Atari Inc · 10-Q · For 12/31/99

Filed On 2/15/00   ·   SEC File 0-27338   ·   Accession Number 950123-0-1259

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

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Gt Interactive Software Corp.                         23    146K 
 2: EX-27.1     Financial Data Schedule                                1      6K 

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

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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.

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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.

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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.

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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.

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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.                   

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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.            

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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               

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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.                                        

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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.         

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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.                                                                        

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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                                                                 

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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              

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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                                                                  

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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

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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.                                      

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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.                                            

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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.                                                                  

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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                                                       
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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                                       

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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.                                                         

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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 

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-Q Filing		Date		First		Last			Other Filings
		11/28/95		10
		6/26/96		11
		8/1/96		10		19
		1/21/97		9		17
		9/18/97		10
		12/1/97		11
		12/12/97		10		19
		1/1/98		7
		2/11/98		10
		6/30/98		21					10-Q
		9/11/98		9		17
		9/17/98		10
		10/6/98		10
		11/12/98		10
		12/1/98		10
		12/31/98		2		17			10-Q
		1/23/99		10
		3/12/99		11
		3/31/99		2		19			10-K, 10-K405/A
		4/12/99		11
		6/29/99		9		17			10-K, 8-K
		6/30/99		10					10-Q
		7/28/99		9		14
		7/30/99		10
		9/15/99		10
		9/30/99		14		16			10-Q
		10/13/99		10		19
		10/20/99		11
		10/31/99		10		17
		11/12/99		20					DEF 14C
		11/15/99		7		21			10-Q, 8-K
		11/19/99		21		22			8-K
		11/23/99		11
		11/29/99		10		19
		11/30/99		11
		12/2/99		20
		12/16/99		7		20			3, 8-K
		12/17/99		20
		12/21/99		22					8-K
For The Period Ended		12/31/99		1		22			10-Q/A, NT 10-Q
		1/25/00		20					DEF 14C
		1/31/00		12
		2/7/00		11
		2/10/00		1		12			3
		2/11/00		12
Filed As Of		2/14/00		20		23
Filed On		2/15/00							8-K, NT 10-Q
Corrected On		2/23/00
		3/29/00		10		19
		3/31/00		9		18			10-K, 10-K/A
		6/30/00		11					10-K/A, 10-KT
		7/29/00		19
		9/11/01		9		17
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