UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended January 31, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________to__________
Commission File Number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0350842
(State of incorporation (IRS Employer
or organization) Identification No.)
575 Broadway, New York, NY 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 334-6633
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
As of March 8, 2000, there were 23,541,961 shares of the registrant's Common
Stock outstanding.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED JANUARY 31, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements*
Consolidated Condensed Balance Sheets - As of January 31, 2000 Restated and
October 31, 1999 (unaudited) 1
Consolidated Condensed Statements of Operations - For the three months ended January 31, 2000
Restated and 1999 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - For the three months ended January 31, 2000
Restated and 1999 (unaudited) 3
Consolidated Condensed Statements of Stockholders' Equity - For the year ended October 31, 1999
and the three months ended January 31, 2000 Restated (unaudited) 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 2. Changes in Securities 17
Item 6. Exhibits and Reports on Form 8-K 17
* This amended form 10-Q is being filed as the result of the following: On
February 12, 2002, the Company restated its financial statements for the fiscal
year ended October 31, 2000, each of the quarters of fiscal 2000 and the first
three quarters of fiscal 2001. All financial data in this report reflects this
restatement. See Note 2 of Notes to Unaudited Consolidated Condensed Financial
Statements.
Item 1.
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of January 31, 2000 and October 31, 1999 (unaudited)
--------------------------------------------------------------------------------
ASSETS: January 31, 2000 October 31, 1999
Restated
--------------- ---------------
Current assets:
Cash and cash equivalents $ 19,255,178 $ 10,374,562
Accounts receivable, net of allowances of $6,845,359 and $6,816,682,
respectively 93,247,424 108,802,903
Inventories 46,781,625 41,299,838
Prepaid royalties 31,148,730 20,118,160
Prepaid expenses and other current assets 9,191,528 6,374,031
Deferred tax asset 2,004,689 2,004,689
--------------- ---------------
Total current assets 201,629,174 188,974,183
Fixed assets, net 4,692,271 4,120,317
Prepaid royalties 75,000 1,510,530
Capitalized software development costs, net 3,219,300 2,226,670
Investment in affiliates 3,798,363 3,954,668
Other investments 4,100,000 100,000
Intangibles, net 30,390,166 30,856,983
Other assets, net 872,368 973,026
--------------- ---------------
Total assets $ 248,776,642 232,716,377
=============== ===============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 56,832,836 $ 71,229,744
Accrued expenses 26,774,678 20,161,810
Lines of credit, current portion 74,520,254 56,047,846
Current portion of capital lease obligation 49,561 65,204
Notes payable -- 30,611
--------------- ---------------
Total current liabilities 158,177,329 147,535,215
Notes payable, net of current portion -- 58,363
Capital lease obligation, net of current portion 14,409 19,882
--------------- ---------------
Total liabilities 158,191,738 147,613,460
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share; 50,000,000 shares authorized;
23,478,082 and 23,085,455 shares issued and outstanding 234,781 230,855
Additional paid-in capital 69,855,134 67,345,381
Deferred compensation (38,901) (47,925)
Retained earnings 22,367,153 18,401,625
Accumulated other comprensive loss (1,833,263) (827,019)
--------------- ---------------
Total stockholders' equity 90,584,904 85,102,917
--------------- ---------------
Total liabilities and stockholders' equity $ 248,776,642 $ 232,716,377
=============== ===============
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 months ended January 31, 2000 and 1999 (unaudited)
--------------------------------------------------------------------------------
Three months ended January 31,
-----------------------------------
2000 1999
Restated
--------------- ---------------
Net sales $ 120,694,669 $ 68,280,653
Cost of sales 85,402,955 53,537,840
--------------- ---------------
Gross profit 35,291,714 14,742,813
--------------- ---------------
Operating expenses:
Selling and marketing 15,275,624 4,161,203
General and administrative 9,294,922 4,411,498
Research and development costs 1,625,437 592,144
Depreciation and amortization 1,402,667 453,415
--------------- ---------------
Total operating expenses 27,598,650 9,618,260
--------------- ---------------
Income from operations 7,693,064 5,124,553
Interest expense, net 1,506,336 816,517
--------------- ---------------
Income before equity in loss of affiliate and income taxes 6,186,728 4,308,036
Equity in loss of affiliate 156,303 --
--------------- ---------------
Income before income taxes 6,030,425 4,308,036
Provision for income taxes 2,064,897 1,413,200
--------------- ---------------
Net income $ 3,965,528 $ 2,894,836
=============== ===============
Per share data:
Basic:
Weighted average common shares outstanding 23,199,395 18,212,240
=============== ===============
Net income per share $ 0.17 $ 0.16
=============== ===============
Diluted:
Weighted average common shares outstanding 24,477,933 19,534,411
=============== ===============
Net income per share $ 0.16 $ 0.15
=============== ===============
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 three months ended January 31, 2000 and 1999 (unaudited)
--------------------------------------------------------------------------------
Three months ended January 31,
----------------------------------
2000 1999
Restated
--------------- ---------------
Cash flows from operating activities:
Net income $ 3,965,528 $ 2,894,836
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 1,402,667 453,415
Loss on disposal of fixed assets 2,436 --
Equity in loss of affiliate 156,303 --
Provision for doubtful accounts 28,677 182,243
Provision for inventory 10,148 --
Amortization of deferred compensation 9,024 41,811
Amortization of affiliate purchase option 100,658 --
Adjustment of prior period compensation expenses -- (55,898)
Amortization of loan discounts -- 1,008
Issuance of compensatory stock -- 116,065
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable 15,526,803 1,463,439
(Increase) decrease in inventories, net (5,491,935) 3,018,419
Increase in prepaid royalties (9,595,040) (755,751)
Increase in advances to developers -- (682,674)
(Increase) decrease in prepaid expenses and other current assets (2,817,497) 331,351
Increase in capitalized software development costs (992,630) (142,921)
Decrease in other assets, net -- 33,259
Decrease in accounts payable (14,396,908) (9,287,924)
Increase in accrued expenses 6,612,868 2,703,165
Decrease in advances-principally distributors -- (136,000)
--------------- ---------------
Net cash (used in) provided by operating activities (5,478,898) 177,843
--------------- ---------------
Cash flows from investing activities:
Purchase of fixed assets (890,282) (184,408)
Other investment (4,000,000) --
Additional cash paid for prior acquisition (458,817) --
--------------- ---------------
Net cash used in investing activities (5,349,099) (184,408)
--------------- ---------------
Cash flows from financing activities:
Net borrowings under the line of credit 18,472,408 1,239,241
Repayment on notes payable (88,974) (132,322)
Proceeds from exercise of stock options 1,949,949 1,157,897
Repayment of capital lease obligation (21,116) (19,558)
Tax benefit from exercise of stock options 402,590 --
--------------- ---------------
Net cash provided by financing activities 20,714,857 2,245,258
--------------- ---------------
Effect of foreign exchange rates (1,006,244) (240,134)
--------------- ---------------
Net increase in cash for the period 8,880,616 1,998,559
Cash and cash equivalents, beginning of the period 10,374,562 2,762,837
--------------- ---------------
Cash and cash equivalents, end of the period $ 19,255,178 $ 4,761,396
=============== ===============
Supplemental disclosure of non-cash investing activities:
Issuance of common stock in connection with acquisition $ 161,140 $ --
=============== ===============
Gathering purchase option $ 872,368 $ --
=============== ===============
During the quarter ended January 31, 2000, the Company paid $458,817 in cash and
issued $161,140 in stock related to a prior period acquisition. Such
payments were capitalized and recorded as Goodwill.
The accompanying notes are an integral part of the consolidated
condensed financial statements.
3
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
For the year ended October 31, 1999 and the three months ended January 31, 2000
(unaudited)
--------------------------------------------------------------------------------
Common Stock
----------------------------------- Additional Deferred
Shares Amount Paid-in Capital Compensation
--------------- --------------- --------------- ---------------
Balance, November 1, 1998 18,071,972 $ 180,719 $ 33,546,417 $ (223,657)
Issuance of compensatory stock options 536,923 5,369 831,203 (5,625)
Exercise of stock options 613,218 6,133 2,378,753 --
Amortization of deferred compensation -- -- -- 181,357
Forfeiture of compensatory stock options in
connection with AIM acquisition -- -- (146,418) --
Issuance of common stock in connection with
LDA and Joytech acquisition 364,766 3,648 3,716,965 --
Issuance of common stock in connection with
DVDWave.com acquisition 50,000 500 505,750 --
Issuance of common stock in connection with
Funsoft acquisition 60,281 603 466,575 --
Issuance of common stock in connection with
the investment in affiliate 125,000 1,250 1,273,750 --
Issuance of common stock in connection with
the Triad and Global acquisition 162,500 1,625 1,399,938 --
Proceeds from exercise of public warrants 40,795 408 223,481 --
Issuance of common stock in connection with
a public offering, net of issuance
costs 3,005,000 30,050 21,822,509 --
Issuance of common stock in lieu of
royalty payments 55,000 550 332,200 --
Tax benefit in connection with the
exercise of stock options -- -- 994,258 --
Foreign currency translation adjustment -- -- -- --
Net income -- -- -- --
--------------- --------------- --------------- ---------------
Balance, October 31, 1999 23,085,455 230,855 67,345,381 (47,925)
Exercise of stock options 376,829 3,768 1,946,181 --
Amortization of deferred compensation -- -- -- 9,024
Issuance of common stock in connection with
LDA and Joytech acquisition 15,798 158 160,982 --
Tax benefit in connection with the exercise
of stock options -- -- 402,590 --
Foreign currency translation adjustment -- -- -- --
Net income - restated -- -- -- --
--------------- --------------- --------------- ---------------
Balance, January 31, 2000 - Restated 23,478,082 $ 234,781 $ 69,855,134 $ (38,901)
=============== =============== =============== ===============
Accumulated
Retained Other
Earnings Comprehensive Comprehensive
(Deficit) Income (Loss) Total Income (Loss)
--------------- --------------- --------------- ---------------
Balance, November 1, 1998 $ 2,069,522 $ (7,433) $ 35,565,568 $ 7,304,367
Issuance of compensatory stock options -- -- 830,947
Exercise of stock options -- -- 2,384,886
Amortization of deferred compensation -- -- 181,357
Forfeiture of compensatory stock options in
connection with AIM acquisition -- -- (146,418)
Issuance of common stock in connection with
LDA and Joytech acquisition -- -- 3,720,613
Issuance of common stock in connection with
DVDWave.com acquisition -- -- 506,250
Issuance of common stock in connection with
Funsoft acquisition -- -- 467,178
Issuance of common stock in connection with
the investment in affiliate -- -- 1,275,000
Issuance of common stock in connection with
the Triad and Global acquisition -- -- 1,401,563
Proceeds from exercise of public warrants -- -- 223,889
Issuance of common stock in connection with
a public offering, net of issuance
costs -- -- 21,852,559
Issuance of common stock in lieu of
royalty payments -- -- 332,750
Tax benefit in connection with the
exercise of stock options -- -- 994,258
Foreign currency translation adjustment -- (819,586) (819,586) (819,586)
Net income 16,332,103 -- 16,332,103 16,332,103
--------------- --------------- --------------- ---------------
Balance, October 31, 1999 18,401,625 (827,019) 85,102,917 15,512,517
Exercise of stock options -- -- 1,949,949
Amortization of deferred compensation -- -- 9,024
Issuance of common stock in connection with
LDA and Joytech acquisition -- -- 161,140
Tax benefit in connection with the exercise
of stock options -- -- 402,590
Foreign currency translation adjustment -- (1,006,244) (1,006,244) (1,006,244)
Net income - restated 3,965,528 -- 3,965,528 3,965,528
--------------- --------------- --------------- ---------------
Balance, January 31, 2000 - Restated $ 22,367,153 $ (1,833,263) $ 90,584,904 $ 2,959,284
=============== =============== =============== ===============
The accompanying notes are an integral part of the consolidated
condensed financial statements.
4
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Notes to Interim Consolidated Condensed Financial Statements (Unaudited)
1. Organization:
Take-Two Interactive Software, Inc. (the "Company") is a leading global
developer, publisher and distributor of interactive software games designed for
multimedia personal computers and video game console platforms.
2. Restatement of Financial Statements
In November 2001, the Company engaged outside counsel to conduct an
investigation into the Company's accounting treatment of certain transactions in
fiscal 2000 and 2001. Counsel was assisted in its investigation by forensic
accountants.
As a result of the investigation, the Company restated its previously issued
consolidated financial statements for fiscal 2000 and each of the quarters in
fiscal 2000 and the first three quarters in fiscal 2001. The restatement of the
financial statements for the three months ended January 31, 2000 relates to the
elimination of $2,195,057 of net sales made to independent third party
distributors and related cost of sales of $870,654 and the related tax effect,
which were improperly recognized as revenue since the products were later
returned or repurchased by the Company.
In addition, the Company reviewed its revenue recognition policy, reserve
policies and its accounting for certain other transactions. As a result of this
review, no additional adjustments were required to the financial statements for
the three months ended January 31, 2000.
The effect of the restatement for the three months ended January 31, 2000 is as
follows:
Three months ended January 31, 2000
As Reported Restatement As Restated
--------------- --------------- ---------------
Statement of Operations Data:
Net sales $ 122,889,726 $ (2,195,057) $ 120,694,669
Cost of sales $ 86,273,609 $ (870,654) $ 85,402,955
Income from operations $ 9,017,467 $ (1,324,403) $ 7,693,064
Income before provision for income taxes $ 7,354,828 $ (1,324,403) $ 6,030,425
Provision for income taxes $ 2,568,170 $ (503,273) $ 2,064,897
Net income $ 4,786,658 $ (821,130) $ 3,965,528
Basic income per share $ 0.21 $ (0.04) $ 0.17
Diluted income per share $ 0.20 $ (0.04) $ 0.16
5
January 31, 2000
As Reported As Restated
--------------- ---------------
Balance Sheet Data
Accounts receivable $ 95,442,481 $ 93,247,424
Inventories $ 45,958,636 $ 46,781,625
Prepaid royalties - current $ 31,101,065 $ 31,148,730
Total assets $ 250,101,045 $ 248,776,642
Accrued expenses and other current liabilities $ 27,277,951 $ 26,774,678
Total liabilities $ 158,695,011 $ 158,191,738
Retained earnings $ 23,188,283 $ 22,367,153
Total liabilities and stockholders' equity $ 250,101,045 $ 248,776,642
Amendment of Credit Agreement
As a result of the restatement, in February 2002, the Company retroactively
amended its covenants under the credit agreement with Bank of America, N.A. to
December 1999. Accordingly, as of January 31, 2000, the Company was in
compliance with the covenants, as amended.
All applicable amounts relating to the aforementioned restatements have been
reflected in these unaudited consolidated condensed financial statements and
notes thereto.
3. Significant Accounting Policies and Transactions:
Basis of Presentation
The Interim Consolidated Condensed Financial Statements of the Company have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and disclosures
necessary for a presentation of the Company's financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. In the opinion of management, these financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the Company's financial position, results of operation and cash
flows for such periods. The results of operations for any interim periods are
not necessarily indicative of the results for the full year. These financial
statements should be read in conjunction with the financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1999.
6
Risk and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. The
most significant estimates and assumptions relate to: the recoverability of
capitalized software development costs, prepaid royalties, advances to
developers and other intangibles; allowances for returns and income taxes.
Actual amounts could differ from those estimates.
Prepaid Royalties
Prepaid royalties represent prepayments made to independent software developers
under development agreements. Prepaid royalties are expensed at the contractual
royalty rate as cost of goods sold based on actual net product sales. Management
continuously evaluates the future realization of prepaid royalties, and charges
to cost of sales any amount that management deems unlikely to be realized at the
contractual royalty rate through product sales. Prepaid royalties are classified
as current and non-current assets based upon estimated net product sales within
the next year.
No prepaid royalties were written down for the three months ended January 31,
2000. For the three months ended January 31, 1999, prepaid royalties were
written down by $656,698 to estimated net realizable value. Amortization of
prepaid royalties for the three months ended January 31, 2000 and 1999 amounted
to $2,802,815 and $1,929,839 respectively.
Capitalized Software Development Costs
Costs associated with research and development are expensed as incurred.
Software development costs incurred subsequent to establishing technological
feasibility are capitalized. Capitalized software costs are compared, by game
title, to estimated net realizable value of the product and capitalized amounts
in excess of estimated net realizable value, if any, are immediately written
off.
Capitalized software costs were written down by $9,000 and $168,000 for the
three months ended January 31, 2000 and 1999, respectively, to estimated net
realizable value. Amortization of capitalized software costs amounted to $68,883
and $50,000 for estimated three months ended January 31, 2000 and 1999
respectively.
Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), establishes standards for reporting information
about operating segments in annual financial statements. SFAS No. 131 had no
impact on the Company's results of operation, financial position or cash flows.
The Company's operations fall within one reportable segment as defined by SFAS
No. 131.
7
Revenue Recognition
Distribution revenue is derived from the sale of third-party interactive
software games and hardware and is recognized upon the shipment of product to
retailers. Distribution revenue amounted to $59,944,649 and $44,350,619 for the
three months ended January 31, 2000 and 1999, respectively. The Company
sometimes negotiates accommodations to retailers, including price discounts,
credits and product returns, when demand for specific products fall below
expectations. Historically, the Company's write-offs from returns for its
distribution activities have been less than 1% of distribution revenues.
Publishing revenue is derived from the sale of internally developed interactive
software games or from the sale of product licensed from a third party developer
and is recognized upon the shipment of product to retailers. Publishing revenue
amounted to $60,750,020 and $23,930,034 for the three months ended January 31,
2000 and 1999, respectively. The Company has historically experienced a product
return rate of approximately 10% of gross publishing revenues.
The Company's distribution arrangements with retailers generally do not give
them the right to return products, however, the Company generally accepts
product returns for stock balancing or defective products. The Company's
publishing arrangements require the Company to accept product returns. The
Company establishes a reserve for future returns at the time of product sales,
based primarily on these return policies, markdown allowances, and historical
return rates, and as such, the Company recognizes revenues net of product
returns.
4. Income Taxes
The provision for income taxes for the three months ended January 31, 2000 and
1999 are based on the Company's estimated annualized tax rate for the respective
years, after giving effect to the utilization of available tax credits and tax
planning opportunities.
5. Net Income per Share
The following table provides a reconciliation of basic earnings per share to
diluted earnings per share for the three months ended January 31, 2000 and
1999.
Net Per Share
Income Shares Amount
--------------- --------------- ---------------
Three Months Ended January 31, 2000 - Restated:
Basic $ 3,965,528 23,199,395 $ .17
Effect of dilutive securities - Stock options
and warrants 1,278,538 (.01)
--------------- --------------- ---------------
Diluted $ 3,965,528 24,477,933 $ .16
=============== =============== ===============
Three Months Ended January 31, 1999:
Basic $ 2,894,836 18,212,240 $ .16
Effect of dilutive securities - Stock options
and warrants 1,322,171 (.01)
--------------- --------------- ---------------
Diluted $ 2,894,836 19,534,411 $ .15
=============== =============== ===============
The January 31, 2000 computation for diluted number of shares excludes
unexercised stock options and warrants which are anti-dilutive.
8
6. Subsequent Events
In February 2000, the Company purchased 400,000 shares of common stock from
eUniverse, Inc. ("eUniverse"), a leading on-line gaming and entertainment
network for $5.00 per share. In connection with the transaction, eUniverse
purchased all of the capital stock of Falcon Ventures Corporation d/b/a
DVDWave.com from the Company for 310,000 shares of common stock. eUniverse
agreed to register these shares under the Securities Act of 1933.
In March 2000, the Company consummated a private sale to one investor of 446,678
shares of Common Stock and received proceeds of $5,000,000 in cash.
In March 2000, the Company acquired from Broadband Solutions, Inc. all of the
outstanding capital stock of Netherlands based Toga Holdings BV, which owns
Pixel Broadband Studios, Ltd., a leading developer of multiplayer broadband
gaming technology, for approximately $4.45 million in cash and approximately
2,563,849 shares of common stock.
9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Restatement of Historical Financial Statements
In November 2001, in connection with an informal and voluntary request from the
SEC to provide documents, the Company engaged outside counsel to conduct an
investigation into the Company's accounting treatment of certain transactions in
fiscal 2000 and 2001. Counsel retained advisors to perform a forensic accounting
investigation.
As a result of the investigation, the Company restated its previously issued
consolidated financial statements for fiscal 2000 and each of the quarters in
fiscal 2000 and the first three quarters in fiscal 2001. The restatement of the
financial statements for the three months ended January 31, 2000 relates to the
elimination of $2,195,057 of net sales made to independent third party
distributors and related cost of sales of $870,654 and the related tax effect,
which were improperly recognized as revenue since the products were later
returned or repurchased by the Company.
In addition, the Company reviewed its revenue recognition policy, reserve
policies and its accounting for certain other transactions. As a result of this
review, no additional adjustments were required to the financial statements for
the three months ended January 31, 2000. See Note 2 of Notes to Unaudited
Consolidated Condensed Financial Statements.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: The statements contained herein which are not historical facts are forward
looking statements that involve material risks and uncertainties, including but
not limited to: risks associated with the Company's future growth, prospects and
operating results; the ability of the Company to successfully integrate the
businesses and personnel of newly acquired entities into its operations; the
availability of adequate sources of financing; credit risks; inventory
obsolescence; products returns; failure of our products to sell-through by
retailers; changes in consumer preferences and demographics; technological
change; competitive factors; unfavorable general economic conditions; and other
factors described herein and in the Company's Registration Statement on Form S-3
as filed with the Securities And Exchange Commission, any or all of which could
have a material adverse affect on the Company's business, financial condition
and results of operations. Actual results may vary significantly from such
forward-looking statements.
Overview
The Company derives its principal sources of revenues from publishing and
distribution activities. Publishing revenues are derived from the sale of
internally developed interactive entertainment software products or products
licensed from third parties. Distribution revenues are derived from the sale of
third-party software and hardware products. Publishing activities generally
generate higher margins than distribution activities, with sales of PC software
resulting in higher margins than sales of cartridges designed for video game
consoles. The Company recognizes revenue from software sales when products are
shipped.
10
The Company's published products are subject to return if not sold to consumers,
including for stock balancing, markdowns or defective products. The Company
establishes a reserve for future returns of published products at the time of
product sales, based primarily on these return policies and historical return
rates, and the Company recognize revenues net of product returns. The Company
has historically experienced a product return rate of approximately 10% of gross
publishing revenues (less than 1% of distribution revenues). If future product
returns significantly exceed these reserves, the Company's operating results
would materially be adversely affected.
Research and development costs (consisting primarily of salaries and related
costs) incurred prior to establishing technological feasibility are expensed in
accordance with Financial Accounting Standards Board (FASB) Statement No. 86. In
accordance with FASB 86, the Company capitalizes software development costs
subsequent to establishing technological feasibility (completion of a detailed
program design) which is amortized (included in cost of sales) based on the
greater of the proportion of current year sales to total estimated sales
commencing with the product's release or the straight line method. At January
31, 2000, the Company had capitalized $3,219,300 of software development costs.
The Company evaluates the recoverability of capitalized software costs which may
be reduced materially in future periods. See Note 3 of Notes to Consolidated
Condensed Financial Statements.
11
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in the Company's statement of
operations:
Three Months Ended
January 31,
-----------------------------------
2000
Restated 1999
--------------- ---------------
Net sales 100.0 % 100.0 %
Cost of sales 70.8 78.4
Selling and marketing 12.7 6.1
General and administrative 7.7 6.5
Research and development costs 1.3 0.9
Depreciation and amortization 1.2 0.7
Interest expense, net 1.2 1.2
Provision for income taxes 1.7 2.1
Net income 3.3 4.2
Results of Three Months Ended January 31, 2000 and 1999
Net sales increased by $52,414,016 or 76.8%, to $120,694,669 for the three
months ended January 31, 2000 from $68,280,653 for the three months ended
January 31, 1999. The increase in net sales was primarily attributable to the
Company's expanded presence in international markets. International publishing
revenues increased by $26,360,951 or 203.0%, to $39,343,486 for the three
months ended January 31, 2000 from $12,982,535 for the three months ended
January 31, 1999. In addition, revenues from distribution activities in the
United States increased by $17,181,163, or 40.2% to $59,944,649 for the three
months ended January 31, 2000 from $42,763,486 for the three months ended
January 31, 1999.
Cost of sales increased by $31,865,115, or 59.5%, to $85,402,955 for the three
months ended January 31, 2000 from $53,537,840 for the three months ended
January 31, 1999. This increase was primarily a result of the expanded scope of
the Company's operations. Cost of sales as a percentage of net sales decreased
primarily due to the higher margin international publishing activities. In
future periods, cost of sales may be adversely affected by manufacturing and
other costs, price competition and by changes in product and sales mix and
distribution channels.
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Selling and marketing expenses increased by $11,114,421, or 267.1%, to
$15,275,624 for the three months ended January 31, 2000 from $4,161,203 for the
three months ended January 31, 1999. Selling and marketing expenses as a
percentage of net sales increased to 12.7% for the three months ended January
31, 2000 from 6.1% for the three months ended January 31, 1999. The increase in
both absolute dollars and as a percentage of net sales was primarily
attributable to increased marketing and promotion efforts undertaken to broaden
product distribution and to assist retailers in positioning our products for
sale to consumers.
General and administrative expenses increased by $4,883,424, or 110.7%, to
$9,294,922 for the three months ended January 31, 2000 from $4,411,498 for the
three months ended January 31, 1999. General and administrative expenses as a
percentage of net sales increased to 7.7% for the three months ended January 31,
2000 from 6.5% for the three months ended January 31, 1999. This increase in
both absolute dollars and as a percentage of net sales was primarily
attributable to salaries, rent, insurance premiums and professional fees
associated with the Company's expanded operations.
Research and development costs increased by $1,033,293, or 174.5%, to $1,625,437
for the three months ended January 31, 2000 from $592,144 for the three months
ended January 31, 1999. This increase was primarily attributable to the
Company's expansion of its product development operations. Research and
development costs as a percentage of net sales remained relatively constant.
Depreciation and amortization expense increased by $949,252, or 209.4%, to
$1,402,667 for the three months ended January 31, 2000 from $453,415 for the
three months ended January 31, 1999. The increase was primarily due to the
amortization of intangible assets from acquisitions.
Interest expense increased by $689,819, or 84.5%, to $1,506,336 for the three
months ended January 31, 2000 from $816,517 for the three months ended January
31, 1999. The increase resulted primarily from interest on increased bank
borrowings.
Income taxes increased by $651,697, or 46.1% to $2,064,897 for the three months
ended January 31, 2000 from $1,413,200 for the three months ended January 31,
1999. The increase in absolute dollars resulted primarily from increased pre-tax
income. Income tax expense as a percentage of net sales remained relatively
constant.
As a result of the foregoing, the Company achieved net income of $3,965,528 for
the three months ended January 31, 2000, as compared to net income of $2,894,836
for the three months ended January 31, 1999.
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to fund
the acquisition, development, manufacture and commercialization of its software
products. The Company has historically financed its operations primarily through
the issuance of debt and equity securities and bank borrowings. At January 31,
2000, the Company had working capital of $43,451,845 as compared to working
capital of $41,438,968 at October 31, 1999.
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Net cash used in operating activities for the three months ended January 31,
2000 was $5,478,898 compared to net cash provided by operating activities of
$177,843 for the three months ended January 31, 1999. The increase in net cash
used in operating activities was primarily attributable to increase in prepaid
royalties and increase in inventories. Net cash used in investing activities for
the three months ended January 31, 2000 was $5,349,099 as compared to net cash
used in investing activities of $184,408 for the three months ended January 31,
1999. The increase in net cash used in investing was primarily attributable to
the Company's investment activities. Net cash provided by financing activities
for the three months ended January 31, 2000 was $20,714,857 as compared to net
cash provided by financing activities of $2,245,258 for the three months ended
January 31, 1999. The increase in net cash provided by financing activities was
primarily attributed to an increase in net borrowings under the line of credit.
At January 31, 2000, the Company had cash and cash equivalents of $19,255,178.
In December 1999, our subsidiary, Take-Two Interactive Software Europe Limited
entered into a line of credit agreement with Barclays' Bank. The line of credit
provides for borrowings of up to approximately British Pounds 17,000,000
(approximately $25,000,000). Advances under the line of credit bear interest at
the rate of 1.4% over Barclays' base rate per annum, payable quarterly.
Borrowings are collateralized by receivables of the Company's European
subsidiaries, and are guaranteed by the Company. The line of credit is repayable
upon demand and is subject to review prior to November 29, 2000. The outstanding
balance and available credit under the revolving line of credit is $14,520,254
and $1,801,865, respectively, as of January 31, 2000.
In December 1999, the Company entered into a credit agreement with a group of
lenders led by Bank of America, N.A., as agent, which provides for borrowings of
up to $75,000,000. The Company may increase the credit line to up to $85,000,000
subject to certain conditions. Interest accrues on such advances at the bank's
prime rate plus 0.5% or at LIBOR plus 2.5%. Borrowings under the line of credit
are collaterized by all of the Company's assets. Under the terms of the credit
agreement, the Company is required to comply with certain financial, affirmative
and negative covenants, including consolidated net worth, consolidated leverage
ratio and consolidated fixed charge ratio. In addition, the credit 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. In February 2002, certain financial covenants and several other
covenants were amended retroactively to December 1999. Accordingly, as of
January 31, 2000, the Company was in compliance with the covenants, as amended.
The line of credit expires on December 7, 2002. The outstanding balance under
the revolving line of credit is $60,000,000 as of January 31, 2000.
In March 2000, the Company consummated a private sale to one investor of 446,678
shares of Common Stock and received proceeds of $5,000,000 in cash.
The Company's accounts receivable, less an allowance for doubtful accounts and
returns, at January 31, 2000 were $93,247,424. Of such receivables,
approximately $16,117,054 or 17.3% were due from Ames Department Stores. Most of
the Company's receivables are covered by insurance and generally have been
collected in the ordinary course of business. The Company's sales are typically
made on credit, with terms that vary depending upon the customer and the demand
for the particular title being sold. The Company does not hold any collateral to
secure payment by our customers. As a result, the Company is subject to credit
risks, particularly in the event that any of our receivables represent sales to
a limited number of retailers or are concentrated in foreign markets. If the
Company is unable to collect its accounts receivable as they become due and such
accounts are not covered by insurance, our liquidity and working capital
position would be materially adversely affected.
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Based on currently proposed operating plans and assumptions, the Company
believes that projected revenues from operations and available cash resources
will be sufficient to satisfy its contemplated cash requirements for the
reasonably foreseeable future. The Company recently acquired from Broadband
Solutions, Inc. all of the outstanding capital stock of Netherlands based Toga
Holdings BV, which owns Pixel Broadband Studios, Ltd., a company engaged in the
development of multiplayer broadband gaming technology, which may require the
Company to seek additional financing to fund ongoing product and technology
development efforts. There can be no assurance that projected revenues from
operations and available cash resources will be sufficient to fund the Company's
operations or future expansion activities (including technology development) or
that any additional financing will be available to the Company on commercially
reasonable forms or at all. Failure to obtain any such additional financing
could severely limit the Company's ability to continue to expand its operations.
Fluctuations in Operating Results and Seasonality
We have experienced and may continue to experience fluctuations in quarterly
operating results as a result of timing in the introduction of new titles;
variations in sales of titles developed for particular platforms; market
acceptance of our titles; development and promotional expenses relating to the
introduction of new titles, sequels or enhancements of existing titles;
projected and actual changes in platforms; the timing and success of title
introductions by our competitors; product returns; changes in pricing policies
by us and our competitors; the accuracy of retailers' forecasts of consumer
demand; the size and timing of acquisitions; the timing of orders from major
customers; and order cancellations and delays in shipment.
Sales of our titles are seasonal, with peak shipments typically occurring in the
fourth calendar quarter (our fourth and first fiscal quarters) as a result of
increased demand for titles during the holiday season.
International Operations
Product sales in international markets, primarily in the United Kingdom and
other countries in Europe and the Pacific Rim, have accounted for an increasing
portion of the Company's revenues. For the three months ended January 31, 2000
and 1999, sales of products in international markets accounted for approximately
34.5% and 21.3%, respectively, of the Company's revenues. The Company is subject
to risks inherent in foreign trade, including increased credit risks, tariffs
and duties, fluctuations in foreign currency exchange rates, shipping delays and
international political, regulatory and economic developments, all of which can
have a significant impact on the Company's operating results. Product sales in
France and Germany are made in local currencies. The Company does not engage in
foreign currency hedging transactions.
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Year 2000
Pursuant to the year 2000 issue, the Company had developed programs to address
the possible exposures related to the impact of computer systems incorrectly
recognizing the year 2000 or "00" as 1900. As a result of implementation of its
programs, the Company did not experience any significant Year 2000 disruptions
during the transition from 1999 to 2000, and since entering 2000 the Company has
not experienced any significant Year 2000 disruptions to its business. In
addition, the Company is not aware of any significant disruptions impacting its
customers or suppliers. The Company will continue to monitor its computer system
over the next several months.
Costs incurred to achieve Year 2000 readiness, which included modification to
existing systems, replacement or non-compliant systems and consulting resources
were not material to the Company's total operating expenses.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities
From November 1999 to January 2000, 160,750 options from the 1997 Stock Option
Plan and 39,000 non-plan options were granted at exercise prices ranging from
$8.00 to $12.00.
In connection with the above securities issuances, the Company relied on Section
4(2) and Regulation D promulgated under the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Exhibit 27 - Financial Data Schedule (SEC use Only)
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Take-Two Interactive Software, Inc. has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Take-Two Interactive Software, Inc.
By: /s/ Kelly Sumner Dated: April 16, 2002
---------------------
Kelly Sumner
Chief Executive Officer
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