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 January 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number 0-29230
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 51-0350842
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
575 Broadway, New York, 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 12, 2002, there were 36,856,317 shares of the Registrant's Common
Stock outstanding.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
QUARTER ENDED JANUARY 31, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements*
Consolidated Condensed Balance Sheets - As of January 31,
2002 and October 31, 2001 (unaudited) 1
Consolidated Condensed Statements of Operations - For the
three months ended January 31, 2002 and 2001 Restated
(unaudited) 2
Consolidated Condensed Statements of Cash Flows - For the
three months ended January 31, 2002 and 2001 Restated
(unaudited) 3
Consolidated Condensed Statements of Stockholders' Equity -
For the year ended October 31, 2001 and the three
months ended January 31, 2002 (unaudited) 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Changes in Securities 34
Item 6. Exhibits and Reports on Form 8-K 34
*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 fiscal quarters of fiscal 2001. All financial data in this report
reflects this restatement. See Note 2 of Notes to Unaudited Consolidated
Condensed Financial Statements.
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Balance Sheets
As of January 31, 2002 and October 31, 2001 (unaudited)
(In thousands, except share data)
--------------------------------------------------------------------------------
ASSETS January 31, 2002 October 31, 2001
--------------- ---------------
Current assets
Cash and cash equivalents $ 30,972 $ 6,056
Accounts receivable, net of provision for doubtful accounts and
sales allowances of $35,778 and $26,106 at January 31, 2002 and
October 31, 2001, respectively 122,701 94,950
Inventories, net 51,804 61,937
Prepaid royalties 19,259 21,892
Prepaid expenses and other current assets 18,816 17,925
Investments 769 6,241
Deferred tax asset 13,873 13,873
--------------- ---------------
Total current assets 258,194 222,874
Fixed assets, net 12,992 11,033
Prepaid royalties 10,562 11,097
Capitalized software development costs, net 8,930 11,934
Investments 55 75
Goodwill, net 56,033 56,033
Intangibles, net 30,670 32,142
Deferred tax asset 7,892 7,892
Other assets, net 381 1,917
--------------- ---------------
Total assets $ 385,709 $ 354,997
=============== ===============
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 73,220 60,223
Accrued expenses and other current liabilities 35,140 20,250
Income taxes payable 21,341 --
Lines of credit, current portion -- 54,073
Current portion of capital lease obligation 92 99
--------------- ---------------
Total current liabilities 129,793 134,645
Capital lease obligation, net of current portion 275 291
--------------- ---------------
Total liabilities $ 130,068 $ 134,936
--------------- ---------------
Stockholders' equity
Common stock, par value $.01 per share; 50,000,000 shares authorized;
36,821,257 and 36,640,972 shares issued and outstanding 368 366
Additional paid-in capital 216,080 213,908
Retained earnings 51,068 16,239
Accumulated other comprehensive loss (11,875) (10,452)
--------------- ---------------
Total stockholders' equity 255,641 220,061
--------------- ---------------
Total liabilities and stockholders' equity $ 385,709 $ 354,997
=============== ===============
The accompanying notes are an integral part of the
consolidated condensed financials statements
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Operations
For the three months ended January 31, 2002 and 2001 (unaudited)
(In thousands, except per share data)
--------------------------------------------------------------------------------
Three months ended January 31,
----------------------------------
2002 2001
Restated
--------------- ---------------
Net sales $ 282,926 $ 157,591
Cost of sales 179,465 104,260
--------------- ---------------
Gross profit 103,461 53,331
--------------- ---------------
Operating expenses
Selling and marketing 21,995 12,552
General and administrative 18,997 10,511
Research and development costs 1,954 1,400
Depreciation and amortization 2,271 2,422
--------------- ---------------
Total operating expenses 45,217 26,885
Income from operations 58,244 26,446
Interest expense 974 2,930
Gain from sales of marketable securities (127) --
--------------- ---------------
Total non-operating expenses 847 2,930
Income before income taxes 57,397 23,516
Provision for income taxes 22,568 9,947
--------------- ---------------
Income before cumulative effect of change in accounting principle 34,829 13,569
Cumulative effect of change in accounting principle, net of taxes of $3,558 -- 5,337
--------------- ---------------
Net income $ 34,829 $ 8,232
=============== ===============
Per share data:
Basic:
Weighted average common shares outstanding 36,724 32,347
=============== ===============
Income before cumulative effect of change in accounting principle
per share $ 0.95 $ 0.41
Cumulative effect of change in accounting principle per share -- (0.16)
--------------- ---------------
Net income - Basic $ 0.95 $ 0.25
=============== ===============
Diluted:
Weighted average common shares outstanding 37,896 32,959
=============== ===============
Income before cumulative effect of change in accounting principle per share $ 0.92 $ 0.41
Cumulative effect of change in accounting principle per share -- (0.16)
--------------- ---------------
Net income - Diluted $ 0.92 $ 0.25
=============== ===============
The accompanying notes are an integral part of the
consolidated condensed financials statements
TAKE-TWO INTERACTIVE SOFTWARE, INC. and SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows For the three months ended
January 31, 2002 and 2001 (unaudited)
--------------------------------------------------------------------------------
(In thousands)
Three Months Ended January 31,
----------------------------------
2002 2001
Restated
--------------- ---------------
Cash flows from operating activities:
Net income $ 34,829 $ 8,232
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,271 2,422
Loss on disposal of fixed assets 122 --
Realized gain on sale of investment (127) --
Provision for doubtful accounts and sales allowances 9,672 551
Amortization of various expenses and discounts 749 263
Tax benefit from exercise of stock options 185 68
Changes in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in accounts receivable (37,423) 5,223
Decrease in inventories, net 10,133 5,167
Increase in prepaid royalties 3,168 (2,629)
Decrease (increase) in prepaid expenses and other current assets (940) (3,385)
Decrease (increase) in capitalized software development costs 3,004 (325)
Decrease in non-current assets 1,236 --
Increase in accounts payable 12,997 2,463
Increase in accrued expenses 14,815 3,270
Increase in income taxes payable 21,341 --
--------------- ---------------
Net cash provided by operating activities 76,032 21,332
--------------- ---------------
Cash flows from investing activities:
Purchase of fixed assets (3,279) (1,333)
Proceeds from sale of investment 5,817 --
Acquisitions, net of cash acquired -- (4,300)
--------------- ---------------
Net cash provided by (used in) investing activities 2,538 (5,633)
--------------- ---------------
Cash flows from financing activities:
Net repayments under lines of credit (54,073) (9,152)
Proceeds from exercise of stock options and warrants 1,989 1,195
Repayment of capital lease obligation (23) (10)
--------------- ---------------
Net cash (used in) provided by financing activities (52,107) (7,967)
--------------- ---------------
Effect of foreign exchange rates (1,547) 681
--------------- ---------------
Net increase in cash for the period 24,916 8,413
Cash and cash equivalents, beginning of the period 6,056 5,245
--------------- ---------------
Cash and cash equivalents, end of the period $ 30,972 $ 13,658
=============== ===============
Supplemental information on businesses acquired:
Fair value of assets acquired
Cash $ -- $ --
Accounts receivables, net -- 9,310
Inventories, net -- 3,810
Prepaid expenses and other assets -- 34
Property and equipment, net -- 286
Intangible asset -- 8,105
Goodwill -- 35,078
Less, liabilities assumed
Line of credit -- (6,641)
Accounts payable -- (12,447)
Accrued expenses -- (1,780)
Other current liabilities -- (651)
Stock issued -- (13,380)
Value of asset recorded -- (17,266)
Direct transaction costs -- (158)
--------------- ---------------
Cash paid -- 4,300
Less, cash acquired -- --
--------------- ---------------
Net cash paid $ -- $ 4,300
=============== ===============
The accompanying notes are an integral part of the
consolidated condensed financial statements.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
Consolidated Condensed Statements of Stockholders' Equity
For the year ended October 31, 2001 and the three months
ended January 31, 2002 (unaudited)
(In thousands)
--------------------------------------------------------------------------------
Common Stock
---------------------------- Additional
Shares Amount Paid-in Capital
------------ ------------ ---------------
Balance, November 1, 2000 31,173 312 157,738
Proceeds from exercise of stock options and warrants 3,266 32 22,582
Amortization of deferred compensation -- -- --
Issuance of common stock in connection with acquisitions 1,466 14 13,967
Issuance of common stock in connection with private placements,
net of issuance costs 1,300 13 20,879
Retirement of common stock (564) (5) (7,305)
Tax benefit in connection with the exercise of stock options -- -- 6,047
Foreign currency translation adjustment -- -- --
Net unrealized income on investments, net of taxes -- -- --
Net loss -- -- --
------------ ------------ ------------
Balance, October 31, 2001 36,641 $ 366 $ 213,908
Proceeds from exercise of stock options and warrants 180 2 1,987
Tax benefit in connection with the exercise of stock options -- -- 185
Foreign currency translation adjustment -- -- --
Net unrealized income on investments, net of taxes -- -- --
Net income -- -- --
------------ ------------ ------------
Balance, January 31, 2002 36,821 $ 368 $ 216,080
============ ============ ============
Accumulated
Other
Deferred Retained Comprehensive
Compensation Earnings Income (Loss)
------------ ------------ ------------
Balance, November 1, 2000 (5) 24,819 (12,672)
Proceeds from exercise of stock options and warrants -- -- --
Amortization of deferred compensation 5 -- --
Issuance of common stock in connection with acquisitions -- -- --
Issuance of common stock in connection with private placements,
net of issuance costs -- -- --
Retirement of common stock -- -- --
Tax benefit in connection with the exercise of stock options -- -- --
Foreign currency translation adjustment -- -- (767)
Net unrealized income on investments, net of taxes -- -- 2,987
Net loss -- (8,580) --
------------ ------------ ------------
Balance, October 31, 2001 $ -- $ 16,239 $ (10,452)
Proceeds from exercise of stock options and warrants -- -- --
Tax benefit in connection with the exercise of stock options -- -- --
Foreign currency translation adjustment -- (1,547)
Net unrealized income on investments, net of taxes -- 124
Net income -- 34,829 --
------------ ------------ ------------
Balance, January 31, 2002 $ -- $ 51,068 $ (11,875)
============ ============ ============
Comprehensive
Total Income (Loss)
------------ ------------
Balance, November 1, 2000 170,192 (5,428)
Proceeds from exercise of stock options and warrants 22,614
Amortization of deferred compensation 5
Issuance of common stock in connection with acquisitions 13,981
Issuance of common stock in connection with private placements,
net of issuance costs 20,892
Retirement of common stock (7,310)
Tax benefit in connection with the exercise of stock options 6,047
Foreign currency translation adjustment (767) (767)
Net unrealized income on investments, net of taxes 2,987 2,987
Net loss (8,580) (8,580)
------------ ------------
Balance, October 31, 2001 $ 220,061 $ (6,360)
Proceeds from exercise of stock options and warrants 1,989
Tax benefit in connection with the exercise of stock options 185
Foreign currency translation adjustment (1,547) (1,547)
Net unrealized income on investments, net of taxes 124 124
Net income 34,829 34,829
------------ ------------
Balance, January 31, 2002 $ 255,641 $ 33,406
============ ============
The accompanying notes are an integral part of the
consolidated condensed financials statements.
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. Restatement of Financial Statements
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, 2001 relates to the
elimination of $3,633,000 of net sales made to independent third party
distributors and related cost of sales of $4,715,000, 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, the Company also restated its previously issued unaudited consolidated
condensed financial statements for the three months ended January 31, 2001 for
the following transactions and the related tax effect:
o The recognition of net sales of $3,780,000 and related cost of sales of
$2,236,000 for transactions that did not qualify for revenue recognition in
the fourth quarter of fiscal 2000.
o Adjustment related to the reversal of revenue related to businesses
acquired adjustments to the purchase price. The adjustment was a reduction
of revenue of $750,000 and a $410,000 net reduction of primarily
amortization expenses.
Additionally, the Company restated its first quarter fiscal 2001 financial
statements to record the cumulative effect of the change in accounting related
to the adoption of SAB 101 "Revenue Recognition" (See Note 3).
The effect of the restatement for the three months ended January 31, 2001 is as
follows (some of the numbers have been reclassified to conform to current year
presentation and are presented in thousands, except per share data):
2
Three months ended January 31, 2001
Effect of
As Reported Restatement SAB 101 Reclassification As Restated
----------- ----------- ------- ---------------- -----------
Statement of Operations Data:
Net sales $ 131,226 $ (603) $ 27,230 $ (262) $ 157,591
Cost of sales 88,222 (2,297) 18,335 -- 104,260
Depreciation and amortization 3,014 (592) -- -- 2,422
Income from operations 15,265 2,286 8,895 -- 26,446
Income before provision for income
taxes 12,335 2,286 8,895 -- 23,516
Provision for income taxes 4,585 1,804 3,558 -- 9,947
Net income $ 7,750 $ 482 $ -- $ -- $ 8,232
Basic income per share $ 0.24 $ 0.01 $ -- $ -- $ 0.25
Diluted income per share $ 0.24 $ 0.01 $ -- $ -- $ 0.25
January 31, 2001
As Reported As Restated
----------- -----------
Balance Sheet Data:
Accounts receivable $ 132,165 $ 114,322
Inventories 46,730 52,429
Prepaid royalties - current 22,860 26,416
Deferred tax assets 666 10,176
Intangible assets 114,825 90,724
Total assets 389,398 370,431
Accounts payable 62,720 61,477
Accrued expenses and other current liabilities 23,657 21,889
Total liabilities 181,873 178,301
Retained earnings 51,115 33,051
Total liabilities and stockholders' equity 389,398 370,431
All applicable amounts relating to the aforementioned restatements have been
reflected in these unaudited consolidated condensed financial statements and
notes thereto.
3
3. Significant Accounting Policies and Transactions
Basis of Presentation
The unaudited Consolidated Condensed Financial Statements of the Company have
been prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the financial statements do not include all
information and disclosures necessary for a presentation of the Company's
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, the
financial statements reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the Company's financial
position, results of operations and cash flows. The results of operations for
any interim periods are not necessarily indicative of the results for the full
year. The financial statements should be read in conjunction with the audited
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K/A for the fiscal year ended October 31, 2001.
Risk and Uncertainties
Substantially all of the Company's net sales are derived from software
publishing and distribution activities, which are subject to increasing
competition, rapid technological change and evolving consumer preferences, often
resulting in the frequent introduction of new products and short product
lifecycles. Accordingly, the Company's profitability and growth prospects depend
upon its ability to continually acquire, develop and market new, commercially
successful software products and obtain adequate financing, if required. If the
Company is unable to continue to acquire, develop and market commercially
successful software products, its operating results and financial condition
could be materially adversely affected in the near future.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reported periods. The
most significant estimates and assumptions relate to the recoverability of
prepaid royalties, capitalized software development costs and other intangibles,
realization of deferred income taxes, valuation of inventories and the adequacy
of allowances for returns, price protection and doubtful accounts. Actual
amounts could differ significantly from these estimates.
Revenue Recognition
Publishing revenue is derived from the sale of internally developed interactive
software titles or from the sale of titles licensed from third-party developers.
Publishing revenue amounted to $191,956,000 and $77,790,000 for the three months
ended January 31, 2002 and 2001, respectively.
Distribution revenue is derived from the sale of third-party interactive
software titles, accessories and hardware. Distribution revenue amounted to
$90,970,000 and $79,801,000 for the three months ended January 31, 2002 and
2001, respectively.
4
The Company recognizes revenue in accordance with Statement of Position ("SOP")
97-2 "Software Revenue Recognition", as amended by SOP 98-9 "Modification of SOP
97-2 Software Revenue Recognition with respect to Certain Transactions." SOP
97-2 provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. SOP 98-9 deals with the
determination of vendor specific objective evidence of fair value in multiple
element arrangements, such as maintenance agreements sold in conjunction with
software packages. The Company's transactions generally include only one
element, the interactive software game. The Company recognizes revenue when the
price is fixed and determinable, there is persuasive evidence of an arrangement,
the fulfillment of its obligations under any such arrangement and determination
that collection is probable. Accordingly, revenue is recognized when title and
all risks of loss are transferred to the customer, which is generally upon
receipt. The Company's payment arrangements with its customers provide primarily
60 day terms and to a limited extent with certain customers 30, 90 or 120 day
terms.
The Company's distribution arrangements with customers generally do not give
customers the right to return products; however, the Company at its discretion
may accept product returns for stock balancing or defective products. In
addition, the Company sometimes negotiates accommodations to customers,
including price discounts, credits and product returns, when demand for specific
products falls below expectations. The Company's publishing arrangements
generally require the Company to accept product returns. The Company establishes
a reserve for future returns and other allowances based primarily on its return
policies, price protection policies and historical return rates. The Company may
not have a reliable basis to estimate returns and price protection for certain
customers or it may be unable to determine that collection of the receivable is
probable. In such circumstances, the Company defers the revenues at the time of
the sale and recognizes them when collection of the related receivable becomes
probable or cash is received.
Effective November 1, 2000, the Company adopted Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements". Consistent with
the guidelines provided in SAB No. 101, the Company changed its revenue
recognition policy to recognize revenue as noted above. Prior to the adoption of
SAB 101, the Company recognized revenue upon shipment. As a result of adopting
SAB 101, net sales and cost of sales of approximately $27.2 million and $18.3
million, respectively, which were originally recognized in the year ended
October 31, 2000 were also recognized in the quarter ended January 31, 2001. The
cumulative effect of the adoption of SAB 101 for the quarter ended January 31,
2001 was approximately $5.3 million of income, net of taxes of $3.6 million.
Prepaid Royalties
The Company's agreements with licensors and developers generally provide it with
exclusive publishing rights and require it to make advance royalty payments that
are recouped against royalties due to the licensor or developer based on product
sales. Prepaid royalties are amortized as cost of sales on a title by title
basis based on the greater of the proportion of current year sales to total of
current and estimated future sales for that title or the contractual royalty
rate based on actual net product sales. The Company continually evaluates the
recoverability of prepaid royalties and charges to cost of sales the amount that
management determines is probable that will not be recouped at the contractual
royalty rate in the period in which such determination is made. Prepaid
royalties are classified as current and non-current assets based upon estimated
net product sales within the next year. Prepaid royalties were written down by
$740,000 for the three months ended January 31, 2002 to estimated net realizable
value. Amortization of prepaid royalties amounted to $15,238,000 and $5,650,000,
which was included in total royalty expense of $19,428,000 and $6,399,000
respectively, for the three months ended January 31, 2002 and 2001.
5
Capitalized Software Development Costs (Including Production Costs)
The Company capitalizes internal software development costs subsequent to
establishing technological feasibility of a title. Amortization of such costs as
a component of cost of sales is recorded on a title-by-title basis upon title
release based on the greater of the proportion of current year sales to total of
current and estimated future sales for that title or the straight-line method
over the remaining estimated useful life of the title. The Company continually
evaluates the recoverability of capitalized software costs. Capitalized software
development costs primarily represent the costs associated with the internal
development of the Company's publishing products. No capitalized software costs
were written down for the three months ended January 31, 2002 and 2001.
Amortization of capitalized software costs amounted to $2,955,000 and $893,000,
respectively, for the three months ended January 31, 2002 and 2001.
Recently Issued Accounting Pronouncements
In November 2001, the Financial Accounting Standards Board ("FASB") Emerging
Issues Task Force (EITF) reached a consensus on EITF Issue 01-09, Accounting for
Consideration Given by a Vendor to a Customer or Reseller of The Vendor's
Products, which is a codification of EITF 00-14, 00-22 and 00-25. This EITF
presumes that consideration from a vendor to a customer or reseller of the
vendor's products a reduction of the selling prices of the vendor's products
and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement and could lead to negative revenue
under certain circumstances. Revenue reduction is required unless consideration
relates to a separate identifiable benefit and the benefit's fair value can be
established. The Company has early adopted EITF 01-09 effective November 1,
2001. The adoption of the new standard did not have a material impact on the
consolidated condensed financial statements. The prior period has been
reclassified in accordance with this statement.
Effective November 1, 2001, the Company adopted Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141") and Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 141 requires all business combinations to be accounted for
using the purchase method of accounting and that certain intangible assets
acquired in a business combination shall be recognized as assets apart from
goodwill. SFAS 142 addresses the recognition and measurement of goodwill and
other intangible assets subsequent to their acquisition. SFAS 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. This statement provides that intangible assets with finite useful lives
be amortized and that intangible assets with indefinite lives and goodwill will
not be amortized, but will be tested at least annually for impairment. Upon
completion of the transitional impairment test, the fair value for each of the
Company's reporting units exceeded the reporting unit's carry amount and no
impairment was indicated (See Note 9).
6
4. Income Taxes
The provision for income taxes for the three months ended January 31, 2002 and
2001 are based on the Company's estimated annualized tax rate for the respective
years after giving effect to the utilization of available tax credits and tax
planning opportunities.
5. Net Income per Share
The following table provides a reconciliation of basic earnings per share to
dilutive earnings per share for the three months ended January 31, 2002 and 2001
(in thousands, except per share data).
Per Share
Net Income Shares Amount
---------- ---------- ----------
Three Months Ended January 31, 2002:
Basic $ 34,829 $ 36,724 .95
Effect of dilutive securities - Stock options
and warrants -- 1,172 (.03)
---------- ---------- ----------
Diluted $ 34,829 $ 37,896 .92
========== ========== ==========
Three Months Ended January 31, 2001-Restated:
Basic $ 8,232 $ 32,347 .25
Effect of dilutive securities - Stock options
and warrants -- 612 --
---------- ---------- ----------
Diluted $ 8,232 $ 32,959 .25
========== ========== ==========
The computation for diluted number of shares excludes 1,155,000 unexercised
stock options and warrants for the three months ended January 31, 2001 which are
anti-dilutive.
7
6. Inventory
As of January 31, 2002 and October 31, 2001, finished product inventory, net of
allowance, consisted of $48,553,000 and $60,469,000, respectively. Parts and
supplies consisted of $3,251,000 and $1,468,000 at January 31, 2002 and October
31, 2001, respectively.
7. Investments
Investments are comprised of equity securities and are classified as current and
non-current assets. Investments are accounted for under the average cost method
as "available-for-sale" in accordance with Statement of Financial Standards
Board No. 115 "Accounting for Certain Investments in Debt and Equity
Securities." Investments are stated at fair value, with unrealized appreciation
(loss) reported as a separate component of accumulated other comprehensive
income (loss) in stockholders' equity.
As of January 31, 2002 and October 31, 2001, investments were summarized as
follows (in thousands):
January 31, 2002 October 31, 2001
--------------------------------------- -------------------------------------
Current Non-Current Current Non-Current
-------------------- ----------------- ----------------- ------------------
Average cost $ 298 $ 75 $ 5,988 $ 75
Unrealized gains (losses) 471 (20) 253 --
-------------------- ----------------- ----------------- ------------------
Fair value $ 769 $ 55 $ 6,241 $ 75
==================== ================= ================= ==================
For the three months ended January 31, 2002, the gross proceeds from the sale of
investments were $5,817,000. The realized gain from these sales totaled
$127,000. The gain on sale of securities is based on the average cost of the
individual securities sold.
8
8. Lines of Credit
In December 1999, the Company entered into a credit agreement, as amended, with
a group of lenders led by Bank of America, N.A., as agent. The agreement was
amended in February 2002 to provide for borrowings of up to $15,000,000 through
February 20, 2002; $22,500,000 through February 28, 2002; $30,000,000 through
April 13, 2002; and $50,000,000 through the remaining term of the agreement.
Generally, advances under the line of credit are based on a borrowing formula
equal to the lesser of (1) the borrowing limit or (2) 70% of eligible accounts
receivable, plus 25% of eligible inventory. Interest accrues on such advances at
the bank's prime rate plus 0.5%, or at LIBOR plus 2.5%. Borrowings under the
line of credit are collateralized by the Company's accounts receivable,
inventory, equipment, general intangibles, securities and other personal
property, including the capital stock of the Company's domestic subsidiaries.
The loan agreement contains certain financial and other covenants, which were
amended retroactively. Accordingly, as of January 31, 2002, the Company is in
compliance with such covenants, as amended. The loan agreement limits or
prohibits us from declaring or paying cash dividends, merging or consolidating
with another corporation, selling assets (other than in the ordinary course of
business), creating liens and incurring additional indebtedness. The line of
credit expires on December 7, 2002. The Company had no outstanding borrowings
under the revolving line of credit as of January 31, 2002.
In February 2001, the Company's United Kingdom subsidiary entered into a credit
facility agreement with Lloyds TSB Bank plc ("Lloyds") under which Lloyds agreed
to make available borrowings of up to $19,000,000. Advances under the credit
facility bear interest at the rate of 1.25% per annum over the bank's base rate,
and are guaranteed by the Company. In March 2002, the credit facility was
amended to extend the expiration date of the facility to March 31, 2004. The
Company had no outstanding borrowings under this facility as of January 31,
2002.
9
9. Intangible Assets
As a result of the adoption of SFAS 142, the Company discontinued the
amortization of goodwill effective November 1, 2001. Identifiable intangible
assets are amortized under the straight-line method over the period of
expected benefit ranging from three to ten years, except for intellectual
property which is amortized based on the expected revenue stream. The
Company recharacterized acquired workforce of $925,000, which is no longer
defined as an acquired intangible asset under SFAS 141, as goodwill.
Additionally, the estimated useful lives of certain identifiable intangible
assets were adjusted in conjunction with the adoption of SFAS 142.
Intangible assets consist of trademarks, intellectual property, customer
lists, acquired technology and the excess purchase price paid over
identified intangible and tangible net assets of acquired companies
(goodwill).
10
The following table sets forth the components of the intangible assets subject
to amortization as of January 31, 2002 and October 31, 2001 (in thousands):
As of January 31, 2002 As of October 31, 2001
-------------------------------------------- --------------------------------------------
Gross Gross
Range of Carrying Accumulated Carrying Accumulated
Useful Life Amount Amortization Net Amount Amortization Net
----------- ------------ ------------ ------------ ------------ ------------ ------------
Trademarks 7-10 years $ 13,922 $ (2,694) $ 11,228 $ 13,922 $ (2,312) $ 11,610
Customer lists and
relationships 5-10 years 9,081 (1,389) 7,692 9,081 (1,068) 8,013
Intellectual property 2-6 years 8,527 (711) 7,816 8,527 (300) 8,227
Technology 3 years 4,640 (706) 3,934 4,640 (348) 4,292
------------ ------------ ------------ ------------ ------------ ------------
$ 36,170 $ (5,500) $ 30,670 $ 36,170 $ (4,028) $ 32,142
============ ============ ============ ============ ============ ============
Amortization expense for the three months ended January 31, 2002 and 2001
amounted to $1,472,000, and $1,350,000, respectively.
Estimated amortization expense for the fiscal years ending October 31, are as
follows (in thousands):
2002 4,244
2003 3,826
2004 3,789
2005 3,553
2006 3,475
-------------
Total 18,887
=============
The following table provides a reconciliation of net income for exclusion of
goodwill amortization:
Three months
ended January 31,
2002 2001
Restated
------ --------
Income before cumulative effect of
change in accounting principle 34,829 13,569
Cumulative effect of change in accounting
principle, net of taxes -- (5,337)
------ -----
Net income - as reported 34,829 8,232
Add: Goodwill amortization, net of taxes -- 939
------ -----
Net income - as adjusted 34,829 9,171
====== =====
Earnings per share:
Income before cumulative effect of change
in accounting principle per share - basic 0.95 0.41
Cumulative effect of change in
accounting principle per share -- (0.16)
Add: Goodwill amortization, net of taxes -- 0.03
------ ------
Adjusted earnings per share - basic 0.95 0.28
====== ======
Income before cumulative effect of change
in accounting principle per share - diluted 0.92 0.41
Cumulative effect of change in
accounting principle per share -- (0.16)
Add: Goodwill amortization, net of taxes -- 0.03
------ ------
Adjusted earnings per share - dulited 0.92 0.28
====== ======
The effect resulting from the change in accounting principle from the early
adoption of SFAS 142 is as follows:
Three months ended
January 31, 2002
----------------
Net income - as reported $34,829
Less: Additional Goodwill amortization, net of taxes (1,230)
-------
Net income - as adjusted $33,599
=======
Earnings per share:
Net income - basic $ 0.95
Add: Goodwill amortization, net of taxes (0.03)
-------
Adjusted earnings per share - basic $ 0.92
=======
Net income - diluted $ 0.92
Add: Goodwill amortization, net of taxes (0.03)
-------
Adjusted earnings per share - diluted $ 0.89
=======
11
10. Legal and Other Proceedings
In December 2001 and January 2002, six purported class action lawsuits have been
filed in the United States District Court for the Southern District of New York
by Peter Fischbein, Drimal Ltd., Corado Petruzzelli, Michael Lucas, Israel M.
Zacks and Eliot Gersten against the Company and certain of its officers or
directors asserting damages on behalf of all persons or entities who purchased
or otherwise acquired the Company's common stock in the open market during the
period commencing on February 24, 2000 through December 17, 2001. These
complaints allege violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by the Company and the individual
defendants and violations of Section 20(a) of the Exchange Act by the individual
defendants.
In the foregoing complaints, the plaintiffs allege that, among other things,
because the Company's financial statements issued during the class period were
not prepared in the conformity with generally accepted accounting principles,
the defendants concealed adverse material information and made or participated
in the making of untrue statements of material facts and omitted to state
material facts concerning the business, financial condition, operations and
future prospects of the Company. The plaintiffs, in each of the complaints, seek
compensatory damages, including interest, against all of the defendants,
recovery of their reasonable litigation costs, and expenses. The Company intends
to vigorously defend the claims against it. Although it cannot predict the
ultimate outcome of these actions, an unfavorable resolution could have a
material adverse effect on the Company's financial condition, cash flows and
results of operations.
The Securities and Exchange Commission has issued a formal order of
investigation into, among other things, certain accounting matters relating to
the Company's financial statements, periodic reporting and internal accounting
control provisions of the federal securities laws.
The Company is involved in routine litigation arising in the ordinary course of
its business. In the opinion of the Company's management, none of the routine
pending routine litigation will have a material adverse effect on the Company's
consolidated financial condition, cash flows or results of operations.
12
11. Segment Reporting
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), which establishes standards for reporting by public business enterprises
of information about product lines, geographic areas and major customers. The
method for determining what information to report is based on the way management
organizes the Company for making operational decisions and assessment of
financial performance. The Company's chief operating decision maker is
considered to be the Company's Chief Executive Officer ("CEO"). The CEO reviews
financial information presented on a consolidated basis accompanied by
disaggregated information about sales by geographic region and by product
platforms. The Company's Board of Directors reviews consolidated financial
information. The Company's operations employ the same products, cost structures,
margins and customers worldwide. The Company's product development, publishing
and marketing activities are centralized in the United States under one
management team, with distribution activities managed geographically.
Accordingly, the Company's operations fall within one reportable segment as
defined in SFAS No. 131.
Information about the Company's non-current assets in the United States and
international areas as of January 31, 2002 and October 31, 2001 are presented
below (in thousands):
January 31, 2002 October 31, 2001
-------------------------- ------------------------------
Total Non-current Assets:
United States.......................... $ 80,831 $ 81,243
International
United Kingdom................... 19,673 21,128
All other Europe................. 18,713 21,405
Other............................ 8,298 8,347
-------------------- -----------------------
$ 127,515 $ 132,123
==================== =======================
13
Information about the Company's net sales in the United States and international
areas for the three months ended January 31, 2002 and 2001 are presented below
(net sales are attributed to geographic areas based on product destination, in
thousands):
Three Months Ended
January 31
-------------------------------
Net Sales: 2002 2001
Restated
----------- -------------
United States.......................... $ 220,008 122,654
Canada................................. 4,066 6,918
International
United Kingdom......................... 15,591 7,866
All other Europe....................... 40,468 16,450
Asia Pacific........................... 2,488 3,563
Other.................................. 305 140
----------- -------------
$ 282,926 $ 157,591
=========== =============
Information about the Company's net sales by product platforms for the three
months ended January 31, 2002 and 2001 are presented below (in thousands):
Three Months Ended
January 31
-------------------------------
Platforms: 2002 2001
Restated
----------- -------------
Sony PlayStation 2............................ $ 188,348 $ 40,454
Sony PlayStation.............................. 28,016 34,707
Microsoft Xbox................................ 24,247 -
PC............................................ 13,039 30,467
Nintendo GameBoy Color,
GameBoy Advance and N64....................... 8,771 23,265
Nintendo GameCube ............................ 4,414 -
Sega Dreamcast................................ 968 8,833
Accessories................................... 7,675 4,638
Hardware...................................... 7,448 15,227
----------- -------------
$ 282,926 $ 157,591
=========== =============
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Restatement of Historical Financial Statements
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 year 2001. All financial data in this report
reflects this restatement. See Note 2 of Notes to Unaudited Consolidated
Condensed Financial Statements. Additionally, the Company restated its fiscal
2001 financial statements to record the cumulative effect of the change in
accounting related to the adoption of SAB 101 "Revenue Recognition". See Note 3
of Notes to Unaudited Consolidated Condensed Financial Statements.
15
Revenue Recognition
The Company's principal sources of revenues are derived from publishing and
distribution operations. Publishing revenues are derived from the sale of
internally developed software titles or software titles licensed from third
parties. Distribution revenues are derived from the sale of third-party software
titles, accessories and hardware. Publishing activities generally generate
significantly higher margins than distribution activities, with sales of PC
software titles resulting in higher margins than sales of CDs or cartridges
designed for video game consoles.
16
Effective November 1, 2000, in accordance with the adoption of SAB 101, "Revenue
Recognition in Financial Statements", the Company recognizes revenue net of
allowances for returns and price protection when title and risk of loss pass to
customers (generally, upon receipt of products by customers). Prior to that
date, the Company recognized revenue upon shipment. In accordance with Statement
of Position 97-2 "Software Revenue Recognition" the Company recognizes revenue
when the price is fixed and determinable, upon persuasive evidence of an
agreement, the Company's fulfillment of its obligations under any such agreement
and a determination that collection is probable. The Company's payment
arrangements with customers provide primarily 60 day terms and to a limited
extent with certain customers 30, 90 or 120 day terms. The Company may not have
a reliable basis to estimate returns and allowances for certain customers or may
be unable to determine that collection of receivables is probable. In such
circumstances, the Company defers revenues at the time of sale and recognizes
revenues when collection of the related receivable becomes probable or cash is
collected.
Returns and Reserves
The Company's arrangements with customers for published titles generally require
it to accept returns and provide price protection. The Company establishes a
reserve for future returns of published titles and price protection based
primarily on historical return rates, return policies and price protection
policies, and recognize revenues net of allowances for returns and price
protection. The Company's distribution arrangements with customers generally do
not give them the right to return titles or to cancel firm orders. However, the
Company sometimes accepts returns for stock balancing and negotiates
accommodations to customers, which includes price discounts, credits and
returns, when demand for specific titles fall below expectations. The historical
product return rate for the Company's distribution business has been
substantially less than for its publishing business. If future returns
significantly exceed established reserves, the Company's operating results would
be adversely affected.
Prepaid Royalties
The Company's agreements with licensors and developers generally provide it with
exclusive publishing rights and require it to make advance royalty payments that
are recouped against royalties due to the licensor or developer based on product
sales. Prepaid royalties are amortized as cost of sales on a title by title
basis based on the greater of the porportion of current year sales to total of
current and estimated future sales for that title or the contractual royalty
rate based on actual net product sales. The Company continually evaluates the
recoverability of prepaid royalties and charges to cost of sales the amount that
management determines is probable that will not be recouped at the contractual
royalty rate in the period in which such determination is made. Prepaid
royalties are classified as current and non-current assets based upon estimated
net product sales within the next year. Prepaid royalties were written down by
$740,000 for the three months ended January 31, 2002 to estimated net realizable
value. Amortization of prepaid royalties amounted to $15,238,000 and $5,650,000
which was included in total royalty expense of $19,428,000 and $6,399,000,
respectively, for the three months ended January 31, 2002 and 2001.
17
Capitalized Software Development Costs
The Company capitalizes internal software development costs subsequent to
establishing technological feasibility of a title. Amortization of such costs as
cost of sales is done on a product-by-product basis based on the greater of the
proportion of current year sales to total of current and estimated future sales
for that title or the straight-line method over the remaining estimated useful
life of the title. The Company continually evaluates the recoverability of
capitalized costs. No capitalized software costs were written down for the three
months ended January 31, 2002 and 2001. Amortization of capitalized software
costs amounted to $2,955,000 and $893,000 for the three months ended January 31,
2002 and 2001.
18
Results of Operations
The following table sets forth for the periods indicated the percentage of net
sales represented by certain items reflected in the Company's statement of
operations, and sets forth net sales by territory, platform and principle
products:
Three Months Ended
January 31
-------------------------------------------
Operating Data: 2002 2001
Restated
---- --------
Net sales..................................................... 100.0% 100.0%
Cost of sales................................................. 63.4 66.2
Selling and marketing......................................... 7.8 8.0
General and administrative.................................... 6.7 6.7
Research and development...................................... 0.7 0.9
Depreciation and amortization................................. 0.8 1.5
Interest expenses............................................. 0.3 1.9
Provision for income taxes.................................... 8.0 6.3
Net income ................................................... 12.3 5.2
Territory:
North America................................................ 79.2% 82.2%
International................................................ 20.8 17.8
Platform:
Console....................................................... 87.3% 61.0%
PC............................................................ 4.6 19.3
Handheld...................................................... 2.8 7.1
Hardware...................................................... 2.6 9.7
Accessories................................................... 2.7 2.9
Products:
Grand Theft Auto 3, PS2....................................... 41.3% -
Max Payne, PS2................................................ 11.4 -
Max Payne, Xbox............................................... 4.5 -
Three Months Ended January 31, 2002 and 2001
Net Sales. Net sales increased by $125,335,000 or 79.5%, to $282,926,000 for the
three months ended January 31, 2002 from $157,591,000 for the three months ended
January 31, 2002. The increase was primarily attributable to growth in
publishing operations. Included in net sales for the three months ended January
31, 2001 was $27.2 million attributable to the adoption of SAB 101.
19
Publishing revenues increased by $114,166,000, or 146.8%, to $191,956,000 for
the three months ended January 31, 2002 from $77,790,000 for the three months
ended January 31, 2001. The increase was primarily attributable to the continued
sales of Grand Theft Auto 3 and the release of Max Payne for PlayStation 2 and
Xbox. For the three months ended January 31, 2002 and 2001, publishing
activities accounted for approximately 67.8% and 49.4% of net sales,
respectively.
For the current period, products designed for PC platforms accounted for
approximately 3.3% of publishing revenues as compared to 34.1% for the prior
comparable period. The decrease is a result of fewer PC titles released during
the current quarter. Products designed for video game console platforms
accounted for 95.2% of publishing revenues as compared to 56.1% for the prior
comparable period. The increase was primarily attributable to the release of Max
Payne for PlayStation 2 and Xbox, and continued sales of Grand Theft Auto 3 for
PlayStation 2.
Distribution revenues increased by $11,169,000, or 14.0%, to $90,970,000 for the
three months ended January 31, 2002 from $79,801,000 for the three months ended
January 31, 2001. The increase was primarily attributable to the commercial
introduction of Xbox and GameCube and the continued rollout of PlayStation 2.
For the three months ended January 31, 2002 and 2001, distribution activities
accounted for approximately 32.2% and 50.6% of net sales, respectively.
International operations accounted for approximately $58,852,000 or 20.8% of net
sales for the three months ended January 31, 2002 compared to $28,019,000 or
17.8% for the three months ended January 31, 2001. The increase was primarily
attributable to expanded publishing operations in Europe, including the release
of Max Payne on PlayStation 2 and continued sales of Grand Theft Auto 3 for
PlayStation 2. The Company expects that international sales will continue to
account for a significant portion of its revenue.
Cost of Sales. Cost of sales increased by $75,205,000, or 72.1%, to $179,465,000
for the three months ended January 31, 2002 from $104,260,000 for the three
months ended January 31, 2001. The increase was commensurate with the increase
in net sales. Cost of sales as a percentage of net sales decreased to 63.4% for
the three months ended January 31, 2002 from 66.2% for the prior comparable
period. The decrease in cost of sales as a percentage of net sales was due to a
higher percentage of publishing revenues which generally have lower cost of
sales. Cost of sales in 2001 included $18.3 million related to the adoption of
SAB 101. In future periods, cost of sales may be adversely affected by
manufacturing and other costs, price competition and by changes in product and
sales mix and distribution channels.
Selling and Marketing. Selling and marketing expenses increased by $9,443,000,
or 75.2%, to $21,995,000 for the three months ended January 31, 2002 from
$12,552,000 for the three months ended January 31, 2001. The increase was
attributable to increased television and other advertising expenses relating to
Max Payne and Grand Theft Auto 3 during the quarter. Selling and marketing
expenses as a percentage of net sales decreased to 7.8% from 8.0% for the three
months ended January 31, 2002 and 2001, respectively.
20
General and Administrative. General and administrative expenses increased by
$8,486,000, or 80.7%, to $18,997,000 for the three months ended January 31, 2002
from $10,511,000 for the three months ended January 31, 2001. General and
administrative expenses as a percentage of net sales remained constant from the
prior period. The increase in absolute dollars was attributable to increased
salaries necessary to support the Company's operations and legal and
professional fees incurred in connection with legal proceedings and regulatory
matters.
Research and Development. Research and development costs increased by $554,000,
or 39.6%, to $1,954,000 for the three months ended January 31, 2002 from
$1,400,000 for the three months ended January 31, 2001. Research and development
costs as a percentage of net sales decreased to 0.7% for the three months ended
January 31, 2002 from 0.9% for the three months ended January 31, 2001. The
decrease as a percentage of net sales was attributable to higher revenues.
Depreciation and Amortization. Depreciation and amortization expense of
$2,271,000 for the three months ended January 31, 2002 decreased slightly from
the prior comparable period, due to the Company's adoption of SFAS 142 offset by
increased costs related to the company wide implementation of a new accounting
software system.
Interest Expense. Interest expense decreased by $1,956,000, or 66.8%, to
$974,000 for the three months ended January 31, 2002 from $2,930,000 for the
three months ended January 31, 2001. The decrease was attributable to decreased
levels of borrowing from the Company's credit facilities.
Gain from Sales of Marketable Securities. For the three months ended January 31,
2002, the Company recognized a gain of $127,000 from the sale of securities.
Provision for Income Taxes. Income tax expenses increased by $12,621,000, or
126.9%, to $22,568,000 for the three months ended January 31, 2002 from
$9,947,000 for the three months ended January 31, 2001. The increase was
primarily attributable to increased taxable income. The decrease in the
effective rate to 39% for the three months ended January 31, 2002 as compared to
42% for the three months ended January 31, 2001 is the result of state and
foreign tax rate differentials and a decrease in non-deductible items, such as
goodwill.
Net Income. For the three months ended January 31, 2002, the Company achieved
net income of $34,829,000, as compared to net income of $8,232,000 for the three
months ended January 31, 2001.
Liquidity and Capital Resources
The Company's primary cash requirements have been and will continue to be to
fund developing, manufacturing and distributing its products. The Company has
historically satisfied its working capital requirements primarily through cash
flow from operations, the issuance of debt and equity securities and bank
borrowings. At January 31, 2002, the Company had working capital of $128,401,000
as compared to working capital of $88,229,000 at October 31, 2001.
21
The Company's cash and cash equivalents increased $24,916,000 to $30,972,000 at
January 31, 2002, from $6,056,000 at October 31, 2001. The increase is primarily
attributable to $76,032,000 of cash provided by operating activities and
$2,538,000 of cash provided by investing activities, offset by $52,107,000 used
in financing activities.
Net cash provided by operating activities for the three months ended January 31,
2002 was $76,032,000 compared to net cash provided by operating activities of
$21,332,000 for the prior comparable period. The increase in net cash was
primarily attributable to increased net income and working capital components.
Net cash provided by investing activities for the three months ended January 31,
2002 was $2,538,000 as compared to net cash used in investing activities of
$5,633,000 for the three months ended January 31, 2001. The increase is
attributable to the sale of securities and no acquisition in 2002 partially
offset by increased expenditures for fixed assts.
Net cash used in financing activities for the three months ended January 31,
2002 was $52,107,000, as compared to net cash used in financing activities of
$7,967,000 for the three months ended January 31, 2001. The increase in net cash
used in financing activities was primarily attributable to the repayment of
indebtedness.
In December 1999, the Company entered into a credit agreement, as amended, with
a group of lenders led by Bank of America, N.A., as agent. The agreement was
amended in February 2002 to provide for borrowings of up to $15,000,000 through
February 20, 2002; $22,500,000 through February 28, 2002; $30,000,000 through
April 13, 2002; and $50,000,000 through the remaining term of the agreement.
Generally, advances under the line of credit are based on a borrowing formula
equal to the lesser of (1) the borrowing limit or (2) 70% of eligible accounts
receivable, plus 25% of eligible inventory. Interest accrues on such advances at
the bank's prime rate plus 0.5%, or at LIBOR plus 2.5%. Borrowings under the
line of credit are collateralized by the Company's accounts receivable,
inventory, equipment, general intangibles, securities and other personal
property, including the capital stock of the Company's domestic subsidiaries.
The loan agreement contains certain financial and other covenants, which were
amended retroactively. Accordingly, as of January 31, 2002, the Company is in
compliance with such covenants, as amended. The loan agreement limits or
prohibits the Company from declaring or paying cash dividends, merging or
consolidating with another corporation, selling assets (other than in the
ordinary course of business), creating liens and incurring additional
indebtedness. The line of credit expires on December 7, 2002. The Company had no
outstanding borrowings under the revolving line of credit as of January 31,
2002.
In February 2001, the Company's United Kingdom subsidiary entered into a credit
facility agreement with Lloyds TSB Bank plc ("Lloyds") under which Lloyds agreed
to make available borrowings of up to $19,000,000. Advances under the credit
facility bear interest at the rate of 1.25% per annum over the bank's base rate,
and are guaranteed by the Company. In March 2002, the credit facility was
amended to extend the expiration date of the facility to March 31, 2004. The
Company had no outstanding borrowings under this facility as of January 31,
2002.
For the three months ended January 31, 2002, the Company received proceeds of
approximately $1,989,000 relating to exercise of stock options and warrants.
22
In connection with the Company's acquisition of the franchise of Duke Nukem' PC
and video games in December 2000, the Company is contingently obligated to pay
$6 million in cash upon delivery of the final PC version of Duke Nukem' Forever.
The payable will be recorded when the contingency is resolved.
The Company's accounts receivable, less an allowance for doubtful accounts,
returns and price protection and other discounts at January 31, 2002 was
$122,701,000. No single customer accounted for more than 10% of the receivable
balance at January 31, 2002. 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 had accounts receivable days outstanding
of 39 at January 31, 2002, as compared to 65 days at January 31, 2001.
The Company's offices and warehouse facilities are occupied under noncancelable
operating leases expiring at various times from July 2001 to October 2011.
Additionally, the Company has leased certain furniture equipment and automobiles
under noncancelable leases expiring through July 2005.
The Company has no material commitments for capital expenditures. The Company
anticipates that it will incur significant legal, accounting and other
professional fees and expenses in connection with pending litigation and
regulatory matters.
Based on its currently proposed operating plans and assumptions, the Company
believes that projected cash flow from operations and available cash resources,
including amounts available under its lines of credit, will be sufficient to
satisfy its cash requirements for the reasonably foreseeable future.
Fluctuations in Operating Results and Seasonality
The Company has experienced fluctuations in quarterly operating results as a
result of the timing of the introduction of new titles; variations in sales of
titles developed for particular platforms; market acceptance of the Company's
titles; development and promotional expenses relating to the introduction of new
titles, sequels or enhancements of existing titles; projected and actual changes
in platforms; the timing and success of title introductions by the Company's
competitors; product returns; changes in pricing policies by the Company and its
competitors; the accuracy of retailers' forecasts of consumer demand; the size
and timing of acquisitions; the timing of orders from major customers; and order
cancellations and delays in product shipment. Sales of the Company's titles are
also seasonal, with peak shipments typically occurring in the fourth calendar
quarter (the Company's fourth and first fiscal quarters) as a result of
increased demand for titles during the holiday season. Quarterly comparisons of
operating results are not necessarily indicative of future operating results.
23
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 January 31, 2002, and 2001, sales in
international markets accounted for approximately 20.8% and 17.8% 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.
Cautionary Statement and Risk Factors
Safe Harbor Statement under the Securities Litigation Reform Act of 1995: The
Company makes statements in this report that are considered forward-looking
statements under federal securities laws. Such forward-looking statements are
based on the beliefs of management as well as assumptions made by and
information currently available to them. The words "expect," "anticipate,"
"believe," "may," "estimate," "intend" and similar expressions are intended to
identify such forward looking statements. Forward-looking statements involve
risks, uncertainties and assumptions including, but not limited to, the
following:
The market for interactive entertainment software titles is characterized by
short product life cycles. The interactive entertainment software market is
characterized by short product life cycles and frequent introduction of new
products. New products may not achieve significant market acceptance or achieve
sufficient sales to permit the Company to recover development, manufacturing and
associated costs. Historically, few interactive entertainment software products
have achieved sustained market acceptance. Even the most successful titles
remain popular for only limited periods of time, often less than six months.
Because revenues associated with the initial shipments of a new product
generally constitute a high percentage of the total revenues associated with the
life of a product, any delay in the introduction of one or more new products
could harm the Company operating results. The failure of one or more of the
Company's products to achieve market acceptance could result in losses.
A significant portion of the Company's revenues is derived from a limited number
of titles. The Company's ten best selling titles accounted for approximately
62.2% of revenues for the three months ended January 31, 2002 and 31.3% of
revenues for the year ended October 31, 2001. Future titles may not be
commercially viable. The Company also may not be able to release new titles
within scheduled release times or at all. If the Company fails to continue to
develop and sell new, commercially successful titles, revenues and profits may
decrease substantially and the Company may incur losses.
24
The Company's quarterly operating results may vary significantly, which could
cause its stock price to decline. The Company has experienced and may continue
to experience wide fluctuations in quarterly operating results. The interactive
entertainment industry is highly seasonal, with sales typically higher during
the fourth and first calendar quarters, due primarily to the increased demand
for games during and immediately following the holiday buying season. The
Company's failure or inability to introduce products on a timely basis to meet
seasonal fluctuations in demand could harm the Company's business and operating
results. Other factors that cause fluctuations include delays in the
introduction of new titles; the size and timing of product and corporate
acquisitions; variations in sales of titles designed to operate on particular
platforms; development and promotional expenses relating to the introduction of
new titles, sequels or enhancements of existing titles; availability of hardware
platforms; the timing and success of title introductions by competitors; product
returns; the accuracy of retailers' forecasts of consumer demand; and the timing
of orders from major customers.
The Company's expense levels are based largely on expectations regarding future
sales. Therefore, the Company's operating results would be harmed by a decrease
in sales or a failure to meet sales expectations. The uncertainties associated
with product development, lengthy manufacturing lead times, production delays
and the approval process for products by hardware manufacturers and other
licensors make it difficult to predict the quarter in which products will ship
and may cause the Company to fail to meet financial expectations. In future
quarters operating results may fall below the expectations of securities
analysts and investors. In this event, the trading price of the Company's common
stock could decline.
The interactive entertainment software industry is cyclical, and is subject to
rapidly changing consumer tastes and preferences. The Company's business is
subject to all of the risks generally associated with the interactive
entertainment software industry, which has been cyclical in nature and has been
characterized by periods of significant growth followed by rapid declines.
Future operating results depend on numerous factors beyond the Company's
control, including the popularity, price and timing of new software and hardware
platforms being released and distributed by the Company and its competitors;
international, national and regional economic conditions, particularly economic
conditions adversely affecting discretionary consumer spending; changes in
consumer demographics; the availability of other forms of entertainment; and
critical reviews and public tastes and preferences, all of which change rapidly
and cannot be predicted.
Rapidly changing technology and platform shifts could hurt the Company's
operating results. The interactive entertainment industry in general is
associated with rapidly changing technology, which often leads to software and
platform obsolescence and significant price erosion over the life of a product.
The introduction of new platforms and technologies can render existing software
titles obsolete or unmarketable. Obsolescence of software or hardware platforms
could leave the Company with increased inventories of unsold titles and limited
amounts of new titles to sell to consumers, which would have a material adverse
effect on the Company's operating results. A number of the Company's competitors
have developed or are currently developing software for use by consumers over
the Internet. Future increases in the availability of such software or
technological advances in such software or the Internet could result in a
decline in platform-based software and impact the Company's sales. Direct sales
of software by major manufacturers over the Internet would materially adversely
affect the Company's distribution business.
25
Next-generation hardware platforms may not achieve significant market
acceptance. The Company's software development efforts with respect to new
hardware platforms may not lead to marketable titles or titles that generate
sufficient revenues to recover their development, manufacturing and marketing
costs, especially if a new hardware platform does not reach a significant level
of market acceptance. This risk may increase in the future as continuing
increases in development costs require corresponding increases in revenues in
order to maintain profitability. The Company is devoting development resources
on products designed for Sony's PlayStation 2, Microsoft's Xbox and Nintendo's
GameCube. If fewer than expected units of a new hardware platform are produced
or shipped, or if such platforms do not achieve commercial success, the Company
may experience lower than expected sales or losses for these platforms.
The Company's business is dependent on licensing and publishing arrangements
with third parties. The Company's success depends on its ability to identify and
develop new titles on a timely basis. The Company has entered into agreements
with third parties to acquire the rights to publish and distribute interactive
entertainment software. These agreements typically require the Company to make
advance payments, pay royalties and satisfy other conditions. The Company's
advance payments may not be sufficient to permit developers to develop new
software successfully. In addition, software development costs, promotion and
marketing expenses and royalties payable to software developers have increased
significantly in recent years and reduce the potential profits derived from
sales of the Company's software. Future sales of titles may not be sufficient to
recover advances to software developers, and the Company may not have adequate
financial and other resources to satisfy its contractual commitments. If the
Company fails to satisfy its obligations under these license agreements, the
agreements may be terminated or modified in ways that may be burdensome.
Returns of published titles and price protection may adversely affect the
Company's operating results. The Company is exposed to the risk of product
returns and price protection with respect to its customers. Although
distribution arrangements with retailers generally do not give them the right to
return titles to the Company or to cancel firm orders, the Company's
arrangements with retailers for published titles require it to accept returns.
The Company establishes a reserve for future returns and price protection for
published titles at the time of sales, based primarily on its return policies,
price protection policies and historical return rates. If return rates and price
protection for published titles significantly exceed established reserves,
revenues will decline and the Company could incur losses.
The interactive entertainment software industry is highly competitive. The
Company competes for both licenses to properties and the sale of interactive
entertainment software with Sony, Nintendo, Microsoft and Sega, each of which is
a large developer and marketer of software for its platforms. Sony and Nintendo
currently dominate the industry and have the financial resources to withstand
significant price competition and to implement extensive advertising campaigns,
particularly for prime-time television spots. These companies may also increase
their own software development efforts or focus on developing software products
for third-party platforms. The Company also competes with domestic and
international companies, large software companies and media companies. Many of
these competitors have far greater financial, technical, personnel and other
resources than the Company, and many are able to carry larger inventories, adopt
more aggressive pricing policies and make higher offers to licensors and
developers for commercially desirable properties.
26
Increased competition for limited shelf space and promotional support from
retailers could require the Company to incur greater expenses to market titles.
Retailers have limited shelf space and promotional resources, and competition is
intense among an increasing number of newly introduced interactive entertainment
software titles for adequate levels of shelf space and promotional support.
Competition for retail shelf space is expected to increase, which may require
the Company to increase its marketing expenditures just to maintain current
levels of sales of titles. Competitors with more extensive lines and popular
titles frequently have greater bargaining power with retailers. Accordingly, the
Company may not be able to achieve the levels of promotional support and shelf
space that such competitors receive.
Rating systems for interactive entertainment software, potential legislation and
consumer opposition could inhibit sales of the Company's products. Trade
organizations within the video game industry require interactive entertainment
software publishers to provide consumers with information relating to graphic
violence, profanity or sexually explicit material contained in software titles.
Certain countries have also established similar rating systems as prerequisites
for sales of interactive entertainment software in such countries. In some
instances, the Company may be required to modify products to comply with the
requirements of such governmental entities, which could delay the release of
those products in such countries. The Company recently discontinued making sales
of Grand Theft Auto 3 in Australia for several weeks while it made certain
content changes to this title to comply with applicable rating systems. The
Company believes that it complies with such rating systems and displays the
ratings received for its titles.
Historically, the Company's software titles received a rating of "E" (all ages)
or "T" (age 13 and over), although most newer titles (including Grand Theft Auto
3, Max Payne and State of Emergency) have received a rating of "M" (age 17 and
over). Certain retailers may decline to sell interactive entertainment software
containing graphic violence or sexually explicit material, which may limit the
potential market for the Company's "M" rated products.
Several proposals have been made for federal legislation to regulate the
interactive entertainment software, motion picture and recording industries,
including a proposal to adopt a common rating system for interactive
entertainment software, television and music containing violence and sexually
explicit material and the Federal Trade Commission has adopted rules with
respect to the marketing of such material to minors. Consumer advocacy groups
have also opposed sales of interactive entertainment software containing graphic
violence and sexually explicit material by pressing for legislation in these
areas and by engaging in public demonstrations and media campaigns. If any
groups were to target the Company's "M" rated titles, it might be required to
significantly change or discontinue a particular title, which in the case of the
Company's best selling titles could hurt its business. Additionally, in light of
the events in September 2001, the Company revised content in certain of its
products that the Company deemed inappropriate. Delays in the release of
products as a result of content changes could result in lost revenues.
27
The Company cannot publish console titles without the approval of hardware
manufacturers. The Company is required to obtain a license to develop and
publish titles for each hardware console platform for which it develops and
publishes titles. If any manufacturer chooses not to renew or extend the
Company's license agreement at the end of its current term, or if the
manufacturer were to terminate the license for any reason, the Company would be
unable to publish additional titles for that manufacturer's hardware platform.
The Company is dependent upon a license agreement with Sony to publish titles
for PlayStation 2. Termination of such agreement would seriously hurt the
Company's business.
Sony and Nintendo are the sole manufacturers of the titles published under
license from them. Games for the Xbox must be manufactured by pre-approved
manufacturers. Each platform license provides that the manufacturer may raise
prices for the titles at any time and grants the manufacturer substantial
control over the release of new titles. Each of these manufacturers also
publishes software for its own platforms and manufactures titles for all of its
other licensees and may choose to give priority to its own titles or those of
other publishers if it has insufficient manufacturing capacity or if there is
increased demand.
In addition, these manufacturers may not have sufficient production capacity to
satisfy the Company's scheduling requirements during any period of sustained
demand. If manufacturers do not supply the Company with finished titles on
favorable terms without delays, the Company's operations would be materially
interrupted, its revenues could decline and it could incur losses.
The Company may not be able to protect its proprietary rights or avoid claims
that it infringes on the proprietary rights of others. The Company develops
proprietary software and has obtained the rights to publish and distribute
software developed by third parties. The Company attempts to protect its
software and production techniques under copyright, trademark and trade secret
laws as well as through contractual restrictions on disclosure, copying and
distribution. Interactive entertainment software is susceptible to unauthorized
copying. Unauthorized third parties may be able to copy or to reverse engineer
the Company's software that the Company regards as proprietary. From time to
time, the Company receives notices from third parties alleging infringement of
their proprietary rights. Although the Company believes that its software and
technologies and the software and technologies of third-party developers and
publishers with whom its has contractual relations do not and will not infringe
or violate proprietary rights of others, it is possible that infringement of
proprietary rights of others has or may occur. Any claims of infringement, with
or without merit, could be time-consuming, costly and difficult to defend.
The Company is dependent on third-party software developers to complete many of
its titles. The Company relies on third-party software developers for the
development of a significant number of its titles. Quality third-party
developers are continually in high demand. Software developers may not be
available to develop software for the Company or may not be able to complete
titles on a timely basis or within acceptable quality standards. In addition,
the development cycle for new titles is long, typically ranging from twelve to
twenty-four months. After development of a product, it may take between six to
twelve additional months to develop the product for other hardware platforms. If
developers experience financial difficulties, additional costs or unanticipated
development delays, the Company may not be able to release titles according to
schedule.
28
The Company's software is susceptible to errors, which can harm the Company's
financial results and reputation. The technological advancements of new hardware
platforms allow more complex software products. As software products become more
complex, the risk of undetected errors in products when first introduced
increases. If, despite testing, errors are found in new products or releases
after shipments have been made, the Company could experience a loss of or delay
in timely market acceptance, product returns, loss of revenues and damage to its
reputation.
Gross margins relating to the Company's distribution business have been
historically narrow which increases the impact of variations in costs on
operating results. As a result of intense price competition in the console
hardware and software distribution industry, gross margins in the Company's
distribution business have historically been narrow and the Company expects them
to continue to be narrow. The Company receives purchase discounts from suppliers
based on various factors, including volume purchases. These purchase discounts
directly affect gross margins. It may become more difficult for the Company to
achieve the percentage growth in sales required to continue to receive volume
purchase discounts.
The Company may not be able to adequately adjust its cost structure in a timely
fashion in response to a sudden decrease in demand. A significant portion of the
Company's selling and general and administrative expense is comprised of
personnel, facilities and costs of invested capital. In the event of a
significant decline in revenues, the Company may not be able to exit facilities,
reduce personnel, or make other significant changes to its cost structure
without significant disruption to its operations or without significant
termination and exit costs. Management may not be able to implement such
actions, if at all, in a timely manner to offset an immediate shortfall in
revenues and gross profit.
The Company's distribution business is dependent on suppliers to maintain an
adequate supply of products to fulfill customer orders on a timely basis. The
Company's ability to obtain particular products in required quantities and to
fulfill customer orders on a timely basis is critical to its success. In most
cases, the Company has no guaranteed price or delivery agreements with
suppliers. In certain product categories, limited price protection or return
rights offered by manufacturers may have a bearing on the amount of product the
Company may be willing to purchase. The console hardware industry experiences
significant product supply shortages from time to time due to the inability of
certain manufacturers to supply certain products on a timely basis. As a result,
the Company has experienced, and may in the future continue to experience,
short-term hardware inventory shortages. In addition, manufacturers who
currently distribute their products through the Company may decide to
distribute, or to substantially increase their existing distribution, through
other distributors, or directly to retailers. In the case of software,
alternative means of distribution have emerged, such as electronic distribution.
29
The Company is subject to the risk that inventory values may decline and
protective terms under supplier arrangements may not adequately cover the
decline in values. The interactive entertainment software and hardware industry
is subject to rapid technological change, new and enhanced generations of
products, and evolving industry standards. These changes may cause inventory to
decline substantially in value or to become obsolete. The Company is exposed to
inventory risk to the extent that supplier price protections are not available
on all products or quantities and are subject to time restrictions. In addition,
suppliers may become insolvent and unable to fulfill price protection
obligations.
A limited number of customers may account for a significant portion of the
Company's sales. Sales to the Company's five largest customers accounted for
approximately 20.9% of revenues for the year ended October 31, 2001 and 31.5%
of revenues for the three months ended January 31, 2002. Customers may terminate
their relationship with the Company at any time. The loss of relationships with
principal customers or a decline in sales to principal customers could harm the
Company's operating results. Bankruptcies or consolidations of certain large
retail customers could also hurt the Company's business.
The Company has historically incurred substantial indebtedness in order to
finance its operations. The Company entered into a line of credit agreement with
a group of lenders led by Bank of America, N.A., as agent. This line of credit
was recently amended to provide for borrowings of up to $30,000,000 through
April 13, 2002 and $50,000,000 thereafter. Borrowings under the line of credit
are collateralized by substantially all of the Company's assets. The loan
agreement contains certain financial and other covenants. The loan agreement
limits or prohibits the Company, subject to certain exceptions, 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. If the Company defaults on its
obligations, the banks could elect to declare its indebtedness to be due and
payable and foreclose on the Company's assets.
The Company is subject to credit and collection risks. Sales are typically made
on credit, with terms that vary depending upon the customer and the demand for
the particular title being sold. The Company does not hold any collateral to
secure payment by its customers. As a result, the Company is subject to credit
risks, particularly in the event that any of its receivables represent sales to
a limited number of retailers or are concentrated in foreign markets. If the
Company is unable to collect on accounts receivable as they become due and such
accounts are not covered by insurance, it could adversely affect the Company's
liquidity and financial condition.
The Company is subject to risks and uncertainties of international trade. Sales
in international markets, primarily in the United Kingdom and other countries in
Europe and the Pacific Rim, have accounted for a significant portion of
revenues. Sales in international markets accounted for approximately 20.8% of
the Company's revenues for the three months ended January 31, 2002. The Company
is subject to risks inherent in foreign trade, including increased credit risks;
tariffs and duties; fluctuations in foreign currency exchange rates; shipping
delays; and international political, regulatory and economic developments, all
of which can have a significant impact on the Company's operating results.
International sales are made in local currencies. For the three month ended
January 31, 2002, the Company's foreign currency translation adjustment loss was
$1,547,000. 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.
30
Class action lawsuits have been filed against the Company. These lawsuits can be
costly to defend and can distract management's time from the Company's
operations. An unfavorable resolution of these actions could have a material
adverse effect on the Company's financial condition and results of operations.
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 January 31, 2002, the Company had no
outstanding variable rate indebtedness.
The Company transacts business in foreign currencies and is exposed to risks
resulting from fluctuations in foreign currency exchange rates. Accounts
relating to foreign operations are translated into United States dollars using
prevailing exchange rates at the relevant fiscal quarter. Translation
adjustments are included as a separate component of stockholders' equity. For
the three months ended January 31, 2002, the Company's foreign currency
translation adjustment loss was $1,547,000. A hypothetical 10% change in
applicable currency exchange rates at January 31, 2002 would result in a
material translation adjustment. The Company purchases currency forward
contracts from time to time to seek to minimize the Company's exposure to
fluctuations in foreign currency exchange rates.
In addition, the Company may be exposed to risk of loss associated with
fluctuations in the value of its investments. The Company's investments are
stated at fair value, with net unrealized appreciation and loss included as a
separate component of stockholders' equity. The Company regularly reviews the
carrying values of its investments to identify and record impairment losses when
events or circumstances indicate that such investments may be permanently
impaired.
At January 31, 2002, the Company held 6,869,000 shares of common stock of
Gameplay.com plc with a fair value of approximately $55,000 and was recorded as
non-current. The Company recorded an unrealized loss of $12,000, net of tax
benefits of $8,000 as a separate component of accumulated other comprehensive
income (loss) in stockholders' equity.
At January 31, 2002, the Company held 113,000 shares of eUniverse Inc. with a
fair value of approximately $769,000, all of which was recorded as current
assets. The Company recorded an unrealized gain of $292,000, net of tax of
$179,000, as a separate component of accumulated other comprehensive income
(loss) in stockholders' equity.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Since December 2001, several purported class action lawsuits have been filed
against the Company and certain of its officers and directors alleging
violations of federal securities laws. The Company intends to vigorously defend
the claims against it.
The Securities and Exchange Commission has issued a formal order of
investigation into, among other things, certain accounting matters relating to
the Company's financial statements, periodic reporting and internal accounting
control provisions of the federal securities laws.
Item 2. Changes in Securities
From November 2001 to January 2002, 169,000 options from the 1997 Stock Option
Plan and 580,000 non-plan options were granted at exercise prices ranging
from $10.33 to $13.00.
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) Exhibits:
10.1 Letter Agreement dated July 26, 2001 by and between Apogee
Software, Ltd. and the Company.*
*Portions hereof have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment in accordance with Exchange Act Rule 24b-2.
(b) Reports on Form 8-K:
None
32
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
18th day of March 2002.
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By: /s/ Kelly Sumner
--------------------------------
Kelly Sumner
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Karl H. Winters
-------------------------------
Karl H. Winters
Chief Financial Officer
(Principal Financial Officer)
33