<PAGE>
As filed with the Securities and Exchange Commission on April 9, 1999.
Registration No. 333-74851
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
to
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) 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. / /
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 April 9, 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 39 are selling 1,500,000 shares. We will not receive any
of the proceeds from shares sold by the selling stockholders.
Our common stock is listed for trading on the Nasdaq National Market under
the symbol "TTWO." On April 8, 1999, the last reported sale price of our common
stock on the Nasdaq National Market was $10.0625.
-------------------------------
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
certain 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:
Cartoon character from Grand Theft Auto holding a gun and saying "... now can
we talk?" in front of the Take-Two logo.
Pictures and names of game titles; Logos for Take-Two, Jack of All Games,
Rockstar Games, Gathering of Developers, Joytech Europe, DVDWave, Mission
Studios and Talonsoft.
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, Norway, Sweden, Denmark 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.
Funsoft Nordic A.S. .................... March 1999 Distributor and budget publisher of interactive
entertainment software in Norway, Sweden
and Denmark.
</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 .............................. 22,988,150 shares, based on the number of
shares outstanding as of the date of this
prospectus. This does not include 3,418,289
shares issuable upon exercise of options and
warrants as of the date of this prospectus.
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>
Fiscal Years Ended October 31,
----------------------------------------------------------------
1994 1995 1996 1997(2) 1998(3)
---------- ---------- ------------ ----------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales ............................ $25,273 $35,758 $ 55,123 $ 97,341 $ 194,052
Income (loss) from operations ........ (373) (381) 2,032 (895) 10,690
Income (loss) before income taxes..... (397) (512) 1,724 (2,739) 7,010
Net income (loss)(4) ................. (471) (603) 1,682 (2,768) 7,181
Net income (loss) per share(4)
Basic .............................. $ (.05) $ (.07) $ .16 $ (.25) $ .49
Diluted ............................ (.05) (.07) .15 (.25) .42
Weighted average number of shares
outstanding
Basic .............................. 8,977 9,423 10,281 11,697 14,747
Diluted ............................ 8,977 9,423 11,454 11,697 17,063
Net income (loss) per share
attributable to common
stockholders -- Diluted(5) ......... $ (0.05) $ (0.10) $ .06 $ (.31) $ .37
======= ======= ======== ======== =========
Three Months Ended
January 31,
--------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Statement of Operations Data:(1)
Net sales ............................ $ 51,405 $ 68,281
Income (loss) from operations ........ 3,378 5,125
Income (loss) before income taxes..... 1,830 4,308
Net income (loss)(4) ................. 1,821 2,895
Net income (loss) per share(4)
Basic .............................. $ .14 $ .16
Diluted ............................ .13 .15
Weighted average number of shares
outstanding
Basic .............................. 13,258 18,212
Diluted ............................ 14,873 19,534
Net income (loss) per share
attributable to common
stockholders -- Diluted(5) ......... $ .10 $ .15
======== ========
</TABLE>
<TABLE>
<CAPTION>
As of October 31, As of January 31, 1999
---------------------------------------------- ----------------------------
1995 1996 1997(2) 1998(3) Actual As Adjusted(6)
--------- --------- --------- ---------- ---------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash and cash equivalents ......... $ 727 $ 737 $ 2,372 $ 2,763 $ 4,761 $ 17,167
Working capital ................... (793) (290) 16,037 21,797 25,980 58,386
Total assets ...................... 11,109 24,209 56,395 109,385 107,641 120,047
Total debt ........................ 2,092 9,127 22,031 30,808 31,916 11,916
Total liabilities ................. 8,955 20,026 44,460 73,820 68,175 48,175
Stockholders' equity .............. 2,154 4,183 11,935 35,566 39,467 71,872
</TABLE>
<PAGE>
- -------------
(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 $367,165 (unaudited), $1,005,800,
$673,092 and $931,000 paid to S-corporation shareholders prior to
acquisitions for 1995, 1996, 1997 and 1998 and $362,000 (unaudited) for the
three months ended January 31, 1998.
(5) Gives effect to distributions of $367,165 (unaudited), $1,005,800, $673,092
and $931,000 paid to S-corporation shareholders prior to acquisitions for
1995, 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. Our 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 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, 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 are required to
complete development of 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.
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<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's
PlayStation game console. 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. If return rates significantly exceed our
estimates, our operating results will be materially adversely affected.
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 licenses for the PlayStation,
Nintendo 64, Nintendo GameBoy and Sega Dreamcast platforms require that we
obtain
10
<PAGE>
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 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 March 31, 1999, $30,665,236 was outstanding under a line of
credit agreement between our subsidiary Jack of All Games, Inc. and NationsBank,
N.A. The line of credit with NationsBank provides for borrowings of up to
$35,000,000 through September 30, 1999 and $45,000,000 thereafter. 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 $32,405,625.
If the underwriters fully exercise their over-allotment option to purchase an
additional 450,000 shares, the net proceeds will be $36,662,063. These estimates
assume that the public offering price is $10.0625 per share, the last reported
sale price of our common stock on the Nasdaq National Market on April 8, 1999.
Net proceeds are computed by deducting estimated underwriting discounts and our
estimated offering expenses from the total offering price. 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 $20,000,000 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 March 31, 1999, $30,665,236 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 April 8, 1999) ......... 13 1/4 7 3/4
On April 8, 1999, the last reported price of our common stock on the Nasdaq
National Market was $10.0625 per share. As of the date of this prospectus, 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 $11,833,951
=========== ===========
Long-term debt ...................................... 81,861 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; 18,425,924 issued and outstanding;
21,925,924 shares issued and outstanding, as
adjusted (1) .................................... 184,259 219,259
Additional paid-in capital ....................... 34,792,045 67,162,670
Deferred compensation ............................ (212,951) (212,951)
Retained earnings ................................ 4,964,358 4,964,358
Foreign currency translation adjustment .......... (261,142) (261,142)
Total stockholders' equity ....................... 39,466,569 71,872,194
----------- -----------
Total capitalization ............................. $39,548,430 $71,954,055
=========== ===========
</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,
--------------------------------------------------------------
1994 1995 1996 1997(2) 1998(3)
---------- ---------- ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:(1)
Net sales .................................. $25,273 $35,758 $ 55,123 $ 97,341 $194,052
Cost of sales .............................. 22,438 31,150 44,316 81,479 147,555
------- ------- -------- -------- --------
Gross profit ............................... 2,835 4,608 10,807 15,862 46,496
Operating expenses:
Research and development costs ........... 453 666 994 1,848 1,702
Selling and marketing .................... 1,370 1,672 4,187 8,043 18,686
General and administrative ............... 1,322 2,490 3,252 5,862 13,583
Depreciation and amortization ............ 63 161 342 1,004 1,835
------- ------- -------- -------- --------
Total operating expenses .............. 3,208 4,989 8,776 16,757 35,807
------- ------- -------- -------- --------
Income (loss) from operations .............. (373) (381) 2,032 (895) 10,690
Interest expense ......................... 24 131 308 1,843 3,680
------- ------- -------- -------- --------
Income (loss) before income taxes .......... (397) (512) 1,724 (2,739) 7,010
Provision (benefit) for income taxes...... 74 91 42 30 (334)
------- ------- -------- -------- --------
Net income (loss)(4) ....................... $ (471) $ (603) $ 1,682 $ (2,768) $ 7,181
======= ======= ======== ======== ========
Net income (loss) per share(4)
Basic ..................................... $ (.05) $ (.07) $ .16 $ (.25) $ .49
Diluted ................................... (.05) (.07) .15 (.25) .42
Net income (loss) per share attributable
to common stockholders -- Diluted(5)....... (.05) (.10) .06 (.31) .37
======= ======= ======== ======== ========
Weighted average number of common
shares outstanding
Basic .................................... 8,977 9,423 10,281 11,697 14,747
Diluted .................................. 8,977 9,423 11,454 11,697 17,063
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended January 31,
------------------------------
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
Statement of Operations Data:(1)
Net sales .................................. $ 51,405 $ 68,281
Cost of sales .............................. 40,798 53,538
-------- --------
Gross profit ............................... 10,608 14,743
Operating expenses:
Research and development costs ........... 487 592
Selling and marketing .................... 4,231 4,161
General and administrative ............... 2,135 4,411
Depreciation and amortization ............ 377 453
-------- --------
Total operating expenses .............. 7,230 9,618
-------- --------
Income (loss) from operations .............. 3,378 5,125
Interest expense ......................... 1,548 817
-------- --------
Income (loss) before income taxes .......... 1,830 4,308
Provision (benefit) for income taxes...... 9 1,413
-------- --------
Net income (loss)(4) ....................... $ 1,821 $ 2,895
======== ========
Net income (loss) per share(4)
Basic ..................................... $ .14 $ .16
Diluted ................................... .13 .15
Net income (loss) per share attributable
to common stockholders -- Diluted(5)....... .10 .15
======== ========
Weighted average number of common
shares outstanding
Basic .................................... 13,258 18,212
Diluted .................................. 14,873 19,534
</TABLE>
<TABLE>
<CAPTION>
As of October 31, As of January 31, 1999
---------------------------------------------- ----------------------------
1995 1996 1997(2) 1998(3) Actual As Adjusted(6)
--------- --------- --------- ---------- ---------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:(1)
Cash and cash equivalents ......... $ 727 $ 737 $ 2,372 $ 2,763 $ 4,761 $ 17,167
Working capital ................... (793) (290) 16,037 21,797 25,980 58,386
Total assets ...................... 11,109 24,209 56,395 109,385 107,641 120,047
Total debt ........................ 2,092 9,127 22,031 30,808 31,916 11,916
Total liabilities ................. 8,955 20,026 44,460 73,820 68,175 48,175
Stockholders' equity .............. 2,154 4,183 11,935 35,566 39,467 71,872
</TABLE>
<PAGE>
- ------------
(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 $367,165 (unaudited), $1,005,800,
$673,092 and $931,000 paid to S-corporation shareholders prior to
acquisitions for 1995, 1996, 1997 and 1998 and $362,000 (unaudited) for the
three months ended January 31, 1998.
(5) Gives effect to distributions of $367,165 (unaudited), $1,005,800, $673,092
and $931,000 paid to S-corporation shareholders prior to acquisitions for
1995, 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.
In March 1999, we acquired Funsoft Nordic A.S., a distributor and budget
publisher of interactive entertainment software in Norway, Sweden and Denmark,
in exchange for $98,000 in cash and 106,265 shares of common stock, subject to
decrease under certain circumstances.
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
19
<PAGE>
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.
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.
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<PAGE>
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.
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,
21
<PAGE>
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.
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.
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<PAGE>
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 March 31,
1999, $30,665,236 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.
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.
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<PAGE>
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
game console, 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 the
PlayStation game console 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, PlayStation April 1998 Featuring England's World Cup
soccer team
You Don't Know Jack! PC May 1998 Popular trivia game
(Europe)
Grand Theft Auto PC, PlayStation June 1998 Car game set in criminal
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, Spring 1999 First mission pack for Grand Theft
PlayStation Auto
Fly! PC Spring 1999 Flight simulation
Railroad Tycoon II 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>
27
<PAGE>
<TABLE>
<CAPTION>
Title Platform Release Date Description
- ----- -------- ------------ -----------
<S> <C> <C> <C>
Earthworm Jim 3-D Nintendo 64, Summer 1999 Everyone's favorite earthworm,
PlayStation (North America) now in 3-D
Darkstone PC, 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, Fall 1999 Sequel to the popular Grand Theft
PlayStation, Auto
Nintendo 64,
GameBoy Color
Spec Ops PlayStation Fall 1999 Military combat action
Wild Metal Country PC, Sega Fall 1999 Futuristic high-tech action game
Dreamcast
Kiss: Psycho Circus PC, Spring 2000 Rock and roll 3-D shooter
PlayStation,
GameBoy Color
Thrasher: Skate and Destroy PlayStation Spring 2000 Urban extreme skateboarding
game
GTA II: Berlin PC, 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 CD-ROMs 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 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 PlayStation game console and ASC Games' One for the PlayStation game
console, (4) the worldwide publishing and distribution rights to a series of
sales region customized World Cup soccer games for the PlayStation game console,
(5) the worldwide publishing, distribution and sequel rights to the role-playing
game Monkey Hero for PlayStation and PC platforms and (6) the worldwide
publishing, distribution and sequel rights to the military combat game Special
Ops for 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 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 81 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,
L.D.A. Distribution Limited, DVDWave.com and Funsoft Nordic A.S. 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 publishing and distribution operations in
the United Kingdom, France, Germany, Norway, Sweden, Denmark 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.
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<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 CD-ROMs for use on their video game platforms on a timely
basis and on favorable terms. Nintendo cartridges are more expensive to
manufacture than CD-ROMs, 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.
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<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 March 31, 1999, we had 292 full-time employees, including five
executive officers, 89 employees engaged in product development, 81 in sales and
marketing and 117 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, L.D.A. Distribution Limited,
Funsoft Nordic A.S., Jack of All Games Norway, Jack of All Games Sweden and
Jack of All Games Denmark; (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
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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). Funsoft Nordic A.S. and its
subsidiaries lease office and warehouse space at locations in Oslo, Norway,
Spanga, Sweden and Arthus, Denmark for current aggregate annual rent of
approximately $180,000.
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.
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<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, our subsidiary,
since July 1997 and our Vice President of International Operations since
February 1999. 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.
Key Employee
Sam Houser, 27, has been the President of our publishing label Rockstar
Games since its inception in November 1998 and our Vice-President of Worldwide
Product Development since March 1998. Prior to joining us, Mr. Houser served for
over eight years in the London office of BMG Entertainment, where he was in
charge of product development for the international office of BMG's Interactive
Division and served as an in-house music video director on projects for many of
BMG's leading artists. Mr. Houser received a B.A. in German and Business from
the University of London.
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 $15,200 paid as consulting fees prior to employment with us.
(6) Represents options to purchase 120,000 shares granted under our 1997 Stock
Option Plan and non-plan options to purchase 30,000 shares.
(7) Mr. Sumner joined us in July 1997.
(8) Represents options to purchase 85,000 shares granted under our 1997 Stock
Option Plan and non-plan options to purchase 40,000 shares.
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<PAGE>
The following table sets forth information concerning options granted in
the fiscal year ended October 31, 1998 to the Named Executives:
Option Grants in Fiscal Year Ended October 31, 1998
<TABLE>
<CAPTION>
Individual Grants
------------------------------
Number of Potential Realizable
Securities Percent of Total Value at Assumed
Underlying Options Granted Exercise Annual Rates of Stock
Options to Employees in Price Expiration Price Appreciation for
Name Granted (#) Fiscal Year(%) ($/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.
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<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 $233,000 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
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<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.
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of the date of this
prospectus, 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
Owned Shares Beneficially
Prior to Offering(2) Owned After 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 15.6% -- 3,048,749 13.3%
BMG Entertainment ................................. 1,850,000 9.5 555,000 1,295,000 5.6
Robert Alexander(4) ............................... 1,425,000 7.3 400,000 1,025,000 4.5
David Rosenbaum(5) ................................ 1,252,500 6.4 200,000 1,052,500 4.6
Oliver R. Grace, Jr.(6) ........................... 781,338 4.0 -- 781,338 3.4
Ryan A. Brant(7) .................................. 718,563 3.6 50,000 668,563 2.9
James and Barbara Rose(8) ......................... 620,002 3.2 97,500 522,502 2.3
John and Greta Davidson(9) ........................ 413,334 2.1 97,500 315,834 1.4
Neil S. Hirsch(10) ................................ 222,276 1.1 -- 222,276 *
Lee Marcel Guinchard(11) .......................... 204,450 1.0 50,000 154,450 *
Larry Muller(12) .................................. 164,167 * -- 164,167 *
David Gillard(11) ................................. 116,000 * 50,000 66,000 *
Robert Flug(13) ................................... 110,000 * -- 110,000 *
Anthony R. Williams(14) ........................... 100,000 * -- 100,000 *
Barbara A. Ras(15) ................................ 70,243 * -- 70,243 *
Kelly Sumner(16) .................................. 62,500 * -- 62,500 *
All directors and executive officers as a group
(eight persons)(17) .............................. 2,229,087 11.0 50,000 2,179,087 9.2
</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 and 100,000 shares of common stock held by
Mr. Brant's wife.
(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. Mr.
Rosenbaum is an employee of Jack of All Games, Inc.
(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.
39
<PAGE>
(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
(ii) 80,000 shares of common stock issuable upon the exercise of options
granted under the 1997 Plan which are currently exercisable.
(8) Represents shares of common stock held by James and Barbara Rose, as
tenants in the entirety. Mr. Rose is an employee of Talonsoft, Inc.
(9) Includes 206,667 shares of common stock held by John Davidson and 206,667
shares of common stock held by Greta Davidson. Mr. Davidson is an employee
of Talonsoft, Inc.
(10) Represents shares of common stock held by Bridgehampton Holdings, Inc., an
entity controlled by Mr. Hirsch.
(11) Mr. Guinchard and Mr. Gillard are employees of L.D.A. Distribution Limited.
(12) Includes 16,667 shares of common stock issuable upon the exercise of
options granted under the 1997 Plan which are currently exercisable.
(13) 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.
(14) 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.
(15) Includes 40,000 shares of common stock issuable upon the exercise of
options granted under the 1997 Plan, which are currently exercisable.
(16) Represents 62,500 shares of common stock issuable upon the exercise of
options.
(17) Includes currently exercisable options to purchase an aggregate of 694,794
shares of common stock.
If the underwriters exercise their over-allotment option in full, after the
offering: (i) Robert Alexander will own 925,000 shares (3.9%); (ii) David
Rosenbaum will own 952,500 shares (4.1%); (iii) James and Barbara Rose will own
472,502 shares (2.0%) and (iv) John and Greta Davidson will own 265,834 shares
(1.1%).
40
<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.
41
<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 22,988,150 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.
42
<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 $700,000.
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 certain 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
43
<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.
44
<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.
45
<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 outstanding 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 January 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 net loss per share ............... -- -- (0.01)
------------ ------------- -------------
Net income (loss) -- Basic ................... $ 0.16 $ (0.25) $ 0.49
============ ============= =============
Supplemental net income (loss) attributable to
common stockholders after giving effect to
S corporation distributions -- 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 net loss per share ............... -- -- (0.01)
------------ ------------- -------------
Net income (loss) -- Diluted ................. $ 0.15 $ (0.25) $ 0.42
============ ============= =============
Supplemental net income (loss) attributable to
common stockholders after giving effect to
S corporation distributions -- Diluted ......... $ 0.06 $ (0.31) $ 0.37
============ ============= =============
</TABLE>
<PAGE>
<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 net loss per share ............... -- --
------------ ------------
Net income (loss) -- Basic ................... $ 0.14 $ 0.16
============ ============
Supplemental net income (loss) attributable to
common stockholders after giving effect to
S corporation distributions -- 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 net loss per share ............... -- --
------------ ------------
Net income (loss) -- Diluted ................. $ 0.13 $ 0.15
============ ============
Supplemental net income (loss) attributable to
common stockholders after giving effect to
S corporation distributions -- 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>
<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>
<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>
<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>
<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>
<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>
<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
Pounds 400,000 ($670,000) and British Pounds 900,000 ($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 Pounds 82,781 ($138,659) and British Pounds 664,759
($1,112,607) at October 31, 1997 and 1998, respectively. In January 1999, the
line was increased to British Pounds 2,000,000 ($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.
The retroactive restatement of the pooled entities, see Note 3, did not
result in an additional income tax provision as the Company's net operating
losses were used to offset the taxable income of the respective pooled entities.
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.
1996 1997 1998
---- ---- ----
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
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 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.
The supplemental net income loss per share attributable to common
shareholders presented on the income statement is provided to give 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.
The following table provides a reconciliation of basic earnings per share
to dilutive earnings per share for the years ended October 31, 1996, 1997 and
1998 and for the three months ended January 31, 1998 and 1999.
F-29
<PAGE>
Notes to Consolidated Financial Statements -- (Continued)
15. Net Income (Loss) per Share: -- (Continued)
<TABLE>
<CAPTION>
Income
(Loss)
Before Pro Forma
Preferred Per Share
Dividends Shares Amount
---------------- ------------ ----------
<S> <C> <C> <C>
Year Ended October 31, 1996
Basic EPS $ 1,664,141 10,281,000 $ .16
Effect of dilutive securities -- -- 1,173,400 (.01)
------------ ---------- ------
Stock options and warrants
Diluted EPS $ 1,664,141 11,454,400 $ .15
============ ========== ======
Year Ended October 31, 1997
Basic EPS $ (2,903,809) 11,697,342 $ (.25)
Effect of dilutive securities -- -- -- --
------------ ---------- -------
Stock options and warrants
Diluted EPS $ (2,903,809) 11,697,342 $ (.25)
============ ========== =======
Year Ended October 31, 1998
Extraordinary net loss on early extinguishment of (162,748) 14,746,854 (.01)
debt -- Basic
Extraordinary net loss on early extinguishment of (162,748) 17,062,806 (.01)
debt -- Diluted
Basic EPS after extraordinary net loss on early $ 7,181,094 14,746,854 $ .49
extinguishment of debt
Effect of dilutive securities -- -- 2,315,952 (.07)
------------ ---------- -------
Stock options and warrants
Diluted EPS after extraordinary net loss on early $ 7,181,094 17,062,806 $ .42
============ ========== =======
extinguishment of debt
Three Months Ended January 31, 1998 (unaudited):
Basic EPS $ 1,821,181 13,258,379 $ .14
Plus: Impact from assumed conversion of 10% 96,330 65,338
convertible notes
Effect of dilutive securities -- -- 1,548,794 (.01)
------------ ---------- -------
Stock options and warrants
Diluted EPS $ 1,917,511 14,872,511 $ .13
============ ========== =======
Three Months Ended January 31, 1999 (unaudited):
Basic EPS $ 2,894,836 18,212,240 $ .16
Effect of dilutive securities -- -- 1,322,171 (.01)
------------ ---------- -------
Stock options and warrants
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>
Microsoft, Monster Truck Madness and the Monster Truck Madness logo are
registered trademarks of Microsoft Corporation in the United States and/or other
countries. (CR)(p) Copyright 1999 Microsoft Corporation. Red Storm Entertainment
is a trademark of Jack Ryan Enterprises Ltd. and Larry Bond. Tom Clancy's
Rainbow Six is a trademark of Red Storm Entertainment, Inc. All rights reserved.
In-Fisherman and the In-Fisherman logo are registered trademarks of
In-Fisherman, Inc. All rights reserved. Railroad Tycoon II, the Railroad Tycoon
II logo, PopTop Software and the PopTop Software logo are trademarks of PopTop
Software, Inc. Gathering of Developers and godgames are trademarks of Gathering
of Developers, Inc. (CR)1998 Gathering of Developers. All rights reserved. Max
Payne, the Max Payne logo, Duke Nukem, and the Duke Nukem logo are trademarks of
3D Realms Entertainment (CR)1999 All Rights reserved. Thrasher, the Thrasher
logo, and the Skate and Destroy logo are trademarks of High Speed Productions
(CR)1999 High Speed Productions, Inc. Kiss and the Kiss logo are trademarks of
Kiss Catalog Ltd. You Don't Know Jack and the You Don't Know Jack logo are
trademarks of Jellyvision. Earthworm Jim and related marks are trademarks of
Shiny Entertainment, Inc. (CR)Shiny Entertainment, Inc. Wild Metal Country and
the Wild Metal Country logo are registered trademarks of Gremlin Interactive.
Centipede(TM) is a registered trademark of Atari Interactive, Inc. Spec Ops is a
trademark of Zombie LLC. Montezuma's Return and the Montezuma's Return logo are
trademarks of Utopia Technologies, Inc. Alexi Lalas photo used under license
from All Sport USA, Inc. Joytech and the Joytech peripherals are trademarks of
Joytech Europe. Jetfighter III and the Jetfighter III logo are trademarks of
Mission Studios. (CR)1997 All rights reserved. East Front II is a trademark of
TalonSoft, Inc. DVDWave.com and the DVDWave logo are trademarks of Falcon
Ventures Corp. Haze and the Haze logo are trademarks of Hyperformance, Inc.
Nintendo, Nintendo(R)64, and GameBoy(R) Color System are registered trademarks
of Nintendo Of America, Inc. (CR)1999 Nintendo of America. PlayStation and the
PlayStation logo are registered trademarks of Sony Computer Entertainment, Inc.
Take-Two Interactive Software, Inc., the Take-Two logo, Grand Theft Auto, and
the Grand Theft Auto logo are registered trademarks of Take-Two Interactive
Software, Inc. (R)1999. All rights reserved. Rockstar Games, the Rockstar Games
logo, GTA 2, the GTA 2 logo, GTA London and the GTA London logo are trademarks
of Take-Two Interactive Software, Inc. All other names, characters and indicia
herein are trademarks of Take-Two Interactive Software, Inc.
<PAGE>
Description of Artwork:
Three globes with Take-Two offices marked with stars
<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 ........................... 25
Business .................................... 26
Management .................................. 34
Principal and Selling Stockholders .......... 39
Certain Transactions ........................ 41
Description of Capital Stock ................ 42
Underwriting ................................ 43
Legal Matters ............................... 44
Experts ..................................... 44
Additional Information ...................... 45
Index to Financial Statements ............... F-1
----------------------------------------
================================================================================
<PAGE>
================================================================================
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. ......................... $ 17,500
Printing and engraving costs ........................... 125,000
Legal fees and expenses. ............................... 175,000
Accounting fees and expenses ........................... 125,000
Blue Sky fees and expenses ............................. 10,000
Transfer agent and registrar fees and expenses ......... 10,000
Miscellaneous. ......................................... $ 217,166.81
------------
Total ................................................ $ 700,000.00
============
- ------------
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.
In March 1999, the Company issued an aggregate of 106,265 shares of common
stock (subject to decrease upon the occurrence of certain events) to Funsoft
Holding GMBH and Industriinvestor ASA in connection with the acquisition of
Funsoft Nordic A.S.
In March 1999, the Company issued warrants to purchase an aggregate of
50,000 shares at $9.00 per share to designees of W.J. Nolan & Company Inc. in
exchange for consulting services rendered.
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 1994 Stock Option Plan of the Company.+
10.2 1997 Stock Option Plan of the Company.+
10.3 Asset and Stock Purchase Agreement dated July 29, 1997 by and among the Company,
GameTek, TTE, ART and GameTek (FL).++
10.4 Agreement and Plan of Merger dated July 10, 1997 by and among the Company
and IMSI.++
10.5 Employment Agreement dated July 29, 1997 with Kelly Sumner.++
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.++++
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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.+++++++
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.+++++++
10.20 Employment Agreement, dated as of August 1, 1998, between the Company and Ryan A. Brant.
10.21 Employment Agreement, dated as of August 1, 1998, between the Company and Anthony R.
Williams.
10.22 Employment Agreement, dated as of January 29, 1999 between the Company and Larry Muller.
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>
- ------------
* Previously filed
+ 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.
II-4
<PAGE>
++++++ 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.
(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 Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, in the City of New York, State of New York, on
April 8, 1999.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Ryan A. Brant
--------------------------------------
Ryan A. Brant, Chief Executive Officer
Each person whose signature appears below on this Amendment No. 1 to this
Registration Statement hereby constitutes and appoints Ryan A. Brant and Anthony
R. Williams, and each of them, as his true and lawful attorney-in-fact and
agent, with full power of substitution for him and in his name, place and stead,
in any and all capacities (until revoked in writing) to sign any and all
amendments (including pre-effective amendments and post-effective amendments and
amendments thereto) to this Registration Statement on Form S-1 of Take-Two
Interactive Software, Inc. and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to 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 April 8, 1999
- ------------------------------------- (Principal Executive Officer)
Ryan A. Brant
/s/ Larry Muller Chief Financial Officer April 8, 1999
- ------------------------------------- (Principal Financial Officer)
Larry Muller
/s/ Anthony R. Williams
- ------------------------------------- Chief Operating Officer and Director April 8, 1999
Anthony R. Williams
/s/ Barbara A. Ras Chief Accounting Officer (Principal April 8, 1999
- ------------------------------------- Accounting Officer) and Secretary
Barbara A. Ras
/s/ Oliver R. Grace, Jr.
- ------------------------------------- Director April 8, 1999
Oliver R. Grace, Jr.
/s/ Neil S. Hirsch
- ------------------------------------- Director April 8, 1999
Neil S. Hirsch
/s/ Kelly Sumner Vice President of International Operations April 8, 1999
- ------------------------------------- and Director
Kelly Sumner
/s/ Robert Flug
- ------------------------------------- Director April 8, 1999
Robert Flug
</TABLE>
II-6
<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 1994 Stock Option Plan of the Company.+
10.2 1997 Stock Option Plan of the Company.+
10.3 Asset and Stock Purchase Agreement dated July 29, 1997 by and among the Company,
GameTek, TTE, ART and GameTek (FL).++
10.4 Agreement and Plan of Merger dated July 10, 1997 by and among the Company and
IMSI.++
10.5 Employment Agreement dated July 29, 1997 with Kelly Sumner.++
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.+++++++
10.20 Employment Agreement, dated as of August 1, 1998, between the Company and Ryan
A. Brant
10.21 Employment Agreement, dated as of August 1, 1998, between the Company and
Anthony R. Williams.
10.22 Employment Agreement, dated as of January 29, 1999 between the Company and
Larry Muller.
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>
- ------------
* Previously filed.
+ 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 1.1
5,000,000 Shares
TAKE-TWO INTERACTIVE SOFTWARE, INC.
COMMON STOCK
(Par Value $.01 Per Share)
UNDERWRITING AGREEMENT
_____, 1999
ING BARING FURMAN SELZ LLC
Gerard Klauer Mattison & Co., Inc.
MORGAN kEEGAN & cOMPANY, iNC.
As Representatives of the
several Underwriters
c/o ING Baring Furman Selz LLC
55 East 52nd Street
New York, New York 10055
Dear Sirs:
1. Introduction. Take-Two Interactive Software, Inc., a
Delaware corporation (the "Company"), proposes to issue and sell to the several
Underwriters named in Schedule I hereto (the "Underwriters"), for which ING
Baring Furman Selz LLC, Gerard Klauer Mattison & Co., Inc. and Morgan Keegan &
Company, Inc. are acting as representatives (the "Representatives"), an
aggregate of 3,500,000 shares (the "Company Shares") of the Company's Common
Stock, par value $.01 per share (the "Common Stock"). The selling stockholders
named in Schedule II hereto (the "Selling Stockholders") propose to sell to the
Underwriters an aggregate of 1,500,000 shares of Common Stock (the "Stockholder
Shares"). The Company Shares to be sold by the Company and the Stockholder
Shares to be sold by the Selling Stockholders are collectively referred to
herein as the "Firm Shares." The Company also proposes to issue and sell to the
several Underwriters an aggregate of not more than 750,000 additional shares of
Common Stock (the "Additional Shares"), if requested by the Underwriters in
accordance with Section 9 hereof. The Firm Shares and the Additional Shares are
collectively referred to herein as the "Shares." The words "you" and "your"
refer to the Representatives of the Underwriters.
<PAGE>
The Company and the Selling Stockholders hereby agree with the
several Underwriters as follows:
2. Representations and Warranties.
(a) The Company represents and warrants to, and
agrees with, each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-______)
under the Securities Act of 1933, as amended (the "Act"), with respect
to the Shares, including a form of prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of
the Act and the rules and regulations of the Securities and Exchange
Commission (the "Commission") thereunder (the "Rules and Regulations").
Such registration statement has been filed with the Commission under
the Act, and one or more amendments to such registration statement may
also have been so filed. After the execution of this Agreement, the
Company shall file with the Commission either (A) if such registration
statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, a prospectus in the form most
recently included in an amendment to such registration statement filed
with the Commission (or, if no such amendment shall have been filed, in
such registration statement), with such insertions and changes as are
required by Rule 430A under the Act or permitted by Rule 424(b) under
the Act as shall have been provided to and approved by the
Representatives prior to the filing thereof, or (B) if such
registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment
to such registration statement, including a form of prospectus, a copy
of which amendment has been furnished to and approved by the
Representatives prior to the filing thereof. As used in this Agreement,
the term "Registration Statement" means such registration statement, as
amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto; the Registration Statement
shall be deemed to include any information omitted therefrom pursuant
to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined) and shall also mean any registration statement
filed pursuant to Rule 462(b) under the Act; the term "Preliminary
Prospectus" means each prospectus subject to completion contained in
such registration statement or any amendment thereto (including the
prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto or filed pursuant to Rule 424(a)
under the Act at the time it was or is declared effective); and the
term "Prospectus" means the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act or, if no prospectus is required
to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement.
(ii) The Company has not received any order preventing or
suspending the use of any Preliminary Prospectus, and the Company has
not received any notice that the Commission has instituted, nor, to the
Company's knowledge, has the Commission threatened to institute, any
proceedings with respect to such an order. When each Preliminary
Prospectus was filed with the Commission it (A) contained all
2
<PAGE>
statements required to be stated therein in accordance with, and
complied in all material respects with, the requirements of the Act and
the Rules and Regulations and (B) did not include any untrue statement
of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. When the Registration
Statement or any amendment thereto was or is declared effective, it (A)
contained or will contain all statements required to be stated therein
in accordance with, and complied or will comply in all material
respects with, the requirements of the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of
a material fact or omit to state any material fact necessary to make
the statements therein not misleading. When the Prospectus and when any
amendment or supplement thereto is filed with the Commission pursuant
to Rule 424(b) (or, if the Prospectus or such amendment or supplement
is not required to be so filed, when the Registration Statement and
when any amendment thereto containing such amendment or supplement to
the Prospectus was or is declared effective) and at all times
subsequent thereto up to and including the Closing Date (as defined in
Section 3 hereof) and the Option Closing Date (as defined in Section 9
hereof), the Prospectus, as amended or supplemented at any such time,
(A) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply in all material
respects with, the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of
a material fact or omit to state any material fact necessary in order
to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions of this
paragraph (ii) shall not apply to (A) statements or omissions made in
any Preliminary Prospectus which have been corrected in a subsequent
Preliminary Prospectus or the Prospectus or (B) statements or omissions
made in any Preliminary Prospectus, the Registration Statement or any
amendment thereto or the Prospectus or any amendment or supplement
thereto in reliance upon, and in conformity with, information furnished
in writing to the Company by or on behalf of the Underwriters through
the Representatives expressly for use therein.
(iii) Each of the Company and its subsidiaries (the
"Subsidiaries") (A) is duly incorporated and validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation, with corporate power and corporate authority to own or
lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus); and (B) is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which (x) the conduct of its business
requires such qualification (except for those jurisdictions in which
the failure so to qualify has not had and will not have a Material
Adverse Effect (as hereinafter defined)) and (y) it owns or leases
property. "Material Adverse Effect" means, when used in connection with
the Company or its Subsidiaries, any development, change or effect that
is materially adverse to the business, operations, properties, assets,
liabilities, net worth, results of operations, condition (financial or
other) or prospects of the Company and its Subsidiaries taken as a
whole.
3
<PAGE>
(iv) The Company has the duly authorized and validly
outstanding capitalization set forth under the caption "Capitalization"
in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and will have the adjusted
capitalization set forth therein on the Closing Date and the Option
Closing Date (each as defined herein), based on the assumptions and
including the exceptions set forth therein and the footnotes thereto.
The capital stock of the Company conforms in all material respects to
the description thereof contained in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus). The outstanding shares of Common Stock have been duly
authorized and validly issued by the Company and are fully paid and
nonassessable. Except as created hereby or described in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no outstanding options, warrants, rights or
other arrangements requiring the Company or any subsidiary at any time
to issue any capital stock. No holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or other
rights to subscribe for any of the Shares, and neither the filing of
the registration statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights for or relating
to the registration of any securities of the Company. The Shares have
been duly authorized; on the Closing Date and the Option Closing Date
(if applicable), after payment therefor in accordance with the terms of
this Agreement, (A) the Firm Shares and the Additional Shares to be
sold by the Company hereunder will be validly issued, fully paid and
nonassessable and (B) good and marketable title to the Firm Shares and
the Additional Shares will pass to the Underwriters on the Closing Date
and the Option Closing Date (if applicable) free and clear of any lien,
encumbrance, security interest, claim or other restriction whatsoever.
All the outstanding shares of capital stock of each Subsidiary have
been duly authorized and validly issued, are fully paid and
nonassessable and are owned directly by the Company, free and clear of
any lien, encumbrance, charge, security interest, claim or other
restriction whatsoever. The Company has received, subject to notice of
issuance, approval to have the Shares quoted on the National Market
System of the National Association of Securities Dealers' Automated
Quotation System, and the Company knows of no reason or set of facts
which is likely to adversely affect such approval.
(v) The consolidated financial statements and the related
notes and schedules thereto included in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) fairly present, in all material
respects, the consolidated financial condition, results of operations,
stockholders' equity and cash flows of the Company and its Subsidiaries
at the dates and for the periods specified therein. Such financial
statements and the related notes and schedules thereto have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as
otherwise noted therein), and such financial statements as are audited
have been examined by PricewaterhouseCoopers LLP, who are independent
public accountants within the meaning of the Act and the Rules and
Regulations, as indicated in their reports filed therewith. The
selected financial information set forth under the caption "Selected
Financial Data" in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) have been prepared
on a basis consistent with the consolidated financial statements of the
Company and its Subsidiaries.
4
<PAGE>
(vi) The Company and each of its Subsidiaries have filed all
necessary federal, state and local income, franchise and other material
tax returns and have paid all taxes shown as due thereunder, and the
Company has no knowledge of any tax deficiency which is reasonably
likely to be assessed against the Company which, if so assessed, would
have a Material Adverse Effect.
(vii) The Company and each of its Subsidiaries maintain
insurance of the types and in amounts which they reasonably believe to
be adequate for their business in such amounts and with such
deductibles as is customary for companies in the same or similar
business, all of which insurance is in full force and effect.
(viii) Except as disclosed in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), there is no action, suit, proceeding or investigation
pending or, to the Company's best knowledge, threatened before or by
any court, regulatory body or administrative agency or any other
governmental agency or body, domestic or foreign, which (A) questions
the validity of the capital stock of the Company or this Agreement or
of any action taken or to be taken by the Company pursuant to or in
connection with this Agreement, (B) is required to be disclosed in the
Registration Statement which is not so disclosed (and such proceedings,
if any, as are summarized in the Registration Statement are accurately
summarized in all material respects), or (C) if decided adversely to
the Company, would have a Material Adverse Effect.
(ix) The Company and each of its Subsidiaries have all
requisite corporate, power and authority to enter into this Agreement
and to consummate the transactions provided for herein. This Agreement
has been duly authorized, executed and delivered by the Company and
each of its Subsidiaries and, assuming it is a binding agreement of
yours, constitutes a legal, valid and binding agreement of the Company
and each of its Subsidiaries , enforceable against the Company and each
of its Subsidiaries in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles relating to the availability of
remedies and except as rights to indemnity or contribution may be
limited by federal or state securities laws and the public policy
underlying such laws), and none of the Company's nor each of the
Subsidiaries' execution or delivery of this Agreement, its performance
hereunder, its consummation of the transactions contemplated herein,
its application of the net proceeds of the offering in the manner set
forth under the caption "Use of Proceeds" or the conduct of its
5
<PAGE>
business as described in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), conflicts or
will conflict with, or results or will result in any breach or
violation of, any of the terms or provisions of, or constitutes or will
constitute a default under, or causes or will cause (or permits or will
permit) the maturation or acceleration of any liability or obligation
or the termination of any right under, or result in the creation or
imposition of any lien, charge or encumbrance upon, any property or
assets of the Company or any of its Subsidiaries pursuant to the terms
of (A) the certificate of incorporation or by-laws of the Company or
any of its Subsidiaries, (B) any indenture, mortgage, deed of trust,
voting trust agreement, stockholders' agreement, note agreement or
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them are or may be bound or
to which any of their respective property is or may be subject or (C)
any statute, judgment, decree, order, rule or regulation applicable to
the Company or any of its Subsidiaries of any government, arbitrator,
court, regulatory body or administrative agency or other governmental
agency or body, domestic or foreign, having jurisdiction over the
Company, any of its Subsidiaries or any of their respective activities
or properties, except, in the cases of clauses (B) and (C) above, for
breaches, violations, defaults or terminations which would not be
reasonably likely to have a Material Adverse Effect.
(x) All executed agreements or copies of executed agreements
filed as exhibits to the Registration Statement to which the Company or
any of its Subsidiaries is a party or by which any of them are or may
be bound or to which any of their assets, properties or businesses is
or may be subject have been duly and validly authorized, executed and
delivered by the Company or such Subsidiary, as the case may be, and,
assuming such agreements are the legal, valid, binding and enforceable
agreements of the other parties thereto, constitute the legal, valid
and binding agreements of the Company or such Subsidiary, as the case
may be, enforceable against each of them in accordance with their
respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
relating to enforcement of creditors' rights generally, and general
equitable principles relating to the availability of remedies, and
except as rights to indemnity or contribution may be limited by federal
or state securities laws and the public policy underlying such laws).
The descriptions in the Registration Statement of contracts and other
documents are accurate in all material respects and fairly present the
information required to be shown with respect thereto by the Act and
the Rules and Regulations, and there are no contracts or other
documents which are required by the Act or the Rules and Regulations to
be described in the Registration Statement or filed as exhibits to the
Registration Statement which are not described or filed as required,
and the exhibits which have been filed are complete and correct copies
of the documents of which they purport to be copies.
(xi) Subsequent to the most recent respective dates as of
which information is given in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), and except
as expressly contemplated therein, neither the Company nor any of its
Subsidiaries has incurred, other than in the ordinary course of its
business, any material liabilities or obligations, direct or
contingent, purchased any of its outstanding capital stock, paid or
declared any dividends or other distributions on its capital stock or
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entered into any material transactions not in the ordinary course of
business, and there has been no material change in capital stock or
debt or any material adverse change in the business, operations,
properties, assets, liabilities, net worth, results of operations,
condition (financial or other) or prospects of the Company and its
Subsidiaries taken as a whole. Neither the Company nor any of its
Subsidiaries (or the manner in which it any of them conducts its
business) is in breach or violation of, or in default under, any term
or provision of (A) its certificate of incorporation or bylaws, (B) any
indenture, mortgage, deed of trust, voting trust agreement,
stockholders' agreement, note agreement or other agreement or
instrument to which it is a party or by which it is or may be bound or
to which any of its property is or may be subject, or any indebtedness,
the effect of which breach or default singly or in the aggregate may
have a Material Adverse Effect or (C) any statute, judgment, decree,
order, rule or regulation applicable to the Company or any of its
Subsidiaries or of any arbitrator, court, regulatory body,
administrative agency or any other governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their respective activities or properties and
the effect of which breach or default singly or in the aggregate would
have a Material Adverse Effect.
(xii) No labor disturbance by the employees of the Company or
any of its Subsidiaries exists or is imminent which would have a
Material Adverse Effect.
(xiii) Except as set forth in the Prospectus, (i) the Company
and its Subsidiaries own or possess valid and enforceable licenses for
all inventions, patents, patent applications, trademarks (registered or
unregistered), trademark applications, tradenames, copyrights,
manufacturing processes, formulae, trade secrets, know-how, and other
intangible property and assets necessary to the conduct of their
business now conducted as described in the Prospectus (collectively,
"Intellectual Property") and the Company does not know of any facts
which would form a reasonable basis for a claim that the Company or any
of its Subsidiaries do not own or possess valid and enforceable
licenses for all Intellectual Property necessary to the conduct of
their business proposed to be conducted as described in the Prospectus;
(ii) the Company has no knowledge that it or any of its Subsidiaries
lack or will be unable to obtain any rights or licenses to use any of
the Intellectual Property; (iii) the Company does not know of any third
parties who have or will be able to establish rights to any of the
Intellectual Property; (iv) to the Company's knowledge, there is no
infringement by third parties of any of the Intellectual Property; (v)
there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others challenging the Company's or any
Subsidiary's rights of title or other interest in or to any
Intellectual Property, and the Company does not know of any facts which
would form a reasonable basis for any such claim; (vi) there is no
pending, or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others challenging the validity and scope of any
Intellectual Property, and the Company does not know of any facts which
would form a reasonable basis for any such claim; (vii) there is no
pending or, to the Company's knowledge, threatened action, suit,
proceeding or claim by others that the Company or any of its
Subsidiaries or any of their products or processes infringe or
otherwise violate any patent, trademark, copyright, trade secret or
other proprietary right of others, and the Company is unaware of any
facts which would form a reasonable basis for any such claim; and
(viii) there is no pending or, to the Company's knowledge, threatened
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action, suit, proceeding or claim by any current or former employee,
consultant or agent of the Company or any of its Subsidiaries seeking
either ownership rights to any invention or compensation from the
Company or any of its Subsidiaries for any invention made by such
employee, consultant or agent in the course of his/her employment with
the Company or any of its Subsidiaries, nor, to the Company's
knowledge, can any such action, suit, proceeding or claim, if
instituted, be sustained. The Prospectus fairly and accurately
describes in all material respects the Company's and its Subsidiaries'
rights with respect to the Intellectual Property.
(xiv) No consent, approval, authorization or order of or
filing with any court, regulatory body, administrative agency or any
other governmental agency or body, domestic or foreign, is required for
the performance of this Agreement or the consummation of the
transactions contemplated hereby, except such as have been or may be
required to be obtained under the Act or may be required under state
securities or Blue Sky laws in connection with the Underwriters'
purchase and distribution of the Shares.
(xv) Neither the Company nor any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken,
directly or indirectly, any action designed to stabilize or manipulate
the price of any security of the Company, or which has constituted or
which might in the future reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the
Company, to facilitate the sale or resale of the Shares or otherwise.
(xvi) Each of the Company and its Subsidiaries has good and
valid title to, or valid and enforceable leasehold interests in, all
properties and assets owned or leased by it, free and clear of all
liens, encumbrances, security interests, claims, restrictions,
equities, claims and defects, except (A) such as are described in the
Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), or such as do not
materially adversely affect the value of any of such properties or
assets taken as a whole and do not materially interfere with the use
made and proposed to be made of any of such properties or assets, and
(B) liens for taxes not yet due and payable as to which appropriate
reserves have been established and reflected in the financial
statements included in the Registration Statement. The Company owns or
leases all such properties as are materially necessary to its
operations as now conducted, and as proposed to be conducted as set
forth in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus); and the properties and business of the Company and its
Subsidiaries conform in all material respects to the descriptions
thereof contained in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus). All the material leases and subleases of the Company and
its Subsidiaries, and under which the Company or any Subsidiary holds
properties or assets as lessee or sublessee, constitute valid leasehold
interests of the Company or such Subsidiary free and clear of any lien,
encumbrance, security interest, restriction, equity, claim or defect,
are in full force and effect, and neither the Company nor any
8
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Subsidiary is in default in respect of any of the material terms or
provisions of any such material leases or subleases, and neither the
Company nor any Subsidiary has notice of any claim which has been
asserted by anyone adverse to the Company's or any of its Subsidiary's
rights as lessee or sublessee under either the material lease or
sublease, or affecting or questioning the Company's or any Subsidiary's
right to the continued possession of the leased or subleased premises
under any such material lease or sublease, in each case which default
or claim would have a Material Adverse Effect.
(xvii) Neither the Company nor any Subsidiary has violated any
applicable environmental, safety, health or similar law applicable to
the business of the Company, nor any federal or state law relating to
discrimination in the hiring, promotion, or pay of employees, nor any
applicable federal or state wages and hours law, nor any provisions of
ERISA or the rules and regulations promulgated thereunder, the
consequences of which violation would have a Material Adverse Effect.
(xviii) Each of the Company and its Subsidiaries hold, and, at
the Closing Date and any later Option Closing Date, as the case may be,
will hold, all franchises, licenses, permits, approvals, certificates
and other authorizations from federal, state and foreign and other
governmental or regulatory authorities necessary to the ownership,
leasing, distribution and operation of their properties or required for
the present conduct of business, and such franchises, licenses,
permits, approvals, certificates and other governmental authorizations
are in full force and effect and the Company and its Subsidiaries are
in compliance therewith in all material respects except where the
failure so to obtain, maintain or comply with would not be reasonably
likely to have a Material Adverse Effect. All of the descriptions in
the Registration Statement and Prospectus of the legal and governmental
proceedings by or before any foreign, state or local government body
are true, complete and accurate in all material respects.
(xix) No Subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such Subsidiary's capital stock, from
repaying to the Company any loans or advances to such Subsidiary from
the Company or from transferring any of such Subsidiary's property or
assets to the Company or any other Subsidiary of the Company, except as
described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(xx) Neither the Company nor any of its Subsidiaries is (i) in
violation of its certificate of incorporation or bylaws, (ii) in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness, which default would have a Material Adverse
Effect, (iii) in default in the performance or observance of any
contract, indenture, mortgage, loan agreement joint venture or other
agreement or instrument to which it is a party or by which its or any
of its properties are bound, which default would have a Material
Adverse Effect, or (iv) in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court of
government agency or body to which the Company is subject, which
violation would have a Material Adverse Effect.
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(xxi) The Company and its Subsidiaries are (i) in compliance
with all applicable United States, foreign, state and local
environmental laws, rules, regulations, treaties, statutes and codes
promulgated by any and all governmental authorities relating to the
protection of human health and safety, the environment or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"), (ii) have received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct their
business as currently conducted, and (iii) are in compliance with all
terms and conditions of any such permit, license or approval, except,
in the case of each of clauses (i) through (iii), above, where such
noncompliance with Environmental Laws, failure to receive required
permit licenses or other approvals would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect. No
action, proceeding, revocation proceeding, writ, injunction or claim is
pending or, to the Company's knowledge, threatened against the Company
or its Subsidiaries relating to the Environmental Laws or to their
activities involving Hazardous Materials. "Hazardous Materials" means
for purposes of this Agreement any material or substance (i) that is
prohibited or regulated by any environmental law, rule, regulation,
order, treaty, statute or code promulgated by any governmental
authority, or any amendment or modification thereto, or (ii) that has
been designated or regulated by any governmental authority as
radioactive, toxic, hazardous or otherwise a danger to health,
reproduction or the environment. The Company and its Subsidiaries have
not engaged in the generation, use, manufacture, transportation or
storage of any Hazardous Materials on any of their properties or former
properties, except where such use, manufacture, transportation or
storage is in compliance in all material respects with Environmental
Laws. The Company and its Subsidiaries have not disposed of any, and to
the Company's knowledge, no parties other than the Company and its
Subsidiaries have disposed of, Hazardous Materials on any of their
properties or on properties formerly owned or leased by them during the
time of such ownership or lease, except in compliance in all material
respects with Environmental Laws. To the Company's knowledge, no
spills, discharges, releases, deposits, emplacements, leaks or disposal
of any Hazardous Materials have occurred on or under or have emanated
from any of the Company's or its Subsidiaries' properties or former
properties during the time of their ownership or lease thereof except
in compliance in all respects with Environmental Laws or that would not
be reasonably likely to have a Material Adverse Effect, and except as
disclosed in the Prospectus, the Company has no knowledge of any
spills, discharges, releases, deposits, emplacements, leaks or disposal
of any Hazardous Materials that have occurred on or under or have
emanated from any of the Company's or Subsidiaries' properties or
former properties prior to the Company's or Subsidiaries' ownership or
lease thereof.
(xxii) Except as disclosed in the Prospectus, there are no
business relationships or related party transactions required to be
disclosed therein by Item 404 of Regulation S-K of the Commission.
(xxiii) The Company and its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
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management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxiv) The Company and its Subsidiaries are in compliance with
all provisions of Florida Statutes ss.517.075 and the regulations
thereunder, relating to issuers doing business with Cuba.
(xxv) The Company and its Subsidiaries have not at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any
contribution in violation of law, or (ii) made any payment to any
foreign, United States or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other
than payments required or permitted by the laws of the United States.
(xxvi) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration
as an "investment company" under the Investment Company Act of 1940.
(b) Each Selling Stockholder, severally and not
jointly, represents and warrants to, and agrees with, the several
Underwriters that:
(i) When any Preliminary Prospectus was filed with the
Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with
the requirements of the Act and the Rules and Regulations and (B) did
not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto
was or is declared effective, it (A) contained or will contain all
statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements
of the Act and the Rules and Regulations and (B) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein not misleading.
When the Prospectus and when any amendment or supplement thereto is
filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so
filed, when the Registration Statement and when any amendment thereto
containing such amendment or supplement to the Prospectus was or is
declared effective) and at all times subsequent thereto up to and
including the Closing Date (as defined in Section 3 hereof) and the
Option Closing Date (as defined in Section 9 hereof), the Prospectus,
as amended or supplemented at any such time, (A) contained or will
contain all statements required to be stated therein in accordance
with, and complied or will comply in all material respects with the
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<PAGE>
requirements of, the Act and the Rules and Regulations and (B) did not
or will not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. The foregoing provisions of this paragraph (i) shall
apply only to information furnished to the Company by or on behalf of
such Selling Shareholder.
(ii) Such Selling Stockholder is a duly incorporated and
validly existing corporation in good standing under the laws of its
jurisdiction of incorporation, as applicable. Such Selling Stockholder
has all requisite corporate power and authority (as applicable) to
enter into this Agreement and to consummate the transactions provided
for herein.
(iii) This Agreement has been duly authorized, executed and
delivered by such Selling Stockholder and, assuming it is your and the
Company's binding agreement of yours, constitutes a legal, valid and
binding agreement of such Selling Stockholder enforceable against such
Selling Stockholder in accordance with its terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application
relating to or affecting the enforcement of creditors' rights and the
application of equitable principles relating to the availability of
remedies and except as rights to indemnity or contribution may be
limited by federal or state securities laws and the public policy
underlying such laws), and none of such Selling Stockholder's execution
or delivery of this Agreement, its performance hereunder, its
consummation of the transactions contemplated herein or its application
of the net proceeds of the offering in the manner set forth under the
caption "Use of Proceeds" conflicts or will conflict with or results or
will result in any breach or violation of any of the terms or
provisions of, or constitutes or will constitute a default under,
causes or will cause (or permits or will permit) the maturation or
acceleration of any liability or obligation or the termination of any
right under, or result in the creation or imposition of any lien,
charge, or encumbrance upon, any property or assets of such Selling
Stockholder pursuant to the terms of, as applicable, (A) the
organizational documents of such Selling Stockholder (if a
corporation), (B) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders' agreement, note agreement or other agreement
or instrument to which such Selling Stockholder is a party or by which
it is or may be bound or to which any of its respective property is or
may be subject or (C) any statute, judgment, decree, order, rule or
regulation applicable to such Selling Stockholder of any government,
arbitrator, court, regulatory body or administrative agency or other
governmental agency or body, domestic or foreign, having jurisdiction
over such Selling Stockholder or any of its respective activities or
properties, except, in the cases of clauses (B) and (C) above, for
breaches, violations, defaults or terminations which would not be
reasonably likely to have a Material Adverse Effect.
(iv) Neither such Selling Stockholder, nor any person acting
on behalf of such Selling Stockholder, has taken, directly or
indirectly, any action designed to stabilize or manipulate the price of
any security of the Company, or which has constituted or which might in
the future reasonably be expected to cause or result in stabilization
or manipulation of the price of any security of the Company, to
facilitate the sale or resale of the Shares or otherwise.
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(v) Such Selling Stockholder is the lawful owner of the
Shares to be sold by it pursuant to this Agreement and has, and on the
Closing Date (and Option Closing Date, if applicable) will have, good
and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever.
(vi) Upon delivery of and payment for the Shares to be sold
by such Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever.
3. Purchase, Sale and Delivery of the Shares. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company and the
Selling Stockholders agree to sell to each Underwriter, and each Underwriter,
severally and not jointly, agrees to purchase from the Company and the Selling
Shareholders, at a purchase price of $______________ per Share, the number of
Firm Shares set forth opposite the name of such Underwriter in Column (1) of
Schedule I hereto.
Delivery of certificates, and payment of the purchase price, for the
Firm Shares shall be made at the offices of ING Baring Furman Selz LLC at 55
East 52nd Street, New York, New York 10055, or such other location as shall be
agreed upon by the Company and the Representatives. Such delivery and payment
shall be made at 10:00 a.m., New York City time, on __________, 1999 or at such
other time and date not more than ten business days thereafter as shall be
agreed upon by the Representatives and the Company. The time and date of such
delivery and payment are herein called the "Closing Date." Delivery of the
certificates for the Firm Shares shall be made to the Representatives for the
respective accounts of the several Underwriters against payment by the several
Underwriters through the Representatives of the purchase price for the Firm
Shares by wire transfer of immediately available funds to an account designated
to the Representatives in writing at least two business days preceding the
Closing Date. The certificates for the Shares to be so delivered will be in
definitive, fully registered form, will bear no restrictive legends and will be
in such denominations and registered in such names as the Representatives shall
request, not less than two full business days prior to the Closing Date. The
certificates for the Firm Shares will be made available to the Representatives
at such office or such other place as the Representatives may designate for
inspection, checking and packaging not later than 9:30 a.m., New York time on
the business day prior to the Closing Date.
4. Public Offering of the Shares. It is understood that the
Underwriters propose to make a public offering of the Shares at the price and
upon the other terms set forth in the Prospectus.
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5. Covenants of the Company and the Selling Stockholders.
(a) The Company covenants and agrees with each of the
Underwriters that:
(i) The Company will use its best efforts to cause
the Registration Statement, if not effective at the time of execution
of this Agreement, and any amendments thereto to become effective as
promptly as practicable. If required, the Company will file the
Prospectus and each amendment or supplement thereto with the Commission
in the manner and within the time period required by Rule 424(b) under
the Act. During any time when a prospectus relating to the Shares is
required to be delivered under the Act, the Company (A) will comply
with all requirements imposed upon it by the Act and the Rules and
Regulations to the extent necessary to permit the continuance of sales
of or dealings in the Shares in accordance with the provisions hereof
and of the Prospectus, as then amended or supplemented, and (B) will
not file with the Commission the prospectus or the amendment referred
to in the third sentence of Section 2(a)(i) hereof, any amendment or
supplement to such prospectus or any amendment to the Registration
Statement of which the Representatives shall not previously have been
advised and furnished with a copy a reasonable period of time prior to
the proposed filing and as to which filing the Representatives shall
not have given their consent.
(ii) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Representatives (A) when
the Registration Statement, as amended, has become effective; if the
provisions of Rule 430A promulgated under the Act will be relied upon,
when the Prospectus has been filed in accordance with said Rule 430A
and when any post-effective amendment to the Registration Statement
becomes effective; (B) of any request made by the Commission for
amending the Registration Statement, for supplementing any Preliminary
Prospectus or the Prospectus or for additional information, or (C) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or the institution or threat of any investigation or proceeding
for that purpose, and will use its best efforts to prevent the issuance
of any such order and, if issued, to obtain the lifting thereof as soon
as possible.
(iii) The Company will (A) use its best efforts to
arrange for the qualification of the Shares for offer and sale under
the state securities or blue sky laws of such jurisdictions as the
Representatives may designate, and the continuation of such
qualifications in effect for as long as may be necessary to complete
the distribution of the Shares, and (B) make such applications, file
such documents and furnish such information as may be required for the
purposes set forth in clause (A); provided, however, that the Company
shall not be required to qualify as a foreign corporation or file a
general or unlimited consent to service of process in any such
jurisdiction.
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(iv) The Company consents to the use of the
Prospectus (and each amendment or supplement thereto) by the
Underwriters and all dealers to whom the Shares may be sold, in
connection with the offering or sale of the Shares and for such period
of time thereafter as the Prospectus is required by law to be delivered
in connection therewith. If, at any time when a prospectus relating to
the Shares is required to be delivered under the Act, any event occurs
as a result of which the Prospectus, as then amended or supplemented,
would include any untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein not
misleading, or if it becomes necessary at any time to amend or
supplement the Prospectus to comply with the Act or the Rules and
Regulations, the Company promptly will so notify the Representatives
and, subject to Section 5(a)(i) hereof, will prepare and file with the
Commission an amendment to the Registration Statement or an amendment
or supplement to the Prospectus which will correct such statement or
omission or effect such compliance, each such amendment or supplement
to be reasonably satisfactory to the Representatives and counsel to the
Underwriters.
(v) As soon as practicable, but in any event not
later than 45 days after the end of the 12-month period beginning on
the day after the end of the fiscal quarter of the Company during which
the effective date of the Registration Statement occurs (90 days in the
event that the end of such fiscal quarter is the end of the Company's
fiscal year), the Company will make generally available to its security
holders, in the manner specified in Rule 158(b) of the Rules and
Regulations, and to the Representatives, an earnings statement which
will be in the detail required by, and will otherwise comply with, the
provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and
Regulations, which statement need not be audited unless required by the
Act or the Rules and Regulations, covering a period of at least 12
consecutive months after the effective date of the Registration
Statement.
(vi) During a period of five years after the date
hereof, the Company will furnish to its stockholders, as soon as
practicable, annual reports (including financial statements audited by
independent public accountants) and unaudited quarterly reports of
earnings, and will deliver to the Representatives:
(A) concurrently with furnishing any quarterly reports to its
stockholders, statements of income of the Company for each quarter in
the form furnished to the Company's stockholders;
(B) concurrently with furnishing annual reports to its
stockholders, a balance sheet of the Company as at the end of the
preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal
year, accompanied by a copy of the report thereon of independent public
accountants;
(C) as soon as they are available, copies of all information
(financial or other) mailed to stockholders;
(D) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
National Association of Securities Dealers, Inc. ("NASD") or any
securities exchange;
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(E) every press release and every material news item or
article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by the Company;
and
(F) any additional information of a public nature concerning
the Company or its business in the possession of the Company which the
Representatives may reasonably request.
During such five-year period, for so long as the Company has
active subsidiaries, the foregoing financial statements will be on a
consolidated basis to the extent that the accounts of the Company and
its subsidiaries are consolidated, and will be accompanied by similar
financial statements for any significant subsidiary which is not so
consolidated.
(vii) The Company will maintain a Transfer Agent and,
if necessary under the jurisdiction of incorporation of the Company, a
Registrar (which may be the same entity as the Transfer Agent) for its
Common Stock.
(viii) The Company will furnish, without charge, to
the Representatives or on the Representatives' order, at such place as
the Representatives may designate, copies of the each Preliminary
Prospectus, the Registration Statement and any pre-effective or
post-effective amendments thereto (two of which copies will be signed
and will include all financial statements and exhibits) and the
Prospectus, and all amendments and supplements thereto, in each case as
soon as available and in such quantities as the Representatives may
reasonably request.
(ix) The Company will not, directly or indirectly,
without the prior written consent of the Representatives, issue, offer,
sell, grant any option to purchase or otherwise dispose (or announce
any issuance, offer, sale, grant of any option to purchase or other
disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common
Stock for the period ending 180 days after the date hereof, except
pursuant to this Agreement and except for issuances pursuant to the
exercise of stock options outstanding on or granted subsequent to the
date hereof pursuant to a stock option or other employee benefit plan
in existence on the date hereof.
(x) The Company will use its best efforts to cause
the Shares to be included for quotation on the Nasdaq National Market
prior to the Closing Date.
(xi) The Company will apply the net proceeds of the
offering received by it in the manner set forth under the caption "Use
of Proceeds" in the Prospectus.
(xii) The Company will timely file all such reports,
forms or other documents as may be required from time to time, under
the Act, the Rules and Regulations, the Exchange Act, and the rules and
regulations thereunder, and all such reports, forms and documents filed
will comply as to form and substance with the applicable requirements
under the Act, the Rules and Regulations, the Exchange Act and the
rules and regulations thereunder.
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(b) Each Selling Stockholder covenants and agrees
with each of the Underwriters that during the period ending 180 days after the
date hereof, such Selling Stockholder will not without your prior written
consent, sell, offer or agree to sell, grant any option for the sale of, or
otherwise dispose of, directly or indirectly, any shares of Common Stock (or any
securities convertible into or exercisable or exchangeable for Common Stock)
other than such Selling Stockholder's sale of Shares hereunder.
6. Expenses.
(a) Regardless of whether the transactions contemplated in
this Agreement are consummated, and regardless of whether for any
reason this Agreement is terminated subject to the last sentence of
this Section 6(a), the Company and the Selling Stockholders will pay,
and hereby agree to indemnify each Underwriter against, all fees and
expenses incident to the performance of the obligations of the Company
and the Selling Stockholders under this Agreement, including, but not
limited to, (i) fees and expenses of accountants and counsel for the
Company, (ii) all costs and expenses incurred in connection with the
preparation, duplication, printing, filing, delivery and shipping of
copies of the Registration Statement and any pre-effective or
post-effective amendments thereto, any Preliminary Prospectus and the
Prospectus and any amendments or supplements thereto (including postage
costs related to the delivery by the Underwriters of any Preliminary
Prospectus or Prospectus, or any amendment or supplement thereto), this
Agreement, and all other documents in connection with the transactions
contemplated herein, including the cost of all copies thereof, (iii)
fees and expenses relating to qualification of the Shares under state
securities or blue sky laws, including the cost of preparing and
mailing the preliminary and final blue sky memoranda and filing fees
and disbursements and reasonable fees of counsel and other related
expenses, if any, in connection therewith, (iv) filing fees of the
Commission and the NASD relating to the Shares, (v) any fees and
expenses in connection with the quotation of the Shares on the Nasdaq
National Market and reasonable fees of counsel to the Underwriters in
connection with NASD filings, (vi) costs and expenses incident to the
preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agent's and
registrar's fees and any applicable transfer taxes incurred in
connection with the delivery to the Underwriters of the Shares to be
sold by the Company and the Selling Stockholders pursuant to this
Agreement, (vii) costs and expenses incident to any meetings with
prospective investors in the Shares (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters) and (viii) costs and expenses of advertising relating to
the offering of the Shares (other than as shall have been specifically
approved by the Representatives to be paid for by the Underwriters).
Except as set forth above and in Section 6(b) below, the Underwriters
shall pay all of their own expenses (including the fees and
disbursements of their counsel and their travel expenses) incurred in
connection with this Agreement and the transactions contemplated
hereby.
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(b) If the purchase of the Shares as herein contemplated is
not consummated for any reason other than the Underwriters' default
under this Agreement or other than by reason of Section 11(a), the
Company and the Selling Stockholders shall reimburse the several
Underwriters for their reasonable out-of-pocket expenses (including
reasonable counsel fees and disbursements) in connection with any
investigation made by them, and any preparation made by them in respect
of marketing of the Shares or in contemplation of the performance by
them of their obligations hereunder.
7. Conditions of the Underwriters' Obligations. The obligation
of each Underwriter to purchase and pay for the Shares set forth opposite the
name of such Underwriter in Schedule I is subject to the continuing accuracy of
the representations and warranties of the Company and the Selling Stockholders
herein as of the date hereof and as of the Closing Date as if they had been made
on and as of the Closing Date; the accuracy on and as of the Closing Date of the
statements of officers of the Company made pursuant to the provisions hereof;
the performance by the Company and the Selling Stockholders on and as of the
Closing Date of all of its covenants and agreements hereunder which are to be
performed on or prior to the Closing Date; and the following additional
conditions:
(a) If the Company has elected to rely on Rule 430A under the
Act, the Registration Statement shall have been declared effective, and
the Prospectus (containing the information omitted pursuant to Rule
430A) shall have been filed with the Commission not later than the
Commission's close of business on the second business day following the
date hereof or such later time and date to which the Representatives
shall have consented; if the Company does not elect to rely on Rule
430A, the Registration Statement shall have been declared effective not
later than 11:00 A.M., New York time, on the first business day
following the date hereof or such later time and date to which the
Representatives shall have consented; if required, in the case of any
changes in or amendments or supplements to the Prospectus in addition
to those contemplated above, the Company shall have filed such
Prospectus as amended or supplemented with the Commission in the manner
and within the time period required by Rule 424(b) under the Act; no
stop order suspending the effectiveness of the Registration Statement
or any amendment thereto shall have been issued, and no proceedings for
that purpose shall have been instituted or, to the knowledge of the
Company or the Representatives, shall be contemplated or threatened by
the Commission; and the Company shall have complied with any request of
the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) The Registration Statement, or any amendment thereto,
shall not contain an untrue statement of material fact, or omit to
state a material fact which is required to be stated therein or is
necessary to make the statements therein not misleading, and the
Prospectus, or any supplement thereto, shall not contain an untrue
statement of material fact, or omit to state a material fact which is
required to be stated therein or is necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
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(c) On or prior to the Closing Date, the Representatives shall
have received from counsel to the Underwriters, such opinion or
opinions with respect to the issuance and sale of the Firm Shares, the
Registration Statement and the Prospectus and such other related
matters as the Representatives reasonably may request and such counsel
shall have received such documents and other information as they
request to enable them to pass upon such matters.
(d) On the Closing Date, the Underwriters shall have received
the opinion, dated the Closing Date, of Tenzer Greenblatt LLP, counsel
to the Company and the Selling Stockholders, in the form attached
hereto as Appendix A, addressed to the Underwriters.
(e) On or prior to the Closing Date, counsel to the
Underwriters shall have been furnished such documents, certificates and
opinions as they may reasonably require in order to evidence the
accuracy, completeness or satisfaction of any of the representations or
warranties of the Company and the Selling Stockholders, or conditions
herein contained.
(f) On the Closing Date, the Representatives shall have
received, a letter from the PricewaterhouseCoopers LLP addressed to the
Company and the Underwriters, dated the Closing Date, confirming that
it is an independent certified public accountant with respect to the
Company within the meaning of the Act and the Rules and Regulations
thereunder and based upon the procedures described in its letter
delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not
more than three days prior to the Closing Date, (i) confirming that the
statements and conclusions set forth in the Original Letter are
accurate as of the Closing Date; and (ii) setting forth any revisions
and additions to the statements and conclusions set forth in the
Original Letter that are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any
development involving a prospective change, in or affecting the
business or properties of the Company which, in your reasonable
judgment, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In
addition, you shall have received from the Accountants a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of
internal accounting controls, to the extent it deemed necessary in
establishing the scope of its latest examination of the Company's
financial statements, did not disclose any weaknesses in internal
controls that it considered to be material weaknesses. All such letters
shall be in a form reasonably satisfactory to the Representatives and
their counsel.
(g) On the Closing Date, the Representatives shall have
received a certificate, dated the Closing Date, of the principal
executive officer and the principal financial or accounting officer of
the Company to the effect that each of such persons has carefully
examined the Registration Statement and the Prospectus and any
amendments or supplements thereto and this Agreement, and that:
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(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the
Closing Date, and the Company has complied with all agreements and
covenants and satisfied all conditions contained in this Agreement on
its part to be performed or satisfied at or prior to the Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that
purpose have been instituted or are pending or, to the best knowledge
of each of such persons are contemplated or threatened under the Act
and any and all filings required by Rule 424 and Rule 430A have been
timely made;
(iii) The Registration Statement and Prospectus and, if
any, each amendment and each supplement thereto, contain all statements
and information required to be included therein, and neither the
Registration Statement nor any amendment thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and neither the Prospectus nor any supplement
thereto includes any untrue statement of a material fact or omits or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
up to and including the Closing Date, other than as contemplated by the
Prospectus, neither the Company nor any of the Subsidiaries has
incurred, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; neither the
Company nor any of the Subsidiaries has purchased any of its
outstanding capital stock or paid or declared any dividends or other
distributions on its capital stock; neither the Company nor any of the
Subsidiaries has entered into any transactions not in the ordinary
course of business; and there has not been any change in the capital
stock or consolidated long-term debt or any increase in the
consolidated short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the
Company or any material adverse change to the business, properties,
assets, net worth, condition (financial or other), or results of
operations of the Company and its Subsidiaries taken as a whole;
neither the Company nor any of the Subsidiaries has sustained any
material loss or damage to its property or assets, whether or not
insured; there is no litigation which is pending or threatened against
the Company or any of its Subsidiaries which if adversely decided would
have a Material Adverse Effect.
References to the Registration Statement and the Prospectus in
this paragraph (g) are to such documents as amended and supplemented at
the date of the certificate.
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<PAGE>
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus up to and
including the Closing Date there has not been (i) any material change
or decrease specified in the letter or letters referred to in paragraph
(f) of this Section 7 or (ii) any material adverse change, or any
development involving a prospective material adverse change, in the
business or properties of the Company or its Subsidiaries which change
or decrease in the case of clause (i) or change or development in the
case of clause (ii) makes it impractical or inadvisable in the
Representatives' judgment to proceed with the public offering or the
delivery of the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any
jurisdiction designated by you pursuant to Section 5(a)(iii)(A) hereof
has been issued on or prior to the Closing Date and no proceedings for
that purpose have been instituted or, to your knowledge or that of the
Company, have been or are contemplated.
(j) The Representatives shall have received from each person
identified on Appendix B attached hereto an agreement to the effect
that such person will not, for the period ending one hundred and eighty
(180) days after the date hereof, directly or indirectly offer, sell,
solicit an offer to buy, make any short sale, pledge, grant any option
to purchase, contract to sell, or otherwise dispose of or transfer
(collectively, a "Disposition") any shares of Common Stock (including,
without limitation, shares of Common Stock which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission) or any
securities convertible into or exercisable or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock now owned or
hereafter acquired directly by the undersigned or with respect to which
the undersigned has or hereafter acquires the power of Disposition,
otherwise than (i) as a bona fide gift or gifts, provided the donee or
donees thereof agree in writing to be bound by this restriction or (ii)
as a distribution to partners or stockholders of the undersigned,
provided that the distributees thereof agree in writing to be bound by
the terms of this restriction.
(k) The Company and the Selling Stockholders shall have
furnished the Underwriters with such further opinions, letters,
certificates or documents as you or counsel for the Representatives may
reasonably request. All opinions, certificates, letters and documents
to be furnished by the Company will comply with the provisions hereof
(to the extent a form of such document is not attached hereto) only if
they are reasonably satisfactory in all material respects to the
Representatives and to counsel for the Representatives. The Company
shall furnish the Representatives with conformed copies of such
opinions, certificates, letters and documents in such quantities as you
reasonably request. The certificates delivered under this Section 7
shall constitute representations, warranties and agreements of the
Company, as to all matters set forth therein as fully and effectively
as if such matters had been set forth in Section 2 of this Agreement.
(l) The Shares shall have been duly authorized for quotation
on the Nasdaq National Market.
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8. Indemnification.
(a) The Company and each Selling Shareholder jointly and
severally agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls such Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages or liabilities, joint or several (and
actions in respect thereof), to which such Underwriter or such
controlling person may become subject, under the Act or other federal
or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement
or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or
alleged omission therein of a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and will
reimburse, as incurred, such Underwriter or such controlling persons
for any legal or other expenses reasonably incurred by such Underwriter
or such controlling persons in connection with investigating, defending
or appearing as a third party witness in connection with any such loss,
claim, damage, liability or action; provided, however, that the Company
and the Selling Stockholders will not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises
out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in any of such documents
in reliance upon and in conformity with information furnished in
writing to the Company on behalf of such Underwriter through the
Representatives expressly for use therein, and provided, further, that
such indemnity with respect to any Preliminary Prospectus shall not
inure to the benefit of any Underwriter (or to the benefit of any
person controlling such Underwriter) from whom the person asserting any
such loss, claim, damage, liability or action purchased Shares which
are the subject thereof to the extent that any such loss, claim,
damage, liability or action (i) results from the fact that such
Underwriter failed to send or give a copy of the Prospectus (excluding
documents incorporated by reference) to such person at or prior to the
confirmation of the sale of such Shares to such person in any case
where such delivery is required by the Act and (ii) arises out of or is
based upon an untrue statement or omission of a material fact contained
in such Preliminary Prospectus that was corrected in the Prospectus,
unless such failure resulted from non-compliance by the Company with
Section 5(viii) hereof.
The indemnity agreement in this paragraph (a) shall be in
addition to any liability which the Company and the Selling
Stockholders may otherwise have.
(b) Each of the Underwriters agrees severally, but not
jointly, to indemnify and hold harmless the Company, each Selling
Stockholder, each of the directors of the Company, each of the officers
of the Company who has signed the Registration Statement, each person,
if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act against any and all losses,
claims, damages or liabilities (and actions in respect thereof) to
which the Company or any such Selling Stockholder, director, officer,
or controlling person may become subject, under the Act or other
federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or
22
<PAGE>
actions arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any
amendment or supplement thereto or in any Blue Sky Application, or
arise out of or are based upon the (i) any untrue statement or alleged
untrue statement of any material fact contained therein, or (ii) the
omission or alleged omission therein of a material fact required to be
stated therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with information furnished
in writing by that Underwriter through the Representatives to the
Company expressly for use therein; and will reimburse, as incurred, all
legal or other expenses reasonably incurred by the Company or any such
Selling Stockholder, director, officer, controlling person in
connection with investigating or defending any such loss, claim,
damage, liability or action. The Company and the Selling Stockholders
acknowledge that the statements with respect to the public offering of
the Shares set forth in paragraphs one (1) and three (3) under the
heading "Underwriting" and the stabilization legend in the Prospectus
have been furnished by the Underwriters to the Company expressly for
use therein and constitute the only information furnished in writing by
or on behalf of the Underwriters for inclusion in the Registration
Statement, the Prospectus and any Preliminary Prospectus. The indemnity
agreement contained in this subsection (b) shall be in addition to any
liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against one or
more indemnifying parties under this Section 8, notify such
indemnifying party or parties of the commencement thereof; but the
omission so to notify the indemnifying party shall not relieve it from
any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) of this Section 8 or to the extent that the
indemnifying party was not adversely affected by such omission. In case
any such action is brought against an indemnified party and it notifies
an indemnifying party or parties of the commencement thereof, the
indemnifying party or parties against which a claim is to be made will
be entitled to participate therein and, to the extent that it or they
may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided however, that if the
defendants in any such action include both the indemnified party and
the indemnifying party and the indemnified party has reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal
defenses and otherwise to participate in the defense of such action on
behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election
so to assume the defense of such action and approval by the indemnified
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party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 8 for any legal or other expenses
(other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party has employed such counsel in
connection with the assumption of such different or additional legal
defenses in accordance with the proviso to the immediately preceding
sentence, (ii) the indemnifying party has not employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement
of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the
expense of the indemnifying party; provided, however, that the Company
and the Selling Stockholders shall only be liable for the reasonable
fees and expenses of one (1) such additional counsel in any single
jurisdiction plus appropriate local counsel in other jurisdictions.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages,
expenses or liabilities (or actions in respect thereof) referred to
therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) (i) in
such proportion as is appropriate to reflect the relative benefits
received by each of the contributing parties, on the one hand, and the
party to be indemnified, on the other hand, from the offering of the
Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above
but also the relative fault of each of the contributing parties, on the
one hand, and the party to be indemnified, on the other hand in
connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. In any case where the Company and the Selling
Stockholders are the contributing party and the Underwriters are the
indemnified party, the relative benefits received by the Company and
the Selling Stockholders on the one hand, and the Underwriters, on the
other, shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Shares (before deducting expenses)
bear to the total underwriting discounts received by the Underwriters
hereunder, in each case as set forth in the table on the cover page of
the Prospectus. Relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company and the Selling
Stockholders or by the Underwriters, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to above in this
paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding
the provisions of this paragraph (d), the Underwriters shall not be
required to contribute any amount in excess of the underwriting
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discount applicable to the Shares purchased by the Underwriters
hereunder. The Underwriters' obligations to contribute pursuant to this
paragraph (d) are several in proportion to their respective
underwriting obligations, and not joint. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this paragraph (d),
(i) each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter and (ii) each
director of the Company, each officer of the Company who has signed the
Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act shall have the same rights to contribution as the
Company, subject in each case to this paragraph (d). Any party entitled
to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect to
which a claim for contribution may be made against another party or
parties under this paragraph (d), notify such party or parties from
whom contribution may be sought, but the omission so to notify such
party or parties shall not relieve the party or parties from whom
contribution may be sought from any other obligation (x) it or they may
have hereunder or otherwise than under this paragraph (d) or (y) to the
extent that such party or parties were not adversely affected by such
omission. The contribution agreement set forth above shall be in
addition to any liabilities which any indemnifying party may otherwise
have.
9. Right to Increase Offering. At anytime during a period of
30 days from the date of the Prospectus, the Underwriters, by no less than two
business days' prior notice to the Company may designate a closing (which may be
concurrent with, and part of, the closing on the Closing Date with respect to
the Firm Shares or may be a second closing held on a date subsequent to the
Closing Date, in either case such date shall be referred to herein as the
"Option Closing Date") at which the Underwriters may purchase all or less than
all of the Additional Shares in accordance with the provisions of this Section 9
at the purchase price per share to be paid for the Firm Shares. In no event
shall the Option Closing Date be later than 10 business days after written
notice of election to purchase Additional Shares is given.
The Company and the Selling Stockholders agree to sell to the
several Underwriters on the Option Closing Date the number of Additional Shares
specified in such notice and the Underwriters agree severally and not jointly,
to purchase such Additional Shares on the Option Closing Date. Such Additional
Shares shall be purchased for the account of each Underwriter in the same
proportion as the number of Firm Shares set forth opposite the name of such
Underwriter in Column (3) of Schedule I bears to the total number of Firm Shares
(subject to adjustment by you to eliminate fractions) and may be purchased by
the Underwriters only for the purpose of covering over-allotments made in
connection with the sale of the Firm Shares.
No Additional Shares shall be sold or delivered unless the
Firm Shares previously have been, or simultaneously are, sold and delivered. The
right to purchase the Additional Shares or any portion thereof may be
surrendered and terminated at any time upon notice by you to the Company.
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Except to the extent modified by this Section 9, all
provisions of this Agreement relating to the transactions contemplated to occur
on the Closing Date for the sale of the Firm Shares shall apply, mutatis
mutandis, to the Option Closing Date for the sale of the Additional Shares.
10. Representations, etc. to Survive Delivery. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers, the Selling Stockholders and
the Underwriters, respectively, set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made by or
on behalf of the Underwriters, and will survive delivery of and payment for the
Shares. Any successors to the Underwriters shall be entitled to the indemnity,
contribution and reimbursement agreements contained in this Agreement.
11. Effective Date and Termination.
(a) This Agreement shall become effective at 11:00 A.M., New
York time on the first business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representatives, in their sole discretion, shall release the Shares for the sale
to the public unless prior to such time the Representatives shall have received
written notice from the Company and the Selling Stockholders that they elect
that this Agreement shall not become effective, or the Representatives shall
have given written notice to the Company that the Representatives on behalf of
the Underwriters elect that this Agreement shall not become effective; provided,
however, that the provisions of this Section and of Section 6 and Section 8
hereof shall at all times be effective. For purposes of this Section 11(a), the
Shares to be purchased hereunder shall be deemed to have been so released upon
the earlier of notification by the Representatives to securities dealers
releasing such Shares for offering or the release by the Representatives for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6
and 8 hereof) may be terminated by the Representatives by notice to the Company
that the Company or the Selling Stockholders have failed to comply in any
respect with any of the provisions of this Agreement required on their part to
be performed at or prior to the Closing Date or the Option Closing Date, or if
any of the representations or warranties of the Company and the Selling
Stockholders are not accurate in any respect or if the covenants, agreements or
conditions of, or applicable to the Company or the Selling Stockholders herein
contained have not been complied with in any respect or satisfied within the
time specified on the Closing Date or the Option Closing Date, respectively, or
if prior to the Closing Date or the Option Closing Date:
(i) the Company or any of its Subsidiaries shall have
sustained a loss by strike, fire, flood, accident or other calamity of such a
character as to interfere materially with the conduct of the business and
operations of the Company and its Subsidiaries taken as a whole regardless of
whether or not such loss was insured;
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities generally
on the New York Stock Exchange or the National Association of Securities Dealers
Automated Quotations National Market System shall have been suspended or a
material limitation on such trading shall have been imposed or minimum or
maximum prices shall have been established on any such exchange or market
system;
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(iii) a banking moratorium shall have been declared by New
York or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak or
escalation of any other insurrection or armed conflict involving the United
States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present or
prospective business or condition (financial or other) of the Company and its
Subsidiaries taken as a whole that, in each case, in the Representatives'
judgment makes it impracticable or inadvisable to make or consummate the public
offering, sale or delivery of the Shares on the terms and in the manner
contemplated in the Prospectus and the Registration Statement.
(c) Termination of this Agreement under this Section 11 or
Section 12 after the Firm Shares have been purchased by the Underwriters
hereunder shall be applicable only to the Additional Shares. Termination of this
Agreement shall be without liability of any party to any other party other than
as provided in Sections 6 and 8 hereof.
12. Substitution of Underwriters. If one or more of the
Underwriters shall fail or refuse (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 7 or
11 hereof) to purchase and pay for (a) in the case of the Closing Date, the
number of Firm Shares agreed to be purchased by such Underwriter or Underwriters
upon tender to you of such Firm Shares in accordance with the terms hereof or
(b) in the case of the Option Closing Date, the number of Additional Shares
agreed to be purchased by such Underwriter or Underwriters upon tender to you of
such Additional Shares in accordance with the terms hereof, and the number of
such Shares shall not exceed 10% of the Firm Shares or Additional Shares
required to be purchased on the Closing Date or the Option Closing Date, as the
case may be, then, each of the non-defaulting Underwriters shall purchase and
pay for (in addition to the number of such Shares which it has severally agreed
to purchase hereunder) that proportion of the number of Shares which the
defaulting Underwriter or Underwriters shall have so failed or refused to
purchase on such Closing Date or Option Closing Date, as the case may be, which
the number of Shares agreed to be purchased by such non-defaulting Underwriter
bears to the aggregate number of Shares so agreed to be purchased by all such
non-defaulting Underwriters on such Closing Date or Option Closing Date, as the
case may be. In such case, you shall have the right to postpone the Closing Date
or the Option Closing Date, as the case may be, to a date not exceeding seven
full business days after the date originally fixed as such Closing Date or the
Option Closing Date, as the case may be, pursuant to the terms hereof in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse
(otherwise than for a reason sufficient to justify the termination of this
Agreement under the provisions of Section 7 or 11 hereof) to purchase and pay
for (a) in the case of the Closing Date, the number of Firm Shares agreed to be
purchased by such Underwriter or Underwriters upon tender to you of such Firm
Shares in accordance with the terms hereof or (b) in the case of the Option
Closing Date, the number of Additional Shares agreed to be purchased by such
27
<PAGE>
Underwriter or Underwriters upon tender to you of such Additional Shares in
accordance with the terms hereof, and the number of such Shares shall exceed 10%
of the Firm Shares or Additional Shares required to be purchased by all the
Underwriters on the Closing Date or the Option Closing Date, as the case may be,
then (unless within 48 hours after such default arrangements to your
satisfaction shall have been made for the purchase of the defaulted Shares by an
Underwriter or Underwriters) and subject to the provisions of Section 11(b)
hereof, this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or on the part of the Company and the Selling
Stockholders except as otherwise provided in Sections 6 and 8 hereof. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this paragraph. Nothing in this Section 12, and no action
taken hereunder, shall relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
13. Notices. All communications hereunder shall be in writing
and if sent to the Representatives shall be mailed or delivered or telegraphed
and confirmed by letter or telecopied and confirmed by letter to c/o ING Baring
Furman Selz LLC at 55 East 52nd Street, New York, New York 10055, Attention:
Syndicate Department, with a copy to Latham & Watkins, 885 Third Avenue, New
York, New York 10022, Attention: Steven Della Rocca or, if sent to the Company,
shall be mailed or delivered or telegraphed and confirmed to the Company at 575
Broadway, 6th Floor, New York, New York 10012, with a copy to Tenzer Greenblatt
LLP, 405 Lexington Avenue, New York, New York 10174, Attention: Robert Mittman.
14. Successors. This Agreement shall inure to the benefit of
and be binding upon the Company, the Selling Stockholders and each Underwriter
and their respective successors and legal representatives, and nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person, except
that the representations, warranties, indemnities and contribution agreements of
the Company and the Selling Stockholders contained in this Agreement shall also
be for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, any person or persons, if
any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Shares from the Underwriters
will be deemed a successor because of such purchase.
15. Applicable Law; Jurisdiction. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without giving effect to the choice of law or conflict of law principles
thereof. Each party hereto consents to the jurisdiction of each court in which
any action is commenced seeking indemnity or contribution pursuant to Section 8
above and agrees to accept, either directly or through an agent, service of
process of each such court.
28
<PAGE>
16. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, and all of
which together shall be deemed to be one and the same instrument.
If the foregoing correctly sets forth our understanding,
please indicate the Underwriters' acceptance thereof in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
between us.
Very truly yours,
The Company:
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By:_____________________________________
Name:
Title:
The Subsidiaries:
GEARHEAD ENTERTAINMENT, INC.
By:_____________________________________
Name:
Title:
MISSION STUDIOS, INC.
By:______________________________________
Name:
Title:
29
<PAGE>
ALTERNATIVE REALITY TECHNOLOGIES, INC.
By:______________________________________
Name:
Title:
TAKE-TWO INTERACTIVE SOFTWARE EUROPE LIMITED
By:______________________________________
Name:
Title:
GOLDWEB SERVICES
By:______________________________________
Name:
Title:
TAKE-TWO INTERACTIVE FRANCE F.A.
By:______________________________________
Name:
Title:
TAKE-TWO INTERACTIVE GMBH
By:______________________________________
Name:
Title:
30
<PAGE>
INVENTORY MANAGEMENT SYSTEMS, INC.
By:______________________________________
Name:
Title:
JACK OF ALL GAMES, INC.
By:______________________________________
Name:
Title:
DIRECTSOFT AUSTRALIA PTY. LIMITED
By:______________________________________
Name:
Title:
TALONSOFT, INC.
By:______________________________________
Name:
Title:
L.D.A. DISTRIBUTION LIMITED
By:______________________________________
Name:
Title:
31
<PAGE>
JOYTECH EUROPE LIMITED
By:______________________________________
Name:
Title:
FALCON VENTURES CORPORATION (d/b/a DVDWAVE.COM)
By:______________________________________
Name:
Title:
The Selling Stockholders:
By:_______________________________________
Name: Peter M. Brant
Title:
By:_______________________________________
Name: BMG Entertainment
Title:
By:_______________________________________
Name: Robert Alexander
Title:
By:_______________________________________
Name: David Rosenbaum
Title:
By:_______________________________________
Name: Oliver R. Grace, Jr.
Title:
By:_______________________________________
Name: Ryan A. Brant
Title:
By:_______________________________________
Name: Neil S. Hirsch
Title:
By:_______________________________________
Name: Larry Muller
Title:
32
<PAGE>
By:_______________________________________
Name: Robert Flug
Title:
By:_______________________________________
Name: Anthony R. Williams
Title:
By:_______________________________________
Name: Barbara A. Ras
Title:
By:_______________________________________
Name: Kelly Sumner
Title:
Accepted as of the date first above
written:
ING BARING FURMAN SELZ LLC Gerard Klauer
Mattison & Co., Inc. MORGAN KEEGAN &
COMPANY, INC.
By: ING Baring Furman Selz LLC Acting on
its own behalf and as one of the
Representatives of the several
Underwriters referred to in the foregoing
Agreement
By:_______________________________________
Name:
Title:
33
<PAGE>
Schedule I
Underwriters
(1) (2)
Number of Firm Number of
Shares to be Additional
Purchased from Shares
the Company to be Purchased
----------- ---------------
Name and Address
- ----------------
ING Baring Furman Selz LLC........... _____________ _____________
Gerard Klauer Mattison & Co., Inc.... _____________ _____________
Morgan Keegan & Company, Inc......... _____________ _____________
Total................................ _____________ _____________
============= =============
34
<PAGE>
Appendix A
1. Opinion of Counsel to the Company
(a) Each of the Company and its Subsidiaries (A) is a duly
incorporated and validly existing corporation in good standing under the laws of
its jurisdiction of incorporation, with corporate power and corporate authority
to own or lease its properties and to conduct its business as described in the
Prospectus; and (B) is duly qualified to do business as a foreign corporation
and is in good standing in each jurisdiction (x) in which the conduct of its
business requires such qualification and (y) in which it owns or leases
property.
(b) The authorized, issued and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in the
Prospectus; the issued and outstanding shares of the Company's capital stock
have been duly authorized and validly issued by the Company, are fully paid and
nonassessable and have been issued in compliance with all federal and state
securities laws and to the knowledge of such counsel, have not been issued in
violation of any preemptive right, co-sale right, registration right, right of
first refusal or other similar right known to such counsel;
(c) The Company has duly authorized the issuance and sale of
the Shares to be sold by it hereunder; such Shares, when issued by the Company
and paid for in accordance with the terms hereof, will be validly issued, fully
paid and nonassessable and will conform in all material respects to the
description thereof contained in the Prospectus and will be sold free and clear
of any pledge, lien, security interests, encumbrance, claim, or equitable
interest, and, to the knowledge of such counsel, not in violation of or subject
to any preemptive right, co-sale right, right of first refusal or other similar
right, which rights have not previously been waived, in connection with the
purchase or sale of any of the Shares;
(d) To the best knowledge of such counsel, there are no
contracts or documents which are required by the Act to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required by the Act
and the Rules and Regulations;
(e) The statements set forth under the headings "Risk Factors
- --_____________," "Business -- Legal Matters," "Management -- Employee Stock and
Other Benefit Plans," "Description of Capital Stock," and "Certain Transactions"
and statements in response to Items 14 and 15 of Form S-1 under the Act of the
Registration Statement in the Prospectus, insofar as such statements constitute
a summary of the legal matters, documents or proceedings referred to therein,
provide an accurate summary in all material respects of such legal matters,
documents and proceedings;
<PAGE>
(f) The Company and each Selling Stockholder, as applicable,
has all requisite corporate legal right, power, and authority to enter into this
Agreement and to consummate the transactions provided for herein; this Agreement
has been duly authorized, executed and delivered by the Company and each Selling
Stockholder, as applicable;
(g) None of the Company's execution or delivery of this
Agreement, its performance hereof, its consummation of the transactions
contemplated herein conflicts or will conflict with or results or will result in
any breach or violation of any of the terms or provisions of, or constitute a
default under, the terms of the certificate of incorporation or by-laws of the
Company; the terms of any indenture, mortgage, deed of trust, voting trust
agreement, stockholder's agreement, note agreement or other agreement or
instrument filed as an exhibit to the Registration Statement to which the
Company is a party or by which it is or may be bound or to which any of its
properties may be subject; or, to the best knowledge of such counsel, any
Massachusetts, New York or United States statute, rule or regulation or the
Delaware General Corporate Law, of any state or Federal regulatory body or
administrative agency or other governmental agency or body, of any state or
Federal government, arbitrator, court, regulatory body or administrative agency
or other governmental agency or body, having such jurisdiction;
(h) None of the Selling Stockholder's execution or delivery of
this Agreement, its performance hereof, its consummation of the transactions
contemplated herein conflicts or will conflict with or results or will result in
any breach or violation of any of the terms or provisions of, or constitute a
default under, the terms of the certificate of incorporation or by-laws of such
Selling Stockholder, as applicable; the terms of any indenture, mortgage, deed
of trust, voting trust agreement, stockholder's agreement, note agreement or
other agreement or instrument filed as an exhibit to the Registration Statement
to which such Selling Stockholder, as applicable, is a party or by which it is
or may be bound or to which any of its properties may be subject; or, to the
best knowledge of such counsel, any New York or United States statute, rule or
regulation or the Delaware General Corporate Law, of any state or Federal
regulatory body or administrative agency or other governmental agency or body,
of any state or Federal government, arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, having such
jurisdiction;
(i) No consent, approval, authorization or order of any state
or Federal court regulatory body or administrative agency or other New York or
Federal governmental agency or body, has been or is required for the Company's
or the Selling Stockholders'performance of this Agreement or the consummation of
the transactions contemplated hereby, except such as have been obtained under
the Act or may be required under state securities or blue sky laws (as to which
no opinion shall be expressed) in connection with the purchase and distribution
by the Underwriters of the Shares or may be required by the National Association
of Securities Dealers, Inc. (as to which no opinion shall be expressed);
(j) Upon delivery of the Shares and payment therefor in
accordance with the terms of the Agreement, the several Underwriters will
acquire all of the rights of the Selling Stockholders to such Shares and will
acquire such Shares free and clear of any "adverse claim"(as such term is used
in Section 8-302 of the Uniform Commercial Code as in effect in the State of New
York), assuming the several Underwriters acquire such Shares in good faith and
without notice of any "adverse claim."
2
<PAGE>
(k) All holders of securities of the Company who, to such
counsel's knowledge, have rights to cause the Company to register shares of
Common Stock or other securities because of the filing of the Registration
Statement by the Company have waived such rights, such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement or such rights have been satisfied in accordance with
their respective terms;
(l) No transfer taxes are required to be paid in connection
with the sale or delivery to the Underwriters of the Shares;
In rendering any such opinion, such counsel may rely, as to
matters of fact, to the extent such counsel deems proper, on certificates of
responsible officers of the Company and public officials and, as to matters
involving the application of laws of any jurisdiction other than the State of
New York, the Delaware General Corporation Law or the United States.
References to the Registration Statement and the Prospectus in
such opinion shall include any amendment or supplement thereto at the date of
such opinion.
In addition, such counsel shall provide a separate letter to
the Representatives of the several Underwriters in the form attached hereto as
Appendix B.
3
<PAGE>
Schedule II
Selling Stockholders
BMG Entertainment
Robert Alexander
David Rosenbaum
Oliver R. Grace, Jr.
Neil S. Hirsch
Larry Muller
Robert Flug
Kelly Sumner
4
<PAGE>
Appendix B
[Insert Date]
ING Baring Furman Selz LLC
Gerard Klauer Mattison & Co., Inc.
Morgan Keegan & Company, Inc.
As representatives of the several
Underwriters named in Schedule I hereto
c/o ING Baring Furman Selz LLC
55 East 52nd Street
New York, New York 10055
Ladies and Gentlemen:
We have acted as counsel for Take-Two Interactive Software,
Inc., a Delaware corporation (the "Company"), in connection with the preparation
and filing with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "Securities Act"), of its
Registration Statement on Form S-1 (Registration No. 333-_______), as amended,
relating to the offering of an aggregate of (i) 3,500,000 shares (the "Company
Shares") of the Company's common stock, par value $.01 per share (the "Common
Stock"), by the Company and (ii) 1,500,000 shares (the "Stockholder Shares") of
Common Stock by the selling stockholders listed in Schedule II (the "Selling
Stockholders") to the several underwriters (the "Underwriters") listed in
Schedule I to the Underwriting Agreement, dated March __, 1999 (the
"Agreement"), between the Company, the Selling Stockholders and you, as
representatives of the several Underwriters (the "Representatives"). The Company
Shares to be sold by the Company and the Stockholder Shares to be sold by the
Selling Stockholders are collectively referred to herein as the "Firm Shares."
The Company also proposed to issue and sell to the several Underwriters an
aggregate of not more than 750,000 additional shares of Common Stock (the
"Additional Shares"), if requested by the Underwriters in accordance with
Section 9 of the Underwriting Agreement. The Firm Shares and the Additional
Shares are collectively referred to herein as the "Shares." The Registration
Statement, as amended when it became effective (including the information deemed
to be a part thereof as of such time pursuant to Rule 430A under the Securities
Act), is herein called the "Registration Statement," and the related prospectus
dated __________, 1999, as filed on __________, 1999 with the Commission
pursuant to Rule 424(b) under the Securities Act, is herein called the
"Prospectus."
We have examined such corporate records, certificates and
other documents as we have considered necessary or appropriate for the purposes
of this letter.
Whenever a statement herein is indicated to be based upon "our
knowledge" or "the best of our knowledge" or contains a similar qualification,
it should be understood that during the course of our representation of the
Company and the Selling Stockholders we have not undertaken any independent
investigation to determine the existence or absence of facts in connection with
the preparation of this letter. The phrase "our knowledge," and similar language
used in certain of the statements below, are limited to the knowledge of the
lawyers within our firm who have given attention to the Company's affairs.
5
<PAGE>
Capitalized terms used but not defined herein shall have the
respective meanings attributed to them in the Agreement.
We have participated in the preparation of the Registration
Statement and Prospectus and have participated in discussions with your
representatives, those of counsel for the Underwriters, and those of the Company
and its accountants. On the basis of the information that we gained in the
course of the performance of the services referred to above, considered in the
light of our understanding of the applicable law and the experience we have
gained through our practice under the Securities Act, we confirm to you that
nothing that came to our attention in the course of such review has caused us to
believe that the Registration Statement or any further amendment thereto made by
the Company prior to the Closing Date contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, or that, as
of its date, the Prospectus or any further amendment or supplement thereto made
by the Company prior to the Closing Date contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading or that, as of the Closing
Date, either the Registration Statement or the Prospectus or any further
amendment or supplement thereto made by the Company prior to the Closing Date
contains an untrue statement of a material fact or omits to state a material
fact necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading.
The Registration Statement and the Prospectus and any further
amendments or supplements thereto made by the Company prior to the Closing Date
(other than financial, statistical or accounting data and related schedules
therein, as to which we make no statement) comply as to form in all material
respects to the requirements of the Securities Act and the applicable Rules and
Regulations promulgated under the Securities Act.
To the best of our knowledge, there is not pending or
threatened against the Company any action, suit, proceeding or investigation
before or by any court, regulatory body or administrative agency, or any other
governmental agency or body, domestic or foreign, of a character required to be
disclosed in the Registration Statement or the Prospectus which is not so
disclosed therein.
The Registration Statement has become effective under the
Securities Act. The foregoing statement is based solely upon verbal advice of
__________ the Securities and Exchange Commission staff on __________, 1999 that
the Commission had declared the Registration Statement effective as of _____
p.m. on __________, 1999. To the best of our knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued by the
Commission nor has any proceeding been instituted or contemplated for that
purpose under the Securities Act. Based solely upon a written confirmation from
the Commission's EDGAR Filing Desk dated __________, 1999, the Prospectus has
been filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations promulgated under the Securities Act within the time period required
thereby.
6
<PAGE>
Notwithstanding the foregoing, the limitations inherent in the
independent verification of factual matters and the character of determinations
involved in the registration process are such, however, that we do not assume
any responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus except for those made
under the captions "Risk Factors--____________," "Business--Legal Matters,"
"Management--Employee Stock and Other Benefit Plans," "Description of Capital
Stock," "Shares Eligible for Future Sale" and "Certain Transactions" in the
Prospectus and statements in response to Items 14 and 15 of Form S-1 under the
Act of the Registration Statement, insofar as such statements constitute a
summary in all material respects of documents referred to therein or matters of
law. Also, we do not express any belief or otherwise make any statement as to
the financial statements, other financial, statistical or accounting data and
related schedules contained in the Registration Statement or the Prospectus.
This letter is furnished by us as counsel for the Company and
the Selling Stockholders to you as Representatives of the several Underwriters
and is solely for the benefit of the several Underwriters and may not be relied
upon by any other person without our express written consent. The statements in
this letter are made as of the date hereof and we disclaim any obligation to
advise you of any changes in facts or circumstances which might affect any
matters or statements set forth herein.
Very truly yours,
TENZER GREENBLATT LLP
7
<PAGE>
Exhibit 5.1
April 8, 1999
Take-Two Interactive Software, Inc.
575 Broadway
New York, New York 10012
Gentlemen:
You have requested our opinion with respect to the public offering and sale
by Take-Two Interactive Software, Inc., a Delaware corporation (the "Company"),
and certain Selling Stockholders pursuant to a Registration Statement (the
"Registration Statement") on Form S-1 (No. 333-74851), under the Securities Act
of 1933, as amended (the "Act"), of up to 5,750,000 shares (the "Shares") of
Common Stock, par value $.01 per share.
We have examined originals, or copies certified or otherwise identified to
our satisfaction, of such documents and corporate and public records as we deem
necessary as a basis for the opinion hereinafter expressed. With respect to such
examination, we have assumed the genuineness of all signatures appearing on all
documents presented to us as originals, and the conformity to the originals of
all documents presented to us as conformed or reproduced copies. Where factual
matters relevant to such opinion were not independently established, we have
relied upon certificates of appropriate state and local officials, and upon
certificates of executive officers and responsible employees and agents of the
Company.
Based upon the foregoing, it is our opinion that the Shares have been duly
and validly authorized and when sold, paid for and issued as contemplated by the
Registration Statement will be duly and validly issued and fully paid and
nonassessable.
We hereby consent to the use of this opinion as Exhibit 5 to the
Registration Statement, and to the use of our name as counsel in connection with
the Registration Statement and in the Prospectus forming a part thereof. In
giving this consent, we do not thereby concede that we come within the
categories of persons whose consent is required by the Act or the General Rules
and Regulations promulgated thereunder.
Very truly yours,
/s/ Tenzer Greenblatt LLP
----------------------
TENZER GREENBLATT LLP
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated as of August 1, 1998 between TAKE-TWO
INTERACTIVE SOFTWARE, INC., a Delaware corporation (the "Employer" or the
"Company"), and Ryan A. Brant (the "Employee").
W I T N E S S E T H :
WHEREAS, the Employer and Employee are parties to an
Employment Agreement dated as of November 1, 1996 (the "Original Agreement");
WHEREAS, the Employer desires to continue to employ the
Employee as its Chief Executive Officer and to be assured of his services as
such on the terms and conditions hereinafter set forth; and
WHEREAS, the Employee is willing to accept such
employment on such terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby, the
Employer and the Employee hereby agree as follows:
I. Term. Employer and Employee agree to terminate the Original
Agreement. Employer hereby agrees to employ Employee, and Employee hereby agrees
to serve Employer for a five-year period commencing effective as of the date of
this Agreement (the "Effective Date") (such period being herein referred to as
the "Initial Term," and any year commencing on the Effective Date or any
anniversary of the Effective Date being hereinafter referred to as an
"Employment Year"). After the Initial Term and on the last day of any Employment
Year thereafter, this Agreement shall be automatically renewed for successive
one year periods (each such period being referred to as a "Renewal Term"),
unless, more than ninety (90) days prior to the expiration of the Initial Term
or any Renewal Term, either the Executive or the Company gives written notice
that employment will not be renewed ("Notice of Non-Renewal"), whereupon (i) if
the Executive gives the Notice of Non-Renewal, the term of the Executive's
employment shall terminate upon the expiration of the Initial Term or the then
current Renewal Term, as the case may be, or (ii) if the Company gives the
Notice of Non-Renewal or terminates this Agreement without Cause, the term of
the Executive's employment shall be for a final five (5) year period (the "Final
Renewal Term"), commencing effective at the date of the Notice of Non-Renewal,
unless sooner terminated pursuant to Section VI hereof.
<PAGE>
II. Employee Duties.
A. During the term of this Agreement, the
Employee shall have the duties and responsibilities of Chief Executive Officer,
reporting directly to the Board of Directors of the Employer (the "Board"). It
is understood that such duties and responsibilities shall be reasonably related
to the Employee's position.
B. The Employee shall devote substantially all
of his business time, attention, knowledge and skills faithfully, diligently and
to the best of his ability, in furtherance of the business and activities of the
Company. The principal place of performance by the Employee of his duties
hereunder shall be the Company's principal executive offices.
III. Compensation.
A. During the term of this Agreement, the
Employer shall pay the Employee a salary (the "Salary") at a rate of $233,000
per annum in respect of each Employment Year, payable in equal installments
bi-weekly, or at such other times as may mutually be agreed upon between the
Employer and the Employee. The Salary shall be increased by 7.5% each year,
commencing April 30, 1999, provided that the Company's net income per share for
the one-year period then ended exceeds the Company's net income per share for
the prior one-year period. Such Salary may be increased from time to time at the
discretion of the Board.
B. The Employee shall be paid a bonus equal to
$20,000 for each fiscal quarter, commencing with the fiscal quarter ending
October 31, 1998; provided that the Company's net income per share in any such
quarter exceeds the Company's net income per share in the comparable quarter for
the prior year. The Employee shall also receive a bonus in the amount of $94,000
on May 1, 1999, provided that the Employee is still employed by the Company on
such date. In addition, in partial consideration of the bonus which would have
been payable to Employee under the terms of the Original Agreement, Employer
shall forgive $84,659 of indebtedness owed to Employer and pay, on behalf of
Employee, simultaneously with the execution of this Agreement, $175,000,
representing the exercise price on a pre-tax basis of options to purchase
100,000 shares of Common Stock held by Employee.
C. The Employee shall be entitled to receive
options to purchase 100,000 shares of the Company's Common Stock at an exercise
price of $5.875 per share. In addition, the Employee shall be entitled to
receive options to purchase 175,000 shares of the Company's Common Stock each
year, commencing July 31, 1999, at the then-current market price, provided that
the Company's net income per share for the one-year period then ended exceeds
the Company's net income per share for the prior one-year period.
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D. The Employee shall be entitled to an
automobile allowance of $1,800 per month.
E. In addition to the foregoing, the Employee
shall be entitled to such other cash bonuses and such other compensation in the
form of stock, stock options or other property or rights as may from time to
time be awarded to him by the Board during or in respect of his employment
hereunder.
IV. Benefits.
A. During the term of this Agreement, the
Employee shall have the right to receive or participate in all existing and
future benefits and plans which the Company may from time to time institute
during such period for its executive officers (the "Executive Officers") and for
which the Employee is eligible. Nothing paid to the Employee under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary or any other obligation payable to the Employee
pursuant to this Agreement.
B. During the term of this Agreement, the
Employee will be entitled to the number of paid holidays, personal days off,
paid vacation days and sick leave days in each calendar year as are determined
by the Company from time to time. Such paid vacation may be taken in the
Employee's discretion with the prior approval of the Employer, and at such time
or times as are not inconsistent with the reasonable business needs of the
Company.
V. Travel Expenses. All travel and other expenses incident to
the rendering of services reasonably incurred on behalf of the Company by the
Employee during the term of this Agreement shall be paid by the Employer
provided that such expenses are incurred in accordance with the Company's
policies. If any such expenses are paid in the first instance by the Employee,
the Employer shall reimburse him therefor on presentation of appropriate
receipts for any such expenses.
VI. Termination.
A. Disability. Employer may terminate this
Agreement for Disability. "Disability" shall exist if because of ill health,
physical or mental disability, or any other reason beyond his control, and
notwithstanding reasonable accommodations made by Employer, the Employee shall
have been unable, unwilling or shall have failed to perform his duties under
this Agreement, as determined in good faith by the Board for a period of 180
consecutive days, or if, in any 12-month period, the Employee shall have been
unable or unwilling or shall have failed to
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perform his duties for a period of 270 or more business days, irrespective of
whether or not such days are consecutive.
B. Cause. Employer may terminate the Employee's
employment for Cause. Termination for "Cause" shall mean termination because of
the Employee's (i) gross negligence on the part of the Employee, (ii) the
engaging by Employee in criminal misconduct that causes material economic harm
to Employer, (iii) a nonappealable conviction of the Employee of a felony, or
(iv) material breach of any provision of this Agreement. Items (i), (ii) and
(iv) of this subsection shall not constitute Cause unless Employer notifies the
Employee thereof in writing, specifying in reasonable detail the basis therefor
and stating that it is grounds for Cause. Furthermore, if Employee's actions are
curable, items (i), (ii) and (iv) of this subsection shall not constitute Cause
unless the Employee fails to cure such matter within 60 days after such notice
is sent or given under this Agreement. The Employee shall be permitted to
respond and to defend himself before the Board or any appropriate committee
thereof within a reasonable time after written notification of any proposed
termination for Cause under items (i), (ii) or (iv) of this subsection.
C. Without Cause. During the Term, Employer may
terminate the Employee's employment Without Cause, subject to the provisions of
subsection VII D (Termination Without Cause or for Company Breach). Termination
"Without Cause" shall mean termination of the Employee's employment by Employer
other than termination for Cause or for Disability.
D. Company Breach. The Employee may terminate
his employment hereunder for Company Breach. For purposes of this Agreement a
"Company Breach" shall be deemed to occur in the event of a material breach of
this Agreement by Employer, including without limitation any material reduction
in the authority, duties and responsibilities that the Employee has on the
Effective Date of this Agreement; provided, however, that the foregoing shall
not constitute a Company Breach unless the Employee notifies Employer thereof in
writing, specifying in reasonable detail the basis therefor and stating that it
is grounds for Company Breach, and unless Employer fails to cure such Company
Breach within 60 days after such notice is sent or given under this Agreement.
E. Change in Control. The Employee may
terminate his employment hereunder within 12 months of a Change in Control
(defined below):
(i) "Change in Control" shall mean any of
the following:
1. any consolidation or merger of
Employer in which Employer is not the
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continuing or surviving corporation or
pursuant to which shares of Employer's
common stock would be converted into cash,
securities or other property, other than a
merger of Employer in which the holders of
Employer common stock immediately prior to
the merger have the same proportionate
ownership of common stock of the surviving
corporation immediately after the merger;
2. any sale, lease, exchange or
other transfer (in one transaction or a
series of related transactions) of all or
substantially all of the assets of Employer;
3. any approval by the stockholders
of Employer of any plan or proposal for the
liquidation or dissolution of Employer;
4. the cessation of control (by
virtue of their not constituting a majority
of directors) of the Board by the
individuals (the "Continuing Directors") who
(x) at the date of this Agreement were
directors or (y) become directors after the
date of this Agreement and whose election or
nomination for election by Employer's
stockholders, was approved by a vote of at
least two-thirds of the directors then in
office who were directors at the date of
this Agreement or whose election or
nomination for election was previously so
approved); or
5. (A) the acquisition of beneficial
ownership ("Beneficial Ownership"), within
the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended
(the "Exchange Act"), of an aggregate of 20%
or more of the voting power of Employer's
outstanding voting securities by any person
or group (as such term is used in Rule 13d-5
under the Exchange Act) who Beneficially
Owned less than 10% of the voting power of
Employer's outstanding voting securities on
the Effective Date of this Agreement, (B)
the acquisition of Beneficial Ownership of
an additional 5% of the voting power of
Employer's outstanding voting securities by
any person or group who Beneficially Owned
at least 10% of the voting power of
Employer's outstanding voting securities on
the Effective Date of this Agreement, or (C)
the execution by Employer and a stockholder
of a
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contract that by its terms grants such
stockholder (in its, hers or his capacity as
a stockholder) or such stockholder's
Affiliate (as defined in Rule 405
promulgated under the Securities Act of 1933
(an "Affiliate")) including, without
limitation, such stockholder's nominee to
the Board (in its, hers or his capacity as
an Affiliate of such stockholder), the right
to veto or block decisions or actions of the
Board; provided, however, that
notwithstanding the foregoing, the events
described in items (A), (B) or (C) above
shall not constitute a Change in Control
hereunder if the acquiror is (aa) Ryan A.
Brant or his Affiliates, (bb) a trustee or
other fiduciary holding securities under an
employee benefit plan of Employer, or one of
its affiliated entities and acting in such
capacity, (cc) a corporation owned, directly
or indirectly, by the stockholders of
Employer in substantially the same
proportions as their ownership of voting
securities of Employer of or (dd) a person
or group meeting the requirements of clauses
(i) and (ii) of Rule 13d-1(b)(1) under the
Exchange Act of or (ee) in the case of an
acquisition described in items (A) or (B)
above (but not in the case of an acquisition
described in item (C) above), any other
person whose acquisition of shares of voting
securities is approved in advance by a
majority of the Continuing Directors;
provided further, however, that none of the
following shall constitute a Change in
Control: (aa) the right of the holders of
any voting securities of Employer to vote as
a class on any matter or (bb) any vote
required of disinterested or unaffiliated
directors or stockholders including, without
limitation, pursuant to Section 144 of the
Delaware General Corporation Law or Rule
16b-3 promulgated pursuant to the Exchange
Act.
6. subject to applicable law, in a
Chapter 11 bankruptcy proceeding, the
appointment of a trustee or the conversion
of a case involving Employer to a case under
Chapter 7.
F. Without Good Reason. During the Term, the
Employee may terminate his employment Without Good Reason.
Termination "Without Good Reason" shall mean termination of the
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Employee's employment by the Employee other than termination for Company Breach.
G. Explanation of Termination of Employment.
Any party terminating this Agreement shall give prompt written notice ("Notice
of Termination") to the other party hereto advising such other party of the
termination of this Agreement. Within thirty (30) days after notification that
the Agreement has been terminated, the terminating party shall deliver to the
other party hereto a written explanation (the "Explanation of Termination of
Employment"), which shall state in reasonable detail the basis for such
termination and shall indicate whether termination is being made for Cause,
Without Cause or for Disability (if Employer has terminated the Agreement) or
for Company Breach, upon a Change in Control or Without Good Reason (if the
Employee has terminated the Agreement).
H. Date of Termination. "Date of Termination
shall mean the date on which Notice of Termination is sent or given under this
Agreement.
VII. Compensation During Disability or Upon Termination.
A. During Disability. During any period that
the Employee fails to perform his duties hereunder because of ill health,
physical or mental disability, or any other reason beyond his control, he shall
continue to receive his full Salary and benefits pursuant to Sections III and IV
(Compensation and Benefits) until the Date of Termination.
B. Termination for Disability. If Employer
shall terminate the Employee's employment for Disability, the Employee shall be
paid, in equal monthly installments, 100% of his Salary, at the rate in effect
at the time Notice of Termination is given, for one year, and thereafter for one
additional year at an annual rate equal to 50% of the Salary which would have
been in effect under this Agreement, plus, in each case, any disability payments
otherwise payable by or pursuant to plans provided by the Employer to its
Executive Officers. To the extent physically and mentally capable of so doing
without potentially impairing or damaging his health, the Employee shall provide
consulting services to the Employer during the period that he is receiving
payments pursuant to this Section VII(B).
C. Termination for Cause or Without Good
Reason. If Employer shall terminate the Employee's employment for Cause or if
the Employee shall terminate his employment Without Good Reason, then Employer's
obligation to pay Salary and benefits pursuant to Sections III and IV
(Compensation and Benefits) shall terminate, except that Employer shall pay the
Employee his accrued but unpaid Salary and benefits pursuant to
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Sections III and IV (Compensation and Benefits) through the Date of Termination.
D. Termination Without Cause or for Company
Breach. If Employer shall terminate the Employee's employment Without Cause or
if the Employee shall terminate his employment for Company Breach, then Employer
shall pay to the Employee, as severance pay in a lump sum on the 15th day
following the Date of Termination, the following amounts:
(i) his then-unpaid Salary through the Date
of Termination at the rate in effect as of the
Date of Termination; and
(ii) in lieu of any further Salary for
periods subsequent to the Date of Termination, an
amount equal to the product of (A) the sum of the
Employee's Salary at the rate in effect as of the
Date of Termination, plus the average bonus paid to
the Employee during the preceding two fiscal quarters
(or such shorter period for which any bonus has been
paid), divided by 365, and multiplied by (B) the
number of days from the Date of Termination to July
31, 2003.
If the Employee terminates his employment for Company Breach
based upon a material reduction by Employer of the Employee's Salary, then for
purposes of this subsection VII (D) (Termination Without Cause or for Company
Breach), the Employee's Salary as of the Date of Termination shall be deemed to
be the Employee's Salary immediately prior to the reduction that the Employee
claims as grounds for Company Breach.
E. Termination Upon a Change in Control. If
the Employee terminates his employment after a Change in Control pursuant to
subsection VI (E) (Change in Control), then Employer shall pay to the Employee
as severance pay and as liquidated damages (because actual damages are difficult
to ascertain), in a lump sum, in cash, within 15 days after termination, an
amount equal to 2.99 times the Employee's "annualized includable compensation
for the base period" (as defined in Section 280G of the Internal Revenue Code of
1986); provided, however, that if such lump sum severance payment, either alone
or together with other payments or benefits, either cash or non-cash, that the
Employee has the right to receive from Employer, including, but not limited to,
accelerated vesting or payment of any deferred compensation, options, stock
appreciation rights or any benefits payable to the Employee under any plan for
the benefit of employees, would constitute an "excess parachute payment" (as
defined in Section 280G of the Internal Revenue Code of 1986), then such lump
sum severance payment or other benefit shall be reduced to the largest amount
that will not result in receipt by the Employee of a parachute payment. The
determination of the
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amount of the payment described in this subsection shall be made by Employer's
independent auditors.
F. Employee Benefits. Unless Employer
terminates the Employee's employment for Cause or the Employee terminates his
employment Without Good Reason, Employer shall maintain in full force and effect
(to the extent consistent with past practice), for the continued benefit of the
Employee and, if applicable, his wife and children, the employee benefits set
forth in section IV (Benefits) above that he was entitled to receive immediately
prior to the Date of Termination (subject to the general terms and conditions of
the plans and programs under which he receives such benefits) for the balance of
the Term or for the period provided for under the terms and conditions of such
plans and programs, whichever is longer, provided that his continued
participation or, if applicable, the participation of his wife and children, is
possible under the general terms and conditions of such plans and programs.
G. No Mitigation. The Employee shall not be
required to mitigate the amount of any payment provided for in this Section VII
(Compensation During Disability or Upon Termination) by seeking other employment
or otherwise.
VIII. Death of Employee. If the Employee dies prior to the
expiration of this Agreement, the Employer shall pay to such person as he shall
designate in writing filed with the Employer, or if no such person shall be
designated, to his estate as a lump sum benefit, his full Salary to the date of
his death in addition to any payments to the Employee's spouse, beneficiaries or
estate may be entitled to receive pursuant to any pension or employee benefit
plan or life insurance policy or similar plan or policy then maintained by the
Employer, and such payments shall, assuming the Employer is in compliance with
the provisions of this Agreement, fully discharge the Employer's obligations
with respect to this Section VIII of this Agreement, but all other obligations
of the Employer under this Agreement, including the obligations to indemnify,
defend and hold harmless the Employee, shall remain in effect.
IX. Confidentiality; Noncompetition.
A. The Employer and the Employee acknowledge
that the services to be performed by the Employee under this Agreement are
unique and extraordinary and, as a result of such employment, the Employee will
be in possession of confidential information relating to the business practices
of the Company. The term "confidential information" shall mean any and all
information (verbal and written) relating to the Company or any of its
affiliates, or any of their respective activities, other than such information
which can be shown by the Employee to be in the public domain (such information
not being deemed to be in the
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public domain merely because it is embraced by more general information which is
in the public domain) other than as the result of breach of the provisions of
this Section IX(a), including, but not limited to, information relating to:
trade secrets, personnel lists, financial information, research projects,
services used, pricing, customers, customer lists and prospects, product
sourcing, marketing and selling and servicing. The Employee agrees that he will
not, during or for a period of one year after the termination of employment,
directly or indirectly, use, communicate, disclose or disseminate to any person,
firm or corporation any confidential information regarding the clients,
customers or business practices of the Company acquired by the Employee during
his employment by Employer, without the prior written consent of Employer;
provided, however, that the Employee understands that Employee will be
prohibited from misappropriating any trade secret at any time during or after
the termination of employment.
B. The Employee hereby agrees that he shall not,
during the period of his employment and for a period of one (1) year following
such employment, directly or indirectly, within any county (or adjacent county)
in any State within the United States or territory outside the United States in
which the Company is engaged in business during the period of the Employee's
employment or on the date of termination of the Employee's employment, engage,
have an interest in or render any services to any business (whether as owner,
manager, operator, licensor, licensee, lender, partner, stockholder, joint
venturer, employee, consultant or otherwise) competitive with the Company's
principal business activities. Notwithstanding the foregoing, Employee shall be
permitted to own (as a passive investment) not more than 5% of any class of
securities which is publicly traded; provided, however that said 5% limitation
shall apply to the aggregate holdings or Employee and those of all other persons
and entities with whom Employee has agreed to act for the purpose of acquiring,
holding, voting or disposing of such securities.
C. The Employee hereby agrees that he shall not,
during the period of his employment and for a period of one (1) year following
such employment, directly or indirectly, take any action which constitutes an
interference with or a disruption of any of the Company's business activities
including, without limitation, the solicitations of the Company's customers, or
persons listed on the personnel lists of the Company. At no time during the term
of this Agreement, or thereafter shall the Employee directly or indirectly,
disparage the commercial, business or financial reputation of the Company.
D. For purposes of clarification, but not of
limitation, the Employee hereby acknowledges and agrees that the provisions of
subparagraphs IX(B) and (C) above shall serve as a prohibition against him,
during the period referred to therein, directly or indirectly, hiring, offering
to hire, enticing,
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soliciting or in any other manner persuading or attempting to persuade any
officer, employee, agent, lessor, lessee, licensor, licensee or customer who has
been previously contacted by either a representative of the Company, including
the Employee, (but only those suppliers existing during the time of the
Employee's employment by the Company, or at the termination of his employment),
to discontinue or alter his, her or its relationship with the Company.
E. Upon the termination of the Employee's
employment for any reason whatsoever, all documents, records, notebooks,
equipment, price lists, specifications, programs, customer and prospective
customer lists and other materials which refer or relate to any aspect of the
business of the Company which are in the possession of the Employee including
all copies thereof, shall be promptly returned to the Company.
F. 1. The Employee agrees that all processes,
technologies and inventions ("Inventions"), including new contributions,
improvements, ideas and discoveries, whether patentable or not, conceived,
developed, invented or made by him during his employment by Employer shall
belong to the Company, provided that such Inventions grew out of the Employee's
work with the Company are related in any manner to the business (commercial or
experimental) of the Company or are conceived or made on the Company's time or
with the use of the Company's facilities or materials. The Employee shall
further: (a) promptly disclose such Inventions to the Company; (b) assign to the
Company, without additional compensation, all patent and other rights to such
Inventions for the United States and foreign countries; (c) sign all papers
necessary to carry out the foregoing; and (d) give testimony in support of his
inventorship;
2. If any Invention is described in a
patent application or is disclosed to third parties, directly or indirectly, by
the Employee within two years after the termination of his employment by the
Company, it is to be presumed that the Invention was conceived or made during
the period of the Employee's employment by the Company; and
3. The Employee agrees that he will not
assert any rights to any Invention as having been made or acquired by him prior
to the date of this Agreement, except for Inventions, if any, disclosed to the
Company in writing prior to the date hereof.
G. The Company shall be the sole owner of all
products and proceeds of the Employee's services hereunder, including, but not
limited to, all materials, ideas, concepts, formats, suggestions, developments,
arrangements, packages, programs and other intellectual properties that the
Employee may acquire, obtain, develop or create in connection with and during
the term of the Employee's employment hereunder, free and clear
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of any claims by the Employee (or anyone claiming under the Employee) of any
kind or character whatsoever (other than the Employee's right to receive
payments hereunder). The Employee shall, at the request of the Company, execute
such assignments, certificates or other instruments as the Company may from time
to time deem necessary or desirable to evidence, establish, maintain, perfect,
protect, enforce or defend its right, or title and interest in or to any such
properties.
H. The parties hereto hereby acknowledge and
agree that (i) the Company would be irreparably injured in the event of a breach
by the Employee of any of his obligations under this Section IX, (ii) monetary
damages would not be an adequate remedy for any such breach, and (iii) the
Company shall be entitled to injunctive relief, in addition to any other remedy
which it may have, in the event of any such breach.
I. The parties hereto hereby acknowledge that,
in addition to any other remedies the Company may have under Section IX(H)
hereof, the Company shall have the right and remedy to require the Employee to
account for and pay over to the Company all compensation, profits, monies,
accruals, increments or other benefits (collectively, "Benefits") derived or
received by the Employee as the result of any transactions constituting a breach
of any of the provisions of Section 10, and the Employee hereby agrees to
account for any pay over such Benefits to the Company.
J. Each of the rights and remedies enumerated in
Section IX(H) and IX(I) shall be independent of the other, and shall be
severally enforceable, and all of such rights and remedies shall be in addition
to, and not in lieu of, any other rights and remedies available to the Company
under law or in equity.
K. If any provision contained in this Section 10
is hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portions.
L. If any provision contained in this Section 10
is found to be unenforceable by reason of the extent, duration or scope thereof,
or otherwise, then the court making such determination shall have the right to
reduce such extent, duration, scope or other provision and in its reduced form
any such restriction shall thereafter be enforceable as contemplated hereby.
M. It is the intent of the parties hereto that
the covenants contained in this Section IX shall be enforced to the fullest
extent permissible under the laws and public policies of each jurisdiction in
which enforcement is sought (the Employee
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hereby acknowledging that said restrictions are reasonably necessary for the
protection of the Company). Accordingly, it is hereby agreed that if any of the
provisions of this Section IX shall be adjudicated to be invalid or
unenforceable for any reason whatsoever, said provision shall be (only with
respect to the operation thereof in the particular jurisdiction in which such
adjudication is made) construed by limiting and reducing it so as to be
enforceable to the extent permissible, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of said
provision in any other jurisdiction.
X. Indemnification. The Employer shall indemnify and hold
harmless the Employee against any and all expenses reasonably incurred by him in
connection with or arising out of (a) the defense of any action, suit or
proceeding in which he is a party, or (b) any claim asserted or threatened
against him, in either case by reason of or relating to his being or having been
an employee, officer or director of the Company, whether or not he continues to
be such an employee, officer or director at the time of incurring such expenses,
except insofar as such indemnification is prohibited by law. Such expenses shall
include, without limitation, the fees and disbursements of attorneys, amounts of
judgments and amounts of any settlements, provided that such expenses are agreed
to in advance by the Employer. The foregoing indemnification obligation is
independent of any similar obligation provided in the Employer's Certificate of
Incorporation or Bylaws, and shall apply with respect to any matters
attributable to periods prior to the Effective Date, and to matters attributable
to his employment hereunder, without regard to when asserted.
XI. General. This Agreement is further governed by the
following provisions:
A. Notices. All notices relating to this
Agreement shall be in writing and shall be either personally delivered, sent by
telecopy (receipt confirmed) or mailed by certified mail, return receipt
requested, to be delivered at such address as is indicated below, or at such
other address or to the attention of such other person as the recipient has
specified by prior written notice to the sending party. Notice shall be
effective when so personally delivered, one business day after being sent by
telecopy or five days after being mailed.
To the Employer:
Take-Two Interactive Software, Inc.
575 Broadway
New York, New York 10012
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To the Employee:
Ryan A. Brant
With, in either case, a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
B. Parties in Interest. Employee may not
delegate his duties or assign his rights hereunder. This Agreement shall inure
to the benefit of, and be binding upon, the parties hereto and their respective
heirs, legal representatives, successors and permitted assigns.
C. Entire Agreement. This Agreement supersedes
any and all other agreements, either oral or in writing, between the parties
hereto with respect to the employment of the Employee by the Employer and
contains all of the covenants and agreements between the parties with respect to
such employment in any manner whatsoever. Any modification or termination of
this Agreement will be effective only if it is in writing signed by the party to
be charged.
D. Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the
State of New York.
E. Warranty. Employee hereby warrants and
represents as follows:
1. That the execution of this Agreement
and the discharge of Employee's obligations hereunder will not breach or
conflict with any other contract, agreement, or understanding between Employee
and any other party or parties.
2. Employee has ideas, information and
know-how relating to the type of business conducted by Employer, and Employee's
disclosure of such ideas, information and know-how to Employer will not conflict
with or violate the rights of any third party or parties.
F. Severability. In the event that any term or
condition in this Agreement shall for any reason be held by a court of competent
jurisdiction to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
condition of this Agreement, but this Agreement shall be construed as if such
invalid or illegal or unenforceable term or condition had never been contained
herein.
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G. Execution in Counterparts. This Agreement
may be executed by the parties in one or more counterparts, each of which shall
be deemed to be an original but all of which taken together shall constitute one
and the same agreement, and shall become effective when one or more counterparts
has been signed by each of the parties hereto and delivered to each of the other
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By:
--------------------------------
Name:
Title:
/s/ Ryan A. Brant
-----------------------------------
Ryan A. Brant
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EMPLOYMENT AGREEMENT
AGREEMENT dated as of August 1, 1998 between Take-Two
Interactive Software, Inc., a Delaware corporation (the "Employer" or the
"Company"), and Anthony R. Williams (the "Employee").
W I T N E S S E T H :
WHEREAS, the Employer desires to employ the Employee as its
Chief Operating Officer and to be assured of his services as such on the terms
and conditions hereinafter set forth; and
WHEREAS, the Employee is willing to accept such
employment on such terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby, the
Employer and the Employee hereby agree as follows:
1. Term. Employer hereby agrees to employ Employee, and
Employee hereby agrees to serve Employer for a three-year period commencing
effective as of the date first written above (the "Effective Date") (such period
being herein referred to as the "Initial Term," and any year commencing on the
Effective Date or any anniversary of the Effective Date being hereinafter
referred to as an "Employment Year"). After the Initial Term, this Agreement
shall be renewable automatically for successive one year periods (each such
period being referred to as a "Renewal Term"), unless, more than ninety days
prior to the expiration of the Initial Term or any Renewal Term, either the
Employee or the Company give written notice that employment will not be renewed.
2. Employee Duties.
(a) During the term of this Agreement, the
Employee shall have the duties and responsibilities of Chief Operating Officer
of the Employer, reporting directly to the Chief Executive Officer of Employer
and the Board of Directors of the Employer (the "Board"). It is understood that
such duties and responsibilities shall be reasonably related to the Employee's
position.
(b) The Employee shall devote substantially all
of his business time, attention, knowledge and skills faithfully, diligently and
to the best of his ability, in furtherance of the business and activities of the
Company. The principal place of performance by the Employee of his duties
hereunder shall be the Company's principal executive offices although the
Employee may
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be required to travel outside of the area where the Company's principal
executive offices are located in connection with the business of the Company.
3. Compensation.
(a) During the term of this Agreement, the
Employer shall pay the Employee a salary (the "Salary") at a rate of $233,000
per annum in respect of each Employment Year, payable in equal installments
bi-weekly, or at such other times as may mutually be agreed upon between the
Employer and the Employee. Such Salary shall be subject to an annual review by
the Board may be increased from time to time at the discretion of the Board.
(b) The Employee shall be paid a bonus equal to
$25,000 in respect of the fiscal year ending October 31, 1998 and a bonus equal
to $10,000 per quarter thereafter; provided that the net income per share in any
such quarter exceeds the Company's net income per share in the comparable
quarter for the prior year. Subject to the discretion of the Board, the Employee
shall also be paid a bonus equal to $20,000 for the fiscal year ended
October 31, 1999.
(c) The Employee shall be entitled to receive
non-qualified options to purchase 30,000 shares of Common Stock at an exercise
price of $2.50 per share and incentive options to purchase 120,000 shares of
Common Stock at an exercise price of $5.0625 per share (vesting as to one-half
of the shares covered thereby on March 1, 1999 and 2000).
(d) The Employee shall be entitled to receive a
car allowance in the amount of $500 per month.
(e) In addition to the foregoing, the Employee
shall be entitled to such other cash bonuses and such other compensation in the
form of stock, stock options or other property or rights as may from time to
time be awarded to him by the Board during or in respect of his employment
hereunder.
4. Benefits.
(a) During the term of this Agreement, the
Employee shall have the right to receive or participate in all benefits and
plans which the Company may from time to time institute during such period for
its employees and for which the Employee is eligible, and shall automatically
receive or participate in all benefits and plans that the Company's Chief
Executive Officer receives or participates in. Nothing paid to the Employee
under any plan or arrangement presently in effect or made available in the
future shall be deemed to be in lieu of the salary or any other obligation
payable to the Employee pursuant to this Agreement.
(b) During the term of this Agreement, the
Employee will be entitled to the number of paid holidays, personal days off,
vacation days and sick leave days in each calendar year as are determined by the
Company from time to time, not to be less than five weeks in the aggregate. Such
vacation
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<PAGE>
may be taken in the Employee's discretion with the prior approval of the
Employer, and at such time or times as are not inconsistent with the reasonable
business needs of the Company.
5. Travel Expenses. All travel and other expenses incident to
the rendering of services reasonably incurred on behalf of the Company by the
Employee during the term of this Agreement shall be paid by the Employer
provided that such expenses are preapproved by the Chief Executive Officer of
the Company. If any such expenses are paid in the first instance by the
Employee, the Employer shall reimburse him therefor on presentation of
appropriate receipts for any such expenses.
6. Termination. Notwithstanding the provisions of
Section 1 hereof, the Employee's employment with the Employer may
be earlier terminated as follows:
(a) By action taken by the Board, the Employee
may be discharged for cause (as hereinafter defined), effective as of such time
as the Board shall determine. Upon discharge of the Employee pursuant to this
Section 6(a), the Employer shall have no further obligation or duties to the
Employee, except for payment of Salary through the effective date of
termination, and the Employee shall have no further obligations or duties to the
Employer, except as provided in Section 7.
(b) In the event of (i) the death of the Employee
or (ii) by action of the Board and the inability of the Employee, by reason of
physical or mental disability, to continue substantially to perform his duties
hereunder for a period of 180 consecutive days, during which 180 day period
Salary and any other benefits hereunder shall not be suspended or diminished.
Upon any termination of the Employee's employment under this Section 6(b), the
Employer shall have no further obligations or duties to the Employee. Employer
may obtain disability insurance naming Employee as an insured, which Employee
shall pay for.
(c) In the event that Employee's employment with
the Employer is terminated by action taken by the Board without cause, then the
Employer shall have no further obligation or duties to Employee, except for
payment of the amounts described below, and Employee shall have no further
obligations or duties to the Employer, except as provided in Section 7. In the
event of such termination, the Employer shall continue to pay Salary to the
Employee for the remainder of the Initial Term, or the remainder of the current
Renewal Term if this Agreement has been renewed; provided, however, that if such
termination occurs during the third year of the Initial Term or the final year
of any Renewal Term, the Employer shall also pay to the Employee an amount equal
to the total Salary and bonus received by the Employee during the 12 months
prior to the date of termination. In the event that this Agreement is not
renewed, the Company may either waive the provisions of Section 7(b) or pay the
Salary to the Employee during the term of the non-compete provision of
Section 7(b).
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<PAGE>
(d) For purposes of this Agreement, the Company
shall have "cause" to terminate the Employee's employment under this Agreement
upon (i) the failure by the Employee to substantially perform his duties under
this Agreement, (ii) the engaging by the Employee in criminal misconduct
(including embezzlement and criminal fraud) which is materially injurious to the
Company, monetarily or otherwise, (iii) the conviction of the Employee of a
felony or (iv) gross negligence on the part of the Employee. The Company shall
give written notice to the Employee, which notice shall specify the grounds for
the proposed termination and the Employee shall be given thirty (30) days to
cure if the grounds arise under clauses (i) or (v) above.
(e) In the event that Employee's employment
with the Employer is terminated upon a Change in Control (as hereinafter
defined), then the Employer shall have no further obligation or duties to
Employee, except for payment of the amounts described below, and Employee shall
have no further obligations or duties to the Employer, except as provided in
Section 7. In the event of such termination, the Employer shall pay the Employee
an amount equal to 1.5 times the total Salary and bonus received by the Employee
during the 12 months prior to the date of termination. All amounts payable to
the Employee pursuant to this Section 6(e) shall be paid in one lump-sum payment
payable immediately upon such termination, and all options granted to Employee
shall vest.
(f) For purposes of this Agreement a "Change in
Control" shall be deemed to occur upon the election of directors constituting a
change in a majority of the Board.
7. Confidentiality; Noncompetition.
(a) The Employer and the Employee acknowledge that the
services to be performed by the Employee under this Agreement are unique and
extraordinary and, as a result of such employment, the Employee will be in
possession of confidential information relating to the business practices of the
Company. The term "confidential information" shall mean any and all information
(verbal and written) relating to the Company or any of its affiliates, or any of
their respective activities, other than such information which can be shown by
the Employee to be in the public domain (such information not being deemed to be
in the public domain merely because it is embraced by more general information
which is in the public domain) other than as the result of breach of the
provisions of this Section 7(a), including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, marketing and selling and servicing. The Employee agrees that
he will not, during or for a period of two years after the termination of
employment, directly or indirectly, use, communicate, disclose or disseminate to
any person, firm or corporation any confidential information regarding the
clients, customers or business practices of the Company acquired by the Employee
during his employment by Employer, without the prior written consent of
Employer; provided, however, that the Employee understands that Employee
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<PAGE>
will be prohibited from misappropriating any trade secret at any time during or
after the termination of employment.
(b) The Employee hereby agrees that he shall not, during the
period of his employment and for a period of one (1) years following such
employment, directly or indirectly, within any county (or adjacent county) in
any State within the United States or territory outside the United States in
which the Company is engaged in business during the period of the Employee's
employment or on the date of termination of the Employee's employment, engage,
have an interest in or render any services to any business (whether as owner,
manager, operator, licensor, licensee, lender, partner, stockholder, joint
venturer, employee, consultant or otherwise) competitive with the Company's
business activities.
(c) The Employee hereby agrees that he shall not, during the
period of his employment and for a period of one (1) years following such
employment, directly or indirectly, take any action which constitutes an
interference with or a disruption of any of the Company's business activities
including, without limitation, the solicitations of the Company's customers, or
persons listed on the personnel lists of the Company. At no time during the term
of this Agreement, or thereafter shall the Employee directly or indirectly,
disparage the commercial, business or financial reputation of the Company.
(d) For purposes of clarification, but not of limitation, the
Employee hereby acknowledges and agrees that the provisions of subparagraphs
7(b) and (c) above shall serve as a prohibition against him, during the period
referred to therein, directly or indirectly, hiring, offering to hire, enticing,
soliciting or in any other manner persuading or attempting to persuade any
officer, employee, agent, lessor, lessee, licensor, licensee or customer who has
been previously contacted by either a representative of the Company, including
the Employee, (but only those suppliers existing during the time of the
Employee's employment by the Company, or at the termination of his employment),
to discontinue or alter his, her or its relationship with the Company.
(e) Upon the termination of the Employee's employment for any
reason whatsoever, all documents, records, notebooks, equipment, price lists,
specifications, programs, customer and prospective customer lists and other
materials which refer or relate to any aspect of the business of the Company
which are in the possession of the Employee including all copies thereof, shall
be promptly returned to the Company.
(f) (i) The Employee agrees that all processes,
technologies and inventions ("Inventions"), including new contributions,
improvements, ideas and discoveries, whether patentable or not, conceived,
developed, invented or made by him
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during his employment by Employer shall belong to the Company, provided that
such Inventions grew out of the Employee's work with the Company are related in
any manner to the business (commercial or experimental) of the Company or are
conceived or made on the Company's time or with the use of the Company's
facilities or materials. The Employee shall further: (a) promptly disclose such
Inventions to the Company; (b) assign to the Company, without additional
compensation, all patent and other rights to such Inventions for the United
States and foreign countries; (c) sign all papers necessary to carry out the
foregoing; and (d) give testimony in support of his inventorship;
(ii) If any Invention is described in a patent
application or is disclosed to third parties, directly or indirectly, by the
Employee within two years after the termination of his employment by the
Company, it is to be presumed that the Invention was conceived or made during
the period of the Employee's employment by the Company; and
(iii) The Employee agrees that he will not assert
any rights to any Invention as having been made or acquired by him prior to the
date of this Agreement, except for Inventions, if any, disclosed to the Company
in writing prior to the date hereof.
(g) The Company shall be the sole owner of all products and
proceeds of the Employee's services hereunder, including, but not limited to,
all materials, ideas, concepts, formats, suggestions, developments,
arrangements, packages, programs and other intellectual properties that the
Employee may acquire, obtain, develop or create in connection with and during
the term of the Employee's employment hereunder, free and clear of any claims by
the Employee (or anyone claiming under the Employee) of any kind or character
whatsoever (other than the Employee's right to receive payments hereunder). The
Employee shall, at the request of the Company, execute such assignments,
certificates or other instruments as the Company may from time to time deem
necessary or desirable to evidence, establish, maintain, perfect, protect,
enforce or defend its right, or title and interest in or to any such properties.
(h) The parties hereto hereby acknowledge and agree that (i)
the Company would be irreparably injured in the event of a breach by the
Employee of any of his obligations under this Section 7, (ii) monetary damages
would not be an adequate remedy for any such breach, and (iii) the Company shall
be entitled to injunctive relief, in addition to any other remedy which it may
have, in the event of any such breach.
(i) The parties hereto hereby acknowledge that, in
addition to any other remedies the Company may have under Section 7(h) hereof,
the Company shall have the right and remedy to require the Employee to account
for and pay over to the
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<PAGE>
Company all compensation, profits, monies, accruals, increments or other
benefits (collectively, "Benefits") derived or received by the Employee as the
result of any transactions constituting a breach of any of the provisions of
Section 7, and the Employee hereby agrees to account for any pay over such
Benefits to the Company.
(j) Each of the rights and remedies enumerated in Section
7(h) and 7(i) shall be independent of the other, and shall be severally
enforceable, and all of such rights and remedies shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or in equity.
(k) If any provision contained in this Section 7 is hereafter
construed to be invalid or unenforceable, the same shall not affect the
remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portions.
(l) If any provision contained in this Section 7 is found to
be unenforceable by reason of the extent, duration or scope thereof, or
otherwise, then the court making such determination shall have the right to
reduce such extent, duration, scope or other provision and in its reduced form
any such restriction shall thereafter be enforceable as contemplated hereby.
(m) It is the intent of the parties hereto that the covenants
contained in this Section 7 shall be enforced to the fullest extent permissible
under the laws and public policies of each jurisdiction in which enforcement is
sought (the Employee hereby acknowledging that said restrictions are reasonably
necessary for the protection of the Company). Accordingly, it is hereby agreed
that if any of the provisions of this Section 7 shall be adjudicated to be
invalid or unenforceable for any reason whatsoever, said provision shall be
(only with respect to the operation thereof in the particular jurisdiction in
which such adjudication is made) construed by limiting and reducing it so as to
be enforceable to the extent permissible, without invalidating the remaining
provisions of this Agreement or affecting the validity or enforceability of said
provision in any other jurisdiction.
8. General. This Agreement is further governed by the
following provisions:
(a) Notices. All notices relating to this
Agreement shall be in writing and shall be either personally delivered, sent by
telecopy (receipt confirmed) or mailed by certified mail, return receipt
requested, to be delivered at such address as is indicated below, or at such
other address or to the attention of such other person as the recipient has
specified by
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<PAGE>
prior written notice to the sending party. Notice shall be effective when so
personally delivered, one business day after being sent by telecopy or five days
after being mailed.
To the Employer:
Take Two Interactive Software, Inc.
575 Broadway
New York, New York 10012
Attention: Ryan A. Brant
To the Employee:
Anthony R. Williams
With, in either case, a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Kenneth Selterman, Esq.
(b) Parties in Interest. Employee may not
delegate his duties or assign his rights hereunder. This Agreement shall inure
to the benefit of, and be binding upon, the parties hereto and their respective
heirs, legal representatives, successors and permitted assigns.
(c) Entire Agreement. This Agreement supersedes
any and all other agreements, either oral or in writing, between the parties
hereto (including the letter agreement dated January 16, 1998) with respect to
the employment of the Employee by the Employer and contains all of the covenants
and agreements between the parties with respect to such employment in any manner
whatsoever. Any modification or termination of this Agreement will be effective
only if it is in writing signed by the party to be charged.
(d) Governing Law. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York.
Employee agrees to and hereby does submit to jurisdiction before any state or
federal court of record in New York County or in the state and county in which
such violation may occur, at Employer's election.
(e) Warranty. Employee hereby warrants and
represents as follows:
(i) That the execution of this Agreement and
the discharge of Employee's obligations hereunder will not breach or conflict
with any other contract, agreement, or understanding between Employee and any
other party or parties.
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<PAGE>
(ii) Employee has ideas, information and
know-how relating to the type of business conducted by Employer, and Employee's
disclosure of such ideas, information and know-how to Employer will not conflict
with or violate the rights of any third party or parties.
(iii) Employee will not disclose any trade
secrets relating to the business conducted by any previous employer and agrees
to indemnify and hold Employer harmless for any liability arising out of
Employee's use of any such trade secrets.
(f) Severability. In the event that any term or
condition in this Agreement shall for any reason be held by a court of competent
jurisdiction to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
condition of this Agreement, but this Agreement shall be construed as if such
invalid or illegal or unenforceable term or condition had never been contained
herein.
(g) Execution in Counterparts. This Agreement
may be executed by the parties in one or more counterparts, each of which shall
be deemed to be an original but all of which taken together shall constitute one
and the same agreement, and shall become effective when one or more counterparts
has been signed by each of the parties hereto and delivered to each of the other
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
TAKE TWO INTERACTIVE SOFTWARE, INC.
By:
---------------------------------
Name: Ryan A. Brant
Title: Chief Executive Officer
------------------------------------
Anthony R. Williams
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<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT dated as of January 29, 1999 between Take-Two
Interactive Software, Inc., a Delaware corporation (the "Employer" or the
"Company"), and Larry Muller (the "Employee").
W I T N E S S E T H :
WHEREAS, the Employer desires to employ the Employee as its
Chief Financial Officer and to be assured of his services as such on the terms
and conditions hereinafter set forth; and
WHEREAS, the Employee is willing to accept such
employment on such terms and conditions;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, and intending to be legally bound hereby, the
Employer and the Employee hereby agree as follows:
1. Term. Employer hereby agrees to employ Employee, and
Employee hereby agrees to serve Employer for a three-year period commencing
effective as of the date first written above (the "Effective Date") (such period
being herein referred to as the "Initial Term," and any year commencing on the
Effective Date or any anniversary of the Effective Date being hereinafter
referred to as an "Employment Year"). After the Initial Term, this Agreement
shall be renewable automatically for successive one year periods (each such
period being referred to as a "Renewal Term"), unless, more than ninety days
prior to the expiration of the Initial Term or any Renewal Term, either the
Employee or the Company give written notice that employment will not be renewed.
2. Employee Duties.
(a) During the term of this Agreement, the Employee shall
have the duties and responsibilities of Chief Financial Officer of the Employer,
reporting directly to the Chief Executive Officer of Employer and the Board of
Directors of the Employer (the "Board"). It is understood that such duties and
responsibilities shall be reasonably related to the Employee's position.
(b) The Employee shall devote substantially all of his
business time, attention, knowledge and skills faithfully, diligently and to the
best of his ability, in furtherance of the business and activities of the
Company. The principal place of performance by the Employee of his duties
hereunder shall be the Company's principal executive offices although the
Employee may be required to travel outside of the area where the Company's
<PAGE>
principal executive offices are located in connection with the business of the
Company.
3. Compensation.
(a) During the term of this Agreement, the Employer shall
pay the Employee a salary (the "Salary") at a rate of $233,000 per annum in
respect of each Employment Year, payable in equal installments bi-weekly, or at
such other times as may mutually be agreed upon between the Employer and the
Employee. Such Salary shall be subject to an annual review by the Board may be
increased from time to time at the discretion of the Board.
(b) The Employee shall be paid a bonus equal to (i) options
to purchase 20,000 shares of Common Stock in respect of each fiscal quarter
during the twelve month period ending October 31, 1999 provided that net income
per share in any such quarter exceeds the Company's net income per share in the
comparable quarter for the prior year and (ii) $20,000 for each fiscal quarter
commencing with the quarter ending January 31, 1999 provided that net income per
share in any such quarter exceeds the Company's net income per share in the
comparable quarter for the prior year. Any such options shall vest immediately
following the end of each fiscal quarter and shall be exercisable during a
five-year period at an exercise price equal to the fair market value of the
Common Stock on the date of grant.
(c) The Employee has been granted incentive options to
purchase 10,000 shares of Common Stock at an exercise price of $5.875 per share.
(d) The Employee shall be entitled to an automobile
allowance of $1,400 per month, which allowance includes insurance, parking and
gasoline.
(e) The Employee shall be entitled to receive $2 million in
life insurance, the premiums for which shall be paid by the Company.
(f) In addition to the foregoing, the Employee shall be
entitled to such other cash bonuses and such other compensation in the form of
stock, stock options or other property or rights as may from time to time be
awarded to him by the Board during or in respect of his employment hereunder.
4. Benefits.
(a) During the term of this Agreement, the Employee shall
have the right to receive or participate in all benefits and plans which the
Company may from time to time institute during such period for its employees and
for which the Employee is eligible, and shall automatically receive or
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<PAGE>
participate in all benefits and plans that the Company's Chief Executive Officer
receives or participates in. Nothing paid to the Employee under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary or any other obligation payable to the Employee
pursuant to this Agreement.
(b) During the term of this Agreement, the Employee will be
entitled to the number of paid holidays, personal days off, vacation days and
sick leave days in each calendar year as are determined by the Company from time
to time, provided that Employee shall be entitled to at least five weeks of paid
vacation. Such vacation may be taken in the Employee's discretion with the prior
approval of the Employee, and at such time or times as are not inconsistent with
the reasonable business needs of the Company.
5. Travel Expenses. All travel and other expenses incident to
the rendering of services reasonably incurred on behalf of the Company by the
Employee during the term of this Agreement shall be paid by the Employer
provided that such expenses are preapproved by the Chief Executive Officer of
the Company. If any such expenses are paid in the first instance by the
Employee, the Employer shall reimburse him therefor on presentation of
appropriate receipts for any such expenses.
6. Termination. Notwithstanding the provisions of Section 1
hereof, the Employee's employment with the Employer may be earlier terminated as
follows:
(a) By action taken by the Board, the Employee may be
discharged for cause (as hereinafter defined), effective as of such time as the
Board shall determine. Upon discharge of the Employee pursuant to this Section
6(a), the Employer shall have no further obligation or duties to the Employee,
and the Employee shall have no further obligations or duties to the Employer,
except as provided in Section 7.
(b) In the event of (i) the death of the Employee or (ii)
by action of the Board and the inability of the Employee, by reason of physical
or mental disability, to continue substantially to perform his duties hereunder
for a period of 180 consecutive days, during which 180 day period Salary and any
other benefits hereunder shall not be suspended or diminished. Upon any
termination of the Employee's employment under this Section 6(b), the Employer
shall have no further obligations or duties to the Employee.
(c) In the event that Employee's employment with the
Employer is terminated by action taken by the Board without cause, including
termination upon a Change in Control (as hereinafter defined), then the Employer
shall have no further obligation or duties to Employee, except for payment of
the
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<PAGE>
amounts described below, and Employee shall have no further obligations or
duties to the Employer, except as provided in Section 7. In the event of such
termination, the Employer shall continue to pay to the Employee his Salary,
bonus and benefits during the 18 months following the date of termination. If
such termination occurs upon a Change in Control, all amounts payable to the
Employee pursuant to this Section 6(c) shall be paid in one lump-sum payment
payable immediately upon such termination and all options granted to Employee
pursuant to Section 3(c) shall vest.
(d) For purposes of Paragraph 6(c), a "Change in Control"
shall be deemed to occur if Ryan A. Brant is no longer Chief Executive Officer
of the Company.
(e) For purposes of this Agreement, the Company shall have
"cause" to terminate the Employee's employment under this Agreement upon (i) the
failure by the Employee to substantially perform his duties under this
Agreement, (ii) the engaging by the Employee in criminal misconduct (including
embezzlement and criminal fraud) which is materially injurious to the Company,
monetarily or otherwise, (iii) the conviction of the Employee of a felony or
(iv) gross negligence on the part of the Employee. The Company shall give
written notice to the Employee, which notice shall specify the grounds for the
proposed termination and the Employee shall be given thirty (30) days to cure if
the grounds arise under clauses (i) or (v) above.
(f) Notwithstanding the foregoing, if Ryan A. Brant is no
longer Chief Executive Officer of the Company as a result of a change of control
of the Company, the Employee shall have the right to terminate his employment
and receive 1.5 times the amount of his annual compensation.
7. Confidentiality; Noncompetition.
(a) The Employer and the Employee acknowledge that the
services to be performed by the Employee under this Agreement are unique and
extraordinary and, as a result of such employment, the Employee will be in
possession of confidential information relating to the business practices of the
Company. The term "confidential information" shall mean any and all information
(verbal and written) relating to the Company or any of its affiliates, or any of
their respective activities, other than such information which can be shown by
the Employee to be in the public domain (such information not being deemed to be
in the public domain merely because it is embraced by more general information
which is in the public domain) other than as the result of breach of the
provisions of this Section 7(a), including, but not limited to, information
relating to: trade secrets, personnel lists, financial information, research
projects, services used, pricing, customers, customer lists and prospects,
product sourcing, marketing and selling and servicing.
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<PAGE>
The Employee agrees that he will not, during or for a period of two years after
the termination of employment, directly or indirectly, use, communicate,
disclose or disseminate to any person, firm or corporation any confidential
information regarding the clients, customers or business practices of the
Company acquired by the Employee during his employment by Employer, without the
prior written consent of Employer; provided, however, that the Employee
understands that Employee will be prohibited from misappropriating any trade
secret at any time during or after the termination of employment.
(b) The Employee hereby agrees that he shall not, during
the period of his employment and for a period of one (1) years following such
employment, directly or indirectly, within any county (or adjacent county) in
any State within the United States or territory outside the United States in
which the Company is engaged in business during the period of the Employee's
employment or on the date of termination of the Employee's employment, engage,
have an interest in or render any services to any business (whether as owner,
manager, operator, licensor, licensee, lender, partner, stockholder, joint
venturer, employee, consultant or otherwise) competitive with the Company's
business activities.
(c) The Employee hereby agrees that he shall not, during
the period of his employment and for a period of one (1) years following such
employment, directly or indirectly, take any action which constitutes an
interference with or a disruption of any of the Company's business activities
including, without limitation, the solicitations of the Company's customers, or
persons listed on the personnel lists of the Company. At no time during the term
of this Agreement, or thereafter shall the Employee directly or indirectly,
disparage the commercial, business or financial reputation of the Company.
(d) For purposes of clarification, but not of limitation,
the Employee hereby acknowledges and agrees that the provisions of subparagraphs
7(b) and (c) above shall serve as a prohibition against him, during the period
referred to therein, directly or indirectly, hiring, offering to hire, enticing,
soliciting or in any other manner persuading or attempting to persuade any
officer, employee, agent, lessor, lessee, licensor, licensee or customer who has
been previously contacted by either a representative of the Company, including
the Employee, (but only those suppliers existing during the time of the
Employee's employment by the Company, or at the termination of his employment),
to discontinue or alter his, her or its relationship with the Company.
(e) Upon the termination of the Employee's employment for
any reason whatsoever, all documents, records, notebooks, equipment, price
lists, specifications, programs, customer and prospective customer lists and
other materials which
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<PAGE>
refer or relate to any aspect of the business of the Company which are in the
possession of the Employee including all copies thereof, shall be promptly
returned to the Company.
(f) (i) The Employee agrees that all processes,
technologies and inventions ("Inventions"), including new contributions,
improvements, ideas and discoveries, whether patentable or not, conceived,
developed, invented or made by him during his employment by Employer shall
belong to the Company, provided that such Inventions grew out of the Employee's
work with the Company are related in any manner to the business (commercial or
experimental) of the Company or are conceived or made on the Company's time or
with the use of the Company's facilities or materials. The Employee shall
further: (a) promptly disclose such Inventions to the Company; (b) assign to the
Company, without additional compensation, all patent and other rights to such
Inventions for the United States and foreign countries; (c) sign all papers
necessary to carry out the foregoing; and (d) give testimony in support of his
inventorship;
(ii) If any Invention is described in a patent
application or is disclosed to third parties, directly or indirectly, by the
Employee within two years after the termination of his employment by the
Company, it is to be presumed that the Invention was conceived or made during
the period of the Employee's employment by the Company; and
(iii) The Employee agrees that he will not assert any
rights to any Invention as having been made or acquired by him prior to the date
of this Agreement, except for Inventions, if any, disclosed to the Company in
writing prior to the date hereof.
(g) The Company shall be the sole owner of all products and
proceeds of the Employee's services hereunder, including, but not limited to,
all materials, ideas, concepts, formats, suggestions, developments,
arrangements, packages, programs and other intellectual properties that the
Employee may acquire, obtain, develop or create in connection with and during
the term of the Employee's employment hereunder, free and clear of any claims by
the Employee (or anyone claiming under the Employee) of any kind or character
whatsoever (other than the Employee's right to receive payments hereunder). The
Employee shall, at the request of the Company, execute such assignments,
certificates or other instruments as the Company may from time to time deem
necessary or desirable to evidence, establish, maintain, perfect, protect,
enforce or defend its right, or title and interest in or to any such properties.
(h) The parties hereto hereby acknowledge and agree that
(i) the Company would be irreparably injured in the event of a breach by the
Employee of any of his obligations under this Section 7, (ii) monetary damages
would not be an adequate
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<PAGE>
remedy for any such breach, and (iii) the Company shall be entitled to
injunctive relief, in addition to any other remedy which it may have, in the
event of any such breach.
(i) The parties hereto hereby acknowledge that, in addition
to any other remedies the Company may have under Section 7(h) hereof, the
Company shall have the right and remedy to require the Employee to account for
and pay over to the Company all compensation, profits, monies, accruals,
increments or other benefits (collectively, "Benefits") derived or received by
the Employee as the result of any transactions constituting a breach of any of
the provisions of Section 7, and the Employee hereby agrees to account for any
pay over such Benefits to the Company.
(j) Each of the rights and remedies enumerated in Section
7(h) and 7(i) shall be independent of the other, and shall be severally
enforceable, and all of such rights and remedies shall be in addition to, and
not in lieu of, any other rights and remedies available to the Company under law
or in equity.
(k) If any provision contained in this Section 7 is
hereafter construed to be invalid or unenforceable, the same shall not affect
the remainder of the covenant or covenants, which shall be given full effect,
without regard to the invalid portions.
(l) If any provision contained in this Section 7 is found
to be unenforceable by reason of the extent, duration or scope thereof, or
otherwise, then the court making such determination shall have the right to
reduce such extent, duration, scope or other provision and in its reduced form
any such restriction shall thereafter be enforceable as contemplated hereby.
(m) It is the intent of the parties hereto that the
covenants contained in this Section 7 shall be enforced to the fullest extent
permissible under the laws and public policies of each jurisdiction in which
enforcement is sought (the Employee hereby acknowledging that said restrictions
are reasonably necessary for the protection of the Company). Accordingly, it is
hereby agreed that if any of the provisions of this Section 7 shall be
adjudicated to be invalid or unenforceable for any reason whatsoever, said
provision shall be (only with respect to the operation thereof in the particular
jurisdiction in which such adjudication is made) construed by limiting and
reducing it so as to be enforceable to the extent permissible, without
invalidating the remaining provisions of this Agreement or affecting the
validity or enforceability of said provision in any other jurisdiction.
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<PAGE>
8. General. This Agreement is further governed by the
following provisions:
(a) Notices. All notices relating to this Agreement shall
be in writing and shall be either personally delivered, sent by telecopy
(receipt confirmed) or mailed by certified mail, return receipt requested, to be
delivered at such address as is indicated below, or at such other address or to
the attention of such other person as the recipient has specified by prior
written notice to the sending party. Notice shall be effective when so
personally delivered, one business day after being sent by telecopy or five days
after being mailed.
To the Employer:
Take Two Interactive Software, Inc.
575 Broadway
New York, New York 10012
Attention: Ryan A. Brant
To the Employee:
Larry Muller
With, in either case, a copy in the same manner to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Kenneth Selterman, Esq.
(b) Parties in Interest. Employee may not delegate his
duties or assign his rights hereunder. This Agreement shall inure to the benefit
of, and be binding upon, the parties hereto and their respective heirs, legal
representatives, successors and permitted assigns.
(c) Entire Agreement. This Agreement supersedes any and all
other agreements, either oral or in writing, between the parties hereto
(including the letter agreement dated January 16, 1998) with respect to the
employment of the Employee by the Employer and contains all of the covenants and
agreements between the parties with respect to such employment in any manner
whatsoever. Any modification or termination of this Agreement will be effective
only if it is in writing signed by the party to be charged.
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York. Employee agrees
to and hereby does submit to jurisdiction before any state or federal court of
record in New
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<PAGE>
York County or in the state and county in which such violation may occur, at
Employer's election.
(e) Warranty. Employee hereby warrants and represents as
follows:
(i) That the execution of this Agreement and the
discharge of Employee's obligations hereunder will not breach or conflict with
any other contract, agreement, or understanding between Employee and any other
party or parties.
(ii) Employee has ideas, information and know-how
relating to the type of business conducted by Employer, and Employee's
disclosure of such ideas, information and know-how to Employer will not conflict
with or violate the rights of any third party or parties.
(iii) Employee will not disclose any trade secrets
relating to the business conducted by any previous employer and agrees to
indemnify and hold Employer harmless for any liability arising out of Employee's
use of any such trade secrets.
(f) Severability. In the event that any term or condition
in this Agreement shall for any reason be held by a court of competent
jurisdiction to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
condition of this Agreement, but this Agreement shall be construed as if such
invalid or illegal or unenforceable term or condition had never been contained
herein.
(g) Execution in Counterparts. This Agreement may be
executed by the parties in one or more counterparts, each of which shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement, and shall become effective when one or more counterparts
has been signed by each of the parties hereto and delivered to each of the other
parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
TAKE TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Ryan A. Brant
----------------------------------
Name: Ryan A. Brant
Title: Chief Executive Officer
/s/ Larry Muller
---------------------------------
Larry Muller
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<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
Funsoft Nordic A.S. ...................................... Norway
Jack Of All Games Norway (5) ............................. Norway
Jack Of All Games Sweden (5) ............................. Sweden
Jack Of All Games Denmark (5) ............................ Denmark
</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
(5) Subsidiary of Funsoft Nordic A.S.
<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
April 7, 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
Cincinnati, Ohio
April 7, 1999
