<PAGE> 1
================================================================================
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 September 30, 1997 Commission File No. 0-27338
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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
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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 November 1, 1997, there were 67,829,641 shares of the registrant's
Common Stock outstanding.
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GT INTERACTIVE SOFTWARE CORP.
1997 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, 1996
(audited) and September 30, 1997 3
Consolidated Statements of Operations for the three months and
the nine months ended September 30, 1996 and 1997 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE> 3
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
(audited) (unaudited)
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 71,867 $ 8,070
Short-term investments 4,717 105
Receivables, net 95,941 141,099
Inventories, net 60,457 83,047
Royalty advances 69,202 87,542
Deferred income taxes 15,283 9,452
Prepaid expenses and other current assets 6,510 10,796
-------- --------
Total current assets 323,977 340,111
Property and equipment, net 10,082 19,252
Goodwill, net 21,003 20,286
Investments 9,829 9,992
Other assets 2,220 1,176
-------- --------
Total assets $367,111 $390,817
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $107,842 $ 92,604
Accrued liabilities 52,812 44,854
Royalties payable 33,378 33,071
Deferred income 4,783 596
Current portion of long-term liabilities 1,334 8
Due to related party 601 1,143
Income taxes payable 9,575 5,362
-------- --------
Total current liabilities 210,325 177,638
Long-term debt -- 40,400
Other long-term liabilities 4,648 1,606
-------- --------
Total liabilities 214,973 219,644
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common stock, $.01 par, 150,000,000 shares authorized,
67,097,347 shares issued and outstanding 664 671
Additional paid-in capital 119,033 120,800
Retained earnings 32,441 49,702
-------- --------
Total stockholders' equity 152,138 171,173
-------- --------
Total liabilities and stockholders' equity $367,111 $390,817
======== ========
The accompanying footnotes are an integral part of these financial statements.
Page 3
</TABLE>
<PAGE> 4
GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
--------------------- ------------------------
1996 1997 1996 1997
------- --------- -------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net sales $86,192 $ 120,990 $230,475 $ 317,108
Cost of goods sold 47,684 65,767 130,232 183,813
Selling and distribution expenses 17,709 26,671 50,757 65,699
General and administrative expenses 8,223 13,619 22,918 35,679
Amortization of goodwill 273 283 819 913
------- --------- -------- ---------
Operating income 12,303 14,650 25,749 31,004
Interest and other income (expense), net 575 (612) 2,827 (990)
------- --------- -------- ---------
Income before income taxes 12,878 14,038 28,576 30,014
Provision for income taxes 4,148 5,512 11,951 12,565
------- --------- -------- ---------
Net income $ 8,730 $ 8,526 $ 16,625 $ 17,449
======= ========= ======== =========
Net income per share $ 0.13 $ 0.13 $ 0.24 $ 0.26
Weighted average shares outstanding 69,217 67,032 68,903 66,600
======= ========= ======== =========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-----------------------
1996 1997
--------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 16,625 $ 17,449
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 2,089 3,459
Deferred income taxes 471 5,831
Deferred income (1,119) (8,092)
Changes in operating assets and liabilities:
Receivables, net (10,784) (44,034)
Inventories, net (13,912) (22,101)
Royalty advances (27,780) (18,340)
Due to related party, net (710) 542
Prepaid expenses and other current assets (5,083) (4,088)
Accounts payable (18,862) (16,912)
Accrued liabilities (5,126) (7,959)
Royalties payable 5,844 (308)
Income taxes payable 1,173 (4,245)
Other (904) 1,320
-------- --------
Net cash used in operating activities (58,078) (97,478)
-------- --------
INVESTING ACTIVITIES:
Purchase of investments (9,521) (163)
Purchase of One Stop -- (846)
Purchase of property and equipment (3,518) (11,558)
Sales of short-term investments, net 4,730 4,613
-------- --------
Net cash used in net investing activities (8,309) (7,954)
-------- --------
FINANCING ACTIVITIES:
Issuance of stock 632 --
Repurchase of warrants (1,935) --
Long-term debt -- 40,400
Proceeds from exercise of warrants and stock options -- 2,788
Other long-term liabilities (363) (528)
-------- --------
Net cash provided by (used in) financing activities (1,666) 42,660
-------- --------
Effect of exchange rates on cash and cash equivalents -- (1,025)
Net decrease in cash and cash equivalents (68,053) (62,772)
Cash and cash equivalents - beginning of year 84,069 71,867
======== ========
Cash and cash equivalents - end of period $ 16,016 $ 8,070
======== ========
</TABLE>
The accompanying footnotes are an integral part of these financial statements.
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
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 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 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 the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1996.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform classifications used in the current period.
NOTE 2 - Acquisitions
In June 1996, the Company acquired all of the outstanding common stock
of WizardWorks Group, Inc. ("WizardWorks"), a developer and publisher of
consumer software, in exchange for 2.4 million shares of the Company's common
stock, par value $.01 per share ("Common Stock").
In June 1996, the Company acquired all of the outstanding common stock
of Candel Inc., the parent company of FormGen Corp. ("FormGen"), a publisher of
multimedia consumer software, in exchange for 1.0 million shares of the
Company's Common Stock.
In July 1996, the Company acquired all of the outstanding common stock
of Humongous Entertainment, Inc. ("Humongous"), a premier developer and
publisher of quality children's software, in exchange for 3.5 million shares of
the Company's Common Stock.
WizardWorks, FormGen and Humongous (collectively the "Acquired
Companies") have been accounted for as pooling of interests and accordingly are
included in the Company's Consolidated Financial Statements as if the
acquisitions had occurred as of the beginning of the periods presented.
In November 1996, the Company acquired the business of Warner
Interactive Europe ("Warner") for $6.3 million in cash, including acquisition
costs. Warner's financial results have been included in the Company's
Consolidated Financial Statements on a purchase basis for the period since the
acquisition.
In January 1997, the Company acquired all of the outstanding capital
stock of Premier Promotion Limited ("One Stop"), the parent company of One Stop
Direct Limited, a leading European value software publisher, for $.8 million in
cash. One Stop's financial results have been included in the Company's
Consolidated Financial Statements on a purchase basis for the period since the
acquisition.
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GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
NOTE 3 - Inventories, net
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
(in thousands)
<S> <C> <C>
Finished goods $58,464 $78,322
Raw materials 1,993 4,725
------- -------
$60,457 $83,047
======= =======
</TABLE>
NOTE 4 - Commitments and Contingencies
On January 21, 1997, the Company entered into a Revolving Credit
Agreement (the "Credit Agreement") with banks expiring on December 31, 1998. The
Credit Agreement was amended on June 30, 1997 to increase the facility from $40
million to a maximum of $65 million to be used for borrowings and letters of
credit. Borrowing is limited to fifty percent of adjusted, as defined,
consolidated accounts receivable, and is secured by these receivables. The
borrowings under this agreement bear interest at either the banks' reference
rate (which is generally equivalent to the published prime rate) or the LIBOR
rate plus 1 1/4%. The Company pays a commitment fee of 1/4% based on the unused
portion of the line. The Credit Agreement requires maintenance of certain
financial ratios and net income levels.
At September 30, 1997, the Company had outstanding long-term debt of
$40.4 million, representing borrowings under the Credit Agreement, and letters
of credit amounting to $15.1 million.
NOTE 5 - Supplemental Cash Flow Information
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
-------------------------
1996 1997
------ -------
(in thousands)
<S> <C> <C>
Cash paid for income taxes $9,204 $10,223
Cash paid for interest 134 1,013
</TABLE>
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NOTE 6 - Subsequent Events
On October 5, 1997, the Company entered into an agreement to acquire by
merger MicroProse, Inc., a Delaware corporation ("MicroProse") and a developer,
producer and publisher of entertainment software for personal computers and
certain console platforms. Under the proposed transaction, the Company will
exchange 0.700 shares of its Common Stock for each of MicroProse's outstanding
shares of common stock and, additionally, the Company will exchange one share of
its newly created series of convertible preferred stock for each outstanding
share of MicroProse's convertible preferred stock. The transaction, which is
anticipated to be completed in the quarter ending December 31, 1997, will be
accounted for as a pooling of interests.
On October 10, 1997, the Credit Agreement was seasonally amended to
increase the facility from $65 million to a maximum of $75 million through
December 31, 1997.
On October 15, 1997, the Company completed its acquisition of
SingleTrac Entertainment Technologies, Inc., a Delaware corporation
("SingleTrac") and a developer of entertainment software. Total consideration
included approximately $5 million of cash and approximately 731,000 shares of
the Company's Common Stock, as well as an assumption of the outstanding options
of SingleTrac which are now convertible into an aggregate of approximately
307,000 shares of the Company's Common Stock. The transaction will be accounted
for as a purchase. The Company anticipates taking a one time charge of $12 to
$14 million, during the quarter ending December 31, 1997, for the write off of
purchased-in-process research and development costs. Additionally, pursuant to
the agreement, the Company has structured a one time retention oriented bonus
pool of up to approximately $10 million in cash and Common Stock of the Company,
which will be distributed to SingleTrac employees based on the achievement of
certain performance goals of SingleTrac over the succeeding two years.
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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 SEC filings including, but not limited to, the
factors described on pages 10-15 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
Overview
The Company creates, publishes, merchandises and distributes interactive
entertainment, edutainment and value-priced consumer software for a variety of
platforms on a world-wide basis. 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 two broad product categories:
published software and 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.
The world-wide consumer software industry has undergone a number of
profound changes with the introduction of new hardware platforms. The "next
generation" of game systems are based on 32- and 64-bit microprocessors that
incorporate dedicated graphics chipsets. The Company began shipping Doom for the
Sony PlayStation ("PlayStation") internationally in the first quarter of 1996.
Domestically, shipments of Doom and Hexen for the Sega Saturn, Tigershark for
the PlayStation and Hexen for the Nintendo 64 System ("N64") and PlayStation
began shipping during the first half of 1997. Shipment of Abe's Oddysee for the
PlayStation began shipping in the quarter ended September 30, 1997. As evidenced
by the strong initial sales of these platforms, the Company believes that
significant growth opportunities exist across a variety of next generation
hardware platforms, including PlayStation and N64, for which the Company is
creating software products.
In June 1996, the Company acquired all of the outstanding stock of
WizardWorks, a leading developer and publisher of value-priced interactive
entertainment, edutainment and productivity software, in exchange for 2.4
million newly issued shares of the Company's common stock, par value $.01 per
share ("Common Stock"). WizardWorks develops, publishes and distributes consumer
software for Windows, DOS and Macintosh formats.
In June 1996, the Company acquired all of the outstanding stock of
Candel Inc., the parent company of FormGen, a leading publisher of interactive
PC shareware and software in exchange for 1.0 million newly issued shares of the
Company's Common Stock.
In July 1996, the Company acquired all of the outstanding common stock
of Humongous, a premier developer and publisher of quality children's software,
in exchange for 3.5 million newly issued shares of the Company's Common Stock.
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<PAGE> 10
WizardWorks, FormGen and Humongous (collectively the "Acquired
Companies"), have each been accounted for as a pooling of interests.
Accordingly, the Company's historical Consolidated Financial Statements have
been restated to include the results of the Acquired Companies.
In November 1996, the Company acquired the business of Warner
Interactive Europe for $6.3 million in cash, including acquisition costs.
Warner's financial results have been included in the Company's Consolidated
Financial Statements on a purchase basis for the period since the acquisition.
In January 1997, the Company acquired all of the outstanding capital
stock of Premier Promotion Limited, the parent company of One Stop, a leading
European value software distributor and publisher, for $.8 million in cash. One
Stop'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. This seasonality is primarily a
result of the increased demand for consumer software during the year-end holiday
buying season.
Results of Operations
The following table sets forth certain consolidated statement of
operations data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Nine
Months
Ended September 30, Ended September 30,
----------------------- ---------------------
1996 1997 1996 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 55.3 54.4 56.5 58.0
Selling and distribution expenses 20.5 22.0 22.0 20.7
General and administrative expenses 9.5 11.3 9.9 11.3
Amortization of goodwill 0.3 0.2 0.4 0.3
----- ----- ----- -----
Operating income 14.3 12.1 11.2 9.8
Interest and other income (expense), net 0.7 (0.5) 1.2 (0.3)
----- ----- ----- -----
Income before income taxes 14.9 11.6 12.4 9.5
Provision for income taxes 4.8 4.6 5.2 4.0
----- ----- ----- -----
Net income 10.1% 7.0% 7.2% 5.5%
===== ===== ===== =====
</TABLE>
Net sales for the three months and nine months ended September 30, 1997
increased approximately $34.8 million, or 40.4%, and $86.6 million, or 37.6%,
respectively, as compared to the three
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and nine months ended September 30, 1996. This growth in net sales for the three
and nine months ended September 30, 1997 was primarily attributable to the
release of newly published titles which include Abe's Oddysee for the
PlayStation, Total Annihilation and Shadow Warrior, the continuing strong sales
of Duke Nukem 3D and Quake and an increase in royalty income. In addition, an
increase in sales from its existing mass merchant shelf space and an increase in
the number of mass merchant stores supplied and serviced by the Company
contributed to the sales growth. Additionally, during the nine months ended
September 30, 1997, the Company released Hexen for the N64 and the PlayStation,
Blood, Putt Putt Travels Through Time and Tigershark for the PlayStation.
Cost of goods sold primarily includes costs of purchased products and
royalties paid to software developers. Cost of goods sold for the three and nine
months ended September 30, 1997 increased approximately $18.1 million, or 37.9%,
and $53.6 million, or 41.1%, respectively, as compared to the three and nine
months ended September 30, 1996. Cost of goods sold as a percentage of net sales
for the three months ended September 30, 1997 decreased to 54.4% as compared to
55.3% for the three months ended September 30, 1996, and increased during the
nine months ended September 30, 1997 to 58.0% from 56.5% for the comparable
period of the prior year. The decrease for the three months ended September 30,
1997 was primarily due to a shift in the Company's overall sales mix toward its
published and value priced products which increased to approximately 68% of net
revenue compared to approximately 63% during the prior period and a change in
product mix within the third party business to higher margin products. The
release of internally developed titles, most notably Total Annihilation,
contributed to an increase in margins for the three months ended September 30,
1997. The increase in cost of goods sold for the nine months ended September 30,
1997 was primarily due to the increase in sales of lower margin N64 titles and
the decline in the average wholesale price of the Company's value priced
products.
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 $9.0
million, or 50.6%, and $14.9 million, or 29.4%, during the three and nine months
ended September 30, 1997, respectively, compared to the comparable periods of
the prior year. The increase is attributable to the overall increase in sales
volume. Selling and distribution expenses as a percentage of net sales for the
three months ended September 30, 1997 increased to 22.0% as compared to 20.5%
for the three months ended September 30, 1996. This increase was primarily
attributable to the growth in advertising expense to promote the Company's
published titles. For the nine months ended September 30, 1997 these expenses as
a percentage of net sales decreased to 20.7%, as compared to 22.0% during the
nine months ended September 30, 1996, due to the Company realizing greater
economies of scale.
General and administrative expenses primarily include personnel
expenses, facilities costs, professional expenses and other overhead charges.
These expenses for the three and nine months ended September 30, 1997 increased
approximately $5.4 million, or 65.6%, and $12.8 million, or 55.7%, respectively,
as compared to the three and nine months ended September 30, 1996. The increase
was due primarily to additional personnel required to support the expansion of
the Company's research and development and publishing operations. This increase
was partially offset by the decline in professional fees attributable to the
Company's acquisitions. General and administrative expenses as a percentage of
net sales for the three and nine months ended September 30, 1997 increased to
11.3%, from 9.5% and 9.9% for the three and nine months ended September 30,
1996, respectively.
Interest and other income, net decreased approximately $1.2 million and
$3.8 million for the three and nine months ended September 30, 1997,
respectively, as compared to the comparable periods of the prior year. This
decrease was primarily attributable to the decrease in short-term investments
and cash balances and the interest costs associated with borrowings under the
Credit Agreement.
Liquidity and Capital Resources
Resources used to finance significant expenditures for the nine months
ended September 30, 1997
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and 1996 are reflected in the following table:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1996 1997
----------- ----------
(in millions)
<S> <C> <C>
Resources used:
Total Payables and accrued liabilities $(17.0) $(29.4)
Receivables, net (10.8) (44.0)
Inventories, net (13.9) (22.1)
Purchase of investments (9.5) (0.2)
Purchase of One Stop -- (0.8)
Purchase of property and equipment (3.5) (11.6)
Royalty advances (27.8) (18.3)
Other, net (6.9) --
------ ------
(89.4) (126.4)
Financed by:
Net income 16.6 17.4
Long-term debt -- 40.4
Sales of short-term investments, net 4.7 4.6
Other, net -- 1.2
------ ------
21.3 63.6
------ ------
Cash and cash equivalents balance decrease $(68.1) $(62.8)
====== ======
</TABLE>
As of September 30, 1997, the Company's working capital increased to
$162.5 million compared to $113.7 million at December 31, 1996. Cash and cash
equivalents decreased for the nine months ended September 30, 1997 by
approximately $62.8 million. The primary sources of cash during the nine months
ended September 30, 1997 were bank borrowings of $40.4 million under the Credit
Agreement and net income of $17.4 million. These externally and internally
generated funds were primarily used to fund payables and accrued liabilities
(which includes accounts payable, royalties payable, income taxes payable and
accrued liabilities) of $29.4 million, receivables of $44.0 million, inventories
of $22.1 million, property and equipment of $11.6 million and royalty advances
of $18.3 million. The decrease in payables for the nine months ended September
30, 1997, as compared to the comparable period in 1996, was primarily
attributable to payment of the seasonally high balance of December 31, 1996, the
shift in sales toward published titles versus third party products, which on
average have higher costs than published products and the fact that Nintendo,
Sega and Sony products require cash payments on most purchases. The Company
utilizes its Credit Agreement to fund these purchases when required. The
receivable balance increase reflected higher sales at the end of the quarter.
The increase in property and equipment is primarily due to the investment in
computer hardware and software to support the Company's growth.
Royalty advances of $87.5 million as of September 30, 1997 represented
advances to outside parties for various products expected to be delivered
throughout the next several years. The Company regularly reviews the expected
return of prepaid royalties over the anticipated life of these products
developed or to be developed and establishes reserves where appropriate for
products not expected to recoup prepaid royalties. In light of the acquisition
of SingleTrac in October 1997 and the anticipated acquisition of MicroProse in
December 1997, the Company is reviewing the status of these advances to
determine the expected rate of return and whether, in view of the Company's
evolving strategy of increasing its focus on internally developed product,
certain of these third party products may be abandoned in favor of internally
generated products or for other reasons. To the extent the Company determines
as a result of this review that any product will not be supported or pursued,
the Company expects to expense the applicable advance account in connection
with the acquisition of MicroProse.
On January 21, 1997, the Company entered into the Credit Agreement with
banks expiring on December 31, 1998. The Credit Agreement was amended on June
30, 1997 to increase the facility from $40 million to a maximum of $65 million
to be used for borrowings and letters of credit. On October 10, 1997, the Credit
Agreement was seasonally amended to increase the facility from $65 million to a
maximum of $75 million through December 31, 1997. At September 30, 1997, the
Company had outstanding, under
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the Credit Agreement, long-term debt and letters of credit issued of
approximately $40.4 million and $15.1 million, respectively.
General Atlantic Partners II, L.P., an affiliate of various General
Atlantic Partners entities which are stockholders of the Company, exercised its
warrants to purchase an aggregate of 504,000 shares of Common Stock on May 2,
1997 for approximately $2.1 million in cash.
The Company expects continued volatility in the use of cash due to
varying seasonal, receivable payment cycles and quarterly working capital needs
to finance its growing publishing and distribution business.
The Company believes that existing cash, cash equivalents and
short-term investments, together with cash expected to be generated from
operations and cash available through the Credit Agreement, will be sufficient
to fund the Company's anticipated operations for the next twelve months.
On October 5, 1997, the Company entered into an agreement to acquire by
merger MicroProse, Inc., a Delaware corporation ("MicroProse") and a developer,
producer and publisher of entertainment software for personal computers and
certain console platforms. Under the proposed transaction, the Company will
exchange 0.700 shares of its Common Stock for each of MicroProse's outstanding
shares of common stock and, additionally, the Company will exchange one share of
its newly created series of convertible preferred stock for each outstanding
share of MicroProse's convertible preferred stock. The transaction, which is
anticipated to be completed in the quarter ending December 31, 1997, will be
accounted for as a pooling of interests.
On October 15, 1997, the Company completed its acquisition of
SingleTrac Entertainment Technologies, Inc., a Delaware corporation
("SingleTrac") and a developer of entertainment software. Total consideration
included approximately $5 million of cash and approximately 731,000 shares of
the Company's Common Stock, as well as an assumption of the outstanding options
of SingleTrac which are now convertible into an aggregate of approximately
307,000 shares of the Company's Common Stock. The transaction will be accounted
for as a purchase. The Company anticipates taking a one time charge of $12 to
$14 million, during the quarter ending December 31, 1997, for the write off of
purchased-in-process research and development costs. Additionally, pursuant to
the agreement, the Company has structured a one time retention oriented bonus
pool of up to approximately $10 million in cash and Common Stock of the Company,
which will be distributed to SingleTrac employees based on the achievement of
certain performance goals of SingleTrac over the succeeding two years.
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Part II - Other Information
Item 1. Legal Proceedings
On September 18, 1997, Scavenger, Inc. ("Scavenger"), a software
developer, filed an action against the Company in New York State Supreme Court
(New York County) claiming that the Company breached a software development
contract between the parties dated November 28, 1995 (the "Development
Agreement"). By a letter dated January 20, 1997, the Company had given notice of
Scavenger's material breach for its failure to comply with the delivery
requirements under the Development Agreement, and, by a letter dated March 12,
1997, the Company terminated the Development Agreement. Scavenger alleges that
the Company, after paying $2.5 million in advances and accepting delivery of
gold master discs for two computer games, refused to pay additional advances,
including advances relating to the development of two additional games under the
Development Agreement. On a breach of contract theory, 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 believes it has
meritorious defenses to all of these claims. On October 10, 1997, the Company
filed an answer to the complaint and counterclaimed for damages of not less than
$5 million.
The Company is also involved in certain other claims or litigation
arising in the ordinary course of business which are not considered material to
the operations of the Company.
Item 2. Changes in Securities
There were no sales of unregistered securities by the Company during
the quarter ended September 30, 1997.
Page 14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
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 18, 1996, and all amendments thereto (Registration No.
333-14441)).
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1997.
Page 15
<PAGE> 16
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, President
and Director
Date: November 14, 1997
By: /s/ Andrew Gregor
-------------------------------------
Andrew Gregor
Chief Financial Officer and Senior
Vice President, Finance and
Administration
Date: November 14, 1997
Page 16
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