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Atari Inc – ‘10-Q’ for 5/1/96

As of:  Tuesday, 5/14/96   ·   For:  5/1/96   ·   Accession #:  950130-96-1703   ·   File #:  0-27338

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

 5/14/96  Atari Inc                         10-Q        5/01/96    7:379K                                   Donnelley R R & S… 02/FA

Quarterly Report   —   Form 10-Q
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                      12     53K 
 2: EX-10.1     Material Contract                                     39     78K 
 3: EX-10.2     Material Contract                                     30     66K 
 4: EX-10.3     Material Contract                                     68    163K 
 5: EX-10.4     Material Contract                                     66    161K 
 6: EX-10.5     Material Contract                                     15     64K 
 7: EX-27       Exhibit 27.1                                           2      7K 


10-Q   —   Quarterly Report
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
7Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
10Item 6. Exhibits and Reports on Form 8-K
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================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________ FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996. Commission File No. 0-27338 __________ GT INTERACTIVE SOFTWARE CORP. (Exact name of registrant as specified in its charter) Delaware 13-3689915 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 16 East 40th Street, New York, NY 10016 (Address of principal executive offices) (Zip code) 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 May 1, 1996, there were 59,304,639 shares of the registrant's Common Stock outstanding. Page __ of ___ Exhibit index begins on page ____
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GT INTERACTIVE SOFTWARE CORP. 1996 QUARTERLY REPORT ON FORM 10-Q TABLE OF CONTENTS Part I - Financial Information Page Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets as of December 31, 1995 (audited) and March 31, 1996 3 Consolidated Statements of Income for the three months ended March 31, 1995 and 1996 4 Consolidated Statements of Cash Flows for the three months ended March 31, 1995 and 1996 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 10 Signatures 11
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Part I. Financial Information Item 1. Financial Statements (Unaudited) GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS [Download Table] December 31, March 31, 1995 1996 -------------- ------------- (audited) (unaudited) (in thousands) ASSETS Current assets: Cash and cash equivalents $ 82,381 $ 81,661 Short-term investments 9,563 9,660 Receivables, net 76,638 69,449 Inventories, net 45,756 44,195 Royalty advances 28,264 33,449 Due from related party -- 404 Deferred income taxes 12,640 15,819 Prepaid expenses and other current assets 1,471 2,700 ------------ ----------- Total current assets 256,713 257,337 Property and equipment, net 5,111 5,861 Goodwill, net 21,286 21,013 Other assets 994 1,932 ------------ ----------- Total assets $ 284,104 $ 286,143 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 85,708 $ 72,131 Accrued liabilities 40,490 45,265 Royalties payable 22,213 21,280 Deferred income 3,410 5,158 Income taxes payable 1,766 8,079 Current portion of long-term liabilities 969 732 Due to related party 955 -- ------------ ----------- Total current liabilities 155,511 152,645 Other long-term liabilities 7,689 7,573 ------------ ----------- Total liabilities 163,200 160,218 ------------ ----------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par, 150,000,000 shares authorized, 59,304,639 shares issued and outstanding 593 593 Cumulative translation adjustment 3 (76) Additional paid-in capital 112,466 112,466 Retained earnings 7,842 12,942 ------------ ----------- Total stockholders' equity 120,904 125,925 ------------ ----------- Total liabilities and stockholders' equity $ 284,104 $ 286,143 ============ =========== The accompanying footnotes are an integral part of these financial statements. Page 3
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) [Download Table] For The Three Months Ended March 31, ---------------------- 1995 1996 ---------- ---------- (in thousands, except per share data) Net sales $ 27,181 $ 62,270 Cost of goods sold 16,112 37,530 Selling and distribution expenses 3,587 10,855 General and administrative expenses 2,451 6,140 -------- -------- Operating income 5,031 7,745 Interest and other income, net 114 1,335 -------- -------- Income before income taxes 5,145 9,080 Provision for (benefit from) income taxes (2,051) 3,980 -------- -------- Net income $ 7,196 $ 5,100 ======== ======== Pro forma adjustment to income tax provision 4,263 -------- Pro forma net income $ 2,933 ======== Net income per share $ 0.09 Weighted average number of shares outstanding 59,305 The accompanying footnotes are an integral part of these financial statements. Page 4
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) [Download Table] For the Three Months Ended March 31, ----------------------- 1995 1996 ---------- ---------- (in thousands) OPERATING ACTIVITIES: Net income $ 7,196 $ 5,100 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 87 561 Deferred income taxes (4,846) (3,178) Deferred income 216 1,617 Changes in operating assets and liabilities: Receivables, net 13,298 7,190 Inventories, net (466) 1,560 Royalty advances (6,380) (5,185) Due from related party, net (3,388) (1,359) Prepaid expenses and other current assets (1,259) (1,229) Accounts payable 1,092 (13,577) Accrued liabilities 4,695 4,775 Royalties payable (1,461) (933) Income taxes payable 1,150 6,312 Other (119) (1,018) ---------- --------- Net cash provided by operating activities 9,815 636 ---------- --------- INVESTING ACTIVITIES: Purchases of short-term investments, net -- (98) Purchase of property and equipment (641) (1,037) ---------- --------- Net cash used in investing activities (641) (1,135) ---------- --------- FINANCING ACTIVITIES: Issuance of Series A preferred stock and warrants 15 -- Proceeds from issuance of note to a related party 15,056 -- Distributions to stockholders (6,000) -- Repayment of notes (6,000) -- Long-term liabilities (219) (221) ---------- --------- Net cash provided by (used in) financing activities 2,852 (221) ---------- --------- Net increase (decrease) in cash and cash equivalents 12,026 (720) Cash and cash equivalents - beginning of year 544 82,381 ---------- --------- Cash and cash equivalents - end of period $ 12,570 $ 81,661 ========== ========= The accompanying footnotes are an integral part of these financial statements. Page 5
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Significant Accounting Policies Basis of Presentation The accompanying interim consolidated financial statements of GT Interactive Software Corp. and Subsidiary (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 footnotes 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 footnotes thereto included in GT Interactive Software Corp.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1995. Net Income Per Share For The Three Months Ended March 31, 1996: Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. NOTE 2 - Inventories, net Inventories consist of the following: [Download Table] December 31, March 31, 1995 1996 ------------- ------------ (in thousands) Finished goods $ 50,650 $ 49,466 Raw materials 1,359 1,626 ------------ ------------ 52,009 51,092 Less: reserve for obsolescence 6,253 6,897 ------------ ------------ $ 45,756 $ 44,195 ============ ============ NOTE 3 - Commitments and Contingencies The Company had an unused letter of credit at March 31, 1996 amounting to approximately $11.7 million, which is secured by certain assets of the Company. NOTE 4 - Supplemental Cash Flow Information [Download Table] For the Three Months Ended March 31, -------------------- 1995 1996 --------- --------- (in thousands) Cash paid for income taxes $ 1,246 $ 843 Cash paid for interest -- 13 Page 6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company is a leading publisher, merchandiser and distributor of consumer software. Since it commenced operations in February 1993, the Company has experienced rapid revenue growth and its product and customer mix have changed substantially. An important element of the Company's financial performance is its product mix which has varied over time as the Company has built its business. The Company's product mix has been composed of three broad product categories: (i) front-line published software; (ii) value-priced software; and (iii) third- party software. 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 sales attributable to each category. In addition, 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. Through February 28, 1995, the Company was an S corporation for Federal and New York state income tax purposes. The income tax provision for the three months ended March 31, 1995 includes a deferred tax benefit of approximately $3.5 million due to the Company's change in tax status. On June 23, 1995, the Company acquired all of the outstanding stock of Slash Corporation ("Slash"), a leading publisher, purchaser, repackager and distributor of value-priced software. Historically, Slash purchased excess inventory from major publishers and sublicensed catalog titles. It sold these products at lower price points or repackaged these and other products into compilation boxes, such as five-packs and ten-packs, for volume sales primarily to mass merchants. Slash's sales of purchased excess inventory have traditionally occurred at lower margins than its sales of sublicensed catalog products. The Company's value-priced software business primarily consists of sublicensed catalog titles which are sold largely to mass merchant customers. Slash's financial results have been included in the Company's Consolidated Financial Statements on a purchase basis for the period since the acquisition. Sales are recorded net of expected future returns which historically have been experienced and reserved for at approximately 30% of gross sales. The consumer software industry is seasonal. Net sales are typically highest during the fourth calendar quarter and are typically lower during the second calendar quarter. This seasonality is primarily a result of the increased demand for consumer software during the year-end holiday buying season. Page 7
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Results of Operations The following table sets forth certain consolidated statement of operations data as a percentage of net sales for the periods indicated: [Download Table] For the Three Months Ended March 31, --------------------- 1995 1996 --------- ---------- Net sales 100.0 % 100.0 % Cost of goods sold 59.3 60.3 Selling and distribution expenses 13.2 17.4 General and administrative expenses 9.0 9.9 --------- ---------- Operating income 18.5 12.4 Interest and other income, net .4 2.1 --------- ---------- Income before income taxes 18.9 14.6 Provision for (benefit from) income taxes (7.5) 6.4 --------- ---------- Net income 26.4 % 8.2 % ========= ========== Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 Net sales for the three months ended March 31, 1996 ("1996") increased approximately $35.1 million or 129% as compared to the three months ended March 31, 1995 ("1995"). Additionally, net units increased approximately 143% for 1996 as compared to 1995. This growth in net sales and volume was primarily attributable to the introduction of newly published front-line titles, such as Heretic: Shadow of the Serpent Rider, Just Me and My Dad and Vikings: Strategy of the Ultimate Conquest, the continuing strong sales of Doom and Doom-related products and the expansion of the Company's value-priced line of software. In addition, an increase in the number of mass merchant stores supplied and serviced by the Company, an increase in the shelf space available to the Company from its existing mass merchant customers and an increase in sales from its existing mass merchant shelf space contributed to the growth in net sales. The purchase of Slash by the Company effective June 23, 1995 and the increase in the distribution of third party software also contributed to the growth in net sales. Cost of goods sold primarily includes costs of purchased products and royalties paid to software developers. Cost of goods sold for 1996 increased approximately $21.4 million or 133% as compared to 1995. Costs of goods sold as a percentage of net sales for 1996 increased to 60.3% from 59.3% for 1995. The percentage increase in cost of goods sold was primarily due to a change in product mix driven by mass merchants for third-party software products which yielded the Company lower margins. The percentage increase was partially offset by a shift in the overall Company mix toward the Company's higher margin published front-line and value-priced products, which increased to slightly in excess of 50% of net sales in 1996 compared to approximately 40% in 1995. Selling and distribution expenses primarily include shipping expenses, sales and distribution labor expenses, advertising and promotion expenses and distribution facilities costs. These expenses increased approximately $7.3 million or 203% during 1996 as compared to 1995. The increase was due to the additional advertising costs of approximately $1.9 million to support the growth of the Company's published products and an increase of $1.2 million in shipping costs attributable to the overall increase in sales volume. In addition, costs associated with the expansion of the Company's sales and distribution staff and distribution center increased approximately $3.2 million to support its growth. Selling and distribution expenses as a percentage of net sales for 1996 increased to 17.4% from 13.2% in 1995. Page 8
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General and administrative expenses primarily include personnel expenses, facilities costs, professional expenses and other overhead charges. These expenses for 1996 increased approximately $3.7 million or 151% as compared to 1995. The increase was due primarily to costs of approximately $1.1 million associated with additional personnel required to support the expansion of the Company's operations, costs of approximately $.4 million associated with new facilities (including depreciation) to accommodate the increase in personnel and other expenses related to the expansion of the Company's operations. General and administrative expenses as a percentage of net sales for 1996 increased to 9.9% from 9.0% for 1995. In the near term, selling and distribution and general and administrative expenses are expected to rise, reflecting additions to the sales, distribution, operational and administrative infrastructure associated with the Company's anticipated growth. These expenses are expected to decline over time as a percentage of the Company's net sales, though there are no assurances to this effect. Interest and other income, net for 1996 increased approximately $1.2 million or 1,018% as compared to 1995. This is attributable to the income earned on the Company's short-term investments and cash equivalents. Liquidity and Capital Resources As of March 31, 1996, the Company's principal sources of liquidity included cash and short-term investments of approximately $91.3 million. Cash from operating activities for the three months ended March 31, 1996 amounted to approximately $.6 million as compared to $9.8 million for the three months ended March 31, 1995. This decrease is attributable to the internally generated funds used to support the Company's growth and fluctuations in relative levels of receivables, inventory, royalty advances, accounts payable and income taxes payable. The relative level of inventory to accounts payable as of March 31, 1996 increased compared to March 31, 1995 primarily as a result of the timing of sales and the scheduled payment of the accounts payable. On February 28, 1995, the Company borrowed $15.0 million from an outside investor. This loan was repaid in December 1995, with proceeds from the Company's initial public offering. In addition, during the three months ended March 31, 1995, the Company repaid a note to a related party for $6.0 million and made distributions to stockholders of the S Corporation in the amount of $6.0 million. As of March 31, 1996, the Company has certain outstanding standby letters of credit amounting to approximately $11.7 million, which are secured by certain assets of the Company. The Company believes that existing cash, cash equivalents and short-term investments together with cash expected to be generated from operations, will be sufficient to fund the Company's anticipated operations for the next twelve months. Except for historical information contained in this Form 10-Q, the information set forth herein may include forward looking statements that are dependent on certain risks and uncertainties. Important factors that could cause actual results to differ materially from the anticipated results include, but are not limited to, world-wide business and industry conditions, adoption of new hardware systems, software development requirements and their impact on product launches, Company customer relations and other risks detailed, from time to time, in the Company's SEC filings including, but not limited to, the Report on Form 10-K for the fiscal year ended December 31, 1995. Page 9
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Part II. - Other Information 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 (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 3.2 Amended and Restated By-laws (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Registration Statement on Form S-1 filed on October 20, 1995, and all amendments thereto (File No. 33-98448)). 10.1 Second Amendment to GTIS Master Option and License Agreement between the Registrant and Williams Entertainment Group, dated March 27, 1996.* 10.2 Amendment to GTIS Master Option and License Agreement (Home Video Games) between the Registrant and Williams Entertainment Group, dated March 27, 1996.* 10.3 Master Option and License Agreement for Atari PC Games between the Registrant and WMS Industries Inc., dated March 27, 1996.* 10.4 Master Option and License Agreement for Atari Home Video Games between the Registrant and WMS Industries Inc., dated March 27, 1996.* 10.5 Employment Agreement between the Registrant and Andrew Gregor. 27.1 Financial Data Schedule. ____________ * Confidential treatment requested. (b) Reports on Form 8-K ----------------------- No reports on Form 8-K have been filed by the Company during the period covered by this report. Page 10
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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/ RONALD CHAIMOWITZ --------------------------- Ronald Chaimowitz Chief Executive Officer and Director Date: May 14, 1996 By: /s/ ANDREW GREGOR --------------------------- Andrew Gregor Chief Financial Officer and Senior Vice President, Finance and Administration Date: May 14, 1996 Page 11
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Exhibits -------- [Download Table] Exhibit No. Description Page ----------- ----------- ---- 3.1 Amended and Restated Certificate of Incorporation (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995). 3.2 Amended and Restated By-laws (incorporated herein by reference to the exhibit with the corresponding number filed as part of the Company's Registration Statement on Form S-1 filed on October 20, 1995, and all amendments thereto (File No. 33-98448)). 10.1 Second Amendment to GTIS Master Option and License Agreement between the Registrant and Williams Entertainment Group, dated March 27, 1996.* 10.2 Amendment to GTIS Master Option and License Agreement (Home Video Games) between the Registrant and Williams Entertainment Group, dated March 27, 1996.* 10.3 Master Option and License Agreement for Atari PC Games between the Registrant and WMS Industries Inc., dated March 27, 1996.* 10.4 Master Option and License Agreement for Atari Home Video Games between the Registrant and WMS Industries Inc., dated March 27, 1996.* 10.5 Employment Agreement between the Registrant and Andrew Gregor. 27.1 Financial Data Schedule. ------------ * Confidential treatment requested. Page 12

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3/31/9619
3/27/961012
12/31/95212
10/20/951012
6/23/9578
3/31/9529
2/28/9579
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Filing Submission 0000950130-96-001703   –   Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

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