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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 31, 1999
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
0-29230
(Commission File No.)
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of Issuer as specified in its charter)
Delaware 51-0350842
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
575 Broadway, New York, New York 10012
(Address of principal executive offices including zip code)
Issuer's telephone number, including area code: (212) 334-6633
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Check whether the Issuer (1) 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 (or for such shorter period that the Issuer was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained herein, and no disclosure will be contained, to the
best of the Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The Issuer's revenues for the fiscal year ended October 31, 1999 were
$305,931,858.
The aggregate market value of the Issuer's common stock held by non-affiliates
as of January 10, 2000 was approximately $322,052,000. As of January 10, 2000,
there were 23,421,962 shares of the Issuer's common stock outstanding.
Documents Incorporated by Reference:
Proxy Statement Relating to Annual Meeting
(incorporated into Part III)
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PART I
Item 1. Business.
General
We are a leading worldwide developer, publisher and distributor of
interactive software games. Our software operates on multimedia personal
computers and video game console platforms manufactured by Sony, Nintendo and
Sega. We are one of the largest distributors of interactive software games in
the United States and one of the top ten publishers of interactive software
games in Europe.
Software is developed by our internal development studios, by developers in
which we have an ownership interest and by third-party developers on our behalf.
Our relationships with developers include Gathering of Developers and Bungie
Software. We have several titles under development for next generation
platforms, such as the PlayStation 2 and Dreamcast.
We publish our software under the Rockstar Games, Talonsoft, Gathering of
Developers, Mission Studios and Take-Two labels. We have released popular titles
in a variety of genres, including Grand Theft Auto, GTA2, Railroad Tycoon II,
Monster Truck Madness and Thrasher: Skate & Destroy, and intend to release new
titles, including Oni and Halo and titles based on the highly successful Duke
Nukem franchise and Austin Powers movies.
Jack of All Games, our subsidiary, distributes our software as well as
third-party software to more than 20,000 retail outlets in the United States.
Our customers include WalMart, Toys R Us, Electronics Boutique, Babbage's, Best
Buy and Ames Department Stores, as well as leading national and regional drug
store, supermarket and discount store chains and specialty retailers.
We also have publishing and distribution operations in the United Kingdom,
France, Germany, Norway, Sweden, Denmark, Italy, Australia and Canada. We have
employed the Jack of All Games trade name in Europe, and have greatly expanded
our international presence by making several acquisitions. Our Joytech
subsidiary is a leading manufacturer of video game hardware accessories in
Europe.
Our objective is to become the global leader in the interactive
entertainment software industry by:
o capitalizing on management's expertise in identifying potentially
significant opportunities arising out of the convergence of motion
picture, television and music entertainment media with interactive
software;
o developing a portfolio of strong game content for both PC and evolving
console markets, particularly for emerging next generation platforms
with potential for significant market penetration;
o establishing brand recognition and consumer awareness, including
through our Rockstar Games label, which has special appeal to today's
youth culture and provides cross promotional opportunities;
o expanding and diversifying our integrated global development,
publishing and distribution operations through internal growth and
acquisition; and
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o developing multi-player online gaming and pursuing
business-to-business distribution opportunities via the Internet.
Industry Overview
The market for interactive software games has grown rapidly. Steadily
declining hardware prices and more powerful and realistic computer graphics
combined with broadening consumer demographics have resulted in greater demand
for software and increasing game play by audiences of all ages. According to the
NPD Group (NPD), sales of interactive software games in the United States
reached $5.6 billion in 1999, an increase of 15.2% from $4.9 billion in 1998. We
believe that the industry will continue to grow largely as a result of an
increasing installed base of PCs, video game console platforms and hand-held
systems, such as the Nintendo GameBoy Color.
Increasing Sales of PC Systems. The International Data Corporation (IDC)
estimates that approximately 56 million households in the United States will own
a PC by 2002, representing a penetration rate of 53% of total households. The
increase in penetration and sales of PCs has resulted in greater demand for PC
entertainment software. According to NPD, sales of PC entertainment software in
the United States were $1.4 billion in 1999 as compared to $1.2 billion in 1998.
Increasing Sales of Video Console Platforms. Three manufacturers of video
console platforms, Sony, Nintendo and Sega, dominate the console market.
According to IDC, console shipments in the United States grew 14% from 15.3
million units in 1997 to 17.5 million units in 1998. Increased shipments of
video console systems have resulted in rapid growth of console software
revenues. According to NPD data, sales of entertainment software for video
console platforms and portable systems increased by 13.5% from $3.7 billion in
1998 to $4.2 billion in 1999.
Expanding Distribution Channels. Interactive software games are sold
primarily through specialty retailers such as Electronics Boutique, major
retailers such as Best Buy and mass merchants such as Wal-Mart. The introduction
of budget software priced at less than $20 has attracted a broader user base,
and non-traditional retail outlets such as drugstore and supermarket chains have
emerged as important new distribution channels for our products.
Technology and Platform Shifts. Historically, the interactive entertainment
software industry has experienced periods of instability when new console
platforms fail to gain widespread market acceptance or when development and
publishing companies fail to quickly adapt to changing consumer hardware
preferences. Sony has announced the next generation of the PlayStation game
console, the PlayStation 2, which it plans to introduce in 2000. Sega has
recently introduced its Dreamcast system and Nintendo has stated that it is
developing a new platform. As a result, game publishers may be required to make
investments in research, game development and inventory in order to supply
products for new platforms. We believe that the substantial installed base of
multimedia PCs, the mass market appeal and expanding user base of interactive
software games and the increasing use of cost-effective CD-ROMs may diminish the
effects of future console platform shifts. In addition, Sony has announced that
PlayStation 2 will be the first console system to feature backwards
compatibility with existing software, allowing consumers to play their old
PlayStation games on the new system. This feature may lessen the impact of
console shifts by extending the useful life of older software titles.
-3-
Releases
We actively seek to release titles with potential for mass appeal. For the
year ended October 31, 1998, Grand Theft Auto sold more than 630,000 copies and
accounted for approximately 7.6% of our revenues. For the year ended October 31,
1999, GTA2 shipped more than one million copies and with Grand Theft Auto
accounted for approximately 10.3% and 6.1%, respectively, of our revenues. The
following are certain titles we have released:
Title Platform Release Date Description
- ----- -------- ------------ -----------
Grand Theft Auto PC, November 1997- Car game set in criminal
PlayStation (International) underworld
June 1998-
(North America)
Railroad Tycoon II PC October 1998 Player builds railroads
to amass wealth
Tom Clancy's Rainbow Six PC December 1997- Save the world from
(International) terrorists
October 1998
-(North America)
GTA: London 1969 PC, April 1999 First mission pack for
PlayStation Grand Theft Auto
Fly! PC July 1999 Flight simulation
Monster Truck Madness Nintendo 64 July 1999- Microsoft's successful PC
(North America) game
October 1999-
(International)
In Fisherman's Bass Hunter 64 Nintendo 64 July 1999 Fishing simulation game
Darkstone PC July 1999- Medieval action
(North America) role-playing game
Hidden and Dangerous PC July 1999 Tactical squad-based
warfare
Earthworm Jim 3-D Nintendo 64 October 1999- Everyone's favorite
(North America) earthworm, now in 3-D
GTA2 PC, October 1999 Sequel to the popular
PlayStation Grand Theft Auto
Nocturne PC October 1999 Horror action game set in
the 1930s
Thrasher: Skate & Destroy PlayStation November 1999- Urban extreme
(North America) skateboarding
January 2000-
(International)
-4-
Publishing and Distribution Arrangements
Agreements with Gathering of Developers
We have entered into distribution agreements with Gathering of Developers
("Gathering"), a group of six premier entertainment software developers, Ritual
Entertainment, Inc., Epic MegaGames, Inc., Terminal Reality, Inc., Apogee
Software, Inc. d/b/a 3D Realms, Poptop Software, Inc. and Edge of Reality, Inc.
Gathering granted us (1) the exclusive right to distribute in the United States
and Canada and publish in Europe all PC titles scheduled to be released by
Gathering through May 31, 2003; (2) until recoupment of certain advances, rights
of first and last refusal for the exclusive worldwide publishing rights to any
console version of titles for which Gathering has publishing rights; and (3)
after recoupment of such advances, the rights of first and last refusal for
publishing rights to any console port of any title for which Gathering has
publishing rights and which was originally published by or on behalf of
Gathering on the PC or other non-console platform. In December 1998, we obtained
the exclusive worldwide rights to publish and distribute Railroad Tycoon II, Max
Payne and Kiss: Psycho Circus designed for use on video game console platforms.
In November 1999, we obtained the exclusive worldwide rights to publish and
distribute a software game based on the Duke Nukem franchise for use on the Sony
PlayStation 2 platform.
Agreements with Bungie Software
In August 1999, we entered into an agreement with Bungie Software Products
Corporation granting us the exclusive right to distribute four PC titles,
including Halo and Oni in North America, and publish these titles in Europe. We
also obtained certain rights for console versions of these products, as well as
new products developed by Bungie.
Agreements with Video Game Console Manufacturers
In February and March 1999, we entered into four-year agreements with Sony
Computer Entertainment America and Sony Computer Entertainment Europe granting
us non-exclusive licenses to develop and publish software for the PlayStation
platform. Under the agreements, Sony is the exclusive manufacturer of all
CD-ROMs for PlayStation titles. In June 1999, we entered into an agreement with
Sony in connection with our use of development tools for titles developed for
the PlayStation 2 platform.
In February 1998, we entered into a three-year agreement with Nintendo of
America Inc. granting us a non-exclusive license in North, Central and South
America to develop and publish software for the Nintendo 64 platform. In May
1998, Nintendo Co., Ltd. entered into a similar three-year agreement with our
subsidiary, Take-Two Interactive Software Europe Limited granting us a
non-exclusive license in Europe, Australia and New Zealand to develop and
publish software for the Nintendo 64 platform. In April 1998, we entered into an
agreement with Nintendo granting us a non-exclusive license to develop software
for the Nintendo GameBoy and GameBoy Color portable game systems.
In March 1999, we entered into an agreement with Sega Enterprises, Ltd.
granting us a non-exclusive license to develop and publish software for the Sega
Dreamcast platform.
We are not required to obtain any license to develop titles designed to
operate on PCs.
Other Publishing and Distribution Arrangements
In March 1998, we acquired certain publishing and distribution rights from
BMG Entertainment North America, a division of BMG Music, including (1) all of
BMG's right, title and interest to Grand Theft Auto, (2) the worldwide
publishing and distribution rights and intellectual property rights to Space
Station: Silicon Valley for the Nintendo 64 gaming system, (3) the European
distribution rights to PC recreational
-5-
software titles including Berkley Systems' After Dark screen saver series, You
Don't Know Jack! trivia series, gaming franchises such as Crystal Dynamic's Gex
and Pandemonium series for the PlayStation game console and ASC Games' One for
the PlayStation game console, (4) the worldwide publishing and distribution
rights to a series of customized World Cup soccer games for the PlayStation game
console, (5) the worldwide publishing, distribution and sequel rights to the
role-playing game Monkey Hero for PlayStation and PC platforms and (6) the
worldwide publishing, distribution and sequel rights to the military combat game
Special Ops for PlayStation and PC platforms.
Other agreements include the exclusive worldwide license from New Line
Productions, Inc. to publish and distribute titles based on Austin Powers movies
on all platforms; the exclusive worldwide license from Microsoft to distribute a
version of Monster Truck Madness designed to operate on the Nintendo 64
platform; exclusive arrangements with Angel Studios, Inc., VIS Interactive plc
and N-Space, Inc. to publish various titles for the Sony PlayStation 2; and the
grant by Majesco Sales, Inc. of exclusive European distribution rights for ten
Nintendo Color GameBoy titles, including Monopoly, Millipede, Frogger,
Centipede, Breakout, Battleship and Missile Command, licensed to Majesco by
Hasbro Interactive.
Internal Software Development
We engage in software development activities through our wholly-owned
United States development subsidiaries, Talonsoft, a developer of historical
military strategy games, Mission Studios, a developer of flight simulation
games, Alternative Reality Technologies and GearHead Entertainment. In addition,
we engage in development activities through our United Kingdom subsidiary, DMA
Design Limited, the developer of the Grand Theft Auto series. We also maintain a
development studio focusing on games for the Nintendo GameBoy Color platform in
the United Kingdom under the name Tarantula. As of October 31, 1999, our
internal development studios and product development department employed 230
development personnel with the technical capabilities to develop software titles
for all major game platforms.
Our production process is designed to enable us to manage and control
development, production budgets and timetables, identify and address possible
production and technical issues and coordinate and implement marketing
strategies in a creative environment. We utilize an integrated scheduling and
production process and software development tools, which include capabilities to
produce cinematic quality movie sequences, full motion digital video and
enhanced "real-time" 3-D graphics. We believe that our production capabilities
permit us to produce high quality software on a timely and cost-effective basis.
For the years ended October 31, 1999, 1998 and 1997, we incurred costs of
$5,262,708, $1,702,339 and $1,847,970 on research and development relating to
our software titles.
Marketing, Sales and Distribution
Our marketing and promotional efforts are intended to maximize exposure and
broaden distribution of our titles, promote brand name recognition, assist
retailers and properly position, package and merchandise our titles. We market
titles by implementing aggressive public relations campaigns, primarily using
print and on-line advertising and to a lesser extent television and radio spots.
Print advertisements are placed in industry magazines using memorable tag lines,
visually appealing full color artwork and creative concepts to position and
distinguish our titles in the marketplace. We also employ various other
marketing methods designed to promote consumer awareness, including in-store
promotions and point-of-purchase displays, direct mail, cooperative advertising,
attendance at trade shows, as well as the use of distinctive packaging. As of
October 31, 1999, we had a sales and marketing staff of 115 persons.
-6-
We distribute our own titles and third-party titles through our
wholly-owned subsidiaries, Take-Two Interactive Software Europe Limited, Jack of
All Games, DirectSoft, L.D.A. Distribution Limited, Funsoft Nordic A.S., CD
Verte Italia Spa and Take-Two Interactive Software Canada, Ltd. For the year
ended October 31, 1999, the sale of third-party products accounted for
approximately 47.6% of our revenues, with sales to Ames Department Stores and
Electronic Boutique accounting for approximately 9.9% and 4.1%, respectively, of
our revenues. No customer accounted for more than 10% of our revenues.
United States Sales. We distribute interactive entertainment software to
over 20,000 retail outlets in the United States through third-party distributors
and through direct relationships with large retail customers. Our customers
include WalMart, Toys R Us, Electronics Boutique, Babbage's, Best Buy and Ames
Department Stores as well as leading national and regional drug store,
supermarket and discount store chains and specialty retailers.
International Sales. We have significantly expanded our international
presence through the acquisition of publishing and distribution operations in
the United Kingdom, France, Germany, Norway, Sweden, Denmark, Italy, Australia
and Canada. We distribute interactive entertainment software to over 20,000
retail outlets in Europe through third party distributors and through direct
relationships with retail customers.
Rockstar Games. We actively pursue marketing relationships with
participants in media industries such as music, magazines and sports aimed at
the youth market through our console publishing label, Rockstar Games. We
believe that the shared demographics among various media and certain of our
software titles marketed by Rockstar Games provide excellent cross promotional
opportunities. We have been working with popular and emerging recording artists
to create sophisticated game soundtracks, have entered into agreements to
license high-profile names and likenesses, and have entered into co-branding
arrangements. Our goal is to accelerate consumer acceptance of our titles by
creating brand awareness.
Manufacturing
Our production of PC software includes CD-ROM pressing, assembly of
components, printing of packaging and user manuals and shipping of finished
goods, which is performed by third-party vendors in accordance with our
specifications and forecasts. We believe that there are alternative sources for
these services that could be implemented without delay. However, we are
dependent on Nintendo to provide supplies of video game cartridges and on Sony
to provide supplies of CD-ROMs for use on their video game platforms. Nintendo
cartridges are more expensive to manufacture than CD-ROMs, resulting in a
greater inventory risk for those games. We purchase titles manufactured by
Nintendo and Sony by placing purchase orders in the ordinary course of business
and by obtaining letters of credit in favor of Nintendo. We send software code
and a prototype of a title, together with related artwork, user instructions,
warranty information, brochures and packaging designs to manufacturers for
approval, defect testing and manufacturing. Titles are generally shipped within
two weeks of receipt of order. Titles manufactured by Nintendo are generally
shipped within four to six weeks of receipt of order. To date, we have not
experienced any material difficulties or delays in the manufacture of our titles
or material delays due to title defects. Our software titles carry a 90-day
limited warranty. In addition, our subsidiary Joytech Europe Limited
manufactures video game accessories and peripherals in Hong Kong and China.
Competition
We compete both for licenses to properties and the sale of interactive
entertainment software with Sony, Nintendo and Sega, each of which is the
largest developer and marketer of software for its platforms. Sony and Nintendo
currently dominate the industry and have the financial resources to withstand
significant price competition and to implement extensive advertising campaigns,
particularly for prime-time television spots. These companies may also increase
their own software development efforts.
-7-
We also compete with domestic companies such as Electronic Arts,
Activision, GT Interactive, Acclaim Entertainment, THQ, Midway Games, Hasbro,
Microsoft and Mattel and international companies such as Infogrames, Eidos,
Capcom, Konami and Namco. In addition, we believe that large software companies
and media companies are increasing their focus on the interactive entertainment
software market. Many of our competitors are developing on-line interactive
games and interactive networks that will compete with our software. Many of our
competitors have far greater financial, technical, personnel and other resources
than we do, and many are able to carry larger inventories, adopt more aggressive
pricing policies and make higher offers to licensors and developers for
commercially desirable properties than we can.
Interactive entertainment software distribution channels have undergone
rapid change in recent years, including financial difficulties of certain
retailers and the emergence of new channels for distribution of software such as
mass merchandisers, other retail outlets and the Internet. An increasing number
of companies and new market entrants are competing for access to these channels.
Retailers typically have limited shelf space and promotional resources, and
competition is intense among an increasing number of newly introduced
entertainment software titles and hardware for adequate levels of shelf space
and promotional support. Competition for retail shelf space is expected to
increase, which may require us to increase our marketing expenditures just to
maintain current levels of sales of our titles. Competitors with more extensive
lines and popular titles frequently have greater bargaining power with
retailers. Accordingly, we may not be able to achieve the levels of support and
shelf space that such competitors receive. Similarly, as competition for popular
properties increases, our cost of acquiring licenses for such properties is
likely to increase, possibly resulting in reduced margins. Prolonged price
competition, increased licensing costs or reduced operating margins would cause
our profits to decrease significantly.
Competition for our titles is influenced by the timing of competitive
product releases and the similarity of such products to our titles and may
result in loss of shelf space or a reduction in sell-through of our titles at
retail stores. Our titles also compete with other forms of entertainment such as
motion pictures, television and audio and video cassettes featuring similar
themes, on-line computer programs and forms of entertainment which may be less
expensive or provide other advantages to consumers.
Intellectual Property
We develop proprietary software and technologies and have obtained the
rights to publish and distribute software developed by third parties. We attempt
to protect our software and production techniques under copyright, trademark and
trade secret laws as well as through contractual restrictions on disclosure,
copying and distribution. We generally do not hold any patents or registered
copyrights.
Interactive entertainment software is susceptible to unauthorized copying.
Unauthorized third parties may be able to copy or to reverse engineer our titles
to obtain and use programming or production techniques that we regard as
proprietary. In addition, our competitors could independently develop
technologies substantially equivalent or superior to our technologies.
As the amount of interactive entertainment software in the market increases
and the functionality of this software further overlaps, we believe that
interactive entertainment software will increasingly become the subject of
claims that such software infringes the copyrights or patents of others. From
time to time, we receive notices from third parties alleging infringement of
their proprietary rights. Although we believe that our titles and technologies
and the titles and technologies of third-party developers and publishers with
whom we have contractual relationships do not and will not infringe or violate
proprietary rights of others, it is possible that infringement of proprietary
rights of others may occur. Any claims of infringement, with or without merit,
could be time-consuming, costly and difficult to defend.
-8-
Employees
As of December 31, 1999, we had 535 full-time employees. None of our
employees are subject to a collective bargaining agreement. We consider our
relations with employees to be good.
Item 2. Properties.
Executive Offices
Our principal executive and administrative office is located at 575
Broadway, New York, New York in approximately 13,300 square feet of office space
under a five-year lease with 575 Broadway Corporation, a company controlled by
Peter Brant, a principal stockholder. We pay $410,000 per year rent. We believe
that the terms of the lease are no less favorable than those that could have
been obtained from an unaffiliated third-party.
International Operations
Take-Two Interactive Software Europe Limited leases 12,500 square feet of
office space in Windsor, United Kingdom. The lease provides for a current annual
rent of (pound)275,000 (approximately $452,000) plus taxes and utilities, and
expires in 2011. Take-Two Interactive Software Europe Limited also leases office
space in Lincoln, United Kingdom. The lease provides for a current annual rent
of (pound)12,000 (approximately $19,700) and expires in 2007. Subsidiaries of
Take-Two Interactive Software Europe Limited lease office and warehouse space at
locations in Paris, France, Munich, Germany and Tokyo, Japan for current
aggregate annual rent of approximately $90,000. Directsoft leases office and
warehouse space in Hornsby, Australia at an annual rent of approximately
$77,000. Joytech Europe Limited leases office space in Leighton Buzzard Beds,
United Kingdom at an annual rent of (pound)58,600 (approximately $96,300).
Funsoft Nordic A.S. and its subsidiaries lease office and warehouse space at
locations in Oslo, Norway, Spanga, Sweden and Arthus, Denmark for current
aggregate annual rent of approximately $180,000. DMA Design Limited currently
leases office space in Dundee and Edinburgh, Scotland, at an annual rental of
(pound)135,000 (approximately $221,900). CD Verte Italia Spa currently leases
office and warehouse space in Golarata, Italy at an annual rent of approximately
$94,200.
Development Facilities
GearHead maintains a production facility in Latrobe, Pennsylvania in 7,200
square feet of leased office space for a rent of $6,500 per month on a
month-to-month basis. Mission leases 2,600 square feet of office space at an
annual rate of $53,040, subject to annual increases, pursuant to a lease that
expires in February 2004. ART leases approximately 3,600 square feet of space in
Ontario, Canada at an annual rental of $25,600 plus taxes and insurance.
Talonsoft leases approximately 10,800 square feet of office space in Baltimore,
Maryland. Talonsoft currently pays $162,000 per annum under the lease.
Distribution Facilities
Jack of All Games leases approximately 13,000 square feet of office and
warehouse space in College Point, New York. The lease provides for annual rent
of $96,000, plus increases in real estate taxes, and expires in July 2001. Jack
of All Games has entered into a six-year lease for approximately 205,900 square
feet of office and warehouse space in Cincinnati, Ohio, commencing April 1,
2000. Jack of All Games will pay $735,000 per annum, plus taxes and insurance,
under the lease, which expires in January 2006. Triad Distributors, Inc.
currently leases approximately 36,750 square feet of office and warehouse space
in Ontario, Canada at an annual rate of approximately $218,700 plus
-9-
operating costs, under a lease that expires September 2004. DVDWave.com leases
approximately 3,000 square feet of office space in San Francisco, California for
an annual rent of $104,335 under a lease that expires August 2002.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
-10-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information. Our common stock has traded since September 23, 1998 on
the NASDAQ National Market under the symbol "TTWO." From April 14, 1997 to
September 22, 1998, our common stock traded on the NASDAQ SmallCap Market. The
following table sets forth, for the periods indicated, the range of the high ask
and low bid prices for the common stock as reported by NASDAQ. Such prices
reflect inter-dealer quotations, without retail mark-up, mark-down or commission
and may not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year Ended October 31, 1997
- ----------------------------------
Second Quarter
(commencing April 14, 1997)............................. 7 5/8 5 1/8
Third Quarter........................................... 9 7
Fourth Quarter.......................................... 8 3/8 6 5/8
Fiscal Year Ended October 31, 1998
- ----------------------------------
First Quarter........................................... 7 1/2 4 1/2
Second Quarter.......................................... 8 11/16 6 1/4
Third Quarter........................................... 8 3/4 5 7/16
Fourth Quarter.......................................... 6 3/4 4 3/4
Fiscal Year Ended October 31, 1999
- ----------------------------------
First Quarter........................................... 13 3/8 5 7/8
Second Quarter.......................................... 13 5/8 7 9/16
Third Quarter........................................... 9 11/16 6 7/8
Fourth Quarter.......................................... 11 1/2 7
Fiscal Year Ending October 31, 2000
- -----------------------------------
First Quarter
(through January 10, 2000).............................. 17 1/2 10
On January 10, 2000, the last sale price for our common stock as reported
by NASDAQ was $13.75 per share. The number of record holders of our common stock
was approximately 23,421,962 as of January 10, 2000. We believe that there are
in excess of 500 beneficial owners of our common stock.
-11-
Dividend Policy. To date, we have not declared or paid any cash dividends.
The payment of dividends, if any, in the future is within the discretion of the
board of directors and will depend upon future earnings, capital requirements
and other relevant factors. We presently intend to retain all earnings to
finance continued growth and development of our business and we do not expect to
declare or pay any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities. In September 1999, we issued
162,500 shares of common stock in connection with the acquisition of Triad
Distributors, Inc. The foregoing issuance was made in reliance on Section 4(2)
of the Securities Act of 1933.
Item 6. Selected Financial Data.
(in thousands, except per share data)
Statement of Operations Data: Fiscal Year Ended October 31
------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Net sales ................................. $ 305,932 $ 194,052 $ 97,341 $ 55,123 $ 35,758
Income (loss) from operations ............. 27,381 10,690 (895) 2,032 (381)
Net income (loss) ......................... 16,332 7,181 (2,768) 1,682 (603)
Net income (loss) per share
Basic ................................ $.79 $.49 $(.25) $.16 $(.07)
Diluted .............................. .76 .42 (.25) .15 (.07)
Net income (loss) per share attributable to
common stockholders - Diluted ............. .76 .37 (.31) .06 (.10)
- --------------------------------------------------------------------------------
Balance Sheet Data: As of October 31
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Cash and cash equivalents $ 10,375 $ 2,763 $ 2,372 $ 737 $ 727
Working capital ......... 41,439 21,797 16,037 (290) (793)
Total assets ............ 232,716 109,385 56,395 24,209 11,109
Total debt .............. 56,137 30,808 22,031 9,127 2,092
Total liabilities ....... 147,613 73,820 44,460 20,026 8,955
Stockholders' equity .... 85,103 35,566 11,935 4,183 2,154
Item 7. 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 our future growth and operating results,
our ability to successfully integrate the businesses and personnel of acquired
entities into our operations, changes in consumer preferences and demographics,
technological and platform change, product returns, failure of retailers to
sell-through our products, competitive factors, unfavorable general economic
conditions and other factors described herein and contained in our Registration
Statement on Form S-3 filed with the Securities and Exchange Commission. Our
actual operating results may vary significantly from such forward-looking
statements.
-12-
Overview
Our principal sources of revenues are derived from publishing and
distribution operations. Publishing revenues are derived from the sale of
internally developed software or software licensed from third parties.
Distribution revenues are derived from the sale of third-party software and
hardware. Our publishing operations typically generate higher margins than
distribution operations, with sales of PC software resulting in higher margins
than sales of cartridges designed for video game consoles. We recognize revenue
from software sales when titles are shipped. See Note 2 to Notes to Consolidated
Financial Statements.
Our published titles are subject to return if not sold to consumers. We
establish a reserve for future returns of published titles at the time of sales
based primarily on our return policies and historical return rates, and we
recognize revenues net of returns. We have historically experienced a return
rate of approximately 10% of gross publishing revenues, with less than 1% of
distribution revenues representing write-offs for returns. If future returns
significantly exceed our reserves, our operating results would be adversely
affected. See Note 2 to Notes to Consolidated Financial Statements.
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
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". In accordance with FASB 86, we capitalize software development costs
subsequent to establishing technological feasibility (completion of a detailed
program design) which is amortized (included in cost of sales) based on the
greater of the proportion of current year sales to total estimated sales
commencing with the title's release or the straight line method. At October 31,
1999, we had $2,226,670 of capitalized software development costs. We evaluate
the recoverability of capitalized software costs which may be reduced materially
in future periods. See Note 2 to Notes to Consolidated Financial Statements.
Recent Acquisitions
In February 1999, we acquired all of the outstanding capital stock of
L.D.A. Distribution Limited, a company engaged in the distribution of
interactive entertainment software in the United Kingdom and France, and
L.D.A.'s subsidiary, Joytech Europe Limited, a leading manufacturer of video
game accessories. We paid approximately $337,000 and issued 364,766 shares of
common stock in connection with the acquisition.
In February 1999, we purchased a 19.9% Class A limited partnership interest
in Gathering for $4 million. The general partner and each Class B limited
partner of Gathering granted us an option to purchase all of their interests,
exercisable on two separate occasions during the six-month periods ending April
30, 2001 and 2002. In consideration of the option grant, we issued to the
general partner and the Class B limited partners 125,000 shares of common stock.
We also granted to the general partner and Class B limited partners an option to
purchase our Class A limited partnership interest, exercisable during the
six-month period ending April 30, 2003. In December 1999, Gathering was
converted into a corporation.
In February 1999, we acquired Falcon Ventures Corporation d/b/a
DVDWave.com, a distributor of DVD movie titles over the Internet, for 50,000
shares of common stock.
In March 1999, we acquired Funsoft Nordic A.S., a distributor and budget
publisher of interactive software games in Norway, Sweden and Denmark for 60,281
shares of common stock.
-13-
In August 1999, through our wholly-owned Canadian subsidiary, Take-Two
Interactive Software Canada, Inc., we purchased all of the issued and
outstanding capital stock of Triad Distributors, Inc. and Global Star Software
Ltd. for $700,000 in cash and the issuance of 162,500 shares of common stock.
Triad is a leading Canadian distributor of third-party computer software and
video games and Global is a leading Canadian budget publisher.
In September 1999, we acquired all of the outstanding capital stock of CD
Verte Italia Spa for $2.2 million, of which $1,000,000 was paid in cash and the
balance is to be paid over a three-year period. CD Verte is a leading
distributor and publisher of software and video games in Italy.
In September 1999, we acquired all of the outstanding capital stock of DMA
Design Holdings Limited for (pound)1.00 and assumed approximately $12,300,000 of
indebtedness. DMA Design Holdings Limited holds all of the outstanding capital
stock of DMA Design Limited, the developer of the Grand Theft Auto series.
In November 1999, we acquired 19.9% of the outstanding capital stock of
Bungie Software Products Corporation for $5 million, of which $4 million was
paid and $1 million is payable in May 2000. Bungie is a leading developer of
software games for the PC platform.
In December 1999, we agreed to purchase 400,000 shares of common stock from
eUniverse, Inc., a leading online gaming network, at a purchase price of $5.00
per share. As part of a proposed cooperative advertising plan, we also have the
option to purchase up to an additional 200,000 shares. Our investment is subject
to eUniverse qualifying its common stock under the Securities Exchange Act of
1934 and customary closing conditions. In connection with the transaction,
eUniverse agreed to purchase all of the capital stock of DVDWave.com from us for
310,000 shares of eUniverse common stock.
For additional information relating to these acquisitions, see Note 3 to
Notes to Consolidated Financial Statements.
Results of Operations
The following table sets forth for the periods indicated the percentage of
net sales represented by certain items reflected in our statement of operations:
Years Ended October 31
---------------------------------
1999 1998 1997
------ ------ ------
Net sales ............................. 100.0% 100.0% 100.0%
Cost of sales ......................... 70.3 76.0 83.7
Selling and marketing ................. 9.8 9.6 8.3
General and administration ............ 8.2 7.0 6.0
Research and development costs ........ 1.7 0.9 1.9
Depreciation and amortization ......... 0.9 0.9 1.0
Interest expense ...................... 1.0 1.9 1.9
Income taxes .......................... 2.6 (0.2) --
Net income (loss) ..................... 5.3 3.7 (2.8)
-14-
The following table sets forth the percentages of publishing revenues
derived from sales of titles designed to operate on specific platforms during
the periods indicated:
Years Ended October 31
---------------------------
Platform 1999 1998 1997
- --------- ----- ----- -----
PC ............................................ 44.0% 28.5% 87.3%
Nintendo (excluding GameBoy) .................. 15.0 29.2 8.0
Nintendo GameBoy .............................. 6.0 -- --
Sony .......................................... 34.8 42.3 4.7
Sega Dreamcast ................................ 0.2 -- --
----- ----- -----
100.0% 100.0% 100.0%
Fiscal Years Ended October 31, 1999 and 1998
Net Sales. Net sales increased by $111,880,292, or 57.7%, to $305,931,858
for fiscal 1999 from $194,051,566 for fiscal 1998. The increase reflects the
success of our global publishing and distribution businesses, with approximately
84% of the increase attributable to internal growth. Publishing revenues
increased by $69,149,500, or 75.8%, to $160,334,972 for fiscal 1999 from
$91,185,472 for fiscal 1998. Distribution revenues increased by $42,730,792, or
41.5%, to $145,596,886 for fiscal 1999 from $102,866,094 for fiscal 1998.
For fiscal 1999, publishing and distribution activities accounted for
approximately 52.4% and 47.6%, respectively, of our net sales. For this year,
software products designed for PC and video game console platforms accounted for
approximately 24.8% and 55.8%, respectively, of our net sales, with video game
hardware and peripherals accounting for 19.4% of net sales. International
operations accounted for approximately $105,913,316 or 34.6% of our net sales
for fiscal 1999.
Cost of Sales. Cost of sales increased by $67,566,652, or 45.8%, to
$215,121,824 for fiscal 1999 from $147,555,172 for fiscal 1998. The increase was
primarily a result of the expanded scope of our operations and was consistent
with revenue growth. Cost of sales as a percentage of net sales decreased to
70.3% for fiscal 1999 from 76.0% for fiscal 1998. This decrease was primarily
due to increased publishing activities which provide higher margins than
distribution activities.
Selling and Marketing. Selling and marketing expenses increased by
$11,422,270, or 61.1%, to $30,108,356 for fiscal 1999 from $18,686,086 for
fiscal 1998. Selling and marketing expenses as a percentage of net sales
increased to 9.8% for fiscal 1999 from 9.6% for fiscal 1998. The increases were
due to increased marketing and promotion efforts undertaken to broaden product
distribution and to assist retailers in positioning our products for sale to
consumers, including television advertising.
General and Administrative. General and administrative expenses increased
by $11,528,400 or 84.9%, to $25,111,531 for fiscal 1999 from $13,583,131 for
fiscal 1998. General and administrative expenses as a percentage of net sales
increased to 8.2% for fiscal 1999 from 7.0% for fiscal 1998. The increases were
due to additional salaries, rent, insurance premiums and professional fees in
connection with our expanded operations.
Research and Development. Research and development costs increased by
$3,560,369, or 209.1%, to $5,262,708 for fiscal 1999 from $1,702,339 for fiscal
1998. Research and development costs as a percentage of sales increased to 1.7%
for fiscal 1999 from 0.9% for fiscal 1998. This increase was primarily
attributable to the acquisition of DMA Design Limited.
-15-
Depreciation and Amortization. Depreciation and amortization expense
increased by $987,030, or 53.8%, to $2,822,087 for fiscal 1999 from $1,835,057
for fiscal 1998. This increase was primarily attributable to the amortization of
goodwill associated with acquisitions. Depreciation and amortization expense as
a percentage of net sales remained constant.
Interest Expense. Interest expense decreased by $770,249, or 20.9%, to
$2,909,826 for fiscal 1999 from $3,680,075 for fiscal 1998. The decrease
resulted primarily from lower interest rates on bank borrowings.
Income Taxes. Income taxes increased by $8,428,106 as a result of a tax
provision of $8,093,970 for fiscal 1999, as compared to a tax benefit of
$334,136 for fiscal 1998. The increase was due to increased pre-tax income in
fiscal 1999 and the full utilization of prior net operating loss carryforwards
in fiscal 1998.
Net Income. As a result of the foregoing, we achieved net income of
$16,332,103 for fiscal 1999, as compared to a net income of $7,181,094 for
fiscal 1998.
Fiscal Years Ended October 31, 1998 and 1997
Net Sales. Net sales increased by $96,710,341, or 99.4%, to $194,051,566
for fiscal 1998 from $97,341,225 for fiscal 1997. The increase was primarily
attributable to the acquisition of product rights from BMG and Gathering.
Publishing revenues increased by $73,572,671, or 417.7%, to $91,185,472 for
fiscal 1998 from $17,612,801 for fiscal 1997. We also acquired leading software
distributors to complement our publishing activities and to maximize product
exposure and revenues. Distribution revenues increased by $23,137,670, or 29.0%,
to $102,866,094 for fiscal 1998 from $79,728,424 for fiscal 1997.
For fiscal 1998, publishing and distribution activities accounted for
approximately 47.0% and 53.0%, respectively, of our net sales. For fiscal 1998,
software products designed for PC and video game console platforms accounted for
approximately 12.0% and 70.2%, respectively, of our net sales, with video game
hardware accounting for 11.2% of net sales. In addition, we significantly
expanded our presence in international markets. International operations
accounted for approximately $41,870,625, or 21.6%, of our net sales for fiscal
1998.
Cost of Sales. Cost of sales increased by $66,075,764, or 81.1%, to
$147,555,172 for fiscal 1998 from $81,479,408 for fiscal 1997. The increase was
primarily a result of the expanded scope of our operations. Cost of sales as a
percentage of net sales decreased to 76.0% for fiscal 1998 from 83.7% for fiscal
1997. This decrease was primarily due to an increase in publishing activities
which provide higher margins than distribution operations.
Selling and Marketing. Selling and marketing expenses increased by
$10,643,139, or 132.3%, to $18,686,086 for fiscal 1998 from $8,042,947 for
fiscal 1997. Selling and marketing costs as a percentage of net sales increased
to 9.6% for fiscal 1998 from 8.3% for fiscal 1997. The increases were primarily
due to increased marketing and promotion efforts undertaken to broaden product
distribution and to assist retailers in positioning our products for sale to
consumers.
General and Administrative. General and administrative expenses increased
by $7,721,170 or 131.7%, to $13,583,131 for fiscal 1998 from $5,861,961 for
fiscal 1997. General and administrative expenses as a percentage of net sales
increased to 7.0% for fiscal 1998 from 6.0% for fiscal 1997. The increases were
primarily due to increased salaries, rent, insurance premiums and professional
fees associated with acquisitions.
-16-
Research and Development. Research and development costs decreased by
$145,631, or 7.9%, to $1,702,339 for fiscal 1998 from $1,847,970 for fiscal
1997. Research and development costs as a percentage of sales decreased to 0.9%
for fiscal 1998 from 1.9% for fiscal 1997. This decrease was attributable to the
shift from software development to publishing and distribution.
Depreciation and Amortization. Depreciation and amortization expense
increased by $830,919, or 82.8%, to $1,835,057 for fiscal 1998 from $1,004,138
for fiscal 1997. This increase was primarily attributable to the amortization of
goodwill associated with acquisitions.
Interest Expense. Interest expense increased by $1,836,672, or 99.6%, to
$3,680,075 for fiscal 1998 from $1,843,403 for fiscal 1997. The increase
resulted primarily from increased borrowings during fiscal 1998.
Income Taxes. Income taxes decreased $363,925 to a tax benefit of $334,136
for fiscal 1998 from a tax provision of $29,789 for fiscal 1997. This decrease
was primarily attributable to the recognition of a deferred tax asset of
$941,000.
Net Income. As a result of the foregoing, we achieved net income of
$7,181,094 for fiscal 1998, as compared to a net loss of $2,768,391 for fiscal
1997.
Liquidity and Capital Resources
Our primary capital requirements have been and will continue to be to fund
product commercialization. We have historically financed our operations through
cash flow from operations, the issuance of debt and equity securities and bank
borrowings. At October 31, 1999, we had working capital of $41,438,968, as
compared to working capital of $21,797,097 at October 31, 1998.
Net cash used in operating activities for fiscal 1999 was $16,745,687, as
compared to net cash used in operating activities of $8,021,041 for fiscal 1998
and $14,460,000 for fiscal 1997. The increase was primarily attributable to
increased levels of receivables, inventories and advances to developers. Net
cash used in investing activities for fiscal 1999 was $21,540,778, as compared
to $727,418 for fiscal 1998 and $2,583,359 for fiscal 1997. The increase was
primarily the result of increased cash paid for acquisitions. Net cash provided
by financing activities for fiscal 1999 was $46,778,800 as compared to
$9,016,664 for fiscal 1998, and $18,809,333 for fiscal 1997. The increase was
primarily the result of increased borrowings under the line of credit and the
proceeds from the secondary public offering.
In December 1999, 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 (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 our European subsidiaries, and are guaranteed by us. The line
of credit is repayable upon demand and is subject to review prior to November
29, 2000. As of December 31, 1999, $18,561,806 was outstanding under the line of
credit.
In December 1999, we 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. We may increase the credit line to up to $85,000,000 subject
to certain conditions. Generally, advances under the line of credit are based on
a borrowing formula equal to the lesser of (1) the borrowing limit or (2) 80% of
eligible accounts receivable, plus 50% of eligible inventory. Interest accrues
on such advances at the bank's prime rate plus 0.5%, or at LIBOR plus 2.5%.
Borrowings under the line of credit are collaterized by our accounts receivable,
inventory, equipment, general intangibles, securities and other personal
property, including the capital stock of our domestic subsidiaries. In addition
to certain financial covenants, the loan agreement limits or
-17-
prohibits us from declaring or paying cash dividends, merging or consolidating
with another corporation, selling assets (other than in the ordinary course of
business), creating liens and incurring additional indebtedness. The line of
credit expires on December 7, 2002. As of December 31, 1999, $61,471,534 was
outstanding under the line of credit.
In May 1999, we consummated a second underwritten public offering pursuant
to which we issued 3,005,000 shares of common stock (including 255,000 shares
sold pursuant to an overallotment option) and received net proceeds of
$21,852,559.
Our accounts receivable, less an allowance for doubtful accounts and
returns, at October 31, 1999 were $108,802,903. Of such receivables,
approximately $15,678,705 or 14.4% were due from Ames Department Stores. The
Company's receivables are covered by insurance and generally have been collected
in the ordinary course of business. Our sales are typically made on credit, with
terms that vary depending upon the customer and the demand for the particular
title being sold. We do not hold any collateral to secure payment by our
customers. As a result, we are subject to credit risks, particularly in the
event that any of our receivables represent sales to a limited number of
retailers or are concentrated in foreign markets. If we are unable to collect
our accounts receivable as they become due and such accounts are not covered by
insurance, our liquidity and working capital position could suffer.
We have no material commitments for capital expenditures.
Fluctuations in Operating Results; Seasonality
We have experienced and may continue to experience fluctuations in
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 our titles; development and promotional expenses relating to the
introduction of new titles, sequels or enhancements of existing titles;
projected and actual changes in platforms; the timing and success of title
introductions by our competitors; product returns; changes in pricing policies
by us and our competitors; the accuracy of retailers' forecasts of consumer
demand; the size and timing of acquisitions; the timing of orders from major
customers; and order cancellations and delays in shipment.
Sales of our titles are seasonal, with peak shipments typically occurring
in the fourth calendar quarter (our fourth and first fiscal quarters) as a
result of increased demand for titles during the holiday season.
International Operations
Sales in international markets, primarily in the United Kingdom and other
countries in Europe, have accounted for an increasing portion of our revenues.
For the years ended October 31, 1999, 1998 and 1997, sales in international
markets accounted for approximately 34.6%, 21.6% and 5.9%, respectively, of our
revenues. We are subject to risks inherent in foreign trade, including increased
credit risks, tariffs and duties, fluctuations in foreign currency exchange
rates, shipping delays and international political, regulatory and economic
developments, all of which can have a significant impact on our operating
results. Sales in the various countries are made in their local currencies.
Year 2000
The inability of computers to recognize and properly process Year 2000 data
may cause software applications to fail or reach erroneous results. We believe
that our accounting and management software and PC products are Year 2000
compliant. To our knowledge, neither we nor any of our principal customers or
suppliers has experienced any difficulties relating to the Year 2000.
-18-
Item 8. Financial Statements.
The financial statements appear in a separate section of this report
following Part III.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-19-
PART III
Item 10. Directors and Executive Officers.
The information required by this Item is incorporated by reference to the
section of the Company's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held in 2000, entitled "Election of Directors" to be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this Report.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
section of the Company's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held in 2000, entitled "Executive Compensation" to be filed
with the Securities and Exchange Commission within 120 days after the end of the
fiscal year covered by this Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
section of the Company's definitive Proxy Statement for it Annual Meeting of
Stockholders to be held in 2000, entitled "Security Ownership of Certain
Beneficial Owners and Management" to be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered by this
Report.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
section of the Company's definitive Proxy Statement for its Annual Meeting of
Stockholders to be held in 2000, entitled "Certain Relationships and Related
Transactions" to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year covered by this Report.
-20-
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Exhibits
3.1 Form of Restated Certificate of Incorporation of the Company.+
3.2 Amendment to Restated Certificate of Incorporation.+
3.3 By-Laws of the Company.+
10.1 1994 Stock Option Plan of the Company.+
10.2 1997 Stock Option Plan of the Company.+
10.3 Employment Agreement, dated as of August 1, 1998, between the Company
and Ryan A. Brant.+++
10.4 Employment Agreement, dated as of August 1, 1998, between the Company
and Anthony R. Williams.+++
10.5 Employment Agreement, dated as of January 29, 1999, between the
Company and Larry Muller.+++
10.6 Employment Agreement, dated as of July 26, 1999, between the Company
and Barry Rutcofsky.
10.7 Credit Agreement, dated December 7, 1999, by and among the Company,
certain of its subsidiaries, certain lenders and Bank of America,
N.A., as Agent.
10.8 Loan Agreement, dated December 6, 1999, between Take-Two Interactive
Software Europe Limited and Barclays Bank, PLC.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Aronowitz, Chaiken & Hardesty, LLP
27.1 Financial Data Schedule (SEC use only).
- ----------
+ Incorporated by reference to the applicable exhibit contained in the
Company's Registration Statement on Form SB-2 (File no. 333-6414).
++ Incorporated by reference to the applicable exhibit contained in the
Company's Current Report on Form 8-K dated February 23, 1999.
+++ Incorporated by reference to the applicable exhibit contained in the
Company's Registration Statement in Form S-1 (File No. 333-748851).
(b) Financial Statement Schedules:
(c) Reports on Form 8-K filed during the quarter ended October 31, 1999:
Current Report on Form 8-K dated September 29, 1999 relating to the
acquisition of DMA Design Holdings Limited.
-21-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly signed this report on its behalf
by the undersigned, thereunto duly authorized on the 17th day of January 2000.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Ryan A. Brant
------------------------------
Ryan A. Brant,
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act of 1934, this
report was signed by the following persons in the capacities and on the dates
stated.
Signature Title Date
--------- ----- ----
/s/ Ryan A. Brant
- ---------------------------------
Ryan A. Brant Chief Executive Officer and Director (Principal January 17, 2000
Executive Officer)
/s/ Barry Rutcofsky
- ---------------------------------
Barry Rutcofsky President January 17, 2000
/s/ Larry Muller
- ---------------------------------
Larry Muller Chief Financial Officer (Principal Financial January 17, 2000
Officer)
/s/ Anthony R. Williams
- ---------------------------------
Anthony R. Williams Co-Chairman and Director January 17, 2000
/s/ Barbara A. Ras
- ---------------------------------
Barbara A. Ras Chief Accounting Officer (Principal Accounting January 17, 2000
Officer) and Secretary
/s/ Oliver R. Grace, Jr.
- ---------------------------------
Oliver R. Grace, Jr. Director January 17, 2000
- ---------------------------------
Neil S. Hirsch Director January __, 2000
/s/ Kelly Sumner
- ---------------------------------
Kelly Sumner Director January 17, 2000
/s/ Robert Flug
- ---------------------------------
Robert Flug Director January 17, 2000
-22-
Report of Independent Accountants
To the Stockholders of
Take-Two Interactive Software, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows,
present fairly, in all material respects, the financial position of Take-Two
Interactive Software, Inc. and Subsidiaries at October 31, 1999, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1999, in conformity with principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
December 31, 1997 financial statements of Jack of All Games, Inc., a wholly
owned subsidiary, which statements reflect total revenues constituting 77
percent, net income constituting 46 percent, and total assets constituting 54
percent of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Jack of All Games, Inc., is based
solely on the reports of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers
New York, New York
December 17, 1999
F-1
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and
Stockholders of Jack of All Games, Inc.
(An S Corporation)
Cincinnati, Ohio
We have audited the accompanying balance sheets of Jack of All Games, Inc. (An S
Corporation) as of December 31, 1997, and the related statements of income,
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Jack of All
Games, Inc. (an S Corporation) as of December 31, 1997 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Aronowitz, Chaiken & Hardesty, LLP
Cincinnati, Ohio
February 26, 1998
F-2
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Balance Sheets
As of October 31, 1999 and 1998
ASSETS:
October 31,
------------------------------
1999 1998
------------- -------------
Current assets:
Cash and cash equivalents $ 10,374,562 $ 2,762,837
Accounts receivable, net of allowances of $6,816,682
and $1,473,017, respectively 108,802,903 49,138,871
Inventories 41,299,838 26,092,541
Prepaid royalties 20,118,160 8,064,510
Advances to developer -- 4,319,989
Prepaid expenses and other current assets 6,374,031 3,981,942
Deferred tax asset 2,004,689 941,000
------------- -------------
Total current assets 188,974,183 95,301,690
Fixed assets, net 4,120,317 1,979,658
Prepaid royalties 1,510,530 1,388,673
Capitalized software development costs, net 2,226,670 2,260,037
Investment in affiliates 4,054,668 --
Intangibles, net of accumulated amortization of
$3,251,358 and $1,589,623, respectively 30,856,983 8,421,777
Other assets, net 973,026 33,259
------------- -------------
Total assets $ 232,716,377 $ 109,385,094
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 71,229,744 $ 33,532,359
Accrued expenses 20,161,810 9,166,867
Lines of credit, current portion 56,047,846 30,226,899
Notes payable due to related parties, net of discount -- 222,955
Current portion of capital lease obligation 65,204 82,373
Notes payable, net of discount 30,611 137,140
Other current liabilities -- 136,000
------------- -------------
Total current liabilities 147,535,215 73,504,593
Lines of credit -- 123,499
Notes payable, net of current portion 58,363 97,392
Capital lease obligation, net of current portion 19,882 94,042
------------- -------------
Total liabilities 147,613,460 73,819,526
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000
shares authorized; 23,085,455 and 18,071,972 shares
issued and outstanding at October 31, 1999 and 1998,
respectively 230,855 180,719
Additional paid-in capital 67,345,381 33,546,417
Deferred compensation (47,925) (223,657)
Retained earnings 18,401,625 2,069,522
Foreign currency translation adjustment (827,019) (7,433)
------------- -------------
Total stockholders' equity 85,102,917 35,565,568
------------- -------------
Total liabilities and stockholders' equity $ 232,716,377 $ 109,385,094
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Operations
For the years ended October 31, 1999, 1998 and 1997
Years Ended October 31,
----------------------------------------------
1999 1998 1997
------------- ------------- -------------
Net sales $ 305,931,858 $ 194,051,566 $ 97,341,225
Cost of sales 215,121,824 147,555,172 81,479,408
------------- ------------- -------------
Gross profit 90,810,034 46,496,394 15,861,817
------------- ------------- -------------
Operating expenses:
Selling and marketing 30,108,356 18,686,086 8,042,947
General and administrative 25,111,531 13,583,131 5,861,961
Research and development costs 5,262,708 1,702,339 1,847,970
Depreciation and amortization 2,822,087 1,835,057 1,004,138
Loss on disposal of fixed assets 124,121 -- --
------------- ------------- -------------
Total operating expenses 63,428,803 35,806,613 16,757,016
------------- ------------- -------------
Income (loss) from operations 27,381,231 10,689,781 (895,199)
Interest expense, net 2,909,826 3,680,075 1,843,403
------------- ------------- -------------
Income (loss) before equity in loss of affiliate and income taxes 24,471,405 7,009,706 (2,738,602)
Equity in loss of affiliate 45,332 -- --
------------- ------------- -------------
Income (loss) before income taxes 24,426,073 7,009,706 (2,738,602)
Provision (benefit) for income taxes 8,093,970 (334,136) 29,789
------------- ------------- -------------
Net income (loss) before extraordinary item 16,332,103 7,343,842 (2,768,391)
Extraordinary net loss on early extinguishment of debt -- 162,748 --
------------- ------------- -------------
Net income (loss)* 16,332,103 7,181,094 (2,768,391)
Perferred dividends and warrants in lieu of preferred dividends -- -- (135,418)
------------- ------------- -------------
Net income (loss) $ 16,332,103 $ 7,181,094 $ (2,903,809)
============= ============= =============
Per share data:
Basic:
Weighted average common shares outstanding 20,689,684 14,746,854 11,697,342
============= ============= =============
Net income (loss) before extraordinary net loss per share $ 0.79 $ 0.50 $ (0.25)
Extraordinary net loss per share -- (0.01) --
------------- ------------- -------------
Net income (loss) - Basic $ 0.79 $ 0.49 $ (0.25)
============= ============= =============
Diluted:
Weighted average common shares outstanding 21,514,625 17,062,806 11,697,342
============= ============= =============
Net income (loss) before extraordinary net loss per share $ 0.76 $ 0.43 $ (0.25)
Extraordinary net loss per share -- (0.01) --
------------- ------------- -------------
Net income (loss) - Diluted $ 0.76 $ 0.42 $ (0.25)
============= ============= =============
* Net income (loss) includes acquired S corporation net income of $0,
$1,232,636, and $1,347,477 for the years ended 1999, 1998 and 1997,
respectively.
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 1999, 1998 and 1997
October 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 16,332,103 $ 7,181,094 $ (2,768,391)
Adjustment to retained earnings as a result of business combination (Note 3) -- (581,089) --
Adjustment to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 2,822,087 1,835,057 1,004,138
Loss on termination of capital lease -- 225,395 --
Loss on disposal of equipment 124,121 -- 772
Gain on extraordinary item -- (62,647) --
Equity in loss of affiliate 45,332 -- --
Recognition of deferred tax asset (1,063,689) (941,000) --
Provision for doubtful accounts 3,842,839 1,429,103 49,486
Provision for inventory 319,440 236,616 --
Amortization of deferred compensation 181,357 121,887 17,250
Amortization of affiliate purchase option 301,974 -- --
Forfeiture of compensatory stock options in connection with AIM acquisition (146,418) -- --
Amortization of loan discounts 2,219 890,062 720,994
Amortization of deferred financing costs -- 246,204 30,776
Issuance of compensatory stock 830,947 -- --
Increase in cash value of life insurance -- -- (1,193)
Tax benefit from exercise of stock options 994,258 -- --
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (56,339,373) (25,865,693) (12,770,174)
Increase in inventories, net (10,834,767) (5,579,244) (5,308,962)
Increase in prepaid royalties (12,118,784) (466,809) (1,090,250)
Decrease (increase) in advances to developers 4,319,989 (4,319,989) --
(Increase) decrease in prepaid expenses and other current assets (1,992,385) 1,295,156 (3,495,307)
Decrease (increase) in capitalized software development costs, net 33,367 2,055,691 (1,033,618)
Decrease (increase) in other assets, net 33,259 (33,259) --
Increase in accounts payable 30,180,775 8,540,452 6,899,111
Increase in accrued expenses 9,502,220 6,920,367 2,443,016
Increase in due to/from related parties -- 49,917 400,420
Decrease in other liabilities (3,980,558) (87,343) --
(Decrease) increase in other current liabilities (136,000) (1,111,769) 441,932
------------ ------------ ------------
Net cash used in operating activities (16,745,687) (8,021,841) (14,460,000)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (2,212,456) (630,304) (714,514)
Proceeds from the sale of fixed assets 34,000 -- 1,500
Cash restricted for letter of credit -- 1,089,760 (1,089,760)
Investment in affiliates (4,100,000) -- 133,893
Acquisitions, net cash paid (15,262,322) (1,186,874) (100,000)
Additional royalty payment in connection with acquisition -- -- (814,478)
------------ ------------ ------------
Net cash used in investing activities (21,540,778) (727,418) (2,583,359)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of stock and warrants in connection with initial public offering
net of stock issuance costs of $1,920,232 -- -- 7,463,769
Issuance of stock in connection with the secondary public offering,
net of issuance costs of $2,187,441 21,852,559 -- --
Redemption of preferred stocks -- (317) --
Proceeds from private placement, net -- 5,955,333 --
Net borrowings under lines of credit 22,868,501 11,547,778 7,611,469
Proceeds from notes payable -- 951,569 7,200,000
Repayments of notes payable (459,706) (8,349,682) (2,687,301)
Proceeds from exercise of stock options 2,384,886 148,264 156
Proceeds from the exercise of public warrants 223,889 -- --
Repayment of capital lease obligation (91,329) (305,281) (70,668)
Dividends to preferred stockholders -- -- (35,000)
Distributions to S Corporation shareholders -- (931,000) (673,092)
------------ ------------ ------------
Net cash provided by financing activities 46,778,800 9,016,664 18,809,333
------------ ------------ ------------
Effect of foreign exchange rates (880,610) 123,238 (130,706)
Net increase in cash for the year 7,611,725 390,643 1,635,268
Cash and cash equivalents, beginning of the year 2,762,837 2,372,194 736,926
------------ ------------ ------------
Cash and cash equivalents, end of the year $ 10,374,562 $ 2,762,837 $ 2,372,194
============ ============ ============
Issuance of warrants in lieu of dividends $ -- $ -- $ 100,352
============ ============ ============
Issuance of common stock in connection with acquisitions $ 10,333 $ 27,500 $ 1,000
============ ============ ============
Supplemental disclosure of non-cash investing and financing activities:
Gathering purchase option $ 973,026 $ -- $ --
============ ============ ============
Supplemental information on businesses acquired:
Fair value of assets acquired $ 4,948,654
Cash $ 328,708 $ 313,126
Accounts receivables, net 7,167,499 2,642,301
Inventories, net 4,691,970 6,753,939
Prepaid royalties 56,723 --
Prepaid expenses and other assets 399,704 366,883
Property and equipment, net 1,245,535 97,580
Goodwill 24,096,940 2,008,119
Less, liabilities assumed (1,100,492)
Line of credit (2,825,107) (3,925,608)
Accounts payable (7,516,610) (4,779,229) (700,000)
Accrued expenses (1,492,723) (108,111) --
Notes payable (92,815) --
Other current liabilities (3,980,558) --
Stock issued (6,095,603) (1,615,706) (3,000,000)
Options issued -- (253,294)
Direct transaction costs (392,633) -- (48,162)
------------ ------------ ------------
Cash paid 15,591,030 1,500,000 100,000
Less, cash acquired (328,708) (313,126) --
============ ============ ============
Net cash paid $ 15,262,322 $ 1,186,874 $ 100,000
============ ============ ============
Cash paid during the year for interest $ 2,669,813 $ 2,323,787 $ 1,290,318
============ ============ ============
Cash paid during the year for taxes $ 829,274 $ 59,235 $ 28,654
============ ============ ============
Equipment acquired under capital lease $ -- $ 75,418 $ 505,088
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the years ended October 31, 1997, 1998 and 1999
Class A Class B
Preferred Stock Preferred Stock
---------------------------- ---------------------
Shares Amount Shares Amount
------------ ------------ --------- ---------
Balance, November 1, 1996 317 $ 317 17,500 $ 249,987
Conversion of preferred stock -- -- (17,500) (249,987)
Issuance of warrants in lieu of dividends -- -- -- --
Issuance of common stock and warrants in connection
with a public offering, net of issuance costs -- -- -- --
Issuance of common stock and warrants in
connection with 1997 placement of debt -- -- -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement -- -- -- --
Issuance of common stock in connection with
TTE and ART acquisition -- -- -- --
Exercise of stock options -- -- -- --
Declaration of dividends to preferred stockholders -- -- -- --
Amortization of deferred compensation -- -- -- --
Distribution to S corporation shareholders prior to acquisition -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net loss -- -- -- --
------------ ------------ --------- ---------
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 -- -- -- --
Conversion of preferred stock to common stock issued in connection
with BMG acquisition -- -- -- --
Issuance of common stock in connection with Directsoft acquisition -- -- -- --
Redemption of preferred stock (317) (317) -- --
Issuance of common stock in connection with March 1998 private
placement, net of issuance costs -- -- -- --
Issuance of common stock in connection with May 1998 private
placement, net of issuance costs -- -- -- --
Cashless exercise of public warrants, 1 share of common stock for
2 warrants surrendered -- -- -- --
Cashless exercise of underwriters' warrants, 1 share of common stock for
2 warrants surrendered -- -- -- --
Conversion of warrants to common stock issued in connection with
1996 private placement -- -- -- --
Exercise of stock options -- -- -- --
Issuance of common stock in connection with early extinguishment of debt -- -- -- --
Issuance of compensatory stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Distributions to S corporation shareholders prior to acquisition -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
Less: net income of JAG and Talonsoft for the two months
ended December 31, 1997 -- -- -- --
------------ ------------ --------- ---------
Balance, October 31, 1998 -- -- -- --
Issuance of compensatory stock options -- -- -- --
Exercise of stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Forfeiture of compensatory stock options in connection with AIM acquisition -- -- -- --
Issuance of common stock in connection with LDA and Joytech acquisition -- -- -- --
Issuance of common stock in connection with DVDWave.com acquisition -- -- -- --
Issuance of common stock in connection with Funsoft acquisition -- -- -- --
Issuance of common stock in connection with the investment in 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 -- -- -- --
Net income -- -- -- --
------------ ------------ --------- ---------
Balance, October 31, 1999 -- $ -- -- $ --
============ ============ ========= =========
Series A Convertible
Preferred Stock Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount
------------ ----------- ------------ ------------
Balance, November 1, 1996 -- $ -- 10,281,000 $ 102,809
Conversion of preferred stock -- -- 409,791 4,098
Issuance of warrants in lieu of dividends -- -- -- --
Issuance of common stock and warrants in connection
with a public offering, net of issuance costs -- -- 1,840,000 18,400
Issuance of common stock and warrants in
connection with 1997 placement of debt -- -- 55,000 550
Conversion of warrants to common stock issued in
connection with 1996 private placement -- -- 26,035 260
Issuance of common stock in connection with
TTE and ART acquisition -- -- 406,553 4,066
Exercise of stock options -- -- 15,000 150
Declaration of dividends to preferred stockholders -- -- -- --
Amortization of deferred compensation -- -- -- --
Distribution to S corporation shareholders prior to acquisition -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net loss -- -- -- --
------------ ----------- ------------ ------------
Balance, October 31, 1997 -- -- 13,033,379 130,333
Issuance of common stock and compensatory stock options in connection
with AIM acquisition -- -- 500,000 5,000
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) 1,850,000 18,500
Issuance of common stock in connection with Directsoft acquisition -- -- 40,000 400
Redemption of preferred stock -- -- -- --
Issuance of common stock in connection with March 1998 private
placement, net of issuance costs -- -- 158,333 1,583
Issuance of common stock in connection with May 1998 private
placement, net of issuance costs -- -- 770,000 7,700
Cashless exercise of public warrants, 1 share of common stock for
2 warrants surrendered -- -- 897,183 8,972
Cashless exercise of underwriters' warrants, 1 share of common stock for
2 warrants surrendered -- -- 160,000 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
Issuance of common stock in connection with early extinguishment of debt -- -- 32,138 322
Issuance of compensatory stock options -- -- -- --
Amortization of deferred compensation -- -- -- --
Distributions to S corporation shareholders prior to acquisition -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
Less: net income of JAG and Talonsoft for the two months
ended December 31, 1997 -- -- -- --
------------ ----------- ------------ ------------
Balance, October 31, 1998 -- -- 18,071,972 180,719
Issuance of compensatory stock options -- -- 536,923 5,369
Exercise of stock options -- -- 613,218 6,133
Amortization of deferred compensation -- -- -- --
Forfeiture of compensatory stock options in connection with AIM acquisition -- -- -- --
Issuance of common stock in connection with LDA and Joytech acquisition -- -- 364,766 3,648
Issuance of common stock in connection with DVDWave.com acquisition -- -- 50,000 500
Issuance of common stock in connection with Funsoft acquisition -- -- 60,281 603
Issuance of common stock in connection with the investment in affiliate -- -- 125,000 1,250
Issuance of common stock in connection with the Triad and Global acquisition -- -- 162,500 1,625
Proceeds from exercise of public warrants -- -- 40,795 408
Issuance of common stock in connection with a public offering,
net of issuance costs -- -- 3,005,000 30,050
Issuance of common stock in lieu of royalty payments -- -- 55,000 550
Tax benefit in connection with the exercise of stock options -- -- -- --
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
------------ ----------- ------------ ------------
Balance, October 31, 1999 -- $ -- 23,085,455 $ 230,855
============ =========== ============ ============
Retained
Additional Deferred Earnings
Paid-in Capital Compensation (Deficit)
--------------- ------------ ------------
Balance, November 1, 1996 $ 3,886,790 $ (34,500) $ (22,582)
Conversion of preferred stock 245,889 -- --
Issuance of warrants in lieu of dividends 100,352 -- (100,352)
Issuance of common stock and warrants in connection
with a public offering, net of issuance costs 7,399,761 -- --
Issuance of common stock and warrants in
connection with 1997 placement of debt 909,229 -- --
Conversion of warrants to common stock issued in
connection with 1996 private placement (104) -- --
Issuance of common stock in connection with
TTE and ART acquisition 2,995,934 -- --
Exercise of stock options 13,650 -- --
Declaration of dividends to preferred stockholders -- -- (35,066)
Amortization of deferred compensation -- 17,250 --
Distribution to S corporation shareholders prior to acquisition -- -- (673,092)
Foreign currency translation adjustment -- -- --
Net loss -- -- (2,768,391)
------------ ------------ ------------
Balance, October 31, 1997 15,551,501 (17,250) (3,599,483)
Issuance of common stock and compensatory stock options in connection
with AIM acquisition 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 -- -- --
Issuance of common stock in connection with Directsoft acquisition 256,100 -- --
Redemption of preferred stock -- -- --
Issuance of common stock in connection with March 1998 private
placement, net of issuance costs 896,750 -- --
Issuance of common stock in connection with May 1998 private
placement, net of issuance costs 5,049,300 -- --
Cashless exercise of public warrants, 1 share of common stock for
2 warrants surrendered (8,972) -- --
Cashless exercise of underwriters' warrants, 1 share of common stock for
2 warrants surrendered (1,600) -- --
Conversion of warrants to common stock issued in connection with
1996 private placement -- -- --
Exercise of stock options 156,743 -- --
Issuance of common stock in connection with early extinguishment of debt 187,032 -- --
Issuance of compensatory stock options 75,000 (75,000) --
Amortization of deferred compensation -- 121,887 --
Distributions to S corporation shareholders prior to acquisition -- -- (931,000)
Foreign currency translation adjustment -- -- --
Net income -- -- 7,181,094
Less: net income of JAG and Talonsoft for the two months
ended December 31, 1997 -- -- (581,089)
------------ ------------ ------------
Balance, October 31, 1998 33,546,417 (223,657) 2,069,522
Issuance of compensatory stock options 831,203 (5,625) --
Exercise of stock options 2,378,753 -- --
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 3,716,965 -- --
Issuance of common stock in connection with DVDWave.com acquisition 505,750 -- --
Issuance of common stock in connection with Funsoft acquisition 466,575 -- --
Issuance of common stock in connection with the investment in affiliate 1,273,750 -- --
Issuance of common stock in connection with the Triad and Global acquisition 1,399,938 -- --
Proceeds from exercise of public warrants 223,481 -- --
Issuance of common stock in connection with a public offering,
net of issuance costs 21,822,509 -- --
Issuance of common stock in lieu of royalty payments 332,200 -- --
Tax benefit in connection with the exercise of stock options 994,258 -- --
Foreign currency translation adjustment -- -- --
Net income -- -- 16,332,103
------------ ------------ ------------
Balance, October 31, 1999 $ 67,345,381 $ (47,925) $ 18,401,625
============ ============ ============
Accumulated
Other Comprehensive
Comprehensive Income
Income Total (Loss)
------------ ------------ ------------
Balance, November 1, 1996 $ -- $ 4,182,821 $ 1,681,673
Conversion of preferred stock -- -- --
Issuance of warrants in lieu of dividends -- -- --
Issuance of common stock and warrants in connection
with a public offering, net of issuance costs -- 7,418,161 --
Issuance of common stock and warrants in
connection with 1997 placement of debt -- 909,779 --
Conversion of warrants to common stock issued in
connection with 1996 private placement -- 156 --
Issuance of common stock in connection with
TTE and ART acquisition -- 3,000,000 --
Exercise of stock options -- 13,800 --
Declaration of dividends to preferred stockholders -- (35,066) --
Amortization of deferred compensation -- 17,250 --
Distribution to S corporation shareholders prior to acquisition -- (673,092) --
Foreign currency translation adjustment (130,706) (130,706) (130,706)
Net loss -- (2,768,391) (2,768,391)
------------ ------------ ------------
Balance, October 31, 1997 (130,706) 11,934,712 (2,899,097)
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 --
Distributions to S corporation shareholders prior to acquisition -- (931,000) --
Foreign currency translation adjustment 123,273 123,273 123,273
Net income -- 7,181,094 7,181,094
Less: net income of JAG and Talonsoft for the two months
ended December 31, 1997 -- (581,089) --
------------ ------------ ------------
Balance, October 31, 1998 (7,433) 35,565,568 7,304,367
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) (819,586)
Net income -- 16,332,103 16,332,103
------------ ------------ ------------
Balance, October 31, 1999 $ (827,019) $ 85,102,917 $ 15,512,517
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
1. Description of the Business:
Take-Two Interactive Software, Inc. ("Take-Two" or the "Company") was
incorporated in the State of Delaware on September 30, 1993. Take-Two and
its wholly owned subsidiaries develop, publish, and distribute interactive
software games designed for multimedia personal computers and video game
console platforms.
2. Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements include the financial statements of
Take-Two and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
As discussed in Note 3, in 1999 and 1998, the Company acquired all of the
outstanding stock of Talonsoft ("Talonsoft") and Jack of All Games, Inc.
("JAG"), respectively. In 1997, the Company acquired Inventory Management
Systems, Inc. ("IMSI") and Creative Alliance Group ("CAG"). These
acquisitions have been accounted for as poolings 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.
Risks and Uncertainties
Substantially all of the Company's net sales are attributable to publishing
and distribution revenues. The publishing and distribution aspects of the
Company's business are subject to increasing competition, rapid
technological change and evolving consumer preferences, which result in
shorter product lifecycles. The Company's continued success depends upon
its ability to acquire, develop and market software products, which often
requires substantial financing. Additionally, the financing for software
products acquired or licensed must be on terms acceptable to the Company.
If sales from newly acquired and developed software products fail to
materialize, the Company's business, operating results and financial
condition could be adversely affected in the near term.
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
the 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 prepaid royalties, advances to developer, the
recoverability of capitalized software development costs, other
intangibles, income taxes, allowances for returns and receivables. Actual
amounts could differ from those estimates.
Concentration of Credit Risk
A significant portion of cash balances are maintained with several major
financial institutions with satisfactory standing and at times, exceeds
insurable amounts.
If the financial condition and operations of the Company's distributors or
retailers deteriorate, the risk of collection could increase substantially.
As of October 31, 1999 and 1998, the receivable balances from the largest
customer amounted to approximately 14.4% and 14.9% of the Company's net
balance, respectively. The 1999 receivable balance is partially insured
whereas the 1998 receivable balance was fully insured. For the years ended
October 1999, 1998 and 1997, the Company's five (5) largest customers
accounted for 24.5%, 22.4% and 36.2% of net sales, respectively. Except for
largest customer noted above, all receivable balances from the remaining
customers were less than 10%.
F-7
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 $145,596,886, $102,866,094
and $79,728,424 for 1999, 1998 and 1997, respectively. The Company
sometimes negotiates accommodations to retailers, including price
discounts, credits and product returns, when demand for specific products
fall below expectations. Historically, the Company's write-offs from
returns for its distribution activities have 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 $160,334,972,
$91,185,472 and $17,612,801 in 1999, 1998 and 1997, respectively. The
Company has historically experienced a product return rate of approximately
10% of gross publishing revenues.
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. The
Company's publishing arrangements require the Company to accept product
returns. The Company establishes a reserve for future returns 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.
Advertising
The Company reports the costs of all advertising as expenses in the periods
in which those costs are incurred. Advertising costs in which the benefits
exist in the future period are recorded as prepaid assets. The Company
shares portions of certain customers' advertising expenses through co-op
advertising arrangements. Advertising expense for the years ended October
31, 1999, 1998 and 1997 amounted to $11,986,347, $6,670,303 and $1,038,407,
respectively.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents.
Inventory
Inventories are stated at the lower of average cost or market. The Company
periodically evaluates the carrying value of its inventories and adjusts
these as necessary.
Prepaid Royalties
Prepaid royalties represent prepayments made to independent software
developers under development agreements. Prepaid royalties are expensed at
the contractual royalty rate as cost of sales based on actual net product
sales. Management continuously evaluates the future realization of prepaid
royalties, and charges to cost of sales any amount that management deems
unlikely to be realized based upon the contractual royalty rate and product
sales. Prepaid royalties are classified as current and non-current assets
based upon estimated net product sales within the next year. Prepaid
royalties were written down $1,307,717, $884,454 and $350,000 for the years
ended October 31, 1999, 1998 and 1997, respectively, to estimated net
realizable value. Amortization of prepaid royalties amounted to
$12,144,006, $9,093,885, and $3,644,935 during fiscal years 1999,1998 and
1997, respectively.
Fixed Assets
Computer equipment, office equipment, furniture and fixtures and
automobiles are depreciated using the straight-line method over their
estimated lives ranging from five to seven years. Computer software is
depreciated using the straight-line method over three years. Leasehold
improvements are amortized over the
F-8
lesser of the term of the related lease or estimated useful lives.
Accumulated amortization includes the amortization of assets recorded under
capital leases. The carrying value of these assets are recorded at
historical cost. The cost of additions and betterments greater than $1,000
is capitalized.
Capitalized Software Development 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 capitalized amounts in excess of estimated net realizable value, if
any, are immediately written off. Capitalized software costs were written
down by $698,407, $1,411,784 and $210,500 for the years ended October 31,
1999, 1998 and 1997, respectively, to estimated net realizable value.
Amortization of capitalized software costs amounted to $1,135,505,
$1,767,486 and $755,986 during 1999, 1998 and 1997, respectively.
Net Income (Loss) per Share
Net income (loss) per share has been computed in accordance with the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 128, Earnings per Share ("SFAS No. 128") which
requires the presentation of basic earnings per share ("EPS"), which
excludes common stock equivalents from its computation and requires the
presentation of diluted EPS which gives effect to all dilutive potential
common shares that were outstanding during the period. The computation
excludes the number of common shares issuable upon the exercise of
outstanding options and warrants and the conversion of preferred stock if
such inclusion would be anti-dilutive.
Comprehensive Income (Loss)
The Company has adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130"). Comprehensive income
(loss) represents the change in net assets of a business enterprise during
a period from transactions and other events and circumstances from
non-owner sources. Comprehensive income (loss) of the Company includes net
income (loss) adjusted for the change in foreign currency translation
adjustments. The net effect of income taxes on comprehensive income (loss)
is immaterial. The disclosures required by SFAS No. 130 for the years ended
October 31, 1999, 1998 and 1997 have been included in the Statements of
Stockholders' Equity.
Intangible Assets
Intangible assets consist of trademarks and the remaining excess purchase
price paid over identified intangible and tangible net assets of acquired
companies. Intangible assets are amortized under the straight-line method
over the period of expected benefit of seven years for the acquisition of
development studios and ten years for the acquisition of distribution
operations. The Company assesses the recoverability of its intangible
assets by determining whether the carrying value can be recovered through
estimated future cash flows over its remaining life. If estimated future
cash flows indicate that the unamortized balance will not be recovered, an
adjustment will be made to reduce the carrying value to an amount
consistent with estimated future cash flows discounted at the Company's
incremental borrowing rate. Cash flow estimates are based on trends of
historical performance and management's estimate of future performance,
giving consideration to existing and anticipated competitive and economic
conditions.
Income Taxes
The Company recognizes deferred taxes under the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for differences between the financial
statement and tax bases of assets and liabilities at currently enacted
statutory tax rates for the years in which the differences are expected to
reverse. The effect on deferred taxes of a change in tax rates is
F-9
recognized in income in the period that includes the enactment date. In
addition, valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. Accounts of foreign operations are translated
into U.S. dollars using quarter or year-end exchange rates for assets and
liabilities at the balance sheet date and average prevailing exchange rates
for the period for revenue and expense accounts. Adjustments resulting from
translation are included as a separate component of stockholders' equity.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, prepaid royalties, advances to
developers, accounts payable and accrued liabilities, approximate fair
value because of their short maturities. The carrying amount of the
Company's line of credit, notes payable and capital lease obligation
approximates the fair value of such instruments based upon management's
best estimate of interest rates that would be available to the Company for
similar debt obligations at October 31, 1999.
3. Business Acquisitions:
The Company acquired a number of companies that develop, publish, and
distribute interactive software games during the three-year period ended
October 31, 1999. The aggregate purchase price, including cash and stock
payments, was $9.7 million, $13.2 million and $3.8 million in 1999, 1998
and 1997, respectively. The aggregate purchase price excludes the value of
stock issued for pooled companies.
In 1999, 1998 and 1997, 1,033,336, 2,750,000 and 900,000 shares of the
Company's common stock were issued for acquisitions accounted for as
poolings of interests. The companies pooled and the respective shares of
the Company's common stock issued were: Talonsoft 1,033,336 shares, JAG
2,750,000 shares and IMSI and CAG 900,000 shares.
The Company's consolidated financial statements, including the related
notes, have been restated as of the earliest period presented to include
the results of operations, financial position and cash flows of the above
pooled entities. The Company, as well as IMSI and CAG, reports its
financial results on an October 31 fiscal year-end basis, whereas JAG and
Talonsoft reported their financial results on a December 31 calendar
year-end basis. For the purpose of pooling of interests accounting, the
Company's statement of operations for the year ended October 31, 1997 was
combined with JAG's and Talonsoft's statement of operations for the year
ended December 31, 1997. The Company's statement of operations for the year
ended October 31, 1998 includes JAG's and Talonsoft's statement of
operations for the period November 1, 1997 to October 31, 1998.
Accordingly, JAG's and Talonsoft's net income of $431,527 and $149,562,
respectively, for the two months ended December 31, 1997 has been reflected
as an adjustment to retained earnings for the year ended October 31, 1998.
The results of operations of JAG and Talonsoft for such two months period
includes net revenues of $23,893,108 and $351,609, respectively. A net
sales and net income (loss) reconciliation for the years ending October 31,
1998 and 1997 is summarized below:
F-10
Net Sales Net Income/(Loss)
--------- -----------------
FOR THE YEAR 1998:
As Reported $191,071,672 $ 6,945,649
Pooled Companies 2,979,894 235,445
As Restated $194,051,566 $ 7,181,094
FOR THE YEAR 1997:
As Reported $ 19,014,083 $ (4,297,499)
Pooled Companies 78,327,142 1,393,690
As Restated $ 97,341,225 $ (2,903,809)
The "As Reported" balances shown above reflect amounts previously reported
on Form 10-K for 1998 and Form 10-KSB for 1997, net of distributions paid
to S corporation shareholders prior to acquisition . The "As Restated"
balance for 1998 reflects the restatement for Talonsoft pooled in December
1998. The "As Restated" balance for 1997 reflects the restatement for JAG
pooled in August 1998 and Talonsoft.
The acquisitions described below have been accounted for as purchase
transactions in accordance with APB No. 16 and, accordingly, the results of
operations and financial position of the acquired businesses are included
in the Company's consolidated financial statements from the date of
acquisition.
In 1999, the Company paid $1.2 million in cash, issued 637,547 shares of
its common stock (valued at $6.1 million), and incurred direct transaction
costs of approximately $390,000 for acquisitions accounted for as
purchases. These acquisitions include LDA Distribution Limited ("LDA"),
Joytech Europe Limited ("Joytech"), DVDWave.com, Funsoft Nordic A.S.
("Funsoft"), Triad Distributors, Inc. ("Triad"), Global Star Software Ltd.
("Global"), DMA Design Holdings Limited, DMA Design Limited ("DMA") and CD
Verte, S.p.A. ("CD Verte"). In addition, for CD Verte, the Company paid
$800,000 on December 1, 1999 and will pay an additional $1.2 million,
subject to downward adjustment based on net income of the acquired entity,
over a three-year period. The most significant assumption of liabilities
relate to the acquisition of DMA where the Company assumed liabilities of
$12.3 million.
In 1998, the Company paid $1.5 million in cash, issued 540,000 shares of
its common stock (valued at $1.9 million), issued 1,850,000 shares of its
Series A Convertible Preferred Stock (the "Preferred Stock" valued at $9.5
million) and granted 76,000 non-plan stock options (valued at $250,000) for
acquisitions accounted for as purchases. The Preferred Stock was converted
into Common Stock in August 1998 on a one-for-one basis. These acquisitions
include Alliance Inventory Management ("AIM"), DirectSoft Australia Pty.
Ltd. ("DirectSoft") and substantially all of the assets of BMG Interactive
Group.
In 1997, the Company issued 406,553 shares of its common stock (valued at
$3 million) and recorded a liability for acquisition related deferred
payments of $700,000 for acquisitions accounted for as purchases. These
acquisitions include Take-Two Interactive Software Europe Limited ("TTE")
and Alternative Reality Technologies ("ART").
F-11
The unaudited pro forma data below for the years ended October 31, 1999 and
1998 is presented as if these purchase acquisitions had been made as of
November 1, 1998 and 1997, respectively. The unaudited pro forma financial
information is based on management's estimates and assumptions and does not
purport to represent the results that actually would have occurred if the
acquisitions had, in fact, been completed on the dates assumed, or which
may result in the future. The unaudited pro forma financial information
does not include purchase acquisition that are insignificant to the
Company's operations.
Pro forma Unaudited
---------------------------------------
October 31, 1999 October 31, 1998
---------------- ----------------
Total Revenues:
Take-Two (1) $305,931,858 $194,051,566
Take-Two inclusive of LDA / Joytech 307,817,830 201,157,956
Take-Two inclusive of LDA / Joytech and Triad/Global 313,289,430 206,611,056
Net income (loss):
Take-Two (1) $ 16,332,103 $ 7,181,094
Take-Two inclusive of LDA / Joytech 16,367,015 7,328,822
Take-Two inclusive of LDA / Joytech and Triad/Global 16,086,615 7,412,222
Net income (loss) per share - Basic $ 0.78 $ 0.48
(1) includes IMSI, CAG, TTE, ART, AIM, BMG, DirectSoft, JAG and Talonsoft
4. Investment:
In February 1999, the Company purchased a 19.9% Class A limited partnership
interest in Gathering of Developers I, Ltd. ("Gathering") for $4 million.
Gathering is a developer-driven computer and video game publishing company.
In accordance with APB No. 18, the investment has been accounted for by the
equity method due to the Company having significant influence over
Gathering. The difference between the carrying value of the investment and
the underlying equity in the net assets amounted to $4,376,529, which was
recorded as an intangible asset. This intangible asset is being amortized
under the straight-line method over the period of expected benefit of seven
years.
In addition, the general partner and each Class B limited partner of
Gathering granted the Company an option to purchase all of their interests,
exercisable on two separate occasions during the six-month periods ending
April 30, 2001 and 2002 based on a fixed formula. In consideration of the
option grant, the Company issued Gathering's partners 125,000 shares of
common stock, valued at $1,275,000, which is being amortized over the life
of the purchase option.
5. Inventories:
As of October 31, 1999 and 1998, inventories consist of:
1999 1998
----------- -----------
Parts and Supplies $ 268,461 $ 166,138
Finished products 41,031,377 25,926,403
----------- -----------
$41,299,838 $26,092,541
=========== ===========
F-12
6. Fixed Assets:
As of October 31, 1999 and 1998, fixed assets consist of:
1999 1998
----------- -----------
Computer equipment $ 2,397,550 $ 1,691,801
Office equipment 1,070,959 629,459
Computer software 8,433 43,151
Furniture and fixtures 1,326,035 554,343
Automobiles 228,453 323,957
Leasehold improvements 798,628 232,784
Capital leases 232,858 248,462
----------- -----------
6,062,916 3,723,957
Less, accumulated depreciation and
amortization (1,942,599) (1,744,299)
----------- -----------
$ 4,120,317 $ 1,979,658
=========== ===========
Depreciation expense for the years ended October 31, 1999, 1998 and 1997
amounted to $1,160,350, $787,691 and $507,951, respectively.
7. Lines of Credit:
1999 1998
----------- -----------
JAG line of credit with Provident Bank- $ -- $22,711,817
(9.25% to 9.75% in 1998)
JAG line of credit with NationsBank - 43,683,555 6,922,860
8.25% to 8.75% (8.75% to 9.25% in 1998)
TTE line of credit with Barclays' Bank -
6.62% to 8.25% (8.25% to 10.25% in 1998) 12,323,530 393,723
Triad line of credit with Royal Bank of Canada- 40,761 --
8.75% to 9.50%
Take-Two line of credit with Citibank - -- 246,998
(9.0% in 1998)
Talonsoft line of credit - -- 75,000
(9.5% in 1998) =========== ===========
Lines of credit $56,047,846 $30,350,398
=========== ===========
In August 1999, the Company's domestic subsidiary, JAG, entered into a line
of credit with NationsBank, N.A. ("NationsBank") which provides for
borrowings of up to $50,000,000 through April 30, 2000 and $45,000,000
thereafter. These borrowings bear a variable interest rate and as of
October 31, 1999, the rate is 8.75% and is payable monthly. Borrowings
under the line of credit are collateralized by all of JAG's accounts
receivable, inventory, equipment, intangibles and other personal property.
The available credit under this facility was $6,316,445 at October 31,
1999. Subsequent to October 31, 1999, the Company replaced this line of
credit as discussed in Note 17.
Also, in August 1999, the Company's European subsidiary, TTE, entered into
a line of credit with Barclays' Bank. The line of credit provides for
borrowings of up to approximately (pound)10,600,000 ($17,423,750) as of
October 31, 1999. Advances under the line of credit bear a variable
interest rate and as of October 31, 1999 the rate is 8.25% and is payable
quarterly. Borrowings are collateralized by receivables of the Company's
F-13
European subsidiaries. The available credit under this facility was
$5,100,220 at October 31, 1999. Subsequent to October 31, 1999, the Company
replaced this line of credit as discussed in Note 17.
In 1998, the Company and its subsidiaries had lines of credit with various
banks. These credit lines permitted borrowings at fluctuating interest
rates determined by the banks. Where required, the Company guaranteed the
repayment of these borrowings. Unused lines of credit by the Company and
its subsidiaries at October 31, 1998 aggregated $3,889,546. The
weighted-average interest rate on outstanding balances at October 31, 1998
was approximately 9.25%.
8. Commitments and Contingencies:
Capital Leases
The Company leases equipment under capital lease agreements, which extend
through fiscal year 2002. Future minimum lease payments under these capital
leases, and the present value of such payments as of October 31, 1999 is as
follows:
Year ending October 31:
-----------------------
2000 $ 69,489
2001 16,525
2002 4,073
--------
Total minimum lease payments 90,087
Less, amounts representing interest (5,001)
--------
Present value of minimum obligations under capital leases $ 85,086
========
Lease Commitments
The Company leases 22 office and warehouse facilities. The corporate
headquarters is under a noncancelable operating lease with related parties
and expires in March 2004. Rent expense and certain utility expenses under
this lease amounted to $301,526, $132,719 and $111,400 for the years ended
October 31, 1999, 1998 and 1997, respectively. The other offices are under
noncancelable operating leases expiring at various times from July 2001 to
September 2007. In addition, the Company has leased certain equipment under
noncancelable operating leases, which expire through December 2002.
Future minimum rentals required as of October 31, 1999 are as follows:
Year ending October 31:
-----------------------
2000 $ 3,425,885
2001 3,211,344
2002 2,587,699
2003 2,090,623
2004 1,762,342
thereafter 2,295,989
-----------
Total minimum lease payments $15,373,882
===========
F-14
Rent expense amounted to $1,543,902, $921,206 and $734,217 for the years
ended October 31, 1999, 1998 and 1997, respectively.
9. Accrued Expenses:
Accrued expenses as of October 31, 1999 and 1998 consist of:
1999 1998
----------- -----------
Accrued co-op advertising, price protection $ 3,613,926 $ 3,075,340
and product discounts
Accrued VAT and corporate taxes payable 12,690,211 2,444,482
Royalties payable 1,989,169 2,143,302
Other 1,868,504 1,503,743
----------- -----------
Total $20,161,810 $ 9,166,867
=========== ===========
10. Employee Savings Plans:
The Company maintains a 401(k) profit sharing plan and trust (the "401(k)
Plan"). The 401(k) Plan is offered to all eligible employees and
participants may make voluntary contributions up to 15% of their salary.
The Company does not match employee contributions.
11. Income Taxes:
The Company is subject to foreign withholding taxes in certain countries
where it does business. The Company's net operating loss carryforwards will
expire between fiscal 2012 and fiscal 2019. Domestic and foreign pre-tax
income (loss) was as follows:
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Domestic $ 228,195 $ 4,000,037 $(3,393,650)
Foreign 24,197,878 3,009,669 655,048
----------- ----------- -----------
Total $24,426,073 $ 7,009,706 $(2,738,602)
=========== =========== ===========
Income tax expense (benefit) is as follows:
Years ended October 31,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
Current:
Federal $ -- $ -- $ --
State and local 22,786 213,793 11,368
Foreign 8,001,753 393,071 18,421
Deferred 69,431 1,442,526 (1,728,577)
Increase (decrease) in valuation allowance -- (2,383,526) 1,728,577
----------- ----------- -----------
Total $ 8,093,970 $ (334,136) $ 29,789
=========== =========== ===========
F-15
A reconciliation of the federal statutory income tax rate to the effective
income tax rate is as follows:
1999 1998 1997
------ ------ ------
Effective tax rate reconciliation:
Statutory federal tax rate (benefit) 34.0% 34.0% (34.0)%
State taxes, net of federal benefit 6.3% 1.9% (4.9)%
Foreign tax rate differential (7.4)% -- 3.0%
Effect of valuation allowance -- (42.9)% 40.9%
Goodwill amortization 1.0% 3.8% 4.9%
Other permanent items (0.8)% (1.5)% (8.8)%
------ ------ ------
33.1% (4.7)% 1.1%
====== ====== ======
The components of the net deferred tax asset as of October 31, 1999 and
1998 consists of the following:
1999 1998
----------- -----------
Capitalized software $(1,580,642) $(1,303,496)
Bad debt allowance 1,266,427 303,355
Other 517,116 178,100
Deferred revenue -- 47,600
Accumulated depreciation and amortization 497,957 792,345
Tax credit carryforward 378,809 348,788
Net operating loss carryforward 925,022 574,308
----------- -----------
Net deferred tax asset 2,004,689 941,000
Less, valuation allowance -- --
----------- -----------
Deferred tax asset $ 2,004,689 $ 941,000
=========== ===========
The Company believes that it is more likely than not that it will utilize
the deferred tax asset in the future, and accordingly, the Company recorded
an asset in the amount of $2,004,689 and $941,000 for the years ended
October 31, 1999 and 1998, respectively.
12. Stockholders' Equity (See Notes 2 and 3):
Private Placement
In March 1998, the Company sold 158,333 shares of Common Stock in a private
placement and received net proceeds of $898,333.
In May 1998, the Company consummated a private placement of 770,000 shares
of Common Stock and received net proceeds of $5,057,000.
Public Offering
In May 1999, the Company consummated a secondary public offering of
3,005,000 shares of common stock, including 255,000 common shares issued
pursuant to an over-allotment option. The proceeds from the offering were
$21,852,559, net of discounts and commissions and offering expenses of
$2,187,441.
Class A Preferred Stock
In November 1997, the Company redeemed all outstanding shares of Class A
Preferred Stock at the redemption price of $1.00 per share.
F-16
Class B Preferred Stock
In February 1997, the holder of Class B Preferred Stock elected to convert
all outstanding shares into 409,791 shares of common stock. Accordingly,
all dividends in arrears became due upon conversion. As an inducement to
enter into such agreement, in February 1997, the Company issued options to
purchase 38,746 shares of Common Stock at an exercise price of $2.41 per
share. Approximately $100,000 has been recorded as an additional dividend
as a result of the issuance of these options for the fiscal year ended
October 31, 1997, and is reflected in the earnings per share computations
for such period. In addition, the Company entered into a three-year
consulting agreement pursuant to which the Stockholder agreed to provide
management-consulting services to the Company in consideration of the
payment of $100,000 over the term of the agreement.
Series A Preferred Stock
In March 1998, the Company issued 1,850,000 shares of Series A Convertible
Preferred Stock in connection with the acquisition of substantially all of
the assets of BMG Interactive Group. This Preferred Stock was converted on
a one-for-one basis into shares of the Company's Common Stock in August
1998.
Warrants
In June 1998, the Company, pursuant to a cashless exercise, announced that
the holders of 1,840,000 warrants issued in connection with its initial
public offering, could elect to receive one share of the Company's Common
Stock for two warrants surrendered to the Company at any time until August
25, 1998. As of August 25, 1998, an aggregate of 1,794,366 warrants were
exchanged for 897,183 shares of Common Stock. In August 1998, the Company
issued 160,000 shares of Common Stock in connection with a cashless
exercise of the 320,000 underwriters' warrants that were issued with its
initial public offering.
In February 1999, the Company announced its election to exercise its option
to redeem its outstanding redeemable warrants issued in connection with its
initial public offering. Each warrant entitles the registered holder to
purchase, at a price of $5.50, one share of the Company's Common Stock at
any time until March 15, 1999. As of March 15, 1999, an aggregate of 40,795
warrants were redeemed.
As of October 31, 1999 and 1998, there are outstanding common stock
purchase warrants for an aggregate of 662,304 and 347,894 shares of the
Company's Common Stock, respectively, at prices ranging from $ .01 to $
9.00.
13. Incentive Plans:
Stock Option Plans
The Company's 1994 Stock Plan, (the "1994 Plan") authorizes the Board to
issue incentive stock options ("ISO"), as defined in Section 422 of the
Internal Revenue Code (the "Code"). Pursuant to the 1994 Plan, qualified
options to acquire an aggregate of 896,654 shares of common stock, may be
granted to key employees, consultants, officers and directors of the
Company. The exercise price of each ISO may not be less than 100% of the
fair market value of the common stock at the time of grant, except that in
the case of a grant to an employee who owns (within the meaning of Code
Section 422) 10% or more of the outstanding stock of the Company (a "10%
Stockholder"), the exercise price shall not be less than 110% of such fair
market value. Each option is to expire at such date as the Board of
Directors determines. Options may not be exercised prior to one month from
the day on which such option is granted, or on or after the tenth
anniversary (fifth anniversary in the case of an ISO granted to a 10%
Stockholder) of their grant. Options may not be transferred during the
lifetime of an option holder.
F-17
As of October 31, 1999, the 1994 Plan has no stock options outstanding. As
of October 31,1998, there were outstanding stock options for an aggregate
of 639,676 shares of the Company's Common Stock at prices ranging from $.92
to $2.41 per share expiring at various times from 1999 to 2005.
In January 1997, the stockholders of the Company approved the Company's
1997 Stock Option Plan, as previously adopted by the Company's Board of
Directors (the "1997 Plan"), pursuant to which officers, directors, and/or
key employees and/or consultants of the Company can receive ISO's to
purchase up to an aggregate of 400,000 shares of the Company's Common
Stock. The aggregate number of options to be granted under the Plan was
increased to 3,500,000 in April 1999 from 2,000,000 in April 1998.
The 1994 Plan and the 1997 Plan (collectively the "Plans") are administered
by the Board of Directors. Subject to the provisions of the Plans, the
Board of Directors or any Committee appointed by the Board of Directors,
has the authority to determine the individuals to whom the stock options
are to be granted, the number of shares to be covered by each option, the
option price, the type of option, the option period, restrictions, if any,
on the exercise of the option, the terms for the payment of the option
price and other terms and conditions.
As of October 31, 1999 and 1998, the 1997 Plan has outstanding stock
options for an aggregate of 2,665,170 and 1,825,204 shares of the Company's
Common Stock, respectively, at prices ranging from $5.00 to $8.93 per share
vesting at various times from 1997 to 2002 and expiring at various times
from 2002 to 2008.
Non-Plan Stock Options
As of October 31, 1999 and 1998, there are outstanding non-plan stock
options for an aggregate of 1,060,167 and 166,320 shares of Common Stock,
respectively, at prices ranging from $2.00 to $12.56 per share vesting from
1999 to 2002 and expiring at various times from 2002 to 2004.
For those options with exercise prices less than fair value at the
measurement date, the difference is amortized over the vesting period.
Compensation expense for the years ended October 31, 1999, 1998, and 1997
approximated $29,000, $121,000, and $17,000, respectively.
The following table summarizes the activity in options under the plans
inclusive of non-plan options:
Weighted Average
Shares Exercise Price
----------- --------------
Options outstanding - October 31, 1996 936,565 $1.02
Granted - exercise price equal to fair value 449,534 $4.71
Exercised (15,000) $0.92
-----------
Options outstanding - October 31, 1997 1,371,099 $2.23
Options exercisable - October 31, 1997 1,073,957
Granted - exercise price equal to fair value 1,540,000 $5.29
Granted - exercise price less than fair value 106,000 $2.14
Exercised (252,000) $0.63
Forfeited (133,899) $5.18
-----------
Options outstanding - October 31, 1998 2,631,200 $4.02
Options exercisable - October 31, 1998 1,019,008
Granted-exercise price equal to fair value 2,506,250 $7.94
Exercised (1,100,784) $2.85
Forfeited (311,329) $5.07
-----------
Options outstanding - October 31, 1999 3,725,337 $6.96
Options exercisable - October 31, 1999 1,346,407
F-18
The following summarizes information about stock options outstanding at
October 31, 1999 and 1998:
Weighted Average
Average Remaining
Exercise Contractual
Exercise Price Shares Shares Price Life
--------------------------------------- --------- --------- ---------
$2.00-$5.50 1,099,687 $ 4.94 3.53
$5.625-$7.75 1,358,650 $ 6.77 4.01
$7.875-$12.5625 1,267,000 $ 8.92 4.63
--------- --------- ---------
Options outstanding - October 31, 1999 3,725,337 $ 6.96 3.93
========= ========= =========
$0.92 - $2.41 826,784 $ 1.37 5.10
$5.00 - $7.125 1,804,416 $ 5.22 4.61
--------- --------- ---------
Options outstanding - October 31, 1998 2,631,200 $ 4.02 4.64
========= ========= =========
The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plans. The Company has
adopted the disclosure-only provision of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in 1999, 1998 and 1997 consistent with the provisions
of SFAS No. 123, the Company's net income (loss) and the net income (loss)
per share would have been reduced to the pro-forma amounts indicated below.
1999 1998 1997
-------------- -------------- --------------
Net income (loss)
As reported $ 16,332,103 $ 7,181,094 $ (2,903,809)
Pro-forma $ 12,769,352 $ 6,500,790 $ (2,708,400)
Net income (loss) per share
As reported-Basic $ .79 $ .49 $ (.25)
Pro-forma-Basic $ .62 $ .44 $ (.23)
The pro-forma disclosures shown are not representative of the effects on
net income (loss) and the net income (loss) per share in future years.
The fair value of the Company's stock options used to compute pro-forma net
income (loss) and the net income (loss) per share disclosures is the
estimated present value at the grant date using the Black-Scholes
option-pricing model. The following weighted average assumptions for 1999
were used to value grants: expected volatility of 60% for grants with a
holding period of three to four years and 65% for holding periods of five
years or more; a risk-free interest rate of generally 4% to 6%; and an
expected holding period of three to five years. For 1998 and 1997,
respectively, the following weighted average assumptions were used to value
grants; expected volatility of 55% and 60%; a risk-free interest rate of 5%
and 6.22%; and an expected holding period of four to five years and seven
years, respectively.
F-19
14. Results By Quarter (Unaudited):
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Net sales $ 68,280,653 $ 52,165,332 $ 63,562,470 $121,923,403
Gross profit 14,742,813 16,080,315 19,631,369 40,355,537
Income (Loss) before
extraordinary items 2,894,836 1,561,172 2,707,824 9,168,271
------------ ------------ ------------ ------------
Net income-basic $ 2,894,836 $ 1,561,172 $ 2,707,824 $ 9,168,271
------------ ------------ ------------ ------------
Net income-diluted $ 2,894,836 $ 1,561,172 $ 2,707,824 $ 9,168,271
------------ ------------ ------------ ------------
Per share data:
Basic EPS 0.16 0.08 0.12 0.39
Diluted EPS 0.15 0.08 0.12 0.39
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1998 Restated As Reported Restated As Reported Restated As Reported Restated As Reported
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $51,405,361 $22,068,437 $39,948,370 $22,922,113 $38,426,145 $21,906,481 $64,271,690 $63,220,619
Gross profit 10,607,792 7,086,801 10,100,929 7,967,049 10,255,862 7,829,190 15,531,811 14,932,068
Income (Loss) before
extraordinary items 1,821,181 1,240,989 721,800 629,153 797,437 165,254 4,003,424 3,660,362
------------------------- ------------------------- ------------------------- -------------------------
Net income-basic $ 1,821,181 $ 1,240,989 $ 496,405 $ 629,153 $ 860,084 $ 227,901 $ 4,003,424 $ 3,660,362
------------------------- ------------------------- ------------------------- -------------------------
Net income-diluted $ 1,917,511 $ 1,337,319 $ 496,405 $ 629,153 $ 860,084 $ 227,901 $ 4,003,424 $ 3,660,362
------------------------- ------------------------- ------------------------- -------------------------
Per share data:
Basic EPS 0.14 0.13 0.04 0.06 0.06 0.02 0.23 0.22
Diluted EPS 0.13 0.12 0.03 0.05 0.05 0.02 0.21 0.21
The "As Reported" balances reflect amounts previously reported which
incorporated the results of all prior acquired companies. The "Restated"
balances reflect the restatement for companies pooled in August 1998 and
December 1998.
15. Geographic Areas:
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.
For the years ended October 31, 1999, 1998 and 1997, the Company's net
sales in domestic markets accounted for approximately 65.4%, 78.4% and
94.1%, respectively, and net sales in international markets accounted for
34.6%, 21.6% and 5.9%, respectively.
As of October 31, 1999 and 1998, the Company's net fixed assets in domestic
markets accounted for approximately $1,762,749 and $1,287,151,
respectively, and net fixed assets in international markets accounted for
$2,357,568 and $692,507, respectively.
F-20
Total non-current assets and net sales are shown below by major geographic
area:
1999 1998 1997
------------ ------------ ------------
Total Non-current Assets:
United States $ 14,032,359 $ 9,116,176 $ 8,244,404
International --
United Kingdom 20,974,138 4,051,233 4,487,514
All other Europe 5,334,078 483,658 --
Other 3,401,619 432,337 --
------------ ------------ ------------
$ 43,742,194 $ 14,083,404 $ 12,731,918
------------ ------------ ------------
Net Sales:
United States $200,018,543 $152,180,941 $ 92,357,474
International
Canada 5,393,152 1,555,853 128,345
United Kingdom 53,101,422 24,444,279 2,966,851
All other Europe 37,303,809 5,080,105 549,000
Asia Pacific 9,366,458 3,122,982 998,507
Other 748,474 7,667,406 341,048
------------ ------------ ------------
$305,931,858 $194,051,566 $ 97,341,225
------------ ------------ ------------
Net Sales are attributed to geographic areas based on where the products
were shipped to.
16. Net Income (Loss) per Share:
The computation for diluted number of shares excludes those unexercised
stock options and warrants which are antidilutive. The number of such
shares were 470,000, 50,000 and 4,192,298 for the years ended October 31,
1999, 1998 and 1997, respectively.
The following table provides a reconciliation of basic earnings per share
to dilutive earnings per share for the years ended October 31, 1999, 1998
and 1997. The extraordinary gain for the year ended October 31, 1998, has
no significant effect on the EPS calculation and therefore, is not shown
separately.
Net Income Per Share
(Loss) Shares Amount
------------ ------------ ------------
Year Ended October 31, 1999
Basic EPS $ 16,332,103 20,689,684 $ .79
Effect of dilutive securities - Stock options and warrants -- 824,941 (.03)
------------ ------------ ------------
Diluted EPS $ 16,332,103 21,514,625 $ .76
============ ============ ============
Year Ended October 31, 1998
Extraordinary net loss on early extinguishment of debt-Basic $ (162,748) 14,746,854 $ (.01)
Extraordinary net loss on early extinguishment of debt- Diluted (162,748) 17,062,806 (.01)
Basic EPS after extraordinary net loss on early extinguishment of debt 7,181,094 14,746,854 .49
Effect of dilutive securities-stock options and warrants -- 2,315,952 (.07)
------------ ------------ ------------
Diluted EPS after extraordinary net loss on early extinguishment of debt $ 7,181,094 17,062,806 $ .42
============ ============ ============
Year Ended October 31, 1997
Basic EPS $ (2,903,809) 11,697,342 $ (.25)
Effect of dilutive securities-
Stock options and warrants -- -- --
============ ============ ============
Diluted EPS $ (2,903,809) 11,697,342 $ (.25)
============ ============ ============
F-21
17. Subsequent Events:
In November 1999, the Company acquired 19.9% of the outstanding capital
stock of Bungie Software Products Corporation for $5 million, of which $4
million was paid, and $1 million is payable in May 2000. Bungie is a
leading developer of software games for the PC platform.
In December 1999, 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. This replaces the Barclay's line of credit described in Note 7.
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 0.5% or at LIBOR plus 2.5 %.
Borrowings under the line of credit are collaterized by all of the
Company's accounts receivable, inventory, equipment, general intangibles,
securities and other personal property, including the capital stock of the
Company's domestic subsidiaries. The line of credit expires on December 7,
2002. This replaces the NationsBank line of credit described in Note 7.
In December 1999, the Company agreed to purchase up to 600,000 shares
(approximately less than 5%) of common stock from eUniverse, Inc. The
Company's investment is subject to eUniverse qualifying its common stock
under the Securities Exchange Act of 1934 and customary closing conditions.
In connection with the transaction, eUniverse agreed to purchase all of the
capital stock of DVDWave.com, which includes the DVDWave.com website, from
the Company for 310,00 shares of common stock.
F-22