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 July 31, 2001
OR
[ ] TRANSISTION 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 of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 September 12, 2001, there were 36,631,308 shares of the registrant's
Common Stock outstanding.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED JULY 31, 2001
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - As of July 31, 2001 and October 31, 2000 (unaudited) 1
Consolidated Condensed Statements of Operations - For the three
months ended July 31, 2001 and 2000 and the nine months
ended July 31, 2001 and 2000 (unaudited) 2
Consolidated Condensed Statements of Cash Flows - For the nine months
ended July 31, 2001 and 2000 (unaudited) 3
Consolidated Condensed Statements of Stockholders' Equity -
For the year ended October 31, 2000 and the nine months ended July 31, 2001 (unaudited) 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of July 31, 2001 and October 31, 2000 (unaudited)
(In thousands, except share data)
ASSETS: July 31, 2001 October 31, 2000
------------- ----------------
Current assets:
Cash and cash equivalents $ 15,346 $ 5,245
Accounts receivable, net of allowances of $15,735 and $9,102 86,380 129,733
Inventories, net 52,674 44,922
Prepaid royalties 26,172 19,721
Prepaid expenses and other current assets 14,987 10,387
Investments 2,808 2,926
Deferred tax asset 8,345 666
--------- ---------
Total current assets 206,712 213,600
Fixed assets, net 10,397 5,260
Prepaid royalties 9,174 1,303
Capitalized software development costs, net 10,526 9,613
Investments 5,007 28,487
Intangibles, net 112,994 90,505
Other assets 5,399 2,557
--------- ---------
Total assets $ 360,209 $ 351,325
========= =========
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 35,275 $ 46,566
Accrued expenses 15,568 20,884
Lines of credit, current portion 69,085 84,605
--------- ---------
Total current liabilities 119,928 152,055
Loan payable, net of discount -- 12,268
--------- ---------
Total liabilities 119,928 164,323
--------- ---------
Commitments and contingencies
Stockholders' equity
Common stock, par value $.01 per share; 50,000,000 shares authorized;
36,241,766 and 31,172,866 shares issued and outstanding 362 312
Additional paid-in capital 210,196 157,738
Deferred compensation -- (5)
Retained earnings 39,600 43,365
Accumulated other comprehensive loss (9,877) (14,408)
--------- ---------
Total stockholders' equity 240,281 187,002
--------- ---------
Total liabilities and stockholders' equity $ 360,209 $ 351,325
========= =========
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the three months ended July 31, 2001 and 2000 (unaudited)
and the nine months ended July 31, 2001 and 2000 (unaudited)
(In thousands, except per share data)
Three months ended July 31, Nine months ended July 31,
2001 2000 2001 2000
--------------------------- --------------------------
(Unaudited) (Unaudited)
Net sales $ 84,502 $ 71,472 $ 309,048 $ 264,398
Cost of sales (includes impairment charge on Internet assets of $3,786
for the nine months ended July 31, 2001) 51,229 40,100 201,609 168,155
--------- --------- --------- ---------
Gross profit 33,273 31,372 107,439 96,243
--------- --------- --------- ---------
Operating expenses:
Selling and marketing (includes impairment charge on Internet assets
of $401 for the nine months ended July 31, 2001) 12,057 9,055 36,886 34,243
General and administrative 11,297 9,106 30,915 25,726
Research and development costs 1,984 1,657 4,985 4,646
Depreciation and amortization 3,821 3,822 11,043 7,398
One time charge related to abandoned offering -- 1,103 -- 1,103
--------- --------- --------- ---------
Total operating expenses 29,159 24,743 83,829 73,116
Income from operations 4,114 6,629 23,610 23,127
Interest expense 1,964 1,635 7,249 4,516
Gain on sale of subsidiary (651) -- (651) --
Loss on impairment of available-for-sale Internet securities -- -- 20,754 --
--------- --------- --------- ---------
Total interest expense, gain on sale and loss on impairment 1,313 1,635 27,352 4,516
Income (loss) before equity in loss of affiliate, income taxes
and extraordinary item 2,801 4,994 (3,742) 18,611
Equity in loss of affiliate -- -- -- 763
--------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item 2,801 4,994 (3,742) 17,848
Provision (benefit) for income taxes 882 1,545 (1,487) 6,258
--------- --------- --------- ---------
Income (loss) before extraordinary item 1,919 3,449 (2,255) 11,590
Extraordinary loss on early extinguishment of debt, net of taxes of $925 1,510 -- 1,510 --
--------- --------- --------- ---------
Net income (loss) $ 409 $ 3,449 $ (3,765) $ 11,590
========= ========= ========= =========
Per share data:
Basic:
Weighted average common shares outstanding 34,293 29,061 33,098 25,981
========= ========= ========= =========
Net income (loss) before extraordinary item per share $ 0.06 $ 0.12 $ (0.07) $ 0.45
Extraordinary loss per share (0.04) -- (0.05) --
--------- --------- --------- ---------
Net income (loss) per share - Basic $ 0.01 $ 0.12 $ (0.11) $ 0.45
========= ========= ========= =========
Diluted:
Weighted average common shares outstanding 35,769 29,879 33,098 26,992
========= ========= ========= =========
Net income (loss) before extraordinary item per share $ 0.05 $ 0.12 $ (0.07) $ 0.43
Extraordinary loss per share (0.04) -- (0.05) --
--------- --------- --------- ---------
Net income (loss) per share - Diluted $ 0.01 $ 0.12 $ (0.11) $ 0.43
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows For the nine months ended July
31, 2001 and 2000 (unaudited)
(In thousands)
Nine months ended July 31,
--------------------------
2001 2000
-------- ---------
Cash flows from operating activities:
Net (loss) income $ (3,765) $ 11,590
Adjustment to reconcile net income to net cash used in operating activities:
Depreciation and amortization 11,043 7,398
Loss on disposal of fixed assets 172 247
Gain on sale of subsidiary (651) --
Net gain from eUniverse transactions -- (2,801)
Loss on impairment of available-for-sale Internet securities 20,754 --
Impairment charge on Internet assets 4,187 --
Equity in loss of affiliate -- 763
Extraordinary loss on early extinguishment of debt, net of taxes 1,510 --
Change in deferred tax asset (7,679) (353)
Provision for doubtful accounts 8,539 (1,732)
Provision for Inventory (203) (3)
Amortization of various expenses and discounts 983 284
Tax benefit from exercise of stock options 5,053 1,941
Changes in operating assets and liabilities, net of effects of acquisitions:
Decrease in accounts receivable 43,248 30,009
(Increase) decrease in inventories, net (3,337) 88
Increase in prepaid royalties (15,208) (16,127)
Increase in prepaid expenses and other current assets (4,593) (2,166)
Increase in capitalized software development costs (1,302) (7,570)
Increase in other assets (4,326) (977)
Decrease in accounts payable (23,437) (39,767)
Decrease in accrued expenses (6,740) (8,082)
-------- --------
Net cash provided by (used in) operating activities 24,248 (27,258)
-------- --------
Cash flows from investing activities:
Net purchase of fixed assets (5,076) (2,406)
Other investment -- (1,432)
Acquisitions, net of cash acquired (4,069) (4,262)
Additional cash paid for prior acquisition -- (1,531)
-------- --------
Net cash used in investing activities (9,145) (9,631)
-------- --------
Cash flows from financing activities:
Net proceeds from private placements 20,842 19,689
Net repayments under lines of credit (28,848) (9,658)
(Repayment) Proceeds from loan payable (15,000) 15,000
Proceeds from exercise of stock options and warrants 19,942 5,919
Proceeds from issuance of stock of subsidiary -- 1,500
Repayment of capital lease obligation (49) (56)
-------- --------
Net cash (used in) provided by financing activities (3,113) 32,394
-------- --------
Effect of foreign exchange rates (1,889) (3,248)
-------- --------
Net increase (decrease) in cash for the period 10,101 (7,743)
Cash and cash equivalents, beginning of the period 5,245 10,374
-------- --------
Cash and cash equivalents, end of the period $ 15,346 $ 2,631
======== ========
Supplemental disclosure of non-cash operating activities:
Gain from Jack of All Games UK transaction $ (651) $ --
======== ========
Tax benefit from exercise of stock options $ 5,053 $ 1,941
======== ========
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows For the nine months ended July
31, 2001 and 2000 (unaudited)
(In thousands)
Nine months ended July 31,
--------------------------
2001 2000
-------- ---------
Supplemental information on businesses acquired:
Fair value of assets acquired
Cash $ 332 $ 196
Accounts receivables, net 8,223 4,646
Inventories, net 4,213 --
Prepaid expenses and other assets 94 643
Prepaid royalties (707) --
Property and equipment, net 769 1,077
Intangible asset 10,381 --
Goodwill 44,601 90,391
Less, liabilities assumed
Line of credit (13,330) --
Accounts payable (13,115) (7,268)
Accrued expenses (3,078) (449)
Deferred royalties -- (15,927)
Other current liabilities -- (8,167)
Stock and warrants issued (13,952) (56,566)
Warrants issued 0
Value of asset recorded (19,829) --
Direct transaction costs (201) (154)
Investment interest and purchase option -- (3,964)
-------- --------
Cash paid 4,401 4,458
Less, cash acquired (332) (196)
-------- --------
Net cash paid $ 4,069 $ 4,262
======== ========
During the nine months ended July 31, 2000, the Company paid $1,531 in cash and
issued $161 in common stock related to a prior period acquisition. Such payments
were capitalized and recorded as Goodwill.
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Stockholders' Equity
For the year ended October 31, 2000 and the nine months ended July 31, 2001
(unaudited)
(In thousands)
Common Stock Additional
----------------------- Paid-in Deferred
Shares Amount Capital Compensation
--------- --------- --------- ------------
Balance, November 1, 1999 23,086 $ 231 $ 67,345 $ (48)
Proceeds from exercise of stock options and warrants 1,373 13 6,963 --
Amortization of deferred compensation -- -- -- 43
Issuance of common stock in connection with acquisitions 4,222 43 55,218 --
Issuance of common stock in connection with private placements,
net of issuance costs 2,422 24 21,261 --
Issuance of common stock and warrants in connection with a debt financing 168 2 5,455 --
Retirement of common stock (98) (1) (1,249) --
Tax benefit in connection with the exercise of stock options -- -- 2,745 --
Foreign currency translation adjustment -- -- -- --
Net unrealized loss on investments -- -- -- --
Net income -- -- -- --
--------- --------- --------- ---------
Balance, October 31, 2000 31,173 $ 312 $ 157,738 $ (5)
Proceeds from exercise of stock options and warrants 2,867 28 19,914 --
Amortization of deferred compensation -- -- -- 5
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 20,829
Acquisition of Treasury shares (564) (5) (7,305) --
Tax benefit in connection with the exercise of stock options -- -- 5,053 --
Foreign currency translation adjustment -- -- -- --
Net unrealized gain on investments -- -- -- --
Net loss -- -- -- --
--------- --------- --------- ---------
Balance, July 31, 2001 36,242 $ 362 $ 210,196 $ --
========= ========= ========= =========
Accumualted
Other
Retained Comprehensive Comprehensive
Earnings Income Income
(Deficit) (Loss) Total (Loss)
--------- --------- ------------- -------------
Balance, November 1, 1999 $ 18,402 $ (827) $ 85,103 $ 15,512
Proceeds from exercise of stock options and warrants -- -- 6,976
Amortization of deferred compensation -- -- 43
Issuance of common stock in connection with acquisitions -- -- 55,261
Issuance of common stock in connection with private placements,
net of issuance costs -- -- 21,285
Issuance of common stock and warrants in connection with a debt financing -- -- 5,457
Retirement of common stock -- -- (1,250)
Tax benefit in connection with the exercise of stock options -- -- 2,745
Foreign currency translation adjustment -- (9,014) (9,014) (9,014)
Net unrealized loss on investments -- (4,567) (4,567) (4,567)
Net income 24,963 -- 24,963 24,963
--------- --------- --------- ---------
Balance, October 31, 2000 $ 43,365 $ (14,408) $ 187,002 $ 11,382
Proceeds from exercise of stock options and warrants -- -- 19,942
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 20,842
Acquisition of Treasury shares -- -- (7,310)
Tax benefit in connection with the exercise of stock options -- -- 5,053
Foreign currency translation adjustment -- (1,509) (1,509) (1,509)
Net unrealized gain on investments -- 6,040 6,040 6,040
Net loss (3,765) -- (3,765) (3,765)
--------- --------- --------- ---------
Balance, July 31, 2001 $ 39,600 $ (9,877) $ 240,281 $ 766
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
condensed financial statements.
Certain amounts have been reclassified for comparative purposes
TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Condensed Financial Statements
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 for the fiscal year ended October 31, 2000.
Certain amounts in the financial statements of the prior years have been
reclassified to conform to the current year presentation for comparative
purposes.
Risk and Uncertainties
The Company's revenues 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 fails 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
and investments, valuation of inventories and the adequacy of allowances for
returns and doubtful accounts. Actual amounts could differ significantly from
these estimates.
5
Prepaid Royalties and Capitalized Software Development Costs
The Company's agreements with licensors and developers generally require it to
make advance royalty payments and pay royalties based on product sales. Prepaid
royalties are amortized at the contractual royalty rate as cost of sales based
on actual net product sales. The Company continually 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.
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 July 31, 2001 and July 31, 2000. For the
nine months ended July 31, 2001 and 2000, prepaid royalties were written down by
$75,000 and $110,000, respectively, to estimated net realizable value.
Amortization of prepaid royalties amounted to $3,836,000 and $3,743,000 for the
three months ended July 31, 2001 and 2000, respectively, and $9,640,000 and
$11,647,000 for the nine months ended July 31, 2001 and 2000, respectively.
The Company capitalizes internal software development costs subsequent to
establishing technological feasibility of a title. Amortization of such costs as
cost of sales is based on the greater of the proportion of current year sales to
total estimated sales commencing with the title's release or the straight-line
method. The Company continually evaluates the recoverability of capitalized
costs. No capitalized software costs were written off for the three months ended
July 31, 2001 while $389,000 was written off as part of an impairment charge for
the nine months ended July 31, 2001. No capitalized software costs were written
off for the three months ended July 31, 2000 while $249,000 were written off for
the nine months ended July 31, 2000. Amortization of capitalized software costs
amounted to $863,000 and $143,000 for the three months ended July 31, 2001 and
2000, respectively, and $2,804,000 and $472,000 for the nine months ended July
31, 2001 and 2000, respectively.
Revenue Recognition
Distribution revenue is derived from the sale of third-party software products,
accessories and hardware and is recognized when the ownership and risk of loss
pass to customers upon receipt of products by customers. Distribution revenue
was $34,643,000 and $29,444,000 for the three months ended July 31, 2001 and
2000, respectively, and $149,090,000 and $123,418,000 for the nine months ended
July 31, 2001 and 2000, respectively.
Publishing revenue is derived from the sale of internally developed software
products or from the sale of products licensed from third-party developers and
is recognized when the ownership and risk of loss pass to customers upon receipt
of products by customers. Publishing revenue was $49,859,000 and $42,028,000 for
the three months ended July 31, 2001 and 2000, respectively, and $159,958,000
and $140,980,000 the nine months ended July 31, 2001 and 2000, respectively.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-2 "Software Revenue
Recognition." SOP 97-2 provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions. The
Company recognizes revenue upon persuasive evidence of an arrangement, the
Company's fulfillment of its obligations under any such arrangement, and
determination that collection is probable. The Company's payment arrangements
with its customers are fixed at the time of sale, with primarily 60 day term
and, to a limited extent, 30, 90 and 120 day terms to certain customers.
The AICPA issued SOP 98-9 Modification of SOP 97-2, "Software Revenue
Recognition with respect to Certain 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 adoption of SOP 98-9 did not have a material impact on
the Company's financial statement.
6
The Company's distribution arrangements with customers generally do not give
them the right to return products; however, the Company accepts 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 require the Company to accept product returns.
The Company establishes a reserve for future returns based primarily on its
return policies, markdown allowances and historical return rates, and recognizes
sales net of product returns and allowances.
Recently Issued Accounting Pronouncement
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition." SAB 101 summarizes
certain of the staff's views in applying generally accepted accounting
principles to revenue recognition in financial statements. The Company has
adopted SAB 101 and it has not had a material impact on the Company's results of
operations.
In July 2001, the FASB issued 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 establishes accounting and reporting for business combinations by
requiring that all business combinations be accounted for under the purchase
method. Use of the pooling-of-interests method is no longer permitted. SFAS 141
requires that the purchase method be used for business combinations initiated
after June 30, 2001. The Company is currently evaluating the expected impact of
the adoption of SFAS 141 on the Company's financial condition and result of
operations.
SFAS 142 requires that goodwill no longer be amortized to earnings, but instead
be reviewed for impairment. The provision of SFAS 142 will be effective for
fiscal year beginning after December 15, 2001; however, early adoption is
permitted in certain instances. The Company is currently evaluating the expected
impact of the adoption of SFAS 142 on the Company's financial condition and
results of operations.
Income Taxes
The provisions for income taxes for the three and nine months ended July 31,
2001 and 2000 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.
3. Business Acquisition
In July 2001, the Company acquired all of the outstanding capital stock of
Techcorp Limited, a Hong Kong based design and engineering firm specializing in
video game accessories. In consideration, the Company issued 30,000 shares
of restricted common stock (valued at $572,000) and paid $100,000 in cash. In
connection with the acquisition, the Company recorded an intangible asset of
$2,676,000 on a preliminary basis. The purchase of Techcorp Limited is not
expected to have a significant effect on the Company's future operating results.
The acquisition has been accounted for as a purchase.
7
4. Business Disposition
In July 2001, the Company sold all of the outstanding capital stock of Jack of
All Games UK, a video game distributor, to Jay Two Limited, an unaffiliated
third-party controlled by Freightmasters Ltd., for approximately $215,000. In
connection with the sale, the purchaser assumed net liabilities (net of
expenses) of $436,000. The Company recorded a non-operating gain of $651,000 net
of taxes relating to the sale. The sale of Jack of All Games UK is not expected
to have a significant effect on the Company's future operating results.
5. Income (Loss) per Share before Extraordinary Item
The following table provides a reconciliation of basic earnings per share to
dilutive earnings per share for the three and nine months ended July 31, 2001
and 2000 (in thousands, except per share data).
Income
(Loss) from
before
Extraordinary Per Share
Item Shares Amount
------------- --------- -----------
Three Months Ended July 31, 2001:
Basic $ 1,919 34,293 $ 0.06
Effect of dilutive securities - Stock options
and warrants
-- 1,476 (0.01)
-------- -------- --------
Diluted $ 1,919 35,769 $ 0.05
======== ======== ========
Three Months Ended July 31, 2000:
Basic $ 3,449 29,061 $ 0.12
Effect of dilutive securities - Stock options
and warrants -- 818 --
-------- -------- --------
Diluted $ 3,449 29,879 $ 0.12
======== ======== ========
Nine Months Ended July 31, 2001:
Basic $ (2,255) 33,098 $ (0.07)
Effect of dilutive securities - Stock options
and warrants -- -- --
-------- -------- --------
Diluted $ (2,255) 33,098 $ (0.07)
======== ======== ========
Nine Months Ended July 31, 2000:
Basic $ 11,590 25,981 $ 0.45
Effect of dilutive securities - Stock options
and warrants -- 1,011 (0.02)
-------- -------- --------
Diluted $ 11,590 26,992 $ 0.43
======== ======== ========
As the Company reported loss for the nine months ended July 31, 2001,
1,186,000 (calculated based on a weighted average) of the total options and
warrants outstanding for this period were anti-dilutive, and therefore, there
was no reconciling items between basic and dilutive loss per share. The
computation for diluted number of shares excludes unexercised stock options and
warrants which are anti-dilutive.
8
6. Extraordinary Net Loss on Early Extinguishment of Debt
In July 2001, the Company prepaid in full the outstanding subordinated
indebtedness of $15 million and recorded an extraordinary charge of $1,510,000,
net of taxes, or $0.04 per fully-diluted share during the quarter related to
deferred financing costs and discount associated with this indebtedness.
7. Inventory
As of July 31, 2001 and October 31, 2000, finished product inventory, net of
allowance, consisted of $51,857,000 and $44,426,000, respectively. Parts and
supplies consisted of $817,000 and $496,000 at July 31, 2001 and October 31,
2000, respectively.
8. Private Placement
In July 2001, the Company consummated the sale of 1,300,000 shares of common
stock to institutional investors and received net proceeds of approximately
$20,842,000.
9. 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.
As of July 31, 2001 and October 31, 2000, investments were summarized as follows
(in thousands):
July 31, 2001 October 31, 2000
------------------------- --------------------------
Current Non-Current Current Non-Current
-------- ----------- -------- -----------
Average cost $ 2,206 $ 4,136 $ 2,896 $ 33,084
Unrealized gains (losses) 602 871 30 (4,597)
-------- -------- -------- --------
Fair value $ 2,808 $ 5,007 2,926 $ 28,487
======== ======== ======== ========
9
10. 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 lines.
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 July 31, 2001 and October 31, 2000 are presented below
(in thousands):
July 31, 2001 October 31, 2000
------------- ----------------
Total Non-current Assets:
United States $ 99,753 $ 87,018
International
United Kingdom 22,893 20,865
All other Europe 22,897 25,924
Other 7,954 3,918
-------- --------
$153,497 $137,725
======== ========
Information about the Company's net sales in the United States and international
areas for the three and nine months ended July 31, 2001 and 2000 are presented
below (net sales are attributed to geographic areas based on product
destination, in thousands):
Three Months Ended Nine Months Ended
July 31 July 31
------------------------- ------------------------
Net Sales: 2001 2000 2001 2000
---- ---- ---- ----
United States $ 63,049 $ 48,624 $228,870 $168,469
Canada 4,509 2,644 13,381 9,111
International
United Kingdom 4,369 6,500 18,281 19,156
All other Europe 9,568 7,874 39,071 56,767
Asia Pacific 2,385 5,352 8,522 10,218
Other 622 478 923 677
-------- -------- -------- --------
$ 84,502 $ 71,472 $309,048 $264,398
======== ======== ======== ========
10
Information about the Company's net sales by product platforms for the three and
nine months ended July 31, 2001 and 2000 are presented below (in thousands):
Three Months Ended Nine Months Ended
July 31 July 31
--------------------------- ---------------------------
Platforms: 2001 2000 2001 2000
------------ ------------ ------------ ------------
PC $ 27,209 $ 27,553 $ 73,598 $ 70,306
Sony PlayStation 2 17,445 -- 73,709 --
Sony PlayStation 13,328 14,234 59,221 81,801
Nintendo GameBoy Color,
GameBoy Advance and 64 9,343 11,694 26,561 44,013
Sega Dreamcast 1,169 4,713 9,609 14,327
Accessories 4,425 3,424 27,322 25,416
Hardware 11,583 9,854 39,028 28,535
------------ ------------ ------------ ------------
$ 84,502 $ 71,472 $ 309,048 $ 264,398
============ ============ ============ ============
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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: risks
associated with future growth and operating results; the Company's ability to
continue to successfully manage growth and integrate the operations of acquired
businesses; the availability of adequate financing to fund periodic cash flow
shortages; credit risks; seasonal factors; inventory obsolescence; technological
change; competitive factors; product returns; failure of retailers to
sell-through the Company's products; the timing of the introduction and
availability of new hardware platforms; market and industry factors adversely
affecting the carrying value of the Company's investments; and unfavorable
general economic conditions (including the current economic downturn), any or
all of which could have a material adverse effect on the Company's business,
operating results and financial condition. Actual operating results may vary
significantly from such forward-looking statements.
Overview
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 or software licensed from third parties.
Distribution revenues are derived from the sale of third-party software,
accessories and hardware. Publishing activities generally generate significantly
higher margins than distribution activities, with sales of PC software resulting
in higher margins than sales of CDs or cartridges designed for video game
consoles. The Company recognizes revenues from software sales upon receipt of
products by customers.
The Company's arrangements with customers for published titles require it to
accept returns for stock balancing, markdowns or defects. The Company
establishes a reserve for future returns of published titles based primarily on
historical return rates and current known circumstances, and recognizes revenues
net of returns.
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 Company's historical product return
rate for its distribution business has been substantially less than for its
publishing business.
Sales returns and allowances for the three months ended July 31, 2001 and 2000,
were $11,427,000 and $6,146,000, respectively. The increase in sales returns and
allowances was attributable to a change in product and customer mix, primarily
an increase in publishing activities and an increase in the Company's North
American customer base.
At July 31, 2001, the company's reserve against accounts receivable for returns,
customer accommodations and doubtful accounts was $15,735,000, which the Company
believes is adequate based on the size and nature of the its receivables at that
date. However, if future returns and allowances significantly exceed the
Company's reserves, the Company's operating results would be adversely affected.
12
The Company's agreements with licensors and developers generally require it to
make advance royalty payments and pay royalties based on product sales. Prepaid
royalties are amortized at the contractual royalty rate as cost of sales based
on actual net product sales. At July 31, 2001, the Company had prepaid royalties
of $35,346,000, including $9,174,000 classified as non-current. The Company also
capitalizes internal software development costs subsequent to establishing
technological feasibility of a title. Amortization of such costs as cost of
sales is based on the greater of the proportion of current year sales to total
estimated sales commencing with the title's release or the straight-line method.
At July 31, 2001, the Company had capitalized software development costs of
$10,526,000. The Company continually evaluates the recoverability of capitalized
costs. If the Company were required to write-off these payments or capitalized
costs to a material extent in future periods, the Company's results of
operations would be adversely affected.
13
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 and platform:
Three Months Ended July 31, Nine Months Ended July 31,
-------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
OPERATING DATA:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 60.6 56.1 65.2 63.6
Selling and marketing 14.3 12.7 11.9 13.0
General and administrative 13.4 12.7 10.0 9.7
Research and development 2.3 2.3 1.6 1.8
Depreciation and amortization 4.5 5.3 3.6 2.8
Interest expense 2.3 2.3 2.3 1.7
Impairment charge -- -- 6.7 --
Provision (benefit) for income
taxes 1.0 2.2 (0.5) 2.4
Extraordinary net loss on early
extinguishment of debt 1.8 -- 0.5 --
Net income (loss) 0.5 4.8 (1.2) 4.4
NET SALES BY TERRITORY:
North America 79.9% 71.7% 78.4% 67.2%
International 20.1 28.3 21.6 32.8
PLATFORM MIX (publishing):
Console 39.4% 26.5% 52.6% 40.9%
PC 52.7 53.1 39.8 41.6
Hand-held -- 9.3 1.6 8.3
Accessories 7.9 11.1 6.0 9.2
14
Three Months Ended July 31, 2001 and 2000
Net Sales. Net sales increased by $13,030,000, or 18.2%, to $84,502,000 for the
three months ended July 31, 2001 from $71,472,000 for the three months ended
July 31, 2000. The increase was attributable to growth in both publishing and
distribution operations.
Publishing revenues increased by $7,831,000, or 18.6%, to $49,859,000 for the
three months ended July 31, 2001 from $42,028,000 for the three months ended
July 31, 2000. The increase was primarily attributable to the release of Max
Payne for the PC and Rune: Viking Warlords for Sony PlayStation 2 during the
current period. For the three months ended July 31, 2001, publishing activities
accounted for approximately 59.0% of net sales.
For the current period, software products designed for PC platforms accounted
for approximately 52.7% of publishing revenues as compared to 53.1% for the
prior comparable period. Software products designed for video game console
platforms accounted for 39.4% of publishing revenues as compared to 26.5% for
the prior comparable period. The increase was primarily attributable to the
continued sell-through of Sony PlayStation 2 titles, such as Midnight Club and
Smuggler's Run. The Company expects that sales of video game console products
will continue to account for a significant portion of its publishing revenues.
Distribution revenues increased by $5,199,000, or 17.7%, to $34,643,000 for the
three months ended July 31, 2001 from $29,444,000 for the three months ended
July 31, 2000. The increase was primarily attributable to the acquisition of VLM
Entertainment Group, Inc. in November 2000. The Company expects that its
distribution operations will continue to expand as a result of the anticipated
introduction of next-generation hardware and software and the continued rollout
of Sony PlayStation 2. For the three months ended July 31, 2001, distribution
activities accounted for approximately 41.0% of net sales.
International operations accounted for approximately $16,944,000 or 20.1% of net
sales for the three months ended July 31, 2001 compared to $20,204,000 or 28.3%
for the three months ended July 31, 2000. The decrease in revenues from
international operations was primarily attributable to a decrease in
distribution revenues as a result of the Company's increase emphasis on
expanding publishing activities in Europe, and the delay of the release of Rune:
Viking Warlords during the quarter. 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 $11,129,000, or 27.8%, to $51,229,000
for the three months ended July 31, 2001 from $40,100,000 for the three months
ended July 31, 2000. The increase was attributable to the Company's expanded
operations and was commensurate with increased net sales. Cost of sales as a
percentage of net sales increased to 60.6% for the three months ended July 31,
2001 from 56.1% for the prior comparable period. The increase in cost of sales
as a percentage of net sales was due to higher margin licensing revenues
generated in the quarter ended July 31, 2000. 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 $3,002,000 to
$12,057,000 for the three months ended July 31, 2001 from $9,055,000 for the
three months ended July 31, 2000. Selling and marketing expenses as a percentage
of net sales increased to 14.3% from 12.7% for the three months ended July 31,
2000. The increases in net sales were primarily attributable to increased
advertising activities as a result of the Company's increase publishing
activities.
15
General and Administrative. General and administrative expenses increased by
$2,191,000 to $11,297,000 for the three months ended July 31, 2001 from
$9,106,000 for the three months ended July 31, 2000. General and administrative
expenses as a percentage of net sales remained relatively constant.
The increase in absolute dollars was attributable to increased salaries and rent
necessary to support the Company's expanded operations. Included in general and
administrative expenses were bad debt expense related to the bankruptcy of a
customer.
Research and Development. Research and development costs increased by $327,000
to $1,984,000 for the three months ended July 31, 2001 from $1,657,000 for the
three months ended July 31, 2000. Research and development costs as a percentage
of net sales remained relatively constant. A substantial portion of the
Company's research and development cost is expensed as cost of goods sold.
Depreciation and Amortization. Depreciation and amortization expense of
$3,821,000 for the three months ended July 31, 2001 remained relatively
constant.
Interest Expense. Interest expense increased by $329,000 to $1,964,000 for the
three months ended July 31, 2001 from $1,635,000 for the three months ended July
31, 2000. The increase was attributable to increased borrowings.
Income Taxes. Income tax expense decreased by $663,000 to $882,000 for the three
months ended July 31, 2001 from $1,545,000 for the three months ended July 31,
2000. The decrease was primarily attributable to lower pre-tax income.
Gain on Sale of Subsidiary. The Company recorded a non-operating gain of
$651,000 on the sale of its Jack of All Games UK subsidiary during the quarter.
Extraordinary Loss on Early Extinguishment of Debt. The Company incurred an
extraordinary charge of $1,510,000, net of taxes, upon the early repayment of
$15 million of subordinated indebtedness during the quarter.
For the three months ended July 31, 2001, the Company achieved net income of
$409,000 as compared to net income of $3,449,000 for the three months ended
July 31, 2000. Excluding the extraordinary charge and the gain on sale described
above, the Company achieved net income of $1,268,000 for the three months ended
July 31, 2001.
Nine Months Ended July 31, 2001 and 2000
Net Sales. Net sales increased by $44,650,000, or 16.9%, to $309,048,000 for the
nine months ended July 31, 2001 from $264,398,000 for the nine months ended July
31, 2000. The increase in net sales was attributable to growth in both the
publishing and distribution operations.
Publishing revenues increased by $18,978,000, or 13.5%, to $159,958,000 for the
nine months ended July 31, 2001 from $140,980,000 for the nine months ended July
31, 2000. This increase was primarily attributable to increased sales of Sony
PlayStation 2 titles. For the nine months ended July 31, 2001, publishing
activities accounted for approximately 51.8% of net sales.
For the nine months, software products designed for PC platforms accounted for
approximately 39.8% of publishing revenues as compared to 41.6% for the prior
comparable period. For the nine months ended
16
July 31, 2001, software products designed for video game console platforms
accounted for 52.6% of the Company's publishing revenues as compared to 40.9%
for the nine months ended July 31, 2000.
Distribution revenues increased by $25,672,000, or 20.8%, to $149,090,000 for
the nine months ended July 31, 2001 from $123,418,000 for the nine months ended
July 31, 2000. This increase was primarily attributable to the acquisition of
VLM Entertainment Group, Inc. in November 2000. For the nine months ended July
31, 2001, distribution activities accounted for approximately 48.2% of net
sales.
International operations accounted for approximately $66,797,000 or 21.6% of the
net sales for the nine months ended July 31, 2001 compared to $86,818,000 or
32.8% for the nine months ended July 31, 2000. The decrease in revenues from
international operations was primarily attributable to a decrease in
distribution revenues as a result of the Company's increase emphasis on
expanding publishing activities in Europe.
Cost of Sales. Cost of sales increased by $33,454,000, or 19.9%, to $201,609,000
for the nine months ended July 31, 2001 from $168,155,000 for the nine months
ended July 31, 2000. This increase was attributable to the Company's expanded
operations and was commensurate with increased net sales. During the nine months
ended July 31, 2001, the Company also included as cost of sales a non-cash
impairment charges of $3,786,000 relating to a reduction in the value of certain
Internet assets. Cost of sales as a percentage of net sales remained relatively
constant.
Selling and Marketing. Selling and marketing expenses increased by $2,634,000 to
$36,886,000 for the nine months ended July 31, 2001 from $34,243,000 for the
nine months ended July 31, 2000. Selling and marketing expenses as a percentage
of net sales decreased to 11.9% for the nine months ended July 31, 2001 from
13.0% for the nine months ended July 31, 2000.
General and Administrative. General and administrative expenses increased by
$5,189,000 to $30,915,000 for the nine months ended July 31, 2001 from
$25,726,000 for the nine months ended July 31, 2000. The increase was
attributable to increased salaries, rent, and professional fees to support the
Company's expanded operations. General and administrative expenses as a
percentage of net sales remained relatively constant.
Research and Development. Research and development costs increased by $339,000
to $4,985,000 for the nine months ended July 31, 2001 from $4,646,000 for the
nine months ended July 31, 2000 and remained relatively constant as a percentage
of net sales.
Depreciation and Amortization. Depreciation and amortization expense increased
by $3,645,000 to $11,043,000 for the nine months ended July 31, 2001 from
$7,398,000 for the nine months ended July 31, 2000. The increase was due to
higher amortization of intangible assets from acquisitions.
Interest Expense. Interest expense increased by $2,733,000 to $7,249,000 for the
nine months ended July 31, 2001 from $4,516,000 for the nine months ended July
31, 2000. The increase was attributable to increased borrowings.
Loss on Impairment of Available-For-Sale Internet Securities. During the nine
months ended July 31, 2001, the Company incurred a non-recurring non-cash
impairment charge of $20,754,000 relating to its investments in Gameplay,
eUniverse and Entertainment Brands. The loss was attributable to an other than
temporary decline in the value of these investments.
17
Income Taxes. For the nine months ended July 31, 2001, the Company recorded a
net income tax benefit of $1,487,000 as compared to a net income tax provision
of $6,258,000 for the nine months ended July 31, 2000. This decrease resulted
from a tax benefit recorded relating to the impairment charges described above.
Gain on Sale of Subsidiary. During the nine months ended July 31, 2001, the
Company recorded a non-operating gain of $651,000 on the sale of Jack of All
Games UK.
Extraordinary Loss on Early Extinguishment of Debt. During the nine months ended
July 31, 2001, the Company incurred an extraordinary charge of $1,510,000, net
of taxes, upon the early repayment of $15 million of subordinated indebtedness.
For the nine months ended July 31, 2001, the Company incurred a net loss of
$3,765,000 as compared to net income of $11,590,000 for the nine months ended
July 31, 2000. Excluding the non-cash impairment charges, the extraordinary
charge and the gain on sale described above, the Company achieved net income of
$12,890,000 for the nine months ended July 31, 2001.
Liquidity and Capital Resources
The Company's primary cash requirements have been and will continue to be to
fund the acquisition, development, manufacture, distribution and publishing of
software products. The Company has historically satisfied its working capital
requirements primarily through the cash flow from operations, issuance of debt
and equity securities and bank borrowings. At July 31, 2001, the Company had
working capital of $86,784,000 as compared to working capital of $61,545,000 at
October 31, 2000.
The Company's cash and cash equivalents increased $10,101,000, to $15,346,000 at
July 31, 2001, from $5,245,000 at October 31, 2000. The increase is primarily
attributable to $24,248,000 of cash provided by operating activities, partially
offset by $9,145,000 used in investing activities and $3,113,000 used in
financing activities.
Net cash provided by operating activities for the nine months ended July 31,
2001 was $24,248,000 compared to net cash used in operating activities of
$27,258,000 for the nine months ended July 31, 2000. The increase in net cash
was primarily attributable to decreased accounts receivable and prepaid
royalties as well as an increase in accounts payable. Net cash used in investing
activities for the nine months ended July 31, 2001 was $9,145,000 as compared to
net cash used in investing activities of $9,631,000 for the nine months ended
July 31, 2000. Net cash used in investing activities reflects the Company's
continued investment in product development. Net cash used in financing
activities for the nine months ended July 31, 2001 was $3,113,000 as compared to
net cash provided by financing activities of $32,394,000 for the nine months
ended July 31, 2000. The increase in net cash used in financing activities was
primarily attributable to the repayment of indebtedness.
In February 2001, the Company's European subsidiary, entered into a credit
facility agreement with Lloyds TSB Bank plc ("Lloyds") under which Lloyds agreed
to make available borrowings of up to $25,000,000. The outstanding balance and
available credit under the revolving line of credit was $13,085,000 and $24,000
respectively, as of July 31, 2001. 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 credit facility expires in December 2001.
18
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 currently provides for
borrowings of up to $75,000,000. The Company may increase the credit line up to
$85,000,000 subject to certain conditions. Interest accrues on 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 substantially all of the Company's assets. In
addition to certain financial 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 or incurring additional indebtedness. The line of
credit expires on December 7, 2002. The outstanding balance and available credit
under the revolving line of credit was $56,000,000 and $17,620,000,
respectively, as of July 31, 2001.
In July 2001, the Company consummated the sale of 1,300,000 shares of common
stock and received net proceeds of approximately $20.8 million. The Company used
the proceeds to repay in full $15 million of subordinated indebtedness bearing
interest at the rate of 12.5% per annum, and reduced its other indebtedness.
During the nine months ended July 31, 2001, the proceeds generated from the
exercise of stock options and warrants were $19,942,000.
The Company's accounts receivable less allowance at July 31, 2001 was
$86,380,000. No single customer accounted for more than 10% of the receivable
balance at July 31, 2001. Most of the Company's receivables are covered by
insurance 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's inventory less allowance at July 31, 2001 was $52,674,000. The
Company has purchased increased levels of inventory to support an expanding
customer base in North America.
The Company expects to incur costs and expenses of approximately $2 million
during fiscal 2001 associated with software and hardware upgrades to its
accounting systems. In addition, the Company expects to spend approximately $1
million in connection with various leasehold improvements to its facilities.
Other than the foregoing, the Company has no material commitments for capital
expenditures.
Based on its currently proposed operating plans and assumptions, the Company
believes that projected revenues from operations and available cash resources,
including amounts available under its line 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
19
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.
Accordingly, quarterly comparisons of operating results are not necessarily
indicative of future operating results.
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 July 31, 2001, and 2000, sales in
international markets accounted for approximately 20.1% and 28.3%, respectively,
of the Company's net sales. For the nine months ended July 31, 2001, and 2000,
sales in international markets accounted for approximately 21.6% and 32.8%,
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 July 31, 2001, the Company had
$69,085,000 in outstanding variable rate indebtedness. A hypothetical 1%
increase in the interest rate of the Company's variable rate debt would increase
annual interest expense by approximately $691,000 as of July 31, 2001.
The Company transacts business in foreign currencies and is exposed to risk
resulting from fluctuations in foreign currency exchange rates. Accounts
relating to foreign operations are translated into United States dollars using
prevailing exchange rates at the relevant fiscal quarter. Translation
adjustments are included as a separate component of stockholders' equity. For
the nine months ended July 31, 2001, the Company's foreign currency translation
adjustment loss was $1,509,000. A hypothetical 10% change in applicable currency
exchange rates at July 31, 2001 would result in a material translation
adjustment. 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.
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 July 31, 2001, the Company held 8,869,407 shares of common stock of
Gameplay.com plc with a fair value of approximately $193,000 and was recorded as
non-current. The Company recorded an unrealized loss of $160,000 as a separate
component of accumulated other comprehensive income (loss) in stockholders'
equity.
20
At July 31, 2001, the Company held 2,269,333 shares of eUniverse Inc. with fair
value of approximately $7,622,000, $2,808,000 of which was recorded as current
and $4,814,000 was recorded as non-current. The Company recorded an unrealized
gain of $1,633,000 as a separate component of accumulated other comprehensive
income (loss) in stockholders' equity.
21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities
From May 2001 to July 2001, 544,000 options from the 1997 Stock Option Plan were
granted at exercise prices ranging from $13.9 to $15.5.
In July 2001, the Company issued 30,000 shares in connection with the
acquisition of Techcorp Limited.
In July 2001, the Company issued 1,300,000 shares of common stock in a private
placement to nine institutional investors and received proceeds of $20.8 million
net of $1.4 million of selling commissions and offering expenses. Commerzbank
Securities and Gerard Klauer Mattison & Co., Inc acted as placement agents in
connection with the offering.
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 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting on June 21, 2001. At the meeting Ryan A.
Brant, Kelly Sumner, Paul Eibeler, Oliver R. Grace, Jr., Mark Lewis, Don Leeds
and Robert Flug were elected as directors. Mr. Brant received 17,492,608 votes
for and 2,856,190 votes withheld; Mr. Sumner received 20,286,840 votes for and
61,958 votes withheld; Mr. Eibeler received 17,493,008 votes for and 2,855,790
votes withheld; Mr. Grace received 20,286,540 votes for and 62,258 votes
withheld; Mr. Lewis received 20,286,840 votes for and 61,958 votes withheld; Mr.
Leeds received 17,493,308 votes for and 2,855,290 votes withheld; and Mr. Flug
received 17,493,008 votes for and 2,855,790 votes withheld. In addition, the
stockholders voted 16,017,723 for and 3,833,179 against, with 497,896
abstentions, to increase the number of shares of common stock available under
the Company's 1997 Stock Option Plan from 5,000,000 to 6,500,000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b)Reports on Form 8-K
None
22
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
14 day of September 2001.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Kelly Sumner
-------------------------------
Kelly Sumner
Chief Executive Officer
(Principal Executive Officer)
By: /s/ James H. David Jr.
-------------------------------
James H. David Jr.
Chief Financial Officer
(Principal Financial Officer)
23