SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF l934.
For the quarterly period ended April 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0350842
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
575 Broadway, New York, New York 10012
(Address of principal executive offices including zip code)
Registrant's Telephone Number, Including Area Code (212) 334-6633
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
As of June 10, 2002, there were 38,855,639 shares of the Registrant's Common
Stock outstanding.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED APRIL 30, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - As of April
30, 2002 and October 31, 2001 (unaudited) 1
Consolidated Condensed Statements of Operations -
For the three and six months ended April 30, 2002
and 2001 (unaudited) 2
Consolidated Condensed Statements of Cash Flows -
For the six months ended April 30, 2002 and 2001
(unaudited) 3
Consolidated Condensed Statements of Stockholders'
Equity - For the year ended October 31, 2001 and the
six months ended April 30, 2002 (unaudited) 5
Notes to Unaudited Consolidated Condensed Financial
Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative & Qualitative Disclosures About Market
Risk 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 2. Changes in Securities 36
Item 6. Exhibits and Reports on Form 8-K 36
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of April 30, 2002 and October 31, 2001 (unaudited)
(In thousands, except share data)
- --------------------------------------------------------------------------------
April 30, 2002 October 31, 2001
-------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 69,617 $ 6,056
Accounts receivable, net of provision for doubtful accounts
and sales allowances of $26,570 and $26,106 at April 30,
2002 and October 31, 2001, respectively 65,095 94,950
Inventories, net 45,481 61,937
Prepaid royalties 18,852 21,892
Prepaid expenses and other current assets 25,755 17,925
Investments 500 6,241
Deferred tax asset 13,873 13,873
--------- ---------
Total current assets 239,173 222,874
--------- ---------
Fixed assets, net 14,837 11,033
Prepaid royalties 12,950 11,097
Capitalized software development costs, net 10,649 11,934
Investments 98 75
Goodwill, net 56,033 56,033
Intangibles, net 29,410 32,142
Deferred tax asset 7,892 7,892
Other assets, net -- 1,917
--------- ---------
Total assets $ 371,042 $ 354,997
========= =========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 37,962 $ 60,223
Accrued expenses and other current liabilities 41,514 20,250
Income taxes payable 13,794 --
Lines of credit, current portion -- 54,073
Current portion of capital lease obligation 92 99
--------- ---------
Total current liabilities 93,362 134,645
Capital lease obligation, net of current portion 254 291
--------- ---------
Total liabilities 93,616 134,936
Stockholders' equity
Common stock, par value $.01 per share; 50,000,000
shares authorized; 37,532,243 and 36,640,972 shares
issued and outstanding 375 366
Additional paid-in capital 227,376 213,908
Deferred compensation (682) --
Retained earnings 60,705 16,239
Accumulated other comprehensive loss (10,348) (10,452)
--------- ---------
Total Stockholders' Equity 277,426 220,061
--------- ---------
Total Liabilities and Stockholders' Equity $ 371,042 $ 354,997
========= =========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
1
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the three and six months ended April 30, 2002 and 2001 (unaudited)
(In thousands, except per share data)
- --------------------------------------------------------------------------------
Three months ended April 30 Six months ended April 30
--------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 170,330 $ 88,179 $ 453,256 $ 245,770
Cost of sales (includes impairment charge on Internet
gaming assets of $3,786 in 2001 periods) 106,675 57,396 286,140 161,656
--------- --------- --------- ---------
Gross profit 63,655 30,783 167,116 84,114
--------- --------- --------- ---------
Operating expenses
Selling and marketing (includes impairment charge
on Internet gaming assets of $401 in 2001 periods) 20,522 11,577 42,517 24,129
General and administrative 18,924 9,107 37,921 19,618
Research and development 3,937 1,601 5,891 3,001
Depreciation and amortization 2,517 3,538 4,788 5,960
--------- --------- --------- ---------
Total operating expenses 45,900 25,823 91,117 52,708
Income from operations 17,755 4,960 75,999 31,406
Interest expense, net 53 2,355 1,027 5,285
(Gain) loss on Internet investments (32) 20,754 (159) 20,754
Class action settlement costs 1,468 -- 1,468 --
--------- --------- --------- ---------
Total non-operating expenses 1,489 23,109 2,336 26,039
Income (loss) before income taxes and cumulative
effect of change in accounting principle 16,266 (18,149) 73,663 5,367
Provision (benefit) for income taxes 6,629 (6,682) 29,197 3,265
--------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 9,637 (11,467) 44,466 2,102
Cumulative effect of change in accounting principle,
net of taxes of $3,558 -- -- -- 5,337
--------- --------- --------- ---------
Net income (loss) $ 9,637 $ (11,467) $ 44,466 $ (3,235)
========= ========= ========= =========
Per share data:
Basic:
Weighted average common shares outstanding 37,057 32,641 36,888 32,491
========= ========= ========= =========
Income before cumulative effect of
change in accounting principle per share $ 0.26 $ (0.35) $ 1.21 $ 0.06
Cumulative effect of change in accounting
principle per share -- -- -- (0.16)
--------- --------- --------- ---------
Net income (loss) per share - Basic $ 0.26 $ (0.35) $ 1.21 $ (0.10)
========= ========= ========= =========
Diluted:
Weighted average common shares outstanding 38,768 32,641 38,280 33,345
========= ========= ========= =========
Income (loss) before cumulative effect of change in
accounting principle per share $ 0.25 $ (0.35) $ 1.16 $ 0.06
Cumulative effect of change in accounting
principle per share -- -- -- (0.16)
--------- --------- --------- ---------
Net income (loss) per share - Diluted $ 0.25 $ (0.35) $ 1.16 $ (0.10)
========= ========= ========= =========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
2
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the six months ended April 30, 2002 and 2001 (unaudited)
(In thousands)
- --------------------------------------------------------------------------------
Six Months Ended April 30
--------------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 44,466 $ (3,235)
Adjustment to reconcile net income to net cash provided by operating activities
Depreciation and amortization 4,788 5,960
Loss on disposal of fixed assets 122 --
(Gain) loss on Internet investments (159) 20,754
Impairment charge on Internet assets -- 4,187
Change in deferred tax asset -- (7,679)
Provision for doubtful accounts and sales allowances 522 5,375
Amortization of various expenses and discounts 1,814 529
Tax benefit from exercise of stock options 3,782 1,057
Issuance of compensatory stock and stock options 2,299 --
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable 31,345 25,503
Decrease in inventories, net 15,450 4,854
Decrease (increase) in prepaid royalties 1,184 (8,950)
Increase in prepaid expenses and other current assets (9,667) (8,724)
Decrease (increase) in capitalized software development costs 1,442 (529)
Decrease in non-current assets 1,411 --
Decrease in accounts payable (21,871) (16,559)
Increase in accrued expenses 17,675 779
Increase in income taxes payable 13,794 --
--------- ---------
Net cash provided by operating activities 108,397 23,322
--------- ---------
Cash flows from investing activities:
Purchase of fixed assets (6,834) (2,777)
Proceeds from sale of investments 5,888 --
Acquisitions, net of cash acquired -- (4,300)
--------- ---------
Net cash used in investing activities (946) (7,077)
--------- ---------
Cash flows from financing activities:
Net repayments under lines of credit (54,044) (17,815)
Deferred financing costs (463) --
Proceeds on notes payable -- 40
Proceeds from exercise of stock options and warrants 7,396 4,011
Repayment of capital lease obligation (73) (36)
--------- ---------
Net cash used in financing activities (47,184) (13,800)
--------- ---------
Effect of foreign exchange rates 3,294 (804)
--------- ---------
Net increase in cash for the period 63,561 1,641
Cash and cash equivalents, beginning of the period 6,056 5,245
--------- ---------
Cash and cash equivalents, end of the period $ 69,617 $ 6,886
========= =========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
3
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows (continued)
For the six months ended April 30, 2002 and 2001 (unaudited)
(In thousands)
- --------------------------------------------------------------------------------
Six Months Ended April 30
-------------------------
2002 2001
---------- --------
Supplemental information on businesses acquired:
Fair value of assets acquired
Cash $ -- $ --
Accounts receivables, net -- 9,973
Inventories, net -- 3,710
Prepaid royalties -- (707)
Prepaid expenses and other assets -- 34
Property and equipment, net -- 272
Intangible asset -- 7,705
Goodwill -- 40,288
Less, liabilities assumed -- --
Lines of credit -- (10,841)
Accounts payable -- (12,447)
Accrued expenses -- (2,219)
Other current liabilities -- (651)
Stock issued -- (13,380)
Value of asset recorded -- (17,266)
Direct transaction costs -- (171)
---------- --------
Cash paid -- 4,300
Less cash acquired -- --
---------- --------
Net cash paid $ -- $ 4,300
========== ========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
4
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
For the year ended October 31, 2001 and the six months ended April 30, 2002
(unaudited)
(In thousands)
- --------------------------------------------------------------------------------
Common Stock
---------------------------- Additional
Shares Amount Paid-in Capital
--------- --------- ---------------
Balance, November 1, 2000 31,173 $ 312 $ 157,738
Proceeds from exercise of stock options and warrants 3,266 32 22,582
Amortization of deferred compensation -- -- --
Issuance of common stock in connection with acquisitions 1,466 14 13,967
Issuance of common stock in connection with private
placements, net of issuance costs 1,300 13 20,879
Retirement of common stock (564) (5) (7,305)
Tax benefit in connection with the exercise of stock options -- -- 6,047
Foreign currency translation adjustment -- -- --
Net unrealized income on investments, net of taxes -- -- --
Net loss -- -- --
--------- --------- ---------
Balance, October 31, 2001 36,641 366 213,908
Proceeds from exercise of stock options and warrants 866 9 7,387
Amortization of deferred compensation -- -- --
Deferred compensation in connection with restricted -- -- --
stock to be issued
Issuance of compensatory stock and stock options 25 -- 2,299
Tax benefit in connection with the exercise of stock options -- -- 3,782
Foreign currency translation adjustment -- -- --
Net unrealized income on investments, net of taxes -- -- --
Net income -- -- --
--------- --------- ---------
Balance, April 30, 2002 37,532 $ 375 $ 227,376
========= ========= =========
Accumulated Other
Deferred Retained Comprehensive
Compensation Earnings Income (Loss)
------------ --------- -----------------
Balance, November 1, 2000 $ (5) $ 24,819 $ (12,672)
Proceeds from exercise of stock options and warrants -- -- --
Amortization of deferred compensation 5 -- --
Issuance of common stock in connection with acquisitions -- -- --
Issuance of common stock in connection with private
placements, net of issuance costs -- -- --
Retirement of common stock -- -- --
Tax benefit in connection with the exercise of stock options -- -- --
Foreign currency translation adjustment -- -- (767)
Net unrealized income on investments, net of taxes -- -- 2,987
Net loss -- (8,580) --
--------- --------- ---------
Balance, October 31, 2001 -- 16,239 (10,452)
Proceeds from exercise of stock options and warrants -- -- --
Amortization of deferred compensation 227 -- --
Deferred compensation in connection with restricted
stock to be issued (909) -- --
Issuance of compensatory stock and stock options -- -- --
Tax benefit in connection with the exercise of stock options -- -- --
Foreign currency translation adjustment -- -- 96
Net unrealized income on investments, net of taxes -- -- 8
Net income -- 44,466 --
--------- --------- ---------
Balance, April 30, 2002 $ (682) $ 60,705 $ (10,348)
========= ========= =========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
5
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity (continued)
For the year ended October 31, 2001 and the six months ended April 30, 2002
(unaudited)
(In thousands)
- --------------------------------------------------------------------------------
Comprehensive
Total Income (Loss)
--------- -------------
Balance, November 1, 2000 $ 170,192 $ (5,428)
Proceeds from exercise of stock options and warrants 22,614
Amortization of deferred compensation 5
Issuance of common stock in connection with acquisitions 13,981
Issuance of common stock in connection with private
placements, net of issuance costs 20,892
Retirement of common stock (7,310)
Tax benefit in connection with the exercise of stock options 6,047
Foreign currency translation adjustment (767) $ (767)
Net unrealized income on investments, net of taxes 2,987 2,987
Net loss (8,580) (8,580)
--------- ---------
Balance, October 31, 2001 220,061 $ (6,360)
Proceeds from exercise of stock options and warrants 7,396
Amortization of deferred compensation 227
Deferred compensation in connection with restricted
stock to be issued (909)
Issuance of compensatory stock and stock options 2,299
Tax benefit in connection with the exercise of stock options 3,782
Foreign currency translation adjustment 96 $ 96
Net unrealized income on investments, net of taxes 8 8
Net income 44,466 44,466
--------- ---------
Balance, April 30, 2002 $ 277,426 $ 44,570
========= =========
The accompanying notes are an integral part of the
consolidated condensed financial statements.
6
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
1. Organization
Take-Two Interactive Software, Inc. (the "Company") develops, publishes and
distributes interactive software games designed for PCs and video game console
platforms.
2. Significant Accounting Policies and Transactions
Basis of Presentation
The unaudited Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the financial statements do not include all
information and disclosures necessary for a presentation of the Company's
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows. The results of operations for
any interim periods are not necessarily indicative of the results for the full
year. The financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K/A for the fiscal year ended October 31, 2001.
Risk and Uncertainties
Substantially all of the Company's net sales are derived from software
publishing and distribution activities, which are subject to increasing
competition, rapid technological change and evolving consumer preferences, often
resulting in the frequent introduction of new products and short product
lifecycles. Accordingly, the Company's profitability and growth prospects depend
upon its ability to continually acquire, develop and market new, commercially
successful software products and obtain adequate financing, if required. If the
Company is unable to continue to acquire, develop and market commercially
successful software products, its operating results and financial condition
could be materially adversely affected in the near future.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods. The
most significant estimates and assumptions relate to the recoverability of
prepaid royalties, capitalized software development costs and other intangibles,
realization of deferred income taxes, valuation of inventories and the adequacy
of allowances for returns, price protection and doubtful accounts. Actual
amounts could differ significantly from these estimates.
Revenue Recognition
Publishing revenue is derived from the sale of internally developed interactive
software titles or from the sale of titles licensed from third-party developers.
Publishing revenue amounted to $133,790 and $48,116 for the three months ended
April 30, 2002 and 2001, respectively, and $325,746 and $125,905 for the six
months ended April 30, 2002 and 2001, respectively.
Distribution revenue is derived from the sale of third-party interactive
software titles, accessories and hardware. Distribution revenue amounted to
$36,540 and $40,063 for the three months ended April 30, 2002 and 2001,
respectively and $127,510 and $119,865 for the six months ended April 30, 2002
and 2001, respectively.
The Company recognizes revenue in accordance with Statement of Position ("SOP")
97-2 "Software Revenue Recognition", as amended by SOP 98-9 "Modification of SOP
97-2 Software Revenue Recognition with respect to Certain Transactions." SOP
97-2 provides guidance on applying generally accepted accounting principles in
7
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
recognizing revenue on software transactions. SOP 98-9 deals with the
determination of vendor specific objective evidence of fair value in multiple
element arrangements, such as maintenance agreements sold in conjunction with
software packages. The Company's transactions generally include only one
element, the interactive software game. The Company recognizes revenue when the
price is fixed and determinable, there is persuasive evidence of an arrangement,
the fulfillment of its obligations under any such arrangement and determination
that collection is probable. Accordingly, revenue is recognized when title and
all risks of loss are transferred to the customer, which is generally upon
receipt by customer. The Company's payment arrangements with its customers
provide primarily 60 day terms and to a limited extent with certain customers
30, 90 or 120 day terms.
The Company's distribution arrangements with customers generally do not give
customers the right to return products; however, the Company at its discretion
may accept product returns for stock balancing or defective products. In
addition, the Company sometimes negotiates accommodations to customers,
including price discounts, credits and product returns, when demand for specific
products falls below expectations. The Company's publishing arrangements
generally require the Company to accept product returns and provide price
protection. The Company establishes a reserve for future returns and other
allowances based primarily on its return policies, price protection policies and
historical return rates. The Company may not have a reliable basis to estimate
returns and price protection for certain customers or it may be unable to
determine that collection of the receivable is probable. In such circumstances,
the Company defers the revenues at the time of the sale and recognizes them when
collection of the related receivable becomes probable or cash is received.
Effective November 1, 2000, the Company adopted Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements". Consistent with
the guidelines provided in SAB No. 101, the Company changed its revenue
recognition policy to recognize revenue as noted above. Prior to the adoption of
SAB 101, the Company recognized revenue upon shipment. As a result of adopting
SAB 101, net sales and cost of sales of approximately $27,230 and $18,335,
respectively, which were originally recognized in the year ended October 31,
2000 were also recognized in the six months ended April 30, 2001. The cumulative
effect of the adoption of SAB 101 for the quarter ended January 31, 2001 was
$5,337 of income, net of taxes of $3,558. This adoption had no effect on net
income for the six months ended April 30, 2001.
Prepaid Royalties
The Company's agreements with licensors and developers generally provide it with
exclusive publishing rights and require it to make advance royalty payments that
are recouped against royalties due to the licensor or developer based on product
sales. Prepaid royalties are amortized as cost of sales on a title-by-title
basis based on the greater of the proportion of current year sales to total of
current and estimated future sales for that title or the contractual royalty
rate based on actual net product sales. The Company continually evaluates the
recoverability of prepaid royalties and charges to cost of sales the amount that
management determines is probable that will not be recouped at the contractual
royalty rate in the period in which such determination is made. 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 by
$2,428 and $3,168 for the three and six months ended April 30, 2002,
respectively, and $75 for the three and six months ended April 30, 2001, to
estimated net realizable value. Amortization of prepaid royalties amounted to
$8,307 and $2,649, which was included in total royalty expense of $19,053 and
$2,905, respectively, for the three months ended April 30, 2002 and 2001.
Amortization of prepaid royalties amounted to $23,545 and $8,669, which was
included in total royalty expense of $38,481 and $9,305, respectively, for the
six months ended April 30, 2002 and 2001.
Capitalized Software Development Costs (Including Production Costs)
The Company capitalizes internal software development costs subsequent to
establishing technological feasibility of a title. Capitalized software
development costs primarily represent the costs associated with the internal
development of the Company's publishing products. Amortization of such costs as
a component of cost of sales is recorded on a title-by-title basis based on the
greater of the proportion of current year sales to total of current and
estimated future sales for the title or the straight-line method over the
remaining estimated useful life of the title.
8
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The Company continually evaluates the recoverability of capitalized software
costs. For the three and six months ended April 30, 2002, capitalized software
costs of $19 were written down to net realizable value. For the three and six
months ended April 30, 2001, capitalized software costs of $389 were written off
as cost of sales as part of the impairment charge as described in Note 3.
Amortization of capitalized software costs amounted to $919 and $1,049 for the
three months ended April 30, 2002 and 2001, respectively, and $3,874 and $1,941
for the six months ended April 30, 2002 and 2001, respectively.
Recently Issued Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force (EITF) reached a consensus on EITF Issue 01-09, Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendor's
Products, which is a codification of EITF 00-14, 00-22 and 00-25. This EITF
presumes that consideration from a vendor to a customer or reseller of the
vendor's products to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement and could lead to negative revenue
under certain circumstances. Revenue reduction is required unless consideration
relates to a separate identifiable benefit and the benefit's fair value can be
established. The Company has early adopted EITF 01-09 effective November 1,
2001. The adoption of the new standard did not have a material impact on the
consolidated condensed financial statements. The prior period has been
reclassified in accordance with this statement.
Effective November 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations to be accounted for
using the purchase method of accounting and that certain intangible assets
acquired in a business combination shall be recognized as assets apart from
goodwill. SFAS 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. This statement provides that intangible assets with finite useful lives
be amortized and that intangible assets with indefinite lives and goodwill will
not be amortized, but will be tested at least annually for impairment. Upon
completion of the transitional impairment test, the fair value for each of the
Company's reporting units exceeded the reporting unit's carry amount and no
impairment was indicated (See Note 9).
In August 2001, the FASB issued Statement of Financial Accounting Standard No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" ("SFAS 143"). The objective of SFAS 143 is to provide accounting
guidance for legal obligations associated with the retirement of long-lived
assets. The retirement obligations included within the scope of this
pronouncement are those that an entity cannot avoid as a result of either the
acquisition, construction or normal operation of a long-lived asset. Components
of larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company is currently evaluating the expected impact of the
adoption of SFAS 143 on the Company's financial condition, cash flows and
results of operations. The Company will adopt the standard in the first quarter
of fiscal 2003.
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). The objectives of SFAS 144 are to address significant issues relating to
the implementation of SFAS 121 and to develop a single accounting model, based
on the framework established in SFAS 121, for the long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. The
provisions of SFAS 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company is currently evaluating the
expected impact of the adoption of SFAS 144 on the Company's financial condition
and results of operations. The Company will adopt the standard in the first
quarter of fiscal 2003.
9
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates
the requirement (in SFAS No. 4) that gains and losses from the extinguishments
of debt be aggregated and classified as extraordinary items, net of the related
income tax. In addition, SFAS No. 145 requires sales-lease back treatment for
certain modifications of a capital lease that result in the lease being
classified as an operating lease. The rescission of SFAS No. 4 is effective for
fiscal years beginning after May 15, 2002, which for the Company would be
November 1, 2002. Earlier application is encouraged. Any gain or loss on
extinguishment of debt that was previously classified as an extraordinary item
would be reclassified to other income (expense). The remainder of the statement
is generally effective for transactions occurring after May 15, 2002. The
Company does not expect that the adoption of SFAS No. 145 will have a material
impact on the Company's financial condition, cash flows and results of
operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
3. 2001 Business Acquisitions
In fiscal 2001, the Company acquired businesses that develop, publish or
distribute interactive software games and accessories. The aggregate purchase
price, including cash payments and issuance of its common stock was $28,143. The
value of the Company's common stock issued in connection with these acquisitions
was based on the market price of the Company's common stock at the time such
transactions were consummated.
The acquisitions described below have been accounted for as purchase
transactions in accordance with APB No. 16 and SFAS 141 (for transactions after
July 1, 2001) and, accordingly, the results of operations and financial position
of the acquired businesses are included in the Company's consolidated financial
statements from the respective dates of acquisition.
In July 2001, the Company acquired all of the outstanding capital stock of
Techcorp Limited ("Techcorp"), a Hong Kong based design and engineering firm
specializing in video game accessories. In consideration, the Company issued
30,000 shares of the Company's restricted common stock (valued at $572), paid
$100 in cash and assumed net liabilities of $2,856. In connection with the
acquisition, the Company recorded goodwill of $3,558 on a preliminary basis. The
Company is in the process of obtaining an independent third party valuation to
complete the purchase price allocation. The Company will make the required
adjustments, if any, upon completion of such valuation. In accordance with SFAS
141, the Company is not amortizing the goodwill recorded in connection with this
acquisition.
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
third-party software products. In connection with this transaction, the Company
paid the former stockholders of VLM $2,000 in cash and issued 875,000 shares of
the Company's common stock (valued at $8,039) and assumed net liabilities of
approximately $10,627.
In connection with the sale of Toga Holdings to Gameplay.com plc ("Gameplay") in
October 2000, the Company agreed to acquire Gameplay's game software development
and publishing business, Neo Software Produktions GMBH ("Neo"). Such acquisition
was completed in January of 2001 and the Company assumed net liabilities of
$808, in addition to the prepaid purchase price of $17,266. In connection with
the acquisition, the Company recorded intangibles of $18,183.
10
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The following table sets forth the components of the purchase price of
the 2001 acquisitions:
Neo VLM Techcorp Total
---------------------------------------------------------------------
Cost of the acquisition:
Value of business sold
(Prepaid purchase price - Neo)
Stock issued $ 17,266 $ 8,039 $ 572 $ 25,877
Cash -- 2,000 100 2,100
Transaction Costs 109 27 30 166
-------- -------- -------- --------
Total $ 17,375 $ 10,066 $ 702 $ 28,143
======== ======== ======== ========
Allocation of purchase price:
Current Assets $ 2 $ 9,852 $ 894 $ 10,748
Non-Current Assets 71 201 498 770
Liabilities (881) (20,680) (4,248) (25,809)
Goodwill 8,207 12,416 3,558 24,181
Customer Lists -- 8,277 -- 8,277
Technology 8,037 -- -- 8,037
Trademarks 1,939 1,939
-------- -------- -------- --------
Total $ 17,375 $ 10,066 $ 702 $ 28,143
======== ======== ======== ========
Certain of Neo's internet-related technology assets were determined to be
impaired in April 2001. Accordingly, the Company recorded as cost of sales a
non-cash impairment charge of $3,786 consisting of $2,350 relating to server
maintenance technologies and $1,047 relating to multiplayer technologies
developed by Neo's development studio in connection with Online Pirates and $389
of capitalized software relating to other products to be developed by Neo. In
addition, the Company recorded as selling and marketing expenses an impairment
charge of $401 related to online sales promotions for Neo's products.
Unaudited pro forma information
The unaudited pro forma data below for the six months ended April 30, 2001 is
presented as if these purchase acquisitions had been made as of November 1,
2000. 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:
Six months ended
April 30, 2001
----------------
Net Sales $ 249,935
===========
Income before cumulative effect of change in
accounting principle $ 1,716
===========
Net income per share - Basic $ 0.05
===========
Net income per share - Diluted $ 0.05
===========
11
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
4. Income Taxes
The provisions for income taxes for the three and six months ended
April 30, 2002 and 2001 are based on the Company's estimated
annualized tax rate for the respective years after giving effect to
the utilization of available tax credits and tax planning
opportunities.
5. Net Income (Loss) Before Cumulative Effect of Change in Accounting
Principle per Share
The following table proves a reconciliation of basic earnings per
share to dilutive earnings per share for the three and six months
ended April 30, 2002 and 2001:
Income (loss) before Shares
cumulative effect of change (in Per Share
in accounting principle thousands) Amount
--------------------------- --------- ---------
Three Months Ended April 30, 2002:
Basic $ 9,637 37,057 $ 0.26
Effect of dilutive securities - Stock options and warrants -- 1,711 (0.01)
-------- -------- --------
Diluted $ 9,637 38,768 $ 0.25
======== ======== ========
Three months ended April 30, 2001 - Basic and Diluted $(11,467) 32,641 $ (0.35)
======== ======== ========
Six Months Ended April 30, 2002
Basic $ 44,466 36,888 $ 1.21
Effect of dilutive securities - Stock options and warrants -- 1,392 (0.05)
-------- -------- --------
Diluted $ 44,466 38,280 $ 1.16
======== ======== ========
Six months ended April 30, 2001
Basic $ 2,102 32,491 $ 0.06
Effect of dilutive securities - Stock options and warrants -- 854 --
-------- -------- --------
Diluted $ 2,102 33,345 $ 0.06
======== ======== ========
The computation of diluted number of shares excludes 60,000 and 660,000
unexercised stock options for the three and six months ended April 30, 2002,
respectively, which are anti-dilutive.
As the Company reported losses before cumulative effect of change in accounting
principle for the three months ended April 30, 2001 all 1,015,000 of the options
and warrants outstanding were anti-dilutive, and therefore, there were no
reconciling items between basic and diluted loss per share. For the six months
ended April 30, 2001, the computation for diluted number of shares excludes
825,000 unexercised stock options and warrants, which are anti-dilutive.
6. Inventory
As of April 30, 2002 and October 31, 2001, inventories consist of:
April 30, 2002 October 31, 2001
-------------- ----------------
Parts and supplies $ 787 $ 1,468
Finished products 44,694 60,469
------------ ------------
$ 45,481 $ 61,937
============ ============
12
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
7. Investments
Investments are comprised of equity securities and are classified as current and
non-current assets. Investments are accounted for under the average cost method
as "available-for-sale" in accordance with Statement of Financial Standards
Board No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Investments are stated at fair value, with unrealized appreciation
(loss) reported as a separate component of accumulated other comprehensive
income (loss) in stockholders' equity.
During the three months ended April 30, 2001, the Company recorded an impairment
charge of $20,754, principally consisting of $18,448 relating to its investment
in Gameplay and $2,000 relating to its investment in eUniverse to reflect other
than temporary declines in value.
As of April 30, 2002 and October 31, 2001, investments were summarized as
follows:
April 30, 2002 October 31, 2001
--------------------------- ---------------------------
Current Non-Current Current Non-Current
------------ ------------ ------------ ------------
Average cost $ 259 $ 75 $ 5,988 $ 75
Unrealized gains 241 23 253 --
------------ ------------ ------------ ------------
Fair value $ 500 $ 98 $ 6,241 $ 75
============ ============ ============ ============
For the six months ended April 30, 2002, the gross proceeds from the sale of
investments were $5,888. The realized gain from these sales totaled $32 and $159
for the three months and six months ended April 30, 2002, respectively. The gain
on sale of securities is based on the average cost of the individual securities
sold.
8. Lines of Credit
In December 1999, the Company entered into a credit agreement, as amended, with
a group of lenders led by Bank of America, N.A., as agent. The agreement was
amended in February 2002 to provide for borrowings of up to $50,000 through the
remaining term of the agreement. Generally, advances under the line of credit
are based on a borrowing formula equal to the lesser of (1) the borrowing limit
or (2) 70% of eligible accounts receivable, plus 25% of eligible inventory.
Interest accrues on such advances at the bank's prime rate plus 1.25%, or at
LIBOR plus 3.25%. Borrowings under the line of credit are collateralized by 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 loan agreement contains certain financial
and other covenants. As of April 30, 2002, the Company is in compliance with
such covenants. The loan agreement limits or prohibits the Company 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. The Company had no outstanding borrowings under the
revolving line of credit as of April 30, 2002.
In February 2001, the Company's United Kingdom subsidiary entered into a credit
facility agreement, as amended in March 2002, with Lloyds TSB Bank plc
("Lloyds") under which Lloyds agreed to make available borrowings of up to
$19,000. 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 the Company. The
facility expires on March 31, 2004. The Company had no outstanding borrowings
under this facility as of April 30, 2002.
13
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
9. Intangible Assets
As a result of the adoption of SFAS 142, the Company discontinued the
amortization of goodwill effective November 1, 2001. Identifiable intangible
assets are amortized under the straight-line method over the period of expected
benefit ranging from three to ten years, except for intellectual property, which
is amortized based on the shorter of the useful life or expected revenue stream.
The Company re-characterized acquired workforce of $925, which is no longer
defined as an acquired intangible asset under SFAS 141, as goodwill.
Additionally, the estimated useful lives of certain identifiable intangible
assets were adjusted in conjunction with the adoption of SFAS 142.
Intangible assets consist of trademarks, intellectual property, customer lists,
acquired technology and the excess purchase price paid over identified
intangible and tangible net assets of acquired companies (goodwill).
The following table sets forth the components of the intangible assets subject
to amortization as of April 30, 2002 and October 31, 2001:
As of April 30, 2002 As of October 31, 2001
------------------------------------- -------------------------------------
Gross Gross
Range of Carrying Accumulated Carrying Accumulated
Useful Life Amount Amortization Net Amount Amortization Net
----------- -------- ------------ -------- -------- ------------ --------
Trademarks 7-10 years $ 13,922 $ (3,077) $ 10,845 $ 13,922 $ (2,312) $ 11,610
Customer lists and
relationships 5-10 years 9,081 (1,710) 7,371 9,081 (1,068) 8,013
Intellectual
property 2-6 years 8,527 (910) 7,617 8,527 (300) 8,227
Technology 3 years 4,640 (1,063) 3,577 4,640 (348) 4,292
-------- -------- -------- -------- -------- --------
$ 36,170 $ (6,760) $ 29,410 $ 36,170 $ (4,028) $ 32,142
======== ======== ======== ======== ======== ========
Amortization expense (including goodwill for 2001) for the three months ended
April 30, 2002 and 2001 amounted to $1,260, and $3,179, respectively and for the
six months ended April 30, 2002 and 2001 amounted to $2,732 and $5,470,
respectively.
Estimated amortization expense for the fiscal years ending October 31, are as
follows:
2002 $ 4,244
2003 3,826
2004 3,789
2005 3,553
2006 3,475
-------
Total $18,887
=======
14
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The following table provides a reconciliation of net income for exclusion of
goodwill amortization:
Three months Six months
ended April 30 ended April 30
-------------------------- ---------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of change
in accounting principle $ 9,637 $ (11,467) $ 44,466 $ 2,102
Cumulative effect of change in accounting
principle, net of taxes -- -- -- (5,337)
---------- ---------- ---------- ----------
Net income (loss) - as reported 9,637 (11,467) 44,466 (3,235)
Add: Goodwill amortization, net of taxes -- 1,193 -- 2,131
---------- ---------- ---------- ----------
Net income (loss) - as adjusted $ 9,637 $ (10,274) $ 44,466 $ (1,104)
========== ========== ========== ==========
Earnings (loss) per share:
Income (loss) before cumulative effect of change
in accounting principle per share - basic $ 0.26 $ (0.35) $ 1.21 $ 0.06
Cumulative effect of change in accounting
principle per share -- -- -- (0.16)
Add: Goodwill amortization, net of taxes -- 0.04 -- 0.07
---------- ---------- ---------- ----------
Adjusted earnings (loss) per share - basic $ 0.26 $ (0.31) $ 1.21 $ (0.03)
========== ========== ========== ==========
Income (loss) before cumulative effect of change
in accounting principle per share - diluted $ 0.25 $ (0.35) $ 1.16 $ 0.06
Cumulative effect of change in accounting
principle per share -- -- -- (0.16)
Add: Goodwill amortization, net of taxes -- 0.04 -- 0.07
---------- ---------- ---------- ----------
Adjusted earnings (loss) per share - diluted $ 0.25 $ (0.31) $ 1.16 $ (0.03)
========== ========== ========== ==========
15
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The effect on fiscal 2002 resulting from the change in accounting principle from
the early adoption of SFAS 142 is as follows:
Three months ended Six months ended
April 30, 2002 April 30, 2002
---------- ----------
Net income - as reported $ 9,637 $ 44,466
Less: Additional Goodwill amortization,
net of taxes 1,239 2,478
---------- ----------
Net income - as adjusted $ 8,398 $ 41,988
========== ==========
Earnings per share:
Reported earnings per share - basic $ 0.26 $ 1.21
Add: Goodwill amortization, net of taxes (0.03) (0.07)
---------- ----------
Adjusted earnings per share - basic $ 0.23 $ 1.14
========== ==========
Reported earnings per share - diluted $ 0.25 $ 1.16
Add: Goodwill amortization, net of taxes (0.03) (0.06)
---------- ----------
Adjusted earnings per share - diluted $ 0.22 $ 1.10
========== ==========
10. Commitments and Contingencies
Since December 2001, thirteen purported class action lawsuits have been filed in
the United States District Court for the Southern District of New York against
the Company and certain of its current and former officers and directors. The
actions were consolidated in one lawsuit, Gershon Bassman v. Take-Two
Interactive Software, Inc., in April 2002. The consolidated complaint includes
claims under Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under Section 10 (b), and generally alleges that
defendants issued false and misleading public filings, press releases and other
statements regarding the Company's financial condition during a class period
commencing on February 24, 2001 through December 17, 2001 in a scheme to
artificially inflate the value of the Company's common stock.
In June 2002, the Company entered into a definitive agreement with the
plaintiffs to settle the consolidated class action lawsuits for $7,500 in cash.
During the quarter ended April 30, 2002, the Company recorded $1,468 of class
action settlement costs, which represents the settlement of $7,500 and related
legal fees, net of $6,145 of insurance proceeds. The settlement amount is
included in accounts payable at April 30, 2002. The insurance proceeds are
included in prepaid expenses and other current assets at April 30, 2002. The
settlement agreement is subject to final approval of the United States District
Court.
The Securities and Exchange Commission has issued a formal order of
investigation into, among other things, certain accounting matters relating to
the Company's financial statements, periodic reporting and internal accounting
control provisions of the federal securities laws.
16
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The Company is involved in routine litigation arising in the ordinary course of
its business. In the opinion of the Company's management, none of the pending
routine litigation will have a material adverse effect on the Company's
consolidated financial condition, cash flows or results of operations.
In April 2002, the Company acquired exclusive distribution rights to various
software games in the United States and Canada. The agreement, which expires in
October 2003, requires minimum guaranteed payments of $4,200, which are
collateralized by a standby letter of credit.
11. Segment Reporting
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), which establishes standards for reporting by public business enterprises
of information about product lines, geographic areas and major customers. The
method for determining what information to report is based on the way management
organizes the Company for making operational decisions and assessment of
financial performance. The Company's chief operating decision maker is
considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews
financial information presented on a consolidated basis accompanied by
disaggregated information about sales by geographic region and by product
platforms. The Company's Board of Directors reviews consolidated financial
information. The Company's operations employ the same products, cost structures,
margins and customers worldwide. The Company's product development, publishing
and marketing activities are centralized in the United States under one
management team, with distribution activities managed geographically.
Accordingly, the Company's operations fall within one reportable segment as
defined in SFAS No. 131.
Information about the Company's non-current assets in the United States and
international areas as of April 30, 2002 and October 31, 2001 are presented
below:
April 30, 2002 October 31, 2001
-------------- ----------------
Total Non-current Assets:
United States ................ $ 84,245 $ 81,243
International ................
United Kingdom .......... 20,539 21,128
All other Europe ........ 18,618 21,405
Other ................... 8,467 8,347
-------- --------
$131,869 $132,123
======== ========
Information about the Company's net sales in the United States and international
areas for the three and six months April 30, 2002 and 2001 are presented below
(net sales are attributed to geographic areas based on product destination):
Three months ended Six months ended
April 30 April 30
------------------------- -------------------------
Net Sales: 2002 2001 2002 2001
----------- ----------- ----------- -----------
United States .. $ 123,954 $ 64,098 $ 343,962 $ 177,461
Canada ......... 5,456 2,247 9,522 8,872
International
United Kingdom . 18,226 6,046 33,817 23,496
All other Europe 18,896 13,053 59,363 29,503
Asia Pacific ... 3,406 2,574 5,894 6,137
Other .......... 392 161 698 301
----------- ----------- ----------- -----------
$ 170,330 $ 88,179 $ 453,256 $ 245,770
=========== =========== =========== ===========
17
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements (concluded)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Information about the Company's net sales by product platforms for the three and
six months ended April 30, 2002 and 2001 are presented below:
Three months ended Six months ended
April 30 April 30
------------------------- -------------------------
Platforms: 2002 2001 2002 2001
----------- ----------- ----------- -----------
Sony Playstation 2 .... $ 118,516 $ 25,375 $ 306,984 $ 61,582
Sony Playstation ...... 10,774 19,651 38,649 50,231
Microsoft Xbox ........ 12,852 -- 37,058 --
PC .................... 11,858 20,307 24,990 50,773
Nintendo GameBoy Color,
GameBoy Advance and N64 2,657 2,959 11,367 18,846
Nintendo GameCube ..... 2,093 -- 6,494 --
Sega Dreamcast ........ 412 1,337 1,376 9,238
Accessories ........... 4,690 5,195 12,366 25,061
Hardware .............. 6,478 13,355 13,972 30,039
----------- ----------- ----------- -----------
$ 170,330 $ 88,179 $ 453,256 $ 245,770
=========== =========== =========== ===========
12. Subsequent Event
In May 2002, the Company acquired all right, title and interest to the Max Payne
product franchise, including all of the intellectual property rights associated
with the brand, and a perpetual, royalty-free license to use the Max Payne game
engine and related technology. The purchase price consisted of $10,000 in cash
and 969,932 shares of restricted common stock. Based on an independent
third-party valuation, the fair value of the shares is $18,543. In addition, the
Company is contingently liable to make aggregate payments of up to $8,000 in
cash upon the timely delivery of the final PC version of Max Payne 2 and the
achievement of certain sales targets for such product. Any contingent payments
will be recorded as an increase to the recorded intangible asset upon resolution
of the contingency. The Company is in the process of obtaining an independent
third-party valuation in support of its purchase price allocation for the assets
acquired.
18
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
General
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,
inventories, realization of deferred income taxes and the adequacy of allowances
for returns, price protection and doubtful accounts. Actual amounts could differ
significantly from these estimates.
Revenue Recognition
The Company's principal sources of revenues are derived from publishing and
distribution operations. Publishing revenues are derived from the sale of
internally developed software titles or software titles licensed from third
parties. Distribution revenues are derived from the sale of third-party software
titles, accessories and hardware. Publishing activities generally generate
significantly higher margins than distribution activities, with sales of PC
software titles resulting in higher margins than sales of CDs or cartridges
designed for video game consoles.
Effective November 1, 2000, in accordance with the adoption of SAB 101, "Revenue
Recognition in Financial Statements", the Company recognizes revenue net of
allowances for returns and price protection when title and risk of loss pass to
customers (generally, upon receipt of products by customers). Prior to that
date, the Company recognized revenue upon shipment. In accordance with Statement
of Position 97-2 "Software Revenue Recognition" the Company recognizes revenue
when the price is fixed and determinable, upon persuasive evidence of an
agreement, the Company's fulfillment of its obligations under any such agreement
and a determination that collection is probable. The Company's payment
arrangements with customers provide primarily 60 day terms and to a limited
extent with certain customers 30, 90 or 120 day terms. The Company may not have
a reliable basis to estimate returns and allowances for certain customers or may
be unable to determine that collection of receivables is probable. In such
circumstances, the Company defers revenues at the time of sale and recognizes
revenues when collection of the related receivable becomes probable or cash is
collected.
Returns and Reserves
The Company's arrangements with customers for published titles generally require
it to accept returns and provide price protection. The Company establishes a
reserve for future returns of published titles and price protection based
primarily on historical return rates, return policies and price protection
policies, and recognizes revenues net of allowances for returns and price
protection. The Company's distribution arrangements with customers generally do
not give them the right to return titles or to cancel firm orders. However, the
Company sometimes accepts returns for stock balancing and negotiates
accommodations to customers, which includes price discounts, credits and
returns, when demand for specific titles fall below expectations. The historical
product return rate for the Company's distribution business has been
substantially less than for its publishing business. If future returns
significantly exceed established reserves, the Company's operating results would
be adversely affected.
19
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Prepaid Royalties
The Company's agreements with licensors and developers generally provide it with
exclusive publishing rights and require it to make advance royalty payments that
are recouped against royalties due to the licensor or developer based on product
sales. Prepaid royalties are amortized as cost of sales on a title by title
basis based on the greater of the proportion of current year sales to total of
current and estimated future sales for that title or the contractual royalty
rate based on actual net product sales. The Company continually evaluates the
recoverability of prepaid royalties and charges to cost of sales the amount that
management determines is probable that will not be recouped at the contractual
royalty rate in the period in which such determination is made. 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 by $2,428 and $3,168 for the three and six
months ended April 30, 2002, respectively, to estimated net realizable value.
Prepaid royalties were written down by $75 for the three and six months ended
April 30, 2001, to estimated net realizable value. Amortization of prepaid
royalties amounted to $8,307 and $2,649, which was included in total royalty
expense of $19,053 and $2,905, respectively, for the three months ended April
30, 2002 and 2001. Amortization of prepaid royalties amounted to $23,545 and
$8,669, which was included in total royalty expense of $38,481 and $9,305,
respectively, for the six months ended April 30, 2002 and 2001.
Capitalized Software Development Costs
The Company capitalizes internal software development costs subsequent to
establishing technological feasibility of a title. Capitalized software
development costs primarily represent the costs associated with the internal
development of the Company's publishing products. Amortization of such costs as
a component of cost of sales is recorded on a title-by-title basis based on the
greater of the proportion of current year sales to total of current and
estimated future sales for the title or the straight-line method over the
remaining estimated useful life of the title. The Company continually evaluates
the recoverability of capitalized software costs. For the three and six months
ended April 30, 2002, capitalized software costs of $19 were written down to net
realizable value. For the three and six months ended April 30, 2001, capitalized
software costs of $389 were written off as cost of sales as part of the
impairment charge as described in Note 3 to the Unaudited Consolidated Condensed
Financial Statements. Amortization of capitalized software costs amounted to
$919 and $1,049 for the three months ended April 30, 2002 and 2001,
respectively, and $3,874 and $1,941 for the six months ended April 30, 2002 and
2001, respectively.
20
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in the Company's statement of
operations, and sets forth net sales by territory, platform and principal
products:
Three months ended Six months ended
April 30 April 30
Operating data: -------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (1) 62.6 65.1 63.1 65.8
Selling and marketing (2) 12.0 13.1 9.4 9.8
General and administrative 11.1 10.3 8.4 8.0
Research and development 2.3 1.8 1.3 1.2
Depreciation and amortization 1.5 4.0 1.1 2.4
Interest expense, net -- 2.7 0.2 2.2
(Gain ) loss on Internet securities -- 23.5 -- 8.4
Provision (benefit) for income taxes 3.9 (7.6) 6.4 1.3
Net income (loss) 5.7 (13.0) 9.8 (1.3)
Net Sales by Territory:
North America 76.0% 75.2% 78.0% 75.8%
International 24.0 24.8 22.0 24.2
Platform Mix (publishing):
Console 93.7% 62.7% 94.5% 58.6%
PC 5.0 33.9 4.0 34.0
Accessories and Hand-held 1.3 3.4 1.5 7.4
Principal Product Sales:
Grand Theft Auto 3, PS2 (released October 2001) 35.5% --% 39.2% --%
State of Emergency (released February 2002) 22.0 -- 8.3 --
Max Payne, PS2 (released December 2001) 8.0 -- 10.2 --
Max Payne, Xbox (released December 2001) 4.9 -- 4.6 --
Ten largest titles 75.0 38.8 66.5 25.3
(1) Includes impairment charge on Internet assets of 4.3% and 1.5% of sales for
the three and six months ended April 30, 2001, respectively.
(2) Includes impairment charge on Internet assets of 0.5% and 0.2% of sales for
the three and six months ended April 30, 2001, respectively.
21
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Three Months Ended April 30, 2002 and 2001
Net Sales. Net sales increased by $82,151 or 93.2%, to $170,330 for the three
months ended April 30, 2002 from $88,179 for the three months ended April 30,
2001. The increase was primarily attributable to growth in publishing
operations.
Publishing revenues increased by $85,674, or 178.1%, to $133,790 for the three
months ended April 30, 2002 from $48,116 for the three months ended April 30,
2001. The increase was primarily attributable to the continued strong sales of
Grand Theft Auto 3 and Max Payne and the release of State of Emergency. For the
three months ended April 30, 2002 and 2001, publishing activities accounted for
approximately 78.5% and 54.6% of net sales, respectively.
For the current period, products designed for PC platforms accounted for
approximately 5.0% of publishing revenues as compared to 33.9% for the prior
comparable period. The decrease is a result of fewer PC titles released during
the current quarter. Products designed for video game console platforms
accounted for 93.7% of publishing revenues as compared to 62.7% for the prior
comparable period. The increase was primarily attributable to the release of
State of Emergency for PlayStation 2, and continued sales of Grand Theft Auto 3
for PlayStation 2 and Max Payne for PlayStation 2 and Xbox.
Distribution revenues decreased by $3,523 or 8.8%, to $36,540 for the three
months ended April 30, 2002 from $40,063 for the three months ended April 30,
2001. The decrease was primarily attributable to lower hardware sales. For the
three months ended April 30, 2002 and 2001, distribution activities accounted
for approximately 21.5% and 45.4% of net sales, respectively.
International operations accounted for approximately $40,921 or 24.0% of net
sales for the three months ended April 30, 2002 compared to $21,834 or 24.8% for
the three months ended April 30, 2001. The increase in absolute dollars was
primarily attributable to expanded publishing operations in Europe.
Cost of Sales. Cost of sales increased by $49,279, or 85.9%, to $106,675 for the
three months ended April 30, 2002 from $57,396 for the three months ended April
30, 2001. The 2001 quarter included a non-cash impairment charge of $3,786
relating to a reduction in the value of certain Internet assets, including
software technologies and products developed by Neo. Excluding this charge, cost
of sales as a percentage of net sales increased to 62.6% for the three months
ended April 30, 2002 from 60.8% for the prior comparable period. The increase in
cost of sales as a percentage of net sales was due partially to the change in
publishing product mix to lower margin console titles as compared to higher
margin PC titles in the prior compatible period. In addition, royalty expense
increased during the current period due principally to sales of State of
Emergency and incremental write downs of prepaid royalties of $2,353. In future
periods, cost of sales may be adversely affected by manufacturing and other
costs, price competition and by changes in product and sales mix and
distribution channels.
Selling and Marketing. Selling and marketing expenses increased by $8,945, or
77.3%, to $20,522 for the three months ended April 30, 2002 from $11,577 for the
three months ended April 30, 2001. The increase was attributable to increased
television and other advertising expenses relating to Max Payne and Grand Theft
Auto 3 during the 2002 quarter. The 2001 quarter includes a non-cash impairment
charge of $401 relating to online sales promotions for the Company's products to
be delivered by Neo to Gameplay. Excluding the 2001 charge, selling and
marketing expenses as a percentage of net sales for the three months ended April
30, 2002 decreased to 12.0% from 12.6% for the three months ended April 30,
2001.
General and Administrative. General and administrative expenses increased by
$9,817, or 107.8%, to $18,924 for the three months ended April 30, 2002 from
$9,107 for the three months ended April 30, 2001. General and administrative
expenses as a percentage of net sales increased to 11.1% from 10.3% from the
prior period. The increase in absolute dollars was attributable to increased
personnel expenses necessary to support the Company's operations and legal and
professional fees incurred in connection with legal proceedings and regulatory
matters.
22
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Research and Development. Research and development costs increased by $2,336, or
145.9%, to $3,937 for the three months ended April 30, 2002 from $1,601 for the
three months ended April 30, 2001. Research and development costs as a
percentage of net sales increased to 2.3% for the three months ended April 30,
2002 from 1.8% for the three months ended April 30, 2001. The increase was
attributable to bonus compensation and increased staffing levels.
Depreciation and Amortization. Depreciation and amortization expense decreased
$1,021, or 28.9%, to $2,517 for the three months ended April 30, 2002 from
$3,538 from the prior comparable period due to the Company's adoption of SFAS
142. The decrease was partially offset by increased costs related to the
company-wide implementation of a new accounting software system.
Income from Operations. Income from operations increased by $12,795, or 258.0%,
to $17,755 for the three months ended April 30, 2002 from $4,960 for the three
months ended April 30, 2001, due to the changes referred to above.
Interest Expense, net. Interest expense decreased by $2,302, or 97.7%, to $53
for the three months ended April 30, 2002 from $2,355 for the three months ended
April 30, 2001. The decrease was attributable to the absence of borrowings from
the Company's credit facilities during the 2002 quarter.
(Gain) Loss on Internet Investments . For the three months ended April 30, 2002,
the Company recognized a gain of $32 from the sale of marketable securities.
During the three months ended April 30, 2001, the Company incurred a
non-recurring non-cash impairment charges of $20,754 relating primarily to its
investments in Gameplay and eUniverse to reflect other than temporary declines
in the value of these investments.
Class Action Settlement Costs. During the three months ended April 30, 2002, the
Company recorded $1,468 of class action settlement costs, which represents a
settlement of $7,500 and related legal fees, net of $6,145 of insurance
proceeds.
Provision (Benefit) for Income Taxes. Income tax expense of $6,629 for the three
months ended April 30, 2002 compared to a benefit of $6,682 for the three months
ended April 30, 2001. The increase in absolute dollars resulted primarily from
attainment of pre-tax income for the three months ended April 30, 2002 as
compared to a pre-tax loss for the comparable 2001 quarter. The effective tax
rate was 40.8% for the three months ended April 30, 2002, while the tax rate for
the 2001 quarter was 36.8%. The effective tax rate differs from the statutory
rate as a result of non deductible expenses and the mix of foreign taxes as
applied to the applicable income or loss.
Net Income. For the three months ended April 30, 2002, the Company achieved net
income of $9,637, as compared to net loss of $11,467 for the three months ended
April 30, 2001.
23
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Six Months Ended April 30, 2002 and 2001
Net Sales. Net sales increased by $207,486, or 84.4%, to $453,256 for the six
months ended April 30, 2002 from $245,770 for the six months ended April 30,
2001. The increase was primarily attributable to growth in publishing
operations. Included in net sales for the six months ended April 30, 2001 was
$27,230 attributable to the adoption of SAB 101.
Publishing revenues increased by $199,841, or 158.7%, to $325,746 for the six
months ended April 30, 2002 from $125,905 for the six months ended April 30,
2001. The increase was primarily attributable to the continued strong sales of
Grand Theft Auto 3 and the release of Max Payne and State of Emergency. For the
six months ended April 30, 2002 and 2001, publishing activities accounted for
approximately 71.9% and 51.2% of net sales, respectively. The 2001 period
included $20,632 attributable to the adoption of SAB 101.
For the current period, products designed for PC platforms accounted for
approximately 4.0% of publishing revenues as compared to 34.0% for the prior
comparable period. The decrease is a result of fewer PC titles released during
the current period. Products designed for video game console platforms accounted
for 94.5% of publishing revenues as compared to 58.6% for the prior comparable
period. The increase was primarily attributable to the release of State of
Emergency for PlayStation 2, and Max Payne for PlayStation 2 and Xbox and
continued sales of Grand Theft Auto 3 for PlayStation 2.
Distribution revenues increased by $7,645 or 6.4% to $127,510 for the six months
ended April 30, 2002 from $119,865 for the six months ended April 30, 2001. The
increase was primarily attributable to the commercial introduction of Xbox and
GameCube and the continued rollout of PlayStation 2. For the six months ended
April 30, 2002 and 2001, distribution activities accounted for approximately
28.1% and 48.8% of net sales, respectively. The 2001 period included $6,598
attributable to the adoption of SAB 101.
International operations accounted for approximately $99,772 or 22.0% of net
sales for the six months ended April 30, 2002 compared to $59,437 or 24.2% for
the six months ended April 30, 2001. The increase was primarily attributable to
expanded publishing operations in Europe, including the release of Max Payne and
State of Emergency on PlayStation 2 and continued sales of Grand Theft Auto 3
for PlayStation 2. The Company expects that international sales will continue to
account for a significant portion of its revenue.
Cost of Sales. Cost of sales increased by $124,484, or 77.0%, to $286,140 for
the six months ended April 30, 2002 from $161,656 for the six months ended April
30, 2001. The 2001 period includes a non-cash impairment charge of $3,786
relating to a reduction in the value of certain Internet assets. Excluding this
charge, cost of sales as a percentage of net sales decreased to 63.1% for the
six months ended April 30, 2002 from 64.3% for the prior comparable period. The
decrease in cost of sales as a percentage of net sales was due to a higher
percentage of publishing revenues derived principally from sales of internally
owned and developed Grand Theft Auto 3. This decrease was partially offset by
higher royalty expense during the current period due primarily to sales of State
of Emergency and incremental write downs of prepaid royalties of $3,093.
Additionally, this decrease in cost of sales as a percentage of net sales was
partially offset by the change in publishing product mix to lower margin console
titles as compared to higher margin PC titles in the prior comparable period.
Cost of sales in 2001 included $18,335 related to the adoption of SAB 101. In
future periods, cost of sales may be adversely affected by manufacturing and
other costs, price competition and by changes in product and sales mix and
distribution channels.
24
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Selling and Marketing. Selling and marketing expenses increased by $18,388, or
76.2%, to $42,517 for the six months ended April 30, 2002 from $24,129 for the
six months ended April 30, 2001. The increase was attributable to increased
television and other advertising expenses relating to Max Payne and Grand Theft
Auto 3 during the period, partly offset by the 2001 non-cash impairment charge
of $401 relating to online sales promotions for the Company's products to be
delivered by Neo to Gameplay. Selling and marketing expenses as a percentage of
net sales declined to 9.4% for the six months ended April 30, 2002 from 9.8% in
the similar period of 2001.
General and Administrative. General and administrative expenses increased by
$18,303, or 93.3%, to $37,921 for the six months ended April 30, 2002 from
$19,618 for the six months ended April 30, 2001. General and administrative
expenses as a percentage of net sales remained constant from the prior period.
The increase in absolute dollars was attributable to increased personnel
expenses necessary to support the Company's operations and legal and
professional fees incurred in connection with legal proceedings and regulatory
matters.
Research and Development. Research and development costs increased by $2,890, or
96.3% to $5,891 for the six months ended April 30, 2002 from $3,001 for the six
months April 30, 2001. Research and development costs as a percentage of net
sales remained relatively constant for the six months ended April 30, 2002 and
2001.
Depreciation and Amortization. Depreciation and amortization expense of $4,788
for the six months ended April 30, 2002 decreased $1,172, or 19.7%, from the
prior comparable period, due to the Company's adoption of SFAS 142 partly offset
by increased costs related to the company-wide implementation of a new
accounting software system.
Income from Operations. Income from operations increased by $44,593, or 142.0%,
to $75,999 for the six months ended April 30, 2002 from $31,406 for the six
months ended April 30, 2001, due to the changes referred to above.
Interest Expense, net. Interest expense decreased by $4,258, or 80.6%, to $1,027
for the six months ended April 30, 2002 from $5,285 for the six months ended
April 30, 2001. The decrease was attributable to substantially lower levels of
borrowing from the Company's credit facilities.
(Gain) Loss on Internet Investments. For the six months ended April 30, 2002,
the Company recognized a gain of $159 from the sale marketable of securities.
During the six months ended April 30, 2001, the Company incurred a non-recurring
non-cash impairment charges of $20,754 relating primarily to its investments in
Gameplay and eUniverse to reflect other than temporary declines in the value of
these investments.
Class Action Settlement Costs. During the three months ended April 30, 2002, the
Company recorded $1,468 of class action settlement costs, which represents a
settlement of $7,500 and related legal fees, net of $6,145 of insurance
proceeds.
Provision (Benefit) for Income Taxes. Income tax expense increased by $25,932,
to $29,197 for the six months ended April 30, 2002 from $3,265 for the six
months ended April 30, 2001. The increase was primarily attributable to
increased taxable income. The decrease in the effective rate to 39.6% for the
six months ended April 30, 2002 as compared to 60.8% for the six months ended
April 30, 2001 is the result of state and foreign tax rate differentials and a
decrease in non-deductible items, such as goodwill as applied to higher levels
of pretax income.
Cumulative Effect of Change in Accounting Principle. In connection with the
adoption of SAB 101, the Company recognized a cumulative effect of $5,337 net of
taxes of $3,558 in 2001.
Net Income. For the six months ended April 30, 2002, the Company achieved net
income of $44,466, as compared to net loss of $3,235 for the six months ended
April 30, 2001.
25
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The Company's primary cash requirements have been and will continue to be to
fund developing, manufacturing, publishing and distributing its products. The
Company has historically satisfied its working capital requirements primarily
through cash flow from operations, the issuance of debt and equity securities
and bank borrowings. At April 30, 2002, the Company had working capital of
$145,811 as compared to working capital of $88,229 at October 31, 2001.
The Company's cash and cash equivalents increased $63,561 to $69,617 at April
30, 2002, from $6,056 at October 31, 2001. The increase is primarily
attributable to $108,397 of cash provided by operating activities, partly offset
by $946 used in investing activities and by $47,184 used in financing
activities.
Cash provided by operating activities for the six months ended April 30, 2002
was $108,397 compared to $23,322 for the six months ended April 30, 2001
reflecting increased net income and working capital.
Net cash used in investing activities for the six months ended April 30, 2002
was $946 as compared to net cash used in investing activities of $7,077 for the
six months ended April 30, 2001. The decrease is primarily attributable to the
sale of securities coupled with no acquisition activity in 2002, partially
offset by increased expenditures for fixed assets.
Net cash used in financing activities for the six months ended April 30, 2002
was $47,184, as compared to net cash used in financing activities of $13,800 for
the six months ended April 30, 2001. The increase in net cash used in financing
activities was primarily attributable to the increased repayment of
indebtedness.
In December 1999, the Company entered into a credit agreement, as amended, with
a group of lenders led by Bank of America, N.A., as agent. The agreement was
amended in February 2002 to provide for borrowings of up to $50,000 through the
remaining term of the agreement. Generally, advances under the line of credit
are based on a borrowing formula equal to the lesser of (1) the borrowing limit
or (2) 70% of eligible accounts receivable, plus 25% of eligible inventory.
Interest accrues on such advances at the bank's prime rate plus 1.25%, or at
LIBOR plus 3.25%. Borrowings under the line of credit are collateralized by 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 loan agreement contains certain financial
and other covenants. As of April 30, 2002, the Company is in compliance with
such covenants. The loan agreement limits or prohibits the Company 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. The Company had no outstanding borrowings under the
revolving line of credit as of April 30, 2002.
In February 2001, the Company's United Kingdom subsidiary entered into a credit
facility agreement, as amended in March 2002, with Lloyds TSB Bank plc
("Lloyds") under which Lloyds agreed to make available borrowings of up to
$19,000. 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 the Company. The
facility expires on March 31, 2004. The Company had no outstanding borrowings
under this facility as of April 30, 2002.
26
s
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
For the six months ended April 30, 2002, the Company received proceeds of $7,396
relating to exercise of stock options and warrants.
In connection with the Company's acquisition of the publishing rights to the
franchise of Duke Nukem' PC and video games in December 2000, the Company is
contingently obligated to pay $6,000 in cash upon delivery of the final PC
version of Duke Nukem' Forever. In addition, in connection with the Company's
acquisition of the Max Payne product franchise, the Company is contingently
liable to make aggregate payments of up to $8,000 in cash upon the timely
delivery of the final PC version of Max Payne 2 and the achievement of certain
sales targets for such product. The payables will be recorded when the
contingencies are resolved.
The Company's accounts receivable, less an allowance for doubtful accounts,
returns and price protection and other discounts at April 30, 2002 was $65,095.
Of such receivables, approximately 10.7% was due from one customer. Most of the
Company's receivables are covered by insurance in the event of a customer's
bankruptcy or insolvency and generally the Company has been able to collect its
receivables in the ordinary course of business. The Company does not hold any
collateral to secure payment from customers. As a result, the Company is subject
to credit risks, particularly in the event that any of the receivables represent
a limited number of retailers or are concentrated in foreign markets. If the
Company is unable to collect its accounts receivable as they become due and such
accounts are not covered by insurance, the Company could be required to increase
its allowance for doubtful accounts, which could adversely affect its liquidity
and working capital position. The Company had accounts receivable days
outstanding of 34 days at April 30, 2002, as compared to 96 days at April 30,
2001. The 2002 period was favorably impacted by the launch of State of Emergency
in the first month of the quarter, which provided the time to collect such
receivables by April 30, 2002.
The Company's offices and warehouse facilities are occupied under non-cancelable
operating leases expiring at various times from January 2003 to October 2011.
Additionally, the Company has leased certain furniture equipment and automobiles
under non-cancelable leases expiring through July 2005. In April 2002, the
Company acquired exclusive distribution rights to various software games in the
United States and Canada. The agreement, which expires in October 2003, requires
minimum guaranteed payments of $4,200, which are collateralized by a standby
letter of credit.
The Company has no material commitments for capital expenditures. The Company
may incur significant legal, accounting and other professional fees and expenses
in connection with pending regulatory matters.
Based on its currently proposed operating plans and assumptions, the Company
believes that projected cash flow from operations and available cash resources,
including amounts available under its lines of credit, will be sufficient to
satisfy its cash requirements for the reasonably foreseeable future.
Fluctuations in Operating Results and Seasonality
The Company has experienced 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 the Company's
titles; development and promotional expenses relating to the introduction of new
titles, sequels or enhancements of existing titles; projected and actual changes
in platforms; the timing and success of title introductions by the Company's
competitors; product returns; changes in pricing policies by the Company and its
competitors; the accuracy of retailers' forecasts of consumer demand; the size
and timing of acquisitions; the timing of orders from major customers; and order
cancellations and delays in product shipment. Sales of the Company's titles are
also seasonal, with peak shipments typically occurring in the fourth calendar
quarter (the Company's fourth and first fiscal quarters) as a result of
increased demand for titles during the holiday season. Quarterly comparisons of
operating results are not necessarily indicative of future operating results.
27
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
International Operations
Sales in international markets, principally in the United Kingdom and other
countries in Europe, have accounted for a significant portion of the Company's
net sales. For the three months ended April 30, 2002, and 2001, sales in
international markets accounted for approximately 24.0% and 24.8%, respectively,
of the Company's net sales. For the six months ended April 30, 2002 and 2001,
sales in international markets accounted for approximately 22.0% and 24.2%,
respectively, of the Company's net sales. The Company is subject to risks
inherent in foreign trade, including increased credit risks, tariffs and duties,
fluctuations in foreign currency exchange rates, shipping delays and
international political, regulatory and economic developments, all of which can
have a significant impact on the Company's operating results.
Recently Issued Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force (EITF) reached a consensus on EITF Issue 01-09, Accounting for
Consideration Given by a Vendor to a Customer or Reseller of the Vendor's
Products, which is a codification of EITF 00-14, 00-22 and 00-25. This EITF
presumes that consideration from a vendor to a customer or reseller of the
vendor's products to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement and could lead to negative revenue
under certain circumstances. Revenue reduction is required unless consideration
relates to a separate identifiable benefit and the benefit's fair value can be
established. The Company has early adopted EITF 01-09 effective November 1,
2001. The adoption of the new standard did not have a material impact on the
consolidated condensed financial statements. The prior period has been
reclassified in accordance with this statement.
Effective November 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations to be accounted for
using the purchase method of accounting and that certain intangible assets
acquired in a business combination shall be recognized as assets apart from
goodwill. SFAS 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. This statement provides that intangible assets with finite useful lives
be amortized and that intangible assets with indefinite lives and goodwill will
not be amortized, but will be tested at least annually for impairment. Upon
completion of the transitional impairment test, the fair value for each of the
Company's reporting units exceeded the reporting unit's carry amount and no
impairment was indicated.
In August 2001, the FASB issued Statement of Financial Accounting Standard No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" ("SFAS 143"). The objective of SFAS 143 is to provide accounting
guidance for legal obligations associated with the retirement of long-lived
assets. The retirement obligations included within the scope of this
pronouncement are those that an entity cannot avoid as a result of either the
acquisition, construction or normal operation of a long-lived asset. Components
of larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company is currently evaluating the expected impact of the
adoption of SFAS 143 on the Company's financial condition, cash flows and
results of operations. The Company will adopt the standard in the first quarter
of fiscal 2003.
28
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
In October 2001, the FASB issued Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). The objectives of SFAS 144 are to address significant issues relating to
the implementation of SFAS 121 and to develop a single accounting model, based
on the framework established in SFAS 21, for the long-lived assets to be
disposed of by sale, whether previously held and used or newly acquired. The
provisions of SFAS 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company is currently evaluating the
expected impact of the adoption of SFAS 144 on the Company's financial condition
and results of operations. The Company will adopt the standard in the first
quarter of fiscal 2003.
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB
Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates
the requirement (in SFAS No. 4) that gains and losses from the extinguishments
of debt be aggregated and classified as extraordinary items, net of the related
income tax. In addition, SFAS No. 145 requires sales-lease back treatment for
certain modifications of a capital lease that result in the lease being
classified as an operating lease. The rescission of SFAS No. 4 is effective for
fiscal years beginning after May 15, 2002, which for the Company would be
November 1, 2002. Earlier application is encouraged. Any gain or loss on
extinguishment of debt that was previously classified as an extraordinary item
would be reclassified to other income (expense). The remainder of the statement
is generally effective for transactions occurring after May 15, 2002. The
Company does not expect that the adoption of SFAS No. 145 will have a material
impact on the Company's financial condition, cash flows and results of
operations.
Cautionary Statement and Risk Factors
Safe Harbor Statement under the Securities Litigation Reform Act of 1995: The
Company makes statements in this report that are considered forward-looking
statements under federal securities laws. Such forward-looking statements are
based on the beliefs of 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, the
following:
The market for interactive entertainment software titles is characterized by
short product life cycles. The interactive entertainment software market is
characterized by short product life cycles and frequent introduction of new
products. New products may not achieve significant market acceptance or achieve
sufficient sales to permit the Company to recover development, manufacturing and
associated costs. Historically, few interactive entertainment software products
have achieved sustained market acceptance. Even the most successful titles
remain popular for only limited periods of time, often less than six months.
Because revenues associated with the initial shipments of a new product
generally constitute a high percentage of the total revenues associated with the
life of a product, any delay in the introduction of one or more new products
could harm the Company's operating results. The failure of one or more of the
Company's products to achieve market acceptance could result in losses.
A significant portion of the Company's revenues is derived from a limited number
of titles. The Company's ten best selling titles accounted for approximately
75.0% and 66.5% of revenues for the three and six months ended April 30, 2002,
respectively, and 31.3% of revenues for the year ended October 31, 2001. Future
titles may not be commercially viable. The Company also may not be able to
release new titles within scheduled release times or at all. If the Company
fails to continue to develop and sell new, commercially successful titles,
revenues and profits may decrease substantially and the Company may incur
losses.
29
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The Company's quarterly operating results may vary significantly, which could
cause its stock price to decline. The Company has experienced and may continue
to experience wide fluctuations in quarterly operating results. The interactive
entertainment industry is highly seasonal, with sales typically higher during
the fourth and first calendar quarters, due primarily to the increased demand
for games during and immediately following the holiday buying season. The
Company's failure or inability to introduce products on a timely basis to meet
seasonal fluctuations in demand could harm the Company's business and operating
results. Other factors that cause fluctuations include delays in the
introduction of new titles; the size and timing of product and corporate
acquisitions; variations in sales of titles designed to operate on particular
platforms; development and promotional expenses relating to the introduction of
new titles, sequels or enhancements of existing titles; availability of hardware
platforms; the timing and success of title introductions by competitors; product
returns; the accuracy of retailers' forecasts of consumer demand; and the timing
of orders from major customers.
The Company's expense levels are based largely on expectations regarding future
sales. Therefore, the Company's operating results would be harmed by a decrease
in sales or a failure to meet sales expectations. The uncertainties associated
with product development, lengthy manufacturing lead times, production delays
and the approval process for products by hardware manufacturers and other
licensors make it difficult to predict the quarter in which products will ship
and may cause the Company to fail to meet financial expectations. In future
quarters operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of the Company's common
stock could decline.
The interactive entertainment software industry is cyclical, and is subject to
rapidly changing consumer tastes and preferences. The Company's business is
subject to all of the risks generally associated with the interactive
entertainment software industry, which has been cyclical in nature and has been
characterized by periods of significant growth followed by rapid declines.
Future operating results depend on numerous factors beyond the Company's
control, including the popularity, price and timing of new software and hardware
platforms being released and distributed by the Company and its competitors;
international, national and regional economic conditions, particularly economic
conditions adversely affecting discretionary consumer spending; changes in
consumer demographics; the availability of other forms of entertainment; and
critical reviews and public tastes and preferences, all of which change rapidly
and cannot be predicted.
Rapidly changing technology and platform shifts could hurt the Company's
operating results. The interactive entertainment industry in general is
associated with rapidly changing technology, which often leads to software and
platform obsolescence and significant price erosion over the life of a product.
The introduction of new platforms and technologies can render existing software
titles obsolete or unmarketable. Obsolescence of software or hardware platforms
could leave the Company with increased inventories of unsold titles and limited
amounts of new titles to sell to consumers, which would have a material adverse
effect on the Company's operating results. A number of the Company's competitors
have developed or are currently developing software for use by consumers over
the Internet. Future increases in the availability of such software or
technological advances in such software or the Internet could result in a
decline in platform-based software and impact the Company's sales. Direct sales
of software by major manufacturers over the Internet would materially adversely
affect the Company's distribution business.
Next-generation hardware platforms may not achieve significant market
acceptance. The Company's software development efforts with respect to new
hardware platforms may not lead to marketable titles or titles that generate
sufficient revenues to recover their development, manufacturing and marketing
costs, especially if a new hardware platform does not reach a significant level
of market acceptance. This risk may increase in the future as continuing
increases in development costs require corresponding increases in revenues in
order to maintain profitability. The Company is devoting development resources
on products designed for Sony's PlayStation 2, Microsoft's Xbox and Nintendo's
GameCube. If fewer than expected units of a new hardware platform are produced
or shipped, or if such platforms do not achieve commercial success, the Company
may experience lower than expected sales or losses for these platforms.
The Company's business is dependent on licensing and publishing arrangements
with third parties. The Company's success depends on its ability to identify and
develop new titles on a timely basis. The Company has entered into agreements
with third parties to acquire the rights to publish and distribute interactive
entertainment
30
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
software. These agreements typically require the Company to make advance
payments, pay royalties and satisfy other conditions. The Company's advance
payments may not be sufficient to permit developers to develop new software
successfully. In addition, software development costs, promotion and marketing
expenses and royalties payable to software developers have increased
significantly in recent years and reduce the potential profits derived from
sales of the Company's software. Future sales of titles may not be sufficient to
recover advances to software developers, and the Company may not have adequate
financial and other resources to satisfy its contractual commitments. If the
Company fails to satisfy its obligations under these license agreements, the
agreements may be terminated or modified in ways that may be burdensome.
Returns of published titles and price protection may adversely affect the
Company's operating results. The Company is exposed to the risk of product
returns and price protection with respect to its customers. Although
distribution arrangements with retailers generally do not give them the right to
return titles to the Company or to cancel firm orders, the Company's
arrangements with retailers for published titles require it to accept returns.
The Company establishes a reserve for future returns and price protection for
published titles at the time of sales, based primarily on its return policies,
price protection policies and historical return rates. If return rates and price
protection for published titles significantly exceed established reserves,
revenues will decline and the Company could incur losses.
The interactive entertainment software industry is highly competitive. The
Company competes for both licenses to properties and the sale of interactive
entertainment software with Sony, Nintendo, Microsoft and Sega, each of which is
a large 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. The Company also competes with domestic and
international companies, large software companies and media companies. Many of
these competitors have far greater financial, technical, personnel and other
resources than the Company, 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.
Increased competition for limited shelf space and promotional support from
retailers could require the Company to incur greater expenses to market titles.
Retailers have limited shelf space and promotional resources, and competition is
intense among an increasing number of newly introduced interactive entertainment
software titles for adequate levels of shelf space and promotional support.
Competition for retail shelf space is expected to increase, which may require
the Company to increase its marketing expenditures just to maintain current
levels of sales of titles. Competitors with more extensive lines and popular
titles frequently have greater bargaining power with retailers. Accordingly, the
Company may not be able to achieve the levels of promotional support and shelf
space that such competitors receive.
Rating systems for interactive entertainment software, potential legislation and
consumer opposition could inhibit sales of the Company's products. Trade
organizations within the video game industry require interactive entertainment
software publishers to provide consumers with information relating to graphic
violence, profanity or sexually explicit material contained in software titles.
Certain countries have also established similar rating systems as prerequisites
for sales of interactive entertainment software in such countries. In some
instances, the Company may be required to modify products to comply with the
requirements of such governmental entities, which could delay the release of
those products in such countries. The Company recently discontinued making sales
of Grand Theft Auto 3 in Australia for several weeks while it made certain
content changes to this title to comply with applicable rating systems. The
Company believes that it complies with such rating systems and displays the
ratings received for its titles.
Historically, the Company's software titles received a rating of "E" (all ages)
or "T" (age 13 and over), although most newer titles (including Grand Theft Auto
3, Max Payne and State of Emergency) have received a rating of "M" (age 17 and
over). Certain retailers may decline to sell interactive entertainment software
containing graphic violence or sexually explicit material, which may limit the
potential market for the Company's "M" rated products.
31
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
Several proposals have been made for federal legislation to regulate the
interactive entertainment software, motion picture and recording industries,
including a proposal to adopt a common rating system for interactive
entertainment software, television and music containing violence and sexually
explicit material and the Federal Trade Commission has adopted rules with
respect to the marketing of such material to minors. Consumer advocacy groups
have also opposed sales of interactive entertainment software containing graphic
violence and sexually explicit material by pressing for legislation in these
areas and by engaging in public demonstrations and media campaigns. If any
groups were to target the Company's "M" rated titles, it might be required to
significantly change or discontinue a particular title, which in the case of the
Company's best selling titles could hurt its business. Additionally, in light of
the events in September 2001, the Company revised content in certain of its
products that the Company deemed inappropriate. Delays in the release of
products as a result of content changes could result in lost revenues.
The Company cannot publish console titles without the approval of hardware
manufacturers. The Company is required to obtain a license to develop and
publish titles for each hardware console platform for which it develops and
publishes titles. If any manufacturer chooses not to renew or extend the
Company's license agreement at the end of its current term, or if the
manufacturer were to terminate the license for any reason, the Company would be
unable to publish additional titles for that manufacturer's hardware platform.
The Company is dependent upon a license agreement with Sony to publish titles
for PlayStation 2. Termination of such agreement would seriously hurt the
Company's business.
Sony and Nintendo are the sole manufacturers of the titles published under
license from them. Games for the Xbox must be manufactured by pre-approved
manufacturers. Each platform license provides that the manufacturer may raise
prices for the titles at any time and grants the manufacturer substantial
control over the release of new titles.
Each of these manufacturers also publishes software for its own platforms and
manufactures titles for all of its other licensees and may choose to give
priority to its own titles or those of other publishers if it has insufficient
manufacturing capacity or if there is increased demand.
In addition, these manufacturers may not have sufficient production capacity to
satisfy the Company's scheduling requirements during any period of sustained
demand. If manufacturers do not supply the Company with finished titles on
favorable terms without delays, the Company's operations would be materially
interrupted, its revenues could decline and it could incur losses.
The Company may not be able to protect its proprietary rights or avoid claims
that it infringes on the proprietary rights of others. The Company develops
proprietary software and has obtained the rights to publish and distribute
software developed by third parties. The Company attempts to protect its
software and production techniques under copyright, trademark and trade secret
laws as well as through contractual restrictions on disclosure, copying and
distribution. Interactive entertainment software is susceptible to unauthorized
copying. Unauthorized third parties may be able to copy or to reverse engineer
the Company's software that the Company regards as proprietary. From time to
time, the Company receives notices from third parties alleging infringement of
their proprietary rights.
Although the Company believes that its software and technologies and the
software and technologies of third-party developers and publishers with whom its
has contractual relations do not and will not infringe or violate proprietary
rights of others, it is possible that infringement of proprietary rights of
others has or may occur. Any claims of infringement, with or without merit,
could be time-consuming, costly and difficult to defend.
The Company is dependent on third-party software developers to complete many of
its titles. The Company relies on third-party software developers for the
development of a significant number of its titles. Quality third-party
developers are continually in high demand. Software developers may not be
available to develop software for the Company or may not be able to complete
titles on a timely basis or within acceptable quality standards. In addition,
the development cycle for new titles is long, typically ranging from twelve to
twenty-four months. After development of a product, it may take between six to
twelve additional months to develop the product for other hardware platforms. If
developers experience financial difficulties, additional costs or unanticipated
development delays, the Company may not be able to release titles according to
schedule.
32
TAKE-TWO INTERACTIVESOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The Company's software is susceptible to errors, which can harm the Company's
financial results and reputation. The technological advancements of new hardware
platforms allow more complex software products. As software products become more
complex, the risk of undetected errors in products when first introduced
increases. If, despite testing, errors are found in new products or releases
after shipments have been made, the Company could experience a loss of or delay
in timely market acceptance, product returns, loss of revenues and damage to its
reputation.
Gross margins relating to the Company's distribution business have been
historically narrow which increases the impact of variations in costs on
operating results. As a result of intense price competition in the console
hardware and software distribution industry, gross margins in the Company's
distribution business have historically been narrow and the Company expects them
to continue to be narrow. The Company receives purchase discounts from suppliers
based on various factors, including volume purchases. These purchase discounts
directly affect gross margins. It may become more difficult for the Company to
achieve the percentage growth in sales required to continue to receive volume
purchase discounts.
The Company may not be able to adequately adjust its cost structure in a timely
fashion in response to a sudden decrease in demand. A significant portion of the
Company's selling and general and administrative expense is comprised of
personnel, facilities and costs of invested capital. In the event of a
significant decline in revenues, the Company may not be able to exit facilities,
reduce personnel, or make other significant changes to its cost structure
without significant disruption to its operations or without significant
termination and exit costs. Management may not be able to implement such
actions, if at all, in a timely manner to offset an immediate shortfall in
revenues and gross profit.
The Company's distribution business is dependent on suppliers to maintain an
adequate supply of products to fulfill customer orders on a timely basis. The
Company's ability to obtain particular products in required quantities and to
fulfill customer orders on a timely basis is critical to its success. In most
cases, the Company has no guaranteed price or delivery agreements with
suppliers. In certain product categories, limited price protection or return
rights offered by manufacturers may have a bearing on the amount of product the
Company may be willing to purchase. The console hardware industry experiences
significant product supply shortages from time to time due to the inability of
certain manufacturers to supply certain products on a timely basis. As a result,
the Company has experienced, and may in the future continue to experience,
short-term hardware inventory shortages. In addition, manufacturers who
currently distribute their products through the Company may decide to
distribute, or to substantially increase their existing distribution, through
other distributors, or directly to retailers. In the case of software,
alternative means of distribution have emerged, such as electronic distribution.
The Company is subject to the risk that inventory values may decline and
protective terms under supplier arrangements may not adequately cover the
decline in values. The interactive entertainment software and hardware industry
is subject to rapid technological change, new and enhanced generations of
products, and evolving industry standards. These changes may cause inventory to
decline substantially in value or to become obsolete. The Company is exposed to
inventory risk to the extent that supplier price protections are not available
on all products or quantities and are subject to time restrictions. In addition,
suppliers may become insolvent and unable to fulfill price protection
obligations.
33
TAKE-TWO INTERACTIVESOFTWARE, INC. and SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations (concluded)
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
A limited number of customers may account for a significant portion of the
Company's sales. Sales to the Company's five largest customers accounted for
approximately 20.9% of revenues for the year ended October 31, 2001 and 32.6% of
revenues for the six months ended April 30, 2002. Customers may terminate their
relationship with the Company at any time. The loss of relationships with
principal customers or a decline in sales to principal customers could harm the
Company's operating results. Bankruptcies or consolidations of certain large
retail customers could also hurt the Company's business.
The Company is subject to credit and collection risks. Sales are typically made
on credit, with terms that vary depending upon the customer and the demand for
the particular title being sold. The Company does not hold any collateral to
secure payment by its customers. As a result, the Company is subject to credit
risks, particularly in the event that any of its receivables represent sales to
a limited number of retailers or are concentrated in foreign markets. If the
Company is unable to collect on accounts receivable as they become due and such
accounts are not covered by insurance, it could adversely affect the Company's
liquidity and financial condition.
The Company is subject to risks and uncertainties of international trade. Sales
in international markets, primarily in the United Kingdom and other countries in
Europe and the Pacific Rim, have accounted for a significant portion of
revenues. Sales in international markets accounted for approximately 24.0% and
22.0%, of the Company's revenues for the three and six months ended April 30,
2002, respectively. The Company is subject to risks inherent in foreign trade,
including increased credit risks; tariffs and duties; fluctuations in foreign
currency exchange rates; shipping delays; and international political,
regulatory and economic developments, all of which can have a significant impact
on the Company's operating results. International sales are made in local
currencies. For the six months ended April 30, 2002, the Company's foreign
currency translation adjustment gain was $96. The Company purchases currency
forward contracts to a limited extent to seek to minimize the Company's exposure
to fluctuations in foreign currency exchange rates.
34
TAKE-TWO INTERACTIVE SOFTWARE INDUSTRIES, INC. and SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
(Dollars in thousands, unless otherwise noted)
- --------------------------------------------------------------------------------
The Company is subject to market risks in the ordinary course of its business,
primarily risks associated with interest rate and foreign currency fluctuations
and possible impairment of the carrying values of the Company's investments.
Historically, fluctuations in interest rates have not had a significant impact
on the Company's operating results. At April 30, 2002, the Company had no
outstanding variable rate indebtedness.
The Company transacts business in foreign currencies and is exposed to risks
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. Translation
adjustments are included as a separate component of stockholders' equity. For
the six months ended April 30, 2002, the Company's foreign currency translation
adjustment gain was $96. A hypothetical 10% change in applicable currency
exchange rates at April 30, 2002 would result in a material translation
adjustment. The Company purchases currency forward contracts from time to time
to seek to minimize the Company's exposure to fluctuations in foreign currency
exchange rates.
In addition, the Company may be exposed to risk of loss associated with
fluctuations in the value of its investments. The Company's investments are
stated at fair value, with net unrealized appreciation and loss included as a
separate component of stockholders' equity. The Company regularly reviews the
carrying values of its investments to identify and record impairment losses when
events or circumstances indicate that such investments may be permanently
impaired.
At April 30, 2002, the Company held 6,869,407 shares of common stock of
Gameplay.com plc with a fair value of approximately $98 and was recorded as a
non-current asset. The Company recorded an unrealized gain of $14, net of taxes
of $9 as a separate component of accumulated other comprehensive income (loss)
in stockholders' equity. For the three and six months ended April 30, 2001, the
Company recorded a loss of $18,448 to reflect the other than temporary
impairment of its investments relating to Gameplay.
At April 30, 2002, the Company held 98,033 shares of eUniverse Inc. with a fair
value of approximately $500, all of which was recorded as current assets. The
Company recorded an unrealized gain of $149, net of taxes of $92, as a separate
component of accumulated other comprehensive income (loss) in stockholders'
equity. For the three and six months ended April 30, 2001, the Company recorded
a loss of approximately $2,000 to reflect the other than temporary impairment of
its investment in eUniverse.
35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Since December 2001, thirteen purported class action lawsuits have been filed in
the United States District Court for the Southern District of New York against
the Company and certain of its current and former officers and directors. The
actions were consolidated in one lawsuit, Gershon Bassman v. Take-Two
Interactive Software, Inc., in April 2002. The consolidated complaint includes
claims under Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under Section 10 (b), and generally alleges that
defendants issued false and misleading public filings, press releases and other
statements regarding the Company's financial condition during a class period
commencing on February 24, 2001 through December 17, 2001 in a scheme to
artificially inflate the value of the Company's common stock.
In June 2002, the Company entered into a definitive agreement with the
plaintiffs to settle the consolidated class action lawsuits for $7,500,000 in
cash. During the quarter ended April 30, 2002, the Company recorded $1,468,000
of class action settlement costs which, represents the settlement of $7,500,000
and related legal fees, net of $6,145,000 of insurance proceeds. The settlement
agreement is subject to final approval of the United States District Court.
The Securities and Exchange Commission has issued a formal order of
investigation into, among other things, certain accounting matters relating to
the Company's financial statements, periodic reporting and internal accounting
control provisions of the federal securities laws.
The Company is involved in routine litigation in the ordinary course of business
which in management's opinion will not have a material adverse effect on the
Company's financial condition, cash flows or results of operations.
Item 2. Changes in Securities
From February 1, 2002 to April 30, 2002, 367,000 options from the 1997 Stock
Option Plan and 804,000 non-plan options were granted at exercise prices ranging
from $15.25 to $25.31.
In February 2002, the Company issued 20,000 shares of restricted common stock to
a former employee of the Company as compensation.
In February 2002, the Company issued 5,000 shares of restricted common stock to
three individuals in connection with the settlement of a lawsuit.
In connection with the above securities issuances, the Company relied on Section
4(2) and Regulation D promulgated under the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Development and Publishing Agreement dated February 10, 2000 by and
between the Company and VIS Interactive plc.
(b) Reports on Form 8-K:
None.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Take-Two Interactive Software, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized on this
13th day of June 2002.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Kelly Sumner
--------------------------------
Kelly Sumner
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Karl H. Winters
-------------------------------
Karl H. Winters
Chief Financial Officer
(Principal Financial Officer)
37