================================================================================
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, 2000
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, 2000 were
$387,006,000.
The aggregate market value of the Issuer's common stock held by non-affiliates
as of January 23, 2001 was approximately $319,579,000. As of January 23, 2001,
there were 32,969,093 shares of the Issuer's common stock outstanding.
Documents Incorporated by Reference:
Proxy Statement Relating to Annual Meeting
(incorporated into Part III)
================================================================================
PART I
Item 1. Business.
General
Take-Two Interactive Software, Inc. is a leading global developer,
publisher and distributor of interactive software games. Our software operates
on PCs and video game consoles manufactured by Sony, Nintendo and Sega. We
develop software internally and engage third parties to develop software on our
behalf. We publish software under our Rockstar Games, Gathering of Developers,
Talonsoft, Mission Studios and Take-Two labels.
Our Rockstar Games subsidiary released Smuggler's Run and Midnight
Club: Street Racing at the launch of Sony's PlayStation(R)2 in October 2000 and
Oni in January 2001, and has a strong line-up of additional PlayStation 2
titles, including sequels to the popular Grand Theft Auto, Duke Nukem and
Smuggler's Run brands. Our Gathering of Developers subsidiary also expects to
bring several blockbuster PC games to market, including the highly anticipated
Duke Nukem Forever, Tropico, Max Payne, Myth 3 and Hidden & Dangerous 2.
Our Jack of All Games distribution subsidiary sells our software as
well as third-party software to 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,
Denmark, Italy, Australia, Canada and Japan.
The Industry
A large and growing installed base of advanced PCs and video game
consoles combined with expanding gamer demographics have driven demand for
interactive software games in recent years. According to The NPD Group, sales of
video game consoles, software and accessories in the United States were
approximately $6.5 billion in 2000. Increased demand for interactive software is
expected as a result of the emergence of next-generation platforms, particularly
Sony's PlayStation 2 and Microsoft's Xbox, which are designed to exploit the
convergence of computing, digital technologies and the Internet.
o Large Installed Base of PCs and Console Platforms. The International
Data Corporation estimates that approximately 56 million households in the
United States, or approximately 53% of all households, will own a PC by 2002.
Also, according to this source, the household penetration rate for video game
consoles in the United States today is approximately 38%, and is expected to
increase.
o Broadening Gamer Demographics. Interactive software games have
increasingly become a mainstream entertainment choice for a maturing,
technologically sophisticated audience. Consumer demographics for interactive
software have expanded to include young adults, as well as women. The average
age of a gamer is now 28 years old. We expect that additional catalysts for
growth, including market penetration of budget software titles and the emergence
of non-traditional retail channels such as drug stores and supermarkets, will
help support this trend.
o Emergence of Next-Generation Platforms. Sony has announced that it
plans to ship nine million units of its PlayStation 2 worldwide by March 2001.
PlayStation 2 specifications include a 128-bit, DVD-based system that is
Internet and cable ready, and is the first console system to feature backwards
compatibility with existing PlayStation software. Microsoft has announced that
it will launch the Xbox in
-2-
the fall of 2001, and Nintendo has announced that it also plans to release
GameBoy Advance and the GameCube in late 2001. We believe that future-generation
gaming platforms with more powerful and realistic graphics and broadband
connectivity will be an integral part of the next major wave of digital home
entertainment.
Software Products
We release titles with potential for broad consumer appeal. For the
year ended October 31, 1999, GTA2 shipped more than one million copies and with
Grand Theft Auto accounted for approximately 16.4% of our revenues. We released
more than sixty titles during the year ended October 31, 2000. For such year,
our five best-selling titles in the aggregate accounted for approximately 12.0%
of our revenues, with Smuggler's Run and Rainbow Six accounting for
approximately 3.1% and 2.5%, respectively, of our revenues.
We plan to deliver high-profile game content for both PC and evolving
console markets, particularly for next-generation platforms with potential for
significant market penetration, including the following titles:
Title Platform Genre Description
----- --------- ------ -----------
Duke Nukem Forever PC First-person shooter The return of video game's ultimate action
hero.
Mafia PC Third-person role Chicago. The 1930's. Prohibition. The real
playing American underworld.
Max Payne PC Third-person action/ NYC is gripped by a new crime wave. One
adventure man can save the city. His name is Payne,
Max Payne.
Myth 3 PC "Real-time" 3D The Dark Ages brought to light.
strategy
Tropico PC Strategy The Caribbean. A typical tin pot banana
republic overthrown by a vicious dictator -
YOU.
Austin Powers PS2 Third-person action/ The international man of mystery is back,
adventure/comedy baby, yeah!
Duke Nukem (untitled) PS2 Third-person action Duke beats up Nazis, aliens and anyone stupid
enough to get in his way.
Grand Theft Auto 3 PC, PS2, Xbox Crime adventure Next in the multi-million selling series.
A 3D epic of car jacking and police chases.
Hidden & Dangerous 2 PC, PS2 Military Tactics and intense action combine in
behind-enemy-lines thriller.
4X4 EVO 2 PS2, Xbox Off-Road Racing Racing in real, fully-licensed sports
utility vehicles.
Smuggler's Run 2 PS2 Off-Road Racing Sequel to the hugely popular driving
adventure. Smuggle nuclear weapons in the
far east.
Midnight Club 2 PS2 Urban Racing Sequel to the hit urban racing game.
-3-
Publishing and Licensing Arrangements
We have entered into license agreements with Sony, Nintendo, Microsoft
and Sega to develop and publish software for the PlayStation, PlayStation 2,
Nintendo 64, Nintendo Color Gameboy, Xbox and Dreamcast in North America and
Europe. We are not required to obtain any license to develop titles for the PC.
We actively seek to acquire licenses for well-recognized properties. We
recently acquired the exclusive worldwide publishing rights to the best-selling
franchise of Duke Nukem PC and video games, including the back catalog rights to
six products, as well as PC, console and sequel rights to Duke Nukem Forever,
the eagerly awaited sequel to the popular Duke Nukem 3D. Among other properties,
we also acquired the exclusive worldwide rights from New Line Productions to
publish and distribute titles based on Austin Powers movies, the exclusive
rights from MTV to exploit titles based on MTV's properties and certain rights
from Microsoft to develop two products utilizing Bungie Software's Halo game
engine.
Software Development
We engage in software development through our internal development
studios, Talonsoft, Mission Studios, Alternative Reality Technologies, DMA
Design Limited, the developer of the Grand Theft Auto series, and PopTop
Software, the developer of Railroad Tycoon 2. 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, 2000, our internal
development studios and product development department employed 185 personnel
with the technical capabilities to develop software titles for all major game
platforms.
For the years ended October 31, 2000, 1999 and 1998, we incurred costs
of $5,668,000, $5,263,000 and $1,702,000 on research and development relating to
our software titles.
Many of our software titles are developed by third parties. We have
entered into agreements with developers such as Angel Studios, N-Space, Apogee
Software/3d Realms and Ritual Entertainment to develop software products on our
behalf. Agreements with developers generally require us to make advance payments
and pay royalties based on product sales and satisfy other conditions. Advances
for software products are generally recoupable against royalties due to
developers.
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, 2000, we had a sales
and marketing staff of 162 persons.
-4-
We distribute our own titles and third-party titles through our
wholly-owned subsidiaries, Take-Two Interactive Software Europe Limited, Jack of
All Games, VLM Entertainment Group, DirectSoft, L.D.A. Distribution Limited,
Funsoft Nordic A.S., CD Verte Italia Spa, Take-Two Interactive Software Canada,
Ltd., Take-Two Interactive Germany GMBH and Take-Two Interactive France F.A. For
the year ended October 31, 2000, the sale of third-party products accounted for
approximately 47.8% of our revenues, with sales to our five largest customers
accounting for approximately 20.0% of our revenues. No single customer accounted
for more than 10% of our revenues during this period.
We sell software to retail outlets in the United States and Europe
through direct relationships with large retail customers and third-party
distributors. Our domestic 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. Our European customers include Dixons, Electronic Boutique,
Karstadt, Carrefour, and Auchan. We have publishing and distribution operations
in the United Kingdom, France, Germany, Denmark, Italy, Australia, Canada and
Japan.
Manufacturing
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, 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 or focus on developing software products
for third party platforms.
We also compete with domestic companies such as Electronic Arts,
Activision, 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.
-5-
Interactive entertainment software distribution channels have undergone
rapid change in recent years as a result of 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. Although we generally do not hold any patents or
registered copyrights, we seek to obtain trademark registrations for our product
names.
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.
Employees
As of December 31, 2000, we had 658 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.
-6-
Executive Offices
Our principal executive offices are located at 575 Broadway, New York,
New York in approximately 13,300 square feet of space under a five-year lease
with 575 Broadway Corporation, a company controlled by Peter M. Brant, a
principal stockholder and the father of Ryan A. Brant, our Chairman. The lease
provides for an annual rent of $410,000 and expires in 2004. We believe that the
terms of the lease are no less favorable than 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 approximately $400,000, 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
approximately $17,000 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 $173,000.
Directsoft leases office and warehouse space in Hornsby, Australia at an annual
rent of approximately $48,000. Joytech Europe Limited leases office space in
Leighton Buzzard Beds, United Kingdom at an annual rent of approximately
$85,000. 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 $45,000. DMA Design Limited
currently leases office space in Dundee and Edinburgh, Scotland, at an annual
rental of approximately $400,000. CD Verte Italia Spa currently leases office
and warehouse space in Golarata, Italy at an annual rent of approximately
$79,000.
Development Facilities
Mission Studios leases 2,600 square feet of office space at an annual
rate of $54,000, 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 approximately $26,000 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. PopTop Software leases approximately 3,300 square feet of office space in
Fenton, Missouri and pays an annual rental of $37,000.
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 also leases approximately 206,000 square feet of office and
warehouse space in Cincinnati, Ohio. Jack of All Games pays $750,000 per annum,
plus taxes and insurance, under the lease, which expires in January 2006. Jack
of All Games Canada, Inc. (formerly Triad Distributors) currently leases
approximately 36,750 square feet of office and warehouse space in Ontario,
Canada at an annual rate of approximately $219,000 plus operating costs, under a
lease that expires September 2004. VLM Entertainment Group leases approximately
4,000 square feet of office space in Las Vegas, Nevada at an annual rental of
$56,000, and approximately 3,000 square feet of space in Northbrook, Illinois at
an annual rental of $33,000. VLM also leases approximately 56,200 square feet of
office and warehouse space in Ottawa, Illinois at an annual rent of $288,000.
VLM leases such space from
-7-
its former stockholders and believes that the terms of the lease are no less
favorable than could have been obtained from an unaffiliated third-party.
In addition, Gathering of Developers leases approximately 15,300 square
feet of office space in Dallas, Texas for an annual rent of $184,000. Gathering
of Developers also leases approximately 27,600 square feet of office space in
Austin, Texas for an annual rent of $167,000.
Item 3. Legal Proceedings.
We are not involved in any significant legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
-8-
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, 1998
First Quarter.......................................................... 7.50 4.50
Second Quarter......................................................... 8.69 6.25
Third Quarter.......................................................... 8.75 5.44
Fourth Quarter......................................................... 6.75 4.75
Fiscal Year Ended October 31, 1999
First Quarter.......................................................... 13.38 5.88
Second Quarter......................................................... 13.63 7.56
Third Quarter.......................................................... 9.69 6.88
Fourth Quarter......................................................... 11.50 7.00
Fiscal Year Ending October 31, 2000
First Quarter.......................................................... 17.50 10.00
Second Quarter......................................................... 18.94 8.00
Third Quarter.......................................................... 13.50 8.88
Fourth Quarter......................................................... 16.50 9.00
Fiscal Year Ending October 31, 2001
First Quarter
(through January 23, 2001)............................................. 13.44 8.63
On January 23, 2001, the last sale price for our common stock as
reported by NASDAQ was $12.25 per share. The number of record holders of our
common stock was approximately 157 as of January 23, 2001. We believe that there
are in excess of 1,000 beneficial owners of our common stock.
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.
-9-
Recent Sales of Unregistered Securities. In August 2000, we issued
559,100 shares of common stock in connection with the acquisition of PopTop
Software, Inc. The foregoing issuance was made in reliance on Section 4(2) of
the Securities Act of 1933.
-10-
Item 6. Selected Financial Data.
(in thousands, except per share data)
Statement of Operations Data: Fiscal Year Ended October 31
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- -----
Net sales................................... $387,006 $305,932 $194,052 $97,341 $55,123
Income (loss) from operations............... 45,061 27,381 10,690 (895) 2,032
Net income (loss)........................... 24,963 16,332 7,181 (2,768) 1,682
Net income (loss) per share
Basic.................................. $.91 $.79 $ .49 $(.25) $.16
Diluted................................ .88 .76 .42 (.25) .15
Net income (loss) per share attributable to
common stockholders - Diluted; supplemental
financial information...................... .88 .76 .37 (.31) .06
Balance Sheet Data: As of October 31
---------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Cash and cash equivalents.............. $ 5,245 $ 10,374 $ 2,763 $ 2,372 $ 737
Working capital........................ 62,885 41,439 21,797 16,037 (290)
Total assets........................... 351,641 231,712 109,385 56,395 24,209
Total debt............................. 96,873 56,137 30,808 22,031 9,127
Total liabilities...................... 164,639 146,609 73,820 44,460 20,026
Stockholders' equity................... 187,002 85,103 35,566 11,935 4,183
-11-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
We make statements in this report and the documents incorporated by
reference that are considered forward looking statements under federal
securities laws. Such forward looking statements are based on the beliefs of our
management as well as assumptions made by and information currently available to
them. The words "expect," "anticipate," "believe," "may," "estimate," "intend"
and similar expressions are intended to identify such forward looking
statements. Forward looking statements involve risks, uncertainties and
assumptions including, but not limited to: risks associated with our future
growth and operating results; our ability to continue to successfully manage
growth and integrate the operations of acquired businesses; the availability of
adequate financing to fund periodic cash flow shortages; credit risks; seasonal
factors; inventory obsolescence; technological change; competitive factors;
product returns; failure of retailers to sell-through our products; the timing
of the introduction and availability of new hardware platforms; market and
industry factors adversely affecting the carrying value of our assets; and
unfavorable general economic conditions, any or all of which could have a
material adverse effect on our business, operating results and financial
condition. Actual operating results may vary significantly from such forward
looking statements.
Overview
We are a leading global developer, publisher and distributor of
interactive software games. Our software operates on PCs and video game consoles
manufactured by Sony, Nintendo and Sega. The following table sets forth the
percentages of our publishing revenues derived from sales of titles for specific
platforms during the periods indicated:
Year Ended October 31
---------------------------
Platform 2000 1999 1998
--------- ---- ---- ----
PC............................................ 39.6% 44.0% 28.5%
Sony PlayStation.............................. 27.0 34.8 42.3
Sony PlayStation 2............................ 15.8 -- --
Nintendo GameBoy.............................. 7.8 6.0 --
Sega Dreamcast................................ 6.4 0.2 --
Nintendo 64................................... 3.4 15.0 29.2
------ ------ ------
100.0% 100.0% 100.0%
Revenue Recognition. 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 CDs or cartridges designed for video game consoles. We recognize
revenue from software sales when product ownership and risk of loss pass to our
customers.
Returns and Reserves. Our arrangements with customers for published
titles require us to accept returns for stock balancing, markdowns or defects.
We establish a reserve for future returns of published titles at the time of
sales based primarily on our return policies and historical return rates, and we
recognize revenues net of returns. Our distribution arrangements with customers
generally do not give them the right to return titles or to cancel firm orders.
However, we sometimes accept returns for stock balancing and negotiate
accommodations to customers, which include price discounts, credits and returns,
when demand for specific titles fall below expectations. Our sales returns and
allowances for the years ended October 31, 2000 and 1999 were $40,162,000 and
$25,147,000, respectively. At October 31, 2000, our reserve against
-12-
accounts receivable for returns, customer accommodations and doubtful accounts
was approximately $9,102,000. If future returns significantly exceed our
reserves, our operating results would be adversely affected.
Capitalized Costs. Our agreements with licensors and developers
generally require us to make advance royalty payments and pay royalties based on
product sales. Prepaid royalties are amortized at the contractual royalty rate
as cost of sales based on actual net sales. At October 31, 2000, we had prepaid
royalties of $21,024,000. We also capitalize internal software development costs
subsequent to establishing technological feasibility of a title. Amortization of
such costs is 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, 2000, we had capitalized software development costs of
$9,613,000. We continually evaluate the recoverability of capitalized costs. If
we were required to write-off these payments or costs to a material extent in
future periods, our results of operations would be adversely affected.
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:
Year Ended October 31
---------------------------------------------
2000 1999 1998
---- ---- ----
Net sales..................................... 100.0% 100.0% 100.0%
Cost of sales................................. 64.0 70.3 76.0
Selling and marketing......................... 11.1 9.8 9.6
General and administration.................... 9.4 8.2 7.0
Research and development costs................ 1.5 1.7 0.9
Depreciation and amortization................. 2.5 0.9 0.9
Interest expense.............................. 1.6 1.0 1.9
Income taxes.................................. 3.4 2.6 (0.2)
Net income.................................... 6.5 5.3 3.7
Fiscal Years Ended October 31, 2000 and 1999
Net Sales. Net sales increased by $81,074,000, or 26.5%, to
$387,006,000 for fiscal 2000 from $305,932,000 for fiscal 1999. The increase
reflects the expansion of our global publishing and distribution businesses,
with substantially all of the increase attributable to internal growth.
Publishing revenues increased by $41,688,000, or 26.0%, to $202,023,000 for
fiscal 2000 from $160,335,000 for fiscal 1999. Distribution revenues increased
by $39,386,000, or 27.1%, to $184,983,000 for fiscal 2000 from $145,597,000 for
fiscal 1999.
For fiscal 2000, publishing and distribution activities accounted for
approximately 52.2% and 47.8%, respectively, of our net sales. For this year,
software products designed for PC and video game console platforms accounted for
approximately 18.7% and 52.4%, respectively, of our net sales, with video game
hardware and peripherals accounting for 19.1% of net sales. International
operations accounted for approximately $113,723,000 or 29.4% of our net sales
for fiscal 2000.
Cost of Sales. Cost of sales increased by $32,674,000, or 15.2%, to
$247,796,000 for fiscal 2000 from $215,122,000 for fiscal 1999. 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
64.0% for fiscal 2000 from 70.3% for fiscal 1999. This decrease was primarily
due to an increase on our higher margin publishing activities.
-13-
Selling and Marketing. Selling and marketing expenses increased by
$12,746,000, or 42.3%, to $42,854,000 for fiscal 2000 from $30,108,000 for
fiscal 1999. Selling and marketing expenses as a percentage of net sales
increased to 11.1% for fiscal 2000 from 9.8% for fiscal 1999. The increases were
due to increased marketing costs associated with establishing our publishing
programs and brand names.
General and Administrative. General and administrative expenses
increased by $11,173,000 or 44.3%, to $36,409,000 for fiscal 2000 from
$25,236,000 for fiscal 1999. General and administrative expenses as a percentage
of net sales increased to 9.4% for fiscal 2000 from 8.2% for fiscal 1999. 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
$405,000, or 7.7%, to $5,668,000 for fiscal 2000 from $5,263,000 for fiscal
1999. Research and development costs as a percentage of sales decreased to 1.5%
for fiscal 2000 from 1.7% for fiscal 1999.
Depreciation and Amortization. Depreciation and amortization expense
increased by $6,983,000, or 247.4%, to $9,805,000 for fiscal 2000 from
$2,822,000 for fiscal 1999. Depreciation and amortization expense as a
percentage of net sales increased to 2.5% for fiscal 2000 from 0.9% for fiscal
1999. The increases were attributable to the amortization of goodwill associated
with the acquisition of Toga Holdings, Gathering of Developers and DMA Design
Limited. We sold Toga Holdings in October 2000.
Interest Expense. Interest expense increased by $3,159,000, or 108.6%,
to $6,069,000 for fiscal 2000 from $2,910,000 for fiscal 1999. The increase was
primarily a result of increased borrowings and the amortized portion of the
expenses relating to a subordinated loan.
Income Taxes. Income taxes increased by $5,172,000 or 63.9% as a result
of a tax provision of $13,266,000 for fiscal 2000 as compared to a tax provision
of $8,094,000 for fiscal 1999.
Net Income. As a result of the foregoing, we achieved net income of
$24,963,000 for fiscal 2000, as compared to net income of $16,332,000 for fiscal
1999. The results for fiscal 2000 included a charge of $1,103,000 consisting
primarily of professional fees related to an abandoned offering, a loss of
$286,000 relating to the sale of Toga Holdings and a gain of $1,976,000 relating
to the sale of DVDWave.
Fiscal Years Ended October 31, 1999 and 1998
Net Sales. Net sales increased by $111,880,000, or 57.7%, to
$305,932,000 for fiscal 1999 from $194,052,000 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 $69,150,000, or 75.8%, to $160,335,000 for fiscal 1999
from $91,185,000 for fiscal 1998. Distribution revenues increased by
$42,731,000, or 41.5%, to $145,597,000 for fiscal 1999 from $102,866,000 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 $105,913,000 or 34.6% of our net sales
for fiscal 1999.
-14-
Cost of Sales. Cost of sales increased by $67,566,000, or 45.8%, to
$215,122,000 for fiscal 1999 from $147,556,000 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
$11,422,000, or 61.1%, to $30,108,000 for fiscal 1999 from $18,686,000 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 $11,653,000 or 85.8%, to $25,236,000 for fiscal 1999 from
$13,583,000 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
$3,561,000, or 209.1%, to $5,263,000 for fiscal 1999 from $1,702,000 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.
Depreciation and Amortization. Depreciation and amortization expense
increased by $987,000, or 53.8%, to $2,822,000 for fiscal 1999 from $1,835,000
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 $770,000, or 20.9%, to
$2,910,000 for fiscal 1999 from $3,680,000 for fiscal 1998. The decrease
resulted primarily from lower interest rates on bank borrowings.
Income Taxes. Income taxes increased by $8,428,000 as a result of a tax
provision of $8,094,000 for fiscal 1999, as compared to a tax benefit of
$334,000 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
$16,332,000 for fiscal 1999, as compared to a net income of $7,181,000 for
fiscal 1998.
Quarterly Operating Results; Seasonality
We experience fluctuations in quarterly operating results as a result
of the timing of 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
product shipment. Sales of our titles are also 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.
Accordingly, quarterly comparisons of operating results are not necessarily
indicative of future operating results.
-15-
The following table sets forth our quarterly results for the
immediately preceding eight quarters (amounts in thousands, except per share
data):
Quarter ended 10/31/00 7/31/00 4/30/00 1/31/00 10/31/99 7/31/99 4/30/99 1/31/99
--------------------------- -------- ------- ------- ------- -------- ------- ------- -------
Net Sales $122,607 $71,473 $70,036 $122,890 $121,924 $63,562 $52,165 $68,281
Operating income 21,935 6,629 7,480 9,017 14,713 4,209 3,334 5,125
Basic earnings per share 0.43 0.12 0.13 0.21 0.39 0.12 0.08 0.16
Diluted earnings per share 0.42 0.12 0.13 0.20 0.39 0.12 0.08 0.15
Liquidity and Capital Resources
Our primary capital requirements have been and will continue to be to
fund developing, publishing and distributing our software products. We have
historically financed our operations through cash flow from operations, the
issuance of debt and equity securities and bank borrowings. At October 31, 2000,
we had working capital of $62,885,000 as compared to working capital of
$41,439,000 at October 31, 1999.
Net cash used in operating activities for fiscal 2000 was $55,259,000
as compared to $16,748,000 for fiscal 1999 and $8,022,000 for fiscal 1998. The
significant increase was primarily attributable to increased levels of
receivables, inventories and advances to developers, reflecting substantial
growth in our operations. Because we have invested heavily during recent years
to position our company as a top-tier software publisher, we have experienced
negative cash flows from operations. Looking forward, we are focusing our
principal efforts on generating positive cash flow, and we expect to achieve
positive cash flow from operations for the fiscal quarter ending January 31,
2001.
Net cash used in investing activities for fiscal 2000 was $12,906,000
as compared to $21,540,000 for fiscal 1999 and $727,000 for fiscal 1998. The
increase was primarily the result of cash paid for investments and acquisitions.
Net cash provided by financing activities for fiscal 2000 was
$71,564,000 as compared to $46,780,000 for fiscal l999 and $9,017,000 for fiscal
1998. The increase was primarily the result of increased borrowings under our
line of credit, the proceeds from private placements of common stock in April
and July 2000 aggregating $21,285,000 and a subordinated loan financing in July
2000 in the amount of $15,000,000. At October 31, 2000, we had cash and cash
equivalents of $5,245,000.
In December 1999, we entered into a credit agreement, as amended, with
a group of lenders led by Bank of America, N.A., as agent, which currently
provides for borrowings of up to $90,000,000 (decreasing to $75,000,000 in March
2001). Thereafter, 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 collateralized 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 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, 2000, $82,453,000 was
outstanding under the line of credit.
In December 1999, our United Kingdom subsidiary entered into a line of
credit agreement with Barclay's Bank. The credit line provides for borrowings of
up to $25,000,000. Advances under the credit line bear interest annually at the
rate of 1.4% over the bank's base rate, payable quarterly, and are
-16-
guaranteed by us. The credit line is repayable on demand and is subject to
review prior to January 31, 2001. As of December 31, 2000, approximately
$15,312,000 was outstanding under the credit line. In January 2001, our United
Kingdom subsidiary entered into a credit facility agreement with Lloyds TSB Bank
plc under which Lloyds agreed to make available borrowings of up to $25,000,000.
Advances under the credit facility bear interest at the rate of 1.25% per annum
over the bank's base rate, and are guaranteed by us. The credit facility expires
in December 2001 and is expected to replace the credit line with Barclay's Bank.
In July 2000, we entered into a subordinated loan agreement with Finova
Mezzanine Capital Inc. under which we borrowed $15,000,000 evidenced by a
five-year promissory note bearing interest at the rate of 12.5% per annum,
payable monthly. In connection with the loan, we issued to Finova warrants to
purchase 451,747 shares of common stock at an exercise price of $11.875 per
share.
Our accounts receivable, less an allowance for doubtful accounts and
returns, at October 31, 2000 were $134,877,000. Of such receivables,
approximately $13,622,000 or 10.1% was due from Electronic Boutique. Most of our
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 would be adversely affected.
We expect to incur costs and expenses of approximately $2 million
during fiscal 2001 in connection with software and hardware upgrades to our
accounting systems. We also expect to finance approximately $2.0 million to
purchase new warehouse and office facilities for Jack of All Games in New York.
Other than the foregoing, we have no material commitments for capital
expenditures.
International Operations
Sales in international markets, principally in the United Kingdom and
other countries in Europe, have accounted for a significant portion of our
revenues. For the years ended October 31, 2000, 1999 and 1998, sales in
international markets accounted for approximately 29.4%, 34.6% and 21.6%,
respectively, of our revenues. We are subject to risks inherent in foreign
trade, including increased credit risks, tariffs and duties, fluctuations in
foreign currency exchange rates, shipping delays and international political,
regulatory and economic developments, all of which can have a significant impact
on our operating results.
Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the ordinary course of our business,
primarily risks associated with interest rate and foreign currency fluctuations.
Historically, fluctuations in interest rates have not had a significant impact
on our operating results. At October 31, 2000, we had $84,605,000 in outstanding
variable rate indebtedness. A hypothetical 1% increase in the interest rate of
our variable rate debt would increase annual interest expense by approximately
$846,000 as of October 31, 2000.
We transact business in foreign currencies and are exposed to risk
resulting from fluctuations in foreign currency exchange rates. Accounts
relating to foreign operations are translated into United States dollars using
prevailing exchange rates at the relevant fiscal quarter or year end.
Translation adjustments are included as a separate component of stockholders'
equity. For the year ended October 31, 2000, our foreign currency translation
adjustment loss was $9,014,000. A hypothetical 10% change in applicable currency
exchange rates at October 31, 2000 would result in a material translation
adjustment. We
-17-
purchase currency forward contracts to a limited extent to seek to minimize our
exposure to fluctuations in foreign currency exchange rates.
In addition, we may be exposed to risk of loss associated with
fluctuations in the value of our investments. Our investments are stated at fair
value, with net unrealized appreciation and loss included as a separate
component of stockholders' equity. At October 31, 2000, our investments had an
aggregate fair market value of $31,413,000 and included an unrealized loss of
$4,567,000.
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.
-18-
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 2001, 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 2001, 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 2001, 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 2001, 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.
-19-
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 1997 Stock Option Plan of the Company.+
10.2 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.++
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers 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 Annual Report on Form 10-K for the year ended October 31,
1999.
(b) Financial Statement Schedules: Schedule II-Valuation and Qualifying
Accounts.
(c) Reports on Form 8-K filed during the quarter ended October 31,
2000: Current Report on Form 8-K dated October 2, 2000
relating to the disposition of Toga Holdings, Inc.
-20-
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 it subsidiaries at October 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended October 31, 2000 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the accompanying financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and the financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits 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.
/s/ PricewaterhouseCoopers LLP
December 13, 2000
-21-
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Balance Sheets
As of October 31, 2000 and 1999
(In thousands, except share data)
ASSETS:
October 31,
-----------------------------------
2000 1999
----- ----
Current assets:
Cash and cash equivalents $ 5,245 $ 10,374
Accounts receivable, net of allowances of $9,102 and $7,821, respectively 134,877 107,799
Inventories 44,922 41,300
Prepaid royalties 19,721 20,118
Prepaid expenses and other current assets 6,551 6,374
Investments 2,926 -
Deferred tax asset 666 2,005
---------- ----------
Total current assets 214,908 187,970
Fixed assets, net 5,260 4,120
Prepaid royalties 1,303 1,510
Capitalized software development costs, net 9,613 2,227
Investments 28,487 -
Investment in affiliates - 3,955
Intangibles, net of accumulated amortization of $9,798 and $3,251, respectively 90,505 30,857
Other assets, net 1,565 1,073
---------- ----------
Total assets $ 351,641 $ 231,712
========== ==========
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 47,972 $ 71,230
Accrued expenses and other current liabilities 19,357 19,157
Lines of credit 84,605 56,048
Current portion of capital lease obligation 89 65
Notes payable, net of discount - 31
---------- ----------
Total current liabilities 152,023 146,531
Loan payable, net of discount 12,268 58
Capital lease obligation, net of current portion 348 20
---------- ----------
Total liabilities 164,639 146,609
---------- ----------
Commitments and contingencies (See Note 11)
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000 shares authorized; 31,172,866
and 23,085,455 shares issued and outstanding at October 31, 2000 and
1999, respectively 312 231
Additional paid-in capital 157,738 67,345
Deferred compensation (5) (48)
Retained earnings 43,365 18,402
Accumulated other comprehensive loss (14,408) (827)
---------- ----------
Total stockholders' equity 187,002 85,103
---------- ----------
Total liabilities and stockholders' equity $ 351,641 $ 231,712
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
Certain amounts have been reclassified for comparative purposes
-22-
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Statements of Operations
For the years ended October 31, 2000, 1999 and 1998
(In thousands, except per share data)
Years Ended October 31,
----------------------------------
2000 1999 1998
--------- --------- ---------
Net sales $ 387,006 $ 305,932 $ 194,052
Cost of sales 247,796 215,122 147,556
--------- --------- ---------
Gross profit 139,210 90,810 46,496
--------- --------- ---------
Operating expenses:
Selling and marketing 42,854 30,108 18,686
General and administrative 36,409 25,236 13,583
Research and development costs 5,668 5,263 1,702
Depreciation and amortization 9,805 2,822 1,835
Other, net (587) -- --
--------- --------- ---------
Total operating expenses 94,149 63,429 35,806
--------- --------- ---------
Income from operations 45,061 27,381 10,690
Interest and other expense, net 6,069 2,910 3,680
--------- --------- ---------
Income before equity in loss of affiliate, income taxes
and extraordinary item 38,992 24,471 7,010
Equity in loss of affiliate 763 45 --
--------- --------- ---------
Income before income taxes 38,229 24,426 7,010
Provision (benefit) for income taxes 13,266 8,094 (334)
--------- --------- ---------
Net income before extraordinary item 24,963 16,332 7,344
Extraordinary net loss on early extinguishment of debt -- -- 163
--------- --------- ---------
Net income* $ 24,963 $ 16,332 $ 7,181
========= ========= =========
Per share data:
Basic:
Weighted average common shares outstanding 27,307 20,690 14,747
========= ========= =========
Net income before extraordinary net loss per share $ 0.91 $ 0.79 $ 0.50
Extraordinary net loss per share -- -- (0.01)
--------- --------- ---------
Net income - Basic $ 0.91 $ 0.79 $ 0.49
========= ========= =========
Supplemental net income attributable to common Stockholders
after giving effect to S corporation distributions - Basic $ 0.91 $ 0.79 $ 0.42
========= ========= =========
Diluted:
Weighted average common shares outstanding 28,330 21,515 17,063
========= ========= =========
Net income before extraordinary net loss per share $ 0.88 $ 0.76 $ 0.43
Extraordinary net loss per share -- -- (0.01)
--------- --------- ---------
Net income - Diluted $ 0.88 $ 0.76 $ 0.42
========= ========= =========
Supplemental net income attributable to common stockholders
after giving effect to S corporation distributions - Diluted $ 0.88 $ 0.76 $ 0.37
========= ========= =========
* Net income includes acquired S corporation net income of $1,233 for the years
ended 1998.
The accompanying notes are an integral part of these consolidated
financial statements.
Certain amounts have been reclassified for comparative purposes
-23-
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 2000, 1999 and 1998
(In thousands, except share information)
October 31,
------------------------------------
2000 1999 1998
-------- ---------- ---------
Cash flows from operating activities (See note below):
Net income $ 24,963 $ 16,332 $ 7,181
Adjustment to retained earnings as a result of business combination -- -- (581)
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 9,805 2,822 1,835
Loss on termination of capital lease -- -- 225
Loss on disposal of equipments 239 124 --
Gain on extraordinary item -- -- (63)
Gain on sale and licensing transactions (6,247) -- --
Loss on disposition of subsidiary 286 -- --
Equity in loss of affiliate 763 45 --
Change in deferred tax asset 1,339 (1,064) (941)
Provision for doubtful accounts 1,213 3,843 1,429
Provision for inventory 9 319 237
Amortization of deferred compensation 43 181 122
Amortization of affiliate purchase option 201 302 --
Forfeiture of compensatory stock options in connection with AIM acquisition -- (146) --
Amortization of loan discounts 195 2 890
Amortization of deferred financing costs -- -- 246
Issuance of compensatory stock 55 831 --
Tax benefit from exercise of stock options 2,745 994 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (28,052) (56,339) (25,866)
Increase in inventories, net (3,631) (10,835) (5,579)
Increase in prepaid royalties (15,842) (12,119) (467)
Decrease (increase) in advances to developers -- 4,320 (4,320)
(Increase) decrease in prepaid expenses and other current assets (173) (1,992) 1,295
(Increase) decrease in capitalized software development costs, net (7,386) 33 2,056
Decrease (increase) in other assets, net -- 33 (33)
(Decrease) increase in accounts payable (27,274) 30,181 8,540
(Decrease) increase in accrued expenses and other current liabilities (7,045) 9,502 6,920
Increase in due to/from related parties -- -- 50
Decrease in other liabilities (1,465) (3,981) (87)
Decrease in other current liabilities -- (136) (1,111)
-------- -------- --------
Net cash used in operating activities (55,259) (16,748) (8,022)
-------- -------- --------
Cash flows from investing activities:
Purchase of fixed assets (2,910) (2,214) (630)
Proceeds from the sale of fixed assets 29 34 --
Cash restricted for letter of credit -- -- 1,090
Investment in affiliates -- (4,100) --
Cash paid for investments (4,122) -- --
Acquisitions, net cash acquired (4,294) (15,260) (1,187)
Additional cash paid for prior acquisitions (1,609) -- --
-------- -------- --------
Net cash used in investing activities (12,906) (21,540) (727)
-------- -------- --------
Cash flows from financing activities:
Issuance of stock in connection with the secondary public offering,
net of issuance costs of $2,187,000 -- 21,852 --
Proceeds from private placement, net 21,285 -- 5,955
Net borrowings under lines of credit 28,557 22,869 11,548
Proceeds from loan payable 15,000 -- --
Proceeds from notes payable -- -- 952
Repayments of notes payable (89) (460) (8,350)
Proceeds from exercise of stock options 6,766 2,385 148
Proceeds from the exercise of warrants 155 224 --
Repayment of capital lease obligation (110) (90) (305)
Distributions to S Corporation shareholders -- -- (931)
-------- -------- --------
Net cash provided by financing activities 71,564 46,780 9,017
-------- -------- --------
Effect of foreign exchange rates (8,528) (881) 123
Net (decrease) increase in cash for the year (5,129) 7,611 391
Cash and cash equivalents, beginning of the year 10,374 2,763 2,372
-------- -------- --------
Cash and cash equivalents, end of the year $ 5,245 $ 10,374 $ 2,763
========= ========= ========
Issuance of warrants in lieu of dividends $ -- $ -- $ --
========= ========= ========
Issuance of common stock in connection with acquisitions $ -- $ 10,333 $ 27,500
========= ========= ========
Supplemental disclosure of non-cash investing and financing activities:
Gathering purchase option -- $ 973 --
========= ========= ========
Supplemental information on businesses acquired:
Fair value of assets acquired
Cash $ 164 $ 329 $ 313
Accounts receivables, net 239 7,167 2642
Inventories, net -- 4,692 6,754
Prepaid royalties (16,447) 57 --
Prepaid expenses and other assets 3 400 367
Property and equipment, net 137 1,245 98
Investment 48,385 -- --
Goodwill 45,416 24,097 2,008
Less, liabilities assumed
Line of credit -- (2,825) (3,926)
Accounts payable (2,015) (7,517) (4,779)
Accrued expenses (7,216) (1,493) (108)
Notes payable -- (93) --
Other current liabilities -- (3,981) --
Stock issued (54,816) (6,096) (1,616)
Options issued (1,750) -- (253)
Direct transaction costs (399) (393) --
Disposal adjustments (3,279) -- --
Investment interest and purchase option (3,964) -- --
-------- -------- --------
Cash paid 4,458 15,589 1,500
Less, cash acquired (164) (329) (313)
-------- -------- --------
Net cash paid $ 4,294 $ 15,260 $ 1,187
========= ========= ========
Cash paid during the year for interest $ 5,944 $ 2,670 $ 2,324
========= ========= ========
Cash paid during the year for taxes $ 4,030 $ 829 $ 59
========= ========= ========
Equipment acquired under capital lease $ 140 $ -- $ 75
========= ========= ========
The cashflow activities for the year ended October 31, 2000 are net of the Pixel
acquisition and disposal. (See Footnote 4)
The accompanying notes are an integral part of these consolidated
financial statements.
Certain amounts have been reclassified for comparative purposes
-24-
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Condensed Statements of Stockholders' Equity
For the years ended October 31, 1998, 1999 and 2000
(In thousands)
Common Stock
--------------------- Additional Deferred
Shares Amount Paid-in Capital Compensation
--------- ------- ---------------- ------------
Balance, November 1, 1997 13,034 130 $ 15,551 $ (18)
Issuance of compensatory stock options -- -- 75 (75)
Exercise of stock options 252 3 157 --
Amortization of deferred compensation -- -- -- 122
Issuance of common stock in connection with acquisitions 2,390 23 11,641 (253)
Cashless exercise of public warrants, 1 share of common stock for
2 warrants surrendered 897 9 (9) --
Cashless exercise of underwriters' warrants, 1 share of common stock for
2 warrants surrendered 160 2 (2) --
Conversion of warrants to common stock issued in connection with
1996 private placement 379 4 -- --
Issuance of common stock in connection with private placements,
net of issuance costs 928 10 5,946 --
Issuance of common stock in connection with early extinguishment of debt 32 -- 187 --
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 18,072 181 33,546 (224)
Issuance of compensatory stock options 537 5 831 (5)
Exercise of stock options 613 6 2,379 --
Amortization of deferred compensation -- -- -- 181
Forfeiture of compensatory stock options in connection with
AIM acquisition -- -- (146) --
Issuance of common stock in connection with acquisitions 763 8 7,364 --
Proceeds from exercise of public warrants 41 -- 223 --
Issuance of common stock in connection with a public offering,
net of issuance costs 3,005 30 21,822 --
Issuance of common stock in lieu of royalty payments 55 1 332 --
Tax benefit in connection with the exercise of stock options -- -- 994 --
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
--------- --------- --------- ---------
Balance, October 31, 1999 23,086 231 67,345 (48)
Issuance of compensatory stock options -- -- 55 --
Exercise of stock options 1,341 13 6,753 --
Amortization of deferred compensation -- -- -- 43
Issuance of common stock in connection with acquisitions 4,222 43 55,218 --
Issuance of common stock in connection with private
placements, net of issuance costs 2,422 24 21,261 --
Issuance of warrants in connection with a debt financing -- -- 2,927 --
Proceeds from exercise of warrants 32 -- 155 --
Issuance of common stock in lieu of repayment of debt
assumed from Pixel 168 2 2,528 --
Retirement of common stock (98) (1) (1,249) --
Tax benefit in connection with the exercise of stock options -- -- 2,745 --
Foreign currency translation adjustment -- -- -- --
Net unrealized loss on investments -- -- -- --
Net income -- -- -- --
--------- --------- --------- ---------
Balance, October 31, 2000 31,173 312 $ 157,738 $ (5)
========= ========= ========= =========
Accumulated
Other
Retained Comprehensive Comprehensive
Earnings Income (Loss) Total Income (Loss)
---------- --------------- ------ -------------
Balance, November 1, 1997 $ (3,599) $ (130) $ 11,934 $ (2,899)
Issuance of compensatory stock options -- -- -- --
Exercise of stock options -- -- 160 --
Amortization of deferred compensation -- -- 122 --
Issuance of common stock in connection with acquisitions -- -- 11,411 --
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 -- -- 4 --
Issuance of common stock in connection with private placements,
net of issuance costs -- -- 5,956 --
Issuance of common stock in connection with early extinguishment of debt -- -- 187 --
Distributions to S corporation shareholders prior to acquisition (931) -- (931) --
Foreign currency translation adjustment -- 123 123 123
Net income 7,181 -- 7,181 7,181
Less: net income of JAG and Talonsoft for the two months
ended December 31, 1997 (581) -- (581) --
--------- --------- --------- ---------
Balance, October 31, 1998 2,070 (7) 35,566 7,304
Issuance of compensatory stock options -- -- 831 --
Exercise of stock options -- -- 2,385 --
Amortization of deferred compensation -- -- 181 --
Forfeiture of compensatory stock options in connection with AIM acquisition -- -- (146) --
Issuance of common stock in connection with acquisitions -- -- 7,372 --
Proceeds from exercise of public warrants -- -- 223 --
Issuance of common stock in connection with a public offering,
net of issuance costs -- -- 21,852 --
Issuance of common stock in lieu of royalty payments -- -- 333 --
Tax benefit in connection with the exercise of stock options -- -- 994 --
Foreign currency translation adjustment -- (820) (820) (820)
Net income 16,332 -- 16,332 16,332
--------- --------- --------- ---------
Balance, October 31, 1999 18,402 (827) 85,103 15,512
Issuance of compensatory stock options -- -- 55 --
Exercise of stock options -- -- 6,766 --
Amortization of deferred compensation -- -- 43 --
Issuance of common stock in connection with acquisitions -- -- 55,261 --
Issuance of common stock in connection with private placements,
net of issuance costs -- -- 21,285 --
Issuance of warrants in connection with a debt financing -- -- 2,927 --
Proceeds from exercise of warrants -- -- 155 --
Issuance of common stock in lieu of repayment of debt assumed from Pixel -- -- 2,530 --
Retirement of common stock -- -- (1,250) --
Tax benefit in connection with the exercise of stock options -- -- 2,745 --
Foreign currency translation adjustment -- (9,014) (9,014) (9,014)
Net unrealized loss on investments -- (4,567) (4,567) (4,567)
Net income 24,963 -- 24,963 24,963
--------- --------- --------- ---------
Balance, October 31, 2000 $ 43,365 $ (14,408) $ 187,002 $ 11,382
========= ========= ========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Certain amounts have been reclassified for comparative purposes
-25-
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. The
Company develops, publishes, and distributes interactive software games
designed for PCs 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.
In the fiscal year ended October 31, 2000, the financial statements
were reformatted to round to the thousandth place. All prior periods
have been conformed to the current presentation. Minor rounding
differences may result due to this change in presentation.
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 the recoverability of
prepaid royalties, capitalized software development costs and other
intangibles, recoverability of investments, valuation of inventories,
income taxes, allowances for returns and doubtful accounts. Actual
amounts could differ from those estimates.
Concentration of Credit Risk
A significant portion of the Company's cash balances is maintained with
several major financial institutions with satisfactory standing and
while attempting to limit credit exposure with any single institution,
there are times that balances will exceed 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, 2000 and 1999, the receivable balances
from the largest customer amounted to approximately 10.1% and 14.4% of
the Company's net balance, respectively. The Company maintains
insurance, to the extent available, on the receivable balance. For the
years ended October 2000, 1999, and 1998, the Company's five (5)
largest customers accounted for 20.0%, 24.5%, and 22.4% of net sales,
respectively. Except for largest customer noted above, all receivable
balances from the remaining customers were less than 10%.
-26-
Revenue Recognition
Distribution revenue is derived from the sale of third-party
interactive software games and hardware and is recognized when the
title and risk of loss to products are transferred to the customers.
Distribution revenue amounted to $184,983,000, $145,597,000, and
$102,866,000 for 2000, 1999, and 1998, respectively. 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 when the title and risk of loss to products are
transferred to the customers. Publishing revenue amounted to
$202,023,000, $160,335,000, and $91,186,000 in 2000, 1999, and 1998,
respectively.
The Company's distribution arrangements with customers generally do not
give them the right to return products, however, the Company generally
accepts product returns for stock balancing or defective products. In
addition, the Company will also negotiate accommodations to customers,
including price discounts, credits and product returns, when demand for
specific products fall below expectations. 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. Return and allowances for the years ended
October 31, 2000, 1999 and 1998 were $40,162,000, $25,147,000 and
$13,672,000.
Advertising
The Company expenses advertising costs as incurred. The Company shares
portions of certain customers' advertising expenses through co-op
advertising arrangements. Advertising expense for the years ended
October 31, 2000, 1999, and 1998 amounted to $16,769,000, $11,986,000,
and $6,670,000, 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 makes adjustments as necessary.
Prepaid Royalties
Prepaid royalties represent prepayments made to independent software
developers under development agreements. Prepaid royalties are
amortized at the contractual royalty rate as cost of sales based on
actual net product sales. Management evaluates the future realization
of prepaid royalties, and charges to cost of sales any amount deemed
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 $501,000, $1,308,000,
and $884,000 for the years ended October 31, 2000, 1999, and 1998,
respectively, to estimated net realizable value. Amortization of
prepaid royalties amounted to $18,365,000, $12,144,000, and $9,094,000
during fiscal years 2000, 1999, and 1998, respectively.
Fixed Assets
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 equipment and software are
depreciated using the straight-line method over three years. Leasehold
improvements are amortized over the lesser of the term of the related
lease or estimated useful lives. Accumulated amortization includes the
amortization of assets recorded under capital leases. The cost of
additions and betterments are capitalized, and repairs and
-27-
maintenance costs are charged to operations in the periods incurred.
When depreciable assets are retired or sold, the cost and related
allowances for depreciation are removed from the accounts and the gain
or loss is recognized. The carrying values of these assets are recorded
at historical cost. The cost of additions and betterments greater than
$1,000 is capitalized.
Capitalized Software Development Costs (Including Film Production
Costs)
Costs associated with research and development are expensed as
incurred. Software development costs incurred subsequent to
establishing technological feasibility are capitalized. Amortization
commences upon the general release of a game and is recognized as a
component of cost of sales by the ratio that current gross revenues for
a product bears to the total of current and anticipated future gross
revenues for that product. 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. No capitalized software costs were
written down for the year ended October 31, 2000. Capitalized software
costs were written down by $698,000, and $1,412,000 for the years ended
October 31, 1999, and 1998, respectively, to estimated net realizable
value. Amortization of capitalized software costs amounted to
$1,451,000, $1,136,000, and $1,767,000 during 2000, 1999, and 1998,
respectively.
Net Income per Share
Net income per share has been computed in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" 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 adjusted for the change in foreign
currency translation adjustments and the change in net unrealized gain
(loss) from investments. The disclosures required by SFAS No. 130 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
-28-
which the differences are expected to reverse. The effect on deferred
taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. Accounts of foreign operations are
translated into U.S. dollars using quarter or year-end exchange rates
for assets and liabilities at the balance sheet date and average
prevailing exchange rates for the period for revenue and expense
accounts. Adjustments resulting from translation are included as a
separate component of stockholders' equity.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, approximate fair value because of their short
maturities. The carrying amount of prepaid royalties and investments
approximate fair value based upon the recoverability of these assets.
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, 2000.
Recently Issued Accounting Pronouncements
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition". SAB
101 summarizes certain of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial
statements. The provisions of this pronouncement are effective for the
fourth quarter of the fiscal year ended October 31, 2001, but must be
retroactively applied to the beginning of the fiscal year. The Company
believes the adoption of SAB 101 will not have a material impact on the
Company's results of operations.
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, 2000. The aggregate purchase price, including cash
and stock payments, was $61.0 million, $9.7 million, and $13.2 million
in 2000, 1999, and 1998, respectively. The aggregate purchase price
excludes the value of stock issued for pooled companies.
In 1999 and 1998, 1,033,000 and 2,750,000 shares of the Company's
common stock were issued for acquisitions accounted for as poolings of
interests, respectively.
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 2000, the Company paid $4.5 million in cash, issued 4,180,000 shares
of its common stock (valued at $54.8 million), and incurred direct
transaction costs of approximately $399,000 for acquisitions accounted
for as purchases. These acquisitions included Toga Holdings, BV
("Toga") which owns Pixel Broadband Studios, Ltd. ("Pixel"), the
remaining 80.1% of Gathering of Developers, Ltd ("Gathering"), and
PopTop Software, Inc. ("PopTop"). For Gathering, the Company issued
1,060,000 shares of its Common Stock and assumed liabilities resulting
in excess purchase price over the net tangible assets of approximately
$39 million. In the acquisition of Toga, the Company paid $4.5 million
in cash, issued 2,561,000 shares of its Common Stock
-29-
(valued at $38.6 million) and issued a warrant valued at $1.75 million.
Toga was sold in October 2000 to Gameplay.com PLC ("Gameplay"). (See
Footnote 4).
In 1999, the Company paid $1.2 million in cash, issued 638,000 shares
of its common stock (valued at $6.1 million), and incurred direct
transaction costs of approximately $390,000 for all 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 ("BMG").
The unaudited pro forma data below for the years ended October 31, 2000
and 1999 is presented as if these purchase acquisitions had been made
as of November 1, 1998. 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 includes purchase acquisitions that are significant to the
Company's operations.
Unaudited Pro forma
(in thousands, except for per share
data)
----------------------------------------
October 31, 2000 October 31, 1999
------------------ ------------------
Total Revenues:
Take-Two (1) $ 387,006 $ 313,289
Take-Two inclusive of Gathering 393,614 328,014
Net income:
Take-Two (1) $ 24,963 $ 16,087
Take-Two inclusive of Gathering 22,433 10,797
Net income per share - Basic $ 0.77 $ 0.43
Net income per share - Diluted $ 0.74 $ 0.42
(1) Includes AIM, BMG, DirectSoft, JAG, Talonsoft, LDA/Joytech, and
Triad/Global.
-30-
4. Disposition of Assets
In February 2000, the Company sold all its interests in Falcon
Ventures Corporation d/b/a DVDWave.com to eUniverse, Inc. ("eUniverse")
in exchange for 310,000 shares of eUniverse's common stock. The Company
recognized a gain of $1,976,000 in connection with this transaction.
In June 2000, the Company sold its 19.9% equity interest in Bungie
Software ("Bungie") to Microsoft Corporation for approximately $5
million. Separately, the Company sold its Halo publishing and
distribution rights to Bungie for $4,000,000 and acquired a royalty
free license to Bungie's Halo technology for two products. In addition,
the Company was granted all of Bungie's right, title and interest to
the Myth franchise and the PC and Playstation(R) 2 game, Oni.
In October 2000, the Company sold all of its shares of Toga, the parent
company of Pixel, to Gameplay. The Company received 14,436,000 shares
of Gameplay's common stock and warrants to purchase 1,000,000 shares of
Gameplay stock after exchanging shares of Gameplay stock (valued at
$1.75 million) for a warrant previously issued to the founder of Pixel,
and shares of Gameplay stock (valued at $1.25 million) for shares of
the Company's common stock. The Company recorded a value for the
Gameplay stock held by it of approximately $28 million. In connection
with the transaction, the Company granted to Gameplay certain on-line
distribution rights and entered into a joint exploitation agreement
with Gameplay under which the Company acquired a software development
business of a subsidiary of Gameplay. The value of the acquired
business of approximately $20 million, which is included in
intangibles, has been allocated on a preliminary basis. The Company
recognized a loss of $286,000 in connection with this transaction. The
shares held by the Company represent approximately 18% of Gameplay's
then outstanding shares.
5. Investments
Investments are comprised of equity securities and are classified as
current and non-current assets. The investments are accounted for under
the average cost method as "available-for-sale" in accordance with
Statement of Financial Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". The investments are stated
at fair value, with unrealized appreciation reported as a separate
component of accumulated other comprehensive income (loss) in
stockholders' equity.
As of October 31, 2000, investments consist of (in thousands):
Current Non Current
------------ -----------
Average cost $ 2,896 $ 33,084
Unrealized gains (losses) 30 (4,597)
--------- ----------
Fair value $ 2,926 $ 28,487
========= ==========
-31-
For the fiscal year ended October 31, 2000, the gross proceeds from the
sale of investments were $639,000. The gross realized losses from these
sales totaled $180,000. The loss on sale of securities is based on the
average cost method.
6. Inventories
As of October 31, 2000 and 1999, inventories consist of (in thousands):
2000 1999
---------- -----------
Parts and supplies $ 496 $ 269
Finished products 44,426 41,031
----------- -----------
$ 44,922 $ 41,300
=========== ===========
7. Fixed Assets
As of October 31, 2000 and 1999, fixed assets consist of (in
thousands):
2000 1999
------------- ---------------
Computer equipment $ 3,737 $ 2,398
Office equipment 816 1,071
Computer software 537 8
Furniture and fixtures 1,710 1,326
Automobiles 305 228
Leasehold improvements 1,086 799
Capital leases 348 233
------------- ---------------
8,539 6,063
Less: accumulated depreciation and
amortization (3,279) (1,943)
------------- ---------------
$ 5,260 $ 4,120
============= ===============
Depreciation expense for the years ended October 31, 2000, 1999, and
1998 amounted to $1,761,000, $1,160,000, and $788,000, respectively.
8. Lines of Credit
(in thousands) 2000 1999
---- ----
Line of credit with Bank of America -
8.38% to 9.23% (8.25% to 8.75% in 1999) $ 70,599 $ 43,684
Line of credit with Barclays' Bank -
7.40% (6.62% to 8.25% in 1999) 14,006 12,324
Line of credit with Royal Bank of Canada-
8.75% to 9.50% - 40
---------- ----------
$ 84,605 $ 56,048
=========== ===========
-32-
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 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 available
credit under this facility was $2,974,000 at October 31, 2000. The line
of credit expires on December 7, 2002. In November 2000, the Company
amended the credit agreement, which increased the borrowings from
$75,000,000 to $90,000,000 until February 28, 2001. After such date,
the borrowings will be limited to $75,000,000.
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 $25,000,000. Advances
under the line of credit bear interest at the rate of 1.4% over
the bank's base rate per annum, payable quarterly. Borrowings are
collateralized by receivables of the Company's European subsidiaries,
and are guaranteed by the Company. The available credit under this
facility was $241,000 at October 31, 2000. The line of credit is
repayable upon demand and is subject to review prior to January 31,
2001.
In 1999, 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, 1999 aggregated to
$11,417,000. The weighted-average interest rate on outstanding balances
at October 31, 1999 was approximately 8.6%.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of October 31, 2000
and 1999 consist of (in thousands):
2000 1999
------------------ -------------------
Accrued co-op advertising, product rebates 2,178 2,610
and product discounts $ $
Accrued VAT and corporate taxes payable 8,740 12,690
Royalties payable 4,866 1,989
Other 3,573 1,868
------------------ ----------------
Total $ 19,357 $ 19,157
================== ===================
10. Loan Payable
In July 2000, the Company entered into a subordinated loan agreement
with Finova Mezzanine Capital Inc. ("Finova") in the principal amount
of $15 million. The loan is payable in full in July 2005, and bears
interest at the rate of 12.5% per annum, payable monthly. In connection
with the loan, the Company issued to Finova a five year warrant to
purchase approximately 452,000 shares of the Company's Common Stock
exercisable at a price of $11.875 per share. Subject to the outstanding
loan balance, the warrant entitles Finova to receive additional shares
of the Company's Common Stock for three consecutive years commencing
July 2003, and contains certain anti-dilution provisions. The Company
has recorded the loan net of discount of approximately $2,927,000 to
reflect an allocation of the proceeds to the estimated value of the
warrant. The discount is being amortized using the
-33-
"interest method" over the term of the financing. At October 31, 2000,
the amount of unamortized discount is approximately $2,732,000.
11. Commitments and Contingencies
Capital Leases
The Company leases equipment under capital lease agreements, which
extend through fiscal year 2005. Future minimum lease payments under
these capital leases, and the present value of such payments as of
October 31, 2000 is as follows:
Year ending October 31: (in thousands)
----------------------
2001 $ 136
2002 116
2003 112
2004 112
2005 63
--------------
Total minimum lease payments 539
Less: amounts representing interest (102)
--------------
Present value of minimum obligations under capital leases $ 437
==============
Lease Commitments
The Company leases 27 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 $419,000, $302,000, and $133,000
for the years ended October 31, 2000, 1999, and 1998, respectively. The
other offices are under noncancelable operating leases expiring at
various times from July 2001 to October 2011. In addition, the Company
has leased certain equipment, furniture and auto leases under
noncancelable operating leases, which expire through July 2005.
Future minimum rentals required as of October 31, 2000 are as follows:
Year ending October 31: (in thousands)
----------------------
2001 $ 3,838
2002 3,390
2003 3,023
2004 2,426
2005 1,912
Thereafter 4,264
----------------
Total minimum lease payments $ 18,853
================
Rent expense amounted to $2,303,000, $1,544,000, and $921,000 for the
years ended October 31, 2000, 1999 and 1998, respectively.
-34-
12. 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.
13. 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 was as follows:
---------------------------------------------------------
(in thousands) 2000 1999 1998
---------------- ----------------- -----------------
Domestic $ 23,761 $ 228 $ 4,000
Foreign 14,468 24,198 3,010
---------------- ----------------- -----------------
Total $ 38,229 $ 24,426 $ 7,010
================ ================= =================
Income tax expense (benefit) is as follows:
(in thousands) Years ended October 31,
---------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
Current:
Federal $ 6,866 $ - $ -
State and local 1,357 23 214
Foreign 3,704 8,002 393
Deferred 1,339 69 1,443
Decrease in valuation allowance - - (2,384)
----------------- ----------------- ----------------
Total $ 13,266 $ 8,094 $ (334)
================= ================= ================
A reconciliation of the federal statutory income tax rate to the
effective income tax rate is as follows:
2000 1999 1998
------------------- --------------------- ---------------------
Effective tax rate reconciliation:
Statutory federal tax rate 35.0% 34.0% 34.0%
State taxes, net of federal benefit 2.3% 6.3% 1.9%
Foreign tax rate differential (3.6)% (7.4)% -
Effect of valuation allowance - - (42.9)%
Goodwill amortization 2.6% 1.0% 3.8%
Other permanent items (1.6)% (0.8)% (1.5)%
------------------- --------------------- ---------------------
34.7% 33.1% (4.7)%
=================== ===================== =====================
The components of the net deferred tax asset as of October 31, 2000 and
1999 consists of the following:
-35-
(in thousands) 2000 1999
------------------ -----------------
Capitalized software $ (3,364) $ (1,581)
Bad debt allowance 3,065 1,266
Other - including reserves 1,029 518
Accumulated depreciation and amortization (137) 498
Tax credit carryforward 73 379
Net operating loss carryforward - 925
------------------ -----------------
Deferred tax asset $ 666 $ 2,005
================== =================
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 $666,000, and $2,005,000 for
the years ended October 31, 2000 and 1999, respectively.
The total amount of undistributed earnings of foreign subsidiaries for
income tax purposes was approximately $10 million for the year ended
October 31, 2000. It is the Company's intention to reinvest
undistributed earnings of its foreign subsidiaries and thereby
indefinitely postpone their remittance. Accordingly, no provision has
been made for foreign withholding taxes or United States Income taxes
which may become payable if undistributed earnings of foreign
subsidiaries were paid as dividends to the Company.
14. Stockholders' Equity (See Also Footnotes 3 and 4)
Private Placement
In 2000, the Company sold 2,422,000 shares of the Company's Common
Stock and received net proceeds of $21,285,000, net of commissions and
offering expenses of $2,432,000.
Public Offering
In July 2000, the Company incurred a one-time charge of $1,103,000
relating to an abandoned public offering of a subsidiary.
In May 1999, the Company consummated a secondary public offering of
3,005,000 shares of common stock, including 255,000 shares issued
pursuant to an over-allotment option. The proceeds from the offering
were $21,852,000, net of discounts and commissions and offering
expenses of $2,187,000.
Retirement of Common Stock
In October 2000, the Board of Directors approved the exchange of 98,000
shares of the Company's common stock (valued at $1,250,000) for an
equivalent value of the Company's Gameplay stock to a shareholder.
These shares were cancelled.
Warrants
In February 1999, warrants issued in connection with the Company's
initial public offering were exercised. Each warrant entitled 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, 41,000 warrants were exercised.
As of October 31, 2000 and 1999, there are outstanding common stock
purchase warrants for an aggregate of 829,000 and 662,000 shares of the
Company's Common Stock, respectively, at prices ranging from $ .01 to
$11.875 and expiring from 2003 to 2005.
-36-
15. Incentive Plans
Stock Option Plans
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, key
employees and consultants of the Company may receive incentive stock
options ("ISO") 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 3,500,000. The number of options was subsequently
increased to 5,000,000 in November 2000.
The 1997 Plan is administered by the Board of Directors. Subject to the
provisions of the 1997 Plan, 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, 2000 and 1999, the 1997 Plan had outstanding stock
options for an aggregate of 1,973,000 and 2,665,000 shares of the
Company's Common Stock, respectively, at prices ranging from $2.41 to
$13.00 per share vesting at various times from 1997 to 2003 and
expiring at various times from 2002 to 2005.
Non-Plan Stock Options
As of October 31, 2000 and 1999, there are outstanding non-plan stock
options for an aggregate of 2,226,000 and 1,060,000 shares of the
Company's Common Stock, respectively, at prices ranging from $2.00 to
$13.00 per share vesting from 1997 to 2003 and expiring at various
times from 2002 to 2005.
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, 2000, 1999, and
1998 was approximately $43,000, $29,000, and $121,000, respectively.
The following table summarizes the activity in options under the plans
inclusive of non-plan options:
Shares Weighted Average
(in thousands) Exercise Price
------------------- ---------------------
Options outstanding - November 1, 1997 1,371 $2.23
Granted - exercise price equal to fair value 1,540 $5.29
Granted - exercise price less than fair value 106 $2.14
Exercised (252) $0.63
Forfeited (134) $5.18
-------------------
Options outstanding - October 31, 1998 2,631 $4.02
Granted-exercise price equal to fair value 2,506 $7.94
Exercised (1,101) $2.85
Forfeited (311) $5.07
-------------------
Options outstanding - October 31, 1999 3,725 $6.96
Granted-exercise price equal to fair value 2,073 $10.14
Granted-exercise price less than fair value 14 $8.23
Exercised (1,270) $6.44
Forfeited (343) $5.89
-------------------
Options outstanding - October 31, 2000 4,199 $8.72
-37-
At October 31, 2000, 1999 and 1998, the number of options exercisable
are 2,119,000, 1,346,000 and 1,019,000, respectively, and their related
weighted average exercise prices are $8.36, $6.21 and $3.72,
respectively.
The following summarizes information about stock options outstanding
and exercisable at October 31, 2000:
Average
Weighted Remaining
Shares Average Contractual
Exercise Price Shares (in thousands) Exercise Price Life
--------------------------------------------------- ------------------ ------------------- ---------------
$2.00-$5.50 552 $ 4.97 2.61
$5.625-$8.938 1,347 $ 7.57 3.52
$9.00-$13.00 2,300 $ 10.30 4.69
------------------ -------------------- ---------------
Options outstanding - October 31,2000 4,199 $ 8.72 4.04
================== ==================== ===============
$2.00-$5.50 357 $ 4.96 2.62
$5.625-$8.938 778 $ 7.52 3.47
$9.00-$13.00 984 $ 10.27 4.65
------------------ -------------------- ---------------
Options exercisable- October 31, 2000 2,119 $ 8.36 3.88
================== ==================== ===============
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 2000, 1999 and
1998 consistent with the provisions of SFAS No. 123, the Company's net
income and the net income per share would have been reduced to the
pro-forma amounts indicated below (in thousands).
2000 1999 1998
----------------- ---------------- -----------------
Net income
As reported $ 24,963 $ 16,332 $ 7,181
Pro-forma $ 13,332 $ 12,769 $ 6,501
Net income per share
As reported-Basic $ .91 $ .79 $ .49
Pro-forma-Basic $ .49 $ .62 $ .44
As reported-Diluted $ .88 $ .76 $ .42
Pro-forma-Diluted $ .47 $ .59 $ .38
The pro-forma disclosures shown are not representative of the effects
on net income and the net income per share in future years.
The fair value of the Company's stock options used to compute pro-forma
net income and the net income 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 2000 were used to
value grants: expected volatility of 96% for all grants; a risk-free
interest rate of generally 5.5% to 6.7%; and an expected holding period
of two to five years. For 1999 and 1998, respectively, the following
weighted average assumptions were used to value grants; expected
volatility of 60% for the grants with a holding period of three to four
year and 65% for holding periods of five years or more and 55%; a
risk-free interest rate of 4% to 6% and 5%; and an expected holding
period of three to five years and four to five years, respectively.
-38-
16. Results By Quarter (Unaudited)
(in thousands, except for per share data)
2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------------------------------------
Net sales $ 122,890 $ 70,036 $ 71,473 $ 122,607
Gross profit 36,616 28,255 31,372 42,967
Net income (a) 4,787 $ 3,354 $ 3,449 $ 13,373
Per share data:
Basic EPS 0.21 0.13 0.12 0.43
Diluted EPS 0.20 0.13 0.12 0.42
1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------------------------------------
Net sales $ 68,281 $ 52,165 $ 63,562 $ 121,924
Gross profit 14,743 16,080 19,631 40,356
Net income $ 2,895 $ 1,561 $ 2,708 $ 9,168
Per share data:
Basic EPS 0.16 0.08 0.12 0.39
Diluted EPS 0.15 0.08 0.12 0.39
(a) Included an after-tax loss of $695,000 ($.02 per diluted share) in
the third quarter of fiscal 2000 for the one-time charge for abandoned
offering described in Footnote 14.
17. 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 (See Footnote 2). The Company provides software
product and many other closely related services in the entertainment
software industry. All of these services fall within one reportable
segment as defined in SFAS No. 131.
For the years ended October 31, 2000, 1999 and 1998, the Company's net
sales in domestic markets accounted for approximately 70.6%, 65.4%, and
78.4%, respectively, and net sales in international markets accounted
for 29.4%, 34.6%, and 21.6%, respectively.
As of October 31, 2000 and 1999, the Company's net fixed assets in
domestic markets accounted for approximately $2,436,000 and $1,762,000,
respectively, and net fixed assets in international markets accounted
for $2,824,000 and $2,358,000, respectively.
-39-
Total non-current assets and net sales are shown below by major
geographic area:
(in thousands) 2000 1999 1998
---- ---- ----
Total Non-current Assets:
United States $ 106,847 $ 14,032 $ 9,116
International
United Kingdom 20,418 20,974 4,051
All other Europe 5,748 5,334 484
Other 3,720 3,402 432
------------------------------------------------------------------
$ 136,733 $ 43,742 $ 14,083
------------------------------------------------------------------
Net Sales:
United States $ 273,283 $ 200,019 $ 152,181
International
Canada 10,408 5,393 1,556
United Kingdom 25,968 53,101 24,444
All other Europe 60,814 37,304 5,080
Asia Pacific 15,505 9,366 3,123
Other 1,028 749 7,668
------------------------------------------------------------------
$ 387,006 $ 305,932 $ 194,052
------------------------------------------------------------------
Net Sales are attributed to geographic areas based on product
destination.
18. Net Income per Share
The computation for diluted number of shares excludes those unexercised
stock options and warrants which are antidilutive. The number of such
shares was 73,000, 470,000, and 50,000 for the years ended October 31,
2000, 1999, and 1998, respectively.
The following table provides a reconciliation of basic earnings per
share to dilutive earnings per share for the years ended October 31,
2000, 1999, and 1998. The extraordinary loss for the year ended October
31, 1998, has no significant effect on the EPS calculation and
therefore, is not shown separately.
Per Share
(in thousands, except per share data) Net Income (Loss) Shares Amount
----------------- --------- -----------
Year Ended October 31, 2000
Basic EPS $ 24,963 $ 27,307 $ .91
Effect of dilutive securities -
Stock options and warrants -- 1,023 (.03)
---------- --------- --------
Diluted EPS $ 24,963 $ 28,330 .88
========== =========== ========
Year Ended October 31, 1999
-40-
Basic EPS $ 16,332 $ 20,690 $ .79
Effect of dilutive securities -
Stock options and warrants - 825 (.03)
---------- --------- --------
Diluted EPS $ 16,332 21,515 $ .76
========== ========== ========
Year Ended October 31, 1998
Extraordinary net loss on early extinguishment of
debt-Basic $ (163) $ 14,747 $ (.01)
Extraordinary net loss on early extinguishment of
debt- Diluted (163) 17,063 (.01)
Basic EPS after extraordinary net loss on early
extinguishment of debt 7,181 14,747 .49
Effect of dilutive securities-stock options and
warrants -- 2,316 (.07)
---------- --------- --------
Diluted EPS after extraordinary net loss on early
extinguishment of debt $ 7,181 17,063 $ .42
========== ========== ========
19. Subsequent Events
In November 2000, the Company acquired all of the outstanding capital
stock of VLM Entertainment Group, Inc. ("VLM"), a company engaged in
the distribution of interactive software games. In connection with this
transaction, the Company paid $2 million in cash and issued 875,000
shares of the Company's Common Stock. In addition, VLM may receive an
additional 100,000 shares based on future revenue performances.
In December 2000, the Company acquired the exclusive publishing rights
for the Duke Nukem PC and video games from Infograms, Inc. In
connection with this transaction, the Company issued 557,103 shares of
the Company's Common Stock and $2.3 million in cash.
-41-
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 26th day of January 2001.
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 26, 2001
Executive Officer)
/s/ James H. David, Jr.
------------------------------------
James H. David, Jr. Chief Financial Officer January 26, 2001
(Principal Financial and Accounting Officer)
/s/ Barry Rutcofsky
------------------------------------
Barry Rutcofsky Co-Chairman and Director January 26, 2001
/s/ Paul Eibeler
------------------------------------
Paul Eibeler President and Director January 26, 2001
/s/ Kelly Sumner
------------------------------------
Kelly Sumner Director January 26, 2001
/s/ Oliver R. Grace, Jr.
------------------------------------
Oliver R. Grace, Jr. Director January 26, 2001
/s/ Don Leeds
------------------------------------
Don Leeds Director January 26, 2001
/s/ Robert Flug
------------------------------------
Robert Flug Director January 26, 2001
-42-
SCHEDULE II
Take-Two Interactive Software, Inc.
Valuation and Qualifying Accounts
(In thousands)
Balance at Balance at
Beginning End of
Description of period Additions (A) Deductions (B) Period
------------ --------- ------------- -------------- ----------
Year ended October 31, 2000
Allowance for doubtful accounts & returns $ 7,821 $ 37,568 $ 36,287 $ 9,102
Year ended October 31, 1999
Allowance for doubtful accounts & returns 1,473 24,413 18,065 7,821
Year ended October 31, 1998
Allowance for doubtful accounts & returns 105 8,516 7,148 1,473
(A) Includes increases in allowance for sales returns and doubtful accounts
due to normal reserving terms and allowance accounts acquired in
conjunction with acquisitions.
(B) Includes actual write-offs of uncollectible accounts receivable or sales
returns and recoveries of previously written off receivables.
-43-