SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): July 29, 1997
TAKE-TWO INTERACTIVE SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-29230 51-0350842
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
575 Broadway, New York, New York 10012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212)941-2988
Not Applicable
Former name or former address, if changed since last report
Item 7. Financial Statements and Exhibits.
The following financial statements and pro forma financial information
omitted from Form 8-K for the event dated July 29, 1997, in reliance upon
instructions 7(a)(4) and 7(b)(2) of Form 8-K, are filed herewith.
(a) Financial Statements of the Businesses Acquired.
1. Financial Statements of Inventory Management Systems, Inc.
Report of Independent Accountants
Balance Sheet as of October 31, 1996
Balance Sheet as of April 30, 1997 (unaudited)
Statements of Operations for the years ended October 31, 1996 and
October 31, 1995
Statements of Operations for the six months ended April 30, 1997 and
April 30, 1996 (unaudited)
Statements of Stockholders' Equity (Deficit) for the years ended
October 31, 1996 and October 31, 1995
Statement of Stockholders' Equity (Deficit) for the six months ended
April 30, 1997 (unaudited)
Statements of Cash Flows for the years ended October 31, 1996 and
October 31, 1995
Statements of Cash Flows for the six months ended April 30, 1997 and
April 30, 1996 (unaudited)
Notes to Financial Statements
2. Financial Statements of GameTek (UK) Limited
Report of Independent Accountants
Consolidated Balance Sheet as of July 29, 1997
Consolidated Statements of Operations for the year ended July 31,
1996 and the period ended July 29, 1997
Consolidated Statements of Stockholders' Equity (Deficit) for the
year ended July 31, 1996 and the period ended July 29, 1997
Consolidated Statements of Cash Flows for the year ended July 31,
1996 and the period ended July 29, 1997
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
Unaudited Pro Forma Consolidated Financial Statements for Take-Two
Interactive Software, Inc.
Unaudited Consolidated Pro Forma Statement of Operations for the year
ended October 31, 1996
Notes to Unaudited Pro Forma Consolidated Financial
Statements for the year ended October 31, 1996
Unaudited Consolidated Pro Forma Statement of Operations for the nine
months ended July 31, 1997
Notes to Unaudited Pro Forma Consolidated Financial
Statements for the nine months ended July 31, 1997
(c) Exhibits.
Reference is made to the Exhibits previously filed with the Securities and
Exchange Commission as Exhibits to the Company's Report on Form 8-K for the
event dated July 29, 1997.
Report of Independent Accountants
To the Stockholders of
Inventory Management Systems Corporation:
We have audited the accompanying balance sheet of INVENTORY MANAGEMENT SYSTEMS,
INC. as of October 31, 1996 and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the two years in the
period ended October 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Inventory Management Systems,
Inc. as of October 31, 1996, and results of operations and cash flows for each
of the two years in the period ended October 31, 1996, in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
August 22, 1997.
INVENTORY MANAGEMENT SYSTEMS, INC.
Balance Sheets
As of October 31, 1996 and April 30, 1997 (unaudited)
October 31, 1996 April 30, 1997
---------------- --------------
(Unaudited)
ASSETS:
Current assets:
Cash $ 92,740 $ 44,756
Accounts receivable 246,597 118,970
Inventories 84,932 76,125
Due from shareholders 119,049 42,979
Due from related party 113,000 10,209
--------- ---------
Total current assets 656,318 293,039
Fixed assets, net 69,420 36,023
--------- ---------
Total assets $ 725,738 $ 329,062
========= =========
LIABILITIES and STOCKHOLDERS' (DEFICIT) EQUITY:
Current liabilities:
Current portion of note payable $ 12,574 $ 16,937
Line of credit 190,400
Accounts payable 548,691 174,603
--------- ---------
Total current liabilities 751,665 191,540
Note payable, net of current portion 10,510 --
--------- ---------
Total liabilities 762,175 191,540
--------- ---------
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, no par value; 5,000 shares authorized;
40 shares issued and outstanding 1,000 1,000
Retained earnings (deficit) (37,437) 136,522
--------- ---------
Total stockholders' (deficit) equity (36,437) 137,522
--------- ---------
Total liabilities and stockholders' (deficit) equity $ 725,738 $ 329,062
========= =========
The accompanying notes are an integral part of the financial statements.
2
INVENTORY MANAGEMENT SYSTEMS, INC.
Statements of Operations
For the years ended October 31, 1995 and 1996 and the
six months ended April 30, 1996 and 1997 (unaudited)
October 31, April 30,
-------------------------- ------------------------
1995 1996 1996 1997
---------- ----------- ----------- -----------
(Unaudited)
Net sales $ 4,461,347 $ 1,374,419 $ 753,866 $ 1,866,421
Cost of sales 4,432,074 1,083,289 594,181 1,374,693
----------- ----------- ----------- -----------
Gross profit 29,273 291,130 159,685 491,728
----------- ----------- ----------- -----------
Operating expenses:
Selling and marketing 23,975 53,155 41,639 43,864
General and administrative 143,388 162,134 79,916 70,775
Depreciation and amortization 10,041 17,052 8,526 4,773
----------- ----------- ----------- -----------
Total operating expenses 177,404 232,341 130,081 119,412
----------- ----------- ----------- -----------
Income (loss) from operations (148,131) 58,789 29,604 372,316
Interest expense (income) 23,478 28,550 17,970 12,739
----------- ----------- ----------- -----------
Net income (loss) $ (171,609) $ 30,239 $ 11,634 $ 359,577
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
3
INVENTORY MANAGEMENT SYSTEMS, INC.
Statements of Stockholders' Equity (Deficit)
For the years ended October 31, 1995 and 1996 and the
six months ended April 30, 1997 (unaudited)
No Par Value
Common Stock
---------------------- Accumulated
Shares Amount Deficit Total
--------- --------- --------- ---------
Balance, October 31, 1994 40 $ 1,000 $ 339,986 $ 340,986
Stockholders' distribution (53,019) (53,019)
Net loss (171,609) (171,609)
--------- --------- --------- ---------
Balance, October 31, 1995 40 1,000 115,358 116,358
--------- --------- --------- ---------
Stockholders' distribution (183,034) (183,034)
Net income 30,239 30,239
--------- --------- --------- ---------
Balance, October 31, 1996 40 1,000 (37,437) (36,437)
Stockholders' distribution (185,618) (185,618)
Net income (unaudited) 359,577 359,577
--------- --------- --------- ---------
Balance, April 30, 1997 (unaudited) 40 $ 1,000 $ 136,522 $ 137,522
========= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
4
INVENTORY MANAGEMENT SYSTEMS, INC.
Statement of Cash Flows
For the years ended October 31, 1995 and 1996 and the
six months ended April 30, 1996 and 1997 (unaudited)
October 31, April 30,
--------------------------- ----------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
Cash flows from operating activities:
Net income (loss) $ (171,609) $ 30,239 $ 11,634 $ 359,577
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 10,041 17,052 8,526 4,773
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (9,308) 266,849 116,894 127,627
(Increase) decrease in due from related parties -- -- (25,400) 102,791
(Increase) decrease in inventory 192,041 84,453 161,181 8,807
(Increase) decrease in other current assets (71,464) (41,536) 4,856 --
Increase (decrease) in accounts payable (476,323) 282,859 121,701 (374,088)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (526,622) 639,916 399,392 229,487
----------- ----------- ----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (57,927) (3,044) (16,900) (4,276)
Proceeds from sale of equipment -- -- -- 47,000
----------- ----------- ----------- -----------
Net cash used in investing activities (57,927) (3,044) (16,900) 42,724
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 20,000 -- 16,520 --
Repayments of notes payable (7,032) (11,502) (11,229) (4,363)
Proceeds from line of credit 1,123,541 444,703 219,859 214,141
Repayments for line of credit (659,841) (718,003) (318,159) (404,541)
Loans to stockholders (554,395) (280,669) 27,726 (50,000)
Payment from stockholders 513,189 161,617 (230,670) 110,187
Distribution to stockholders (53,019) (183,034) (23,269) (185,618)
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities 382,443 (586,888) (319,222) (320,194)
----------- ----------- ----------- -----------
Net increase (decrease) in cash for
the period (202,106) 49,984 63,270 (47,983)
Cash, beginning of period 244,862 42,756 42,756 92,739
----------- ----------- ----------- -----------
Cash, end of period $ 42,756 $ 92,740 $ 106,026 $ 44,756
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 28,904 $ 29,852 $ 18,822 $ 12,739
=========== =========== =========== ===========
Equipment acquired under capital lease $ 17,040
===========
The accompanying notes are an integral part of the financial statements.
5
INVENTORY MANAGEMENT SYSTEMS, INC.
Notes to Financial Statements
1. The Company:
Inventory Management Systems Corporation (the "Company") was incorporated
in the state of Virginia on February 24, 1992 as a subchapter S
corporation. The Company is engaged in the wholesale distribution of
entertainment software for personal computers and video game console
platforms primarily in the United States.
On July 30, 1997 the Company was merged with and into Take-Two Interactive
Software, Inc. ("Take-Two"). Under the terms of the merger agreement,
18,750 shares of Take-Two common stock were exchanged for each share of the
Company. In connection with this merger, 750,000 shares of Take-Two common
stock were exchanged for all of the outstanding stock of the Company.
2. Significant Accounting Policies:
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates relate to the
collectibility of accounts receivable and the valuation of inventory.
Actual results could differ from these estimates.
Concentration of Credit Risk
Cash balances are maintained with one financial institution and may, at
times, exceed insurable amounts.
Revenue Recognition
Revenue from the sale of multiple copies of software products is recognized
upon shipment to retailers. An allowance for returns is determined based
upon the higher of historical patterns or negotiated terms. Advance
payments are deferred and recognized as income when earned.
Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Inventories consist of finished products totaling $84,932 and
$76,125 (unaudited) at October 31, 1996 and April 30, 1997, respectively.
Continued
6
INVENTORY MANAGEMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
2. Significant Accounting Policies, Continued
Fixed Assets
Depreciation of computer equipment and furniture and fixtures is provided
for under the straight-line method over their estimated useful lives of
three and five years. The cost of additions and betterments is capitalized,
and repairs and maintenance costs are charged to operations in the periods
incurred. When depreciable assets are retired or sold, the cost and related
allowances for depreciation are removed from the accounts and the resulting
gain or loss is recognized.
Advertising
The Company expenses advertising costs as incurred. Advertising expense for
the years ended October 31, 1995 and 1996 and the six months ended April
30, 1996 and 1997 amounted to $0, $3,523, $23 (unaudited) and $15,000
(unaudited), respectively.
Recently Issued Pronouncements
On January 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which was issued by the FASB in March 1995. This
statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. There was no effect upon adoption to the
Company's results of operations or cash flows.
Interim Financial Statements (Unaudited)
(a) Basis of Presentation - The interim unaudited financial statements
reflect adjustments, consisting only of normal recurring accruals,
which are, in the opinion of the Company's management, necessary for a
fair presentation of the results of operations for the periods
presented. Revenues and net loss for any interim period are not
necessarily indicative of the results for a full year.
Continued
7
INVENTORY MANAGEMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
3. Fixed Assets:
Fixed assets consist of the following:
October 31, April 30,
1996 1997
---------- ----------
(Unaudited)
Vehicle $ 67,221 $ 20,221
Equipment 28,226 32,502
Furniture and fixtures 7,899 7,899
-------- --------
103,346 60,622
Less, Accumulated depreciation and
amortization 33,926 24,599
-------- --------
$ 69,420 $ 36,023
======== ========
Depreciation expense for the years ended October 31, 1995 and 1996 and the
six months ended April 30, 1996 and 1997 amounted to $10,041, $17,052,
$8,526 (unaudited) and $4,773 (unaudited), respectively.
4. Common Stock:
As of October 31, 1996 there were 5,000 shares of no par value common stock
authorized and 40 shares issued and outstanding.
5. Related Party Transaction:
During the years ended October 31, 1995 and 1996, the Company paid sales
commissions of $4,590 and $33,000, respectively, to a related party. As of
October 31, 1996, there was $113,000 due from this related party relating
to advances. These advances have no repayment terms.
The corporate headquarters of the Company is under a month to month lease
with a related party. Rent expense under this lease amounted to $5,500 and
$12,000 for the years ended October 31, 1995 and 1996, respectively.
Continued
8
INVENTORY MANAGEMENT SYSTEMS, INC.
Notes to Financial Statements, Continued
6. Line of Credit:
In February 1995, the Company entered into a line of credit agreement with
Crestar Bank with a credit limit of $500,000, bearing interest at prime
rate plus 1/2% per year (9.25% and 8.75% at October 31, 1995 and 1996,
respectively). Monthly accrued interest is due on the first day of the
following month, and is automatically added to the outstanding balance of
the line of credit. In February 1997, the Company renewed the line of
credit agreement with Crestar Bank, its credit limit was reduced to
$250,000, and bears interest at prime rate plus 1/2% per year.
7. Concentration of Risk:
For the year ended October 31, 1996 and 1995, the Company recorded net
sales of 21% and 61% from its largest customer.
For the years ended October 31, 1996 and 1995, the Company purchased 52%
and 83%, respectively, of products sold, from its main supplier.
9
GAMETEK (UK) LIMITED AND SUBSIDIARY
CONTENTS
Page
----
Report of Independent Accountants 1
Consolidated Balance Sheet as of July 29, 1997 2
Consolidated Statements of Operations for the year ended July 31, 1996
and the period ended July 29, 1997 3
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended July 31, 1996
and the period ended July 29, 1997 4
Consolidated Statements of Cash Flows for the year ended July 31, 1996 and
the period ended July 29, 1997 5
Notes to Consolidated Financial Statements 7
Report of Independent Accountants
To the Board of Directors and Stockholders of
Gametek (UK) Limited and Subsidiary:
We have audited the accompanying consolidated balance sheet of Gametek (UK)
Limited and Subsidiary (collectively, the "Company") as of July 29, 1997 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the year ended July 31, 1996 and the period ended July 29,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gametek (UK)
Limited and Subsidiary as of July 29, 1997 and the consolidated results of
operations and cash flows for the year ended July 31, 1996 and the period ended
July 29, 1997, in conformity with United States generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses and net capital deficiency
raise substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ COOPERS & LYBRAND
Reading, England
October 13, 1997
GAMETEK (UK) LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in US Dollars)
July 29,
1997
-----------
ASSETS
Current assets:
Cash and cash equivalents $ 151,977
Accounts receivable, less allowance for doubtful accounts of $353,561 66,569
Corporation tax receivable 672,126
Prepaid expense and other current assets 58,855
-----------
Total current assets 949,527
Property and equipment, net 57,616
-----------
Total assets $ 1,007,143
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 712,839
Accrued expenses 222,471
Bank overdrafts 686,384
Other taxes and social security 150,418
-----------
Total current liabilities 1,772,112
Other liabilities 89,725
-----------
Total liabilities 1,861,837
-----------
Stockholders' deficit:
Common stock 1 pound ($1.55) par value, 1,677,756 shares authorized;
1,677,756 shares issued and outstanding 2,692,826
Accumulated deficit (3,638,494)
Cumulative translation adjustment 90,974
-----------
Total stockholders' deficit (854,694)
-----------
Total liabilities and stockholders' deficit $ 1,007,143
===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
GAMETEK (UK) LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in US Dollars)
July 31, July 29,
1996 1997
----------- -----------
Net sales $ 8,851,681 $ 5,068,676
Cost of sales 6,008,628 5,737,481
----------- -----------
Gross profit (loss) 2,843,053 (668,805)
Operating expenses:
Selling and marketing 1,879,967 1,145,021
General and administrative 1,762,313 3,049,379
Depreciation 118,987 88,372
----------- -----------
Loss from operations (918,214) (4,951,577)
Interest expenses 85,828 58,695
Other expenses 111,837 63,635
----------- -----------
Loss before income tax benefit (1,115,879) (5,073,907)
Income tax benefit 292,330 557,333
----------- -----------
Net loss $ (823,549) $(4,516,574)
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
3
GAMETEK (UK) LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in US Dollars)
Retained
Earnings Cumulative
Common Stock (Accumulated Translation
Shares Amount Deficit) Adjustment Total
----------- ----------- ------------ ----------- -----------
Balance, July 31, 1995 652,155 $ 1,010,840 $ 1,701,629 $ 54,978 $ 2,767,447
Net loss (823,549) (823,549)
Foreign currency translation (40,452) (40,452)
----------- ----------- ----------- ----------- -----------
Balance, July 31, 1996 652,155 1,010,840 878,080 14,526 1,903,446
Issuance of common stock 1,025,601 1,681,986 1,681,986
Net loss (4,516,574) (4,516,574)
Foreign currency translation 76,448 76,448
----------- ----------- ----------- ----------- -----------
Balance, July 29, 1997 1,677,756 $ 2,692,826 $(3,638,494) $ 90,974 $ (854,694)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
GAMETEK (UK) LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in US Dollars)
July 31, July 29,
----------- -----------
1996 1997
----------- -----------
Cash flows from operating activities:
Net loss $ (823,549) $(4,516,574)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 118,987 88,372
Amortization of prepaid royalties 512,614 121,523
Impairment of prepaid royalties 52,675 518,278
Provision for bad debts and returns allowances 348,578 (168,994)
Provision for inventory obsolescence 29,411 (71,679)
Loss on disposal of property and equipment -- 12,062
Changes in operating assets and liabilities:
Decrease in accounts receivable 875,528 2,264,942
(Increase)/decrease in other current assets (603,162) 1,148,481
(Increase)/decrease in inventories (144,816) 510,273
Increase in corporation tax receivable (294,216) (672,126)
(Decrease)/increase in accounts payable (626,137) 294,408
Increase/(decrease) in accrued expenses 161,848 (40,480)
Increase in other accounts payable 217,818 1,285,030
Decrease in royalties payable (432,293) (153,589)
----------- -----------
Net cash (used in)/provided by operating activities (606,714) 619,927
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (91,075) (26,867)
----------- -----------
Net cash used in investing activities (91,075) (26,867)
----------- -----------
Cash flows from financing activities:
Net reduction/(borrowings) under overdraft facility 721,271 (459,525)
----------- -----------
Net cash provided by/(used in) financing activities 721,271 (459,525)
----------- -----------
Effect of foreign currency translation on cash 10,876 (19,057)
----------- -----------
Net increase in cash for the period 34,358 114,478
Cash, beginning of period 3,141 37,499
----------- -----------
Cash, end of period $ 37,499 $ 151,977
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
5
GAMETEK (UK) LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in US Dollars)
July 31, July 29,
---------- ----------
1996 1997
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for corporation tax $ -- $ 252,893
========== ==========
Cash paid during the year for interest $ 85,858 $ 55,814
========== ==========
Conversion of inter-company debt to equity $ -- $1,681,986
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
6
GAMETEK (UK) LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. The Company
Gametek (UK) Limited ("Gametek") was incorporated in England and Wales on
August 14, 1992 and was a wholly owned subsidiary of GameTek Inc, a Florida
Corporation. Gametek and its wholly owned subsidiary, Gametek Deutschland
GmbH (collectively, the "Company") publishes and distributes entertainment
software games. The Company delivers game titles to consumers mainly
through distribution and licensing agreements.
On July 29, 1997 the Company was acquired by and became a wholly owned
subsidiary of Take-Two Interactive Software, Inc. On August 1, 1997,
Gametek changed its name to Take-Two Interactive Software Europe Limited.
2. Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements include the financial statements of
Gametek and its wholly owned subsidiary. All intercompany balances and
transactions have been eliminated.
The accompanying financial statements have been prepared assuming Gametek
will continue as a going concern. This basis of preparation contemplates
the realization of assets and the settlement of liabilities and commitments
in the normal course of business. Continuance of the Company as a going
concern is dependent upon, among other things, the Company's ability to
publish and distribute new commercially successful entertainment software
products and obtaining additional financing to fund the development of
these products, the outcome of which cannot presently be determined. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. A significant proportion of cash
balances are maintained with two major financial institutions with
satisfactory standing. The Company sells a significant portion of its
products through third-party distributors and, as a result, may maintain
individually significant receivable balances with distributors. If the
financial condition and operations of such distributors deteriorate and the
risk of collections increases substantially, the Company's operating
results could be adversely affected.
7
GAMETEK (UK) LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Revenue Recognition
Software license revenue is recognized in the period the software is
delivered (in the absence of any continuing obligation by the Company) and
collectibility of the resulting receivable is reasonably assured. Revenue
from the sale of software products is recognized upon shipment.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. All maintenance and repairs
are expensed as incurred. Depreciation is provided using the straight-line
method. Furniture and fixtures, office equipment and computer equipment are
depreciated over four years. Leasehold improvements are amortized over the
estimated lives of the assets or the lease terms, whichever are shorter.
On disposal, costs and accumulated depreciation are removed from the
accounts and gains (losses) are recognized in the statement of operations.
Prepaid Royalties
Cash paid by the Company to third party developers, in exchange for the
exclusive rights to publish and distribute the related software games, is
capitalized as prepaid royalties.
Amortization commences upon the general release of a game title and is
recognized as a component of cost of sales. Amortization of these assets is
recognized based on the ratio of gross revenues from actual products
shipped, compared to the total anticipated gross revenues from a
predetermined number of games to be shipped, as agreed between the Company
and the developers and defined in the agreement. Once the predetermined
number of games has been shipped and the asset has been fully amortized,
the Company is then obligated to pay the developer royalties on future
sales, as defined in the agreement. These royalities are recognized at the
time of the sale as a component of cost of sales.
Prepaid royalties are compared, by individual game title, to the net
realizable value of the amounts capitalized. Amounts in excess of net
realizable value, if any, are immediately written off.
8
GAMETEK (UK) LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
As of July 29, 1997 the Company has $8,200 of prepaid royalties recorded on
its balance sheet. During 1996 and 1997, the amortization of prepaid
royalties was $512,614 and $121,523, respectively. Prepaid royalties
written off due to impairment amounted to $52,675 and $518,278 in 1996 and
1997, respectively.
Income Taxes
The Company recognizes deferred taxes under the asset and liability method
of accounting for income taxes. Deferred income taxes are recorded to
reflect the tax consequences on future years of differences between the tax
basis of assets and liabilities and financial reporting amounts at each
year-end. In addition, valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Use of Estimates
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 date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. The most significant estimates and assumptions
relate to the recoverability of prepaid royalties, allowance for doubtful
accounts and income taxes. Actual results could differ from those
estimates.
Recently Issued Pronouncement
On August 1, 1996, the Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which was issued by the FASB in March 1995. This
statement requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. There was no effect upon adoption to the
Company's results of operations or cash flows.
Foreign Currency Translation
Assets and liabilities of Gametek (UK) Limited and its foreign subsidiary
have been translated into United States dollars at the rates of exchange at
the balance sheet date. Revenues and expenses are translated into United
States dollars at the average rate during the period. Translation gains and
losses arising from the use of differing exchange rates from year to year
are included in the cumulative translation adjustment on the balance sheet.
9
GAMETEK (UK) LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
Transaction losses of $112,837 and $64,259 were incurred for the year
ended July 31, 1996 and the period ended July 29, 1997, respectively.
3. Property and Equipment :
Property and equipment consist of the following:
July 29,
1997
--------
Office equipment 210,293
Furniture and fixtures 63,386
Leasehold improvements 9,134
--------
282,813
Less accumulated depreciation and amortization (225,197)
--------
57,616
========
Depreciation and amortization expense for the year ended July 31, 1996 and
the period ended July 29, 1997 was $118,987 and $88,372, respectively.
4. Income Taxes:
For the year ended July 31, 1996 and the period ended July 29, 1997 the
Company incurred significant tax losses. These losses were carried back
against prior years' profits, resulting in the Company's recognition of an
income tax benefit of $292,330 in the year ended December 31, 1996 and
$557,333 in the period ended July 29, 1997. The Company has fully utilized
all prior years' profits available for offsetting future losses, for
purposes of recovering taxes paid in prior years.
10
GAMETEK (UK) LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
The components of the net deferred tax assets as of July 29, 1997 consist
of the following:
Net operating loss carryforwards $ (803,590)
Depreciation (27,290)
Other 2,409
--------------
Net deferred tax assets (828,471)
Less: valuation allowance 828,471
--------------
Deferred tax asset $ --
==============
5. Commitments and Contingencies
The Company occupies one office facility, which is under a noncancelable
operating lease and expires in August 2006. In addition, the Company has
leased certain equipment under noncancelable operating leases which expire
through the year 2000.
Future minimum rentals required as of July 29, 1997 are as follows:
Year ending July 31,
1998 $ 194,009
1999 $ 178,537
2000 $ 177,933
2001 $ 163,110
2002 and after $ 829,143
----------
1,542,732
==========
Rent expense for the year ended July 31, 1996 and the period ended July 29,
1997 was $107,482 and $154,857, respectively.
The company has firm commitments with third party software developers under
which it is obligated to pay $264,860 during the year ended July 31, 1998.
The company had a bank guarantee of up to 200,000 pounds ($328,000)
covering the payment of duty on imported goods.
11
GAMETEK (UK) LIMITED AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
6. Line of Credit
The Company has a line of credit with Barclays Bank PLC, with a credit
limit of 400,000 pounds ($656,000). Interest is charged on the account at
2.25% above the base (LIBOR-7%) rate. At July 29, 1997, the Company's
outstanding borrowing balance was 387,460 pounds ($635,434).
7. Related Party Transactions
During the year ended July 31, 1996 and the period ended July 29, 1997 the
Company entered into certain royalty and trading transactions with its
previous parent company, GameTek, Inc. These transactions are summarized as
follows:
July 31, July 29,
1996 1997
Sales to GameTek, Inc $ -- $ 125,415
========== ==========
Purchases from GameTek, Inc $ 322,721 $ 99,644
========== ==========
Royalties paid to GameTek, Inc $ -- $1,426,402
========== ==========
On July 24, 1997, the Company settled its debt of 1,025,601 pounds
($1,681,986) owed to GameTek, Inc. This balance was settled through the
capitalization of the debt and issuance of 1,025,601 shares of Common
Stock, 1 pound par value.
12
Unaudited Pro Forma Consolidated Financial Information
The following unaudited pro forma consolidated statement of operations, for the
year ended October 31, 1996, including the notes thereto, give effect to the
acquisitions of Mission Studios Corp. ("Mission"), GameTek (UK) Limited
("GameTek"), and Inventory Management Systems Inc. ("IMSI"), by Take-Two
Interactive Software, Inc. and subsidiaries (the "Company") as if the
acquisitions had occurred as of November 1, 1995.
Under purchase accounting, the assets and liabilities of the acquired businesses
are required to be adjusted from their historical amount to their estimated fair
value. Purchase accounting adjustments have been preliminarily estimated by the
Company's management based upon available information and are believed by
management to be reasonable. There can be no assurance, however, that the final
purchase accounting adjustments that will ultimately be determined by the
Company's management will not differ from these estimates.
The unaudited pro forma consolidated statement of operations for the year ended
October 31, 1996 has been prepared based on the audited historical consolidated
statement of operations of the Company for the year ended October 31, 1996; the
unaudited historical statement of operations of Mission for the period from
November 1, 1995 to September 16, 1996, (the day prior to the effective
acquisition date of Mission); the audited historical statement of operations of
GameTek for the year ended July 31, 1996; and the audited historical statement
of operations of IMSI for the year ended October 31, 1996. The historical
statement of operations for Alternative Realty Technologies, Inc. is immaterial
and has not been included in the unaudited pro forma consolidated statement of
operations.
The unaudited pro forma consolidated financial information presented for
informational purposes only, is not necessarily indicative of the actual results
of operations of the Company that would have been reported if the acquisitions
of Mission, GameTek, and IMSI had occurred as of November 1, 1995, nor does such
information purport to indicate results of future operations or financial
condition. In the opinion of management, all adjustments necessary to present
fairly such pro forma financial information have been made to the financial
statements, and are reflected in the accompanying notes. The unaudited pro forma
consolidated financial information should be read in conjunction with the
Company's Registration Statement on Form SB-2 and with the financial statements
included in this filing.
Historical Pro Forma
------------------------------------------------------- -------------------------------
Company (1) Mission (2) GameTek (3) IMSI (4) Adjustments As Adjusted
----------- ----------- ----------- ----------- ------------ ------------
Net sales $11,154,709 $ 7,148 $ 8,851,681 $ 1,374,419 $ (862,567)(5) $ 20,525,390
Cost of sales 5,153,414 5,869 6,008,628 1,083,289 (919,637)(5) 11,331,563
----------- ----------- ----------- ----------- ------------ ------------
Gross profit 6,001,295 1,279 2,843,053 291,130 57,070 9,193,827
Operating expenses:
Research and development 718,089 92,852 -- -- 810,941
Selling and marketing 2,664,923 102,972 1,879,967 53,155 (9,417)(5) 4,691,600
General and administrative 1,613,817 85,565 1,762,313 162,134 3,623,829
Depreciation and amortization 252,471 15,107 118,987 17,052 391,969 (6) 1,172,951
377,365 (7)
----------- ----------- ----------- ----------- ------------ ------------
Total operating expenses 5,249,300 296,496 3,761,267 232,341 759,917 10,299,321
----------- ----------- ----------- ----------- ------------ ------------
Income (loss) from 751,995 (295,217) (918,214) 58,789 (702,847) (1,105,494)
operations
Interest and other expenses 203,545 11,861 197,665 28,550 27,152 (8) 1,285,524
207,203 (9)
569,548 (10)
40,000 (11)
----------- ----------- ----------- ----------- ------------ ------------
Income (loss) before income
and foreign withholding taxes 548,450 (307,078) (1,115,879) 30,239 (1,546,750) (2,391,018)
Provision for income and foreign
withholding taxes 29,049 -- (292,330) -- (263,281)
----------- ----------- ----------- ----------- ------------ ------------
Net income (loss) $ 519,401 $ (307,078) $ (823,549) $ 30,239 $ (1,546,750) $ (2,127,737)
=========== =========== =========== =========== ============ ============
Net loss per share $ (0.27)
============
Weighted average shares outstanding (12) 7,927,617
============
Notes to Unaudited Pro Forma Consolidated Financial Statements
for the year ended 10/31/96
(1) Reflects the Company's audited historical financial statements for the year
ended October 31, 1996, which includes the operations of Mission from
September 17, 1996, the date of its acquisition.
(2) Reflects Mission's unaudited historical financial statements for the period
from November 1, 1995 to September 16, 1996. No game titles were released
during this period. The Company released Jetfighter III in November 1996.
(3) Reflects GameTek's audited historical financial statements for the year
ended July 31, 1996.
(4) Reflects IMSI's audited historical financial statements for the year ended
October 31, 1996.
(5) Reflects the elimination of inter-company transactions between Take-Two and
GameTek.
(6) Reflects the adjustment of $391,969, which represents the amortization of
the intangible assets acquired in connection with the Mission acquisition.
(7) Reflects the adjustment of $377,365, which represents the amortization of
the intangible assets acquired in connection with the GameTek acquisition.
The acquired intangible asset is being amortized over the estimated useful
life of 10 years.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follows:
Working capital $(1,160,278)
Equipment 59,786
Software titles 1,175,000
Intangibles 3,773,654
-----------
$ 3,848,162
===========
(8) Reflects additional interest expense incurred in connection with the
$337,500 promissory note, bearing interest at an effective rate of 10.25%
per annum, issued in connection with the Mission acquisition.
(9) Reflects additional interest expense incurred in connection with the 1996
private placement of debt securities, bearing interest at 10.25% per annum
for the short-term portion of the notes and 14.0% per annum for the
long-term portion of the notes.
(10) Reflects additional interest expense as a result of the amortization of the
discount attributable to the issuance of warrants in connection with the
1996 private placement of debt securities.
(11) Reflects interest expense incurred in connection with the $500,000
promissory note, bearing interest at 8.0% per annum, issued in connection
with the GameTek acquisition.
(12) Reflects the Company's historical weighted average shares outstanding, plus
750,000 shares issued in connection with the acquisition of IMSI, plus
406,553 shares issued in connection with the acquisition of GameTek.
The following unaudited pro forma consolidated statement of operations, for the
nine months ended July 31, 1997, including the notes thereto, give effect to the
acquisitions of Mission, GameTek, IMSI and Creative Alliance Group, Inc.
("CAG"), by the Company as if the acquisitions had occurred as of November 1,
1995.
Under purchase accounting, the assets and liabilities of the acquired businesses
are required to be adjusted from their historical amount to their estimated fair
value. Purchase accounting adjustments have been preliminarily estimated by the
Company's management based upon available information and are believed by
management to be reasonable. There can be no assurance, however, that the final
purchase accounting adjustments that will ultimately be determined by the
Company's management will not differ from these estimates.
The unaudited pro forma consolidated statement of operations for the nine month
period ended July 31, 1997 has been prepared based on the unaudited historical
consolidated statement of operations of the Company as reported in the Company's
Form 10Q-SB for the quarter ended July 31, 1997 and the unaudited historical
consolidated statement of operations for the period from November 1, 1996 to
July 29, 1997, (the day prior to the effective acquisition date of GameTek). The
historical statement of operations for Alternative Realty Technologies, Inc. is
immaterial and has not been included in the unaudited pro forma consolidated
statement of operations.
The unaudited pro forma consolidated financial information presented for
informational purposes only, is not necessarily indicative of the actual results
of operations of the Company that would have been reported if the acquisitions
of Mission, GameTek, IMSI and CAG had occurred as of November 1, 1995 nor does
such information purport to indicate results of future operations or financial
condition. In the opinion of management, all adjustments necessary to present
fairly such pro forma financial information have been made to the financial
statements, and are reflected in the accompanying notes. The unaudited pro forma
consolidated financial information should be read in conjunction with the
Company's Registration Statement on Form SB-2 and with the financial statements
included in this filing.
Historical Pro Forma
------------------------------ ---------------------------------
Company (1) GameTek (2) Adjustments As Adjusted
------------ ------------ ------------ ------------
Net sales $ 12,480,137 $ 3,081,054 $ 15,561,191
Cost of sales 7,701,026 3,727,094 $ 11,428,120
------------ ------------ ------------ ------------
Gross profit 4,779,111 (646,040) 4,133,071
Operating expenses:
Research and development 890,003 -- 890,003
Selling and marketing 2,734,494 736,377 3,470,871
General and administrative 1,816,942 2,539,249 4,356,191
Depreciation and amortization 494,572 58,627 $ 283,024 (3) 836,223
------------ ------------ ------------ ------------
Total operating expenses 5,936,011 3,334,253 283,024 9,553,288
------------ ------------ ------------ ------------
Income (loss) from operations (1,156,900) (3,980,293) (283,024) (5,420,217)
Interest and other expenses 600,599 43,772 (6,012)(4) 77,696
(184,626)(5)
(391,037)(6)
15,000 (7)
------------ ------------ ------------ ------------
Income (loss) before income
and foreign withholding taxes (1,757,499) (4,024,065) 283,651 (5,497,913)
Provision for income and foreign withholding taxes 18,104 (247,610) (229,506)
------------ ------------ ------------ ------------
Net income (loss) $ (1,775,603) $ (3,776,455) $ 283,651 $ (5,268,407)
============ ============ ============ ============
Net loss per share $ (0.63)
============
Weighted average shares outstanding (8) 8,401,612
============
Notes to Unaudited Pro Forma Consolidated Financial Statements
for the nine months ended 7/31/97
(1) Reflects the unaudited historical financial statements for the nine months
ended July 31, 1997, which includes the operations of Take-Two, Mission,
IMSI, CAG and GameTek from July 29, 1997, the date of its acquisition.
(2) Reflects GameTek's unaudited historical financial statements for the period
from November 1, 1996 to July 28, 1997.
(3) Reflects the adjustment of $283,024, which represents the amortization of
the intangible assets acquired in connection with the GameTek acquisition.
The acquired intangible asset is being amortized over the estimated useful
life of 10 years.
(4) Reflects the reduction of interest expense incurred in connection with the
$337,500 promissory note, bearing interest at an effective rate of 10.25%
per annum, issued in connection with the Mission acquisition which has
already been incurred in the unaudited pro forma consolidated income
statement for the year ended October 31, 1996.
(5) Reflects the reduction of interest expense incurred in connection with the
1996 private placement of debt securities, bearing interest at 10.25% per
annum for the short-term portion of the notes and 14.0% per annum for the
long-term portion of the notes which has already been incurred in the
unaudited pro forma consolidated income statement for the year ended
October 31, 1996.
(6) Reflects the reduction of interest expense as a result of the amortization
of the discount attributable to the issuance of warrants in connection with
the 1996 private placement of debt securities which has already been
incurred in the unaudited pro forma consolidated income statement for the
year ended October 31, 1996.
(7) Reflects interest expense incurred on the unpaid principal amount of a
$500,000 promissory note, bearing interest at 8.0% per annum, issued in
connection with the GameTek acquisition.
(8) Reflects the Company's historical weighted average shares outstanding, plus
750,000 shares issued in connection with the acquisition of IMSI, plus
150,000 shares issued in connection with the acquisition of CAG, plus
406,553 shares issued in connection with the acquisition of GameTek.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October __, 1997
TAKE-TWO INTERACTIVE SOFTWARE, INC.
By /s/ Ryan A. Brant
-----------------
Name: Ryan A. Brant
Title: Chairman
