UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended April 30, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________to__________
Commission File Number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0350842
(State of incorporation or organization) (IRS Employer Identification No.)
575 Broadway, New York, NY 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 334-6633
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
As of June 12, 2000, there were 28,887,788 shares of the registrant's Common
Stock outstanding.
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
QUARTER ENDED APRIL 30, 2000
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - As of April 30, 2000 (unaudited) and October 31, 1999 1
Consolidated Condensed Statements of Operations - For the three months ended April 30, 2000 and 1999 2
and the six months ended April 30, 2000 and 1999 (unaudited)
Consolidated Condensed Statements of Cash Flows - For the six months ended April 30, 2000 and 1999 (unaudited) 3
Consolidated Condensed Statements of Shareholders' Equity - For the six months ended April 30, 2000 (unaudited)
and the year ended October 31, 1999 4
Notes to Interim Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
Item 1.
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of April 30, 2000 (unaudited) and October 31, 1999
ASSETS: April 30,2000 October 31, 1999
------------- ----------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,185,666 $ 10,374,562
Accounts receivable, net of allowances of $4,929,269 and $6,816,682, respectively 82,628,593 108,802,903
Inventories 39,205,394 41,299,838
Prepaid royalties 23,662,774 20,118,160
Prepaid expenses and other current assets 11,667,020 6,374,031
Marketable securities 7,013,750 --
Deferred tax asset 2,004,689 2,004,689
------------- -------------
Total current assets 169,367,886 188,974,183
Fixed assets, net 5,539,147 4,120,317
Prepaid royalties 75,000 1,510,530
Capitalized software development costs, net 3,415,467 2,226,670
Investment in affiliates -- 3,954,668
Other investments 4,100,000 100,000
Intangibles, net of accumulated amortization of $6,016,473 and $3,251,358 respectively 112,542,733 30,856,983
Other assets, net -- 973,026
------------- -------------
Total assets $ 295,040,233 $ 232,716,377
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 39,578,580 $ 71,229,744
Accrued expenses 25,032,850 20,161,810
Lines of credit, current portion 68,173,141 56,047,846
Current portion of capital lease obligation 38,269 65,204
Notes payable, net of discount -- 30,611
------------- -------------
Total current liabilities 132,822,840 147,535,215
Notes payable, net of current portion -- 58,363
Capital lease obligation, net of current portion 44,261 19,882
Other liabilities 399,000 --
Minority interest 1,500,000 --
------------- -------------
Total liabilities 134,766,101 147,613,460
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000 shares authorized;
28,879,122 and 23,085,455 shares issued and outstanding 288,791 230,855
Additional paid-in capital 135,037,191 67,345,381
Deferred compensation (23,159) (47,925)
Retained earnings 27,647,555 18,401,625
Accumulated other comprensive loss (2,676,246) (827,019)
------------- -------------
Total stockholders' equity 160,274,132 85,102,917
------------- -------------
Total liabilities and stockholders' equity $ 295,040,233 $ 232,716,377
============= =============
The accompanying notes are an integral part of the
consolidated condensed financial statements
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the three months ended April 30, 2000 and 1999
and the six months ended April 30, 2000 and 1999 (unaudited)
Three months ended April 30, Six months ended April 30,
---------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Net sales $ 70,036,073 $ 52,165,332 $192,925,799 $120,445,985
Cost of sales 41,781,203 36,085,017 128,054,812 89,622,857
------------ ------------ ------------ ------------
Gross profit 28,254,870 16,080,315 64,870,987 30,823,128
------------ ------------ ------------ ------------
Operating expenses:
Selling and marketing 9,912,061 5,328,266 25,187,685 9,489,469
General and administrative 7,324,710 6,225,883 16,619,630 10,637,381
Research and development costs 1,363,870 632,005 2,989,308 1,224,149
Depreciation and amortization 2,173,787 560,006 3,576,454 1,013,421
------------ ------------ ------------ ------------
Total operating expenses 20,774,428 12,746,160 48,373,077 22,364,420
------------ ------------ ------------ ------------
Income from operations 7,480,442 3,334,155 16,497,910 8,458,708
Interest expense, net 1,374,754 782,953 2,881,090 1,599,470
------------ ------------ ------------ ------------
Income before equity in loss of affiliate and income taxes 6,105,688 2,551,202 13,616,820 6,859,238
Equity in loss of affiliate 606,378 -- 762,682 --
------------ ------------ ------------ ------------
Income before income taxes 5,499,310 2,551,202 12,854,138 6,859,238
Provision for income taxes 2,145,099 990,030 4,713,269 2,403,230
------------ ------------ ------------ ------------
Net income $ 3,354,211 $ 1,561,172 $ 8,140,869 $ 4,456,008
============ ============ ============ ============
Per share data:
Basic:
Weighted average common shares outstanding 25,698,852 19,152,376 24,423,859 18,674,517
============ ============ ============ ============
Net income per share $ 0.13 $ 0.08 $ 0.33 $ 0.24
============ ============ ============ ============
Diluted:
Weighted average common shares outstanding 26,819,177 20,751,120 25,631,363 20,131,660
============ ============ ============ ============
Net income per share $ 0.13 $ 0.08 $ 0.32 $ 0.22
============ ============ ============ ============
The accompanying notes are an integral part of
the consolidated condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the six months ended April 30, 2000 and 1999 (unaudited)
Six months ended April 30,
--------------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net income $ 8,140,869 $ 4,456,008
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,576,454 1,015,149
Loss on disposal of fixed assets 99,057 57,504
Net gain from eUniverse transactions (2,776,449) --
Equity in loss of affiliate 762,682 --
Provision for doubtful accounts (1,349,052) 362,530
Provision for inventory (41,832) (28,904)
Amortization of deferred compensation 24,766 136,434
Forfeiture of compensatory stock options in connection with AIM acquisition -- (146,418)
Amortization of affiliate purchase option 201,316 100,658
Issuance of compensatory stock -- 299,779
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable 22,692,917 7,262,129
Decrease in inventories, net 2,136,276 4,355,461
Increase in prepaid royalties (18,035,989) (4,575,076)
Increase in advances to developers - (1,641,911)
Increase in prepaid expenses and other current assets (418,632) (137,426)
(Increase) decrease in capitalized software development costs (1,188,796) 75,428
Decrease in other assets, net -- 33,259
Decrease in accounts payable (38,918,992) (15,684,653)
Increase in accrued expenses 3,664,469 1,452,212
Decrease in other liabilities -- (136,000)
------------ ------------
Net cash used in operating activities (21,430,936) (2,743,837)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (1,224,909) (1,599,373)
Cash paid for investments (5,975,000) (1,332,000)
Acquisitions, net cash paid (4,274,611) (81,712)
Additional cash paid for prior acquisition (1,276,900) --
------------ ------------
Net cash used in investing activities (12,751,420) (3,013,085)
------------ ------------
Cash flows from financing activities:
Net borrowings under the line of credit 12,036,321 2,602,236
Repayment on notes payable -- (409,381)
Proceeds from exercise of stock options 5,397,602 1,965,815
Proceeds from private placements 8,515,535 --
Proceeds from minority interest 1,500,000 --
Proceeds from the exercise of public warrants -- 223,889
Repayment of capital lease obligation (44,926) (51,226)
Tax benefit from exercise of stock options 1,940,655 723,323
------------ ------------
Net cash provided by financing activities 29,345,187 5,054,656
------------ ------------
Effect of foreign exchange rates (2,351,727) (613,426)
------------ ------------
Net decrease in cash for the period (7,188,896) (1,315,692)
Cash and cash equivalents, beginning of the period 10,374,562 2,762,837
------------ ------------
Cash and cash equivalents, end of the period $ 3,185,666 $ 1,447,145
============ ============
Supplemental disclosure of non-cash investing and financing activities:
Gain from DVDWave transactions $ (870,883) $ --
============ ============
Gain from eUniverse transactions $ (1,905,566) $ --
============ ============
Tax benefit from exercise of stock options $ 1,940,655 $ 723,323
============ ============
Gathering purchase option $ - $ 1,275,000
============ ============
Supplemental information on businesses acquired:
Fair value of assets acquired:
Cash $ 195,270 $ 343,865
Accounts receivable, net 390,420 5,852,779
Inventories, net -- 2,301,672
Prepaid expenses and other assets 4,899,200 320,123
Property and Equipment, net 1,011,622 629,155
Goodwill 83,291,209 5,136,686
Less liabilities assumed
Line of credit -- (2,210,517)
Accounts payable (7,267,828) (6,132,408)
Accrued expenses (1,059,742) (370,972)
Other liabilities (24,046,405) --
Stock issued (48,980,169) (5,237,842)
Direct transaction costs -- (206,964)
Investment interest and purchase option (3,963,696) --
------------ ------------
Cash paid 4,469,881 425,577
Less cash acquired (195,270) (343,865)
------------ ------------
Net cash paid (acquired) $ 4,274,611 $ 81,712
============ ============
During the six months ended April 30, 2000, the Company paid $1,276,900 in cash
and issued $161,140 in common stock related to a prior period acquisition. Such
payments were capitalized and recorded as Goodwill.
The accompanying notes are an integral part of
the consolidated condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
For the year ended October 31, 1999 and the six months ended April 30, 2000
(unaudited)
Common Stock
--------------------------
Shares Amount
---------- -------------
Balance, November 1, 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
Exercise of stock options 1,099,507 10,995
Amortization of deferred compensation -- --
Issuance of common stock in connection with LDA and Joytech acquisition 15,798 158
Issuance of common stock in connection with Pixel acquisition 2,561,245 25,612
Issuance of common stock in connection with GOD acquisition 1,060,017 10,600
Issuance of common stock in connection with private placements,
net of issuance costs 876,678 8,767
Issuance of common stock in lieu of repayment of debt assumed from Pixel 167,922 1,679
Issuance of common stock in connection with the purchase of DVD 12,500 125
Tax benefit in connection with the exercise of stock options -- --
Foreign currency translation adjustment -- --
Unrealized gain on available-for-sale securities -- --
Net income -- --
------------- -------------
Balance, April 30, 2000 28,879,122 $ 288,791
============= =============
Additional Deferred
Paid-in Capital Compensation
--------------- -------------
Balance, November 1, 1998 $ 33,546,417 $ (223,657)
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 -- --
------------- -------------
Balance, October 31, 1999 67,345,381 (47,925)
Exercise of stock options 5,386,607 --
Amortization of deferred compensation -- 24,766
Issuance of common stock in connection with LDA and Joytech acquisition 160,982 --
Issuance of common stock in connection with Pixel acquisition 38,553,140 --
Issuance of common stock in connection with GOD acquisition 10,390,817 --
Issuance of common stock in connection with private placements,
net of issuance costs 8,506,768 --
Issuance of common stock in lieu of repayment of debt assumed from Pixel 2,605,310 --
Issuance of common stock in connection with the purchase of DVD 147,531 --
Tax benefit in connection with the exercise of stock options 1,940,655 --
Foreign currency translation adjustment -- --
Unrealized gain on available-for-sale securities -- --
Net income -- --
------------- -------------
Balance, April 30, 2000 $ 135,037,191 $ (23,159)
============= =============
Accumulated
Other
Retained Comprehensive
Earnings Income (Loss)
------------- --------------
Balance, November 1, 1998 $ 2,069,522 $ (7,433)
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 -- (819,586)
Net income 16,332,103 --
------------- -------------
Balance, October 31, 1999 18,401,625 (827,019)
Exercise of stock options -- --
Amortization of deferred compensation -- --
Issuance of common stock in connection with LDA and Joytech acquisition -- --
Issuance of common stock in connection with Pixel acquisition -- --
Issuance of common stock in connection with GOD acquisition -- --
Issuance of common stock in connection with private placements,
net of issuance costs -- --
Issuance of common stock in lieu of repayment of debt assumed from Pixel -- --
Issuance of common stock in connection with the purchase of DVD 1,105,061 --
Tax benefit in connection with the exercise of stock options -- --
Foreign currency translation adjustment -- (2,351,727)
Unrealized gain on available-for-sale securities -- 502,500
Net income 8,140,869 --
------------- -------------
Balance, April 30, 2000 $ 27,647,555 $ (2,676,246)
============= =============
Comprehensive
Total Income (Loss)
------------- -------------
Balance, November 1, 1998 $ 35,565,568 $ 7,304,367
Issuance of compensatory stock options 830,947 --
Exercise of stock options 2,384,886 --
Amortization of deferred compensation 181,357 --
Forfeiture of compensatory stock options in connection with AIM acquisition (146,418) --
Issuance of common stock in connection with LDA and Joytech acquisition 3,720,613 --
Issuance of common stock in connection with DVDWave.com acquisition 506,250 --
Issuance of common stock in connection with Funsoft acquisition 467,178 --
Issuance of common stock in connection with the investment in affiliate 1,275,000 --
Issuance of common stock in connection with the Triad and Global acquisition 1,401,563 --
Proceeds from exercise of public warrants 223,889 --
Issuance of common stock in connection with a public offering,
net of issuance costs 21,852,559 --
Issuance of common stock in lieu of royalty payments 332,750 --
Tax benefit in connection with the exercise of stock options 994,258 --
Foreign currency translation adjustment (819,586) (819,586)
Net income 16,332,103 16,332,103
------------- -------------
Balance, October 31, 1999 85,102,917 15,512,517
Exercise of stock options 5,397,602 --
Amortization of deferred compensation 24,766 --
Issuance of common stock in connection with LDA and Joytech acquisition 161,140 --
Issuance of common stock in connection with Pixel acquisition 38,578,752 --
Issuance of common stock in connection with GOD acquisition 10,401,417 --
Issuance of common stock in connection with private placements,
net of issuance costs 8,515,535 --
Issuance of common stock in lieu of repayment of debt assumed from Pixel 2,606,989 --
Issuance of common stock in connection with the purchase of DVD 1,252,717 --
Tax benefit in connection with the exercise of stock options 1,940,655 --
Foreign currency translation adjustment (2,351,727) (2,351,727)
Unrealized gain on available-for-sale securities 502,500 502,500
Net income 8,140,869 8,140,869
------------- -------------
Balance, April 30, 2000 $ 160,274,132 $ 6,291,642
============= =============
The accompanying notes are an integral part of
the consolidated condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Interim Consolidated Condensed Financial Statements
(Information at April 30, 2000 and for the three and six month periods
ended April 30, 2000 and 1999 is unaudited)
1. Organization:
Take-Two Interactive Software, Inc. (the "Company") is a leading global
developer, publisher and distributor of interactive software games designed for
multimedia personal computers and video game console platforms.
2. Significant Accounting Policies and Transactions:
Basis of Presentation
The Consolidated Condensed Financial Statements of the Company have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
necessary for a presentation of the Company's financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, these financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for such periods. The results of operations for any interim periods are
not necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1999.
Risk and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to: the recoverability of
capitalized software development costs, prepaid royalties, advances to
developers and other intangibles, allowances for returns and income taxes.
Actual amounts could differ from those estimates.
Prepaid Royalties
Prepaid royalties represent prepayments made to independent software developers
under development agreements. Prepaid royalties are expensed at the contractual
royalty rate as cost of goods sold 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 at the
contractual royalty rate through product sales. Prepaid royalties are classified
as current and non-current assets based upon estimated net product sales within
the next year.
5
Prepaid royalties were written down by $109,242 and $187,414 for the three
months ended April 30, 2000 and 1999, respectively, and $109,242 and $844,112
for the six months ended April 30, 2000 and 1999, respectively, to estimated net
realizable value. Amortization of prepaid royalties amounted to $1,737,751 and
$1,952,532 for the three months ended April 30, 2000 and 1999, respectively, and
$4,791,016 and $3,882,371 for the six months ended April 30, 2000 and 1999,
respectively.
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 amounts in excess of
estimated net realizable value, if any, are immediately written off.
Capitalized software costs were written down by $240,184 and $520,068 for the
three months ended April 30, 2000 and 1999, respectively, and $249,184 and
$688,068 for the six months ended April 30, 2000 and 1999, respectively, to
estimated net realizable value. Amortization of capitalized software costs
amounted to $260,087 and $180,000 for the three months ended April 30, 2000 and
1999, respectively, and $328,970 and $230,000 for the six months ended April 30,
2000 and 1999, respectively.
Segment Reporting
Statement of Financial Accounting Standards ("FAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information", establishes standards for
reporting information about operating segments in annual financial statements.
FAS No. 131 had no impact on the Company's results of operations, financial
position or cash flows. The Company's operations fall within one reportable
segment as defined by FAS No. 131.
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 $33,309,323 and $21,065,177 for the
three months ended April 30, 2000 and 1999, respectively, and $93,973,518 and
$65,415,815 for the six months ended April 30, 2000 and 1999, 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 $36,726,750 and $31,100,155 for the three months ended April 30,
2000 and 1999, respectively, and $98,952,281 and $55,030,170 for the six months
ended April 30, 2000 and 1999, 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
6
revenues net of product returns.
3. Income Taxes
The provisions for income taxes for the three months ended, as well as for the
six months ended April 30, 2000 and 1999 are based on the Company's estimated
annualized tax rate for the respective years, after giving effect to the
utilization of available tax credits and tax planning opportunities.
4. Net Income per Share
The following table provides a reconciliation of basic earnings per share to
dilutive earnings per share for the three and six months ended April 30, 2000
and 1999.
Per Share
Income Shares Amount
---------- ---------- ----------
Three Months Ended April 30, 2000:
Basic $3,354,211 25,698,852 $ .13
Effect of dilutive securities - Stock options
and warrants 1,120,325 --
---------- ---------- ----------
Diluted $3,354,211 26,819,177 $ .13
========== ========== ==========
Three Months Ended April 30, 1999:
Basic $1,561,172 19,152,376 $ .08
Effect of dilutive securities - Stock options 1,598,744 --
and warrants ---------- ---------- ----------
Diluted $1,561,172 20,751,120 $ .08
========== ========== ==========
Six Months Ended April 30, 2000:
Basic $8,140,869 24,423,859 $ .33
Effect of dilutive securities - Stock options 1,207,504 (.01)
and warrants ---------- ---------- ----------
Diluted $8,140,869 25,631,363 $ .32
========== ========== ==========
Six Months Ended April 30, 1999:
Basic $4,456,008 18,674,517 $ .24
Effect of dilutive securities - Stock options 1,457,143 (.02)
and warrants ---------- ---------- ----------
Diluted $4,456,008 20,131,660 $ .22
========== ========== ==========
The April 30, 2000 computation for diluted number of shares excludes unexercised
stock options and warrants which are anti-dilutive.
5. Business Acquisitions
In March 2000, the Company acquired from Broadband Solutions, Inc. all the
outstanding capital stock of Toga Holdings, BV ("Toga") which owns Pixel
Broadband Studios, Ltd. ("Pixel"). Pixel is
7
a leading developer of multiplayer broadband gaming technology. The outstanding
shares of Toga were exchanged for approximately $4.45 million in cash and
2,561,245 shares of common stock of the Company.
In April 2000, the Company purchased the 80.1% of Gathering of Developers, Ltd.
("Gathering"), which it did not already own. Gathering is a leading publisher of
PC gaming software. To effect the acquisition, the outstanding shares of
Gathering not already owned by the Company were exchanged for 1,060,017 shares
of common stock of the Company.
The acquisitions have been accounted for as a purchase. The Consolidated
Condensed Statement of Operations includes the operating results of each
business from the date of acquisition.
The following unaudited pro forma results below assumes the acquisitions
occurred on November 1, 1998:
Six Months Ended Six Months Ended
April 30, 2000 April 30, 1999
---------------- ----------------
Net Sales $ 200,217,679 $ 130,757,766
Net Income $ 8,577,271 $ 288,963
Net Income per share (basic) $ 0.31 $ 0.01
Net Income per share (fully diluted) $ 0.30 $ 0.01
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions of Toga and
Gathering been consummated as of November 1, 1998 nor are they necessarily
indicative of future operating results.
6. Disposition of DVDWave.com
The Company has sold all of the capital stock of Falcon Ventures Corporation
d/b/a DVDWave.com to eUniverse, Inc for 310,000 shares of common stock. The
Company has recognized a gain of $870,883 in connection with the transaction.
8
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical facts are forward
looking statements that involve material risks and uncertainties, including but
not limited to: risks associated with the Company's future growth, prospects and
operating results; the ability of the Company to successfully integrate the
businesses and personnel of newly acquired entities into its operations; the
availability of adequate sources of financing; credit risks; inventory
obsolescence; products returns; failure of our products to sell-through by
retailers; changes in consumer preferences and demographics; technological
change; competitive factors; unfavorable general economic conditions; and other
factors described herein and in the Company's Registration Statement on Form S-3
as filed with the Securities And Exchange Commission, any or all of which could
have a material adverse affect on the Company's business, financial condition
and results of operations. Actual results may vary significantly from such
forward-looking statements.
Overview
The Company derives its principal sources of revenues from publishing and
distribution activities. Publishing revenues are derived from the sale of
internally developed interactive entertainment software products or products
licensed from third parties. Distribution revenues are derived from the sale of
third-party software and hardware products. Publishing activities generally
generate higher margins than distribution activities, with sales of PC software
resulting in higher margins than sales of cartridges designed for video game
consoles. The Company recognizes revenue from software sales when products are
shipped.
The Company's published products are subject to return if not sold to consumers,
including for stock balancing, markdowns or defective products. The Company
establishes a reserve for future returns of published products at the time of
product sales, based primarily on these return policies and historical return
rates, and the Company recognize revenues net of product returns. The Company
has historically experienced a product return rate of approximately 10% of gross
publishing revenues (less than 1% of distribution revenues). If future product
returns significantly exceed these reserves, the Company's operating results
would materially be adversely affected.
Research and development costs (consisting primarily of salaries and related
costs) incurred prior to establishing technological feasibility are expensed in
accordance with Statement of Financial Accounting Standards ("FAS") No. 86
"Accounting for the Costs of Computer Software to Be Sold Leased, or Otherwise
Marketed". In accordance with FAS No. 86, the Company capitalizes software
development costs subsequent to establishing technological feasibility
(completion of a detailed program design) which is amortized (included in cost
of sales) based on the greater of the proportion of current year sales to total
estimated sales commencing with the product's release or the straight line
method. At April 30, 2000, the Company had capitalized $3,415,467 of software
development costs. The Company evaluates the recoverability of capitalized
software costs, which may be reduced materially in future periods. See Note 2 to
Notes to Consolidated Condensed Financial Statements.
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Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in the Company's statement of
operations:
Three Months Ended Six Months Ended
April 30, April 30,
--------- ---------
2000 1999 2000 1999
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 59.7 69.2 66.4 74.4
Selling and marketing 14.2 10.2 13.1 7.9
General and administrative 10.5 11.9 8.6 8.8
Research and development costs 1.9 1.2 1.5 1.0
Depreciation and amortization 3.1 1.1 1.9 .8
Interest expense 2.0 1.5 1.5 1.3
Income taxes 3.1 1.9 2.4 2.0
Net income 4.8 3.0 4.2 3.7
Results of Three Months Ended April 30, 2000 and 1999
Net sales increased by $17,870,741 or 34.3%, to $70,036,073 for the three months
ended April 30, 2000 from $52,165,332 for the three months ended April 30, 1999.
The increase in net sales was primarily attributable to the Company's expanded
distribution operations. Distribution revenues increased by $12,244,146 or
58.1%, to $33,309,323 for the three months ended April 30, 2000 from $21,065,177
for the three months ended April 30, 1999. In addition, publishing revenues
increased by $5,626,595, or 18.1% to $36,726,750 for the three months ended
April 30, 2000 from $31,100,155 for the three months ended April 30, 1999.
Cost of sales increased by $5,696,186, or 15.8%, to $41,781,203 for the three
months ended April 30, 2000 from $36,085,017 for the three months ended April
30, 1999. This increase was primarily a result of the expanded scope of the
Company's operations. Cost of sales as a percentage of net sales decreased from
69% to 60% primarily due to higher margin international and PC publishing
activities. In future periods, cost of sales may be adversely affected by
manufacturing and other costs, price competition and by changes in product and
sales mix and distribution channels.
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Selling and marketing expenses increased by $4,583,795, or 86.0%, to $9,912,061
for the three months ended April 30, 2000 from $5,328,266 for the three months
ended April 30, 1999. Selling and marketing expenses as a percentage of net
sales increased to 14.2% for the three months ended April 30, 2000 from 10.2%
for the three months ended April 30, 1999. The increase in both absolute dollars
and as a percentage of net sales was primarily attributable to increased
marketing and promotion efforts undertaken to broaden product distribution and
to assist retailers in positioning our products for sale to consumers.
General and administrative expenses increased by $1,098,827, or 17.6%, to
$7,324,710 for the three months ended April 30, 2000 from $6,225,883 for the
three months ended April 30, 1999. General and administrative expenses as a
percentage of net sales decreased to 10.5% for the three months ended April 30,
2000 from 11.9% for the three months ended April 30, 1999. This increase in
absolute dollars was primarily attributable to salaries, rent, insurance
premiums and professional fees associated with the Company's expanded
operations. The decrease as a percentage of net sales is a result of increased
revenue growth without a proportionate increase in fixed costs.
Research and development costs increased by $731,865, or 115.8%, to $1,363,870
for the three months ended April 30, 2000 from $632,005 for the three months
ended April 30, 1999. This increase was primarily attributable to the Company's
expansion of its product development operations. Research and development costs
as a percentage of net sales remained relatively constant.
Depreciation and amortization expense increased by $1,613,781 or 288.2%, to
$2,173,787 for the three months ended April 30, 2000 from $560,006 for the three
months ended April 30, 1999. The increase was primarily due to the amortization
of intangible assets from acquisitions.
Interest expense increased by $591,801, or 75.6%, to $1,374,754 for the three
months ended April 30, 2000 from $782,953 for the three months ended April 30,
1999. The increase resulted from increased bank borrowings.
Income taxes increased by $1,155,069, or 116.7% to $2,145,099 for the three
months ended January 31, 2000 from $990,030 for the three months ended April 30,
1999. The increase in absolute dollars resulted primarily from increased pre-tax
income. Income tax expense as a percentage of net sales remained constant.
As a result of the foregoing, the Company achieved net income of $3,354,211 for
the three months ended April 30, 2000, as compared to net income of $1,561,172
for the three months ended April 30, 1999.
Results of Six Months Ended April 30, 2000 and 1999
Net sales increased by $72,479,814 or 60.2%, to $192,925,799 for the six months
ended April 30, 2000 from $120,445,985 for the six months ended April 30, 1999.
The increase in net sales was primarily attributable to the Company's expanded
presence in international markets. International publishing revenues increased
by $29,565,787 or 98.4%, to $59,615,309 for the six months ended April 30, 2000
from $30,049,522 for the six months ended April 30, 1999. In addition, revenues
from distribution activities increased by $28,557,703, or 43.7% to $93,973,518
for the six months ended April 30, 2000 from $65,415,815 for the six months
ended April 30, 1999.
Cost of sales increased by $38,431,955, or 42.9%, to $128,054,812 for the six
months ended April 30, 2000 from $89,622,857 for the six months ended April 30,
1999. This increase was primarily a result of
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the expanded scope of the Company's operations. Cost of sales as a percentage of
net sales decreased primarily due to the higher margin publishing activities. In
future periods, cost of sales may be adversely affected by manufacturing and
other costs, price competition and by changes in product and sales mix and
distribution channels.
Selling and marketing expenses increased by $15,698,216, or 165.4%, to
$25,187,685 for the six months ended April 30, 2000 from $9,489,469 for the six
months ended April 30, 1999. Selling and marketing expenses as a percentage of
net sales increased to 13.1% for the six months ended April 30, 2000 from 7.9%
for the six months ended April 30, 1999. The increase in both absolute dollars
and as a percentage of net sales was primarily attributable to increased
marketing and promotion efforts undertaken to broaden product distribution and
to assist retailers in positioning our products for sale to consumers.
General and administrative expenses increased by $5,982,249, or 56.2%, to
$16,619,630 for the six months ended April 30, 2000 from $10,637,381 for the six
months ended April 30, 1999. General and administrative expenses as a percentage
of net sales remained constant for the six month periods ended April 30, 2000
and 1999. The increase in absolute dollars was primarily attributable to
salaries, rent, insurance premiums and professional fees associated with the
Company's expanded operations.
Research and development costs increased by $1,765,159, or 144.2%, to $2,989,308
for the six months ended April 30, 2000 from $1,224,149 for the six months ended
April 30, 1999. This increase was primarily attributable to the Company's
expansion of its product development operations. Research and development costs
as a percentage of net sales remained relatively constant.
Depreciation and amortization expense increased by $2,563,033 or 252.9%, to
$3,576,454 for the six months ended April 30, 2000 from $1,013,421 for the six
months ended April 30, 1999. The increase was primarily due to the amortization
of intangible assets from acquisitions.
Interest expense increased by $1,281,620, or 80.1%, to $2,881,090 for the six
months ended April 30, 2000 from $1,599,470 for the six months ended April 30,
1999. The increase resulted primarily from increased bank borrowings.
Income taxes increased by $2,310,039, or 96.1% to $4,713,269 for the six months
ended April 30, 1999 from $2,403,230 for the six months ended April 30, 1999.
The increase in absolute dollars resulted primarily from increased pre-tax
income. Income tax expense as a percentage of net sales remained constant.
As a result of the foregoing, the Company achieved net income of $8,140,869 for
the six months ended April 30, 2000, as compared to net income of $4,456,008 for
the six months ended April 30, 1999.
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to be to
fund the acquisition, development, manufacture and commercialization of its
software products. The Company has historically financed its operations
primarily through the issuance of debt and equity securities and bank
borrowings. At April 30, 2000, the Company had working capital of $36,545,046 as
compared to working capital of $41,438,968 at October 31, 1999.
Net cash used in operating activities for the six months ended April 30, 2000
was $21,430,936 compared
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to net cash used by operating activities of $2,743,837 for the six months ended
April 30, 1999. The increase in net cash used in operating activities was
primarily attributable to an increase in prepaid royalties. Net cash used in
investing activities for the six months ended April 30, 2000 was $12,751,420 as
compared to net cash used in investing activities of $3,013,085 for the six
months ended April 30, 1999. The increase in net cash used in investing was
primarily attributable to the Company's acquisition activities and third party
investments. Net cash provided by financing activities for the six months ended
April 30, 2000 was $29,345,187 as compared to net cash provided by financing
activities of $5,054,656 for the six months ended April 30, 1999. The increase
in net cash provided by financing activities was primarily attributed to an
increase in net borrowings under the line of credit, cash received from private
placements and the impact of increased exercises of stock options. At April 30,
2000, the Company had cash and cash equivalents of $3,185,666.
In December 1999, the Company's subsidiary, Take-Two Interactive Software Europe
Limited entered into a line of credit agreement with Barclays' Bank. The line of
credit provides for borrowings of up to approximately British Pounds
(pound)17,000,000 (approximately $25,000,000). Advances under the line of credit
bear interest at the rate of 1.4% over Barclays' base rate per annum, payable
quarterly. Borrowings are collateralized by receivables of the Company's
European subsidiaries, and are guaranteed by the Company. The line of credit is
repayable upon demand and is subject to review prior to November 29, 2000. The
outstanding balance and available credit under the revolving line of credit is
$18,190,158 and $1,334,958, respectively, as of April 30, 2000.
In December 1999, the Company entered into a credit agreement with a group of
lenders led by Bank of America, N.A., as agent, which provides for borrowings of
up to $75,000,000. The Company may increase the credit line to up to $85,000,000
subject to certain conditions. Interest accrues on such advances at the bank's
prime rate plus .5% or at LIBOR plus 2.5%. Borrowings under the line of credit
are collaterized by all of the Company's assets. The line of credit expires on
December 7, 2002. The outstanding balance and available credit under the
revolving line of credit is $49,982,983 and $761,584, respectively, as of April
30, 2000.
In March and April 2000, the Company received net proceeds of $8,515,535 from
the sale of common stock.
The Company's accounts receivable, less an allowance for doubtful accounts and
returns, at April 30, 2000 were $82,628,593. Of such receivables, approximately
$8,322,831 or 10.1% were due from Ames Department Stores. Most of the Company's
receivables are covered by insurance and generally have been collected in the
ordinary course of business. The Company's sales are typically made on credit,
with terms that vary depending upon the customer and the demand for the
particular title being sold. The Company does not hold any collateral to secure
payment from customers. As a result, the Company is subject to credit risks,
particularly in the event that any of the receivables represent sales to a
limited number of retailers or are concentrated in foreign markets. If the
Company is unable to collect its accounts receivable as they become due and such
accounts are not covered by insurance, the Company's liquidity and working
capital position would be materially adversely affected.
Based on currently proposed operating plans and assumptions, the Company
believes that projected revenues from operations and available cash resources
will be sufficient to satisfy its contemplated cash requirements for the
reasonably foreseeable future. The Company recently acquired from Broadband
Solutions, Inc. all of the outstanding capital stock of Netherlands based Toga
Holdings BV, which owns Pixel Broadband Studios, Ltd., a company engaged in the
development of multiplayer broadband gaming technology, which may require the
Company to seek additional financing to fund ongoing product and
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technology development efforts. The Company has entered into a letter of intent
in connection with a proposed public offering of the securities of Broadband
Studios, Inc., the parent of Pixel. There can be no assurance that projected
revenues from operations and available cash resources will be sufficient to fund
the Company's operations or future expansion activities (including technology
development) or that any additional financing will be available to the Company
on commercially reasonable terms or at all. Failure to obtain any such
additional financing could severely limit the Company's ability to continue to
expand its operations.
Fluctuations in Operating Results and Seasonality
The Company has 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
Product sales in international markets, primarily in the United Kingdom and
other countries in Europe and the Pacific Rim, have accounted for an increasing
portion of the Company's revenues. For the six months ended April 30, 2000 and
1999, sales of products in international markets accounted for approximately
34.5% and 27.7%, respectively, of the Company's revenues. The Company is subject
to risks inherent in foreign trade, including increased credit risks, tariffs
and duties, fluctuations in foreign currency exchange rates, shipping delays and
international political, regulatory and economic developments, all of which can
have a significant impact on the Company's operating results. Product sales in
France and Germany are made in local currencies. The Company does not engage in
foreign currency hedging transactions.
Year 2000
Pursuant to the year 2000 issue, the Company had developed programs to address
the possible exposures related to the impact of computer systems incorrectly
recognizing the year 2000 or "00" as 1900. As a result of implementation of its
programs, the Company did not experience any significant Year 2000 disruptions
during the transition from 1999 to 2000, and since entering 2000 the Company has
not experienced any significant Year 2000 disruptions to its business. In
addition, the Company is not aware of any significant disruptions impacting its
customers or suppliers. The Company will continue to monitor its computer system
over the next several months.
Costs incurred to achieve Year 2000 readiness, which included modification to
existing systems, replacement or non-compliant systems and consulting resources
were not material to the Company's total operating expenses.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities
From February 2000 to April 2000, 202,500 options from the 1997 Stock Option
Plan and 590,000 non-plan options were granted at exercise prices ranging from
$8.25 to $12.64.
In March 2000, the Company issued 446,678 shares of Common Stock to an
individual investor in exchange for $5 million.
In April 2000, the Company issued 430,000 shares of Common Stock to a group of
investors in a private placement for $3,515,535 that was net of $246,965 in
commissions and discounts.
In connection with the above securities issuances, the Company relied on Section
4(2) and Regulation D promulgated under the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 27 - Financial Data Schedule (SEC use Only)
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated March 14, 2000
relating to the acquisition of Pixel Broadband Studios, Ltd.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Take-Two Interactive Software, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Take-Two Interactive Software, Inc.
By: /s/ Ryan A. Brant Dated: June 14, 2000
------------------------
Ryan A. Brant
Chief Executive Officer
By: /s/ Larry Muller Dated: June 14, 2000
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Larry Muller
Chief Financial Officer