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 July 31, 2000
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) 334-6633
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
As of September 8, 2000, there were 31,002,552 shares of the registrant's Common
Stock outstanding.
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED JULY 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Condensed Balance Sheets - As of July 31, 2000 and October 31, 1999 (unaudited) 1
Consolidated Condensed Statements of Operations - For the three months ended July 31, 2000 and 1999
and the nine months ended July 31, 2000 and 1999 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - For the nine months ended July 31, 2000 and 1999 (unaudited) 3
Consolidated Condensed Statements of Stockholders' Equity - For the year ended October 31, 1999 and the nine
months ended July 31, 2000 (unaudited) 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE>
Item 1.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Condensed Balance Sheets
As of July 31, 2000 and October 31, 1999 (unaudited)
<TABLE>
<CAPTION>
ASSETS: July 31, 2000 October 31, 1999
------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,631,068 $ 10,374,562
Accounts receivable, net of allowances of $3,921,494 and $6,816,682, respectively 85,173,092 108,802,903
Inventories 41,214,022 41,299,838
Prepaid royalties 20,844,252 20,118,160
Prepaid expenses and other current assets 9,183,915 6,374,031
Marketable securities 3,559,399 --
Deferred tax asset 2,357,249 2,004,689
------------- -------------
Total current assets 164,962,997 188,974,183
Fixed assets, net 6,230,260 4,120,317
Prepaid royalties 860,000 1,510,530
Capitalized software development costs, net 9,796,522 2,226,670
Investment in affiliates -- 3,954,668
Intangibles, net of accumulated amortization of $9,248,842 and $3,251,358 respectively 116,442,511 30,856,983
Other assets, net 1,076,557 1,073,026
------------- -------------
Total assets $ 299,368,847 $ 232,716,377
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 38,730,790 $ 71,229,744
Accrued expenses 17,680,878 20,161,810
Lines of credit 46,478,365 56,047,846
Current portion of capital lease obligation 82,998 65,204
Notes payable, net of discount -- 30,611
------------- -------------
Total current liabilities 102,973,031 147,535,215
Note payable, net of current portion -- 58,363
Loan payable, net of unamortized discount 12,121,820 --
Capital lease obligation, net of current portion 329,323 19,882
Other liabilities 1,889,953 --
------------- -------------
Total liabilities 117,314,127 147,613,460
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000 shares authorized;
30,958,055 and 23,085,455 shares issued and outstanding 309,581 230,855
Additional paid-in capital 157,147,567 67,345,381
Deferred compensation (14,135) (47,925)
Retained earnings 31,096,526 18,401,625
Accumulated other comprehensive loss (6,484,819) (827,019)
------------- -------------
Total stockholders' equity 182,054,720 85,102,917
------------- -------------
Total liabilities and stockholders' equity $ 299,368,847 $ 232,716,377
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements
Certain amounts have been reclassified for comparative purposes
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Condensed Statements of Operations
For the three months ended July 31, 2000 and 1999
and the nine months ended July 31, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
Three months ended July 31, Nine months ended July 31,
--------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Net sales $71,472,587 $63,562,470 $ 264,398,385 $184,008,455
Cost of sales 40,100,344 43,931,101 168,155,154 133,553,958
----------- ----------- ------------- ------------
Gross profit 31,372,243 19,631,369 96,243,231 50,454,497
----------- ----------- ------------- ------------
Operating expenses:
Selling and marketing 9,055,486 6,925,874 34,243,171 16,415,343
General and administrative 9,105,921 6,779,560 25,725,552 17,416,941
Research and development costs 1,656,737 986,845 4,646,045 2,210,994
Depreciation and amortization 3,821,587 730,146 7,398,041 1,743,567
One time charge related to abandoned offering 1,103,170 -- 1,103,170 --
----------- ----------- ------------- ------------
Total operating expenses 24,742,901 15,422,425 73,115,979 37,786,845
----------- ----------- ------------- ------------
Income from operations 6,629,342 4,208,944 23,127,252 12,667,652
Interest expense, net 1,635,618 453,825 4,516,708 2,053,295
----------- ----------- ------------- ------------
Income before equity in income/(loss) of affiliate and
provision for income taxes 4,993,724 3,755,119 18,610,544 10,614,357
Equity in income/(loss) of affiliate -- 110,973 (762,683) 110,973
----------- ----------- ------------- ------------
Income before provision for income taxes 4,993,724 3,866,092 17,847,861 10,725,330
Provision for income taxes 1,544,753 1,158,268 6,258,022 3,561,498
----------- ----------- ------------- ------------
Net income $ 3,448,971 $ 2,707,824 $ 11,589,839 $ 7,163,832
=========== =========== ============= ============
Per share data:
Basic:
Weighted average common shares outstanding 29,061,499 22,440,547 25,981,014 19,939,990
=========== =========== ============= ============
Net income per share $ 0.12 $ 0.12 $ 0.45 $ 0.36
=========== =========== ============= ============
Diluted:
Weighted average common shares outstanding 29,879,265 23,292,541 26,992,485 21,205,200
=========== =========== ============= ============
Net income per share $ 0.12 $ 0.12 $ 0.43 $ 0.34
=========== =========== ============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Condensed Statements of Cash Flows
For the nine months ended July 31, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
Nine months ended July 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,589,839 $ 7,163,832
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 7,398,041 1,743,567
Loss on disposal of fixed asset 247,630 57,504
Net gain from eUniverse transactions (2,801,449) --
Equity in loss (earnings) of affiliate 762,683 (110,972)
Change in deferred tax asset (352,560) 941,000
Provision for allowances (1,734,921) 760,914
Forfeiture of compensatory stock options in connection with AIM acquisition -- (146,418)
Other amortization 283,889 365,790
Issuance of compensatory stock -- 641,909
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable 30,008,597 (8,806,651)
Decrease (increase) in inventories, net 88,302 (5,358,443)
Increase in prepaid royalties (16,127,467) (5,921,749)
Increase in prepaid expenses and other current assets (2,166,456) (742,318)
(Increase) decrease in capitalized software development costs (7,569,852) 159,686
(Increase) decrease in other assets, net (976,557) 33,259
Decrease in accounts payable (39,767,284) (4,190,634)
(Decrease) increase in accrued expenses (8,081,269) 3,039,522
------------ ------------
Net cash used in operating activities (29,198,834) (10,370,202)
------------ ------------
Cash flows from investing activities:
Net purchases of fixed assets (2,405,920) (1,869,971)
Cash paid for investments (1,432,500) (4,000,000)
Acquisition, net cash (paid) acquired (4,261,640) 5,182
Cash paid for prior acquisitions (1,531,385) --
------------ ------------
Net cash used in investing activities (9,631,445) (5,864,789)
------------ ------------
Cash flows from financing activities:
Net proceeds from secondary public offering -- 21,852,559
Proceeds from private placement, net 19,689,684 --
Net repayment under the line of credit (9,658,455) (7,637,956)
Proceeds from loan payable 15,000,000 --
Repayment of notes payable -- (449,572)
Proceeds from exercise of stock options 5,913,253 2,187,321
Proceeds from exercise of warrants 6,460 223,926
Proceeds from issuance of stock of subsidiary 1,500,000 --
Repayment of capital lease obligation (56,363) (70,932)
Tax benefit from exercise of stock options 1,940,655 753,523
------------ ------------
Net cash provided by financing activities 34,335,234 16,858,869
------------ ------------
Effect of foreign exchange rates (3,248,449) (468,574)
------------ ------------
Net (decrease) increase in cash for the period (7,743,494) 155,304
Cash and cash equivalents, beginning of the period 10,374,562 2,762,837
------------ ------------
Cash and cash equivalents, end of the period $ 2,631,068 $ 2,918,141
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Tax benefit from the exercise of stock options $ 1,940,655 $ 753,523
============ ============
Gathering purchase option $ -- $ 1,275,000
============ ============
Supplemental information on businesses acquired:
Fair value of assets acquired
Cash $ 196,100 $ 343,865
Accounts receivables, net 4,646,351 5,852,779
Inventories, net -- 2,301,672
Prepaid expenses and other assets 643,426 320,123
Property and equipment, net 1,077,216 629,155
Intangibles 90,391,069 4,960,891
Less, liabilities assumed
Line of credit -- (2,210,517)
Accounts payable (7,268,330) (6,132,408)
Accrued expenses (449,777) (370,972)
Deferred royalties (15,926,905) --
Other liabilities (8,167,452) --
Stock issued (54,815,776) (5,119,165)
Warrants issued (1,750,000) --
Direct transaction costs (154,486) (236,740)
Investment interest and purchase option (3,963,696) --
------------ ------------
Cash paid 4,457,740 338,683
Less, cash acquired (196,100) (343,865)
------------ ------------
Net cash paid (acquired) $ 4,261,640 $ (5,182)
============ ============
</TABLE>
During the nine months ended July 31, 2000, the Company paid $1,531,385 in cash
and issued $161,140 in common stock related to a prior period acquisition.
Such payments were accounted for as additional consideration and had the
effect of increasing intangibles.
The accompanying notes are an integral part of the consolidated
condensed financial statements
Certain amounts have been reclassified for comparative purposes
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Condensed Statements of Stockholders' Equity
For the year ended October 31, 1999 and the nine months ended July 31, 2000
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional
Shares Amount Paid-in Capital
---------- -------- ---------------
<S> <C> <C> <C>
Balance, October 31, 1998 18,071,972 $180,719 $ 33,546,417
Issuance of compensatory stock options 536,923 5,369 831,203
Exercise of stock options 613,218 6,133 2,378,753
Amortization of deferred compensation -- -- --
Forfeiture of compensatory stock options in connection with AIM acquisition -- -- (146,418)
Issuance of common stock in connection with LDA and Joytech acquisition 364,766 3,648 3,716,965
Issuance of common stock in connection with DVDWave.com acquisition 50,000 500 505,750
Issuance of common stock in connection with Funsoft acquisition 60,281 603 466,575
Issuance of common stock in connection with the investment in affiliate 125,000 1,250 1,273,750
Issuance of common stock in connection with the Triad and Global acquisition 162,500 1,625 1,399,938
Proceeds from exercise of public warrants 40,795 408 223,481
Issuance of common stock in connection with a public offering,
net of issuance costs 3,005,000 30,050 21,822,509
Issuance of common stock in lieu of royalty payments 55,000 550 332,200
Tax benefit in connection with the exercise of stock options -- -- 994,258
Foreign currency translation adjustment -- -- --
Net income -- -- --
---------- -------- -------------
Balance, October 31, 1999 23,085,455 230,855 67,345,381
Exercise of stock options 1,203,340 12,034 5,901,220
Amortization of deferred compensation -- -- --
Issuance of common stock in connection with LDA and Joytech acquisition 15,798 158 160,982
Issuance of common stock and warrants in connection with Pixel acquisition 2,561,245 25,612 40,303,140
Issuance of common stock in connection with GOD acquisition 1,060,017 10,600 10,390,817
Issuance of common stock in connection with PopTop acquisition 559,100 5,591 5,830,015
Issuance of common stock in connection with private placements,
net of issuance costs 2,291,678 22,917 19,666,767
Issuance of warrants in connection with a debt financing -- -- 2,926,963
Proceeds from exercise of warrants 1,000 10 6,450
Issuance of common stock in lieu of repayment of debt assumed from Pixel 167,922 1,679 2,527,646
Issuance of common stock in connection with the purchase of DVD 12,500 125 147,531
Tax benefit in connection with the exercise of stock options -- -- 1,940,655
Foreign currency translation adjustment -- -- --
Unrealized loss on available-for-sale securities -- -- --
Net income -- -- --
---------- -------- -------------
Balance, July 31, 2000 30,958,055 $309,581 $ 157,147,567
========== ======== =============
<CAPTION>
Accumulated
Other
Deferred Retained Comprehensive
Compensation Earnings Income (Loss)
--------- ----------- -----------
<S> <C> <C> <C>
Balance, October 31, 1998 $(223,657) $ 2,069,522 $ (7,433)
Issuance of compensatory stock options (5,625) -- --
Exercise of stock options -- -- --
Amortization of deferred compensation 181,357 -- --
Forfeiture of compensatory stock options in connection with AIM acquisition -- -- --
Issuance of common stock in connection with LDA and Joytech acquisition -- -- --
Issuance of common stock in connection with DVDWave.com acquisition -- -- --
Issuance of common stock in connection with Funsoft acquisition -- -- --
Issuance of common stock in connection with the investment in affiliate -- -- --
Issuance of common stock in connection with the Triad and Global acquisition -- -- --
Proceeds from exercise of public warrants -- -- --
Issuance of common stock in connection with a public offering,
net of issuance costs -- -- --
Issuance of common stock in lieu of royalty payments -- -- --
Tax benefit in connection with the exercise of stock options -- -- --
Foreign currency translation adjustment -- -- (819,586)
Net income -- 16,332,103 --
--------- ----------- -----------
Balance, October 31, 1999 (47,925) 18,401,625 (827,019)
Exercise of stock options -- -- --
Amortization of deferred compensation 33,790 -- --
Issuance of common stock in connection with LDA and Joytech acquisition -- -- --
Issuance of common stock and warrants in connection with Pixel acquisition -- -- --
Issuance of common stock in connection with GOD acquisition -- -- --
Issuance of common stock in connection with PopTop acquisition -- -- --
Issuance of common stock in connection with private placements,
net of issuance costs -- -- --
Issuance of warrants in connection with a debt financing -- -- --
Proceeds from exercise of warrants -- -- --
Issuance of common stock in lieu of repayment of debt assumed from Pixel -- -- --
Issuance of common stock in connection with the purchase of DVD -- 1,105,062 --
Tax benefit in connection with the exercise of stock options -- -- --
Foreign currency translation adjustment -- -- (3,248,449)
Unrealized loss on available-for-sale securities -- -- (2,409,351)
Net income -- 11,589,839 --
--------- ----------- -----------
Balance, July 31, 2000 $ (14,135) $31,096,526 $(6,484,819)
========= =========== ===========
<CAPTION>
Comprehensive
Total Income (Loss)
------------- ------------
<S> <C> <C>
Balance, October 31, 1998 $ 35,565,568 $ 7,304,367
Issuance of compensatory stock options 830,947 --
Exercise of stock options 2,384,886 --
Amortization of deferred compensation 181,357 --
Forfeiture of compensatory stock options in connection with AIM acquisition (146,418) --
Issuance of common stock in connection with LDA and Joytech acquisition 3,720,613 --
Issuance of common stock in connection with DVDWave.com acquisition 506,250 --
Issuance of common stock in connection with Funsoft acquisition 467,178 --
Issuance of common stock in connection with the investment in affiliate 1,275,000 --
Issuance of common stock in connection with the Triad and Global acquisition 1,401,563 --
Proceeds from exercise of public warrants 223,889 --
Issuance of common stock in connection with a public offering,
net of issuance costs 21,852,559 --
Issuance of common stock in lieu of royalty payments 332,750 --
Tax benefit in connection with the exercise of stock options 994,258 --
Foreign currency translation adjustment (819,586) (819,586)
Net income 16,332,103 16,332,103
------------- ------------
Balance, October 31, 1999 85,102,917 15,512,517
Exercise of stock options 5,913,254 --
Amortization of deferred compensation 33,790 --
Issuance of common stock in connection with LDA and Joytech acquisition 161,140 --
Issuance of common stock and warrants in connection with Pixel acquisition 40,328,752 --
Issuance of common stock in connection with GOD acquisition 10,401,417 --
Issuance of common stock in connection with PopTop acquisition 5,835,606 --
Issuance of common stock in connection with private placements,
net of issuance costs 19,689,684 --
Issuance of warrants in connection with a debt financing 2,926,963 --
Proceeds from exercise of warrants 6,460 --
Issuance of common stock in lieu of repayment of debt assumed from Pixel 2,529,325 --
Issuance of common stock in connection with the purchase of DVD 1,252,718 --
Tax benefit in connection with the exercise of stock options 1,940,655 --
Foreign currency translation adjustment (3,248,449) (3,248,449)
Unrealized loss on available-for-sale securities (2,409,351) (2,409,351)
Net income 11,589,839 11,589,839
------------- ------------
Balance, July 31, 2000 $ 182,054,720 $ 5,932,039
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
<PAGE>
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Notes to Consolidated Condensed Financial Statements
(Information at July 31, 2000 and for the three and nine month periods
ended July 31, 2000 and 1999 are unaudited)
1. Organization:
Take-Two Interactive Software, Inc. (the "Company") is a leading global
developer, publisher and distributor of interactive software games designed for
multimedia personal computers and video game console platforms.
2. Significant Accounting Policies and Transactions:
Basis of Presentation
The Consolidated Condensed Financial Statements of the Company have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
necessary for a presentation of the Company's financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, these financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for such periods. The results of operations for any interim periods are
not necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1999.
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 represent prepayments made to independent software developers
under development agreements. Prepaid royalties are expensed at the contractual
royalty rate as cost of sales based on actual net product sales. Management
continuously evaluates the future realization of prepaid royalties, and charges
to cost of sales any amount which is deemed unlikely to be realized at the
contractual royalty rate through future product sales. Prepaid royalties are
classified as current and non-current assets based upon estimated net product
sales within the next year.
5
<PAGE>
Prepaid royalties were not written down for the three months ended July 31, 2000
and 1999. For the nine months ended July 31, 2000 and 1999, prepaid royalties
were written down by $109,942 and $844,112, respectively, to estimated net
realizable value. Amortization of prepaid royalties amounted to $6,290,248 and
$6,308,905 for the three months ended July 31, 2000 and 1999, respectively, and
$11,081,264 and $10,191,276 for the nine months ended July 31, 2000 and 1999,
respectively.
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. Capitalized software costs are compared, by game
title, to estimated net realizable value of the product and amounts in excess of
estimated net realizable value, if any, are immediately charged to cost of
sales.
No capitalized software costs were written down for the three months ended July
31, 2000 and 1999. For the nine months ended July 31, 2000 and 1999, capitalized
software costs were written down by $249,184 and $688,068, respectively, to
estimated net realizable value. Amortization of capitalized software costs
amounted to $143,479 and $451,783 for the three months ended July 31, 2000 and
1999, respectively, and $472,449 and $681,783 for the nine months ended July 31,
2000 and 1999, respectively.
Segment Reporting
Statement of Financial Accounting Standards ("FAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information", establishes standards for
reporting information about operating segments in annual financial statements.
FAS No. 131 had no impact on the Company's results of operations, financial
position or cash flows. The Company's operations fall within one reportable
segment as defined by FAS No. 131.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"). SAB 101 summarizes certain of the staff's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. The provisions of this pronouncement are effective for the
fourth quarter of the fiscal year ended October 31, 2001. The Company is in the
process of determining the impact, if any, it will have on its financial
statements.
Revenue Recognition
Distribution revenue is derived from the sale of third-party interactive
software games and hardware and is recognized upon the shipment of product to
retailers. Distribution revenue amounted to $29,444,878 and $20,946,961 for the
three months ended July 31, 2000 and 1999, respectively, and $123,418,395 and
$86,362,777 for the nine months ended July 31, 2000 and 1999, respectively. The
Company at times negotiates accommodations to retailers, including price
discounts, credits and product returns, when demand for specific products fall
below expectations. The Company's distribution arrangements with retailers
generally do not give them the right to return products, however, the Company
generally accepts product returns for stock balancing or defective products.
Historically, the Company's write-offs for returns from its distribution
activities have been less than 1% of distribution revenues.
Publishing revenue is derived from the sale of internally developed interactive
software games or from the
6
<PAGE>
sale of product licensed from a third party developer and is recognized upon the
shipment of product to retailers. Publishing revenue amounted to $42,027,709 and
$42,615,509 for the three months ended July 31, 2000 and 1999, respectively, and
$140,979,990 and $97,645,678 for the nine months ended July 31, 2000 and 1999,
respectively. The Company's publishing arrangements require the Company to
accept product returns. A reserve is established at the time of product sales,
based primarily on these return policies, markdown allowances, and historical
return rates, and as such, the Company recognizes revenues net of product
returns. The Company has historically experienced a product return rate of
approximately 10% of gross publishing revenues.
3. Business Acquisitions
In July 2000, the Company acquired all of the issued and outstanding capital
stock of PopTop Software, Inc. ("PopTop") for 559,100 shares of the Company's
common stock. PopTop is the creator of the best selling Railroad Tycoon II.
The acquisition has been accounted for as a purchase. The Consolidated Condensed
Statement of Operations includes the operating results of each business from the
date of acquisition.
The following unaudited pro forma results below assumes the acquisitions of Toga
Holding, BV ("Toga") and Gathering of Developers, Ltd ("Gathering") occurred on
November 1, 1998:
Nine Months Ended Nine Months Ended
July 31, 2000 July 31, 1999
--------------- -----------------
Net Sales $ 271,690,266 $ 200,200,341
Net Income $ 12,026,242 $ 1,455,908
Net Income per share (basic) $ 0.43 $ 0.06
Net Income per share (fully diluted) $ 0.42 $ 0.06
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions of Toga and
Gathering been consummated as of November 1, 1998 nor are they necessarily
indicative of future operating results.
4. Loan Payable
In July 2000, the Company entered into a subordinated loan agreement with Finova
Mezzanine Capital Inc. ("Finova") in the principal amount of $15 million. The
loan is payable in full in July 2005, and bears interest at the rate of 12.5%
per annum, payable monthly. In connection with the loan, the Company issued to
Finova a five year warrant to purchase 451,747 shares of Common Stock
exercisable at a price of $11.875 per share. Subject to the outstanding loan
balance, the warrant entitles Finova to receive additional shares of Common
Stock for three consecutive years commencing July 2003, and contains certain
anti-dilution provisions. The Company has recorded the loan net of discount of
$2,926,963 to reflect an allocation of the proceeds to the estimated value
7
<PAGE>
of the warrant. The discount is being amortized using the "interest method" over
the term of the financing.
5. Income Taxes
The provisions for income taxes for the three months ended, as well as for the
nine months ended July 31, 2000 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.
6. Net Income per Share
The following table provides a reconciliation of basic earnings per share to
diluted earnings per share for the three and nine months ended July 31, 2000 and
1999.
<TABLE>
<CAPTION>
Per Share
Income Shares Amount
--------------- --------------- -----------------
<S> <C> <C> <C>
Three Months Ended July 31, 2000:
Basic $ 3,448,971 29,061,499 $ 0.12
Effect of dilutive securities - Stock options
and warrants 817,766 -
------------- --------------- -----------------
Diluted $ 3,448,971 29,879,265 $ 0.12
=============== =============== =================
Three Months Ended July 31, 1999:
Basic $ 2,707,824 22,440,547 $ 0.12
Effect of dilutive securities - Stock options
and warrants 851,994 --
--------------- --------------- -----------------
Diluted $ 2,707,824 23,292,541 $ 0.12
=============== =============== =================
Nine months Ended July 31, 2000:
Basic $ 11,589,839 25,981,014 $ 0.45
Effect of dilutive securities - Stock options
and warrants 1,011,471 (.02)
------------- --------------- -----------------
Diluted $ 11,589,839 26,992,485 $ 0.43
=============== =============== =================
Nine months Ended July 31, 1999:
Basic $ 7,163,832 19,939,990 $ 0.36
Effect of dilutive securities - Stock options
and warrants 1,265,210 (.02)
--------------- --------------- -----------------
Diluted $ 7,163,832 21,205,200 $ 0.34
=============== =============== =================
</TABLE>
The computations for diluted number of shares excludes unexercised stock options
and warrants which are anti-dilutive.
8
<PAGE>
7. Disposition of Assets
In June 2000, the Company sold its 19.9% equity interest in Bungie Software
("Bungie") to Microsoft Corporation for approximately $5 million (or 19.9% of
$25,000,000, the total share consideration paid to Bungie shareholders).
Separately, the Company sold its publishing and distribution rights to Halo for
$4,000,000 and acquired a royalty free license to Bungie's Halo technology for
two products. In addition, the Company was granted all of Bungie's right, title
and interest to the best-selling Myth franchise and the highly anticipated
upcoming PC and PlayStation(R) 2 game, Oni, titles which the Company had
previously only held certain distribution rights.
9
<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 material risks and uncertainties, including but
not limited to: risks associated with the Company's future growth, prospects and
operating results; the ability of the Company to successfully integrate the
businesses and personnel of newly acquired entities into its operations; the
availability of adequate sources of financing; credit risks; inventory
obsolescence; products returns; failure of our products to sell-through by
retailers; changes in consumer preferences and demographics; technological
change; competitive factors; unfavorable general economic conditions; and other
factors described herein and in the Company's Registration Statement on Form S-3
as filed with the Securities And Exchange Commission, any or all of which could
have a material adverse affect on the Company's business, financial condition
and results of operations. 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 to customers.
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. For distribution sales, the Company at times 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 for returns from its distribution activities have been
less than 1% of distribution revenues. If future product returns significantly
exceed these reserves, the Company's operating results would be materially
adversely affected.
Research and development costs (consisting primarily of salaries and related
costs) incurred prior to establishing technological feasibility are expensed in
accordance with Statement of Financial Accounting Standards ("FAS") No. 86
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed". In accordance with FAS No. 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 July 31, 2000, the Company had $9,796,522 of capitalized software
development costs. The Company evaluates the recoverability of capitalized
software costs, the amount in excess of estimated net realizable value may
10
<PAGE>
have a material adverse effect on the Company's operating results in future
periods. See Note 2 to Notes to Consolidated Condensed 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:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
July 31, July 31,
-------- --------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 56.1 69.1 63.6 72.6
Selling and marketing 12.7 10.9 13.0 8.9
General and administrative 12.7 10.7 9.7 9.5
Research and development costs 2.3 1.6 1.8 1.2
Depreciation and amortization 5.3 1.1 2.8 .9
One time charge related to
abandoned offering 1.5 -- .4 --
Interest expense 2.3 .7 1.7 1.1
Income taxes 2.2 1.8 2.4 1.9
Net income 4.8 4.3 4.4 3.8
</TABLE>
Results of Three Months Ended July 31, 2000 and 1999
Net sales increased by $7,910,117 or 12.4%, to $71,472,587 for the three months
ended July 31, 2000 from $63,562,470 for the three months ended July 31, 1999.
The increase in net sales was primarily attributable to the Company's expanded
distribution operations. Distribution revenues increased by $8,497,917 or 40.6%,
to $29,444,878 for the three months ended July 31, 2000 from $20,946,961 for the
three months ended July 31, 1999. Publishing revenues of $42,027,709 for the
three months ended July 31, 2000 (which included licensing revenue of
approximately $5.5 million) remained relatively constant compared to the three
months ended July 31, 1999.
Cost of sales decreased by $3,830,757 or 8.7%, to $40,100,344 for the three
months ended July 31, 2000 from $43,931,101 for the three months ended July 31,
1999. Cost of sales as a percentage of net sales decreased from 69.1% to 56.1%.
The Company attributes this decrease primarily to the continued growth
11
<PAGE>
in its publishing margins due to higher PC sales and expanding distribution and
budget publishing margins. 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.
Selling and marketing expenses increased by $2,129,612 or 30.8%, to $9,055,486
for the three months ended July 31, 2000 from $6,925,874 for the three months
ended July 31, 1999. As a percentage of net sales, selling and marketing
expenses increased to 12.7% for the three months ended July 31, 2000 from 10.9%
for the three months ended July 31, 1999. The increase in both absolute dollars
and as a percentage of net sales was primarily attributable to the acquisition
of Gathering of Developers, Ltd, which was previously accounted for under the
equity method and increased marketing and promotion efforts undertaken to
broaden product distribution.
General and administrative expenses increased by $2,326,361 or 34.3%, to
$9,105,921 for the three months ended July 31, 2000 from $6,779,560 for the
three months ended July 31, 1999. General and administrative expenses as a
percentage of net sales increased to 12.7% for the three months ended July 31,
2000 from 10.7% for the three months ended July 31, 1999. This increase in both
absolute dollars and as a percentage of net sales is a result of increased
personnel through its acquisitions.
Research and development costs increased by $669,892 or 67.9%, to $1,656,737 for
the three months ended July 31, 2000 from $986,845 for the three months ended
July 31, 1999. This increase was primarily attributable to the expansion of the
Company's product development operations. Research and development costs as a
percentage of net sales remained relatively constant.
Depreciation and amortization expense increased by $3,091,441 or 423.4%, to
$3,821,587 for the three months ended July 31, 2000 from $730,146 for the three
months ended July 31, 1999. The increase was primarily due to the amortization
of intangible assets from acquisitions.
The Company incurred a one-time charge of $1,103,170 in the three months ended
July 31, 2000 covering professional fees and other expenses related to an
abandoned offering to list a subsidiary's stock on EASDAQ.
Interest expense increased by $1,181,793 or 260.4%, to $1,635,618 for the three
months ended July 31, 2000 from $453,825 for the three months ended July 31,
1999. The increase resulted from expanded credit facilities, as well as the
amortization of fees paid in connection with financing activities.
Income taxes increased by $386,485, or 33.4% to $1,544,753 for the three months
ended July 31, 2000 from $1,158,268 for the three months ended July 31, 1999.
The increase in absolute dollars resulted primarily from increased pre-tax
income. Income tax expense as a percentage of net sales remained constant.
As a result of the foregoing, the Company achieved net income of $3,448,971 for
the three months ended July 31, 2000, as compared to net income of $2,707,824
for the three months ended July 31, 1999.
Results of Nine months Ended July 31, 2000 and 1999
Net sales increased by $80,389,930 or 43.7%, to $264,398,385 for the nine months
ended July 31, 2000 from $184,008,455 for the nine months ended July 31, 1999.
The increase in net sales was primarily attributable to the Company's expanded
presence in international markets. International publishing
12
<PAGE>
revenues increased by $25,991,128 or 55.4%, to $72,880,996 for the nine months
ended July 31, 2000 from $46,889,868 for the nine months ended July 31, 1999.
Revenues from distribution activities increased by $37,055,618 or 42.9% to
$123,418,395 for the nine months ended July 31, 2000 from $86,362,777 for the
nine months ended July 31, 1999.
Cost of sales increased by $34,601,196, or 25.9%, to $168,155,154 for the nine
months ended July 31, 2000 from $133,553,958 for the nine months ended July 31,
1999. This increase was primarily a result of the expanded scope of the
Company's operations. Cost of sales as a percentage of net sales decreased
primarily due to the higher margin publishing activities. 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.
Selling and marketing expenses increased by $17,827,828, or 108.6%, to
$34,243,171 for the nine months ended July 31, 2000 from $16,415,343 for the
nine months ended July 31, 1999. Selling and marketing expenses as a percentage
of net sales increased to 13.0% for the nine months ended July 31, 2000 from
8.9% for the nine months ended July 31, 1999. The increase in both absolute
dollars and as a percentage of net sales was primarily attributable to the
acquisition of Gathering of Developers, Ltd, which was previously accounted for
under the equity method and 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 $8,308,611, or 47.7%, to
$25,725,552 for the nine months ended July 31, 2000 from $17,416,941 for the
nine months ended July 31, 1999. The increase in absolute dollars and as a
percentage of net sales was primarily attributable to increased cost associated
with the Company's expanded operations through its acquisitions.
Research and development costs increased by $2,435,051, or 110.1%, to $4,646,045
for the nine months ended July 31, 2000 from $2,210,994 for the nine months
ended July 31, 1999. This increase was primarily attributable to the expansion
of the Company's product development operations.
Depreciation and amortization expense increased by $5,654,474 or 324.3%, to
$7,398,041 for the nine months ended July 31, 2000 from $1,743,567 for the nine
months ended July 31, 1999. The increase was primarily due to the amortization
of intangible assets from acquisitions.
The Company incurred a one-time charge of $1,103,170 in the nine months ended
July 31, 2000 covering professional fees and other expenses related to an
abandoned offering to list a subsidiary's stock on EASDAQ.
Interest expense increased by $2,463,413, or 120.0%, to $4,516,708 for the nine
months ended July 31, 2000 from $2,053,295 for the nine months ended July 31,
1999. The increase resulted primarily from increased bank borrowings.
Income taxes increased by $2,696,524, or 75.7% to $6,258,022 for the nine months
ended July 31, 2000 from $3,561,498 for the nine months ended July 31, 1999. The
increase in absolute dollars resulted primarily from increased pre-tax income.
Income tax expense as a percentage of net sales remained constant.
As a result of the foregoing, the Company achieved net income of $11,589,839 for
the nine months ended
13
<PAGE>
July 31, 2000, as compared to net income of $7,163,832 for the nine months ended
July 31, 1999.
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
primarily through the issuance of debt and equity securities and bank
borrowings. At July 31, 2000, the Company had working capital of $61,989,966 as
compared to $41,438,968 at October 31, 1999.
Net cash used in operating activities for the nine months ended July 31, 2000
was $29,198,834 compared to net cash used by operating activities of $10,370,202
for the nine months ended July 31, 1999. The increase in net cash used in
operating activities was primarily attributable to an increase in prepaid
royalties and capitalized software costs. Net cash used in investing activities
for the nine months ended July 31, 2000 was $9,631,445 as compared to net cash
used in investing activities of $5,864,789 for the nine months ended July 31,
1999. The increase in net cash used in investing was primarily attributable to
the Company's acquisition activities. Net cash provided by financing activities
for the nine months ended July 31, 2000 was $34,335,234 as compared to net cash
provided by financing activities of $16,858,869 for the nine months ended July
31, 1999. The increase in net cash provided by financing activities was
primarily attributed to cash received from the loan with Finova, cash received
from private placements and the impact of increased exercises of stock options.
At July 31, 2000, the Company had cash and cash equivalents of $2,631,068.
In December 1999, the Company's subsidiary, Take-Two Interactive Software Europe
Limited entered into a line of credit agreement with Barclays' Bank. The line of
credit provides for borrowings of up to approximately British Pounds
(pound)17,000,000 (approximately $25,000,000). Advances under the line of credit
bear interest at the rate of 1.4% over Barclays' base rate per annum, payable
quarterly. Borrowings are collateralized by receivables of the Company's
European subsidiaries, and are guaranteed by the Company. The line of credit is
repayable upon demand and is subject to review prior to November 29, 2000. The
outstanding balance and available credit under the revolving line of credit is
$14,186,488 and $1,099,162, respectively, as of July 31, 2000.
In December 1999, the Company entered into a credit agreement with a group of
lenders led by Bank of America, N.A., as agent, which provides for borrowings of
up to $75,000,000. The Company may increase the credit line to up to $85,000,000
subject to certain conditions. Interest accrues on such advances at the bank's
prime rate plus .5% or at LIBOR plus 2.5%. Borrowings under the line of credit
are collaterized by all of the Company's assets. The line of credit expires on
December 7, 2002. The outstanding balance and available credit under the
revolving line of credit is $32,291,878 and $9,920,433, respectively, as of July
31, 2000.
In July 2000, the Company entered into a subordinated loan agreement with Finova
in the principal amount of $15 million. The loan is payable in full in July
2005, and bears interest at the rate of 12.5% per annum, payable monthly.
In July 2000, the Company received net proceeds of $11,174,149 from the sale of
common stock.
The Company's accounts receivable, less an allowance for doubtful accounts and
returns, at July 31, 2000 were $85,173,092. None of the Company's customers are
accounted for more than 10% of accounts receivable at July 31, 2000. Most of the
Company's receivables are covered by insurance and generally
14
<PAGE>
have been collected in the ordinary course of business. The Company's sales are
typically made on credit, with terms that vary depending upon the customer and
the demand for the particular title being sold. The Company does not hold any
collateral to secure payment from customers. As a result, the Company is subject
to credit risks, particularly in the event that any of the receivables represent
sales to a limited number of retailers or are concentrated in foreign markets.
If the Company is unable to collect its accounts receivable as they become due
and such accounts are not recoverable by insurance, the Company's liquidity and
working capital position would be materially adversely affected.
Based on currently proposed operating plans and assumptions, the Company
believes that projected revenues from operations and available cash resources
will be sufficient to satisfy its contemplated cash requirements for the
reasonably foreseeable future. There can be no assurance that projected revenues
from operations and available cash resources will be sufficient to fund the
Company's operations or future expansion activities or that any additional
financing, if required, will be available to the Company on commercially
reasonable terms. Failure to obtain any such additional financing could severely
limit the Company's ability to continue to expand its operations.
Fluctuations in Operating Results and Seasonality
The Company may experience fluctuations in quarterly operating results as a
result of timing in the introduction of new titles; variations in sales of
titles developed for particular platforms; market acceptance of the Company's
titles; development and promotional expenses relating to the introduction of new
titles, sequels or enhancements of existing titles; projected and actual changes
in platforms; the timing and success of title introductions by the competitors;
product returns; changes in pricing policies by the Company and its competitors;
the accuracy of retailers' forecasts of consumer demand; the size and timing of
acquisitions; the timing of orders from major customers; and order cancellations
and delays in shipment.
Sales of the titles are seasonal, with peak shipments typically occurring in the
fourth calendar quarter (the Company's fourth and first fiscal quarters) as a
result of increased demand for titles during the 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 nine months ended July 31, 2000 and
1999, sales of products in international markets accounted for approximately
32.8% and 29.9%, 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.
Year 2000
To address the Year 2000 issue, the Company had developed programs to address
the possible exposures related to the impact of computer systems incorrectly
recognizing the year 2000 or "00" as 1900. As a result of implementation of its
programs, the Company did not experience any significant Year 2000 disruptions
during the transition from 1999 to 2000, and since entering 2000 the Company has
not experienced any significant Year 2000 disruptions to its business. In
addition, the Company is not aware of any significant disruptions impacting its
customers or suppliers. The Company intends to continue to monitor its computer
system over the next several months.
15
<PAGE>
Costs incurred to achieve Year 2000 readiness, which included modification to
existing systems, replacement or non-compliant systems and consulting resources
were not material to the Company's total operating expenses.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities
During the three months ended July 31, 2000, 70,000 options from the 1997 Stock
Option Plan and 731,500 non-plan options were granted at exercise prices ranging
from $8.25 to $10.875.
In July 2000, the Company issued to Finova a warrant to purchase 451,747 shares
of the Company stock at an exercise price of $11.875 in connection with the
loan.
In July 2000, the Company issued 1,415,000 shares of Common Stock to a limited
number of institutional investors in consideration of $11,174,149, which was net
of $1,345,926 in commissions.
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 27 - Financial Data Schedule (SEC use Only)
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Take-Two Interactive Software, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Take-Two Interactive Software, Inc.
By: /s/ Ryan A. Brant Dated: September 14, 2000
------------------
Ryan A. Brant
Chief Executive Officer
By: /s/ Chip David Dated: September 14, 2000
--------------
Chip David
Chief Financial Officer
18
