protection and product
discounts ........................................... $ 136,088 $ 3,075,340
Accrued VAT and corporate taxes payable ............... 641,687 2,444,482
Accrued sales commissions ............................. 329,454 331,149
Royalties payable ..................................... 1,091,110 2,143,302
Other ................................................. 1,279,101 2,981,089
---------- -----------
Total ................................................. $3,477,440 $10,975,362
========== ===========
</TABLE>
10. Commitments and Contingencies:
Capital Leases
The Company leases equipment under capital lease agreements which extend
through fiscal year 2002. Future minimum lease payments under these capital
leases, together with the present value of such payments as of October 31, 1998
is as follows:
<TABLE>
<CAPTION>
Year ending October 31:
- -----------------------
<S> <C>
1999 ................................................................. $ 99,122
2000 ................................................................. 75,754
2001 ................................................................. 20,179
2002 ................................................................. 4,068
---------
Total minimum lease payments ............................................. 199,123
Less, amounts representing interest ...................................... (22,708)
---------
Present value of minimum obligations under capital leases ................ $ 176,415
=========
</TABLE>
In April 1998, the Company recorded an extraordinary loss of $225,395 for
the early termination of a capital lease for computer equipment. The lease was
scheduled to expire in June 2000 and the early termination resulted in a cash
payment of $233,145 and the write-off of net assets and liabilities totaling
$276,761 and $284,511, respectively.
Lease Commitments
The Company leases 13 office and warehouse facilities. The corporate
headquarters is under a noncancelable operating lease with related parties and
expires in April 2000. Rent expense and certain utility expense under this
lease amounted to $88,631, $111,400 and $132,719 for the years ended October
31, 1996,
F-24
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
10. Commitments and Contingencies: -- (Continued)
1997, and 1998, respectively. The other offices are under noncancelable
operating leases expiring at various times from December 1998 to August 2006.
In addition, the Company has leased certain equipment under noncancelable
operating leases which expire through September 2001.
Future minimum rentals required as of October 31, 1998 are as follows:
Year ending October 31:
- -----------------------
1999 ................................... $ 1,286,327
2000 ................................... 982,520
2001 ................................... 794,259
2002 ................................... 494,837
Thereafter ............................. 738,134
-----------
Total minimum lease payments ........... $ 4,296,077
===========
Rent expense amounted to $339,934, $734,217 and $921,206 for the years
ended October 31, 1996, 1997 and 1998, respectively.
Legal Proceedings
In August 1998, the Company entered into an agreement to resolve the
litigation that was filed by Navarre Corporation in January 1997 which alleged
that the Company breached a distribution agreement by failing to remit monies
for product returns and marketing charges. The Company settled the litigation
by providing Navarre product having an aggregate cost of $249,124 by January
31, 1999. If the Company fails to provide the full amount of product by January
31, 1999, the balance will be payable in cash. The loss on settlement was
recorded in the 1998 financial statements.
11. Employee Savings Plans:
In January 1995, the Company established a 401(k) profit sharing plan and
trust (the "Plan"). The Plan is offered to all eligible employees and
participants may make voluntary contributions to the Plan up to 15% of their
salary. The Company does not match employee contributions.
12. Income Taxes:
The Company is subject to foreign withholding taxes in certain countries
where it does business. Domestic and foreign pre-tax income was $(3,393,650)
and $655,068) for 1997 and $4,000,037 and 3,009,669 in 1998, respectively. 1996
foreign income was immaterial to the financial statements. As of October 31,
1997, the Company had cumulative federal and state net operating loss
carryforwards of approximately $5,400,000 and $3,400,000, respectively, which
if not offset against future taxable income, will expire in fiscal year 2011.
Income tax expense is as follows:
<TABLE>
<CAPTION>
Years ended October 31,
-------------------------------------------------
1996 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Current:
Federal ........................................... $ -- $ -- $ --
State and local ................................... 13,100 11,368 213,793
Foreign ........................................... 29,049 18,421 393,071
Deferred ........................................... 269,289 1,728,577 1,442,526
Increase (decrease) in valuation allowance ......... (269,289) (1,728,577) (2,383,526)
---------- ------------ ------------
Total .......................................... $ 42,149 $ 29,789 $ (334,136)
========== ============ ============
</TABLE>
F-25
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
12. Income Taxes: -- (Continued)
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
Effective tax rate reconciliation:
Statutory federal tax rate (benefit) ......... 34.0% (34.0)% 34.0%
State taxes, net of federal benefit .......... 2.5% (4.9)% 1.9%
Foreign taxes ................................ 1.5% 3.0% --
Disqualified ISO disposition ................. -- -- (5.0)%
Effect of valuation allowance ................ (41.9)% 40.9% (37.9)%
Goodwill amortization ........................ 2.5% 4.9% 3.8%
Other ........................................ 3.9% (8.8)% (1.5)%
----- ----- -----
2.5% 1.1% (4.7)%
===== ===== =====
</TABLE>
The components of the net deferred tax asset as of October 31, 1998
consists of the following:
<TABLE>
<CAPTION>
1997 1998
--------------- ----------------
<S> <C> <C>
Capitalized software ................................... $ (681,994) $ (1,361,166)
Bad debt allowance ..................................... -- 428,815
Other .................................................. 2,100 (5,419)
Foreign tax credit carryforward ........................ 125,788 348,788
Deferred revenue ....................................... 596,242 55,760
Depreciation and amortization .......................... (105,910) (87,280)
Research and experimental credit carryforward .......... 185,509 --
Net operating loss carryforword ........................ 2,315,915 1,561,502
------------ ------------
Net deferred tax asset ............................. 2,437,650 941,000
Less, valuation allowance ............................. (2,437,650) --
------------ ------------
Deferred tax asset ................................. $ -- $ 941,000
============ ============
</TABLE>
Due to the probability that the Company will utilize the deferred tax
asset in the future, the Company recorded this asset in the amount of $941,000
as of October 31, 1998.
13. Stockholders' Equity (See Notes 2, 3, 7 and 14):
Private Placement
In March 1998, the Company sold 158,333 shares of Common Stock in a
private placement and received net proceeds of $898,333.
In May 1998 the Company consummated a private placement of 770,000 shares
of Common Stock and received proceeds of $5,057,000, net of issuance costs.
Class A Preferred Stock
In November 1997, the Company redeemed the 317 shares of Class A Preferred
Stock at the redemption price of $1.00 per share.
Class B Preferred Stock
In February 1997, the holder of Class B Preferred Stock elected to convert
all outstanding shares into 409,791 shares of common stock. Accordingly, all
dividends in arrears became due upon conversion. As an
F-26
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
13. Stockholders' Equity (See Notes 2, 3, 7 and 14): -- (Continued)
inducement to enter into such agreement, in February 1997, the Company issued
options to purchase 38,746 shares of Common Stock at an exercise price of $2.41
per share. Approximately, $100,000 has been recorded as an additional dividend
as a result of the issuance of these options for the fiscal year ended October
31, 1997, and is reflected in the earnings per share computations for such
period. In addition, the Company entered into a three-year consulting agreement
pursuant to which the Stockholder agreed to provide management consulting
services to the Company in consideration of the payment of $100,000 over the
term of the agreement.
Series A Preferred Stock
In March 1998, the Company issued 1,850,000 shares of Series A Convertible
Preferred Stock in connection with the acquisition of substantially all of the
assets of BMG Interactive Group. The Preferred Stock is convertible on a
one-for-one basis into shares of Common Stock, and is not entitled to receive
dividends and has a liquidation preference of $6.875 per share. In August 1998,
BMG shareholders elected to convert all outstanding shares into 1,850,000
shares of common stock.
Warrants
In June 1998 the Company, pursuant to a cashless exercise, announced that
the 1,840,000 public warrants issued in connection with its initial public
offering, could elect to receive one share of the Company's Common Stock for
two warrants surrendered to the Company at any time until August 25, 1998. As
of August 25, 1998, an aggregate of 1,794,366 warrants were exchanged for
897,183 shares of Common Stock.
In August 1998, the Company issued 160,000 shares of Common Stock in
connection with a cashless exercise of the 320,000 underwriters' warrants that
were issued with its initial public offering.
As of October 31, 1997 and 1998, there are currently outstanding common
stock purchase warrants for an aggregate of 2,821,199 and 347,894 shares of the
Company's Common Stock, respectively, at prices ranging from $.01 to $9.08.
1994 Stock Option Plan
In August 1994, the Company adopted the 1994 Stock Plan, (the "Plan"),
pursuant to which qualified options to acquire an aggregate of 896,654 shares
of common stock, may be granted to key employees, consultants, officers and
directors of the Company. The Plan authorizes the Board to issue incentive
options ("ISO"), as defined in Section 422 of the Internal Revenue Code (the
"Code"). The exercise price of each ISO may not be less than 100% of the fair
market value of the common stock at the time of grant, except that in the case
of a grant to an employee who owns (within the meaning of Code Section 422) 10%
or more of the outstanding stock of the Company (a "10% Stockholder"), the
exercise price shall not be less than 110% of such fair market value. Each
option is to expire at such date as the Board of Directors determines. Options
may not be exercised prior to one month from the day on which such option is
granted, or on or after the tenth anniversary (fifth anniversary in the case of
an ISO granted to a 10% Stockholder) of their grant. Options may not be
transferred during the lifetime of an option holder.
As of October 31, 1997 and 1998, there are currently outstanding stock
options for an aggregate of 879,991 and 639,676 shares of the Company's Common
Stock, respectively, at prices ranging from $.92 to $2.41 per share expiring at
various times from 1999 to 2005.
1997 Stock Option Plan
In January 1997, the stockholders of the Company approved the Company's
1997 Stock Option Plan, as previously adopted by the Company's Board of
Directors (the "Plan"), pursuant to which officers, directors,
F-27
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
13. Stockholders' Equity (See Notes 2, 3, 7 and 14): -- (Continued)
and/or key employees and/or consultants of the Company can receive incentive
stock options to purchase up to an aggregate of 400,000 shares of the Company's
Common Stock. In April 1998, the aggregate number of options to be granted
under the Plan was increased to 2,000,000.
The Plans are administered by the Board of Directors. Subject to the
provisions of the Plans, the Board of Directors or any Committee appointed by
the Board of Directors, has the authority to determine the individuals to whom
the stock options are to be granted, the number of shares to be covered by each
option, the option price, the type of option, the option period, restrictions,
if any, on the exercise of the option, the terms for the payment of the option
price and other terms and conditions. Payment by the option holders upon
exercise of an option may be made (as determined) in cash or other such form of
payment acceptable to the Board of Directors.
As of October 31, 1997 and 1998, there are currently outstanding stock
options for an aggregate of 390,000 and 1,825,204 shares of the Company's
Common Stock, respectively, at prices ranging from $5.00 to $7.125 per share
vesting at various times from 1997 to 2001 and expiring at various times from
2002 to 2008.
Non-Plan Stock Options
In February 1996 and October 1998, the Board of Directors of the Company
authorized the issuance of non-plan stock options to purchase up to 166,320
shares of the Company's Common Stock.
For those options with exercise prices less than fair value at the
measurement date, the difference is amortized over the vesting period.
Compensation expense for the years ended October 31, 1996, 1997, and 1998
approximated $17,000, $17,000 and $121,000, respectively.
As of October 31, 1997 and 1998, there are outstanding stock options for
an aggregate of 101,108 and 166,320 shares of Common Stock, respectively, at
prices ranging from $1.16 to $2.50 per share vesting from 1998 to 2001 and
expiring at various times from 1999 to 2006.
The following table summarizes the activity in options under the plans
inclusive of non-plan options:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------- -----------------
<S> <C> <C>
Options outstanding -- November 1, 1995 830,137 $ 0.90
Granted -- exercise price equal to fair value 66,518 $ 2.41
Granted -- exercise price less than fair value 41,573 $ 1.16
Exercised (1,663) $ 0.45
---------
Options outstanding -- October 31, 1996 936,565 $ 1.02
Granted -- exercise price equal to fair value 449,534 $ 4.71
Exercised (15,000) $ 0.92
---------
Options outstanding -- October 31, 1997 1,371,099 $ 2.23
Options exercisable -- October 31, 1997 1,073,957
Granted -- exercise price equal to fair value 1,540,000 $ 5.29
Granted -- exercise price less than fair value 106,000 $ 2.14
Exercised (252,000) $ 0.63
Forfeited (133,899) $ 5.18
---------
Options outstanding -- October 31, 1998 2,631,200 $ 4.02
---------
Options exercisable -- October 31, 1998 1,019,008
=========
</TABLE>
F-28
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
13. Stockholders' Equity (See Notes 2, 3, 7 and 14): -- (Continued)
The following summarizes information about stock options outstanding at
October 31, 1997 and 1998:
<TABLE>
<CAPTION>
Average
Weighted Remaining
Average Contractual
Exercise Price Shares Shares Exercise Price Life
- ------------------------------------------ ------------ ---------------- ------------
<S> <C> <C> <C>
$0.92 -- $2.41 981,099 $ 1.10 6.19
$5.00 -- $5.50 390,000 $ 5.06 5.61
--------- ------- ----
Options outstanding -- October 31, 1997 1,371,099 $ 2.23 6.00
========= ======= ====
$0.92 -- $2.41 826,784 $ 1.37 5.10
$5.00 -- $7.125 1,804,416 $ 5.22 4.61
--------- ------- ----
Options outstanding -- October 31, 1998 2,631,200 $ 4.02 4.64
========= ======= ====
</TABLE>
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its plans. The
Company has adopted the disclosure-only provision of SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in 1996, 1997, and 1998 consistent with the provisions of
SFAS No. 123, the Company's income (loss) and earnings (loss) per share would
have been reduced to the pro-forma amounts indicated below.
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ----------------- ----------------
<S> <C> <C> <C>
Net income (loss)
As reported $ 1,664,141 $ (2,903,809) $ 7,181,094
Pro-forma $ 1,619,243 $ (2,708,400) $ 6,500,790
Net income (loss)
As reported-Basic $ .16 $ (.25) $ .49
Pro-forma-Basic $ .16 $ (.23) $ .44
</TABLE>
The pro-forma disclosures shown are not representative of the effects on
income (loss) and earnings (loss) per share in future years.
The fair value of the Company's stock options used to compute pro-forma
income (loss) and earning (loss) per share disclosures is the estimated present
value at the grant date using the Black-Scholes option-pricing model. The
following weighted average assumptions were used to value grants for 1998, 1997
and 1996: expected volatility of 60%, 60% and 55%; a risk-free interest rate of
6.22%, 6.22% and 5%; and an expected holding period of seven years, seven years
and four to five years, respectively.
14. Extraordinary Event Net Loss on Early Extinguishment of Debt:
In July 1998, the Company issued 32,138 shares of Common Stock, having a
market value of $187,353, to Ocean Bank as payment in full for a promissory
note due July 29, 1999. The gain on the early extinguishment of debt amounted
to $62,647.
The Company also recorded a loss of $225,395 on the early termination of a
capital lease. See Note 10.
15. Net Income (Loss) per Share:
The following table provides a reconciliation of basic earnings per share
to dilutive earnings per share for the years ended October 31, 1996, 1997, 1998
and for the three months ended January 31, 1998 and 1999.
The computation for diluted number of shares excludes unexercised stock
options and warrants which are antidilutive. The number of such shares were 0,
4,192,298 and 50,000 for the years ended October 31, 1996, 1997, 1998,
respectively, and 590,000 and 0 for the three months ended January 31, 1998 and
1999 (unaudited), respectively.
Pro forma net income loss per share gives effect to the distributions paid
to S corporation shareholders prior to the acquisitions, see Note 3, of
$1,005,800, $673,092 and $931,000 for 1996, 1997 and 1998, respectively, and
$362,000 (unaudited) for the three months ended January 31, 1998.
F-29
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
15. Net Income (Loss) per Share: -- (Continued)
<TABLE>
<CAPTION>
Pro Forma
Income
(Loss)
Before Pro Forma
Preferred Per Share
Dividends Shares Amount
----------------- ------------ ----------
<S> <C> <C> <C>
Year Ended October 31, 1996
Basic EPS $ 658,341 10,281,000 $ .06
Effect of dilutive securities --
Stock options and warrants -- 1,173,400 --
------------- ---------- -------
Diluted EPS $ 658,341 11,454,400 $ .06
============= ========== =======
Year Ended October 31, 1997
Basic EPS $ (3,576,901) 11,697,342 $ (.31)
Effect of dilutive securities --
Stock options and warrants -- -- --
------------- ---------- --------
Diluted EPS $ (3,576,901) 11,697,342 $ (.31)
============= ========== ========
Year Ended October 31, 1998
Extraordinary net loss on early extinguishment of
debt (162,748) 14,746,854 (.01)
Basic EPS $ 6,250,094 14,746,854 $ .42
Effect of dilutive securities --
Stock options and warrants -- 2,315,952 (.05)
------------- ---------- --------
Diluted EPS $ 6,250,094 17,062,806 $ 0.37
============= ========== ========
Three Months Ended January 31, 1998 (unaudited):
Basic EPS $ 1,459,181 13,258,379 $ .11
Plus: Impact from assumed conversion of 10%
convertible notes 96,330 65,338
Effect of dilutive securities --
Stock options and warrants -- 1,548,794 (.01)
------------- ---------- --------
Diluted EPS $ 1,555,511 14,872,511 $ .10
============= ========== ========
Three Months Ended January 31, 1999 (unaudited):
Basic EPS $ 2,894,836 18,212,240 $ .16
Effect of dilutive securities --
Stock options and warrants -- 1,322,171 (.01)
------------- ---------- --------
Diluted EPS $ 2,894,836 19,534,411 $ .15
============= ========== ========
</TABLE>
16. Related-Party Transactions:
In February 1994, the Company entered into a consulting agreement with a
shareholder. The agreement provides for an annual consulting fee of $75,000 and
expires in February 1999. The Company owes approximately $61,000 and $66,229
under the consulting agreement as of October 31, 1997 and October 31, 1998,
respectively.
During the years ended October 31, 1997 and 1998, IMSI and AIM paid sales
commissions of $18,603 and $39,812, respectively, to an affiliate of a
stockholder. In addition, as of October 31, 1997 and 1998, there was $42,978
due from related parties relating to advances made prior to the acquisition of
IMSI. These advances have no repayment terms.
During the years ended October 31, 1997 and 1998, JAG paid sales
commissions of $20,000 and $20,342, respectively, to a stockholder and
employee. In addition, JAG paid $231,567 and $145,275 for the years ended
October 31, 1997 and 1998, respectively, for purchases of inventory from a
related party.
F-30
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
17. Subsequent Events (Unaudited):
In February 1999, the Company acquired all of the outstanding capital
stock of L.D.A. Distribution Limited ("LDA") and its subsidiary, Joytech Europe
Limited ("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 peripherals for
first-party console manufacturers. The Company paid British Pounds200,000
(approximately $328,000) and issued 580,000 shares of restricted Common Stock.
The acquisition will be accounted for as a purchase transaction.
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 aggregated $4 million, payable in six equal
monthly installments of $667,000. 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.
In February 1999, the Company amended its distribution agreement ("the
Agreement") with Gathering 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 recoupable advances
of $12,500,000, payable over one year from the date of the agreement. 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 pay the Company the
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 the Company materially breaches the agreement and, upon any
subsequent two material breaches, may terminate the entire agreement.
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 the Company 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.
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. The acquisition will be accounted for as a purchase transaction.
F-31
<PAGE>
================================================================================
We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus
does not offer to sell or buy any shares in any jurisdiction where it is
unlawful. The information in this prospectus is current only as of its date.
----------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary .............................................. 3
Risk Factors .................................................... 7
Use of Proceeds ................................................. 14
Price Range of Common Stock and
Dividend Policy ............................................. 15
Capitalization .................................................. 16
Selected Financial Data ......................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................................... 18
Industry Overview ............................................... 24
Business ........................................................ 25
Management ...................................................... 33
Principal and Selling Stockholders .............................. 38
Certain Transactions ............................................ 40
Description of Capital Stock .................................... 41
Underwriting .................................................... 42
Legal Matters ................................................... 43
Experts ......................................................... 43
Additional Information .......................................... 44
Index to Financial Statements ................................... F-1
----------------------------
Until , 1999 ( days after the date of this prospectus), all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
5,000,000 Shares
[GRAPHIC OMITTED]
TAKE-TWO INTERACTIVE
SOFTWARE, INC.
Common Stock
------------------------------------------------
PROSPECTUS
------------------------------------------------
ING Baring Furman Selz LLC
Gerard Klauer Mattison & Co., Inc.
Morgan Keegan & Company, Inc.
, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
SEC registration ....................................... $ 14,586.31
NASD fee ............................................... $ 5,746.88
NASDAQ additional listing fee. ......................... $ *
Printing and engraving costs ........................... *
Legal fees and expenses. ............................... *
Accounting fees and expenses ........................... *
Blue Sky fees and expenses ............................. *
Transfer agent and registrar fees and expenses ......... *
Miscellaneous. ......................................... $ *
-----------
Total ................................................ $ *
===========
- ------------
* To be provided by amendment.
Item 14. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware
contains provisions permitting a corporation's directors and officers to be
indemnified in certain circumstances against judgments, fines, amounts paid in
settlement and reasonable expenses (including attorneys' fees) incurred as the
result of an action or proceeding in which they may be involved by reason of
having been a director or officer.
Section 102(b) of the Delaware General Corporation Law permits a
corporation, by so providing in its certificate of incorporation, to eliminate
or limit the personal liability of directors to the corporation and its
stockholders for monetary damages for breaches of their fiduciary duty. This
section does not permit a corporation to eliminate or limit the liability of a
director with respect to any of the following: (i) breaches of the director's
duty of loyalty to the corporation or its stockholders; (ii) acts or omissions
not made in good faith or which involve intentional misconduct or knowing
violations of law; (iii) liability under Section 174 of the Delaware General
Corporation Law; or (iv) any transaction from which the director derived an
improper personal benefit. This section does not authorize any limitation on
the ability of the corporation or its stockholders to obtain injunction relief,
specific performance or other equitable relief against directors.
Article Six of the Company's Certificate of Incorporation provides that no
director of the Company shall be personally liable to the Company or its
stockholders for any monetary damages for breaches of fiduciary duty to the
Company or its stockholders except for (i) any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the General Corporation of Law of the State of
Delaware; or (iv) any transaction from which the director derived an improper
personal benefit.
Article Seven of the Company's Certificate of Incorporation and the
Company's By-laws provide that the Company shall indemnify its directors and
officers to the extent permitted under the General Corporation Law of the State
of Delaware from time to time. This right of indemnification is not exclusive
of any other rights to which those seeking indemnification may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors,
or otherwise.
Insofar as indemnification for liabilities under the Act may be permitted
to directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
II-1
<PAGE>
In the Underwriting Agreement, the proposed form of which is filed as
Exhibit 1.1, the Underwriters agree to indemnify the directors and certain
officers of the Company and certain other persons against certain civil
liabilities.
Item 15. Recent Sales of Unregistered Securities.
During the past three years, the Company sold the following unregistered
securities:
In September 1996, the Company issued (i) $2,088,539 principal amount of
promissory notes and (ii) five-year warrants to purchase 417,234 shares of
common stock at $.01 per share. Purchasers were: Anglo American Security Fund,
L.P., Peter M. Brant, CAPCOR, Employee Pension Plan, Churchill Associates,
L.P., Field Nominees, Ltd., Neil S. Hirsch, Dennis Hopper, Corey M. Horowitz,
Moretons Holdings Limited, Paribas Nominee Singapore Pte. Ltd., John David and
Joanna Pinto, June Rosamond Maxwell Robinson, Michael Robinson, Ira Shapiro and
Sintra Fund, Ltd.
In July 1997, the Company issued 900,000 shares of common stock to Terry
Phillips, Cathy Phillips, David Clark, Karen Clark and Russell Howard in
connection with the acquisitions of Inventory Management Systems, Inc. and
Creative Alliance Group.
In July 1997, the Company issued 406,553 shares of common stock in
connection with the acquisition of GameTek (UK) Limited, now known as Take-Two
Interactive Software Europe Limited, and Alternative Reality Technologies.
In October 1997, pursuant to a securities purchase agreement, the Company
issued and sold (i) 10% secured convertible notes in the aggregate principal
amount of $4,200,000; (ii) 50,000 shares of common stock; and (iii) five-year
warrants to purchase 250,000 shares of common stock at a price of $6.46 per
share to Infinity Investors Limited, Infinity Emerging Opportunities and
Glacier Capital Limited. In addition, the Company issued 5,000 shares of common
stock and warrants to purchase 20,000 shares of common stock to Whale
Securities Co., L.P. as a fee for services rendered in connection with the
transactions contemplated in the securities purchase agreement. In November
1998, the Company was required to issue an additional 5,043 shares of common
stock to Infinity Investors Limited, Infinity Emerging Opportunities and
Glacier Capital Limited pursuant to the securities purchase agreement.
In December 1997, the Company issued an aggregate of 500,000 shares to
Larry Muller, Andre Muller and Jay Gelman in connection with the acquisition of
L&J Marketing, Inc. d/b/a Alliance Distributors.
In March 1998, the Company issued 1,850,000 shares of series A convertible
preferred stock to BMG in connection with the acquisition of substantially all
of the assets of BMG Group, a division of BMG Entertainment North America. The
shares of preferred stock were converted into shares of common stock on a
one-for-one basis in August 1998.
In March 1998, the Company issued an aggregate of 158,333 shares of common
stock to investors as a private placement. Purchasers were: CFM Capital
Limited, Robert Holmes, Anthony Williams and Terry Phillips.
In May 1998, the Company issued an aggregate of 770,000 shares of common
stock to investors as a private placement. BlueStone Capital Partners, L.P.
served as placement agent in connection with the private placement.
In June 1998, the Company issued 40,000 shares of common stock in
connection with the acquisition of all of the assets of DirectSoft Australia
Pty. Ltd.
In August 1998, the Company issued an aggregate of 2,750,000 shares of
common stock to Robert Alexander, David Rosenbaum and Thomas Rosenbaum in
connection with the acquisition of Jack of All Games, Inc.
In August 1998, the Company issued warrants to purchase 20,000 shares of
common stock at $5.625 per share to the Provident Bank in connection with an
amended loan agreement.
In November 1998, the Company issued 32,138 shares of common stock to
Ocean Bank.
II-2
<PAGE>
In December 1998, the Company issued an aggregate of 1,033,336 shares of
common stock to James and Barbara Rose, John Davidson and Greta Davidson in
connection with the acquisition of Talonsoft, Inc.
In December 1998, the Company issued 35,000 shares and warrants to
purchase 100,000 shares at $6.50 per share to designees of Whale Securities
Co., L.P. in exchange for consulting services rendered.
In February 1999, the Company issued an aggregate of 580,000 shares of
common stock (subject to decrease upon the occurrence of certain events) to
Interactive Development, S.A., Lee Marcel Guinchard and David Gillard in
connection with the acquisition of L.D.A. Distribution Limited and its
subsidiary Joytech Europe Limited.
In February 1999, the Company issued 50,000 shares to Samuel Osborn,
Jeffrey Tyler, David Wallerich, William Bennett, Wei Zheng and Steven Kahn 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 Gathering of Developers I, Ltd. 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.
All of the above transactions were private transactions not involving a
public offering and were exempt from the registration provisions of the
Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities
Act and Regulation D promulgated thereunder. Except for the May 1998 private
placement, all of the above issuances were without the use of an underwriter or
placement agent. All purchasers of securities were accredited investors, and
all certificates evidencing shares of common stock sold bore a restrictive
legend permitting transfer only upon registration of such shares or pursuan to
an exemption under the Securities Act.
Item 16. Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement between the Company and the underwriters.*
3.1 Form of Restated Certificate of Incorporation of the Company.+
3.2 Amendment to Restated Certificate of Incorporation.+
3.3 By-Laws of the Company.+
5.1 Opinion of Tenzer Greenblatt LLP.*
10.1 Amended and Restated Employment Agreement, dated as of November 1, 1996, between the
Company and Ryan A. Brant, as amended.+
10.2 1994 Stock Option Plan of the Company.+
10.3 1997 Stock Option Plan of the Company.+
10.4 Asset and Stock Purchase Agreement dated July 29, 1997 by and among the Company,
GameTek, TTE, ART and GameTek (FL).++
10.5 Agreement and Plan of Merger dated July 10, 1997 by and among the Company and IMSI.++
10.6 Agreement and Plan of Merger dated as of December 22, 1997 by and among the Company,
IMSI, AIM and Alliance.+++
10.7 Loan Documents by and among NationsBank, N.A., IMSI, AIM and the Company, as
guarantor.+++
10.8 Asset Purchase Agreement, dated March 10, 1998, by and between the Company and
BMG.++++
10.9 Registration Rights Agreement, dated March 11, 1998, between BMG and the Company.++++
10.10 Distribution Agreement, dated as of May 27, 1998, by and between the Company and
Gathering.+++++
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.11 Agreement and Plan of Merger, dated as of August 22, 1998, by and among the Company, its
subsidiary, JAG and the JAG stockholders.++++++
10.12 Registration Rights Agreement, dated August 31, 1998, among the Company and the JAG
stockholders.++++++
10.13 Loan Documents, dated August 31, 1998, by and among Provident, JAG and the Company, as
guarantor.++++++
10.14 Agreement and Plan of Merger dated December 22, 1998 among the Company, its subsidiary,
Talonsoft and the shareholders of Talonsoft.+++++++
10.15 Agreement for the Sale and Purchase of Share Capital dated February 3, 1999 between the
Company and the shareholders of LDA.+++++++
10.16 Securities Purchase Agreement dated February 8, 1999 by and among the Company, T2
Developer, Inc., Gathering of Developers, Inc., Gathering of Developers I, Ltd. and the limited
partners of Gathering.+++++++
10.17 Option Agreement dated February 8, 1999 among the Company, T2 Developer, Inc., Gathering
of Developers, Inc., Gathering of Developers I, Ltd. and the limited partners of
Gathering.+++++++
10.18 Amended Distribution Agreement, dated as of February 8, 1999, among the Company,
Gathering, PopTop Software, Inc., Terminal Reality, Inc., and Apogee Software, Inc./3D
Realms.+++++++
10.19 Revolving Credit Agreement, dated February 16, 1999 by and among Jack of All Games, Inc.,
NationsBank, N.A., The Provident Bank, and NationsBank, N.A., as Agent.+++++++
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Aronowitz, Chaiken & Hardesty, LLP.
27.1 Financial Data Schedule (SEC use only).
</TABLE>
- ------------
* To be filed by amendment
+ Incorporated by reference to the applicable exhibit contained in the
Company's Registration Statement on Form SB-2 (file no. 333-6414).
++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated July 29, 1997.
+++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated December 24, 1997.
++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated March 18, 1998.
+++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated May 27, 1998.
++++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated August 31, 1998.
+++++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated February 23, 1999.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy, as
expressed in the Securities Act of 1933 and is therefore unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, in the City of New York, State of New York, on March 22, 1999.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Ryan A. Brant
--------------------------------------
Ryan A. Brant, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ryan A. Brant Chief Executive Officer and Director March 22, 1999
----------------------- (Principal Executive Officer)
Ryan A. Brant
/s/ Larry Muller Chief Financial Officer March 22, 1999
----------------------- (Principal Financial Officer)
Larry Muller
/s/ Anthony R. Williams Chief Operating Officer and Director March 22, 1999
-----------------------
Anthony R. Williams
/s/ Barbara A. Ras Chief Accounting Officer (Principal March 22, 1999
----------------------- Accounting Officer) and Secretary
Barbara A. Ras
/s/ Oliver R. Grace, Jr. Director March 22, 1999
------------------------
Oliver R. Grace, Jr.
/s/ Neil S. Hirsch Director March 22, 1999
-----------------------
Neil S. Hirsch
/s/ Kelly Sumner Vice President of International Operations March 22, 1999
----------------------- and Director
Kelly Sumner
/s/ Robert Flug Director March 22, 1999
-----------------------
Robert Flug
</TABLE>
II-6
<PAGE>
Report of Independent Accountants to Schedule 2
In connection with our audits of the consolidated financial statements of
Take-Two Interactive Software, Inc. as of October 31, 1998 and 1997 and for
each of the three years in the period ended October 31, 1998, which financial
statements are included in the Prospectus, we have also audited the attached
financial statement schedule.
In our opinion, this financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
December 21, 1998
1301 Avenue of the Americas
New York, NY
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
SCHEDULE 2
VALUATION and QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Costs and End
of Period Expenses Deductions of Period
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
For the year ended October 31, 1996:
Allowance for doubtful accounts ......... $273,638 337,366 -- $ 611,004
For the year ended October 31, 1997:
Allowance for doubtful accounts ......... 611,004 49,486 555,518 104,972
For the year ended October 31, 1998:
Allowance for doubtful accounts ......... $104,972 1,429,103 61,058 $1,473,017
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page
Exhibits -----
<S> <C> <C>
1.1 Form of Underwriting Agreement between the Company and the underwriters.*
3.1 Form of Restated Certificate of Incorporation of the Company.+
3.2 Amendment to Restated Certificate of Incorporation.+
3.3 By-Laws of the Company.+
5.1 Opinion of Tenzer Greenblatt LLP.*
10.1 Amended and Restated Employment Agreement, dated as of November 1, 1996,
between the Company and Ryan A. Brant, as amended.+
10.2 1994 Stock Option Plan of the Company.+
10.3 1997 Stock Option Plan of the Company.+
10.4 Asset and Stock Purchase Agreement dated July 29, 1997 by and among the Company,
GameTek, TTE, ART and GameTek (FL).++
10.5 Agreement and Plan of Merger dated July 10, 1997 by and among the Company and
IMSI.++
10.6 Agreement and Plan of Merger dated as of December 22, 1997 by and among the
Company, IMSI, AIM and Alliance.+++
10.7 Loan Documents by and among NationsBank, N.A., IMSI, AIM and the Company, as
guarantor.+++
10.8 Asset Purchase Agreement, dated March 10, 1998, by and between the Company and
BMG.++++
10.9 Registration Rights Agreement, dated March 11, 1998, between BMG and the
Company.++++
10.10 Distribution Agreement, dated as of May 27, 1998, by and between the Company and
Gathering.+++++
10.11 Agreement and Plan of Merger, dated as of August 22, 1998, by and among the
Company, its subsidiary, JAG and the JAG stockholders.++++++
10.12 Registration Rights Agreement, dated August 31, 1998, among the Company and the
JAG stockholders.++++++
10.13 Loan Documents, dated August 31, 1998, by and among Provident, JAG and the
Company, as guarantor.++++++
10.14 Agreement and Plan of Merger dated December 22, 1998 among the Company, its
subsidiary, Talonsoft and the shareholders of Talonsoft.+++++++
10.15 Agreement for the Sale and Purchase of Share Capital dated February 3, 1999 between
the Company and the shareholders of LDA.+++++++
10.16 Securities Purchase Agreement dated February 8, 1999 by and among the Company,
T2 Developer, Inc., Gathering of Developers, Inc., Gathering of Developers I, Ltd. and
the limited partners of Gathering.+++++++
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.17 Option Agreement dated February 8, 1999 among the Company, T2 Developer, Inc.,
Gathering of Developers, Inc., Gathering of Developers I, Ltd. and the limited partners
of Gathering.+++++++
10.18 Amended Distribution Agreement, dated as of February 8, 1999, among the Company,
Gathering, PopTop Software, Inc., Terminal Reality, Inc., and Apogee Software,
Inc./3D Realms.+++++++
10.19 Revolving Credit Agreement, dated February 16, 1999 by and among Jack of All
Games, Inc., NationsBank, N.A., The Provident Bank, and NationsBank, N.A., as
Agent.+++++++
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Aronowitz, Chaiken & Hardesty, LLP.
27.1 Financial Data Schedule (SEC use only).
</TABLE>
- ------------
* To be filed by amendment
+ Incorporated by reference to the applicable exhibit contained in the
Company's Registration Statement on Form SB-2 (file no. 333-6414).
++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated July 29, 1997.
+++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated December 24, 1997.
++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated March 18, 1998.
+++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated May 27, 1998.
++++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated August 31, 1998.
+++++++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated February 23, 1999.
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- ------------------------------
<S> <C>
GearHead Entertainment, Inc. ............................. Pennsylvania
Mission Studios, Inc. .................................... Illinois
Alternative Reality Technologies, Inc. ................... Florida
Take-Two Interactive Software Europe Limited ............. United Kingdom
Goldweb Services (1) ..................................... United Kingdom
Take-Two Interactive France F.A. (2) ..................... France
Take-Two Interactive GMBH (2) ............................ Germany
Inventory Management Systems, Inc. ....................... Delaware
Jack of All Games, Inc. (3) .............................. New York
DirectSoft Australia Pty. Limited ........................ New South Wales, Australia
Talonsoft, Inc. .......................................... Delaware
L.D.A. Distribution Limited .............................. United Kingdom
Joytech Europe Limited (4) ............................... United Kingdom
Falcon Ventures Corporation (d/b/a DVDWave.com) .......... California
</TABLE>
- ------------
(1) Subsidiary of Take-Two Interactive Software Europe Limited
(2) Subsidiary of Goldweb Services
(3) Subsidiary of Inventory Management Systems, Inc.
(4) Subsidiary of L.D.A. Distribution Limited
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated December 21, 1998, on our audits of the financial statements
and financial statement schedule of Take-Two Interactive Software, Inc. We also
consent to the reference to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
New York, NY
March 22, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
on Form S-1 of Take-Two Interactive Software, Inc. of our report dated February
26, 1998, relating to our audit of the balance sheets of Jack of All Games,
Inc. as of December 31, 1997 and 1996, and related statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1997. We also consent to the reference to our firm under the
caption "Experts."
Aronowitz, Chaiken & Hardesty
New York, NY
March 19, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
FINANCIAL STATEMENT INCLUDED IN THIS FORM S-1 REGISTRATION STATEMENT, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1998 OCT-31-1999
<PERIOD-END> OCT-31-1997 OCT-31-1998 JAN-31-1999
<CASH> 2,372,194 2,762,837 4,761,936
<SECURITIES> 0 0 0
<RECEIVABLES> 21,509,655 50,611,888 49,019,997
<ALLOWANCES> 104,972 1,473,017 1,526,808
<INVENTORY> 12,736,952 26,092,541 23,074,122
<CURRENT-ASSETS> 43,663,105 95,301,690 94,009,153
<PP&E> 2,765,606 3,723,957 3,749,135
<DEPRECIATION> 1,024,363 1,744,299 1,781,777
<TOTAL-ASSETS> 56,395,023 109,385,094 107,641,084
<CURRENT-LIABILITIES> 27,626,419 73,504,593 68,028,684
<BONDS> 0 0 0
0 0 0
317 0 0
<COMMON> 130,333 180,719 184,259
<OTHER-SE> 11,804,062 35,384,849 39,282,310
<TOTAL-LIABILITY-AND-EQUITY> 56,395,023 109,385,094 107,641,084
<SALES> 97,341,225 194,051,566 68,280,653
<TOTAL-REVENUES> 97,341,225 194,051,566 68,280,653
<CGS> 81,479,408 147,555,172 53,537,840
<TOTAL-COSTS> 81,479,408 147,555,172 53,537,840
<OTHER-EXPENSES> 2,852,108 3,537,396 1,045,559
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 1,843,403 3,680,075 816,517
<INCOME-PRETAX> (2,738,602) 7,009,706 4,308,036
<INCOME-TAX> 29,789 (334,136) 1,413,200
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 162,748 0
<CHANGES> 0 0 0
<NET-INCOME> (2,768,391) 7,181,094 2,894,836
<EPS-PRIMARY> (.25) .49 0.16
<EPS-DILUTED> (.25) .42 0.15
</TABLE>
