UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended January 31, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________to__________
Commission File Number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0350842
(State of incorporation or organization) (IRS Employer Identification No.)
575 Broadway, New York, NY 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 941-2988
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes _X_ No___
As of March 12, 1999, there were 18,642,023 shares of the registrant's Common
Stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
QUARTER ENDED JANUARY 31, 1999
FORM 10-Q
INDEX
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet - As of October 31, 1998 and January 31, 1999 (unaudited) 1
Consolidated Statements of Operations - For the three months ended January 31, 1998 and 1999 (unaudited) 2
Consolidated Statements of Cash Flows - For the three months ended January 31, 1998 and 1999 (unaudited) 3
Consolidated Statements of Shareholders' Equity - For the year ended October 31, 1998 and
the three months ended January 31, 1999 (unaudited) 4
Notes to Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>
Item 1.
<TABLE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheet
As of October 31, 1998 and January 31, 1999 (unaudited)
- --------------------------------------------------------------------------------------------------------------------
ASSETS:
<CAPTION>
October 31, 1998 January 31, 1999
---------------- ----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,762,837 $ 4,761,396
Accounts receivable, net of allowances of $1,473,017 and $1,526,808 49,138,871 47,493,189
Inventories, net 26,092,541 23,074,122
Prepaid royalties 8,064,510 9,086,192
Advances to developers 4,319,989 5,002,663
Prepaid expenses and other current assets 3,981,942 3,650,591
Deferred tax asset 941,000 941,000
------------- -------------
Total current assets 95,301,690 94,009,153
Fixed assets, net 1,979,658 1,967,358
Prepaid royalties 1,388,673 1,122,742
Capitalized software development costs, net 2,260,037 2,402,958
Intangibles, net 8,421,777 8,138,873
Other assets, net 33,259 --
------------- -------------
Total assets $ 109,385,094 $ 107,641,084
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Lines of credit, current portion $ 30,226,899 $ 31,589,639
Notes payable due to related parties, net of discount 222,955 128,734
Current portion of capital lease obligation 82,373 80,266
Note payable 137,140 115,578
Accounts payable 31,723,864 22,435,940
Accrued expenses 10,975,362 13,678,527
Advances-principally distributors 136,000 --
------------- -------------
Total current liabilities 73,504,593 68,028,684
Line of credit 123,499 --
Notes payable, net of current portion 97,392 81,861
Capital lease obligation, net of current portion 94,042 63,970
------------- -------------
Total liabilities 73,819,526 68,174,515
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, Series A, no par value; 5,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, par value $.01 per share; 50,000,000 shares authorized;
18,071,972 and 18,425,924 shares issued and outstanding 180,719 184,259
Additional paid-in capital 33,546,417 34,792,045
Deferred compensation (223,657) (212,951)
Retained earnings 2,069,522 4,964,358
Foreign currency translation adjustment (7,433) (261,142)
------------- -------------
Total stockholders' equity 35,565,568 39,466,569
------------- -------------
Total liabilities and stockholders' equity $ 109,385,094 $ 107,641,084
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended January 31, 1998 and 1999 (unaudited)
- --------------------------------------------------------------------------------------
<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 from operations 3,377,864 5,124,553
Interest expense 1,548,035 816,517
------------ ------------
Income before income taxes 1,829,829 4,308,036
Provision for income taxes 8,648 1,413,200
------------ ------------
Net income 1,821,181 2,894,836
Distributions paid to S corporation shareholders
prior to acquisition 362,000 --
------------ ------------
Net income attributable to common
stockholders' - Basic $ 1,459,181 $ 2,894,836
============ ============
Net income attributable to common
stockholders' - Diluted $ 1,555,511 $ 2,894,836
============ ============
Per share data:
Basic:
Weighted average common shares outstanding 13,258,379 18,212,240
============ ============
Net income per share $ 0.11 $ 0.16
============ ============
Diluted:
Weighted average common shares outstanding 14,872,511 19,534,411
============ ============
Net income per share $ 0.10 $ 0.15
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended January 31, 1998 and 1999 (unaudited)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three months ended January 31,
-----------------------------
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,459,181 $ 2,894,836
Adjustment to retained earnings as a result of business combination, see (A) below (581,089) --
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 376,542 453,415
Provision for bad debts and return allowances 404,911 182,243
Amortization of deferred compensation 4,312 41,811
Adjustment of prior period compensation expenses -- (55,898)
Amortization of loan discounts 664,580 1,008
Amortization of deferred financing costs 184,653 --
Issuance of compensatory stock -- 116,065
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable 3,848,825 1,463,439
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)
Decrease in prepaid expenses and other current assets 2,654,352 331,351
Decrease (increase) in capitalized software development costs, net 1,278,854 (142,921)
Decrease in other assets, net -- 33,259
Decrease in accounts payable (7,244,244) (9,287,924)
Increase in accrued expenses 496,629 2,703,165
Decrease in advances-principally distributors (595,050) (136,000)
Increase in due to/from related parties (120,070) --
----------- -----------
Net cash provided by operating activities 4,660,934 177,843
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (65,470) (184,408)
Acquisition, net cash paid (1,186,874) --
----------- -----------
Net cash used in investing activities (1,252,344) (184,408)
----------- -----------
Cash flows from financing activities:
Net borrowings under the line of credit (980,826) 1,239,241
Proceeds from notes payable 803,800 --
Repayment on 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)
----------- -----------
Net cash (used in) provided by financing activities (3,855,611) 2,245,258
----------- -----------
Effect of foreign exchange rates (10,418) (240,134)
----------- -----------
Net (decrease) increase 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
=========== ===========
Supplemental information on business acquired:
Fair value of assets acquired $12,181,948 $ --
Less, liabilities assumed (8,812,948) --
Stock issued (1,612,500) --
Options issued (256,500) --
----------- -----------
Cash paid 1,500,000 --
Less, cash acquired (313,126) --
----------- -----------
Net cash paid $ 1,186,874 $ --
=========== ===========
</TABLE>
(A) For the purposes of pooling of interests accounting, the statement of
operations for the year ended October 31, 1997 was combined with JAG's and
Talonsoft's December 31, 1997 statement of operations. The Company's
statement of operations for the year ended October 31, 1998 includes JAG's
and Talonsoft's restated statement of operations for the period November 1,
1997 to October 31,1998. Accordingly, JAG's and Talonsoft's net income of
$431,527 and $149,562, respectively, for the two months ended December 31,
1997 have been reflected as an adjustment to retained earnings for the year
ended October 31, 1998.
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the year ended October 31, 1998 and the three months ended January 31, 1999
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Series A Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------------- -------------------- -----------------------
Shares Amount Shares Amount Shares Amount
-------- --------- ------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1997 ............................. 317 317 -- -- -- --
Issuance of common stock and compensatory stock
options in connection with AIM acquisition ........... -- -- -- -- -- --
Issuance of preferred stock in connection with
BMG acquisition ....................................... -- -- -- -- 1,850,000 18,500
Conversion of preferred stock to common stock issued
in connection with BMG acquisition .................... -- -- -- -- (1,850,000) (18,500)
Issuance of common stock in connection with
DirectSoft acquisition ................................ -- -- -- -- -- --
Redemption of preferred stock ......................... (317) (317) -- -- -- --
Issuance of common stock in connection with
March 1998 private placement, net of issuance costs ... -- -- -- -- -- --
Issuance of common stock in connection with
May 1998 private placement, net of issuance costs ..... -- -- -- -- -- --
Cashless exercise of public warrants, 1 share of
common stock for 2 warrants surrendered ............... -- -- -- -- -- --
Cashless exercise of underwriters' warrants, 1 share of
common stock for 2 warrants surrendered ............... -- -- -- -- -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement ................ -- -- -- -- -- --
Issuance of common stock in connection with
early extinguishment of debt .......................... -- -- -- -- -- --
Issuance of compensatory stock options ................ -- -- -- -- -- --
Amortization of deferred compensation ................. -- -- -- -- -- --
Foreign currency translation adjustment ............... -- -- -- -- -- --
Net income ............................................ -- -- -- -- -- --
Less: net income of JAG and Talonsoft for the
two months ended December 31, 1997 .................... -- -- -- -- -- --
-------- --------- ------ ----------- ---------- ---------
Balance, October 31, 1998 ............................. -- -- -- -- -- --
Exercise of stock options ............................. -- -- -- -- -- --
Amortization of deferred compensation ................. -- -- -- -- -- --
Issuance of compensatory stock options ................ -- -- -- -- -- --
Forfeiture of compensatory stock options in connection -- --
with AIM acquisition ................................ -- --
Foreign currency translation adjustment ............... -- -- -- -- -- --
Net income ............................................ -- -- -- -- -- --
-------- --------- ------ ----------- ---------- ---------
Balance, January 31, 1999 ............................. -- $ -- -- $ -- -- $ --
======== ========= ====== =========== ========== =========
<CAPTION>
Common Stock Retained
------------------------ Additional Deferred Earnings
Shares Amount Paid-in Capital Compensation Deficit
----------- ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1997 ............................. 13,033,379 130,333 15,551,501 (17,250) (3,599,483)
Issuance of common stock and compensatory stock
options in connection with AIM acquisition ........... 500,000 5,000 1,864,000 (253,294) --
Issuance of preferred stock in connection with
BMG acquisition ....................................... -- -- 9,520,563 -- --
Conversion of preferred stock to common stock issued
in connection with BMG acquisition .................... 1,850,000 18,500 -- -- --
Issuance of common stock in connection with
DirectSoft acquisition ................................ 40,000 400 256,100 -- --
Redemption of preferred stock ......................... -- -- -- -- --
Issuance of common stock in connection with
March 1998 private placement, net of issuance costs ... 158,333 1,583 896,750 -- --
Issuance of common stock in connection with
May 1998 private placement, net of issuance costs ..... 770,000 7,700 5,049,300 -- --
Cashless exercise of public warrants, 1 share of
common stock for 2 warrants surrendered ............... 897,183 8,972 (8,972) -- --
Cashless exercise of underwriters' warrants, 1 share of
common stock for 2 warrants surrendered ............... 160,000 1,600 (1,600) -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement ................ 378,939 3,789 -- -- --
Exercise of stock options ............................. 252,000 2,520 156,743 -- --
Issuance of common stock in connection with
early extinguishment of debt .......................... 32,138 322 187,032 -- --
Issuance of compensatory stock options ................ -- -- 75,000 (75,000) --
Amortization of deferred compensation ................. -- -- -- 121,887 --
Foreign currency translation adjustment ............... -- -- -- -- --
Net income ............................................ -- -- -- -- 6,250,094
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 ............................. 353,952 3,540 1,270,421 -- --
Amortization of deferred compensation ................. -- -- -- 126,706 --
Issuance of compensatory stock options ................ -- -- 116,000 (116,000) --
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 ............................. 18,425,924 $ 184,259 $ 34,792,045 $ (212,951) $ 4,964,358
=========== ========== ============ ============ ============
<CAPTION>
Accumulated
Other Comprehensive
Comprehensive Income
Income Total (Loss)
------------ ------------ ------------
<S> <C> <C> <C>
Balance, October 31, 1997 ............................. (130,706) 11,934,712 (3,572,189)
Issuance of common stock and compensatory stock
options in connection with AIM acquisition ........... -- 1,615,706 --
Issuance of preferred stock in connection with
BMG acquisition ....................................... -- 9,539,063 --
Conversion of preferred stock to common stock issued
in connection with BMG acquisition .................... -- -- --
Issuance of common stock in connection with
DirectSoft acquisition ................................ -- 256,500 --
Redemption of preferred stock ......................... -- (317) --
Issuance of common stock in connection with
March 1998 private placement, net of issuance costs ... -- 898,333 --
Issuance of common stock in connection with
May 1998 private placement, net of issuance costs ..... -- 5,057,000 --
Cashless exercise of public warrants, 1 share of
common stock for 2 warrants surrendered ............... -- -- --
Cashless exercise of underwriters' warrants, 1 share of
common stock for 2 warrants surrendered ............... -- -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement ................ -- 3,789 --
Exercise of stock options ............................. -- 159,263 --
Issuance of common stock in connection with
early extinguishment of debt .......................... -- 187,354 --
Issuance of compensatory stock options ................ -- -- --
Amortization of deferred compensation ................. -- 121,887 --
Foreign currency translation adjustment ............... 123,273 123,273 123,273
Net income ............................................ -- 6,250,094 6,250,094
Less: net income of JAG and Talonsoft for the
two months ended December 31, 1997 .................... -- (581,089) --
------------ ------------ ------------
Balance, October 31, 1998 ............................. (7,433) 35,380,182 6,373,367
Exercise of stock options ............................. -- 1,273,961 --
Amortization of deferred compensation ................. -- 132,331 --
Issuance of compensatory stock options ................ -- -- --
Forfeiture of compensatory stock options in connection -- -- --
with AIM acquisition ................................ -- (146,418) --
Foreign currency translation adjustment ............... (253,709) (253,709) (253,709)
Net income ............................................ -- 2,894,836 2,894,836
------------ ------------ ------------
Balance, January 31, 1999 ............................. $ (261,142) $ 39,281,183 $ 2,641,127
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
(Information at January 31, 1999 and for the three month periods
ended January 31, 1998 and 1999 is unaudited)
1. Organization:
Take-Two Interactive Software, Inc. (the "Company") was incorporated in the
State of Delaware on September 30, 1993. Take-Two and its wholly owned
subsidiaries, GearHead Entertainment ("GearHead"), Mission Studios Corporation
("Mission"), Take-Two Interactive Software Europe Limited ("TTE"), Alternative
Reality Technologies ("ART"), Inventory Management Systems, Inc. ("IMSI"),
Alliance Inventory Management ("AIM"), Jack of All Games, Inc. ("JAG"), Creative
Alliance Group Inc. ("CAG"), Talonsoft, Inc. ("Talonsoft"), and DirectSoft
Australia Pty. Ltd. ("DirectSoft") design, develop, publish, market and
distribute interactive software games for use on multimedia personal computer
and video game console platforms. The Company's interactive software games are
sold primarily in the United States, Europe, Australia, and Asia.
2. Significant Accounting Policies and Transactions:
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring entries necessary for a fair presentation have been included.
Operating results for the three months ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the year ended
October 31, 1999. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-KSB
for the year ended October 31, 1998.
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 prior
to the business combinations.
<PAGE>
Risk and Uncertainties
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.
Prepaid Royalties
Prepaid royalties were written down $656,698 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.
Capitalized Software Development Costs (Including Film Production Costs)
Capitalized software costs were written down by $168,000 for the three months
ended January 31, 1999 to net realizable value. Amortization of capitalized
software costs amounted to $50,000 for the three months ended January 31, 1999.
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.
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 $34,469,905 and $44,389,431 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
<PAGE>
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 rate of product 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 $16,935,456 and $23,891,222 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 three months ended January 31, 1998 and 1999, the Company's net sales in
domestic markets accounted for approximately 97.2% and 78.7%, respectively, and
net sales in international markets accounted for 2.8% and 21.3%, respectively.
As of January 31, 1999, the Company's net fixed assets in domestic and
international markets are $1,291,148 and $676,210, respectively.
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, except for certain entities. 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
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 Acquisition
In August 1998, the Company acquired all the outstanding stock of JAG. JAG is
engaged in the
<PAGE>
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 prior to the business combinations. Certain operating expenses
were reclassed to be consistent with the Company's financial statement
presentation.
Separate results of the combining entities for the three months ended January
31, 1998 and 1999 are as follows:
Three Three
Months Ended Months Ended
January 31, January 31,
1998 1999
----------- -----------
Total revenues:
Take-Two $22,068,437 $32,167,920
JAG 28,966,589 34,494,625
Talonsoft 370,335 1,618,108
----------- -----------
$51,405,361 $68,280,653
=========== ===========
Net income attributable to common
stockholders' - Basic:
Take-Two $ 1,240,989 $ 148,680
JAG 169,660 2,237,344
Talonsoft 48,532 508,812
----------- -----------
$ 1,459,181 $ 2,894,836
=========== ===========
Net income per share - Basic $ .11 $ .16
=========== ===========
Net income attributable to common
stockholders' - Diluted:
Take-Two $ 1,337,319 $ 148,680
JAG 169,660 2,237,344
Talonsoft 48,532 508,812
----------- -----------
$ 1,555,511 $ 2,894,836
=========== ===========
Net income per share - Diluted $ .10 $ .15
=========== ===========
<PAGE>
4. Income Taxes
The provisions for income taxes for the three months ended January 31, 1998 and
1999 are based on the Company's estimated annualized tax rate for the respective
years, after giving effect to the utilization of available tax credits and tax
planning opportunities.
5. Comprehensive Income
For the three months ended January 31, 1998 and 1999, the components of
comprehensive income were:
Three Months Ended January 31,
1998 1999
----------- -----------
Net income $ 1,459,181 $ 2,894,836
Change in foreign currency translation
adjustment 120,288 (253,709)
----------- -----------
Total comprehensive income $ 1,579,469 $ 2,641,127
=========== ===========
6. Net Income per Share
The following table provides a reconciliation of basic earnings per share to
dilutive earnings per share for the three months ended January 31, 1998 and
1999.
<TABLE>
<CAPTION>
Per
Share
Income Shares Amount
----------- ----------- ------
<S> <C> <C> <C>
Three Months Ended January 31, 1998:
Basic EPS $ 1,459,181 13,258,379 $.11
Plus: Impact from assumed conversion of 10%
convertible notes 96,330 65,338
Effect of dilutive securities - Stock options
and warrants 1,548,794 (.01)
----------- ----------- ----
Diluted EPS $ 1,555,511 14,872,511 $.10
=========== =========== ====
Three Months Ended January 31, 1999:
Basic EPS $ 2,894,836 18,212,240 $.16
Effect of dilutive securities - Stock options
and warrants 1,322,171 (.01)
----------- ----------- ----
Diluted EPS $ 2,894,836 19,534,411 $.15
=========== =========== ====
</TABLE>
The computation for diluted number of shares excludes unexercised stock options
and warrants which are anti-dilutive. The number of such shares were 590,000 for
the three months ended January 31, 1998. There were no anti-dilutive stock
options or warrants for the three months ended January 31, 1999.
<PAGE>
7. Subsequent Events
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 (pound)200,000 (approximately $328,000) and
issued 580,000 shares of restricted Common Stock.
In February 1999, the Company purchased a 19.9% class A limited partnership
interest in Gathering of Developers I, Ltd. ("Gathering"). Gathering is a
developer-driven computer and video game publishing company. The Company's
investment in Gathering amounted to $4 million, payable in six equal monthly
installments of $667,000. 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 May 1998 the Company entered into a distribution agreement ("the Agreement")
with Gathering, as amended in February 1999, which granted the company (i) the
exclusive right to distribute in the United States and Canada all products
designed by Gathering to operate on PC platforms and scheduled to be released by
May 31, 2003; (ii) the exclusive right to publish in Europe all products
designed by Gathering to operate on PC platforms and scheduled to be released by
May 31, 2003; (iii) until recoupment of the advances described below, rights of
first and last refusal for the exclusive worldwide publishing rights to any
console version of products for which Gathering has publishing rights; and (iv)
after recoupment of such advances, the rights of first and last refusal for
publishing rights and which Gathering has publishing by or on behalf of
Gathering on the PC or other non-console platform.
The agreement obligates the Company to pay Gathering 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 refund any un-recouped portion of the
advance attributable to a particular title. In addition, Gathering may terminate
the agreement with respect to a particular title in the event we materially
breach the agreement and, upon any subsequent two material breaches, may
terminate the entire agreement.
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,
<PAGE>
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 in accordance
with APB No. 16.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical facts are forward
looking statements that involve risks and uncertainties, including but not
limited to, risks associated with the Company's future growth and operating
results, the ability of the Company to successfully integrate the businesses and
personnel of newly acquired entities into its operations, changes in consumer
preferences and demographics, technological change, competitive factors,
unfavorable general economic conditions, Year 2000 compliance and other factors
described herein. Actual results may vary significantly from such forward
looking statements.
Overview
The Company derives its principal sources of revenues from publishing and
distribution activities. Publishing revenues are derived from the sale of
internally developed interactive entertainment software products or products
licensed from third parties. Distribution revenues are derived from the sale of
third-party software and hardware products. Publishing activities generally
generate higher margins than distribution activities, with sales of PC software
resulting in higher margins than sales of cartridges designed for video game
consoles. The Company recognizes revenue from software sales when products are
shipped. See Note 2 to Notes to Consolidated Financial Statements.
The Company's published products are subject to return if not sold to consumers,
including for stock balancing, markdowns or defective products. The Company
establishes a reserve for future returns of published products at the time of
product sales, based primarily on these return policies and historical return
rates, and the Company recognize revenues net of product returns. The Company
has historically experienced a product return rate of approximately 10% of gross
publishing revenues (less than 1% of distribution revenues). If future product
returns significantly exceed these reserves, the Company's operating results
would materially 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, the Company capitalizes software development costs
subsequent to establishing technological feasibility (completion of a detailed
program design) which is amortized (included in cost of sales) based on the
greater of the proportion of current year sales to total estimated sales
commencing with the product's release or the straight line method. At January
31, 1999, the Company had capitalized $2,402,958 of software development costs.
The Company evaluates the recoverability of capitalized software costs which may
be reduced materially in future periods. See Note 2 to Notes to Consolidated
Financial Statements.
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in the Company's statement of
operations:
<PAGE>
Three Months Ended
January 31,
1998 1999
------ ------
Net sales 100.0% 100.0%
Cost of sales 79.4 78.4
Research and development costs .9 .9
Selling and marketing 8.2 6.1
General and administrative 4.2 6.5
Depreciation and amortization .7 .7
Interest expense 3.0 1.2
Income taxes -- 2.1
Net income 2.8 4.2
Results of Three Months Ended January 31, 1998 and 1999
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 the Company's
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 $8,826,949, or 25.6% from $34,469,904 for the three months ended January 31,
1998 to $43,296,853 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 is primarily a result of the expanded
scope of the Company's 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
<PAGE>
ended January 31, 1998 to $592,144 for the three months ended January 31, 1999.
This increase is primarily attributable to the Company's expansion of its
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 the
Company's acquisition of leading software distributors and its 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 the
Company's 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 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 lower interest rates on borrowings.
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, the Company achieved net income of $2,894,836 for
the three months ended January 31, 1999, as compared to net income of $1,459,181
for the three months ended January 31, 1998.
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to be to
fund the acquisition, development, manufacture and commercialization of its
software products. The Company has historically financed its operations through
advances made by distributors, the issuance of debt and equity securities and
bank borrowings. At January 31, 1999, the Company had working capital of
$25,980,469 as compared to working capital of $21,797,097 at October 31, 1998.
The increase in working capital was primarily attributable to the decrease in
accounts payable as of January 31, 1999.
Net cash provided by operating activities for the three months ended January 31,
1999 was $177,843 as compared to net cash provided by operating activities of
$4,660,934 for the three months ended January 31, 1998. The decrease was
primarily attributable to a decrease in accounts receivable and prepaid
<PAGE>
expenses and other assets. Net cash used in investing activities for the three
months ended January 31, 1999 was $184,408 as compared to net cash used in
investing activities of $1,252,344 for the three months ended January 31, 1998.
The decrease in net cash used in investing was primarily attributable to the AIM
acquisition that occurred in 1998. Net cash provided by financing activities for
the three months ended January 31, 1999 was $2,245,258 as compared to net cash
used in financing activities of $3,855,611 for the three months ended January
31, 1998. The increase in net cash provided by financing activities was
primarily attributed to a decrease in repayments on the Company's debt
instruments and an increase in proceeds from the exercise of stock options. At
January 31, 1999, the Company had cash and cash equivalents of $4,761,396.
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.
The Company's accounts receivable at January 31, 1999 were $47,493,189, net of
allowances of $1,526,808. Most of the Company's receivables are covered by
insurance and have been collected in the ordinary course of business to date.
Delays in collection or uncollectibility of accounts receivable could adversely
affect the Company's working capital position. The Company is subject to credit
risks, particularly in the event that any of its receivables represent sales to
a limited number of retailers or distributors or are concentrated in foreign
markets, which could require the Company to increase its allowance for doubtful
accounts. The Company has credit insurance for most receivables.
Based on plans and assumptions relating to its operations, the Company believes
that projected cash flow from operations and available cash resources will be
sufficient to satisfy its contemplated cash requirements for the reasonably
foreseeable future. To the extent the Company continues to implement its
expansion plans, the Company may seek to obtain additional financing. There can
be no assurance that projected cash flow from operations and available cash
resources will be sufficient to fund the Company's operations or that additional
financing will be available to the Company, if required.
Fluctuations in Operating Results and Seasonality
The Company has experienced and may continue to experience fluctuations in
operating results as a result of delays in the introduction of principal titles;
product and platform mix; the size and growth rate of the consumer software
market; market acceptance of the Company's products; development and promotional
expenses relating to the introduction of new products; sequels or enhancements
of existing products; the timing and success of product introductions by the
Company and its competitors; changes in pricing policies by the Company and its
competitors; the accuracy of retailers' forecasts of consumer demand; the size
and timing of acquisitions; the timing of orders from major customers; and order
cancellations and delays in shipment.
<PAGE>
Sales of the Company's products are seasonal, with peak product shipments
typically occurring in the fourth calendar quarter (the Company's fourth and
first fiscal quarter) as a result of increased demand for products during the
year-end holiday season.
International Operations
Product sales in international markets, primarily in the United Kingdom and
other countries in Europe and the Pacific Rim, have accounted for an increasing
portion of the Company's revenues. For the three months ended January 31, 1998
and 1999, sales of products in international markets accounted for approximately
2.8% and 21.3%, respectively, of the Company's revenues. The Company is subject
to risks inherent in foreign trade, including increased credit risks, tariffs
and duties, fluctuations in foreign currency exchange rates, shipping delays and
international political, regulatory and economic developments, all of which can
have a significant impact on the Company's operating results. Product sales in
France and Germany are made in local currencies. The Company does not engage in
foreign currency hedging transactions.
Year 2000
The inability of many existing computers to recognize and properly process data
as the Year 2000 approaches may cause many computer software applications to
fail or reach erroneous results. The Company has assessed potential issues that
may result from the Year 2000 and is upgrading its accounting and management
information software, which the Company expects to complete by June 1999. The
Company does not contemplate incurring material costs in connection with
ensuring year 2000 readiness.
The Company has contacted principal third-party suppliers to determine their
year 2000 readiness and believes that such suppliers are in the process of
becoming year 2000 compliant. However, the Company's failure or the failure of
the Company's third-party suppliers to correct a material year 2000 problem
could result in an interruption in, or a failure of, certain of the Company's
business operations.
Statement of Financial Accounting Standards Not Yet Adopted
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, except for certain entities. 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.
<PAGE>
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
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.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
In December 1998, the Company issued 1,033,336 shares of Common Stock in
connection with the acquisition of Talonsoft.
In December 1998, the Company issued 100,000 warrants to purchase shares of
Common Stock in consideration of consulting fees.
In November 1998, the Company issued 5,043 shares of Common Stock in connection
with a financing arrangement.
In connection with the above securities issuances, the Company relied on Section
4(2) and Regulation D promulgated under the Securities Act of 1933, as amended.
Each purchaser of securities is an "accredited investor".
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated December 22, 1998 reporting under
Item 5 - Other Events
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Take-Two Interactive Software, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Take-Two Interactive Software, Inc.
By: /s/ Ryan A. Brant Dated: March 16, 1999
---------------------------
Ryan A. Brant
Chief Executive Officer
By: /s/ Larry Muller Dated: March 16, 1999
---------------------------
Larry Muller
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S FINANCIAL STATEMENT INCLUDED IN THIS QUARTERLY REPORT ON
FORM 10-Q, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 4,761,396
<SECURITIES> 0
<RECEIVABLES> 49,019,997
<ALLOWANCES> 1,526,808
<INVENTORY> 23,074,122
<CURRENT-ASSETS> 94,009,153
<PP&E> 3,749,135
<DEPRECIATION> 1,781,777
<TOTAL-ASSETS> 107,641,084
<CURRENT-LIABILITIES> 68,028,684
<BONDS> 0
0
0
<COMMON> 184,259
<OTHER-SE> 39,282,310
<TOTAL-LIABILITY-AND-EQUITY> 107,641,084
<SALES> 68,280,653
<TOTAL-REVENUES> 68,280,653
<CGS> 53,537,840
<TOTAL-COSTS> 53,537,840
<OTHER-EXPENSES> 1,045,559
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 816,517
<INCOME-PRETAX> 4,308,036
<INCOME-TAX> 1,413,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,894,836
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
