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Atari Inc · 10-Q · For 12/31/99

Filed On 2/14/00   ·   Accession Number 950123-0-1259   ·   SEC File 0-27338

This Filing's "Filed As Of" Date was Corrected by the SEC on 2/23/00.

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  As Of                Filer                Filing    For/On/As Docs:Size              Issuer               Agent

 2/14/00  Atari Inc                         10-Q®      12/31/99    2:69K                                    RR Donnelley/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Gt Interactive Software Corp.                         23    135K 
 2: EX-27.1     Financial Data Schedule                                1      6K 


10-Q   —   Gt Interactive Software Corp.
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
13Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
19Item 1. Litigation
"Item 2. Changes in Securities and Use of Proceeds
20Item 4. Submissions of Matters to a Vote of Security Holders
"Item 5. Other Information
21Item 6. Exhibits and Reports on Form 8-K
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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 Commission File No. 0-27338 GT INTERACTIVE SOFTWARE CORP. (Exact name of registrant as specified in its charter) [Download Table] DELAWARE 13-3689915 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 417 FIFTH AVENUE, NEW YORK, NY 10016 (Address of principal (Zip code) executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / As of February 10, 2000, there were 103,216,452 shares of the registrant's Common Stock outstanding.
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GT INTERACTIVE SOFTWARE CORP. DECEMBER 31, 1999 QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION [Download Table] PAGE ---- Item 1. Financial Statements (Unaudited): Consolidated Condensed Balance Sheets as of March 31, 1999 (audited) and December 31, 1999 3 Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 1998 and 1999 4 Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended December 31, 1998 and 1999 5 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1998 and 1999 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II - OTHER INFORMATION Item 1. Litigation 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 4. Submissions of Matters to a Vote of Security Holders 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 23
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PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) [Enlarge/Download Table] MARCH 31, DECEMBER 31, 1999 1999 (AUDITED) (UNAUDITED) --------- ------------ ASSETS Current assets: Cash, cash equivalents and short-term investments $ 13,512 $ 20,380 Receivables, net 110,020 99,275 Inventories, net 138,208 84,774 Income taxes receivable 1,973 1,970 Other current assets 58,283 5,511 --------- --------- Total current assets 321,996 211,910 Property and equipment, net 36,808 29,445 Goodwill, net 34,194 8,709 Deferred income taxes 12,664 40,680 Other assets 13,249 17,082 --------- --------- Total assets $ 418,911 $ 307,826 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 132,556 $ 78,996 Accrued liabilities 35,501 38,362 Revolving credit facility -- 71,000 Royalties payable 18,515 20,888 Income taxes payable 2,569 -- Other current liabilities 1,085 860 --------- --------- Total current liabilities 190,226 210,106 Long-term debt 98,750 96,361 Other long-term liabilities 2,802 1,626 --------- --------- Total liabilities 291,778 308,093 --------- --------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $0.01 par, 5,000,000 shares authorized, 600,000 and 0 shares of Series A Convertible Preferred Stock issued and outstanding, respectively, stated at liquidation preference of $50.00 per share 30,000 -- Common stock, $0.01 par 150,000,000 shares authorized, 72,775,868 and 103,217,352 shares issued and outstanding, respectively 727 1,032 Additional paid-in capital 161,073 226,304 Accumulated deficit (64,667) (227,603) --------- --------- Total stockholders' equity (deficit) 127,133 (267) --------- --------- Total liabilities and stockholders' equity (deficit) $ 418,911 $ 307,826 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. Page 3
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) [Enlarge/Download Table] THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ---------------------- ---------------------- 1998 1999 1998 1999 --------- --------- --------- --------- Net revenues $ 246,303 $ 101,727 $ 478,845 $ 314,478 Cost of goods sold 119,612 84,420 231,467 211,183 Selling and distribution expenses 50,488 40,156 106,056 111,620 General and administrative expenses 14,414 24,425 38,278 51,360 Research and development 20,727 14,820 53,289 56,415 Restructuring and other charges -- 32,116 -- 32,116 Purchased research and development 5,000 -- 5,000 -- SingleTrac retention bonus 1,680 -- 1,680 -- Amortization of goodwill 676 733 2,223 2,549 --------- --------- --------- --------- Operating income (loss) 33,706 (94,943) 40,852 (150,765) Interest and other expenses, net 1,945 6,444 3,910 14,259 --------- --------- --------- --------- Income (loss) before provision for income taxes 31,761 (101,387) 36,942 (165,024) Provision for income taxes 14,429 5,242 16,438 1,519 --------- --------- --------- --------- Net income (loss) from continuing operations 17,332 (106,629) 20,504 (166,543) --------- --------- --------- --------- Discontinued operations: Loss from operations of OZM 560 -- 560 -- Loss on disposal of operations -- -- -- 477 --------- --------- --------- --------- Loss from discontinued operations 560 -- 560 477 --------- --------- --------- --------- Net income (loss) before extraordinary item 16,772 (106,629) 19,944 (167,020) ========= ========= ========= ========= Extraordinary item: Gain on early extinguishment of debt -- 3,200 -- 3,200 --------- --------- --------- --------- Net income (loss) $ 16,772 $(103,429) $ 19,944 $(163,820) ========= ========= ========= ========= Basic income (loss) per share from continuing operations $ 0.25 $ (1.35) $ 0.30 $ (2.21) Basic income (loss) per share from discontinued operations (0.01) -- (0.01) $ (0.01) Basic income (loss) per share from extraordinary item $ -- $ 0.04 $ -- $ 0.04 --------- --------- --------- --------- Basic net income (loss) per share $ 0.24 $ (1.31) $ 0.29 $ (2.18) ========= ========= ========= ========= Weighted average number of shares outstanding 69,742 79,072 68,632 75,275 ========= ========= ========= ========= Diluted income (loss) per share from continuing operations $ 0.25 $ (1.35) $ 0.30 $ (2.21) Diluted income (loss) per share from discontinued operations $ (0.01) $ -- $ (0.01) $ (0.01) Diluted income (loss) per share from extraordinary item $ -- $ 0.04 $ -- $ 0.04 --------- --------- --------- --------- Diluted net income (loss) per share $ 0.24 $ (1.31) $ 0.29 $ (2.18) ========= ========= ========= ========= Weighted average number of shares outstanding 70,097 79,072 68,292 75,275 ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated financial statements. Page 4
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (UNAUDITED) [Enlarge/Download Table] THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------- ------------------- 1998 1999 1998 1999 -------- --------- ------- --------- Net income (loss) $ 16,772 $(103,429) $19,944 $(163,820) Other comprehensive income (loss): Foreign currency translation adjustments (408) 687 344 883 -------- --------- ------- --------- Comprehensive income (loss) $ 16,364 $(102,742) $20,288 $(162,937) ======== ========= ======= ========= The accompanying notes are an integral part of these consolidated financial statements. Page 5
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) [Enlarge/Download Table] NINE MONTHS ENDED DECEMBER 31, ---------------------- 1998 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 19,944 $(163,820) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 10,123 12,322 Issuance of warrants to Infogrames -- 8,985 Purchased research and development 5,000 -- Deferred income taxes (1,527) 8,129 Deferred income 28 (87) Write-off of assets in connection with restructuring charges -- 29,964 Warrants issued in connection with revolving credit facility -- 3,188 Issuance of common stock in lieu of partial royalty payment -- 4,208 Issuance of common stock pursuant to Employee Stock Purchase Plan -- 416 Changes in operating assets and liabilities: Receivables, net (118,739) 10,819 Inventories, net (68,770) 53,489 Income taxes receivable 8,895 3 Other current assets (4,443) 16,515 Accounts payable 71,848 (53,521) Accrued liabilities 21,034 2,879 Royalties payable (4,403) 2,364 Income taxes payable 14,276 (2,593) Long-term liabilities 194 (1,175) Other (1,366) 152 --------- --------- Net cash used in operating activities (47,906) (67,763) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (15,910) (8,681) Acquisitions, net (2,465) -- --------- --------- Net cash used in investing activities (18,375) (8,681) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings, net 67,000 (27,750) Redemption of preferred stock -- (30,000) Issuance of Infogrames 5% subordinated convertible note, net -- 55,934 Issuance of General Atlantic Partners, LLC 0% subordinated convertible note -- 35,649 Issuance of common stock to Infogrames, net -- 48,615 Proceeds from exercise of stock options 360 125 --------- --------- Net cash provided by financing activities 67,360 82,573 --------- --------- Effect of exchange rates on cash and cash equivalents 763 739 --------- --------- Net increase in cash and cash equivalents 1,842 6,868 Cash and cash equivalents - beginning of period 17,224 13,407 --------- --------- Cash and cash equivalents - end of period $ 19,066 $ 20,275 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. Page 6
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying interim consolidated financial statements of GT Interactive Software Corp. and its subsidiaries (the "Company") are unaudited, but in the opinion of management, reflect all adjustments consisting of normal recurring accruals necessary for a fair presentation of the results for the interim period in accordance with instructions for Form 10-Q. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements to conform to classifications used in the current period. NET INCOME PER SHARE Basic EPS is computed as net earnings divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock awards, warrants and other convertible securities using the treasury stock method. FISCAL YEAR Effective January 1, 1998, the Company changed its fiscal year end from December 31 to March 31. NOTE 2 - PURCHASE OF MAJORITY INTEREST BY INFOGRAMES ENTERTAINMENT S.A. ("INFOGRAMES") On November 15, 1999, Infogrames Entertainment S.A. and/or its subsidiaries ("Infogrames") purchased from the Company a $25 million principal amount Short-Term Senior Secured Note ("Short-Term Note"). In connection with this transaction, the Company issued to Infogrames warrants to purchase 50,000 shares of Common Stock at an exercise price of $0.01 per share. On December 16, 1999, the Company consummated a number of transactions with Infogrames and certain partnerships affiliated with General Atlantic Partners, LLC ("GAP"). Infogrames, the founding Cayre family ("Cayre"), and GAP entered into further transactions as well. Page 7
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) Infogrames purchased 33, 558,581 shares of common stock from the founding Cayre family for $25.0 million and also purchased $10 million of subordinated notes ("Cayre Notes") of the Company. Infogrames purchased 28,571,429 shares of Common Stock from the Company for $50 million ($1.75 per share) and $60.6 million principal amount of a new 5% subordinated convertible note of the Company for $25 million, the Cayre Notes, the Short-Term Notes and $0.6 million accrued interest. The new 5% subordinated convertible note is convertible into common stock at $1.85 per share. The Company issued to GAP $50 million principal amount ($35.6 million fair market value) of non-interest bearing subordinated convertible notes in exchange for 600,000 shares of Series A Preferred Stock and $20 million of subordinated notes of the Company, and accrued interest thereon, held by GAP. These notes are convertible into common stock at $4.00 per share. Infogrames acquired from GAP warrants to purchase 4,500,000 shares of common stock at an exercise price of $.01 per share, for nominal consideration. As a result of these transactions, as of December 31, 1999, Infogrames owns approximately 62 million shares of the Company's common stock, or 60% of the voting securities of the Company. NOTE 3 - ACQUISITIONS In October 1997, the Company acquired SingleTrac Entertainment Technologies, Inc. ("SingleTrac"), a software developer, for cash and stock. Total consideration, including acquisition costs, was approximately $14.7 million, of which approximately $5.4 million was cash and the balance of the purchase price was the issuance of 0.7 million newly issued shares of the Company's Common Stock, and the assumption of approximately 0.3 million stock options. The acquisition was accounted for as a purchase. The purchase price was allocated to net assets acquired, purchased in-process research and development ("R&D"), and goodwill and other intangibles. Purchased in-process R&D includes the value of products in the development stage and not considered to have reached technological feasibility. In accordance with the applicable accounting rules, purchased in-process R&D is required to be expensed. Accordingly, approximately $11 million of acquisition cost was expensed in the fourth quarter of 1997. In connection with the reorganization of the Company's frontline publishing business, the Company wrote-off approximately $3.3 million of goodwill relating to SingleTrac in the quarter ended March 31, 1999. Page 8
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) In November 1998, the Company acquired One Zero Media, Inc. ("OZM"), an Internet entertainment content company, in exchange for approximately 2.3 million newly issued shares of the Company's Common Stock and approximately 0.6 million stock options to purchase the Company's Common Stock. Total consideration, including acquisition costs, was approximately $17.2 million, which was allocated to net assets acquired and goodwill. The acquisition was accounted for as a purchase, because it was the Company's intention to sell an ownership interest in OZM. At March 31, 1999, the Company decided to sell OZM and therefore OZM was accounted for as a discontinued operation. OZM was sold on July 28, 1999 for $5.2 million in cash. This resulted in an additional loss for the three months ended December 31, 1999 from discontinued operations of $0.5 million. The initial loss recorded in the prior fiscal year of $19.0 million included a provision of $5.0 million for operating losses during the phase-out period. In December 1998, the Company acquired Reflections Interactive Limited ("Reflections"), a developer of interactive entertainment software for computer games, in exchange for approximately 2.3 million newly issued shares of the Company's Common Stock. Total consideration, including acquisition costs, was approximately $13.5 million. The acquisition was accounted for as a purchase. The purchase price was allocated to net assets acquired, purchased in-process R&D and goodwill. Accordingly, $5.0 million of acquisition cost was expensed in the quarter ended December 31, 1998. Additionally, the Company acquired Prism Leisure Tontragervertriebs GmbH ("Prism"), a distributor of value-priced software based in Germany, for nominal consideration. The acquisition was accounted for as a purchase. The purchase price was allocated to net assets acquired and goodwill. In December 1998, the Company formed GT Interactive European Holdings B.V., a European holding company, which acquired all of the outstanding capital stock of Home Software Benelux B.V. ("Homesoft"), a distributor of entertainment software, for approximately $1.0 million in cash. The acquisition was accounted for as a purchase. In December 1998, the Company purchased the assets of Legend Entertainment Company ("Legend"), a developer of entertainment software. Total consideration, including acquisition costs, was approximately $2.0 million. The purchase price was allocated to goodwill. NOTE 4 - INVENTORIES, NET Inventories consist of the following: [Download Table] MARCH 31, DECEMBER 31, 1999 1999 -------- ------------ (IN THOUSANDS) Finished goods $134,014 $78,999 Raw materials 4,194 5,775 -------- ------- $138,208 $84,774 ======== ======= NOTE 5 - COMMITMENTS AND CONTINGENCIES On January 21, 1997, the Company entered into a revolving credit agreement (as amended, the "Old Credit Agreement") with certain banks expiring on December 31, 1998. On September 11, 1998, the borrowings under the Old Credit Agreement were repaid and the Old Credit Agreement was terminated. Simultaneously, on September 11, 1998, the Company entered with First Union National Bank, as agent for a syndicate of banks, into a new revolving credit agreement (the "New Credit Agreement"), expiring on September 11, 2001. The New Credit Agreement was amended on June 29, 1999 and, concurrently with the execution of definitive documentation for the Infogrames Transaction, amended again on November 15, 1999 (the "New Credit Agreement, as amended"), expiring on March 31, 2000. Under the New Credit Agreement, as amended, the Company can borrow up to $75 million (the "Line"). These borrowings are used for ongoing working capital requirements, letters of credit and other general Page 9
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) corporate purposes. Borrowing is limited to a percentage of domestic accounts receivable and inventory, and is secured by these and other assets of the Company. Under the New Credit Agreement, as amended, certain financial covenants were waived. The Company anticipates that under the New Credit Agreement, as amended, substantially all of the Line should be available to the Company through March 31, 2000. To induce the banks to amend the New Credit Agreement, the Company issued the banks warrants to purchase, at an exercise price of $0.01 per share, an aggregate of 850,000 shares of the Company's Common Stock with varying vesting schedules for exercisability. Of these, warrants to purchase 375,000 shares of Common Stock were immediately exercisable, 250,000 shares of Common Stock became exercisable on October 31, 1999 and warrants to purchase the remaining 225,000 shares of Common Stock will become exercisable only upon the occurrence of certain events. At December 31, 1999, the Company had outstanding debt of $71.0 million, representing borrowings under the New Credit Agreement, as amended, and letters of credit amounting to approximately $1.2 million. Refer to Note 2 for additional obligations of the Company incurred concurrent with the Infogrames Transaction. In January, February, and March 1998, ten substantially similar complaints were filed against the Company, its former Chairman and its former Chief Executive Officer, and in certain actions, its former Chief Financial Officer, in the United States District Court for the Southern District of New York. The plaintiffs, in general, purport to sue on behalf of a class of persons who purchased shares (and as to certain complaints, purchased call options or sold put options) of the Company during the period from August 1, 1996 through December 12, 1997. In January 1999, plaintiffs filed a consolidated and amended complaint alleging that the Company violated the federal securities laws by making misrepresentations and omissions of material facts that allegedly artificially inflated the market price of the Company's common stock during the class period. The plaintiffs further allege that the Company failed to expense properly certain prepaid royalties for software products that had been terminated or had failed to achieve technological feasibility, which misstatements purportedly had the effect of overstating the Company's net income and net assets. By order dated January 23, 1999, the plaintiffs were granted leave to file a second consolidated and amended complaint, which added claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 against the Company's independent auditor, Arthur Andersen LLP. The Company and Arthur Andersen LLP each filed motions to dismiss the second consolidated and amended complaint. In an Order and Opinion, dated November 29, 1999, the District Court granted both motions and dismissed with prejudice the complaint. Plaintiffs have appealed that dismissal to the United States Court of Appeals for the Second Circuit. The Company believes that these actions are without merit and intends to defend itself vigorously against them. On September 18, 1997, Scavenger, Inc. ("Scavenger"), a software developer, filed a lawsuit against the Company in New York Supreme Court claiming that the Company breached a software development contract between the parties dated November 28, 1995. Scavenger alleges that the Company, after paying $2.5 million in advances and accepting delivery of gold master disks for two computer games, refused to pay any more advances, including advances relating to the development of two additional games under the agreement. Scavenger is suing for the remaining advances ($4.3 million) and for future royalties ($5 million), and also seeks consequential damages for allegedly being forced out of business ($100 million) and losing contracts with unspecified third parties ($4 million) as a result of the Company's alleged breach. The Company filed an answer and counterclaim, in which it denies any liability to Scavenger and alleges, among other things, that the contract was lawfully terminated when Scavenger failed to deliver the two remaining games after receiving from the Company written notice to cure its material breaches. By its counterclaim, the Company seeks damages and restitution for at least $5 million on grounds of breach of contract and unjust enrichment. Pursuant to a preliminary conference order dated February 11, 1998, the parties had until year end 1998 to conduct discovery. On September 17, 1998, however, Scavenger's counsel filed a motion seeking to be relieved as counsel, which the Court granted on October 6, 1998. At a November 12, 1998 preliminary conference, another attorney appeared as Scavenger's prospective new counsel, subject to further discussions with Scavenger. New counsel thereafter filed a notice of appearance in the case. At a December 1, 1998 compliance conference, the Court reissued a discovery order, whereby discovery was to be completed by July 30, 1999. At a June 30, 1999 conference, the Court extended the discovery deadline until September 15, 1999. Scavenger has now moved for partial summary judgment on its first two causes of action for remaining advances ($4.3 million), and the Company has opposed that motion and asked the court to dismiss those two claims with prejudice. Scavenger has moved to amend the complaint adding claims of fraud and prima facie tort seeking punitive damages; the proposed amended complaint seeks $60 million and $100 million on the fraud claims and $10 million in punitive damages on the prima facie tort claim. The Company has, at once, opposed the motion to amend and cross moved to dismiss the additional claims if leave to amend is granted. At the September 1999 conference, the Court extended the discovery deadline through October 13, 1999 and, except for certain discrete items being pursued with the Court's permission, discovery has been completed. The Company has now served a motion for partial summary judgment, seeking dismissal of the third, fourth and fifth causes of action which, respectively, seek $5 million in claimed additional royalty payments, $100 million in claimed consequential damages and $4 million for alleged tortious interference with contract. Scavenger has opposed that motion and cross-moved for an accounting. On October 13, 1999, Scavenger filed a note of issue (i.e., certificate of readiness for trial). While no trial date has been set, a pretrial conference has been scheduled for March 29, 2000. The Company intends to vigorously defend this action and pursue its counterclaim. Page 10
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) On April 12, 1999, an action was commenced by the administrators for three children who were murdered on December 1, 1997 by Michael Carneal at the Heath High School in McCracken County, Kentucky. The action was brought against 25 defendants, including the Company and other corporations in the videogame business; companies that produced or distributed the movie "The Basketball Diaries;" and companies that allegedly provide obscene internet content. The complaint alleges, with respect to the Company and other videogame corporations, that Carneal was influenced by the allegedly violent content of certain videogames and that the videogame manufacturers are liable for Carneal's conduct. The complaint seeks $10 million in compensatory damages and $100 million in punitive damages. The Company and approximately ten other videogame corporations have entered into a joint defense agreement, and have retained counsel. The Court has stayed all discovery pending the briefing of motions to discuss the complaint; reply briefs are due November 23, 1999. The Company intends to vigorously defend this action. On March 12, 1999, Fenris Wolf Ltd. ("Fenris"), a software developer, filed a lawsuit in New York Supreme Court claiming that the Company failed to adequately pursue OEM bundling opportunities for the software game "Rebel Moon Rising MMX" and unlawfully rejected the ninth milestone deliverable for the software game "Rebel Moon Revolution" under a development contract between the parties dated June 26, 1996. The complaint asserts five claims of breach and intentional interference, which seek $100,000 for the nonpayment and rejection of milestone nine, $400,000 for the balance of payments under the contract, $775,000 for alleged lost OEM bundling opportunities, $775,000 for alleged intentional interference with bundling arrangements and $500,000 for alleged interference with contractual relations. In an October 20, 1999 opinion and order, the court granted the Company's motion to dismiss three of the five claims so that only the milestone nine contract and OEM bundling claims remain. Fenris has filed a notice of appeal from the dismissal of the $400,000 claim for the balance of payments under the contract; and the Company has filed a counterclaim for breach seeking to recover not less than the $800,000 in milestone payments advanced for the development of "Rebel Moon Revolution." Pursuant to a November 30, 1999 court order, discovery must be completed by June 30, 2000. The Company intends to vigorously defend this action and pursue its counterclaim. On February 7, 2000, Hasbro Interactive Inc., its subsidiary Atari Interactive, Inc. and Zao Elorg d/b/a Elorg Corporation filed a lawsuit against the Company and five other companies in Massachusetts federal court. The complaint asserts claims against the Company for copyright infringement and unfair competition based on the sale of the computer videogames entitled "HemiRoids," "Patriot Command," "Bricklayer," "3D TetriMadness," "3D Munch Man," "3D Munch Man II," and "Mac-Man," as well as claims for trademark infringement and dilution for use of the name "3D TetriMadness." The complaint seeks injunctive relief, actual profits, statutory damages, attorneys' fees and costs pursuant to federal copyright and trademark laws, as well as common law damages. The Company, which has not yet responded to the complaint, intends to vigorously defend this action. Additionally, the Company is involved in various claims and legal actions, the ultimate resolution of which management believes will not be material to the Company's results of operations or financial condition. Page 11
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (UNAUDITED) NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION [Download Table] NINE MONTHS ENDED DECEMBER 31, ----------------- 1998 1999 ------- ------ (IN THOUSANDS) Common stock issued in connection with the acquisition of OZM $15,473 -- Common stock issued in connection with the acquisition of Reflections $12,279 -- Warrants issued in connection with New Credit Agreement -- $3,188 Warrants issued to GAP and acquired by Infogrames -- 8,835 Warrants issued in connection with Short-Term Note -- 150 Common stock issued in lieu of partial royalty payment -- 4,208 Cash paid for income taxes 5,000 2,611 Cash paid for interest 4,083 7,526 NOTE 7 - RESTRUCTURING AND OTHER CHARGES Restructuring and other charges of approximately $17.5 million, recorded in the three months ended March 31, 1999, related to a reorganization of the Company's frontline publishing business, contemplated relocation of corporate headquarters to California and outsourcing of the Company's distribution function. Restructuring and other charges of approximately $32.1 million, recorded in the three months ended December 31, 1999 relate to the Company's continuing reorganization of its operations. These charges primarily include: 1) the write-off of goodwill due to the consolidation of the value distribution division with the Company's publishing division and 2) the consolidation of European publishing operations. The Company has closed down certain internal development studios as part of its reorganization. The Company's plans to relocate corporate headquarters have been terminated. The following table sets forth adjustments to the restructuring reserve: [Download Table] BALANCE, BALANCE, MARCH 31, DECEMBER 1999 ADDITIONS PAYMENTS 31, 1999 Severance $8,357 $ 2,101 $(2,005) $8,454 Transition rent 635 -- (514) 120 ------ ------- ------- ------ $8,992 $ 2,101 $(1,262) $8,574 ====== ======= ======= ====== NOTE 8 - SUBSEQUENT EVENTS Pursuant to the Company's consolidation of the value distribution division with the Company's publishing division, the employment of Charles F. Bond, President, Value Products and Close-outs Division, was terminated by mutual agreement effective January 31, 2000. On February 10, 2000, following the Company's decision to remain headquartered in New York, New York, Thomas A. Heymann, the Chief Executive Officer and Chairman of the Board of Directors of the Company, and John T. Baker IV, the President and Chief Operating Officer of the Company, announced that they would resign from the Company. Mr. Heymann's resignation was effective February 11, 2000. Mr. Baker's resignation is pending. Bruno Bonnell, Chairman and Chief Executive Officer of Infogrames was elected Chairman and Chief Executive Officer of the Company effective February 11, 2000. Mr. Heymann will continue to serve on the Board of Directors of the Company. Page 12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. The Company's actual results or future events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, world-wide business and industry conditions, adoption of new hardware systems, product delays, software development requirements and their impact on product launches, company customer relations and other risks and factors detailed, from time to time, in the Company's filings with the Securities and Exchange Commission including, but not limited to, the factors described on pages 9 through 15 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999. OVERVIEW The Company develops, publishes and distributes interactive entertainment software for the children's education ("edutainment"), leisure entertainment and gaming enthusiast's markets for a variety of platforms. The Company employs a portfolio approach to achieve a broad base of published products across most major consumer software categories. Since it commenced operations in February 1993, the Company has experienced rapid growth and its product and customer mix has changed substantially. Publishing and distribution are the two major activities of the Company. Publishing is divided into frontline, leisure and children's publishing. Because each of these product categories has different associated costs, the Company's margins have depended and will depend, in part, on the percentage of net revenues attributable to each category. In addition, a particular product's margin may depend on whether it has been internally or externally developed and on what platforms it is published. Further, the Company's margins may vary significantly from quarter to quarter depending on the timing of its new published product releases. To the extent that mass merchants require greater proportions of third-party software products, some of which may yield lower margins, the Company's operating results may be impacted accordingly. The worldwide interactive entertainment software market is comprised primarily of software for two distinct platforms: PCs and dedicated game consoles. The market has grown dramatically in recent years with its growth driven by the increasing installed base of multimedia PCs and current generation game console systems. In addition, the development of enabling multimedia technologies, the proliferation of software titles, the development of new and expanding distribution channels and the emergence of a strong international market for interactive entertainment software have spurred the rapid expansion of the interactive entertainment market. The consumer software industry is seasonal. Net revenues are typically highest during the fourth calendar quarter. This seasonality is primarily a result of the increased demand for consumer software during the year-end holiday buying season. There has been an increased rate of change and complexity in the technological innovations affecting the Company's products, coupled with increased competitiveness for shelf space and buyer selectivity. The market for frontline titles has become increasingly hit-driven, which has led to higher production budgets, more complex development processes, longer development cycles and generally shorter product life cycles. The importance of the timely release of hit titles, as well as the increased scope and complexity of the product development and production process, have increased the need for disciplined product development processes that limit cost and schedule overruns. This in turn has increased the importance of leveraging the technologies, characters or story-lines of such hit titles into additional interactive entertainment software products in order to spread development costs among multiple products. In this environment, the Company is determined to achieve a balance between internal and external development, alliances and acquisitions, and to reduce its relative dependence on third-party developers. Consumer software is sold through specialty retailers such as Electronics Boutique and CompUSA, mass merchants and warehouse clubs such as Wal-Mart, Sam's Page 13
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Club, Price-Costco and Target, and major retailers including Best Buy. The Internet and on-line networks also present a new channel through which publishers and distributors can make their products available to end-users. Sales are recorded net of expected future returns. Higher than anticipated returns were experienced in the first nine months of the fiscal year. Management has taken a substantial provision for returns and price protection in the current quarter as described below. Management continuously assesses and re-evaluates the rate of returns based on business conditions and market factors. In 1998, the Company acquired OZM, Reflections, Legend and Homesoft. Financial results of these companies have been included in the Company's Consolidated Financial Statements on a purchase basis for the period since the acquisition. At March 31, 1999, OZM is accounted for as a discontinued operation, as it was the Company's intention to sell OZM. OZM was sold on July 28, 1999 for $5.2 million in cash. This resulted in an additional loss for the three months ended September 30, 1999 from discontinued operations of $0.5 million. The initial loss recorded in the prior fiscal year of $19.0 million included a provision of $5.0 million for operating losses during the phase-out period. RESULTS OF OPERATIONS The following table sets forth certain consolidated statements of operations data as a percentage of net revenues for the periods indicated: [Enlarge/Download Table] THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, -------------- -------------- 1998 1999 1998 1999 ----- ----- ----- ----- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of goods sold 48.6 83.0 48.3 67.2 Selling and distribution expenses 20.5 39.5 22.1 35.5 General and administrative expenses 5.9 24.0 8.0 16.3 Research and development 8.4 14.6 11.1 17.9 Restructuring charges 0.0 31.6 0.0 10.2 Purchased research and development 2.0 0.0 1.0 0.0 SingleTrac retention bonus 0.7 0.0 0.4 0.0 Amortization of goodwill 0.3 0.7 0.5 0.8 ----- ------ ----- ----- Operating income (loss) 13.7 (93.3) 8.5 (47.9) Interest and other expenses, net 0.8 6.3 0.8 4.5 ----- ------ ----- ----- Income (loss) before provision for income taxes 12.9 (99.7) 7.7 (52.5) Provision for income taxes 5.9 5.2 3.4 0.5 ----- ------ ----- ----- Net income (loss) from continuing operations 7.0 (104.8) 4.3 (53.0) ----- ------ ----- ----- Discontinued operations: Loss from operations of OZM 0.2 0.0 0.1 0.0 Loss on disposal of operations 0.0 0.0 0.0 0.2 ----- ------ ----- ----- Loss from discontinued operations 0.2 0.0 0.1 0.2 ----- ------ ----- ----- Net income (loss) before extraordinary item 6.8 (104.8) 4.2 (53.1) Extraordinary item: Gain on early extinguishment of debt 0.0 3.1 0.0 1.0 ----- ------ ----- ----- Net income (loss) 6.8% (101.7)% 4.2% (52.1)% ===== ====== ===== ===== Net revenues for the three months ended December 31, 1999 decreased approximately $144.6 million, or 58.7%, to $101.7 million from $246.3 million, as compared to the comparable period of the prior year. Net revenues for the nine months ended December 31, 1999 decreased approximately $164.4 million, or 34.3%, to $314.5 million from $478.8 million, as compared to the comparable period of the prior year. Such decrease in net revenues is attributable primarily to a light new release schedule, higher than anticipated Page 14
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returns and reduced volume in the distribution business. As a result of Infogrames' strong international presence, the Company is winding down its European publishing operations and has substantially increased its provision for returns in that territory. During the quarter, the Company's perceived financial condition significantly constrained its ability to acquire inventory for its third party distribution business. As a result, the Company was forced to substantially downsize its distribution business. Management expects net revenues from the distribution business to significantly under-perform its original projections for the remainder of the fiscal year, as the Company continues to downsize that business and focus its resources on its core publishing business. While the consumer software business is typically seasonal, the granting of price protection and returns of products in the first three fiscal quarters exceeded expectations. As consumer pricing has become more competitive, the Company is finding more frequently that it is necessary to offer mark-downs for products which have not yet sold through to the consumer, or to accept a higher level of returns of product that are not selling at retail, or both. In anticipation of a further reduction in net revenues and as a reflection of the higher than expected returns, management has increased substantially its provision for price protection and returns in the current fiscal quarter. Publishing revenues declined substantially in frontline, children's, leisure and international primarily as a result of a light new release schedule. Domestic frontline net revenues decreased 16% from $41.4 million to $34.7 million for the three months ended December 31, 1999, compared to the prior year period. Domestic frontline net revenues decreased 37% from $121.5 million to $77.2 million for the nine months ended December 31, 1999 as compared to the comparable period of the prior year. International frontline net revenues decreased 77% from $68.3 million to $16.0 million for the three months ended December 31, 1999, compared to the prior year period. International frontline net revenues decreased 37% from $121.5 million to $77.2 million for the nine months ended December 31, 1999 as compared to the comparable period of the prior year. Due to the downsizing of the Company's distribution business, distribution net revenues decreased 70% from $103.5 million to $31.1 million for the three months ended December 31, 1999, compared to the prior year period. Distribution net revenues decreased 51% from $213.1 million to $104.5 million for the nine months ended December 31, 1999 as compared to the comparable period of the prior year. Some of the Company's larger retail customers continue to purchase consumer software direct from several large publishers whose software was previously sold through the Company. Cost of goods sold for the three months ended December 31, 1999 decreased approximately $35.2 million, or 29.4%, to $84.4 million from $119.6 million, as compared to the comparable period of the prior year. Cost of goods sold for the nine months ended December 31, 1999 decreased approximately $20.3 million, or 8.8%, to $211.2 million from $231.5 million, as compared to the comparable period of the prior year. Cost of goods sold as a percentage of net revenues for the three and nine months ended December 31, 1999 increased to 83.0% and 67.2% from 48.6% and 48.3%, respectively, as compared to the comparable periods of the prior year. The increase for the three and nine months ended December 31, 1999, as a percentage of net revenues, was due primarily to the additional royalties expense for sales of Driver and reserving for substantially all International inventory which Infogrames does not expect to re-sell. Additionally, the increase in cost of goods was due to the increased sale of console products, which generally have a higher overall cost than PC products. Selling and distribution expenses primarily include shipping expenses, sales and distribution labor expenses, advertising and promotion expenses and distribution facilities costs. These expenses for the three months ended December 31, 1999 decreased approximately $10.3 million, or 20.5%, to $40.2 million from $50.5 million, as compared to the comparable period of the prior year. Selling and distribution expenses for the nine months ended December 31, 1999 increased approximately $5.6 million, or 5.2%, to $111.6 million from $106.1 million, as compared to the comparable period of the prior year. Selling and distribution expenses as a percentage of net revenues for the three and nine months ended December 31, 1999 increased to 39.5% and 35.3% from 20.5% and 22.1%, respectively, as compared to the comparable period of the prior year. The increase, as a Page 15
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percentage of net revenues for the three and nine months ended December 31, 1999, was primarily attributable to advertising worldwide to support existing and upcoming releases of the Company's frontline publishing products. General and administrative expenses primarily include personnel expenses, facilities costs, professional expenses and other overhead charges. These expenses for the three months ended December 31, 1999 increased approximately $10.0 million, or 69.5%, to $24.4 million from $14.4 million, as compared to the comparable period of the prior year. General and administrative expenses for the nine months ended December 31, 1999 increased approximately $13.1 million, or 34.2%, to $51.4 million from $38.3 million, as compared to the comparable period of the prior year. General and administrative expenses as a percentage of net revenues for the three and nine months ended December 31, 1999 increased to 24.0% and 16.3% from 5.9% and 8.0%, respectively, as compared to the comparable periods of the prior year. The increase was primarily due to the increased costs associated with the Company's restructuring. Research and development expenses ("R&D") primarily includes payment of royalty advances to third-party developers on products that are currently in development and direct costs of internally developing and producing a title such as salaries and related costs. These expenses for the three months ended December 31, 1999 decreased approximately $5.9 million, or 28.5%, to $14.8 million from $20.7 million, as compared to the comparable period of the prior year. R&D expenses for the nine months ended December 31, 1999 increased approximately $3.1 million, or 5.9%, to $56.4 million from $53.3 million, as compared to the comparable period of the prior year. Research and development as a percentage of net revenues for the three and nine months ended December 31, 1999 increased to 14.6% and 17.9% from 8.4% and 11.1%, respectively, as compared to the comparable periods of the prior year. The increase is primarily due to a $7.8 million earned-out royalty payment to Reflections Interactive for Driver in the three months ended September 30, 1999, which was paid in cash and Common Stock. This was partially offset by the Company entering into fewer new contracts with external developers. Research and development expenses of the Company's internal development studios, which primarily include Humongous, Legend Entertainment and Reflections decreased to $8.3 million from $9.2 million for the three months ended December 31, 1999 and increased to $37.9 million from $23.6 million for the nine months ended December 31, 1999, as compared to the comparable periods of the prior year. Restructuring and other charges of approximately $32.1 million, recorded in the three months ended December 31, 1999, relate to the Company's continuing reorganization of its operations. These charges primarily include : 1) the write-off of goodwill due to the consolidation of the value distribution division with the Company's publishing division and 2) the consolidation of European publishing operations. In connection with the acquisition of Reflections in December 1998, the Company incurred a charge of $5.0 million for purchased research and development. In connection with the acquisition of SingleTrac in October 1997, the Company incurred a charge of $1.7 million for the three months ended December 31, 1998 for a retention bonus for the SingleTrac employees, which was based on the achievement of certain performance goals. Interest and other expenses, net, increased approximately $4.5 million and $10.3 million for the three and nine months ended December 31, 1999, respectively, as compared to the comparable periods of the prior year. The increase was partially attributable to the increase in interest costs associated with increased borrowings under the Old Credit Agreement and New Credit Agreement. The amortization of deferred financing costs relating to the New Credit Agreement and the subordinated notes held by General Atlantic Partners, LLC (together with its affiliates, "GAP")and the Cayre family also contributed to the increase in interest and other expenses, net. The Company's effective tax rate for the three and nine months ended December 31, 1999 was 5% and 1%, respectively, compared to 45% and 44% for the three and nine months ended December 31, 1998, respectively. The Company does not anticipate earnings in the near future sufficient to offset a tax benefit. The gain on early extinguishment of debt of $3.2 million relates to the net gain recognized on the GAP Securities Exchange and the write-off of deferred Page 16
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financing costs associated with warrants issued in connection with the New Credit Agreement, and, warrants issued to GAP and subsequently acquired by Infogrames concurrent with the Infogrames transaction on December 16, 1999. (See Note 2). LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were $20.3 million at December 31, 1999 compared to $13.4 million at March 31, 1999. As of December 31, 1999, the Company had working capital of $1.8 million compared to $131.8 million at March 31, 1999. During the nine months ended December 31, 1999, $82.6 million of cash and cash equivalents was provided by financing activities. The Company repaid $27.8 million of its revolving line of credit and entered into various commitments with Infogrames and GAP, as further described below. The cash flow from financing activities was primarily used to fund $67.8 million for net cash used in operating activities which resulted from operating losses, and a reduction in the accounts payable balance (for past due accounts). This was offset by a decline in receivables due to a reduction in volume of revenues. Approximately $8.7 million in cash was used in investing activities to purchase property and equipment, primarily additional computer hardware and software for the development of internal systems. On January 21, 1997, the Company entered into a revolving credit agreement (as amended, the "Old Credit Agreement") with certain banks expiring on December 31, 1998. On September 11, 1998, the borrowings under the Old Credit Agreement were repaid and the Old Credit Agreement was terminated. Simultaneously, on September 11, 1998, the Company entered with First Union National Bank, as agent for a syndicate of banks, into a new revolving credit agreement (the "New Credit Agreement") expiring on September 11, 2001. The New Credit Agreement was amended on June 29, 1999 and, concurrently with the execution of definitive documentation for the Infogrames Transaction, amended again on November 15, 1999 (the "New Credit Agreement, as amended,") expiring on March 31, 2000. Under the New Credit Agreement, as amended, the Company can borrow up to $75 million (the "Line"). These borrowings are used for ongoing working capital requirements, letters of credit and other general corporate purposes. Borrowing is limited to a percentage of domestic accounts receivable and inventory, and is secured by these and other assets of the Company. Under the New Credit Agreement, as amended, certain financial covenants were waived. The Company anticipates that under the New Credit Agreement, as amended, substantially all of the Line should be available to the Company through March 31, 2000. To induce the banks to amend the New Credit Agreement, the Company issued the banks warrants to purchase, at an exercise price of $0.01 per share, an aggregate of 850,000 shares of the Company's Common Stock with varying vesting schedules for exercisability. Of these, warrants to purchase 375,000 shares of Common Stock were immediately exercisable, 250,000 shares of Common Stock became exercisable on October 31, 1999 and warrants to purchase the remaining 225,000 shares of Common Stock will become exercisable only upon the occurrence of certain events. At December 31, 1999, the Company had outstanding debt of $71.0 million, representing borrowings under the New Credit Agreement, as amended, and letters of credit amounting to approximately $1.2 million. On November 15, 1999, Infogrames Entertainment S.A. and/or its subsidiaries ("Infogrames") purchased from the Company a $25 million principal amount Short-Term Senior Secured Note ("Short-Term Note"). In connection with this transaction, the Company issued to Infogrames warrants to purchase 50,000 shares of Common Stock at an exercise price of $0.01 per share. On December 16, 1999, the Company consummated a number of transactions with Infogrames and certain partnerships affiliated with General Atlantic Partners, LLC ("GAP"). Infogrames, the founding Cayre family ("Cayre"), and GAP entered into further transactions as well. Page 17
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Infogrames purchased 33, 558,581 shares of common stock from the founding Cayre family for $25.0 million and also purchased $10 million of subordinated notes ("Cayre Notes") of the Company. Infogrames purchased 28,571,429 shares of Common Stock from the Company for $50 million ($1.75 per share) and $60.6 million principal amount of a new 5% subordinated convertible note of the Company for $25 million, the Cayre Notes, the Short-Term Notes and $0.6 million accrued interest. The new 5% subordinated convertible note is convertible into common stock at $1.85 per share. The Company issued to GAP $50 million principal amount ($35.6 million fair market value) of non-interest bearing subordinated convertible notes in exchange for 600,000 shares of Series A Preferred Stock and $20 million of subordinated notes of the Company, and accrued interest thereon, held by GAP. These notes are convertible into common stock at $4.00 per share. Infogrames acquired from GAP warrants to purchase 4,500,000 shares of common stock at an exercise price of $.01 per share, for nominal consideration. As a result of these transactions, as of December 31, 1999, Infogrames owns approximately 62 million shares of the Company's common stock, or 60% of the voting securities of the Company. Management believes that the proceeds from the Company's operations and the proceeds from the transaction with Infogrames will be sufficient to fund operations for the foreseeable future, provided that the New Credit Agreement, as amended, which terminates on March 31, 2000, is replaced or extended by such date. While the Company believes that replacement financing will be available, the failure to replace or extend the New Credit Agreement, as amended, by March 31, 2000 would have a material adverse effect on the Company and its operations and there is no assurance that such replacement financing or extension will be available. The Company expects continued volatility in the use of cash due to varying, seasonal receivable payment cycles, quarterly working capital needs to finance its publishing businesses and the downscaling of its distribution business. YEAR 2000 COMPLIANCE To date, no significant problems related to Year 2000 have been identified in the Company's internal systems or with its vendors, suppliers, service providers or customers that would materially impact the Company's business. Also, no Year 2000 issues have been identified with the internally developed or third party products that the Company distributes. Although the Company does not expect any significant future Year 2000 related failures or malfunctions, the Company will continue to monitor its internal systems and work closely with its suppliers, service providers and customers to seek to avoid any material interruptions in its business. The Company has spent $0.8 million for the cost of upgrading, replacing, testing and implementing its Year 2000 compliance plan. No further expenditures are currently expected. Page 18
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PART II. OTHER INFORMATION  ITEM 1. LITIGATION With respect to the action brought against the Company by persons purporting to sue on behalf of a class of persons who purchased shares of the Company during the period from August 1, 1996 through December 12, 1997, previously described in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999 (the "1999 Annual Report"), in an Order and Opinion, dated November 29, 1999, the District Court granted motions filed by the Company and Arthur Andersen LLP and dismissed with prejudice the complaint. Plaintiffs have appealed that dismissel to the United States Court of Appeals for the Second Circuit. With respect to the action brought against the Company by Scavenger, previously described in the 1999 Annual Report, at the September 1999 conference, the Court extended the discovery deadline through October 13, 1999 and, except for certain discrete items being pursued with the Court's permission, discovery has been completed. The Company has now served a motion for partial summary judgment, seeking dismissal of the third, fourth and fifth causes of action which, respectively seek $5 million in claimed additional royalty payments, $100 million in claimed consequential damages and $4 million for alleged tortious interference with contract. Scavenger has opposed that motion and cross-moved for an accounting. On October 13, 1999, Scavenger filed a note of issue (i.e., certificate of readiness for trial). While no trial date has been set, a pretrial conference has been scheduled for March 29, 2000. Additionally, the Company is involved in various claims and legal actions, the ultimate resolution of which management believes will not be material to the Company's results of operations or financial condition.  ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Recent Sales of Unregistered Securities On December 16, 1999, pursuant to a securities purchase agreement, dated as of November 15, 1999 (the "GT Purchase Agreement"), by and among the Company, Infogrames Entertainment S.A. ("Infogrames") and California U.S. Holdings, Inc. ("Purchaser"), the Company issued to Purchaser and Purchaser acquired from the company: (i) 28,571,429 shares of the Company's common stock, par value $0.01 per share ("Common Stock") at a purchase price of $1.75 per share and (ii) a 5% Convertible Subordinated Note due 2004 (the "Infogrames Note") in the principal amount of approximately $60.5 million and convertible into approximately 32,700,000 shares of Common Stock at a conversion price of $1.85 per share, subject to adjustment in certain circumstances. The total purchase price for the securities issued to Purchaser pursuant to the GT Purchase Agreement was approximately $110.5 million. Concurrently with the execution of the GT Purchase Agreement, Infogrames purchased from the Company a Short-Term Senior Secured Note in the aggregate principal amount of $25.0 million (the "Short-Term Note"), which, together with accrued interest, was applied toward the payment by Infogrames for the Infogrames Note. In connection with the funding of the Short-Term Note, the Company issued warrants to Infogrames to purchase 50,000 shares of Common Stock, at an exercise price of $0.01 per share. On December 16, 1999, concurrently with the consummation of the transactions contemplated in the GT Purchase Agreement and pursuant to an exchange agreement between General Atlantic Partners, LLC and certain of its affiliates (collectively, "GAP"), on the one hand, and the Company, on the other hand, GAP exchanged its 600,000 shares of Series A Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), and its $20.0 million in principal amount of 9% Subordinated Notes of the Company, due July 29, 2000, for $50.0 million in principal amount of Convertible Subordinated Notes due 2004 issued by the Company, which Convertible Subordinated Notes are non-interest bearing and are convertible into approximately 12,500,000 shares of Common Stock at a conversion price of $4.00 per share, subject to adjustment in certain circumstances. Page 19
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The securities issued in the transactions set forth above were not registered under the Securities Act of 1933, as amended, pursuant to the exemption provided under Section 4(2) thereof for transactions not involving a public offering.  ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS On November 12, 1999, the Company's Board of Directors approved an amendment to the Company's Amended and Restated Certificate of Incorporation (the "Charter Amendment"), which increases the total number of shares of authorized capital stock of the Company from 155,000,000 shares to 305,000,000 shares. On November 15, 1999, pursuant to (i) securities purchase and voting agreements by and among Purchaser and Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, their children and various associated trusts (collectively, the "Cayre Family") and (ii) a securities purchase and voting agreement by and among Purchaser and GAP, the Cayre Family and GAP, holders on such date of 41,667,106 shares of Common Stock in the aggregate and 600,000 shares of Series A Preferred Stock representing approximately 59% of the outstanding voting securities of the Company, approved and adopted the Charter Amendment. As a result, the Charter Amendment was approved by a majority of the issued and outstanding voting securities of the Company and no further votes were needed. On or about January 25, 2000, the Company mailed an Information Statement, filed with the Securities and Exchange Commission on Schedule 14C, to all holders of record at the close of business on December 2, 1999 of the Company's Common Stock and Series A Preferred Stock in connection with the approval and adoption of the Charter Amendment. The Charter Amendment will be effective on February 14, 2000.  ITEM 5. OTHER INFORMATION Effective as of December 16, 1999, pursuant to the GT Purchase Agreement, all then current members of the Company's Board of Directors, other than Mr. Thomas A. Heymann and Mr. Steven A. Denning, resigned as directors of the Company and Mr. Bruno Bonnell, the Chairman of the Board of Directors, President and Chief Executive Officer of Infogrames, and Mr. Thomas Schmider, the Managing Director of Infogrames, were elected as new directors of the Company. In addition, on December 17, 1999, the reconstituted Board of Directors of the Company set the number of directors on the Board of Directors at five and appointed Mr. Herve Liagre, the Mergers and Acquisitions Director of Infogrames, as a director of the Company.  ITEM 5. OTHER INFORMATION Page 20
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: [Download Table] EXHIBIT NO. DESCRIPTION ------- ----------- 3.1 Amended and Restated Certificate of Incorporation, as amended (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.2 Amended and Restated By-laws, as amended (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.1 Securities Purchase Agreement, dated as of November 15, 1999, by and among Infogrames Entertainment S.A., California U.S. Holdings, Inc. and the Company (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Current Report on Form 8-K filed on November 19, 1999). 10.2 Securities Exchange Agreement, dated as of November 15, 1999, by and among the Company, General Atlantic Partners 54, L.P., and GAP Coinvestment Partners II, L.P. (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Current Report on Form 8-K filed on November 19, 1999). 10.3 Third Amendment, Consent, Waiver and Agreement, dated as of November 15, 1999, by and among the Company, the Lenders thereto and First Union National Bank, as Administrative Agent (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Current Report on Form 8-K filed on November 19, 1999). 10.4 Second Amended and Restated Security Agreement, dated as of November 15, 1999, by and among the Company, certain of its subsidiaries, First Union National Bank, as Administrative Agent, and California U.S. Holdings, Inc. (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Current Report on Form 8-K filed on November 19, 1999). 10.5 Second Amended and Restated Pledge Agreement, dated as of November 15, 1999, by the Company and certain of its subsidiaries in favor of First Union National Bank, as Administrative Agent, and California U.S. Holdings, Inc. (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Current Report on Form 8-K filed on November 19, 1999). 10.6 Promissory Note of the Company in the aggregate principal amount of $25,000,000 payable to California U.S. Holdings, Inc. (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Current Report on Form 8-K filed on November 19, 1999). 27.1 Financial Data Schedule. (b) Reports on Form 8-K Page 21
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During the quarter ended December 31, 1999, the Company filed: (i) a Current Report on Form 8-K on November 19, 1999, announcing the proposed transactions with Infogrames and the amendment to the New Credit Agreement, and (ii) a current Report on Form 8-K on December 21, 1999, reporting a change of control of the Company. Page 22
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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. GT INTERACTIVE SOFTWARE CORP. By: /s/ JOHN T. BAKER IV ------------------------------- John T. Baker IV President and Chief Operating Officer Date: February 14, 2000 Page 23

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11/28/9510
6/26/9611
8/1/961019
1/21/97917
9/18/9710
12/1/9711
12/12/971019
1/1/987
2/11/9810
6/30/982110-Q
9/11/98917
9/17/9810
10/6/9810
11/12/9810
12/1/9810
12/31/9821710-Q
1/23/9910
3/12/9911
3/31/9921910-K, 10-K405/A
4/12/9911
6/29/9991710-K, 8-K
6/30/991010-Q
7/28/99914
7/30/9910
9/15/9910
9/30/99141610-Q
10/13/991019
10/20/9911
10/31/991017
11/12/9920DEF 14C
11/15/9972110-Q, 8-K
11/19/9921228-K
11/23/9911
11/29/991019
11/30/9911
12/2/9920
12/16/997203, 8-K
12/17/9920
12/21/99228-K
For The Period Ended12/31/9912210-Q/A, NT 10-Q
1/25/0020DEF 14C
1/31/0012
2/7/0011
2/10/001123
2/11/0012
Filed On / Filed As Of2/14/002023
Corrected On2/23/00
3/29/001019
3/31/0091810-K, 10-K/A
6/30/001110-K/A, 10-KT
7/29/0019
9/11/01917
 
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