UNITED STATES
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): March 18, 1998
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 incoropration) File Number) Identification No.)
575 Broadway, New York, NY 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 March 18, 1998, 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 BMG Interactive Group
Independent Auditors' Report
Combined Balance Sheet as of June 30, 1997
Combined Statements of Operations for the Years ended June 30, 1997
and 1996
Combined Statements of Divisional Deficit for the Years ended June 30,
1997 and 1996
Combined Statements of Cash Flows for the Years ended June 30, 1997
and 1996
Notes to Combined Financial Statements
Other Independent Auditors' Reports
Combined Balance Sheet as of December 31, 1997 (unaudited)
Combined Statements of Operations and Divisional Deficit for the six
months ended December 31, 1997 and 1996 (unaudited)
Combined Statements of Cash Flows for the six months ended December
31, 1997 and 1996 (unaudited)
(b) Pro Forma Financial Information.
Unaudited Pro Forma Consolidated Financial Statements for Take-Two
Interactive Software, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended October 31, 1997.
Notes to Unaudited Pro Forma Consolidated Financial Statements for the
year ended October 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 March 18, 1998.
Independent Auditors' Report
The Board of Directors
Bertelsmann AG:
We have audited the accompanying combined balance sheet of BMG Interactive Group
(the "Company"), an indirect wholly owned operation of Bertelsmann AG, as of
June 30, 1997, and the related combined statements of operations, divisional
deficit, and cash flows for each of the years in the two-year period ended June
30, 1997. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits. We did not audit the
financial statements of the Company's operations in the United Kingdom, France,
Italy and Japan, which statements reflect assets constituting 43% of combined
assets as of June 30, 1997, and revenues constituting 60% and 77% of combined
revenues in 1997 and 1996, respectively. Those statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to the amounts included for the operations of the United Kingdom,
France, Italy and Japan, is based solely on the reports of the other auditors.
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 statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
The BMG Interactive Group has been operated as an integral part of BMG
Entertainment, a division of Bertelsmann AG, and has no separate legal
existence. The basis of preparation of the accompanying financial statements is
described in note 2 to the combined financial statements.
In our opinion, based on our audits and the reports of other auditors, the
combined financial statements referred to above present fairly, in all material
respects, the financial position of BMG Interactive Group, an indirect wholly
owned operation of Bertelsmann AG, as of June 30, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended June 30, 1997 on the basis described in the preceding paragraph and in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
May 19, 1998
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Balance Sheet
(in thousands)
June 30, 1997
Assets 1997
----
Current assets:
Cash $ 144
Accounts receivable, net 3,523
Inventory, net 1,393
Producer royalty advances, net 8,809
Prepaid expenses and other current assets 943
--------
Total current assets 14,812
Furniture and equipment, net of
accumulated depreciation of $528 852
Other noncurrent assets 1,039
--------
Total assets $ 16,703
========
Liabilities and Divisional Deficit
Current liabilities:
Accounts payable 2,213
Accrued expenses 1,556
Other current liabilities 5,165
Due to Bertelsmann AG and affiliates 75,036
--------
Total current liabilities 83,970
Contingencies (note 7)
Divisional deficit:
Retained deficit (67,602)
Cumulative translation adjustment 335
--------
Total divisional deficit (67,267)
Total liabilities and divisional deficit $ 16,703
========
See accompanying notes to combined financial statements.
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Statements of Operations
(in thousands)
Years ended June 30, 1997 and 1996
1997 1996
---- ----
Net revenues $ 33,531 15,011
Cost of revenues (44,962) (13,928)
-------- --------
Gross profit (loss) (11,431) 1,083
-------- --------
Operating expenses:
Selling 7,181 4,043
General and administrative 18,376 15,994
-------- --------
25,557 20,037
-------- --------
Net loss $(36,988) (18,954)
======== ========
See accompanying notes to combined financial statements.
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Statements of Divisional Deficit
(in thousands)
Years ended June 30, 1997 and 1996
Cumulative
Retained Translation Divisional
Deficit Adjustment Deficit
-------- ----------- ---------
Balance at July 1, 1995 $(11,660) -- (11,660)
Foreign Currency
Translation Adjustments -- 404 404
Net Loss (18,954) -- (18,954)
-------- -------- --------
Balance at June 30, 1996 (30,614) 404 (30,210)
Foreign Currency
Translation Adjustments -- (69) (69)
Net Loss (36,988) -- (36,988)
-------- -------- --------
Balance at June 30, 1997 $(67,602) 335 (67,267)
======== ======== ========
See accompanying notes to combined financial statements.
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Statements of Cash Flows
(in thousands)
Years ended June 30, 1997 and 1996
1997 1996
---- ----
Cash flows from operating activities:
Net loss $(36,988) (18,954)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 223 464
Change in assets and liabilities:
Accounts receivable, net (733) (2,376)
Inventory, net (405) (379)
Producer royalty advances, net 12,804 (3,053)
Prepaid expenses and other assets 98 (2,004)
Other current liabilities 2,765 3,033
-------- --------
Net cash used in operating activities (22,236) (23,269)
-------- --------
Cash flows from investing activities:
Capital expenditures (289) (566)
-------- --------
Net cash used in investing activities (289) (566)
-------- --------
Cash flows from financing activities:
Net advances from Bertelsmann and affiliates 22,397 23,878
-------- --------
Net cash provided by financing activities 22,397 23,878
-------- --------
Net (decrease) increase in cash (128) 43
Cash at beginning of year 272 229
-------- --------
Cash at end of year $ 144 272
======== ========
See accompanying notes to combined financial statements.
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements
June 30, 1997 and 1996
(1) Company Background
BMG Interactive Group (collectively the "Company") representing the
interactive operations of BMG Entertainment Companies ("BMG") in various
countries, including the United States, United Kingdom, Germany, France,
Italy, Sweden, and Japan, are wholly owned operations of their ultimate
parent, Bertelsmann AG ("BAG"), a privately owned German corporation. The
Company designs, develops, publishes, markets and distributes interactive
software games for use on multimedia personal computer and video game
console platforms. The operations of the Company have never been operated
as a separate legal entity but rather an integral part of BMG.
In July 1997, the operations in Sweden were sold to an unaffiliated entity.
Net revenues and operating income for the operations in Sweden for the year
ended June 30, 1996 amounted to approximately $2.2 million and $210,000,
respectively. Total assets of Sweden at June 30, 1996 amounted to
approximately $2.7 million. In May 1997, the Company decided to wind-down
its U.S. operations.
In March 1998, Take-Two Interactive Software, Inc. ("Take-Two") acquired
substantially all of the operating assets of the Company including
operations in France, Germany and the United Kingdom and excluding Japan
and Italy.
As consideration for this purchase, Take-Two issued to BMG 1,850,000 shares
of newly created Series A Convertible Preferred Stock (the "Preferred
Stock"), which are convertible on a one-for-one basis into common shares of
Take-Two. Take-Two has granted BMG certain "piggyback" and demand
registration rights with respect to the shares of Common stock issuable
upon conversion of the Preferred Stock.
2
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements, Continued
(2) Significant Accounting Policies
Basis of Presentation and Principles of Combination
The accompanying combined financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States and include the accounts of the Company. All significant
intercompany balances and transactions between interactive operations have
been eliminated in the combined financial statements. The Company's
operations have never been operated as a separate legal entity but rather
an integral part of BMG. Included in the accompanying statements of
operations are net revenues and costs of revenues that substantially relate
directly to the Company. Selling and general and administrative expenses
(including severance costs associated with the U.S. operations in 1997)
include those accounts that relate directly to the Company as well as
allocations from BMG (see note 3(b)). These allocations are believed by
management to be reasonable under the circumstances, however, there can be
no assurances that such allocations will be indicative of future results of
operations.
The accompanying financial statements have been prepared under a going
concern basis and do not reflect the sale of the Company to Take-Two or any
purchase accounting adjustments to be made by Take-Two.
Inventory
Inventory, consisting of finished goods, is stated at the lower of average
cost or market.
Producer Royalty Advances
Producer royalty advances represent advance payments made to independent
software developers and licensors of intellectual property. Generally such
agreements specify guaranteed minimum royalties requiring partial payment
in advance of performance and payment of the balance within a certain
period of time after performance. The liabilities for unpaid guaranteed
minimum royalties are recorded when it is determined that all conditions
preparatory to performance have been met by the developer or licensor. The
Company recognizes royalty expense to developers/licensors based upon
revenue earned from the respective product. Upon release, or at time the
determination is made that the product will not be released, royalty
advances not expected to be recovered through royalties on sales or
subsidiary rights are charged to cost of revenues.
3
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements, Continued
(2), Continued
Furniture and Equipment
Furniture and equipment are stated at cost and depreciation is computed on
a straight-line basis over the estimated useful lives of 3 to 7 years.
Maintenance and repair costs are expensed as incurred.
Revenue Recognition
Revenue from the distribution of interactive software games is recognized
upon the shipment of product by distributors. Retailers have the right to
return copies not sold. Accordingly, an allowance for returns is
established when sales by distributors occur based upon historical
experience. Royalty income is recognized when earned.
Income Taxes
The Company is not subject to income taxes directly. However the combined
financial statements reflect the accounting for income taxes as if the
Company were to have been a separate tax filer in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. If the
Company were to have been a separate tax filer, hypothetical deferred tax
assets primarily representing the tax effected net operating loss
carryforwards in various jurisdictions, amounted to $23.5 million at June
30, 1997. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during future periods. Management has determined that a valuation
allowance for the entire amount is necessary.
4
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements, Continued
(2), Continued
Foreign Currency Translation
Cumulative translation adjustments include primarily the effects of using
current rates in translating the financial statements of the foreign
operations where applicable.
Use of Estimates
The preparation of combined 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 disclosures of contingent assets and liabilities at the
date of the combined financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Prospective Accounting Pronouncements
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130")
and "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131") were issued. SFAS 130 establishes standards for reporting and
disclosure of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders,
which is not currently required. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Adoption of these statements will not impact the Company's
combined financial position, results of operations, or cash flows, and any
effect will be limited to the form and content of its disclosure. Both
statements are effective for fiscal years beginning after December 15,
1997.
Fair Value of Financial Instruments
In estimating the fair value for financial instruments, the Company has
assumed that the carrying amount of cash, accounts receivable, accounts
payable, and accrued expenses approximates fair value because of the short
maturity of those instruments. It is not practical to estimate the fair
market value of the amount Due to Bertelsmann AG and affiliates due to the
related party nature of the transaction.
5
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements, Continued
(3) Transactions with Related Parties
(a) Affiliates of the Company are responsible for fulfillment and warehousing
activities related to the Company's software games. These affiliated
companies are also responsible for collection of receivables from sale of
products, and are obligated to pay such receivables, net of returns, in
accordance with specified dating terms, regardless of collection results.
In exchange for these services, the Company pays a fee based on a
predetermined formula or actual costs incurred.
(b) The Company receives an allocation of assessments from affiliates of the
Company for its share of certain personnel and related employee benefits
and other overhead charges such as rent, utilities, finance, human resource
and information technology support, etc. Total amounts paid under these
assessments amounted to $2,997,887 and $1,567,873 in 1997 and 1996,
respectively.
(4) Foreign Operations
The information below summarizes the results of operations and selected
balance sheet information for the Company's foreign geographic operations.
1997 1996
---- ----
(in thousands)
--------------
Net Revenues $ 32,198 $ 14,318
Net Loss $ (4,392) $ (7,146)
Identifiable Assets $ 11,878
6
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements, Continued
(5) International Production Agreement
In March 1994, the Company entered into an exclusive distribution agreement
with Crystal Dynamics N.V. ("Crystal") to market, distribute and sell,
outside of the United States and Canada, interactive entertainment software
programs produced by Crystal. The term of the Agreement was to continue up
to and including June 30, 1998.
In accordance with the agreement, the Company advanced to Crystal $15
million upon signing and executing the contract. In addition, 18 months
following the date of execution, the Company paid an additional advance of
approximately $700,000 as specified by the agreement.
All advances paid to Crystal are recoupable from net receipts. Net
receipts, as defined by the agreement, represent gross sales less a
distribution fee retained by BMG and other selling and administrative
expenses.
The Company amended this agreement in March, 1998 to include the
distribution of one additional Crystal product released in March, 1998, for
a recoupable, non-returnable advance of approximately $1 million. No
further amounts are required to be advanced to Crystal by the Company.
(6) Liquidity and Due to Bertelsmann AG and Affiliates
The combined financial statements of the Company have been prepared on a
going-concern basis which contemplates the realization of assets and the
liquidation of liabilities in the normal course of business. As shown in
the accompanying combined financial statements, the Company has incurred
operating losses through June 30, 1997. The ability of the Company to
continue as a going concern is dependent upon the Company's ability to
achieve profitable operations and obtain additional financing. The combined
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company not be able to continue in existence as BMG has committed to
provide additional funding necessary to fund the Company's cash
requirements until December 1998.
7
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Notes to Combined Financial Statements, Continued
(7) Contingencies
In September 1996, Gametek (UK) Limited ("Gametek") filed a claim against
an affiliate Company relating to a distribution agreement with Gametek.
Gametek claimed damages of non-performance of approximately $900,000. A
counterclaim of approximately $200,000 was filed by the Company's affiliate
that advances provided to Gametek under the agreement should be refunded.
Judgment was received in favor of the Company's affiliate in November 1997.
Gametek is seeking to appeal such decision. Take-Two Interactive Software,
Inc., which currently owns Gametek, has agreed to take all action to
terminate and resolve the dispute and release BMG from all liability under
this claim pursuant to the terms of the Asset Purchase Agreement between
Take-Two and BMG (see note 1).
In October 1996, Montparnasse Multimedia S.A.R.L. ("Montparnasse"), acting
as a manufacturer of the Company, filed a claim for $100,000 in damages
against Heritage Creative Partners Company ("Heritage") and Mr. Patrice
Dubreuil (collectively "the Plaintiffs") relating to various contracts
entered into for the packaging of Company products. Montparnasse initially
claimed breach of contract against Heritage; the Plaintiffs counterclaimed
against Montparnasse for approximately $500,000. BAG and the affiliated
Company were brought into the legal proceedings as it is claimed that the
Company's affiliate sold Montparnasse worldwide product and made
adjustments to the packaging to conform to the local markets without
authorization of the Plaintiffs.
During 1997, the Company and Montparnasse filed a series of claims against
one another for violation of contractual obligations of license and
distribution agreement. Montparnasse's claim is in the amount of FF
57,000,000 (approximately $9.5 million). In September 1997, a judgment was
made in favor of the Company; however, no amount of damages was allocated
with respect to the Company's claim. Montparnasse has appealed this
decision; no date for the appeal has been set. Montparnasse and the Company
are currently discussing a settlement.
The Company is party to other legal proceedings generally incidental to its
business.
No amounts have been provided with respect to the above contingencies as
management believes that the outcome from the above litigation is not
probable and will not have a material adverse effect on the combined
financial position or results of operations of the Company.
(8) Supplemental Cash Flow Information
The Company did not expend any amounts relative to interest or income taxes
during 1997 and 1996
Independent Auditor's Report
On Combining Financial Statements
The Board of Directors
Bertelsmann AG
We have audited the accompanying balance sheet of BMG Interactive Italy as of
June 30, 1997, and the related statements of operations, divisional deficit and
cash flows for each of the years in the two-year period ended June 30, 1997.
These financial statements are the responsibility of the BMG Ricordi SpA, Italy
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standard generally accepted
in the United States. Those standards required 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.
The accompanying financial statements have been prepared in conformity with the
accounting instructions of Bertelsmann AG, the Company's ultimate parent, for
use in preparing the combined financial statement of BMG Interactive Group.
These instructions, which do not require the presentation of substantially all
disclosures, differ from accounting principles generally accepted in the United
States. Accordingly, the accompanying financial statements are not intended to
present BMG Interactive Italy's financial position, results of operations, and
cash flows in accordance with accounting principles generally accepted in the
United States.
In our opinion, the financial statements referred to above have been prepared,
for the purpose described in the preceding paragraph, in all material respects,
in conformity with the accounting instructions of Bertelsmann AG, as discussed
in Note 2.
Bozen April 17, 1998
REVISA & CO. KG
Dr. Mansjorg Verdorfer
To the Board of Directors
Of BMG Entertainment International (UK and Ireland) Limited
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, divisional deficit and cash flows present
fairly, in all material respects, the financial position of BMG Interactive (UK
Business) (the "Business") at 30 June 1997 and 1996, and the results of its
operations and its cash flows for each of the two years in the period ended 30
June 1997, in conformity with generally accepted accounting principles in the
United States. These financial statements are the responsibility of the
Business's management, our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards in the
United Kingdom which do not differ in any material respect to generally accepted
auditing standards in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
BMG Interactive (UK Business) has been operated as an integral part of BMG
Entertainment International (UK and Ireland) Limited, a wholly owned subsidiary
of Bertelsmann AG, and has no separate legal existence. The basis of preparation
of the accompanying financial statements is described in Note 1 to the combined
financial statements.
The accompanying financial statements have been prepared assuming that the
Business will continue as a going concern. As discussed in Note 1 to the
financial statements, the Business has a working capital deficiency, has
incurred recurring negative cash flow from operations, and may require
additional financing to fund its operations, which 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.
Price Waterhouse
London, United Kingdom
19 May 1998
Independent Auditors' Report
On Combining Financial statements
To the Board of Directors of Bertelsmann AG:
We have audited the accompanying balance sheet of BMG Interactive Japan ("the
Division"), a division of BMG Japan, Inc. ("the Company") (formerly BMG Victor,
Inc., a Japanese corporation) as of June 30, 1997, and the related statements of
operations, divisional deficit and cash flows for each of the years in the
two-years period ended June 30, 1997. These financial statements are the
responsibility of the BMG Japan, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standard generally accepted
in the United States. Those standards required 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.
The accompanying financial statements have been prepared in conformity with the
accounting instructions of Bertelsmann AG, the Company's ultimate parent, for
use in preparing the combined financial statement of BMG Interactive Group.
These instructions, which do not require the presentation of substantially all
disclosures, differ from accounting principles generally accepted in the United
States. Accordingly, the accompanying financial statements are not intended to
present the Division's financial position, results of operations, and cash flows
in accordance with accounting principles generally accepted in the United
States.
In our opinion, the financial statements referred to above have been prepared,
for the purpose described in the preceding paragraph, in all material respects,
in conformity with the accounting instructions of Bertelsmann AG, as discussed
in Note 2.
Arthur Andersen
Tokyo, Japan
April 17, 1998
Independent Auditors' Report
On Combining Financial statements
To the Board of Directors of Bertelsmann AG:
We have audited the accompanying balance sheet of BMG Interactive (France) as of
June 30, 1997, and the related statements of operations, divisional deficit and
cash flows for each of the years in the two-years period ended June 30, 1997.
These financial statements are the responsibility of the BMG France SA
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standard generally accepted
in the United States. Those standards required 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.
The accompanying financial statements have been prepared in conformity with the
accounting instructions of Bertelsmann AG, the Company's ultimate parent, for
use in preparing the combined financial statement of BMG Interactive Group.
These instructions, which do not require the presentation of substantially all
disclosures, differ from accounting principles generally accepted in the United
States. Accordingly, the accompanying financial statements are not intended to
present BMG Interactive (France)'s financial position, results of operations,
and cash flows in accordance with accounting principles generally accepted in
the United States.
In our opinion, the financial statements referred to above have been prepared,
for the purpose described in the preceding paragraph, in all material respects,
in conformity with the accounting instructions of Bertelsmann AG, as discussed
in Note 1.
Neuilly, April 17, 1998
Deloitte Touche Tohmatsu
Albert Aidan
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Balance Sheet
(in thousands)
December 31, 1997
(unaudited)
Assets
Current assets:
Cash $ 21
Accounts receivable, net 2,662
Inventory, net 992
Producer royalty advances, net 6,241
Prepaid expenses and other current assets 395
--------
Total current assets 10,311
Furniture and equipment, net of
accumulated depreciation of $826 306
Other noncurrent assets 322
--------
Total assets $ 10,939
========
Liabilities and Divisional Deficit
Current liabilities:
Accounts payable 1,255
Accrued expenses 3,435
Other current liabilities 1,800
Due to Bertelsmann AG and affiliates 78,843
--------
Total current liabilities 85,333
Contingencies
Divisional deficit:
Retained deficit (75,579)
Cumulative translation adjustment 1,185
--------
Total divisional deficit (74,394)
Total liabilities and divisional deficit $ 10,939
========
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Statements of Operations and Divisional Deficit
(in thousands)
Six-Month period ended December 31, 1997 and 1996
(unaudited)
1997 1996
---- ----
Net revenues $ 14,441 14,779
Cost of revenues (12,716) (10,797)
-------- --------
Gross (loss) profit (1,725) 3,982
-------- --------
Operating expenses:
Selling 3,427 2,675
General and administrative 6,112 10,554
-------- --------
9,539 13,229
-------- --------
Net loss (7,814) (9,247)
Divisional deficit beginning of period (67,267) (30,210)
Foreign currency translation adjustment 687 146
-------- --------
Divisional deficit end of period $(74,394) (39,311)
======== ========
BMG INTERACTIVE GROUP
(An Indirect Wholly-Owned Operation of Bertelsmann AG)
Combined Statements of Cash Flows
(in thousands)
Six-Month period ended December 31, 1997 and 1996
(unaudited)
1997 1996
---- ----
Cash flows from operating activities:
Net loss $ (7,814) (9,247)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 298 74
Change in assets and liabilities:
Accounts receivable, net 861 (5,664)
Inventory, net 401 (209)
Producer royalty advances, net 2,568 (8,220)
Prepaid expenses and other assets 1,504 (245)
Other current liabilities (1,748) 4,661
-------- --------
Net cash used in operating activities (3,930) (18,850)
-------- --------
Cash flows from investing activities:
Capital expenditures -- (70)
-------- --------
Net cash used in investing activities -- (70)
-------- --------
Cash flows from financing activities:
Net advances from Bertelsmann and affiliates 3,807 18,877
-------- --------
Net cash provided by financing activities 3,807 18,877
-------- --------
Net decrease in cash (123) (43)
Cash at beginning of year 144 272
-------- --------
Cash at end of year $ 21 229
======== ========
Unaudited Pro Forma Consolidated Financial Information
The following unaudited pro forma consolidated statement of operations, for the
year ended October 31, 1997, including the notes thereto, give effect to the
acquisitions of GameTek (UK) Limited ("GameTek"), Alternative Reality
Technologies, Inc. ("ART"), Inventory Management Systems Inc. ("IMSI"), Creative
Alliance Group, Inc. ("CAG"), L & J Marketing, Inc. D/B/A Alliance Distributors
("Alliance"), and BMG Interactive Group ("BMG"), by Take-Two Interactive
Software, Inc. and subsidiaries (the "Company") as if the acquisitions had
occurred as of November 1, 1996.
On July 31, 1997, the Company acquired all the outstanding stock of IMSI and
CAG. IMSI and CAG are engaged in the wholesale distribution of interactive
software games. To effect the acquisition, all of the outstanding shares of
common stock of each of IMSI and CAG were exchanged for 900,000 shares of
restricted common stock of the Company. The acquisition has been accounted for
as a pooling of interests in accordance with APB No. 16 and accordingly, the
Company's financial statements for the year ended October 31, 1997, have been
restated to include the results of operations of IMSI and CAG.
All other acquisitions were accounted for under purchase accounting. As a
result, the assets and liabilities of the acquired businesses are 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, 1997 has been prepared based on the audited historical consolidated
statement of operations of the Company for the year ended October 31, 1997 which
includes Take-Two, Mission, IMSI, CAG and GameTek / ART from July 29, 1997, the
date of its acquisition; the unaudited historical statement of operations of
GameTek for the period from November 1, 1996 to July 28, 1997; the historical
statement of operations for ART, prior to its acquisition, is immaterial and has
not been included in the unaudited pro forma consolidated statement of
operations; the unaudited historical statement of operations of Alliance for the
period from October 1, 1996 to September 30, 1997; and the unaudited historical
statement of operations of BMG (excluding the operations of Japan, Sweden and
Italy which were not acquired by the Company) for the period from January 1,
1997 to December 31, 1997.
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 GameTek, IMSI, CAG, Alliance and BMG had occurred as of November 1, 1996, 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 Annual Report on Form 10-KSB and with the financial statements
included in this filing.
Historical Pro Forma
------------------------------------------------------------ -------------------------------
Company (1) GameTek(2) Alliance(3) BMG(4) Adjustments As adjusted
------------ ------------ ------------ ------------ ------------ ------------
Net sales $ 19,014,083 $ 3,081,054 $ 29,143,311 $ 26,181,000 $ (95,110)(5) $ 77,324,338
Cost of sales 12,459,189 3,727,094 26,142,345 42,261,000 (95,110)(5) 84,494,518
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 6,554,894 (646,040) 3,000,966 (16,080,000) -- (7,170,180)
Operating expenses:
Research and development 1,248,258 -- -- -- -- 1,248,258
Selling and marketing 4,203,984 736,377 1,507,753 5,874,000 84,431(8) 12,406,545
General and administrative 3,385,481 2,539,249 1,040,920 12,975,000 -- 19,940,650
Depreciation and
amortization 844,221 58,627 27,980 -- 283,024(6) 1,414,664
200,812(7)
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 9,681,944 3,334,253 2,576,653 18,849,000 568,267 35,010,117
Income (loss) from
operations (3,127,050) (3,980,293) 424,313 (34,929,000) (568,267) (42,180,297)
Interest and other expenses 1,016,612 43,772 288,375 -- 30,000(9) 1,378,759
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before
income taxes (4,143,662) (4,024,065) 135,938 (34,929,000) (598,267) (43,559,056)
Provision for income taxes
(benefit) 18,421 (247,610) 15,100 -- -- (214,089)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) (4,162,083) (3,776,455) 120,838 (34,929,000) (598,267) (43,344,967)
Preferred dividends (135,416) -- -- -- -- (135,416)
Distributions paid to
S corporation shareholders
prior to acquisition (202,092) -- -- -- -- (202,092)
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)
attributable to
common stockholders'
$ (4,499,591) $ (3,776,455) $ 120,838 $(34,929,000) $ (598,267) $(43,682,475)
============ ============ ============ ============ ============ ============
Net loss per share $ (4.78)
Weighted average shares
outstanding (10) 9,141,029
Notes to Unaudited Pro Forma Consolidated Financial Statements for the
year ended October 31, 1997
(1) Reflects the Company's audited historical financial statements for the year
ended October 31, 1997, which includes the operations of Take-Two, Mission,
IMSI, CAG, and GameTek / ART 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 Alliance's unaudited historical financial statements for the
period from October 1, 1996 to September 30, 1997.
(4) Reflects BMG's unaudited historical financial statements for the period
January 1, 1997 to December 31, 1997. These unaudited historical financial
statements exclude the operations of Sweden, Japan and Italy which were not
acquired by the Company. BMG's operations in Sweden were sold in 1997 to an
unaffiliated entity. The operations of Japan and Italy served as
distribution channels and licensees of BMG content; these operations did
not contain any intellectual property.
The cost of the acquisition was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values as follow:
Working Capital $ 10,957,000
Equipment 541,000
------------
$ 11,498,000
============
(5) Reflects the elimination of inter-company transactions between IMSI and
Alliance.
(6) Reflects an 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.
(7) Reflects an adjustment of $200,812, which represents the amortization of
intangible assets acquired in connection with the Alliance acquisition. The
acquired intangible asset is being amortized over the estimated useful life
of 10 years.
(8) Reflects an adjustment of $84,431, which represents the amortization of
deferred compensation as a result of the issuance of non-qualified options
to Alliance employees at an exercise price of $2.00 per share. The options
vest over a period of three years. The difference between the exercise
price and the fair value of the options at the measurement date is being
amortized over the vesting period.
(9) Reflects additional 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.
(10) Reflects the Company's historical weighted average shares outstanding, plus
900,000 shares issued in connection with the acquisition of IMSI and CAG,
plus 406,553 shares issued in connection with the acquisition of GameTek,
plus 500,000 shares issued in connection with the acquisition of Alliance.
The calculation does not include the 1,850,000 shares of Series A
Convertible Preferred Stock, convertible on a one-for-one basis into shares
of Common Stock, issued in connection with the acquisition of BMG because
their inclusion would be anti-dilutive.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 26, 1998
Take-Two Interactive Software, Inc.
By: /s/ Ryan A. Brant
---------------------------
Ryan A. Brant
Chief Executive Officer
